GRILL CONCEPTS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(MARK ONE)

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

For the Fiscal Year Ended December 29, 2002

[ ] 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. [X]

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, 2002 was approximately
$3,922,000. Number of share outstanding of the registrant's common stock,
$.00004 par value, as of March 20, 2003: 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 29, 2002 are
incorporated by reference into Part III.

TABLE OF CONTENTS

PART I Page
----

ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 14
ITEM 6. SELECTED FINANCIAL DATA 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 30

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 30
ITEM 11. EXECUTIVE COMPENSATION 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 30

PART IV

ITEM 14. CONTROLS AND PROCEDURES 31
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 31

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 27 of this Form 10-K.

ITEM 1. BUSINESS

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, the Company
owns and operates, or has 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 its acquisition of Grill Concepts, Inc., a California corporation ("GCI"),
in March of 1995, the Company has focused principally on the expansion of the
"Daily Grill" and "The Grill on the Alley" restaurant formats of GCI.

At December 29, 2002, the Company owned and operated 13 restaurants and
managed or licensed 7 additional restaurants, consisting of 9 Daily Grill
restaurants and 4 The Grill on the Alley restaurants which are owned and
operated by the Company, 4 Daily Grill restaurants which are managed by the
Company and 2 Daily Grill restaurants and a City Bar & Grill restaurant which
are licensed by the Company. With the exception of three The Grill on the Alley
restaurants, which restaurants are operated by partnerships, all of the Daily
Grill and The Grill on the Alley restaurants which were owned and operated at
December 29, 2002 were solely owned and operated on a non-franchise basis by the
Company.

During 2002, the Company (1) sold its Pizzeria Uno franchise in Cherry
Hill, New Jersey and (2) closed the Daily Grill in Encino, California.

During 2002, 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 in
strategic markets throughout the United States. 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. One managed Daily Grill
restaurant was opened in Houston, Texas in July 2002 pursuant to the alliance.
An additional managed Daily Grill restaurant, not covered by the Starwood
alliance, was opened adjoining the Handlery Union Square Hotel in San Francisco,
California in February 2002.

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 2002 and 2001 by restaurant concept for both Company owned restaurants
("Company Restaurants") and Company managed and/or licensed restaurants
("Managed Restaurants"):

-1-

2001 2002
---- ----
Number of restaurants:
Daily Grill restaurants:
Company Restaurants:
Beginning of year 10 10
Restaurant closings - (1)
---- -----
End of year 10 9

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

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

Grill restaurants:
Company Restaurants:
Beginning of year 3 4
Restaurant openings 1 -
---- -----
End of year 4 4

Total Grill restaurants:
Beginning of year 3 4
Restaurant openings 1 -
---- -----
End of year 4 4
=== ===

Other restaurants1:
Company Restaurants:
Beginning of year 2 1
Restaurants closed or sold (1) (1)
---- -----
End of year 1 -

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

Total Other restaurants:
Beginning of year 3 2
Restaurants closed or sold (1) (1)
---- -----
End of year 2 1
==== ===

Total restaurants:
Beginning of year 20 20
Restaurant openings 1 2
Restaurants closed or sold (1) (2)
---- -----
End of year 20 20
==== ===

1 Includes one Pizzeria Uno Restaurant in 2001 operated by the Company
pursuant to a franchise agreement.

-2-

2001 2002
---- ----
Weighted average weekly sales per restaurant:
Daily Grill restaurants:
Company Restaurants $60,041 $57,133
Managed Restaurants. n.a. n.a.
Grill restaurants:
Company Restaurants $88,965 $73,057
Managed Restaurants. n.a. n.a.
Other restaurants:
Company Restaurants $34,340 $29,239

Change in comparable restaurant sales:
Daily Grill restaurants
Company Restaurants - (4.2)%
Managed Restaurants n.a. n.a.
Grill restaurants
Company Restaurants (4.6)% (2.3)%
Managed Restaurants n.a. n.a.
Other restaurants:
Company Restaurants (4.6)% -

Total system sales:
Daily Grill $28,099,000 $25,593,000
Grill 13,714,000 15,196,000
Pizza Restaurants 2,716,000 497,000
Management and license fees 872,000 1,006,000
----------- ---------
Total consolidated revenues 45,401,000 42,292,000

Managed restaurants 10,488,000 13,975,000
Licensed restaurants 7,392,000 6,963,000
Less: management and license fees (872,000) (1,006,000)
----------- ---------

Total system sales $62,409,000 $62,224,000
=========== =========

RESTAURANT CONCEPTS

- - DAILY GRILL RESTAURANTS

Background. At December 29, 2002, the Company, through its subsidiary,
GCI, owned and operated, managed or licensed nine 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 and one Daily Grill restaurant in
Houston, Texas. Daily Grill restaurants are patterned after "The Grill on the
Alley" in Beverly Hills, a fine dining American-style grill restaurant which was
acquired by the Company 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 29, 2002, fifteen Daily Grill restaurants were in operation, eight
of which were 100% owned by the Company and located in shopping malls and other
commercial properties, one of which was 50% owned and located in Universal
CityWalk, California, four of which were managed by the Company and located in
hotels and two of which were licensed restaurants.

-3-

Daily Grill locations opened, or are scheduled to open, 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%
Bethesda, Maryland (Hyatt Hotel) September 2003 100%

Each 100% owned Daily Grill restaurant is located in leased facilities.
Site selection is viewed as critical to the success of the Company 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 anchor tenants at high profile malls 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 the Company, operated pursuant to a partnership,
joint venture or license arrangement or operated pursuant to 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 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 of 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 the Company's part. However, each hotel restaurant arrangement
will be negotiated separately and the capital investment by the Company may vary
widely. Opening costs, for the Company, of existing hotel restaurants, including
leasehold improvements, furniture, fixtures and equipment and pre-opening
expenses, have ranged from $150,000 to $600,000 per restaurant.

-4-

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, in contrast to the "nouvelle cuisine" and diet meal fads
of the 1980'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 in menu pricing,
from $9.50 for an "original" beef dip sandwich to $21.95 for a char-broiled 16
oz. T-bone steak with all the trimmings. The average lunch check is $16.00 per
person and the average dinner check is $24.00 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 29, 2002, 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. The
Company's management believes that its 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 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. The 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.

The attention to detail and quality of the 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 the Company's 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
the Company's procedures and policies but in every aspect of Daily Grill
operations. The Company's 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%.

The Company believes 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.

-5-

THE GRILL ON THE ALLEY

Background. At December 29, 2002, the Company, through its 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, the Company acquired the original Grill from a
partnership, the managing partner of which was controlled by the Company's
principal shareholders and directors.

Restaurant Sites. At December 29, 2002, the Company operated four Grill
restaurants, two of which are non-hotel based facilities and two of which are
hotel-based facilities.

Grill locations opened, or are scheduled to open, in the following months
and years, are owned or managed as indicated and, where indicated, in the
referenced hotels:
Ownership
Interest,
Licensed 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%

The Company's Grill restaurants are located in leased facilities. As with
the Company's Daily Grill restaurants, site selection is viewed as critical to
the success of the Company 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 criteria.

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 the Company, operated pursuant to a partnership or
joint venture arrangement or operated pursuant to a management agreement. As
with free standing restaurants, site selection is viewed as critical to the
success of the Company 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 1,500 square feet 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 2,000 square feet 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 the Company's part. However, each hotel
restaurant arrangement will be negotiated separately and the capital investment
by the Company 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 $3.4 million.

-6-

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 $11.95 for a hamburger to $34.50 for a Prime
Porterhouse Steak. The average lunch check is $26.00 per person and the average
dinner check is $54.00 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 29, 2002, 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. The Company's
management believes that its 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.

The attention to detail and quality of the 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 the Company's 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 the
Company's procedures and policies but in every aspect of Grill operations. The
Company's 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.

The Company believes 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 its Cherry Hill, New Jersey Pizzeria Uno
Restaurant for $325,000, the Company completed its planned divestiture of its
interests in Pizzeria Uno Restaurants. Previously, the Company operated as many
as four franchised Pizzeria Uno Restaurants. During 1998, the Company
determined that the continued ownership and operation of the Pizza Restaurants
did not fit with the Company's strategic growth plan. Based on that
determination, in July, 2000, the Company closed its Pizzeria Uno restaurant in
Media, Pennsylvania due to declining operations and, in July 2001, the Company
sold its Pizzeria Uno restaurant in South Plainfield, New Jersey for $700,000.

-7-

OTHER RESTAURANT ACTIVITIES

In addition to owning and operating Daily Grill and The Grill, the Company,
at December 29, 2002, also provided management services for Daily Grill
restaurants at the Burbank Hilton, the Georgetown Inn, the Handlery Hotel and
the Westin Galleria 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

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

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

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

In February 2002, the Company, pursuant to the Hotel Property Agreement,
began providing management services for a Daily Grill restaurant at the Handlery
Hotel in San Francisco. Pursuant to its management agreement with the hotel,
the Company advanced the restaurant $287,000 to be paid out of future operating
profits. The Company is entitled to a management fee equal to 6% of gross
receipts of the restaurant. Additionally, the Company is entitled to 25% of the
net income of the restaurant.

In July 2002, the Company, pursuant to the Hotel Property Agreement, began
providing management services for a Daily Grill restaurant at the Westin
Galleria in Houston, Texas. Pursuant to its management agreement with the
hotel, the Company advanced the restaurant $64,000 to be repaid out of net
income available for distribution, second only to owner's working capital
advances. The Company is entitled to a management fee equal to 5% of gross
receipts of the restaurant. Additionally, the Company is entitled to 35% of the
annual profits of the restaurant after working capital requirements are
satisfied.

- - RESTAURANT LICENSING

LAX Daily Grill. Since January 1997, CA One Services 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 the Company and CA One Services, and since April 1998
has been operated by CA One Services under a license agreement.

Pursuant to the terms of the License Agreement, the Company is 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 the Company is entitled to a
license fee equal to the greater of $65,000 or 2% of sales per year.

-8-

HOTEL PROPERTY AGREEMENT

In order to facilitate the Company's efforts to open restaurants on a large
scale basis in hotel properties, the Company, in August of 1998 entered into the
Hotel Property Agreement with HRP pursuant to which HRP has agreed to assist the
Company in locating suitable hotel locations for the opening of the Company's
restaurants. 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. The
Company will, in turn, enter into management agreements with HRP or the hotel
owners, as appropriate. The Company 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. The Company will be entitled to
receive from HRP a base overhead fee equal to $1,667 per month per Managed
Outlet. Net income after repayments required on Manager Loans from each Managed
Outlet will be allocated 75% to the Company 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 the
Company is 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, the
Company 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
common stock of the Company 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

The Company's 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 review will 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, the Company intends to monitor the results of any
modifications to its existing restaurants and to incorporate any successful
modifications into future restaurants. All future restaurants are expected to
feature full bar service.

The Company's 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, the Company expects 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, the Company intends 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 29, 2002, the Company 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 2003, 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 the Company pursues expansion.

-9-

At December 29, 2002, hotel based Daily Grill restaurants were operated
under management or licensing agreements in Southern California, Washington,
D.C., Skokie, Illinois, San Francisco, California and Houston, Texas, and hotel
based Grill restaurants were operated in San Jose, California and Chicago,
Illinois. The Company 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 by the Company may vary widely. The Company signed a
lease for a hotel-based owned Daily Grill restaurant in Bethesda, Maryland.

STARWOOD DEVELOPMENT AGREEMENT

On July 27, 2001, in conjunction with the purchase by Starwood Hotels and
Resorts of 666,667 shares of the Company's common stock and 666,667 $2.00
warrants for $1,000,000, 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.

Under the Starwood Development Agreement, either the Company 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, the Company is prohibited from developing,
managing, operating or licensing the Company's 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 the Company's 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 effect
the exclusivity rights as to the other brand or in general.

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.

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 continues 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.

-10-

Following the events of September 11, 2001, Starwood substantially
curtailed new development activities and only one management agreement has, 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

The Company strives to maintain quality and consistency in its 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. The Company believes that its concept and
high sales volume enable it to attract quality, experienced restaurant
management and hourly personnel. The Company has 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 the Company. The general manager has primary responsibility for the
operation of the restaurant and reports directly to an Area Director who in turn
reports to the Company's 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 85
employees. Restaurant operations are standardized, and a comprehensive
management manual exists to ensure operational quality and consistency.

The Company maintains 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 the Company's 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,
the Company has developed training courses for assistant managers and chefs. The
Company typically has a number of employees involved in management training, so
as to provide qualified management personnel for new restaurants. The Company's
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 the Company's philosophy,
strategy and standards of quality are being adhered to in all aspects of
restaurant operations.

-11-

PURCHASING

The Company has developed proprietary recipes for substantially all the
items served at its 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 the Company's 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, the Company is working with outside
suppliers to produce a limited number of selected proprietary items such as
salad dressings, soups and seasoning combinations.

The Company utilizes its point-of-sale computer system to monitor inventory
levels and sales, then orders food ingredients daily based on such levels. The
Company employs contract purchasing in order to lock in food prices and reduce
short term exposure to price increases. The Company's 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 the Company's 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

The Company's marketing philosophy is to provide our guests with an
exceptional and enjoyable dining experience that creates loyalty and frequent
visits. The Company's marketing and promotional efforts have been fueled
historically by its 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. The
Company supplements its 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,
customer newsletters, a birthday club, as well as holiday and special interest
events. The Company also supports and participates in local charity campaigns.
These activities are managed by a full time Director of Marketing. Guest
feedback is solicited regularly through a comment card program. During 2002,
expenditures for advertising and promotion were approximately 1.3% 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 the Company's hotel based restaurants is primarily limited to
restaurants within the immediate proximity of the hotel.

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. The
Company believes it competes favorably with respect to these factors. The
Company believes that its ability to compete effectively will continue to depend
in large measure on its ability to offer a diverse selection of high quality,
fresh food products with an attractive price/value relationship served in a
friendly atmosphere.

EMPLOYEES

The Company and its subsidiaries employ approximately 1,269 people, 37 of
whom are corporate personnel and 98 of whom are restaurant managers, assistant
managers and chefs. The remaining employees are restaurant personnel. Of the
Company's 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.

-12-

With the exception of the Chicago Grill on the Alley, none of the Company's
employees are represented by labor unions or are subject to collective
bargaining or other similar agreements. The union contract covering the Chicago
Grill expired in August 2002 and is presently in negotiation. Pending agreement
on a new union contract, the Chicago Grill on the Alley is subject to the risk a
work stoppage although management does not anticipate one.

TRADEMARKS AND SERVICE MARKS

The Company regards its trademarks and service marks as having significant
value and as being important to its marketing efforts. The Company has
registered its "Daily Grill" mark and logo and its "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 has secured
California state registration of such marks. The Company's policy is to pursue
registration of its marks and to oppose strenuously any infringement.

GOVERNMENT REGULATION

The Company is subject to various federal, state and local laws affecting
its business. Each of the Company's 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 the Company's restaurants.

Alcoholic beverage control regulations require each of the Company's
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 the Company's restaurants,
including minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control, and handling, storage and dispensing of
alcoholic beverages.

The Company 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. The Company
presently carries liquor liability coverage as part of its existing
comprehensive general liability insurance.

Various federal and state labor laws govern the Company's relationship with
its 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 the Company's restaurants.
Management is not aware of any environmental regulations that have had a
material effect on the Company to date.

ITEM 2. PROPERTIES

With the exception of certain properties which may be operated pursuant to
management arrangements or partnership or joint venture arrangements, all of the
Company's restaurants are located in space leased from parties unaffiliated with
the Company. The leases have initial terms ranging from 10 to 25 years, with
varying renewal options on all but one of such leases. Each of the leases
provides 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 which may be deemed to be controlled by a director of the
Company, Lewis Wolff who may also be deemed to be an affiliate of the Company as
a result of his holdings of common stock and securities convertible into or
exercisable to acquire common stock of the Company.

-13-

The Company's 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 the Company's existing restaurant and executive
office space is adequate to support current operations. The Company intends to
lease, from time to time, such additional office space and restaurant sites as
management deems necessary to support its future growth plans.

ITEM 3. LEGAL PROCEEDINGS

Restaurants such as those operated by the Company are subject to litigation
in the ordinary course of business, most of which the Company expects to be
covered by its general liability insurance. However, punitive damages 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 which may
arise in the future.

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

No matters were submitted to a vote of the Company's stockholders through
the solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year ended December 29, 2002.

PART II

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

The Company's 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
the Company's common stock for each quarterly period during the last two fiscal
years:

High Low
---- ---

2001 - First Quarter 3.344 1.938
Second Quarter 3.500 1.940
Third Quarter 2.900 1.500
Fourth Quarter 1.900 1.100

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

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

At March 17, 2003, the closing bid price of the Common Stock was $1.32.

As of March 17, 2003, there were approximately 414 holders of record of the
Common Stock of the Company.

The Company has never declared or paid any cash dividend on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.

-14-

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table gives information about the Company's common stock that
may be issued upon exercise of (1) options granted pursuant to the option plan
and (2) options or warrants granted pursuant to equity compensation plans not
approved by security holders as of December 29, 2002.

NUMBER OF SECURITIES
NUMBER OF SECURITIES WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
TO BE ISSUED UPON EXERCISE PRICE OF FUTURE ISSUANCE UNDER
EXERCISE OF OUTSTANDING EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS REFLECTED IN COLUMN (A))
- -------------------- -------------------- ------------------ --------------------------

Equity compensation 669,975 $ 2.89 402,525
plans approved by
security holders

- - -
Equity compensation -------------------- ------------------ --------------------------
plans not approved
by security holders

Total 669,975 $ 2.89 402,525
-------------------- ------------------ --------------------------

-15-

ITEM 6. SELECTED FINANCIAL DATA

The following tables present selected historical consolidated financial
data derived from the consolidated financial statements of the Company. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company included elsewhere herein.

Fiscal Year Ended December
-------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ----------- ----------- -----------
(In thousands except per share data)

Statement of Operations Data:
Sales $ 34,464 $ 38,432 $ 44,598 $ 44,529 $ 41,286
Management and license fees 444 544 1,078 872 1,006
----------- ----------- ----------- ----------- -----------
Total revenues 34,908 38,976 45,676 45,401 42,292
----------- ----------- ----------- ----------- -----------

Gross profit 25,234 28,090 32,674 32,985 30,858
Operating expenses:
Restaurant operating expenses 21,321 23,426 27,201 27,288 25,678
General and administration 2,755 3,296 3,303 3,540 3,568
Depreciation and amortization 1,137 1,196 1,334 1,457 1,492
Pre-opening costs 175 54 330 199 69
Gain on sale of assets - - - (225) (71)
Unusual charges 964 - 73 - -
----------- ----------- ----------- ----------- -----------

Total 26,352 27,972 32,241 32,259 30,736
----------- ----------- ----------- ----------- -----------

Income (loss) from operations (1,118) 118 433 726 122
Interest expense, net (231) (376) (478) (394) (214)
----------- ----------- ----------- ----------- -----------

Income (loss) before taxes, minority
interest, equity in loss of joint
venture and cumulative effective
of change in accounting principle (1,349) (258) (45) 332 (92)
Provision for income taxes (10) (6) (14) (65) (37)
Equity in loss of joint venture - (74) (9) (9) (23)
Minority interests 122 (68) 102 211 285
Cumulative effect of change in
accounting principle (70) - - - -
----------- ----------- ----------- ----------- -----------

Net income (loss) (1,307) (406) 34 469 133
----------- ----------- ----------- ----------- -----------

Preferred dividends accrued or paid (85) (50) (50) (50) (50)
Accounting deemed dividends (83) - - - -
----------- ----------- ----------- ----------- -----------

Net income (loss) applicable to
common stock $ (1,475) $ (456) $ (16) $ 419 $ 83
=========== =========== =========== =========== ===========

Net income (loss) per share applicable
to common stock (1):
Basic $ (0.37) $ (0.11) $ 0.00 $ 0.09 $ 0.02
=========== =========== =========== =========== ===========
Diluted $ (0.37) $ (0.11) $ 0.00 $ 0.09 $ 0.02
=========== =========== =========== =========== ===========

Weighted average shares outstanding
Basic 3,972,256 4,003,738 4,104,360 4,776,741 5,537,071
=========== =========== =========== =========== ===========
Diluted 3,972,256 4,003,738 4,104,360 4,866,449 5,551,751
=========== =========== =========== =========== ===========

-16-

Balance Sheet Data:
Working deficit $ (2,300) $ (3,685) $ (2,719) $ (693) $ (1,321)
Total assets 11,387 11,288 12,534 14,344 13,665
Long-term debt, less
current portion 2,928 2,033 2,866 1,534 976
Stockholders' equity 3,867 3,461 3,495 6,045 6,178

(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.

-17-

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

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 27 of this Form 10-K.

GENERAL

During the fiscal year ended December 29, 2002 the Company owned and
operated 15 restaurants and managed or licensed 7 additional restaurants
consisting of 10 Daily Grill restaurants (Encino closed in April 2002), 3 Grill
on the Alley restaurants, one The Grill on Hollywood restaurant and one Pizzeria
Uno restaurant (sold in April 2002) which were owned and operated by the
Company, 4 Daily Grill restaurants which are managed by the Company, a City Bar
and Grill restaurant which was converted from a managed to a licensed restaurant
during the year and 2 Daily Grill restaurants which are licensed by the Company.
During the fiscal year ended December 30, 2001, the Company owned and operated
16 restaurants and managed or licensed 5 additional restaurants, consisting of
10 Daily Grill restaurants, 2 Pizzeria Uno restaurants (one was sold in July
2001), 3 The Grill on the Alley restaurants and 1 The Grill on Hollywood (opened
in November 2001) which were owned and operated by the Company, 2 Daily Grill
restaurants and a City Bar and Grill restaurant which are managed by the Company
and 2 Daily Grill restaurants which are licensed by the Company. During the
fiscal year ended December 31, 2000, the Company owned and operated a total of
16 restaurants and managed or licensed 5 additional restaurants, consisting of
10 Daily Grill restaurants, 3 Pizzeria Uno restaurants (one was closed in July
2000) and 3 The Grill on the Alley restaurants which were owned and operated by
the Company, 2 Daily Grill restaurants and a City Bar & Grill restaurant which
are managed by the Company and 2 Daily Grill restaurants which are licensed by
the Company. See "Business."

Fiscal 2002 operating results include a full year of operations for The
Grill on Hollywood (compared to 7 weeks in 2001), 44 weeks of operations at the
San Francisco Daily Grill and 25 weeks of operations at the Houston Galleria
Daily Grill. The Encino Daily Grill was closed in April 2002 and the Cherry
Hill Pizzeria Uno was sold in April 2002.

Fiscal 2001 operating results include a full year of operations from the
Chicago Grill restaurant (compared to 29 weeks in 2000), 7 weeks of operations
of The Grill on Hollywood and a full year of operations for the Skokie
restaurant (compared to 12 weeks in 2000). The Pizzeria Uno restaurant in South
Plainfield, New Jersey was sold in July 2001.

Fiscal 2000 operating results include a full year of operations and
management fees from the Georgetown Inn Daily Grill restaurant (compared to 39
weeks of operations in 1999) and the Universal CityWalk Daily Grill (compared to
25 weeks of operations in 1999), 29 weeks of operations of the Chicago Grill
restaurant, and 12 weeks of operations at the Daily Grill in Skokie, Illinois.
The Pizzeria Uno restaurant in Media, Pennsylvania was closed in July 2000.

The Company accounts for its 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.

-18-

Sales revenues of the Company are derived from sales of food, beer, wine,
liquor and non-alcoholic beverages. Approximately 81% of combined 2002 sales
were food and 19% 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.

The Company's expenses are comprised primarily of cost of food and
beverages and restaurant operating expenses, including payroll, rent, occupancy
costs and franchise fees. The largest expenses of the Company 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 the
Company's restaurants. Restaurant operating expenses consist primarily of wages
paid to part-time and full-time employees, rent, utilities, insurance and taxes.

In addition to its cost of food and beverages and normal restaurant
operating expenses through April 2002 when the Company sold its last Pizzeria
Uno Restaurant, the Company paid a continuing license fee with respect to its
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, the Company pays certain
general and administrative expenses which relate primarily to operation of the
Company's 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
various office expenses.

RESULTS OF OPERATIONS

The following table sets forth certain items as a percentage of total
revenues from the Company's Statements of Operations during 2000, 2001 and 2002:

Fiscal Year Ended December
--------------------------
2000 2001 2002
------ ------ ------

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

Total revenues 100.0 100.0 100.0
Cost of sales 28.5 27.3 27.0
------ ------ ------

Gross profit 71.5 72.7 73.0
------ ------ ------

Restaurant operating expense 59.6 60.1 60.7
General and administrative expense 7.2 7.8 8.5
Depreciation and amortization 2.9 3.2 3.5
Preopening costs 0.7 0.5 0.2
Gain on sale of assets - (0.5) (0.2)
Unusual charges 0.2 0.0 0.0
------ ------ ------

Total operating expenses 70.6 71.1 72.7
------ ------ ------

Operating income 0.9 1.6 0.3
Interest expense, net ( 1.0) (0.9) (0.5)
------ ------ ------

Income (loss) before income tax ( 0.1) 0.7 (0.2)
Provision for taxes 0.0 (0.2) (0.1)
Minority interest 0.2 0.5 0.7
Equity in loss of joint venture 0.0 0.0 (0.1)
------ ------ ------

Net income 0.1% 1.0% 0.3%
====== ====== ======

-19-

FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001

Revenues. The Company's 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.

Price increases were last implemented during December 2002 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 head
count at existing restaurants and selected price increases. When entering new
markets where the Company has not yet established a market presence, sales
levels are expected to be lower than in existing markets where the Company has a
concentration of restaurants and high customer awareness. Although the
Company's 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 may result.

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.

The Company accounts for its 50% interest in the Universal CityWalk Daily
Grill using the equity method. As a result, the Company's sales do not include
sales from Universal CityWalk. Total revenues for the Universal CityWalk Daily
Grill were $2.1million 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.

-20-

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
4.7% to $30.7 million in 2002 (representing 72.7% of revenues) from $32.3
million in 2001 (representing 71.1% of sales).

Restaurant operating expenses decreased 5.9% 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 60.1% 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. The Company
reported a minority interest in the loss of its 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 the Company 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.

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

The Company reported net income of $133,000 in 2002 as compared to a net
income of $469,000 for 2001.

FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000

Revenues. The Company's revenues for 2001 decreased 0.6% to $45.4 million
from $45.7 million in 2000. Sales revenues decreased 0.2% to $44.5 million in
2001 from $44.6 million in 2000. Management and license fee revenues decreased
to $872,000 in 2001 from $1,078,000 in 2000. System-wide sales, including sales
of non-consolidated restaurants operated under license, management agreement or
partnership, totaled $62.4 million in 2001 compared to $62.3 million in 2000.

The decline in consolidated revenues for the year is partially due to one
less week of sales in 2001 compared to 2000. Additionally it is believed to be
attributable to specific factors which may have effected individual restaurants,
to unfavorable economic and operating conditions which prevailed during the
fourth quarter of 2001, including weak economic conditions, the impact of the
September 11 terrorist attacks, corporate spending cutbacks and reduced business
travel. These factors contributed to a decline in consolidated revenues during
the fourth quarter of 15.1%, from $13.6 million in 2000 to $11.5 million in
2001.

-21-

Sales for Daily Grill restaurants were flat at $28.1 million in 2000 and
2001. Although weighted average weekly sales at the Daily Grill restaurants
increased 1.9% from $58,920 in 2000 to $60,041 in 2001, the additional week in
2000 contributed, on average, $530,000, or 2% of sales. An increase in the
average ticket of almost $2.00 was offset by a 0.9% decrease in the number of
guests.

Sales for Grill restaurants increased by 12.7% from $12.2 million in 2000
to $13.7 million in 2001. The increase in sales revenues for the Grill
restaurants from 2000 to 2001 was primarily attributable to (1) the opening of
the Grill on Hollywood in November 2001 which contributed $0.7 million and (2)
having the full year of Chicago compared to only 29 weeks in 2000 which
contributed $1.2 million. Weighted average weekly sales at the Grill
restaurants decreased 0.6% from $89,476 in 2000 to $88,965 in 2001. An increase
in the average ticket of $7.73, primarily attributable to San Jose Grill,
combined with the addition of Hollywood offset the decrease in guests at both
San Jose and Beverly Hills.

Sales for the Pizza Restaurants decreased by 37.2% from $4.3 million in
2000 to $2.7 million in 2001. The decrease in sales revenues for the Pizza
Restaurants from 2000 to 2001 was attributable to (1) the closing of the
Pizzeria Uno franchise restaurant in Media, PA ($0.6 million), (2) the sale of
the Pizzeria Uno in South Plainfield, NJ ($0.9 million) and (3) a 4.6% decline
in same store sales at the remaining location. Weighted average weekly sales at
the Pizza Restaurants increased 7.2% from $32,000 in 2000 to $34,300 in 2001.
Management previously determined that continued ownership and operation of the
Pizza Restaurants does not fit with the Company's strategic growth plans. In
July 2001, the Company finalized the sale of its Pizza Restaurant in South
Plainfield, New Jersey for $700,000. At the end of 2001, the Company was
seeking a suitable buyer for its Pizza Restaurant in Cherry Hill, New Jersey.

Price increases were last implemented during the fourth quarter of 2000 for
certain menu items with minor increases as a result of menu engineering in the
second quarter of 2001. While selected price increases may be implemented from
time to time in the future, the Company does not plan to implement additional
price increases in the foreseeable future. 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 head count at existing restaurants and selected
price increases. When entering new markets where the Company has not yet
established a market presence, sales levels are expected to be lower than in
existing markets where the Company has a concentration of restaurants and high
customer awareness. Although the Company's 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 may
result.

Management and license fee revenues were attributable to (1) hotel
restaurant management services which accounted for management fees of $577,000
in 2001 and $750,000 in 2000, (2) licensing fees from the LAX Daily Grill and
Skokie, Illinois Daily Grill which totaled $194,000 in 2001 and $148,000 in
2000, and (3) fees from Universal CityWalk which totaled $101,000 in 2001 and
$122,000 in 2000. The decrease in management fees during 2001 was attributable
to decreased sales at the Burbank Hilton and San Jose City Bar & Grill offset by
increases at the Georgetown Inn.

The Company accounts for its 50% interest in the Universal CityWalk Daily
Grill using the equity method. As a result, the Company's sales do not include
sales from Universal CityWalk. Total revenues for the Universal CityWalk Daily
Grill were $2.0 million during 2001 as compared to $2.2 million during 2000.

Cost of Sales and Gross Profit. While sales revenues decreased by 0.2% in
2001 as compared to 2000, cost of sales decreased by 4.5% ($0.6 million) and
decreased as a percentage of sales from 28.5% in 2000 to 27.3% in 2001. The
decrease in cost of sales as a percentage of sales revenues was primarily
attributable to menu refinements and related sales mix as well as cost
reductions resulting from improved purchasing.

Gross profit increased 1.0% from $32.7 million (71.5% of sales) in 2000 to
$33.0 million (72.7% of sales) in 2001.

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, rose 0.1%
to $32.3 million in 2001 (representing 71.1% of revenues) from $32.2 million in
2000 (representing 70.6% of sales).

-22-

Restaurant operating expenses decreased 0.5% to $27.1 million in 2001 from
$27.2 million in 2000. As a percentage of sales, restaurant operating expenses
represented 59.6% in both 2001 and 2000. The decrease in restaurant operating
expenses resulted primarily from the sale of the Pizzeria Uno restaurant in
South Plainfield, New Jersey for net proceeds of $225,000 which were credited
against restaurant operating expenses.

General and administrative expenses increased 7.2% to $3.5 million in 2001
from $3.3 million in 2000. General and administrative expenses represented 7.8%
of sales in 2001 as compared to 7.2% of sales in 2000. The increase in total
general and administrative was primarily the result of increased headcount at
the corporate office and related benefits ($0.3 million).

Depreciation and amortization expense was $1.5 million during 2001 as
compared to $1.3 million during 2000. The increase in depreciation and
amortization expense reflects the opening of the Hollywood Grill in November
2001 ($0.1 million) and a full year of expense for the Chicago Grill ($0.1
million).

Pre-opening costs totaled $199,000 in 2001 as compared with $330,000 in
2000. These pre-opening costs were attributable to the opening in 2001 of The
Grill on Hollywood and in 2000 of the Chicago Grill.

Unusual charges totaling $73,000 in 2000 related to the costs of closing
the Media Pizza Restaurant. The Company reported no unusual charges in 2001.

Interest Expense. Interest expense, net, totaled $394,000 during 2001 as
compared to $478,000 in 2000. The decrease in interest expense was primarily
attributable to the reduction in total debt and decrease in interest rates on
bank debt.

Minority Interest and Equity in Loss of Joint Venture. The Company
reported a minority interest in the loss of its majority owned subsidiaries of
$211,000 during 2001, consisting of 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. For the year ending December
31, 2000 the Company recorded a minority interest in the earnings of San Jose
Grill on the Alley, LLC of $115,000 and a minority interest in the loss of
Chicago - The Grill on the Alley, LLC of $217,000.

The Company recorded equity in loss of joint venture of $9,000 in 2001 and
2000 relating to the Company's 50% interest in Universal CityWalk Daily Grill.

The Company reported net income of $469,000 in 2001 as compared to $34,000
for 2000.

LIQUIDITY AND CAPITAL RESOURCES

At December 29, 2002, the Company had a working capital deficit of $1.3
million and a cash balance of $1.3 million as compared to a working capital
deficit of $0.7 million and a cash balance of $2.3 million at December 30, 2001.
In 2002 the Company 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) which opened in San Francisco and Houston. During 2001, the Company's
cash was primarily attributable to the issuance of new equity, proceeds from the
sale of the Pizzeria Uno in South Plainfield, New Jersey and cash flow from
operations that were used to pay off the Company's bank borrowing of $1.2
million and other debt of $0.5 million. The Company has generated modest net
income in each of the last three fiscal years and has generated positive
operating cash flows in each of the last five 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 $1.6 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 its landlords, and, beginning in 1999, through joint
venture arrangements.

At December 29, 2002, 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, an SBA loan of $0.1 million, loans from stockholders/officers/directors
of $0.3 million, equipment loans of $0.8 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 $0.8 million at December 29, 2002 and will ratably reduce to $0.5
million by the end of fiscal year 2003. To provide for future financing needs,
management intends to increase its borrowing capacity in 2003 by securing
additional financing. However, there can be no assurances that such financing
will be available on acceptable terms.

On August 1, 2000, the Company 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, the Company issued
40,000 warrants. In June 2001 the lender became a member of the Company's Board
of Directors and the loan was reclassified as related party debt. The balance
owed on the loan at December 29, 2002 was $176,000.

-23-

On December 13, 2001 the Company amended its 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 $500,000 at December
29, 2002 and will ratably reduce to $200,000 by the end of fiscal 2003. The
Company has an additional line of credit which provides borrowing up to $0.3
million. At December 29, 2002 and December 30, 2001 there were no borrowings
under either line of credit. Interest is payable at the bank's prime rate. In
connection with the Credit Facility the Company is required to comply with
certain debt service coverage and liquidity requirements. Two of the Company's
principal stockholders have guaranteed the Credit Facility. In exchange for the
guarantee, the Company 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.

During 2002, the Company and its subsidiaries were obligated under 16
leases covering the premises in which the Company's Daily Grill, Grill and Pizza
Restaurants are located as well as leases on its 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 $2.2 million in 2002 and paid percentage rent obligations above
and beyond minimum rent of $0.4 million. The Company's minimum rent obligations
for 2003 are $2.1 million.

The Company 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 the Company advanced
approximately $287,000, with the balance being paid by the hotel owners. The
advance made by the Company will be repaid through future profits.

The Company 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, the Company has advanced $64,000 to the restaurant for initial
working capital to be repaid from future cash flows.

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 the Company
of opening such restaurants to be less than the Company's cost to build and open
non-hotel based restaurants.

Capital expenditures were $2.4 million in 2000, $1.4 million in 2001 and
$1.3 million in 2002. Capital expenditures in fiscal 2003 are expected to be
between $0.7 million and $1.1 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
the Company's part. In addition, if the Company opens more, or less,
restaurants than it currently anticipates, its capital requirements will
increase, or decrease, accordingly.

In order to finance restaurant openings during 1997 and 1998, the Company
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 to the Company of approximately
$1.5 million. The 1997 offering consisted of a private placement of 200,000
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 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 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. Accrued dividends in
arrears total $276,000 at December 29, 2002 and $226,000 at December 30, 2001.

-24-

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.

In February of 1999, the Company entered into a limited liability
company/member loan arrangement to provide financing for the planned opening of
a Grill restaurant at the Chicago Westin Hotel which opened June of 2000.
Pursuant to the financing arrangement for the Chicago Westin Hotel Grill,
investor members of the limited liability company (the "Chicago LLC") invested
$1,000 in the Chicago LLC and loaned an additional $1.699 million to the Chicago
LLC. $1,190,000 of the loan was converted to equity. The Company manages the
Chicago LLC for which it receives a management fee of 5% of sales and owns a 60%
interest in the Chicago LLC. The Company guaranteed repayment of the loan to
the Chicago LLC and issued warrants to acquire 203,645 shares of common stock at
$7.00 per share. The total cost to construct the Chicago Grill was $2.5
million. The Chicago Grill opened in June 2000. At December 29, 2002, the
balance of the loan to Chicago LLC guaranteed by the Company was $414,000.

The Operating Agreement and the Senior Promissory Note for Chicago - The
Grill on the Alley, LLC stipulates that the non-manager member of Chicago - The
Grill on the Alley, LLC is entitled to a cumulative preferred return of eight
percent annually of their converted capital contribution. Preferred return
payments of $81,000 were paid to the non-manager member during 2002. These
payments are treated as a reduction of equity. Payments returning $95,000 of
converted capital contribution were made in 2002. The minority member's
unrecovered capital contribution at December 29, 2002 was $750,000.

The Operating Agreement for San Jose Grill LLC, stipulates that
distributions of distributable cash shall be made first, 10% to the manager and
90% to the members in the ratio of their percentage interests until the members
have received the amount of their initial capital contribution. Second, to the
payment of the preferred return of ten percent per annum on the unpaid balance
of the member's adjusted capital contribution until the entire accrued but
unpaid preferred return has been paid. Third, to the members in the ratio of
their percentage interests until the additional capital contributions have been
repaid. Thereafter, distributions of distributable cash will be made first, 16
2/3% as an incentive to the manager and the balance to the members in the ratio
of their percentage interests. In 2002 two distributions of distributable cash
totaling $167,000 were made to the minority member that reduced the member's
interest. The minority member's unrecovered capital contribution at December
29, 2002 was $150,000.

In July 2001, the Company entered into a limited liability company for the
opening of The Grill on Hollywood. The investor member of the limited liability
company invested $1.2 million. The Company invested $250,000 and owns a 51%
interest in The Grill on Hollywood, LLC. The Company manages The Grill for
which it receives a management fee of 5% of sales. In November 2001, the
Company opened The Grill on Hollywood as a free-standing restaurant in
Hollywood, California.

The Operating Agreement for The Grill on Hollywood, LLC stipulates that
distributions of distributable cash shall be made first, 90% to the non-manager
member and 10% to the manager member until non-manager member's preferred
return, unrecovered contribution account and additional contribution account are
reduced to zero. Second, 90% to the manager member and 10% to the non-manager
member until the manager member's preferred return and unrecovered contribution
account have been reduced to zero. Thereafter, distributions of distributable
cash shall be made to the members in proportion to their respective percentage
interests. No distributions were made in 2002. The minority member's
unrecovered capital contribution at December 29, 2002 was $1,200,000.

-25-

The Company may enter into investment/loan arrangements in the future on
terms similar to the Chicago Westin Grill arrangements to provide for the
funding of selected restaurants.

In September 2000, the Company opened a hotel-based licensed Daily Grill
restaurant at the Double Tree in Skokie, Illinois. All costs to build and open
the restaurant were paid by the hotel operator.

In July 2001, the Company completed a transaction with Starwood Hotels and
Resorts Worldwide, Inc. pursuant to which the Company sold 666,667 shares of
restricted common stock and 666,6667 stock warrants at $2.00 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 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, 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.

Under the Starwood Development Agreement, either the Company 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, the Company is prohibited from developing,
managing, operating or licensing the Company's 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 the Company's 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 effect
the exclusivity rights as to the other brand or in general.

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.

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 continues 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.

-26-

Following the events of September 11, 2001, Starwood substantially
curtailed new development activities and only one management agreement has, 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.

In July 2001, the Company sold its South Plainfield, New Jersey Pizza
Restaurant for net proceeds of $225,000.

In April 2002, the Company sold its Cherry Hill, New Jersey Pizza
Restaurant for net proceeds of $264,000.

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

In May 2002, the Company entered into a limited liability company for the
opening of the South Bay Daily Grill. The investor member of the limited
liability company invested $1.0 million. The Company invested $350,000 and owns
a 50.1% interest in The Daily Grill at Continental Park, LLC. The Company will
manage the South Bay Daily Grill for which it will receive a management fee of
5% of sales. The restaurant opened January 16, 2003.

In October 2002, the Company signed a lease for an owned hotel based
restaurant in Bethesda, Maryland. The restaurant is scheduled to open in the
third quarter 2003.

Management believes that the Company has adequate resources on hand and
operating cash flow to sustain operations for at least the following 12 months.
The Company projects increased operating cash flows in 2003 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, the majority of which have occurred, as well as, modest increases in
same store sales. The Company does not expect sales to decrease in fiscal
2003 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 further 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, the Company might require additional capital which might be raised
through the issuance of debt or equity securities, or the formation of
additional investment/loan arrangements, or a combination thereof. The Company
presently has 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 Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The Company believes the following critical
accounting policies affect its more significant judgments and estimates used in
the preparation of its financial statements.

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

The Company's 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. The Company's
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.

The Company's interest in the 50% owned joint venture which 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 the Company's
financial statements. Instead, the Company reports on its statement of
operations a single line entry reflecting its proportionate interest in the
earnings or loss of the joint venture, provided that the aggregate net losses
from the joint venture do not exceed the Company's equity in the venture. The
Company's equity in the joint venture is reflected as an investment on the
balance sheet which is adjusted, but not below zero, to reflect the Company's
aggregate share of net income and losses of the venture.

-27-

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

The Company reviews 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,
the Company 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.

Utilizing the above method, the Company, in prior years, wrote down the
assets of its Pizza Restaurants to zero. Based on the Company's review of its
presently operating restaurants and other long-lived assets, during the fiscal
year ended December 29, 2002, the Company recorded no impairments of its
long-lived assets.

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. 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 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 the Company's
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; and 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 which could adversely impact
revenues and earnings; and potential increases in meat prices, and 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.

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 expired in August 2002 and is presently in negotiation. Pending agreement
on a new union contract, the Chicago Grill on the Alley is subject to the risk
of a work stoppage although management does anticipate one.

The Company closed its Media, Pennsylvania Pizza Restaurant in 2000, sold
its South Plainfield, New Jersey Pizza Restaurant for $700,000 in July 2001, and
sold its Cherry Hill, New Jersey Pizza Restaurant for $325,000 in April 2002.
As a result of the foregoing, the Company no longer operates Pizzeria Uno
restaurants.

-28-

FUTURE ACCOUNTING REQUIREMENTS

In May 2002, the FASB issued Statement of Financial Standards No. 145,
("SFAS 145"), "Rescission of FAS Nos. 4, 44 and 64, Amendment of FAS 13, and
Technical Corrections." Among other things, SFAS 145 rescinds various
pronouncements regarding early extinguishment of debt and allows extraordinary
accounting treatment for early extinguishment only when the provisions of APB
No. 30 are met. SFAS 145 provisions regarding early extinguishment of debt are
generally effective for fiscal years beginning after May 15, 2002. Management
does not believe that the adoption of this statement will have a material impact
on our consolidated financial statements.

In July 2002, the FASB issued Statement of Financial Standards No. 146,
("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities," which superceded EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity."
SFAS 146 requires that a liability for a cost associated with an exit activity
or disposal activity be recognized and measured initially at fair value only
when the liability is incurred. EITF Issue No. 94-3 requires recognition of a
liability at the date an entity commits to an exit plan. All provisions of SFAS
146 will be effective for exit or disposal activities that are initiated after
December 31, 2002. Management does not believe that the adoption of this
statement will have a material impact on our consolidated financial statements.

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 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 will be effective on
a prospective basis to guarantees issued or modified after December 31, 2002.
Consistent with the provisions of FIN 45, the Company will apply 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 2002.

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.

In January 2003, the FASB issued FIN No. 46, " Consolidation of Variable
Interest Entities." FIN 46 will be the guidance that determines (1) whether
consolidation is required under the "controlling financial interest" model of
Accounting Research Bulletin No. 51 ("ARB 51"), "Consolidated Financial
Statements" or alternatively, (2) whether the variable interest model under FIN
46 should be used to account for existing and new entities. The variable
interest model of FIN 46 looks to identify the "primary beneficiary" of a
variable interest entity. The primary beneficiary is the party that is exposed
to the majority of the risk or stands to benefit the most from the variable
interest entity's activities. A variable interest entity would be required to
be consolidated if certain conditions are met. FIN 46 effective dates and
transition provisions will be required to preexisting entities as of the
beginning of the first interim period beginning after June 15, 2003. Management
does not believe that the adoption of this statement will have a material impact
on our consolidated financial statements.

IMPACT OF INFLATION

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

A majority of the Company's employees are paid hourly rates related to
federal and state minimum wage laws and various laws that allow for credits to
that wage. The Company's 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 the Company has 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 its prices or that increased prices will be absorbed by customers
without diminishing, to some degree, customer spending at its restaurants.

-29-

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest rates on
funded debt. This exposure relates to its reducing credit line facility. At
December 29, 2002 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 the
Company's results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company, together with the
independent accountants report thereon of PricewaterhouseCoopers, LLP, appears
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.

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 the Company's fiscal year. Such information is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

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 the Company's fiscal year. Such information is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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 the Company's fiscal year. Such information is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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 the Company's fiscal year. Such information is incorporated
herein by reference.

-30-

PART IV

ITEM 14. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Our chief executive
officer and our chief financial officer, after evaluating the effectiveness of
the Company's "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the
"Evaluation Date") within 90 days before the filing date of this annual report
on Form 10-K, have concluded that as of the Evaluation Date, our disclosure
controls and procedures were adequate and designed to ensure that material
information relating to us and our consolidated subsidiaries would be made known
to them by others within those entities.

Changes in internal controls. There were no significant changes in our
internal controls or to our knowledge, in other factors that could significantly
affect our disclosure controls and procedures subsequent to the Evaluation Date.

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)

-31-

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)
21.1* Subsidiaries of Registrant
23.1* Consent of PricewaterhouseCoopers LLP
99.1* Certification of CEO Pursuant to 18.U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2* 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.

-32-

(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
29, 2002.

-33-

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 24, 2003

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

Signature Title Date
--------- ----- ----

/s/ Robert Spivak
- ------------------ President, March 24, 2003
Robert Spivak Chief Executive Officer and
Director (Principal
Executive Officer)

/s/ Michael Weinstock
- ---------------------
Michael Weinstock Chairman of the Board March 24, 2003
of Directors and
Executive Vice President

/s/ Charles Frank
- ------------------- Director March 24, 2003
Charles Frank

/s/ Glenn Golenberg
- -------------------- Director March 24, 2003
Glenn Golenberg

/s/ Norman MacLeod
- --------------------- Director March 24, 2003
Norman MacLeod

/s/ Stephen Ross
- --------------------- Director March 24, 2003
Stephen Ross

/s/ Lewis Wolff
- --------------------- Director March 24, 2003
Lewis Wolff

/s/ Daryl Ansel
- --------------------- Chief Financial Officer March 24, 2003
Daryl Ansel (Principal Accounting Officer
And Principal Financial Officer)

-34-

CERTIFICATIONS

I, Robert Spivak, certify that:

1. I have reviewed this annual report on Form 10-K of Grill Concepts, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: March 24, 2003

By:
/s/ Robert Spivak
- ------------------
Robert Spivak
Chief Executive Officer

-35-

CERTIFICATIONS

I, Daryl Ansel, certify that:

1. I have reviewed this annual report on Form 10-K of Grill Concepts, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: March 24, 2003

By:
/s/ Daryl Ansel
- -----------------
Daryl Ansel
Chief Financial Officer

-36-

Grill Concepts, Inc. and Subsidiaries
Schedule II

VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES

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

Allowance for
Doubtful Accounts

Year Ended
December 29, 2002 - $ 46,000 - $ 46,000

-37-

Financial Statement

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

PAGE
----

REPORT OF INDEPENDENT ACCOUNTANTS F-2

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 29, 2002 AND DECEMBER 30, 2001 F-3

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 29, 2002, DECEMBER 30, 2001 F-4
AND DECEMBER 31, 2000

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 29, 2002, DECEMBER 30, 2001 F-5
AND DECEMBER 31, 2000

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 29, 2002, DECEMBER 30, 2001 F-6
AND DECEMBER 31, 2000

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, stockholders' equity, and cash flows present fairly, in all
material respects, the financial position of Grill Concepts, Inc. and its
subsidiaries at December 29, 2002 and December 30, 2001, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 29, 2002 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) on page 30 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 schedule based on our audits. We did not audit the
financial statements of the Company's majority-owned subsidiaries, The San Jose
Grill, LLC (a California Limited Liability Company) and Chicago-The Grill on The
Alley, LLC (an Illinois Limited Liability Company) for the year ended December
31, 2000, which combined statements reflect total revenues of $8,063,000. Those
statements were audited by other auditors whose reports thereon have been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for the aforementioned majority-owned subsidiaries, is based
solely on the reports of the other auditors. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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 and the reports of other auditors provide a reasonable basis for our
opinion.

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 14, 2003

Los Angeles, CA

F-2

GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 29, DECEMBER 30,
2002 2001
-------------- --------------

ASSETS

CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 1,275,000 $ 2,300,000
INVENTORIES 469,000 590,000
RECEIVABLES, NET OF RESERVE ($46,000 AND $0 IN 2002 AND 2001, RESPECTIVELY) 549,000 602,000
PREPAID EXPENSES AND OTHER CURRENT ASSETS 527,000 575,000
-------------- --------------
TOTAL CURRENT ASSETS 2,820,000 4,067,000

FURNITURE, EQUIPMENT AND IMPROVEMENTS, NET 8,768,000 9,066,000

GOODWILL 205,000 205,000
LIQUOR LICENSES 332,000 454,000
RESTRICTED CASH 616,000 -
ADVANCES TO MANAGED OUTLETS 351,000 -
NOTE RECEIVABLE 121,000 -
OTHER ASSETS 452,000 552,000
-------------- --------------
TOTAL ASSETS $ 13,665,000 $ 14,344,000
============== ==============

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 978,000 $ 1,179,000
ACCRUED EXPENSES 2,454,000 2,919,000
CURRENT PORTION OF LONG-TERM DEBTS 403,000 369,000
NOTES PAYABLE - RELATED PARTIES 306,000 293,000
-------------- --------------
TOTAL CURRENT LIABILITIES 4,141,000 4,760,000

LONG-TERM DEBTS 538,000 943,000
NOTES PAYABLE - RELATED PARTIES 438,000 591,000
-------------- --------------
TOTAL LIABILITIES 5,117,000 6,294,000
-------------- --------------

MINORITY INTEREST 2,370,000 2,005,000

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 2002 AND 2001 - -
SERIES II, 10% CONVERTIBLE PREFERRED STOCK, $.001 PAR VALUE; 1,000,000 SHARES
AUTHORIZED, 500 SHARES ISSUED AND OUTSTANDING IN 2002 AND 2001, LIQUIDATION
PREFERENCE OF $276,000 AND $226,000 IN 2002 AND 2001, RESPECTIVELY - -
COMMON STOCK, $.00004 PAR VALUE; 12,000,000 SHARES AUTHORIZED IN 2002 AND
2001, 5,537,071 ISSUED AND OUTSTANDING IN 2002 AND 2001 - -
ADDITIONAL PAID-IN CAPITAL 13,152,000 13,152,000
ACCUMULATED DEFICIT (6,974,000) (7,107,000)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 6,178,000 6,045,000
-------------- --------------

TOTAL LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY $ 13,665,000 $ 14,344,000
============== ==============

F-3

GRILL CONCEPTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

DECEMBER 29, DECEMBER 30, DECEMBER 31,
2002 2001 2000
-------------- -------------- --------------

REVENUES:
SALES $ 41,286,000 $ 44,529,000 $ 44,598,000
MANAGEMENT AND LICENSE FEES 1,006,000 872,000 1,078,000
-------------- -------------- --------------
TOTAL REVENUES 42,292,000 45,401,000 45,676,000
COST OF SALES 11,434,000 12,416,000 13,002,000
-------------- -------------- --------------

GROSS PROFIT 30,858,000 32,985,000 32,674,000
-------------- -------------- --------------

OPERATING EXPENSES:
RESTAURANT OPERATING EXPENSES 25,678,000 27,288,000 27,201,000
GENERAL AND ADMINISTRATIVE 3,568,000 3,540,000 3,303,000
DEPRECIATION AND AMORTIZATION 1,492,000 1,457,000 1,334,000
PREOPENING COSTS 69,000 199,000 330,000
GAIN ON SALE OF ASSETS (71,000) (225,000) -
UNUSUAL CHARGES - - 73,000
-------------- -------------- --------------
TOTAL OPERATING EXPENSES 30,736,000 32,259,000 32,241,000
-------------- -------------- --------------
INCOME FROM OPERATIONS 122,000 726,000 443,000
INTEREST EXPENSE, NET (150,000) (182,000) (398,000)
INTEREST EXPENSE - RELATED PARTIES (64,000) (212,000) (80,000)
-------------- -------------- --------------

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES, MINORITY
INTEREST, AND EQUITY IN LOSS OF JOINT VENTURE (92,000) 332,000 (45,000)
PROVISION FOR INCOME TAXES (37,000) (65,000) (14,000)
-------------- -------------- --------------

INCOME (LOSS) BEFORE MINORITY INTEREST AND EQUITY IN LOSS OF
JOINT VENTURE (129,000) 267,000 (59,000)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 285,000 211,000 102,000
EQUITY IN LOSS OF JOINT VENTURE (23,000) (9,000) (9,000)
-------------- -------------- --------------

NET INCOME 133,000 469,000 34,000
-------------- -------------- --------------

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

NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 83,000 $ 419,000 $ (16,000)
============== ============== ==============

NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON STOCK:
BASIC NET INCOME (LOSS) $ 0.02 $ 0.09 $ 0.00
============== ============== ==============
DILUTED NET INCOME (LOSS) $ 0.02 $ 0.09 $ 0.00
============== ============== ==============
AVERAGE-WEIGHTED SHARES OUTSTANDING:
BASIC 5,537,071 4,776,741 4,104,360
============== ============== ==============
DILUTED 5,551,751 4,866,449 4,104,360
============== ============== ==============

F-4

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

SERIES I PREFERRED STOCK SERIES II PREFERRED STOCK COMMON STOCK ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- -------- ------ -------- --------- -------- ----------- ------------- -------

BALANCE, DECEMBER 26, 1999 1,000 $ - 500 $ - 4,003,738 $ - $11,071,000 $(7,610,000) $3,461,000

CONVERSION OF SERIES I,
CONVERTIBLE PREFERRED (1,000) - - - 200,000 - - - -
STOCK, TO COMMON STOCK

NET INCOME - - - - - - - 34,000 34,000
------- -------- ------ -------- --------- -------- ----------- ------------- -------

BALANCE, DECEMBER 31, 2000 - - 500 - 4,203,738 - 11,071,000 (7,560,000) 3,495,000

ISSUANCE OF COMMON - - - - 1,333,333 - 2,081,000 2,081,000
STOCK AND WARRANTS

NET INCOME - - - - - - - 469,000 469,000
------- -------- ------ -------- --------- -------- ----------- ------------- -------

BALANCE, DECEMBER 30, 2001 - - 500 - 5,537,071 - 13,152,000 (7,107,000) 6,045,000

NET INCOME - - - - - - - 133,000 133,000
------- -------- ------ -------- --------- -------- ----------- ------------- -------
BALANCE, DECEMBER 29, 2002 - $ - 500 $ - 5,537,071 $ - $13,152,000 $(6,974,000)$6,178,000
======= ======== ====== ======== ========= ======== =========== ============= =======

F-5

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

DECEMBER 29 DECEMBER 30, DECEMBER 31,
2002 2001 2000
------------- -------------- --------------

CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 133,000 $ 469,000 $ 34,000
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 1,492,000 1,457,000 1,334,000
UNUSUAL CHARGES - WRITE-OFF OF ASSETS - - 73,000
GAIN ON SALE OF ASSETS (71,000) (225,000) -
MINORITY INTEREST IN NET LOSS OF SUBSIDIARIES (285,000) (211,000) (102,000)
EQUITY IN LOSS OF JOINT VENTURE 23,000 9,000 9,000
CHANGES IN OPERATING ASSETS AND LIABILITIES:
INVENTORIES 121,000 (49,000) (115,000)
RECEIVABLES 53,000 (1,000) 84,000
PREPAID EXPENSES AND OTHER CURRENT ASSETS 33,000 (303,000) 24,000
LIQUOR LICENSES AND OTHER ASSETS 78,000 (56,000) 51,000
ACCOUNTS PAYABLE (201,000) (241,000) (461,000)
ACCRUED EXPENSES (373,000) 547,000 695,000
------------- -------------- --------------

NET CASH PROVIDED BY OPERATING ACTIVITIES 1,003,000 1,396,000 1,626,000
------------- -------------- --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO FURNITURE, EQUIPMENT AND IMPROVEMENTS (1,335,000) (1,423,000) (2,382,000)
RESTRICTED CASH FOR DAILY GRILL AT CONTINENTAL PARK, LLC ( 616,000) - -
PROCEEDS FROM SALE OF FIXED ASSETS 175,000 655,000 -
ADVANCE TO MANAGED OUTLETS (351,000) - -
PURCHASE OF LIQUOR LICENSE - (31,000) -
ADDITIONAL INVESTMENT IN CITYWALK (47,000) - -
------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (2,174,000) (799,000) (2,382,000)
------------- -------------- --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF NOTES PAYABLE - - 400,000
NET INCREASE IN BANK LINE OF CREDIT - - 100,000
PROCEEDS FROM TERM DEBT - - 1,200,000
RETURN OF CAPITAL TO MINORITY MEMBER ON SAN JOSE GRILL LLC (167,000) (90,000) -
PROCEEDS FROM MINORITY MEMBER'S INVESTMENT IN LLCS 1,000,000 1,200,000 1,190,000
PREFERRED RETURN TO MINORITY MEMBER ON CHICAGO - THE GRILL (176,000) (191,000) (73,000)
ON THE ALLEY, LLC
PROCEEDS FROM EQUIPMENT FINANCING - - 1,007,000
PAYMENTS ON LONG TERM DEBT AND BANK LOANS (371,000) (1,562,000) (2,398,000)
PAYMENTS ON RELATED PARTY DEBT (140,000) (138,000) (399,000)
PROCEEDS FROM ISSUANCE OF COMMON STOCK - 1,861,000 -
------------- -------------- --------------

NET CASH PROVIDED BY FINANCING ACTIVITIES 146,000 1,080,000 1,027,000
------------- -------------- --------------

NET INCREASE (DECREASE) IN CASH AND CASH (1,025,000) 1,677,000 271,000
EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,300,000 623,000 352,000
------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,275,000 $ 2,300,000 $ 623,000
============= ============== ==============

SUPPLEMENTAL CASH FLOWS INFORMATION:
CASH PAID DURING THE YEAR FOR:
INTEREST $ 240,000 $ 391,000 $ 544,000
INCOME TAXES $ 100,000 $ 28,000 $ 12,000
NON-CASH TRANSACTIONS:
NOTE RECEIVABLE FROM SALE OF ASSETS $ 117,000 - -

F-6

GRILL CONCEPTS, INC. AND 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 29, 2002, the Company owned and operated
thirteen restaurants, consisting of seven 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 nonfranchise basis by the Company. The Company manages four Daily
Grill restaurants and licenses two 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.

LIQUIDITY

At December 29, 2002, the Company had a working capital deficit of $1.3
million and a cash balance of $1.3 million as compared to a working capital
deficit of $0.7 million and a cash balance of $2.3 million at December 30, 2001.
The decrease in the Company's cash was primarily attributable to the purchase of
fixed assets for The Daily Grill at Continental Park, LLC ($0.7 million), the
remodel of the Newport Daily Grill ($0.4 million), advances to new managed
locations ($0.4 million) and repayment of debt ($0.5 million). The Company has
generated modest net income in each of the last three fiscal years and has
generated positive operating cash flows in each of the last five 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 $1.6 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 $2.4 million in 2000, $1.4
million in 2001 and $1.3 million in 2002. Capital expenditures in fiscal 2003
are expected to be between $0.7 Million and $1.1 million, primarily for the
development of new restaurants, capital replacements and refurbishing existing
restaurants.

At December 29, 2002, 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, an SBA loan of $0.1 million, loans from stockholders/officers/directors
of $0.3 million, equipment loans of $0.8 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 $0.8 million at December 29, 2002 and will ratably reduce to $0.5
million by the end of fiscal year 2003. Management does not anticipate having to
borrow funds under credit facility in fiscal year 2003. To provide for future
financing needs, management intends to increase its borrowing capacity in 2003
by securing additional financing. However, there can be no assurances that such
financing will be available on acceptable terms.

The Company projects increased operating cash flows in 2003 which, when
added to existing cash balances, will allow it to meet all operating, investing
and financing needs. Such projections are based on sales increase due to store
openings, the majority of which have occurred, as well as modest increases in
same store sales. The Company does not expect sales to decrease in fiscal year
2003 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 further 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.

F-7

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND MINORITY INTEREST

The consolidated financial statements for the period ended December 29,
2002 include the accounts of Grill Concepts, Inc. and its wholly-owned
subsidiaries, which include one Pizzeria Uno Restaurant (sold April 2002), The
Grill on the Alley, Universal Grill Concepts, Inc. and four 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. 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. 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 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.

F-8

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FISCAL YEAR

The Company's fiscal year is the 52 or 53 weeks ending the Sunday closest
to December 31. The fiscal years 2002 and 2001 consisted of 52 weeks ended
December 29, 2002 and December 30, 2001, respectively. The fiscal year 2000
consisted of 53 weeks ended December 31, 2000.

REVENUE RECOGNITION

Revenue from restaurant sales is recognized when food and beverage products
are sold. Management and license fees 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.

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 29,
2002, cash balances were in excess of Federal Depository Insurance Corporation
("FDIC") insurance limits.

INVENTORIES

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

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

F-9

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 year ended December 29, 2002. If the non-amortization provisions had
been in effect as of the beginning of 2000, goodwill amortization of $8,000
would have been eliminated in fiscal 2001 and 2000.

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.

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("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.

F-10

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 29, 2002, December 30, 2001 and December 31, 2000 was $634,000,
$580,000 and $ 844,000, respectively. Included in these amounts are $15,000,
$83,000 and $100,000 for 2002, 2001 and 2000, respectively related to the
Pizzeria Unos restaurants.

RECLASSIFICATIONS

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

LONG-LIVED ASSETS

In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
which was adopted by the Company at the beginning of fiscal 2002. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," and amends APB No. 30, "Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS No. 144 retains the
fundamental provisions of SFAS No. 121 for (a) recognition and measurement of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sale, but broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented.

In accordance with SFAS No. 144, 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 net 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 net 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.

STOCK-BASED COMPENSATION

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

F-11

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

an employee must pay to acquire the stock. The Company accounts for stock
and options to non-employees at fair value in accordance with the provisions of
SFAS No. 123 and the Emerging Issues Task Force Consensus on Issue No. 96-18.

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." Accordingly, no compensation expense
has been recognized for the stock option plans. Compensation expense for the
Company's stock option plans determined based on the fair value at the grant
date for awards in fiscal year 2002, 2001 and 2000 would have decreased net
income by $185,000, $170,000, and $115,000, respectively on a pro forma basis.

2002 2001 2000
--------- -------- ---------

Net income, as reported $133,000 $469,000 $ 34,000
Net income (loss), pro forma $(52,000) $299,000 $(81,000)
Net income per share, as reported:
Basic $ 0.02 $ 0.09 $ 0.00
Diluted $ 0.02 $ 0.09 $ 0.00
Net income (loss) per share, pro forma:
Basic $ (0.01) $ 0.05 $ (0.03)
Diluted $ (0.01) $ 0.05 $ (0.03)

The fair value of each option grant issued in fiscal year 2002, 2001 and
2000 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 71.25%, (c)
risk-free interest rates ranging from 4.43% to 6.00%, and (d) expected option
lives of five years.

The weighted average fair value of options granted at market price during
2002, 2001 and 2000 was $1.02, $1.56, and $0.98, 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.

F-12

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 29, 2002, December 30, 2001 and December 31,
2000 follow:

2002 2001 2000
-------------------- ------------------- --------------------
Earnings Shares Earnings Shares Earnings Shares

Net income $ 133,000 $ 469,000 $ 34,000
Less: preferred stock (50,000) (50,000) (50,000)
dividend ----------- ----------- -----------

Earnings available to 83,000 5,537,071 419,000 4,776,741 (16,000) 4,104,360
common stockholders
Dilutive securities:
Dilutive stock options - 20,450 -
Warrants - 14,680 - 69,258 - -
----------- ----------- ----------- ----------- ------------ ---------
Diluted earnings
Available to common $ 83,000 5,551,751 $ 419,000 4,866,449 $ (16,000) 4,104,360
stockholders =========== =========== =========== =========== ============ =========

Stock options for 669,975, 460,813 and 381,488 shares for 2002, 2001 and
2000, respectively, were excluded from the calculation of diluted earnings per
share because they were anti-dilutive. Warrants for 1,732,786, 1,287,370, and
844,895 shares for 2002, 2001 and 2000, respectively, were excluded from the
calculation of diluted earnings per share because they were anti-dilutive.

DISTRIBUTION OF CAPITAL AND PREFERRED RETURNS

The Operating Agreement for San Jose Grill LLC, stipulates that
distributions of distributable cash shall be made first, 10% to the manager and
90% to the members in the ratio of their percentage interests until the members
have received the amount of their initial capital contribution. Second, to the
payment of the preferred return of ten percent per annum on the unpaid balance
of the member's adjusted capital contribution until the entire accrued but
unpaid preferred return has been paid. Third, to the members in the ratio of
their percentage interests until the additional capital contributions have been
repaid. Thereafter, distributions of distributable cash will be made first, 16
2/3% as an incentive to the manager and the balance to the members in the ratio
of their percentage interests. In January 2002 distributions of distributable
cash in the amount of $64,000 were made to the minority member that reduced the
member's interest. In November 2002 distributions of distributable cash
representing $46,000 of initial capital and $57,000 of preferred return were
made to the minority member that reduced the member's interest. The minority
member's unrecovered capital contribution at December 29, 2002 was $150,000.

The Operating Agreement and the Senior Promissory Note for Chicago - The
Grill on the Alley, LLC stipulates that the non-manager member of Chicago - The
Grill on the Alley, LLC is entitled to a cumulative preferred return of eight
percent annually of their

F-13

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED)

converted capital contribution. Preferred return payments of $81,000 were
paid to the non-manager member during 2002. These payments are treated as a
reduction of minority interest. Payments returning $95,000 of converted capital
contribution were made in 2002. The minority member's unrecovered capital
contribution at December 29, 2002 was $750,000.

The Operating Agreement for The Grill on Hollywood, LLC stipulates that
distributions of distributable cash shall be made first, 90% to the non-manager
member and 10% to the manager member until non-manager member's preferred
return, unrecovered contribution account and additional contribution account are
reduced to zero. Second, 90% to the manager member and 10% to the non-manager
member until the manager member's preferred return and unrecovered contribution
account have been reduced to zero. Thereafter, distributions of distributable
cash shall be made to the members in proportion to their respective percentage
interests. No distributions were made in 2002. The minority member's unrecovered
capital contribution at December 29, 2002 was $1,200,000.

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 those
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 May 2002, the FASB issued Statement of Financial Standards No. 145,
("SFAS 145"), "Rescission of FAS Nos. 4, 44 and 64, Amendment of FAS 13, and
Technical Corrections." Among other things, SFAS 145 rescinds various
pronouncements regarding early extinguishment of debt and allows extraordinary
accounting treatment

F-14

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

for early extinguishment only when the provisions of APB No. 30 are met.
SFAS 145 provisions regarding early extinguishment of debt are generally
effective for fiscal years beginning after May 15, 2002. Management does not
believe that the adoption of this statement will have a material impact on our
consolidated financial statements.

In July 2002, the FASB issued Statement of Financial Standards No. 146,
("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities," which superceded EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity." SFAS
146 requires that a liability for a cost associated with an exit activity or
disposal activity be recognized and measured initially at fair value only when
the liability is incurred. EITF Issue No. 94-3 requires recognition of a
liability at the date an entity commits to an exit plan. All provisions of SFAS
146 will be effective for exit or disposal activities that are initiated after
December 31, 2002. Management does not believe that the adoption of this
statement will have a material impact on our consolidated financial statements.

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 will be effective on
a prospective basis to guarantees issued or modified after December 31, 2002.
Consistent with the provisions of FIN 45, the Company will apply 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 2002.

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 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.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN 46 will be the guidance that determines (1) whether
consolidation is required under the "controlling interest' model of Accounting
Research Bulletin No. 51 ("ARB 51"), "Consolidated Financial Statements" or,
alternatively, (2) whether the variable interest model under FIN 46 should be
used to account for existing and new entities. The variable interest model of
FIN 46 looks to identify the "primary beneficiary" of a variable interest
entity. The primary interest entity would be required to be consolidated if
certain conditions are met. FIN 46 effective dates and transition provisions
will be required to preexisting entities as of the first interim period
beginning after June 15, 2003. Management does not believe that the adoption of
this statement will have a material impact on our consolidated financial
statements.

F-15

3. FURNITURE, EQUIPMENT AND IMPROVEMENTS, NET

Furniture, equipment and improvements at December 29, 2002 and December 30, 2001
consisted of:

2002 2001
------------ ------------

Furniture, fixtures and equipment $ 7,591,000 $ 7,514,000
Leasehold improvements 9,933,000 9,148,000
Motor vehicle 23,000 23,000
Expendables 335,000 335,000
------------ ------------

Furniture, equipment and improvements 17,882,000 17,020,000

Less, Accumulated depreciation (9,114,000) (7,954,000)
------------ ------------

Furniture, equipment and improvements, net $ 8,768,000 $ 9,066,000
============ ============

4. ACCRUED EXPENSES

Accrued Expenses at December 29, 2002 and December 30, 2001 consist of the
following:

2002 2001
---------- ----------

Accrued payroll $ 598,000 $ 636,000
Accrued sales tax 257,000 484,000
Accrued vacation 403,000 377,000
Deferred rent 325,000 331,000
Other 871,000 1,091,000
---------- ----------
Total $2,454,000 $2,919,000
========== ==========

5. DEBTS

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 $500,000 which will be reduced To
$200,000 by the end of fiscal year 2003. The Company has an additional line Of
credit which provides borrowing up to $0.3 million. At December 29, 2002 there
is no outstanding balance under either line of credit.

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.

F-16

5. DEBTS (CONTINUED)

Debts at December 29, 2002 and December 30, 2001 are summarized as follows:

2002 2001
---------- ----------

Note payable to Small Business Administration collateralized
by property, payable monthly, $1,648, including interest at
4.0%, due September 23, 2006. $ 66,000 $ 84,000

Note payable to lessor, uncollateralized, payable monthly,
$1,435, including interest at 10.0%, due April 30, 2013. 118,000 123,000

Note payable for equipment, payable monthly, $2,039, due
April 8, 2002. - 5,000

Note payable for equipment, payable monthly, $14,597,
including interest at 9.25%, due April 30, 2004. 208,000 356,000

Note payable for equipment, payable monthly, $6,382,
including interest at 10.8%, due May 1, 2004. 96,000 159,000

Note payable for equipment, payable monthly, $15,396,
including interest at 10.8%, due December 1, 2005. 452,000 583,000

Note payable for equipment, payable monthly, $136, including
interest at 11.8%, due July 1, 2003. 1,000 2,000
---------- ----------

941,000 1,312,000

Less, Current portion of long-term debts 403,000 369,000
Less, Bank line of credit - -
---------- ----------
Long-term portion $ 538,000 $ 943,000
========== ==========

Principal maturities of long-term debt are as follows:

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

2003 $ 403,000
2004 254,000
2005 173,000
2006 20,000
2007 8,000
Thereafter 83,000
-------------
Total $ 941,000
=========

F-17

6. RELATED PARTIES

Debts with related parties at December 29, 2002 and December 30, 2001
consisted of:

2002 2001
-------- --------

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, 2003. $ 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 85,000 85,000
June 30, 2003.

Note payable to a member of the Board of Directors, payable
monthly, $9,954, including interest at 9.0%, due August 1, 175,000 274,000
2004.

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 principle 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. 414,000 455,000
-------- --------
744,000 884,000

Less, Current portion of notes payable - related parties 306,000 293,000
-------- --------

Long-term portion $438,000 $591,000
======== ========

F-18

6. RELATED PARTIES (CONTINUED)

Principal maturities of debts with related parties are as follows:

Year Ending December 30,
------------------------
2003 $ 306,000
2004 115,000
2005 52,000
2006 56,000
2007 60,000
Thereafter 155,000
--------------
Total $ 744,000
=============

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,
$59,000, and $44,000 for fiscal years 2002, 2001 and 2000, 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 $83,000, $252,000, and $248,000 for each of the fiscal years 2002,
2001 and 2000, 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 through management agreements
entered into during 1998. Revenue related to this management agreement was
$62,000, $65,000 and $92,000 for the fiscal years 2002, 2001 and 2000,
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 $168,000, $143,000 and $188,000 of
management fees paid to HRP on this Agreement for fiscal year 2002, 2001 and
2000, 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 $192,000 at December 29, 2002 and $133,000 at December 30, 2001.
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-19

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 29, 2002. Accumulated dividends in arrears totaled $276,000 and
$226,000 as of December 29, 2002 and December 30, 2001, 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.

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

F-20

7. STOCKHOLDERS' EQUITY (CONTINUED)

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 continues 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, 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 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 November 1999, 3,750 warrants exercisable at $2.00 were issued and are
scheduled to expire November 2004.

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.

In connection with a guarantee of the Company's bank lending facility, the
Company issued 150,000 warrants in July 2000 to two principle 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

F-21

7. STOCKHOLDERS' EQUITY (CONTINUED)

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 is being amortized over the life of the
guarantee.

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.

A total of 1,072,500 common shares are reserved for issuance pursuant to
these plans. During the year, upon recommendation of the Compensation Committee,
163,000 options were granted at $1.65. 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 2002, 2001 and 2000 under the Plans
were as follows:

2002 2001 2000
-------------- -------------- ---------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
Of Shares Option of Shares Option of Shares Option
---------- ---------- ----------
Exercise Exercise Exercise
--------- ---------- ----------
Price Price Price
---------- ---------- ----------

Options outstanding at
Beginning of year 543,113 $ 3.24 381,488 $ 4.22 362,812 $ 5.05
Options granted - price
equals fair value 163,000 1.65 179,500 2.54 92,300 1.55
Options granted - price greater
Than fair value - - 100,000 3.16 - -
Options exercised - - - - - -
Options cancelled (36,138) 2.50 (117,875) 5.27 (73,624) 4.96
---------- ---------- ---------- -------- ---------- --------
Options outstanding at end of
year 669,975 $ 2.89 543,113 $ 3.24 381,488 $ 4.22
========== ========== ========== ======== ========== ========
Options exercisable at end of
year 295,095 188,210 234,863
Options available for grant at
end of year 402,525 529,387 191,012

F-22

7. STOCKHOLDERS' EQUITY (CONTINUED)

The following table summarizes information about stock options outstanding at
December 29, 2002 (shares in thousands):

Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Number Weighted- Number
Outstanding at Average Weighted- Outstanding at Weighted-
Range of December 29, Remaining Average December 29, Average
Exercise Price 2002 Contractual Life Exercise Price 2002 Exercise Price
- --------------- --------------- ---------------- -------------- --------------- ---------------

$1.55 73,600 7.7 $1.55 29,920 $1.55
$1.65 157,000 9.5 $1.65 31,000 $1.65
2.19 to $3.30 266,100 7.8 $2.79 91,300 $2.98
4.00 to $4.68 102,275 3.6 $4.24 74,575 $4.27
5.36 to $6.12 71,000 3.1 $5.49 68,300 $5.49
--------------- ---------------
669,975 295,095
=============== ==============

8. UNUSUAL CHARGES

In 2000 the Company recorded a charge to earnings of $73,000 for the costs
related to the closure of the Pizzeria Uno restaurant in Media, PA.

9. 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 2002, 2001
and 2000, the Company made no contributions to the Plan.

10. 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.

F-23

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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

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

2003 $ 2,050,000
2004 2,013,000
2005 1,756,000
2006 1,156,000
2007 1,006,000
Thereafter 4,847,000
--------------
Total $ 12,828,000
==========

Rent expense was $2,574,000, $2,906,000, and $2,990,000 for fiscal years
2002, 2001 and 2000, respectively, including $384,000, $337,000, and $ 395,000
for 2002, 2001 and 2000, 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 which 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.

The Company plans on new restaurant openings during 2003. 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.

11. INCOME TAXES

The provisions for income taxes for the fiscal years ended December 29, 2002,
December 30, 2001 and December 31, 2000 are as follows:

2002 2001 2000
------- ------- -------

Current - federal $ - $ - $ 9,700
Current - state 37,000 65,000 4,300
------- ------- -------

$37,000 $65,000 $14,000
======= ======= =======

F-24

11. INCOME TAXES (CONTINUED)

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

2002 2001 2000
------- ------- -------

Taxes at the federal tax rate $(31,000) $113,000 $ (15,000)
State tax net of federal benefit 24,000 43,000 3,000
Change in valuation allowance 225,000 (224,000) -
Net operating loss for which no
tax benefit was realized - - 111,000
General business and tip tax credit (188,000) 91,000 (110,000)
Other 7,000 42,000 25,000
------- ------- -------
Income tax provision $ 37,000 $ 65,000 $14,000
======= ======= =======

Deferred tax assets and liabilities consist of the following as of December 29,
2002 and December 30, 2001:

2002 2001
------------------ ------------

Deferred tax assets:
Net operating loss $ 1,156,000 $ 1,212,000
Fixed Assets 420,000 416,000
Intangibles 58,000 62,000
General business credit 929,000 640,000
Other 96,000 110,000
------------------ ------------

Total gross deferred tax assets 2,658,000 2,440,000

Less, Valuation allowance (2,485,000) (2,260,000)
------------------ ------------

Net deferred tax assets 173,000 180,000

Deferred tax liabilities:
Intangible assets (173,000) (180,000)
------------------ ------------

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

At December 29, 2002, the Company has available federal and state net
operating loss carryforwards of $2,208,000 and $4,055,000 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 begin expiring in 2003. A full valuation allowance has been established
to reduce net deferred tax assets to the amount expected to be realized.

F-25

12. STORE 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
$287,000 that is to be repaid out of future operations.

The Company began management of a Houston, Texas hotel-based Daily Grill
restaurant in July 2002. The Company advanced the restaurant approximately
$64,000 for initial working capital that is to be repaid from future cash flows.
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.

STORE CLOSINGS

As noted in Note 8, the Company ceased to operate the Pizzeria Uno
restaurant in Media, Pennsylvania in July 2000.

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-26

13. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized unaudited quarterly financial data for fiscal years 2002 and 2001 is
as follows:

Quarter Ended
-------------
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

April 1, July 1, September 30, December 30,
2001 2001 2001 2001
------------ --------------- --------------- --------------
Total revenues $12,435,000 $ 11,300,000 $ 10,140,000 $ 11,526,000

Gross profit 9,063,000 8,163,000 7,314,000 8,445,000

Income (loss) from operations 403,000 (18,000) 171,000 170,000

Net income (loss) 329,000 (74,000) 54,000 160,000

Basic net income (loss) per share $ 0.08 $ (0.02) $ 0.01 $ 0.03

Diluted net income (loss) per share $ 0.08 $ (0.02) $ 0.01 $ 0.03

F-27