Accounting period

The Company's fiscal year ends on the Saturday nearest September 30. The Company reports fiscal years under a 52/53-week format. This reporting method is used by many companies in the hospitality industry and is meant to improve year-to-year comparisons of operating results. Under this method, certain years will contain 53 weeks. The fiscal years ended September 27, 2003 and October 1, 2005 each included 52 weeks. The fiscal year ended October 2, 2004 included 53 weeks.

Overview

The Company has reclassified its statements of operations data for the prior periods presented below, in accordance with FAS 144, as a result of the sale of three of the Company's restaurants and the closure of one restaurant during the fiscal year ended October 2, 2004 and the sale of another restaurant during the fiscal year ended October 1, 2005. The operations of these restaurants have been presented as discontinued operations for the fiscal years ended October 2, 2004 and October 1, 2005. See "Item 1 -Recent Restaurant Dispositions and Charges", "Item 7 - Recent Restaurant Dispositions" and Note 2 of Notes to Consolidated Financial Statements.

Revenues

Total revenues at restaurants owned by the Company decreased by 1.1% from fiscal 2004 to fiscal 2005 and increased by 12.4% from fiscal 2003 to fiscal 2004.

Same store sales decreased 0.9%, or $989,000, on a Company-wide basis from fiscal 2004 to fiscal 2005. This decrease was primarily due to the fact that fiscal 2004 contained an extra week of sales as opposed to fiscal 2005, resulting in a 4.0%, or $2,678,000, decrease in same store sales at the Company's Las Vegas restaurants, a 3.6%, or $1,122,000, increase in same store sales at the Company's New York restaurants and a 3.2%, or $567,000, increase in same store sales at the Company's Washington D.C. restaurants. If the fifty-third week of fiscal 2004 were excluded from same store sales, the result would be a 1.2%, or $1,381,000, increase in same store sales on a Company-wide basis, a 2.0%, or $1,312,000, decrease in same store sales at the Company's Las Vegas restaurants, a 5.7%, or $1,791,000, increase in same store sales at the Company's New York restaurants and a 5.3%, or $902,000, increase in same store sales at the Company's Washington D.C. restaurants. The increases in New York and Washington D.C. were principally due to a general improvement in economic conditions and the public's willingness and inclination to resume vacation and convention travel.

During the fourth quarter of 2002 the Company abandoned its restaurant and food court operations at the Desert Passage, the retail complex at the Aladdin Resort & Casino in Las Vegas. From fiscal 2002 to

fiscal 2001 sales decreased at this location from $4,999,000 to $2,853,000, or 42.9%, resulting in the Company's decision to abandon these operations.

Of the $5,219,000 decrease in revenues from fiscal 2001 to fiscal 2002, $3,282,000 is attributable to the year long closure of the Grill Room restaurant located in 2 World Financial Center, an office building adjacent to the World Trade Center site. This restaurant was damaged in the September 11, 2001 attack and reopened in early fiscal 2003. A $256,000 increase in sales is attributable to the opening of the Saloon at the Neonopolis Center in downtown Las Vegas.

Other operating income, which consists of the sale of merchandise at various restaurants, management fee income and door sales were $1,826,000 in fiscal 2005, $850,000 in fiscal 2004 and $679,000 in fiscal 2003.

Costs and Expenses

Food and beverage cost of sales as a percentage of total revenue was 25.1% in fiscal 2005, 25.5% in fiscal 2004 and 24.7% in fiscal 2003.

Total costs and expenses increased by $1,244,000, or 1.2%, from fiscal 2004 to fiscal 2005. The increase in the minimum wage in New York and Washington, D.C., the cost of compliance with the Sarbanes-Oxley Act and increased energy costs contributed to this increase.

Total costs and expenses increased by $9,101,000, or 9.4%, from fiscal 2003 to fiscal 2004. Increases in food costs, rent and payroll, as a result of the increase in total revenues, contributed to this increase. Sales increases in restaurants where the Company pays a percentage rent resulted in an increase in percentage rent of $374,000 during fiscal 2004 compared to fiscal 2003. Other operating costs and expenses also increased in fiscal 2004 due to the increase in total revenue and a one time charge of $270,000 used to pay for casino entertainment tax liability. The Company had previously thought that certain of its operations at the Venetian Hotel Resort Casino were exempt from casino entertainment tax due to the fact that such operations were not on the casino floor. As subsequent tax ruling by tax authorities determined that such operations were subject to casino entertainment tax and the Company determined to include such charge in other operating costs and expenses.

Payroll expenses as a percentage of total revenues was 31.3% in fiscal 2005 compared to 31.2% in fiscal 2004 and 32.3% in fiscal 2003. Payroll expense was $36,212,000, $36,045,000 and $33,176,000 in fiscal 2005, 2004 and 2003, respectively. In fiscal 2003, the Company had aggressively adapted its cost structure in response to lower sales expectations following September 11th. Due to the increase in sales during fiscal 2004, the Company had increased its payroll expenses incrementally. In fiscal 2005, the increase of the minimum wage in New York and Washington, D.C. resulted in an increase in payroll expenses. The Company continually evaluates its payroll expenses as they relate to sales.

No pre-opening expenses and early operating losses were incurred during fiscal 2005, 2004 or 2003. The Company did not open any new restaurants during fiscal 2005, 2004 and 2003. The Company typically incurs significant pre-opening expenses in connection with its new restaurants that are expensed as incurred. Furthermore, it is not uncommon that such restaurants experience operating losses during the early months of operation.

General and administrative expenses, as a percentage of total revenue, were 6.3% in fiscal 2005, 5.6% in fiscal 2004 and 6.5% in fiscal 2003. The decrease in these expenses as a percentage of total revenue during fiscal 2004 is primarily due to increased total revenue during this period.

The Company managed two restaurants it did not own (The Saloon and El Rio Grande) and also managed the Tampa and Hollywood Florida food court operations at October 1, 2005. The Company managed two restaurants it did not own (The Saloon and El Rio Grande) at October 2, 2004. The Company managed one restaurant it did not own (El Rio Grande) at September 27, 2003. Sales of El Rio Grande, which are not included in consolidated sales, were $3,262,000 in fiscal 2005, $2,786,000 in fiscal 2004 and $2,765,000 in fiscal 2003. The Company's lease of The Saloon was converted into a management agreement effective as of August 22, 2004, whereby the Company receives a management fee of $7,000 per month regardless of the results of operations of this restaurant. During fiscal 2004, the Company entered into agreements to manage 11 fast food restaurants located in the Hard Rock Casinos in Hollywood and Tampa, Florida. Sales from these operations totaled $8,843,000 during the 2005 fiscal year.

Interest expense was $25,000 in fiscal 2005, $190,000 in fiscal 2004 and $732,000 in fiscal 2003. The significant decreases during these periods was due to lower outstanding borrowings on the Company's credit facility and the benefit from rate decreases in the prime-borrowing rate. As of October 1, 2005, the Company had no borrowings on its credit facility. Interest income was $101,000 in fiscal 2005, $138,000 in fiscal 2004 and $162,000 in fiscal 2003.

Other income, which generally consists of purchasing service fees and other income at various restaurants, was $671,000, $595,000 and $973,000 for fiscal 2005, 2004 and 2003, respectively. Other income was impacted during fiscal 2003 by the Company's receipt of $508,000 in World Trade Center Grants for four restaurants located in downtown New York that were adversely impacted by the September 11, 2001 terrorist attacks.

Income Taxes

The provision for income taxes reflects Federal income taxes calculated on a consolidated basis and state and local income taxes calculated by each New York subsidiary on a non-consolidated basis. Most of the restaurants owned or managed by the Company are owned or managed by a separate subsidiary.

For state and local income tax purposes, the losses incurred by a subsidiary may only be used to offset that subsidiary's income, with the exception of the restaurants operating in the District of Columbia. Accordingly, the Company's overall effective tax rate has varied depending on the level of losses incurred at individual subsidiaries. During fiscal 2002 the Company abandoned its restaurant and food court operations at the Desert Passage, the retail complex at the Aladdin Resort & Casino in Las Vegas. In fiscal 2002, the Company was able to utilize the deferred tax asset created in fiscal 2001, by the impairment of these operations. During the years ended October 2, 2004 and October 1, 2005, the Company decreased its allowance for the utilization of the deferred tax asset arising from state and local operating loss carryforwards by $395,000 and $125,000 in such years based on the merger of certain unprofitable subsidiaries into profitable ones.

The Company's overall effective tax rate in the future will be affected by factors such as the level of losses incurred at the Company's New York facilities, which cannot be consolidated for state and local tax purposes, pre-tax income earned outside of New York City and the utilization of state and local net operating loss carry forwards. Nevada has no state income tax and other states in which the Company operates have income tax rates substantially lower in comparison to New York. In order to utilize more effectively tax loss carry forwards at restaurants that were unprofitable, the Company has merged certain profitable subsidiaries with certain loss subsidiaries.

The Revenue Reconciliation Act of 1993 provides tax credits to the Company for FICA taxes paid by the Company on tip income of restaurant service personnel. The net benefit to the Company was $779,000 in fiscal 2005, $591,000 in fiscal 2004 and $132,000 in fiscal 2003.

During fiscal 2002, the Company and the Internal Revenue Service finalized the adjustments to the Company's Federal income tax returns for fiscal years 1995 through 1998. The settlement did not have a material effect on the Company's consolidated financial statements. During fiscal 2006, the Company and the Internal Revenue Service finalized the adjustments to the Company's Federal income tax returns for fiscal years 1999 through 2004. This settlement did not have a material effect on the Company's consolidated financial statements.

Liquidity and Sources of Capital

The Company's primary source of capital has been cash provided by operations and funds available from its main bank, Bank Leumi USA. The Company from time to time also utilizes equipment financing in connection with the construction of a restaurant and seller financing in connection with the acquisition of a restaurant. The Company utilizes capital primarily to fund the cost of developing and opening new restaurants, acquiring existing restaurants owned by others and remodeling existing restaurants owned by the Company.

The net cash used in investing activities in fiscal 2005 of ($3,836,000) was primarily used for the replacement of fixed assets at existing restaurants and the construction of a restaurant and bar in Atlantic City, New Jersey. The net cash used in investing activities in fiscal 2004 of ($1,336,000) was primarily used for the replacement of fixed assets at existing restaurants. The net cash used in investing activities in fiscal 2003 of ($1,434,000) was used for the expansion of an existing restaurant in Las Vegas and for the replacement of fixed assets at existing restaurants.

The net cash used in financing activities in fiscal 2005 ($4,397,000), was principally used for the payment of dividends. The net cash used in financing activities in fiscal 2004 ($5,106,000) and fiscal 2003 ($8,356,000) was principally due to repayments of long-term debt on the Company's main credit facility in excess of borrowings on such facility.

The Company had a working capital surplus of $4,299,000 at October 1, 2005 as compared to a working capital surplus of $1,893,000 at October 2, 2004.

The Company's Revolving Credit and Term Loan Facility (the "Facility") with its main bank (Bank Leumi USA), which included a $8,500,000 credit line to finance the development and construction of new restaurants and for working capital purposes at the Company's existing restaurants, matured on March 12, 2005. The Company does not currently plan to enter into another credit facility and expects required cash to be provided by operations. As of October 1, 2005, the Company had no borrowings on its credit facility. The Facility also includes a $500,000 Letter of Credit Facility for use in lieu of lease security deposits. The Company has delivered $253,000 in irrevocable letters of credit on this Facility at October 1, 2005. The Company generally is required to pay commissions of 1 1/2% per annum on outstanding letters of credit.

The Company's subsidiaries each guaranteed the obligations of the Company under the Facility and granted security interests in their respective assets as collateral for such guarantees. In addition, the Company pledged stock of such subsidiaries as security for obligations of the Company under such Facility.

In April 2000, the Company borrowed $1,570,000 from its main bank at an interest rate of 8.8% to refinance the purchase of various restaurant equipment at the Venetian. The note which was payable in 60 equal monthly installments through May 2005, was secured by such restaurant equipment. At October 1, 2005 the Company had nothing outstanding on this facility.

The Company entered into a sale and leaseback agreement with GE Capital for $1,652,000 in November 2000 to refinance the purchase of various restaurant equipment at its food and beverage facilities in a hotel and casino in Las Vegas, Nevada. The lease bears interest at 8.65% per annum and is payable in 48 equal monthly installments of $32,000 until maturity in November 2004 at which time the Company had an option to purchase the equipment for $519,000 or extend the lease for an additional 12 months at the same monthly payment until maturity in November 2005 and repurchase the equipment at such time for $165,000. In November 2004, the Company chose to extend the lease for an additional 12 months.

The Company originally accounted for this agreement as an operating lease and did not record the assets or the lease liability in the financial statements. During the year ended September 29, 2001, the Company recorded the entire amount payable under the lease as a liability of $1,600,000 based on the anticipated abandonment of the Aladdin operations. In 2002, the operations at the Aladdin were abandoned and at October 1, 2005 $117,000 remained accrued in other current liabilities representing future operating lease payments.

A quarterly cash dividend in the amount of $0.35 per share was declared on October 12, 2004. Subsequent to October 12, 2004, quarterly cash dividends in the amount of $0.35 per share were declared on January 12, April 12, July 12 and October 11, 2005. Prior to this, the Company had not paid any cash dividends since its inception. The Company intends to continue to pay such quarterly cash dividend for the foreseeable future, however, the payment of future dividends is at the discretion of the Company's Board of Directors and is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation and other relevant factors.

Contractual Obligations and Commercial Commitments

To facilitate an understanding of our contractual obligations and commercial commitments, the following data is provided:

                                                                      Payments Due by Period
                                           ========================================================================
                                                             Within                                       After 5
                                               Total         1 year        2-3 years      4-5 years        years
                                                                   (in thousands of dollars)
Contractual Obligations:
Operating Leases                           $     58,528   $      7,631   $     12,348   $     10,443   $     28,106
                                           ------------   ------------   ------------   ------------   ------------

Total Contractual Cash Obligations         $     58,528   $      7,631   $     12,348   $     10,443   $     28,106
                                           ============   ============   ============   ============   ============

                                                           Amount of Commitment Expiration Per Period
                                           ========================================================================
                                                             Within                                      After 5
                                               Total         1 year        2-3 years     4-5 years        years
                                                                     (in thousands of dollars)
Other Commercial Commitments:
Letters of Credit                          $        253   $       --     $        253   $       --     $       --
                                           ------------   ------------   ------------   ------------   ------------

Total Commercial Commitments               $        253   $       --     $        253   $       --     $       --
                                           ============   ============   ============   ============   ============

Restaurant Expansion

In December 2005, the Company opened a restaurant, Gallagher's Steakhouse, and a bar, Luna Lounge, at the Resorts Atlantic City Hotel and Casino in Atlantic City, New Jersey.

Recent Restaurant Dispositions and Charges

In fiscal 2003, the Company determined that its restaurant, Lutece, located in New York City, had been impaired by the events of September 11th and the continued weakness in the economy. Based upon the sum of the future undiscounted cash flows related to the Company's long-lived fixed assets at Lutece, the Company determined that impairment had occurred. To estimate the fair value of such long-lived fixed assets, for determining the impairment amount, the Company used the expected present value of the future cash flows. The Company projected continuing negative operating cash flow for the foreseeable future with no value for subletting or assigning the lease for the premises. As a result, the Company determined that there was no value to the long-lived fixed assets. The Company had an investment of $667,000 in leasehold improvements, furniture fixtures and equipment. The Company believed that these assets would have nominal value upon disposal and recorded an impairment charge of $667,000 during fiscal 2003. Due to continued weak sales, the Company closed Lutece during the second quarter of 2004. The Company recorded a net operating loss of $60,000 during the fiscal year ended October 1, 2005 which is included in losses from discontinued operations. In fiscal 2004, the Company also incurred a one-time charge of $470,000 related to pension plan contributions required in connection with the closing of Lutece which is payable monthly over a nine year period beginning May 17, 2004 and bears interest at a rate of 8% per annum.

On December 1, 2003, the Company sold a restaurant, Lorelei, for approximately $850,000. The book value of inventory, fixed assets, intangible assets and goodwill related to this entity was approximately

$625,000. The Company recorded a gain on the sale of approximately $225,000 during the first quarter of fiscal 2004.

The Company's restaurant Ernie's, located on the upper west side of Manhattan opened in 1982. As a result of a steady decline in sales, the Company felt that a new concept was needed at this location. The restaurant was closed June 16, 2003 and reopened in August 2003. Total conversion costs were approximately $350,000. Sales at the new restaurant, La Rambla, failed to reach the level sufficient to achieve the results the Company required. As a result, the Company sold this restaurant on January 1, 2004 and realized a gain on the sale of this restaurant of approximately $214,000. Net operating losses of $12,000 were included in losses from discontinued operations for the fiscal year ended October 1, 2005.

The Company's restaurant Jack Rose located on the west side of Manhattan has experienced weak sales for several years. In addition, this restaurant did not fit the Company's desired profile of being in a landmark destination location. As a result, the Company sold this restaurant on February 23, 2004. The Company realized a loss on the sale of this restaurant of $137,000 which was recorded during the second quarter of fiscal 2004. Net operating losses of $19,000 were included in losses from discontinued operations for the fiscal year ended October 1, 2005.

The Company's restaurant, America, located in New York City has experienced declining sales for several years. In March 2004, the Company entered into a new lease for this restaurant at a significantly increased rent. The Company entered into this lease with the belief that due to the location and the uniqueness of the space the lease had value. On January 19, 2005, the Company signed a definitive agreement for the sale of this restaurant which closed on March 15, 2005. The Company realized a pre-tax gain of $644,000 on the sale of this restaurant. Net operating income of $47,000 was included in losses from discontinued operations for the fiscal year ended October 1, 2005.

Critical Accounting Policies

Financial Reporting Release No. 60, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. The Company's significant accounting policies are more fully described in Note 1 to the Company's consolidated financial statements. While all these significant accounting policies impact its financial condition and results of operations, the Company views certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on the Company's consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.

The Company believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on the Company's consolidated results of operations, financial position or cash flows for the periods presented in this report.

Below are listed certain policies that management believes are critical:

Use of Estimates

The preparation of financial statements requires the application of certain accounting policies, which may require the Company to make estimates and assumptions of future events. In the process of preparing its consolidated financial statements, the Company estimates the appropriate carrying value of certain assets and liabilities, which are not readily apparent from other sources. The primary estimates underlying the

Company's financial statements include allowances for potential bad debts on accounts and notes receivable, the useful lives and recoverability of its assets, such as property and intangibles, fair values of financial instruments, the realizable value of its tax assets and other matters. Management bases its estimates on certain assumptions, which they believe are reasonable in the circumstances and actual results could differ from those estimates. Although management does not believe that any change in those assumptions in the near term would have a material effect on the Company's consolidated financial position or the results of operation, differences in actual results could be material to the financial statements.

Long-Lived Assets

The Company annually assesses any impairment in value of long-lived assets to be held and used. The Company evaluates the possibility of impairment by comparing anticipated undiscounted cash flows to the carrying amount of the related long-lived assets. If such cash flows are less than carrying value the Company then reduces the asset to its fair value. Fair value is generally calculated using discounted cash flows. Various factors such as sales growth and operating margins and proceeds from a sale are part of this analysis. Future results could differ from the Company's projections with a resulting adjustment to income in such period.

Leases

The Company is obligated under various lease agreements for certain restaurants. The Company recognizes rent expense on a straight-line basis over the expected lease term, including option periods as described below. Within the provisions of certain leases there are escalations in payments over the base lease term, as well as renewal periods. The effects of the escalations have been reflected in rent expense on a straight-line basis over the expected lease term, which includes option periods when it is deemed to be reasonably assured that the Company would incur an economic penalty for not exercising the option. Percentage rent expense is generally based upon sales levels and is expensed as incurred. Certain leases include both base rent and percentage rent. The Company records rent expense on these leases based upon reasonably assured sales levels. The consolidated financial statements reflect the same lease terms for amortizing leasehold improvements as were used in calculating straight-line rent expense for each restaurant. The judgments of the Company may produce materially different amounts of amortization and rent expense than would be reported if different lease terms were used.

Deferred Income Tax Valuation Allowance

The Company provides such allowance due to uncertainty that some of the deferred tax amounts may not be realized. Certain items, such as state and local tax loss carry forwards, are dependent on future earnings or the availability of tax strategies. Future results could require an increase or decrease in the valuation allowance and a resulting adjustment to income in such period.

Accounting for Goodwill and Other Intangible Assets

During 2001, the FASB issued FAS 142, which requires that for the Company, effective September 28, 2002, goodwill, including the goodwill included in the carrying value of investments accounted for using the equity method of accounting, and certain other intangible assets deemed to have an indefinite useful life, cease amortizing. FAS 142 requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of the reporting unit (the Company is being treated as one

reporting unit) with its net book value (or carrying amount), including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The impairment test for other intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

Determining the fair value of the reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of the reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. Similarly, estimates and assumptions are used in determining the fair value of other intangible assets. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. To assist in the process of determining goodwill impairment, the Company obtains appraisals from independent valuation firms. In addition to the use of independent valuation firms, the Company performs internal valuation analyses and considers other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flows and market comparisons and recent transactions. These approaches use significant estimates and assumptions including projected future cash flows (including timing), discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables. Based on the above policy no impairment charges were recorded during the fiscal years ended 2005, 2004 and 2003.

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (R), "Accounting for Stock-Based Compensation." SFAS No. 123 (R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123 (R) focuses primarily on accounting for transactions in which an entity obtains employee services through the issuance of stock options and other share-based payment transactions. SFAS No. 123 (R) requires that the fair value of such equity instruments be recognized as expense in the historical financial statements as services are performed. Prior to SFAS No. 123 (R), only certain pro forma disclosures of fair value were required. SFAS No. 123 (R) shall be effective for public entities that do not file as small business issuers as of the beginning of the first annual reporting period that begins after December 15, 2005. SFAS No. 123 (R) shall be effective for the Company beginning in its first quarter of fiscal 2006. The Company has not determined if the adoption of this new accounting pronouncement is expected to have a material impact on the financial statements of the Company for fiscal 2006.