##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

FORM 10-K



---



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

For the fiscal year ended December 30, 2006

or



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

Commission File Number 000-50845



---

MCCORMICK & SCHMICKS SEAFOOD RESTAURANTS, INC.

(Exact Name of Registrant as Specified in its Charter)



---



|                                                               |  |                                    
|-------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                       |  | 20-1193199                         
|(State or other jurisdiction of incorporation 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



---

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, 2006 on The
Nasdaq Stock Market Global Market) was $225,072,336. There were 14,481,718 shares of common stock outstanding as of February 27, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates by reference information from the
registrants Proxy Statement for the 2007 Annual Meeting of Stockholders.



---



---

##### Table of Contents

TABLE OF CONTENTS



|         |  |          |  |                                                                                                |  |   
|-------- |  | -------- |  | ---------------------------------------------------------------------------------------------- |  | --
|PART I   |  |         
|         |  | ITEM 1.  |  | BUSINESS                                                                                       |  | 1 
|         |  | ITEM 1A. |  | RISK FACTORS                                                                                   |  | 12
|         |  | ITEM 1B. |  | UNRESOLVED STAFF COMMENTS                                                                      |  | 18
|         |  | ITEM 2.  |  | PROPERTIES                                                                                     |  | 18
|         |  | ITEM 3.  |  | LEGAL PROCEEDINGS                                                                              |  | 19
|         |  | ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            |  | 19
|         |  | ITEM 4A. |  | EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES                                                     |  | 19
|         | 
|PART II  |  |         
|         |  | ITEM 5.  |  | MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                      |  | 21
|         |  | ITEM 6.  |  | SELECTED FINANCIAL DATA                                                                        |  | 24
|         |  | ITEM 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          |  | 26
|         |  | ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     |  | 39
|         |  | ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    |  | 40
|         |  | ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           |  | 64
|         |  | ITEM 9A. |  | CONTROLS AND PROCEDURES                                                                        |  | 64
|         |  | ITEM 9B. |  | OTHER INFORMATION                                                                              |  | 64
|         | 
|PART III |  |         
|         |  | ITEM 10. |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                         |  | 65
|         |  | ITEM 11. |  | EXECUTIVE COMPENSATION                                                                         |  | 65
|         |  | ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |  | 65
|         |  | ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                      |  | 65
|         |  | ITEM 14. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                         |  | 65
|         | 
|PART IV  |  |         
|         |  | ITEM 15. |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                     |  | 66
|         |  |          |  | SIGNATURES                                                                                     |  | 67
|         |  |          |  | EXHIBITS                                                                                       |  | 68



i



---

##### Table of Contents

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. We have successfully grown our business during the past 35
years by focusing on serving a broad selection of fresh seafood. As of December 30, 2006 we had 66 restaurants in 24 states and the District of Columbia, including two restaurants operated pursuant to management contracts.

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 high quality 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.



1



---

##### Table of Contents

Fresh Seafood

Our primary business focus for more than 35 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
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 in 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
2006, alcohol sales, predominantly from our bar, accounted for approximately 29% of our revenues and contributed higher gross margins than food sales. The higher gross margins we generate from bar sales allows us the flexibility to offer lower
prices on some of our food menu items, helping us maintain our broad guest 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 $33 for lunch and $36 to $61 for dinner, with
an average of approximately $21 and $48, 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



2



---

##### Table of Contents

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 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 2006, banquets accounted for approximately
10% of our revenues.

Entrepreneurial Culture with Corporate Control

A key component of our success for over 35 years 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 certain exempt employees at the restaurant level based on the restaurants revenues, costs and profitability, 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 restaurant general managers and executive chefs is approximately 87%. 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, positions 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 30, 2006, we operated 66 restaurants in 24
states and the District of Columbia, including two pursuant to management contracts, and plan to open as many as 37 additional restaurants over the next three years, excluding our anticipated acquisition of The Boathouse restaurants.

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. 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.

We compete on a restaurant-by-restaurant basis with independent local restaurant operators while leveraging the operating strengths of our national
infrastructure. We have successfully executed our concept at the local



3



---

##### Table of Contents

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 more than 35 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.

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 restaurant 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 U.S. markets in 2007.

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 five restaurants in new U.S. markets in 2007.

The anticipated acquisition of The Boathouse restaurants will mark our entry into the Canadian market through a well established brand known for its
premium locations, broad appeal and operational excellence. Under the purchase agreement, we will acquire five existing restaurants and one that is currently under construction, in the greater Vancouver B.C. area.

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 seven 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
profitable. We operate two restaurants under management agreements with hotels.



4



---

##### Table of Contents

Unit Level Economics

Our average investment per restaurant opened since 1997 has been approximately $2.8 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. 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 restaurant sales volume for restaurants opened from 1997 through 2003 was approximately $5.4 million by the third year of operations. These
restaurants were, on average, approximately 10,000 square feet each. Since the beginning of 2002, we have opened 29 new company-owned restaurants, which averaged approximately 8,000 square feet each. Our growth model assumes average unit sales
volumes for our 8,000 square feet restaurants of $4.4 million in the third year of operations.

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 regional 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. We believe 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 high quality 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 13% of our food purchases in 2006. No other vendor accounted for more than 10% of our purchases in 2006.

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



5



---

##### Table of Contents

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 superior service to further enhance their dining experience.



6



---

##### Table of Contents

Restaurant Locations, Lease Arrangements and Management Fee Arrangements

At December 30, 2006, we operated 66 restaurants in 24 states and the District of Columbia. 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       
|McCormick & Schmicks Seafood Restaurant      |  | Burbank       |  | 2006       
|                                              |  |              
|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       
|Jimmys on K Street                           |  | Washington    |  | 2006       
|                                              |  |              
|Florida                                       |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Orlando       |  | 2002       
|McCormick & Schmicks Seafood Restaurant      |  | Boca Raton    |  | 2006       
|                                              |  |              
|Georgia                                       |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Atlanta       |  | 2000       
|McCormick & Schmicks Seafood Restaurant      |  | Atlanta       |  | 2002       
|                                              |  |              
|Illinois                                      |  |               |  |            
|McCormick & Schmicks Seafood Restaurant      |  | Chicago       |  | 1998       
|McCormick & Schmicks Seafood Restaurant      |  | Chicago       |  | 2006       
|                                              |  |              
|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       



7



---

##### Table of Contents

|                                                                  |  |              |  |            
|----------------------------------------------------------------- |  | ------------ |  | -----------
|Restaurant Name                                                   |  | City         |  | Year Opened
|                                                                  |  |             
|Minnesota                                                         |  |              |  |            
|McCormick & Schmicks Seafood Restaurant                          |  | Minneapolis  |  | 2000       
|M&S Grill                                                         |  | Minneapolis  |  | 2006       
|                                                                  |  |             
|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       
|                                                                  |  |             
|Ohio                                                              |  |              |  |            
|McCormick & Schmicks Seafood Restaurant                          |  | Columbus     |  | 2006       
|McCormick & Schmicks Seafood Restaurant                          |  | Cincinnati   |  | 2006       
|                                                                  |  |             
|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.
|- | ---------------------------------------------------------



8



---

##### Table of Contents

Site Selection

We believe our site selection strategy is critical to our growth strategy. We carefully consider potential markets and we devote a substantial amount of time and effort evaluating each potential restaurant site. We
identify new restaurant development opportunities through an established real estate broker network and developer relationships. Our site specifications are flexible and we believe this allows us to 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 66 restaurants, including the two we operate under management
agreements, 24 were opened within the last three years and 31 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
2006 and our plan for 2007 includes the opening of eleven restaurants, excluding the anticipated acquisition of existing and opening of any new Boathouse restaurants. We anticipate opening twelve, fourteen and sixteen restaurants in 2008, 2009 and
2010, 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 2006, 75% of our marketing expenditures were at the local level, which constituted approximately 2% 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



9



---

##### Table of Contents

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.

Our restaurants 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.

National Marketing

In 2006, we incurred
approximately 32% of our advertising expenditures at the national level which comprised 15% of our total marketing expenditures. Our campaign focuses on national periodicals such as United Airlines, Delta Airlines, Southwest
Airlines and Alaska Airlines in-flight magazines and WHERE Magazine. Additionally, we advertise across the national network ofThe 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. Each of our vice presidents reports to our executive vice president of operations.

Fourteen multi-restaurant managers, of whom
seven are regional managers and seven 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 activities.

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 hourly 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.



10



---

##### Table of Contents

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 2006, dinner comprised approximately 76% of our revenues, while lunch comprised approximately 24% of revenues, and our restaurants served an average of 1,088 guests per week during lunch and 1,575 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 2006, banquets accounted for approximately 10% of our revenues.

Employees

As of
December 30, 2006 we employed 5,866 persons, of whom 564 were salaried and 5,302 were hourly personnel. None of our employees are represented by unions and, in general, 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 |  | 18                
|General managers                     |  | 69                
|Assistant managers                   |  | 211               
|Executive chefs                      |  | 68                
|Sous chefs                           |  | 152               
|Non-salaried restaurant staff        |  | 5,263             
|Corporate salaried                   |  | 46                
|Corporate non-salaried               |  | 39                
|                                     |  |                   
|Total                                |  | 5,866             
|                                     |  |                   

Management Information Systems

All of our information processing is managed from our headquarters in Portland, Oregon. Point-of-sale terminals at each restaurant 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 restaurant 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;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | hedging against increases in seafood costs is often not possible;
| | - |  | -----------------------------------------------------------------



11



---

##### Table of Contents

| |  |  | preparing and handling 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
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 atwww.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 many 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



12



---

##### Table of Contents

| |  |  | 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.

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 seven company-owned restaurants in 2005 and seven in 2006. We plan to open eleven company-owned restaurants in 2007, excluding the anticipated
acquisition of the Boathouse restaurants. 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



13



---

##### Table of Contents

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;
| | - |  | ----------------------------------------------------------------------



| |  |  | 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, including statutory minimum wage increases;
| | - |  | ---------------------------------------------------------------------



| |  |  | 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. 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.



14



---

##### Table of Contents

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

We depend on the services of our key senior management personnel. 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 twelve 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.

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 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



15



---

##### Table of Contents

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 anticipate completing our acquisition of The Boathouse restaurants in March 2007. These restaurants will be the first we own outside of the United
States, and we do not have experience operating restaurants in British Columbia, Canada. We may seek to selectively acquire other existing restaurants and integrate them into our business operations. Achieving the expected benefits of The Boathouse
restaurants and any other 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
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



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

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 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.



16



---

##### Table of Contents

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.

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 twelve 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.



17



---

##### Table of Contents

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 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 could
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 one we own and expect to open in 2007 and two that we operate under management agreements.



18



---

##### Table of Contents

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 59) co-founded
McCormick & Schmicks in 1972 and was appointed chief executive officer in February 2007 and chairman of the board of directors in 2004. From 1997 through January 2007 he served as president and from 1997 through 1999, he also served
as 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.

Emanuel (Manny) N. Hilario (age 39) 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 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.

Michael B. Liedberg (age 44) joined McCormick & Schmicks in January 2004 and was appointed executive vice president of operations in January 2007. From 2004 through 2006, he was 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. 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.

Jerry R. Kelso (age 53) has been our chief internal audit and compliance officer 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 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 52) 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
60) 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.



19



---

##### Table of Contents

Martin P. Gardner (age 46) has been our vice president of finance since January 2007.
Mr. Gardner joined us in 2004 and previously served as our director of finance. From 2000 to 2004 Mr. Gardner was corporate controller of Lexar, Inc. From 1995 to 2000, Mr. Gardner held various management positions, including
corporate controller, for Mattson Technology, Inc. Mr. Gardner received his Bachelor of Science degree in accounting from San Jose State University, his Master of Science degree in finance from Golden Gate University and is a certified public
accountant.

William H.P. King (age 55) has been vice president of culinary development & training of
McCormick & Schmicks since 2006. Mr. King joined McCormick & Schmicks in 1985 and has held various positions, including executive chef, regional senior chef and executive director of training & culinary
development. Mr. King attended Cornell Universitys School of Hotel and Restaurant Administration and has over 30 years experience in the culinary and hospitality industry.

Steven B. Foote (age 47) has been a vice president of operations of McCormick & Schmicks since January 2007. Mr. Foote
also has held the positions of regional senior chef (2003-2006) and executive chef (1999-2003). Mr. Foote had over 12 years of chef and related culinary experience prior to joining McCormick & Schmicks.



20



---

##### 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 Global Stock 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 2006 and 2005, as reported by the NASDAQ Global Stock Market.



|                 |  |             |       |     |   |      
|---------------- |  | ----------- | ----- | --- | - | -----
|                 |  | Sales Price
|                 |  | High        |       | Low
|4th Quarter 2006 |  | $           | 26.50 |     | $ | 21.46
|3rd Quarter 2006 |  |             | 24.33 |     |   | 17.15
|2nd Quarter 2006 |  |             | 27.52 |     |   | 21.25
|1st Quarter 2006 |  |             | 25.47 |     |   | 20.16
|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



21



---

##### Table of Contents

Stock Performance Graph

The following graph compares the total return on an indexed basis of a $100 investment in our common stock, the Nasdaq Composite Index and the Dow Jones U.S. Restaurants and Bars Index. For comparison purposes, the
data points of our common stock are as of July 20, 2004, the day our common stock was first sold in our initial public offering, and December 23, 2004, December 30, 2005, and December 29, 2006, the last trading day in our
fiscal years 2004, 2005 and 2006, respectively. The data points for both the NASDAQ Composite Index and the Dow Jones U.S. Restaurants & Bars Index are as of July 20, 2004 and the last trading day in December 2004, 2005 and 2006. The
historical stock performance presented below is not intended to and may not be indicative of future stock performance.

LOGO



|                                         |  |      |        |       |   |        |  |       |        |  |   |       
|---------------------------------------- |  | ---- | ------ | ----- | - | ------ |  | ----- | ------ |  | - | ------
|                                         |  | 7/04 |        | 12/04 |   | 12/05  |  | 12/06
|McCormick & Schmicks Seafood Restaurant |  | $    | 100.00 |       | $ | 124.80 |  | $     | 182.74 |  | $ | 194.81
|NASDAQ Composite                         |  | $    | 100.00 |       | $ | 110.69 |  | $     | 111.35 |  | $ | 120.82
|Dow Jones US Restaurants & Bars          |  | $    | 100.00 |       | $ | 125.02 |  | $     | 131.08 |  | $ | 161.43



22



---

##### Table of Contents

Holders of Record

As of February 27, 2007 there were approximately 31 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 we have not paid dividends in the
prior two fiscal years 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.

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 30, 2006.



|                                                        |  |                                                                    |  |                                                     |       |                                                                                                                                      |        
|------------------------------------------------------- |  | ------------------------------------------------------------------ |  | --------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------ | -------
|                                                        |  | 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 |                                                                                                                                      | 520,028

Issuer Purchases of Equity Securities

We did not repurchase any of our equity securities during 2006.



23



---

##### Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial and operating data below are derived
from our consolidated financial statements for the fiscal years 2002, 2003, 2004, 2005 and 2006, 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                            |        
|                                                                                                                |  | 2002                                  |         |   | 2003 |   |         | 2004 |  |   | 2005    |   | 2006 |  
|                                                                                                                |  | (in thousands, except per share data) |        
|Statement of Operations Data:                                                                                   |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Revenues                                                                                                        |  | $                                     | 180,104 |   |      | $ | 196,717 |      |  | $ | 238,757 |   |      | $ | 278,813 |  | $ | 308,323 |  
|                                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Restaurant operating costs                                                                                      |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Food and beverage                                                                                               |  |                                       | 53,168  |   |      |   | 57,959  |      |  |   | 70,873  |   |      |   | 81,630  |  |   | 89,443  |  
|Labor                                                                                                           |  |                                       | 56,147  |   |      |   | 61,644  |      |  |   | 75,081  |   |      |   | 86,823  |  |   | 95,886  |  
|Operating                                                                                                       |  |                                       | 26,406  |   |      |   | 29,244  |      |  |   | 35,204  |   |      |   | 41,857  |  |   | 46,044  |  
|Occupancy                                                                                                       |  |                                       | 15,349  |   |      |   | 16,890  |      |  |   | 21,401  |   |      |   | 24,790  |  |   | 27,650  |  
|                                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Total restaurant operating costs                                                                                |  |                                       | 151,070 |   |      |   | 165,737 |      |  |   | 202,559 |   |      |   | 235,100 |  |   | 259,023 |  
|                                                                                                                |  |                                       |         |   |     
|General and administrative expenses                                                                             |  |                                       | 7,576   |   |      |   | 9,769   |      |  |   | 12,062  |   |      |   | 15,105  |  |   | 16,651  |  
|Restaurant pre-opening costs                                                                                    |  |                                       | 1,006   |   |      |   | 1,219   |      |  |   | 2,393   |   |      |   | 2,496   |  |   | 2,892   |  
|Depreciation and amortization                                                                                   |  |                                       | 8,808   |   |      |   | 9,853   |      |  |   | 10,723  |   |      |   | 9,608   |  |   | 10,640  |  
|Management fees and covenants not to compete                                                                    |  |                                       | 2,550   |   |      |   | 2,550   |      |  |   | 4,241   |   |      |   |        |  |   |        |  
|Impairment of assets                                                                                            |  |                                       |        |   |      |   | 1,513   |      |  |   |        |   |      |   |        |  |   |        |  
|                                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Total costs and expenses                                                                                        |  |                                       | 171,010 |   |      |   | 190,641 |      |  |   | 231,978 |   |      |   | 262,309 |  |   | 289,206 |  
|                                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Operating income                                                                                                |  |                                       | 9,094   |   |      |   | 6,076   |      |  |   | 6,779   |   |      |   | 16,504  |  |   | 19,117  |  
|Interest expense (income), net                                                                                  |  |                                       | 3,720   |   |      |   | 3,069   |      |  |   | 2,680   |   |      |   | 550     |  |   | (228    | )
|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 |  |                                       | 5,374   |   |      |   | (1,207  | )    |  |   | (2,948  | ) |      |   | 15,954  |  |   | 19,345  |  
|Income tax expense (benefit)                                                                                    |  |                                       | 2,570   |   |      |   | 1,323   |      |  |   | (3,651  | ) |      |   | 4,946   |  |   | 5,997   |  
|Accrued dividends and accretion on mandatorily redeemable preferred stock                                       |  |                                       | 3,347   |   |      |   | 1,832   |      |  |   |        |   |      |   |        |  |   |        |  
|                                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Net income (loss)                                                                                               |  | $                                     | (543    | ) |      | $ | (4,362  | )    |  | $ | 703     |   |      | $ | 11,008  |  | $ | 13,348  |  
|                                                                                                                |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Net income (loss) per share(1)                                                                                  |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Basic                                                                                                           |  | $                                     | (0.07   | ) |      | $ | (0.56   | )    |  | $ | 0.07    |   |      | $ | 0.80    |  | $ | 0.94    |  
|Diluted                                                                                                         |  | $                                     | (0.07   | ) |      | $ | (0.56   | )    |  | $ | 0.07    |   |      | $ | 0.78    |  | $ | 0.92    |  
|Shares used in computing net income (loss) per share(1)                                                         |  |                                       |         |   |      |   |         |      |  |   |         |   |      |   |         |  |   |         |  
|Basic                                                                                                           |  |                                       | 7,782   |   |      |   | 7,782   |      |  |   | 10,387  |   |      |   | 13,798  |  |   | 14,227  |  
|Diluted                                                                                                         |  |                                       | 7,782   |   |      |   | 7,782   |      |  |   | 10,416  |   |      |   | 14,047  |  |   | 14,521  |  



24



---

##### Table of Contents

|                                                                                                          |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                          |  | Year End       |        
|                                                                                                          |  | 2002           |         |   | 2003 |   |         | 2004 |  |   | 2005    |   |  | 2006 |        
|                                                                                                          |  | (in thousands) |        
|Balance Sheet Data:                                                                                       |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash and cash equivalents                                                                                 |  | $              | 2,945   |   |      | $ | 2,453   |      |  | $ | 451     |   |  | $    | 4,705   |   |  | $ | 10,553  |  
|Total assets                                                                                              |  |                | 157,953 |   |      |   | 161,792 |      |  |   | 179,060 |   |  |      | 204,160 |   |  |   | 228,420 |  
|Long-term debt, revolving credit facility and obligations under capital leases, including current portion |  |                | 46,983  |   |      |   | 40,056  |      |  |   | 13,140  |   |  |      | 706     |   |  |   | 338     |  
|Mandatorily redeemable preferred stock                                                                    |  |                | 19,404  |   |      |   | 23,137  |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total members/stockholders equity                                                                       |  |                | 61,860  |   |      |   | 57,767  |      |  |   | 124,070 |   |  |      | 143,453 |   |  |   | 160,230 |  
|                                                                                                          | 
|                                                                                                          |  | Year End       |        
|                                                                                                          |  | 2002           |         |   | 2003 |   |         | 2004 |  |   | 2005    |   |  | 2006 |        
|                                                                                                          |  | (in thousands) |        
|Other Data:                                                                                               |  |                |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Restaurants open at end of period (including managed restaurants)                                         |  |                | 39      |   |      |   | 42      |      |  |   | 52      |   |  |      | 59      |   |  |   | 66      |  
|Net cash provided by operating activities                                                                 |  | $              | 14,582  |   |      | $ | 20,652  |      |  | $ | 21,452  |   |  | $    | 30,158  |   |  | $ | 34,427  |  
|Net cash used in investing activities                                                                     |  |                | (8,779  | ) |      |   | (14,956 | )    |  |   | (27,284 | ) |  |      | (21,416 | ) |  |   | (30,314 | )
|Net cash provided by (used in) financing activities                                                       |  |                | (4,886  | ) |      |   | (6,188  | )    |  |   | 3,830   |   |  |      | (4,488  | ) |  |   | 1,735   |  
|EBITDA(2)                                                                                                 |  |                | 17,902  |   |      |   | 15,929  |      |  |   | 17,502  |   |  |      | 26,112  |   |  |   | 29,757  |  

---

|(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 2, Summary of Selected 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     |       
|                                                                          |  | 2002           |        |   | 2003 |   |        | 2004 |  |   | 2005   |   | 2006 |  
|                                                                          |  | (in thousands) |       
|Net income (loss)                                                         |  | $              | (543   | ) |      | $ | (4,362 | )    |  | $ | 703    |   |      | $ | 11,008 |  | $ | 13,348 |  
|Accrued dividends and accretion on mandatorily redeemable preferred stock |  |                | 3,347  |   |      |   | 3,733  |      |  |   | 5,759  |   |      |   |       |  |   |       |  
|Income tax expense (benefit)                                              |  |                | 2,570  |   |      |   | 1,323  |      |  |   | (3,651 | ) |      |   | 4,946  |  |   | 5,997  |  
|Interest expense (income), net                                            |  |                | 3,720  |   |      |   | 3,069  |      |  |   | 2,680  |   |      |   | 550    |  |   | (228   | )
|Depreciation and amortization                                             |  |                | 8,808  |   |      |   | 9,853  |      |  |   | 10,723 |   |      |   | 9,608  |  |   | 10,640 |  
|Write off of deferred loan costs on early extinguishment of debt          |  |                |       |   |      |   | 2,313  |      |  |   | 1,288  |   |      |   |       |  |   |       |  
|                                                                          |  |                |        |   |      |   |        |      |  |   |        |   |      |   |        |  |   |        |  
|EBITDA                                                                    |  | $              | 17,902 |   |      | $ | 15,929 |      |  | $ | 17,502 |   |      | $ | 26,112 |  | $ | 29,757 |  
|                                                                          |  |                |        |   |      |   |        |      |  |   |        |   |      |   |        |  |   |        |  



25



---

##### 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 our acquisition of Jakes Famous Crawfish in
Portland, Oregon. As of December 30, 2006 we have expanded our restaurant base to 66 restaurants, including two restaurants operated pursuant to management contracts.

We have grown our business by offering our guests a twice daily-printed menu in most of our locations, 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 2006, banquets accounted for approximately 10% of our revenues.
In 2006, food and non-alcoholic beverage sales accounted for approximately 71% of revenues and the remaining 29% 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 financial 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 million 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 twice daily in most of our locations, 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 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 continue our growth and have become 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.

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 restaurant model and flexible real estate strategy provide us with continued opportunities to find attractive real estate locations on favorable terms.



26



---

##### Table of Contents

Strategic Focus and Operating Outlook

Our primary business focus for over 35 years has been to consistently offer a broad selection of high quality, fresh seafood, which we believe
commands strong loyalty from our guests. 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 nine company-owned restaurants in 2004, and seven in both 2005 and 2006 and entered into a management contract for one restaurant in 2004, growing from 42 to 66 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
plan for 2007 includes the opening of eleven restaurants, excluding the anticipated acquisition and growth of The Boathouse restaurants. In addition to new unit growth, we are committed to improving comparable restaurant sales over the levels
achieved in 2006 by driving increased guest counts as well as restaurant level operating margins.

Results of Operations

Our operating results for the fiscal years 2004, 2005 and 2006 are expressed as a percentage of revenues below:



|                                                                                                                |  |            |    |  |       |   |  |       |   
|--------------------------------------------------------------------------------------------------------------- |  | ---------- | -- |  | ----- | - |  | ----- | --
|                                                                                                                |  | Year Ended |   
|                                                                                                                |  | 2004       |    |  | 2005  |   |  | 2006  |   
|Revenues                                                                                                        |  | 100.0      | %  |  | 100.0 | % |  | 100.0 | % 
|                                                                                                                |  |            |    |  |       |   |  |       |   
|Food and beverage                                                                                               |  | 29.7       | %  |  | 29.3  | % |  | 29.0  | % 
|Labor                                                                                                           |  | 31.4       | %  |  | 31.1  | % |  | 31.1  | % 
|Operating                                                                                                       |  | 14.7       | %  |  | 15.0  | % |  | 14.9  | % 
|Occupancy                                                                                                       |  | 9.0        | %  |  | 8.9   | % |  | 9.0   | % 
|                                                                                                                |  |            |    |  |       |   |  |       |   
|Total restaurant operating costs                                                                                |  | 84.8       | %  |  | 84.3  | % |  | 84.0  | % 
|General and administrative expenses                                                                             |  | 5.1        | %  |  | 5.4   | % |  | 5.4   | % 
|Restaurant pre-opening costs                                                                                    |  | 1.0        | %  |  | 0.9   | % |  | 0.9   | % 
|Depreciation and amortization                                                                                   |  | 4.5        | %  |  | 3.5   | % |  | 3.5   | % 
|Management fees and covenants not to compete                                                                    |  | 1.8        | %  |  |      |   |  |      |   
|                                                                                                                |  |            |    |  |       |   |  |       |   
|Total costs and expenses                                                                                        |  | 97.2       | %  |  | 94.1  | % |  | 93.8  | % 
|                                                                                                                |  |            |    |  |       |   |  |       |   
|Operating income                                                                                                |  | 2.8        | %  |  | 5.9   | % |  | 6.2   | % 
|Interest expense (income), net                                                                                  |  | 1.1        | %  |  | 0.2   | % |  | (0.1  | )%
|Accrued dividends and accretion on mandatorily redeemable preferred stock                                       |  | 2.4        | %  |  |      |   |  |      |   
|Write off of deferred loan costs on early extinguishment of debt                                                |  | 0.5        | %  |  |      |   |  |      |   
|                                                                                                                |  |            |    |  |       |   |  |       |   
|Income (loss) before income taxes and accrued dividends and accretion on mandatorily redeemable preferred stock |  | (1.2       | )% |  | 5.7   | % |  | 6.3   | % 
|Income tax expense (benefit)                                                                                    |  | (1.5       | )% |  | 1.8   | % |  | 1.9   | % 
|                                                                                                                |  |            |    |  |       |   |  |       |   
|Net income                                                                                                      |  | 0.3        | %  |  | 3.9   | % |  | 4.4   | % 
|                                                                                                                |  |            |    |  |       |   |  |       |   

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.



27



---

##### Table of Contents

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 fiscal 2006 compared to fiscal 2005:



| |  |  | Revenues increased 10.6% to $308.3 million
| | - |  | ------------------------------------------



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



| |  |  | Net income was $13.3 million compared to $11.0 million
| | - |  | ------------------------------------------------------



| |  |  | Diluted earnings per share was $0.92 compared to $0.78
| | - |  | ------------------------------------------------------

2006 (52 weeks) Compared to 2005 (53 weeks)

Our financial results in fiscal 2006 included 52 weeks of operation, compared
to 53 weeks in fiscal 2005. The fiscal 2005 financial results also include operations on New Years Eve Day in 2004 and 2005. Our restaurants typically have large sales volumes on New Years Eve Day.

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 31,2005 |                | December 30,2006 |  
|                                 |  |                  | $              |                  | % |        
|                                 |  |                  | (in thousands) |                  |   |        
|Revenues                         |  | $                | 278,813        |                  | $ | 308,323 |  | $ | 29,510 |  | 10.6 | %
|                                 |  |                  |                |                  |   |         |  |   |        |  |      |  
|Restaurant operating costs       |  |                  |                |                  |   |         |  |   |        |  |      |  
|Food and beverage                |  | $                | 81,630         |                  | $ | 89,443  |  | $ | 7,813  |  | 9.6  | %
|Labor                            |  |                  | 86,823         |                  |   | 95,886  |  |   | 9,063  |  | 10.4 | %
|Operating                        |  |                  | 41,857         |                  |   | 46,044  |  |   | 4,187  |  | 10.0 | %
|Occupancy                        |  |                  | 24,790         |                  |   | 27,650  |  |   | 2,860  |  | 11.5 | %
|                                 |  |                  |                |                  |   |         |  |   |        |  |      |  
|Total restaurant operating costs |  | $                | 235,100        |                  | $ | 259,023 |  | $ | 23,923 |  | 10.2 | %
|                                 |  |                  |                |                  |   |         |  |   |        |  |      |  



28



---

##### Table of Contents

Revenues. Revenues increased by
$29.5 million, or 10.6%, to $308.3 million in 2006 from $278.8 million in 2005. This increase was attributable to revenues of $13.5 million generated by seven company-owned restaurants opened in 2006, a $12.8 million increase in
revenues in 2006 from restaurants opened in 2005, and a $3.2 million increase from restaurants opened prior to 2005. The 53rdweek of operation in 2005 contributed $5.9 million in revenues. Comparable restaurant sales, based on a 52 week to 52 week comparison, were positive 3.0% in 2006, primarily as the result of improved guest counts coupled with higher
menu pricing.

Food and Beverage Costs. Food and beverage costs increased by $7.8 million, or 9.6%, to $89.4 million in
2006 from $81.6 million in 2005. This increase was primarily due to the seven company-owned restaurants opened in 2006. Food and beverage costs as a percentage of revenues decreased to 29.0% in 2006 from 29.3% in 2005, primarily as a result of
higher menu pricing.

Labor Costs. Labor costs increased by $9.1 million, or 10.4%, to $95.9 million in 2006 from $86.8
million in 2005. This increase was primarily due to the seven company-owned restaurants opened in 2006, coupled with labor costs from restaurants not in the comparable base. Labor costs as a percentage of revenues were 31.1% in both 2006 and 2005,
however in 2006 we had lower workers compensation claims, which were offset by an increase in labor cost for the non comparable restaurants, as a percentage of revenues.

Operating Costs. Operating costs increased by $4.2 million, or 10.0%, to $46.0 million in 2006 from $41.9 million in 2005, primarily due to the
seven company-owned restaurants opened in 2006. Operating costs as a percentage of revenues decreased to 14.9% in 2006 from 15.0% in 2005, primarily due to leverage of higher revenues on fixed operating costs.

Occupancy Costs. Occupancy costs increased by $2.9 million, or 11.5%, to $27.7 million in 2006 from $24.8 million in 2005, primarily due to the
seven company-owned restaurants opened in 2006. Occupancy costs as a percentage of revenues increased to 9.0% in 2006 from 8.9% in 2005, primarily due to an increase in fixed occupancy costs, coupled with an increase in common area maintenance
costs. Non-cash rents were $2.2 million, or 0.7% of revenues, and $2.2 million, or 0.9% of revenues, for 2006 and 2005, respectively.

General
and Administrative Expenses, Restaurant Pre-Opening Cost and Depreciation and Amortization

The following table sets forth general
and administrative, restaurant pre-opening and depreciation and amortization costs from our consolidated statements of operations.



|                                    |  |                  |        |                  |   |        |  |   |       |  |      |  
|----------------------------------- |  | ---------------- | ------ | ---------------- | - | ------ |  | - | ----- |  | ---- | -
|                                    |  | Year Ended       |        | Change           |  
|                                    |  | December 31,2005 |        | December 30,2006 |  
|                                    |  |                  |        | $                |   | %      | 
|                                    |  | (in thousands)   |        |                  |  
|General and administrative expenses |  | $                | 15,105 |                  | $ | 16,651 |  | $ | 1,546 |  | 10.2 | %
|Restaurant pre-opening costs        |  |                  | 2,496  |                  |   | 2,892  |  |   | 396   |  | 15.9 | %
|Depreciation and amortization       |  |                  | 9,608  |                  |   | 10,640 |  |   | 1,032 |  | 10.7 | %

General and Administrative Expenses. General and administrative expenses increased by
$1.5 million, or 10.2%, to $16.7 million in 2006 from $15.1 million in 2005. The increase was primarily due to the growth in our business coupled with share-based compensation expense of $1.3 million recognized as a result of the
adoption of Statements of Financial Accounting Standards (SFAS) No. 123, Share Based Payment (revised 2004) (SFAS 123R) as of January 1, 2006. General and administrative expenses as a percentage of
revenues were 5.4% in both 2006 and 2005.

Restaurant Pre-Opening Costs. There were seven company-owned restaurants opened in each
of the fiscal years 2006 and 2005. Restaurant pre-opening costs increased by $0.4 million, or 15.9%, to $2.9 million in 2006 from $2.5 million in 2005. The increase in restaurant pre-opening cost was primarily due to the timing of restaurant
openings and restaurants under construction in 2006 compared to 2005. Our average pre-opening cost per 2006 and 2005 restaurant opening was $0.4 million.



29



---

##### Table of Contents

Depreciation and Amortization. Depreciation and amortization increased by $1.0 million, or 10.7%,
to $10.6 million in 2006 from $9.6 million in 2005. The increase was primarily due to the seven company-owned restaurants opened in 2006.

Interest
Expense (Income), net, Income Tax Expense and Net Income

The following table sets forth interest expense (income), net, income tax
expense and net income from our consolidated statements of operations.



|                               |  |                  |        |                  |        |        |   |  |   |       |   |  |      |  
|------------------------------ |  | ---------------- | ------ | ---------------- | ------ | ------ | - |  | - | ----- | - |  | ---- | -
|                               |  | Year Ended       |        |                  | Change |       
|                               |  | December 31,2005 |        | December 30,2006 |        |       
|                               |  |                  |        | $                |        |        | % | 
|                               |  | (in thousands)   |       
|Interest expense (income), net |  | $                | 550    |                  | $      | (228   | ) |  | $ | (778  | ) |  | *    |  
|                               |  |                  |        |                  |        |        |   |  |   |       |   |  |      |  
|Income before income taxes     |  | $                | 15,954 |                  | $      | 19,345 |   |  | $ | 3,391 |   |  | 21.3 | %
|Income tax expense             |  |                  | 4,946  |                  |        | 5,997  |   |  |   | 1,051 |   |  | 21.2 | %
|                               |  |                  |        |                  |        |        |   |  |   |       |   |  |      |  
|Net income                     |  | $                | 11,008 |                  | $      | 13,348 |   |  | $ | 2,340 |   |  | 21.3 | %
|                               |  |                  |        |                  |        |        |   |  |   |       |   |  |      |  

---

|* | Percentage is non-meaningful
|- | ----------------------------

Interest Expense
(Income), net. Interest income was $0.2 million in 2006 compared to interest expense of $0.6 million in 2005. This change was primarily due to the pay-down of our credit facility in December 2005, coupled with interest income earned on our
invested cash and cash equivalents.

Income Tax Expense. In 2006, we recognized income tax expense of $6.0 million, resulting in an
overall effective tax rate of 31%. The provision for income taxes represents federal, state and local income taxes. In 2006 and 2005 our estimated combined statutory income tax rate was 40.2% and 39.9%, respectively. The difference between our
effective tax rate of 31% for 2006 and 2005 and our estimated combined statutory rate in these years is primarily the result of FICA Tip Credits.

Net Income. Net income increased $2.3 million, or 21.3%, to $13.3 million in 2006 from $11.0 million in 2005. This increase is primarily due to an increase in revenues of $29.5 million, coupled with interest income, net and lower
food and beverage costs, and operating costs, as a percentage of revenues.

Financial Performance Overview

The following are highlights of our financial performance for fiscal 2005 compared to fiscal 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 fiscal 2005 included 53 weeks of operation, compared to 52 weeks in fiscal 2004. The fiscal 2005 financial results also include operations on New Years Eve Day 2004 and 2005. Our restaurants typically have large
sales volumes on New Years Eve Day.



30



---

##### 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 from 29.7% in 2004 primarily as a result of menu price increases and improved
food and beverage costs 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.



31



---

##### 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 $0.4 million.

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.



32



---

##### Table of Contents

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 | % 
|                                                                          |  |                   |        |        |                   |   |        |  |   |        |   |  |         |   

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 income tax expense of
$1.1 million on current earnings before the accrued dividends and accretion on mandatorily redeemable preferred stock.

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.



33



---

##### Table of Contents

The following table sets forth quarterly unaudited operating results in each of the 2005 and 2006 fiscal
quarters:



|                                              |  |                                       |        |      |   |        |  |    |        |    |   |        |    |   |        |    |  |   |        |   |  |   |        |   |  |   |        |  
|--------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ |  | -- | ------ | -- | - | ------ | -- | - | ------ | -- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                              |  | 2005                                  |        | 2006 |  
|                                              |  | Q1                                    |        | Q2   |   | Q3     |  | Q4 |        | Q1 |   |        | Q2 |   |        | Q3 |  |   | Q4     |  
|                                              |  | (in thousands, except per share data) |       
|Revenues                                      |  | $                                     | 60,385 |      | $ | 68,386 |  | $  | 68,014 |    | $ | 82,028 |    | $ | 71,606 |    |  | $ | 76,763 |   |  | $ | 75,648 |   |  | $ | 84,305 |  
|Restaurant operating costs                    |  |                                       |        |      |   |        |  |    |        |    |   |        |    |   |        |    |  |   |        |   |  |   |        |   |  |   |        |  
|Food and beverage                             |  |                                       | 17,760 |      |   | 19,927 |  |    | 20,013 |    |   | 23,930 |    |   | 21,022 |    |  |   | 22,363 |   |  |   | 22,120 |   |  |   | 23,939 |  
|Labor                                         |  |                                       | 19,356 |      |   | 21,380 |  |    | 21,421 |    |   | 24,665 |    |   | 22,736 |    |  |   | 23,802 |   |  |   | 23,827 |   |  |   | 25,519 |  
|Operating                                     |  |                                       | 9,017  |      |   | 9,998  |  |    | 10,447 |    |   | 12,396 |    |   | 10,486 |    |  |   | 11,137 |   |  |   | 11,768 |   |  |   | 12,653 |  
|Occupancy                                     |  |                                       | 5,605  |      |   | 6,061  |  |    | 6,267  |    |   | 6,857  |    |   | 6,591  |    |  |   | 6,924  |   |  |   | 6,964  |   |  |   | 7,172  |  
|                                              |  |                                       |        |      |   |        |  |    |        |    |   |        |    |   |        |    |  |   |        |   |  |   |        |   |  |   |        |  
|Total restaurant operating costs              |  |                                       | 51,738 |      |   | 57,366 |  |    | 58,148 |    |   | 67,848 |    |   | 60,835 |    |  |   | 64,226 |   |  |   | 64,679 |   |  |   | 69,283 |  
|General and administrative expenses           |  |                                       | 3,342  |      |   | 3,561  |  |    | 3,541  |    |   | 4,660  |    |   | 3,971  |    |  |   | 3,983  |   |  |   | 4,031  |   |  |   | 4,665  |  
|Restaurant pre-opening costs                  |  |                                       | 529    |      |   | 759    |  |    | 760    |    |   | 449    |    |   | 763    |    |  |   | 722    |   |  |   | 310    |   |  |   | 1,097  |  
|Depreciation and amortization                 |  |                                       | 2,232  |      |   | 2,381  |  |    | 2,483  |    |   | 2,513  |    |   | 2,659  |    |  |   | 2,725  |   |  |   | 2,733  |   |  |   | 2,524  |  
|                                              |  |                                       |        |      |   |        |  |    |        |    |   |        |    |   |        |    |  |   |        |   |  |   |        |   |  |   |        |  
|Total costs and expenses                      |  |                                       | 57,841 |      |   | 64,067 |  |    | 64,932 |    |   | 75,470 |    |   | 68,228 |    |  |   | 71,656 |   |  |   | 71,753 |   |  |   | 77,569 |  
|                                              |  |                                       |        |      |   |        |  |    |        |    |   |        |    |   |        |    |  |   |        |   |  |   |        |   |  |   |        |  
|Operating income                              |  |                                       | 2,544  |      |   | 4,319  |  |    | 3,082  |    |   | 6,558  |    |   | 3,378  |    |  |   | 5,107  |   |  |   | 3,895  |   |  |   | 6,736  |  
|Interest expense (income), net                |  |                                       | 156    |      |   | 166    |  |    | 131    |    |   | 96     |    |   | (3     | )  |  |   | (87    | ) |  |   | (69    | ) |  |   | (69    | )
|                                              |  |                                       |        |      |   |        |  |    |        |    |   |        |    |   |        |    |  |   |        |   |  |   |        |   |  |   |        |  
|Income before income taxes                    |  |                                       | 2,388  |      |   | 4,153  |  |    | 2,951  |    |   | 6,462  |    |   | 3,381  |    |  |   | 5,194  |   |  |   | 3,964  |   |  |   | 6,805  |  
|Income tax expense                            |  |                                       | 741    |      |   | 1,287  |  |    | 915    |    |   | 2,003  |    |   | 1,075  |    |  |   | 1,652  |   |  |   | 1,261  |   |  |   | 2,009  |  
|                                              |  |                                       |        |      |   |        |  |    |        |    |   |        |    |   |        |    |  |   |        |   |  |   |        |   |  |   |        |  
|Net income                                    |  | $                                     | 1,647  |      | $ | 2,866  |  | $  | 2,036  |    | $ | 4,459  |    | $ | 2,306  |    |  | $ | 3,542  |   |  | $ | 2,703  |   |  | $ | 4,796  |  
|                                              |  |                                       |        |      |   |        |  |    |        |    |   |        |    |   |        |    |  |   |        |   |  |   |        |   |  |   |        |  
|Net income per share                          |  |                                       |        |      |   |        |  |    |        |    |   |        |    |   |        |    |  |   |        |   |  |   |        |   |  |   |        |  
|Basic                                         |  | $                                     | 0.12   |      | $ | 0.21   |  | $  | 0.15   |    | $ | 0.32   |    | $ | 0.16   |    |  | $ | 0.25   |   |  | $ | 0.19   |   |  | $ | 0.34   |  
|Diluted                                       |  | $                                     | 0.12   |      | $ | 0.21   |  | $  | 0.15   |    | $ | 0.31   |    | $ | 0.16   |    |  | $ | 0.24   |   |  | $ | 0.19   |   |  | $ | 0.33   |  
|Shares used in computing net income per share |  |                                       |        |      |   |        |  |    |        |    |   |        |    |   |        |    |  |   |        |   |  |   |        |   |  |   |        |  
|Basic                                         |  |                                       | 13,782 |      |   | 13,782 |  |    | 13,783 |    |   | 13,841 |    |   | 14,192 |    |  |   | 14,218 |   |  |   | 14,230 |   |  |   | 14,267 |  
|Diluted                                       |  |                                       | 13,959 |      |   | 13,958 |  |    | 14,026 |    |   | 14,187 |    |   | 14,482 |    |  |   | 14,530 |   |  |   | 14,480 |   |  |   | 14,603 |  

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.

On July 20, 2004, we completed our initial public offering. In connection with our 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34



---

##### Table of Contents

| |  |  | 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.

The following table sets forth our sources and uses of cash:



|                                                     |  |                |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                     |  | Year Ended     |        
|                                                     |  | 2004           |         |   | 2005 |   |         | 2006 | 
|                                                     |  | (in thousands) |        
|Net cash provided by operating activities            |  | $              | 21,452  |   |      | $ | 30,158  |      |  | $ | 34,427  |  
|Net cash used in investing activities                |  |                | (27,284 | ) |      |   | (21,416 | )    |  |   | (30,314 | )
|Net cash provided by (used in) financing activities  |  |                | 3,830   |   |      |   | (4,488  | )    |  |   | 1,735   |  
|                                                     |  |                |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents |  | $              | (2,002  | ) |      | $ | 4,254   |      |  | $ | 5,848   |  
|                                                     |  |                |         |   |      |   |         |      |  |   |         |  

Net cash provided by operating activities was $34.4 million in 2006, compared to $30.2 million in
2005 and $21.5 million in 2004. The increase in net cash provided by operating activities in 2006 compared to 2005 was primarily due to an increase in operating income as a result of higher revenues in 2006. 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.

Net cash used in investing activities was $30.3 million in 2006, $21.4 million in 2005 and $27.3 million in 2004. We use cash for property and equipment to open new restaurants, to purchase 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 existing restaurant capacity expanded during the period. In 2006 we purchased a restaurant, including
land and building, for $2.7 million in Schaumburg, Illinois. Purchases of property and equipment also include purchases of information technology systems and expenditures relating to our corporate headquarters. Our net cash used in investing
activities in 2006 reflects $26.4 million of expenditures related to restaurant openings.

Net cash provided by financing activities was
$1.7 million in 2006. Net cash used in financing activities was $4.5 million in 2005 and net cash provided by financing activities was $3.8 million in 2004. Net cash provided by financing activities in 2006 was primarily a result of
proceeds from exercised stock options of $1.5 million. 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 offset by $8.2 million of
proceeds from our public stock offering in December 2005.

On December 20, 2005 we paid down the remaining outstanding balance on our
credit facility. As of December 30, 2006, 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 up to 0.75% or the
Eurodollar rate plus a margin of 0.75% to 1.75%, 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 30, 2006.



35



---

##### Table of Contents

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 30, 2006 the maximum exposure under these
standby letters of credit was $2.7 million. At December 30, 2006 the Company had $47.3 million available under its revolving credit facility.

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, potential initial operating losses related to new restaurant openings and the anticipated acquisition of The Boathouse restaurants, for at least the next 12 months.

Off-Balance Sheet Arrangements

As of
December 30 2006 we had no off-balance sheet arrangements, as defined in Item 303(a)(4) of the Securities and Exchange Commission Regulation S-K.

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 between one and
three five-year renewal options. Contractual obligations as of December 30, 2006 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                   |  |                        | 232,716 |                  |   | 19,758    |  |           | 42,649 |                   |   | 40,063 |  |   | 130,246
|Capital leases, including interest |  |                        | 348     |                  |   | 348       |  |           |       |                   |   |       |  |   |       
|Purchase obligations(2)            |  |                        | 2,742   |                  |   | 2,615     |  |           | 127    |                   |   |       |  |   |       
|                                   |  |                        |         |                  |   |           |  |           |        |                   |   |        |  |   |        
|Total                              |  | $                      | 235,806 |                  | $ | 22,721    |  | $         | 42,776 |                   | $ | 40,063 |  | $ | 130,246
|                                   |  |                        |         |                  |   |           |  |           |        |                   |   |        |  |   |        

---

|(1) | Our revolving credit facility balance as of December 30, 2006 was zero and matures on July 23, 2009. The interest rate on the revolving credit facility is based on the
financial institutions prime rate plus a margin of up to 0.75% or the Eurodollar rate plus a margin of 0.75% to 1.75%, with margins determined by certain financial ratios.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Purchase obligations include commitments related to the construction of new restaurants and other non-food supply and service agreements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

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:

Property and Equipment

Property and equipment
are stated at cost less accumulated depreciation and amortization. Equipment consists primarily of restaurant equipment, furniture, fixtures and smallwares. Depreciation is calculated using



36



---

##### Table of Contents

the straight-line method over the estimated useful lives of the related assets. Equipment under capitalized leases are amortized over the shorter of the
useful life of the asset or the length of the related lease term. 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 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. There were no impairments during 2004, 2005 or 2006.

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 30, 2006, and determined that there were no impairment losses related to goodwill and other indefinite lived assets. 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 including workers compensation, employee health, and general liability.
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.



37



---

##### Table of Contents

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
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 was deemed
necessary as of December 30, 2006.

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.

Share-Based Compensation

We account for share-based compensation in accordance with the fair value recognition provisions of SFAS No. 123, Share Based Payment (revised
2004) (SFAS 123R). We adopted SFAS 123R using the modified prospective transition method as of January 1, 2006, the first day of our fiscal year 2006. Under SFAS 123R, we determined the fair value of share-based payment awards
on the date of grant using the Black-Scholes option-pricing model. The model is affected by the Companys stock price as well as the Companys assumptions regarding a number of complex and subjective variables, including but not limited to
the Companys expected stock price volatility over the term of the awards, life of the option, expected term of the option, the estimated forfeiture rate, the risk-free interest rate and the expected dividend yield.

Recent Accounting Pronouncements

In March 2006, the
FASB Emerging Issues Task Force issued Issue 06-3 (EITF 06-3), How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement.A tentative consensus was
reached that a company should disclose its accounting policy (i.e., gross or net presentation) regarding presentation of taxes within the scope of EITF 06-3. If taxes are significant, a company should disclose the amount of such taxes for each
period for which an income statement is presented. The guidance is effective for periods beginning after December 15, 2006. We present revenues net of sales tax. We do not believe adopting EITF 06-3 will have any impact on our consolidated
financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the
financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after



38



---

##### Table of Contents

December 15, 2006 and is required to be adopted by us in the first quarter of fiscal 2007. The cumulative effects, if any, of applying FIN 48 will be
recorded as an adjustment to retained earnings as of the beginning of the period of adoption. We are evaluating the impact adopting FIN 48 will have on our consolidated results of operations and financial condition and are not yet in a position to
determine the impact.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement
and related financial statement disclosure using both the rollover approach and the iron curtain approach, as those terms are defined in SAB 108. The rollover approach quantifies misstatements based on the amount of the error in the current
year financial statement, whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatements year(s) of
origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be
amended. If a Company determines that an adjustment to prior year financial statements is required upon adoption of SAB 108 and does not elect to restate its previous financial statements, it must recognize the cumulative effect of applying
SAB 108 in fiscal 2006 beginning balances of the affected assets and liabilities with a corresponding adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is effective for interim periods of the first fiscal year
ending after November 15, 2006. The adoption of SAB 108 did not have an impact on our consolidated financial statements.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and liabilities. The standard expands required
disclosures about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 is effective for fiscal years beginning
after November 15, 2007. We are evaluating the impact adopting SFAS 157 will have on our consolidated financial statements.

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

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 selected offerings and pricing on our daily printed menus.

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 up to 0.75% or the Eurodollar rate plus a margin of 0.75% to 1.75%, 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 2006, there was no outstanding balance under our revolving credit facility.



39



---

##### Table of Contents

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                                      |  | 41  
|                                                                                             | 
|Consolidated Financial Statements:                                                           |  |     
|                                                                                             | 
|Consolidated Balance Sheets                                                                  |  | 43  
|                                                                                             | 
|Consolidated Statements of Income                                                            |  | 44  
|                                                                                             | 
|Consolidated Statements of Members and Stockholders Equity and Comprehensive Income (Loss) |  | 45  
|                                                                                             | 
|Consolidated Statements of Cash Flows                                                        |  | 46  
|                                                                                             | 
|Notes to Consolidated Financial Statements                                                   |  | 47  



40



---

##### Table of Contents

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 30, 2006 and December 31, 2005
consolidated financial statements and of its internal control over financial reporting as of December 30, 2006 and an audit of its December 25, 2004 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 30, 2006 and December 31, 2005, and the results of their operations and their cash flows for each of the three years in the period ended
December 30, 2006 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.

As discussed in Note 11 to the consolidated financial statements, effective January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123(R) Share Based Payment.

Internal control over financial reporting

Also, in our opinion, managements assessment, included inReport of Management on Internal Control Over Financial Reporting appearing under
item 9A, that the Company maintained effective internal control over financial reporting as of December 30, 2006 based on criteria established inInternal 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 30, 2006, 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



41



---

##### Table of Contents

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 8, 2007



42



---

##### Table of Contents

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

Consolidated Balance
Sheets

(in thousands, except per share data)



|                                                                                                                                                         |  |                  |         |                  |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ---------------- | - | -------
|                                                                                                                                                         |  | December 31,2005 |         | December 30,2006
|Assets                                                                                                                                                   |  |                  |         |                  |   |        
|Current assets                                                                                                                                           |  |                  |         |                  |   |        
|Cash and cash equivalents                                                                                                                                |  | $                | 4,705   |                  | $ | 10,553 
|Trade accounts receivable, net                                                                                                                           |  |                  | 5,081   |                  |   | 6,498  
|Tenant improvement allowance receivables                                                                                                                 |  |                  | 1,780   |                  |   | 1,538  
|Inventories                                                                                                                                              |  |                  | 4,517   |                  |   | 4,982  
|Prepaid expenses and other current assets                                                                                                                |  |                  | 3,020   |                  |   | 3,918  
|Deferred income taxes                                                                                                                                    |  |                  | 6,688   |                  |   | 2,888  
|                                                                                                                                                         |  |                  |         |                  |   |        
|Total current assets                                                                                                                                     |  |                  | 25,791  |                  |   | 30,377 
|Property and equipment                                                                                                                                   |  |                  | 104,727 |                  |   | 124,346
|Other assets                                                                                                                                             |  |                  | 53,646  |                  |   | 53,701 
|Goodwill                                                                                                                                                 |  |                  | 19,996  |                  |   | 19,996 
|                                                                                                                                                         |  |                  |         |                  |   |        
|Total assets                                                                                                                                             |  | $                | 204,160 |                  | $ | 228,420
|                                                                                                                                                         |  |                  |         |                  |   |        
|Liabilities and Stockholders Equity                                                                                                                     |  |                  |         |                  |   |        
|Current liabilities                                                                                                                                      |  |                  |         |                  |   |        
|Accounts payable                                                                                                                                         |  | $                | 13,431  |                  | $ | 15,639 
|Accrued expenses                                                                                                                                         |  |                  | 18,970  |                  |   | 24,016 
|Capital lease obligations, current portion                                                                                                               |  |                  | 368     |                  |   | 338    
|                                                                                                                                                         |  |                  |         |                  |   |        
|Total current liabilities                                                                                                                                |  |                  | 32,769  |                  |   | 39,993 
|Other long-term liabilities                                                                                                                              |  |                  | 15,618  |                  |   | 17,645 
|Capital lease obligations, noncurrent portion                                                                                                            |  |                  | 338     |                  |   |       
|Deferred income taxes                                                                                                                                    |  |                  | 11,982  |                  |   | 10,552 
|                                                                                                                                                         |  |                  |         |                  |   |        
|Total liabilities                                                                                                                                        |  |                  | 60,707  |                  |   | 68,190 
|                                                                                                                                                         |  |                  |         |                  |   |        
|                                                                                                                                                         |  |                 
|Commitments and Contingencies (Note 12)                                                                                                                  |  |                  |         |                  |   |        
|                                                                                                                                                         |  |                 
|Stockholders equity                                                                                                                                     |  |                  |         |                  |   |        
|Common stock, $0.001 par value, 120,000 shares authorized, 14,179 shares issued and outstanding in 2005 and 14,303 shares issued and
outstanding in 2006 |  |                  | 14      |                  |   | 14     
|Additional paid in capital                                                                                                                               |  |                  | 136,292 |                  |   | 139,721
|Retained earnings                                                                                                                                        |  |                  | 7,147   |                  |   | 20,495 
|                                                                                                                                                         |  |                  |         |                  |   |        
|Total stockholders equity                                                                                                                               |  |                  | 143,453 |                  |   | 160,230
|                                                                                                                                                         |  |                  |         |                  |   |        
|Total liabilities and stockholders equity                                                                                                               |  | $                | 204,160 |                  | $ | 228,420
|                                                                                                                                                         |  |                  |         |                  |   |        

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



43



---

##### Table of Contents

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

Consolidated Statements
of Income

(in thousands, except per share data)



|                                                                                                                |  |                  |         |   |                  |   |                  |  |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ---------------- |  | - | ------- | -
|                                                                                                                |  | Year Ended       |        
|                                                                                                                |  | December 25,2004 |         |   | December 31,2005 |   | December 30,2006 | 
|Revenues                                                                                                        |  | $                | 238,757 |   |                  | $ | 278,813          |  | $ | 308,323 |  
|                                                                                                                |  |                  |         |   |                  |   |                  |  |   |         |  
|Restaurant operating costs                                                                                      |  |                  |         |   |                  |   |                  |  |   |         |  
|Food and beverage                                                                                               |  |                  | 70,873  |   |                  |   | 81,630           |  |   | 89,443  |  
|Labor                                                                                                           |  |                  | 75,081  |   |                  |   | 86,823           |  |   | 95,886  |  
|Operating                                                                                                       |  |                  | 35,204  |   |                  |   | 41,857           |  |   | 46,044  |  
|Occupancy                                                                                                       |  |                  | 21,401  |   |                  |   | 24,790           |  |   | 27,650  |  
|                                                                                                                |  |                  |         |   |                  |   |                  |  |   |         |  
|Total restaurant operating costs                                                                                |  |                  | 202,559 |   |                  |   | 235,100          |  |   | 259,023 |  
|General and administrative expenses                                                                             |  |                  | 12,062  |   |                  |   | 15,105           |  |   | 16,651  |  
|Restaurant pre-opening costs                                                                                    |  |                  | 2,393   |   |                  |   | 2,496            |  |   | 2,892   |  
|Depreciation and amortization                                                                                   |  |                  | 10,723  |   |                  |   | 9,608            |  |   | 10,640  |  
|Management fees and covenants not to compete                                                                    |  |                  | 4,241   |   |                  |   |                 |  |   |        |  
|                                                                                                                |  |                  |         |   |                  |   |                  |  |   |         |  
|Total costs and expenses                                                                                        |  |                  | 231,978 |   |                  |   | 262,309          |  |   | 289,206 |  
|                                                                                                                |  |                  |         |   |                  |   |                  |  |   |         |  
|Operating income                                                                                                |  |                  | 6,779   |   |                  |   | 16,504           |  |   | 19,117  |  
|Interest expense (income), net                                                                                  |  |                  | 2,680   |   |                  |   | 550              |  |   | (228    | )
|Accrued dividends and accretion on mandatorily redeemable preferred stock                                       |  |                  | 5,759   |   |                  |   |                 |  |   |        |  
|Write off of deferred loan costs on early extinguishment of debt                                                |  |                  | 1,288   |   |                  |   |                 |  |   |        |  
|                                                                                                                |  |                  |         |   |                  |   |                  |  |   |         |  
|Income (loss) before income taxes and accrued dividends and accretion on mandatorily redeemable preferred stock |  |                  | (2,948  | ) |                  |   | 15,954           |  |   | 19,345  |  
|Income tax expense (benefit)                                                                                    |  |                  | (3,651  | ) |                  |   | 4,946            |  |   | 5,997   |  
|                                                                                                                |  |                  |         |   |                  |   |                  |  |   |         |  
|Net income                                                                                                      |  | $                | 703     |   |                  | $ | 11,008           |  | $ | 13,348  |  
|                                                                                                                |  |                  |         |   |                  |   |                  |  |   |         |  
|Net income per share (Note 2)                                                                                   |  |                  |         |   |                  |   |                  |  |   |         |  
|Basic                                                                                                           |  | $                | 0.07    |   |                  | $ | 0.80             |  | $ | 0.94    |  
|Diluted                                                                                                         |  | $                | 0.07    |   |                  | $ | 0.78             |  | $ | 0.92    |  
|Shares used in computing net income per share (Note 2)                                                          |  |                  |         |   |                  |   |                  |  |   |         |  
|Basic                                                                                                           |  |                  | 10,387  |   |                  |   | 13,798           |  |   | 14,227  |  
|Diluted                                                                                                         |  |                  | 10,416  |   |                  |   | 14,047           |  |   | 14,521  |  

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



44



---

##### Table of Contents

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

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



|                                                                           |  |                  |   |  |                         |         |   |              |            |                           |        |                      |        |       |                                        |            |  |                                          |    |  |       |         |  |   |     |   |  |   |        |   |  |   |      |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ---------------- | - |  | ----------------------- | ------- | - | ------------ | ---------- | ------------------------- | ------ | -------------------- | ------ | ----- | -------------------------------------- | ---------- |  | ---------------------------------------- | -- |  | ----- | ------- |  | - | --- | - |  | - | ------ | - |  | - | ---- | - |  | - | ------- | -
|                                                                           |  | Preferred Units  |   |  | M&S LLC Units(1)Warrant |         |   | Common Stock |            | Additional Paid-inCapital |        | UnearnedCompensation |        |       | Retained Earnings (AccumulatedDeficit) |            |  | AccumulatedOtherComprehensiveGain (Loss) |    |  | Total |        
|                                                                           |  | Units            |   |  | Amount                  |         |   | Units        |            |                           | Amount |                      |        | Units |                                        | Amount     |  |                                          |    |  |      
|                                                                           |  | ($ in thousands) |  
|Balances at December 27, 2003                                              |  | 57,000           |   |  | $                       | 57,000  |   |              | 1,280,294  |                           |        | $                    | 5,861  |       |                                        |           |  | $                                        |   |  | $     |        |  | $ | (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 | ) |              | (1,171,442 | )                         |        |                      | (801   | )     |                                        | 7,179,358  |  |                                          | 7  |  |       | 57,794  |  |   |    |   |  |   |       |   |  |   |     |   |  |   |        |  
|Exercise of warrants                                                       |  |                 |   |  |                         |        |   |              | (108,852   | )                         |        |                      | (5,054 | )     |                                        | 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 |  
|Share based compensation                                                   |  |                 |   |  |                         |        |   |              |           |                           |        |                      |       |       |                                        |           |  |                                          |   |  |       | 1,326   |  |   |    |   |  |   |       |   |  |   |     |   |  |   | 1,326   |  
|Exercise of stock options                                                  |  |                 |   |  |                         |        |   |              |           |                           |        |                      |       |       |                                        | 123,925    |  |                                          |   |  |       | 1,487   |  |   |    |   |  |   |       |   |  |   |     |   |  |   | 1,487   |  
|Tax benefit from disqualifying stock option dispositions                   |  |                 |   |  |                         |        |   |              |           |                           |        |                      |       |       |                                        |           |  |                                          |   |  |       | 616     |  |   |    |   |  |   |       |   |  |   |     |   |  |   | 616     |  
|Net Income                                                                 |  |                 |   |  |                         |        |   |              |           |                           |        |                      |       |       |                                        |           |  |                                          |   |  |       |        |  |   |    |   |  |   | 13,348 |   |  |   |     |   |  |   | 13,348  |  
|                                                                           |  |                  |   |  |                         |         |   |              |            |                           |        |                      |        |       |                                        |            |  |                                          |    |  |       |         |  |   |     |   |  |   |        |   |  |   |      |   |  |   |         |  
|Balances at December 30, 2006                                              |  |                 |   |  | $                       |        |   |              |           |                           |        | $                    |       |       |                                        | 14,303,131 |  | $                                        | 14 |  | $     | 139,721 |  | $ |    |   |  | $ | 20,495 |   |  | $ |     |   |  | $ | 160,230 |  
|                                                                           |  |                  |   |  |                         |         |   |              |            |                           |        |                      |        |       |                                        |            |  |                                          |    |  |       |         |  |   |     |   |  |   |        |   |  |   |      |   |  |   |         |  

---

|(1) | See Note 14
|--- | -----------

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



45



---

##### Table of Contents

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

Consolidated Statements
of Cash Flows

(in thousands)



|                                                                                 |  |                  |         |   |                  |   |         |                  |  |   |         |  
|-------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | ---------------- |  | - | ------- | -
|                                                                                 |  | Year Ended       |        
|                                                                                 |  | December 25,2004 |         |   | December 31,2005 |   |         | December 30,2006 | 
|Operating activities                                                             |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net income                                                                       |  | $                | 703     |   |                  | $ | 11,008  |                  |  | $ | 13,348  |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Depreciation and amortization                                                    |  |                  | 10,723  |   |                  |   | 9,608   |                  |  |   | 10,640  |  
|Amortization of unearned compensation                                            |  |                  | 42      |   |                  |   |        |                  |  |   |        |  
|Provision for doubtful accounts                                                  |  |                  | 31      |   |                  |   | 69      |                  |  |   |        |  
|Deferred income taxes                                                            |  |                  | (3,805  | ) |                  |   | 4,566   |                  |  |   | 2,370   |  
|Write off of deferred loan costs on early extinguishment of debt                 |  |                  | 1,288   |   |                  |   |        |                  |  |   |        |  
|Equity based compensation                                                        |  |                  |        |   |                  |   |        |                  |  |   | 1,326   |  
|Accrued dividends and accretion on mandatorily redeemable preferred stock        |  |                  | 5,759   |   |                  |   |        |                  |  |   |        |  
|Changes in operating assets and liabilities                                      |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Trade accounts receivables                                                       |  |                  | (1,754  | ) |                  |   | (509    | )                |  |   | (1,417  | )
|Tenant improvement allowance receivable                                          |  |                  | 424     |   |                  |   | (1,433  | )                |  |   | 242     |  
|Inventories                                                                      |  |                  | (680    | ) |                  |   | (1,133  | )                |  |   | (465    | )
|Prepaid expenses and other current assets                                        |  |                  | (479    | ) |                  |   | (174    | )                |  |   | (898    | )
|Accounts payable                                                                 |  |                  | 1,659   |   |                  |   | 556     |                  |  |   | 2,208   |  
|Accrued expenses                                                                 |  |                  | 2,499   |   |                  |   | 3,773   |                  |  |   | 5,046   |  
|Other long-term liabilities                                                      |  |                  | 5,042   |   |                  |   | 3,827   |                  |  |   | 2,027   |  
|                                                                                 |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net cash provided by operating activities                                        |  |                  | 21,452  |   |                  |   | 30,158  |                  |  |   | 34,427  |  
|                                                                                 |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Investing activities                                                             |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Purchase of property and equipment                                               |  |                  | (27,017 | ) |                  |   | (21,347 | )                |  |   | (30,072 | )
|Other assets                                                                     |  |                  | (267    | ) |                  |   | (69     | )                |  |   | (242    | )
|                                                                                 |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net cash used in investing activities                                            |  |                  | (27,284 | ) |                  |   | (21,416 | )                |  |   | (30,314 | )
|                                                                                 |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Financing activities                                                             |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Decrease in book overdraft                                                       |  |                  | (4,623  | ) |                  |   | (429    | )                |  |   |        |  
|Loan costs                                                                       |  |                  | (805    | ) |                  |   |        |                  |  |   |        |  
|Borrowings made on revolving credit facility                                     |  |                  | 65,500  |   |                  |   | 16,500  |                  |  |   |        |  
|Payments made on revolving credit facility                                       |  |                  | (92,000 | ) |                  |   | (28,500 | )                |  |   |        |  
|Proceeds from stock options exercised                                            |  |                  |        |   |                  |   | 202     |                  |  |   | 1,487   |  
|Proceeds from issuance of common stock, net of offering costs                    |  |                  | 65,076  |   |                  |   | 8,173   |                  |  |   |        |  
|Redemption of senior preferred stock                                             |  |                  | (28,896 | ) |                  |   |        |                  |  |   |        |  
|Payments on capital lease obligations                                            |  |                  | (416    | ) |                  |   | (434    | )                |  |   | (368    | )
|Excess tax benefits from stock based compensation                                |  |                  |        |   |                  |   |        |                  |  |   | 616     |  
|Purchase of Class B units                                                        |  |                  | (6      | ) |                  |   |        |                  |  |   |        |  
|                                                                                 |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net cash provided by (used in) financing activities                              |  |                  | 3,830   |   |                  |   | (4,488  | )                |  |   | 1,735   |  
|                                                                                 |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                             |  |                  | (2,002  | ) |                  |   | 4,254   |                  |  |   | 5,848   |  
|Cash and cash equivalents, beginning of year                                     |  |                  | 2,453   |   |                  |   | 451     |                  |  |   | 4,705   |  
|                                                                                 |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Cash and cash equivalents, end of year                                           |  | $                | 451     |   |                  | $ | 4,705   |                  |  | $ | 10,553  |  
|                                                                                 |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Supplemental disclosure of cash flow information                                 |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Cash paid during the year                                                        |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Interest                                                                         |  | $                | 3,097   |   |                  | $ | 949     |                  |  | $ | 290     |  
|Income taxes                                                                     |  |                  | 57      |   |                  |   | 343     |                  |  |   | 2,267   |  

Non-cash investing and financing activities

In 2004, accounts receivable totaling $0.2 million were converted to a note receivable.

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



46



---

##### Table of Contents

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.

As of December 30,
2006, the Company owned and operated 66 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.

Fiscal Year

The Company utilizes a 52 or 53 week accounting period that ends on the Saturday closest to December 31.
The fiscal year ended December 25, 2004 was comprised of 52 weeks, the fiscal year ended December 31, 2005 was comprised of 53 weeks and the fiscal year ended December 30, 2006 was comprised of 52 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 cash on hand in restaurant locations and deposits held at major banks that may at times exceed FDIC-insured
limits.



47



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



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 25, 2004 |  | $                          | 125 |                             | $ | 31         |  | $                    | 49 |  | $ | 107
|December 31, 2005 |  |                            | 107 |                             |   | 69         |  |                      | 69 |  |   | 107
|December 30, 2006 |  |                            | 107 |                             |   | 44         |  |                      | 44 |  |   | 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.

Property and Equipment

Property and equipment 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. Equipment under capitalized leases are amortized over the shorter of the useful life of the asset or the length of the related lease term. Leasehold improvements are amortized using the straight-line method over the shorter of the
lease term, including option 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 life. 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 2004, 2005 and 2006 for tradenames,
trademarks, or goodwill.



48



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



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 property and equipment, 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 its 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.

There were no impairments of property and equipment in
2004, 2005 and 2006.

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 more likely than not to be realized in future periods.

Revenue Recognition

Revenues are recognized at the point of delivery of products and services.

The Company recognizes income from gift cards when the gift card is redeemed by the customer; or the likelihood of the gift card being redeemed by the
customer is remote (gift card breakage) and the Company determines there is no legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. The Company determines the gift card breakage rate based upon historical
redemption patterns. The Company recognizes breakage income for those cards for which the likelihood of redemption is deemed to be remote. Gift card income is included within revenues in the consolidated statements of income. Revenues are presented
net of sales tax and the related obligation is recorded as a liability until the taxes are remitted to the appropriate taxing authorities.



49



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



Share-Based Compensation Plan

The Company adopted Statements of Financial Accounting Standards (SFAS) No. 123, Share Based Payment (revised 2004) (SFAS 123R) using the modified prospective transition
method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Companys fiscal year 2006. The Companys consolidated financial statements as of and for the year ended December 30,
2006 reflect the impact of SFAS 123R. In accordance with the modified prospective transition method, the Companys consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS
123R. Share-based compensation expense recognized under SFAS 123R for the year ended December 30, 2006 was $1.3 million, which consisted of share-based compensation expense related to employee stock options and restricted stock awards. There
was no share-based compensation expense recognized related to stock awards during the years ended December 31, 2005 and December 25, 2004.

Upon adoption of SFAS 123R (see Note 11), the Company determined the fair value of stock option awards on the date of grant using the Black-Scholes option-pricing model. The model is affected by the Companys
stock price as well as the Companys assumptions regarding a number of complex and subjective variables, including but not limited to the Companys expected stock price volatility over the term of the awards, life of the option, expected
term of the option, the estimated forfeiture rate, the risk-free interest rate and the expected dividend yield. The Companys expected stock price volatility was based on historical volatility of the Companys stock price and expected
future changes in the Companys stock price volatility. The option life was based on the contractual life of the option. The expected term of the option was based on an average of selected peer companies in the Companys industry and our
expectation of average time until exercise of the options by the grantees. The estimated forfeiture rate was based on historical data and estimated future terminations over the vesting period of the award. The risk-free interest rate was based on
the implied yield available at the time of grant on U.S. Treasury zero-coupon issues. Dividend yield is based on managements estimation of dividends to be paid in the future.

The fair value of the Companys stock options was estimated using the following assumptions.



|                          |  |                  |   |  |                  |   |  |                  |  
|------------------------- |  | ---------------- | - |  | ---------------- | - |  | ---------------- | -
|                          |  | Year ended       |  
|                          |  | December 25,2004 |   |  | December 31,2005 |   |  | December 30,2006 |  
|Expected volatility       |  | 24.3             | % |  | 24.3             | % |  | 24.3             | %
|Option life               |  | 10 years         |   |  | 10 years         |   |  | 10 years         |  
|Expected term             |  | 5.5 years        |   |  | 5.5 years        |   |  | 5.5 years        |  
|Estimated forfeiture rate |  | 9                | % |  | 9                | % |  | 14               | %
|Risk-free interest rate   |  | 3.9              | % |  | 3.9              | % |  | 3.9              | %
|Dividend yield            |  | 0                | % |  | 0                | % |  | 0                | %

In May 2006, we issued 142,000 shares of restricted stock to certain employees and executive
officers at a price equal to $23.05, the fair market value of the stock on the date of grant. One third of the restricted stock grant vests on each of the three anniversary dates following the grant date if the grantee is then employed by the
Company.



50



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



The following table represents the effect on net income and net income per share for the years ended
December 31, 2005 and December 25, 2004, if the Company had applied the fair value based method and recognition provisions of SFAS No. 123, Share Based Payment (SFAS 123) to share-based compensation.



|                                                     |  |                                      |        |   |                  |   |        |  
|---------------------------------------------------- |  | ------------------------------------ | ------ | - | ---------------- | - | ------ | -
|                                                     |  | 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 expense 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 |  |                                      |        |   |                  |   |        |  
|Basic                                                |  |                                      |        |   |                  |   |        |  
|As reported                                          |  |                                      | 10,387 |   |                  |   | 13,798 |  
|Pro forma                                            |  |                                      | 10,387 |   |                  |   | 13,798 |  
|Fully diluted                                        |  |                                      |        |   |                  |   |        |  
|As reported                                          |  |                                      | 10,416 |   |                  |   | 14,047 |  
|Pro forma                                            |  |                                      | 10,387 |   |                  |   | 13,976 |  

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 $2.6 million, $3.3 million and $3.7 million for the years ended December 25, 2004, December 31, 2005 and December 30, 2006, respectively.

Insurance Liability

The Company maintains various
policies including workers compensation, employee health, and general liability. 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 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.



51



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



Basic and Diluted Net Income per Share

Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is
computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of employee stock options and restricted stock.

SFAS No. 128, Earnings per Share, requires that employee equity share options, non-vested shares and similar equity instruments granted
by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options and is calculated based on the average share price for each
fiscal period using the treasury stock method. Under the treasury stock method, assumed proceeds include the amount the employee must pay for exercising stock options, the purchase price the grantee pays for restricted stock, the amount of
compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits, if any, that would be credited to additional paid-in capital upon the exercise of the options or vesting of the restricted stock.

Options to purchase 870,500, 832,846, and 700,691 shares of common stock were outstanding at December 25, 2004, December 31,
2005, and December 30, 2006, respectively. The diluted weighted average number of shares include 29,020, 248,532 and 293,457 shares subject to stock options for the years ended December 25, 2004, December 31, 2005, and stock options
and restricted stock for the year ended December 30, 2006, 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 non-substantive 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 a reduction of rent expense over the lease term. Accordingly, the Company has recorded a deferred rent liability for the straight lining of
rents and lease incentives, which is included in other long-term liabilities of $14.5 million and $16.9 million as of December 31, 2005 and December 30, 2006, 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 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.



52



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



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, and December 30, 2006, the Company did not hold a position in a derivative instrument and did not have any hedges outstanding.

3. Property and Equipment

Property and Equipment consist of the following:



|                                                |  |                  |         |   |                  |   |         |  
|----------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                                |  | December 31,2005 |         |   | December 30,2006 |  
|                                                |  | (in thousands)   |        
|Fixtures and equipment                          |  | $                | 46,324  |   |                  | $ | 54,824  |  
|Leasehold improvements                          |  |                  | 90,746  |   |                  |   | 106,991 |  
|Construction in progress                        |  |                  | 3,937   |   |                  |   | 9,016   |  
|Equipment under capital leases                  |  |                  | 1,723   |   |                  |   | 1,717   |  
|                                                |  |                  |         |   |                  |   |         |  
|                                                |  |                  | 142,730 |   |                  |   | 172,548 |  
|Less: Accumulated depreciation and amortization |  |                  | (38,003 | ) |                  |   | (48,202 | )
|                                                |  |                  |         |   |                  |   |         |  
|Property and equipment, net                     |  | $                | 104,727 |   |                  | $ | 124,346 |  
|                                                |  |                  |         |   |                  |   |         |  

For the year ended December 31, 2005 the Company capitalized interest in the amount of $0.2
million and there was no capitalized interest for the year ended December 30, 2006. Depreciation and amortization expense related to equipment and leasehold improvements for the years ended December 25, 2004, December 31, 2005 and
December 30, 2006 was $10.3 million, $9.4 million and $10.5 million, respectively.

4. Other Assets

Other assets consist of the following:



|                                                                                                                                                               |  |                  |        |   |                  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                                                                               |  | December 31,2005 |        |   | December 30,2006 |  
|                                                                                                                                                               |  | (in thousands)   |       
|Tradename and trademarks                                                                                                                                       |  | $                | 50,600 |   |                  | $ | 50,600 |  
|Loan costs                                                                                                                                                     |  |                  | 813    |   |                  |   | 813    |  
|Liquor licenses                                                                                                                                                |  |                  | 1,216  |   |                  |   | 1,447  |  
|Notes receivable                                                                                                                                               |  |                  | 686    |   |                  |   | 652    |  
|Other                                                                                                                                                          |  |                  | 649    |   |                  |   | 694    |  
|                                                                                                                                                               |  |                  |        |   |                  |   |        |  
|                                                                                                                                                               |  |                  | 53,964 |   |                  |   | 54,206 |  
|Less accumulated amortization of loan costs ($233,000 and $395,000) and other ($85,000 and $110,000 ) at December 31, 2005 and
December 30, 2006, respectively |  |                  | (318   | ) |                  |   | (505   | )
|                                                                                                                                                               |  |                  |        |   |                  |   |        |  
|                                                                                                                                                               |  | $                | 53,646 |   |                  | $ | 53,701 |  
|                                                                                                                                                               |  |                  |        |   |                  |   |        |  

Amortization expense related to other assets (loan costs, prepaid management contract and a
covenants not to compete agreement) was $433,000, $244,000 and $187,000 for the years ended December 25, 2004, December 31, 2005 and December 30, 2006, respectively.



53



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



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 30, 2006 and thereafter is as follows (in thousands):



|           |  |   |    
|---------- |  | - | ---
|2007       |  | $ | 187
|2008       |  |   | 187
|2009       |  |   | 118
|2010       |  |   | 25 
|2011       |  |   | 25 
|Thereafter |  |   | 15 
|           |  |   |    
|           |  | $ | 557
|           |  |   |    

5. Accrued Expenses

Accrued expenses consist of the following:



|                                  |  |                   |        |                   |   |       
|--------------------------------- |  | ----------------- | ------ | ----------------- | - | ------
|                                  |  | December 31, 2005 |        | December 30, 2006
|                                  |  | (in thousands)   
|Accrued compensation and benefits |  | $                 | 8,753  |                   | $ | 10,291
|Gift certificate liability        |  |                   | 4,542  |                   |   | 5,978 
|Accrued legal and related costs   |  |                   | 430    |                   |   | 137   
|Accrued sales tax                 |  |                   | 1,942  |                   |   | 2,232 
|Accrued rent                      |  |                   | 1,098  |                   |   | 872   
|Accrued interest                  |  |                   | 67     |                   |   | 23    
|Other                             |  |                   | 2,138  |                   |   | 4,483 
|                                  |  |                   |        |                   |   |       
|                                  |  | $                 | 18,970 |                   | $ | 24,016
|                                  |  |                   |        |                   |   |       

6. Long-Term Debt

On December 20, 2005 the Company paid down the remaining outstanding balance on its credit facility. As of December 30, 2006, 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 up to 0.75% or the Eurodollar rate plus a margin of 0.75% to 1.75%, 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 30, 2006.

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 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 30, 2006 the maximum exposure under these standby letters of credit was $2.7 million. At December 30, 2006 the Company had $47.3 million available under its revolving credit facility.



54



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



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.

7. Other Long-Term Liabilities

Other long-term liabilities consist of the following:



|                                          |  |                   |        |                   |   |       
|----------------------------------------- |  | ----------------- | ------ | ----------------- | - | ------
|                                          |  | December 31, 2005 |        | December 30, 2006
|                                          |  | (in thousands)   
|Deferred Rent                             |  | $                 | 9,033  |                   | $ | 11,697
|Unamortized Tenant Improvement Allowances |  |                   | 5,512  |                   |   | 5,251 
|Other                                     |  |                   | 1,073  |                   |   | 697   
|                                          |  |                   |        |                   |   |       
|                                          |  | $                 | 15,618 |                   | $ | 17,645
|                                          |  |                   |        |                   |   |       

8. Capital Leases

The Company is the lessee of equipment under capital leases expiring in 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 gross amount of equipment and related accumulated amortization recorded under capital leases are as follows:



|                               |  |                   |       |   |                   |   |       |  
|------------------------------ |  | ----------------- | ----- | - | ----------------- | - | ----- | -
|                               |  | December 31, 2005 |       |   | December 30, 2006 |  
|                               |  | (in thousands)    |      
|Equipment                      |  | $                 | 1,723 |   |                   | $ | 1,717 |  
|Less: Accumulated amortization |  |                   | (701  | ) |                   |   | (918  | )
|                               |  |                   |       |   |                   |   |       |  
|                               |  | $                 | 1,022 |   |                   | $ | 799   |  
|                               |  |                   |       |   |                   |   |       |  

Minimum future lease payments under capital leases as of December 30, 2006 are as follows (in
thousands):



|                                            |  |   |      |  
|------------------------------------------- |  | - | ---- | -
|2007                                        |  | $ | 348  |  
|                                            |  |   |      |  
|Total minimum lease payments                |  |   | 348  |  
|Less: Amount representing interest          |  |   | (10  | )
|                                            |  |   |      |  
|Present value of net minimum lease payments |  |   | 338  |  
|Less: Current portion                       |  |   | (338 | )
|                                            |  |   |      |  
|Long-term portion                           |  | $ |     |  
|                                            |  |   |      |  



55



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



9. Income Taxes

The provision (benefit) for income taxes consists of:



|                               |  |                   |        |   |                   |   |                   |  |   |      
|------------------------------ |  | ----------------- | ------ | - | ----------------- | - | ----------------- |  | - | -----
|                               |  | Year Ended       
|                               |  | December 25, 2004 |        |   | December 31, 2005 |   | December 30, 2006
|                               |  | (in thousands)   
|Current tax expense            |  |                   |        |   |                   |   |                   |  |   |      
|Federal                        |  | $                 |       |   |                   | $ | 168               |  | $ | 2,961
|State and local                |  |                   | 154    |   |                   |   | 212               |  |   | 666  
|                               |  |                   |        |   |                   |   |                   |  |   |      
|                               |  |                   | 154    |   |                   |   | 380               |  |   | 3,627
|                               |  |                   |        |   |                   |   |                   |  |   |      
|Deferred tax expense (benefit) |  |                   |        |   |                   |   |                   |  |   |      
|Federal                        |  |                   | (3,797 | ) |                   |   | 3,983             |  |   | 1,907
|State and local                |  |                   | (8     | ) |                   |   | 583               |  |   | 463  
|                               |  |                   |        |   |                   |   |                   |  |   |      
|                               |  |                   | (3,805 | ) |                   |   | 4,566             |  |   | 2,370
|                               |  |                   |        |   |                   |   |                   |  |   |      
|                               |  | $                 | (3,651 | ) |                   | $ | 4,946             |  | $ | 5,997
|                               |  |                   |        |   |                   |   |                   |  |   |      

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



|                                                                                                                                   |  |                  |    |  |                  |    |  |                  |   
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -- |  | ---------------- | -- |  | ---------------- | --
|                                                                                                                                   |  | Year Ended       |   
|                                                                                                                                   |  | December 25,2004 |    |  | December 31,2005 |    |  | December 30,2006 |   
|Federal statutory rate                                                                                                             |  | (35.0            | )% |  | 35.0             | %  |  | 35.0             | % 
|State and local taxes                                                                                                              |  | (4.4             | )% |  | 4.9              | %  |  | 5.2              | % 
|Valuation allowance                                                                                                                |  | (40.1            | )% |  |                 |    |  |                 |   
|Nondeductible expenses and other-primarily nondeductible accrued dividends and accretion of mandatorily redeemable preferred
stock |  | 82.4             | %  |  | 0.8              | %  |  | 0.3              | % 
|FICA Tip Credits                                                                                                                   |  | (126.7           | )% |  | (10.1            | )% |  | (9.2             | )%
|Other                                                                                                                              |  |                 |    |  | 0.4              | %  |  | (0.3             | )%
|                                                                                                                                   |  |                  |    |  |                  |    |  |                  |   
|                                                                                                                                   |  | (123.8           | )% |  | 31.0             | %  |  | 31.0             | % 
|                                                                                                                                   |  |                  |    |  |                  |    |  |                  |   



56



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



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



|                                                        |  |                  |         |   |                  |   |         |  
|------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                                        |  | December 31,2005 |         |   | December 30,2006 |  
|                                                        |  | (in thousands)   |        
|Deferred tax (liabilities) assetscurrent               |  |                  |         |   |                  |   |         |  
|Liability insurance                                     |  | $                | (210    | ) |                  | $ | (250    | )
|Accrued vacation pay                                    |  |                  | 829     |   |                  |   | 972     |  
|Federal & state credits                                 |  |                  | 499     |   |                  |   | 154     |  
|FICA Tip Credits                                        |  |                  | 4,500   |   |                  |   | 2,028   |  
|Net operating loss carryforwards                        |  |                  | 1,022   |   |                  |   | 47      |  
|Other                                                   |  |                  | 48      |   |                  |   | (63     | )
|                                                        |  |                  |         |   |                  |   |         |  
|Current deferred tax asset                              |  |                  | 6,688   |   |                  |   | 2,888   |  
|                                                        |  |                  |         |   |                  |   |         |  
|Deferred tax (liabilities) assetsnoncurrent            |  |                  |         |   |                  |   |         |  
|Depreciation and amortization of property and equipment |  |                  | (12,397 | ) |                  |   | (14,159 | )
|Amortization of intangible assets                       |  |                  | (8,242  | ) |                  |   | (10,171 | )
|Deferred rent                                           |  |                  | 5,796   |   |                  |   | 6,753   |  
|Smallwares and supplies                                 |  |                  | (1,106  | ) |                  |   | (1,286  | )
|FICA Tip Credits                                        |  |                  | 3,717   |   |                  |   | 7,735   |  
|Other                                                   |  |                  | 250     |   |                  |   | 576     |  
|                                                        |  |                  |         |   |                  |   |         |  
|Non-current deferred tax liability                      |  |                  | (11,982 | ) |                  |   | (10,552 | )
|                                                        |  |                  |         |   |                  |   |         |  
|Net deferred tax liability                              |  | $                | (5,294  | ) |                  | $ | (7,664  | )
|                                                        |  |                  |         |   |                  |   |         |  

Deferred tax assets consist of federal credit carryforwards, state and local net operating loss
carryforwards, other miscellaneous state credit carryforwards, and timing differences between book and tax income. A valuation allowance is recorded when it is more likely than not that some portion of the deferred tax assets will not be realized.
Management believes it is more likely than not that the Company will realize the benefits of the deferred tax assets and, accordingly, no valuation allowance was recorded as of December 31, 2005 or December 30, 2006.

As of December 30, 2006, for federal income tax purposes, the Company had FICA Tip Credit carryforwards of $9.8 million and alternative minimum tax
credit carryforwards of $0.2 million. As of December 30, 2006, for state and local income tax purposes, the Company had net operating loss carryforwards of $3.0 million and other miscellaneous state credits of $0.2 million. If not used to
reduce taxable income in future periods, portions of the FICA Tip Credit carryforwards will start expiring in 2022 through 2026, and the state and local net operating loss carryforwards will expire in 2008 through 2019. The alternative minimum tax
credits and other miscellaneous state credits will carryforward indefinitely.

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 $3.3 million for the year ended December 25, 2004. 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 $0.9 million for the year ended December 25,
2004. The management fee agreements and all but one of the



57



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



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 $0.8 million, $0.9 million and $0.9 million for the years ended December 25, 2004, December 31, 2005 and December 30, 2006, respectively.

11. Share-Based Compensation

The Company adopted
Statements of Financial Accounting Standards (SFAS) No. 123, Share Based Payment (revised 2004) (SFAS 123R) using the modified prospective transition method, which required the application of the accounting
standard as of January 1, 2006, the first day of the Companys fiscal year 2006. The Companys consolidated financial statements as of and for the fiscal year ended December 30, 2006 reflect the impact of SFAS 123R. In accordance
with the modified prospective transition method, the Companys consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. Share-based compensation expense recognized under
SFAS 123R for the fiscal year ended December 30, 2006 was $1.3 million, which consisted of share-based compensation expense related to employee stock options and restricted stock. There was no share-based compensation expense recognized related
to stock awards during the fiscal years ended December 31, 2005 and December 25, 2004.

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.

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.

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, restricted stock and other awards to
employees, directors, consultants and to any parent or subsidiary of the Company. On July 20,



58



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



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 30, 2006, 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 of the stock on the date of grant
(July 20, 2004).

In May 2006, the Company issued 142,000 shares of restricted stock to certain employees and executive officers at a
price equal to $23.05, the fair market value of the stock on the date of grant. One third of the restricted stock grant vests on each of the three anniversary dates following the grant date if the grantee is then employed by the Company. As of
December 30, 2006 there were 138,500 shares of restricted stock outstanding.

The table below summarizes the status of the
Companys stock based compensation plans, including stock options and restricted stock grants, as of December 30, 2006:



|                                 |  |              |  |                                |       |                 |         |             |         |                         |   |           
|-------------------------------- |  | ------------ |  | ------------------------------ | ----- | --------------- | ------- | ----------- | ------- | ----------------------- | - | ----------
|                                 |  | StockOptions |  | Weighted AverageExercise Price |       | RestrictedStock |         | TotalShares |         | AggregateIntrinsicValue
|Outstanding at July 19, 2004     |  |             |  | $                              |      |                 |        |             |        |                         |   |           
|Awards granted                   |  | 879,600      |  |                                | 12.00 |                 |        |             | 879,600 |                         |   |           
|Awards forfeited                 |  | 9,100        |  |                                | 12.00 |                 |        |             | 9,100   |                         |   |           
|                                 |  |              |  |                                |       |                 |         |             |         |                         |   |           
|Outstanding at December 25, 2004 |  | 870,500      |  |                                | 12.00 |                 |        |             | 870,500 |                         |   |           
|                                 |  |              |  |                                |       |                 |         |             |         |                         |   |           
|Awards granted                   |  |             |  |                                |       |                 |        |             |        |                         |   |           
|Awards exercised                 |  | 16,856       |  |                                | 12.00 |                 |        |             | 16,856  |                         |   |           
|Awards forfeited                 |  | 20,798       |  |                                | 12.00 |                 |        |             | 20,798  |                         |   |           
|                                 |  |              |  |                                |       |                 |         |             |         |                         |   |           
|Outstanding at December 31, 2005 |  | 832,846      |  |                                | 12.00 |                 |        |             | 832,846 |                         |   |           
|                                 |  |              |  |                                |       |                 |         |             |         |                         |   |           
|Awards granted                   |  |             |  |                                |      |                 | 142,000 |             | 142,000 |                         | $ | 3,413,680 
|Awards exercised                 |  | 123,925      |  |                                | 12.00 |                 |        |             | 123,925 |                         |   | 1,527,577 
|Awards forfeited                 |  | 8,230        |  |                                | 12.00 |                 | 3,500   |             | 11,730  |                         |   | 183,229   
|                                 |  |              |  |                                |       |                 |         |             |         |                         |   |           
|Outstanding at December 30, 2006 |  | 700,691      |  |                                | 12.00 |                 | 138,500 |             | 839,191 |                         |   | 11,765,860
|                                 |  |              |  |                                |       |                 |         |             |         |                         |   |           
|Exercisable at December 30, 2006 |  | 423,128      |  |                                | 12.00 |                 |        |             | 423,128 |                         |   | 5,094,461 



59



---

##### Table of Contents

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 30, 2006:



|                       |  |                  |  |                                                   |  |                                |       |                  |         |                                |   |      
|---------------------- |  | ---------------- |  | ------------------------------------------------- |  | ------------------------------ | ----- | ---------------- | ------- | ------------------------------ | - | -----
|Outstanding            |  | Exercisable     
|Range ofExercisePrices |  | Number ofOptions |  | Weighted AverageRemaining Yearsof ContractualLife |  | Weighted AverageExercise price |       | Number ofOptions |         | Weighted AverageExercise price
|$12.00                 |  | 700,691          |  | 7.6                                               |  | $                              | 12.00 |                  | 423,128 |                                | $ | 12.00

As of December 31, 2005 and December 30, 2006, the unamortized compensation cost related
to stock options and restricted stock granted to employees under the Companys 2004 Stock Incentive Plan was $1.3 million and $3.1 million, respectively.

The following table summarizes share-based compensation expense related to employee stock options under SFAS 123R for the fifty-two week period ended December 30, 2006 (in thousands).



|                                                                               |  |                  |      
|------------------------------------------------------------------------------ |  | ---------------- | -----
|                                                                               |  | Year ended      
|                                                                               |  | December 30,2006
|Labor                                                                          |  | $                | 71   
|General and administrative expenses                                            |  |                  | 1,255
|                                                                               |  |                  |      
|Share-based compensation expense included in total costs and expenses          |  |                  | 1,326
|Income tax benefit related to share-based compensation                         |  |                  | 324  
|                                                                               |  |                  |      
|Share-based compensation expense related to employee stock options, net of tax |  | $                | 1,002
|                                                                               |  |                  |      

12. Commitments and Contingencies

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

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 of one of its wholly owned subsidiaries. See Note 1, The Business and Organization.



60



---

##### Table of Contents

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.

The table below summarizes information about the Preferred
units, Warrants, Class A units, Class B units and Class C units:



|                              |  |                  |   |  |               |        |   |         |            |   |                |   |      |               |  |          |        |  |   |       |   |  |          |   |  |       |     |   |        |     |   |  |   |     |  
|----------------------------- |  | ---------------- | - |  | ------------- | ------ | - | ------- | ---------- | - | -------------- | - | ---- | ------------- |  | -------- | ------ |  | - | ----- | - |  | -------- | - |  | ----- | --- | - | ------ | --- | - |  | - | --- | -
|                              |  | Preferred Unit   |   |  |               |        |   |         |            |   | Class A-2 Unit |   |      |               |  |          |        |  |   |       |   |  |          |  
|                              |  | Warrant          |   |  | Class A Units |        |   | Warrant |            |   | Class B Units  |   |      | Class C Units | 
|                              |  | Units            |   |  | Amount        |        |   | Units   |            |   | Amount         |   |      | Units         |  |          | Amount |  |   | Units |   |  | Amount   |   |  | Units |     |   | Amount |    
|                              |  | ($ in thousands) |  
|Balances at December 27, 2003 |  | 4,956            |   |  | $             | 4,951  |   |         | 1,000,000  |   |                | $ | 756  |               |  | 103,896  |        |  | $ | 103   |   |  | 171,429  |   |  | $     | 37  |   |        | 13  |   |  | $ | 14  |  
|Purchase of Class B units     |  |                 |   |  |               |       |   |         |           |   |                |   |     |               |  |         |        |  |   |      |   |  |         |   |  |       | (6  | ) |        |    |   |  |   |    |  
|Reorganization                |  |                 |   |  |               |       |   |         | (1,000,000 | ) |                |   | (756 | )             |  |         |        |  |   |      |   |  | (171,429 | ) |  |       | (31 | ) |        | (13 | ) |  |   | (14 | )
|Exercise of warrants          |  | (4,956           | ) |  |               | (4,951 | ) |         |           |   |                |   |     |               |  | (103,896 | )      |  |   | (103  | ) |  |         |   |  |       |    |   |        |    |   |  |   |    |  
|                              |  |                  |   |  |               |        |   |         |            |   |                |   |      |               |  |          |        |  |   |       |   |  |          |   |  |       |     |   |        |     |   |  |   |     |  
|Balances at December 25, 2004 |  |                 |   |  | $             |       |   |         |           |   |                | $ |     |               |  |         |        |  | $ |      |   |  |         |   |  | $     |    |   |        |    |   |  | $ |    |  
|                              |  |                  |   |  |               |        |   |         |            |   |                |   |      |               |  |          |        |  |   |       |   |  |          |   |  |       |     |   |        |     |   |  |   |     |  

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 25,
2004, December 31, 2005 and December 30, 2006, Company matching contributions totaled approximately $0.2 million, $0.3 million and $0.4 million, respectively.



61



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



16. Operating Leases

The Company generally operates its restaurants in leased premises. The typical restaurant premises lease is for an initial term between 10 and 20 years with one to three five-year renewal options. The leases
generally require the Company to pay property taxes, utilities, and various other use and occupancy costs by the Company.

Minimum payments
under lease commitments as of December 30, 2006 are summarized below for operating leases.



|           |  |                |        
|---------- |  | -------------- | -------
|           |  | (in thousands)
|2007       |  | $              | 19,758 
|2008       |  |                | 21,063 
|2009       |  |                | 21,586 
|2010       |  |                | 20,627 
|2011       |  |                | 19,436 
|Thereafter |  |                | 130,246
|           |  |                |        
|           |  | $              | 232,716
|           |  |                |        

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



|                                   |  |                  |        |                  |   |                  |  |   |       
|---------------------------------- |  | ---------------- | ------ | ---------------- | - | ---------------- |  | - | ------
|                                   |  | Year Ended      
|                                   |  | December 25,2004 |        | December 31,2005 |   | December 30,2006
|                                   |  | (in thousands)  
|Fixed rent                         |  | $                | 14,252 |                  | $ | 15,860           |  | $ | 18,027
|Contingent rent, based on revenues |  |                  | 2,184  |                  |   | 2,765            |  |   | 2,421 
|Non-cash rent                      |  |                  | 1,865  |                  |   | 2,153            |  |   | 2,203 
|                                   |  |                  |        |                  |   |                  |  |   |       
|                                   |  | $                | 18,301 |                  | $ | 20,778           |  | $ | 22,651
|                                   |  |                  |        |                  |   |                  |  |   |       

17. Recent Accounting Pronouncements

In March 2006, the FASB Emerging Issues Task Force issued Issue 06-3 (EITF 06-3), How Sales Taxes Collected From Customers and Remitted
to Governmental Authorities Should Be Presented in the Income Statement. A tentative consensus was reached that a company should disclose its accounting policy (i.e., gross or net presentation) regarding presentation of taxes within the scope
of EITF 06-3. If taxes are significant, a company should disclose the amount of such taxes for each period for which an income statement is presented. The guidance is effective for periods beginning after December 15, 2006. The Company is
evaluating the impact adopting EITF 06-3 will have on its consolidated financial statement disclosure.

In July 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition
threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48
is effective for fiscal years beginning after December 15, 2006 and is required to be adopted by the Company in the first quarter of fiscal 2007. The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained
earnings as of the beginning of the period of adoption. The Company is evaluating the impact adopting FIN 48 will have on its consolidated results of operations and financial condition and are not yet in a position to determine such impact.



62



---

##### Table of Contents

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

Notes to Consolidated Financial Statements(Continued)



In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial
statement and related financial statement disclosure using both the rollover approach and the iron curtain approach, as those terms are defined in SAB 108. The rollover approach quantifies misstatements based on the amount of the error in the
current year financial statement, whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatements
year(s) of origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require previously filed reports
to be amended. If a Company determines that an adjustment to prior year financial statements is required upon adoption of SAB 108 and does not elect to restate its previous financial statements, then it must recognize the cumulative effect of
applying SAB 108 in fiscal 2006 beginning balances of the affected assets and liabilities with a corresponding adjustment to the fiscal 2006 opening balance in retained earnings. SAB 108 is effective for interim periods of the first fiscal
year ending after November 15, 2006. The adoption of SAB 108 did not have an impact on the Companys consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 provides guidance for using fair value to measure assets and liabilities. The
standard expands required disclosures about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. The Company is evaluating the impact adopting SFAS 157 will have on its consolidated financial statements.

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



63



---

##### Table of Contents

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 30, 2006. 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 30, 2006, 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 30, 2006 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 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.

ITEM 9B. OTHER INFORMATION

None.



64



---

##### Table of Contents

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information about our directors is
incorporated by reference to our definitive proxy statement, for our 2007 annual meeting of stockholders (the 2007 Proxy Statement), under the caption Proposal 1: Election of Directors, 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 30, 2006. 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 is
incorporated by reference to the 2007 Proxy Statement under the captions Corporate GovernanceBoard Committees and Report of the Audit Committee.

Information regarding the process by which shareholders may nominate directors is incorporated by reference to the 2007 Proxy Statement

Information regarding disclosure of compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the
2007 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 atwww.McCormickandSchmicks.com, Investors, Corporate
Governance.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is hereby incorporated by
reference to the 2007 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 2007 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, AND DIRECTOR INDEPENDENCE

Information regarding
certain relationships and related transactions, and director independence is hereby incorporated by reference to our 2007 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 2007 Proxy Statement.



65



---

##### Table of Contents

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 68 or a description of the documents that are filed as Exhibits to this Annual Report on Form 10-K or incorporated herein by reference.



66



---

##### Table of Contents

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 9, 2007.



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, Douglas L.
Schmick 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 30, 2006, 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 9, 2007.



|                                                          |  |                                                                     
|--------------------------------------------------------- |  | --------------------------------------------------------------------
|Signatures                                                |  | Title                                                               
|                                                          | 
|/s/    DOUGLAS L.
SCHMICK Douglas L. Schmick              |  | Chief Executive Officer and Director (Principal Executive Officer)  
|                                                          | 
|/s/    EMANUEL N.
HILARIO Emanuel N. Hilario              |  | Chief Financial Officer (Principal Financial and Accounting Officer)
|                                                          | 
|/s/    LEE M.
COHN Lee M. Cohn                            |  | Director                                                            
|                                                          | 
|/s/    HAROLD O. ROSSER
II Harold O. Rosser II            |  | Director                                                            
|                                                          | 
|/s/    DAVID B.
PITTAWAY David B. Pittaway                |  | Director                                                            
|                                                          | 
|/s/    JUSTIN B.
WENDER Justin B. Wender                  |  | Director                                                            
|                                                          | 
|/s/    J. RICE
EDMONDS J. Rice Edmonds                    |  | Director                                                            
|                                                          | 
|/s/    FORTUNATO N.
VALENTI Fortunato N. Valenti          |  | Director                                                            
|                                                          | 
|/s/    ELLIOTT H. JURGENSEN,
JR. Elliott H. Jurgensen Jr. |  | Director                                                            
|                                                          | 
|/s/    JEFFREY D.
KLEIN Jeffrey D. Klein                  |  | Director                                                            
|                                                          | 
|/s/    JAMES R.
PARISH James R. Parish                    |  | Director                                                            



67



---

##### 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  |   |  | Amended and Restated Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.1 to our current report on Form 8-K dated October 25, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     |  
|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); Second Amendment to Credit Agreement dated
October 31, 2006 among McCormick & Schmick Acquisition Corp. and certain of its subsidiaries, as borrowers, and Bank of America, N.A. and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. Rabobank International New York
Branch, as lenders (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K dated October 31, 2006)
|     |  
|10.2 |   |  | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     |  
|10.3 |   |  | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |  
|10.4 | * |  | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |  
|10.5 | * |  | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     |  
|10.6 | * |  | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|     |  
|10.7 | * |  | Form of Restricted Stock Agreement, as amended (incorporated by reference to Exhibit 10.1 to our quarterly report on Form 10-Q for the period ended July 1, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     |  
|21.1 |   |  | Subsidiaries of McCormick & Schmicks Seafood Restaurants, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     |  
|24.1 |   |  | Power of Attorney (included on signature page)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|     |  
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



68



---

##### Table of Contents

|     |  |                                                                                                                                                                                      
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|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.                               



69