Edgar Filing: GRILL CONCEPTS INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Fiscal Year Ended December 28, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ______________ to _______________.

Commission File No. 0-23226

GRILL CONCEPTS, INC.
--------------------
(Exact name of registrant as specified in its charter)

Delaware 13-3319172
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

11661 San Vicente Blvd., Suite 404, Los Angeles, California 90049
-----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Include Area Code: (310) 820-5559

Securities Registered Under Section 12(b) of the Exchange Act:

Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None

Securities Registered Under Section 12(g) of the Exchange Act:

Common Stock, $.00004 par value
-------------------------------
(Title of Class)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]

The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, based on the closing price on the NASDAQ
Small-Cap Market, as of the close of business June 30, 2003 was approximately $
7,424,000.

Number of shares outstanding of the registrant's common stock, $.00004 par
value, as of March 12, 2004: 5,537,071 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive annual proxy statement to be filed
within 120 days of the Registrant's fiscal year ended December 28, 2003 are
incorporated by reference into Part III.

EXPLANATORY NOTE

See Note 1 of the consolidated financial statements for information regarding
revisions of previously issued financial statements filed in this Form 10-K/A .
All disclosures in this amendment, other than those related to these financial
statement revisions, are as of the date of the original filing and have not been
updated.

TABLE OF CONTENTS

PART I Page
----

ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . 16

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . 17
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . 36
ITEM 9A. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . 37

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . 38
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . 38
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES . . . . . . . . . 38

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . 38

PART I

This 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. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 33 of this Form 10-K.

ITEM 1. BUSINESS

Except as expressly indicated or unless the context otherwise requires, as
used herein, "GCI," the "Company", "we", "our", or "us", means Grill Concepts,
Inc., a Delaware corporation and its subsidiaries.

GENERAL

Grill Concepts, Inc. and its subsidiaries (the "Company") develop and
operate casual dining restaurants under the name "Daily Grill" and fine dining
restaurants under the name "The Grill on the Alley." In addition, we own and
operate, or have management or licensing agreements with respect to, other
restaurant properties.

The Company was incorporated under the laws of the State of Delaware in
November of 1985 to acquire and operate franchised Pizzeria Uno restaurants.
Since our acquisition of Grill Concepts, Inc., a California corporation ("GCI"),
in March of 1995, we have focused principally on the expansion of the "Daily
Grill" and "The Grill on the Alley" restaurant formats of GCI.

At December 28, 2003, we owned and operated fourteen restaurants and
managed or licensed eight additional restaurants. Of the total ten Daily Grill
restaurants and four The Grill on the Alley restaurants are owned and operated,
five Daily Grill restaurants are managed and two Daily Grill restaurants and a
City Bar & Grill restaurant are licensed by us. With the exception of three The
Grill on the Alley restaurants, which are operated by partnerships, all of the
Daily Grill and The Grill on the Alley restaurants which were owned and operated
at December 28, 2003 were solely owned and operated on a non-franchise basis by
us.

In 2001 the Company entered into a strategic alliance with Starwood Hotels
and Resorts Worldwide, Inc. to jointly develop the Company's restaurant
properties in Starwood hotels. Management believes that the opening of
restaurants in hotel properties in strategic markets will help further establish
brand name recognition for the opening of free-standing restaurants in those
markets.

During 2002, we opened two managed restaurants, consisting of (1) a Daily
Grill restaurant, not subject to the Starwood alliance, opened in February 2002
in the Handlery Union Square Hotel in San Francisco, California, and (2) a Daily
Grill restaurant opened in July 2002 in the Westin Galleria Hotel in Houston,
Texas pursuant to our alliance with Starwood. During 2002, we (1) sold our last
Pizzeria Uno franchise in Cherry Hill, New Jersey and (2) closed the Daily Grill
in Encino, California.

During 2003, the Company continued to pursue a strategic growth plan
whereby the Company plans to open, and/or convert, and operate, and/or manage,
Daily Grill and The Grill on the Alley restaurants in hotel properties, and
free-standing restaurants, in strategic markets throughout the United States.

During 2003, we opened one owned and one managed restaurant, being (1) a
50.1% owned Daily Grill opened in January 2003 in El Segundo (South Bay),
California, and (2) a managed Daily Grill opened in September 2003 in the
Portland Westin Hotel in Portland, Oregon operated pursuant to our alliance with
Starwood.

In January 2004, a 100% owned Daily Grill, not covered by the Starwood
alliance, was opened in the Hyatt Bethesda Hotel in Bethesda, Maryland.

The following table sets forth unaudited restaurant count information, per
restaurant sales information, comparable restaurant sales information for
restaurants open twelve months in both periods, and total sales information
during 2003 and 2002 by restaurant concept for both owned restaurants ("Company
Restaurants") and managed and/or licensed restaurants ("Managed Restaurants"):

2002 2003
----- ----

Number of restaurants:
Daily Grill restaurants:
Company Restaurants:
Beginning of year . . . . . 10 9
Restaurant opening. . . . . - 1
Restaurant closings . . . . (1) -
----- ----
End of year . . . . . . . . 9 10

Managed or Licensed Restaurants:
Beginning of year . . . . . 4 6
Restaurant openings . . . . 2 1
----- ----
End of year . . . . . . . . 6 7

Total Daily Grill restaurants:
Beginning of year . . . . . 14 15
Restaurant openings . . . . 2 2
Restaurants closed or sold. (1) -
----- ----
End of year . . . . . . . . 15 17
===== ====

Grill restaurants:
Company Restaurants:
Beginning of year . . . . . 4 4
Restaurant openings . . . . - -
----- ----
End of year . . . . . . . . 4 4

Total Grill restaurants:
Beginning of year . . . . . 4 4
Restaurant openings . . . . - -
----- ----
End of year . . . . . . . . 4 4
===== ====

Other restaurants(1):
Company Restaurants:
Beginning of year . . . . . 1 -
Restaurants closed or sold. (1) -
----- ----
End of year . . . . . . . . - -

Managed or Licensed Restaurants:
Beginning of year . . . . . 1 1
----- ----
End of year . . . . . . . . 1 1

Total Other restaurants:
Beginning of year . . . . . 2 1
Restaurants closed or sold. (1) -
----- ----
End of year . . . . . . . . 1 1
===== ====

Total restaurants:
Beginning of year . . . . . 20 20
Restaurant openings . . . . 2 2
Restaurants closed or sold. (2) -
----- ----
End of year . . . . . . . . 20 22
===== ====

(1) Includes one Pizzeria Uno Restaurant in 2002 operated pursuant to a
franchise agreement.

2002 2003
------------ ------------

Weighted average weekly sales per restaurant:
Daily Grill restaurants:
Company Restaurants. . . . . . . . . . $ 57,133 $ 62,365
Managed Restaurants. . . . . . . . . . n.a. n.a.
Grill restaurants:
Company Restaurants. . . . . . . . . . $ 73,057 $ 78,728
Managed Restaurants. . . . . . . . . . n.a. n.a.
Other restaurants:
Company Restaurants. . . . . . . . . . $ 29,239 -

Change in comparable restaurant sales:
Daily Grill restaurants
Company Restaurants. . . . . . . . . . (4.2)% 5.3%
Managed Restaurants. . . . . . . . . . n.a. n.a.
Grill restaurants
Company Restaurants. . . . . . . . . . (2.3)% 7.8%
Managed Restaurants. . . . . . . . . . n.a. n.a.
Other restaurants:
Company Restaurants. . . . . . . . . . - -

Total system sales:
Daily Grill . . . . . . . . . . . . . . . $25,593,000 $29,051,000
Grill . . . . . . . . . . . . . . . . . . 15,196,000 16,376,000
Pizza Restaurants . . . . . . . . . . . . 497,000 -
Management and license fees . . . . . . . 1,006,000 1,147,000
------------ ------------
Total consolidated revenues . . . . . . . 42,292,000 46,574,000

Managed restaurants . . . . . . . . . . 13,975,000 15,711,000
Licensed restaurants. . . . . . . . . . 6,963,000 8,762,000
Less: management and license fees . . . (1,006,000) (1,147,000)
------------ ------------

Total system sales. . . . . . . . . . . . $62,224,000 $69,900,000
============ ============

RESTAURANT CONCEPTS

- DAILY GRILL RESTAURANTS

Background. At December 28, 2003, we, through our subsidiaries, GCI and
Grill Concepts Management, Inc., owned and operated, managed or licensed ten
Daily Grill restaurants in Southern California, three Daily Grill restaurants in
the Washington, D.C./Virginia market, one Daily Grill restaurant in Skokie,
Illinois, one Daily Grill restaurant in San Francisco, California, one Daily
Grill restaurant in Houston, Texas and one Daily Grill in Portland, Oregon.
Daily Grill restaurants are patterned after "The Grill on the Alley" in Beverly
Hills, a fine dining American-style grill restaurant which we acquired during
1996. See "-- The Grill on the Alley." The Grill on the Alley was founded by
Robert Spivak, Michael Weinstock and Richard Shapiro (the founders of GCI) in
the early 1980's to offer classic American foods in the tradition of the classic
American dinner house. After successfully operating The Grill on the Alley for
a number of years, in 1988, Messrs. Spivak, Weinstock and Shapiro decided to
expand on that theme by opening the first Daily Grill restaurant. Daily Grill,
in an effort to offer the same qualities that made The Grill on the Alley
successful, but at more value oriented prices, adopted six operating principles
that characterize each Daily Grill restaurant: high quality food, excellent
service, good value, consistency, appealing atmosphere and cleanliness. GCI
emphasized those principles in an effort to create a loyal patron who will be a
"regular" at its restaurants.

Restaurant Sites. Current and planned Daily Grill restaurants can be
characterized as either owned, in part or in whole, managed or licensed and as
either hotel based or based in shopping malls and other commercial properties.
At December 28, 2003, seventeen Daily Grill restaurants were in operation, eight
of which were 100% owned by us and located in shopping malls and other
commercial properties, one of which was 50% owned and located in Universal
CityWalk, California, one of which was 50.1% owned by us and located in an
office park, five of which were managed by us and located in hotels and two of
which were licensed restaurants.

Daily Grill locations opened, in the following months and years, are owned,
managed or licensed as indicated and, where indicated, are located in the
referenced hotels:

Ownership
Opened or Interest,
Scheduled Licensed or
Location Opening Managed
-------- -------------- ------------

Brentwood, California September 1988 100%
Los Angeles, California April 1990 100%
Newport Beach, California April 1991 100%
Studio City, California August 1993 100%
Palm Desert, California January 1994 100%
Irvine, California September 1996 100%
Los Angeles International Airport January 1997 Licensed
Washington, D.C. March 1997 100%
Tysons Corner, Virginia October 1998 100%
Burbank, California (Hilton Hotel) January 1999 Managed
Washington, D.C. (Georgetown Inn) April 1999 Managed
Universal CityWalk, California May 1999 50%
Skokie, Illinois (DoubleTree Hotel) September 2000 Licensed
San Francisco, California (Handlery Union Square Hotel) February 2002 Managed
Houston, Texas (Westin Galleria) July 2002 Managed
El Segundo (South Bay), California January 2003 50.1%
Portland, Oregon (Portland Westin) September 2003 Managed
Bethesda, Maryland (Hyatt Hotel) January 2004 100%

Each 100% owned Daily Grill restaurant is located in leased facilities.
Site selection is viewed as critical to the success of our restaurants and,
accordingly, significant effort is exerted to assure that each site selected is
appropriate. For non-hotel based restaurants, the site selection process
focuses on local demographics and household income levels, as well as specific
site characteristics such as visibility, accessibility, parking availability and
traffic volume. Each site must have sufficient traffic such that management
believes the site can support at least twelve strong meal periods a week (i.e.,
five lunches and seven dinners). Preferred Daily Grill sites, which
characterize the existing 100% owned restaurants, are high-end, mid-size retail
shopping malls in large residential areas with significant daytime office
populations and some entertainment facilities. Historically, Daily Grill
restaurants have been viewed as desirable tenants drawing traffic to the high
profile malls where we locate and, therefore, have received significant tenant
improvement allowances.

Hotel based Daily Grill restaurants may be newly constructed facilities or
remodeled facilities on the premises of, or adjacent to, a hotel. Such
facilities may be leased by us, operated pursuant to a partnership, a joint
venture, a license arrangement, or a management agreement. As with non-hotel
based restaurants, site selection is viewed as critical and, accordingly,
significant effort is exerted to assure that each site selected is appropriate.
The site selection process for hotel based restaurants is the responsibility of
Hotel Restaurant Properties, Inc. ("HRP") which identifies suitable locations
and negotiates leases, license or management agreements for those properties.
See "-- Hotel Property Agreement."

Existing non-hotel based Daily Grill restaurants range in size from 3,750
to 7,000 square feet -- of which approximately 30% is devoted to kitchen and
service areas -- and seat between 100 and 250 persons. Our costs for existing
non-hotel based restaurants, including leasehold improvements, furniture,
fixtures and equipment and pre-opening expenses, have averaged $325 per foot per
restaurant, less tenant improvement allowances.

Existing hotel based Daily Grill restaurants range in size from 5,000 to
8,000 square feet -- of which approximately 30% is devoted to kitchen and
service areas -- and seat between 140 and 250 persons. Management anticipates
that additional hotel based Daily Grill restaurants will require minimal capital
investment on our part. However, each hotel restaurant arrangement will be
negotiated separately and our capital investment may vary widely. Our portion of
opening costs of existing hotel restaurants, including leasehold improvements,
furniture, fixtures and equipment and pre-opening expenses, have ranged from
$64,000 to $513,000 per restaurant.

Menu and Food Preparation. Each Daily Grill restaurant offers a similar
extensive menu featuring over 100 items. The menu was designed to be
reminiscent of the selection available at American-style grill restaurants of
the 1930's and 1940's. Daily Grill offers such "signature" items as Cobb salad,
Caesar salad, meatloaf with mashed potatoes, chicken pot pie, chicken burgers,
hamburgers, rice pudding and fresh fruit cobbler. The emphasis at the Daily
Grill is on freshly prepared American food served in generous portions.

Entrees range in price, subject to regional differences, from $8.95 for a
hamburger to $23.95 for a char-broiled New York steak with all the trimmings.
The average lunch check is $17.00 per person and the average dinner check is
$25.00 per person, including beverage. Daily Grill restaurants also offer a
children's menu with reduced portions of selected items at reduced prices. All
of the existing Daily Grill restaurants offer a full range of beverages,
including beer, wine and full bar service. During the year ended December 28,
2003, food and non-alcoholic beverage sales constituted approximately 85% of the
total restaurant revenues for the Daily Grill restaurants, with alcoholic
beverages accounting for the remaining 15%.

Proprietary recipes have been developed for substantially all of the items
offered on the Daily Grill menu. The same recipes are used at each location and
all chefs undergo extensive training in order to assure consistency and quality
in the preparation of food. Virtually all of the menu items offered at the
Daily Grill are cooked from scratch utilizing fresh food ingredients. Our
management believes that our standards for ingredients and the preparation of
menu items are among the most stringent in the industry.

Each Daily Grill restaurant has up to seven cooks on duty during regular
lunch and dinner hours to provide prompt, specialized service. Restaurant staff
members utilize a "point-of-sale" computer system to monitor the movement of
food items to assure prompt and proper service of guests and for fiscal control
purposes.

Atmosphere and Service. All Daily Grill restaurants are presently open for
lunch and dinner seven days a week and for Sunday brunch. Each Daily Grill
location is designed to provide the sense and feel of comfort. In the tradition
of an old-time American-style grill, the setting is very open with a mix of
booths and tables. Several of the restaurants have counters for singles to feel
comfortable. A number of the Daily Grill restaurants have private dining rooms
for banquets or additional seating. Each restaurant emphasizes the quality and
freshness of Daily Grill food dishes in addition to the cleanliness of
operations. The dining area is well-lit and is characterized by a "high energy
level". Reservations are accepted but not required.

Attention to detail and quality of decor is carried through to the
professional service. All Daily Grill employees are trained to treat each
person who visits the restaurant as a "guest" and not merely a customer. Each
server is responsible for assuring that his or her guest is satisfied. In
keeping with the traditions of the past, each Daily Grill employee is taught
that at the Daily Grill "the guest is always right." The Daily Grill's policy
is to accommodate all guest requests, ranging from substitutions of menu items
to take-out orders.

In order to assure that our philosophy of guest service is adhered to, all
Daily Grill employees from the kitchen staff to the serving staff undergo
extensive training making each employee knowledgeable not only in our procedures
and policies but in every aspect of Daily Grill operations. Our policy of
promoting from within and providing access to senior management for all
employees has produced a work force which works in a cooperative team approach
and has resulted in an employee turnover rate of just under 57% per year for
hourly employees, considerably below the industry average which management
believes to be approximately 125%.

We believe that the familiarity and feeling of comfort which accompanies
dining in a familiar setting, with familiar food and quality service by familiar
servers, produces satisfied customers who become "regulars." Management believes
that at the Daily Grills which have been open for over a year repeat business is
significantly greater than the industry average, with many guests becoming
"regulars" in the tradition of the neighborhood restaurant.

THE GRILL ON THE ALLEY

Background. At December 28, 2003, we, through our subsidiary, GCI, owned
and operated four The Grill on the Alley restaurants ("Grill"), one in Beverly
Hills, California, one in San Jose, California, one in Chicago, Illinois and one
in Hollywood, California, named The Grill on Hollywood.

The original Grill is a fine dining Beverly Hills restaurant which opened
in 1984 and served as the model for the Daily Grill restaurants. The Grill is
set in the traditional style of the old-time grills of New York and San
Francisco, with black-and-white marbled floors, polished wooden booths and deep
green upholstery. In 1995, the Grill was inducted into Nation's Restaurant
News' Fine Dining Hall of Fame and was described by W Magazine as "home of the
quintessential Beverly Hills power lunch." The Grill offers five-star American
cuisine and uncompromising service in a comfortable, dignified atmosphere.

In April of 1996, we acquired the original Grill from a partnership, the
managing partner of which was controlled by our then principal shareholders and
directors.

Restaurant Sites. At December 28, 2003, we operated four Grill
restaurants, two of which are non-hotel based facilities and two of which are
hotel-based facilities.

Grill locations opened in the following months and years, are owned or
managed as indicated and, where indicated, in the referenced hotels:

Ownership
Interest or
Location Opened Managed
-------- ------------- --------

Beverly Hills, California January 1984 100.00%
San Jose, California (Fairmont Hotel) May 1998 50.05%
Chicago, Illinois (Westin Hotel) June 2000 60.00%
Hollywood, California November 2001 51.00%

Our Grill restaurants are located in leased facilities. As with the Daily
Grill restaurants, site selection is viewed as critical to success and,
accordingly, significant effort is exerted to assure that each site selected is
appropriate. For non-hotel based Grill restaurants, the site selection process
focuses on local demographics and household income levels, as well as specific
site characteristics such as visibility, accessibility, parking availability and
traffic volume. Because of the upscale nature of Grill restaurants, convenience
for business patrons is considered a key site selection criterion.

Hotel based Grill restaurants may be newly constructed facilities or
remodeled facilities on the premises of, or adjacent to, a hotel. Such
facilities may be leased by us, operated pursuant to a partnership, a joint
venture arrangement, or a management agreement. As with free standing
restaurants, site selection is viewed as critical to success and, accordingly,
significant effort is exerted to assure that each site selected is appropriate.

The Beverly Hills based Grill restaurant is approximately 4,300 square feet
-- of which approximately 35% is devoted to kitchen and service areas -- and
seats 120 persons. The Hollywood based Grill restaurant is approximately 5,600
square feet - of which approximately 36% is devoted to kitchen and service areas
- and seats 200 persons.

The San Jose based Grill restaurant is approximately 8,000 square feet --
of which approximately 38% is devoted to kitchen and service areas -- and seats
280 persons. The Chicago based Grill restaurant is approximately 8,500 square
feet, of which approximately 35% is devoted to kitchen and service areas, and
seats more than 300 guests.

Because of the unique nature of Grill restaurants, the size, seating
capacity and opening costs of future sites cannot be reasonably estimated.
Management anticipates that additional hotel based Grill restaurants will
require minimal capital investment on our part. However, each hotel restaurant
arrangement will be negotiated separately and our capital investment may vary
widely. Total project costs of the existing hotel based restaurants, including

leasehold improvements, furniture, fixtures and equipment and pre-opening
expenses, have ranged from $2.1 million to $3.1 million.

Menu and Food Preparation. Each Grill restaurant offers a similar
extensive menu featuring over 100 items. The menu was designed to be
reminiscent of the selection available at fine American-style grill restaurants
of the 1930's and 1940's, featuring steaks and seafood and freshly prepared
salads and vegetables served in generous portions.

Entrees range in price from $13.25 for a cheeseburger to $36.75 for a prime
porterhouse steak. The average lunch check is $28.00 per person and the average
dinner check is $55.00 per person, including beverage. All of the existing
Grill restaurants offer a full range of beverages, including beer, wine and full
bar service. During the year ended December 28, 2003, food and non-alcoholic
beverage sales constituted approximately 71% of the total restaurant revenues
for Grill restaurants, with alcoholic beverages accounting for the remaining
29%.

Proprietary recipes have been developed for substantially all of the items
offered on the Grill menu. The same recipes are used at each location and all
chefs undergo extensive training in order to assure consistency and quality in
the preparation of food. Virtually all of the menu items offered at the Grill
are cooked from scratch utilizing fresh food ingredients. Our management
believes that our standards for ingredients and the preparation of menu items
are among the most stringent in the industry.

Each Grill has up to 8 cooks on duty during regular lunch and dinner hours
to provide prompt, specialized service. Restaurant staff members utilize a
"point-of-sale" computer system to monitor the movement of food items to assure
prompt and proper service of guests and for fiscal control purposes.

Atmosphere and Service. Each Grill restaurant is presently open for lunch
six days a week and dinner seven days a week. Each Grill location is designed
to provide the sense and feel of comfort and elegance. In the tradition of an
old-time American-style grill, the setting is an open kitchen adjacent to tables
and booths. The open kitchen setting emphasizes the quality and freshness of
food dishes in addition to the cleanliness of operations. The dining area is
well-lit and is characterized by a "high energy level". Reservations are
accepted but are not required.

Attention to detail and quality of decor is carried through to the
professional service. All Grill employees are trained to treat each person who
visits the restaurant as a "guest" and not merely a customer. Each server is
responsible for assuring that his or her guest is satisfied. In keeping with
the traditions of the past, each Grill employee is taught that "the guest is
always right." The Grill's policy is to accommodate all guest requests, ranging
from substitutions of menu items to take-out orders.

In order to assure that our philosophy of guest service is adhered to, all
Grill employees from the kitchen staff to the serving staff undergo extensive
training making each employee knowledgeable not only in our procedures and
policies but in every aspect of Grill operations. Our policy of promoting from
within and providing access to senior management for all employees has produced
a work force which works in a cooperative team approach.

We believe that the familiarity and feeling of comfort which accompanies
dining in a familiar setting, with familiar food and quality service by familiar
servers, produces satisfied customers who become "regulars." Management
believes that at the original Grill repeat business is significantly greater
than the industry average, with many guests becoming "regulars" in the tradition
of the neighborhood restaurant.

SALE OF PIZZERIA UNO RESTAURANTS

In April 2002, with the sale of our Cherry Hill, New Jersey Pizzeria Uno
Restaurant for $325,000, we completed our planned divestiture of our interests
in Pizzeria Uno Restaurants. Previously, we operated as many as three
franchised Pizzeria Uno Restaurants. During 1998, we determined that the
continued ownership and operation of the Pizza Restaurants did not fit with our
strategic growth plan. Based on that determination, in July 2000, we closed our
Pizzeria Uno restaurant in Media, Pennsylvania and, in July 2001, we sold our
Pizzeria Uno restaurant in South Plainfield, New Jersey for $700,000.

OTHER RESTAURANT ACTIVITIES

In addition to owning and operating Daily Grills and The Grills, we, at
December 28, 2003, also provided management services for Daily Grill restaurants
at the Burbank Hilton, the Georgetown Inn, the Handlery Hotel, the Westin
Galleria and the Portland Westin and had granted licenses to operate a Daily
Grill at LAX, a Daily Grill at the DoubleTree Hotel in Skokie, Illinois and for
the City Bar & Grill in the San Jose Hilton.

- RESTAURANT MANAGEMENT SERVICES

Restaurant management services include overseeing the design, development,
construction, equipping, furnishing and operation of the restaurant. Once the
restaurant is open to the public, the manager is responsible for rendering and
performing all services in connection with the operation of the restaurant.
Those services include employing, training and supervision personnel, purchasing
and maintaining adequate inventory, etc.

In May 1998, pursuant to our agreement with HRP, we began providing
management services for a restaurant in the Burbank Hilton Hotel. The
restaurant was converted from its former concept to a Daily Grill in January
1999. Pursuant to our management agreement with the hotel, we invested $500,000
for conversion of the restaurant to a Daily Grill and are responsible for
management and supervision of the restaurant. We are entitled to a management
fee equal to 8.5% of the gross receipts of the restaurant. Additionally, we are
entitled to 30% of the annual profits of the restaurant in excess of a base
amount increased annually by the CPI.

In March 1999, pursuant to the Hotel Property Agreement (see below), we
began providing management services for a Daily Grill restaurant at the
Georgetown Inn. Pursuant to our management agreement with the hotel, we were
not required to invest in the restaurant but we are responsible for management
and supervision of the restaurant. We are entitled to a management fee equal to
8% of the gross receipts of the restaurant. Additionally, we are entitled to 30%
of the annual profits of the restaurant.

In February 2002, pursuant to the Hotel Property Agreement, we began
providing management services for a Daily Grill restaurant at the Handlery Hotel
in San Francisco. Pursuant to our management agreement with the hotel, we
advanced the restaurant $331,000 to be paid out of future operating profits. We
are entitled to a management fee equal to 6% of gross receipts of the
restaurant. Additionally, we are entitled to 25% of the net income of the
restaurant.

In July 2002, pursuant to the Hotel Property Agreement, we began providing
management services for a Daily Grill restaurant at the Westin Galleria in
Houston, Texas. Pursuant to our management agreement with the hotel, we
advanced the restaurant $64,000 which was repaid out of net income available for
distribution in May 2003. We are entitled to a management fee equal to 5% of
gross receipts of the restaurant. Additionally, we are entitled to 35% of the
annual profits of the restaurant after working capital requirements are
satisfied.

In September 2003, pursuant to the Hotel Property Agreement, we began
providing management services for a Daily Grill restaurant at the Portland
Westin in Portland, Oregon. We were not required to invest in the restaurant.
We are entitled to a management fee of 5% of gross receipts of the restaurant
and 35% of annual profit after working capital requirements are satisfied.

- RESTAURANT LICENSING

Under restaurant licensing agreements, we earn a licensing fee in exchange
for use of our brand, as well as, the proprietary menu.

LAX Daily Grill. Since January 1997, CA One Services, Inc. has operated a
Daily Grill restaurant (the "LAX Daily Grill") in the International Terminal of
the Los Angeles International Airport. The LAX Daily Grill was originally
operated as a joint venture between us and CA One Services, Inc., and since
April 1998 has been operated by CA One Services under a license agreement.

Pursuant to the terms of the License Agreement, we are entitled to receive
royalties in an amount equal to 2.5% of the first $5 million of annual revenues
from the restaurant and 4% of annual revenues in excess of $5 million.

Skokie Daily Grill. In September 2000, pursuant to the Hotel Property
Agreement, a licensed Daily Grill restaurant was opened in the DoubleTree Hotel
in Skokie, Illinois. Under the terms of the license, the hotel operator
paid all costs to build and open the restaurant and we are entitled to a license
fee equal to the greater of $65,000 or 2% of sales per year.

San Jose City Bar and Grill. In conjunction with our entry into the hotel
restaurant market, in May 1998, we began providing management services at the
City Bar & Grill at the San Jose Hilton. In September 2002 the agreement
relating to our management of the City Bar and Grill was converted to a license
agreement under which we are entitled to receive license fees equal to the
greater of $2,500 per month or 1.5% on sales.

HOTEL PROPERTY AGREEMENT

In order to facilitate our efforts to open restaurants on a large scale
basis in hotel properties, in August of 1998, we entered into the Hotel Property
Agreement with Hotel Restaurant Properties, Inc. ("HRP") pursuant to which HRP
has agreed to assist us in locating suitable hotel locations for the opening of
our restaurants. HRP is considered a related party as one of its owners is a
family member of a director and preferred stock holder. HRP is responsible for
identifying suitable hotel locations in which a Grill or Daily Grill can be
operated ("Managed Outlets") and negotiating and entering into leases or
management agreements for those properties. We will, in turn, enter into
management agreements with HRP or the hotel owners, as appropriate. We may
advance certain pre-opening costs and certain required advances ("Manager
Loans") and will manage and supervise the day-to-day operations of each Managed
Outlet. We will be entitled to receive from HRP a base overhead fee equal to
$1,667 per month per Managed Outlet. Net income derived from management or
licensing of restaurants covered by the Hotel Property Agreement, after
repayments required on Manager Loans from each Managed Outlet, will be allocated
75% to us and 25% to HRP.

In July 2001, in conjunction with an investment in the Company by Starwood
Hotels, the Hotel Property Agreement was amended to limit, for so long as we are
subject to the exclusivity provisions of a Property Development Agreement with
Starwood, the amounts payable to HRP to $400,000 annually plus 12.5% of the
amounts otherwise payable to HRP with respect to the Burbank, Georgetown and San
Jose Hilton restaurants.

The Agreement with HRP also provides that, beginning in May 2004, we shall
have the right to acquire HRP and HRP shall have the right to cause the Company
to acquire HRP. The purchase price of HRP shall be computed by (1) multiplying
the operating income of HRP over the preceding twelve months, excluding
operating income attributable to certain defined restaurants, by ten, (2)
subtracting from the product the principal balance of loans made in connection
with the development of restaurants pursuant to the HRP Agreement, and (3)
multiplying that amount by 25%. The purchase price shall be payable in our
common stock based on the average closing price of the common stock over the ten
trading days immediately preceding closing.

Pursuant to the July 2001 amendment to the Hotel Property Agreement, the
maximum purchase price of HRP will not exceed $4,500,000.

BUSINESS EXPANSION

Our expansion plans focus on the addition of Daily Grill restaurants with
selected expansion of the Grill restaurant concept also planned.

Management continually reviews possible expansion into new markets and
within existing markets. Such reviews entail careful analysis of potential
locations to assure that the demographic make-up and general setting of new
restaurants is consistent with the patterns which have proven successful at the
existing Daily Grills and Grills. While the general appearance and operations of
future Daily Grills and Grill restaurants are expected to conform generally to
those of existing facilities, we intend to monitor the results of any
modifications to our existing restaurants and to incorporate any successful
modifications into future restaurants. All future restaurants are expected to
feature full bar service.

Our future expansion efforts are expected to concentrate on (1) expansion
into new markets through the establishment of hotel based restaurants pursuant
to the Hotel Property Agreement, and (2) expansion within existing markets
through the opening of non-hotel based restaurants. With the assistance of HRP,
we expect to establish name recognition and market presence through the opening
of Daily Grill and Grill restaurants in fine hotel

properties in strategic markets throughout the United States. Upon establishing
name recognition and a market presence in a market, we intend to construct and
operate clusters of free-standing restaurants within those markets. Management
intends to limit the construction and operation of Grill restaurants to one
restaurant per market while constructing multiple Daily Grill restaurants within
each market. The exact number of Daily Grill restaurants to be constructed
within any market will vary depending upon population, demographics and other
factors.

At December 28, 2003, we operated non-hotel based Daily Grill and Grill
restaurants in Southern California, principally the greater-Los Angeles market,
and metropolitan Washington, D.C. Management is presently evaluating the
opening of additional non-hotel based Daily Grill and Grill restaurants in
existing markets and in other major metropolitan areas. Existing markets will
be evaluated for expansion in order to establish market presence and economies
of scale. As of March 2004, negotiations are under way for several sites,
however no definitive site had been identified for future construction of
free-standing restaurants. Management anticipates that the cost to open
additional free standing Daily Grill and Grill restaurants will average $325 per
square foot per restaurant, less tenant improvement allowances, with each
restaurant expected to be approximately 6,000 to 7,000 square feet in size.
Actual costs may vary significantly depending upon the tenant improvements,
market conditions, rental rates, labor costs and other economic factors
prevailing in each market in which we pursue expansion.

At December 28, 2003, hotel based Daily Grill restaurants were operated
under management or licensing agreements in Southern California, Washington,
D.C., Skokie, Illinois, San Francisco, California, Houston, Texas, and Portland,
Oregon and hotel based Grill restaurants were operated in San Jose, California
and Chicago, Illinois. We, and HRP, are presently evaluating the opening of
additional hotel based Daily Grill restaurants in existing markets and in other
major metropolitan areas. Each hotel restaurant arrangement will be negotiated
separately and the size of the restaurants, ownership and operating arrangements
and capital investment on our part may vary widely. We opened a hotel-based
company owned Daily Grill restaurant in Bethesda, Maryland in January 2004.

STARWOOD DEVELOPMENT AGREEMENT

On July 27, 2001, in conjunction with the purchase by Starwood Hotels and
Resorts of 666,667 shares of our common stock and 666,667 $2.00 warrants for
$1,000,000, we and Starwood entered into a Development Agreement under which we
and Starwood agreed to jointly develop our restaurant properties in Starwood
hotels.

Under the Starwood Development Agreement, either we, or Starwood, may
propose to develop a Daily Grill, Grill or City Bar and Grill restaurant in a
Starwood hotel property. If the parties agree in principal to the development
of a restaurant, the parties will attempt to negotiate either a management
agreement or a license agreement with respect to the operation of the
restaurant.

So long as Starwood continues to meet certain development thresholds set
forth in the Development Agreement, we are prohibited from developing, managing,
operating or licensing our restaurants in any hotel owned, managed or franchised
by a person or entity, other than Starwood, with more than 50 locations operated
under a single brand. Existing hotel based restaurants are excluded from the
exclusive right of Starwood. The development thresholds required to be
satisfied to maintain Starwood's exclusive development rights require,
generally, (1) the signing of an average of one management agreement or license
agreement with respect to Daily Grill restaurants annually over the life of the
Development Agreement, (2) the signing of one management agreement or license
agreement in any two year period with respect to Grill restaurants, and (3) the
signing of an aggregate average of three management agreements or license
agreements with respect to all of our restaurants annually over the life of the
Development Agreement. Satisfaction of the thresholds set forth in the
Development Agreement are determined on each anniversary of the Development
Agreement. With respect to satisfaction of the specific thresholds applying to
Daily Grill restaurants and Grill restaurants, the failure to satisfy the
development thresholds with respect to those individual brands will terminate
the exclusivity provisions relative to such brand but will not affect the
exclusivity rights as to the other brand or in general.

issuable, or (2) the market price on the date of the Development Agreement. If
the market price of our common stock on the date the warrants are to be issued
is less than the market price on the date of the Development Agreement, the
warrants will be exercisable at a price equal to the market price as of the date
such warrants become issuable. The warrants will be exercisable for a period of
five years.

In addition to the warrants described above, if and when the aggregate
number of restaurants operated under the Development Agreement exceeds 35% of
the total Daily Grill, Grill and City Grill-branded restaurants, we will be
obligated to issue to Starwood a warrant to purchase a number of shares of our
common stock equal to 0.75% of the outstanding shares on that date exercisable
for a period of five years at a price equal to the market price at that date.
On each anniversary of that date on which the restaurants operated under the
Development Agreement continues to exceed the 35% threshold, for so long as the
Development Agreement remains effective, we shall issue to Starwood additional
warrants to purchase 0.75% of the outstanding shares on that date at an exercise
price equal to the market price on that date.

Following the events of September 11, 2001, Starwood substantially
curtailed new development activities and only two management agreements have, as
yet, been entered into under the Development Agreement. Certain portions of the
exclusivity agreement have terminated due to the lack of performance on
Starwood's part.

RESTAURANT MANAGEMENT

We strive to maintain quality and consistency in our restaurants through
the careful hiring, training and supervision of personnel and the adherence to
standards relating to food and beverage preparation, maintenance of facilities
and conduct of personnel. We believe that our concept and high sales volume
enable it to attract quality, experienced restaurant management and hourly
personnel. We have experienced a relatively low turnover at every level at its
Daily Grill and Grill restaurants. See "-- Daily Grill Restaurants" above.

Each Daily Grill and Grill restaurant, including both free standing and
hotel-based restaurants, is managed by one general manager and up to four
managers or assistant managers. Each restaurant also has one head chef and one
or two sous chefs, depending on volume. On average, general managers have
approximately seven years experience in the restaurant industry and three years
with us. The general manager has primary responsibility for the operation of the
restaurant and reports directly to an Area Director who in turn reports to our
Director of Operations. In addition to ensuring that food is prepared properly,
the head chef is responsible for product quality, food costs and kitchen labor
costs. Each restaurant has approximately 77 employees. Restaurant operations
are standardized, and a comprehensive management manual exists to ensure
operational quality and consistency.

We maintain financial and accounting controls for each Daily Grill and
Grill restaurant through the use of a "point-of-sale" computer system integrated
with centralized accounting and management information systems. In the year
2000, the point of sale systems in the original six Daily Grills were updated to
new systems similar to those in newer restaurants. Inventory, expenses, labor
costs, and cash are carefully monitored with appropriate control systems. With
the current systems, revenue and cost reports, including food and labor costs,
are produced every night reflecting that day's business. The restaurant general
manager, as well as corporate management, receive these daily reports to ensure
that problems can be identified and resolved in a timely manner. All employees
receive appropriate training relating to cost, revenue and cash control.
Financial management and accounting policies and procedures are developed and
maintained by our Corporate Controller, Director of Information Systems, and
Chief Financial Officer.

All managers participate in a comprehensive six-week training program
during which they are prepared for overall management of the dining room. The
program includes topics such as food quality and preparation, customer service,
food and beverage service, safety policies and employee relations. In addition,
we have developed training courses for assistant managers and chefs. We
typically have a number of employees involved in management training, so as to
provide qualified management personnel for new restaurants. Our senior
management meets bi-weekly with each restaurant management team to discuss
business issues, new ideas and revisit the manager's manual. Overall
performance at each location is also monitored with shoppers' reports, guest
comment cards and third party quality control reviews.

Servers at each restaurant participate in approximately ten days of
training during which the employee works under close supervision, experiencing
all aspects of the operations both in the kitchen and in the dining room. The
extensive training is designed to improve quality and customer satisfaction.
Experienced servers are given

responsibility for training new employees and are rewarded with additional
hourly pay plus other incentives. Management believes that such practice fosters
a cooperative team approach which contributes to a lower turnover rate among
employees. Representatives of corporate management regularly visit the
restaurants to ensure that our philosophy, strategy and standards of quality are
being adhered to in all aspects of restaurant operations.

PURCHASING

We have developed proprietary recipes for substantially all the items
served at our Daily Grill and Grill restaurants. In order to assure quality and
consistency at each of the Daily Grill and Grill restaurants, ingredients
approved for the recipes are ordered on a unit basis by each restaurant's head
chef from a supplier designated by our Vice President-Operations and
Development. Because of the emphasis on cooking from scratch, virtually all food
items are purchased "fresh" rather than frozen or pre-cooked, with the exception
being bread, which is ordered from a central supplier which prepares the bread
according to a proprietary recipe and delivers daily to assure freshness. In
order to reduce food preparation time and labor costs while maintaining
consistency, we work with outside suppliers to produce a limited number of
selected proprietary items such as salad dressings, soups and seasoning
combinations.

We utilize our point-of-sale computer system to monitor inventory levels
and sales, then order food ingredients daily based on such levels. We employ
contract purchasing in order to lock in food prices and reduce short-term
exposure to price increases. Our Vice President-Operations and Development
establishes general purchasing policies and is responsible for controlling the
price and quality of all ingredients. The Vice President - Operations and
Development in conjunction with our team of chefs, constantly monitors the
quality, freshness and cost of all food ingredients. All essential food and
beverage products are available, or upon short notice can be made available,
from alternative qualified suppliers.

ADVERTISING AND MARKETING

Our marketing philosophy is to provide our guests with an exceptional and
enjoyable dining experience that creates loyalty and frequent visits. Our
marketing and promotional efforts have been fueled historically by our quality
reputation, word of mouth, and positive local reviews. The Grill on the Alley
and The Daily Grill have been featured in articles and reviews in numerous local
as well as national publications. We supplement our reputation with a program of
marketing and public relations activities designed to keep the Daily Grill and
Grill name before the public. Such activities include media advertising, direct
mail promotions, a birthday club, as well as holiday and special interest
events. We also support and participate in local charity campaigns. These
activities are managed by a full time Vice President of Marketing. Guest
feedback is solicited regularly through a comment card program. During 2003,
expenditures for advertising and promotion were approximately 1.6% of gross
revenues.

COMPETITION

The Daily Grill restaurants compete within the mid-price, full-service
casual dining segment. Daily Grill competitors include national and regional
chains, such as Cheesecake Factory and Houston's, as well as local
owner-operated restaurants. Grill restaurants compete within the fine dining
segment. Grill competitors include a limited number of national fine dining
chains as well as selected local owner-operated fine dining establishments.
Competition for our hotel-based restaurants is primarily limited to restaurants
within the immediate proximity of the hotels.

The restaurant business is highly competitive with respect to price,
service, restaurant location and food quality and is affected by changes in
consumer tastes, economic conditions and population and traffic patterns. We
believe we compete favorably with respect to these factors. We believe that our
ability to compete effectively will continue to depend in large measure on our
ability to offer a diverse selection of high quality, fresh food products with
an attractive price/value relationship served in a friendly atmosphere.

EMPLOYEES

We, and our subsidiaries, employ approximately 1,569 people, 32 of whom are
corporate personnel and 122 of whom are restaurant managers, assistant managers
and chefs. The remaining employees are restaurant personnel. Of our employees,
approximately 40% are full-time employees, with the remainder being part-time
employees.

Management believes that its employee relations are good at the present
time. An anonymous employee survey is taken each year and the results are
disseminated to keep management aware of the level of employee satisfaction.

With the exception of the Chicago Grill on the Alley, none of our employees
are represented by labor unions or are subject to collective bargaining or other
similar agreements. The current union contract expires in August 2005.
Management believes that its employee relations are good at the present time.

TRADEMARKS AND SERVICE MARKS

We regard our trademarks and service marks as having significant value and
as being important to our marketing efforts. We have registered our "Daily
Grill" mark and logo and our "Satisfaction Served Daily," "Think Daily," "Daily
Grind" and other marks with the United States Patent and Trademark Office as
service marks for restaurant service, and have secured California state
registration of such marks. Our policy is to pursue registration of our marks
and to oppose strenuously any infringement.

GOVERNMENT REGULATION

We are subject to various federal, state and local laws affecting our
business. Each of our restaurants is subject to licensing and regulation by a
number of governmental authorities, which may include alcoholic beverage
control, health and safety, and fire agencies in the state or municipality in
which the restaurants are located. Difficulties or failures in obtaining or
renewing the required licenses or approvals could result in temporary or
permanent closure of our restaurants.

Alcoholic beverage control regulations require each of our restaurants to
apply to a state authority and, in certain locations, county and municipal
authorities for a license or permit to sell alcoholic beverages on the premises.
Typically, licenses must be renewed annually and may be revoked or suspended for
cause at any time. Alcoholic beverage control regulations relate to numerous
aspects of the daily operation of our restaurants, including minimum age of
patrons and employees, hours of operation, advertising, wholesale purchasing,
inventory control, and handling, storage and dispensing of alcoholic beverages.

We may be subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which served alcoholic beverages to such person.
In addition to potential liability under "dram-shop" statutes, a number of
states recognize a common-law negligence action against persons or
establishments which serve alcoholic beverages where injuries are sustained by a
third party as a result of the conduct of an intoxicated person. We presently
carry liquor liability coverage as part of our existing comprehensive general
liability insurance.

Various federal and state labor laws govern our relationship with our
employees, including such matters as minimum wage requirements, overtime and
other working conditions. Significant additional government-imposed increases
in minimum wages, paid leaves of absence and mandated health benefits, or
increased tax reporting requirements for employees who receive gratuities, could
be detrimental to the economic viability of our restaurants. Management is not
aware of any environmental regulations that have had a material effect on us to
date.

ITEM 2. PROPERTIES

With the exception of certain properties that may be operated pursuant to
management arrangements or partnership or joint venture arrangements, all of our
restaurants are located in space leased from unaffiliated third parties. The
leases have initial terms ranging from 10 to 25 years, with varying renewal
options on all but one of such leases. Most of the leases provide for a base
rent plus payment of real estate taxes, insurance and other expenses, plus
additional percentage rents based on revenues of the restaurant. See
"Business."

The Grill restaurant in San Jose is located in space leased from a hotel
management company that may be deemed to be controlled by one of our directors,
Lewis Wolff.

Our executive offices are located in 3,300 square feet of office space
located in Los Angeles, California. Such space is leased from an unaffiliated
party pursuant to a lease expiring in May 2005.

Management believes that our existing restaurant and executive office space
is adequate to support current operations. We intend to lease, from time to
time, such additional office space and restaurant sites as management deems
necessary to support our future growth plans.

ITEM 3. LEGAL PROCEEDINGS

Restaurants such as those we operate are subject to litigation in the
ordinary course of business, most of the related costs we expect to be covered
by our general liability insurance. However, punitive damages awards are not
covered by general liability insurance. Punitive damages are routinely claimed
in litigation actions against us. No material causes of action are presently
pending against us. However, there can be no assurance that punitive damages
will not be given with respect to any actions that may arise in the future.

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

No matters were submitted to a vote of our stockholders through the
solicitation of proxies, or otherwise, during the fourth quarter of our fiscal
year ended December 28, 2003.

EXECUTIVE OFFICERS

Our executive officers as of March 9, 2004, and their ages and current positions
as of that date are as follows:

NAME AGE POSITION
----------------- --- --------------------------------------------------

Robert Spivak 60 President and Chief Executive Officer
Michael Weinstock 61 Chairman of the Board and Executive Vice President
John Sola 51 Vice President - Operations and Development
Daryl Ansel 42 Chief Financial Officer

ROBERT SPIVAK has served as our President, Chief Executive Officer and a
director since 1995. Mr. Spivak was a co-founder of our predecessor, Grill
Concepts, Inc. (a California corporation)("GCI") and served as President, Chief
Executive Officer and a director of GCI from the company's inception in 1988
until 1995. Prior to forming GCI, Mr. Spivak co-founded, and operated, The
Grill on the Alley restaurant in Beverly Hills in 1984. Mr. Spivak is a founder
and past president of the Beverly Hills Restaurant Association. Mr. Spivak also
chairs the executive advisory board of the Collins School of Hotel and
Restaurant Management at California State Polytechnic University at Pomona, is
Director Emeritus of the California Restaurant Association and is a member of
the Board of Directors of DiRoNA - Distinguished Restaurants of North America.

MICHAEL WEINSTOCK has served as our Executive Vice President and a director
since 1995 and as Chairman of the Board since 2000. From 1995 to 2000, Mr.
Weinstock served as Vice-Chairman of the Board. Mr. Weinstock was a co-founder
of GCI and served as Chairman of the Board, Vice President and a director of GCI
from 1988 until 1995. Prior to forming GCI, Mr. Weinstock co-founded The Grill
on the Alley restaurant in Beverly Hills in 1984. Mr. Weinstock previously
served as President, Chief Executive Officer and a director of Morse Security
Group, Inc., a security systems manufacturer.

JOHN SOLA has served as our Vice President - Operations and Development since
September 2001. Previously, Mr. Sola served as Executive Chef for GCI from 1988
until 1995 when he assumed the position of Vice President - Executive Chef of
the Company. Mr. Sola oversees all kitchen operations, including personnel,
food preparation and food costs, as well as monitoring and maintaining the
overall performance of the kitchens and establishing procedures and policies in
connection with the opening of new Daily Grill restaurants. Mr. Sola, along
with Mr. Spivak, created the Daily Grill menu. Prior to joining GCI, Mr. Sola
served as opening chef at The Grill on the Alley from inception in 1984 to 1988.
Previously, Mr. Sola served in various positions, including Executive Chef, at a
wide range of restaurants.

DARYL ANSEL has served as our Chief Financial Officer since January 2001. Prior
to joining the Company, Mr. Ansel served as food and beverage finance manager at
Universal Studios from June 1999 to January 2001. Previously, Mr. Ansel owned
and operated catering and restaurant businesses from 1990 to 1997, and served,
from 1983 to 1990, in various senior finance positions with the University of
California, Berkeley.

There are no family relationships among the executive officers and
directors. Except as otherwise provided in employment agreements, each of the
executive officers serves at the discretion of the Board.

PART II

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

Our common stock is currently traded in the over-the-counter market and is
quoted on the Nasdaq Small-Cap Market ("Nasdaq") under the symbol "GRIL". The
following table sets forth the high and low bid price per share for our common
stock for each quarterly period during the last two fiscal years:

High Low
----- -----

2002 - First Quarter 1.850 1.220
Second Quarter 2.000 1.500
Third Quarter 1.900 1.400
Fourth Quarter 1.850 0.970

2003 - First Quarter 1.620 0.830
Second Quarter 2.850 1.050
Third Quarter 2.950 2.010
Fourth Quarter 2.900 1.940

The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.

At March 8, 2004, the closing bid price of our Common Stock was $3.43.

As of March 8, 2004, there were approximately 412 holders of record of our
Common Stock.

We have never declared or paid any cash dividend on our Common Stock and do
not expect to declare or pay any such dividend in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

The following tables present selected historical consolidated financial data
derived from our consolidated financial statements. The following data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
included elsewhere herein. As discussed in Note 1 of the consolidated financial
statements, the Company's consolidated financial statements have been restated
from those originally issued to reflect the accounting for employee stock
options using variable accounting treatment and other miscellaneous corrections.
These adjustments are described in further detail in Management's Discussion and
Analysis of Financial Condition and Results of Operations.

Fiscal Year Ended December
---------------------------------------------------------------
1999 2000 2001 2002 2003
----------- ----------- ----------- ----------- -----------
Restated Restated Restated

(In thousands except per share data)
Statement of Operations Data:
Sales . . . . . . . . . . . . . . $ 38,432 $ 44,598 $ 44,529 $ 41,286 $ 45,427
Management and license fees . . . 544 1,078 872 1,006 1,147
----------- ----------- ----------- ----------- -----------
Total revenues. . . . . . . . . . 38,976 45,676 45,401 42,292 46,574
----------- ----------- ----------- ----------- -----------

Gross profit . . . . . . . . . . . . 28,090 32,674 32,985 30,858 33,831
Operating expenses:
Restaurant operating expenses . . 23,426 27,226 27,263 25,678 28,150
General and administration. . . . 3,296 3,313 3,530 3,568 3,815
Depreciation and amortization . . 1,196 1,334 1,457 1,492 1,461
Pre-opening costs . . . . . . . . 54 330 199 69 182
Gain on sale of assets. . . . . . - - (225) (71) (12)
Unusual charges . . . . . . . . . - 73 - - -
----------- ----------- ----------- ----------- -----------

Total. . . . . . . . . . . . . . . . 27,972 32,276 32,224 30,736 33,596
----------- ----------- ----------- ----------- -----------

Income from operations . . . . . . . 118 398 761 122 235
Interest expense, net. . . . . . . . (376) (478) (394) (214) (194)
----------- ----------- ----------- ----------- -----------

Income (loss) before taxes, minority
interest, equity in loss of joint
venture . . . . . . . . . . . . . (258) (80) 367 (92) 41
Provision for income taxes . . . . . (6) (14) (65) (37) (89)
Equity in loss of joint venture. . . (74) (9) (9) (23) (19)
Minority interests . . . . . . . . . (68) 102 211 285 317
----------- ----------- ----------- ----------- -----------

Net income (loss). . . . . . . . . . (406) (1) 504 133 250
----------- ----------- ----------- ----------- -----------

Preferred dividends accrued. . . . . (50) (50) (50) (50) (50)
----------- ----------- ----------- ----------- -----------

Net income (loss) applicable to
common stock. . . . . . . . . . . $ (456) $ (51) $ 454 $ 83 $ 200
=========== =========== =========== =========== ===========

Net income (loss) per share applicable
to common stock (1):
Basic . . . . . . . . . . . . . . $ (0.11) $ (0.01) $ 0.10 $ 0.02 $ 0.04
=========== =========== =========== =========== ===========
Diluted . . . . . . . . . . . . . $ (0.11) $ (0.01) $ 0.09 $ 0.02 $ 0.04
=========== =========== =========== =========== ===========

Weighted average shares outstanding
Basic. . . . . . . . . . . . . . 4,003,738 4,104,360 4,776,741 5,537,071 5,537,071
=========== =========== =========== =========== ===========
Diluted. . . . . . . . . . . . . 4,003,738 4,104,360 4,866,449 5,551,751 5,640,842
=========== =========== =========== =========== ===========

Fiscal Year Ended December
----------------------------------------------------
1999 2000 2001 2002 2003
-------- ---------- -------- -------- ----------
Restated Restated

(In thousands except per share data)
Balance Sheet Data:
Working deficit . . . . . . . . . $(3,685) $ (2,754) $ (693) $ (996) $ (444)
Total assets. . . . . . . . . . . 11,288 12,534 14,344 13,665 13,887
Long-term debt, less
current portion . . . . . . . . 2,033 2,866 1,534 976 606
Stockholders' equity. . . . . . . 3,461 3,460 6,045 6,178 6,428

(1) All per share amounts and weighted average shares outstanding have been
adjusted to reflect a 1-for-4 reverse stock split effective August 9, 1999.

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

GENERAL

Grill Concepts develops, owns and operates casual dining restaurants under
the name "Daily Grill" and fine dining restaurants under the name "The Grill on
the Alley." Additionally, we manage or license other restaurant properties.

During the fiscal year ended December 28, 2003, we owned and operated, for
the full fiscal year, thirteen restaurants (nine Daily Grill and four Grill
restaurants), including one Daily Grill and three Grill restaurants owned in
partnership with third parties. During fiscal 2003, we also operated one Daily
Grill that opened in January and is owned in partnership.

Also during fiscal 2003, we managed or licensed, for the full fiscal year,
seven restaurants (six Daily Grill and one City Bar and Grill restaurant).
During fiscal 2003, we commenced management of one Daily Grill that opened in
September.

During the fiscal year ended December 29, 2002, we owned and operated, for
the full fiscal year, thirteen restaurants (nine Daily Grill and four Grill
restaurants), including one Daily Grill and three Grill restaurants owned in
partnership. During fiscal 2003, we operated for a portion of the year two
restaurants (one Daily Grill and one Pizzeria Uno) that were closed or sold
during the year.

Also during fiscal 2002, we managed or licensed, for the full fiscal year,
five restaurants (four Daily Grill and one City Bar and Grill restaurant).
During fiscal 2002, we commenced management of two Daily Grill restaurants that
opened in February and July, respectively. See "Business."

We account for our interest in the Universal CityWalk Daily Grill using the
equity method. All other owned restaurants are consolidated with minority
interest being reflected in the San Jose Fairmont Grill, The Chicago Grill on
the Alley, The Grill on Hollywood and the South Bay Daily Grill.

Sales revenues are derived from sales of food, beer, wine, liquor and
non-alcoholic beverages. Approximately 73% of combined 2003 sales were food and
27% were beverage. Sales revenues from restaurant operations are primarily
influenced by the number of restaurants in operation at any time, the timing of
the opening of such restaurants and the sales volumes of each restaurant.

Expenses are comprised primarily of cost of food and beverages and
restaurant operating expenses, including payroll, rent and occupancy costs. Our
largest expenses are payroll and the cost of food and beverages, which is

primarily a function of the price of the various ingredients utilized in
preparing the menu items offered at our restaurants. Restaurant operating
expenses consist primarily of wages paid to part-time and full-time employees,
rent, utilities, insurance and taxes.

In addition to our cost of food and beverages and normal restaurant
operating expenses through April 2002 when we sold our last Pizzeria Uno
Restaurant, we paid a continuing license fee with respect to our Pizza
Restaurant, an advertising fee and was required to expend certain minimum
amounts on local advertising and promotion. See "Business - Sale of Pizzeria Uno
Restaurants."

In addition to restaurant operating expenses, we pay certain general and
administrative expenses that relate primarily to operation of our corporate
offices. Corporate office general and administrative expenses consist primarily
of salaries of officers, management personnel and clerical personnel, rent,
legal and accounting costs, travel, insurance and office expenses.

RESTATEMENT

The consolidated financial statements from which the selected financial data is
derived have been restated from those originally issued by the Company to
reflect the accounting for employee stock options using variable accounting
treatment and to make other miscellaneous corrections.

In 2004, the terms of the Company's option grants were reevaluated -
specifically, provisions which allow an employee to exercise the option by
surrendering a portion of the vested shares in lieu of paying cash. Under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," this cashless exercise feature requires the Company to
account for its option plan using a variable accounting treatment. Under
variable accounting, compensation expense must be remeasured each balance sheet
date based on the difference between the current market price of the Company's
stock and the option's exercise price. An accrual for compensation expense is
determined based on the proportionate vested amount of each option as prescribed
by Financial Interpretation No. 28, "Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans." Each period, adjustments to
the accrual are recognized in the income statement. Previously, the Company had
accounted for its options using a fixed accounting treatment whereby
compensation expense, if any, was only evaluated at the date of the option
grant. The impact of this change in accounting increased stock compensation
expense in fiscal years 2003 and 2000. Due to the movement in the Company's
stock price, the accrual recorded in fiscal year 2000 was reversed in fiscal
year 2001.

In addition to this change, the Company also recorded additional general and
administrative expenses of $29,000 in the fourth quarter of fiscal year 2003 to
correctly state its liability for payroll and other costs, and reduced
restaurant operating expenses by $20,000 in fiscal 2001 and increased restaurant
operating expenses by $20,000 in fiscal 2000 to correctly state rent expense in
the proper period. Lastly, the Company increased additional paid-in capital and
accumulated deficit by $55,000 as of each fiscal yearend in the period from 1998
through 2003, to properly reflect the fair value of stock options issued in
connection with severance agreements arranged in fiscal year1998.

The impact of this restatement is as follows:

Fiscal Year Ended December
----------------------------------------------------------------------------------------
2000 2000 2001 2001 2003 2003
------------- ------------- ------------- ------------- ------------- -------------
(As reported) (As restated) (As reported) (As restated) (As reported) (As restated)

Statement of Operations Data:
-----------------------------

Restaurant operating expenses 27,201 27,226 27,288 27,263 28,095 28,150
General and administrative 3,303 3,313 3,540 3,530 3,673 3,815
Total operating expenses 32,241 32,276 32,359 32,224 33,399 33,596
Income from operations 433 398 726 761 432 235
Income (loss) before provision
for income taxes, minority
interest, and equity in loss of
joint venture (45) (80) 332 367 238 41
Minority interest in loss of
subsidiaries 316 317
Net income 34 (1) 469 504 446 250
Net income applicable to
common stock (16) (51) 419 454 396 200
Net income per share applicable
to common stock:
Basic net income 0.00 (0.01) 0.09 0.10 0.07 0.04
Diluted net income 0.00 (0.01) 0.09 0.09 0.07 0.04

Balance Sheet Data:
-------------------

Working deficit (2,719) (2,754) (247) (444)
Stockholders' equity 3,495 3,460 6,624 6,428

RESULTS OF OPERATIONS

The following table sets forth certain items as a percentage of total
revenues from our Statements of Operations during 2001, 2002 and 2003:

Fiscal Year Ended December
----------------------------
2001 2002 2003
--------- ------ ---------
Restated Restated

Sales revenues 98.1% 97.6% 97.5%
Management and licensing fees 1.9 2.4 2.5
--------- ------ ---------

Total revenues 100.0 100.0 100.0
Cost of sales 27.3 27.0 27.4
--------- ------ ---------

Gross profit 72.7 73.0 72.6
--------- ------ ---------

Restaurant operating expense 60.0 60.7 60.4
General and administrative expense 7.8 8.5 8.2
Depreciation and amortization 3.2 3.5 3.1
Pre-opening costs 0.5 0.2 0.4
Gain on sale of assets (0.5) (0.2) (0.0)
--------- ------ ---------

Total operating expenses 71.0 72.7 72.1
--------- ------ ---------

Operating income 1.7 0.3 0.5
Interest expense, net ( 0.9) (0.5) (0.4)
--------- ------ ---------

Income (loss) before income tax 0.8 (0.2) 0.1
Provision for taxes (0.1) (0.1) (0.2)
Minority interest 0.4 0.7 0.7
Equity in loss of joint venture 0.0 (0.1) 0.0
--------- ------ ---------

Net income 1.1% 0.3% 0.5%
========= ====== =========

FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002

Revenues. Revenues for 2003 increased 10.1% to $46.6 million from $42.3
million in 2002. Sales revenues increased 10.0% to $45.4 million in 2003 from
$41.3 million in 2002. Management and license fee revenues increased to $1.1
million in 2003 from $1.0 million in 2002. System-wide sales, including sales
of non-consolidated restaurants operated under license, management or
partnership agreement, totaled $69.9 million in 2003, an increase of 12.4% from
$62.2 million in 2002. System-wide sales, computed by adding to total revenues
the revenues of unconsolidated restaurants and subtracting license and
management fees reported from those restaurants, is considered by management to
be a key indicator of brand strength. See reconciliation of system-wide sales
to revenues in "Business - General."

Sales for Daily Grill restaurants increased by 13.5% from $25.6 million in
2002 to $29.1 million in 2003. The increase in sales revenues for the Daily
Grill restaurants from 2002 to 2003 was primarily attributable to a increase in
same store sales of 5.3% ($1.3 million) for restaurants open for 12 months in
both 2003 and 2002 and opening of the South Bay Daily Grill ($2.7 million),
offset by the closure of the Encino Daily Grill ($0.6 million) and the Cherry
Hill Pizzeria Uno ($0.5 million). Weighted average weekly sales at the Daily
Grill restaurants increased 9.2% from $57,133 in 2002 to $62,365 in 2003.
Comparable restaurant sales and weighted average weekly sales at the Daily Grill
restaurants in 2003 were favorably affected approximately equally by increased
guest counts and improved average checks.

Sales for Grill restaurants increased by 7.8% from $15.2 million in 2002 to
$16.4 million in 2003. The increase in sales revenues for the Grill restaurants
from 2002 to 2003 was attributable to the improved check averages and increased
guest counts. Weighted average weekly sales at the Grill restaurants increased
7.8% from $73,057 in 2002 to $78,728 in 2003.

Price increases were last implemented during the first quarter of 2003 for
certain menu items. Selected price increases may be implemented from time to
time in the future, consistent with the casual dining industry and how the
economy fares. Future revenue growth is expected to be driven principally by a
combination of expansion into new markets and the opening of additional
restaurants and establishment of market share in those new markets as well as
increases in guest count at existing restaurants and selected price increases.
When entering new markets where we have not yet established a market presence,
sales levels are expected to be lower than in existing markets where we have a
concentration of restaurants and high customer awareness. Although our
experience in developing markets indicates that the opening of multiple
restaurants within a particular market results in increased market share,
decreases in comparable restaurant sales could result.

Management and license fee revenues during 2003 were attributable to (1)
hotel restaurant management services which accounted for $834,000 of management
fees, and (2) licensing fees from the LAX Daily Grill, Skokie, Illinois Daily
Grill and the San Jose City Bar and Grill which totaled $203,000 and (3)
$110,000 in management fees from Universal CityWalk. The increase in management
fees during 2003 was attributable to (1) management of the San Francisco Daily
Grill open a full year compared to 44 weeks in 2002, (2) management of the
Houston Daily Grill for the full year compared to 25 weeks in 2002 and (3)
management of the Portland Daily Grill for 15 weeks in 2003.

We account for our 50% interest in the Universal CityWalk Daily Grill using
the equity method. As a result, our sales do not include sales from Universal
CityWalk. Total revenues for the Universal CityWalk Daily Grill were $2.2
million during 2003 as compared to $2.1 million during 2002.

Cost of Sales and Gross Profit. While sales revenues increased by 10.0%
($4.1 million) in 2003 as compared to 2002, cost of sales increased by 11.4%
($1.3 million) and increased as a percentage of sales from 27.0% in 2002 to
27.4% in 2003. The increase in cost of sales as a percentage of sales revenues
was attributable to higher beef costs during the second half of the year.

Gross profit increased 9.6% from $30.9 million (73.0% of revenues) in 2002
to $33.8 million (72.6% of revenues) in 2003.

Operating Expenses and Operating Results. Total operating expenses,
including restaurant operating expenses, general and administrative expense,
depreciation and amortization, and pre-opening costs, increased 9.3% to
$33.6 million in 2003 (representing 72.1% of revenues) from $30.7 million in
2002 (representing 72.7% of revenues).

Restaurant operating expenses increased 9.6% to $28.2 million in 2003 from
$25.7 million in 2002. As a percentage of revenues, restaurant operating
expenses represented 60.4% in 2003 compared to 60.7% in 2002. The dollar
increase in restaurant operating expenses followed the sales increase and was
negatively impacted by increases in marketing, stock option compensation
expense, workers' compensation and general insurance. The decrease in operating
expenses as a percentage of revenues resulted from improved labor management.

General and administrative expenses rose slightly to $3.8 million in 2003
compared to $3.6 million in 2002. General and administrative expenses
represented 8.2% of revenues in 2003 as compared to 8.5% of revenues in 2002.
While these expenses in total were nearly equal, there were increases in payroll
and related benefits, stock option compensation expense, professional services
and rent, partially offset by decreases in recruitment costs and office
expenses. Depreciation and amortization expense was $1.5 million during 2003 and
2002.

Pre-opening costs totaled $182,000 in 2003 as compared with $69,000 in
2002. These pre-opening costs were attributable to the opening in January 2003
of the South Bay Daily Grill and the opening of the Bethesda Daily Grill in
January 2004.

Interest Expense. Interest expense, net, totaled $194,000 during 2003 as
compared to $214,000 in 2002. The decrease in interest expense was primarily
attributable to the maturing of the loans.

Minority Interest and Equity in Loss of Joint Venture. We reported a
minority interest in the loss of its majority owned subsidiaries of $316,000
during 2003, consisting of a minority interest in the earnings of San Jose Grill
on the Alley, LLC of $132,000, a minority interest in the loss of Chicago - The
Grill on the Alley LLC of $44,000, a minority interest in the loss of The Grill
on Hollywood, LLC of $140,000 and a minority interest in the loss of The Daily
Grill at Continental Park, LLC of $264,000. For the year ended December 29,
2002 we recorded a minority interest in the earnings of San Jose Grill on the
Alley, LLC of $102,000, a minority interest in the loss of Chicago - The Grill
on the Alley, LLC of $67,000, a minority interest in the loss of The Grill on
Hollywood, LLC of $269,000 and a minority interest in the loss of The Daily
Grill at Continental Park of $51,000.

We recorded equity in loss of joint venture of $19,000 in 2003 and $23,000
in 2002 relating to the Company's 50% interest in the Universal CityWalk Daily
Grill.

We reported net income of $250,000 in 2003 as compared to a net income of
$133,000 for 2002.

FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001

Revenues. Revenues for 2002 decreased 6.8% to $42.3 million from $45.4
million in 2001. Sales revenues decreased 7.3% to $41.3 million in 2002 from
$44.5 million in 2001. Management and license fee revenues increased to
$1,006,000 in 2002 from $872,000 in 2001. System-wide sales, including sales of
non-consolidated restaurants operated under license, management agreement or
partnership, totaled $62.2 million in 2002, a decrease of 0.3% from $62.4
million in 2001.

Sales for Daily Grill restaurants decreased by 8.9% from $28.1 million in
2001 to $25.6 million in 2002. The decrease in sales revenues for the Daily
Grill restaurants from 2001 to 2002 was primarily attributable to a decrease in
same store sales of 4.2% ($1.1 million) for restaurants open for 12 months in
both 2002 and 2001 and the closure of the Encino Daily Grill ($1.4 million).
Weighted average weekly sales at the Daily Grill restaurants decreased 4.8% from
$60,041 in 2001 to $57,133 in 2002. Comparable restaurant sales and weighted
average weekly sales at the Daily Grill restaurants in 2002 were negatively
affected by decreased customer counts in all restaurants.

Sales for Grill restaurants increased by 10.8% from $13.7 million in 2001
to $15.2 million in 2002. The increase in sales revenues for the Grill
restaurants from 2001 to 2002 was primarily attributable to the opening of the
Hollywood Grill in November 2001. Weighted average weekly sales at the Grill
restaurants decreased 17.9% from $88,965 in 2001 to $73,057 in 2002. Comparable
restaurant sales and weighted average weekly sales at the Grill restaurants in
2002 were negatively affected by decreased guest counts and a much lower check
average at the Grill

on Hollywood compared to other Grill restaurants.

Sales for the Pizza Restaurants decreased by 81.7% from $2.7 million in
2001 to $0.5 million in 2002. The decrease in sales revenues for the Pizza
Restaurants from 2001 to 2002 was attributable to the closing of the Pizzeria
Uno franchise restaurant in Cherry Hill in April 2002 and the closing of the
South Plainfield restaurant in July 2001. Weighted average weekly sales at the
Pizza Restaurants decreased 14.9% from $34,340 in 2001 to $29,239 in 2002.

Management and license fee revenues during 2002 were attributable to (1)
hotel restaurant management services which accounted for $726,000 of management
fees, and (2) licensing fees from the LAX Daily Grill and Skokie, Illinois Daily
Grill which totaled $175,000 and (3) $105,000 in management fees from Universal
CityWalk. The increase in management fees during 2002 was attributable to (1)
management of the San Francisco Daily Grill for 44 weeks in 2002, and (2)
management of the Houston Daily Grill for 25 weeks in 2002 offset by decreases
at the Georgetown Inn and Burbank Hilton.

We account for our 50% interest in the Universal CityWalk Daily Grill using
the equity method. As a result, our sales do not include sales from Universal
CityWalk. Total revenues for the Universal CityWalk Daily Grill were
$2.1 million during 2002 as compared to $2.0 million during 2001.

Cost of Sales and Gross Profit. While sales revenues decreased by 7.3%
($3.2 million) in 2002 as compared to 2001, cost of sales decreased by 7.9%
($1.0 million) and decreased as a percentage of sales from 27.3% in 2001 to
27.0% in 2002. The decrease in cost of sales as a percentage of sales revenues
was attributable to improved purchasing and menu refinements.

Gross profit decreased 6.4% from $33.0 million (72.7% of sales) in 2001 to
$30.9 million (73.0% of sales) in 2002.

Operating Expenses and Operating Results. Total operating expenses,
including restaurant operating expenses, general and administrative expense,
depreciation and amortization, pre-opening costs, and unusual charges, decreased
4.6% to $30.7 million in 2002 (representing 72.7% of revenues) from $32.2
million in 2001 (representing 71.0% of sales).

Restaurant operating expenses decreased 5.8% to $25.7 million in 2002 from
$27.3 million in 2001. As a percentage of sales, restaurant operating expenses
represented 60.7% in 2002 as compared to 60.0% in 2001. The dollar decrease in
restaurant operating expenses followed the sales decrease for the Company offset
by increases in minimum wages in California. The increase in operating expenses
as a percentage of sales resulted from increased insurance costs and labor due
to California minimum wage increases.

General and administrative expenses rose slightly to $3.6 million in 2002
compared to $3.5 million in 2001. General and administrative expenses
represented 8.5% of sales in 2002 as compared to 7.8% of sales in 2001. While
these expenses in total were nearly equal, there were increases of approximately
$224,000 in wages and related benefits, offset by decreases of approximately
$176,000 in professional services.

Depreciation and amortization expense was $1.5 million during 2002 and
2001. Increased depreciation related to the operation of The Grill on Hollywood
for a full year was offset by the discontinuance of depreciation for the Encino
Daily Grill and the Pizzeria Uno at Cherry Hill.

Pre-opening costs totaled $69,000 in 2002 as compared with $199,000 in
2001. These pre-opening costs were attributable to the opening in January 2003
of the South Bay Daily Grill and the opening of The Grill on Hollywood in
November 2001.

Interest Expense. Interest expense, net, totaled $214,000 during 2002 as
compared to $394,000 in 2001. The decrease in interest expense was primarily
attributable to not having any bank debt in 2002.

Minority Interest and Equity in Loss of Joint Venture. We reported a
minority interest in the loss of our majority owned subsidiaries of $285,000
during 2002, consisting of a minority interest in the earnings of San Jose Grill
on the Alley, LLC of $102,000, a minority interest in the loss of Chicago - The
Grill on the Alley LLC of $67,000, a minority interest in the loss of The Grill
on Hollywood, LLC of $269,000 and a minority interest in the loss of The Daily
Grill at Continental Park, LLC of $51,000. For the year ending December 30,
2001 we recorded a

minority interest in the earnings of San Jose Grill on the Alley, LLC of
$77,000, a minority interest in the loss of Chicago - The Grill on the Alley,
LLC of $144,000 and a minority interest in the loss of The Grill on Hollywood,
LLC of $144,000.

We recorded equity in loss of joint venture of $23,000 in 2002 and $9,000
in 2001 relating to our 50% interest in the Universal CityWalk Daily Grill.

We reported net income of $133,000 in 2002 as compared to a net income of
$504,000 for 2001.

LIQUIDITY AND CAPITAL RESOURCES

CASH POSITION AND SHORT-TERM LIQUIDITY. At December 28, 2003, we had a
working capital deficit of $0.4 million and a cash balance of $1.5 million as
compared to a working capital deficit of $1.0 million and a cash balance of $1.3
million at December 29, 2002. In 2003 we generated cash from operations ($1.2
million), received tenant improvement allowances ($1.1 million), purchased fixed
assets ($1.7 million) and repaid debt ($0.6 million). During 2002 we used cash
to purchase fixed assets for the South Bay Daily Grill ($0.7 million), remodel
the Newport Beach Daily Grill ($0.4 million), repay debt ($0.5 million) and make
advances to managed restaurants ($0.4 million) that opened in San Francisco and
Houston. We have generated modest net income in each of the last three fiscal
years and have generated positive operating cash flows in each of the last six
years.

Our need for capital resources historically has resulted from, and for the
foreseeable future is expected to relate primarily to, the construction and
opening of new restaurants. Historically, we have funded our day-to-day
operations through operating cash flows that have ranged from $1.0 million to
$1.4 million over the past three fiscal years. Growth has been funded through a
combination of bank borrowing, loans from stockholders/officers, the sale of
debentures and stock, loans and tenant allowances from certain of our landlords,
and, beginning in 1999, through joint venture arrangements.

FINANCING FACILITIES. At December 28, 2003, we had a bank credit facility
with nothing owing, a loan from a member of Chicago - The Grill on the Alley,
LLC of $0.4 million, loans from stockholders/ officers/directors of $0.2
million, equipment loans of $0.4 million, and loans/advances from a landlord of
$0.1 million. Although no amounts have been borrowed under the credit facility
since 2001, availability under the line has been reducing in accordance with its
terms. Borrowings available under the credit facility are $0.5 million at
December 28, 2003 and will ratably reduce until October 2004 when it expires.

On August 1, 2000, we received a $400,000 loan from private individuals.
The loan bears interest at 9% and is payable in monthly installments over four
years. In connection with the loan, we issued 40,000 warrants. In June 2001
the lender became a member of our Board of Directors and the loan was
reclassified as related party debt. The balance owed on the loan at December
28, 2003 was $67,000.

On December 13, 2001 we amended our bank credit facility converting the
term loan to a $0.8 million reducing line of credit under which the amount
available to draw is reduced each month by $25,000 so that it mimics the
previous term loan as to the maximum outstanding balance. The maximum borrowing
available under the reducing line of credit was $200,000 at December 28, 2003
and will expire in October 2004. We have an additional line of credit that
provides borrowing up to $0.3 million. At December 28, 2003 and December 29,
2002 there were no borrowings under either line of credit. Interest is payable
at the bank's prime rate. In connection with the Credit Facility, we are
required to comply with certain debt service coverage and liquidity
requirements. Two of our principal stockholders have guaranteed the Credit
Facility. In exchange for the guarantee, we issued warrants to purchase 150,000
shares at an exercise price of $1.406 per share exercisable for a period of four
years and agreed to pay each of the stockholders interest of 2% per annum on the
average annual balance on the note payable to the bank for guaranteeing the
note. The reducing line of credit matures in October 2004.

In March 2004, we entered into a preliminary agreement with respect to the
establishment of a new bank credit facility to replace our facility that expires
in October 2004. Under the terms of the new bank credit facility, we will be
provided with financing in the form of a revolving line of credit in the amount
of $500,000, an irrevocable standby letter of credit in the amount of $700,000
and equipment financing in the amount of $500,000. The facility will have a
one-year term, be secured by assets and is subject to certain standard borrowing
covenants. The credit facility is subject to execution of definitive loan
documents that, as of March 24, 2004, have been drafted by the bank but have not
been signed.

OPERATING LEASES. During 2003, we, and our subsidiaries, were obligated
under sixteen leases covering the premises in which our Daily Grill and Grill
Restaurants are located as well as leases on our executive offices. Such
restaurant leases and the executive office lease contain minimum rent provisions
which provided for the payment of minimum aggregate annual rental payments of
approximately $3.0 million in 2003 and paid percentage rent obligations above
and beyond minimum rent of $0.5 million. Our minimum rent obligations for 2004
are $2.8 million.

CONTRACTUAL OBLIGATIONS. Our only material contractual obligations
requiring determinable future payments on our part are various notes payable and
our leases relating to our executive offices and restaurants, each of which is
described above.

The following table details our contractual obligations as of December 28,
2003:

Payments due by period
----------------------------------------------------------------
Total 2004 2005 - 2006 2007 - 2008 Thereafter

Long-term debt $ 1,129,000 $ 523,000 $ 300,000 $ 142,000 $ 164,000
Capital lease obligations - - - - -
Operating lease commitments 18,510,000 2,845,000 4,848,000 3,877,000 6,940,000
Other contractual purchase
Obligations - - - - -
Other long-term liabilities - - - - -
----------- ---------- ------------ ------------ -----------
Total $19,639,000 $3,368,000 $ 5,148,000 $ 4,019,000 $ 7,104,000
----------- ---------- ------------ ------------ -----------

COMMITMENTS RELATING TO MANAGED RESTAURANTS AND LLCS. We began management
in February 2002, of the San Francisco Daily Grill in the Handlery Hotel in
Union Square. Cost of opening the Handlery Hotel Daily Grill in San Francisco
was $2.8 million, of which we advanced approximately $331,000, with the balance
being paid by the hotel owners. The advance made by us will be repaid through
future profits.

We began management of a hotel-based Daily Grill in the Westin Galleria in
Houston, Texas on July 10, 2002. Under the terms of the Management Agreement,
we advanced $64,000 to the restaurant for initial working capital which has
since been repaid in full.

We began management in September 2003, of the Portland Daily Grill in the
Portland Westin Hotel in Portland, Oregon. Under the terms of the Management
Agreement, we had no cash obligations for initial advances or construction
costs.

Under certain of our operating and management agreements we have an
obligation to potentially make additional cash advances and/or contributions and
may not realize any substantial returns for some time. The agreements and
arrangements under which we may be required to make cash advances or
contributions, guarantee obligations or defer receipt of cash are:

CITYWALK. The CityWalk management agreement requires that each member
to loan, interest free, to the joint venture 50 percent of any operating
deficit forecast for the next quarter, such loans to be repaid out of the
first cash available from operations.

SAN FRANCISCO DAILY GRILL. The management agreement for the San
Francisco Daily Grill stipulates that if in any month there is insufficient
working capital to pay operating expenses, excluding payments to us or the
owner, we will provide one-half of the required working capital. Such
advances are to be repaid prior to deferred payments to us or the owner.

PORTLAND DAILY GRILL. The management agreement for the Portland Daily
Grill stipulates that the Owner shall provide working capital of no less
than $50,000 or more than $150,000. If during any month there is
insufficient working capital to pay for operating expenses the Owner agrees
to advance the required working capital until the balance of the Owner
Working Capital Advance equals $150,000. Thereafter if additional working
capital is necessary we as the manager will be required to loan it. Any
advances we make will earn interest at a rate of 12% per annum and will be
repaid as second priority behind owner's working capital advance but before
owner's return of capital. At December 28, 2003 the Owner had advanced
$50,000.

CHICAGO - THE GRILL ON THE ALLEY. The Operating Agreement and the
Senior Promissory Note for Chicago - The Grill on the Alley, LLC stipulates
that the non-manager member shall receive a preferred return of eight
percent on its capital contribution and a payment on its converted capital
prior to any distribution of cash.

THE GRILL ON HOLLYWOOD. The Operating Agreement for The Grill on
Hollywood, LLC stipulates that 90% of distributable cash shall go to the
non-managing member until its preferred return, unrecovered contribution
and any additional contribution have been returned.

SAN JOSE GRILL. The Operating Agreement for San Jose Grill, LLC
stipulates that distributable cash shall be paid first 10% to the manager
and 90% to the members in proportion to their ownership percentage until
initial capital is recovered, then as a preferred return on the capital
contributions to both members in proportion to their ownership percentage,
then to the managing member and non-managing member in proportion to their
ownership percentage until the additional capital contribution is
recovered, and finally 16 2/3% to the manager and the balance to the
members in proportion to their ownership percentages.

Our San Jose Grill, Chicago - Grill on the Alley, Grill on Hollywood and
South Bay Daily Grill restaurants are each owned by limited liability companies
(the "LLCs") in which we serve as manager and own a controlling interest. Each
of the LLCs has minority interest owners. In connection with the financing of
each of the LLCs, the minority members may have certain rights to priority
distributions of capital until they have received a return of their initial
investments ("Return of Member Capital") as well as rights to receive defined
preferred returns on their invested capital ("Preferred Return").

The following tables set forth a summary for each of the LLCs of (1) the
initial capital contributions of the Company and the minority LLC members (the
"Members"), (2) the distributions of capital to the Members and/or us during the
year ended December 28, 2003, (3) the unreturned balance of the capital
contributions of the Members and/or us at December 28, 2003, (4) the Preferred
Return rate to Members and/or us, (5) the accrued but unpaid preferred returns
due to the Members and/or us at December 28, 2003, (6) the management incentive
fees, if any, payable to us, and (7) a summary of the principal distribution
provisions:

SAN JOSE GRILL LLC

Initial Capital Contribution: Members (a) $1,149,650
===========
Company $ 350,350
===========

Distributions of capital, preferred return
and profit during the year ended December
28, 2003: Members $ 275,000
===========
Company $ 275,000
===========

Unreturned Initial Capital Contributions at
December 28, 2003: Members $ 0
===========
Company $ 0
===========
Preferred Return rate: Members 10%
Company 10%

Accrued but unpaid Preferred Returns at
December 28, 2003: Members $ 0
===========
Company $ 0
===========
Management Fee: Company 5%

Principal Distribution Provisions:

Order of Distributions ALLOCATION
---------------------------------------- ----------------------------

1 Until Return of Initial Capital 10% to Company (Manager)
50.05% of 90% to Company
49.95% of 90% to Members

2 Until Return of Preferred Return 50.05% to Company
49.95% to Members

3 Until Return of Additional Contributions 50.05% to Company
49.95% to Members

Thereafter:

4 Balance of distributable cash 16.67% to Company (Manager)
50.05% of 83.33% to Company
49.95% of 83.33% to Members

CHICAGO - GRILL ON THE ALLEY

Initial Capital Contribution: Members (b) $1,700,000
===========
Company $ 0
===========

Distributions of capital and note
repayments during the year ended
December 28, 2003: Members (b) $ 220,000
===========

Unreturned Initial Capital Contributions at
December 28, 2003: Members $ 944,000
===========
Preferred Return rate: Members 8%

Accrued but unpaid Preferred Returns at
December 28, 2003: Members $ 0
===========
Management Fee: Company 5%

Principal Distribution Provisions:

Order of Distributions Allocation
-------------------------------- ---------------

1 Until Return of Members Capital 100% to Members

2 Until Return of Preferred Return 100% to Members

Thereafter:

3 Balance of distributable cash 60% to Company
40% to Members

THE GRILL ON HOLLYWOOD LLC

Initial Capital Contribution: Members $1,200,000
===========
Company $ 250,000
===========

Distributions of capital during nine months
ended December 28, 2003: Members $ 0
===========
Company $ 0
===========

Unreturned Initial Capital Contributions at
December 28, 2003: Members $1,200,000
===========
Company $ 250,000
===========
Members 12%
Preferred Return rate: Company 12%

Accrued but unpaid Preferred Returns at
December 28, 2003: Members $ 0
===========
Company $ 65,000
===========
Management Fee: Company 5%

Principal Distribution Provisions:

Order of Distributions Allocation
------------------------------------- ------------------------

1 Until Return of Members Capital and 10% to Company (Manager)
Preferred Return 90% to Members

2 Until Return of Company's Capital and 90% to Company (Manager)
Preferred Return 10% to Members

Thereafter:

3 Balance of distributable cash 51% to Company
49% to Members

SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)

Initial Capital Contribution: Members $1,000,000
===========
Company $ 350,000
===========

Distributions of capital during nine months
ended December 28, 2003: Members $ 0
===========
Company $ 0
===========

Unreturned Initial Capital Contributions at
December 28, 2003: Members $1,000,000
===========
Company $ 350,000
===========
10%
Preferred Return rate: Members Company (c) 10%

Accrued but unpaid Preferred Returns at
December 28, 2003: Members $ 100,000
===========
Company $ 35,000
===========
Management Fee: Company 5%

Principal Distribution Provisions:

Order of Distributions Allocation
------------------------------------- -------------------------------

1 Until payment in full of all deferred 100% to Company (Manager)
management fees

2 Until Return of Any Additional Ratably to Company and Members
Contributions and Preferred Returns
Thereon

3 Until $300,000 is paid 33.3% to Company
66.7% to Members

4 Until Return of Members accrued and 10% to Company
unpaid preferred returns 90% to Members

5 Until Members Capital Contribution 10% to Company
Returned 90% to Members

6 Until Return of Company's Preferred 90% to Company
Return 10% to Members

7 Until Return of Company's Capital 90% to Company
Contribution 10% to Members
Thereafter

8 Balance of distributable cash 50.1% to Company
49.9% to Members

(a) The initial capital contributions of the Members of San Jose Grill LLC
consisted of a capital contribution of $349,650 and a loan of $800,000.
(b) The initial capital contributions of the Members of Chicago - Grill on the
Alley LLC consisted of a capital contribution of $1,000 and a loan of
$1,699,000. $1,189,000 of the loan was converted to capital in 1999.
Distribution of capital as of December 28, 2003 includes $176,000 of
capital and preferred return and $44,000 of payment on the loan.
(c) Our preferred return with respect to the South Bay Daily Grill is based on
unrecovered capital contribution and accrued but unpaid management fees.

OFF-BALANCE SHEET ARRANGEMENTS. At December 28, 2003, we had no
off-balance sheet arrangements of the nature described in Item 303(a)(4) of
Regulation S-K.

CAPITAL EXPENDITURES. Management anticipates that new non-hotel based
restaurants will cost between $1 million and $2 million per restaurant to build
and open depending upon the location and available tenant allowances. Hotel
based restaurants may involve remodeling existing facilities, substantial
capital contributions from the hotel operators and other factors which will
cause the cost to us of opening such restaurants to be less than our cost to
build and open non-hotel based restaurants.

Capital expenditures were $1.4 million in 2001, $1.3 million in 2002 and
$1.7 million in 2003. Capital expenditures in fiscal 2004 are expected to be
between $0.2 million and $2.2 million, primarily for the development of new
restaurants, capital replacements and refurbishing existing restaurants. The
amount of actual capital expenditures will be dependent upon, among other
things, the proportion of free standing versus hotel based properties as hotel
based restaurants are expected to generally require lower capital investment on
our part. In addition, if we open more, or less, restaurants than we currently
anticipate, our capital requirements will increase, or decrease, accordingly.

In October 2002, we signed a lease for an owned hotel based restaurant in
Bethesda, Maryland. The restaurant opened January 19, 2004. Construction of
the restaurant was paid for through a $1.8 million tenant improvement allowance.

CONVERTIBLE SECURITIES AND WARRANTS. In order to finance restaurant
openings during 1997 and 1998, we conducted an offering of common stock,
convertible preferred stock and warrants during 1997 and entered into a joint
operating arrangement and loan in 1998.

The 1997 offering provided net proceeds of approximately $1.5 million. The
1997 offering consisted of a private placement of 50,000 shares of common stock,
1,000 shares of Series I Convertible Preferred Stock, 500 shares of Series II
10% Convertible Preferred Stock, 187,500 five year $8.00 Warrants and 187,500
five year $12.00 Warrants. The aggregate sales price of those securities was
$1,500,000.

The Series I Convertible Preferred Stock was converted into 200,000 shares
of common stock in July 2000.

The Series II 10% Convertible Preferred Stock is convertible into common
stock commencing one year from the date of issuance at the greater of (i) $4.00
per share, or (ii) 75% of the average closing price of our common stock for the
five trading days immediately prior to the date of conversion; provided,
however, that the conversion price shall in no event exceed $10.00 per share.
The Series II 10% Convertible Preferred Stock is entitled to receive an annual
dividend equal to $100 per share payable on conversion or redemption in cash or,
at our option, in common stock at the then applicable conversion price. The
Series II Convertible Preferred Stock is subject to redemption, in whole or in
part, at our option on or after the second anniversary of issuance at $1,000 per
share. Accrued dividends in arrears total $326,000 at December 28, 2003 and
$276,000 at December 29, 2002.

The $8.00 Warrants were exercisable to purchase common stock at a price of
$8.00 per share commencing three years from the date of issuance and ending five
years from the date of issuance. The warrants expired in June 2002.

The $12.00 Warrants were exercisable to purchase common stock at a price of
$12.00 per share commencing three years from the date of issuance and ending
five years from the date of issuance. The warrants expired in June 2002.

STARWOOD ALLIANCE

In July 2001, we completed a transaction with Starwood Hotels and Resorts
Worldwide, Inc. pursuant to which we sold 666,667 shares of restricted common
stock and 666,667 stock warrants at $2.00 to Starwood for $1,000,000.
Concurrently, we sold an additional 666,666 shares of restricted common stock
and 666,666 stock purchase warrants for $2.25 to other strategic investors for
$1,000,000. Proceeds reflected in the financial statements are net of
transaction costs.

In conjunction with the investment by Starwood, we and Starwood entered
into a Development Agreement under which we and Starwood agreed to jointly
develop our restaurant properties in Starwood hotels.

Under the Starwood Development Agreement, either we or Starwood may propose
to develop a Daily Grill, Grill or City Bar and Grill restaurant in a Starwood
hotel property. If the parties agree in principal to the development of a
restaurant, the parties will attempt to negotiate either a management agreement
or a license agreement with respect to the operation of the restaurant.

Under the Development Agreement, we are obligated to issue to Starwood
warrants to acquire a number of shares of our common stock equal to four percent
of the outstanding shares upon the attainment of certain development milestones.
Such warrants are issuable upon execution of management agreements and/or
license agreements relating to the development and operation, and the
commencement of operation, of an aggregate of five, ten, fifteen and twenty of
our branded restaurants. If the market price of our common stock on the date
the warrants are to be issued is greater than the market price on the date of
the Development Agreement, the warrants will be exercisable at a price equal to
the greater of (1) 75% of the market price as of the date such warrant becomes
issuable, or (2) the market price on the date of the Development Agreement. If
the market price of our common stock on the date the warrants are to be issued
is less than the market price on the date of the Development Agreement, the
warrants will be exercisable at a price equal to the market price as of the date
such warrants become issuable. The warrants will be exercisable for a period of
five years.

In addition to the warrants described above, if and when the aggregate
number of restaurants operated under the Development Agreement exceeds 35% of
the total Daily Grill, Grill and City Grill-branded restaurants, we will be
obligated to issue to Starwood a warrant to purchase a number of shares of our
common stock equal to 0.75% of the outstanding shares on that date exercisable
for a period of five years at a price equal to the market price at that date.
On each anniversary of that date at which the restaurants operated under the
Development Agreement continues to exceed the 35% threshold, for so long as the
Development Agreement remains effective, we shall issue to Starwood additional
warrants to purchase 0.75% of the outstanding shares on that date at an exercise
price equal to the market price on that date.

TERMINATION OF PIZZERIA UNO OPERATIONS

In July 2001, we sold our South Plainfield, New Jersey Pizza Restaurant for
net proceeds of $225,000.

In April 2002, we sold our Cherry Hill, New Jersey Pizza Restaurant for net
proceeds of $264,000.

RESTAURANT CLOSINGS

In April 2002, we closed our Encino, California Daily Grill restaurant when
the lease expired. Assets of the restaurant were sold for net proceeds of
$61,000.

SHORT-TERM FINANCING REQUIREMENTS

Management believes that we have adequate resources on hand and operating
cash flow to sustain operations for at least the following 12 months through
March 2005. We project increased operating cash flows in 2004 which, when added
to existing cash balances, will allow us to meet all operating, investing and
financing needs. Such projections are based on sales increases due to store
openings, as well as modest increases in same store sales. We do not expect
sales to decrease in fiscal year 2004 as was the case in fiscal 2002, however, a
further deterioration in the economy and the hospitality industry could impact
projected cash flows. Management believes it can respond to a decrease in sales
through cost controls, reductions in discretionary capital improvements and
borrowings under the existing credit facility. In order to fund the opening of
additional restaurants, we might require additional capital that might be raised
through the issuance of debt or equity securities, or the formation of
additional investment/loan arrangements, or a combination thereof. We presently
have no commitments in that regard. See "Business -- Business Expansion" and
"Management's Discussion and Analysis -- Certain Factors Affecting Future
Operating Results."

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.

Principals of Consolidation and Minority Interests
--------------------------------------------------

Our restaurant operations are conducted through multiple wholly-owned
subsidiaries as well as through four majority-owned limited liability companies
and through a 50% owned joint venture. Our consolidated financial statements
include balance sheet and income statement items, after eliminating intercompany
accounts and transactions, of each wholly-owned and majority-owned subsidiary.
The proportionate interest of the earnings or loss of majority-owned
subsidiaries attributable to the minority owners of those subsidiaries is
reflected in a single statement of operations entry, with minority interests in
earnings being a reduction in net income and minority interests in losses being
an increase in net income. The proportionate interest in the equity of
majority-owned subsidiaries attributable to the minority owners of those
subsidiaries is reflected as a single balance sheet entry between liabilities
and stockholders' equity.

Our interest in the 50% owned joint venture that operates the Universal
CityWalk Daily Grill is accounted for under the equity method of accounting.
Under the equity method, the balance sheet and statement of operations items of
that joint venture are not included on our financial statements. Instead, we
report on our statement of operations a single line entry reflecting our
proportionate interest in the earnings or loss of the joint venture, provided
that the aggregate net losses from the joint venture do not exceed our equity in
the venture. Our equity in the joint venture is reflected as an investment on
the balance sheet that is adjusted, but not below zero, to reflect our aggregate
share of net income and losses of the venture.

Impairment of Long-Lived Assets
-------------------------------

We review all long-lived assets on a regular basis to determine if there
has been an impairment in the value of those assets. If, upon review, it is
determined that the carrying value of those assets may not be recoverable, we
will record a charge to earnings and reduce the value of the asset on the
balance sheet to the amount determined to be recoverable.

For purposes of evaluating recoverability of long-lived assets, the
recoverability test is performed using undiscounted cash flows of the individual
restaurants and consolidated undiscounted net cash flows for long-lived assets
not identifiable to individual restaurants compared to the related carrying
value. If the undiscounted operating income is less than the carrying value,
the amount of the impairment, if any, will be determined by comparing the
carrying value of each asset with its fair value. Fair value is generally based
on a discounted cash flow analysis.

Based on our review of our presently operating restaurants and other
long-lived assets, during the fiscal year ended December 28, 2003, we recorded
no impairments of our long-lived assets.

Valuation of Accounts Receivable
-----------------------------------

We review all of our accounts receivable on a regular basis to determine
the collectability of each account based on age, response to collection efforts,
and other factors. We establish a reserve for those accounts where collection
seems doubtful. If a determination is made that the customer will definitely
not pay, the amount is written off against the reserve.

Based on our review at December 28, 2003, the current reserve for
uncollectable accounts receivable is adequate.

CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS

This 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. Our actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such
a difference include the following: adverse weather conditions and other
conditions affecting agricultural output which may cause shortages of key food
ingredients and volatility of food prices and which, in turn, may reduce
operating margins; changes in consumer tastes, demographics and adverse economic
conditions which may result in reduced frequency of dining at our restaurants;
the dependence on key personnel and ability to attract and retain qualified
management and restaurant personnel to support existing operations and future
growth; regulatory developments, particularly relating

to labor matters (i.e., minimum wage, health insurance and other benefit
requirements), health and safety conditions, service of alcoholic beverages and
taxation, which could increase the cost of restaurant operations; establishment
of market position and consumer acceptance in new markets in light of intense
competition in the restaurant industry and the geographic separation of senior
management from such markets; potential delays in securing sites for new
restaurants and delays in opening restaurants which may entail additional costs
and lower revenues than would otherwise exist in the absence of such delays; the
availability of capital to fund future restaurant openings; rising energy costs
and the occurrence of rolling blackouts in California which may result in higher
occupancy costs and periodic restaurant closures; potential increases in meat
prices with corresponding decreases in operating margins. In addition to the
foregoing, the following specific factors may affect the Company's future
operating results:

The anticipated opening of additional Daily Grill and Grill locations is
expected to result in the incurrence of various pre-opening expenses and high
initial operating costs which may adversely impact earnings during the first
year of operations of such restaurants. However, management anticipates that
each of such operations can be operated profitably within the first year of
operations and that the opening of each of the restaurants presently
contemplated will improve revenues and profitability.

In order to better manage the cost of our workers compensation expense,
commencing in 2004, we have altered our workers compensation coverage to
substantially increase our per event and aggregate deductibles. As a result, we
expect to substantially reduce our recurring cost of workers compensation
insurance. On the other hand, we will have substantially higher exposure to
losses resulting from claims under that policy should those claims exceed our
prior deductible levels.

The employees of the Chicago restaurant are members of the Hotel Employees
and Restaurant Employees Union AFL-CIO. The union contract covering the Chicago
Grill was recently signed extending it until August 2005. Under the new union
contract, our labor costs are expected to increase slightly.

FUTURE ACCOUNTING REQUIREMENTS

In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires that upon issuance of a guarantee, the entity (i.e.,
the guarantor) must recognize a liability for the fair value of the obligation
it assumes under that guarantee. FIN 45's provisions for initial recognition
and measurement were effective on a prospective basis to guarantees issued or
modified after December 31, 2002. Consistent with the provisions of FIN 45, we
have applied this statement prospectively. As required by FIN 45, the
disclosure provisions, when required, have been included in our consolidated
financial statements for the year ended 2003. Adoption of this statement has had
no impact on our consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure'" which amends SFAS No. 123. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based compensation and the effect of the method
on reported results of operations. As we have not elected to change to the fair
value based method of accounting for stock based employee compensation, the
adoption of SFAS No. 148 did not have a material impact on our financial
position or results of operations. All disclosure requirements of SFAS No. 148
have been adopted and are reflected in these financial statements.

In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities," which addresses the consolidation of business enterprises
(variable interest entities) to which the usual condition (ownership of a
majority voting interest) of consolidation does not apply. The interpretation
focuses on financial interests that indicate control. It concludes that in the
absence of clear control through voting interests, a company's exposure
(variable interest) to the economic risks and potential rewards from the
variable interest entity's assets and activities are the best evidence of
control. Variable interests are rights and obligations that convey economic
gains or losses from changes in the values of the variable interest entity's
assets and liabilities. Variable interest may arise from financial instruments,
service contracts, nonvoting ownership interests and other arrangements. If an
enterprise holds a majority of the variable interests of an entity, it would be
considered the primary beneficiary. The primary beneficiary would be required
to include the assets, liabilities and the results of operations of the variable
interest

entity in its financial statements. In December 2003, the FASB issued a revision
to FIN 46 to address certain implementation issues. The provisions of this
Interpretation will be effective for the Company for interim periods ending
after March 15, 2004. The Company is in the process of reviewing its various
agreements in order to determine if any variable interest entities exist which
would require consolidation. At this point the Company does not believe that it
holds the majority of the variable interests of an entity whereby it would be
considered the primary beneficiary. Accordingly, the adoption of this
Interpretation is not expected to have a significant impact on the Company's
financial results of operations and financial position upon adoption.

In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity", was issued. This
Statement establishes standards for how an issuer classifies and measurers
certain financial instruments with characteristics of both liabilities and
equity. FASB Staff Position No. FAS 150-3, "Effective Date for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity," was issued on November 7, 2003. The FASB Staff
Position deferred the effective date for the classification and measurement
provisions for certain mandatorily redeemable noncontrolling interests for an
indefinite period. The other provisions of this Statement were effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
were effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 for those provisions effective in the
current period has not had a significant impact on the Company's financial
results of operations and financial position. The adoption of those provisions
effective in 2004 is not expected to have a significant impact on the Company's
financial results of opertions and financial position.

IMPACT OF INFLATION

Substantial increases in costs and expenses, particularly food, supplies,
labor and operating expenses, could have a significant impact on our operating
results to the extent that such increases cannot be passed along to customers.
We do not believe that inflation has materially affected our operating results
during the past two years.

A majority of our employees are paid hourly rates related to federal and
state minimum wage laws and various laws that allow for credits to that wage.
Our cost of operations have been affected by several increases in the Federal
and State minimum wage in recent years, including a state minimum wage increase
in California in January 2002. In addition, further increases in the minimum
wage are also being discussed by the federal and various state governments.
Although we have been able to and will continue to attempt to pass along
increases in costs through food and beverage price increases, there can be no
assurance that all such increases can be reflected in our prices or that
increased prices will be absorbed by customers without diminishing, to some
degree, customer spending at its restaurants.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates on funded
debt. This exposure relates to its reducing credit line facility. At December
28, 2003 there are no borrowings under the credit line. Borrowings under the
credit facility bear interest at the lender's prime rate. A hypothetical 1%
interest rate change would not have a material impact on our results of
operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements, together with the report of
independent auditors appear herein. See Index to Financial Statements on F-1 of
this report.

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures (as defined in
Exchange Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure that
information required to be disclosed in the Company's Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding the required disclosure.

In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.

An evaluation as of the end of the period covered by this report was
carried out under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) and Rule 15d -15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based on their
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures are effective to ensure that we
record, process, summarize, and report information required to be disclosed by
us in our reports filed under the Securities Exchange Act within the time
periods specified by the Securities and Exchange Commission's rules and forms.

Subsequent to filing our original report, and in connection with the review
of our financial statements for the first quarter of 2004, our independent
accountants, PricewaterhouseCoopers LLP, reported to management and the Audit
Committee that our stock options plans which had been accounted for using fixed
accounting should have been accounted for using variable accounting.
PricewaterhouseCoopers LLP also advised management and the Audit Committee that
it considered this situation to be a material weakness. In response to the
report of our independent accountants, and after re-evaluation of our stock
option accounting practices, our management determined to restate our
consolidated financial statements as of and for the year ended December 28, 2003
and for the first three quarters of fiscal 2003, to recognize compensation
expense arising from the application of variable accounting to our existing
stock option plans. During the restatement process, we also elected to make
other miscellaneous corrections which were previously identified but passed upon
due to their immaterial impact on our consolidated financial statements.

In conjunction with the decision to restate our financial statements,
management re-evaluated our disclosure controls and procedures over the
selection and application of accounting principles, in particular stock option
accounting under APB 25 and SFAS 123. During the second quarter of 2004, we
took steps to identify, rectify and prevent the recurrence of the circumstances
that resulted in our determination to restate prior period financial statements,
including reviewing the terms of our grant agreements in relation to the option
plan agreement, consulting with our independent accountants, increasing emphasis
on continuing education for our accounting personnel and increasing emphasis on
reviewing applicable accounting literature, all relating to the selection and
application of accounting principles pertaining to stock options. We believe
these enhancements to our system of internal controls and our disclosure
controls and procedures will be adequate to provide reasonable assurance that
the control objectives will be met.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of our fiscal year. Such information is incorporated herein by
reference.

Information with respect to our executive officers is included in Part I.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this Report:

(1) Consolidated Financial Statements: See Index to Financial Statements
on page F-1 of this report for financial statements and supplementary data filed
as part of this report.

(2) Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts and Allowances

(3) Exhibits

Exhibit
Number Description of Exhibit
------ ----------------------

3.1 Certificate of Incorporation, as amended, of Grill Concepts, Inc. (7)
3.2 Certificate of Amendment to Restated Certificate of Incorporation of
Grill Concepts, Inc. (8)
3.3 Certificate of Amendment to Restated Certificate of Incorporation of
Grill Concepts, Inc. dated August 1999 (13)

3.4 Certificate of Amendment of Restated Certificate of Incorporation of
Grill Concepts, Inc., dated July 3, 2001 (20)
3.5 Bylaws, as amended, of Grill Concepts, Inc. (1)
3.6 Amendment to Bylaws of Magellan Restaurant Systems, Inc. dated
December 31, 1994 (2)
4.1 Certificate of Designation fixing terms of Series II Preferred Stock
(8)
4.2 Specimen Common Stock Certificate (1)
4.3 Form of Offshore Warrant (3)
4.4 Form of $8.00 Warrant (8)
4.5 Form of $12.00 Warrant (8)
10.1 Form of Franchise Agreement (1)
10.2 Lease Agreement between Uno Concepts of Cherry Hill, Inc. and Denbob
Corp. dated June 29, 1989 for premises in Cherry Hill, New Jersey (1)
+10.3 Grill Concepts, Inc. 1995 Stock Option Plan (6)
+10.4 Employment Agreement, dated January 1, 2001, with Robert Spivak (18)
10.5 Operating Agreement for San Jose Grill LLC, dated June 1997 (9)
10.6 Amendment, dated December 1997, to Operating Agreement for San Jose
Grill LLC (9)
10.7 Subordinate Note, dated December 1997, relating to San Jose Grill LLC
(9)
10.8 Management Agreement re: San Jose City Bar & Grill (10)
10.9 Blanket Conveyance, Bill of Sale and Assignment between Grill
Concepts, Inc. and Air Terminal Services, Inc. (11)
10.10 License Agreement between Grill Concepts, Inc. and Airport Grill,
L.L.C. (11)
10.11 Agreement, dated August 27, 1998, between Grill Concepts, Inc. and
Hotel Restaurant Properties, Inc. (11)
10.12 Restaurant Management Agreement between Grill Concepts, Inc., Hotel
Restaurant Properties, Inc. and CapStar Georgetown Company, L.L.C. for
the Georgetown Inn (11)
10.13 Loan Agreement between Grill Concepts, Inc. and The Wolff Revocable
Trust of 1993 (12)
10.14 Addendum to Management Agreement re: San Jose City Bar & Grill (12)
+10.15 Grill Concepts, Inc. 1998 Comprehensive Stock Option and Award Plan,
as amended February 27, 2001 (14)
10.16 Bank of America Business Loan Agreement (15)
10.17 Peter Roussak Warrant dated November 1999 (15)
10.18 Chicago - Grill on the Alley Warrant (15)
10.19 Chicago - Grill on the Alley First Extension Warrant (15)
10.20 Chicago - Grill on the Alley Second Extension Warrant (15)
10.21 Guaranty - Michigan Avenue Group Note (15)
10.22 Operating Agreement for Chicago - The Grill on the Alley LLC (15)
10.23 Letter Agreement dated July 19, 2000 with Wells Fargo Bank (16)
10.24 Indemnification Agreement between Grill Concepts, Inc., Lewis N.
Wolff and the Lewis N. Wolff Revocable Trust of 1993 and Michael S.
Weinstock and Michael S. Weinstock Trustee of the Michael S. Weinstock
Living Trust (16)
10.25 Form of Letter Agreement regarding Loan Facility (16)
10.26 Form of four year 9% Promissory Note (16)
10.27 Form of Warrant issued in connection with Promissory Notes (16)
10.28 Guarantee Agreement dated July 11, 2000 with Michael Weinstock and
Lewis Wolff (16)
10.29 Form of Warrant issued in connection with Loan Guaranty (16)
10.30 Michael Grayson Warrant (17)
10.31 Daily Grill Restaurant Management Agreement, dated February 5, 2001,
between Grill Concepts Management, Inc., Hotel Restaurant Properties
II Management, Inc., and Handlery Hotel, Inc. (17)
10.32 Asset Purchase Agreement, dated October 18, 2000 re: South Plainfield
Pizzeria Uno (17)
10.33 Subscription Agreement, dated May 16, 2001, by and between Grill
Concepts, Inc. and Starwood Hotels & Resorts Worldwide, Inc. (19)
10.34 Development Agreement by and between Grill Concepts, Inc. and
Starwood Hotels & Resorts Worldwide, Inc. (19)
10.35 Investor Rights Agreement by and between Grill Concepts, Inc. and
Starwood Hotels & Resorts Worldwide, Inc. (19)
10.36 Stockholders' Agreement by and between Grill Concepts, Inc., Starwood
Hotels & Resorts Worldwide, Inc., Robert Spivak, Michael Weinstock,
Lewis Wolff, Keith Wolff and Wolff Revocable Trust of 1993. (18)

10.37 Form of $2.00 Warrant. (19)
10.38 Amendment to Hotel Restaurant Properties, Inc. Agreement, dated July
27, 2001 (20)
10.39 Amendment to San Jose City Bar and Grill Agreement (21)
14.1 Code of Business Ethics - CEO and Senior Financial Officers (22)
14.2 Code of Ethics (22)
21.1 Subsidiaries of Registrant (22)
23.1* Consent of PricewaterhouseCoopers LLP
31.1* Section 302 Certification of CEO
31.2* Section 302 Certification of CFO
32.1* Certification of CEO 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 CFO Pursuant to 18.U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+ Compensatory plan or management agreement.
* Filed herewith
(1) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-55378-NY) declared effective by the Securities and Exchange Commission
on May 11, 1993.
(2) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form S-4 (Commission File No. 33-
85730) declared effective by the Securities and Exchange Commission on
February 3, 1995.
(3) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1996.
(4) Incorporated by reference to the respective exhibits filed with
Registrant's Current Report on Form 8-K dated December 13, 1996.
(5) Incorporated by reference to the respective exhibits filed with
Registrant's Annual Report on Form 10-KSB for the year ended December 25,
1994.
(6) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 25,
1995.
(7) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-55378-NY) declared effective by the Securities and Exchange Commission
on May 11, 1993 and the exhibits filed with the Registrant's Current Report
on Form 8-K dated March 3, 1995.
(8) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-QSB for the quarter ended June 29, 1997.
(9) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-KSB for the year ended December 28,
1997.
(10) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-QSB for the quarter ended March 29, 1998.
(11) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-QSB for the quarter ended September 27, 1998.
(12) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended December 27,
1998.
(13) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-Q for the quarter ended June 27, 1999.
(14) Incorporated by reference to the Company's Definitive Proxy Statement filed
May 29, 2001.
(15) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-K for the year ended December 26, 1999.
(16) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-Q for the quarter ended September 24, 2000.
(17) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2000.
(18) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-Q for the quarter ended April 1, 2001.

(19) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 8-K dated May 16, 2001.
(20) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-Q for the quarter ended July 1, 2001.
(21) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-K for the year ended December 30, 2001.

(b) Reports on Form 8-K

The Company filed no reports on Form 8-K during the quarter ended December
28, 2003.

SIGNATURES

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

GRILL CONCEPTS, INC.

By: /s/ Robert Spivak
Robert Spivak
President

Dated: March 25, 2004

Grill Concepts, Inc. and Subsidiaries
Schedule II

VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES

Balance at Additions Balance
Beginning Charged to Net At End
Of Year Operations Deductions Of Year

Allowance for
Doubtful Accounts
Year Ended
December 30, 2001 $ - $ - $ - $ -
December 29, 2002 $ - $ 46,000 $ - $ 46,000
December 28, 2003 $ 46,000 $ 29,000 $ 62,000 $ 13,000

GRILL CONCEPTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

REPORT OF INDEPENDENT AUDITORS F-2

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 28, 2003 (RESTATED) AND DECEMBER 29, 2002 (RESTATED) F-3

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 28, 2003 (RESTATED), DECEMBER 29, 2002 F-4
AND DECEMBER 30, 2001 (RESTATED)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 28, 2003 (RESTATED), DECEMBER 29, 2002 (RESTATED) F-5
AND DECEMBER 30, 2001 (RESTATED)

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 28, 2003 (RESTATED), DECEMBER 29, 2002 F-6
AND DECEMBER 30, 2001 (RESTATED)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7

REPORT OF INDEPENDENT AUDITORS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Grill Concepts, Inc.

In our opinion, the consolidated financial statements referred to under Item
15(a)(1) and listed in the index appearing on page F-1, present fairly, in all
material respects, the financial position of Grill Concepts, Inc. and its
subsidiaries at December 28, 2003 and December 29, 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended December 28, 2003 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules 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 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 1 to the accompanying consolidated financial statements,
the Company has restated its financial statements as of December 28, 2003 and
December 29, 2002 and for each of the three years in the period ended December
28, 2003.

As discussed in Note 2 to the consolidated financial statements, effective
December 31, 2001, the Company changed its method of accounting for goodwill in
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets."

PricewaterhouseCoopers LLP
March 11, 2004, except for the restatement as described
in Note 1 which is as of May 14, 2004
Los Angeles, CA

F-2

F-3

GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 28, DECEMBER 29,
2003. 2002.
-------------- --------------
RESTATED RESTATED

ASSETS

CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 1,473,000 $ 1,275,000
INVENTORIES 570,000 469,000
RECEIVABLES, NET OF RESERVE ($13,000 AND $46,000 IN 2003 AND 2002, RESPECTIVELY) 741,000 549,000
PREPAID EXPENSES AND OTHER CURRENT ASSETS 608,000 527,000
-------------- --------------
TOTAL CURRENT ASSETS 3,392,000 2,820,000

FURNITURE, EQUIPMENT AND IMPROVEMENTS, NET 9,020,000 8,768,000

GOODWILL 205,000 205,000
LIQUOR LICENSES 330,000 332,000
RESTRICTED CASH 72,000 616,000
ADVANCES TO MANAGED OUTLETS 331,000 351,000
NOTE RECEIVABLE 111,000 121,000
OTHER ASSETS 426,000 452,000
-------------- --------------
TOTAL ASSETS $ 13,887,000 $ 13,665,000
============== ==============

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 998,000 $ 978,000
ACCRUED EXPENSES 2,315,000 2,129,000
CURRENT PORTION OF LONG-TERM DEBT 254,000 403,000
CURRENT PORTION NOTES PAYABLE - RELATED PARTIES 269,000 306,000
-------------- --------------
TOTAL CURRENT LIABILITIES 3,836,000 3,816,000

LONG-TERM DEBT 283,000 538,000
NOTES PAYABLE - RELATED PARTIES 323,000 438,000
OTHER LONG-TERM LIABILITIES 1,496,000 325,000
-------------- --------------

TOTAL LIABILITIES 5,938,000 5,117,000
-------------- --------------

MINORITY INTEREST 1,521,000 2,370,000

COMMITMENTS AND CONTINGENCIES (NOTE 10)

STOCKHOLDERS' EQUITY:
SERIES I, CONVERTIBLE PREFERRED STOCK, $0.01 PAR VALUE; 1,000,000 SHARES
AUTHORIZED, NONE ISSUED AND OUTSTANDING IN 2003 AND 2002 - -
SERIES II, 10% CONVERTIBLE PREFERRED STOCK, $.001 PAR VALUE; 1,000,000 SHARES
AUTHORIZED, 500 SHARES ISSUED AND OUTSTANDING IN 2003 AND 2002, LIQUIDATION
PREFERENCE OF $326,000 AND $276,000 IN 2003 AND 2002, RESPECTIVELY - -
COMMON STOCK, $.00004 PAR VALUE; 12,000,000 SHARES AUTHORIZED IN 2003 AND
2002, 5,537,071 ISSUED AND OUTSTANDING IN 2003 AND 2002 - -
ADDITIONAL PAID-IN CAPITAL 13,207,000 13,207,000
ACCUMULATED DEFICIT (6,779,000) (7,029,000)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 6,428,000 6,178,000
-------------- --------------

TOTAL LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY $ 13,887,000 $ 13,665,000
============== ==============

The accompanying notes are an integral part of these consolidated financial
statements.
F-4

GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

DECEMBER 28, DECEMBER 29, DECEMBER 30,
2003. 2002. 2001.
-------------- -------------- --------------
RESTATED RESTATED

REVENUES:
SALES $ 45,427,000 $ 41,286,000 $ 44,529,000
MANAGEMENT AND LICENSE FEES 1,147,000 1,006,000 872,000
-------------- -------------- --------------
TOTAL REVENUES 46,574,000 42,292,000 45,401,000
COST OF SALES (EXCLUSIVE OF DEPRECIATION, PRESENTED SEPARATELY
BELOW) 12,743,000 11,434,000 12,416,000
-------------- -------------- --------------

GROSS PROFIT 33,831,000 30,858,000 32,985,000
-------------- -------------- --------------

OPERATING EXPENSES:
RESTAURANT OPERATING EXPENSES 28,150,000 25,678,000 27,263,000
GENERAL AND ADMINISTRATIVE 3,815,000 3,568,000 3,530,000
DEPRECIATION AND AMORTIZATION 1,461,000 1,492,000 1,457,000
PRE-OPENING COSTS 182,000 69,000 199,000
GAIN ON SALE OF ASSETS (12,000) (71,000) (225,000)
-------------- -------------- --------------
TOTAL OPERATING EXPENSES 33,596,000 30,736,000 32,224,000
-------------- -------------- --------------
INCOME FROM OPERATIONS 235,000 122,000 761,000
INTEREST EXPENSE, NET (138,000) (150,000) (182,000)
INTEREST EXPENSE - RELATED PARTIES (56,000) (64,000) (212,000)
-------------- -------------- --------------

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN LOSS OF JOINT VENTURE 41,000 (92,000) 367,000
PROVISION FOR INCOME TAXES (89,000) (37,000) (65,000)
-------------- -------------- --------------

INCOME (LOSS) BEFORE MINORITY INTEREST AND EQUITY IN LOSS OF
JOINT VENTURE (48,000) (129,000) 302,000
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 317,000 285,000 211,000
EQUITY IN LOSS OF JOINT VENTURE (19,000) (23,000) (9,000)
-------------- -------------- --------------

NET INCOME 250,000 133,000 504,000

PREFERRED DIVIDENDS ACCRUED (50,000) (50,000) (50,000)
-------------- -------------- --------------

NET INCOME APPLICABLE TO COMMON STOCK $ 200,000 $ 83,000 $ 454,000
============== ============== ==============

NET INCOME PER SHARE APPLICABLE TO COMMON STOCK:
BASIC NET INCOME $ 0.04 $ 0.02 $ 0.10
============== ============== ==============
DILUTED NET INCOME $ 0.04 $ 0.02 $ 0.09
============== ============== ==============
AVERAGE-WEIGHTED SHARES OUTSTANDING:
BASIC 5,537,071 5,537,071 4,776,741
============== ============== ==============
DILUTED 5,640,842 5,551,751 4,866,449
============== ============== ==============

The accompanying notes are an integral part of these consolidated financial
statements.
F-5

GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

SERIES I PREFERRED STOCK SERIES II PREFERRED STOCK COMMON STOCK

SHARES AMOUNT. SHARES AMOUNT. SHARES AMOUNT.
------------ ------------- ------------ -------------- ------------ --------

BALANCE, DECEMBER 31, 2000 - RESTATED - $ - 500 $ - 4,203,738 $ -

ISSUANCE OF COMMON STOCK AND WARRANTS - - - - 1,333,333 -

NET INCOME - RESTATED - - - - - -
------------ ------------- ------------ -------------- ------------ --------

BALANCE, DECEMBER 30, 2001 - RESTATED - - 500 - 5,537,071 -

NET INCOME - - - - - -
------------ ------------- ------------ -------------- ------------ --------

BALANCE, DECEMBER 29, 2002 - RESTATED - - 500 - 5,537,071 -

NET INCOME - RESTATED - - - - - -
------------ ------------- ------------ -------------- ------------ --------

BALANCE, DECEMBER 28, 2003 - RESTATED - $ - 500 $ - 5,537,071 $ -
============ ============= ============ ============== ============ ========

ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL. DEFICIT. TOTAL
----------- ------------- ----------

BALANCE, DECEMBER 31, 2000 - RESTATED $11,126,000 $ (7,666,000) $3,460,000

ISSUANCE OF COMMON STOCK AND WARRANTS 2,081,000 - 2,081,000

NET INCOME - RESTATED - 504,000 504,000
----------- ------------- ----------

BALANCE, DECEMBER 30, 2001 - RESTATED 13,207,000 (7,162,000) 6,045,000

NET INCOME - 133,000 133,000
----------- ------------- ----------

BALANCE, DECEMBER 29, 2002 - RESTATED 13,207,000 (7,029,000) 6,178,000

NET INCOME - RESTATED - 250,000 250,000
----------- ------------- ----------

BALANCE, DECEMBER 28, 2003 - RESTATED $13,207,000 $ (6,779,000) $6,428,000
=========== ============= ==========

The accompanying notes are an integral part of these consolidated financial
statements.
F-7

GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

DECEMBER 28, DECEMBER 29, DECEMBER 30,
2003 2002. 2001
-------------- -------------- --------------
RESTATED RESTATED

CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 250,000 $ 133,000 $ 504,000
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 1,461,000 1,492,000 1,457,000
STOCK BASED COMPENSATION EXPENSE (INCOME) 168,000 - (15,000)
GAIN ON SALE OF ASSETS (12,000) (71,000) (225,000)
MINORITY INTEREST IN NET LOSS OF SUBSIDIARIES (317,000) (285,000) (211,000)
EQUITY IN LOSS OF JOINT VENTURE 19,000 23,000 9,000
CHANGES IN OPERATING ASSETS AND LIABILITIES:
INVENTORIES (101,000) 121,000 (49,000)
RECEIVABLES (192,000) 53,000 (1,000)
PREPAID EXPENSES AND OTHER CURRENT ASSETS (96,000) 33,000 (303,000)
OTHER ASSETS 15,000 78,000 (56,000)
ACCOUNTS PAYABLE 20,000 (201,000) (241,000)
ACCRUED EXPENSES (68,000) (367,000) 488,000
OTHER LONG-TERM LIABILITIES 38,000 (6,000) 39,000
-------------- -------------- --------------

NET CASH PROVIDED BY OPERATING ACTIVITIES 1,185,000 1,003,000 1,396,000
-------------- -------------- --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF FURNITURE, EQUIPMENT AND IMPROVEMENTS (1,656,000) (1,335,000) (1,423,000)
CHANGE IN RESTRICTED CASH FOR DAILY GRILL AT CONTINENTAL PARK, LLC 544,000 (616,000) -
PROCEEDS FROM SALE OF FIXED ASSETS 26,000 175,000 655,000
ADVANCE TO (REPAYMENTS FROM) MANAGED OUTLETS 20,000 (351,000) -
PURCHASE OF LIQUOR LICENSES (12,000) - (31,000)
ADDITIONAL INVESTMENT IN CITYWALK (50,000) (47,000) -
-------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (1,128,000) (2,174,000) (799,000)
-------------- -------------- --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
TENANT IMPROVEMENT ALLOWANCES 1,133,000 - -
RETURN OF CAPITAL, PREFERRED RETURN AND PROFIT TO MINORITY MEMBER ON
SAN JOSE GRILL LLC (275,000) (167,000) (90,000)
PROCEEDS FROM MINORITY MEMBER'S INVESTMENT IN LLCS - 1,000,000 1,200,000
RETURN OF CAPITAL AND PREFERRED RETURN TO MINORITY MEMBER ON
CHICAGO - THE GRILL ON THE ALLEY, LLC (176,000) (176,000) (191,000)
NOTE RECEIVABLE COLLECTIONS 15,000 - -
PAYMENTS ON LONG TERM DEBT AND BANK LOANS (404,000) (371,000) (1,562,000)
PAYMENTS ON RELATED PARTY DEBT (152,000) (140,000) (138,000)
PROCEEDS FROM ISSUANCE OF COMMON STOCK - - 1,861,000
-------------- -------------- --------------

NET CASH PROVIDED BY FINANCING ACTIVITIES 141,000 146,000 1,080,000
-------------- -------------- --------------

NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 198,000 (1,025,000) 1,677,000

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,275,000 2,300,000 623,000
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,473,000 $ 1,275,000 $ 2,300,000
============== ============== ==============

SUPPLEMENTAL CASH FLOWS INFORMATION:
CASH PAID DURING THE YEAR FOR:
INTEREST $ 186,000 $ 240,000 $ 391,000
INCOME TAXES $ 175,000 $ 100,000 $ 28,000
NON-CASH TRANSACTIONS:
NOTE RECEIVABLE FROM SALE OF ASSETS $ - $ 117,000 -

The accompanying notes are an integral part of these consolidated financial
statements.
F-8

GRILL CONCEPTS, INC. AN SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION

GENERAL

Grill Concepts, Inc. (the "Company") is incorporated under the laws of the
State of Delaware. The Company operates exclusively in the restaurant
industry in the United States. At December 28, 2003, the Company owned and
operated fourteen restaurants, consisting of eight Daily Grill restaurants
in California; The Grill on the Alley ("The Grill"); The Grill in San Jose
("The San Jose Grill LLC"); The Grill in Chicago ("Chicago - The Grill on
the Alley LLC"); The Grill on Hollywood (The Grill on Hollywood, LLC): one
Daily Grill in Washington, D.C.; and one Daily Grill in Virginia. Each of
the Company's restaurants is owned and operated on a non-franchise basis by
the Company. In addition the Company manages five Daily Grill restaurants
and licenses three additional Daily Grill restaurants. During 2002 the San
Jose City Bar and Grill which had been operated under a management
agreement was converted to a license agreement.

RESTATEMENT

The accompanying consolidated financial statements as of December 28, 2003
and December 29, 2002 and for each of the three years in the period ended
December 28, 2003 have been restated from those originally issued by the
Company to reflect the accounting for employee stock options using variable
accounting treatment and to make other miscellaneous corrections.

In 2004, the terms of the Company's option grants were reevaluated -
specifically, provisions which allow an employee to exercise the option by
surrendering a portion of the vested shares in lieu of paying cash. Under
the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," this cashless exercise feature requires the
Company to account for its option plan using a variable accounting
treatment. Under variable accounting, compensation expense must be
remeasured each balance sheet date based on the difference between the
current market price of the Company's stock and the option's exercise
price. An accrual for compensation expense is determined based on the
proportionate vested amount of each option as prescribed by Financial
Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans." Each period, adjustments to the
accrual are recognized in the income statement. Previously, the Company had
accounted for its options using a fixed accounting treatment whereby
compensation expense, if any, was only evaluated at the date of the option
grant.

In addition to this change, the Company also recorded additional general
and administrative expenses of $29,000 in the fourth quarter of fiscal year
2003 to correctly state its liability for payroll and other costs, and
reduced restaurant operating expenses by $20,000 in fiscal 2001 to
correctly state rent expense which should have been recognized in fiscal
year 2000. Lastly, the Company increased additional paid-in capital and
accumulated deficit by $55,000 as of each fiscal yearend in the period from
1999 through 2003, to properly reflect the fair value of stock options
issued in connection with severance agreements arranged in fiscal year
1998.

F-9

GRILL CONCEPTS, INC. AN SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION - RESTATEMENT
(CONTINUED)

These revisions impacted the balance sheets as of December 28, 2003 and
December 29, 2002, the statements of operations for the years ended
December 28, 2003 and December 30, 2001, the statements of stockholders'
equity for each of the years in the three year period ended December 28,
2003 and the statements of cash flows for the years ended December 28, 2003
and December 30, 2001. Quarterly data for the year ended December 28, 2003
included in Note 12 have also been restated.

The impact of this restatement, which has been reflected throughout the
consolidated financial statements and accompanying notes, is as follows:

F-10

GRILL CONCEPTS, INC. AN SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Balance Sheet
------------- December 28, December 28, December 29, December 29,
2003 2003 2002 2002
-------------- -------------- ------------- -------------
(As reported) (As restated) (As reported) (As restated)

Accrued expenses $ 2,118,000 $ 2,315,000
Total current liabilities 3,639,000 3,836,000
Total liabilities 5,741,000 5,938,000
Minority interest 1,522,000 1,521,000
Additional paid-in capital 13,152,000 13,207,000 13,152,000 13,207,000
Accumulated deficit (6,528,000) (6,779,000) (6,974,000) (7,029,000)
Total stockholders equity 6,624,000 6,428,000

Income Statement
---------------- Year ended Year ended Year ended Year ended
December 28, December 28, December 30, December 30,
2003 2003 2001 2001
-------------- -------------- ------------- -------------
(As reported) (As restated) (As reported) (As restated)

Restaurant operating expenses 28,095,000 28,150,000 27,288,000 27,263,000
General and administrative 3,673,000 3,815,000 3,540,000 3,530,000
Total operating expenses 33,399,000 33,596,000 32,259,000 32,224,000
Income from operations 432,000 235,000 726,000 761,000
Income (loss) before provision for
income taxes, minority interest, and
equity in loss of joint venture 238,000 41,000 332,000 367,000
Income (loss) before minority interest
and equity in loss of joint venture 149,000 (48,000) 267,000 302,000
Minority interest in loss of subsidiaries 316,000 317,000
Net income 446,000 250,000 469,000 504,000
Net income applicable to common
stock 396,000 200,000 419,000 454,000
Net income per share applicable to
common stock:
Basic net income 0.07 0.04 0.09 0.10
Diluted net income 0.07 0.04 0.09 0.09

Statement of Stockholders' Equity
---------------------------------
(As reported) (As restated)
December 31, 2000
Additional paid-in capital 11,071,000 11,126,000
Accumulated Deficit (7,576,000) (7,666,000)
Total stockholders' equity 3,495,000 3,460,000
December 31, 2001
Additional paid-in capital 13,152,000 13,207,000
Accumulated Deficit (7,107,000) (7,162,000)
Net income 469,000 504,000
December 31, 2002
Additional paid-in capital 13,152,000 13,207,000
Accumulated Deficit (6,974,000) (7,029,000)
December 31, 2003
Additional paid-in capital 13,152,000 13,207,000
Accumulated Deficit (6,528,000) (6,779,000)
Net income 446,000 250,000
Total stockholders' equity 6,624,000 6,428,000

Statement of Cash Flows
----------------------- Year ended Year ended Year ended Year ended
December 28, December 28, December 30, December 30,
2003 2003 2001 2001
-------------- -------------- ------------- -------------
(As reported) (As restated) (As reported) (As restated)

Net income 446,000 250,000 469,000 504,000
Stock based compensation (income) - 168,000 - (15,000)
Minority interest in loss of subsidiaries (316,000) (317,000)
Accrued expenses (97,000) (68,000) 508,000 488,000

F-11

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

LIQUIDITY

At December 28, 2003, the Company had a working capital deficit of $0.4
million and a cash balance of $1.5 million as compared to a working capital
deficit of $1.0 million and a cash balance of $1.3 million at December 29,
2002. The increase in the Company's cash was primarily attributable to cash
provided by operations ($1.2 million), tenant improvement allowances ($1.1
million), partially offset by purchases of fixed assets ($1.7 million) and
repayment of debt ($0.6 million). The Company has generated modest net
income in each of the last four fiscal years and has generated positive
operating cash flows in each of the last six years.

The Company's need for capital resources historically has resulted from,
and for the foreseeable future is expected to relate primarily to, the
construction and opening of new restaurants. Historically, the Company has
funded its day-to-day operations through its operating cash flows which
have ranged from $1.0 million to $1.4 million over the past three fiscal
years. Growth has been funded through a combination of bank borrowings,
loans from stockholders/officers, the sale of debentures and preferred
stock, loans and tenant allowances from certain of its landlords, and,
beginning in 1999, through joint venture arrangements. Capital expenditures
were $1.4 million in 2001, $1.3 million in 2002 and $1.7 million in 2003.
Capital expenditures in fiscal 2004 are expected to be between $0.2 million
and $2.2 million, primarily for the development of new restaurants, capital
replacements and refurbishing existing restaurants.

At December 28, 2003, the Company had a bank credit facility with nothing
owing, a loan from a member of Chicago - The Grill on the Alley, LLC of
$0.4 million, loans from stockholders/officers/directors of $0.2 million,
equipment loans of $0.4 million, and loans/advances from a landlord of $0.1
million. Although no amounts have been borrowed under the credit facility
since 2001, availability under the line has been reducing in accordance
with its terms. Borrowings available to the Company under the credit
facility are $0.5 million at December 28, 2003 and will ratably reduce
until October 2004 when it expires.

In March 2004, we entered into a preliminary agreement with respect to the
establishment of a new bank credit facility to replace our facility that
expires in October 2004. Under the terms of the proposed new bank credit
facility, we will be provided with financing in the form of a revolving
line of credit in the amount of $500,000, an irrevocable standby letter of
credit in the amount of $700,000 and equipment financing in the amount of
$500,000. The proposed facility will have a one-year term, be secured by
assets and is subject to certain standard borrowing covenants. The proposed
credit facility is subject to execution of definitive loan documents that,
as of March 24, 2004, have been drafted by the bank but have not yet been
signed.

F-12

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company projects increased operating cash flows in 2004 which, when
added to existing cash balances, will allow it to meet all operating,
investing and financing needs. Such projections are based on sales
increases due to store openings, as well as modest increases in same store
sales. The Company does not expect sales to decrease in fiscal year 2004 as
was the case in fiscal year 2002, however, a further deterioration in the
economy and the hospitality industry could adversely impact projected cash
flows. Management believes it can respond to a decrease in sales through
cost controls, reductions in discretionary capital improvements and
borrowings under the existing credit facility. Management believes that the
Company has adequate resources on hand and operating cash flows to sustain
operations for at least the following 12 months through March 2005.

PRINCIPLES OF CONSOLIDATION AND MINORITY INTEREST

The consolidated financial statements for the period ended December 28,
2003 include the accounts of Grill Concepts, Inc. and its wholly-owned
subsidiaries, which include The Grill on the Alley, Universal Grill
Concepts, Inc., Grill Concepts Management, Inc., and five majority-owned
subsidiaries: The San Jose Grill LLC (a California Limited Liability
Company), Chicago - The Grill on the Alley, LLC, The Grill on Hollywood,
LLC and the Daily Grill at Continental Park, LLC. All significant
intercompany accounts and transactions for the periods presented have been
eliminated in consolidation. The equity method of accounting is used by
Universal Grill Concepts, Inc. to account for the investment in the joint
venture in Universal CityWalk.

In connection with the building of a new restaurant, in May 2002, a limited
liability company was formed for the operation of the Daily Grill at
Continental Park in El Segundo, California of which the Company owns 50.1%.
Construction of the restaurant has been funded primarily by a capital
contribution of $1,000,000 from the minority interest member of the limited
liability company and a tenant improvement allowance of $500,000 received
from the landlord. The Company contributed $350,000 in July 2002 as its
investment in the limited liability company. The restaurant opened January
16, 2003. The consolidated financial statements include the accounts of the
limited liability company with minority interest reflected.

In connection with the building of a new restaurant, in July 2001, a
limited liability company was formed for the operation of "The Grill on
Hollywood" restaurant in

Hollywood, California, of which the Company owns 51%. Construction of the
restaurant was funded by a capital contribution of $1,200,000 from the
minority interest member and a tenant improvement allowance of up to
$1,015,000 received from the landlord. The Company contributed $250,000 to
the limited liability company. The consolidated financial statements
include the accounts of the limited liability company with minority
interest reflected.

In connection with the building of a new restaurant, in February 1999, a
limited liability company was formed for the operation of "The Grill on the
Alley" restaurant in Chicago, Illinois, of which the Company owns 60.0%.
Construction of the restaurant was funded primarily by a capital
contribution of $1,190,000 and a loan of $510,000 from the minority
interest member of the limited liability company and $750,000 of equipment

F-13

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

financing. The consolidated financial statements include the accounts of
the limited liability company with minority interest reflected.

In connection with the building of a new restaurant, in January 1998, a
limited liability company was formed for the operation of "The Grill"
restaurant in San Jose, California, of which the Company owns 50.05%.
Construction of the restaurant was funded primarily by a capital
contribution from the Company of $350,350 and by a capital contribution of
$349,650 and a $800,000 loan from the minority interest member of the
limited liability company. The consolidated financial statements include
the accounts of the limited liability company with minority interest
reflected.

FISCAL YEAR

The Company's fiscal year is the 52 or 53 weeks ending the last Sunday in
the calendar year. The fiscal years 2003, 2002 and 2001 consisted of 52
weeks ended December 28, 2003, December 29, 2002, and December 30, 2001,
respectively.

REVENUE RECOGNITION

Revenue from restaurant sales is recognized when food and beverage products
are sold. Management and license fees are typically determined based on a
percentage of revenues and are recognized on an accrual basis when earned.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of three months or less at date of purchase to be cash
equivalents.

RESTRICTED CASH

Restricted cash consists of amounts held in escrow for the construction of
the Daily Grill at Continental Park in El Segundo, California which was
opened in January 2003 and all but $72,000 was released.

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to a
concentration of credit risk are cash and cash equivalents. The Company
currently maintains substantially all of its day-to-day operating cash
balances with major financial institutions. At times during the year, and
at December 28, 2003, cash balances were in excess of Federal Depository
Insurance Corporation ("FDIC") insurance limits.

INVENTORIES

Inventories consist of food, soft beverages, wine and liquor and are stated
at the lower of cost or market, cost generally being determined on a
first-in, first-out basis.

F-14

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FURNITURE, EQUIPMENT AND IMPROVEMENTS

Furniture, equipment and improvements are stated at cost.

Depreciation of furniture and equipment is computed by use of the
straight-line method based on the estimated useful lives of 3 to 10 years
of the respective assets. Leasehold improvements are amortized using the
straight-line method over the life of the improvement or the remaining life
of the lease, whichever is shorter. Interest costs incurred during
construction were capitalized and are being amortized over the related

assets' estimated useful lives. When properties are retired or otherwise
disposed of, the costs and related accumulated depreciation are removed
from the accounts, and the

resulting gain or loss is credited or charged to current-year operations.
The policy of the

Company is to charge amounts expended for maintenance and repairs to
current-year expense and to capitalize expenditures for major replacements
and betterments.

GOODWILL

Goodwill relates to the excess of cost over the fair value of the net
assets of The Grill on the Alley in Beverly Hills, California acquired in
April 1996. Effective December 31, 2001, the Company adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangibles." SFAS No. 142

addresses financial accounting and reporting requirements for acquired
goodwill and other intangible assets. In accordance with the adoption of
SFAS No. 142, goodwill is deemed to have an indefinite useful life and is
no longer amortized but rather, tested at least annually for impairment. An
impairment loss should be recognized if the carrying amount of goodwill is
not recoverable and the carrying amount exceeds its fair value. The Company
has not recognized any impairment losses.

In accordance with SFAS No. 142, the Company has not amortized goodwill
during the years ended December 28, 2003 and December 29, 2002. If the
non-amortization provisions had been in effect as of the beginning of 2001,
goodwill amortization of $8,000 would have been eliminated in fiscal 2001.

EXPENDABLES

Initial amounts spent for china, glassware and flatware in connection with
the opening of a new restaurant are capitalized. Subsequent purchases are
expensed as incurred.

LIQUOR LICENSES

The cost of acquiring liquor licenses is capitalized at cost and is stated
at the lower of cost or market.

PRE-OPENING COSTS

Pre-opening costs are expensed as incurred.

F-15

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which prescribes an asset and liability
approach. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory rates applicable to future years to the difference
between the financial statement carrying amounts and the tax basis of
existing assets and liabilities. The effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the
enactment date. The Company establishes a valuation allowance to reduce net
deferred tax assets to the amount expected to be realized.

ADVERTISING AND PROMOTION COSTS

All costs associated with advertising and promoting products are expensed
in the year incurred. Advertising and promotion expense for the years ended
December 28, 2003, December 29, 2002 and December 30, 2001 was $734,000,
$634,000, and $580,000, respectively.

RECLASSIFICATIONS

Certain prior-year amounts have been reclassified to conform to the
current-year presentation.

LONG-LIVED ASSETS

Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. For purposes of evaluating the
recoverability of long-lived assets, the recoverability test is performed
using undiscounted future cash flows of the individual restaurants and
consolidated undiscounted future cash flows for long-lived assets not
identifiable to individual restaurants compared to the related carrying
value. If the undiscounted future cash flow is less than the carrying
value, the amount of the

impairment, if any, is determined by comparing the carrying value of each
asset with its fair value. Fair value is generally based on a discounted
cash flow analysis. Based on its review, the Company does not believe that
any impairment of its long-lived assets has occurred.

F-16

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION

In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure," which amends SFAS No. 123. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results of operations. As the Company has
not elected to change to the fair value based method of accounting for
stock based employee compensation, the adoption of SFAS No. 148 did not
have a material impact on the Company's financial position or results of
operations. All disclosure requirements of SFAS No. 148 have been adopted
and are reflected in these financial statements.

The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, and complies with the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Under APB 25, compensation
expense is based on the difference, if any, on the date of grant between
the fair value of the Company's stock and the amount

an employee must pay to acquire the stock. Because grants under the plan
require variable accounting treatment, compensation expense is remeasured
at each balance sheet date based on the difference between the current
market price of the Company's stock and the option exercise price. An
accrual for compensation expense is determined based on the proportionate
vested amount of each option as prescribed by Financial Interpretation No.
28, "Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans." Each period, adjustments to the accrual are
recognized in the income statement. The Company accounts for stock and
options to non-employees at fair value in accordance with the provisions of
SFAS No. 123.

The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and will continue to use the
intrinsic value-based method of accounting prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees." Pro forma compensation
expense for the Company's stock option plans determined based on the fair
value at the grant date for awards in fiscal year 2003, 2002 and 2001 would
have been as follows:

F-17

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

2003 2002 2001
---------- ---------- ----------
Restated

Net income, as reported $ 250,000 $ 133,000 $ 504,000
Add: Stock compensation expense 168,000 - (15,000)
(income) recorded
Deduct: Stock compensation (163,000) (185,000) (170,000)
expense under fair value method
Net income (loss), pro forma $ 255,000 $ (52,000) $ 319,000
Net income per share, as reported:
Basic $ 0.04 $ 0.02 $ 0.10
Diluted $ 0.04 $ 0.02 $ 0.09
Net income (loss) per share, pro
forma:
Basic $ 0.04 $ (0.02) $ 0.06
Diluted $ 0.04 $ (0.02) $ 0.06

The fair value of each option grant issued in fiscal year 2003, 2002 and
2001 is estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: (a)
no dividend yield on the Company's stock,

(b) expected volatility ranging from 70.00% to 71.35%, (c) risk-free
interest rates ranging from 2.5% to 4.87%, and (d) expected option lives of
five and ten years.

The weighted average fair value of options granted at market price during
2003, 2002 and 2001 was $1.39, $1.02, and $1.56, respectively.

NET INCOME PER SHARE

Pursuant to SFAS No. 128, "Earnings Per Share," basic net income per share
is computed by dividing the net income attributable to common shareholders
by the weighted-average number of common shares outstanding during the
period. Diluted net income per share is computed by dividing the net income
attributable to common shareholders by the weighted-average number of
common and common equivalent shares outstanding during the period. Common
share equivalents included in the diluted computation represent shares
issuable upon assumed exercise of stock options, warrants and convertible
preferred stocks using the treasury stock method.

A reconciliation of earnings available to common stockholders and diluted
earnings available to common stockholders and the related weighted average
shares for the years ended December 28, 2003, December 29, 2002 and
December 30, 2001 follow:

F-18

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - NET INCOME PER SHARE
(CONTINUED)

2003 2002 2001
--------------------- --------------------- ---------------------
Earnings Shares Earnings Shares Earnings Shares
Restated

Net income $ 250,000 $ 133,000 $ 504,000
Less: preferred stock dividend (50,000) (50,000) (50,000)
---------- ---------- ----------

Earnings available to
common stockholders 200,000 5,537,071 83,000 5,537,071 454,000 4,776,741
Dilutive securities:
Dilutive stock options 47,565 - 20,450
Warrants - 56,206 - 14,680 - 69,258
---------- --------- ---------- --------- ---------- ---------
Diluted earnings available
to common stockholders $ 200,000 5,640,842 $ 83,000 5,551,751 $ 454,000 4,866,449
========== ========= ========== ========= ========== =========

Stock options for 454,475, 669,975, and 460,813 shares for 2003, 2002 and
2001, respectively, were excluded from the calculation of diluted earnings
per share because they were anti-dilutive. Warrants for 1,722,786,
1,732,786, and 1,287,370, shares for 2003, 2002 and 2001, respectively,
were excluded from the calculation of diluted earnings per share because
they were anti-dilutive.

DISTRIBUTION OF CAPITAL AND PREFERRED RETURNS

The Company's San Jose Grill, Chicago - Grill on the Alley, Grill on
Hollywood and South Bay Daily Grill restaurants are each owned by limited
liability companies (the "LLCs") in which the Company serves as manager and
owns a controlling interest. Each of the LLCs has minority interest owners.
In connection with the financing of each of the LLCs, the minority members
may have certain rights to priority distributions of capital until they
have received a return of their initial investments ("Return of Member
Capital") as well as rights to receive defined preferred returns on their
invested capital ("Preferred Return").

The following tables set forth a summary for each of the LLCs of (1) the
initial capital contributions of the Company and the minority LLC members
(the "Members"), (2) the distributions of capital to the Members and/or the
Company during the year ended December 28, 2003, (3) the unreturned balance
of the capital contributions of the Members and/or the Company at December
28, 2003, (4) the Preferred Return rate to Members and/or the Company, (5)
the accrued but unpaid preferred returns due to the Members and/or the
Company at December 28, 2003, (6) the management incentive fees, if any,
payable to the Company, and (7) a summary of the principal distribution
provisions. In each of the tables, the balance of distributable cash
represents cash available for distribution to the members after all
obligations, including minimum working capital advances, have been
satisfied.

F-19

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SAN JOSE GRILL LLC

Initial Capital Contribution: Members (a) $1,149,650
===========
Company $ 350,350
===========

Distributions of capital, preferred return
and profit during the year ended
December 28, 2003: Members $ 275,000
===========
Company $ 275,000
===========

Unreturned Initial Capital Contributions
at December 28, 2003: Members $ 0
===========
Company $ 0
===========

Preferred Return rate: Members 10%
Company 10%

Accrued but unpaid Preferred Returns at December 28, 2003: Members $ 0
===========
Company $ 0
===========
Management Fee: Company 5%

Order of Distributions ALLOCATION
-------------------------------- ----------------------------

1 Until Return of Initial Capital 10% to Company (Manager)
50.05% of 90% to Company
49.95% of 90% to Members

2 Until Return of Preferred Return 50.05% to Company
49.95% to Members

3 Until Return of Additional 50.05% to Company
Contributions 49.95% to Members

Thereafter:

4 Balance of distributable cash 16.67% to Company (Manager)
50.05% of 83.33% to Company
49.95% of 83.33% to Members

F-20

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CHICAGO - GRILL ON THE ALLEY

Initial Capital Contribution: Members (b) $1,700,000
===========
Company $ 0
===========

Distributions of capital and note
repayments during the year ended
December 28, 2003: Members (b) $ 220,000

===========
Unreturned Initial Capital
Contributions at December 28,
2003: Members $ 944,000
===========
Preferred Return rate: Members 8%

Accrued but unpaid Preferred
Returns at December 28, 2003: Members $ 0
===========

Management Fee: Company 5%

Principal Distribution Provisions:

Order of Distributions Allocation
-------------------------------- ---------------

1 Until Return of Members Capital 100% to Members

2 Until Return of Preferred Return 100% to Members

Thereafter:

3 Balance of distributable cash 60% to Company
40% to Members

F-21

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

THE GRILL ON HOLLYWOOD LLC

Initial Capital Contribution: Members $1,200,000
===========
Company $ 250,000
===========

Distributions of capital during nine
months ended December 28, 2003: Members $ 0
===========
Company $ 0
===========

Unreturned Initial Capital
Contributions at December 28,
2003: Members $1,200,000
===========
Company $ 250,000
===========

Preferred Return rate: Members 12%
Company 12%
Accrued but unpaid Preferred
Returns at December 28, 2003: Members $ 0
===========
Company $ 65,000
===========

Management Fee: Company 5%

Principal Distribution Provisions:

Order of Distributions Allocation
--------------------------------- ------------------------

1 Until Return of Members Capital 10% to Company (Manager)
and Preferred Return 90% to Members

2 Until Return of Company's Capital 90% to Company (Manager)
and Preferred Return 10% to Members

Thereafter:

3 Balance of distributable cash 51% to Company
49% to Members

F-22

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SOUTH BAY DAILY GRILL (CONTINENTAL PARK LLC)

Initial Capital Contribution: Members $1,000,000
===========
Company $ 350,000
===========

Distributions of capital during nine
months ended December 28, 2003: Members $ 0
===========
Company $ 0
===========

Unreturned Initial Capital
Contributions at December 28,
2003: Members $1,000,000
===========
Company $ 350,000
===========

Preferred Return rate: Members 10%
Company (c) 10%

Accrued but unpaid Preferred
Returns at December 28, 2003: Members $ 100,000
===========
Company $ 35,000
===========

Management Fee: Company 5%

F-23

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Order of Distributions Allocation
------------------------------------- -------------------------

1 Until payment in full of all deferred 100% to Company (Manager)
management fees

2 Until Return of Any Additional Ratably to Company and
Contributions and Preferred Members
Returns thereon

3 Until $300,000 is paid 33.3% to Company
66.7% to Members

4 Until Return of Members accrued 10% to Company
and unpaid preferred returns 90% to Members

5 Until Members Capital 10% to Company
Contribution Returned 90% to Members

6 Until Return of Company's 90% to Company
Preferred Return 10% to Members

7 Until Return of Company's Capital 90% to Company
Contribution 10% to Members

Thereafter

8 Balance of distributable cash 50.1% to Company
49.9% to Members

(a) The initial capital contributions of the Members of San Jose Grill LLC
consisted of a capital contribution of $349,650 and a loan of
$800,000.
(b) The initial capital contributions of the Members of Chicago - Grill on
the Alley LLC consisted of a capital contribution of $1,000 and a loan
of $1,699,000. $1,189,000 of the loan was converted to capital in
1999. Distribution of capital as of December 28, 2003 includes
$176,000 of capital and preferred return and $44,000 of payment on the
loan.
(c) The Company's preferred return with respect to the South Bay Daily
Grill is based on unrecovered capital contribution and accrued but
unpaid management fees.

F-24

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions for the reporting period and as of the financial
statement date. These estimates and assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingent liabilities, and
the reported amounts of revenue and expenses. Actual results could differ
from these estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires disclosure of fair value information about most financial
instruments both on and off the balance sheet, if it is practicable to
estimate. SFAS No. 107 excludes certain financial

instruments, such as certain insurance contracts, and all nonfinancial
instruments from

its disclosure requirements. A financial instrument is defined as a
contractual obligation

that ultimately ends with the delivery of cash or an ownership interest in
an entity. Disclosures regarding the fair value of financial instruments
have been derived using external market sources, estimates using present
value or other valuation techniques.

Cash, accounts payable and accrued liabilities are reflected in the
financial statements at fair value because of the short-term maturity of
these instruments. The fair value of long-term debt closely approximates
its carrying value.

RECENTLY ISSUED ACCOUNTING REQUIREMENTS

In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 required
that upon issuance of a guarantee, the entity (i.e., the guarantor) must
recognize a liability for the fair value of the obligation it assumes under
the guarantee. FIN 45's provisions for initial recognition and measurement
were effective on a prospective basis to guarantees issued or modified
after December 31, 2002. Consistent with the provisions of FIN 45, the
Company has applied this statement prospectively. As required by FIN 45,
the disclosure provisions, when required, have been included in the
Company's consolidated financial statements for the year ended 2003.
Adoption of this statement has not had a material impact on our
consolidated financial statements.

F-25

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

variable interest entity's assets and activities are the best evidence of
control. Variable interests are rights and obligations that convey economic
gains or losses from changes in the values of the variable interest
entity's assets and liabilities. Variable interests may arise from
financial instruments, service contracts, nonvoting ownership interests and
other arrangements. If an enterprise holds a majority of the variable
interests of an entity, it would be considered the primary beneficiary. The
primary beneficiary would be required to include the assets, liabilities
and the results of operations of the variable interest entity in its
financial statements. In December 2003, the FASB issued a revision to FIN
46 to address certain implementation issues. The provisions of this
Interpretation will be effective for the Company for interim periods ending
after March 15, 2004. The Company is in the process of reviewing its
various agreements in order to determine if any variable interest entities
exist which would require consolidation. At this point the Company does not
believe that it holds the majority of the variable interests of an entity
whereby it would be considered the primary beneficiary. Accordingly, the
adoption of this Interpretation is not expected to have a significant
impact on the Company's financial results of operations and financial
position upon adoption.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. FASB Staff Position No. FAS 150-3, "Effective Date
for Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling Interests under
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity," was issued on November 7,
2003. This FASB Staff Position deferred the effective date for the
classification and measurement provisions for certain mandatorily
redeemable noncontrolling interests for an indefinite period. The other
provisions of this Statement were effective for financial instruments
entered into or modified after May 31, 2003, and otherwise were effective
at the beginning of the first interim period beginning after June 15, 2003.
The adoption of SFAS No. 150 for those provisions effective in the current
period has not had a significant impact on the Company's financial results
of operations and financial position. The adoption of those provisions
effective in 2004 is not expected to have a significant impact on the
Company's financial results of operations and financial position.

F-26

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. FURNITURE, EQUIPMENT AND IMPROVEMENTS, NET

Furniture, equipment and improvements at December 28, 2003 and December 29,
2002 consisted of:

2003 2002
------------- ------------

Furniture, fixtures and equipment $ 8,053,000 $ 7,591,000
Leasehold improvements 11,073,000 9,933,000
Motor vehicle 23,000 23,000
Expendables 389,000 335,000
------------- ------------

Furniture, equipment and improvements 19,538,000 17,882,000

Less, Accumulated depreciation (10,518,000) (9,114,000)
------------- ------------

Furniture, equipment and improvements, net $ 9,020,000 $ 8,768,000
============= ============

4. ACCRUED EXPENSES

Accrued Expenses at December 28, 2003 and December 29, 2002 consist of the
following:

2003 2002
---------- ----------
Restated

Accrued payroll $ 718,000 $ 598,000
Accrued sales tax 266,000 257,000
Stock based compensation 168,000 -
Accrued vacation 391,000 403,000
Accrued audit fees 137,000 120,000
Accrued rent 93,000 120,000
Other 542,000 631,000
---------- ----------
Total $2,315,000 $2,129,000
========== ==========

5. DEBT

On December 13, 2001, the bank credit facility was amended converting the
term loan to a $800,000 reducing line of credit under which the amount
available to draw is reduced each month by $25,000 so that it mimics the
previous term loan as to the maximum outstanding balance. The reducing line
of credit expires in October 2004 and bears interest at the bank prime
rate. The maximum borrowing available under the reducing line of credit is
$200,000 which will be reduced to zero by the end of fiscal year 2004. The
Company has an additional line of credit which provides borrowing up to
$300,000 . At December 28, 2003 there is no outstanding balance under
either line of credit.

F-27

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. DEBT (CONTINUED)

The credit facility is collateralized by an interest in the assets of the
Company. In addition, two of the Company's principal stockholders have
guaranteed the credit facility. In connection with this facility, the
Company is required to comply with a number of restrictive covenants,
including meeting certain debt service coverage and liquidity requirements.
The credit agreement also contains a subjective acceleration clause and a
cross-default provision.

Debts at December 28, 2003 and December 29, 2002 are summarized as follows:

2003 2002
-------- --------

Note payable to Small Business Administration collateralized by
property, payable monthly, $1,648, including interest at 4.0%,
due September 23, 2006. $ 49,000 $ 66,000

Note payable to lessor, uncollateralized, payable monthly,
1,435, including interest at 10.0%, due April 30, 2013. 113,000 118,000

Note payable for equipment, payable monthly, $14,597,
including interest at 9.25%, due April 30, 2004. 44,000 208,000

Note payable for equipment, payable monthly, $6,382, including
interest at 10.8%, due May 1, 2004. 25,000 96,000

Note payable for equipment, payable monthly, $15,396,
including interest at 10.8%, due December 1, 2005. 306,000 452,000

Note payable for equipment, payable monthly, $136, including
interest at 11.8%, due July 1, 2003. - 1,000
-------- --------

537,000 941,000

Less, Current portion of long-term debts 254,000 403,000
-------- --------
Long-term portion $283,000 $538,000
======== ========

Principal maturities of long-term debt are as follows:

Year Ending December
--------------------

2004 $254,000
2005 172,000
2006 20,000
2007 8,000
2008 9,000
Thereafter 74,000
--------

Total $537,000
========

F-28

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. RELATED PARTIES

Debts with related parties at December 28, 2003 and December 29, 2002
consisted of:

2003 2002
-------- --------

Uncollateralized note payable to officer/Board member/major
shareholder, with interest payable at a rate of 10% per annum.
The note payable and interest is due on June 30, 2004. $ 70,000 $ 70,000

Uncollateralized subordinated note payable to officer/Board
member/major shareholder, with interest payable at a rate of
7.0% per annum. The note payable and interest is due on June
30, 2004. 85,000 85,000

Note payable to a member of the Board of Directors, payable
monthly, $9,954, including interest at 9.0%, due August 1,
2004. 67,000 175,000

Collateralized subordinated note payable to a member of
Chicago - The Grill on the Alley LLC. Conversion of the note is
at the option of the member. The original principal amount of
the note was $1,699,000. However, in February 1999, the
member converted $1,190,000 of the note to equity. The note
bears monthly payments of $6,292, including interest at 8% per
annum. The note will mature on October 1, 2009. The
Company guaranteed repayment of the loan to Chicago - The
Grill on the Alley, LLC and issued 203,645 warrants to acquire
common stock at $7.00 per share. 370,000 414,000
-------- --------
592,000 744,000

Less, Current portion of notes payable - related parties 269,000 306,000
-------- --------

Long-term portion $323,000 $438,000
======== ========

F-29

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. RELATED PARTIES (CONTINUED)

Principal maturities of debts with related parties are as follows:

Year Ending December,
---------------------

2004 $269,000
2005 52,000
2006 56,000
2007 60,000
2008 65,000
Thereafter 90,000
--------
Total $592,000
========

The Company agreed to pay to each of two stockholders interest at a rate of
2% per annum of the average annual balance of the bank credit facility for
guaranteeing the note with their personal assets. Interest expense totaled
zero, zero, and $59,000 for fiscal years 2003, 2002 and 2001, respectively.

A stockholder of the Company was the lessor for property leased by the
Pizzeria Uno Restaurant in Cherry Hill. Rent expense related to this
operating lease was zero, $83,000, and $252,000, for each of the fiscal
years 2003, 2002 and 2001, respectively.

The holder of all of the Company's preferred stock is a part owner of the
San Jose Fairmont Hotel, the site of The San Jose Grill LLC. He is also a
part owner of the San Jose Hilton Hotel, the site of The City Bar & Grill,
which is one of the restaurants licensed by the Company which was converted
from a management agreement entered into during 1998. Revenue related to
the license and management agreement was $6,000, $62,000, and $65,000 for
the fiscal years 2003, 2002 and 2001, respectively.

In August 1998, the Company entered into an agreement (the "Agreement")
with Hotel Restaurant Properties, Inc. ("HRP") in which HRP will assist the
Company in locating hotel locations for the opening of Company restaurants.
One of the two owners of HRP is a family member of the above-referenced
preferred stockholder of the Company. There were $ 235,000, $168,000, and
$143,000 of management fees paid to HRP on this Agreement for fiscal year
2003, 2002 and 2001, respectively. The Agreement also provides that HRP
will repay to the Company amounts advanced to managed units on behalf of
HRP. Receivable from HRP was $255,000 at December 28, 2003 and $192,000 at
December 29, 2002. Additionally, the Agreement provides that in certain
cases both HRP and the Company will have certain rights to cause the
Company to acquire HRP.

7. STOCKHOLDERS' EQUITY

In June 1997, the Company completed a private placement of 50,000 shares of
common stock, 1,000 shares of Series I Convertible Preferred Stock, 500
shares of Series II, 10% Convertible Preferred Stock, 187,500 five-year
$8.00 warrants and 187,500 five-year $12.00 warrants. The warrants expired
during 2002. The aggregate sales price of those securities was $1,500,000.

F-30

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. STOCKHOLDERS' EQUITY (CONTINUED)

The Series I Convertible Preferred Stock was convertible into common stock
at $5.00 per share. In July 2000, the holder of the Series I convertible
preferred stock converted all 1,000 shares of preferred stock into 200,000
shares of common stock.

The Series II 10% Convertible Preferred Stock is convertible into common
stock commencing one year from the date of issuance at the greater of (i)
$4.00 per share, or (ii) 75% of the average closing price of the Company's
common stock for the five trading days immediately prior to the date of
conversion; provided, however, that the conversion price shall in no event
exceed $10.00 per share. The Series II, 10% Convertible Preferred Stock is
entitled to receive an annual dividend equal to $100 per share payable on
conversion or redemption in cash or, at the Company's option, in common
stock at the then-applicable conversion price. The Series II, 10%
Convertible Preferred Stock is subject to redemption, in whole or in part,
at the option of the Company on or after the second anniversary of issuance
at $1,000 per share. There were no conversions as of December 28, 2003.
Accumulated dividends in arrears totaled $326,000 and $276,000 as of
December 28, 2003 and December 29, 2002, respectively.

In July 2001, the Company completed a transaction with Starwood Hotels and
Resorts Worldwide, Inc. pursuant to which (1) the Company and Starwood
entered into a Development Agreement under which the Company and Starwood
agreed to jointly develop the Company's restaurant properties in Starwood
hotels; (2) the Company sold 666,667 shares of restricted common stock and
666,667 $2.00 stock purchase warrants to Starwood for $1,000,000.
Concurrently, the Company sold an additional 666,666 shares of restricted
common stock and 666,666 stock purchase warrants at $2.25 to other
strategic investors for $1,000,000. Proceeds reflected in the financial
statements are net of transaction costs.

Under the Development Agreement, the Company is obligated to issue to
Starwood warrants to acquire a number of shares of the Company's common
stock equal to four percent of the outstanding shares upon the attainment
of certain development milestones. Such warrants are issuable upon
execution of management agreements and/or license agreements relating to
the development and operation, and the commencement of operation, of an
aggregate of five, ten, fifteen and twenty of the Company's branded
restaurants. If the market price of the Company's common stock on the date
the warrants are to be issued is greater than the market price on the date
of the Development Agreement, the warrants will be exercisable at a price
equal to the greater of (1) 75% of the market price as of the date such
warrant becomes issuable, or (2) the market price on the date of the
Development Agreement. If the market price of the Company's common stock on
the date the warrants are to be issued is less than the market price on the
date of the Development Agreement, the warrants will be exercisable at a
price equal to the market price as of the date such warrants become
issuable. The warrants will be exercisable for a period of five years.

F-31

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. STOCKHOLDERS' EQUITY (CONTINUED)

In addition to the warrants described above, if and when the aggregate
number of Company restaurants operated under the Development Agreement
exceeds 35% of the total Daily Grill, Grill and City Grill-branded
restaurants, the Company will be obligated to issue to Starwood a warrant
to purchase a number of shares of the Company's common stock equal to 0.75%
of the outstanding shares on that date exercisable for a period of five
years at a price equal to the market price at that date. On each
anniversary of that date at which the restaurants operated under the
Development Agreement continue to exceed the 35% threshold, for so long as
the Development Agreement remains effective, the Company shall issue to
Starwood additional warrants to purchase 0.75% of the outstanding shares on
that date at an exercise price equal to the market price on that date.

WARRANTS

In June 1997, 187,500 warrants exercisable at $8.00 per share and 187,500
warrants exercisable at $12.00 per share were issued in connection with the
offering of the Series I Convertible Preferred Stock. These warrants
expired on June 26, 2002.

In February 1999, 177,083 warrants exercisable at $7.00 per share were
issued in connection with the receipt of a loan from a Member of the
Chicago - The Grill on the Alley, LLC. These warrants expire April 1, 2005.

In February 1999, 17,708 warrants exercisable at $7.00 per share were
issued in connection with the receipt of a loan from a Member of the
Chicago - The Grill on the Alley, LLC. The exercisability of these warrants
is contingent on the accepting of renewal options with regard to the
restaurant lease for the Chicago - The Grill on the Alley, LLC. These
warrants expire June 2010.

In February 1999, 8,854 warrants exercisable at $7.00 per share were issued
in connection with the receipt of a loan from a Member of the Chicago - The
Grill on the Alley, LLC. The exercisability of these warrants is contingent
on the accepting of renewal options with regard to the restaurant lease for
the Chicago - The Grill on the Alley, LLC. These warrants expire June 2015.

In November 1999, 3,750 warrants exercisable at $2.00 were issued and are
scheduled to expire November 2004. These warrants were issued as additional
compensation in relation to a private placement memorandum.

In connection with a $400,000 loan to the Company, the Company issued
40,000 warrants to two accredited investors in July 2000. The warrants are
exercisable for a period of four years at a price of $1.406 per share. The
warrants were issued pursuant to a privately negotiated lending arrangement
with two accredited investors pursuant to the exemption from registration
in Section 4(2) of the Securities Act of 1933, as amended. In July 2001, an
additional 32,058 warrants exercisable for a period of four years were
issued in connection with this loan at a price of $2.77 per share.

F-32

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. STOCKHOLDERS' EQUITY (CONTINUED)

In connection with a guarantee of the Company's bank lending facility, the
Company issued 150,000 warrants in July 2000 to two principal shareholders
of the Company. The warrants are exercisable for a period of four years at
a price of $1.406 per share. The warrants were issued pursuant to a
privately negotiated guarantee of the Company's loan facility by two
directors of the Company pursuant to the exemption from registration in
Section 4(2) of the Securities Act of 1933, as amended. In August 2001, an
additional 150,000 warrants exercisable for a period of four years were
issued in connection with the guaranty at a price of $2.12 per share. In
2001, the fair value of the warrants was being amortized over the life of
the guarantee and is recorded as additional interest expense.

In July 2001, in conjunction with the sale of restricted common stock to
Starwood Hotels and Resorts Worldwide, Inc. and other strategic investors,
the company issued 666,667 $2.00 stock purchase warrants and 666,666 $2.25
stock purchase warrants. The warrants expire in July 2006.

OPTIONS

On June 1, 1995, the Company's Board of Directors adopted the Grill
Concepts, Inc. 1995 Stock Option Plan (the "1995 Plan") and on June 12,
1998 the 1998 Stock Option Plan (the "1998 Plan") was adopted. These Plans
provide for options to be issued to the Company's employees and others. The
exercise price of the shares under option shall be equal to or exceed 100%
of the fair market value of the shares at the date of grant. The options
generally vest over a five-year period.

The terms of the option grants allow the employee to exercise the option by
surrendering a portion of the vested shares in lieu of paying cash. This
cashless exercise feature requires the Company to account for its option
plan using a variable accounting treatment.

F-33

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. STOCKHOLDERS' EQUITY (CONTINUED)

A total of 1,072,500 common shares are reserved for issuance pursuant to
these plans. During fiscal year 2003, upon recommendation of the
Compensation Committee, 89,250 options were granted at an average exercise
price of $1.96. The Plans were approved at the 1996 and 1998 annual
stockholders' meetings. The number of shares reserved under the Plans was
increased by 500,000 shares at the annual stockholders' meeting in 2001.
Transactions during the fiscal years 2003, 2002 and 2001 under the Plans
were as follows:

2003 2002 2001
--------------------------- --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Number Average Option Number Average Option Number Average Option
Of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
---------- --------------- ---------- --------------- ---------- ---------------

Options outstanding at
Beginning of year 669,975 $ 2.89 543,113 $ 3.24 381,488 $ 4.22
Options granted - price
equals fair value 89,250 1.96 163,000 1.65 179,500 2.54
Options granted - price greater
Than fair value - - - - 100,000 3.16
Options exercised - - - - - -
Options cancelled (42,600) 2.27 (36,138) 2.50 (117,875) 5.27
---------- --------------- ---------- --------------- ---------- ---------------

Options outstanding at end of
Year 716,625 $ 2.81 669,975 $ 2.89 543,113 $ 3.24
========== =============== ========== =============== ========== ===============

Options exercisable at end of
Year 427,630 295,095 188,210
Options available for grant at
end of year 355,875 402,525 529,387

The following table summarizes information about stock options outstanding at
December 28, 2003:

Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Number Weighted- Number
Outstanding at Average Weighted- Outstanding at Weighted-
Range of December 28, Remaining Average December 28, Average
Exercise Price 2003. Contractual Life Exercise Price 2003. Exercise Price
--------------- -------------- ---------------- --------------- -------------- ---------------

1.55 66,600 6.7 $ 1.55 41,280 $ 1.55
1.65 142,800 7.4 $ 1.65 54,800 $ 1.65
1.70 52,750 9.4 $ 1.70 - $ 1.70
$2.19 to $3.30 287,900 6.5 $ 2.77 179,650 $ 2.85
$4.00 to $4.68 99,325 2.6 $ 4.24 86,000 $ 4.25
$5.36 to $6.12 67,250 2.1 $ 5.48 65,900 $ 5.49
-------------- --------------
716,625 427,630
============== ==============

F-34

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. PENSION PLAN

Effective January 1, 1996, the Company established the Grill Concepts, Inc.
401(k) Plan (the "Plan"), a defined contribution savings plan, which is
open to all employees of the Company who have completed one year (1,000
hours in that year) of service and have attained the age of 21. The Plan
allows employees to contribute up to the lesser of the Internal Revenue
Code-prescribed maximum amount or 20% of their income on a pre-tax basis,
through contribution to the Plan. The Company's contributions are
discretionary. For the years 2003, 2002 and 2001, the Company made no
contributions to the Plan.

9. COMMITMENTS AND CONTINGENCIES

The Company leases most of its restaurant facilities and corporate offices
under noncancellable operating leases. The restaurant leases generally
include land and building, require various expenses incidental to the use
of the property, and certain leases require contingent rent above the
minimum lease payments based on a percentage of sales. Certain leases also
contain renewal options and escalation clauses.

The aggregate minimum lease payments under noncancellable operating leases
are as follows:

Fiscal Year Ending
------------------

2004 $ 2,845,000
2005 2,565,000
2006 2,283,000
2007 2,103,000
2008 1,774,000
Thereafter 6,940,000
-----------

Total $18,510,000
===========

Rent expense was $2,975,000, $2,574,000, and $2,906,000 for fiscal years
2003, 2002 and 2001, respectively, including $464,000, $384,000, and
$337,000 for 2003, 2002 and 2001, respectively, for contingent rentals
which are payable on the basis of a percentage of sales in excess of base
rent amounts.

Restaurants such as those operated by the Company are subject to litigation
in the ordinary course of business, most of the related costs the Company
expects to be covered by its general liability insurance. However, punitive
damage awards are not covered by general liability insurance. Punitive
damages are routinely claimed in litigation actions against the Company. No
material causes of action are presently pending against the Company.
However, there can be no assurance that punitive damages will not be given
with respect to any actions that may arise in the future.

F-35

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Company plans on new restaurant openings during 2004. The restaurants
will be structured as owned, joint ventures, LLCs or management agreements.
In connection with the building of the restaurants, the Company may be
obligated for a portion of the start-up and/or construction costs.

In order to better manage the cost of our workers compensation expense,
commencing in 2004, we have altered our workers compensation coverage to
substantially increase our per event and aggregate deductibles. As a
result, we expect to substantially reduce our recurring cost of workers
compensation insurance. On the other hand, we will have substantially
higher exposure to losses resulting from claims under that policy should
those claims exceed our prior deductible levels.

10. INCOME TAXES

The provisions for income taxes for the fiscal years ended December 28,
2003, December 29, 2002 and December 30, 2001 are as follows:

2003 2002 2001
------- ------- -------

Current - federal $ - $ - $ -
Current - state 89,000 37,000 65,000
------- ------- -------

$89,000 $37,000 $65,000
======= ======= =======

The following is a reconciliation of taxes at the U.S. federal statutory
rate and the effective tax rate:

2003 2002 2001
---------- ---------- ----------
Restated Restated

Taxes at federal tax rate $ 23,000 $ (31,000) $ 113,000
State tax net of federal benefit 59,000 24,000 43,000
Variable incentive stock option 58,000 - -
Change in valuation allowance 300,000 225,000 (224,000)
Net operating loss for which no
tax benefit was realized - - -
General business and tip tax
credit (181,000) (188,000) 91,000
Other (170,000) 7,000 42,000
---------- ---------- ----------

Income tax provision $ 89,000 $ 37,000 $ 65,000
========== ========== ==========

F-36

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. INCOME TAXES (CONTINUED)

Deferred tax assets and liabilities consist of the following as of December
28, 2003 and December 29, 2002:

2003 2002
-------------------- -------------------

Deferred tax assets:
Net operating loss $ 628,000 $ 1,156,000
Fixed Assets 602,000 420,000
Intangibles 75,000 58,000
General business credit 1,258,000 928,000
Other 442,000 96,000
-------------------- -------------------

Total gross deferred tax
assets 3,005,000 2,658,000

Less, Valuation allowance (2,785,000) (2,485,000)
-------------------- -------------------

Net deferred tax assets 220,000 173,000

Deferred tax liabilities:
Intangible assets (220,000) (173,000)
-------------------- -------------------

Net deferred tax assets
and liabilities $ - $ -
==================== ===================

At December 28, 2003, the Company has available federal and state net
operating loss carryforwards of $672,000 and $3,996,000 respectively, that
may be utilized to offset future federal and state taxable earnings.
Federal net operating losses begin to expire in 2014. The remaining state
net operating losses began expiring in 2003. A full valuation allowance has
been established to reduce net deferred tax assets to the amount expected
to be realized.

11. STORE OPENINGS AND CLOSINGS

OPENINGS
In connection with the building of a new restaurant in July 2001, The Grill
on Hollywood, LLC was formed for the operation of a Grill restaurant at the
new Hollywood and Highland entertainment and shopping complex in Hollywood,
California. The construction of the restaurant was financed through a
combination of equity capital and tenant improvement allowances. The
restaurant opened on November 9, 2001.

The Company began management of a San Francisco hotel-based Daily Grill
restaurant in February 2002. The Company advanced the restaurant
approximately $331,000 that is to be repaid out of future operations, none
of which has yet been repaid.

The Company began management of a Houston, Texas hotel-based Daily Grill
restaurant in July 2002. The Company advanced the restaurant approximately
$64,000

F-37

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. STORE OPENINGS AND CLOSINGS (CONTINUED)

for initial working capital that was repaid in May 2003. This is the first
restaurant opened under the Starwood agreement.

In connection with the building of a new restaurant, The Daily Grill at
Continental Park, LLC was formed for the operation of a Daily Grill
restaurant in El Segundo, California. The construction of the restaurant is
being financed through a combination of equity capital and tenant
improvement allowances. The restaurant opened January 16, 2003.

The Company began management of a Portland, Oregon hotel-based Daily Grill
restaurant in September 2003. This is the second restaurant opened under
the Starwood agreement.

The Company signed a lease to open an owned hotel-based Daily Grill
restaurant in the Hyatt Bethesda in Bethesda, Maryland. The restaurant
opened January 19, 2004. The construction was financed by $1.8 million
tenant improvement allowance which was treated as a lease incentive and
recorded as a long-term liability which will be amortized over the life of
the lease.

CLOSINGS

In July 2001, the Company finalized its sale of its Pizzeria Uno restaurant
in South Plainfield, New Jersey for $700,000 less legal and other sale
related fees of $45,000.

In April 2002, the Company sold the assets of its Pizzeria Uno restaurant
in Cherry Hill, New Jersey for $325,000 less legal and other sale related
fees of $61,000. The Company received $175,000 in cash and a non-interest
bearing note for the remaining $150,000. The note was recorded with a
discount of $33,000 in 2001 that is being taken into interest income over
the life of the note.

In April 2002, the lease for the Encino Daily Grill expired and was not
renewed.

F-38

GRILL CONCEPTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. QUARTERLY FINANCIAL DATA (UNAUDITED)
As described in Note 1, the consolidated financial statements for each of
the quarters during the fiscal year ended December 28, 2003 have been
restated from those originally issued by the Company to reflect the
accounting for employee stock options using variable accounting treatment
and other miscellaneous corrections. Summarized unaudited quarterly
financial data for fiscal years 2003 and 2002 is as follows

Quarter Ended
----------------------------------------------------------
March 30, June 29, September 28, December 28,
2003 2003 2003 2003
----------- ------------ --------------- --------------

Total revenues $11,922,000 $11,781,000 $ 10,787,000 $ 12,084,000

Gross profit 8,748,000 8,559,000 7,819,000 8,705,000

Income (loss) from operations (as
reported) 239,000 246,000 (456,000) 403,000
Income (loss) from operations (as
restated) 234,000 111,000 (449,000) 341,000

Net income (loss) (as reported) 347,000 218,000 (330,000) 211,000
Net income (loss) (as restated) 342,000 83,000 (323,000) 148,000

Basic net income (loss) per share
(as reported) $ 0.06 $ 0.04 $ (0.06) $ 0.04
Basic net income (loss) per share
(as restated) 0.06 0.01 (0.06) $ 0.02

Diluted net income (loss) per
share (as reported) 0.06 0.04 (0.06) 0.04
Diluted net income (loss) per
share (as restated) 0.06 0.01 (0.06) 0.02

March 31, June 30, September 29, December 29,
2002 2002 2002 2002
----------- ------------ --------------- --------------

Total revenues $11,772,000 $10,308,000 $ 9,467,000 $ 10,745,000

Gross profit 8,591,000 7,528,000 6,857,000 7,882,000

Income (loss) from operations 258,000 (141,000) (487,000) 492,000

Net income (loss) 243,000 (65,000) (442,000) 397,000

Basic net income (loss) per share $ 0.04 $ (0.01) $ (0.08) $ 0.07

Diluted net income (loss) per
share $ 0.04 $ (0.01) $ (0.08) $ 0.07

F-39