sec document

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                       --
                                    FORM 10-K

/X/    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
       ACT OF 1934   [FEE REQUIRED]

       For the fiscal year ended December 30, 2003
                                 -----------------

/ /    TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15(D) OF THE  SECURITIES
       EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

       For the transition period from ______ to ______

                         Commission file number 0-19907
                                                -------

                       LONE STAR STEAKHOUSE & SALOON, INC.
             (Exact name of Registrant as specified in its charter)

          DELAWARE                                      48-1109495
          --------                                      ----------
(State or other jurisdiction of             (I.R.S. employer identification no.)
incorporation or organization)

                           224 EAST DOUGLAS, SUITE 700
                              WICHITA, KANSAS 67202
               (Address of principal executive offices) (Zip code)

                                 (316) 264-8899
              (Registrant's telephone number, including area code)

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

                                      NONE

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

                          Common Stock, $.01 par value

            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. Yes /X/ No / /

            Indicate by check mark  whether  the  Registrant  is an  accelerated
filer (as defined in Exchange Act Rule 12b-2). Yes /X/ No / /

            As of June 17, 2003, the aggregate  market value of the Registrant's
Common Stock held by non-affiliates  of the Registrant was $411,873,919.  Solely
for the purpose of this  calculation,  shares held by directors  and officers of
the  Registrant  have  been  excluded.  Such  exclusion  should  not be deemed a
determination by or an admission by the Registrant that such individuals are, in
fact, affiliates of the Registrant.

            As of February 23, 2004, there were 21,136,692 shares outstanding of
the Registrant's Common Stock.

                                      -1-





                       DOCUMENTS INCORPORATED BY REFERENCE

            The  information  required  by  Part  III  will be  incorporated  by
reference to certain portions of a definitive proxy statement, which is expected
to be filed by the  Registrant  within  120 days  after the close of its  fiscal
year.

                                TABLE OF CONTENTS

ITEM                                                                       PAGE
----                                                                       ----

                                     PART I

1.  Business.................................................................3
2.  Properties ..............................................................9
3.  Legal Proceedings.......................................................12
4.  Submission of Matters to a Vote of Security Holders ....................12

                                     PART II

5.  Market for the Registrant's Common Equity and Related
     Stockholder Matter.....................................................13
6.  Selected Financial Data.................................................14
7.  Management's Discussion and Analysis of Financial Condition and Results
     of Operations..........................................................16
7A. Quantitative and Qualitative Disclosures about Market Risk..............28
8. Financial Statements and Supplementary Data..............................28
9. Changes in and Disagreements with Accountants on Accounting and
     Financial Disclosure...................................................28
9A.Controls and Procedures..................................................28

                                    PART III

10. Directors and Executive Officers of the Registrant......................29
11. Executive Compensation..................................................29
12. Security Ownership of Certain Beneficial Owners and Management
     and Related Stockholder Matters........................................29
13. Certain Relationships and Related Transactions..........................29
14. Principal Accountants Fees and Services.................................29

                                     PART IV

15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........30
    Signatures..............................................................32

                                      -2-





                                     PART I

This Annual  Report on Form 10-K  contains  certain  forward-looking  statements
within the meaning of Section 27A of the Securities  Act, and Section 21E of the
Exchange  Act,  which are  intended  to be covered by the safe  harbors  created
thereby.  Stockholders are cautioned that all forward-looking statements involve
risks and uncertainty,  including without limitation,  changes in costs of food,
retail  merchandise,   labor,  and  employee  benefits,  risks  associated  with
litigation,  our ability to continue to acquire and retain  prime  locations  at
acceptable  lease or purchase  terms,  the impact of specific events such as the
outbreak of "mad cow disease" or "foot/mouth disease", as well as general market
conditions,  competition,  and pricing. Although we believe that the assumptions
underlying the  forward-looking  statements  included in this Annual Report will
prove to be accurate, in light of the significant  uncertainties inherent in the
forward-looking  statements  included herein,  the inclusion of such information
should not be regarded as a  representation  by us or any other  person that our
objectives  and plans will be achieved.  Our  forward-looking  statements may be
identified by words such as  "believes,"  "expects,"  "anticipates,"  "intends,"
"estimates" or similar expressions.

ITEM 1.           BUSINESS

BACKGROUND

            As of February 23, 2004,  Lone Star  Steakhouse & Saloon,  Inc. (the
"Company")  owned and operated  250  mid-priced,  full  service,  casual  dining
restaurants  located in the United  States,  which  operate under the trade name
Lone Star  Steakhouse  & Saloon or Lone  Star Cafe  ("Lone  Star" or " Lone Star
Steakhouse  &  Saloon"),  20 Texas  Land & Cattle  Co.  ("Texas  Land & Cattle")
restaurants,  and 20  upscale  steakhouse  restaurants,  five  operating  as Del
Frisco's Double Eagle Steak House ("Del Frisco's")  restaurants and 15 operating
as Sullivan's Steakhouse ("Sullivan's") restaurants. The Company also operates a
mid-priced  restaurant operating as Frankie's Italian Grille  ("Frankie's").  In
addition,  a licensee  operates three Lone Star  restaurants in California and a
licensee operates a Del Frisco's restaurant in Orlando, Florida.

            The Texas Land & Cattle restaurants were purchased out of bankruptcy
on January 28,  2004,  and none of their  operating  results are included in the
accompanying  financial information relating to the year ended December 30, 2003
or prior years.

            Internationally,  licensees operate 13 Lone Star Steakhouse & Saloon
restaurants in Australia and one in Guam.

            Steak  continues  to be one of the most  frequently  ordered  dinner
entrees at  restaurants.  In 2003,  the United States  Department of Agriculture
estimated the average  annual per capita  consumption of beef to be 65.2 pounds,
down slightly  from 2002.  Company  management  believes the limited menu of its
restaurants,  which  concentrates  primarily on high quality USDA  choice-graded
steaks,  and the appeal of its "Texas Roadhouse"  ambiance and excellent service
distinguishes  Lone Star restaurants.  Company  management  believes  Sullivan's
restaurants are distinguished by featuring high quality,  top end choice of beef
whereas Del Frisco's  restaurants are  distinguished  by featuring high quality,
USDA prime graded  steaks.  In  addition,  Sullivan's  and Del Frisco's  feature
specialized  new entrees,  award-winning  wine lists,  an exciting  ambiance and
attentive team service.

            The Company's  focus on selection,  training and in-store  execution
along  with Lone  Star's  continued  marketing  initiatives  and the  successful
creation  of the  Sullivan's  upscale  concept  and the  development  of the Del
Frisco's concept, differentiate the Company from other restaurant companies that
operate steakhouse restaurants.  The Company believes that through its operation
of four (4) distinct steak restaurant concepts, it has positioned itself as "The
Steak Company."

                                      -3-





RESTAURANT CONCEPTS

            Lone Star  restaurants are positioned as  "destination  restaurants"
that  attract  loyal  clientele.  Lone Star  restaurants  embrace a  Texas-style
concept  that  features  Texas  artifacts  and country and  western  music.  The
authentic "Texas Roadhouse"  concept was developed to capitalize on the enduring
popularity of Texas related themes.  Lone Star is further  distinguished  by its
high quality,  USDA choice-graded  steaks which are hand-cut fresh daily at each
restaurant  and  mesquite  grilled to order.  Meals are  generous  "Texas-sized"
portions and full bar service is available.  The exciting and vibrant atmosphere
created by the restaurants'  "Texas Roadhouse" ambiance includes neon beer signs
and specially  selected  upbeat  country and western  music.  The decor includes
planked wooden floors, dim lighting,  flags and other Texas memorabilia,  all of
which enhance the casual dining  experience  and establish a distinct  identity.
Lone Star  restaurants  are open seven days a week and most serve both lunch and
dinner with an average  check per customer for 2003 of  approximately  $12.00 at
lunch and $19.00 at dinner.

            Del  Frisco's  is  designed  to  serve  a  sophisticated  clientele,
including  business  related  dining  occasions,  and  is the  recipient  of the
prestigious  Ivy Award and has been elected to the fine dining hall of fame. The
Del Frisco's  concept  embraces an elegant and timeless early twentieth  century
motif.  The concept  features old ways of cooking,  such as master  broiling and
roasting.  Del Frisco's  decor and ambiance  include dark woods,  fabric  walls,
fireplaces,  separate  dining rooms and soft  background  music.  These elements
enhance  the  dining  experience  and  establish  a  distinct  identity  for Del
Frisco's.  Del  Frisco's  is further  distinguished  by its high  quality,  USDA
prime-graded steaks hand cut in each restaurant.  Del Frisco's restaurants serve
dinner only,  except the New York City restaurant  which is also open for lunch,
and are generally  open Monday  through  Saturday  with an average  dinner guest
check of approximately $87.00.

            Sullivan's  was named after the legendary  boxer,  John L. Sullivan,
and embraces a Chicago style 1940's  steakhouse theme with nostalgic  influences
that feature jazz and swing music. In 1997, Sullivan's was named the hot concept
of the year by  Nation's  Restaurant  News.  The bar  features  live jazz  music
several  nights a week.  The decor  includes an open  kitchen,  separate  dining
rooms,  dark  wood  paneling,   carpeted  floors,   warm  lighting,   and  white
tablecloths. Sullivan's is distinguished by its high quality, well aged, midwest
grain fed steaks,  chops, and seafood.  Most Sullivan's  restaurants serve lunch
and dinner, and are generally open seven days a week with an average guest check
per customer of approximately $65.00.

            Texas Land & Cattle  restaurants  are mid-priced full service dining
restaurants  located in Texas  (19) and New Mexico  (1).  The  concept  features
authentic  Texas ranch house settings with large  fireplaces,  serving lunch and
dinner  seven days per week.  The average  check per  customer is  approximately
$13.00 at lunch and at $18.00 at dinner.

            Frankie's  Italian Grille is a mid-priced  casual dining  restaurant
featuring  traditional  Italian cuisine in large portions.  Frankie's features a
high energy, vibrant atmosphere and is open seven days a week, serving lunch and
dinner,  with  check  averages  of  approximately  $12.00 at lunch and $28.00 at
dinner.

CORPORATE STRATEGY

            During 2003,  the Company did not open any new  restaurants.  During
2003,  the Company sold 13 Lone Star  restaurants in Australia to a licensee and
closed an additional seven Australian Lone Star restaurants.

            The Company is currently  evaluating  development  opportunities for
all concepts for 2004 and beyond,  depending on site  availability,  the economy
and other  considerations.  In addition,  the Company plans to test and evaluate
remodeling  certain  domestic  Lone  Star  locations  and is in the  process  of
developing a new prototype building.

            During  2003,  the  Company   continued  its  focus  on  operational
consistency,  improved guest satisfaction and management staffing and retention.

            Average  guest  satisfaction  scores as measured by mystery  shopper
scores  conducted  by  independent  third  parties  continue  to  improve at all
domestic restaurants.

                                      -4-





            Domestic  Lone  Stars  have  continued  a  direct  mail  promotional
advertising campaign and focused more on wine, beer and alcohol beverage sales.

            Both  Sullivan's  and Del Frisco's have continued the print branding
campaign in such upscale  publications  as Wine Spectator and Cigar  Aficionado.
The menus in each of these concepts remain basically unchanged in the last year.

            The  Company's  strategy  is to grow its unit base  modestly in 2004
with no more than 6-10 new units, and to evaluate further  expansion in light of
the  economy,  site  availability  and  other  considerations.  There  can be no
assurance  that the Company will be able to achieve its  expansion  goals.  Lone
Star remodels,  if  successfully  tested could roll out more rapidly,  but would
entail the costs associated with retaining and retraining staff and lost revenue
during the time  restaurants are closed for  remodeling,  as well as the cost of
the remodeling.

            As of February 23, 2004, the Company has opened one new Lone Star in
2004, one new Lone Star  restaurant  under  construction,  and secured sites for
three additional restaurants.

UNIT ECONOMICS

            The Company's  management  team focuses on selecting  locations with
the  potential of  producing  significant  revenues  while  controlling  capital
expenditures and occupancy  costs. The Company's Lone Star restaurants  averaged
approximately  $1.9 million in sales on an annualized  basis during 2003. Of the
250 Lone Star restaurants  open at February 23, 2004, 90 were leased  facilities
and had an average cash  investment of  approximately  $1.0 million and 160 were
owned and had an average cost for land  acquisition,  construction and equipment
of approximately $1.9 million.

            The Company  anticipates the average total investment per restaurant
for a typical Del Frisco's restaurant and Sullivan's  restaurant will range from
$3.0 million to $5.0 million.

MENU

            The  dinner  menu  at a Lone  Star  restaurant  features  a  limited
selection of high quality, specially seasoned and mesquite grilled steaks, prime
rib, ribs,  chicken,  fish,  king crab,  shrimp and various  combinations.  Most
dinners  consist  of a complete  meal  including  salad,  bread and butter and a
choice of baked potato,  baked sweet potato,  steak fries, steamed vegetables or
Texas rice. The lunch menu offers a selection of hamburgers, chicken sandwiches,
luncheon  steaks,  ribs, soups and salads.  Depending on local  availability and
quality,  fish  selections are also offered at lunch and dinner.  Appetizers and
desserts,  together  with a full bar service is  available.  Alcoholic  beverage
service accounts for approximately 12% of Lone Star's net sales.

            The menu at Del Frisco's  features  high  quality USDA  prime-graded
steaks,  chops,  seafood, and quality side dishes. Del Frisco's wine list offers
over 300 high quality wines and a full bar.  Alcoholic beverage service accounts
for approximately 37% of Del Frisco's sales.

            The menu at Sullivan's  features high  quality,  well aged,  midwest
grain fed steaks,  chops,  seafood  and quality  side  dishes.  Sullivan's  also
features  a number of high  quality  wines and a full  bar.  Alcoholic  beverage
service accounts for approximately 39% of Sullivan's sales.

            The menu at Texas Land & Cattle Steak House  restaurants  features a
selection of high quality,  mesquite grilled steaks,  smoked sirloin, as well as
prime rib, ribs, chicken, fish, shrimp and combinations. Most dinners consist of
a complete meal including salad, bread and butter and a choice of side dish. The
lunch menu offers a selection of hamburgers,  sandwiches, luncheon steaks, soups
and  salads.  Appetizers  and  desserts,  together  with a full bar  service  is
available.  Alcoholic  beverage service accounts for  approximately 11% of Texas
Land & Cattle Steak House net sales.

                                      -5-





SITE SELECTION

            The Company  believes  site  selection is critical for the potential
success of a particular  restaurant and senior  management  devotes  significant
time and  resources  to  analyzing  each  prospective  site.  Among the  factors
considered  in  site  selection  are  the  specific  steakhouse  concept  to  be
developed,  local market  demographics,  and site  visibility.  Consideration is
given to  accessibility  and  proximity to  significant  generators of potential
customers such as major retailers,  retail centers and office complexes,  office
and hotel concentrations, and entertainment centers (stadiums, arenas, theaters,
etc.).  The Company also reviews  potential  competition and attempts to analyze
the profitability of other national chain restaurants operating in the area.

            Leases are  negotiated  generally with a primary term of five years,
with multiple  renewal options.  The Company has generally  required between 150
and 280 days  after the  signing  of a lease or the  closing  of a  purchase  to
complete  construction  and open a new restaurant.  Additional time is sometimes
required to obtain  certain  government  approvals and licenses,  such as liquor
licenses.

RESTAURANT LAYOUT

            The  Company   believes  the  decor  and  interior   design  of  its
restaurants  significantly contribute to its success. The Lone Star restaurants'
open layout  permits  customers to view the bar and Texas  memorabilia,  thereby
enhancing  the casual  dining  atmosphere.  The Company also designs its kitchen
space  for  efficiency  of  workflow,  thereby  minimizing  the  amount of space
required.

            Lone Star restaurants  currently average  approximately 5,800 square
feet and include a dining area with seating for approximately 220 customers.  In
addition,  a bar area is  located  adjacent  to the  dining  room  primarily  to
accommodate  customers waiting for dining tables or to accommodate  overflow. In
some restaurants, an outside patio area provides additional seating.

            The   original  Del  Frisco's   restaurant   in  Dallas,   Texas  is
approximately  10,000  square  feet and  seats  approximately  350  persons  and
includes an extended wine cellar,  with private dining  available.  In addition,
Del  Frisco's  features a bar area  adjacent  to the dining  room  primarily  to
accommodate  customers  waiting for  tables.  The Ft.  Worth,  Texas and Denver,
Colorado Del Frisco's restaurants are approximately 8,000 and 12,000 square feet
and seat  approximately  300 and 360  persons,  respectively.  The New York City
location  is  approximately  16,500  square  feet and the Las Vegas  location is
approximately 11,000 square feet.

            The first  Sullivan's  restaurant  in Austin,  Texas was expanded in
1997 by 4,500 square feet to 12,000 square feet and now seats 320 customers. The
other Sullivan's  restaurants  range from 7,000 to 9,000 square feet. A separate
jazz bar area  called  "Ringside"  is utilized  at the Baton  Rouge,  Louisiana,
Dallas and Houston,  Texas  Sullivan's  restaurants.  The Sullivan's bar area is
separate from the dining room and is designed to be a  destination  unto itself,
featuring live jazz music and an upbeat, convivial atmosphere.

            Texas Land & Cattle restaurants average  approximately 7,300 sq. ft.
and have seating for approximately 280 customers.

MARKETING

            Lone Star restaurants are "destination  location  restaurants"  that
focus on the mid-priced full service casual dining market segments.  The Company
is  committed   to  customer   service,   providing  an  excellent   price-value
relationship  and  coupled  with the unique  "Texas  Roadhouse"  ambiance of its
restaurants attracts and retains customers. Accordingly, the Company has focused
its  resources  on  providing  customers  with  superior  service,  value and an
exciting  and  vibrant  atmosphere,  and  relied  primarily  on word of mouth to
attract new  customers.  The Company  also  utilizes  billboard  advertising  to
promote its  restaurants  and build  customer  awareness.  The Company  utilizes
direct mail featuring new products and limited price promotions in lieu of media
advertising.  This marketing  strategy enables the Company to provide  marketing
support for all its Lone Star restaurants.

                                      -6-





            Sullivan's' and Del Frisco's utilize high quality print ads in CIGAR
AFICIONADO AND WINE  SPECTATOR,  which are national  publications  and reach the
Company's  target  audience.  Special  promotions are also utilized  featuring a
specific wine vineyard and local charitable event promotions.

RESTAURANT OPERATIONS AND MANAGEMENT

            The Company  strives to maintain  quality and  consistency in all of
its restaurants  through  careful hiring,  training and supervision of personnel
and the  establishment of standards  relating to food and beverage  preparation,
maintenance of facilities and conduct of personnel.

            The  typical  Lone Star  management  team  consists  of one  general
manager and four managers.  Each restaurant  also employs a staff  consisting of
approximately 50 to 90 hourly employees, many of whom work part-time. Typically,
each general  manager  reports  directly to a district  manager who reports to a
regional manager.  Restaurant  managers complete an eight-week  training program
during which they are  instructed in all areas of the operation  including  food
quality,  safety and  preparation,  customer  satisfaction,  alcoholic  beverage
service,  governmental  regulations  compliance,  liquor liability avoidance and
employee  relations.  Restaurant  management is also provided with a proprietary
operations  manual  relating  to food and  beverage  preparation,  all  areas of
restaurant management and compliance with governmental  regulations.  Working in
concert with  restaurant  managers,  the  Company's  senior  management  defines
operations  and   performance   objectives  for  each  restaurant  and  monitors
implementation.  An incentive  cash bonus program has been  established in which
each restaurant's management team participates.  Awards under the incentive plan
are tied to  achievement  of specified  revenue and  operating  targets.  Senior
management  regularly  visits Company  restaurants and meets with the respective
management teams to ensure the Company's strategies and standards of quality are
met in all respects of restaurant operations and personnel development.

            The Company's  commitment to customer  service and  satisfaction  is
evidenced  by several  practices  and  policies,  including  periodic  visits by
restaurant  management to customers'  tables,  active  involvement of restaurant
management in responding to customer  comments,  and assigning wait persons to a
limited  number of  tables,  generally  three  for  dinner  and four for  lunch.
Teamwork is emphasized through a runner system for delivering food to the tables
that is designed to serve customers in an efficient and timely manner.

            Each  new  restaurant  employee  of the  Company  participates  in a
training program during which the employee works under the close  supervision of
a restaurant manager. Management strives to instill enthusiasm and dedication in
its employees and create a stimulating and rewarding  working  environment where
employees  know  what  is  expected  of  them in  measurable  terms.  Management
continuously  solicits employee feedback  concerning  restaurant  operations and
strives to be responsive to employee concerns.

PURCHASING

            Approximately 61% of the consumable products used in the restaurants
are distributed through and delivered by a single vendor. The Company negotiates
directly  with  suppliers  for food and beverage  products to ensure  consistent
quality and freshness of products and to obtain competitive  prices. The Company
purchases  substantially  all food and beverage  products from local or national
suppliers.  Food and supplies are shipped directly to the restaurants,  although
invoices for purchases are sent to the Company for payment. The Company does not
maintain  a  central  product  warehouse  or  commissary.  The  Company  has not
experienced  any  significant  delays  in  receiving   restaurant  supplies  and
equipment.  From time to time,  the  Company  may engage in  forward  pricing or
consider other risk management strategies with regard to its meat and other food
costs to minimize  the impact of potential  price  fluctuations.  This  practice
could help  stabilize  the  Company's  food costs  during  times of  fluctuating
prices. The Company did not engage in any forward pricing or hedging in 2003. As
of February 23, 2004, the Company had no significant forward pricing contracts.

                                      -7-





MANAGEMENT INFORMATION SYSTEMS

            The Company continually  monitors its management  information system
to take advantage of technological  improvements.  Its P.O.S. system is designed
to  improve  labor  scheduling  and  food  cost  management,  provide  corporate
management quicker access to financial data and reduce the restaurant  manager's
administrative  time.  Each  general  manager  uses the  system  for  production
planning, labor scheduling and food cost variance analysis. The system generates
daily reports for the Company's management on sales, check average, guest counts
and labor.

            The Company maintains  financial and accounting controls for each of
its  restaurants  through  the  use of  centralized  accounting  and  management
information systems.  Sales information is collected daily from each restaurant,
and restaurant  managers are provided with daily,  weekly and  twenty-eight  day
period  operating  statements for their  locations.  Cash is controlled  through
daily  deposits of sales  proceeds in local  operating  accounts  which are wire
transferred periodically to the Company's principal operating account.

            The Company  generates weekly,  consolidated  sales reports and food
and labor cost  variance  reports at its  corporate  headquarters,  and detailed
profit and loss statements for each restaurant  every four weeks.  Additionally,
the Company  monitors the average check,  customer count,  product mix and other
sales trends on a daily basis.

            The  Company   expects  to   continue  to  develop  its   management
information  systems to improve  efficiencies and assist management in analyzing
business results and opportunities.

COMPETITION

            The  restaurant  industry is intensely  competitive  with respect to
price,  service,  location and food quality, and there are many well-established
competitors with  substantially  greater  financial and other resources than the
Company.  Some  of the  Company's  competitors  have  been  in  existence  for a
substantially  longer period than the Company and may be better  established  in
the  markets  where  the  Company's  restaurants  are  or may  be  located.  The
restaurant  business is often affected by changes in consumer tastes,  national,
regional or local economic conditions,  demographic trends, traffic patterns and
the type,  number and location of competing  restaurants.  In addition,  factors
such as inflation, increased food, labor and benefits costs and the availability
of  experienced  management  and  hourly  employees  may  adversely  affect  the
restaurant industry in general and the Company's restaurants in particular.  The
Company  believes that its concepts,  attractive  price-value  relationship  and
quality  of  food  and  service  enable  it to  differentiate  itself  from  its
competitors.  The Company  believes that its ability to compete will depend upon
attracting  and retaining  high quality  employees and  continuing to offer high
quality,  competitively  priced  food  in a  full  service,  distinctive  dining
environment.

GOVERNMENT REGULATION

            The Company's restaurants are subject to numerous federal, state and
local laws affecting health, sanitation, safety and ADA accessibility standards,
as well as to state  and local  licensing  regulation  of the sale of  alcoholic
beverages.  Each restaurant has appropriate licenses from regulatory authorities
allowing it to sell liquor,  beer and wine,  and has food service  licenses from
local health  authorities.  The Company's  licenses to sell alcoholic  beverages
must be renewed  annually and may be suspended or revoked at any time for cause,
including  violation by the Company or its  employees  of any law or  regulation
pertaining to alcoholic  beverage control,  such as those regulating the minimum
age of patrons or employees,  advertising,  wholesale purchasing,  and inventory
control.  The failure of a restaurant to obtain or retain liquor or food service
licenses  could have a material  adverse effect on its  operations.  In order to
reduce this risk, each  restaurant is operated in accordance  with  standardized
procedures   designed  to  ensure  compliance  with  all  applicable  codes  and
regulations.

            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  that wrongfully served alcoholic

                                      -8-





beverages  to the  intoxicated  person.  The Company  carries  liquor  liability
coverage as part of its existing comprehensive general liability insurance.

            Any future  development and  construction of additional  restaurants
will be subject to compliance with applicable zoning, land use and environmental
regulations. The Company's restaurant operations are also subject to federal and
state minimum wage laws governing such matters as working  conditions,  overtime
and tip credits and other employee matters. Significant numbers of the Company's
food service and preparation  personnel are paid at rates related to the federal
minimum wage and, accordingly,  further increases in the federal, state or local
minimum wage could increase the Company's labor costs.

TRADEMARKS

            The Company  regards  its  primary  marks,  Lone Star  Steakhouse  &
Saloon(R),  Lone Star  Cafe(R),  Del  Frisco's(R)  Double Eagle Steak  House(R),
Sullivan's  Steakhouse(R)  and Texas Land & Cattle  Company  Steak  House(R)  as
having  significant  value and as being an important  factor in the marketing of
its restaurants.  The Company is aware of names and marks similar to the service
marks of the Company used by other persons in certain geographic areas. However,
the Company  believes  such uses have not had a material  adverse  effect on the
Company's financial condition or its results of operations. The Company's policy
is to  pursue  registration  of  its  marks  whenever  possible  and  to  oppose
vigorously  infringements of its marks. The Company has obtained registration of
its marks in numerous foreign countries.

EMPLOYEES

            As of February 23, 2004, the Company employed  approximately  19,440
persons,  11 of whom  are  executive  officers,  94 of whom are  office  support
personnel,  7 of whom are regional  managers,  35 of whom are district managers,
approximately  1,400  of  whom  are  restaurant  management  personnel  and  the
remainder of whom are hourly restaurant  personnel.  While none of the Company's
employees are currently covered by a collective  bargaining  agreement,  a Union
has been  certified  to  represent  certain of the  Company's  employees  at its
Atlantic  City,  New  Jersey  restaurant.  To  date,  there  have  been  several
negotiating  sessions,  but  none  since  December  19,  2002.  There  can be no
assurance  that the Company will be able to negotiate a contract with this Union
on terms acceptable to the Company. The Company considers its employee relations
to be good.

WEBSITE ACCESS

            The Company's  website  address is  www.lonestarsteakhouse.com.  The
Company's  filings  with the  Securities  and  Exchange  Commission  ("SEC") are
available at no cost on its website as soon as  practicable  after the filing of
such reports with the SEC.

ITEM 2.  PROPERTIES.

            As of February 23, 2004,  the Company leased 90 and owned 160 of its
Lone Star restaurant locations. At such date, the Company leased three and owned
two Del Frisco's restaurants locations. Of the 15 Sullivan's restaurants, 13 are
leased and two are owned. All of the Texas Land & Cattle restaurants are leased.
Lease terms are generally five years, with multiple renewal options.  All of the
Company's  leases  provide  for a  minimum  annual  rent  and some  provide  for
additional rent based on sales volume at the particular  location over specified
minimum levels.  Generally,  the leases are triple net leases, which require the
Company  to pay the costs of  insurance,  taxes  and  maintenance.  The  Company
intends to continue  to  purchase  restaurant  locations  where  cost-effective.
During  2003,  the  Company  acquired  a  land  site  in  Dundee,  Michigan  for
construction of a Lone Star Restaurant.

                                      -9-





            In addition,  the Company has entered into three  additional  leases
for  land  for  construction  of  Lone  Star  restaurants  in  Hampton,  Virgina
(currently under construction), Mitchell, South Dakota, and Columbia, Missouri.

                                      -10-





                  RESTAURANT LOCATIONS AS OF FEBRUARY 23, 2004

            The  following  table  sets  forth  the  location  of the  Company's
existing,  open domestic Lone Star  Steakhouse & Saloon (250)  Restaurants,  Del
Frisco's (5) restaurants,  Sullivan's (15) restaurants, Texas Land & Cattle (20)
restaurants, and (1) Frankie's Restaurant

LONE STAR                     Chicago (10)        MICHIGAN            Jacksonville             TENNESSEE
                              Decatur             Battle Creek        Raleigh (3)              Jackson
ALABAMA                       Effingham           Bay City            Rocky Mount              Johnson City
Anniston                      Hodgkins            Brighton            Salisbury                Memphis (2)
Birmingham (2)                Mt. Vernon          Dearborn Heights    Southern Pines
Huntsville                    Peoria              Detroit (6)         Winston-Salem
Mobile                        Rockford            Flint                                        UTAH
Montgomery                    Springfield         Grand Rapids        NORTH DAKOTA             Centerville
Trussville                                        Jackson             Fargo                    Layton
Tuscaloosa                    INDIANA             Mt. Pleasant                                 Salt Lake City
                              Anderson            Saginaw             OHIO                     Sugarhouse
ALASKA                        Evansville          Ypsilanti           Akron
Anchorage                     Ft. Wayne                               Canton                   VIRGINIA
                              Indianapolis (4)    MISSISSIPPI         Cincinnati (2)           Alexandria
ARIZONA                       Lafayette           Hattiesburg         Cleveland (3)            Centreville
Mesa                          Merrillville        Jackson             Columbus (4)             Chesapeake
Phoenix (4)                   South Bend                              Dayton (2)               Fairfax
                              Terre Haute         MISSOURI            Findlay                  Fredericksburg
ARKANSAS                                          Branson             Lancaster                Herndon
Ft. Smith                     IOWA                Independence        Middletown               Norfolk
Little Rock (2)               Cedar Rapids        Kansas City         Niles                    Potomac Mills
Springdale                    Coralville          Springfield         Springfield              Richmond (3)
                              Davenport           St. Louis (5)       Toledo (2)               Sterling
COLORADO                      Des Moines                              Youngstown               Virginia Beach
Colorado Springs              Waterloo            NEBRASKA
Denver  (6)                                       Lincoln             OKLAHOMA                 WEST VIRGINIA
Ft. Collins                   KANSAS              Omaha (2)           Lawton                   Beckley
Loveland                      Garden City                             Oklahoma City            Charleston
                              Hutchinson          NEVADA              Tulsa (2)                Huntington
DELAWARE                      Overland Park       Las Vegas (4)
Dover                                                                 PENNSYLVANIA             WISCONSIN
Wilmington (2)                KENTUCKY            NEW JERSEY          Allentown                Racine
                              Bowling Green       Atlantic City       Easton
FLORIDA                       Florence            Bridgewater         Harrisburg               SULLIVAN'S
Bradenton                     Lexington           Cherry Hill         Johnstown                Anchorage, AK
Clearwater                    Louisville          Delran              King of Prussia          Austin, TX
Ft. Lauderdale                                    Hanover Township    Lancaster                Baton Rouge, LA
Ft. Myers                     LOUISIANA           Hazlet              Middletown               Charlotte, NC
Lakeland                      Baton Rouge (2)     Marlton             Philadelphia             Chicago, IL
Ocala                         Houma               Ocean County        Pittsburgh (5)           Dallas, TX
Orlando                       Lafayette           Scotch Plains       Pottstown                Denver, CO
Pensacola                     Monroe              Turnersville        Reading                  Houston, TX
Port Orange                   New Orleans (3)     Voorhees            Scranton                 Indianapolis, IN
Port Richey                                       Wayne               Wilkes-Barre             King of Prussia, PA
Sarasota                      MAINE                                   York                     Naperville, IL
St. Petersburg                South Portland      NEW MEXICO                                   Palm Desert, CA
Tampa                                             Albuquerque         RHODE ISLAND             Raleigh, NC
                              MARYLAND                                Warwick                  Tucson, AZ
GEORGIA                       Bel Air             NEW YORK                                     Wilmington, DE
Atlanta                       Columbia            Albany              SOUTH CAROLINA
Augusta                       Frederick                               Greenville
                              Gaithersburg                            Myrtle Beach (2)         DEL FRISCO'S
IDAHO                         Laurel              NORTH CAROLINA                               Denver, CO
Boise                         Lexington Park      Asheville                                    Dallas, TX
                              Waldorf             Boone               SOUTH DAKOTA             Fort Worth, TX
ILLINOIS                      Westminster         Charlotte (4)       Sioux Falls              Las Vegas, NV
Bloomington                                       Durham                                       New York, NY
Bradley                       MASSACHUSETS        Fayetteville
Carbondale                    Boston              Greensboro (2)                               FRANKIE'S
Champaign                                         Greenville                                   Charlotte, NC

                                      -11-





ITEM 3.     LEGAL PROCEEDINGS

            California Public Employees  Retirement  System  ("CalPERS") filed a
shareholders  derivative  action on October 16, 2001 against certain present and
former  Directors  alleging  breach of fiduciary  duties by certain  present and
former  Directors and that certain of such  defendants  were  unjustly  enriched
through  related  party  transactions  and by the  re-pricing  of stock  options
previously  issued.  The lawsuit  also seeks to prevent  enforcement  of certain
change of control agreements granted to executive officers of the Company, seeks
declaratory  and injunctive  relief and seeks damages to be paid to the Company.
The Company is a nominal defendant.

            The  Company  has  indemnified  present  and former  Directors  with
respect to the  shareholders  derivative  action filed by CalPERS by contractual
agreement,  as  well as by the  Articles  of  Incorporation  of the  Company  as
provided in accordance with the Delaware General Corporation Law.

            On January 9, 2002,  CalPERS filed an amended  complaint and added a
class  action  claim  to  attempt  to  certify  a class  action  based  on their
allegation  that a  provision  in the  change  of  control  agreements  violates
Delaware  law. A motion to dismiss  was filed by all  defendants  on February 8,
2002,  seeking to dismiss all claims of CalPERS.  Discovery was stayed pending a
court decision on the motion to dismiss.

            The Vice  Chancellor  issued  his  decision  on  December  18,  2002
dismissing  numerous  counts and also  substantially  reducing  the scope of two
other claims,  both involving the repricing of stock options.  Two of the counts
sustained by the court involve  challenges to change of control agreements which
have now expired.  On January 17, 2003, the Vice Chancellor agreed to permit the
plaintiff to proceed with its discovery to obtain certain documents from certain
third parties and the named defendants, and ordered the plaintiff to timely file
its motion to amend its complaint.

            On  April  16,  2003,  CalPERS  filed a  Motion  for  Leave to Amend
Plaintiff's First Amended Complaint,  which complaint added no additional causes
but added  allegations  which are subsequent to the date of the first  complaint
and  allegations  which also  address  counts  which were  dismissed by the Vice
Chancellor  on December 18, 2002.  All  defendants  filed  objections to CalPERS
attempt to amend and oral  argument was heard by the Vice  Chancellor  on August
21, 2003.  As of this date,  no decision has been rendered and discovery by both
parties continues.

            The Company is involved from time to time in  litigation  arising in
the  ordinary  course of  business  as well as the matter set forth  above.  The
Company  believes the outcome of such  matters will not have a material  adverse
effect on its consolidated financial position or results of operations.

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

            No matters were  submitted to a vote of the holders of the Company's
Common  Stock  during the  fourth  quarter of the  Company's  fiscal  year ended
December 30, 2003.

                                      -12-





                                     PART II

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

MARKET INFORMATION

            The  Company's   Common  Stock  (ticker  symbol:   STAR)  is  traded
over-the-counter  on the Nasdaq  National Market  (Nasdaq).  The following table
sets forth,  for the periods  indicated,  the high and low prices for the Common
Stock, as reported by Nasdaq.

                                              Prices
                                              ------
  Calendar 2003                    High                      Low
  -------------                    ----                      ---
First Quarter                     $21.99                    $18.32
Second Quarter                    $23.10                    $18.84
Third Quarter                     $23.34                    $20.66
Fourth Quarter                    $23.49                    $20.35


                                               Prices
                                               ------
  Calendar 2002                    High                      Low
  -------------                    ----                      ---
First Quarter                     $21.02                    $14.25
Second Quarter                    $21.95                    $16.00
Third Quarter                     $24.81                    $18.02
Fourth Quarter                    $22.07                    $17.35

DIVIDENDS

            The Company  initiated  the payment of quarterly  cash  dividends in
April 2000 and paid cash  dividends at the rate of $0.125 per share each quarter
until January 2002.  The Company  increased its quarterly cash dividend to $0.15
per share, in January 2002, to $.165 per share and in February 2003 and to $.175
per share in February 2004. The Company plans to continue the quarterly dividend
payments for the  foreseeable  future;  however,  there can be no assurance that
such cash  dividends  will  continue  to be paid or as to the amount of the cash
dividend.

NUMBER OF STOCKHOLDERS

            As of February 23,  2004,  there were  approximately  350 holders of
record of the Company's  Common Stock.  The Company believes there are in excess
of 7,000 beneficial owners of the Company's Common Stock.

EQUITY COMPENSATION PLAN INFORMATION

            The  information  required  by this  item  will be in the  Company's
definitive  proxy  materials  to be  filed  with  the  Securities  and  Exchange
Commission  and is  incorporated  in this  Annual  Report  on Form  10-K by this
reference.

                                      -13-





ITEM 6.     SELECTED FINANCIAL DATA

            The following table sets forth selected consolidated  financial data
and is  qualified by  reference  to and should be read in  conjunction  with the
consolidated  financial  statements  and the  notes  thereto  and  "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
included elsewhere in this Form 10-K. The selected  consolidated  financial data
of the Company as of December 30, 2003 and  December  31, 2002,  and for each of
the five years in the period  ended  December  30,  2003,  were derived from the
Company's  audited  consolidated  financial  statements.  The pro forma data set
forth below for the periods  presented  are  unaudited and have been prepared by
management solely to facilitate period-to-period comparison and do not represent
the actual  results  of  operations  for the  periods  presented.  The pro forma
amounts reflect the adjusted amounts applicable for fiscal years 2001, 2000, and
1999 to give retroactive effect for the non-amortization  provisions of SFAS No.
142 requiring  that  goodwill and  intangible  assets deemed to have  indefinite
lives no longer be  amortized,  but are  subject to annual  impairment  tests in
accordance  with SFAS No. 142, which was adopted by the Company  effective as of
the beginning of fiscal 2002.

                                      -14-





                                                                                        Year Ended In December(1)
                                                         ---------------------------------------------------------------------------
                                                                                  (Amounts in thousands, except share data)

                                                              2003           2002              2001           2000           1999
                                                              ----           ----              ----           ----           ----
Income Statement Data:

Net sales                                               $    591,401    $    593,617    $    571,115    $    544,111    $    545,901

Costs and expenses:


   Costs of sales                                            212,593         194,183         195,707         190,730         194,313
   Restaurant operating expenses                             274,388         265,730         264,758         257,458         242,953
   Restaurant depreciation and
     amortization                                             20,817          24,452          25,876          26,363          28,533
   General and administrative expenses                        43,346          45,085          41,884          40,422          33,949
   Abandoned merger expenses                                    --             2,990            --              --              --
   Non-cash stock compensation expense                         1,474           2,949           3,212          12,016          14,944
   Contribution - "Dine for America"                            --              --             2,124            --              --
   Provision for impaired assets and
      restaurant closings                                       --               792             565           3,142          37,875
                                                        ------------    ------------    ------------     -----------     -----------

Total costs and expenses                                     552,618         536,181         534,126         530,131         552,567
                                                        ------------    ------------    ------------     -----------     -----------

Income (loss) from operations                                 38,783          57,436          36,989          13,980          (6,666)

Other income, net                                                553           2,986           4,906           3,350           2,171
                                                        ------------    ------------    ------------     -----------     -----------

Income (loss) from continuing operations before
   provision for income taxes                                 39,336          60,422          41,895          17,330          (4,495)

Benefit (provision) for income taxes                         (12,013)        (20,040)        (14,703)         (5,971)          1,165
                                                        ------------    ------------    ------------     -----------     -----------

Income (loss) from continuing operations                      27,323          40,382          27,192          11,359          (3,330)

Discontinued operations:
   (Loss) from operations of discontinued restaurants        (10,774)         (1,322)         (6,644)         (5,625)         (2,098)
   Income tax benefit                                          2,117             467           2,354           1,972             729
                                                        ------------    ------------    ------------     -----------     -----------
   Loss on discontinued operations                            (8,657)           (855)         (4,290)         (3,653)         (1,369)
                                                        ------------    ------------    ------------     -----------     -----------

Income (loss) before cumulative effect of change in
   accounting principle                                       18,666          39,527          22,902           7,706          (4,699)

Cumulative effect of change in accounting principle
   (net of income tax of $190) (3)                              --              (318)           --              --              --
                                                        ------------    ------------    ------------    ------------    ------------
Net income (loss) (2)                                   $     18,666    $     39,209    $     22,902    $      7,706    $     (4,699)
                                                        ============    ============    ============    ============    ============

Basic earnings (loss) per share:
   Continuing operations                                $       1.31    $       1.76    $       1.13    $        .43    $       (.09)
   Discontinued operations (4)                                  (.41)           (.03)           (.18)           (.14)           (.04)
                                                        ------------    ------------    ------------    ------------    ------------
   Income (loss) before cumulative effect of
      change in accounting principle                             .90            1.73             .95             .29            (.13)

   Cumulative effect of change
      in accounting principle                                     --            (.02)             --              --              --
                                                        ------------    ------------    ------------    ------------    ------------

Basic earnings (loss) per share                         $        .90    $       1.71    $        .95    $        .29    $      (.13)
                                                        ============    ============    ============    ============    ============

Weighted average shares outstanding                       20,801,894      22,908,821      24,036,942      26,189,600      35,089,084
                                                        ============    ============    ============    ============    ============

Pro forma net income (loss) (2)                         $     18,666    $     39,527    $     23,825    $      8,789    $     (3,638)
                                                        ============    ============    ============    ============    ============

Pro forma basic earnings (loss) per share               $        .90    $       1.73    $        .99    $        .33    $       (.10)
                                                        ============    ============    ============    ============    ============

                                      -15-





                                        At fiscal year end in December, (1)
                                --------------------------------------------------------
                                                 (Dollars in thousands)

                                  2003         2002        2001        2000        1999
Balance Sheet Data:

Working capital (deficit)      $  71,944   $  44,575   $  48,284   $  (1,716)   $  20,215
Total assets                     488,495     473,313     536,025     517,274      558,330
Stockholders' equity             421,099     419,759     475,435     466,135      509,177


(1)   The  Company  operates  on a 52 or  53-week  fiscal  year  ending the last
      Tuesday  in  December.  The fiscal  quarters  for the  Company  consist of
      accounting  periods of 12, 12, 12, and 16 or 17 weeks,  respectively.  The
      Company's 1999,  2000,  2001, 2002 and 2003 fiscal years ended on December
      28, 26, 25, 31 and 30,  respectively.  Fiscal  2002  included  53 weeks of
      operations while fiscal 2003, 2001, 2000, and 1999 included 52 weeks.
(2)   Pro forma net income (loss)  amounts  reflect the  adjustments  for fiscal
      2001,  2000,  and  1999  to  give  retroactive  effect  to the  change  in
      accounting for the  non-amortization  provisions of SFAS No. 142, Goodwill
      and Other Intangible Assets, as adopted by the Company effective as of the
      first quarter of fiscal 2002.
(3)   The cumulative  effect of change in accounting  principles for fiscal 2002
      reflect the impairment  charge of goodwill  related to certain  Australian
      investments  resulting  from the  adoption  of SFAS No.  142 in the  first
      quarter of fiscal 2002.
(4)   During  fiscal  2003,  the  Company  announced a plan to divest all of its
      Australian operations. In December 2003, the Company completed the sale to
      a  licensee  of 13 of its 19  restaurants  in  Australia  and  closed  the
      remaining six restaurants.  The losses included in discontinued operations
      for fiscal 2003 include aggregate pre-tax charges of approximately $12,000
      incurred in connection with its exit activities from Australia,  including
      impairment losses related to assets either sold or to be sold, termination
      costs associated with employees and certain lease obligations,  and losses
      related to the realization of the Company's  cumulative  foreign  currency
      translation  adjustments.  See  Note  12  to  the  Consolidated  Financial
      Statements for additional information.

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

GENERAL

            The following  discussion and analysis should be read in conjunction
with  the  information  set  forth  under  "Selected  Financial  Data"  and  the
consolidated financial statements including the notes thereto included elsewhere
in this Form 10-K.

            The Company  opened eleven  restaurants  in fiscal 2001, and none in
fiscal 2002 and 2003.  The Company  opened one domestic Lone Star  restaurant in
February 2004.

            There  were 250  operating  domestic  Lone  Star  restaurants  as of
February 23, 2004. In addition,  a licensee operates three Lone Star restaurants
in California.  The Company closed one domestic Lone Star restaurant in February
2002,  and a domestic Lone Star  restaurant  was destroyed by fire in March 2002
and was not rebuilt.

            The Company  currently  operates five Del Frisco's  restaurants.  In
addition, a licensee operates one Del Frisco's restaurant. The Company currently
operates fifteen Sullivan's restaurants.

            In addition,  during 2002 the Company  closed a Mexican food concept
restaurant.

            Internationally,  licensees operate 13 Lone Star Steakhouse & Saloon
restaurants  in Australia and one  restaurant in Guam.  During fiscal 2003,  the
Company sold 13  restaurants to a licensee in Australia and closed an additional
seven restaurants in Australia. The Company closed five restaurants in Australia
in fiscal 2002.

CRITICAL ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)

            The  consolidated  financial  statements  are prepared in accordance
with  accounting  principles  generally  accepted  in the United  States,  which
require the Company to make  estimates and  assumptions  that affect the amounts
reported in the consolidated  financial statements and notes thereto (see Note 1
to the  Consolidated  Financial  Statements).  The Company  believes that of its

                                      -16





significant  accounting  policies,  the following represent  accounting policies
that may involve a higher degree of judgment and complexity.

IMPAIRMENT OF LONG-LIVED ASSETS - UNDERPERFORMING  RESTAURANTS AND DEFINITE LIFE
INTANGIBLES  Property and equipment and definite life  intangibles  are reviewed
for impairment whenever events or changes in circumstances indicate the carrying
amount  of an asset  may not be  recoverable.  The  Company  reviews  applicable
intangible assets and long-lived assets related to each restaurant on a periodic
basis.  When  events or changes in  circumstances  indicate  an asset may not be
recoverable, the Company estimates the future cash flows expected to result from
the use of the asset. If the sum of the expected  undiscounted future cash flows
is less than the carrying value of the asset,  an impairment loss is recognized.
The  impairment  loss is  recognized  by measuring  the  difference  between the
carrying  value of the  assets  and the fair  market  value of the  assets.  The
Company's  estimates of fair values are based on the best information  available
and require the use of  estimates,  judgments,  and  projections  as  considered
necessary. The actual results may vary significantly.

IMPAIRMENT  OF  LONG-LIVED  ASSETS - GOODWILL AND  INDEFINITE  LIFE  INTANGIBLES
Goodwill and certain intangible assets deemed to have indefinite lives which are
not subject to amortization are subjected to an annual  impairment test, or more
frequent tests if indicators of impairment exist. In assessing recoverability of
goodwill,  the Company may be required to make assumptions  regarding  estimated
future cash flow and other  factors to determine  the fair value.  The amount of
fair value for certain  intangible  assets having  indefinite  lives are made by
reference to recent market  transactions.  An impairment loss is recognized when
the estimates of fair value are less than the carrying value of the assets.

SELF-INSURANCE  RESERVES During fiscal 2003, the Company adopted  self-insurance
programs for its worker's compensation,  general liability, and medical benefits
programs.  In order to minimize the exposure under the self-insurance  programs,
the Company has purchased  stop-loss coverage both on a per occurrence and on an
aggregate  basis.  The self insured  losses under the programs are accrued based
upon the Company's  estimate of the ultimate expected  liability for both claims
incurred and on an incurred but not reported basis.  The  establishment  of such
accruals for self-insurance involve certain management judgments and assumptions
regarding the frequency or severity of claims, the historical  patterns of claim
development  and the  Company's  experience  with claim reserve  management  and
settlement  practices.  To  the  extent  actual  results  may  differ  from  the
assumptions used to develop the accrual  estimate  amounts,  such  unanticipated
changes  may  produce  significantly  different  amounts of  expense  than those
estimated under the self-insurance program.

INCOME  TAXES - DEFERRED  INCOME TAX  Deferred  tax assets and  liabilities  are
recognized for the effect of temporary  differences between the carrying amounts
of assets and liabilities for financial  reporting purposes and amounts used for
income tax purposes. Deferred tax assets are reduced by a valuation allowance if
it is more likely than not that some  portion or all of the  deferred  tax asset
will not be realized. The Company reviews the recoverability of any deferred tax
assets  reflected in the balance sheet and provides any necessary  allowances as
required. Any adjustment to the deferred tax asset would be charged to income in
the period such determination was made.

                                      -17-





RESULTS OF OPERATIONS

            The  following  table  sets  forth  for the  periods  indicated  the
percentages  which  certain  items  included in the  Consolidated  Statements of
Income bear to net sales.

                                                                                Year Ended
                                                                    -------------------------------------
                                                                    December 30, December 31, December 25,
                                                                      2003          2002         2001
                                                                    -------       -------       -------
                                                                            (Dollars in thousands)
Statement of Income:

Net sales                                                             100%          100%          100%
   Costs and expenses:
     Costs of sales                                                    36.0          32.7          34.3
     Restaurant operating expenses                                     46.4          44.8          46.4
     Depreciation and amortization                                      3.5           4.1           4.5
     Provision for impaired assets and restaurant closings               --           0.1           0.1
                                                                    -------       -------       -------
     Restaurant costs and expenses                                     85.9          81.7          85.3
                                                                    -------       -------       -------

Restaurant operating income                                            14.1          18.3          14.7
General and administrative expenses                                     7.3           7.6           7.3
Abandoned merger expenses                                                --           0.5            --
Non-cash stock compensation expense                                     0.2           0.5           0.6
Contribution - "Dine for America"                                        --            --           0.4
                                                                    -------       -------       -------

Income from operations                                                  6.6           9.7           6.4
Other income, net                                                       0.1           0.5           0.9
                                                                    -------       -------       -------

Income from continuing operations before income taxes
   and cumulative effect of accounting change                           6.7          10.2           7.3
Provision for income taxes                                              2.1           3.4           2.6
                                                                    -------       -------       -------
Income from continuing operations before cumulative
   effect of accounting change                                          4.6           6.8           4.7
Loss from discontinued operations, net of applicable income taxes      (1.4)         (0.1)         (0.7)
                                                                    -------       -------       -------

Income before cumulative effect of accounting change                    3.2           6.7           4.0
Cumulative effect of accounting change, net of tax                       --          (0.1)           --
                                                                    -------       -------       -------

Net income                                                              3.2%          6.6%          4.0%
                                                                    =======       =======       =======

                                      -18-





LONE STAR STEAKHOUSE & SALOON, INC.

      YEAR ENDED DECEMBER 30, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
                          (DOLLAR AMOUNTS IN THOUSANDS)

            Net sales  decreased  $2,216 or .4% to  $591,401  for the year ended
December  30, 2003  ("fiscal  2003"),  compared  to $593,617  for the year ended
December 31, 2002 ("fiscal 2002"). The decrease was attributable  principally to
the fact that fiscal  2003 was a 52 week period  compared to a 53 week period in
fiscal 2002.  In  addition,  since fiscal 2002 ended on December 31, the Company
had two New Year's Eve revenue days in fiscal 2002 compared to no New Year's Eve
revenues for fiscal 2003.  The Company  estimates that the extra week for fiscal
2002 provided  additional  sales of  approximately  $11,900.  Blended same store
sales increased 1.9%.

            Costs  of  sales,  primarily  food  and  beverages,  increased  as a
percentage  of net sales to 36.0% from 32.7% due  primarily  to  increased  beef
costs. Restaurant operating expenses in fiscal 2003 increased $8,658 to $274,388
compared to $265,730 in fiscal 2002,  and increased as a percentage of net sales
to 46.4% from 44.8%. The increase is primarily attributable to (1) approximately
$3,400 due to salaries for  increased  manager  staffing and indirect  labor for
payroll  related  taxes  and  insurance  costs,  (2)  approximately  $1,500  for
increased  advertising  spending,  (3) approximately $670 for increased building
and equipment repairs and (4) approximately $1,200 for increased utilities.

            Depreciation  and  amortization  decreased  $3,635  in  fiscal  2003
compared with fiscal 2002. The decrease is attributable primarily to a reduction
in  depreciation  for certain assets that have become fully  depreciated.

            General and administrative  expenses decreased $1,739 in fiscal 2003
compared with fiscal 2002.  Fiscal 2003 expense  decreased as a result of (1) an
approximately  $2,100 decrease for salary related costs,  reflecting primarily a
decrease in incentive  compensation and (2) a decrease in professional  fees and
related costs of  approximately  $1,700.  These decreases were offset in part by
increases  in  directors  and  officers'  liability  insurance  costs as well as
increased costs for travel and recruiting.

            Non-cash stock compensation  expense in fiscal 2003 decreased $1,475
compared with fiscal 2002. The decrease reflects  approximately $1,906 for lower
amortization  of such costs.  The decrease was  partially  offset by a charge of
$431 relating to the accounting for certain shares of the Company's common stock
held by a Rabbi Trust pursuant to a deferred compensation arrangement.  See Note
3 to the Consolidated Financial Statements for additional information.

            Other income,  net for fiscal 2003, was $553,  compared to $2,986 in
fiscal  2002.  The  decrease  is  attributable  to a decrease in gain on sale of
assets and a decline in interest  income as a result of lower interest rates and
reduced amounts of excess funds available for investment.

            The  effective  income tax rate was 30.5% and 33.2% for fiscal  2003
and fiscal 2002,  respectively.  The factors which cause the effective tax rates
to vary from the federal  statutory rate of 35% include state income taxes,  the
impact of FICA Tip and other credits,  certain non-deductible  expenses, and the
tax effect of incentive  stock options.  There is generally no tax impact to the
Company  associated  with incentive  stock options and the related  amortization
associated with such options in the income statement.  However, tax benefits may
arise at the time the  incentive  options are  exercised  to the extent that the
exercise  is  followed  by a  disqualifying  disposition  of the  shares  by the
optionee.  The decrease in the  effective  tax rate for fiscal 2003 reflects (1)
both the impact of a  decrease  in the amount of  amortization  of stock  option
compensation  and an  increase  in tax  benefits  resulting  from  disqualifying
disposition of shares related to incentive stock options,  and (2) the impact of
FICA Tip and other tax  credits on the lower  pre-tax  income  for  fiscal  2003
compared with fiscal 2002.

            Discontinued operations reflect the operations of restaurants closed
during  fiscal 2003 and 2002 which are  required to be reported as  discontinued
operations  pursuant  to SFAS  No.  144.  Discontinued  operations  include  the
applicable operations of Australia.  In December 2003, the Company completed the

                                      -19-





sale of 13 of its restaurants in Australia to a licensee, and the Company closed
six other  restaurants in Australia prior to December 30, 2003. The discontinued
operations for fiscal 2003 include  aggregate  pre-tax charges of  approximately
$12,000  incurred  in  connection  with  its  exit  activities  from  Australia,
including  impairment  losses,  termination  costs associated with employees and
certain  lease  obligations,  and  losses  related  to  the  realization  of the
Company's  cumulative foreign currency translation  adjustments.  See Note 12 to
the Consolidated Financial Statements for additional information.

                                      -20-






LONE STAR STEAKHOUSE & SALOON, INC.

      YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 25, 2001
                          (DOLLAR AMOUNTS IN THOUSANDS)

            Net sales  increased  $22,502 or 3.9% to $593,617  for fiscal  2002,
compared to $571,115 for the year ended December 25, 2001 ("fiscal  2001").  The
increase  was  attributable  to (1) the fact  fiscal  2002 was a 53 week  period
compared to a 52 week period in fiscal  2001,  allowing  the Company to have two
New  Year's  eve sales days in 2002 and (2)  incremental  sales of $11,800  from
eleven new domestic Lone Star  restaurants  opened  during fiscal 2001.  Blended
same store sales decreased 0.4% compared with the comparable prior year period.

            Costs  of  sales,  primarily  food  and  beverages,  decreased  as a
percentage  of net sales to 32.7% from 34.3% due primarily to a decrease in beef
costs.  The decrease was partially  offset by the impact of promotional  pricing
from the Company's direct mail campaigns initiated late in the second quarter of
fiscal 2001.

            Restaurant  operating  expenses increased $972 to $265,730 in fiscal
2002  compared to $264,758 in fiscal 2001,  but decreased as a percentage of net
sales to 44.8% from 46.4%.  The decrease as a percent of sales largely  reflects
the leverage from increased sales volumes. In addition,  the Company experienced
lower  overall  labor  costs as a result  of  improved  labor  efficiencies  and
controls.  In terms of absolute dollars, the increase is primarily  attributable
to (1)  approximately  $3,400 for increased  building and equipment  maintenance
costs and (2)  approximately  $2,300 for increased  general  liability and other
insurance  costs.  The  increases  were  largely  offset  by (1) a  decrease  in
advertising  expenses  of  approximately  $3,300 as the  Company  decreased  its
spending for broadcast media and focused its advertising  efforts in print media
and (2) a decrease of approximately $1,900 in pre-opening expenses.

            Depreciation  and  amortization  decreased  $1,424  in  fiscal  2002
compared  with fiscal 2001.  The decrease is  attributable  to the impact of the
non-amortization  rules on accounting for goodwill and certain other intangibles
and to a reduction in the depreciable  base for certain assets that became fully
depreciated.

            Provision for impaired assets and restaurant closings in fiscal 2002
was $792 compared to $565 in fiscal 2001.  The provision in fiscal 2002 reflects
a pre-tax charge of $250 for the write-down of one underperforming domestic Lone
Star  restaurant.  In addition,  the  provision for fiscal 2002 includes $542 of
costs incurred for stores closed in previous years.

            General and administrative  expenses increased $3,201 in fiscal 2002
compared with fiscal 2001. The increase in absolute  dollars is due primarily to
the  extra  week of  costs  incurred  in  fiscal  2002  relating  to the 53 week
accounting   period.   Fiscal  2002  expense   increased  as  a  result  of  (1)
approximately  $2,500  increase for salary related  costs,  reflecting a general
inflationary  increase  in salary  levels,  an  increase  in the number of field
supervisory  personnel  and  an  increase  in  incentive  compensation  and  (2)
approximately  $1,500 for increased  costs of directors  and officers  liability
insurance and certain legal and  professional  expenses.  These  increases  were
partially offset by decreases in recruiting,  travel and information  technology
consulting costs.

            Abandoned  merger  expenses  of $2,990 for fiscal  2002  reflect the
costs incurred  related to the proposed sale and merger of the Company which was
terminated on May 4, 2002.  Such costs include fees paid to investment  advisors
and legal counsel and certain  costs  reimbursed by the Company to the potential
buyer in connection with its due diligence efforts.

            Non-cash stock  compensation  expense for fiscal 2002 decreased $263
compared  with fiscal 2001  reflecting  a decrease  in the  amortization  of the
vested compensation amounts.

            Other income,  net for fiscal 2002,  was $2,986,  compared to $4,906
for  fiscal  2001.  The  decrease  is  attributable  to an  increase  in  credit
availability  fees, a decrease in interest income and a decrease in gain on sale
of assets.

                                      -21-





            The  effective  income tax rate was 33.1% and 35.1% for fiscal  2003
and fiscal 2002,  respectively.  The factors which cause the effective tax rates
to vary from the federal  statutory rate of 35% include state income taxes,  the
impact of FICA Tip and other credits,  certain non-deductible  expenses, and the
tax effect of incentive  stock options and the related  amortization  associated
with such options in the income  statement.  However,  tax benefits may arise at
the time the incentive  options are exercised to the extent that the exercise is
followed  by a  disqualifying  disposition  of the shares by the  optionee.  The
decrease  in the  effective  tax rate for  fiscal  2002  primarily  reflects  an
increase in tax benefits resulting from the disqualifying  disposition of shares
related to incentive stock options as compared with fiscal 2001.

            Discontinued  operations  reflect the  operations  of the  Company's
Australian  business and certain other  restaurants  closed subsequent to fiscal
2001 which are required to be reported as  discontinued  operations  pursuant to
SFAS  No.  144.  See  Note  12 to  the  Consolidated  Financial  Statements  for
additional information.

            The cumulative  effect of accounting  change  reflects the effect of
adoption  of the  provisions  of SFAS No.  142,  GOODWILL  AND OTHER  INTANGIBLE
ASSETS.  The Company  adopted the provisions of SFAS No. 142 effective  December
26,  2001.  The  cumulative  effect of the change in  accounting  resulted  in a
one-time  charge of $318,  net of income  taxes,  to reflect the  impairment  of
goodwill  related  to the  Company's  Australian  operations  (see Note 2 to the
Consolidated Financial Statements for additional information.)

                                      -22-





IMPACT OF INFLATION

            The primary  inflationary factors affecting the Company's operations
include food and labor costs. A number of the Company's restaurant personnel are
paid at the federal and state established minimum wage levels and,  accordingly,
changes in such wage levels affect the Company's labor costs. However, since the
majority of personnel are tipped employees,  minimum wage changes generally have
little effect on overall labor costs.  Historically,  as costs of food and labor
have increased, the Company has been able to offset these increases through menu
price  increases  and  economies of scale;  however,  there may be delays in the
implementation  of such menu price increases or in effecting timely economies of
scale, as well as,  competitive  pressures which may limit the Company's ability
to recover any cost increases in their entirety. Historically, inflation has not
had a material  impact on operating  margins.  During  fiscal 2003,  the Company
experienced significant increases in beef prices. If the price of beef continues
at its recent  levels,  it will continue to have a material  negative  impact on
operating margins.

LIQUIDITY AND CAPITAL RESOURCES (Dollars in thousands, except share amounts)

The following table presents a summary of the Company's cash flows for the years
ended:

                                                      December 30, December 31, December 25,
                                                          2003        2002        2001
                                                       ----------  -----------  ----------

Net cash provided by operating activities              $ 54,138    $ 74,792    $ 62,235
Net cash provided by (used in) investment activities     (8,106)      5,240       5,840
Net cash used by financing activities                   (27,149)    (98,843)    (15,382)
Effect of exchange rate changes on cash                   1,486         363           4
Net cash provided by discontinued operations             10,492         898       1,193
                                                       --------    --------    --------
Net increase (decrease) in cash and cash equivalents   $ 30,861    $(17,550)   $ 53,890
                                                       ========    ========    ========

            The decrease in net cash provided by operating activities for fiscal
2003 compared with fiscal 2002 is due to a decrease in net income and a decrease
in depreciation and amortization. The increase in net cash provided by operating
activities  in fiscal 2002  compared to fiscal 2001 is due to an increase in net
income.

            During  fiscal 2003,  2002,  and 2001,  the  Company's  purchases of
property and equipment were $6,928, $2,776, and $3,924, respectively.  In fiscal
2003, 2002, and 2001, the Company  received  proceeds from the sale of assets of
$1,730, $7,879, and $10,098, respectively.

            The Company opened 11 restaurants in the past three fiscal years all
of which opened during fiscal 2001.

            During  fiscal  2003,  the Company  received net proceeds of $10,244
from the issuance of 1,210,682 shares of its common stock due to the exercise of
stock  options  compared to proceeds of $23,551 and $2,024 from the  issuance of
2,058,838 and 242,838 shares in fiscal 2002 and 2001, respectively.

            In June 2002, the Company  completed a Modified Dutch Auction tender
offer for the  purchase of  4,000,000  shares of its common  stock at a price of
$21.375  per share.  The  aggregate  cost to  repurchase  the shares was $86,301
including the costs of the tender offer.  The  transaction was financed from the
Company's existing available cash.

            The  Company's  Board of Directors  has  authorized  the purchase of
shares of the Company's  common stock from time to time in the open market or in
privately  negotiated  transactions.  In  fiscal  2003,  the  Company  purchased
1,132,500  shares of its common  stock at a cost of $23,833.  In fiscal 2002 and

                                      -23-





2001,  the Company  purchased  1,114,000 and 468,687 shares at a cost of $22,374
and $5,145, respectively. The shares repurchased exclude the 4,000,000 shares in
the tender offer as previously described.

            The Company has paid  quarterly  cash  dividends on its common stock
since the second quarter of fiscal 2000. In January 2003, the Company  increased
its quarterly cash dividend from $.15 to $.165 per share.  The Company  recently
announced in 2004 that it would  increase its quarterly cash dividend from $.165
to $.175 per share.  During  fiscal 2003,  2002,  and 2001 the Company paid cash
dividends as follows:

                             Amount             Per Share
                             ------             ---------
    Fiscal 2003             $13,560              $0.645
    Fiscal 2002             $13,719              $0.60
    Fiscal 2001             $12,019              $0.50

            At  December  30,  2003,  the  Company  had $96,230 in cash and cash
equivalents.  The Company had available  $55,000 in unsecured  revolving  credit
facilities. At December 30, 2003, the Company had no outstanding borrowings. See
Note 4 to the Consolidated  Financial Statements in this Form 10-K for a further
description  of the Company's  credit  facilities.  The Company  expects to fund
future  requirements for normal investing and financing  activities through cash
provided from operations and existing cash and cash equivalent balances.

            The Company's  contractual  obligations at December 30, 2003 are for
operating leases as follows:

                             2004                          $10,312
                             2005                            8,137
                             2006                            5,777
                             2007                            3,969
                             2008                            2,693
                       Thereafter                            4,339
                                                           -------
Total operating lease obligations                          $35,227
                                                           =======

            In addition to the  contractual  obligations  set forth  above,  the
Company has assumed certain  contractual  obligations as of January 28, 2004 for
operating  leases  in  connection  with its  acquisition  of  TX.C.C.,  Inc.  as
described elsewhere herein. Such lease obligations are as follows:

                             2004                           $ 3,019
                             2005                             3,340
                             2006                             3,376
                             2007                             3,424
                             2008                             3,467
                       Thereafter                            23,464
                                                            -------
                                                            $40,090
                                                            =======

            The  Company  from  time to time may  utilize  derivative  financial
instruments in the form of live beef cattle  futures  contracts to manage market
risks and reduce its exposure  resulting from fluctuations in the price of meat.
Realized and unrealized changes in the fair values of the derivative instruments
are recognized in income in the period in which the change occurs.  Realized and
unrealized gains and losses for the period were not significant.  As of December
30, 2003, the Company had no positions in futures contracts.

                                      -24





RECENT DEVELOPMENTS
            On January 28, 2004, the Company's Joint Plan of  Reorganization  to
purchase   TX.C.C.,    Inc.,   and   affiliated   entities    TXCC-Preston   and
TXLC-Albuquerque  (collectively  "TXCC")  was  confirmed  by the  United  States
Bankruptcy Court for the District of Texas,  Dallas  Division.  The Plan will be
funded by the Company and provides that the TXCC  creditors will receive cash or
Lone Star Steakhouse & Saloon, Inc. common stock, at the option of the creditor.
TXCC presently  operates  twenty Texas Land & Cattle Steak House(R)  restaurants
located primarily in Texas. The Company will fund any cash requirements from its
current available cash balances. The Company expects that the aggregate purchase
price,  including the funding of payments to the  prepetition  creditors and the
assumption of post petition liabilities will approximate $21,000.

IMPACT OF RECENTLY ISSUED FINANCIAL STANDARDS
            In June 2002,  the FASB issued SFAS No.  146,  ACCOUNTING  FOR COSTS
ASSOCIATED  WITH EXIT OR DISPOSAL  ACTIVITIES.  This  statement  requires that a
liability for a cost associated with an exit or disposal  activity be recognized
only when the liability is incurred and measured at fair value.  SFAS No. 146 is
effective for exit or disposal  activities that are initiated after December 31,
2002.  The Company has adopted the  provisions  of this  statement in connection
with such  activities for  transactions  entered into subsequent to December 31,
2002.

RISK FACTORS
CHANGING CONSUMER  PREFERENCES AND DISCRETIONARY  SPENDING  PATTERNS,  POTENTIAL
OUTBREAKS  OF "MAD COW  DISEASE"  OR  "FOOT/MOUTH  DISEASE"  AND  OTHER  FACTORS
AFFECTING  THE  AVAILABILITY  OF BEEF COULD FORCE US TO MODIFY OUR  RESTAURANTS'
CONCEPT AND MENU AND COULD RESULT IN A REDUCTION IN OUR REVENUES.

            Even if we are able to  successfully  compete with other  restaurant
companies with similar concepts, we may be forced to make changes in one or more
of our  concepts  in order to respond to  changes in  consumer  tastes or dining
patterns.  Consumer  preferences  could be affected by health concerns about the
consumption of beef, the primary item on our menus,  or by specific  events such
as the  recently  confirmed  case of "mad  cow  disease"  by the  Department  of
Agriculture in the State of Washington or "foot/mouth disease" which occurred in
the United Kingdom. In addition,  these events could reduce the available supply
of beef or  significantly  raise  the price of beef.  If we change a  restaurant
concept, we may lose additional  customers who do not prefer the new concept and
menu,  and we may not be able to  attract  a  sufficient  new  customer  base to
produce the revenue needed to make the restaurant  profitable.  In addition,  we
may have  different or additional  competitors  for our intended  customers as a
result  of such a concept  change  and may not be able to  successfully  compete
against such competitors. Our success also depends on numerous factors affecting
discretionary  consumer  spending,  including economic  conditions,  the cost of
gasoline, disposable consumer income and consumer confidence. Adverse changes in
these factors could reduce guest traffic or impose  practical limits on pricing,
either of which could reduce revenues and operating income.

UNFORESEEN COST INCREASES COULD ADVERSELY AFFECT OUR PROFITABILITY.
            Our  profitability  is highly  sensitive to increases in food, labor
and other  operating  costs.  During  fiscal  2003,  the Company  experienced  a
significant  increase  in beef  prices.  If the price of beef  continues  at its
recent levels,  it will continue to have a material negative effect on operating
margins.  In  addition,  our  dependence  on frequent  deliveries  of fresh food
supplies means that shortages or  interruptions  in supply could  materially and
adversely affect our operations.  Moreover,  unfavorable  trends or developments
concerning the following factors could adversely affect our results:

                                      -25-





            o  Inflation, food, labor, energy and utilities and employee benefit
               costs; and
            o  rent increases  resulting from rent escalation  provisions in our
               leases.

            We may be unable to  anticipate or react to changing  prices.  If we
are  unable to modify our  purchasing  practices  or quickly or readily  pass on
increased costs to customers, our business could be materially affected.

IF WE ARE UNABLE TO COMPETE  EFFECTIVELY  WITH OUR  COMPETITORS,  WE WILL NOT BE
ABLE TO  INCREASE  REVENUES  OR  GENERATE  PROFITS.  OUR  INABILITY  TO INCREASE
REVENUES IS  DIRECTLY  RELATED TO OUR  ABILITY TO COMPETE  EFFECTIVELY  WITH OUR
COMPETITORS. KEY COMPETITIVE FACTORS INCLUDE:

o      The quality  and  numbers of  employees  needed to  adequately  staff our
       restaurants;
o      the quality and value of the food products offered;
o      the quality of service;
o      the cost of our raw products;
o      the price of the food products offered;
o      the restaurant locations; and
o      the ambiance of facilities.

            We compete with other steakhouse  restaurants  specifically and with
all other restaurants  generally.  We compete with national and regional chains,
as well as  individually  owned  restaurants.  The  restaurant  industry has few
non-economic  barriers  to  entry,  and as our  competitors  expand  operations,
competition  from steakhouse  restaurants  with concepts  similar to ours can be
expected to  intensify.  Many of our  competitors  are well  established  in the
upscale and mid-scale steak segments and certain  competitors have substantially
greater  financial,  marketing  and  other  resources  than us.  Such  increased
competition could adversely affect our revenues.

FAILURE  TO COMPLY  WITH  GOVERNMENT  REGULATIONS  COULD  ADVERSELY  AFFECT  OUR
OPERATING PERFORMANCE.
            Our restaurant operations are subject to certain federal,  state and
local laws and government regulations, such as:

   o Obtaining of licenses for the sale of food and alcohol beverages;
   o national and local health sanitation laws and regulations;
   o national and local employment and safety laws and regulations; and
   o local zoning, building code and land-use regulations.

            While we have never  experienced  any  significant  difficulties  in
obtaining necessary governmental approvals, the failure to obtain or retain food
and liquor  licenses or any other  governmental  approvals could have a material
adverse effect on our operating results.

            We  may be  subjected  to  "dram-shop"  liability,  which  generally
provides a person  injured by an  intoxicated  person  with the right to recover
damages from an establishment that wrongfully served alcoholic  beverages to the

                                      -26-





intoxicated  person.  Although we carry liquor liability coverage as part of our
comprehensive general liability insurance,  if we lost a lawsuit related to this
liability, our business could be materially harmed.

THE  RESTAURANT  INDUSTRY  IS  AFFECTED  BY A NUMBER  OF  TRENDS,  AS WELL AS BY
COMPETITION.
            The  restaurant  industry is affected by changes in consumer  tastes
and by national, regional, and local economic conditions and demographic trends.
The  performance  of individual  restaurants  may be affected by factors such as
traffic patterns,  demographic  considerations and the type, number and location
of competing  restaurants.  In addition,  factors such as  inflation,  increased
food,  labor and employee  benefit  costs and the  availability  of  experienced
management and hourly employees to successfully operate the restaurants may also
adversely  affect the  restaurant  industry  in general and our  restaurants  in
particular.

OUR  BUSINESS  DEPENDS ON A LIMITED  NUMBER OF KEY  PERSONNEL,  THE LOSS OF WHOM
COULD ADVERSELY AFFECT US.
            Some of our senior  executives are important to our success  because
they have been  instrumental in setting the strategic  direction of our Company,
operating  our business,  identifying,  recruiting  and training key  personnel,
identifying  areas for expansion and arranging  necessary  financing.  These key
personnel include Jamie B. Coulter, our Chief Executive Officer, T.D. O'Connell,
our  President  of Lone Star  Restaurants,  and  certain of our other  executive
officers.  Although we believe there is a significant pool of talented personnel
in the  restaurant  industry,  if these  members of our senior  management  team
become  unable or unwilling  to continue in their  present  positions,  it could
adversely affect our business and development.

SHAREHOLDERS  MAY NOT BE ABLE TO  RESELL  THEIR  STOCK  OR MAY HAVE TO SELL AT A
PRICE SUBSTANTIALLY LOWER THAN THE PRICE THEY PAID FOR IT.
            The trading price for our common stock has been highly  volatile and
could  continue  to be  subject  to  significant  fluctuations  in  response  to
variations  in  our  quarterly  operating  results,  general  conditions  in the
restaurant industry or the general economy, and other factors. In addition,  the
stock market is subject to price and volume  fluctuations  affecting  the market
price for public companies  generally,  or within broad industry  groups,  which
fluctuations may be unrelated to the operating results or other circumstances of
a particular  company.  Such  fluctuations may adversely affect the liquidity of
our common stock, as well as the price that holders may achieve for their shares
upon any future sale.

STAGGERED BOARD; BLANK-CHECK PREFERRED STOCK.
            Our current  certificate  of  incorporation  and bylaws  provide for
three  classes of  directors  to be elected on a staggered  basis.  This enables
existing directors to exercise significant control over our affairs, and may act
as an impediment to any future  attempts by third parties to take control of our
board of  directors.  In  addition,  our board of  directors  has the  authority
without further action by the stockholders to issue shares of preferred stock in
one  or  more  series  and  to  fix  the  rights,  preferences,  privileges  and
restrictions  thereof.  The  exercise  of this  authority  may act as a  further
impediment to any future  attempts by third parties to take control of our board
of directors.

A SINGLE VENDOR DISTRIBUTES MOST OF OUR CONSUMABLE PRODUCTS.
            Approximately 61% of the consumable products used in our restaurants
are  distributed  through and delivered by a single vendor.  While we believe we
could  replace this  vendor,  any  disruption  of services by this vendor or any
change to a new vendor could adversely affect our restaurants.

                                      -27-





THE RISK OF FUTURE TERRORIST ATTACKS MAY ADVERSELY IMPACT OUR REVENUE.
            As a  result  of the  terrorist  attacks  on the  United  States  on
September 11, 2001, a number of our  restaurants,  particularly our Del Frisco's
and Sullivan's  restaurants,  were  negatively  affected.  Additionally,  recent
terrorist warnings,  both in the United States and internationally,  suggest the
possibility   of   future   terrorist   attacks,   which   together   with   the
unpredictability of future military action and other responses to such terrorist
attacks has resulted in economic uncertainty. The occurrence of future terrorist
attacks may adversely affect our business and make it more difficult to forecast
our future results of operation.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            Not applicable.

Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

            See the Consolidated Financial Statements listed in the accompanying
Index to Financial  Statements.  Information  required for  financial  schedules
under  Regulation  S-X has been omitted  since the required  information  is not
present.

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

            Not applicable.

ITEM 9A.    CONTROLS AND PROCEDURES
            Disclosure  controls  are  procedures  that  are  designed  with the
objective of ensuring that information required to be disclosed in the Company's
reports under the  Securities  Exchange Act of 1934,  such as this Form 10-K, is
reported in accordance  with the  Securities  and Exchange  Commission's  rules.
Disclosure  controls are also  designed with the objective of ensuring that such
information is accumulated and  communicated to management,  including the Chief
Executive  Officer and Chief  Financial  Officer as  appropriate to allow timely
decisions regarding required disclosure.

            As of the end of the period  covered by the Form 10-K,  the  Company
carried out an evaluation  under the supervision and with the  participation  of
the Company's  management,  including the Company's Chief Executive  Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to the Securities Exchange
Act Rule 13a-14.  Based upon that  evaluation,  the Chief Executive  Officer and
Chief Financial  Officer  concluded that the Company's  disclosure  controls and
procedures  are  effective  in  timely  alerting  them to  material  information
relating to the Company (including its consolidated subsidiaries) required to be
in the Company's periodic SEC filings.  There were no significant changes in the
Company's internal controls or in other factors that could significantly  affect
these controls subsequent to the date of their evaluation.

            Certifications  of the Chief  Executive  Officer and Chief Financial
Officer  regarding,  among other items,  disclosure  controls and procedures are
included as exhibits to this Form 10-K.

                                      -28-





                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

            The  information  required by this Item 10 will be in the  Company's
definitive  proxy  materials  to be  filed  with  the  Securities  and  Exchange
Commission  and is  incorporated  in this  Annual  Report  on Form  10-K by this
reference.

ITEM 11.    EXECUTIVE COMPENSATION

            The  information  required by this Item 11 will be in the  Company's
definitive  proxy  materials  to be  filed  with  the  Securities  and  Exchange
Commission  and is  incorporated  in this  Annual  Report  on Form  10-K by this
reference.

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

            The  information  required by this Item 12 will be in the  Company's
definitive  proxy  materials  to be  filed  with  the  Securities  and  Exchange
Commission  and is  incorporated  in this  Annual  Report  on Form  10-K by this
reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            The  information  required by this Item 13 will be in the  Company's
definitive  proxy  materials  to be  filed  with  the  Securities  and  Exchange
Commission  and is  incorporated  in this  Annual  Report  on Form  10-K by this
reference.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

            The  information  required  by  Item  14  will  be in the  Company's
definitive  proxy  materials  to be  filed  with  the  Securities  and  Exchange
Commission  and is  incorporated  in this  Annual  Report  on Form  10-K by this
reference.

                                      -29-





                                     PART IV

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

            (a)   The following documents are filed as part of this report:
                  (1) Financial Statements.
                  See Index to Financial  Statements  which  appears herein.
                  All financial  statement schedules have been omitted since the
                  required information is not present.


Exhibits

      INDEX TO EXHIBITS
         Exhibit               Exhibit
         Number
           **3.1      Company's Certificate of Incorporation as amended
          ***3.3      Company's Amended and Re-Stated By-Laws
      ******10.2      1992 Lone Star Steakhouse & Saloon,  Inc. Directors' Stock
                      Option Plan as amended the "Director's Plan"
        ****10.3      1992 Lone Star  Steakhouse & Saloon,  Inc.  Incentive  and
                      Non-qualified Stock Option Plan (the "Plan") as amended
          **10.4      Form of Indemnification Agreement for officers and directors of the Company
       *****10.7      Employment  Agreement  between  the  Company and Gerald T.
                      Aaron, dated April 24, 2003.
       *****10.8      Employment  Agreement  between  the Company and Randall H.
                      Pierce, dated April 24, 2003
       *****10.9      Employment   Agreement   between   the  Company  and  T.D.
                      O'Connell, dated April 24, 2003
      *****10.11      Employment  Agreement  between  the  Company  and  John D.
                      White, dated April 24, 2003
     ******10.20      Non-Qualified Deferred Compensation Plan
    *******10.21      Revolver Loan Agreement  dated August 10, 2001 between the
                      Company and Sun Trust Bank
 **********10.23      Lone Star Steakhouse & Saloon,  Inc. Stock Option Deferred
                      Compensation Plan dated September 30, 2002
 **********10.24      Deferred  Compensation  Agreement  dated  October  4, 2002
                      between LS Management, Inc. and Jamie B. Coulter
   ********10.25      Agreement  dated as of April 24, 2002  between the Company
                      and Mark Saltzgaber
  *********10.26      Amendment to the Director's Plan
  *********10.27      Amendment to the Plan
          *21.1       Subsidiaries of the Company

                                      -30-





          *23.1       Independent  Auditors'  consent  to the  incorporation  by
                      reference in the Company's Registration Statements on Form
                      S-8 of the independent auditors' report included herein
          *31.1       Certification  of  Chief  Executive  Officer  pursuant  to
                      Section 302 of the Sarbanes-Oxley Act
          *31.2       Certification  of  Chief  Financial  Officer  pursuant  to
                      Section 302 of the Sarbanes-Oxley Act
          *32.1       Certification  of  Chief  Executive  Officer  pursuant  to
                      Section 906 of the Sarbanes-Oxley Act
          *32.2       Certification  of  Chief  Financial  Officer  pursuant  to
                      Section 906 of the Sarbanes-Oxley Act

      -----------------

        (b)   Reports  on Form 8-K:  During  the  fourth  quarter  of 2003,  the
              Company  filed  four  reports  on Form 8-K  under  Item #5 - Other
              Events on the  following  dates,  December 2, 2003,  December  10,
              2003, December 22, 2003 and December 23, 2003.

         *    Filed herewith.
        **    Incorporated by reference to the Company's  Registration Statement
              on Form  S-1,  filed  with the  Commission  on  January  31,  1992
              (Commission File No. 33-45399), as amended.
       ***    Incorporated  by reference to the  Company's  Quarterly  Report on
              Form 10-Q for the quarter ended June 12, 2001.
      ****    Incorporated by reference to the Company's  Registration Statement
              on Form  S-8,  filed  with the  Commission  on  January  12,  1996
              (Commission File No. 33-00280), as amended.
     *****    Incorporated  by reference to the  Company's  Quarterly  Report on
              Form 10-Q for the quarter ended June 17, 2003.
    ******    Incorporated by reference to the Company's  Registration Statement
              on  Form  S-8,  filed  with  the  Commission  on  March  31,  2000
              (Commission File No. 333-33762).
   *******    Incorporated  by reference to the  Company's  Quarterly  Report on
              Form 10-Q for the quarter ended September 4, 2001.
  ********    Incorporated  by reference to the  Company's  Quarterly  Report on
              Form 10-Q for the quarter ended June 11, 2002.
 *********    Incorporated by Reference to the Company's  Registration Statement
              on  Form  S-8,   filed  with  the  Commission  on  July  24,  2002
              (Commission File No. 333-97271).
**********    Incorporated  by Reference to the Company's  Annual Report on Form
              10-K for the year ended December 31, 2002.

                                      -31-





SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the  undersigned,  thereunto  duly  authorized,  in the City of
Wichita, State of Kansas, on this 10th day of March 2004.


                                    LONE STAR STEAKHOUSE & SALOON, INC.
                                                (Registrant)



                                    /s/ Randall H. Pierce
                                    -------------------------------------
                                    Randall H. Pierce
                                    Chief Financial Officer and
                                    Principal Accounting Officer

                                      -32-





                                   SIGNATORIES


Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following  persons in the  capacities  and on
the date indicated.


        SIGNATURE                   TITLE                       DATE
        ---------                   -----                       ----



/s/ Jamie B. Coulter        Chief Executive Officer          March 10, 2004
-----------------------     Principal Executive
   Jamie B. Coulter


/s/ John D. White           Executive Vice                   March 10, 2004
-----------------------     President,
   John D. White            Treasurer and Director


/s/ Randall H. Pierce       Chief Financial Officer          March 10, 2004
-----------------------     and Principal
   Randall H. Pierce        Accounting Officer


/s/ William B. Greene
-----------------------     Chairman of the Board            March 10, 2004
   William B. Greene        and Director



/s/ Anthony Bergamo
-----------------------     Director                         March 10, 2004
   Anthony Bergamo


/s/ Fred B. Chaney
-----------------------     Director                         March 10, 2004
   Fred B. Chaney


/s/ Thomas C. Lasorda
-----------------------     Director                         March 10, 2004
   Thomas C. Lasorda


/s/ Michael A. Ledeen
-----------------------     Director                         March 10, 2004
   Michael A. Ledeen

                                      -33-




/s/ Clark R. Mandigo
-----------------------   Director                           March 10, 2004
   Clark R. Mandigo


/s/ Mark Saltzgaber
-----------------------   Director                           March 10, 2004
   Mark Saltzgaber


                                      -34-















CONSOLIDATED FINANCIAL STATEMENTS

Lone Star Steakhouse & Saloon, Inc.
Years Ended December 30, 2003, December 31, 2002, and December 25, 2001






                       Lone Star Steakhouse & Saloon, Inc.

                          Index to Financial Statements


                                                                           Pages
                                                                           -----

Report of Independent Auditors.............................................F-1
Consolidated Balance Sheets as of December 30, 2003 and December 31, 2002..F-2
Consolidated Statements of Income for the years ended December 30, 2003,
   December 31, 2002, and December 25, 2001................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
   December 30, 2003, December 31, 2002, and December 25, 2001.............F-6
Consolidated Statements of Cash Flows for the years ended
   December 30, 2003, December 31, 2002, and December 25, 2001.............F-7
Notes to Consolidated Financial Statements.................................F-8






                         Report of Independent Auditors

The Board of Directors and Stockholders
Lone Star Steakhouse & Saloon, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets  of Lone Star
Steakhouse & Saloon, Inc. (the Company) and subsidiaries as of December 30, 2003
and  December  31,  2002,  and the related  consolidated  statements  of income,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 30, 2003. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  consolidated  financial  position  of  Lone  Star
Steakhouse & Saloon, Inc. and subsidiaries at December 30, 2003 and December 31,
2002, and the consolidated  results of their operations and their cash flows for
each of the three years in the period ended  December 30,  2003,  in  conformity
with accounting principles generally accepted in the United States.

As discussed in Note 1,  effective  December 26, 2001,  the Company  adopted the
provisions of SFAS No. 142,  GOODWILL AND OTHER INTANGIBLE  ASSETS. In addition,
as discussed in Note 1,  effective  December 26, 2001,  the Company  adopted the
provisions  of SFAS No.  144,  ACCOUNTING  FOR THE  IMPAIRMENT  OR  DISPOSAL  OF
LONG-LIVED ASSETS.

                                                     /s/ Ernst & Young LLP

Kansas City, Missouri
February 20, 2004

                                      F-1





                       Lone Star Steakhouse & Saloon, Inc.

                           Consolidated Balance Sheets
                      (In Thousands, Except Share Amounts)

                                                    December 30,    December 31,
                                                        2003           2002
Assets
Current assets:
    Cash and cash equivalents                        $ 96,230         $ 65,369
    Inventories                                        12,955           12,390
    Deferred income taxes                               5,151            3,138
    Other                                               6,729            6,174
                                                     -------------------------
Total current assets                                  121,065           87,071

Property and equipment:
    Land                                              112,933          117,175
    Buildings                                         166,795          170,005
    Leasehold improvements                            109,091          112,283
    Equipment                                          99,621          100,620
    Furniture and fixtures                             18,828           20,430
                                                     -------------------------
                                                      507,268          520,513
    Less accumulated depreciation and amortization    195,048          181,778
                                                     -------------------------
                                                      312,220          338,735

Deferred compensation plan investments                 11,670            8,878

Other assets:
    Goodwill                                           11,513           11,513
    Intangible assets, net                             10,452           11,521
    Deferred income taxes                              16,228           13,171
    Other                                               5,347            2,424
                                                     -------------------------
                                                       43,540           38,629
                                                     -------------------------
Total assets                                         $488,495         $473,313
                                                     =========================

                                       F-2






                                                                       December 30,    December 31,
                                                                          2003            2002
                                                                       ----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                     $  12,166      $  13,378
    Sales tax payable                                                        3,018          2,706
    Accrued payroll                                                          8,118         10,851
    Real estate taxes                                                        2,380          2,407
    Gift certificates                                                        9,207          8,562
    Income taxes payable                                                     7,017           --
    Other                                                                    7,215          4,592
                                                                       ----------------------------
Total current liabilities                                                   49,121         42,496

Long-term liabilities, principally deferred
   compensation obligations                                                 18,275         11,058

Stockholders' equity:
    Preferred stock, $.01 par value, 2,000,000 shares
      authorized; none issued                                                 --             --
    Common stock, $.01 par value, 98,000,000 shares
      authorized; 21,072,790 shares issued and
      outstanding (20,994,608 in 2002)                                         211            210
    Additional paid-in capital                                             177,844        189,908
    Retained earnings                                                      246,707        241,601
    Common stock held by trust                                              (3,663)          --
    Accumulated other comprehensive loss                                      --          (11,960)
                                                                       ----------------------------
Total stockholders' equity                                                 421,099        419,759

                                                                       ----------------------------
Total liabilities and stockholders' equity                               $ 488,495      $ 473,313
                                                                       ============================

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                      F-3





                       Lone Star Steakhouse & Saloon, Inc.

                        Consolidated Statements of Income
                  (In Thousands, Except for Per Share Amounts)

                                                                         For the Year Ended
                                                             --------------------------------------------
                                                             December 30,    December 31,   December 25,
                                                                2003            2003           2001
                                                             --------------------------------------------

Net sales                                                     $ 591,401      $ 593,617      $ 571,115

Costs and expenses:
    Costs of sales                                              212,593        194,183        195,707
    Restaurant operating expenses                               274,388        265,730        264,758
    Depreciation and amortization                                20,817         24,452         25,876
    Provision for impaired assets and restaurant closings          --              792            565
                                                             -----------------------------------------
Restaurant costs and expenses                                   507,798        485,157        486,906
                                                             -----------------------------------------

Restaurant operating income                                      83,603        108,460         84,209

General and administrative expenses                              43,346         45,085         41,884
Abandoned merger expenses                                          --            2,990           --
Non-cash stock compensation expense                               1,474          2,949          3,212
Contribution - "Dine for America"                                  --             --            2,124
                                                             -----------------------------------------
Income from operations                                           38,783         57,436         36,989

Other income, net                                                   553          2,986          4,906
                                                             -----------------------------------------
Income from continuing operations before income
    taxes and cumulative effect of accounting changes            39,336         60,422         41,895

Provision for income taxes                                      (12,013)       (20,040)       (14,703)
                                                             -----------------------------------------
Income from continuing operations before
    cumulative effect of accounting change                       27,323         40,382         27,192

Discontinued operations:
    Loss from operations of discontinued restaurants            (10,774)        (1,322)        (6,644)
    Income tax benefit                                            2,117            467          2,354
                                                             -----------------------------------------
Loss on discontinued operations                                  (8,657)          (855)        (4,290)
                                                             -----------------------------------------
Income before cumulative effect of accounting change             18,666         39,527         22,902
Cumulative effect of accounting change, net of tax                 --             (318)          --
                                                             -----------------------------------------
Net income                                                    $  18,666      $  39,209      $  22,902
                                                             =========================================

                                      F-4





                       Lone Star Steakhouse & Saloon, Inc.

                  Consolidated Statements of Income (continued)
                  (In Thousands, Except for Per Share Amounts)

                                                        For the Year Ended
                                             -----------------------------------------
                                             December 30,  December 31,   December 25,
                                                2003          2002           2001
                                             -----------------------------------------

Basic earnings per share:
    Continuing operations                      $   1.31     $   1.76       $   1.13
    Discontinued operations                        (.41)        (.03)          (.18)
    Cumulative effect of accounting change           --         (.02)            --
                                               ------------------------------------
Basic earnings per share                       $    .90     $   1.71       $    .95
                                               ====================================

Diluted earnings per share:
    Continuing operations                      $   1.15     $   1.53       $   1.07
    Discontinued operations                        (.36)        (.03)          (.17)
    Cumulative effect of accounting change           --         (.01)            --
                                               ------------------------------------
Diluted earnings per share                     $    .79     $   1.49       $    .90
                                               ====================================

See notes to consolidated financial statements.

                                      F-5





                       Lone Star Steakhouse & Saloon, Inc.

                 Consolidated Statements of Stockholders' Equity
                      (In Thousands, Except Share Amounts)


                                                                                          Additional
                                                 Preferred         Common Stock             Paid-In       Retained
                                                   Stock       Number        Amount         Capital       Earnings
                                                ------------------------------------------------------------------------

Balance, December 26, 2000                            --     24,275,619    $       243    $   272,523    $   205,228
Stock options exercised                               --        242,838              2          2,022           --
Tax benefit related to options exercised              --           --             --              152           --
Common stock purchased and retired                    --       (468,687)            (5)        (5,140)          --
Cash dividends ($.50 per share)                       --           --             --             --          (12,019)
Redemption of preference rights                       --           --             --             (242)          --
Non-cash stock compensation expense                   --           --             --            3,212           --
Comprehensive income:
    Net income                                        --           --             --             --           22,902
    Foreign currency translation adjustments          --           --             --             --             --

Comprehensive income
                                                ------------------------------------------------------------------------
Balance, December 25, 2001                            --     24,049,770            240        272,527        216,111
Stock options exercised                               --      2,058,838             21         23,530           --
Tax provision related to options exercised            --           --             --             (474)          --
Common stock purchased and retired                    --     (5,114,000)           (51)      (108,624)          --
Cash dividends ($.60 per share)                       --           --             --             --          (13,719)
Non-cash stock compensation expense                   --           --             --            2,949           --
Comprehensive income:
    Net income                                        --           --             --             --           39,209
    Foreign currency translation adjustments          --           --             --             --             --

Comprehensive income
                                                ------------------------------------------------------------------------
Balance, December 31, 2002                            --     20,994,608            210        189,908        241,601
Stock options exercised                               --      1,210,682             12         10,232           --
Tax benefit related to options exercised              --           --             --              483           --
Common stock purchased and retired                    --     (1,132,500)           (11)       (23,822)          --
Cash dividends ($.645 per share)                      --           --             --             --          (13,560)
Non-cash stock compensation expense                   --           --             --            1,043           --
Common stock held by trust (177,145 shares)           --           --             --             --             --
Comprehensive income:
    Net income                                        --           --             --             --           18,666
    Foreign currency translation adjustments          --           --             --             --             --

Comprehensive income
                                                ------------------------------------------------------------------------
Balance, December 30, 2003                            --     21,072,790    $       211    $   177,844    $   246,707
                                                ========================================================================


                                                                   Accumulated
                                                      Common          Other
                                                       Stock       Comprehensive
                                                    Held By Trust  (Loss) Income     Total
                                                -------------------------------------------

Balance, December 26, 2000                        $      --      $   (11,859)   $   466,135
Stock options exercised                                  --             --            2,024
Tax benefit related to options exercised                 --             --              152
Common stock purchased and retired                       --             --           (5,145)
Cash dividends ($.50 per share)                          --             --          (12,019)
Redemption of preference rights                          --             --             (242)
Non-cash stock compensation expense                      --             --            3,212
Comprehensive income:
    Net income                                           --             --           22,902
    Foreign currency translation adjustments             --           (1,584)        (1,584)
                                                                                -----------
Comprehensive income                                                                 21,318
                                                -------------------------------------------
Balance, December 25, 2001                               --          (13,443)       475,435
Stock options exercised                                  --             --           23,551
Tax provision related to options exercised               --             --             (474)
Common stock purchased and retired                       --             --         (108,675)
Cash dividends ($.60 per share)                          --             --          (13,719)
Non-cash stock compensation expense                      --             --            2,949
Comprehensive income:
    Net income                                           --             --           39,209
    Foreign currency translation adjustments             --            1,483          1,483
                                                                                -----------
Comprehensive income                                                                 40,692
                                                -------------------------------------------
Balance, December 31, 2002                               --          (11,960)       419,759
Stock options exercised                                  --             --           10,244
Tax benefit related to options exercised                 --             --              483
Common stock purchased and retired                       --             --          (23,833)
Cash dividends ($.645 per share)                         --             --          (13,560)
Non-cash stock compensation expense                      --             --            1,043
Common stock held by trust (177,145 shares)            (3,663)          --           (3,663)
Comprehensive income:
    Net income                                           --             --           18,666
    Foreign currency translation adjustments             --           11,960         11,960
                                                                                -----------
Comprehensive income                                                                 30,626
                                                -------------------------------------------
Balance, December 30, 2003                        $    (3,663)   $      --      $   421,099
                                                ===========================================

See notes to consolidated financial statements.

                                      F-6





                       Lone Star Steakhouse & Saloon, Inc.

                      Consolidated Statements of Cash Flows
                                 (In Thousands)

                                                                              For the Year Ended
                                                                   ----------------------------------------
                                                                   December 30, December 31,  December 25,
                                                                       2003         2002          2001
                                                                   ---------------------------------------
Operating activities
Net income                                                          $  18,666    $  39,209    $  22,902
Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation                                                     22,879       27,076       27,012
      Amortization                                                      1,047        1,047        2,622
      Non-cash stock compensation                                       1,474        2,949        3,212
      Provision for impaired assets and restaurant
         closings                                                        --            250          565
      (Gain) loss on sales of assets                                       42       (1,971)      (3,038)
      Cumulative effect of accounting change                             --            508         --
      Deferred income taxes                                            (5,070)      16,812          108
      Loss from discontinued operations                                 8,657          855        4,290
      Net change in operating assets and liabilities:
         Inventories                                                     (490)         103          206
         Other current assets                                            (505)        (718)      (2,057)
         Accounts payable                                              (1,212)        (432)         442
         Income taxes payable                                           7,017      (11,541)      10,485
         Other liabilities                                              1,633          645       (4,514)
                                                                   -------------------------------------
Net cash provided by operating activities of continuing
         operations                                                    54,138       74,792       62,235

Investing activities
Purchases of property and equipment                                    (6,928)      (2,776)      (3,924)
Proceeds from sales of assets                                           1,730        7,879       10,098
Other                                                                  (2,908)         137         (334)
                                                                   -------------------------------------
Net cash provided by (used in) investing activities of continuing
         operations                                                    (8,106)       5,240        5,840

Financing activities
Net proceeds from issuance of common stock                             10,244       23,551        2,024
Common stock repurchased and retired                                  (23,833)    (108,675)      (5,145)
Dividends paid                                                        (13,560)     (13,719)     (12,019)
Redemption of preference rights                                          --           --           (242)
                                                                   -------------------------------------
Net cash used in financing activities of continuing
         operations                                                   (27,149)     (98,843)     (15,382)

Effect of exchange rate changes on cash                                 1,486          363            4
Net cash provided by discontinued operations                           10,492          898        1,193
                                                                   -------------------------------------
Net increase (decrease) in cash and cash equivalents                   30,861      (17,550)      53,890

Cash and cash equivalents at beginning of year                         65,369       82,919       29,029
                                                                   -------------------------------------
Cash and cash equivalents at end of year                            $  96,230    $  65,369    $  82,919
                                                                   =====================================

Supplemental disclosure of cash flow information
Cash paid for income taxes                                          $   6,875    $  15,175    $   1,755
                                                                   =====================================

Shares issued to trust                                              $   3,663    $    --      $    --
                                                                   =====================================

See notes to consolidated financial statements.

                                      F-7





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

                                December 30, 2003

1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES

BACKGROUND

Lone Star  Steakhouse & Saloon,  Inc. (the Company) owns and operates a chain of
mid-priced  full service,  casual dining  restaurants in the United States.  The
restaurants serve  mesquite-grilled  steaks, ribs, chicken, and fish in a "Texas
Roadhouse"  atmosphere  that  is  positioned  to  attract  local  clientele.  In
addition,  the Company  operates  restaurants in the upscale  steakhouse  market
through Del Frisco's Double Eagle Steak House and Sullivan's  Steakhouse.  As of
December  30, 2003,  the Company  owns and  operates 249 Lone Star  Steakhouse &
Saloons in the United  States.  In addition,  the Company owns and operates five
Del Frisco's  Double  Eagle Steak  Houses,  15  Sullivan's  Steakhouses  and one
Frankie's Italian Grille.

SIGNIFICANT ACCOUNTING POLICIES

   o  Principles of Consolidation

      The consolidated  financial  statements  include the accounts of Lone Star
      Steakhouse  &  Saloon,  Inc.  and  its  wholly  owned  subsidiaries.   All
      significant intercompany accounts and transactions have been eliminated.

   o  Foreign Currency Translation

      Assets and  liabilities of the Company's  foreign  operations in Australia
      are translated at current  exchange rates,  while revenue and expenses are
      translated at average exchange rates prevailing  during the year. Prior to
      December 30, 2003, translation adjustments were reported as a component of
      comprehensive income in stockholders' equity;  however, as a result of the
      Company's  divestiture  of its  Australia  operations  in fiscal 2003,  as
      described in Note 12, the foreign  currency  translation  adjustments were
      realized  and  are  included  as a  component  of loss  from  discontinued
      operations.

                                      F-8





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

   o  Concentration of Credit Risk

      The Company's  financial  instruments  exposed to  concentration of credit
      risk  consist   primarily  of  cash  and  short-term   investments   (cash
      equivalents).  The  Company  places  its cash  with  high  credit  quality
      financial  institutions  and, at times,  such cash may be in excess of the
      federal  depository  insurance  limit. The Company has cash equivalents of
      approximately  $73,014 and $47,293 at December  30, 2003 and  December 31,
      2002, respectively,  in investment grade securities with municipal, state,
      and U.S. government agencies.

   o  Use of Estimates

      The  preparation of consolidated  financial  statements in conformity with
      accounting  principles  generally  accepted in the United States  requires
      management  to make  estimates  and  assumptions  that  affect the amounts
      reported in the consolidated  financial statements and accompanying notes.
      Actual results could differ from those estimates.

   o  Cash and Cash Equivalents

      The Company  considers cash and cash  equivalents  to include  currency on
      hand,  demand  deposits with banks or other  financial  institutions,  and
      short-term  investments  with  maturities  of three  months  or less  when
      purchased.   Cash  and  cash   equivalents   are  carried  at  cost  which
      approximates fair value.

   o  Financial Instruments

      The  Company  considers  carrying  amounts  of cash and cash  equivalents,
      receivables, and accounts payable to approximate fair value.

      The Company sometimes  utilizes  derivative  financial  instruments in the
      form of commodity  futures contracts to manage market risks and reduce its
      exposure  resulting from  fluctuations  in the prices of meat. The Company
      uses live beef cattle  futures  contracts  to  accomplish  its  objective.
      Realized  and  unrealized  changes  in the fair  values of the  derivative
      instruments  are  recognized  in income in the  period in which the change
      occurs. Realized and unrealized gains and losses related to these

                                      F-9





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      derivative instruments have not been significant. The Company held no live
      beef cattle  futures  contracts at December 30, 2003 or December 31, 2002.
      These  instruments  are  with   counterparties  of  high  credit  quality;
      therefore,  the risk of nonperformance by the counterparties is considered
      to be negligible.

   o  Inventories

      Inventories  consist of food and  beverages and are stated at the lower of
      cost (first-in, first-out) or market.

   o  Property and Equipment

      Property  and  equipment  are stated at cost.  Maintenance,  repairs,  and
      renewals  which do not enhance  the value of or  increase  the life of the
      assets are expensed as incurred.

      Buildings are depreciated  using the  straight-line  method over 20 years,
      which is the estimated useful life of the assets.  Leasehold  improvements
      are amortized on the  straight-line  method over the lesser of the maximum
      life of the lease or 20 years or the estimated useful lives of the assets.
      Equipment   and  furniture   and  fixtures  are   depreciated   using  the
      straight-line  method over seven years, which is the estimated useful life
      of the assets.

   o  Preopening Costs

      Preopening  costs,  including  labor  costs,  costs of hiring and training
      personnel,  and certain other costs  relating to opening new  restaurants,
      are expensed when the costs are incurred.

   o  Intangible Assets

      Intangible assets include goodwill,  trademarks,  intellectual properties,
      and licensing  permits.  Effective  December 26, 2001, the Company adopted
      the provisions of Statement of Financial  Accounting  Standards (SFAS) No.
      142  requiring  that  goodwill  and  intangible   assets  deemed  to  have

                                      F-10





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      indefinite  lives no  longer  be  amortized,  but  subjected  to an annual
      impairment test or more frequent tests if indicators of impairment  exist.
      For those  intangibles  which continue to be subject to amortization,  the
      Company  amortizes on a straight-line  basis over the estimated periods of
      benefit, generally 10 to 20 years. See Note 2 for additional information.

   o  Deferred Compensation Plan

      In connection with the Company's  deferred  compensation plan, the Company
      has  created  a grantor  trust to which it  contributes  amounts  equal to
      employee  participants'  qualified  deferrals and the  Company's  matching
      portion.  The plan is informally funded using life insurance policies held
      by the grantor  trust.  All assets held by the  grantor  trust  remain the
      property of the Company; however, the Company does not currently intend to
      use  such  assets  for any  purpose  other  than to fund  payments  to the
      participants  pursuant to the terms of the deferred compensation plan. The
      assets of the plan consist  principally  of cash  surrender  values of the
      life insurance  policies.  Because the  investment  assets of the deferred
      compensation  plan are  assets of the  Company,  and would be  subject  to
      general claims by creditors in the event of the Company's insolvency,  the
      accompanying  consolidated  balance  sheets  reflect such  investments  as
      assets with an offsetting liability for deferred compensation reflected in
      long-term liabilities.

      During  fiscal  2002,  the  Company   adopted  a  Stock  Option   Deferred
      Compensation   Plan,   which  allows   certain  key  executives  to  defer
      compensation  arising from the exercise of stock  options.  See Note 3 for
      additional information.

   o  Impairment of Long-Lived Assets

      Property and  equipment  and definite  life  intangibles  are reviewed for
      impairment  whenever  events or  changes  in  circumstances  indicate  the
      carrying  amount of an asset may not be  recoverable.  The Company reviews
      applicable  intangible  assets  and  long-lived  assets  related  to  each
      restaurant on a periodic  basis.  When events or changes in  circumstances
      indicate an asset may not be recoverable, the Company estimates the future
      cash flows expected to result from the use of the asset. If the sum of the
      expected undiscounted future cash flows is less than the carrying value of
      the asset,  an  impairment  loss is  recognized.  The  impairment  loss is
      recognized by measuring the  difference  between the carrying value of the

                                      F-11





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      assets and the fair market value of the assets. The Company's estimates of
      fair values are based on the best  information  available  and require the
      use of estimates,  judgments, and projections as considered necessary. The
      actual results may vary significantly.

      As noted above,  goodwill and  indefinite  life  intangibles  are reviewed
      annually for  impairment,  or more  frequently if indicators of impairment
      exist.  Goodwill is tested by  comparing  net book value of the  reporting
      unit to its estimated fair value.  Indefinite life  intangibles are tested
      by comparing book value to estimated fair value.

   o  Self-Insurance Reserves

      During fiscal 2003, the Company  adopted  self-insurance  programs for its
      workers' compensation,  general liability,  and medical benefits programs.
      In order to minimize the exposure under the self-insurance  programs,  the
      Company has purchased  stop-loss  coverage both on a per occurrence and on
      an aggregate basis. The self-insured losses under the programs are accrued
      based on the  Company's  estimate of the ultimate  expected  liability for
      both  claims  incurred  and on an incurred  but not  reported  basis.  The
      establishment  of  such  accruals  for  self-insurance   involves  certain
      management  judgments and assumptions  regarding the frequency or severity
      of claims, the historical patterns of claim development, and the Company's
      experience with claim reserve management and settlement practices.  To the
      extent actual results may differ from the assumptions  used to develop the
      accrual  estimate  amounts,   such   unanticipated   changes  may  produce
      significantly  different amounts of expense than those estimated under the
      self-insurance programs.

   o  Advertising Costs

      Advertising  costs are expensed as incurred.  Advertising  expense for the
      years ended  December 30, 2003,  December 31, 2002,  and December 25, 2001
      was $15,033, $13,528, and $16,802, respectively.

   o  Accounting for Stock-Based Compensation

      At  December  30,  2003,   the  Company  has  two   stock-based   employee
      compensation  plans, which are described more fully in Note 6. The Company

                                      F-12





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      uses the fair value recognition provisions of SFAS No. 123, ACCOUNTING FOR
      STOCK-BASED  COMPENSATION,  for  stock-based  employee  compensation.  The
      Company values stock options issued based upon an option pricing model and
      recognizes  this value as an expense  over the period in which the options
      vest.

   o  Earnings Per Share

      Basic   earnings   per   share   amounts   are   computed   based  on  the
      weighted-average  number of shares actually  outstanding.  For purposes of
      diluted  computations,  average shares  outstanding  have been adjusted to
      reflect (1) the number of shares that would be issued from the exercise of
      stock  options,  reduced  by the  number of shares  which  could have been
      purchased  from the proceeds at the average  market price of the Company's
      stock or price of the Company's stock on the exercise date if options were
      exercised  during the period  presented  and (2) the number of shares that
      may be issuable to effect the settlement of certain deferred  compensation
      liabilities  pursuant to the Company's Stock Option Deferred  Compensation
      Plan.  The effect of shares  issuable to settle the deferred  compensation
      liabilities  has not been  included  for any periods as their effect would
      have been antidilutive.

   o  Recent Accounting Pronouncements

      In June  2002,  the  FASB  issued  SFAS  No.  146,  ACCOUNTING  FOR  COSTS
      ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES.  This statement requires that
      a liability  for a cost  associated  with an exit or disposal  activity be
      recognized only when the liability is incurred and measured at fair value.
      SFAS  No.  146 is  effective  for  exit or  disposal  activities  that are
      initiated  after December 31, 2002. The Company has applied the provisions
      of this  statement in connection  with such  activities  for  transactions
      entered into  subsequent to December 31, 2002. The application of SFAS No.
      146 did not have a material impact on the Company's consolidated financial
      statements.

   o  Fiscal Year

      The  Company  operates  on a 52- or 53-week  fiscal  year  ending the last
      Tuesday  in  December.  The fiscal  quarters  for the  Company  consist of
      accounting periods of 12, 12, 12, and 16 or 17 weeks, respectively. Fiscal
      2003 and 2001 each included 52 weeks of operations, while 2002 included 53
      weeks of operations.

                                      F-13





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

   o  Reclassifications

      Certain  amounts  from the prior years have been  reclassified  to conform
      with the current year's presentation.

2. INTANGIBLE ASSETS AND GOODWILL

                              Estimated Useful
                                  Lives           2003       2002
                              ------------------------------------

Amortized intangible assets:
  Gross carrying amount:
     Licenses                      20 years    $  3,229    $  3,285
     Intellectual properties       10 years       9,839       9,839
                                               --------------------
  Subtotal                                       13,068      13,124

Accumulated amortization:
  Licenses                                       (1,223)     (1,182)
  Intellectual property                          (5,018)     (4,068)
                                              ---------------------
Subtotal                                         (6,241)     (5,250)
                                              ---------------------
Net amortized intangible assets                $  6,827    $  7,874
                                              =====================

Unamortized intangible assets:
  Goodwill                                    $ 11,513     $ 11,513
  Licenses                                       3,449        3,471
  Other                                            176          176
                                              ---------------------
                                               $ 15,138    $ 15,160
                                              =====================

Aggregate amortization expense                 $  1,047    $  1,047
                                              =====================

Estimated amortization expense:
  For the fiscal year ended 2004                           $  1,047
  For the fiscal year ended 2005                              1,047
  For the fiscal year ended 2006                              1,047
  For the fiscal year ended 2007                              1,047
  For the fiscal year ended 2008                              1,047

                                      F-14





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

2.    INTANGIBLE ASSETS AND GOODWILL (CONTINUED)

      Certain liquor licenses are not subject to amortization,  as such licenses
      have  indefinite  lives and are  transferable  through open markets in the
      jurisdictions where the licenses were granted. These licenses are reviewed
      at  least  annually  for  impairment  by  comparing  their  book  value to
      estimated  market value.  The  estimated  market value is  established  by
      reference to recent market transactions.

      The Company  adopted the  provisions  of SFAS No. 142,  Goodwill and Other
      Intangible Assets,  effective as of the beginning of fiscal 2002. SFAS No.
      142 requires  that goodwill and certain  intangible  assets deemed to have
      indefinite lives are no longer to be amortized,  but are subject to annual
      impairment  tests.  In the first  quarter  of  fiscal  2002,  the  Company
      completed the  measurement  tests for  measurement of impairment  loss for
      both goodwill and indefinite lived intangible assets,  which resulted in a
      charge for the cumulative effect of an accounting change of $318, or $0.02
      per share,  net of income  taxes of $190,  to reflect  the  impairment  of
      certain goodwill related to Australian investments.  The pro forma effects
      of the  adoption  of SFAS No.  142 on net  income  and basic  and  diluted
      earnings per share are as follows:

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

Reported income before cumulative effect of
  accounting change                              $   18,666   $   39,527   $   22,902
Add back:
  Goodwill amortization, net of tax benefit            --           --            523
  Adjust amortization for indefinite lived
       intangibles, net of tax benefit                 --           --            400
                                                 ------------------------------------
Pro forma net income                             $   18,666   $   39,527   $   23,825
                                                 ====================================

Basic earnings per share:
  Earnings as reported before cumulative
        effect of accounting change              $      .90   $     1.73   $      .95
  Goodwill amortization, net tax benefit               --           --            .02
  Intangibles amortization, net of tax benefit         --           --            .02
                                                 ------------------------------------
Pro forma per share                              $      .90   $     1.73   $      .99
                                                 ====================================

Diluted earnings per share:
  Earnings as reported before cumulative
       effect of accounting change               $      .79   $     1.50   $      .90
  Goodwill amortization, net tax benefit               --           --            .02
  Intangibles amortization, net of tax benefit         --           --            .02
                                                 ------------------------------------
Pro forma per share                              $      .79   $     1.50   $      .94
                                                 ====================================

                                      F-15





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

2.    INTANGIBLE ASSETS AND GOODWILL (CONTINUED)

Excluding  the  impairment  for goodwill  recorded in fiscal 2002 related to the
change in accounting for adopting SFAS No. 142 as discussed above, there were no
changes in goodwill carrying amounts during 2002 or 2003.

3. COMMON STOCK TRANSACTIONS

In May 2002, the Company commenced a Modified Dutch Auction tender offer.  Under
the terms of the tender offer, the Company invited  shareholders to tender their
shares at prices specified by the tendering  shareholder at a purchase price not
in  excess of $22.50  nor less than  $20.50  per  share.  The  tender  offer was
completed in June 2002, and as a result, the Company purchased  4,000,000 shares
of its common  stock at a price of  $21.375  per share.  The  aggregate  cost to
repurchase  the shares was $86,301  including the cost of the tender offer.  The
transaction was financed from the Company's existing available cash.

The Board of Directors has from time to time  authorized the Company to purchase
shares  of the  Company's  common  stock  in the  open  market  or in  privately
negotiated  transactions.  Excluding the  4,000,000  shares  repurchased  in the
tender offer in fiscal 2002 as previously  described,  the Company has purchased
1,132,500,  1,114,000,  and 468,687 shares of its common stock at average prices
of $21.05,  $20.08,  and $10.98 per share  during the fiscal  years  ended 2003,
2002,  and 2001,  respectively.  The Company is accounting  for the  repurchases
using the constructive retirement method of accounting wherein the aggregate par
value of the stock is charged to the common stock account and the excess of cost
over par value is charged to additional paid-in capital.

In September 2002, the Company adopted a Stock Option Deferred Compensation Plan
(the Plan),  which allows certain key executives to defer  compensation  arising
from the exercise of stock options  granted under the Company's  1992  Incentive
and  Nonqualified  Stock Option Plan.  During 2003,  the Company  issued 300,000
shares of its common  stock to effect  the  exercise  of such  stock  options in
exchange for 122,855  shares of the  Company's  common stock as payment for such
shares.  The 122,855 shares  received by the Company were canceled.  The Company
issued  122,855  shares to the optionee and,  pursuant to the terms of the Plan,
the Company  issued  177,145  shares to a Rabbi  trust (the Trust) with  Intrust
Bank,  NA serving as the trustee.  The Trust holds the shares for the benefit of
the  participating  employees  (Participants).  Under  the  terms  of the  Plan,
Participants may elect to change the Plan's  investments from time to time which
may result in the sale of the  shares.  Since the  shares  held by the Trust are

                                      F-16





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

3. COMMON STOCK TRANSACTIONS (CONTINUED)

held pursuant to a deferred  compensation  arrangement whereby amounts earned by
an employee  are  invested in the stock of the employer and placed in the Trust,
the Company  accounts for the  arrangement  as required by Emerging  Issues Task
Force (EITF) consensus on Issue No. 97-14,  Accounting for Deferred Compensation
Arrangements  Where Amounts  Earned are Held in a Rabbi Trust and Invested (EITF
No. 97-14). Accordingly, shares issued to the Trust were recorded at fair market
value at the date  issued  by the  Company  in the  amount of  $3,663,  which is
reflected in the accompanying  consolidated  balance sheets as common stock held
by trust.  The  corresponding  amount  was  credited  to  deferred  compensation
obligations.  Each  period,  the  shares  owned by the Trust  are  valued at the
closing market price, with corresponding  changes in the underlying shares being
reflected as  adjustments  to  compensation  expense and  deferred  compensation
obligations.  At  December  30,  2003,  the  Trust  held  177,145  shares of the
Company's common stock. Included in non-cash stock compensation expense for year
ended  December 30, 2003 was a charge of $431  relating to the changes in market
price for such shares.

4. TERM REVOLVERS

The Company has a credit  facility,  pursuant to an unsecured  revolving  credit
agreement with a group of banks led by SunTrust Bank. The credit facility allows
the Company to borrow up to $50,000. The commitment terminates at June 30, 2004;
however,  it is subject to  acceleration  in the event of a change of control of
the Company,  as that term is defined in the revolving credit agreement.  At the
time of each  borrowing,  the  Company  may elect to pay  interest at either the
bank's  published  prime rate or a rate  determined by reference to the Adjusted
LIBOR rate. The Company is required to achieve certain  financial  ratios and to
maintain  certain net worth amounts as defined in the agreement.  The Company is
required to pay on a quarterly  basis a facility fee equal to 0.25% per annum on
the daily  unused  amount of the  credit  facility.  At  December  30,  2003 and
December 31, 2002, there were no borrowings  outstanding  pursuant to the credit
facility.

The Company also has entered into a $5,000  revolving term loan agreement with a
bank,  under  which no  borrowings  were  outstanding  at  December  30, 2003 or
December  31,  2002.  The loan  commitment  matures in August 2004 and  required
interest only payments through April 2003, at which time the loan converted to a
term note with monthly  principal and interest  payments  sufficient to amortize
the loan over its remaining  term. The interest rate is at 0.50% below the daily
prime rate as published in the "Wall Street Journal".  In addition,  the Company
pays a facility fee of 0.25% per annum on the daily unused portion of the credit
facility.

                                      F-17





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

5. PREFERRED STOCK AND REDEMPTION OF PREFERENCE RIGHTS

The  Company's  Board of  Directors  has the  authority to issue up to 2,000,000
shares  of  preferred  stock  in one or  more  series  and  to fix  the  rights,
preferences,  privileges,  and restrictions thereof,  including dividend rights,
conversion rights, voting rights, terms of redemption,  liquidation  preference,
and the numbers of shares  constituting  any series or the  designation  of such
series.

In 1997, the Company  issued,  in the form of a dividend,  one preference  share
purchase  right (the  Right and,  collectively,  the  Rights)  for each share of
Company common stock outstanding on October 10, 1997. Each Right represented the
right to purchase  one-hundredth of a preference share, upon the terms set forth
in the rights  agreement  dated October 3, 1997. On November 15, 2001, the Board
of Directors  pursuant to the provisions of the rights agreement,  exercised its
option to redeem all of the outstanding Rights at a redemption price of $.01 per
Right, and the Rights were redeemed on December 10, 2001.

6. STOCK OPTIONS

As  previously  described  in Note  1,  the  Company  accounts  for  stock-based
compensation  following the provisions of SFAS No. 123 which  establishes a fair
value-based method of accounting for stock-based compensation.  Pursuant to SFAS
No. 123,  the fair value of stock  options are  determined  at the date of grant
under the Company's stock option plans and are charged to  compensation  expense
over the vesting period of the options.

The  aggregate   non-cash  stock   compensation   expense,   including   amounts
attributable to non-cash stock compensation  arising from the common shares held
by the Rabbi  Trust as  described  in Note 3, for the years ended  December  30,
2003,  December 31, 2002, and December 25, 2001 was $1,474,  $2,949, and $3,212,
respectively.

The fair value for those options  granted during the fiscal years presented were
estimated at the date of grant using a  Black-Scholes  option pricing model with
the  following  weighted-average  assumptions  for 2002 and 2001,  respectively:
risk-free  interest rates of 3.1% and 4.1%;  volatility  factors of the expected
market  price of the  Company's  common  stock of 0.506 and  0.503;  a  weighted
average  expected  life of the option  ranging  from four to five  years;  and a
dividend yield of 3%. There were no stock options granted in fiscal 2003.

                                      F-18





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

6. STOCK OPTIONS (CONTINUED)

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

    Weighted-average fair value of options
     granted during the year                       $  -         $5.45       $3.95

   o  1992 Stock Option Plan

      In January  1992,  the Board of Directors  adopted the 1992  Incentive and
      Non-Qualified  Stock  Option Plan (the Plan),  last  amended in June 1996,
      providing for incentive and nonqualified stock options,  pursuant to which
      up to  10,000,000  shares of  common  stock are  available  for  issuance.
      Options granted under this Plan vest in periods ranging from three to five
      years in equal annual installments commencing from the date of grant.

   o  Directors Stock Option Plan

      In January  1992,  the Board of  Directors  adopted a stock option plan as
      amended June 9, 2000, providing for nondiscretionary grants to nonemployee
      directors,  pursuant  to which up to  700,000  shares of common  stock are
      available for issuance.  All options granted under this plan have ten-year
      terms and vest equally over a three-year  period  commencing from the date
      of grant.

Both of the above plans expired in January 2002,  and the Company  currently has
no other  stock  option  plans in  effect  for  employees,  including  executive
officers, or for directors.

A summary of the Company's stock option activity and related information for the
years ended  December 30, 2003,  December 31, 2002,  and December 25, 2001 is as
follows:

                                           2003                   2002                     2001
                                   --------------------------------------------------------------------
                                    Weighted              Weighted                 Weighted-
                                     Average               Average                  Average
                                    Exercise  Options     Exercise   Options       Exercise    Options
                                      Price    (000)        Price     (000)          Price      (000)
                                   --------------------------------------------------------------------

Outstanding at beginning of year   $   8.98     5,867       $ 9.67     7,919         $ 9.57      7,827
Granted                                 --       --          14.80        48          10.44        461
Exercised                              9.58    (1,334)       11.44    (2,059)          8.33       (243)
Canceled                               9.84       (14)       12.71       (41)          9.09       (126)
                                               ------                 ------                    ------
Outstanding at end of year         $   8.98     4,519       $ 8.98     5,867         $ 9.67      7,919
                                               ======                 ======                    ======

                                      F-19





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

6. STOCK OPTIONS (CONTINUED)

For  options  outstanding  as of  December  30,  2003,  the  number of  options,
weighted-average  exercise price, and  weighted-average  remaining contract life
for each group of options are as follows:

                             Options Outstanding
   ------------------------------------------------------------------------------
                                    Number            Weighted-      Weighted-
                                Outstanding at        Average         Average
                                  December 30,        Exercise       Remaining
   Range of Prices                    2003              Price       Contract Life
   ------------------------------------------------------------------------------

   $6.69 to $9.38                  4,238,890          $ 8.51         3.17 years
   $14.30 to $18.81                  279,813          $16.19         5.88 years

The number of shares and weighted-average  exercise price of options exercisable
at December 30, 2003 are as follows:

                             Options Exercisable
   -----------------------------------------------------------------------------
                                                         Number        Weighted-
                                                     Exercisable at     Average
                                                      December 30,     Exercise
   Range of Prices                                        2003           Price
   -----------------------------------------------------------------------------

   $6.69 to $9.38                                      4,176,305      $ 8.51
   $14.30 to $18.81                                      226,218      $16.60

7.   RELATED-PARTY TRANSACTIONS

The Company  leases on a  month-to-month  basis  parking lot space and  document
storage  space and,  prior to April 1, 2001,  meeting room space,  from entities
owned by Jamie B. Coulter,  the Company's Chief Executive Officer.  Total rental
fees paid to these related  entities in 2003,  2002, and 2001 were $26, $27, and
$37, respectively. In addition, in 2002 and 2001, the Company purchased business
gifts and awards from a retail store owned by Jamie B. Coulter  totaling $2, and
$2, respectively.

The Company  believes  the charges  reimbursed  are at least as favorable as the
charges  that would have been  incurred for similar  services or purchases  from
unaffiliated third parties.

                                      F-21





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

7.   RELATED-PARTY TRANSACTIONS (CONTINUED)

During  2002,  one  of  the  Company's  directors  received  a fee  of  $250  in
consideration  of  providing  certain  services  in  connection  with a proposed
transaction between the Company and Bruckmann,  Rosser, Sherrill & Co., Inc. See
Note 14 for more information regarding the proposed transaction.

8.  LEASES

The Company leases  certain  facilities  under  noncancelable  operating  leases
having terms expiring  between 2004 and 2025. The leases have renewal clauses of
5 to 20 years,  which are exercisable at the option of the lessee.  In addition,
certain leases contain escalation  clauses based on a fixed percentage  increase
and provisions for contingent  rentals based on a percentage of gross  revenues,
as defined. Total rental expense for the fiscal years ended 2003, 2002, and 2001
was $11,631, $11,388, and $11,321, respectively, including contingent rentals of
approximately $832, $751, and $444, respectively.

Lease payments under  noncancelable  operating  leases for each of the next five
years and in the aggregate are as follows at December 30, 2003:

                                                Operating
                                                 Leases
                                                -------

    2004                                        $10,312
    2005                                          8,137
    2006                                          5,777
    2007                                          3,969
    2008                                          2,693
    Thereafter                                    4,339
                                                -------
    Total minimum lease payments                $35,227
                                                =======

                                      F-22





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

9.   EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

                                                         2003               2002             2001
                                                      -----------------------------------------------
    Numerator:
      Numerator for basic and diluted
         earnings per share - income available
         to common stockholders                       $    18,666        $    39,209     $    22,902
                                                      ==============================================

    Denominator:
      Denominator for basic earnings per
        share - weighted-average shares               20,801,894          22,908,821      24,036,942
      Effect of dilutive employee stock options        2,961,703           3,400,961       1,336,391
                                                      ----------------------------------------------
    Denominator for diluted earnings per
        share - adjusted weighted-average
        shares                                        23,763,597          26,309,782      25,373,333
                                                      ==============================================

    Basic earnings per share                          $      .90        $       1.71     $      0.95
                                                      ==============================================

    Diluted earnings per share                        $      .79        $       1.49     $      0.90
                                                      ==============================================

10. INCOME TAXES

The components of the provision for income taxes consist of the following:

                                                         2003                2002                       2001
                                                      -------------------------------------------------------
    Current tax expense:
      Federal                                         $13,229           $       949                   $10,512
      State                                             1,737                 1,622                     1,729
                                                     --------------------------------------------------------
    Total current                                      14,966                 2,571                    12,241

    Deferred tax expense (benefit):
      Federal                                          (4,885)               16,642                      (387)
      Foreign                                               -                        -                    536
      State                                              (185)                  170                       (41)
                                                     --------------------------------------------------------
    Total deferred expense (benefit)                   (5,070)               16,812                       108
                                                     --------------------------------------------------------
    Total provision for income taxes                 $  9,896               $19,383                   $12,349
                                                     ========================================================

                                      F-23





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

10. INCOME TAXES (CONTINUED)

The  difference  between  the  reported  provision  for  income  taxes and taxes
determined by applying the applicable U.S. federal  statutory income tax rate to
income before taxes is reconciled as follows:

                                                       2003                    2002                     2001
                                              ------------------------------------------------------------------------
                                                Amount        Rate      Amount         Rate      Amount         Rate
                                              ------------------------------------------------------------------------
Income tax expense at federal statutory rate   $  9,997          35%    $ 20,507          35%    $ 12,338          35%
State tax expense, net                              640           2        1,113           2        1,207           3
Nondeductible foreign losses                      1,239           4         --          --           --          --
Tax benefit from foreign stock deduction           --          --         (8,128)        (14)        --          --
Opportunity credits                              (2,479)         (9)      (2,209)         (4)      (2,160)         (6)
Valuation allowance                                --          --          7,411          13         --          --
Other items, net                                    499           2          689           1          964           3
                                             ------------------------------------------------------------------------
Actual provision for income taxes              $  9,896          34%    $ 19,383          33%    $ 12,349          35%
                                            ==========================================================================

Deferred income taxes reflect the net effects of temporary  differences  between
the carrying amounts of assets and liabilities for financial  reporting purposes
and amounts used for income tax purposes.

Significant  components  of deferred tax  liabilities  and assets are  presented
below:
                                         December 30,         December 31,
                                             2003                  2002
                                         ---------------------------------
Deferred tax assets:
  Foreign NOL carryforward                   $   --              $ 11,250
  Accrued liabilities                           4,327               1,406
  Stock-based compensation                     20,582              22,536
  Deferred compensation                         4,775               3,291
  Other                                         2,080               1,966
                                            -----------------------------
                                               31,764              40,449
Valuation allowance                              --               (11,250)
                                            -----------------------------
Total deferred tax assets                      31,764              29,199

Deferred tax liabilities:
  Property and equipment                        4,008               5,764
  Basis differences in foreign investments      3,575               5,760
  Intangible assets                             2,220               1,349
  Other                                           582                  17
                                            -----------------------------
Total deferred tax liabilities                 10,385              12,890
                                            -----------------------------
Net deferred tax assets                      $ 21,379            $ 16,309
                                            =============================

                                      F-24





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

10. INCOME TAXES (CONTINUED)

In prior years,  the Company  reported the tax benefits  associated with its net
operating loss (NOL)  carryforwards  related to its  Australian  operations as a
deferred  tax asset  which was  offset in full by a  valuation  allowance.  As a
result of the Company's decision to divest its Australian  operations during the
year  ended  December  30,  2003,  the  Company  has  determined  that  such NOL
carryforwards  will not be realized and accordingly has reduced the deferred tax
asset and  valuation  allowance by the amount of deferred  tax asset  previously
recognized.

11. PROVISION FOR IMPAIRED ASSETS AND RESTAURANT CLOSINGS

The  Company  periodically  reviews its  long-lived  assets for  indications  of
impairment.  Based on  those  reviews,  the  trends  of  operations  of  certain
restaurants indicated the undiscounted cash flows from their operations would be
less than the carrying value of the long-lived  assets of the restaurants.  As a
result, the carrying values were written down to the Company's estimates of fair
value. Fair value was estimated  utilizing the best information  available using
estimates, judgments, and projections considered necessary.

During 2002, the Company recorded a provision  related to continuing  operations
of $250  for the  write-down  to  estimated  fair  value  of an  underperforming
domestic restaurant.  In addition,  the Company recorded a provision of $542 for
certain costs associated with certain restaurants closed in previous years.

During 2001, the Company recorded a provision  related to continuing  operations
of $287 for the write-down to estimated fair value of impaired property,  plant,
and  equipment.  In  addition,  a charge  of $278  was  recorded  to  continuing
operations  for  severance,  rents,  and  certain  other costs  associated  with
restaurant closings.

To the extent there are "assets  held for  disposal"  recorded in the  Company's
consolidated balance sheets, such amounts are included in property and equipment
at the lower of cost or fair market  value less  estimated  selling  costs.  The
remaining  carrying value of the related assets is not significant.  Fiscal 2001
results  included net sales of $611 for all closed  restaurants in the Company's
continuing  operating  results  and  related  operating  losses  of  $112 at the
restaurant level.

                                      F-25





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

12. DISCONTINUED OPERATIONS

In December of fiscal 2003, the Company  announced its plan to divest all of its
Australian  operations.  Over the past few years,  the Company  has  experienced
operating losses in Australia and had closed over 20 restaurants. As a result of
the   underperforming   Australian   operations,   the  Company  determined  the
divestiture  and  discontinuance  of its  Australian  operations was in its best
interests.  On December 29, 2003, the Company closed six of the  restaurants and
on December 30, 2003 the Company completed the sale of its remaining  Australian
operations  to  an  investor  group  consisting  of  former  management  of  the
Australian  operations.  Pursuant to the terms of the sale, the Company received
approximately  $3,150 in cash and  $2,750 in notes  secured by real  estate.  In
connection  with its exit  activities  from  Australia,  the Company  incurred a
pretax loss of approximately  $12,000,  including  impairment  losses related to
assets either sold or held for sale of $3,600, termination costs associated with
employees and certain lease obligations of $1,000,  and losses of $7,400 related
to the realization of its cumulative foreign currency  translation  adjustments.
All of the losses incurred are included in discontinued operations.  The Company
will account for its remaining  exit costs in accordance  with the provisions of
SFAS No. 146, Accounting for Costs Associated With Exit or Disposal  Activities,
which  requires  that  such  costs be  expensed  in the  period  such  costs are
incurred.   The  Company  believes  that  such  additional  costs  will  not  be
significant.

As described in Note 1 to the  consolidated  financial  statements,  the Company
accounts for its closed  restaurants  in accordance  with the provisions of SFAS
No. 144.  Therefore,  when a restaurant  is closed and the  restaurant is either
held for sale or abandoned,  the restaurant's operations are eliminated from the
ongoing  operations.  Accordingly,  the operations of such  restaurants,  net of
applicable  income taxes,  are presented as  discontinued  operations  and prior
period  consolidated  financial  statements  are  reclassified.  The table below
reflects as discontinued  operations the applicable  operations of the Company's
Australian  business and certain other  restaurants  closed subsequent to fiscal
2001 which meet the criteria for such presentation.

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

    Loss from operations               $(10,774)        $ (1,322)          $ (6,644)
    Income tax benefit                    2,117              467              2,354
                                       ---------------------------------------------
    Net loss from discontinued
       operations                      $(8,657)         $  (855)           $ (4,290)
                                       =============================================

    Net sales from discontinued
      operations                       $25,631          $24,460            $26,902
                                       =============================================

                                      F-26





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

13. RETIREMENT PLANS

In August 1999,  the Company  approved  the adoption of two plans which  provide
retirement benefits to the participants. The salary reduction plans are provided
through a qualified 401(k) plan and a nonqualified  deferred  compensation  plan
(the Plans).  Under the Plans,  employees who meet minimum service  requirements
and elect to  participate  may make  contributions  of up to 15% of their annual
salaries  under the 401(k)  plan and up to 80% under the  deferred  compensation
plan.  The Company may make  additional  contributions  at the discretion of the
Board of Directors.  The Plans were  effective  beginning  October 7, 1999,  and
during 2003,  2002,  and 2001,  the  Company's  contributions  to the Plans were
$2,146, $1,984, and $1,978, respectively.

14. ABANDONED MERGER EXPENSES

On May  4,  2002,  the  nonbinding  Letter  of  Intent  previously  signed  with
Bruckmann,  Rosser, Sherrill & Co., Inc. (BRS) with respect to the proposed sale
and  merger  of the  Company  expired,  as the  Company  and BRS were  unable to
complete a  definitive  agreement.  The direct  costs  incurred  by the  Company
associated with the proposed  merger,  primarily  consisting of fees paid to the
Company's  investment  advisors  and legal  counsel,  as well as  certain  costs
reimbursed  by the Company to BRS in connection  with its due diligence  efforts
pursuant  to the terms of the  Letter of  Intent,  were  expensed  and have been
included in the accompanying consolidated statements of income under the caption
abandoned merger expenses.

15. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED)

The table  below set forth  consolidated  quarterly  results of  operations  for
fiscal 2003 and 2002.  The results  have been  adjusted to reflect the impact of
certain discontinued operations to the extent such amounts were reclassified.

                                           First        Second         Third        Fourth
                                           Quarter      Quarter        Quarter      Quarter
                                         ---------------------------------------------------

    Net sales                            $   139,373   $   137,942   $   130,312   $183,774
    Restaurant operating income               23,344        21,272        15,543     23,444
    Income from continuing operations          8,971         6,898         3,638      7,816
    Net income (loss) (A)                      8,730         7,628         3,664     (1,356)
    Basic earnings (loss) per share (B):
      Continuing operations              $      0.43   $      0.33   $      0.18   $   0.37
      Net income (loss)                         0.41          0.37          0.18       (.06)
    Diluted earnings (loss) per share (B):
      Continuing operations              $      0.37   $      0.29   $      0.15$      0.33
      Net income (loss)                         0.36          0.32          0.16      (0.06)

                                      F-27





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

15. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED) (CONTINUED)

   (A)   The fourth  quarter of fiscal  2003  includes a charge to  discontinued
         operations of approximately  $12,000 ($9,270 net of income tax) related
         to the Company's divestiture of its Australian operations.  See Note 12
         for additional information.

   (B)   Earnings per share is computed  independently  for each of the quarters
         presented.  Therefore,  the sum of the  quarterly per share amounts may
         not  equal  the  total  for  the  year  due  to  the  impact  of  stock
         transactions which occurred during the periods presented.

                                                                     First            Second        Third          Fourth
                                                                    Quarter           Quarter       Quarter        Quarter
                                                             -------------------------------------------------------------
   2002
       Net sales                                                      $143,251       $134,077       $128,738       $187,551
       Restaurant operating income                                      30,949         24,101         21,161         32,249
       Income from continuing operations before cumulative
          effect of an accounting change(A) and (B)                     13,008          6,471          8,296         12,607
       Net income                                                       12,193          6,057          8,198         12,761
       Basic earnings per share (C):
         Continuing operations                                        $   0.54       $   0.26       $   0.37       $   0.59
         Net income                                                       0.50           0.24           0.37           0.60
       Diluted earnings per share (C):
         Continuing operations                                        $   0.47       $   0.23       $   0.32       $   0.52
         Net income                                                       0.44           0.21           0.32           0.53

   (A)   The second  quarter of fiscal  2002  includes a charge to  earnings  of
         $2,967  ($1,854  net of  income  tax)  related  to  costs  incurred  in
         connection  with a  proposed  merger  which was  abandoned  during  the
         quarter.

   (B)   The fourth  quarter of fiscal 2002 includes  gains on sale of assets of
         $2,098  ($1,215 net of income tax) arising from  property  sales during
         the quarter.

   (C)   Earnings per share is computed  independently  for each of the quarters
         presented.  Therefore,  the sum of the  quarterly per share amounts may
         not  equal  the  total  for  the  year  due  to  the  impact  of  stock
         transactions which occurred during the periods presented.

16. OTHER INCOME, NET

The components of other income, net are as follows:

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

    Interest income                                   $ 789             $1,312             $1,868
    Interest expense, principally credit
      availability fees                                (194)              (297)                 -
    Gain (loss) on sale of assets                       (42)             1,971              3,038
                                                      --------------------------------------------
                                                      $ 553             $2,986             $4,906
                                                      ============================================

                                      F-28





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

17.   LITIGATION

California  Public  Employees  Retirement  System (CalPERS) filed a shareholders
derivative  action on  October  16,  2001  against  certain  present  and former
Directors  alleging  breach of  fiduciary  duties by certain  present and former
Directors and that certain of such  defendants  were unjustly  enriched  through
related-party transactions and the repricing of stock options previously issued.
The  lawsuit  also seeks to  prevent  enforcement  of certain  change of control
agreements granted to executive  officers of the Company,  seeks declaratory and
injunctive relief, and seeks damages to be paid to the Company. The Company is a
nominal defendant.

On  January  9,  2002,  CalPERS  filed a motion  to amend its  complaint,  which
included a claim to attempt to certify a class action based on their  allegation
that a provision in the change of control  agreements  violates  Delaware law. A
motion to dismiss was filed by certain  defendants on February 8, 2002,  seeking
to dismiss all claims of CalPERS.  The Delaware Court took under  advisement the
motion to amend and stayed  discovery  pending a court decision on the motion to
dismiss.

On  December  18,  2002,  the  Delaware  Court  dismissed a number of claims and
retained several others. On January 7, 2003, the Delaware Court agreed to permit
CalPERS to proceed with its discovery,  requesting specific  documents,  if any,
from certain third parties and from the named  defendants and ordered CalPERS to
timely file its motion to amend its complaint.

On April 16, 2003,  CalPERS filed a Motion for Leave to Amend  Plaintiff's First
Amended  Complaint,  which  complaint  added  no  additional  causes  but  added
allegations  which  are  subsequent  to the  date  of the  first  complaint  and
allegations  which  also  address  counts  which  were  dismissed  by  the  Vice
Chancellor on December 18, 2002.  All  defendants  filed  objections to CalPERS'
attempt to amend,  and oral argument was heard by the Vice  Chancellor on August
21, 2003.  As of this date,  no decision has been rendered and discovery by both
parties continues.

The Company is involved from time to time in litigation  arising in the ordinary
course of business as well as the matter set forth above.  The Company  believes
the  outcome  of such  matters  will not have a material  adverse  effect on its
consolidated financial position or results of operations.

                                      F-29





                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (All Amounts in Thousands, Except Share and Per Share Amounts)

18. DIVIDEND DECLARATION

On January 5, 2004, the Board of Directors increased its quarterly dividend from
$.165 to $.175 and declared the Company's  quarterly  cash dividend of $.175 per
share, payable February 2, 2004, to stockholders of record on January 19, 2004.

19. ACQUISITION OF TEXAS LAND AND CATTLE STEAK HOUSE

On January 28, 2004,  the  Company's  Joint Plan of  Reorganization  to purchase
TX.C.C.,   Inc.  and  affiliated  entities  TXCC-Preston  and  TXLC-Albuquerque,
(collectively,  "TXCC") was confirmed by the United States  Bankruptcy Court for
the District of Texas,  Dallas Division.  The plan will be funded by the Company
and provides that the TXCC creditors will receive cash or Lone Star Steakhouse &
Saloon,  Inc.  common  stock,  at the  option of the  creditor.  TXCC  presently
operates 20 Texas Land & Cattle Steak House(R)  restaurants located primarily in
Texas. The Company will fund any cash  requirements  from its current  available
cash balances.  The Company expects that the aggregate purchase price, including
the funding of payments to the prepetition  creditors and the assumption of post
petition liabilities, will approximate $21,000.

                                      F-30