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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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

For the fiscal year ended December 31, 2005

or



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

Commission File Number 000-50845



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MCCORMICK & SCHMICKS SEAFOOD RESTAURANTS, INC.

(Exact Name of Registrant as Specified in its Charter)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 20-1193199                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S Employer Identification No.)

|                                                     |  |           
|---------------------------------------------------- |  | ----------
|                                                     | 
|720 SW Washington Street, Suite 550 Portland, Oregon |  | 97205     
|(Address of principal executive offices)             |  | (Zip Code)

Registrants telephone number, including area code: (503) 226-3440

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

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

Common
Stock, par value $0.001 per share



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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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



|                         |  |                      |  |                       
|------------------------ |  | -------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer  x |  | Non-accelerated filer ̈

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates (based on the closing price on December 30, 2005 on The
Nasdaq Stock Market National Market) was $199.5 million. There were 14,179,606 shares of common stock outstanding as of February 17, 2006.



DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates by reference information from the registrants Proxy Statement for the 2006 Annual Meeting of Stockholders.



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TABLE OF CONTENTS



|         |  |          |  |                                                                                                |  |   
|-------- |  | -------- |  | ---------------------------------------------------------------------------------------------- |  | --
|PART I   |  | 1       
|         |  | ITEM 1.  |  | BUSINESS                                                                                       |  | 1 
|         |  | ITEM 1A. |  | RISK FACTORS                                                                                   |  | 12
|         |  | ITEM 1B. |  | UNRESOLVED STAFF COMMENTS                                                                      |  | 18
|         |  | ITEM 2.  |  | PROPERTIES                                                                                     |  | 18
|         |  | ITEM 3.  |  | LEGAL PROCEEDINGS                                                                              |  | 18
|         |  | ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            |  | 18
|         |  | ITEM 4A. |  | EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES                                                     |  | 18
|         | 
|PART II  |  | 20      
|         |  | ITEM 5.  |  | MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                      |  | 20
|         |  | ITEM 6.  |  | SELECTED FINANCIAL DATA                                                                        |  | 21
|         |  | ITEM 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          |  | 23
|         |  | ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     |  | 38
|         |  | ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    |  | 39
|         |  | ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           |  | 62
|         |  | ITEM 9A. |  | CONTROLS AND PROCEDURES                                                                        |  | 62
|         |  | ITEM 9B. |  | OTHER INFORMATION                                                                              |  | 62
|         | 
|PART III |  | 63      
|         |  | ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                             |  | 63
|         |  | ITEM 11. |  | EXECUTIVE COMPENSATION                                                                         |  | 63
|         |  | ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |  | 63
|         |  | ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                 |  | 63
|         |  | ITEM 14. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                         |  | 63
|         | 
|PART IV  |  | 64      
|         |  | ITEM 15. |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                     |  | 64
|         |  |          |  | SIGNATURES                                                                                     |  | 65



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Forward Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements represent our expectations or beliefs concerning future events, including the following: any statements regarding future sales, costs and expenses and gross profit
percentages; any statements regarding the continuation of historical trends; any statements regarding the expected number of future restaurant openings and expected capital expenditures; and any statements regarding the sufficiency of our cash
balances and cash generated from operating and financing activities for future liquidity and capital resource needs. In addition, the words believes, anticipates, plans, expects, should,
estimates and similar expressions are intended to identify forward-looking statements. We have identified significant factors that could cause actual results to differ materially from those stated or implied in the forward-looking
statements in Item 1A, Risk Factors.

Reorganization in Connection with Initial Public Offering

In connection with our initial public offering in July 2004, we converted McCormick & Schmick Holdings LLC, a Delaware limited liability
company, into McCormick & Schmicks Seafood Restaurants, Inc., a Delaware corporation. Because our operations are conducted by wholly owned subsidiaries, the conversion did not affect our financial statements, except with respect
to information regarding the membership units in McCormick & Schmick Holdings LLC. Except where specifically noted, references in this Annual Report on Form 10-K to we or to the Company means
McCormick & Schmick Holdings LLC for periods before July 20, 2004 and McCormick & Schmicks Seafood Restaurants, Inc. for periods on and after July 20, 2004.

PART I

ITEM 1. BUSINESS

Overview

McCormick & Schmicks Seafood Restaurants, Inc. is a leading national seafood restaurant operator in the affordable upscale dining segment. For more than 34 years, we have successfully grown our
business to 59 restaurants in 24 states at December 31, 2005 by focusing on serving a broad selection of fresh seafood.

Our
daily-printed menu typically contains between 85 and 100 made-to-order dishes, including an extensive selection of international, national, regional and local species of seafood. Our signature Fresh List, prominently displayed at the top
of our daily-printed menu, features 30 to 40 varieties of fresh seafood, based on product availability, price and customer preferences. We also offer alternatives to seafood, including prime aged beef, creative salads and fresh pasta dishes.

Our restaurants are designed to capture the distinctive characteristics of each local market, positioning us to compete successfully in a
sector comprised primarily of locally owned and operated seafood restaurants. We seek to create an inviting atmosphere which allows us to attract a diverse customer base of men and women, primarily ages 30 to 60, typically college-educated and in
the middle to upper-middle income brackets. We believe the combination of our restaurant atmosphere and our extensive menu offering and broad range of price points appeals to a diverse customer base from casual diners, families and tourists to
business travelers and special occasion diners.

We believe we are the only high quality seafood restaurant that operates on a national
scale. We believe we have successfully differentiated ourselves from our competitors by focusing on the following core strengths of our business model.

Fresh Seafood

Our primary business focus for more than 34 years has been to consistently offer a broad
selection of fresh seafood, which we believe commands strong loyalty from our customers. Our daily-printed menu typically



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contains between 85 and 100 made-to-order dishes, including an extensive selection of nationally available species such as Atlantic lobster, Dungeness crab
and Alaskan halibut, as well as seasonal products such as wild King salmon, Columbia River sturgeon, Sashimi grade tuna, exotic Hawaiian catch and an extensive variety of cold water oysters. The executive chef and general manager at the majority of
our restaurants tailor the menu, at least once daily, based on the availability of different species of fresh seafood, price and customer preferences.

We believe we successfully differentiate our concept from both independent local seafood restaurants and national and regional seafood restaurant chains by including in our daily-printed menu our signature Fresh
List of typically 30 to 40 fresh seafood items, sourced from throughout the United States and from select international locations. We are able to offer a wide variety of consistently fresh, high quality seafood through our close relationships
with reputable local and national seafood vendors. We encourage our vendors to adopt preferred and sustainable fishing practices to guarantee the current and future quality and supply of our seafood. During our daily fresh talk, the
executive chef at each of our restaurants educates our restaurant staff on the menu items of the day so we can effectively communicate the sourcing, freshness, quality and method of preparation of our products to our customers.

Attraction of Our Full-Service Bar

We
consider our bar operations to be an integral part of the McCormick & Schmicks brand and central to our broad appeal. We believe the success of our first restaurant, Jakes Famous Crawfish, was largely driven by its
bar operation, which enhanced the dining room business by creating a social forum and building clientele. Our bar operation remains a cornerstone of our restaurant concept, showcasing our commitment to traditionalism and quality. We attract patrons
to our bar as a final destination, where they can enjoy a broad selection of liquors, wines and beers in a traditional yet lively environment. Our cocktail drinks are created using traditional methods and are hand-shaken, hand-poured and made with
freshly squeezed juices, underlining our focus on product quality. We also offer value-priced items from our full restaurant menu at our bars, which tends to attract younger customers whom we aim to develop into regular restaurant customers.

As a result of our focus on our bar operations as an integral part of our business, our bars drive sales to our restaurants. We run our
bar operations as a profit center rather than a mere holding area for diners. In 2005, alcohol sales, predominantly from our bar, accounted for approximately 30% of our revenues and contributed higher gross margins than food sales, allowing us the
flexibility to offer lower prices on some of our menu items, which helps us maintain our broad appeal.

Broad Appeal of Our Concept

We believe we appeal to a broad range of customers by providing an attractive price-value proposition, with prices that are
generally more affordable than those of our upscale competitors. Additionally, we believe we offer service that is superior to that of most casual dining operators. The price of a typical meal, including beverages, ranges from $16 to $28 for lunch
and $37 to $62 for dinner, with an average of approximately $21 and $47, respectively. Over the past few years, we have enhanced our menu to offer our customers a more affordable dining option by including a selection of lower priced items on our
menu. For example, we offer a variety of lunch specials starting at $5.95. We believe even the price sensitive diner values our superior service, and we have received recognition from our customers and industry awards for our service quality.

The combination of our high quality seafood, pricing strategy and customer service enables us to attract a broad customer demographic.
Most of our customers are 30 to 60 years old, primarily college-educated, in the middle to upper-middle income brackets and split relatively evenly between male and female customers, with a significant number of our customers comprising the
post-war baby boomer generation. These baby boomers, who are the largest segment of the U.S. population (approximately 26% of the total) and a primary driver in the restaurant industry, generally have the greatest level of disposable income and tend
to be more focused on better health and specialized diets than other age groups. As our core customers, we believe baby boomers typically



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prefer restaurants that offer higher quality food items, stronger flavor profiles and wider menu diversity. In addition to this core customer base, our bar
operations allow us to also capture the 25 to 35 year old professionals, positioning us to attract a younger clientele as dedicated restaurant customers.

Our broad appeal is supported by our catering and banquet services which we offer both in our restaurants and at other locations as customers request. Our presence in and near hotels enables us to expand the reach of
our banquet offerings. In 2005, banquets accounted for approximately 10% of our revenues.

Entrepreneurial Culture with Corporate Control

A key component of our success for over 34 years and under successive owners has been our commitment to promoting and
sustaining an entrepreneurial culture throughout our restaurants while maintaining strong corporate oversight and financial controls. Within this strong corporate infrastructure, each restaurant has profit and loss responsibility and a high degree
of operating autonomy. The executive chef and general manager at each restaurant have the flexibility, within clearly defined corporate guidelines, to structure menus to cater to customer preferences in that restaurants market and respond to
changes in product availability and market conditions. We offer quarterly and annual cash performance incentives to exempt employees at the restaurant level based on the units revenues, profitability and costs, compliance with corporate
administrative and payroll guidelines, and the success of other initiatives, such as local community involvement.

We believe our
entrepreneurial culture helps us to attract and retain highly qualified and motivated individuals. We have historically retained substantially all of our regional chefs and regional managers and our retention rate for our unit general managers and
executive chefs is approximately 80%. We believe our decentralized, employee-oriented, entrepreneurial culture creates a sense of pride in our company and allows us to ensure quality service execution at the restaurant level. We believe the
stability of our management team and operating personnel, coupled with our disciplined but entrepreneurial culture, position us for the continued success and growth of our concept.

Portability of Our Brand

We have expanded the McCormick & Schmicks seafood
restaurant concept throughout the United States and have competed successfully with both national and regional restaurant chains and independent local operators, due in part to the flexibility of our real estate model and our nationwide
infrastructure. At December 31, 2005, we operated 59 restaurants in 24 states across the United States and plan to open as many as 30 additional restaurants over the next three years.

Our restaurants are designed to have broad consumer appeal. We customize our restaurant design and appearance to appeal to local consumer affinities and
preferences, and have many restaurants located in buildings that have local significance, including some historic buildings. We have a proven track record of successfully opening restaurants in a variety of sizes, typically ranging from 6,000 to
14,000 square feet and in a number of real estate formats, including both freestanding and in-line locations. We believe the flexibility of our real estate model is a competitive advantage, allowing us to cost-effectively and opportunistically open
restaurants in attractive markets without being constrained by a standard prototype or other limiting real estate factors.

We compete on a
unit-by-unit basis with independent local restaurant operators while leveraging the operating strengths of our national infrastructure. We have successfully executed our concept at the local level while maintaining quality and consistency on a
national basis in a manner that is not formulaic and that enables us to celebrate the uniqueness of each of our markets. We believe the breadth and scale of our restaurant operations and our over 34 years of experience in the business give us a
competitive advantage in terms of the quality, sourcing and freshness of our menu offerings, and flexibility of price points, making our model difficult to replicate. This competitive advantage contributes to our brands reputation for quality
and service in the affordable upscale dining sector, which we believe commands strong loyalty from our customers.



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Our Growth Strategy

We believe our flexible business model, combined with our fresh menu offerings, professional customer service and inviting restaurant environment, provide us with significant opportunities to further grow our
business. Key elements of our growth strategy include the following:

Expansion in Existing Markets

We remain focused on the disciplined growth of our McCormick & Schmicks brand in our existing markets. We believe we have established the
necessary market analysis and site selection procedures for identifying new unit opportunities in these markets. In particular, we will continue to evaluate opportunities in affluent suburban areas near existing units in downtown areas to better
diversify our presence in existing markets. This strategy enables us to achieve a higher degree of market penetration and brand awareness, resulting in increased repeat business from our broad and diverse customer base. Additionally, we will further
leverage the economies of scale of our operations to enhance our competitive advantage against independent local competitors, principally in the areas of advertising, purchasing and distribution infrastructure. We intend to open six restaurants in
existing markets in 2006.

Entry into New Markets

In selecting new market opportunities, we continue to focus on downtown and affluent suburban areas that have large middle to upper-middle income populations, have high customer traffic from thriving businesses or
retail markets, and that are convenient for and appealing to business and leisure travelers. We will continue to promote the McCormick & Schmicks brand image and our broad appeal by opening new restaurants in prime real estate
locations and by customizing each new restaurant to the local market. We intend to open two additional restaurants in new markets in 2006.

Capture
of Ancillary Business Opportunities

We will continue to pursue secondary opportunities that are complementary to our primary
concept and further our growth objectives. We operate six restaurants under the name M&S Grill and one under the name Jakes Grill, each of which offers an alternative menu to that of our seafood restaurants. These restaurants are located
near our existing seafood restaurants to take advantage of management and operating efficiencies. We will also continue to consider catering opportunities and management agreements with hotels. We believe entering into management agreements with
hotels gives our brand additional exposure to business and leisure travelers, requires minimal initial investment and is therefore low-risk, and is profitable. We operate two restaurants under management agreements with hotels.

Unit Level Economics

Our average investment per
restaurant opened since 1997 has been approximately $2.7 million, including leasehold improvements, furniture, fixtures and equipment, and net of landlord incentive allowances. As a result of the reduction in the size of our restaurant
prototype, to facilitate our entry into a greater variety of markets and provide us with increased flexibility with site selection, we anticipate that our average investment per restaurant will be approximately $2.4 million going forward,
consistent with the average investment incurred for the restaurants we opened in 2005. We believe our focus on a traditional décor has allowed us to benefit from lower restaurant-level maintenance or upgrade costs than those incurred by some
of our competitors.

The average unit volume for restaurants opened from 1997 through 2002 was approximately $5.4 million by the third
year of operations. These restaurants were, on average, approximately 10,300 square feet each. Since the beginning of 2002, we have opened 22 new company-owned restaurants, which averaged approximately 7,900 square feet each. Our growth model
assumes average unit volumes for our 8,000 square feet restaurants of $4.4 million in the third year of operations.



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Menu, Food Preparation, Quality Control and Purchasing

Most of our menu items are prepared from scratch daily at each restaurant and each order is assembled when the order is placed with the kitchen staff.
Each restaurant has an executive chef responsible for overseeing kitchen operations, including planning the daily-printed menu and ordering necessary ingredients and supplies. Each executive chef is assisted by two to four sous chefs, who help to
manage food preparation and service timing.

We maintain strict quality standards at all of our restaurants. We expect each of our
employees to adhere to these standards, and it is the responsibility of the general manager and the executive chef at each restaurant to ensure these standards are upheld. We are committed to providing our guests with high quality, fresh products
and superior service. We regularly hold senior management meetings designed to re-emphasize McCormick & Schmicks philosophy, culture, standards of operation and culinary development. Through use of our standard training materials and
our commitment to the hiring, development and training of chefs, we are able to maintain high standards and guidelines for our regularly purchased seafood species.

At the restaurant level, purchasing is primarily directed by the executive chef, who is trained in our purchasing practices and philosophy and is supervised by an experienced regional chef. To provide the freshest
ingredients and products and to improve operating efficiencies between purchase and use, each executive chef determines the daily requirements for food ingredients, products and supplies. The executive chef orders accordingly from local suppliers
and regional and national distributors. Fresh seafood is sourced through multiple vendors in varying geographic regions and delivered daily to each restaurant.

We encourage each of our restaurants to purchase seafood from a network of preferred vendors we have identified as consistently supplying seafood that meets our high standards. The identification and selection of
seafood suppliers is reviewed regularly based on product quality, sanitation, fishing practices, pricing and customer service. We prefer suppliers who use day-boats rather than those who are at sea for multiple days because their product is
typically fresher. Our national and regional presence allows us to achieve better quality and pricing terms for key products, such as fresh fin fish and shellfish, than most of our competitors. Other food products, such as prime beef and dry goods,
are sourced primarily from SYSCO Corporation, a national food distributor, while liquor, beer and wine are purchased from local distributors. SYSCO accounted for approximately 12% of our food purchases in 2005. No other vendor accounted for more
than 10% of our purchases in 2005.

Restaurant Design and Atmosphere

Our restaurant designs and décor are intended to capture distinctive attributes of each local market, varying from traditional New England-style fish houses to contemporary dinner houses with waterfront views.
Some of our restaurants are located in historic buildings, which reinforces our commitment to local design elements and further promotes the appeal and ambience of our restaurants. Our flexible approach to our restaurant designs contributes to the
uniqueness of each restaurant and allows us to successfully compete in a sector comprised primarily of independent, locally-owned and operated seafood restaurants.

Our restaurants are generally modeled after two styles:



| |  |  | turn-of-the-century style, which blends different types and colors of wood; and
| | - |  | ---------------------------------------------------------------------------------



| |  |  | classic art deco style.
| | - |  | -----------------------

Additionally, our interior
décor fosters an inviting atmosphere that we believe is equally appealing to both men and women.

Our wait staff and bartenders are
typically uniformed in traditional white jackets and black ties and are committed to providing our guests with service to further enhance their dining experience.



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Our Full Service Bar

We believe the success of our first restaurant, Jakes Famous Crawfish, was largely driven by its bar operation. This enhanced the restaurants dining room business by building clientele and serving as a
social forum. Our bar operation remains a cornerstone of our restaurant concept and central to our broad appeal. We seek to attract patrons to our bar as a final destination, where they can enjoy a broad selection of liquors, wines and beers in a
traditional yet lively environment. Our focus on traditional mixing methods reinforces our appeal and underlines our focus on product quality and professional service. Our cocktail drinks are hand-poured and shaken and all our juices are freshly
squeezed. We also offer value-priced items from our full restaurant menu at our bars, which tends to attract younger customers whom we aim to develop into regular restaurant customers.

We operate our bars to drive sales to our restaurants. Each bar is a profit center, rather than a mere holding area for diners. In 2005, alcohol sales
accounted for approximately 30% of our revenues in our restaurants and contributed higher gross margins than food sales, allowing us the flexibility to offer lower prices on some of our menu items, which helps us maintain our broad appeal.

Layout and Use of Space

Our
restaurant model offers us the flexibility to open restaurants in prime downtown or suburban areas. We have a proven track record of opening restaurants in sizes typically ranging from 6,000 to 14,000 square feet and in a range of real estate
formats, including both freestanding and in-line locations. The typical size for our current restaurant prototype is 8,000 square feet. We believe the flexibility of our real estate model is a competitive advantage, allowing us to cost-effectively
and opportunistically open restaurants in attractive markets without being constrained by a standard prototype or other limiting real estate factors.



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Restaurant Locations, Lease Arrangements and Management Fee Arrangements

At December 31, 2005, we operated 59 restaurants in 24 states. We lease all of our restaurant sites, except for the two we operate under management
agreements. Terms vary by restaurant, but we generally lease space for 10 to 20 years and negotiate one to three five-year renewal options.



|                                              |  |               |  |            
|--------------------------------------------- |  | ------------- |  | -----------
|Restaurant Name                               |  | City          |  | Year Opened
|Alabama                                       |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Birmingham    |  | 2004       
|                                              |  |              
|Arizona                                       |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Phoenix       |  | 1999       
|                                              |  |              
|California                                    |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Irvine        |  | 1989       
|McCormick & Kuletos Seafood Restaurant       |  | San Francisco |  | 1991       
|McCormick & Schmicks Seafood Restaurant      |  | Los Angeles   |  | 1992       
|McCormick & Schmicks Seafood Restaurant      |  | Pasadena      |  | 1993       
|McCormick & Schmicks a Pacific Seafood Grill |  | Beverly Hills |  | 1994       
|McCormick & Schmicks Seafood Restaurant      |  | El Segundo    |  | 1998       
|Spengers Fresh Fish Grotto                   |  | Berkeley      |  | 1999       
|The Seafood Brasserie*                        |  | Santa Rosa    |  | 2002       
|McCormick & Schmicks Seafood Restaurant      |  | San Jose      |  | 2004       
|McCormick & Schmicks Seafood Restaurant*     |  | San Diego     |  | 2004       
|                                              |  |              
|Colorado                                      |  |               |  |            
|McCormicks Fish House & Bar                  |  | Denver        |  | 1987       
|McCormick & Schmicks Seafood Restaurant      |  | Denver        |  | 2004       
|                                              |  |              
|District of Columbia                          |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Washington    |  | 1996       
|M&S Grill                                     |  | Washington    |  | 1998       
|McCormick & Schmicks Seafood Restaurant      |  | Washington    |  | 2004       
|                                              |  |              
|Florida                                       |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Orlando       |  | 2002       
|                                              |  |              
|Georgia                                       |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Atlanta       |  | 2000       
|McCormick & Schmicks Seafood Restaurant      |  | Atlanta       |  | 2002       
|                                              |  |              
|Illinois                                      |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Chicago       |  | 1998       
|                                              |  |              
|Indiana                                       |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Indianapolis  |  | 2005       
|                                              |  |              
|Maryland                                      |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Baltimore     |  | 1998       
|McCormick & Schmicks Seafood Restaurant      |  | Bethesda      |  | 1999       
|M&S Grill                                     |  | Baltimore     |  | 2003       
|                                              |  |              
|Massachusetts                                 |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Boston        |  | 2000       
|McCormick & Schmicks Seafood Restaurant      |  | Boston        |  | 2001       
|                                              |  |              
|Michigan                                      |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Troy          |  | 2001       
|                                              |  |              
|Minnesota                                     |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Minneapolis   |  | 2000       



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|                                                                  |  |              |  |          
|----------------------------------------------------------------- |  | ------------ |  | ---------
|Restaurant Name                                                   |  | City         |  | Year Open
|Missouri                                                          |  |              |  |          
|McCormick & Schmicks Seafood Restaurant                          |  | Kansas City  |  | 2000     
|M&S Grill                                                         |  | Kansas City  |  | 2005     
|                                                                  |  |             
|Nevada                                                            |  |              |  |          
|McCormick & Schmicks Seafood Restaurant                          |  | Las Vegas    |  | 1998     
|                                                                  |  |             
|New Jersey                                                        |  |              |  |          
|McCormick & Schmicks Seafood Restaurant                          |  | Hackensack   |  | 2002     
|McCormick & Schmicks Seafood Restaurant                          |  | Bridgewater  |  | 2003     
|                                                                  |  |             
|New York                                                          |  |              |  |          
|McCormick & Schmicks Seafood Restaurant                          |  | New York     |  | 2004     
|                                                                  |  |             
|North Carolina                                                    |  |              |  |          
|McCormick & Schmicks Seafood Restaurant                          |  | Charlotte    |  | 2005     
|McCormick & Schmicks Seafood Restaurant                          |  | Charlotte    |  | 2005     
|                                                                  |  |             
|Oregon                                                            |  |              |  |          
|Jakes Famous Crawfish                                            |  | Portland     |  | 1972     
|McCormick & Schmicks Seafood Restaurant                          |  | Portland     |  | 1979     
|McCormicks Fish House & Bar                                      |  | Beaverton    |  | 1981     
|McCormick & Schmicks Harborside at the Marina                    |  | Portland     |  | 1985     
|Jakes Grill / Jakes Catering                                    |  | Portland     |  | 1994     
|The Heathman Restaurant                                           |  | Portland     |  | 2000     
|M&S Grill                                                         |  | Tigard       |  | 2005     
|                                                                  |  |             
|Pennsylvania                                                      |  |              |  |          
|McCormick & Schmicks Seafood Restaurant                          |  | Philadelphia |  | 2001     
|McCormick & Schmicks Seafood Restaurant                          |  | Pittsburgh   |  | 2005     
|                                                                  |  |             
|Rhode Island                                                      |  |              |  |          
|McCormick & Schmicks Seafood Restaurant                          |  | Providence   |  | 2004     
|                                                                  |  |             
|Texas                                                             |  |              |  |          
|McCormick & Schmicks Seafood Restaurant                          |  | Houston      |  | 1999     
|McCormick & Schmicks Seafood Restaurant                          |  | Dallas       |  | 2003     
|McCormick & Schmicks Seafood Restaurant                          |  | Austin       |  | 2004     
|                                                                  |  |             
|Virginia                                                          |  |              |  |          
|McCormick & Schmicks Seafood Restaurant                          |  | Reston       |  | 1997     
|McCormick & Schmicks Seafood Restaurant                          |  | McLean       |  | 2000     
|M&S Grill                                                         |  | Reston       |  | 2004     
|McCormick & Schmicks Seafood Restaurant                          |  | Arlington    |  | 2004     
|                                                                  |  |             
|Washington                                                        |  |              |  |          
|McCormicks Fish House & Bar                                      |  | Seattle      |  | 1977     
|McCormick & Schmicks Seafood Restaurant                          |  | Seattle      |  | 1984     
|McCormick & Schmicks Catering at the Museum of Flight in Seattle |  | Seattle      |  | 1994     
|McCormick & Schmicks Harborside on Lake Union                    |  | Seattle      |  | 1996     
|McCormick & Schmicks Seafood Restaurant                          |  | Bellevue     |  | 2005     

---

|* | We operate these restaurants under management agreements.
|- | ---------------------------------------------------------

Site
Selection

We believe our site selection strategy is critical to our growth strategy. We carefully consider potential markets and we
devote substantial time and effort to evaluating each potential restaurant site. We identify new



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restaurant development opportunities through an established real estate broker network and developer relationships. Our site specifications are flexible and
we believe we consider a broader range of possible locations than most of our regional and national competitors. The criteria we consider in developing our expansion plans and in siting new restaurants include:



| |  |  | population density and the income and educational level of the population;
| | - |  | --------------------------------------------------------------------------



| |  |  | competitive conditions and price points;
| | - |  | ----------------------------------------



| |  |  | estimates of the return on investment;
| | - |  | --------------------------------------



| |  |  | available square footage and lease economics;
| | - |  | ---------------------------------------------



| |  |  | the proximity of hotels and office space and the density of pedestrian and vehicle traffic;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | the suitability of the site for an affordable, upscale restaurant with a traditional ambience;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | capacity expansion possibilities; and
| | - |  | -------------------------------------



| |  |  | managements experience in the market and the locations of our existing restaurants.
| | - |  | ------------------------------------------------------------------------------------

A majority of our restaurants are located in high-traffic, metropolitan areas and several are located in historic buildings. We believe there are many
additional markets that meet our demographic and geographic profiles.

Of our 59 restaurants, including the two we operate under management
agreements, 20 were opened within the last three years and 27 were opened within the last five years. Although our expansion has increased in the last five years, we believe it has been steady, controlled and prudent. We opened seven restaurants in
2005 and our plan for 2006 includes the opening of eight restaurants. We anticipate opening ten, twelve and fourteen restaurants in 2007, 2008 and 2009, respectively. The typical lead-time from the selection of a location to the opening of a
restaurant at that location is approximately twelve to fifteen months.

Marketing and Advertising

The goals of our marketing efforts are to:



| |  |  | increase comparable restaurant sales by attracting new guests;
| | - |  | --------------------------------------------------------------



| |  |  | increase the frequency of visits by our current guests;
| | - |  | -------------------------------------------------------



| |  |  | support new restaurant openings to achieve sales and profit goals; and
| | - |  | ----------------------------------------------------------------------



| |  |  | communicate and promote the uniqueness, appeal, quality and consistency of our brand.
| | - |  | -------------------------------------------------------------------------------------

In 2005, our marketing expenditures, 93% of which were allocated at the local level, constituted approximately 2.5% of revenues.

Local Marketing

Approximately 60 days before a scheduled restaurant opening, our local public relations firms
collaborate with the local media to publicize our restaurant opening and to generate awareness of our brand. For example, we typically host several social events in the local community to generate publicity before the official opening of a
restaurant. Post-opening, we maintain a strong relationship with our public relations firms and remain focused on our commitment to promoting our brand in the local market through various programs, such as cooking demonstrations by our chefs or
discussions on seafood and related offerings on local news broadcasts. We also advertise with local daily and weekly publications, key monthly magazines and local business journals in most urban markets.

We expect each of our restaurants to actively promote our special holiday programs and sponsor community events, such as donations, charitable and
non-profit organizations and visual and performing cultural arts activities. We believe that, in addition to benefiting our local communities, these activities generate positive media attention and publicity for our brand and enhance our local
public image.



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National Marketing

In 2005, we incurred approximately 16% of our advertising expenditures at the national level. Our national campaign focuses on national periodicals such as United Airlines, Delta Airlines, Northwest
Airlines and Alaska Airlines in-flight magazines and WHERE Magazine. Additionally, we advertise across the national network of The Business Journal publication.

To reinforce our broad differentiation, we highlight the breadth and freshness of our seafood, in both local and national advertising. We periodically
offer promotional certificates and maintain contact with organizations in the travel and convention industries, such as hotels, travel agents, convention centers and local shops, to further enhance both brand and restaurant location awareness and to
target specific guest groups.

Operations

Restaurant Management

Our restaurant operations are organized into three divisions (West Coast, Southeast and
Northeast), each with a vice president of operations overseeing all aspects of restaurant operations within the designated division, including financial performance, new restaurant openings, capital expenditure requests, management development and
marketing.

Thirteen multi-unit managers, of whom five are regional managers and eight are regional chefs, are each responsible for five to
eleven restaurants and report to a vice president of operations. Both regional managers and regional chefs are responsible for overall restaurant operations, but have an increased focus on their respective areas of expertise. For example, regional
chefs focus more heavily on negotiating food costs, ensuring high food quality, developing and nurturing executive and sous chefs and being responsive to overall kitchen staff needs. Regional managers focus primarily on revenues, profitability,
front-of-house management and marketing issues.

Our typical restaurant management team consists of a general manager and an executive
chef, two to four assistant managers, two to four sous chefs and, in some cases, a meeting planner/banquet coordinator. The remaining restaurant-level employees are non-salaried personnel varying in number based on restaurant size. Our typical
restaurant employs 80 to 90 full-time and part-time employees. The general manager is responsible for all management functions, including purchasing (other than food), hiring and firing and oversight of restaurant-level bookkeeping and cash
controls. The executive chef is responsible for managing all kitchen functions, including training, menu design and food purchasing, quality and presentation.

We emphasize frequent interaction between our vice presidents, regional managers and restaurant level management. As a result, neither vice presidents nor regional managers operate out of our corporate office and are
routinely accessible to restaurant staff.

All management levels in operations, from vice presidents to assistant managers, participate in
incentive bonus programs. These incentive programs are designed to establish specific goals and objectives and to ensure accountability and reward performance.

Restaurant Operations

Our restaurants are generally open 365 days each year, serve lunch and dinner and are
generally open from 11:00 a.m. to 11:00 p.m. Sunday through Thursday and 11:00 a.m. to 1:00 a.m. Friday and Saturday. In 2005, dinner comprised approximately 76% of our revenues, while lunch comprised approximately 24% of
revenues, and our restaurants served an average of 1,100 guests per week during lunch and 1,600 guests per week during dinner. To accommodate guests who have limited time available during lunch, we offer a 45-minute lunch guarantee.

Additionally, we offer catering and banquet services both in our restaurants and at other locations as customers request. Our presence in and near hotels
enables us to expand the reach of our banquet offerings. In 2005, banquets accounted for approximately 10% of our revenues.



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Employees

As of December 31, 2005 we employed 5,401 persons, of whom 530 were salaried and 4,871 were hourly personnel. None of our employees are represented by unions and we consider our relationship with our employees to
be good. Our employees are summarized by major functional area in the table below.



|                                     |  |                   
|------------------------------------ |  | ------------------
|Functional Area                      |  | Number ofEmployees
|VPs/regional managers/regional chefs |  | 16                
|General managers                     |  | 61                
|Assistant managers                   |  | 190               
|Executive chefs                      |  | 60                
|Sous chefs                           |  | 157               
|Non-salaried restaurant staff        |  | 4,834             
|Corporate salaried                   |  | 46                
|Corporate non-salaried               |  | 37                
|                                     |  |                   
|Total                                |  | 5,401             
|                                     |  |                   

Management Information Systems

All of our information processing is managed from our headquarters in Portland, Oregon. Point-of-sale terminals at each unit allow us to generate the
daily reports needed to manage our restaurants and our business. These reports include, among other things, daily and weekly revenues, guest counts, meal period sales breakouts and food and liquor consumption. The data from the point of sale system
is electronically transferred each night to a third party intranet provider, with the data then accessible by us through the Internet. Financial operating results are reviewed at the corporate office and studied by unit level and regional
management. Variances from expectations are analyzed and addressed at frequent financial meetings.

Industry and Competition

Industry

We operate in a highly competitive
industry that is affected by changes in consumer eating habits and dietary preferences, population trends and traffic patterns, and local and national economic conditions. Key competitive factors in the industry include the taste, quality and price
of the food products offered, quality and speed of guest service, brand name identification, attractiveness of facilities, restaurant location, and overall dining experience. We believe we compete favorably with respect to each of these factors and
have successfully overcome the following barriers faced by seafood restaurants:



| |  |  | developing and maintaining consistent, reliable sources of high quality, fresh seafood;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | it is often not possible to hedge against increases in seafood costs;
| | - |  | ---------------------------------------------------------------------



| |  |  | the preparing and handling of seafood is more complicated than for other types of cuisine; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | consumer tastes in seafood products vary from region to region.
| | - |  | ---------------------------------------------------------------

Competition

While we compete with a range of restaurant operators for consumers dining preferences and with
both restaurants and retailers for site locations and personnel requirements, we consider our principal competitors to include the following:



| |  |  | independent, local seafood houses;
| | - |  | ----------------------------------



| |  |  | regional seafood restaurant concepts, such as Cameron Mitchells, Kings Seafood, Landrys Seafood, Legal Sea Foods, Oceanaire and Roys; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | upscale steak and chop houses such as Capital Grille, Mortons, Ruths Chris, Smith & Wollensky and The Palm, among others.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------

Available Information

We make available free of
charge on or through our website at www.mccormickandschmicks.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we file these materials with the Securities and Exchange Commission. These materials are also available on the Security and Exchange Commissions
website at www.sec.gov.

ITEM 1A. RISK FACTORS

Restaurant companies have been the target of class-actions and other lawsuits alleging, among
other things, violation of federal and state law.

We are subject to a variety of claims arising in the ordinary course of our
business brought by or on behalf of our customers or employees, including personal injury claims, contract claims, and employment-related claims. In recent years, a number of restaurant companies have been subject to lawsuits, including class-action
lawsuits, alleging violations of federal and state law regarding workplace, employment and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted
against us from time to time. Regardless of whether any claims against us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our
performance. A judgment significantly in excess of our insurance coverage for any claims could materially adversely affect our financial condition or results of operations, and adverse publicity resulting from these allegations may materially
adversely affect our business. We may incur substantial damages and expenses resulting from lawsuits, which could have a material adverse effect on our business.

Our ability to expand our restaurant base is influenced by factors beyond our control and therefore we may not be able to achieve our planned growth.

Our growth strategy depends in large part on our ability to open new restaurants and to operate these restaurants profitably. Delays or failures in
opening new restaurants could impair our ability to meet our growth objectives. We have in the past experienced delays in restaurant openings and may experience similar delays in the future. Our ability to expand our business successfully will
depend upon numerous factors, including:



| |  |  | hiring, training and retaining skilled management, chefs and other qualified personnel to open, manage and operate new restaurants;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | locating and securing a sufficient number of suitable new restaurant sites in new and existing markets on acceptable lease terms;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | managing the amount of time and construction and development costs associated with the opening of new restaurants;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | obtaining adequate financing for the construction of new restaurants;
| | - |  | ---------------------------------------------------------------------



| |  |  | securing governmental approvals and permits required to open new restaurants in a timely manner, if at all;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | successfully promoting our new restaurants and competing in the markets in which our new restaurants are located; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------



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

Some of these factors are
beyond our control. We may not be able to achieve our expansion goals and our new restaurants may not be able to achieve operating results similar to those of our existing restaurants.



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Unexpected expenses and low market acceptance could adversely affect the profitability of restaurants that we open
in new markets.

Our growth strategy includes opening restaurants in markets where we have little or no operating experience and in
which potential customers may not be familiar with our restaurants. The success of these new restaurants may be affected by different competitive conditions, consumer tastes and discretionary spending patterns, and our ability to generate market
awareness and acceptance of the McCormick & Schmicks brand. As a result, we may incur costs related to the opening, operation and promotion of these new restaurants that are greater than those incurred in other areas. Even though we
may incur substantial additional costs with these new restaurants, they may attract fewer customers than our more established restaurants in existing markets. Sales at restaurants we open in new markets may take longer to reach our average annual
sales, if at all. As a result, the results of operations at our new restaurants may be inferior to those of our existing restaurants. We may not be able to profitably open restaurants in new markets.

Our growth may strain our infrastructure and resources, which could slow our development of new restaurants and adversely affect our ability to manage our existing
restaurants.

We opened nine company-owned restaurants and began operating an additional restaurant under a management contract in
2004. We opened seven company-owned restaurants in 2005 and we plan to open eight in 2006. Our expansion and our future growth may strain our restaurant management systems and resources, financial controls and information systems. Those demands on
our infrastructure and resources may also adversely affect our ability to manage our existing restaurants. If we fail to continue to improve our infrastructure or to manage other factors necessary for us to meet our expansion objectives, our
operating results could be materially and adversely affected.

Our ability to raise capital in the future may be limited, which could adversely
impact our growth.

Changes in our operating plans, acceleration of our expansion plans, lower than anticipated sales, increased
expenses or other events described in this section may require us to seek additional debt or equity financing. Financing may not be available on acceptable terms and our failure to raise capital when needed could negatively impact our growth and our
financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability
to operate our business.

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

Our profitability depends significantly on our ability to anticipate and react to changes in seafood costs. We rely on
local, regional and national suppliers to provide our seafood. Increases in distribution costs or sale prices or failure to perform by these suppliers could cause our food costs to increase. We could also experience significant short-term
disruptions in our supply if a significant supplier failed to meet its obligations. The supply of seafood is more volatile than other types of food. The type, variety, quality and price of seafood is subject to factors beyond our control, including
weather, governmental regulation, availability and seasonality, each of which may affect our food costs or cause a disruption in our supply. Changes in the price or availability of certain types of seafood could affect our ability to offer a broad
menu and price offering to customers and could materially adversely affect our profitability.

Our operating results may fluctuate significantly and
could fall below the expectations of securities analysts and investors due to seasonality and other factors, resulting in a decline in our stock price.

Our operating results may fluctuate significantly because of several factors, including:



| |  |  | our ability to achieve and manage our planned expansion;
| | - |  | --------------------------------------------------------



| |  |  | our ability to achieve market acceptance, particularly in new markets;
| | - |  | ----------------------------------------------------------------------



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| |  |  | our ability to raise capital in the future;
| | - |  | -------------------------------------------



| |  |  | changes in the availability and costs of food;
| | - |  | ----------------------------------------------



| |  |  | the loss of key management personnel;
| | - |  | -------------------------------------



| |  |  | the concentration of our restaurants in specific geographic areas;
| | - |  | ------------------------------------------------------------------



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



| |  |  | changes in consumer preferences or discretionary spending;
| | - |  | ----------------------------------------------------------



| |  |  | fluctuations in the number of visitors or business travelers to downtown locations;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | health concerns about seafood or other foods;
| | - |  | ---------------------------------------------



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



| |  |  | increases in labor costs;
| | - |  | -------------------------



| |  |  | the impact of federal, state or local government regulations relating to our employees or the sale or preparation of food and the sale of alcoholic beverages;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the effect of competition in the restaurant industry; and
| | - |  | ---------------------------------------------------------



| |  |  | economic trends generally.
| | - |  | --------------------------

Our business also is subject
to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the second and fourth quarter of each year. As a result, our quarterly and annual operating results and restaurant sales may fluctuate significantly as
a result of seasonality and the factors discussed above. Accordingly, results for any one fiscal quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any
particular future period may decrease. Our operating results may also fall below the expectations of securities analysts and investors. In that event, the price of our common stock would likely decrease.

A decline in visitors or business travelers to downtown areas where our restaurants are located could negatively affect our restaurant sales.

Many of our restaurants are located in downtown areas. We depend on both local residents and business travelers to frequent these locations. If the
number of visitors to downtown areas declines due to economic or other conditions, changes in consumer preferences, changes in discretionary consumer spending or for other reasons, our revenues could decline significantly and our results of
operations could be adversely affected.

If we lose the services of any of our key management personnel our business could suffer.

We depend on the services of our key management personnel, including Saed Mohseni, our chief executive officer, and Douglas L.
Schmick, our president. If we lose the services of any members of our senior management or key personnel for any reason, we may be unable to replace them with qualified personnel, which could have a material adverse effect on our business and
growth. We do not carry key person life insurance on any of our executive officers.

Many of our restaurants are concentrated in local or regional
areas and, as a result, we are sensitive to economic and other trends and developments in these areas.

We operate five restaurants
in the Seattle, Washington area, seven in the Portland, Oregon area and 10 in California; our East Coast restaurants are concentrated in and around Washington, D.C. As a result, adverse economic conditions, weather and labor markets in any of these
areas could have a material adverse effect on our overall results of operations. For example, ice storms in northwestern Oregon in January 2004 affected sales at six, or 13%, of our then existing restaurants.



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In addition, given our geographic concentrations, negative publicity regarding any of our restaurants in
these areas could have a material adverse effect on our business and operations, as could other regional occurrences such as local strikes, oil spills, terrorist attacks, energy shortages or increases in energy prices, droughts or earthquakes or
other natural disasters.

Our success depends on our ability to protect our proprietary information. Failure to protect our trademarks, service marks
or trade secrets could adversely affect our business.

Our business prospects depend in part on our ability to develop favorable
consumer recognition of the McCormick & Schmicks name. Although McCormick & Schmicks, M&S Grill and other of our service marks are federally registered trademarks with the United States Patent and Trademark Office,
our trademarks could be imitated in ways that we cannot prevent. In addition, we rely on trade secrets, proprietary know-how, concepts and recipes. Our methods of protecting this information may not be adequate, however, and others could
independently develop similar know-how or obtain access to our trade secrets, know-how, concepts and recipes. Moreover, we may face claims of misappropriation or infringement of third parties rights that could interfere with our use of our
proprietary know-how, concepts, recipes or trade secrets. Defending these claims may be costly and, if unsuccessful, may prevent us from continuing to use this proprietary information in the future, and may result in a judgment or monetary damages.

We do not maintain confidentiality and non-competition agreements with all of our executives, key personnel or suppliers. If competitors
independently develop or otherwise obtain access to our know-how, concepts, recipes or trade secrets, the appeal of our restaurants could be reduced and our business could be harmed.

Our current insurance policies may not provide adequate levels of coverage against all claims.

We believe we maintain insurance coverage that is customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not commercially reasonable to insure.
These losses, if they occur, could have a material and adverse effect on our business and results of operations.

Expanding our restaurant base by
opening new restaurants in existing markets could reduce the business of our existing restaurants.

Our growth strategy includes
opening restaurants in markets in which we already have existing restaurants. We may be unable to attract enough customers to the new restaurants for them to operate at a profit. Even if we are able to attract enough customers to the new restaurants
to operate them at a profit, those customers may be former customers of one of our existing restaurants in that market and the opening of new restaurants in the existing market could reduce the revenue of our existing restaurants in that market.

We may not be able to successfully integrate into our business the operations of restaurants that we acquire, which may adversely affect our
business, financial condition and results of operations.

We may seek to selectively acquire existing restaurants and integrate them
into our business operations. Achieving the expected benefits of any restaurants that we acquire will depend in large part on our ability to successfully integrate the operations of the acquired restaurants and personnel in a timely and efficient
manner. The risks involved in such restaurant acquisitions and integration include:



| |  |  | challenges and costs associated with the acquisition and integration of restaurant operations located in markets where we have limited or no experience;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | possible disruption to our business as a result of the diversion of managements attention from its normal operational responsibilities and duties; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | consolidation of the corporate, information technology, accounting and administrative infrastructure and resources of the acquired restaurants into our business.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

Future acquisitions of existing restaurants, which may be accomplished through a cash purchase transaction or the issuance
of our equity securities, or a combination of both, could result in dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and impairment charges related to goodwill and other intangible assets, any of which
could harm our business and financial condition.

We may be unable to successfully integrate the operations, or realize the anticipated
benefits, of any restaurant that we acquire. If we cannot overcome the challenges and risks that we face in integrating the operations of newly acquired restaurants, our business, financial condition and results of operations could be adversely
affected.

Negative publicity concerning food quality, health and other issues and costs or liabilities resulting from litigation may have a material
adverse effect on our results of operations.

We are sometimes the subject of complaints or litigation from customers alleging
illness, injury or other food quality, health or operational concerns. Litigation or adverse publicity resulting from these allegations may materially and adversely affect us or our restaurants, regardless of whether the allegations are valid or
whether we are liable. Further, these claims may divert our financial and management resources from revenue-generating activities and business operations.

Health concerns relating to the consumption of seafood or other foods could affect consumer preferences and could negatively impact our results of operations.

We may lose customers based on health concerns about the consumption of seafood or negative publicity concerning food quality, illness and injury
generally, such as negative publicity concerning the accumulation of mercury or other carcinogens in seafood, e-coli, mad cow or foot-and-mouth disease, publication of government or industry findings about food products
served by us or other health concerns or operating issues stemming from one of our restaurants. In addition, our operational controls and training may not be fully effective in preventing all food-borne illnesses. Some food-borne illness incidents
could be caused by food suppliers and transporters and would be outside of our control. Any negative publicity, health concerns or specific outbreaks of food-borne illnesses attributed to one or more of our restaurants, or the perception of an
outbreak, could result in a decrease in guest traffic to our restaurants and could have a material adverse effect on our business.

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

The restaurant industry
is characterized by the introduction of new concepts and is subject to rapidly changing consumer preferences, tastes and purchasing habits. Our continued success depends in part upon the popularity of seafood and the style of dining we offer. Shifts
in consumer preferences away from this cuisine or dining style could materially and adversely affect our operating results. Our success will depend in part on our ability to anticipate and respond to changing consumer preferences, tastes and
purchasing habits, and to other factors affecting the restaurant industry, including new market entrants and demographic changes. If we change our concept and menu to respond to changes in consumer tastes or dining patterns, we may lose customers
who do not like the new concept or menu, and may not be able to attract a sufficient new customer base to produce the revenue needed to make the restaurant profitable. Our success also depends to a significant extent on numerous factors affecting
discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. Adverse changes in these factors could reduce guest traffic or impose practical limits on pricing, either of which could harm our
results of operations.



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Labor shortages or increases in labor costs could slow our growth or harm our business.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including regional operational
managers and regional chefs, restaurant general managers and executive chefs, necessary to continue our operations and keep pace with our growth. Qualified individuals are in short supply and competition for these employees is intense. If we are
unable to recruit and retain sufficient qualified individuals, our business and our growth could be adversely affected. Additionally, competition for qualified employees could require us to pay higher wages, which could result in higher labor costs.
If our labor costs increase, our results of operations will be negatively affected.

We may incur costs or liabilities and lose revenue, and our
growth strategy may be adversely impacted, as a result of government regulation.

Our restaurants are subject to various federal,
state and local government regulations, including those relating to employees, the preparation and sale of food and the sale of alcoholic beverages. These regulations affect our restaurant operations and our ability to open new restaurants.

Each of our restaurants must obtain licenses from regulatory authorities to sell liquor, beer and wine, and each restaurant must obtain a
food service license from local health authorities. Each liquor license must be renewed annually and may be revoked at any time for cause, including violation by us or our employees of any laws and regulations relating to the minimum drinking age,
advertising, wholesale purchasing and inventory control. In California, where we operate 10 restaurants, the number of alcoholic beverage licenses available is limited and licenses are traded at market prices.

The failure to maintain our food and liquor licenses and other required licenses, permits and approvals could adversely affect our operating results.
Difficulties or failure in obtaining the required licenses and approvals could delay or result in our decision to cancel the opening of new restaurants.

We are subject to dram shop statutes in some states. These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic
beverages to the intoxicated person. A judgment substantially in excess of our insurance coverage could harm our operating results and financial condition.

Various federal and state labor laws govern our relationship with our employees and affect operating costs. These laws include minimum wage requirements, overtime pay, unemployment tax rates, workers
compensation rates, and citizenship requirements. Additional government-imposed increases in minimum wages, overtime pay, paid leaves of absence and mandated health benefits, increased tax reporting and tax payment requirements for employees who
receive gratuities, or a reduction in the number of states that allow tips to be credited toward minimum wage requirements could harm our operating results and financial condition.

The Federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. Although our
restaurants are designed to be accessible to the disabled, we could be required to make modifications to our restaurants to provide service to, or make reasonable accommodations for, disabled persons.

Our operations and profitability are susceptible to the effects of violence, war and economic trends.

Terrorist attacks and other acts of violence or war and U.S. military reactions to such attacks may negatively affect our operations and an investment in
our shares of common stock. The terrorist attacks in New York and Washington, D.C. on September 11, 2001 led to a temporary interruption in deliveries from some of our suppliers and, we believe, contributed to the decline in average annual
comparable restaurant sales in 2001 and 2002.

Future acts of violence or war could cause a decrease in travel and in consumer confidence,
decrease consumer spending, result in increased volatility in the United States and worldwide financial markets and



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economy, or result in an economic recession in the United States or abroad. They could also impact consumer leisure habits, for example, by increasing time
spent watching television news programs at home, and may reduce the number of times consumers dine out, which could adversely impact our revenue. Any of these occurrences could harm our business, financial condition or results of operations, and may
result in the volatility of the market price for our securities and on the future price of our securities.

Terrorist attacks could also
directly impact our physical facilities or those of our suppliers, and attacks or armed conflicts may make travel and the transportation of our supplies and products more difficult and more expensive and ultimately affect our revenues.

We may not be able to compete successfully with other restaurants, which could adversely affect our results of operations.

The restaurant industry is intensely competitive with respect to price, service, location, food quality, ambiance and the overall dining experience. Our
competitors include a large and diverse group of restaurant chains and individual restaurants that range from independent local operators to well capitalized national restaurant companies. Some of our competitors have been in existence for a
substantially longer period than we have and may be better established in the markets where our restaurants are or may be located. Some of our competitors may have substantially greater financial, marketing and other resources than we do. If our
restaurants are unable to compete successfully with other restaurants in new and existing markets, our results of operations will be adversely affected. We also compete with other restaurants for experienced management personnel and hourly
employees, and with other restaurants and retail establishments for quality restaurant sites.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate headquarters are located in Portland, Oregon. We occupy this facility under a
lease that terminates in December 2009. We lease all of our restaurant facilities, except for two that we operate under management agreements.

ITEM 3. LEGAL PROCEEDINGS

Occasionally, we are a defendant in litigation arising in the ordinary course of our
business, including claims resulting from slip and fall accidents, employment related claims and claims from guests or employees alleging illness, injury or other food quality, health or operational concerns. None of these types of
litigation, most of which are covered by insurance, has had a material effect on our business, results of operations, financial position or cash flows.

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

No matters were submitted to a vote of
stockholders during the fourth quarter of the fiscal year covered by this report.

ITEM 4A. EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES

Douglas L. Schmick(age 58) co-founded
McCormick & Schmicks in 1972 and has been our president since March 1997 and Chairman of the Board of Directors since 2004. From 1997 through 1999, he was also chief executive officer and served as secretary, treasurer, and chief
executive officer from 1974 through 1997. Mr. Schmick has served on the board of directors since August 22, 2001. Mr. Schmick received his Bachelor of Science degree from the University of Idaho.



18



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##### Table of Contents

Saed Mohseni(age 43) has been our chief executive officer since January 2000 and became
a director in June 2004. Mr. Mohseni joined McCormick & Schmicks in 1986 as a general manager. He has also held the positions of senior manager (1988-1993), vice president of operations-California (1993-1997), and senior
vice president of operations (1997-1999).

Emanuel (Manny) N. Hilario(age 38) joined McCormick & Schmicks
in April 2004 as chief financial officer. For the four years before joining us, Mr. Hilario was with Angelo and Maxies, Inc. (formerly Chart House Enterprises, Inc.) most recently as vice president of finance and chief
financial officer. From December 1997 until April 2000, Mr. Hilario was with ACCO North America, a wholly owned subsidiary of Fortune Brands, where he held various positions. Previously, he spent nine years with McDonalds
Corporation. Mr. Hilario received his Bachelor of Science and Commerce degree in accounting from Santa Clara University and is a certified public accountant.

Jerry R. Kelso (age 52) has been the chief internal audit and compliance officer of the Company since April 2004. Mr. Kelso joined us in 1984 as our controller and was vice president of finance
and chief financial officer from 1988 to April 2004. He previously worked for nearly seven years with two regional and local certified public accounting firms. Mr. Kelso received his Bachelor of Arts degree from Central Washington State
College and became a certified public accountant in 1983.

Jeffrey H. Skeele (age 51) has been a vice president of operations
of McCormick & Schmicks since 1998. He also has held the positions of senior manager (1991-1996) and general manager (1986-1988). From 1988 to 1991, Mr. Skeele was a vice president at West Group Partners. Mr. Skeele
graduated from the University of Oregon.

David E. Jenkins (age 59) has been a vice president of operations since joining
McCormick & Schmicks in 1997. Before that, Mr. Jenkins was a regional manager of Island Restaurants (1992-1996), the owner and operator of Santa Fe East (1988-1991), a general manager of Landi Brothers (1982-1987), and the
general manager of Hamburger Hamlet (1978-1981). Mr. Jenkins received his Bachelor of Arts degree from the University of Tampa.

Michael B. Liedberg(age 43) joined McCormick & Schmicks in January 2004 as a vice president of operations. Mr. Liedberg has over 20 years of management experience in the restaurant industry
including service as the president and chief executive officer of Desert Moon Restaurants from December 2001 to January 2004. Before 2001, Mr. Liedberg held various positions for thirteen years with Avado Brands, Inc. in various
executive capacities. Mr. Liedbergs education includes a certificate from the Management Program at Georgia Institute of Technology and a Human Resources Certificate from the University of Georgia.

Raymond E. Bean, Jr.(age 48) has held the position of controller since joining McCormick & Schmicks in 1991.
Mr. Bean also became our chief accounting officer in 1997. Before joining us, Mr. Bean worked in the audit department of a regional certified public accounting firm for eleven years. Mr. Bean received his Bachelor of Science degree
from Central Washington University and is a certified public accountant.



19



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##### Table of Contents

PART II

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

Market Information

Our common stock is listed on The Nasdaq Stock Market National Market under the symbol MSSR. The table below sets forth the
high and low closing price for our common stock in the first, second, third and fourth quarters of fiscal 2005 and the third and fourth quarter of fiscal 2004, as reported by The Nasdaq Stock Market. Our initial public offering occurred in
July 2004. There was no established public trading market for our common stock prior to that date.



|                 |  |             |       |     |   |      
|---------------- |  | ----------- | ----- | --- | - | -----
|                 |  | Sales Price
|                 |  | High        |       | Low
|4th Quarter 2005 |  | $           | 25.86 |     | $ | 19.21
|3rd Quarter 2005 |  |             | 19.80 |     |   | 15.02
|2nd Quarter 2005 |  |             | 16.75 |     |   | 14.82
|1st Quarter 2005 |  |             | 17.58 |     |   | 13.85
|4th Quarter 2004 |  |             | 17.00 |     |   | 10.75
|3rd Quarter 2004 |  |             | 13.20 |     |   | 9.80 

Holders of Record

As of February 17, 2006 there were approximately 54 holders of record of our common stock.

Dividend Policy

We expect to retain all of our earnings to finance the expansion and development of our business and, except as described below, we
have not paid and have no plans to pay cash dividends to our stockholders for the foreseeable future. The payment of dividends is within the discretion of our board of directors and will depend upon our earnings, capital requirements and operating
and financial condition, among other factors. Our revolving credit agreement restricts our ability to pay dividends. See Part IIItem 7, Managements Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources.

From August 23, 2001 to July 23, 2004 we accrued dividends on the 13%
senior exchangeable preferred stock of McCormick & Schmick Acquisition Corp. II, our wholly owned subsidiary. In connection with our initial public offering and reorganization, on July 23, 2004 we paid $28.9 million, including
payment for accrued dividends, to redeem all of the outstanding mandatorily redeemable 13% senior exchangeable preferred stock.

Securities Authorized
for Issuance Under Equity Compensation Plans

The following table provides information about compensation plans (including individual
compensation arrangements) under which our equity securities are authorized for issuance to employees or non-employees (such as directors and consultants), at December 31, 2005.



|                                                        |  |                                                                    |  |                                                     |       |                                                                                                                                      |        
|------------------------------------------------------- |  | ------------------------------------------------------------------ |  | --------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------ | -------
|Plan Category                                           |  | Number ofsecurities to beissued uponexercise ofoutstanding options |  | Weighted-averageexercise price ofoutstandingoptions |       | Number of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected incolumn(a))
|                                                        |  | (a)                                                                |  | (b)                                                 |       | (c)                                                                                                                                 
|Equity compensation plans approved by security holders: |  |                                                                    |  |                                                     |       |                                                                                                                                      |        
|2004 Stock Incentive Plan                               |  | 832,846                                                            |  | $                                                   | 12.00 |                                                                                                                                      | 650,298

Issuer Purchases of Equity Securities

We did not repurchase any of our equity securities during 2005.



20



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##### Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial and operating data below are derived from
the following sources:



| |  |  | The unaudited financial statements of the Company, while operated as a division of Avado Brands, Inc. (which we refer to as our Predecessor), for the period from
December 31, 2000 to August 22, 2001. The unaudited Predecessor financial statements, represent the financial position and results of operations of the McCormick & Schmick division, which have been carved-out from the
consolidated financial statements of Avado Brands.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our unaudited consolidated financial statements for the period from August 23, 2001 to December 29, 2001 and our consolidated financial statements for the fiscal years
2002, 2003, 2004 and 2005, which have been audited by an independent registered public accounting firm.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The selected
consolidated financial and operating data below represent portions of our financial statements which should be read together with Part IIItem 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and the related notes included in Part IIItem 8. Historical results are not necessarily indicative of future performance.



|                                                                                                                |  |                                       |         |                                  |   |        |      |   |         |      |  |   |         |   |  |   |         |   |  |   |        
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | -------------------------------- | - | ------ | ---- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | - |  | - | -------
|                                                                                                                |  | Year Ended                           
|                                                                                                                |  | 2001                                  |         | 2002                             |   |        | 2003 |   |         | 2004 |  |   | 2005   
|                                                                                                                |  | Predecessor                           |         | Successor                       
|                                                                                                                |  | December 31,2000 -August 22,2001      |         | August 23,2001 -December 29,2001 |   |        |      |   |         |      |  |   |         |   | 
|                                                                                                                |  | (in thousands, except per share data)
|Statement of Income Data:                                                                                       |  |                                       |         |                                  |   |        |      |   |         |      |  |   |         |   |  |   |         |   |  |   |        
|Revenues                                                                                                        |  | $                                     | 113,875 |                                  | $ | 59,760 |      | $ | 180,104 |      |  | $ | 196,717 |   |  | $ | 238,757 |   |  | $ | 278,813
|                                                                                                                |  |                                       |         |                                  |   |        |      |   |         |      |  |   |         |   |  |   |         |   |  |   |        
|Restaurant operating costs                                                                                      |  |                                       |         |                                  |   |        |      |   |         |      |  |   |         |   |  |   |         |   |  |   |        
|Food and beverage                                                                                               |  |                                       | 34,150  |                                  |   | 17,408 |      |   | 53,168  |      |  |   | 57,959  |   |  |   | 70,873  |   |  |   | 81,630 
|Labor                                                                                                           |  |                                       | 36,263  |                                  |   | 18,213 |      |   | 56,147  |      |  |   | 61,644  |   |  |   | 75,081  |   |  |   | 86,823 
|Operating                                                                                                       |  |                                       | 16,387  |                                  |   | 8,887  |      |   | 26,406  |      |  |   | 29,244  |   |  |   | 35,204  |   |  |   | 41,857 
|Occupancy                                                                                                       |  |                                       | 9,727   |                                  |   | 5,114  |      |   | 15,349  |      |  |   | 16,890  |   |  |   | 21,401  |   |  |   | 24,790 
|                                                                                                                |  |                                       |         |                                  |   |        |      |   |         |      |  |   |         |   |  |   |         |   |  |   |        
|Total restaurant operating costs                                                                                |  |                                       | 96,527  |                                  |   | 49,622 |      |   | 151,070 |      |  |   | 165,737 |   |  |   | 202,559 |   |  |   | 235,100
|                                                                                                                |  |                                       |         |                                  |   |       
|General and administrative expenses                                                                             |  |                                       | 4,732   |                                  |   | 2,555  |      |   | 7,576   |      |  |   | 9,769   |   |  |   | 12,062  |   |  |   | 15,105 
|Restaurant pre-opening costs                                                                                    |  |                                       | 671     |                                  |   | 319    |      |   | 1,006   |      |  |   | 1,219   |   |  |   | 2,393   |   |  |   | 2,496  
|Depreciation and amortization                                                                                   |  |                                       | 3,810   |                                  |   | 2,761  |      |   | 8,808   |      |  |   | 9,853   |   |  |   | 10,723  |   |  |   | 9,608  
|Management fees and covenants not to compete                                                                    |  |                                       |        |                                  |   | 778    |      |   | 2,550   |      |  |   | 2,550   |   |  |   | 4,241   |   |  |   |       
|Impairment of assets                                                                                            |  |                                       |        |                                  |   |       |      |   |        |      |  |   | 1,513   |   |  |   |        |   |  |   |       
|                                                                                                                |  |                                       |         |                                  |   |        |      |   |         |      |  |   |         |   |  |   |         |   |  |   |        
|Total costs and expenses                                                                                        |  |                                       | 105,740 |                                  |   | 56,035 |      |   | 171,010 |      |  |   | 190,641 |   |  |   | 231,978 |   |  |   | 262,309
|                                                                                                                |  |                                       |         |                                  |   |        |      |   |         |      |  |   |         |   |  |   |         |   |  |   |        
|Operating income                                                                                                |  |                                       | 8,135   |                                  |   | 3,725  |      |   | 9,094   |      |  |   | 6,076   |   |  |   | 6,779   |   |  |   | 16,504 
|Interest expense                                                                                                |  |                                       | 5,711   |                                  |   | 1,626  |      |   | 3,720   |      |  |   | 3,069   |   |  |   | 2,680   |   |  |   | 550    
|Accrued dividends and accretion on mandatorily redeemable preferred stock                                       |  |                                       |        |                                  |   |       |      |   |        |      |  |   | 1,901   |   |  |   | 5,759   |   |  |   |       
|Write off of deferred loan costs on early extinguishment of debt                                                |  |                                       |        |                                  |   |       |      |   |        |      |  |   | 2,313   |   |  |   | 1,288   |   |  |   |       
|                                                                                                                |  |                                       |         |                                  |   |        |      |   |         |      |  |   |         |   |  |   |         |   |  |   |        
|Income (loss) before income taxes and accrued dividends and accretion on mandatorily redeemable preferred stock |  |                                       | 2,424   |                                  |   | 2,099  |      |   | 5,374   |      |  |   | (1,207  | ) |  |   | (2,948  | ) |  |   | 15,954 
|Income tax expense (benefit)                                                                                    |  |                                       | 946     |                                  |   | 647    |      |   | 2,570   |      |  |   | 1,323   |   |  |   | (3,651  | ) |  |   | 4,946  
|Accrued dividends and accretion on mandatorily redeemable preferred stock                                       |  |                                       |        |                                  |   | 1,111  |      |   | 3,347   |      |  |   | 1,832   |   |  |   |        |   |  |   |       
|                                                                                                                |  |                                       |         |                                  |   |        |      |   |         |      |  |   |         |   |  |   |         |   |  |   |        
|Net income (loss)                                                                                               |  | $                                     | 1,478   |                                  | $ | 341    |      | $ | (543    | )    |  | $ | (4,362  | ) |  | $ | 703     |   |  | $ | 11,008 
|                                                                                                                |  |                                       |         |                                  |   |        |      |   |         |      |  |   |         |   |  |   |         |   |  |   |        
|Net income (loss) per share(1)                                                                                  |  |                                       |         |                                  |   |        |      |   |         |      |  |   |         |   |  |   |         |   |  |   |        
|Basic                                                                                                           |  | $                                     | 0.19    |                                  | $ | 0.04   |      | $ | (0.07   | )    |  | $ | (0.56   | ) |  | $ | 0.07    |   |  | $ | 0.80   
|Diluted                                                                                                         |  | $                                     | 0.19    |                                  | $ | 0.04   |      | $ | (0.07   | )    |  | $ | (0.56   | ) |  | $ | 0.07    |   |  | $ | 0.78   
|Shares used in computing net income (loss) per share(1)                                                         |  |                                       |         |                                  |   |        |      |   |         |      |  |   |         |   |  |   |         |   |  |   |        
|Basic                                                                                                           |  |                                       | 7,782   |                                  |   | 7,782  |      |   | 7,782   |      |  |   | 7,782   |   |  |   | 10,387  |   |  |   | 13,798 
|Diluted                                                                                                         |  |                                       | 7,782   |                                  |   | 7,782  |      |   | 7,782   |      |  |   | 7,782   |   |  |   | 10,416  |   |  |   | 14,047 



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|                                                                                                          |  |                                  |         |   |                                  |   |          |      |  |   |         |   |  |      |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | -------------------------------- | - | -------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                          |  | Year End                         |        
|                                                                                                          |  | 2001                             |         |   | 2002                             |   |          | 2003 |  |   | 2004    |   |  | 2005 |        
|                                                                                                          |  | Predecessor                      |         |   | Successor                        |  
|                                                                                                          |  | December 31,2000 -August 22,2001 |         |   | August 23,2001 -December 29,2001 |   |          |      |  |   |         |   |  |      |         |   |  |  
|                                                                                                          |  | (in thousands)                   |        
|Balance Sheet Data:                                                                                       |  |                                  |         |   |                                  |   |          |      |  |   |         |   |  |      |         |   |  |   |         |   |  |   |         |  
|Cash and cash equivalents                                                                                 |  | $                                | 385     |   |                                  | $ | 2,028    |      |  | $ | 2,945   |   |  | $    | 2,453   |   |  | $ | 451     |   |  | $ | 4,705   |  
|Total assets                                                                                              |  |                                  | 126,317 |   |                                  |   | 158,581  |      |  |   | 157,953 |   |  |      | 161,792 |   |  |   | 179,060 |   |  |   | 204,160 |  
|Long-term debt, revolving credit facility and obligations under capital leases, including current portion |  |                                  |        |   |                                  |   | 54,000   |      |  |   | 46,983  |   |  |      | 40,056  |   |  |   | 13,140  |   |  |   | 706     |  
|                                                                                                          |  |                                  |         |   |                                  |  
|Mandatorily redeemable preferred stock                                                                    |  |                                  |        |   |                                  |   | 16,057   |      |  |   | 19,404  |   |  |      | 23,137  |   |  |   |        |   |  |   |        |  
|Total members/stockholders equity                                                                       |  |                                  | 95,428  |   |                                  |   | 63,151   |      |  |   | 61,860  |   |  |      | 57,767  |   |  |   | 124,070 |   |  |   | 143,453 |  
|                                                                                                          | 
|                                                                                                          |  | Year Ended                       |        
|                                                                                                          |  | 2001                             |         |   | 2002                             |   |          | 2003 |  |   | 2004    |   |  | 2005 |        
|                                                                                                          |  | Predecessor                      |         |   | Successor                        |  
|                                                                                                          |  | December 31,2000 -August 22,2001 |         |   | August 23,2001 -December 29,2001 |   |          |      |  |   |         |   |  |      |         |   |  |  
|                                                                                                          |  | (in thousands)                   |        
|Other Data:                                                                                               |  |                                  |         |  
|Restaurants open at end of period (including managed restaurants)                                         |  |                                  | 34      |   |                                  |   | 35       |      |  |   | 39      |   |  |      | 42      |   |  |   | 52      |   |  |   | 59      |  
|Net cash provided by operating activities                                                                 |  | $                                | 5,838   |   |                                  | $ | 4,745    |      |  | $ | 14,582  |   |  | $    | 20,652  |   |  | $ | 21,452  |   |  | $ | 30,158  |  
|Net cash used in investing activities                                                                     |  |                                  | (8,529  | ) |                                  |   | (134,473 | )    |  |   | (8,779  | ) |  |      | (14,956 | ) |  |   | (27,284 | ) |  |   | (21,416 | )
|Net cash provided by (used in) financing activities                                                       |  |                                  | 2,852   |   |                                  |   | 131,756  |      |  |   | (4,886  | ) |  |      | (6,188  | ) |  |   | 3,830   |   |  |   | (4,488  | )
|EBITDA(2)                                                                                                 |  |                                  | 11,945  |   |                                  |   | 6,486    |      |  |   | 17,902  |   |  |      | 15,929  |   |  |   | 17,502  |   |  |   | 26,112  |  

---

|(1) | For periods prior to initial our public offering, we have given retroactive effect to the completion of our corporate reorganization in calculating common shares outstanding. See
Part IIItem 8, Note 3, Summary of Significant Accounting Policies.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | EBITDA represents earnings before interest, taxes, depreciation and amortization, write off of deferred loan costs on early extinguishment of debt and accrued dividends and
accretion on mandatorily redeemable preferred stock. We are presenting EBITDA because it provides an additional measure to view our operations which, when considered with both our GAAP results and the reconciliation to net income (loss), we believe
provides a more complete understanding of our business than could be obtained absent this disclosure. EBITDA is not a measurement determined in accordance with GAAP and should not be considered in isolation or as an alternative to net income (loss),
net cash provided by operating, investing or financing activities or other financial statement data presented as indicators of financial performance or liquidity. EBITDA as presented may not be comparable to other similarly titled measures of other
companies. A reconciliation of EBITDA to net income (loss) is provided below.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                          |  |                                  |        |                                  |   |       |      |   |        |      |  |   |        |   |  |   |        |   |  |   |       
|------------------------------------------------------------------------- |  | -------------------------------- | ------ | -------------------------------- | - | ----- | ---- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | - |  | - | ------
|                                                                          |  | Year Ended                      
|                                                                          |  | 2001                             |        | 2002                             |   |       | 2003 |   |        | 2004 |  |   | 2005  
|                                                                          |  | Predecessor                      |        | Successor                       
|                                                                          |  | December 31,2000 -August 22,2001 |        | August 23,2001 -December 29,2001 |   |       |      |   |        |      |  |   |        |   | 
|                                                                          |  | (in thousands)                  
|Net income (loss)                                                         |  | $                                | 1,478  |                                  | $ | 341   |      | $ | (543   | )    |  | $ | (4,362 | ) |  | $ | 703    |   |  | $ | 11,008
|Accrued dividends and accretion on mandatorily redeemable preferred stock |  |                                  |       |                                  |   | 1,111 |      |   | 3,347  |      |  |   | 3,733  |   |  |   | 5,759  |   |  |   |      
|Income tax expense (benefit)                                              |  |                                  | 946    |                                  |   | 647   |      |   | 2,570  |      |  |   | 1,323  |   |  |   | (3,651 | ) |  |   | 4,946 
|Interest expense                                                          |  |                                  | 5,711  |                                  |   | 1,626 |      |   | 3,720  |      |  |   | 3,069  |   |  |   | 2,680  |   |  |   | 550   
|Depreciation and amortization                                             |  |                                  | 3,810  |                                  |   | 2,761 |      |   | 8,808  |      |  |   | 9,853  |   |  |   | 10,723 |   |  |   | 9,608 
|Write off of deferred loan costs on early extinguishment of debt          |  |                                  |       |                                  |   |      |      |   |       |      |  |   | 2,313  |   |  |   | 1,288  |   |  |   |      
|                                                                          |  |                                  |        |                                  |   |       |      |   |        |      |  |   |        |   |  |   |        |   |  |   |       
|EBITDA                                                                    |  | $                                | 11,945 |                                  | $ | 6,486 |      | $ | 17,902 |      |  | $ | 15,929 |   |  | $ | 17,502 |   |  | $ | 26,112
|                                                                          |  |                                  |        |                                  |   |       |      |   |        |      |  |   |        |   |  |   |        |   |  |   |       



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##### Table of Contents

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

Overview

Our company was founded in 1972 with William P. McCormicks acquisition of Jakes
Famous Crawfish in Portland, Oregon. We grew our family of restaurants slowly through the next two decades and in 1994, when we owned 14 restaurants, a majority interest in our company was purchased by Castle Harlan Partners II, L.P., a private
investment firm. Avado Brands purchased us in 1997. We operated as a division of Avado Brands and added 18 new restaurants in just under four and a half years. In August 2001, Avado Brands sold our company to Castle Harlan Partners III, L.P.
(Castle Harlan) and Bruckmann, Rosser, Sherrill & Co., II, L.P. (BRS), private equity investment firms that actively invest in restaurant companies. We have expanded our restaurant base to 59 restaurants, at
December 31, 2005, including two restaurants operated pursuant to management contracts.

We have grown our business by offering our
customers a daily-printed menu with a broad selection of affordable, quality fresh seafood in an upscale environment, serviced by knowledgeable and professional management and staff. Our revenues are generated by sales at our restaurants, including
banquets. In 2005, banquets accounted for approximately 10% of our revenues. In 2005, food and non-alcoholic beverage sales accounted for approximately 70% of revenues and the remaining 30% of revenues was from the sale of alcoholic beverages.

We measure performance using key operating indicators such as comparable restaurant sales, food and beverage costs, and restaurant
operating expenses, with a focus on labor as a percentage of revenues and total occupancy costs. We also track trends in average weekly revenues at both the restaurant level and on a consolidated basis as an indicator of our performance. The key
operating measure used by management in evaluating our operating results is operating income. Operating income is calculated by deducting restaurant operating costs, general and administrative expenses, restaurant pre-opening costs, depreciation and
amortization and other corporate costs from revenues. We monitor general and administrative expenses as a percentage of revenues, which we monitor to be within our budgeted levels. Restaurant pre-opening costs are analyzed based on the number and
timing of restaurant openings and by comparison to budgeted amounts, with an overall target of approximately $0.3 to $0.4 million per restaurant opening, which may include up to $0.1 million in non-cash rent expense during the construction
period.

The most significant restaurant operating costs are food and beverage costs and labor and related employee benefits. We believe
our national and regional presence allows us to achieve better quality and pricing on key products than most of our competitors. We closely monitor food and beverage costs and regularly review our selection of preferred vendors on the basis of
several key metrics, including pricing. In addition, because we print our menu at least once daily in each of the majority of our restaurants, we are able to adapt the seafood items we offer to changes in vendor pricing to optimize our revenue mix
and mitigate the impact of cost increases in any particular seafood item by substituting a lower-cost alternative on our menu or by adjusting the price. With respect to labor costs, we believe the combination of future growth in revenues and the
resulting greater leverage of our vice presidents of operations and regional managers will allow us to better leverage payroll expenses over time. Our employee benefits include health insurance, the cost of which continues to increase faster than
the general rate of inflation. We continually monitor this cost and review strategies to effectively control increases but we are subject to the overall trend of increases in healthcare costs.

General and administrative expenses are controlled in absolute amounts and monitored as a percentage of revenues. As we have continued our growth and
became a public company, we have incurred substantial training costs and made significant investments in infrastructure, including our information systems. As we continue to grow and are able to leverage investments made in our people and systems,
we expect these expenses to decrease as a percentage of revenues over time.



23



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##### Table of Contents

Identification of appropriate new restaurant sites is essential to our growth strategy. We evaluate and
invest in new restaurants based on site-specific projected returns on investment. We believe our store model and flexible real estate strategy provide us with continued opportunities to find attractive real estate locations on favorable terms.

Strategic Focus and Operating Outlook

Our primary business focus for over 34 years has been to consistently offer a broad selection of high quality, fresh seafood, which we believe commands strong loyalty from our customers. We have successfully expanded our
McCormick & Schmicks seafood restaurant concept throughout the United States and have competed effectively with both national and regional restaurant chains as well as with local operators. We opened three, nine and seven
company-owned restaurants in 2003, 2004 and 2005, respectively, and entered into a management contract for one restaurant in 2004, growing from 39 to 59 restaurants during this three year period.

Our objective is to continue to prudently grow McCormick & Schmicks seafood restaurants in existing and new markets. Our 2006 plan
includes the opening of eight new restaurants. In addition to new unit growth, we are committed to improving comparable restaurant sales over the levels achieved in 2005 by driving increased guest counts as well as restaurant level operating
margins.

Results of Operations

Our
operating results for the fiscal years 2003, 2004 and 2005 are expressed as a percentage of revenues below:



|                                                                                                                |  |            |    |  |       |    |  |       |  
|--------------------------------------------------------------------------------------------------------------- |  | ---------- | -- |  | ----- | -- |  | ----- | -
|                                                                                                                |  | Year Ended |   
|                                                                                                                |  | 2003       |    |  | 2004  |    |  | 2005  |  
|Revenues                                                                                                        |  | 100.0      | %  |  | 100.0 | %  |  | 100.0 | %
|                                                                                                                |  |            |    |  |       |    |  |       |  
|Food and beverage                                                                                               |  | 29.5       | %  |  | 29.7  | %  |  | 29.3  | %
|Labor                                                                                                           |  | 31.3       | %  |  | 31.4  | %  |  | 31.1  | %
|Operating                                                                                                       |  | 14.9       | %  |  | 14.7  | %  |  | 15.0  | %
|Occupancy                                                                                                       |  | 8.6        | %  |  | 9.0   | %  |  | 8.9   | %
|                                                                                                                |  |            |    |  |       |    |  |       |  
|Total restaurant operating costs                                                                                |  | 84.3       | %  |  | 84.8  | %  |  | 84.3  | %
|General and administrative expenses                                                                             |  | 5.0        | %  |  | 5.1   | %  |  | 5.4   | %
|Restaurant pre-opening costs                                                                                    |  | 0.6        | %  |  | 1.0   | %  |  | 0.9   | %
|Depreciation and amortization                                                                                   |  | 4.9        | %  |  | 4.5   | %  |  | 3.5   | %
|Management fees and covenants not to compete                                                                    |  | 1.3        | %  |  | 1.8   | %  |  |      |  
|Impairment of assets                                                                                            |  | 0.8        | %  |  |      |    |  |      |  
|                                                                                                                |  |            |    |  |       |    |  |       |  
|Total costs and expenses                                                                                        |  | 96.9       | %  |  | 97.2  | %  |  | 94.1  | %
|                                                                                                                |  |            |    |  |       |    |  |       |  
|Operating income                                                                                                |  | 3.1        | %  |  | 2.8   | %  |  | 5.9   | %
|Interest expense                                                                                                |  | 1.6        | %  |  | 1.1   | %  |  | 0.2   | %
|Accrued dividends and accretion on mandatorily redeemable preferred stock                                       |  | 1.0        | %  |  | 2.4   | %  |  |      |  
|Write off of deferred loan costs on early extinguishment of debt                                                |  | 1.2        | %  |  | 0.5   | %  |  |      |  
|                                                                                                                |  |            |    |  |       |    |  |       |  
|Income (loss) before income taxes and accrued dividends and accretion on mandatorily redeemable preferred stock |  | (0.7       | )% |  | (1.2  | )% |  | 5.7   | %
|Income tax expense (benefit)                                                                                    |  | 0.6        | %  |  | (1.5  | )% |  | 1.8   | %
|Accrued dividends and accretion on mandatorily redeemable preferred stock                                       |  | 0.9        | %  |  |      |    |  |      |  
|                                                                                                                |  |            |    |  |       |    |  |       |  
|Net income (loss)                                                                                               |  | (2.2       | )% |  | 0.3   | %  |  | 3.9   | %
|                                                                                                                |  |            |    |  |       |    |  |       |  



24



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##### Table of Contents

Description of Terms

Revenues consist of revenues from comparable restaurants, new restaurants and management agreements. For purposes of comparable restaurant sales, a restaurant is included in the comparable restaurant base in
the first full quarter following the eighteenth month of operations. New restaurant revenues include revenues from restaurants we opened during the period under discussion.

Restaurant operating costs consist of:



| |  |  | food and beverage costs;
| | - |  | ------------------------



| |  |  | labor costs, consisting of restaurant management salaries, hourly staff payroll and other payroll-related items including taxes and fringe benefits;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | operating costs, consisting of advertising, maintenance, utilities, insurance, bank and credit card charges, and any other restaurant level expenses; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | occupancy costs, consisting of both fixed and variable portions of rent, common area maintenance charges, property insurance premiums, and real property taxes.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

General and administrative expenses consist of expenses associated with corporate administrative functions that
support development and restaurant operations and provide an infrastructure to support future growth, including management and staff salaries, employee benefits, travel, legal and professional fees, technology and market research.

Restaurant pre-opening costs, which are expensed as incurred, consist of costs incurred prior to opening a new restaurant and are comprised
principally of manager salaries and relocation, employee payroll and related training costs for new employees, including practice and rehearsal of service activities. Restaurant pre-opening costs also include non-cash rent expense during the
construction period.

Depreciation and amortization consists of depreciation of equipment and amortization of leasehold improvements
and capitalized loan costs.

Financial Performance Overview

The following are highlights of our financial performance for 2005 compared to 2004:



| |  |  | Revenues increased 16.8% to $278.8 million
| | - |  | ------------------------------------------



| |  |  | Comparable restaurant sales increased 3.0%
| | - |  | ------------------------------------------



| |  |  | Net income was $11.0 million compared to $0.7 million, which included a $3.7 million tax benefit in 2004
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Diluted earnings per share was $0.78 compared to $0.07, which included a $0.35 per share tax benefit in 2004
| | - |  | ------------------------------------------------------------------------------------------------------------

2005 (53 weeks) Compared to 2004 (52 weeks)

Our
financial results in 2005 included 53 weeks of operation, compared to 52 weeks in 2004, and also included operations on New Years Eve Day in 2004 and 2005. Our restaurants typically have large sales volumes on New Years Eve
Day.



25



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##### Table of Contents

Revenues and Restaurant Operating Costs

The following table sets forth revenues and restaurant operating costs, including food and beverage, labor, operating and occupancy costs from our
consolidated statements of operations.



|                                 |  |                   |         |                   |   |         |  |   |        |  |      |  
|-------------------------------- |  | ----------------- | ------- | ----------------- | - | ------- |  | - | ------ |  | ---- | -
|                                 |  | Year Ended        |         | Change            |  
|                                 |  | December 25, 2004 |         | December 31, 2005 |  
|                                 |  |                   | $       |                   | % |        
|                                 |  | (in thousands)    |         |                   |  
|Revenues                         |  | $                 | 238,757 |                   | $ | 278,813 |  | $ | 40,056 |  | 16.8 | %
|                                 |  |                   |         |                   |   |         |  |   |        |  |      |  
|Restaurant operating costs       |  |                   |         |                   |   |         |  |   |        |  |      |  
|Food and beverage                |  | $                 | 70,873  |                   | $ | 81,630  |  | $ | 10,757 |  | 15.2 | %
|Labor                            |  |                   | 75,081  |                   |   | 86,823  |  |   | 11,742 |  | 15.6 | %
|Operating                        |  |                   | 35,204  |                   |   | 41,857  |  |   | 6,653  |  | 18.9 | %
|Occupancy                        |  |                   | 21,401  |                   |   | 24,790  |  |   | 3,389  |  | 15.8 | %
|                                 |  |                   |         |                   |   |         |  |   |        |  |      |  
|Total restaurant operating costs |  | $                 | 202,559 |                   | $ | 235,100 |  | $ | 32,541 |  | 16.1 | %
|                                 |  |                   |         |                   |   |         |  |   |        |  |      |  

Revenues. Revenues increased by $40.1 million, or 16.8%, to $278.8 million in
2005 from $238.8 million in 2004. This increase was attributable to revenues of $5.9 million in the 53rdweek
in 2005, $19.4 million generated by seven company-owned restaurants opened in 2005, an $8.8 million increase in revenues in 2005 from restaurants opened in 2004, and a $6.0 million increase from restaurants opened prior to 2004. Comparable
restaurant sales, based on a 52 week to 52 week comparison were positive 3.0% in 2005, primarily as the result of improved guest counts coupled with higher menu pricing.

Food and Beverage Costs. Food and beverage costs increased by $10.8 million, or 15.2%, to $81.6 million in 2005 from $70.9 million in 2004. This increase was primarily due to the additional revenues
in 2005. Food and beverage costs as a percentage of revenues decreased to 29.3% in 2005 compared to 29.7% in 2004 primarily related to menu price increases and improved food and beverage cost at the newer restaurants.

Labor Costs. Labor costs increased by $11.7 million, or 15.6%, to $86.8 million in 2005 from $75.1 million in 2004. This increase was
primarily due to the additional revenues in 2005. Labor costs as a percentage of revenues decreased to 31.1% in 2005 from 31.4% in 2004. Labor costs as a percentage of revenues decreased due to leverage resulting from the higher average sales
volumes for 2005.

Operating Costs. Operating costs increased by $6.7 million, or 18.9%, to $41.9 million in 2005 from $35.2 million
in 2004 primarily due to the additional revenues in 2005. Operating costs as a percentage of revenues increased from 14.7% in 2004 to 15.0% in 2005 primarily due to higher utility rates and higher marketing expenses.

Occupancy Costs. Occupancy costs increased by $3.4 million, or 15.8%, to $24.8 million in 2005 from $21.4 million in 2004 primarily due to the
additional revenues in 2005. Occupancy costs as a percentage of revenues decreased to 8.9% in 2005 from 9.0% in 2004 primarily due to leveraging results from the higher average sales volumes for 2005. Non-cash rents were $2.2 million, or 0.9%
of revenues and $1.9 million, or 0.8% of revenues for 2005 and 2004, respectively.



26



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##### Table of Contents

General and Administrative Expenses, Restaurant Pre-Opening Costs, Depreciation and Amortization and Management
Fees and Covenants Not to Compete

The following table sets forth general and administrative, restaurant pre-opening, depreciation
and amortization and management fees and covenants not to compete costs from our consolidated statements of operations.



|                                             |  |                   |        |                   |   |        |   |   |        |   |  |        |   
|-------------------------------------------- |  | ----------------- | ------ | ----------------- | - | ------ | - | - | ------ | - |  | ------ | --
|                                             |  | Year Ended        |        | Change            |  
|                                             |  | December 25, 2004 |        | December 31, 2005 |  
|                                             |  |                   |        | $                 |   |        | % |  
|                                             |  | (in thousands)    |        |                   |   |       
|General and administrative expenses          |  | $                 | 12,062 |                   | $ | 15,105 |   | $ | 3,043  |   |  | 25.2   | % 
|Restaurant pre-opening costs                 |  |                   | 2,393  |                   |   | 2,496  |   |   | 103    |   |  | 4.3    | % 
|Depreciation and amortization                |  |                   | 10,723 |                   |   | 9,608  |   |   | (1,115 | ) |  | (10.4  | )%
|Management fees and covenants not to compete |  |                   | 4,241  |                   |   |       |   |   | (4,241 | ) |  | (100.0 | )%

General and Administrative Expenses. General and administrative expenses increased by
$3.0 million, or 25.2%, to $15.1 million in 2005 from $12.1 million in 2004. General and administrative expenses as a percentage of revenues were 5.4% in 2005 compared to 5.1% in 2004. The increase is primarily attributable to the
seven additional months of expenses for being a publicly traded company and due to one additional week of operations and performance based compensation expense.

Restaurant Pre-Opening Costs. There were seven and nine company-owned restaurants opened in 2005 and 2004, respectively. Restaurant pre-opening costs increased by $0.1 million, or 4.3%, to $2.5 million in 2005
from $2.4 million in 2004. Our average pre-opening cost per 2005 opening was $358,000.

Depreciation and Amortization. Depreciation
and amortization decreased by $1.1 million, or 10.4%, to $9.6 million in 2005 from $10.7 million in 2004. The decrease is primarily due to three year assets that were fully depreciated in 2004.

Management Fees and Covenants Not to Compete. Prior to our initial public offering, we paid annual management fees of $1.1 million to each of
BRS and Castle Harlan. Affiliates of each of BRS and Castle Harlan had significant ownership interests in the Company at the time of the agreement terminations. Management fees recognized as expenses totaled $3.3 million for 2004. The amount of
$3.3 million paid for in 2004 includes $1.1 million paid to each of BRS and Castle Harlan for the termination of the management agreements as of June 25, 2004. Pursuant to covenants not to compete agreements with certain stockholders,
we expensed $0.9 million for 2004. The management fee agreements and all but one of the covenants not to compete agreements were terminated in connection with our initial public offering in 2004. The remaining covenants not to compete agreement
terminated in 2005.

Interest Expense, Accrued Dividends and Accretion on Mandatorily Redeemable Preferred Stock, Income Tax Expense (Benefit) and
Net Income

The following table sets forth interest expense, accrued dividends and accretion on mandatorily redeemable preferred
stock, income tax expense (benefit) and net income from our consolidated statements of operations.



|                                                                          |  |                   |        |        |                   |   |        |  |   |        |   |  |         |   
|------------------------------------------------------------------------- |  | ----------------- | ------ | ------ | ----------------- | - | ------ |  | - | ------ | - |  | ------- | --
|                                                                          |  | Year Ended        |        | Change |                  
|                                                                          |  | December 25, 2004 |        |        | December 31, 2005 |  
|                                                                          |  |                   | $      |        |                   | % |       
|                                                                          |  | (in thousands)    |        |        |                   |  
|Interest expense                                                          |  | $                 | 2,680  |        |                   | $ | 550    |  | $ | (2,130 | ) |  | (79.5   | )%
|                                                                          |  |                   |        |        |                   |   |        |  |   |        |   |  |         |   
|Accrued dividends and accretion on mandatorily redeemable preferred stock |  | $                 | 5,759  |        |                   | $ |       |  | $ | (5,759 | ) |  | (100.0  | )%
|                                                                          |  |                   |        |        |                   |   |        |  |   |        |   |  |         |   
|Write off of deferred loan costs on early extinguishment of debt          |  |                   | 1,288  |        |                   |   |       |  |   | (1,288 | ) |  | (100.0  | )%
|                                                                          |  |                   |        |        |                   |   |        |  |   |        |   |  |         |   
|Income (loss) before income taxes                                         |  | $                 | (2,948 | )      |                   | $ | 15,954 |  | $ | 18,902 |   |  | 641.2   | % 
|Income tax expense (benefit)                                              |  |                   | (3,651 | )      |                   |   | 4,946  |  |   | 8,597  |   |  | 235.5   | % 
|                                                                          |  |                   |        |        |                   |   |        |  |   |        |   |  |         |   
|Net income                                                                |  | $                 | 703    |        |                   | $ | 11,008 |  | $ | 10,305 |   |  | 1,465.9 | % 
|                                                                          |  |                   |        |        |                   |   |        |  |   |        |   |  |         |   



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##### Table of Contents

Interest Expense. Interest expense decreased by $2.1 million, or 79.5%, to $0.6 million
in 2005, from $2.7 million in 2004 primarily due to a decrease in the average outstanding debt balance as a result of the pay-down of our credit facility in 2005.

Accrued Dividends and Accretion on Mandatorily Redeemable Preferred Stock. Dividends and accretive rights of a subsidiarys redeemable preferred stock are reflected as accrued dividends and accretion on
mandatorily redeemable preferred stock in the consolidated financial statements. Proceeds from our initial public offering in 2004 were used to redeem all of the preferred stock. See Liquidity and Capital Resources.

Write Off of Deferred Loan Costs on Early Extinguishment of Debt. In July 2004 we entered into a new revolving credit facility and wrote off
deferred loan costs relating to the prior credit facility in the amount of $1.3 million.

Income Tax (Benefit) Expense. In
2005, we recognized income tax expense of $4.9 million resulting in an overall effective tax rate of 31%. The provision for income taxes represents Federal, state and local income taxes. Our estimated combined statutory income tax rate for 2005 is
39.9%. The difference between our effective tax rate and the estimated combined statutory rate is primarily the result of FICA Tip Credits. In 2004, we recognized an income tax benefit of $3.7 million primarily related to a reduction in the deferred
tax asset valuation allowance of $1.2 million and FICA Tip Credits of $3.7 million (net of reduction in net operating loss carry forward), offset by the income tax expense of $1.1 million on current earnings before the accrued dividends and
accretion on mandatorily redeemable preferred stock.

2004 (52 weeks) Compared to 2003 (52 weeks)

Revenues and Restaurant Operating Costs

The
following table sets forth revenues and restaurant operating costs, including food and beverage, labor, operating and occupancy costs from our consolidated statements of operations.



|                                 |  |                   |         |                   |   |         |  |   |        |  |      |  
|-------------------------------- |  | ----------------- | ------- | ----------------- | - | ------- |  | - | ------ |  | ---- | -
|                                 |  | Year Ended        |         | Change            |  
|                                 |  | December 27, 2003 |         | December 25, 2004 |  
|                                 |  |                   | $       |                   | % |        
|                                 |  | (in thousands)    |         |                   |  
|Revenues                         |  | $                 | 196,717 |                   | $ | 238,757 |  | $ | 42,040 |  | 21.4 | %
|                                 |  |                   |         |                   |   |         |  |   |        |  |      |  
|Restaurant operating costs       |  |                   |         |                   |   |         |  |   |        |  |      |  
|Food and beverage                |  | $                 | 57,959  |                   | $ | 70,873  |  | $ | 12,914 |  | 22.3 | %
|Labor                            |  |                   | 61,644  |                   |   | 75,081  |  |   | 13,437 |  | 21.8 | %
|Operating                        |  |                   | 29,244  |                   |   | 35,204  |  |   | 5,960  |  | 20.4 | %
|Occupancy                        |  |                   | 16,890  |                   |   | 21,401  |  |   | 4,511  |  | 26.7 | %
|                                 |  |                   |         |                   |   |         |  |   |        |  |      |  
|Total restaurant operating costs |  | $                 | 165,737 |                   | $ | 202,559 |  | $ | 36,822 |  | 22.2 | %
|                                 |  |                   |         |                   |   |         |  |   |        |  |      |  

Revenues. Revenues increased by $42.0 million, or 21.4%, to $238.8 million in
2004 from $196.7 million in 2003. This increase was attributable to revenues of $25.9 million generated by nine company-owned restaurants opened in 2004, a $9.7 million increase in revenues in 2004 from restaurants opened in 2003, and
a $6.4 million increase from restaurants opened prior to 2003. Comparable restaurant sales were positive 3.8% in 2004, primarily as the result of higher pricing.

Food and Beverage Costs. Food and beverage costs increased by $12.9 million, or 22.3%, to $70.9 million in 2004 from $58.0 million in 2003. This increase was primarily due to the nine
company-owned restaurants opened in 2004. Food and beverage costs as a percentage of revenues increased to 29.7% in 2004 compared to 29.5% in 2003 primarily related to product handling inefficiency at the nine company-owned restaurants opened in
2004.



28



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##### Table of Contents

Labor Costs. Labor costs increased by $13.4 million, or 21.8%, to $75.1 million in 2004
from $61.6 million in 2003. This increase was primarily due to the nine company-owned restaurants opened in 2004. Labor costs as a percentage of revenues increased to 31.4% in 2004 from 31.3% in 2003. Labor costs as a percentage of revenues
decreased for the comparable restaurants primarily due to leverage resulting from the higher average volumes for 2004. This was offset by the impact of the new restaurants that typically experience lower productivity and higher training costs during
the first and second year of operations as the new employees learn our operating model.

Operating Costs. Operating costs increased
by $6.0 million, or 20.4%, to $35.2 million in 2004 from $29.2 million in 2003. This increase was primarily due to the nine company-owned restaurants opened in 2004. We also experienced higher energy costs in 2004. Operating costs as a
percentage of revenues decreased to 14.7% in 2004 from 14.9% in 2003. Several of the operating costs included in this cost category are either fixed or semi-variable. As a result, operating costs as a percentage of revenues decreased due to the 3.8%
comparable restaurant sales increase in 2004.

Occupancy Costs. Occupancy costs increased by $4.5 million, or 26.7%, to $21.4
million in 2004 from $16.9 million in 2003 primarily due to the occupancy costs of the restaurants opened in 2004. Occupancy costs as a percentage of revenues increased to 9.0% in 2004 from 8.6% in 2003 primarily due to occupancy costs as a
percentage of revenues for the restaurants opened in 2004 being higher than occupancy costs as a percentage of revenues for the comparable restaurants. Non-cash rents were $1.9 million, or 0.8% of revenues and $1.7 million, or 0.9% of
revenues for 2004 and 2003, respectively.

General and Administrative Expenses, Restaurant Pre-Opening Costs, Depreciation and Amortization,
Management Fees and Covenants Not to Compete and Impairment of Assets

The following table sets forth general and administrative,
restaurant pre-opening, depreciation and amortization, management fees and covenants not to compete and impairment of assets costs from our consolidated statements of operations.



|                                             |  |                   |       |                   |   |        |   |   |        |   |  |        |   
|-------------------------------------------- |  | ----------------- | ----- | ----------------- | - | ------ | - | - | ------ | - |  | ------ | --
|                                             |  | Year Ended        |       | Change            |  
|                                             |  | December 27, 2003 |       | December 25, 2004 |  
|                                             |  |                   |       | $                 |   |        | % |  
|                                             |  | (in thousands)    |       |                   |   |       
|General and administrative expenses          |  | $                 | 9,769 |                   | $ | 12,062 |   | $ | 2,293  |   |  | 23.5   | % 
|Restaurant pre-opening costs                 |  |                   | 1,219 |                   |   | 2,393  |   |   | 1,174  |   |  | 96.3   | % 
|Depreciation and amortization                |  |                   | 9,853 |                   |   | 10,723 |   |   | 870    |   |  | 8.8    | % 
|Management fees and covenants not to compete |  |                   | 2,550 |                   |   | 4,241  |   |   | 1,691  |   |  | 66.3   | % 
|Impairment of assets                         |  |                   | 1,513 |                   |   |       |   |   | (1,513 | ) |  | (100.0 | )%

General and Administrative Expenses. General and administrative expenses increased by
$2.3 million, or 23.5%, to $12.1 million in 2004 from $9.8 million in 2003. General and administrative expenses as a percentage of revenues were 5.1% in 2004 compared to 5.0% in 2003. Although general and administrative expenses as a
percentage of revenues remained relatively flat in 2004 as compared to 2003, the 2004 expenses reflect increases in salary and related expenses associated with the oversight and administrative support of additional restaurants coupled with costs of
being a publicly traded company, partially offset by a decrease due to a $1.2 million expense in 2003 to settle a California labor dispute.

Restaurant Pre-Opening Costs. There were nine and three company-owned restaurants opened in 2004 and 2003, respectively. Restaurant pre-opening costs increased by $1.2 million, or 96.3%, to $2.4 million in 2004 from $1.2 million in
2003, primarily due to the increased number of restaurants opened in 2004 compared to 2003.



29



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##### Table of Contents

Depreciation and Amortization. Depreciation and amortization increased by $0.9 million, or 8.8%,
to $10.7 million in 2004 from $9.9 million in 2003. The increase was primarily due to the addition of nine company-owned restaurants in 2004.

Management Fees and Covenants Not to Compete. Prior to our initial public offering, we paid annual management fees of $1.1 million to each of BRS and Castle Harlan. Affiliates of each of BRS and Castle Harlan had significant
ownership interests in the Company at the time of the agreement terminations. Management fees recognized as expenses totaled $3.3 million and $2.2 million for 2004 and 2003, respectively. The amount of $3.3 million paid for 2004
includes $1.1 million paid to each of BRS and Castle Harlan for the termination of the management agreements as of June 25, 2004. Pursuant to covenants not to compete agreements with certain stockholders, we expensed $0.9 million and
$0.35 million for 2004 and 2003, respectively. The management fee agreements and all but one of the covenants not to compete agreements were terminated in connection with our initial public offering.

Interest Expense, Accrued Dividends and Accretion on Mandatorily Redeemable Preferred Stock, Income Tax Expense (Benefit) and Net Income (Loss)

The following table sets forth interest expense, accrued dividends and accretion on mandatorily redeemable preferred stock, income tax expense
(benefit) and net income (loss) from our consolidated statements of operations.



|                                                                                                       |  |                   |        |   |                   |   |        |   |  |   |        |   |  |        |   
|------------------------------------------------------------------------------------------------------ |  | ----------------- | ------ | - | ----------------- | - | ------ | - |  | - | ------ | - |  | ------ | --
|                                                                                                       |  | Year Ended        |        |   | Change            |  
|                                                                                                       |  | December 27, 2003 |        |   | December 25, 2004 |   |       
|                                                                                                       |  |                   | $      |   |                   | % |       
|                                                                                                       |  | (in thousands)    |        |   |                   |  
|Interest expense                                                                                       |  | $                 | 3,069  |   |                   | $ | 2,680  |   |  | $ | (389   | ) |  | (12.7  | )%
|                                                                                                       |  |                   |        |   |                   |   |        |   |  |   |        |   |  |        |   
|Accrued dividends and accretion on mandatorily redeemable preferred stock                              |  | $                 | 1,901  |   |                   | $ | 5,759  |   |  | $ | 3,858  |   |  | 202.9  | % 
|                                                                                                       |  |                   |        |   |                   |   |        |   |  |   |        |   |  |        |   
|Write off of deferred loan costs on early extinguishment of debt                                       |  |                   | 2,313  |   |                   |   | 1,288  |   |  |   | (1,025 | ) |  | (44.3  | )%
|                                                                                                       |  |                   |        |   |                   |   |        |   |  |   |        |   |  |        |   
|Loss before income taxes and accrued dividends and accretion on mandatorily redeemable preferred stock |  | $                 | (1,207 | ) |                   | $ | (2,948 | ) |  | $ | (1,741 | ) |  | (144.2 | )%
|Income tax expense (benefit)                                                                           |  |                   | 1,323  |   |                   |   | (3,651 | ) |  |   | (4,974 | ) |  | (376.0 | )%
|                                                                                                       |  |                   |        |   |                   |   |        |   |  |   |        |   |  |        |   
|Accrued dividends and accretion on mandatorily redeemable preferred stock                              |  |                   | 1,823  |   |                   |   |       |   |  |   | (1,832 | ) |  | (100.0 | )%
|                                                                                                       |  |                   |        |   |                   |   |        |   |  |   |        |   |  |        |   
|Net income (loss)                                                                                      |  | $                 | (4,362 | ) |                   | $ | 703    |   |  | $ | 5,065  |   |  | 116.1  | % 
|                                                                                                       |  |                   |        |   |                   |   |        |   |  |   |        |   |  |        |   

Interest Expense. Interest expense decreased by $0.4 million, or 12.7%, to
$2.7 million in 2004, from $3.1 million in 2003 primarily due to an $8.9 million decrease in the average outstanding debt balance as a result of the payoff of our prior credit facility in connection with our initial public offering.

Accrued Dividends and Accretion on Mandatorily Redeemable Preferred Stock. Dividends and accretive rights of a subsidiarys
redeemable preferred stock are reflected as accrued dividends and accretion on mandatorily redeemable preferred stock in the consolidated financial statements. Proceeds from our initial public offering were used to redeem all of the preferred stock.
See Liquidity and Capital Resources.

Write Off of Deferred Loan Costs on Early Extinguishment of Debt. In connection
with a new revolving credit facility, in July 2004 we wrote off deferred loan costs relating to the prior credit facility in the amount of $1.3 million. In connection with a then new revolving credit facility, in October 2003 we wrote
off deferred loan costs relating to the prior credit facility in the amount of $2.3 million.



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Income Tax (Benefit) Expense. In 2004, the we recognized an income tax benefit of $3.7 million
primarily related to a reduction in the deferred tax asset valuation allowance of $1.2 million and FICA Tip Credits of $3.7 million (net of reduction in net operating loss carry forward), offset by the income tax expense of $1.1 million on current
earnings before the accrued dividends and accretion on mandatorily redeemable preferred stock. In 2003, our income tax expense was $1.3 million. Our effective tax rate in 2004 and 2003 was (123.8%) and 109.6%, respectively. The
effective tax rate in 2004 and 2003 was significantly impacted by the change in the valuation allowance, the accrued dividends and accretion on mandatorily redeemable preferred stock which is not deductible for income tax purposes, and in 2004 by
the FICA Tip Credits.

Net Income (Loss). Net income was $0.7 million in 2004 compared to a net loss of ($4.4) million in 2003. The
increase was primarily due to a $3.7 million tax benefit primarily from the recognition of deferred tax assets and a 21.4% increase in revenues primarily due to the opening of nine company-owned restaurants in 2004.

Potential Fluctuations in Quarterly Results and Seasonality

Our quarterly operating results may fluctuate significantly as a result of a variety of factors. See Factors That May Affect Our Business and the Price of Our Stock.

Our business is also subject to seasonal fluctuations. Historically, revenues in most of our restaurants have been higher during the spring months and
winter holiday season. For the reasons and factors discussed above our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly. Accordingly, results for any one quarter are not necessarily indicative of
results to be expected for any other quarter or for any year and comparable restaurant sales for any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors. If
this occurs, the price of our common stock would likely decrease.



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The following table sets forth quarterly unaudited operating results in each of the 2004 and 2005 fiscal
quarters:



|                                                                          |  |                                       |        |   |      |   |        |    |  |   |        |   |  |    |        |    |  |    |        |    |   |        |  |   |        |  |   |       
|------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ | -- |  | - | ------ | - |  | -- | ------ | -- |  | -- | ------ | -- | - | ------ |  | - | ------ |  | - | ------
|                                                                          |  | 2004                                  |        |   | 2005
|                                                                          |  | Q1                                    |        |   | Q2   |   |        | Q3 |  |   | Q4     |   |  | Q1 |        | Q2 |  | Q3 |        | Q4
|                                                                          |  | (in thousands, except per share data)
|Revenues                                                                  |  | $                                     | 54,513 |   |      | $ | 59,723 |    |  | $ | 59,597 |   |  | $  | 64,924 |    |  | $  | 60,385 |    | $ | 68,386 |  | $ | 68,014 |  | $ | 82,028
|Restaurant operating costs                                                |  |                                       |        |   |      |   |        |    |  |   |        |   |  |    |        |    |  |    |        |    |   |        |  |   |        |  |   |       
|Food and beverage                                                         |  |                                       | 16,286 |   |      |   | 17,931 |    |  |   | 17,776 |   |  |    | 18,880 |    |  |    | 17,760 |    |   | 19,927 |  |   | 20,013 |  |   | 23,930
|Labor                                                                     |  |                                       | 17,810 |   |      |   | 18,732 |    |  |   | 19,013 |   |  |    | 19,526 |    |  |    | 19,356 |    |   | 21,380 |  |   | 21,421 |  |   | 24,665
|Operating                                                                 |  |                                       | 7,874  |   |      |   | 8,744  |    |  |   | 8,947  |   |  |    | 9,639  |    |  |    | 9,017  |    |   | 9,998  |  |   | 10,447 |  |   | 12,396
|Occupancy                                                                 |  |                                       | 4,848  |   |      |   | 5,397  |    |  |   | 5,434  |   |  |    | 5,722  |    |  |    | 5,605  |    |   | 6,061  |  |   | 6,267  |  |   | 6,857 
|                                                                          |  |                                       |        |   |      |   |        |    |  |   |        |   |  |    |        |    |  |    |        |    |   |        |  |   |        |  |   |       
|Total restaurant operating costs                                          |  |                                       | 46,818 |   |      |   | 50,804 |    |  |   | 51,170 |   |  |    | 53,767 |    |  |    | 51,738 |    |   | 57,366 |  |   | 58,148 |  |   | 67,848
|General and administrative expenses                                       |  |                                       | 2,549  |   |      |   | 2,616  |    |  |   | 3,340  |   |  |    | 3,557  |    |  |    | 3,342  |    |   | 3,561  |  |   | 3,541  |  |   | 4,660 
|Restaurant pre-opening costs                                              |  |                                       | 994    |   |      |   | 1,120  |    |  |   | 112    |   |  |    | 167    |    |  |    | 529    |    |   | 759    |  |   | 760    |  |   | 449   
|Depreciation and amortization                                             |  |                                       | 2,683  |   |      |   | 2,902  |    |  |   | 2,690  |   |  |    | 2,448  |    |  |    | 2,232  |    |   | 2,381  |  |   | 2,483  |  |   | 2,513 
|Management fees and covenants not to compete                              |  |                                       | 638    |   |      |   | 3,603  |    |  |   |       |   |  |    |       |    |  |    |       |    |   |       |  |   |       |  |   |      
|                                                                          |  |                                       |        |   |      |   |        |    |  |   |        |   |  |    |        |    |  |    |        |    |   |        |  |   |        |  |   |       
|Total costs and expenses                                                  |  |                                       | 53,682 |   |      |   | 61,045 |    |  |   | 57,312 |   |  |    | 59,939 |    |  |    | 57,841 |    |   | 64,067 |  |   | 64,932 |  |   | 75,470
|                                                                          |  |                                       |        |   |      |   |        |    |  |   |        |   |  |    |        |    |  |    |        |    |   |        |  |   |        |  |   |       
|Operating income (loss)                                                   |  |                                       | 831    |   |      |   | (1,322 | )  |  |   | 2,285  |   |  |    | 4,985  |    |  |    | 2,544  |    |   | 4,319  |  |   | 3,082  |  |   | 6,558 
|Interest expense                                                          |  |                                       | 857    |   |      |   | 939    |    |  |   | 570    |   |  |    | 314    |    |  |    | 156    |    |   | 166    |  |   | 131    |  |   | 96    
|Accrued dividends and accretion on mandatorily redeemable preferred stock |  |                                       | 1,012  |   |      |   | 1,054  |    |  |   | 3,693  |   |  |    |       |    |  |    |       |    |   |       |  |   |       |  |   |      
|Write off of deferred loan costs on early extinguishment of debt          |  |                                       |       |   |      |   |       |    |  |   | 1,288  |   |  |    |       |    |  |    |       |    |   |       |  |   |       |  |   |      
|                                                                          |  |                                       |        |   |      |   |        |    |  |   |        |   |  |    |        |    |  |    |        |    |   |        |  |   |        |  |   |       
|Income (loss) before income taxes                                         |  |                                       | (1,038 | ) |      |   | (3,315 | )  |  |   | (3,266 | ) |  |    | 4,671  |    |  |    | 2,388  |    |   | 4,153  |  |   | 2,951  |  |   | 6,462 
|Income tax expense (benefit)                                              |  |                                       | (15    | ) |      |   | (734   | )  |  |   | 71     |   |  |    | (2,973 | )  |  |    | 741    |    |   | 1,287  |  |   | 915    |  |   | 2,003 
|                                                                          |  |                                       |        |   |      |   |        |    |  |   |        |   |  |    |        |    |  |    |        |    |   |        |  |   |        |  |   |       
|Net income (loss)                                                         |  | $                                     | (1,023 | ) |      | $ | (2,581 | )  |  | $ | (3,337 | ) |  | $  | 7,644  |    |  | $  | 1,647  |    | $ | 2,866  |  | $ | 2,036  |  | $ | 4,459 
|                                                                          |  |                                       |        |   |      |   |        |    |  |   |        |   |  |    |        |    |  |    |        |    |   |        |  |   |        |  |   |       
|Net income (loss) per share(1)                                            |  |                                       |        |   |      |   |        |    |  |   |        |   |  |    |        |    |  |    |        |    |   |        |  |   |        |  |   |       
|Basic                                                                     |  | $                                     | (0.13  | ) |      | $ | (0.33  | )  |  | $ | (0.27  | ) |  | $  | 0.55   |    |  | $  | 0.12   |    | $ | 0.21   |  | $ | 0.15   |  | $ | 0.32  
|Diluted                                                                   |  | $                                     | (0.13  | ) |      | $ | (0.33  | )  |  | $ | (0.27  | ) |  | $  | 0.55   |    |  | $  | 0.12   |    | $ | 0.21   |  | $ | 0.15   |  | $ | 0.31  
|Shares used in computing net income (loss) per share(1)                   |  |                                       |        |   |      |   |        |    |  |   |        |   |  |    |        |    |  |    |        |    |   |        |  |   |        |  |   |       
|Basic                                                                     |  |                                       | 7,782  |   |      |   | 7,782  |    |  |   | 12,200 |   |  |    | 13,782 |    |  |    | 13,782 |    |   | 13,782 |  |   | 13,783 |  |   | 13,841
|Diluted                                                                   |  |                                       | 7,782  |   |      |   | 7,782  |    |  |   | 12,200 |   |  |    | 13,896 |    |  |    | 13,959 |    |   | 13,958 |  |   | 14,026 |  |   | 14,187

---

|(1) | For periods prior to our initial public offering, we give retroactive effect to the completion of our corporate reorganization in calculating common shares outstanding.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Liquidity and Capital Resources

Our primary cash needs have been for new restaurant construction, working capital and general corporate purposes, including payments under credit facilities. Our main sources of cash have been issuance of common stock, net cash provided by
operating activities and borrowings under credit facilities.



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On July 20, 2004, we completed our initial public offering. In connection with the initial public
offering, we:



| |  |  | Issued 7,179,358 shares of common stock in the merger to the holders of McCormick & Schmick Holdings LLCs units, not including 602,992 shares issuable upon the
exercise of warrants at a nominal price to The Bell Atlantic Master Trust. See Note 14, Members Equity, to our Financial Statements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sold 6,000,000 shares of common stock at $12.00 per share, raising approximately $65.1 million after underwriting discounts and transaction costs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Repaid $51.5 million of indebtedness on our then existing credit facility with the proceeds raised in the initial public offering and from $18.1 million in loans under a
new revolving credit facility, which provides, among other things, for $50.0 million in revolving credit loans.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Paid $28.9 million to The Bell Atlantic Master Trust to redeem all of the 13% senior exchangeable preferred stock of a wholly owned subsidiary.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Paid $2.8 million in connection with the termination of the management agreements and covenants not to compete agreements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------

On December 13, 2005, we completed a public offering in which we sold 380,000 shares of common stock, raising approximately $8.2 million after
underwriting discounts and transaction costs, and selling stockholders sold 4,707,500 shares of common stock. We repaid $1.0 million on December 20, 2005 of indebtedness on our credit facility with proceeds from the offering.



|                                                     |  |                |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                     |  | Year Ended     |        
|                                                     |  | 2003           |         |   | 2004 |   |         | 2005 | 
|                                                     |  | (in thousands) |        
|Net cash provided by operating activities            |  | $              | 20,652  |   |      | $ | 21,452  |      |  | $ | 30,158  |  
|Net cash used in investing activities                |  |                | (14,956 | ) |      |   | (27,284 | )    |  |   | (21,416 | )
|Net cash provided by (used in) financing activities  |  |                | (6,188  | ) |      |   | 3,830   |      |  |   | (4,488  | )
|                                                     |  |                |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents |  | $              | (492    | ) |      | $ | (2,002  | )    |  | $ | 4,254   |  
|                                                     |  |                |         |   |      |   |         |      |  |   |         |  

Net cash provided by operating activities was $30.2 million in 2005, compared to $21.5 million in
2004 and $20.7 million in 2003. The increase in net cash provided by operating activities in 2005 compared to 2004 was primarily due to an increase in operating income as a result of higher revenues in 2005. The increase in cash provided by
operating activities in 2004 compared to 2003 was primarily because of improvements in working capital due to better management of payables as well as incremental operating income due to the additional new restaurants.

Net cash used in investing activities was $21.4 million in 2005, $27.3 million in 2004 and $15.0 million in 2003. We use cash for tenant
improvements and equipment to open new restaurants, and to upgrade and add capacity to existing restaurants. Net cash used in investing activities varied in the periods presented based on the number of new restaurants opened and/or existing
restaurant capacity expanded during the period. Purchases of property and equipment also include purchases of information technology systems and expenditures relating to our corporate headquarters.

Net cash used in financing activities was $4.5 million in 2005. Net cash provided by financing activities was $3.8 million in 2004 and net cash used
in financing activities was $6.2 million in 2003. Net cash used in financing activities in 2005 was primarily a result of payments, net of borrowings, of $12.0 million on our revolving credit facility, partially off set by $8.2 million of
proceeds from our public stock offering. Net cash provided by financing activities in 2004 consisted primarily of net proceeds from issuance of common stock in connection with our initial public offering, offset by payments on redemption of senior
preferred stock of $28.9 million and net proceeds and payments on our revolving credit facilities of $26.5 million. The net cash used in financing activities during 2003 was primarily related to financing the property and equipment
purchases for restaurant openings.



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On December 20, 2005 we paid down the remaining outstanding balance on our credit facility. As of
December 31, 2005, there was no outstanding balance on our revolving credit facility. The interest rate on the credit facility is based on the financial institutions prime rate plus a margin of 0.25% to 0.75% or the Eurodollar rate plus a
margin of 1.75% to 2.25%, with margins determined by certain financial ratios. Under our revolving credit facility agreement, we are subject to certain financial and non-financial covenants, including an adjusted leverage ratio, a consolidated cash
flow ratio, and growth capital expenditures limitations. We were in compliance with these covenants as of December 31, 2005.

Under
our revolving credit facility agreement, loans are collateralized by a first priority security interest in all of our assets and are scheduled to mature on July 23, 2009. The revolving credit facility agreement also provides for bank guarantees
under standby letter of credit arrangements in the normal course of business operations. Our commercial bank issues standby letters of credit to secure our obligations to pay or perform when required to do so pursuant to the requirements of an
underlying agreement or the provision of goods and services. The standby letters of credit are cancelable only at the option of the beneficiary who is authorized to draw drafts on the issuing bank up to the face amount of the standby letter of
credit in accordance with its terms. As of December 31, 2005 the maximum exposure under these standby letters of credit was $1.5 million. At December 31, 2005 the Company had $48.5 million available under its revolving credit facility.

On July 23, 2004, we repaid the outstanding balance on our prior amended and restated revolving credit facility in the amount of
$51.5 million with net proceeds from our initial public offering and $18.1 million in loans under our current revolving credit facility agreement. For the year ended December 25, 2004, we recognized a $1.3 million expense related
to the write-off of unamortized deferred loan costs related to the prior revolving credit facility.

Our prior revolving credit facility,
entered into on October 28, 2003, provided for a $70.0 million revolving credit loan. Loans under this facility were collateralized by a first priority security interest in all of our assets and were scheduled to mature April 2007 and
bore interest based on the financial institutions prime rate plus a margin of 1.75% to 2.25% or the Eurodollar rate plus a margin of 3.25% to 3.75%, with margins determined by certain financial ratios.

Before October 28, 2003, we had term loans and a $15.0 million revolving credit facility payable to financial institutions. The term loans had
quarterly principal payments due in amounts ranging from $0.3 million to $2.1 million and were scheduled to mature between June 2006 and June 2008. The interest rates on these term loans were based on the financial
institutions prime rate plus a margin of 1.5% to 3.0% or the Eurodollar rate plus a margin of 3.0% to 4.25% determined by certain financial ratios.

We believe the net cash provided by operating activities and funds available from our revolving credit facility will be sufficient to satisfy our working capital and capital expenditure requirements, including
restaurant construction, pre-opening costs and potential initial operating losses related to new restaurant openings for at least the next 12 months.

Off-Balance Sheet Arrangements

As of December 31, 2005 we had no off-balance sheet arrangements, as defined in
Item 303(a)(4) of the Securities and Exchange Commission (SEC) Regulation S-K.



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Contractual Obligations

Our contractual obligations consist of long-term debt, operating leases (primarily restaurant leases) and capital leases. We lease all of our restaurants and our corporate offices under non-cancelable operating
leases. Most of our restaurants have an initial operating lease term of 10 to 20 years and options to renew for between 5 and 15 additional years. Contractual obligations as of December 31, 2005 were as follows:



|                                   |  |                        |         |                  |   |           |  |           |        |                   |   |        |  |   |        
|---------------------------------- |  | ---------------------- | ------- | ---------------- | - | --------- |  | --------- | ------ | ----------------- | - | ------ |  | - | -------
|                                   |  | Payments Due by Period
|                                   |  | Total                  |         | Less than 1 year |   | 1-3 years |  | 4-5 years |        | More than 5 years
|                                   |  | (in thousands)        
|Long-term debt(1)                  |  | $                      |        |                  | $ |          |  | $         |       |                   | $ |       |  | $ |       
|Operating leases                   |  |                        | 196,617 |                  |   | 18,039    |  |           | 36,900 |                   |   | 34,825 |  |   | 106,853
|Capital leases, including interest |  |                        | 750     |                  |   | 402       |  |           | 348    |                   |   |       |  |   |       
|Purchase obligations(2)            |  |                        | 4,585   |                  |   | 3,636     |  |           | 949    |                   |   |       |  |   |       
|                                   |  |                        |         |                  |   |           |  |           |        |                   |   |        |  |   |        
|Total                              |  | $                      | 201,952 |                  | $ | 22,077    |  | $         | 38,197 |                   | $ | 34,825 |  | $ | 106,853
|                                   |  |                        |         |                  |   |           |  |           |        |                   |   |        |  |   |        

---

|(1) | Revolving credit facility balance as of December 31, 2005 due July 23, 2009. The interest rate on the revolving credit facility is based on the financial
institutions prime rate plus a margin of 0.25% to 0.75% or the Eurodollar rate plus a margin of 1.75% to 2.25%, with margins determined by certain financial ratios.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Purchase obligations include commitments related to the construction of new restaurants.
|--- | ----------------------------------------------------------------------------------------

Critical Accounting Policies and Use of Estimates

Our significant accounting policies are those that
we believe are both important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently
uncertain. We believe our critical accounting policies and estimates used in the preparation of our consolidated financial statements are the following:

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Equipment consists primarily of restaurant equipment, furniture, fixtures and smallwares. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets. Leasehold
improvements are amortized using the straight-line method over the shorter of the lease term as defined in Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases (SFAS 13), as
amended, or the estimated useful life of the asset. As discussed in SFAS 13, the lease term includes any period covered by a renewal option where the renewal is reasonably assured because failure to renew the lease would impose an economic penalty
to the lessee. Repairs and maintenance are expensed as incurred; renewals and betterments are capitalized. Estimated useful lives are generally as follows: equipment3 to 10 years; furniture and fixtures5 to 10 years and
leasehold improvements7 to 30 years. Judgments and estimates made by us related to the expected useful lives of these assets are affected by factors such as changes in economic conditions and changes in operating performance. If these
assumptions change in the future, we may be required to record impairment charges for these assets.

Impairment of Long-Lived Assets

We review property and equipment (which includes leasehold improvements) for impairment when events or circumstances indicate these
assets might be impaired. We test impairment using historical cash flow and other relevant facts and circumstances as the primary basis for our estimates of future cash flows. The analysis is performed at the restaurant level for indicators of
permanent impairment. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term. If assets are determined to be impaired, the impairment charge is
measured by calculating the amount



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by which the asset-carrying amount exceeds its fair value. The determination of asset fair value is also subject to significant judgment. This process
requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets. In our most recent impairment evaluation for
long-lived assets, no additional impairment charge would have resulted even if there were a permanent 5% reduction in revenues in our restaurants.

During 2003, we recorded a loss on impairment of long-lived assets in the amount of $1.5 million. The charge was related to the partial impairment of fixtures and equipment and leasehold improvements at one restaurant. This restaurant
had experienced a decline in cash flows due to the location of the restaurant. There were no impairments during 2004 or 2005.

Goodwill and Other
Indefinite Lived Assets

Goodwill and other indefinite lived assets resulted from our acquisition in 2001 by Castle Harlan Partners
III, L.P. and Bruckmann, Rosser, Sherrill & Co. II, L.P. Goodwill and other intangible assets with indefinite lives are not subject to amortization. However, such assets must be tested for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable and at least annually. We completed our most recent impairment test on balances as of December 31, 2005, and determined that there were no impairment losses related to
goodwill and other indefinite lived assets. There were no impairments of goodwill or assets with indefinite lives in 2003 or 2004. In assessing the recoverability of goodwill and other indefinite lived assets, market values and projections regarding
estimated future cash flows and other factors are used to determine the fair value of the respective assets. The estimated future cash flows were projected using significant assumptions, including future revenues and expenses. If these estimates or
related projections change in the future, we may be required to record impairment charges for these assets.

Insurance Liability

We maintain various insurance policies for workers compensation, employee health, general liability, and property damage. Pursuant to those
policies, we are responsible for losses up to certain limits and are required to estimate a liability that represents our ultimate exposure for aggregate losses below those limits. This liability is based on managements estimates of the
ultimate costs to be incurred to settle known claims and claims not reported as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial
assumptions, and economic conditions. If actual trends differ from our estimates, our financial results could be impacted.

Income Taxes

We have accounted for, and currently account for, income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes. This Statement establishes financial accounting and reporting standards for the effects of income taxes that result from an enterprises activities during the current and preceding years. It requires an asset and liability approach
for financial accounting and reporting of income taxes. We recognize deferred tax liabilities and assets for the future consequences of events that have been recognized in our consolidated financial statements or tax returns. In the event the future
consequences of differences between financial reporting bases and tax bases of our assets and liabilities result in a net deferred tax asset, an evaluation is made of the probability of being able to realize the future benefits indicated by such
asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of or all deferred tax asset will not be realized. The realization of such net deferred tax asset will generally depend on
whether we will have sufficient taxable income of an appropriate character within the carry forward period permitted by the tax law. Without sufficient taxable income to offset the deductible amounts and carry forwards, the related tax benefits will
expire unused. We have evaluated both positive and negative evidence in making a



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determination as to whether it is more likely than not that all or some portion of the deferred tax asset will not be realized. Measurement of deferred items
is based on enacted tax laws. No deferred tax asset valuation allowance has been recorded as of December 31, 2005.

Operating Leases

Rent expense for our operating leases, which generally have escalating rentals over the term of the lease, is recorded on the
straight-line basis over the lease term as defined in SFAS 13. The lease term commences on the date which is normally when the property is ready for normal tenant improvements (build-out period), when no rent payments are typically due under the
terms of the lease. The difference between rent expense and rent paid is recorded as a deferred rent liability and is included in the consolidated balance sheets.

Recent Accounting Pronouncements

In October 2005, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position No. FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period (FSP 13-1). FSP 13-1 requires rental costs associated with ground or building operating leases incurred during a construction
period to be recognized as rental expense. FSP 13-1 is effective for reporting periods beginning after December 15, 2005. Retroactive application is permitted, but not required. We do not expect the adoption of this standard to have a material
effect on our financial position or results of operations.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes
and Error Correctionsa Replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154), which requires retrospective application to prior periods financial statements of every voluntary change in
accounting principal unless it is impracticable to do so. SFAS 154 is effective for accounting changes and corrections of errors beginning in fiscal 2007. We do not expect the adoption of this standard to have any effect on our financial
position or results of operations.

In March 2005, the SEC released SEC Staff Accounting Bulletin No. 107
(SAB 107). SAB 107 provides the SEC staff position regarding the application of SFAS No. 123, (Share Based Payment (revised 2004)) (SFAS 123R). SAB 107 contains interpretive guidance relating to the
interaction between SFAS 123R and certain SEC rules and regulations, as well as the staffs views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also highlights the importance of disclosures
made related to the accounting for share-based payment transactions. We will be incorporating SAB 107 as part of our adoption of SFAS 123R in the first quarter of 2006.

In December 2004, the FASB issued SFAS 123R. SFAS 123R revises SFAS 123 and requires companies to expense the fair value of employee stock options and
other forms of stock-based compensation. In addition to revising SFAS 123, SFAS 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and amends FASB Statement No. 95, Statement
of Cash Flows. In April 2005, The SEC announced the amendment of the adoption compliance date of SFAS 123R from the first interim period to the first annual period after June 15, 2005. We have adopted and have applied the expense
recognition provisions of SFAS 123R beginning in the first quarter of 2006. The estimated impact of the adoption of SFAS 123R and SAB 107 for 2006, relating to prior year grants only, will be approximately $750,000 to $850,000, net of tax.

Effect of Inflation

We do not believe
inflation has had a significant effect on our operations during the past several years. We generally have been able to substantially offset increases in our restaurant and operating costs resulting from inflation by altering our menu, increasing
menu prices or making other adjustments.



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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk exposures are related to
our cash and cash equivalents. We invest any excess cash in highly liquid short-term investments with maturities of less than one year. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the
investment income we earn on our investments and, therefore, impact our cash flows and results of operations.

Under our revolving credit
facility, we are exposed to market risk from changes in interest rates on borrowings, which bear interest at the financial institutions prime rate plus a margin of 0.25% to 0.75% or the Eurodollar rate plus a margin of 1.75% to 2.25%, with
margins determined by certain financial ratios. At our option, we may convert loans under our revolving credit facility from one type of rate to the other. At the end of 2005, there was no outstanding balance under our revolving credit facility.



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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

McCormick & Schmicks Seafood
Restaurants, Inc. and Subsidiaries

Index to Financial Statements



|                                                                                             |  |     
|-------------------------------------------------------------------------------------------- |  | ----
|                                                                                             |  | Page
|Report of Independent Registered Public Accounting Firm                                      |  | 40  
|                                                                                             | 
|Consolidated Financial Statements:                                                           |  |     
|                                                                                             | 
|Consolidated Balance Sheets                                                                  |  | 42  
|                                                                                             | 
|Consolidated Statements of Operations                                                        |  | 43  
|                                                                                             | 
|Consolidated Statements of Members and Stockholders Equity and Comprehensive Income (Loss) |  | 44  
|                                                                                             | 
|Consolidated Statements of Cash Flows                                                        |  | 45  
|                                                                                             | 
|Notes to Consolidated Financial Statements                                                   |  | 46  



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Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Stockholders

McCormick and Schmicks Seafood Restaurants, Inc.

We have completed an integrated audit of McCormick and Schmicks Seafood Restaurants, Inc.s December 31, 2005 consolidated financial
statements and of its internal control over financial reporting as of December 31, 2005 and audits of its December 25, 2004 and December 27, 2003 consolidated financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position
of McCormick and Schmicks Seafood Restaurants, Inc. and its subsidiaries at December 31, 2005 and December 25, 2004, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in
our opinion, managements assessment, included inReport of Managementon Internal Control Over Financial Reporting appearing under item 9A, that the Company maintained effective internal control over financial reporting as of
December 31, 2005 based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated
Framework issued by the COSO. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements assessment and on the effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable



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assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

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

PricewaterhouseCoopers LLP

Portland, Oregon

March 10, 2006



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McCormick & Schmicks Seafood Restaurants, Inc. and Subsidiaries

Consolidated Balance
Sheets

(in thousands, except per share data)



|                                                                                                                                                         |  |                  |         |   |                  |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | -------
|                                                                                                                                                         |  | December 25,2004 |         |   | December 31,2005
|Assets                                                                                                                                                   |  |                  |         |   |                  |   |        
|Current assets                                                                                                                                           |  |                  |         |   |                  |   |        
|Cash and cash equivalents                                                                                                                                |  | $                | 451     |   |                  | $ | 4,705  
|Trade accounts receivable, net                                                                                                                           |  |                  | 4,641   |   |                  |   | 5,081  
|Tenant improvement allowance receivables                                                                                                                 |  |                  | 347     |   |                  |   | 1,780  
|Inventories                                                                                                                                              |  |                  | 3,384   |   |                  |   | 4,517  
|Prepaid expenses and other current assets                                                                                                                |  |                  | 2,846   |   |                  |   | 3,020  
|Deferred income taxes                                                                                                                                    |  |                  | 830     |   |                  |   | 6,688  
|                                                                                                                                                         |  |                  |         |   |                  |   |        
|Total current assets                                                                                                                                     |  |                  | 12,499  |   |                  |   | 25,791 
|Equipment and leasehold improvements, net                                                                                                                |  |                  | 92,744  |   |                  |   | 104,727
|Other assets                                                                                                                                             |  |                  | 53,821  |   |                  |   | 53,646 
|Goodwill                                                                                                                                                 |  |                  | 19,996  |   |                  |   | 19,996 
|                                                                                                                                                         |  |                  |         |   |                  |   |        
|Total assets                                                                                                                                             |  | $                | 179,060 |   |                  | $ | 204,160
|                                                                                                                                                         |  |                  |         |   |                  |   |        
|Liabilities and Stockholders Equity                                                                                                                     |  |                  |         |   |                  |   |        
|Current liabilities                                                                                                                                      |  |                  |         |   |                  |   |        
|Book overdraft                                                                                                                                           |  | $                | 429     |   |                  | $ |       
|Accounts payable                                                                                                                                         |  |                  | 12,875  |   |                  |   | 13,431 
|Accrued expenses                                                                                                                                         |  |                  | 15,197  |   |                  |   | 18,970 
|Capital lease obligations, current portion                                                                                                               |  |                  | 433     |   |                  |   | 368    
|                                                                                                                                                         |  |                  |         |   |                  |   |        
|Total current liabilities                                                                                                                                |  |                  | 28,934  |   |                  |   | 32,769 
|Revolving credit facility                                                                                                                                |  |                  | 12,000  |   |                  |   |       
|Other long-term liabilities                                                                                                                              |  |                  | 11,791  |   |                  |   | 15,618 
|Capital lease obligations, noncurrent portion                                                                                                            |  |                  | 707     |   |                  |   | 338    
|Deferred income taxes                                                                                                                                    |  |                  | 1,558   |   |                  |   | 11,982 
|                                                                                                                                                         |  |                  |         |   |                  |   |        
|Total liabilities                                                                                                                                        |  |                  | 54,990  |   |                  |   | 60,707 
|                                                                                                                                                         |  |                  |         |   |                  |   |        
|                                                                                                                                                         |  |                 
|Commitments and Contingencies (Note 12)                                                                                                                  |  |                  |         |   |                  |   |        
|                                                                                                                                                         |  |                 
|Stockholders equity                                                                                                                                     |  |                  |         |   |                  |   |        
|Common stock, $0.001 par value, 120,000 shares authorized, 13,782 shares issued and outstanding in 2004 and 14,179 shares issued and
outstanding in 2005 |  |                  | 14      |   |                  |   | 14     
|Additional paid in capital                                                                                                                               |  |                  | 127,917 |   |                  |   | 136,292
|Retained earnings (accumulated deficit)                                                                                                                  |  |                  | (3,861  | ) |                  |   | 7,147  
|                                                                                                                                                         |  |                  |         |   |                  |   |        
|Total stockholders equity                                                                                                                               |  |                  | 124,070 |   |                  |   | 143,453
|                                                                                                                                                         |  |                  |         |   |                  |   |        
|Total liabilities and stockholders equity                                                                                                               |  | $                | 179,060 |   |                  | $ | 204,160
|                                                                                                                                                         |  |                  |         |   |                  |   |        

The accompanying notes are an integral part of these consolidated financial statements.



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McCormick & Schmicks Seafood Restaurants, Inc. and Subsidiaries

Consolidated Statements
of Operations

(In thousands, except per share data)



|                                                                                                                |  |                  |         |   |                  |   |         |                  |  |   |        
|--------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | ---------------- |  | - | -------
|                                                                                                                |  | Year Ended      
|                                                                                                                |  | December 27,2003 |         |   | December 25,2004 |   |         | December 31,2005
|Revenues                                                                                                        |  | $                | 196,717 |   |                  | $ | 238,757 |                  |  | $ | 278,813
|                                                                                                                |  |                  |         |   |                  |   |         |                  |  |   |        
|Restaurant operating costs                                                                                      |  |                  |         |   |                  |   |         |                  |  |   |        
|Food and beverage                                                                                               |  |                  | 57,959  |   |                  |   | 70,873  |                  |  |   | 81,630 
|Labor                                                                                                           |  |                  | 61,644  |   |                  |   | 75,081  |                  |  |   | 86,823 
|Operating                                                                                                       |  |                  | 29,244  |   |                  |   | 35,204  |                  |  |   | 41,857 
|Occupancy                                                                                                       |  |                  | 16,890  |   |                  |   | 21,401  |                  |  |   | 24,790 
|                                                                                                                |  |                  |         |   |                  |   |         |                  |  |   |        
|Total restaurant operating costs                                                                                |  |                  | 165,737 |   |                  |   | 202,559 |                  |  |   | 235,100
|General and administrative expenses                                                                             |  |                  | 9,769   |   |                  |   | 12,062  |                  |  |   | 15,105 
|Restaurant pre-opening costs                                                                                    |  |                  | 1,219   |   |                  |   | 2,393   |                  |  |   | 2,496  
|Depreciation and amortization                                                                                   |  |                  | 9,853   |   |                  |   | 10,723  |                  |  |   | 9,608  
|Management fees and covenants not to compete                                                                    |  |                  | 2,550   |   |                  |   | 4,241   |                  |  |   |       
|Impairment of assets                                                                                            |  |                  | 1,513   |   |                  |   |        |                  |  |   |       
|                                                                                                                |  |                  |         |   |                  |   |         |                  |  |   |        
|Total costs and expenses                                                                                        |  |                  | 190,641 |   |                  |   | 231,978 |                  |  |   | 262,309
|                                                                                                                |  |                  |         |   |                  |   |         |                  |  |   |        
|Operating income                                                                                                |  |                  | 6,076   |   |                  |   | 6,779   |                  |  |   | 16,504 
|Interest expense                                                                                                |  |                  | 3,069   |   |                  |   | 2,680   |                  |  |   | 550    
|Accrued dividends and accretion on mandatorily redeemable preferred stock                                       |  |                  | 1,901   |   |                  |   | 5,759   |                  |  |   |       
|Write off of deferred loan costs on early extinguishment of debt                                                |  |                  | 2,313   |   |                  |   | 1,288   |                  |  |   |       
|                                                                                                                |  |                  |         |   |                  |   |         |                  |  |   |        
|Income (loss) before income taxes and accrued dividends and accretion on mandatorily redeemable preferred stock |  |                  | (1,207  | ) |                  |   | (2,948  | )                |  |   | 15,954 
|Income tax expense (benefit)                                                                                    |  |                  | 1,323   |   |                  |   | (3,651  | )                |  |   | 4,946  
|Accrued dividends and accretion on mandatorily redeemable preferred stock                                       |  |                  | 1,832   |   |                  |   |        |                  |  |   |       
|                                                                                                                |  |                  |         |   |                  |   |         |                  |  |   |        
|Net income (loss)                                                                                               |  | $                | (4,362  | ) |                  | $ | 703     |                  |  | $ | 11,008 
|                                                                                                                |  |                  |         |   |                  |   |         |                  |  |   |        
|Net income (loss) per common share (Note 2)                                                                     |  |                  |         |   |                  |   |         |                  |  |   |        
|Basic                                                                                                           |  | $                | (0.56   | ) |                  | $ | 0.07    |                  |  | $ | 0.80   
|Diluted                                                                                                         |  | $                | (0.56   | ) |                  | $ | 0.07    |                  |  | $ | 0.78   
|Shares used in computing net income (loss) per share (Note 2)                                                   |  |                  |         |   |                  |   |         |                  |  |   |        
|Basic                                                                                                           |  |                  | 7,782   |   |                  |   | 10,387  |                  |  |   | 13,798 
|Diluted                                                                                                         |  |                  | 7,782   |   |                  |   | 10,416  |                  |  |   | 14,047 

The accompanying notes are an integral part of these consolidated financial statements.



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McCormick & Schmicks Seafood Restaurants, Inc. and Subsidiaries

Consolidated Statements
of Members and Stockholders Equity and Comprehensive Income (Loss)



|                                                                           |  |                  |   |  |                       |         |   |               |        |   |                       |   |        |               |  |            |               |  |   |              |   |                          |          |                       |  |       |                                       |   |        |                                             |   |       |       |     |        |  |     |        |  |        |     |   |  |            |  |   |    |  |   |         |  |   |     |   |  |   |        |   |  |   |      |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ---------------- | - |  | --------------------- | ------- | - | ------------- | ------ | - | --------------------- | - | ------ | ------------- |  | ---------- | ------------- |  | - | ------------ | - | ------------------------ | -------- | --------------------- |  | ----- | ------------------------------------- | - | ------ | ------------------------------------------- | - | ----- | ----- | --- | ------ |  | --- | ------ |  | ------ | --- | - |  | ---------- |  | - | -- |  | - | ------- |  | - | --- | - |  | - | ------ | - |  | - | ---- | - |  | - | ------- | -
|                                                                           |  | Preferred Units  |   |  | Preferred UnitWarrant |         |   | Class A Units |        |   | Class A-2 UnitWarrant |   |        | Class B Units |  |            | Class C Units |  |   | Common Stock |   | AdditionalPaid-in Amount |          | Unearned Compensation |  |       | RetainedEarnings(Accumulated Deficit) |   |        | AccumulatedOtherComprehensive Income (Loss) |   |       | Total |    
|                                                                           |  | Units            |   |  | Amount                |         |   | Units         |        |   | Amount                |   |        | Units         |  |            | Amount        |  |   | Units        |   |                          | Amount   |                       |  | Units |                                       |   | Amount |                                             |   | Units |       |     | Amount |  |     | Shares |  | Amount |     |   |  |            | 
|                                                                           |  | ($ in thousands) |  
|Balances at December 28, 2002                                              |  | 57,000           |   |  | $                     | 57,000  |   |               | 4,956  |   |                       | $ | 4,951  |               |  | 1,000,000  |               |  | $ | 756          |   |                          | 103,896  |                       |  | $     | 103                                   |   |        |                                            |   |       | $     |    |        |  |    |        |  | $      |    |   |  |           |  | $ |   |  | $ |        |  | $ |    |   |  | $ | (202   | ) |  | $ | (748 | ) |  | $ | 61,860  |  
|Issuance of Class B and Class C units                                      |  |                 |   |  |                       |        |   |               |       |   |                       |   |       |               |  |           |               |  |   |             |   |                          |         |                       |  |       |                                      |   |        | 171,429                                     |   |       |       | 37  |        |  | 13  |        |  |        | 14  |   |  |           |  |   |   |  |   |        |  |   | (51 | ) |  |   |       |   |  |   |     |   |  |   |        |  
|Amortization of unearned compensation                                      |  |                 |   |  |                       |        |   |               |       |   |                       |   |       |               |  |           |               |  |   |             |   |                          |         |                       |  |       |                                      |   |        |                                            |   |       |       |    |        |  |    |        |  |        |    |   |  |           |  |   |   |  |   |        |  |   | 9   |   |  |   |       |   |  |   |     |   |  |   | 9       |  
|Net loss                                                                   |  |                 |   |  |                       |        |   |               |       |   |                       |   |       |               |  |           |               |  |   |             |   |                          |         |                       |  |       |                                      |   |        |                                            |   |       |       |    |        |  |    |        |  |        |    |   |  |           |  |   |   |  |   |        |  |   |    |   |  |   | (4,362 | ) |  |   |     |   |  |   | (4,362  | )
|Realized gain on interest rate swap, net of income tax expense of $168     |  |                 |   |  |                       |        |   |               |       |   |                       |   |       |               |  |           |               |  |   |             |   |                          |         |                       |  |       |                                      |   |        |                                            |   |       |       |    |        |  |    |        |  |        |    |   |  |           |  |   |   |  |   |        |  |   |    |   |  |   |       |   |  |   | 260  |   |  |   | 260     |  
|                                                                           |  |                  |   |  |                       |         |   |               |        |   |                       |   |        |               |  |            |               |  |   |              |   |                          |          |                       |  |       |                                       |   |        |                                             |   |       |       |     |        |  |     |        |  |        |     |   |  |            |  |   |    |  |   |         |  |   |     |   |  |   |        |   |  |   |      |   |  |   |         |  
|Total comprehensive loss                                                   |  |                  |   |  |                       |         |   |               |        |   |                       |   |        |               |  |            |               |  |   |              |   |                          |          |                       |  |       |                                       |   |        |                                             |   |       |       |     |        |  |     |        |  |        |     |   |  |            |  |   |    |  |   |         |  |   |     |   |  |   |        |   |  |   |      |   |  |   | (4,102  | )
|                                                                           |  |                  |   |  |                       |         |   |               |        |   |                       |   |        |               |  |            |               |  |   |              |   |                          |          |                       |  |       |                                       |   |        |                                             |   |       |       |     |        |  |     |        |  |        |     |   |  |            |  |   |    |  |   |         |  |   |     |   |  |   |        |   |  |   |      |   |  |   |         |  
|Balances at December 27, 2003                                              |  | 57,000           |   |  |                       | 57,000  |   |               | 4,956  |   |                       |   | 4,951  |               |  | 1,000,000  |               |  |   | 756          |   |                          | 103,896  |                       |  |       | 103                                   |   |        | 171,429                                     |   |       |       | 37  |        |  | 13  |        |  |        | 14  |   |  |           |  |   |   |  |   |        |  |   | (42 | ) |  |   | (4,564 | ) |  |   | (488 | ) |  |   | 57,767  |  
|Net income                                                                 |  |                 |   |  |                       |        |   |               |       |   |                       |   |       |               |  |           |               |  |   |             |   |                          |         |                       |  |       |                                      |   |        |                                            |   |       |       |    |        |  |    |        |  |        |    |   |  |           |  |   |   |  |   |        |  |   |    |   |  |   | 703    |   |  |   |     |   |  |   | 703     |  
|Realized gain on interest rate swap, net of income tax expense of $317     |  |                  |   |  |                       |         |   |               |        |   |                       |   |        |               |  |            |               |  |   |              |   |                          |          |                       |  |       |                                       |   |        |                                             |   |       |       |     |        |  |     |        |  |        |     |   |  |            |  |   |    |  |   |         |  |   |     |   |  |   |        |   |  |   | 488  |   |  |   | 488     |  
|                                                                           |  |                  |   |  |                       |         |   |               |        |   |                       |   |        |               |  |            |               |  |   |              |   |                          |          |                       |  |       |                                       |   |        |                                             |   |       |       |     |        |  |     |        |  |        |     |   |  |            |  |   |    |  |   |         |  |   |     |   |  |   |        |   |  |   |      |   |  |   |         |  
|Total comprehensive income                                                 |  |                  |   |  |                       |         |   |               |        |   |                       |   |        |               |  |            |               |  |   |              |   |                          |          |                       |  |       |                                       |   |        |                                             |   |       |       |     |        |  |     |        |  |        |     |   |  |            |  |   |    |  |   |         |  |   |     |   |  |   |        |   |  |   |      |   |  |   | 1,191   |  
|                                                                           |  |                  |   |  |                       |         |   |               |        |   |                       |   |        |               |  |            |               |  |   |              |   |                          |          |                       |  |       |                                       |   |        |                                             |   |       |       |     |        |  |     |        |  |        |     |   |  |            |  |   |    |  |   |         |  |   |     |   |  |   |        |   |  |   |      |   |  |   |         |  
|Amortization of unearned compensation                                      |  |                 |   |  |                       |        |   |               |       |   |                       |   |       |               |  |           |               |  |   |             |   |                          |         |                       |  |       |                                      |   |        |                                            |   |       |       |    |        |  |    |        |  |        |    |   |  |           |  |   |   |  |   |        |  |   | 42  |   |  |   |       |   |  |   |     |   |  |   | 42      |  
|Purchase of Class B units                                                  |  |                 |   |  |                       |        |   |               |       |   |                       |   |       |               |  |           |               |  |   |             |   |                          |         |                       |  |       |                                      |   |        |                                            |   |       |       | (6  | )      |  |    |        |  |        |    |   |  |           |  |   |   |  |   |        |  |   |    |   |  |   |       |   |  |   |     |   |  |   | (6      | )
|Reorganization                                                             |  | (57,000          | ) |  |                       | (57,000 | ) |               |       |   |                       |   |       |               |  | (1,000,000 | )             |  |   | (756         | ) |                          |         |                       |  |       |                                      |   |        | (171,429                                    | ) |       |       | (31 | )      |  | (13 | )      |  |        | (14 | ) |  | 7,179,358  |  |   | 7  |  |   | 57,794  |  |   |    |   |  |   |       |   |  |   |     |   |  |   |        |  
|Exercise of warrants                                                       |  |                 |   |  |                       |        |   |               | (4,956 | ) |                       |   | (4,951 | )             |  |           |               |  |   |             |   |                          | (103,896 | )                     |  |       | (103                                  | ) |        |                                            |   |       |       |    |        |  |    |        |  |        |    |   |  | 602,992    |  |   | 1  |  |   | 5,059   |  |   |    |   |  |   |       |   |  |   |     |   |  |   | 6       |  
|Issuance of common stock in initial public offering, net of offering costs |  |                 |   |  |                       |        |   |               |       |   |                       |   |       |               |  |           |               |  |   |             |   |                          |         |                       |  |       |                                      |   |        |                                            |   |       |       |    |        |  |    |        |  |        |    |   |  | 6,000,000  |  |   | 6  |  |   | 65,064  |  |   |    |   |  |   |       |   |  |   |     |   |  |   | 65,070  |  
|                                                                           |  |                  |   |  |                       |         |   |               |        |   |                       |   |        |               |  |            |               |  |   |              |   |                          |          |                       |  |       |                                       |   |        |                                             |   |       |       |     |        |  |     |        |  |        |     |   |  |            |  |   |    |  |   |         |  |   |     |   |  |   |        |   |  |   |      |   |  |   |         |  
|Balances at December 25, 2004                                              |  |                 |   |  |                       |        |   |               |       |   |                       |   |       |               |  |           |               |  |   |             |   |                          |         |                       |  |       |                                      |   |        |                                            |   |       |       |    |        |  |    |        |  |        |    |   |  | 13,782,350 |  |   | 14 |  |   | 127,917 |  |   |    |   |  |   | (3,861 | ) |  |   |     |   |  |   | 124,070 |  
|Exercise of stock options                                                  |  |                 |   |  |                       |        |   |               |       |   |                       |   |       |               |  |           |               |  |   |             |   |                          |         |                       |  |       |                                      |   |        |                                            |   |       |       |    |        |  |    |        |  |        |    |   |  | 16,856     |  |   |   |  |   | 202     |  |   |    |   |  |   |       |   |  |   |     |   |  |   | 202     |  
|Issuance of common stock in public offering, net of offering costs         |  |                 |   |  |                       |        |   |               |       |   |                       |   |       |               |  |           |               |  |   |             |   |                          |         |                       |  |       |                                      |   |        |                                            |   |       |       |    |        |  |    |        |  |        |    |   |  | 380,000    |  |   |   |  |   | 8,173   |  |   |    |   |  |   |       |   |  |   |     |   |  |   | 8,173   |  
|Net income                                                                 |  |                 |   |  |                       |        |   |               |       |   |                       |   |       |               |  |           |               |  |   |             |   |                          |         |                       |  |       |                                      |   |        |                                            |   |       |       |    |        |  |    |        |  |        |    |   |  |           |  |   |   |  |   |        |  |   |    |   |  |   | 11,008 |   |  |   |     |   |  |   | 11,008  |  
|                                                                           |  |                  |   |  |                       |         |   |               |        |   |                       |   |        |               |  |            |               |  |   |              |   |                          |          |                       |  |       |                                       |   |        |                                             |   |       |       |     |        |  |     |        |  |        |     |   |  |            |  |   |    |  |   |         |  |   |     |   |  |   |        |   |  |   |      |   |  |   |         |  
|Balances at December 31, 2005                                              |  |                 |   |  | $                     |        |   |               |       |   |                       | $ |       |               |  |           |               |  | $ |             |   |                          |         |                       |  | $     |                                      |   |        |                                            |   |       | $     |    |        |  |    |        |  | $      |    |   |  | 14,179,206 |  | $ | 14 |  | $ | 136,292 |  | $ |    |   |  | $ | 7,147  |   |  | $ |     |   |  | $ | 143,453 |  
|                                                                           |  |                  |   |  |                       |         |   |               |        |   |                       |   |        |               |  |            |               |  |   |              |   |                          |          |                       |  |       |                                       |   |        |                                             |   |       |       |     |        |  |     |        |  |        |     |   |  |            |  |   |    |  |   |         |  |   |     |   |  |   |        |   |  |   |      |   |  |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



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McCormick & Schmicks Seafood Restaurants, Inc. and Subsidiaries

Consolidated Statements
of Cash Flows

(in thousands)



|                                                                                        |  |                  |         |   |                  |   |         |                  |  |   |         |  
|--------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | ---------------- |  | - | ------- | -
|                                                                                        |  | Year Ended       |        
|                                                                                        |  | December 27,2003 |         |   | December 25,2004 |   |         | December 31,2005 | 
|Operating activities                                                                    |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net income (loss)                                                                       |  | $                | (4,362  | ) |                  | $ | 703     |                  |  | $ | 11,008  |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Depreciation and amortization                                                           |  |                  | 9,853   |   |                  |   | 10,723  |                  |  |   | 9,608   |  
|Amortization of unearned compensation                                                   |  |                  | 9       |   |                  |   | 42      |                  |  |   |        |  
|Provision for doubtful accounts                                                         |  |                  | 48      |   |                  |   | 31      |                  |  |   | 69      |  
|Deferred income taxes                                                                   |  |                  | 1,323   |   |                  |   | (3,805  | )                |  |   | 4,566   |  
|Write off of deferred loan costs on early extinguishment of debt                        |  |                  | 2,313   |   |                  |   | 1,288   |                  |  |   |        |  
|Impairment of assets                                                                    |  |                  | 1,513   |   |                  |   |        |                  |  |   |        |  
|Accrued dividends and accretion on mandatorily redeemable preferred stock               |  |                  | 3,733   |   |                  |   | 5,759   |                  |  |   |        |  
|Changes in operating assets and liabilities                                             |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Trade accounts receivables                                                              |  |                  | (446    | ) |                  |   | (1,754  | )                |  |   | (509    | )
|Tenant improvement allowance receivable                                                 |  |                  |        |   |                  |   | 424     |                  |  |   | (1,433  | )
|Inventories                                                                             |  |                  | (387    | ) |                  |   | (680    | )                |  |   | (1,133  | )
|Prepaid expenses and other current assets                                               |  |                  | (495    | ) |                  |   | (479    | )                |  |   | (174    | )
|Accounts payable                                                                        |  |                  | 2,978   |   |                  |   | 1,659   |                  |  |   | 556     |  
|Accrued expenses                                                                        |  |                  | 2,310   |   |                  |   | 2,499   |                  |  |   | 3,773   |  
|Other long-term liabilities                                                             |  |                  | 2,262   |   |                  |   | 5,042   |                  |  |   | 3,827   |  
|                                                                                        |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net cash provided by operating activities                                               |  |                  | 20,652  |   |                  |   | 21,452  |                  |  |   | 30,158  |  
|                                                                                        |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Investing activities                                                                    |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Acquisition of equipment and leasehold improvements                                     |  |                  | (14,889 | ) |                  |   | (27,017 | )                |  |   | (21,347 | )
|Other assets                                                                            |  |                  | (67     | ) |                  |   | (267    | )                |  |   | (69     | )
|                                                                                        |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net cash used in investing activities                                                   |  |                  | (14,956 | ) |                  |   | (27,284 | )                |  |   | (21,416 | )
|                                                                                        |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Financing activities                                                                    |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Increase (decrease) in book overdraft                                                   |  |                  | 2,130   |   |                  |   | (4,623  | )                |  |   | (429    | )
|Loan costs                                                                              |  |                  | (1,398  | ) |                  |   | (805    | )                |  |   |        |  
|Payments on long-term debt                                                              |  |                  | (45,056 | ) |                  |   |        |                  |  |   |        |  
|Borrowings made on revolving credit facility                                            |  |                  | 103,000 |   |                  |   | 65,500  |                  |  |   | 16,500  |  
|Payments made on revolving credit facility                                              |  |                  | (64,500 | ) |                  |   | (92,000 | )                |  |   | (28,500 | )
|Proceeds from stock options exercised                                                   |  |                  |        |   |                  |   |        |                  |  |   | 202     |  
|Proceeds from issuance of common stock, net of offering costs                           |  |                  |        |   |                  |   | 65,076  |                  |  |   | 8,173   |  
|Redemption of senior preferred stock                                                    |  |                  |        |   |                  |   | (28,896 | )                |  |   |        |  
|Proceeds from notes receivable                                                          |  |                  | 26      |   |                  |   |        |                  |  |   |        |  
|Payments on capital lease obligations                                                   |  |                  | (390    | ) |                  |   | (416    | )                |  |   | (434    | )
|Purchase of Class B units                                                               |  |                  |        |   |                  |   | (6      | )                |  |   |        |  
|                                                                                        |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net cash provided by (used in) financing activities                                     |  |                  | (6,188  | ) |                  |   | 3,830   |                  |  |   | (4,488  | )
|                                                                                        |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                    |  |                  | (492    | ) |                  |   | (2,002  | )                |  |   | 4,254   |  
|Cash and cash equivalents, beginning of year                                            |  |                  | 2,945   |   |                  |   | 2,453   |                  |  |   | 451     |  
|                                                                                        |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Cash and cash equivalents, end of year                                                  |  | $                | 2,453   |   |                  | $ | 451     |                  |  | $ | 4,705   |  
|                                                                                        |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Supplemental disclosure of cash flow information                                        |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Cash paid during the year                                                               |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Interest                                                                                |  | $                | 3,457   |   |                  | $ | 3,097   |                  |  | $ | 949     |  
|Income taxes                                                                            |  |                  | 96      |   |                  |   | 57      |                  |  |   | 343     |  

Non-cash investing and financing activities

In 2003, accounts receivable totaling $226 were converted to a note receivable, which is included in other assets. A liquor license was purchased for $306
using a note payable. In 2004, accounts receivable totaling $160 were converted to a note receivable.

The accompanying notes are an
integral part of these consolidated financial statements.



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McCormick & Schmicks Seafood Restaurants, Inc. and Subsidiaries

Notes to Consolidated
Financial Statements

1. The Business and Organization

McCormick and Schmicks Seafood Restaurants, Inc. is a leading national seafood restaurant operator in the affordable upscale dining segment. McCormick & Schmicks Seafood
Restaurants, Inc. is the survivor of a merger with McCormick & Schmick Holdings LLC (the LLC) that occurred on July 20, 2004, prior to the Companys initial public offering.

The financial statements for the period covered by this report are those of McCormick & Schmicks Seafood Restaurants, Inc. for
periods beginning after July 19, 2004 and those of the LLC for periods ended on or before July 19, 2004. Except with respect to information regarding the membership units in the LLC and the common stock issued upon the reorganization,
there was no impact to the financial statements as a result of converting from a limited liability company to a corporation. Before July 20, 2004, the Companys operations were conducted in McCormick & Schmick Acquisition Corp.
and its subsidiaries, which are taxable corporations. Accordingly, the financial statements of the Company have historically included a provision for income taxes and related deferred income taxes. Throughout this report, McCormick &
Schmicks Seafood Restaurants, Inc. and the LLC are referred to collectively as the Company.

In connection with the
reorganization and initial public offering, the Company:



| |  |  | Issued 7,179,358 shares of common stock in the merger to the holders of the LLCs units, not including 602,992 shares issuable upon the exercise of warrants at a nominal price
to The Bell Atlantic Master Trust. See Note 14, Members Equity.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Issued 6,000,000 shares of common stock at $12.00 per share, raising approximately $65.1 million after underwriting discounts and transaction costs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Repaid $51.5 million of indebtedness on its then existing credit facility with the proceeds raised in the initial public offering and from $18.1 million in loans under a
new revolving credit facility. See Note 6, Long Term Debt.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Paid $28.9 million to The Bell Atlantic Master Trust to redeem all of the 13% senior exchangeable preferred stock of a Company subsidiary. See Note 13, Mandatorily
Redeemable Preferred Stock.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Paid $2.8 million in connection with the termination of the management agreements and covenants not to compete agreements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------

The Company owns and operates 59 restaurants in 24 states throughout the United States of America including two pursuant to management agreements. The
Company has aggregated its operations to one reportable segment.

2. Summary of Selected Accounting Policies

Principles of Consolidation

The consolidated
financial statements include the assets, liabilities and results of operations of McCormick & Schmicks Seafood Restaurants, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated upon
consolidation.



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McCormick & Schmicks Seafood Restaurants, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Fiscal Year

The Company utilizes a 52 or 53 week accounting period that ends on the Saturday closest to December 31. The fiscal years ended December 27, 2003 and December 25, 2004 were each comprised of 52 weeks
and the fiscal year ended December 31, 2005 was comprised of 53 weeks. Approximately every six years a 53-week fiscal year occurs.

Management
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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual results could differ from those estimates
under different assumptions or conditions.

Cash and Cash Equivalents

The Company considers all highly liquid investment instruments purchased with an initial maturity of three months or less to be cash equivalents. Cash consists of deposits held at major banks that may at times exceed
FDIC-insured limits, and cash on hand in restaurant locations.

Trade Accounts Receivable

Trade accounts receivable consists of balances receivable from credit card companies and other third parties. The allowance for doubtful accounts is the
Companys best estimate of the amount of probable losses in its existing accounts receivable. We review our allowances by assessing individual accounts receivable over a specific aging and amount. The Company has established an allowance for
doubtful accounts as follows:



|                  |  |                            |     |                             |   |            |  |                      |    |  |   |    
|----------------- |  | -------------------------- | --- | --------------------------- | - | ---------- |  | -------------------- | -- |  | - | ---
|                  |  | Balance atBeginningof Year |     | Charged toCosts andExpenses |   | Deductions |  | Balance atEnd ofYear
|                  |  | (in thousands)            
|December 27, 2003 |  | $                          | 117 |                             | $ | 48         |  | $                    | 40 |  | $ | 125
|December 25, 2004 |  |                            | 125 |                             |   | 31         |  |                      | 49 |  |   | 107
|December 31, 2005 |  |                            | 107 |                             |   | 69         |  |                      | 69 |  |   | 107

Inventories

Inventories, which consist principally of restaurant food, beverages and supplies, are stated at the lower of cost or market using the first-in, first-out method.

Equipment and Leasehold Improvements

Equipment and
leasehold improvements are stated at cost less accumulated depreciation and amortization. Equipment consists primarily of restaurant equipment, furniture, fixtures and smallwares. Depreciation is calculated using the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term, including option



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McCormick & Schmicks Seafood Restaurants, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



periods which are reasonably assured of renewal or the estimated useful life of the asset. Repairs and maintenance are expensed as incurred; renewals and
betterments are capitalized. Upon disposal of equipment and leasehold improvements, the accounts are relieved of the costs and related accumulated depreciation or amortization, and resulting gains or losses are reflected in operations.

Estimated useful lives are generally as follows:



|                       |  |           
|---------------------- |  | ----------
|Equipment              |  | 3-10 years
|Furniture and fixtures |  | 5-10 years
|Leasehold improvements |  | 7-30 years

Other Assets and Goodwill

Other assets include trademarks, loan costs and liquor licenses, which are stated at cost, less amortization, if any. The tradenames and trademarks are used in the advertising and marketing of the restaurants and are
widely recognized and accepted by consumers in each respective market as an indication of and recognition of service, value and quality. Goodwill represents the excess of purchase price over the fair value of the net assets of the business
acquired. Other intangible assets deemed to have definite lives are amortized over their estimated useful live. Goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more
frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair value. The Company tested the tradename, trademarks and goodwill
for impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets. Based on its evaluation, there were no impairments in 2003, 2004 and 2005 for tradenames,
trademarks, or goodwill.

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as equipment and leasehold improvements, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Companys assessment of recoverability of property and equipment is performed on a
restaurant-by-restaurant basis. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of
an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the
consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in
the appropriate asset and liability sections of the consolidated balance sheet.

During 2003, the Company recorded a loss on impairment of
long-lived assets in the amount of $1.5 million. The charge was related to partial impairment of fixtures and equipment and leasehold improvements at one restaurant. This restaurant is located on a site that was hidden from view from the street by a
building constructed subsequent to the opening of this restaurant and in an area where several competing restaurants have been built. These factors, along with the seasonality of business experienced at this location, led to a decline in the cash
flows from this restaurant location. Because this restaurant has reduced its costs and because several nearby restaurants have closed or relocated, the cash flow from this location has stabilized at approximately a break-even level, which is
projected to continue for the foreseeable future. There are no plans to sell or abandon this restaurant location and no reserves have been established for future lease payments or other costs.



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McCormick & Schmicks Seafood Restaurants, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Management measured the impairment charge with the assistance of an independent appraisal of the related assets. There were no impairments of equipment and
leasehold improvements in 2004 or 2005.

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, receivables, accounts payable, and accrued expenses approximate fair value because of the immediate or
short-term maturity of these financial instruments. The fair value of long-term debt is determined using current applicable rates for similar instruments and collateral as of the balance sheet date and approximates the carrying value of such debt.

Book Overdraft

Book overdraft
represents the amount of checks outstanding in excess of cash in banks and deposits in transit.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes.
Deferred taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. The deferred tax assets and liabilities represent the future tax return consequences of these differences,
which will either be taxable or deductible when the assets and liabilities are recovered or settled. Recognition of deferred tax assets is limited to amounts considered to be more likely than not of realization in future periods.

Revenue Recognition

Revenues are recognized at the
point of delivery of products and services. A deferred liability is recognized for gift certificates that have been sold but not yet redeemed. The Company recognizes revenue and reduces the related deferred liability when the gift certificates are
redeemed.

Equity-Based Compensation Plan

The Company accounts for its equity-based compensation plan using the intrinsic-value method prescribed by Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees (APB
25). Accordingly, the Company computed compensation cost for employee equity units granted as the amount by which the estimated fair value of the Companys equity units on the date of grant exceeds the amount the employee must pay to
acquire the related equity units. The amount of compensation cost is charged to income over the vesting period.

Under SFAS No. 123
Share Based Payment (SFAS 123), as amended by SFAS No. 148 Accounting for Stock-Based CompensationTransition and Disclosure, companies who choose to account for equity-based compensation plans using the
intrinsic-value method are required to determine the fair value of employee equity grants using the fair value method and to disclose the impact of fair value accounting in a note to the financial statements. Prior to the initial public offering,
there was no difference between the accounting for the equity-based compensation plan described in Note 11 under APB 25 and SFAS 123. Accordingly, prior to the initial public offering, there was no difference between reported net income and pro
forma net income determined under SFAS 123.

In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Share Based Payment (revised 2004) (SFAS 123R). SFAS 123R revises SFAS 123 and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. As of
January 1, 2006 the Company adopted SFAS 123R. See Note 11 for further discussion of SFAS 123R.



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The table below shows the proforma effects on net income and net income per share had compensation
cost been measured with the fair value method pursuant to SFAS 123.



|                                                     |  |                                      |        |   |                  |   |        |  
|---------------------------------------------------- |  | ------------------------------------ | ------ | - | ---------------- | - | ------ | -
|                                                     |  | Year Ended                           |       
|                                                     |  | December 25,2004                     |        |   | December 31,2005 |  
|                                                     |  | (in thousands,except per share data) |       
|Net income, as reported                              |  | $                                    | 703    |   |                  | $ | 11,008 |  
|Compensation expense included in net income          |  |                                      | 42     |   |                  |   |       |  
|Compensation cost based on the fair value method     |  |                                      | (318   | ) |                  |   | (832   | )
|                                                     |  |                                      |        |   |                  |   |        |  
|Pro forma net income                                 |  | $                                    | 427    |   |                  | $ | 10,176 |  
|                                                     |  |                                      |        |   |                  |   |        |  
|Basic net income per share                           |  |                                      |        |   |                  |   |        |  
|As reported                                          |  | $                                    | 0.07   |   |                  | $ | 0.80   |  
|Pro forma                                            |  | $                                    | 0.04   |   |                  | $ | 0.74   |  
|Fully diluted net income per share                   |  |                                      |        |   |                  |   |        |  
|As reported                                          |  | $                                    | 0.07   |   |                  | $ | 0.78   |  
|Pro forma                                            |  | $                                    | 0.04   |   |                  | $ | 0.73   |  
|Shares used in computing net income per common share |  |                                      |        |   |                  |   |        |  
|As reported                                          |  |                                      |        |   |                  |   |        |  
|Basic                                                |  |                                      | 10,387 |   |                  |   | 13,798 |  
|Fully diluted                                        |  |                                      | 10,416 |   |                  |   | 14,047 |  
|Pro forma                                            |  |                                      |        |   |                  |   |        |  
|Basic                                                |  |                                      | 10,387 |   |                  |   | 13,798 |  
|Fully diluted                                        |  |                                      | 10,387 |   |                  |   | 13,976 |  

The preceding pro forma results were calculated with the use of the Black Scholes option pricing
model. The following assumptions were used:

(1) risk-free interest rate of 3.9%;

(2) dividend yield of 0%;

(3) expected life of 5.5 years; and

(4) volatility of 24.3%.

Results may vary depending on the assumptions applied within the model.

There is no difference between reported net loss and net loss per share and pro forma net loss and net loss per share determined under SFAS No. 123 for the year ended December 27, 2003.

Restaurant Pre-Opening Costs

Restaurant pre-opening
costs, consisting primarily of wages and salaries, hourly employee recruiting, license fees, meals, lodging and travel, and non-cash rent expenses during the construction period are expensed as incurred.

Advertising Costs

Advertising costs are expensed as
incurred and were $2.0 million, $2.6 million and $3.3 million for the years ended December 27, 2003, December 25, 2004 and December 31, 2005, respectively.

Insurance Liability

The Company maintains various policies for workers compensation, employee
health, general liability, and property damage. Pursuant to those policies, the Company is responsible for losses up to certain limits. The Company records a liability for the estimated exposure for aggregate losses below those limits. This
liability is



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based on estimates of the ultimate costs to be incurred to settle known claims and claims not reported as of the balance sheet date. The estimated liability
is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions, and economic conditions.

Comprehensive Income (Loss)

The Company accounts for comprehensive income (loss) under SFAS No. 130, Reporting
Comprehensive Income (SFAS 130). SFAS 130 establishes standards for the reporting and display of elements of comprehensive income (loss), including unrealized gains and losses on certain investments in debt and equity securities
and deferred gains and losses on unrealized derivative hedge transactions. The Companys other comprehensive income (loss) relates to derivative hedge transactions.

Basic and Diluted Net Income (Loss) per Share

Basic income (loss) per share is computed based on the
weighted-average number of common shares outstanding during the period since the initial public offering. For periods prior to the initial public offering, the 7,179,358 shares of common stock of the Company issued to the former unit holders of
McCormick & Schmick Holdings LLC and the 602,992 shares issuable upon the exercise of certain warrants (because the warrants had a nominal exercise price) are assumed to be outstanding for all periods presented. Diluted earnings per share
are computed using the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the year. Shares from stock options and other common stock equivalents are excluded from the computation
when their effect is antidilutive.

Options to purchase 870,500 and 832,846 shares of common stock were outstanding at December 25,
2004 and December 31, 2005, respectively. The diluted weighted-average shares include 29,020 and 248,532 shares subject to stock options for the years ended December 25, 2004 and December 31, 2005, respectively. There were no stock
options prior to the initial public offering.

Operating Leases

The Company generally operates its restaurants in leased premises. The Company records the minimum base rents for its operating leases on a straight-line basis over the life of the lease term, including option periods
which are reasonably assured of renewal due to the presence of certain economic penalties. For purposes of calculating straight line rents, the lease term commences on the date the lessee obtains control of the property, which is normally when the
property is ready for normal tenant improvements (build-out-period). For certain leases the Company only has the right to exercise its option for renewal if certain sales targets are achieved at or near the renewal date. These renewal option periods
have been included in the lease term when the Company determines at lease inception or at the acquisition date of the restaurant, if later, that the sales targets are nonsubstantive and achievement of such sales targets is virtually certain. The
difference between rent expense calculated on a straight line basis and rent paid is recorded as deferred rent liability. The Company receives certain tenant improvement allowances which are considered lease incentives and are amortized as reduction
of rent expense over the lease term. Accordingly, the Company has recorded a deferred rent liability for the straightlining of rents and lease incentives, which is included in other long-term liabilities of $10.8 million and $14.5 million as of
December 25, 2004 and December 31, 2005, respectively.

Derivative Instruments and Hedging Activities

The Company accounts for all derivative instruments on the balance sheet at fair value. Changes in the fair value (i.e., gains or losses) of the
derivatives are recorded each period in the consolidated statement of operations or accumulated other comprehensive income (loss). For a derivative designated as a cash flow hedge, the gain or loss on the derivative is initially reported as a
component of other comprehensive income (loss) and subsequently



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reclassified into the statement of operations when the hedged transaction affects earnings. For derivatives recognized as a fair value hedge, the gain or
loss on the derivative in the period of change and the offsetting loss or gain of the hedged item attributed to the hedged risk are recognized in the consolidated statement of operations. For derivatives not recognized as hedges, the gain or loss on
the derivative in the period of change is recognized as other income.

If the Company were to terminate an interest rate swap, any gain or
loss realized upon termination would be deferred and amortized to interest expense over the remaining term of the underlying debt instrument it was intended to modify or would be recognized immediately if the underlying debt instrument were settled
prior to maturity. As of December 31, 2005, the Company did not hold a position in a derivative instrument and did not have any hedges outstanding.

3. Equipment and Leasehold Improvements

Equipment and leasehold improvements consist of the following:



|                                                |  |                  |         |   |                  |   |         |  
|----------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                                |  | December 25,2004 |         |   | December 31,2005 |  
|                                                |  | (in thousands)   |        
|Fixtures and equipment                          |  | $                | 36,808  |   |                  | $ | 46,324  |  
|Leasehold improvements                          |  |                  | 77,331  |   |                  |   | 90,746  |  
|Construction in progress                        |  |                  | 5,699   |   |                  |   | 3,937   |  
|Equipment under capital leases                  |  |                  | 1,992   |   |                  |   | 1,723   |  
|                                                |  |                  |         |   |                  |   |         |  
|                                                |  |                  | 121,830 |   |                  |   | 142,730 |  
|Less: Accumulated depreciation and amortization |  |                  | (29,086 | ) |                  |   | (38,003 | )
|                                                |  |                  |         |   |                  |   |         |  
|Equipment and leasehold improvements, net       |  | $                | 92,744  |   |                  | $ | 104,727 |  
|                                                |  |                  |         |   |                  |   |         |  

For the years ended December 25, 2004 and December 31, 2005, the Company capitalized
interest in the amount of $88,000 and $227,400, respectively. Depreciation and amortization expense related to equipment and leasehold improvements for the years ended December 27, 2003, December 25, 2004 and December 31, 2005 was
$9,285,000, $10,290,000 and 9,364,000, respectively.

4. Other Assets

Other assets consist of the following:



|                                                                                                                                                             |  |                  |        |   |                  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                                                                             |  | December 25,2004 |        |   | December 31,2005 |  
|                                                                                                                                                             |  | (in thousands)   |       
|Tradename and trademarks                                                                                                                                     |  | $                | 50,600 |   |                  | $ | 50,600 |  
|Loan costs                                                                                                                                                   |  |                  | 805    |   |                  |   | 813    |  
|Liquor licenses                                                                                                                                              |  |                  | 1,103  |   |                  |   | 1,216  |  
|Notes receivable                                                                                                                                             |  |                  | 716    |   |                  |   | 686    |  
|Other                                                                                                                                                        |  |                  | 1,036  |   |                  |   | 649    |  
|                                                                                                                                                             |  |                  |        |   |                  |   |        |  
|                                                                                                                                                             |  |                  | 54,260 |   |                  |   | 53,964 |  
|Less accumulated amortization of loan costs ($68,000 and $233,000) and other ($371,000 and $85,000) at December 25, 2004 and
December 31, 2005, respectively |  |                  | (439   | ) |                  |   | (318   | )
|                                                                                                                                                             |  |                  |        |   |                  |   |        |  
|                                                                                                                                                             |  | $                | 53,821 |   |                  | $ | 53,646 |  
|                                                                                                                                                             |  |                  |        |   |                  |   |        |  



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Amortization expense related to other assets (loan costs, prepaid management contract and a covenants
not to compete agreement) was $568,000, $433,000 and $244,000 for the years ended December 27, 2003, December 25, 2004 and December 31, 2005, respectively.

Estimated aggregate amortization expense related to the loan costs and prepaid management contract for each of the periods ended during the next five years from December 31, 2005 and thereafter is as follows (in
thousands):



|           |  |   |    
|---------- |  | - | ---
|2006       |  | $ | 187
|2007       |  |   | 187
|2008       |  |   | 187
|2009       |  |   | 118
|2010       |  |   | 25 
|Thereafter |  |   | 40 
|           |  |   |    
|           |  | $ | 744
|           |  |   |    

5. Accrued Expenses

Accrued expenses consist of the following:



|                                  |  |                  |        |                  |   |       
|--------------------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                                  |  | December 25,2004 |        | December 31,2005
|                                  |  | (in thousands)  
|Accrued compensation and benefits |  | $                | 7,814  |                  | $ | 8,753 
|Gift certificate liability        |  |                  | 3,089  |                  |   | 4,542 
|Accrued legal and related costs   |  |                  | 331    |                  |   | 430   
|Accrued sales tax                 |  |                  | 1,392  |                  |   | 1,942 
|Accrued rent                      |  |                  | 636    |                  |   | 1,098 
|Accrued interest                  |  |                  | 156    |                  |   | 67    
|Other                             |  |                  | 1,779  |                  |   | 2,138 
|                                  |  |                  |        |                  |   |       
|                                  |  | $                | 15,197 |                  | $ | 18,970
|                                  |  |                  |        |                  |   |       

6. Long-Term Debt

On December 20, 2005 the Company paid down the remaining outstanding balance on its credit facility. As of December 31, 2005, there was no outstanding balance on the Companys revolving credit facility.
The interest rate on the credit facility is based on the financial institutions prime rate plus a margin of 0.25% to 0.75% or the Eurodollar rate plus a margin of 1.75% to 2.25%, with margins determined by certain financial ratios. Under the
revolving credit facility agreement, the Company is subject to certain financial and non-financial covenants, including an adjusted leverage ratio, a consolidated cash flow ratio and growth capital expenditures limitations. The Company was in
compliance with these covenants as of December 31, 2005.

Under the Companys revolving credit facility agreement, loans are
collateralized by a first priority security interest in all of the assets of the Company and mature on July 23, 2009. The revolving credit facility agreement also provides for bank guarantee under standby letter of credit arrangements in the
normal course of business operations. The Companys commercial bank issues standby letters of credit to secure our obligations to pay or perform when required to do so pursuant to the requirements of an underlying agreement or the provision of
goods and services. The standby letters of credit are cancelable only at the option of the beneficiary who is



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authorized to draw drafts on the issuing bank up to the face amount of the standby letter of credit in accordance with its terms. As of December 31,
2005 the maximum exposure under these standby letters of credit was $1.5 million. At December 31, 2005 the Company had $48.5 million available under its revolving credit facility.

On July 23, 2004, the Company repaid the outstanding balance on its prior amended and restated revolving credit facility in the amount of
$51.5 million with net proceeds from the Companys initial public offering and $18.1 million in loans under the Companys current revolving credit facility agreement. For the year ended December 25, 2004, the Company
recognized a $1.3 million expense related to the write off of unamortized deferred loan costs related to the prior revolving credit facility.

The Companys prior revolving credit facility, entered into on October 28, 2003, provided for a $70.0 million revolving credit loan. Loans under this facility were collateralized by a first priority security interest in all
of the assets of the Company, were scheduled to mature April 2007 and bore interest based on the financial institutions prime rate plus a margin of 1.75% to 2.25% or the Eurodollar rate plus a margin of 3.25% to 3.75%, with margins
determined by certain financial ratios.

Before October 28, 2003, the Company had term loans and a $15.0 million revolving credit
facility payable to financial institutions. The term loans had quarterly principal payments due in amounts ranging from $0.3 million to $2.1 million and were scheduled to mature between June 2006 and June 2008. The interest rates
on these term loans were based on the financial institutions prime rate plus a margin of 1.5% to 3.0% or the Eurodollar rate plus a margin of 3.0% to 4.25% determined by certain financial ratios.

7. Other Long-Term Liabilities

Other long-term
liabilities consist of the following:



|                                          |  |                  |        |                  |   |       
|----------------------------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                                          |  | December 25,2004 |        | December 31,2005
|                                          |  | (in thousands)  
|Deferred Rent                             |  | $                | 6,481  |                  | $ | 9,033 
|Unamortized Tenant Improvement Allowances |  |                  | 4,310  |                  |   | 5,512 
|Other                                     |  |                  | 1,000  |                  |   | 1,073 
|                                          |  |                  |        |                  |   |       
|                                          |  | $                | 11,791 |                  | $ | 15,618
|                                          |  |                  |        |                  |   |       

8. Capital Leases

The Company is the lessee of equipment under capital leases expiring in years through 2007. The assets and related liabilities under capital leases are recorded at the fair value of the assets at the inception of the
lease. The assets are depreciated over their estimated useful lives. Depreciation of assets under capital leases is included in depreciation expense.

The gross amount of equipment and related accumulated amortization recorded under capital leases are as follows:



|                               |  |                  |       |   |                  |   |       |  
|------------------------------ |  | ---------------- | ----- | - | ---------------- | - | ----- | -
|                               |  | December 25,2004 |       |   | December 31,2005 |  
|                               |  | (in thousands)   |      
|Equipment                      |  | $                | 1,992 |   |                  | $ | 1,723 |  
|Less: Accumulated amortization |  |                  | (616  | ) |                  |   | (701  | )
|                               |  |                  |       |   |                  |   |       |  
|                               |  | $                | 1,376 |   |                  | $ | 1,022 |  
|                               |  |                  |       |   |                  |   |       |  



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Minimum future lease payments under capital leases as of December 31, 2005 are as follows (in
thousands):



|                                            |  |   |      |  
|------------------------------------------- |  | - | ---- | -
|2006                                        |  | $ | 402  |  
|2007                                        |  |   | 348  |  
|                                            |  |   |      |  
|Total minimum lease payments                |  |   | 750  |  
|Less: Amount representing interest          |  |   | (44  | )
|                                            |  |   |      |  
|Present value of net minimum lease payments |  |   | 706  |  
|Less: Current portion                       |  |   | (368 | )
|                                            |  |   |      |  
|Long-term portion                           |  | $ | 338  |  
|                                            |  |   |      |  

9. Income Taxes

The provision (benefit) for income taxes consists of:



|                     |  |                  |       |                  |   |        |                  |  |   |      
|-------------------- |  | ---------------- | ----- | ---------------- | - | ------ | ---------------- |  | - | -----
|                     |  | Year Ended      
|                     |  | December 27,2003 |       | December 25,2004 |   |        | December 31,2005
|                     |  | (in thousands)  
|Current tax expense  |  |                  |       |                  |   |        |                  |  |   |      
|Federal              |  | $                |      |                  | $ |       |                  |  | $ | 168  
|State and local      |  |                  |      |                  |   | 154    |                  |  |   | 212  
|                     |  |                  |       |                  |   |        |                  |  |   |      
|                     |  |                  |      |                  |   | 154    |                  |  |   | 380  
|                     |  |                  |       |                  |   |        |                  |  |   |      
|Deferred tax expense |  |                  |       |                  |   |        |                  |  |   |      
|Federal              |  |                  | 1,268 |                  |   | (3,797 | )                |  |   | 3,983
|State and local      |  |                  | 55    |                  |   | (8     | )                |  |   | 583  
|                     |  |                  |       |                  |   |        |                  |  |   |      
|                     |  |                  | 1,323 |                  |   | (3,805 | )                |  |   | 4,566
|                     |  |                  |       |                  |   |        |                  |  |   |      
|                     |  | $                | 1,323 |                  | $ | (3,651 | )                |  | $ | 4,946
|                     |  |                  |       |                  |   |        |                  |  |   |      

The effective income tax rate differs from the federal statutory rate as follows:



|                                                                                                                                   |  |                  |    |  |                  |    |  |                  |   
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -- |  | ---------------- | -- |  | ---------------- | --
|                                                                                                                                   |  | Year Ended       |   
|                                                                                                                                   |  | December 27,2003 |    |  | December 25,2004 |    |  | December 31,2005 |   
|Federal statutory rate                                                                                                             |  | (35.0            | )% |  | (35.0            | )% |  | 35.0             | % 
|State and local taxes                                                                                                              |  | (4.8             | )% |  | (4.4             | )% |  | 4.9              | % 
|Valuation allowance                                                                                                                |  | 98.0             | %  |  | (40.1            | )% |  |                 |   
|Nondeductible expenses and other-primarily nondeductible accrued dividends and accretion of mandatorily redeemable preferred
stock |  | 51.4             | %  |  | 82.4             | %  |  | 0.8              | % 
|FICA Tip Credits                                                                                                                   |  |                 |    |  | (126.7           | )% |  | (10.1            | )%
|Other                                                                                                                              |  |                 |    |  |                 |    |  | 0.4              | % 
|                                                                                                                                   |  |                  |    |  |                  |    |  |                  |   
|                                                                                                                                   |  | 109.6            | %  |  | (123.8           | )% |  | 31.0             | % 
|                                                                                                                                   |  |                  |    |  |                  |    |  |                  |   

The Company adopted the provisions of SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (SFAS 150) effective June 29, 2003. Effective with the adoption of SFAS 150, dividends and accretion of mandatorily redeemable preferred stock are included in the



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computation of income before income taxes and, accordingly, impacts the effective income tax rates. Prior to the adoption of SFAS 150 in July 2003, such
amounts were reported after income taxes and did not impact the effective income tax rates. In accordance with SFAS 150, the restatement of financial statements for earlier years is not permitted.

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are:



|                                                        |  |                  |        |   |                  |   |         |  
|------------------------------------------------------- |  | ---------------- | ------ | - | ---------------- | - | ------- | -
|                                                        |  | December 25,2004 |        |   | December 31,2005 |  
|                                                        |  | (in thousands)   |       
|Deferred tax (liabilities) assetscurrent               |  |                  |        |   |                  |   |         |  
|Lessor reimbursement                                    |  | $                | 240    |   |                  | $ |        |  
|Liability insurance                                     |  |                  | (332   | ) |                  |   | (210    | )
|Accrued vacation pay                                    |  |                  | 693    |   |                  |   | 829     |  
|Federal & state credits                                 |  |                  |       |   |                  |   | 499     |  
|FICA Tip Credit                                         |  |                  |       |   |                  |   | 4,500   |  
|Net operating loss carryforwards                        |  |                  |       |   |                  |   | 1,022   |  
|Other                                                   |  |                  | 229    |   |                  |   | 48      |  
|                                                        |  |                  |        |   |                  |   |         |  
|Current deferred tax asset                              |  |                  | 830    |   |                  |   | 6,688   |  
|                                                        |  |                  |        |   |                  |   |         |  
|Deferred tax (liabilities) assetsnoncurrent            |  |                  |        |   |                  |   |         |  
|Depreciation and amortization on property and equipment |  |                  | (9,546 | ) |                  |   | (12,397 | )
|Amortization of intangible assets                       |  |                  | (6,247 | ) |                  |   | (8,242  | )
|Deferred rent                                           |  |                  | 2,475  |   |                  |   | 5,796   |  
|Smallwares and supplies                                 |  |                  | (869   | ) |                  |   | (1,106  | )
|FICA Tip Credits                                        |  |                  | 5,746  |   |                  |   | 3,717   |  
|Net operating loss carryforwards                        |  |                  | 6,866  |   |                  |   |        |  
|Other                                                   |  |                  | 17     |   |                  |   | 250     |  
|                                                        |  |                  |        |   |                  |   |         |  
|Non-current deferred tax liability                      |  |                  | (1,558 | ) |                  |   | (11,982 | )
|                                                        |  |                  |        |   |                  |   |         |  
|Net deferred tax liability                              |  | $                | (728   | ) |                  | $ | (5,294  | )
|                                                        |  |                  |        |   |                  |   |         |  

In assessing whether deferred tax assets can be realized, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will be realized. As of December 27, 2003, there was a net deferred tax asset arising from net operating losses and other temporary differences (other than those relating to
amortization of indefinite lived assets) for which utilization was uncertain due to projected future taxable income at that date. Accordingly, a valuation allowance was established as of December 27, 2003.

As discussed in Note 1, during 2004 the Company completed an initial public offering, a portion of the proceeds of which was used to repay indebtedness.
In connection with its initial public offering the Company redeemed the mandatorily redeemable preferred stock and terminated certain agreements. As a result of these changes and continued improved operating results for the years ended
December 25, 2004 and December 31, 2005, management believes it is more likely than not that the Company will realize the benefits of the deferred tax assets and, accordingly, no deferred tax asset valuation allowance was recorded as of
December 25, 2004 or December 31, 2005.

At December 31, 2005, the Company has federal business credits of $8.6 million that will
begin to expire in 2021 and state business credits of $200,000 that carryforward indefinitely. The Company also has federal net operating loss carryforwards of $2.4 million that will expire in 2024 and state and local net operating loss
carryforwards of $7.1 million that will expire between 2007 and 2024, if not used.



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10. Related Party Transactions

Prior to the initial public offering, the Company paid annual management fees of $1.1 million to each of BRS and Castle Harlan. Affiliates of each of BRS and Castle Harlan had significant ownership interests in
the LLC at the time of the agreement terminations. Management fees recognized as expenses totaled $2.2 million and $3.3 million for the years ended December 27, 2003 and December 25, 2004, respectively. The amount of
$3.3 million paid for the year ended December 25, 2004 includes $1.1 million paid to each of BRS and Castle Harlan for the termination of the management agreements as of June 25, 2004.

Pursuant to covenants not to compete agreements with certain stockholders, the Company expensed $0.35 million and $0.9 million for the years
ended December 27, 2003 and December 25, 2004, respectively. The management fee agreements and all but one of the covenants not to compete agreements were terminated in connection with the Companys initial public offering. The
remaining covenants not to compete agreement terminated in 2005.

The Company leases properties from landlords controlled by certain
stockholders of the Company. Total rent paid to these landlords was $0.5 million, $0.8 million and $0.9 million for the years ended December 27, 2003, December 25, 2004 and December 31, 2005, respectively.

11. Equity Based Compensation

In March 2005, the
Securities and Exchange Commission (SEC) released SEC Staff Accounting Bulletin No. 107 (SAB 107). SAB 107 provides the SEC staff position regarding the application of SFAS 123R. SAB 107 contains
interpretive guidance relating to the interaction between SFAS 123R and certain SEC rules and regulations, as well as the staffs views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also
highlights the importance of disclosures made related to the accounting for share-based payment transactions. As of January 1, 2006 the Company adopted SAB 107 as part of its adoption of SFAS 123R.

In December 2004, the FASB issued SFAS 123R. SFAS 123R revises SFAS 123 and requires companies to expense the fair value of employee stock options and
other forms of stock-based compensation. In addition to revising SFAS 123, SFAS 123R supersedes APB 25, and amends SFAS No. 95, Statement of Cash Flows (SFAS 95). In April 2005, The SEC announced the amendment of the adoption
compliance date of SFAS 123R from the first interim period to the first annual period after June 15, 2005. As of January 1, 2006 the Company adopted SFAS 123R. The estimated impact of the adoption of SFAS 123R for 2006, relating to prior
year grants only, will be approximately $750,000 to $850,000, net of tax.

Prior to the initial public offering, the Company had an
equity-based compensation plan under which it could grant the right to purchase a fixed number of its equity units. The Company accounted for its equity-based compensation plan using the intrinsic-value method prescribed by APB 25. Accordingly, the
Company computed compensation cost for employee equity units granted at the amount by which the estimated fair value of its equity units on the date of grant exceeded the amount the employee would have had to pay to acquire the related equity units.
The amount of compensation cost was charged to income over the vesting period.

Under SFAS 123, as amended by SFAS 148, companies that
choose to account for equity-based compensation plans using the intrinsic-value method are required to determine the fair value of employee equity grants using the fair value method and to disclose the impact of fair value accounting in a note to
the financial statements. There was no difference between the accounting for the equity-based compensation plan described above under APB 25 and SFAS 123. Accordingly, there was no difference between reported net loss and pro forma net loss
determined under SFAS 123 for the year ended December 27, 2003.



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McCormick & Schmicks Seafood Restaurants, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



In connection with the initial public offering, all of the outstanding Class B units owned by
employees of the Company vested at July 20, 2004. The Company accounted for the acceleration of the vesting of the units in accordance with Financial Accounting Standards Board Interpretation (FIN) No. 44, Accounting for
Certain Transactions Involving Stock Compensation. This resulted in a new measurement date at the time of the acceleration and a new measurement of compensation as if the award were newly granted. However, based on the formula used to
calculate the conversion ratios of various classes of LLC units into common stock when the LLC merged into McCormick & Schmicks Seafood Restaurants, Inc., the Class B units had no value and accordingly no shares of common
stock were issued for the Class B units. Shares of common stock with an aggregate value of $3.0 million were allocated among the holders of Class C units, which had already vested.

On June 16, 2004, the Company adopted a 2004 Stock Incentive Plan (the Plan) under which 1,500,000 shares were reserved for issuance.
Under the Plan, the Company may grant stock options and other awards to employees, directors, consultants and to any parent or subsidiary of the Company. On July 20, 2004, the Company issued to officers and employees options to purchase an
aggregate of 879,600 shares of common stock at $12.00 per share. These options become exercisable over a three-year period and are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code. Additional awards
granted under the Plan may be in the form of nonqualified stock options, incentive stock options, stock appreciation rights (SARs), restricted stock, stock bonuses and performance-based awards.

Incentive stock options must have an exercise price that is at least equal to the fair market value of the common stock, or 110% of fair market value of
the common stock for any greater than 10% owner of the Companys common stock, on the date of grant. Vesting of awards under the Plan may vary. Each award granted under the Plan may, at the discretion of the board of directors of the Company,
become fully exercisable or payable, as applicable, upon a change of control of the Company.

Each award shall expire on the date
determined at the date of grant, however, the maximum term of options, SARs and other rights to acquire common stock under the Plan is 10 years after the initial date of the award, subject to provisions for further deferred payment in certain
circumstances. These and other awards may also be issued solely or in part for services. Any shares subject to awards that are not paid or exercised before they expire or are terminated will become available for other award grants under the Plan. If
not sooner terminated by the Companys board of directors, the Plan will terminate on June 16, 2014. As of December 31, 2005, options to acquire a total of 879,600 shares of the Companys common stock have been granted under the
Plan at a price equal to $12.00, the fair market value on the date of grant (July 20, 2004).

The table below summarizes the status of
the Companys stock based compensation plans as of December 31, 2005:



|                                 |  |         |  |                                |      
|-------------------------------- |  | ------- |  | ------------------------------ | -----
|                                 |  | Shares  |  | Weighted AverageExercise Price
|Outstanding at July 19, 2004     |  |        |  | $                              |     
|Awards granted                   |  | 879,600 |  |                                | 12.00
|Awards forfeited                 |  | 9,100   |  |                                | 12.00
|                                 |  |         |  |                                |      
|Outstanding at December 25, 2004 |  | 870,500 |  |                                | 12.00
|                                 |  |         |  |                                |      
|Awards granted                   |  |        |  |                                |      
|Awards exercised                 |  | 16,856  |  |                                | 12.00
|Awards forfeited                 |  | 20,798  |  |                                | 12.00
|                                 |  |         |  |                                |      
|Outstanding at December 31, 2005 |  | 832,846 |  |                                | 12.00
|                                 |  |         |  |                                |      



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McCormick & Schmicks Seafood Restaurants, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



The table below summarizes information about stock options outstanding at December 31, 2005:



|                       |  |                  |  |                                                   |  |                                |       |                  |         |                                |   |      
|---------------------- |  | ---------------- |  | ------------------------------------------------- |  | ------------------------------ | ----- | ---------------- | ------- | ------------------------------ | - | -----
|Outstanding            |  | Exercisable     
|Range ofExercisePrices |  | Number ofOptions |  | Weighted AverageRemaining Yearsof ContractualLife |  | Weighted AverageExercise price |       | Number ofOptions |         | Weighted AverageExercise price
|$12.00                 |  | 832,846          |  | 8.6                                               |  | $                              | 12.00 |                  | 267,309 |                                | $ | 12.00

12. Commitments and Contingencies

During 2003, the Company was a defendant in a labor code class action lawsuit filed in the Superior Court of California, Orange County. In
January 2004, the Company resolved this matter in principal by agreeing to pay $1.2 million, which was accrued as of December 27, 2003 and paid in November 2004. The Company believes that its restaurants in California, and in
states with similar laws, are now complying with meal and rest period requirements.

The Company is subject to various other claims,
possible legal actions, and other matters arising out of the normal course of business. While it is not possible to predict the outcome of these issues, management is of the opinion that adequate provision for potential losses has been made in the
accompanying consolidated financial statements and that the ultimate resolution of these matters will not have a material adverse effect on the Companys financial position, results of operations or cash flow.

13. Mandatorily Redeemable Preferred Stock

McCormick & Schmick Acquisition Corp II (Acquisition Corp II) is a subsidiary of the Company. Acquisition Corp IIs mandatorily redeemable 13% senior exchangeable preferred stock is reflected as mandatorily
redeemable preferred stock in the December 27, 2003 balance sheet. In connection with the reorganization and initial public offering, on July 23, 2004 the Company paid $28.9 million to redeem all of the outstanding mandatorily
redeemable 13% senior exchangeable preferred stock. See Note 1, The Business and Organization. Following is the summary of mandatorily redeemable preferred stock:



|                                                        |  |                 |   |  |                          |         |   |                             |   |        |               |  |   |         |  
|------------------------------------------------------- |  | --------------- | - |  | ------------------------ | ------- | - | --------------------------- | - | ------ | ------------- |  | - | ------- | -
|                                                        |  | Number ofShares |   |  | MandatoryRedemptionValue |         |   | UnamortizedIssuanceDiscount |   |        | Net BookValue | 
|                                                        |  | (in thousands)  |  
|Balances at December 27, 2003                           |  | 20,000          |   |  | $                        | 27,002  |   |                             | $ | (3,865 | )             |  | $ | 23,137  |  
|Accrual of dividends and accretion of issuance discount |  |                 |   |  |                          | 5,467   |   |                             |   | 292    |               |  |   | 5,759   |  
|Redemption of senior exchangeable preferred stock       |  | (20,000         | ) |  |                          | (32,469 | ) |                             |   | 3,573  |               |  |   | (28,896 | )
|                                                        |  |                 |   |  |                          |         |   |                             |   |        |               |  |   |         |  
|Balances at December 25, 2004                           |  |                |   |  | $                        |        |   |                             | $ |       |               |  | $ |        |  
|                                                        |  |                 |   |  |                          |         |   |                             |   |        |               |  |   |         |  



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McCormick & Schmicks Seafood Restaurants, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



14. Members Equity

Prior to its initial public offering, the Company had outstanding the following equity units: preferred units, Class A-1 units, Class A-2 units, Class B units and Class C units. All of the units
were converted into common stock as the result of the initial public offering. The holders of the Class A-1 units had voting rights; the Class A-2 units, Class B units, Class C units and preferred units did not have voting
rights. At December 27, 2003 members equity consisted of the following ($ in thousands):



|                                                                                          |  |   |        |  
|----------------------------------------------------------------------------------------- |  | - | ------ | -
|Preferred units, 57,000 units issued and outstanding (liquidation preference of $77,385)  |  | $ | 57,000 |  
|Warrant to acquire 4,956.52 Preferred units, entitled to liquidation preference of $6,772 |  |   | 4,951  |  
|Class A units, 1,000,000 units issued and outstanding                                     |  |   | 756    |  
|Warrant to acquire 103,896.1 Class A-2 units                                              |  |   | 103    |  
|Class B units, 171,428.57 units issued and outstanding                                    |  |   | 37     |  
|Class C units, 13.20 units issued and outstanding                                         |  |   | 14     |  
|Unearned compensation                                                                     |  |   | (42    | )
|                                                                                          |  |   |        |  
|                                                                                          |  | $ | 62,819 |  
|                                                                                          |  |   |        |  

In connection with the issuance of the senior exchangeable preferred stock of McCormick &
Schmick Acquisition Corp II discussed in Note 13, Mandatorily Redeemable Preferred Stock, the Company also sold for $102,857 a warrant to purchase 103,896.10 Class A-2 units and sold for $5.0 million a warrant to purchase
4,956.52 preferred units. In connection with the corporate reorganization, the warrants became exercisable for 602,992 shares of common stock for an aggregate exercise price of $5,995. On October 20, 2004, The Bell Atlantic Master Trust
exercised its warrants to purchase 602,992 shares of common stock for $5,995.

15. Employee Benefit Plans

The Company has a 401(k) contributory benefit plan for eligible employees, which currently matches up to a maximum of 3% of the participants
eligible compensation. For the years ended December 27, 2003, December 25, 2004 and December 31, 2005, Company matching contributions totaled approximately $234,000, $245,000 and $304,000, respectively.

16. Operating Leases

The Company generally operates
its restaurants in leased premises. The typical restaurant premises lease is for an initial term between 15 and 25 years with renewal options ranging from 5 to 10 years. The leases generally provide for the payment of property taxes,
utilities, and various other use and occupancy costs by the Company.

Minimum payments under lease commitments as of December 31, 2005
are summarized below for operating leases.



|           |  |                |        
|---------- |  | -------------- | -------
|           |  | (in thousands)
|2006       |  | $              | 18,039 
|2007       |  |                | 18,864 
|2008       |  |                | 18,036 
|2009       |  |                | 17,892 
|2010       |  |                | 16,933 
|Thereafter |  |                | 106,853
|           |  |                |        
|           |  | $              | 196,617
|           |  |                |        



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McCormick & Schmicks Seafood Restaurants, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)



Rent expense charged to operations under all operating leases is as follows:



|                                   |  |                  |        |                  |   |                  |  |   |       
|---------------------------------- |  | ---------------- | ------ | ---------------- | - | ---------------- |  | - | ------
|                                   |  | Year Ended      
|                                   |  | December 27,2003 |        | December 25,2004 |   | December 31,2005
|                                   |  | (in thousands)  
|Fixed rent                         |  | $                | 11,032 |                  | $ | 14,252           |  | $ | 15,860
|Contingent rent, based on revenues |  |                  | 2,114  |                  |   | 2,184            |  |   | 2,765 
|Non-cash rent                      |  |                  | 1,687  |                  |   | 1,865            |  |   | 2,153 
|                                   |  |                  |        |                  |   |                  |  |   |       
|                                   |  | $                | 14,833 |                  | $ | 18,301           |  | $ | 20,778
|                                   |  |                  |        |                  |   |                  |  |   |       

17. Recent Accounting Pronouncements

In October 2005, the FASB issued FASB Staff Position No. FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period
(FSP 13-1). FSP 13-1 requires rental costs associated with ground or building operating leases incurred during a construction period to be recognized as rental expense. FSP 13-1 is effective for reporting periods beginning after
December 15, 2005. Retroactive application is permitted, but not required. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Correctionsa Replacement of APB Opinion No. 20 and
FASB Statement No. 3 (SFAS 154), which requires retrospective application to prior periods financial statements of every voluntary change in accounting principal unless it is impracticable to do so. SFAS 154 is
effective for accounting changes and corrections of errors beginning in fiscal 2007. The Company does not expect the adoption of this standard to have any effect on its financial position or results of operations.

In March 2005, the SEC released SAB 107. SAB 107 provides the SEC staff position regarding the application of SFAS 123R. SAB 107 contains
interpretive guidance relating to the interaction between SFAS 123R and certain SEC rules and regulations, as well as the staffs views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also
highlights the importance of disclosures made related to the accounting for share-based payment transactions. As of January 1, 2006 the Company adopted SAB 107 as part of its adoption of SFAS 123R.

In December 2004, the FASB issued SFAS 123R. SFAS 123R revises SFAS 123 and requires companies to expense the fair value of employee stock options and
other forms of stock-based compensation. In addition to revising SFAS 123, SFAS 123R supersedes APB 25, and amends SFAS 95. In April 2005, The SEC announced the amendment of the adoption compliance date of SFAS 123R from the first interim period to
the first annual period after June 15, 2005. As of January 1, 2006 the Company adopted SFAS 123R. The estimated impact of the adoption of SFAS 123R and SAB 107 for 2006, relating to prior year grants only, will be approximately $750,000 to
$850,000, net of tax. Subsequent to the initial public offering the Company issued options to employees as further discussed in Note 11, Equity Based Compensation.



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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our chief executive officer and chief financial officer, the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the Exchange Act). Based on that evaluation, our chief
executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act
reports is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and (2) accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Report of Management on
Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control
over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

Under the supervision and with the participation of our
management, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal ControlIntegrated Framework. Based on our assessment we determined that, as of December 31, 2005, our internal control over financial reporting is effective based on those criteria.

PricewaterhouseCoopers LLP, our independent registered public accounting firm, has issued an audit report on our managements assessment of the
effectiveness of our internal control over financial reporting as of December 31, 2005 which is included in the Report of Independent Registered Public Accounting Firm contained in Item 8.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred in our fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.

ITEM 9B. OTHER INFORMATION

On January 31, 2006 the Compensation Committee of the board of directors
determined the compensation to be paid to independent directors for 2006. The Compensation Committee of the board of directors has determined the 2006 compensation for the Chief Executive Officer and for other named executive officers,
as defined in SEC Regulation S-K, Item 402. A summary of the compensation for the directors and specified executive officers is filed as Exhibit 10.9 to this Annual Report on Form 10-K.



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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information about our directors is
incorporated by reference to our definitive proxy statement, under the caption Proposal 1: Election of Directors, for our 2006 annual meeting of stockholders (the 2006 Proxy Statement) to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934, which proxy statement we expect to file no later than 120 days after the end of our fiscal year ended December 31, 2005. Information with respect to our executive officers is included under
Item 4A of Part I of this report.

Information regarding our audit committee and our audit committee financial expert, under the
captions Corporate GovernanceBoard Committees and Report of the Audit Committee, is incorporated by reference to the 2006 Proxy Statement.

Information regarding disclosure of compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the 2006 Proxy Statement.

We have adopted a Business and Ethics Code of Conduct for the guidance of our directors, officers, and employees, including our principal executive,
financial and accounting officers and our controller. Our code of conduct, along with other corporate governance documents, is posted on our website at www.McCormickandSchmicks.com, Investors, Corporate Governance.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is hereby incorporated by
reference to the 2006 Proxy Statement.

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

Information setting forth the security ownership of certain beneficial owners and management is hereby incorporated by reference to our 2006 Proxy Statement.

Information regarding our equity compensation plan is included in Item 5 of this Annual Report on Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and
related transactions is hereby incorporated by reference to our 2006 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information regarding principal accountant fees and
services, appearing under the caption Report of the Audit CommitteeFees Paid to Independent Registered Public Accounting Firm, is hereby incorporated by reference to our 2006 Proxy Statement.



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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) and (a)(2) Financial
Statements. The Financial Statements of the Company are filed in Part IIItem 8 of this Annual Report on Form 10-K. The Financial Statement schedules have been omitted because they are not required or because the information required
to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.

(a)(3) Exhibits. See
Exhibit Index beginning on page 66 or a description of the documents that are filed as Exhibits to this Annual Report on Form 10-K or incorporated herein by reference.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of March 13, 2006.



MCCORMICK & SCHMICKS SEAFOOD
RESTAURANT, INC.By:

/s/    EMANUEL N.
HILARIOEmanuel N. Hilario Chief Financial Officer


POWER OF ATTORNEY

KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Saed Mohseni
and Emanuel N. Hilario, and each of them, attorneys-in-fact for the undersigned, each with the power of substitution, for the undersigned in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K for the year
ended December 31, 2005, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may 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 on behalf of the registrant and in the capacities indicated as of March 13, 2006.



|                                                           |  |                                                                                        
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------
|Signatures                                                 |  | Title                                                                                  
|                                                           | 
|/s/     SAED
MOHSENI Saed Mohseni                          |  | Chief Executive Officer and Director (Principal Executive Officer)                     
|                                                           | 
|/s/    EMANUEL N.
HILARIO Emanuel N. Hilario               |  | Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
|                                                           | 
|/s/    DOUGLAS L.
SCHMICK Douglas L. Schmick               |  | President and Director                                                                 
|                                                           | 
|/s/    LEE M.
COHN Lee M. Cohn                             |  | Director                                                                               
|                                                           | 
|/s/    ELLIOTT H. JURGENSEN,
JR. Elliott H. Jurgensen, Jr. |  | Director                                                                               
|                                                           | 
|/s/    J. RICE
EDMONDS J. Rice Edmonds                     |  | Director                                                                               
|                                                           | 
|/s/    DAVID B.
PITTAWAY David B. Pittaway                 |  | Director                                                                               
|                                                           | 
|/s/    HAROLD O.
ROSSER Harold O. Rosser                   |  | Director                                                                               
|                                                           | 
|/s/    FORTUNATO N.
VALENTI Fortunato N. Valenti           |  | Director                                                                               
|                                                           | 
|Justin B. Wender                                           |  | Director                                                                               



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##### Table of Contents

EXHIBITS.

Items
identified with an asterisk (*) are management contracts or compensatory plans or arrangements.



|     |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |   |  | Certificate of Incorporation of the Company, as amended. Incorporated by reference to Exhibit 3.1 to the Companys Registration Statement on Form S-1, File
No. 333-114977.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|     |  
|3.2  |   |  | Bylaws of the Company, as amended (incorporated by reference to Exhibits 3.2 and 3.2a to our Registration Statement on Form S-1, File No. 333-114977)                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     |  
|4.1  |   |  | Registration Rights Agreement, dated as of August 22, 2001, by and among McCormick & Schmick Holdings LLC, Bruckmann, Rosser, Sherrill & Co. II, L.P., Castle Harlan
Partners III, L.P. and certain other parties thereto (incorporated by reference to Exhibit 4.2 to our registration statement on Form S-1, file No. 333-114977)                                                                                                                                                                                                                                                                              
|     |  
|10.1 |   |  | Revolving Credit Agreement, dated as of July 23, 2004, by and among McCormick & Schmick Acquisition Corp. and certain of its subsidiaries, Fleet National Bank, as Administrative
Agent, Banc of America Securities LLC, as Arrangers, and specified other lenders; Amendment to Post-Closing Delivery Requirements dated October 12, 2004 by and among McCormick & Schmick Acquisition Corp. and certain of its subsidiaries
and Fleet National Bank as Administrative Agent and Lender (incorporated by reference to Exhibit 10.1 to our quarterly report on Form 10-Q for the period ended September 25, 2004)
|     |  
|10.2 |   |  | Lease, dated as of October 13, 1994, between Boin Properties, LLC, as successor in interest to William P. McCormick, and McCormick & Schmick Restaurant Corp., as successor in
interest to Jakes Restaurant, Inc. (incorporated by reference to Exhibit 10.9 to our registration statement on Form S-1, file No. 333-114977) and First Amendment to Lease dated November 23, 2005, between BOIN Properties,
LLC and the Company (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K dated November 23, 2005).                                                                          
|     |  
|10.3 |   |  | Retail Lease Agreement, dated as of February 14, 1985, between Harborside Partners, LLC, as successor in interest to Cornerstone Development Company, and McCormick & Schmick
Restaurant Corp., as successor in interest to the Cornerstone-McCormick Joint Venture dba Harborside Restaurant, and Amendments 4 and 5 thereto (incorporated by reference to Exhibit 10.10 to our registration statement on Form S-1, file
No. 333-114977)                                                                                                                                                                        
|     |  
|10.4 |   |  | Lease, dated June 18, 2004, between DLS Investments, LLC and McCormick & Schmick Restaurant Corp. (incorporated by reference to Exhibit 10.11 to our registration
statement on Form S-1, file No. 333-114977) and Amendment to Lease dated November 23, 2005, between DLS Investments, LLC and the Company (incorporated by reference to Exhibit 10.2 to our current report on Form 8-K dated November 23,
2005)                                                                                                                                                                                                 
|     |  
|10.5 | * |  | Form of Executive Severance Agreement entered into by William P. McCormick, Douglas L. Schmick and Saed Mohseni and McCormick & Schmicks Seafood Restaurants, Inc.
(incorporated by reference to Exhibit 10.12 to our registration statement on Form S-1, file No. 333-114977)                                                                                                                                                                                                                                                                                                                                  
|     |  
|10.7 | * |  | McCormick & Schmicks Seafood Restaurants, Inc. 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.16 to our registration statement on Form S-1,
file No. 333-114977)                                                                                                                                                                                                                                                                                                                                                                                                                            
|     |  
|10.8 | * |  | Form of McCormick & Schmicks Seafood Restaurants, Inc. Incentive Stock Option Agreement; form of McCormick & Schmicks Seafood Restaurants, Inc.
Non-Statutory Stock Option Agreement (incorporated by reference to Exhibit 10.17 to our registration statement on Form S-1, file No. 333-114977)                                                                                                                                                                                                                                                                                                               
|     |  
|10.9 | * |  | Summary of Director and Executive Officer Compensation for Fiscal 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     |  
|21.1 |   |  | Subsidiaries of McCormick & Schmicks Seafood Restaurants, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     |  
|24.1 |   |  | Power of Attorney (included on signature page)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



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##### Table of Contents

|     |  |                                                                                                                                                                                      
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|     | 
|31.2 |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|     | 
|32.1 |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                               
|     | 
|32.2 |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                               



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