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 27, 2005

|_|   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 the registrant is a well-known  seasoned issuer,
as defined in Rule 405 of the Securities Act Yes |_| No |X|

      Indicate by check mark if the  registrant  is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act Yes |_| No |X|

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


      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be  contained,  to the best of  registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|

      Indicate  by check mark  whether  the  registrant  is a large  accelerated
filer,  an accelerated  filer,  or a  non-accelerated  filer.  See definition of
"accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange
Act. (Check one):

Large accelerated filer |_|  Accelerated filer |X|  Non-accelerated filer  |_|

      Indicate  by check mark  whether  the  Registrant  is a shell  company (as
defined in Rule 12-b-2 of the Exchange Act). Yes |_| No |X|

      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 |_|

      As of June 14, 2005, the aggregate market value of the Registrant's Common
Stock held by non-affiliates of the Registrant was $559,730,900. 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 March 6,  2006,  there were  20,680,756  shares  outstanding  of the
Registrant's Common Stock.

                       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.


                                      -1-


                                TABLE OF CONTENTS

ITEM                                                                        PAGE
----                                                                        ----

                                     PART I

 1.   Business............................................................     3
 1A.  Risk Factors........................................................    10
 1B.  Unresolved Staff Comments...........................................    13
 2.   Properties .........................................................    13
 3.   Legal Proceedings...................................................    15

                                     PART II

 5.   Market for the Registrant's Common Equity and Related Stockholder
      Matter and Issuer's Purchases of Equity Securities..................    16
 6.   Selected Financial Data.............................................    16
 7.   Management's Discussion and Analysis of Financial Condition and
      Results of Operations...............................................    18
 7A.  Quantitative and Qualitative Disclosures about Market Risk..........    27
 8.   Financial Statements and Supplementary Data.........................    27
 9.   Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure................................................    27
 9A.  Controls and Procedures.............................................    27
 9B.  Other Information...................................................    29

                                    PART III

 10.  Directors and Executive Officers of the Registrant..................    30
 11.  Executive Compensation..............................................    30
 12.  Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters.....................................    30
 13.  Certain Relationships and Related Transactions......................    30
 14.  Principal Accountant Fees and Services..............................    31

                                     PART IV

 15.  Exhibits and Financial Statement Schedules..........................    31
      Signatures..........................................................    33


                                      -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 March 6, 2006, 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  four Lone Star  restaurants  in  California  and a  licensee
operates  a  Del  Frisco's  restaurant  in  Orlando,  Florida.  Internationally,
licensees operate 12 Lone Star Steakhouse & Saloon  restaurants in Australia and
one in Guam.

      On March 11, 2006, the Company's Board of Directors approved  management's
recommendation to close certain Lone Star Steakhouse &  Saloon  restaurants.
As a result, the Company will immediately close 30 under-performing stores. This
group of stores consists of 13 owned locations and 17 leased  locations with net
carrying  values of land,  buildings,  leasehold  improvements  and equipment of
approximately $10,577,000,  $6,014,000, $3,984,000 and $812,000 respectively and
deferred  rent  obligations  of  $1,343,000.  These  identified  store  closings
resulted from management's  analysis of not only the performance of these stores
but also related  return on investment  targets,  the  geographical  location of
these stores as compared to other Company owned stores, and demographic  changes
in the local markets surrounding these stores.

      The operations of the closed stores for the years ended December 27, 2005,
December 28, 2004, and December 30, 2003 are as follows:

                           2005                 2004                 2003
Net Sales               $32,900,000          $35,589,000           $36,787,000
Loss from operations    $ 4,637,000          $ 2,298,000           $ 1,267,000

      The  decision  to close  these  restaurants  is the  result  of a  lengthy
process,  spanning several months, which included among other things,  analyzing
the identified  restaurants  sales trends,  earnings  before  interest taxes and
depreciation and amortization (EBITDA), and pretax profit contribution.

      Although  limited in number,  the  Company's  newest Lone Star  Steakhouse
&  Saloon  restaurants  are opening at  projected  volumes in excess of $3.4
million.  These  sales  levels are similar to the  opening  volumes  reported by
several of the Company's  direct  competitors  and if these volumes are achieved
should provide substantial  increases in all metrics when compared with those of
the recently closed restaurants.

      Since the start of the 2006  fiscal  year,  the Company has opened two new
Lone  Star  Steakhouse  &  Saloon  restaurants  and  has  plans  to  open an
additional 20 new units throughout the year, or early 2007. There are also seven
Texas Land &  Cattle  restaurants,  five Sullivan's  Steakhouses and one Del
Frisco Double Eagle Steakhouse that will open throughout 2006 or early in 2007.

      The Texas Land & Cattle  restaurants  were  purchased out of bankruptcy on
January 28, 2004,  and their  operating  results are  included in the  Company's
accompanying financial information for the year ended December 28, 2004 from the
date of acquisition.

      Steak continues to be one of the most frequently ordered dinner entrees at
restaurants.  In 2005, the United States Department of Agriculture estimated the
average  annual per capita  consumption of beef to be 66.5 pounds an increase of
..6 pounds over 2004.  Company  management  believes the limited menu of its Lone
Star  restaurants,  which feature high quality USDA graded and well aged steaks,
and the appeal of its  roadhouse  ambiance and excellent  service  distinguishes
Lone Star restaurants.  Texas Land & Cattle restaurants are distinguished by
warm and comfortable Texas ranch house ambiance  featuring  fireplaces,  a broad
menu  featuring  high quality USDA choice and prime graded  steaks and attentive
service. 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,  the successful integration of
Texas Land & Cattle into the Company's operations, the successful development 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  embrace a Texas-style  concept that features Texas
artifacts and country and western  music.  The authentic  roadhouse  concept was
developed to capitalize on the enduring popularity of Texas related themes. Lone
Star is further  distinguished by its high quality, USDA graded well aged 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'  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 2005
of approximately $12.00 at lunch and $18.50 at dinner.

      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 a week. The average check per customer is approximately $13.60
at lunch and $20.60 at dinner.

      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 a 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 and warm lighting. Sullivan's is distinguished by
its high quality,  well aged,  USDA inspected  beef,  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 $63.00.

      Del  Frisco's is designed to serve a  sophisticated  clientele,  including
business related dining occasions, is the recipient of the prestigious Ivy Award
and has been elected to the National Restaurant  Association 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 featuring high quality, USDA
prime-graded steaks hand cut in each restaurant.  Del Frisco's restaurants serve
dinner only, except the New York City and Denver restaurants which are also open
for lunch, and are generally open Monday through Saturday with an average dinner
guest check of approximately $86.00.

      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  $13.00 at lunch and $30.00 at
dinner.

CORPORATE STRATEGY

      The focus of the Company's corporate strategy is to increase the Company's
earnings  per share and  Shareholder  value.  The  Company is in the  process of
considering a number of initiatives to achieve this goal including:

      o     Opening new restaurants for all concepts;
      o     Evaluating opportunity for new concepts developed internally;
      o     Share repurchases from existing cashflow;
      o     Instituting  menu,  operational  and marketing  initiatives  aimed at
            incresing unit volumes and margins;
      o     Review and institute cost cutting initiatives;
      o     Reviewing  other   alternatives  for  enhancing   shareholder  value
            including closing and/or relocating additional underperforming units;
      o     Evaluating strategic acquisitions; and
      o     Franchising existing or undeveloped markets both domestically and
            internationally.


                                      -4-


      There can be no  assurance  that these  initiatives  will be  successfully
implemented or as to the timing of these  initiatives and the Company  currently
has no agreements,  commitments or understandings  with respect to any strategic
acquisition or franchising opportunity.

      Since the start of the 2006  fiscal  year,  the Company has opened two new
Lone Star Steakhouse & Saloon restaurants and has plans to open an additional 20
new units  throughout the year, or early 2007. There are also seven Texas Land &
Cattle  resturants,  five Sullivan  Steakhouses  and one Del Frisco Double Eagle
Steakhouse that will open throughout 2006 or early in 2007. In addition,  we are
evaluating the results of our Lone Star remodel  program that began in 2004, and
expect additional Lone Stars will be remodeled in 2006. While the results of the
remodels of existing  Lone Stars has been mixed,  the new units  opened with the
revised  decor  and  image  have  opened at  higher  volumes  than the  existing
restaurants.

      We believe that our strong financial  position,  significant  ownership of
properties,  and  consistent  cashflow  will allow us to  restart  growth in all
concepts,  continue  returning  value  to  shareholders  through  dividends  and
potentially share repurchases,  and still enable us to have the capacity through
cash  reserves  or a  modest  amount  of  debt,  to be able to act  quickly  and
strategically to effectuate  acquisitions or franchising  opportunities or other
attractive options to increase shareholder value.

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. Of the 250 Lone Star  restaurants  open at
March 6, 2006, 89 were leased  facilities and had an average cash  investment of
approximately  $1.1  million and 161 were owned and had an average cost for land
acquisition, construction and equipment of approximately $2.0 million.

      The Company  expects the following  revenue and unit costs  excluding land
for typical new restaurants:

                                                                    Projected
                                        Unit development costs       Initial
                                      -------------------------
Concept                               Capitalized   Pre-opening   Annual Revenue
-------                               -----------   -----------   ---------------

Lone Star Steakhouse & Saloon           $1,900          $250          $3,400

Texas Land & Cattle                      2,000          $250          $3,400

Sullivan's                               3,250          $350          $5,000

Del Frisco's                             5,500          $350          $8,000

      There are and the  Company  anticipates  that  there  will be  exceptional
sites,  particuarly  for the  Sullivan's  and Del  Frisco's  concepts  where the
Company believes that the development costs and expected revenues should exceeed
those shown above.

      There can be no assurance that these revenue and cost  assumptions will be
achieved.


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 11% of Lone Star's net sales.

      The menu at Texas Land & Cattle  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 12% of Texas Land & Cattle
net sales.

      The menu at Sullivan's  features high quality,  well aged,  USDA inspected
beef, 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 38% of Sullivan'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
1,000 high quality wines and a full bar. Alcoholic beverage service accounts for
approximately 36% of Del Frisco's 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 short  initial terms with multiple
renewal  options.  The  Company  generally  takes from 9 to 12 months  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.

      A new prototype  Lone Star building has been  developed  which features an
open view kitchen,  with the interior decor  utilizing  newer and vibrant colors
and quality materials of granite and stone. The building exterior features earth
tones  with  cultured  stone and a stucco  finish.  The  prototype  building  is
approximately 6,800 sq. ft. with a seating count of approximately 260 people.

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

      The Sullivan's restaurant in Austin, Texas is currently 12,000 square feet
and seats 320 customers.  The other Sullivan's  restaurants  range from 7,000 to
9,000 square feet, with seating capacity for  approximately  250 customers.  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.  A separate  jazz bar area called  "Ringside" is utilized in four of
the Sullivan's restaurants.

      The original Del Frisco's  restaurant  in Dallas,  Texas is  approximately
12,000  square  feet and seats  approximately  440  customers  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  11,000 and 12,000 square feet and seat
approximately 320 and 360 customers, respectively. The New York City location is
approximately  16,500 square feet, with seating capacity for  approximately  460
customers and the Las Vegas location is  approximately  11,000 square feet, with
seating capacity for approximately 320 customers.

MARKETING

      The Company has  committed to sponsor a NASCAR car for 2006 and 2007.  For
17 races each  season,  Lone Star will be the primary  sponsor,  and will be the
associate  sponsor for the remaining 19 races.  While the Company  believes that
the  advertising  and  marketing  benefit  from this  commitment  will more than
recover the cost,  there can be no assurance  that it will,  and the Company may
need  to  continue  and/or  increase  its  traditional   marketing  program  and
associated expense.

      Lone Star  restaurants  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 texas roadhouse ambiance


                                      -6-


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 of its Lone Star restaurants.

      The Company  utilizes  high quality  print ads  featuring all of its steak
concepts 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.  Texas
Land & Cattle  utilizes local store marketing and local print  publications.  In
addition, radio is utilized in the Dallas/Ft.  Worth market sponsoring a popular
local sports talk program.

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.

      Depending upon the volume of the units,  the typical Lone Star  management
team consists of one general  manager and two to four managers.  Each restaurant
also employs a staff consisting of approximately 50 to 90 hourly employees, many
of  whom  work   part-time.   The  regional   managers   report  to  a  regional
vice-president.  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.


                                      -7-


PURCHASING

      Approximately  53% 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 2005. As
of March 6, 2006, the Company had no significant forward pricing contracts.

MANAGEMENT INFORMATION SYSTEMS

      The  Company  has spent the last ten  months  evaluating  various  new POS
systems for use in its  restaurants.  Beginning in March 2006,  the Company will
begin to  install  new,  web  based  POS  systems  in its  restaurants  with the
conversion  of all  units  expected  by May  2006.  The  estimated  cost of this
enhancement  is $5  million to $6  million.  The new  system  will also  feature
enhancements  to the back of the house  cost  monitoring  and  reporting,  labor
scheduling, and ease of training that we anticipate will reduce ongoing variable
costs per unit.

      The Company continually monitors its management information system to take
advantage of technological improvements. Its point-of-sale 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

                                      -8-


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 Americans with Disabilities Act
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 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 March 6, 2006, the Company employed approximately 19,750 persons, 12
of whom are executive  officers,  95 of whom are office support personnel,  9 of
whom are  regional  managers,  31 of whom are district  managers,  approximately
1,230 of whom are restaurant  management personnel and the remainder of whom are
hourly  restaurant  personnel.  None of the  Company's  employees  are currently
covered by a collective bargaining agreement. The Company considers its employee
relations to be good.


                                      -9-


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 1A. 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 cases of "mad cow disease" or "foot/mouth disease". 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  2005 and 2004,  our beef  prices  were
generally above historical levels. To the extent that beef prices continue to be
significantly  above historical  levels, it will 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:

      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:


                                      -10-


      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 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.


                                      -11-


CONSUMER PERCEPTIONS OF FOOD SAFETY COULD ADVERSELY AFFECT OUR BUSINESS

      Our business could be adversely  affected by consumer  perceptions of food
safety in the United States or in the market areas in which we operate,  whether
such  perceptions  are  based on fact or not.  In  addition,  adverse  publicity
resulting from poor food quality,  illness,  injury or other health  concerns at
one or a limited number of our restaurants  could have a material adverse effect
on our business, results of operations and financial condition.

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 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  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  53% 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.

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


                                      -12-


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.

A KEY ELEMENT OF OUR  STRATEGY IS OPENING NEW  RESTAURANTS.  IF WE ARE UNABLE TO
OPEN A SIGNIFICANT  NUMBER OF THESE  RESTAURANTS  WHEN WE EXPECT THEM TO OPEN OR
OUR  SALES  VOLUMES  FOR  THESE   RESTAURANTS   ARE   SIGNIFICANTLY   BELOW  OUR
EXPECTATIONS, OUR RESULTS OF OPERATIONS WILL SUFFER.

Part of our corporate  strategy is to open new  restaurants.  Since the start of
the 2006  fiscal  year,  we have  opened two new Lone Star  Steakhouse  & Saloon
restaurants and have  commitments to open an additional 20 new units  throughout
the  year,  or early  2007.  We also  believe  that  seven  Texas  Land & Cattle
restaurants,   five  Sullivan  Steakhouses  and  one  Del  Frisco  Double  Eagle
Steakhouse will open during 2006 or early in 2007. This time frame is predicated
by our experience that,  assuming we can obtain certain  governmental  approvals
and license,  such as liquor  licenses,  it generally  takes from 9 to 12 months
after  the  signing  of a  lease  or  the  closing  of a  purchase  to  complete
construction and open a new restaurant.  If a significant  number of restaurants
do not open when we expect them to open, it could  negatively  impact our future
results of operations. In addition,  although limited in number, our newest Lone
Star Steakhouse & Saloon  restaurants are opening at projected  annualized sales
volumes in excess of $3.4 million.  If this trend continues for such restaurants
and the additional Lone Star Steakhouse & Saloon  restaurants we intend to open,
it should provide substantial  increases in all metrics when compared with those
of our recently closed  restaurants.  If we fail to achieve our projected volume
for our new Lone Star Steakhouse & Saloon restaurants as well as the volumes for
the new  restaurants  in  other  concepts  our  results  of  operations  will be
negatively impacted.

WE RECENTLY DECIDED TO CLOSE 30 RESTAURANTS AND PART OF OUR STRATEGY IS TO CLOSE
UNDER-PERFORMING UNITS.

On March 11, 2006, our Board of Directors approved  management's  recommendation
to close certain Lone Star Steakhouse & Saloon restaurants. As a result, we will
immediately close 30 under-performing  stores. Part of our corporate strategy is
to review other  alternatives for enhancing  stockholder value including closing
and/or  relocating   under-performing   units.   Accordingly,   if  other  units
under-perform  we will need to consider closing  additional  restaurants and our
results of operations could be negatively impacted.

WE ARE  UNABLE  TO  PREDICT  WHETHER  WE  WILL  RECEIVE  ANY  BENEFIT  FROM  OUR
ADVERTISING AND MARKETING EFFORTS.

While we have primarily  relied on word of mouth to promote our  restaurants and
build  customer  awareness,  we  do  utilize  other  marketing  and  advertising
strategies.  Recently we agreed to sponsor a NASCAR car for 2006 and 2007. While
we  believe  that  the  advertising  and  marketing   benefit  from  the  NASCAR
sponsorship  and other  advertising  strategies will more than recover the cost,
there  can be no  assurance  that it will  and we may  need to  continue  and/or
increase our traditional marketing programs and associated expenses.


ITEM 1B. UNRESOLVED STAFF COMMENTS.

      Not Applicable.

ITEM 2. PROPERTIES

     As of March 6, 2006,  the Company  leased 89 and owned 161 of its Lone Star
restaurant locations.  On March 11, 2006, the Comapny approved the closing of 30
under-performing  restaurants, of which 13 are owned locations and 17 are leased
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.  The Company  leases 18 Texas Land & Cattle  restaurants  and two are
owned. 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.  In
addition to the restaurant  properties  described above,  the Company  currently
owns land at nine additional locations.


                                      -13-


                    RESTAURANT LOCATIONS AS OF MARCH 6, 2006

     The following table sets forth the location of the Company's existing,
   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           Effingham             Dundee              Salisbury             Salt Lake City
---------           Hodgkins              Flint               Southern Pines        Sugarhouse
                    Mt. Vernon            Grand Rapids        Winston-Salem
ALABAMA             Peoria                Jackson                                   VIRGINIA
Anniston            Rockford              Mt. Pleasant        NORTH DAKOTA          Alexandria
Birmingham (2)      Springfield           Saginaw             Fargo                 Centreville
Huntsville                                Ypsilanti                                 Chesapeake
Mobile              INDIANA                                   OHIO                  Fairfax
Montgomery          Anderson              MISSISSIPPI         Akron                 Fredericksburg
Trussville          Evansville            Hattiesburg         Canton                Hampton
Tuscaloosa          Ft. Wayne             Jackson             Cincinnati (2)        Herndon
                    Indianapolis (4)                          Cleveland (3)         Norfolk
ALASKA              Lafayette             MISSOURI            Columbus (3)          Potomac Mills
Anchorage           Merrillville          Branson             Dayton (2)            Richmond (3)
                    South Bend            Independence        Findlay               Sterling
ARIZONA             Terre Haute           Kansas City         Lancaster             Virginia Beach
Mesa                                      Springfield         Mentor
Phoenix (4)         IOWA                  St. Louis (5)       Middletown            WEST VIRGINIA
                    Cedar Rapids                              Niles                 Beckley
ARKANSAS            Coralville            NEBRASKA            Springfield           Charleston
Ft. Smith           Davenport             Lincoln             Toledo (2)            Huntington
Little Rock (2)     Des Moines            Omaha (2)           Youngstown
Springdale          Waterloo                                                        WISCONSIN
                                          NEVADA              OKLAHOMA              Racine
COLORADO            KANSAS                Las Vegas (4)       Lawton
Colorado Springs    Garden City                               Oklahoma City         SULLIVAN'S
Denver  (6)         Hutchinson            NEW JERSEY          Tulsa (2)             ----------
Ft. Collins         Overland Park         Atlantic City                             Anchorage, AK
Loveland                                  Bridgewater         PENNSYLVANIA          Austin, TX
                    KENTUCKY              Cherry Hill         Allentown             Baton Rouge, LA
DELAWARE            Bowling Green         Delran              Easton                Charlotte, NC
Dover               Florence              Hanover Township    Harrisburg            Chicago, IL
Wilmington (2)      Lexington             Hazlet              Johnstown             Dallas, TX
                    Louisville            Marlton             King of Prussia       Denver, CO
FLORIDA                                   Ocean County        Lancaster             Houston, TX
Bradenton           LOUISIANA             Scotch Plains       Middletown            Indianapolis, IN
Clearwater          Baton Rouge (2)       Turnersville        Philadelphia          King of Prussia, PA
Ft. Lauderdale      Houma                 Voorhees            Pittsburgh (5)        Naperville, IL
Ft. Myers           Lafayette             Wayne               Pottstown             Palm Desert, CA
Lakeland            Monroe                                    Reading               Raleigh, NC
Ocala               New Orleans (3)       NEW MEXICO          Scranton              Tucson, AZ
Orlando                                   Albuquerque         Wilkes-Barre          Wilmington, DE
Pensacola           MAINE                                     York
Port Orange         South Portland        NEW YORK                                  TEXAS LAND & CATTLE
Port Richey                               Albany              SOUTH CAROLINA        -------------------
Sarasota            MARYLAND                                  Greenville            Dallas, TX (7)
St. Petersburg      Bel Air               NORTH CAROLINA      Myrtle Beach (2)      Austin, TX (4)
Tampa               Columbia              Asheville                                 Houston, TX (4)
                    Frederick             Boone               SOUTH DAKOTA          San Antonio, TX (3)
GEORGIA             Gaithersburg          Clayton             Sioux Falls           Lubbock, TX
Augusta             Laurel                Charlotte (4)                             Albuquerque, NM
                    Lexington Park        Durham              TENNESSEE
IDAHO               Waldorf               Fayetteville        Jackson               DEL FRISCO'S
Boise               Westminster           Greensboro (2)      Johnson City          ------------
                                          Greenville          Memphis               Denver, CO
ILLINOIS            MICHIGAN              Jacksonville                              Dallas, TX
Bloomington         Battle Creek          Mt. Airy            UTAH                  Fort Worth, TX
Bradley             Bay City              Raleigh (3)         Centerville           Las Vegas, NV
Carbondale          Brighton              Roanoke Rapids      Layton                New York, NY
Champaign           Dearborn Heights      Rocky Mount
Chicago (10)        Detroit (6)                                                     FRANKIE'S
Decatur                                                                             ---------
                                                                                    Charlotte, NC


                                      -14-


ITEM 3. LEGAL PROCEEDINGS

      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.



                                      -15-

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS AND ISSUER'S PURCHASES OF EQUITY SECURITIES


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 during the day
for the Common Stock, as reported by Nasdaq.

                                                                 Prices
                                                                 ------
     Calendar 2005                                       High               Low
     -------------                                       ----               ---
First Quarter                                           $29.60            $25.66
Second Quarter                                          $31.98            $27.61
Third Quarter                                           $31.14            $24.02
Fourth Quarter                                          $27.07            $22.56

                                                                 Prices
                                                                 ------
     Calendar 2004                                       High               Low
     -------------                                       ----               ---
First Quarter                                           $29.98            $23.15
Second Quarter                                          $33.03            $24.73
Third Quarter                                           $27.47            $20.70
Fourth Quarter                                          $28.17            $23.84

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 in February  2003, to $.175 per share
in February  2004,  to $.195 in January 2005 and to $.205 in January  2006.  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 March 6, 2006, there were  approximately 350 holders of record of the
Company's  Common  Stock.  The  Company  believes  there  are in excess of 6,000
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.

ITEM 6. SELECTED FINANCIAL DATA

      The following  table sets forth selected  consolidated  financial data and
certain pro forma 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  has been  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 year 2001 to give retroactive effect for
the  non-amortization  provisions  of SFAS No. 142  requiring  that goodwill and
intangible


                                      -16-


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.

                                                                                  Year Ended In December(1)
                                                       ----------------------------------------------------------------------------

                                                                        (Amounts in thousands, except share data)

                                                               2005        2004 (2)            2003            2002            2001
                                                               ----        --------            ----            ----            ----

Income Statement Data:

Net sales                                              $    669,355    $    667,546    $    589,235    $    591,442    $    568,816

Costs and expenses:

   Costs of sales                                           235,903         238,925         211,785         193,442         194,864
   Restaurant operating expenses                            332,648         315,621         273,640         265,192         264,260
   Restaurant depreciation and amortization                  19,362          20,181          20,638          24,376          25,816
   Provision for impaired assets                                410           1,167              --             792             565
   General and administrative expenses                       46,650          45,269          43,346          45,085          41,884
   Abandoned merger expenses                                     --              --              --           2,990              --
   Hurricane disaster relief donation                         1,853
   Provision for casualty losses                                535
   Non-cash stock compensation expense                        1,575           1,193           1,474           2,949           3,212
   Contribution - "Dine for America"                             --              --              --              --           2,124
                                                       ------------    ------------    ------------    ------------    ------------

Total costs and expenses                                    638,936         622,356         550,883         534,826         532,725
                                                       ------------    ------------    ------------    ------------    ------------

Income from operations                                       30,419          45,190          38,352          56,616          36,091

Other income, net                                             1,258           1,737             553           2,986           4,906
                                                       ------------    ------------    ------------    ------------    ------------

Income from continuing operations before
   provision for income taxes                                31,677          46,927          38,905          59,602          40,997

Provision for income taxes                                   10,371          15,503          11,850          19,732          14,366
                                                       ------------    ------------    ------------    ------------    ------------

Income from continuing operations                            21,306          31,424          27,055          39,870          26,631

Discontinued operations (3,4):
   Loss from operations of discontinued restaurants            (627)           (311)        (11,017)         (1,369)         (6,755)
   Income tax benefit                                        10,282             100           2,207             484           2,395
                                                       ------------    ------------    ------------    ------------    ------------
   Income (loss) on discontinued operations                   9,655            (211)         (8,810)           (885)         (4,360)
                                                       ------------    ------------    ------------    ------------    ------------

Income before cumulative effect of change in
   accounting principle                                      30,961          31,213          18,245          38,985          22,271

Cumulative effect of change in accounting principle
   (net of income tax of $190) (5)                               --              --              --            (318)             --
                                                       ------------    ------------    ------------    ------------    ------------

Net income                                             $     30,961    $     31,213    $     18,245    $     38,667    $     22,271
                                                       ============    ============    ============    ============    ============

Basic earnings (loss) per share:
   Continuing operations                               $       1.04    $       1.50    $       1.30    $       1.74    $       1.10
   Discontinued operations (4)                                  .47            (.01)           (.42)           (.03)           (.18)
                                                       ------------    ------------    ------------    ------------    ------------
   Income before cumulative effect of
      change in accounting principle                           1.51            1.49            0.88            1.71            0.92

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

Basic earnings per share                               $       1.51    $       1.49    $       0.88    $       1.69    $       0.92
                                                       ============    ============    ============    ============    ============

Weighted average shares outstanding                      20,416,840      20,962,919      20,801,894      22,908,821      24,036,942
                                                       ============    ============    ============    ============    ============

Pro forma net income (6)                               $     30,961    $     31,213    $     18,245    $     38,985    $     23,194
                                                       ============    ============    ============    ============    ============

Pro forma basic earnings per share                     $       1.51    $       1.49    $       0.88    $       1.71    $       0.96
                                                       ============    ============    ============    ============    ============


                                      -17-


                                                 At fiscal year end in December, (1)
                                      --------------------------------------------------------
                                           (Dollars in thousands, except per share data)

                                          2005        2004        2003        2002        2001

Balance Sheet Data:

   Working capital                    $ 40,655    $ 39,332    $ 68,369    $ 41,000    $ 48,284
   Total assets                        517,813     498,292     499,988     478,586     537,462
   Stockholders' equity                412,341     392,781     414,680     413,761     469,979
   Cash dividends per common share    $    .76    $    .70    $   .645    $    .60    $    .50

(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 2001,  2002, 2003, 2004, and 2005 fiscal years ended on December
      25, 31, 30, 28, and 27  respectively.  Fiscal  2002  included  53 weeks of
      operations while fiscal 2005, 2004, 2003, and 2001 included 52 weeks.
(2)   On  January  28,  2004,  the  Company  acquired  20  Texas  Land &  Cattle
      restaurants for approximately  $23,496, which consisted of $12,579 of cash
      net of $2,145 of cash  acquired,  119,485  shares of the Company's  common
      stock valued at $2,679,  and the  assumption  of  approximately  $6,093 of
      certain  liabilities.  The  transaction  was  accounted for as a purchase.
      Accordingly,  the  results  of  operations  of  acquired  restaurants  are
      included in the Company's  consolidated  results of  operations  since the
      date of acquisition.  See Note 19 to the Consolidated Financial Statements
      for additional information.
(3)   Fiscal 2005 includes tax benefits of $10,100 resulting from the release of
      tax contingency reserves related to tax matters which were resolved during
      fiscal 2005. The adjustments relate primarily to the Company's investments
      in Australia which were  discontinued in fiscal 2003.  Accordingly the tax
      benefits are included in discontinued operations.
(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.
(5)   The  cumulative  effect of change in accounting  principle 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.
(6)   Pro forma net income amounts  reflect the  adjustments for fiscal 2002 and
      2001 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.

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 two Lone Star  restaurants in fiscal year 2005 and one
in fiscal 2004. During fiscal 2005, the Company closed two underperforming  Lone
Star  restaurants  and one  restaurant  was destroyed by fire.  Through March 6,
2006, the Company has opened two Lone Star restaurants.

     On March 11, 2006, the Company's Board of Directors  approved  management's
recommendation to close certain Lone Star Steakhouse & Saloon restaurants.  As a
result,  the Company will immediately  close 30  under-performing  stores.  This
group of stores consists of 13 owned locations and 17 leased  locations with net
carrying  values of land,  buildings,  leasehold  improvements  and equipment of
approximately $10,577,  $6,014, $3,984, and $812, respectively and deferred rent
obligations  of  $1,343.   These   identified   store  closings   resulted  from
management's  analysis  of not only the  performance  of these  stores  but also
related return on investment targets, the geographical  location of these stores
as compared to other  Company  owned stores,  and  demographical  changes in the
local markets surrounding these stores.

      The operations of the closed stores for the years ended December 27, 2005,
December 28, 2004, and December 30, 2003 are as follows:


                                    2005                2004              2003
Net Sales                          $32,900             $35,589           $36,787
Loss from operations               $ 4,637             $ 2,298           $ 1,267

     The decision to close these restaurants is the result of a lengthy process,
spanning  several  months,  which  included  among other  things,  analyzing the
identified restaurants sales trends, EBITDA, and pretax profit contribution.

      Although  limited in number,  the Company's  newest Lone Star Steakhouse &
Saloon  restaurants are opening at projected  volumes in excess of $3.4 million.
These sales levels are similar to the opening volumes reported by several of the
Company's  direct  competitors and should provide  substantial  increases in all
metrics when compared with those of the recently closed restaurants.

      The Company has commitments to open an additional 20 new units  throughout
the year, or early 2007.  There are also seven Texas Land & Cattle  restaurants,
five Sullivan's Steakhouses and one Del Frisco Double Eagle Steakhouse that will
open throughout 2006 or early in 2007.

      There were 250  operating  domestic Lone Star  restaurants  as of March 6,
2006,  before  consideration  of store closings  described above including three
restaurants in New Orleans,  temporarily closed due to Hurricane Katrina.  These
restaurants  will not likely be repaired and reopened until mid to late 2006. In
addition, a licensee operates four Lone Star restaurants in California.


                                      -18-


      The Company currently operates five Del Frisco's restaurants. In addition,
a licensee operates one Del Frisco's restaurant.  The Company currently operates
15 Sullivan's restaurants,  20 Texas Land & Cattle restaurants and one Frankie's
restaurant.

      Internationally,  licensees  operate  12 Lone  Star  Steakhouse  &  Saloon
restaurants  in Australia and one in Guam.  During fiscal 2003, the Company sold
13  restaurants  to a  licensee  in  Australia  and closed an  additional  seven
restaurants in Australia. During fiscal 2004, the Australian licensee closed one
restaurant.

      On  January  28,  2004,  the  Company  acquired  20  Texas  Land &  Cattle
restaurants which are located primarily in Texas. The operating results of those
restaurants are included in the Company's  consolidated  operating  results from
the date of acquisition.

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 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 FINITE LIFE
INTANGIBLES  Property and equipment and finite 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. Fair value
was estimated utilizing the best information  available,  including management's
estimates and judgments, independent appraisals of fair value 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.  An impairment
loss is  recognized  when the estimates of fair value are less than the carrying
value of the assets.

SELF-INSURANCE   RESERVES   Beginning  in  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.


                                      -19-


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.

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 27,   December 28,   December 30,
                                                                                    2005           2004           2003
                                                                                    ----           ----           ----
Statement of Income:

Net sales                                                                            100%           100%           100%
   Costs and expenses:
     Costs of sales                                                                 35.2           35.8           36.0
     Restaurant operating expenses                                                  49.7           47.3           46.4
     Depreciation and amortization                                                   2.9            3.0            3.5
     Provision for impaired assets                                                   0.1            0.2             --
                                                                                  ------         ------         ------
     Restaurant costs and expenses                                                  87.9           86.3           85.9

General and administrative expenses                                                  6.9            6.8            7.3
Hurricane disaster relief donation                                                   0.3             --             --
Provision for casualty loss                                                          0.1             --             --
Non-cash stock compensation expense                                                  0.3            0.2            0.3
                                                                                  ------         ------         ------

Income from operations                                                               4.5            6.7            6.5
Other income, net                                                                    0.2            0.3            0.1
                                                                                  ------         ------         ------

Income from continuing operations before income taxes                                4.7            7.0            6.6
Provision for income taxes                                                           1.5            2.3            2.0
                                                                                  ------         ------         ------
Income from continuing operations                                                    3.2            4.7            4.6
Income (loss) from discontinued operations, net of applicable income taxes           1.4             --           (1.5)
                                                                                  ------         ------         ------

Net income                                                                           4.6%           4.7%           3.1%
                                                                                  ======         ======         ======


                                      -20-


LONE STAR STEAKHOUSE & SALOON, INC.

                    YEAR ENDED COMPARED TO DECEMBER 27, 2005
                    COMPARED TO YEAR ENDED DECEMBER 28, 2004
              (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

      Net sales increased  $1,809 or .3% to $669,355 for the year ended December
27, 2005 ("fiscal  2005"),  compared to $667,546 for the year ended December 28,
2004 ("fiscal 2004"). Sales for fiscal 2005 include fifty-two weeks of sales for
TXCC compared with the prior period for fiscal 2004 which includes sales of TXCC
covering a  forty-eight  week period.  The  Company's  blended same store sales,
representing net sales, by store, for all the Company owned restaurant  concepts
opened for more than 18 months in the current and  comparable  prior year period
decreased  .5%. The  Company's  average  check  increased  2.4% and guest counts
decreased 2.8%.

      Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 35.2% from 35.8% due  primarily to decreased  costs for beef partly
offset by  increased  costs for  seafood  items as a result  of  changes  in the
menu-mix.

      Restaurant  operating  expenses  for  fiscal  2005  increased  $17,027  to
$332,648  compared  to  $315,621  in the prior year  period and  increased  as a
percentage of net sales to 49.7% from 47.3%. Labor costs increased .9% primarily
as the result of increased  management staffing at the restaurants.  Advertising
costs increased .4%. Building  maintenance costs increased .4% and utility costs
increased  .2%.  Remodel  expenses  increased  .1%. The increases were partially
offset by a decrease in certain insurance costs.

      Depreciation and amortization  decreased $819 in fiscal 2005 compared with
the prior period.  The decrease is  attributable  to the continued  reduction in
depreciation  for  certain  assets that have become  fully  depreciated  for the
Company's  historical  concepts.  This  decrease  is  partially  offset  by  the
depreciation of assets related to the TXCC acquisition.

      General  and  administrative  expenses  increased  $1,381 in  fiscal  2005
compared to the prior period.  General and  administrative  expenses  reflect an
increase of approximately $300 for increases related to the TXCC acquisition for
the  additional  four week period  included in fiscal 2005 as compared  with the
prior period.  In addition,  general and  administrative  costs  reflect  higher
travel expenses and costs for restaurant  development.  The increases are offset
in part by a decrease in incentive compensation.

      Provision  for  impaired  assets  of  $410 in  fiscal  2005  reflects  the
write-down of five underperforming restaurants to their estimated fair value.

      Hurricane  disaster  relief donation in fiscal 2005 reflects the Company's
contribution  to the American Red Cross in connection  with disaster  relief for
the victims of Hurricane  Katrina.  The Company  donated 100% of its  restaurant
sales of $1,853 on Labor Day, September 5, 2005.

      Provision for casualty loss in fiscal 2005 reflects the Company's estimate
of losses  associated  with its  restaurants  which were  damaged  by  Hurricane
Katrina.  Such losses primarily  relate to estimated  property damages for which
insurance  recoveries  will not be  available  due to  limitations  of insurance
deductible amounts.

      Non-cash stock compensation  expense in fiscal 2005 was $1,575 compared to
$1,193 for the prior year  period.  The change is primarily  attributable  to an
increase  in the  amortization  of stock  compensation  expense  in fiscal  2005
compared  to fiscal  2004,  reflecting  the impact of stock  options  granted in
December 2004 and during 2005. In addition, the 2005 period includes a credit of
$797 compared to a charge of $831 in the prior year  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 Notes to Consolidated
Financial Statements).

      Other  income,  net in fiscal  2005 was $1,258  compared to $1,737 for the
prior year.  The decrease in other income  results  primarily from a decrease in
gains on sale of assets in 2005 as compared to 2004.

      The effective  income tax rate from  continuing  operations  was 32.7% and
33.0% for fiscal 2005 and fiscal 2004, respectively. The factors which cause the
effective tax rates to vary from the federal statutory rate of


                                      -21-


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 compensation  associated with such options in the income
statement.  However,  tax benefits may arise at the time  incentive  options are
exercised  to the  extent  that the  exercise  is  followed  by a  disqualifying
disposition of the shares by the optionee.

      Discontinued  operations  reflect the  operations  of  restaurants  closed
subsequent to fiscal 2002 which are reported as discontinued operations pursuant
to SFAS No. 144 (see Note 12 to the Notes to Consolidated  Statements).  The tax
benefit  included in  discontinued  operations  reflects the  resolution  of tax
matters related to Australian operations which were discontinued in fiscal 2003.


                                      -22-


LONE STAR STEAKHOUSE & SALOON, INC.

      YEAR ENDED DECEMBER 28, 2004 COMPARED TO YEAR ENDED DECEMBER 30, 2003
                          (DOLLAR AMOUNTS IN THOUSANDS)

      Net  sales  increased  $78,311  or 13.3% to  $667,546  for the year  ended
December  28, 2004  ("fiscal  2004"),  compared  to $589,235  for the year ended
December 30, 2003 ("fiscal 2003").  Sales for fiscal 2004 include  approximately
$56,020  attributable  to the  acquisition  of Texas Land & Cattle.  The Company
experienced  sales growth in all its  restaurant  concepts as blended same store
sales  representing  net sales, by store,  for all the Company owned  restaurant
concepts,  opened for more than 18 months in the  current and  comparable  prior
year period increased 3.6%. The Company's average check increased 1.6% and guest
counts increased 2.7%.

      Costs of sales, primarily food and beverages, decreased as a percentage of
net sales to 35.8% from 36.0% due to declining  beef costs  occurring  primarily
during the fourth  quarter of fiscal 2004. The decline in beef costs were offset
in part by increased costs for dairy products.

      Restaurant operating expenses in fiscal 2004 increased $41,981 to $315,621
compared to $273,640 in fiscal 2003,  and increased as a percentage of net sales
to 47.3%  from  46.4%.  Labor  costs  increased  .3%  primarily  as a result  of
increased  costs  for  worker's  compensation  and  employee  medical  expenses.
Advertising  costs increased  approximately  .1% reflecting  increased  printing
costs.  Occupancy  costs were up .4% due  primarily to the impact of higher rent
expenses  applicable to the Texas Land & Cattle stores. In addition,  restaurant
operating  expenses for fiscal 2004 include  approximately  $555 of  pre-opening
costs compared to none in fiscal 2003.

      Depreciation  and  amortization  decreased $457 in fiscal 2004 compared to
fiscal  2003.  The  decrease  is  attributable   primarily  to  a  reduction  in
depreciation  for  certain  assets that have become  fully  depreciated  for the
Company's historical concepts,  offset in part by depreciation of assets related
to the Texas Land & Cattle acquisition.

      Provision  for  impaired  assets of $1,167 in  fiscal  2004  reflects  the
write-down of five underperforming restaurants to their estimated fair value.

      General  and  administrative  expenses  increased  $1,923 in  fiscal  2004
compared  with fiscal 2003.  The primary  reason for the increase is  additional
general and administrative costs applicable to Texas Land & Cattle of $2,500. In
addition,   the  increase   reflects  higher   compensation   related  costs  of
approximately  $1,525  which  were  mostly  offset by  decreases  in travel  and
directors  and officer's  liability  insurance  costs and a favorable  insurance
settlement.

      Non-cash stock compensation expense in fiscal 2004 decreased $281 compared
to fiscal 2003. The change  reflects a decrease of $681 in the  amortization  of
stock based compensation in fiscal 2004 as compared to fiscal 2003. In addition,
the decrease is offset by an increase of $400 for stock compensation 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 Notes
to Consolidated Financial Statements).

      Other income,  net in fiscal 2004, was $1,737,  compared to $553 in fiscal
2003. The increase is  attributable  to an increase in interest income and gains
from sales of assets in fiscal 2004  compared to fiscal  2003.  The increase for
fiscal  2004  was  partially  offset  by  foreign  exchange  losses  related  to
Australian funds which were repatriated during the fiscal year.

      The effective  income tax rate from  continuing  operations  was 33.0% and
30.4% for fiscal 2004 and fiscal 2003, 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.  While  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,  tax  benefits  may  arise  at the  time the  incentive  options  are
exercised to the extent that the


                                      -23-


exercise  is  followed  by a  disqualifying  disposition  of the  shares  by the
optionee.  The fiscal  2003  period  reflects a greater  amount of tax  benefits
associated  with incentive stock options  exercised  during the year compared to
fiscal 2004.

      Discontinued  operations  reflect the  operations  of  restaurants  closed
subsequent to fiscal 2002 which are reported as discontinued operations pursuant
to SFAS No. 144, (see Note 12 to the Notes to Consolidated Statements).


                                      -24-


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 the past two fiscal years,
the Company experienced significant volatility in beef prices as such prices for
the periods were  generally  above  historical  levels.  To the extent that beef
prices continue to be  significantly  above  historical  levels,  it will 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 27,   December 28,   December 30,
                                                                          2005           2004           2003
                                                                          ----           ----           ----

Net cash provided by operating activities of continuing operations      $ 47,143       $ 61,059       $ 54,077
Net cash used in investment activities of continuing operations          (55,824)       (65,334)        (8,106)
Net cash used in financing activities of continuing operations           (13,177)       (54,788)       (27,149)
Effect of exchange rate changes on cash                                       --             --          1,486
Net cash provided by discontinued operations                               1,920          1,348         10,553
                                                                        --------       --------       --------
Net increase (decrease) in cash and cash equivalents                    $(19,938)      $(57,715)      $ 30,861
                                                                        ========       ========       ========

      The decrease in net cash provided by operating  activities for fiscal 2005
compared to fiscal  2004 is due  primarily  to a decrease  in net income  during
fiscal 2005 as compared to fiscal 2004.

      During fiscal 2005,  2004, and 2003, the Company's  investment in property
and equipment was $44,725,  $22,245, and $6,928,  respectively.  In fiscal 2005,
2004, and 2003, the Company received proceeds from the sale of assets of $1,036,
$2,035, and $1,730, respectively.

      During  fiscal  2005 and fiscal  2004,  the Company  invested  $11,525 and
$33,500 in short term securities  primarily consisting of investments in auction
rate securities  with  contractual  maturities of up to 30 years.  These auction
rate securities have interest re-set dates that occur every 7 to 90 days and can
be actively  marketed at ongoing  auctions that occur every 7 to 90 days.  These
investments are in investment-grade  debt instruments such as  government-backed
securities. Auction rate securities are classified as available-for-sale and are
reported on the balance sheet at par value,  which equals  market value,  as the
rate on such securities resets every 7 to 90 days.  Consequently,  interest rate
movements  do not affect the  balance  sheet  valuation  of these  fixed  income
investments.

      The Company  opened two domestic Lone Star  restaurant in fiscal 2005, one
in fiscal 2004 and none in fiscal 2003.  During fiscal 2005,  the Company closed
two  underperforming  Lone Star  restaurants and one restaurant was destroyed by
fire.

      Since the start of the 2006  fiscal  year,  the Company has opened two new
Lone Star Steakhouse & Saloon restaurants and has plans to open an additional 20
new units  throughout the year, or early 2007. There are also seven Texas Land &
Cattle  resturants,  five Sullivan  Steakhouses  and one Del Frisco Double Eagle
Steakhause that will open throughout 2006 or early in 2007.

      As more fully described in Note 19 to the Notes to Consolidated  Condensed
Financial  Statements,  on January 28,  2004,  the Company  acquired  TXCC which
operates 20 Texas Land & Cattle Steak House(R)  restaurants located primarily in
Texas.  The cash portion of the purchase  price,  net of cash acquired of $2,145
was $12,579 and was funded from the  Company's  existing  cash  balance.  In May
2005,  the Company  acquired  for $1,200 in cash,  the  remaining  40%  minority
interest of certain limited partners in TXCC-Preston, L.P.


                                      -25-


      During fiscal 2005,  the Company  received net proceeds of $2,453 from the
issuance  of 247,186  shares of its common  stock due to the  exercise  of stock
options  compared  to  proceeds  of $11,454  and  $10,244  from the  issuance of
1,350,065 and 1,210,682 shares in fiscal 2004 and 2003, respectively.

      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.  The most recent  authorization  was November 17, 2004
when the Board of Directors approved the repurchase of up to 2,026,190 shares of
the Company's common stock. During fiscal 2005, the Company made no purchases of
its common stock. In fiscal 2004 and 2003, the Company  purchased  2,072,800 and
1,132,500 shares at a cost of $51,410 and $23,833, respectively. At December 27,
2005,  the Company may purchase up to 2,026,190  shares of common stock pursuant
to its current authorization by the Board of Directors.

      The Company has paid  quarterly  cash  dividends on its common stock since
the second  quarter of fiscal 2000. In January 2005,  the Company  increased its
quarterly  cash  dividend  from $.175 to $.195 per share.  The Company  recently
announced in 2006 that it would  increase its quarterly cash dividend from $.195
to $.205 per share.  During fiscal 2005,  2004,  and 2003, the Company paid cash
dividends as follows:

                                      Amount                       Per Share
                                      ------                       ---------

         Fiscal 2005                 $15,630                         $0.76
         Fiscal 2004                 $14,832                         $0.70
         Fiscal 2003                 $13,560                         $0.645

      The Company  anticipates  that its  aggregate  costs to complete the store
development currently in process or planned will range from $100,000 to $110,000
relating primarily to construction and equipment costs for new restaurants,  the
acquisition  of  additional  restaurant  sites and the  installation  of the new
web-based  POS  system  in  its  existing  stores.  As  of  December  27,  2005,
approximately  $20,000  of this  aggregate  cost  was  already  incurred  by the
Company.

     At December 27, 2005, the Company had $18,577 in cash and cash  equivalents
and $45,025 in short term  investments.  The Company  has  available  $55,000 in
unsecured  revolving credit facilities which expire in October 2007. At December
27, 2005, the Company had no outstanding  borrowings under such facilities.  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  investing  and  financing  activities,  including its
capital  expenditure  requirements,  through cash  expected to be provided  from
operations,  existing  balances  in cash  and cash  equivalent  and  short  term
investments and existing credit facilities.

      The Company's obligations at December 27, 2005 are for operating leases as
follows:

                                     2006                $ 14,519
                                     2007                  14,071
                                     2008                  14,220
                                     2009                  14,179
                                     2010                  13,833
                               Thereafter                 113,332
                                                         --------
        Total operating lease obligations                $184,154
                                                         ========

      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
27, 2005 and during the fiscal year then ended,  the Company had no positions in
futures contracts.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

      In  October  2005,  the FASB  issued  FASB  Staff  Position  No. FAS 13-1,
ACCOUNTING  FOR RENTAL COSTS INCURRED  DURING A CONSTRUCTION  PERIOD (FSP 13-1).
FSP 13-1 requires rental costs associated with ground or


                                      -26-


building operating leases incurred during a construction period to be recognized
as rental expense.  FSP 13-1 is effective for reporting  periods beginning after
December 15, 2005. Retroactive  application is permitted,  but not required. Had
FSP 13-1  been  effective,  the  impact  would  have been  insignificant  to the
Company's financial statements for fiscal years 2005, 2004 and 2003.

      In  December  2004,  the FASB issued  Statement  of  Financial  Accounting
Standards No. 123 (revised 2004).  "Share-Based Payment," (SFAS 123R). SFAS 123R
is a revision of SFAS No. 123, "Accounting for Stock-Based  Compensation." Among
other  items,  SFAS 123R  eliminates  the use of the  intrinsic  value method of
accounting,  and requires  companies  to recognize  the cost of awards of equity
instruments  granted in exchange for employee  services  received,  based on the
grant  date  fair  value of  those  awards,  in the  financial  statements.  The
effective  date of SFAS 123R was the first interim period  beginning  after June
15, 2005;  however,  on April 14, 2005, the  Securities and Exchange  Commission
announced  that the effective  date of SFAS 123R was  postponed  until the first
annual period  beginning after June 15, 2005. The Company  currently  recognizes
the cost of its awards of equity  instruments  granted in exchange  for employee
services  received,  based on the  grant  date  fair  value of those  awards  in
accordance  Statement of Financial Accounting Standards No. 123 in its financial
statements.  Therefore,  the Company  does not believe the adoption of SFAS 123R
will have a significant impact to its financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The  response  to this item is  included  in a  separate  section  of this
report. See "Index to Consolidated Financial Statements" on page F-1.

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

      Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

      The Company carried out an evaluation,  under the supervision and with the
participation of the Company's management, including the chief executive officer
and  the  chief  financial  officer,  of the  effectiveness  of the  design  and
operation  of the  disclosure  controls  and  procedures,  as  defined  in Rules
13a-15(e) and 15d-15(e)  under the  Securities  Exchange Act of 1934, as amended
(the "Exchange Act"). Based upon that evaluation,  the Company's chief executive
officer and chief  financial  officer  concluded  that the Company's  disclosure
controls and procedures  are  effective,  as of the end of the period covered by
this Report (December 27, 2005), in ensuring that material  information relating
to Lone Star Steakhouse & Saloon, Inc. including its consolidated  subsidiaries,
required  to be  disclosed  by the  Company in reports  that it files or submits
under the Exchange Act is recorded,  processed,  summarized and reported  within
the time periods specified in the SEC rules and forms.  There were no changes in
the Company's internal control over


                                      -27-


financial  reporting  during the quarter  ended  December  27,  2005,  that have
materially  affected,  or  are  reasonably  likely  to  materially  affect,  the
Company's internal control over financial reporting.

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

      The management of Lone Star Steakhouse & Saloon,  Inc., is responsible for
establishing and maintaining adequate internal control over financial reporting.
Internal  control over  financial  reporting is a process to provide  reasonable
assurance  regarding the  reliability  of our  financial  reporting for external
purposes in accordance  with  accounting  principles  generally  accepted in the
United States of America.  Internal  control over financial  reporting  includes
maintaining  records that in reasonable detail accurately and fairly reflect our
transactions;  providing  reasonable assurance that transactions are recorded as
necessary for  preparation  of our financial  statements;  providing  reasonable
assurance  that  receipts  and  expenditures  of  company  assets  are  made  in
accordance with management  authorization;  and providing  reasonable  assurance
that unauthorized  acquisition,  use or disposition of company assets that could
have a  material  effect  on our  financial  statements  would be  prevented  or
detected  on a timely  basis.  Because  of its  inherent  limitations,  internal
control over financial  reporting is not intended to provide absolute  assurance
that a misstatement of our financial statements would be prevented or detected.

      Management  conducted an evaluation of the  effectiveness  of our internal
control over financial reporting based on the framework and criteria established
in  Internal  Control  -  Integrated  Framework  , issued  by the  Committee  of
Sponsoring  Organizations of the Treadway  Commission.  This evaluation included
review of the documentation of controls,  evaluation of the design effectiveness
of controls, testing of the operating effectiveness of controls and a conclusion
on this  evaluation.  Based on this  evaluation,  management  concluded that the
Company's internal control over financial reporting was effective as of December
27, 2005.  Management's  assessment of the effectiveness of our internal control
over  financial  reporting  as of December  27, 2005 has been audited by Ernst &
Young LLP, an independent  registered public accounting firm, as stated in their
report which is included below.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited management's assessment,  included in the accompanying Report of
Management  on  Internal  Control  over  Financial  Reporting,  that  Lone  Star
Steakhouse & Saloon, Inc. and subsidiaries maintained effective internal control
over financial reporting as of December 27, 2005, based on criteria  established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations  of  the  Treadway  Commission  (the  COSO  criteria).  Lone  Star
Steakhouse & Saloon,  Inc.  and  subsidiaries'  management  is  responsible  for
maintaining  effective  internal  control over  financial  reporting and for its
assessment of the  effectiveness of internal  control over financial  reporting.
Our  responsibility  is to express an opinion on management's  assessment and an
opinion on the  effectiveness  of the company's  internal control over financial
reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.


                                      -28-


A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that Lone Star Steakhouse & Saloon, Inc.
and subsidiaries  maintained effective internal control over financial reporting
as of December 27, 2005, is fairly stated,  in all material  respects,  based on
the COSO criteria. Also, in our opinion, Lone Star Steakhouse & Saloon, Inc. and
subsidiaries,  maintained, in all material respects,  effective internal control
over financial reporting as of December 27, 2005, based on the COSO criteria.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated balance sheets of
Lone Star Steakhouse & Saloon, Inc. and subsidiaries as of December 27, 2005 and
December  28,  2004,  and  the  related   consolidated   statements  of  income,
shareholders'  equity,  and cash flows for each of the three years in the period
ended December 27, 2005 of Lone Star Steakhouse & Saloon,  Inc. and subsidiaries
and our report dated March 6, 2006, (except for note 20, as to which the date is
March 11, 2006) expressed an unqualified opinion thereon.


                                             /s/ Ernst & Young LLP

Kansas City, Missouri
March 6, 2006

ITEM 9B. OTHER INFORMATION

In December 2005, the Company's Compensation/Stock Option Committee approved the
fiscal 2005 cash bonuses and stock  options to be granted to executive  officers
of the Company and approved the salaries of the executive officers for 2006.

      The  bonuses,  option  grants and  salaries  for the  Company's  executive
officers are as follows:

Named Executive Officer        2006 Base Salary    2005 Cash Bonus    Stock Option Grants(1)

Jamie B Coulter                   $866,250              1,500                 --
Mark Mednansky                     300,000            151,500             75,000
John D. White                      675,000              1,500                 --
Gerald T. Aaron                    275,000             45,213                 --
Dee Lincoln                        260,000             55,105                 --


                                      -29-


      (1) Granted  pursuant to the Company's 2004 Stock Option Plan. The options
shall vest in equal  installments on each of the first four anniversaries of the
date of the grant.

      The Company  entered  into  separate  employment  agreements  with each of
Messrs.  White,  Aaron,  and  Mednansky,  on April 29, 2003.  The agreements for
Messrs.  White and Aaron  have been  previously  filed by the  Company  with the
Securities  and  Exchange  Commission  and  the  employment  agreement  for  Mr.
Mednansky  is being  filed  with  this  Form  10-K.  The  material  terms of the
employment agreements for Messrs. White, Aaron and Mednansky have been described
in prior Company filings with the Securities Exchange  Comission.  In connection
with his appointment as the Comapny's Chief Operating Officer, the Comapny is in
the process of negotiating a new employment contract with Mr. Mednansky.

      Mr. Coulter and Ms. Lincoln do not have written employment agreements with
the  Company.  Their  base  salary  and  cash  bonus  are set  each  year by the
Compensation/Stock Option Committee.

                                    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.


                                      -30-


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.

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

            (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
     Number          Exhibit
     ------          -------

          **3.1      Company's Certificate of Incorporation as amended

         ***3.3      Company's Amended and Restated 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.

          *10.9      Employment   Agreement   between   the   Company  and  Mark
                     Mednansky, 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

  ********10.23      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

   *******10.26      Amendment to the Director's Plan

   *******10.27      Amendment to the Plan

 *********10.28      Revolver  Credit  Loan  Agreement  dated  October  8,  2004
                     between the Company and Suntrust Bank

**********10.29      2004 Stock Option Plan

          *21.1      Subsidiaries of the Company


                                      -31-


          *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

----------
         *      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   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.

 *********      Incorporated  by Reference to the Company's  Periodic  Report on
                Form 8-K, filed with the Commission on October 14, 2004.

**********      Incorporated  by Reference to the Company's  Periodic  Report on
                Form 8-K, filed with the Commission on December 20, 2004.


                                      -32-


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 13th day of March 2006.

                                             LONE STAR STEAKHOUSE & SALOON, INC.
                                                         (Registrant)


                                             /s/ John D. White
                                             -----------------------------------
                                                        John D. White
                                                 Chief Financial Officer and
                                                Principal Accounting Officer


                                      -33-


                                   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 13, 2006
-----------------------------     Principal Executive
      Jamie B. Coulter                  Officer


      /s/ John D. White       Chief Financial Officer and         March 13, 2006
----------------------------- Principal Accounting Officer
        John D. White           and Principal Financial
                                Officer, Executive Vice
                                    President,
                              Treasurer and Director


     /s/ Fred B. Chaney          Chairman of the Board            March 13, 2006
-----------------------------         and Director
       Fred B. Chaney


     /s/ Anthony Bergamo                Director                  March 13, 2006
-----------------------------
       Anthony Bergamo


    /s/ William B. Greene               Director                  March 13, 2006
-----------------------------
      William B. Greene


    /s/ Thomas C. Lasorda               Director                  March 13, 2006
-----------------------------
      Thomas C. Lasorda


    /s/ Michael A. Ledeen               Director                  March 13, 2006
-----------------------------
      Michael A. Ledeen


    /s/ Clark R. Mandigo                Director                  March 13, 2006
-----------------------------
      Clark R. Mandigo


     /s/ Mark Saltzgaber                Director                  March 13, 2006
-----------------------------
       Mark Saltzgaber


                                      -34-


CONSOLIDATED FINANCIAL STATEMENTS

Lone Star Steakhouse & Saloon, Inc.
Years Ended December 27, 2005, December 28, 2004, and December 30, 2003



                       Lone Star Steakhouse & Saloon, Inc.

                          Index to Financial Statements

                                                                           Pages
                                                                           -----

Report of Independent Registered Public Accounting Firm.....................F-1
Consolidated Balance Sheets as of December 27, 2005, and December 28, 2004..F-2
Consolidated Statements of Income for the years ended December 27, 2005,
   December 28, 2004, and December 30, 2003.................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
   December 27, 2005, December 28, 2004, and December 30, 2003..............F-5
Consolidated Statements of Cash Flows for the years ended
   December 27, 2005, December 28, 2004, and December 30, 2003..............F-6
Notes to Consolidated Financial Statements..................................F-8



             Report of Independent Registered Public Accounting Firm

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 27,
2005, and December 28, 2004, and the related consolidated  statements of income,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 27, 2005. 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 the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  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 27, 2005, and December
28, 2004, and the consolidated  results of their operations and their cash flows
for each of the three years in the period ended December 27, 2005, in conformity
with U.S. generally accepted accounting principles.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight  Board (United  States),  the  effectiveness  of Lone Star
Steakhouse & Saloon,  Inc. and  subsidiaries'  internal  control over  financial
reporting  as of December 27, 2005,  based on criteria  established  in INTERNAL
CONTROL  -  INTEGRATED   FRAMEWORK   issued  by  the   Committee  of  Sponsoring
Organizations  of the Treadway  Commission,  and our report dated March 6, 2006,
expressed an unqualified opinion thereon.


                                                    /s/ Ernst & Young LLP

Kansas City, Missouri
March 6, 2006, except for
  Note 20, as to which the
  date is March 11, 2006


                                                                             F-1


                       Lone Star Steakhouse & Saloon, Inc.

                           Consolidated Balance Sheets
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                     December 27,   December 28,
                                                         2005          2004
                                                     ------------   ------------
ASSETS
Current assets:
   Cash and cash equivalents                           $ 18,577      $ 38,515
   Short-term investments                                45,025        33,500
                                                       ----------------------
                                                         63,602        72,015

   Inventories                                           12,859        12,765
   Deferred income taxes                                  8,888         7,532
   Prepaid insurance deposits                            16,346        14,537
   Other                                                  8,876         6,225
                                                       ----------------------
Total current assets                                    110,571       113,074

Property and equipment:
   Land                                                 127,273       118,672
   Buildings                                            185,936       174,628
   Leasehold improvements                               125,507       118,203
   Equipment                                            117,968       107,872
   Furniture and fixtures                                21,418        19,267
                                                       ----------------------
                                                        578,102       538,642
   Less accumulated depreciation and amortization       237,674       217,837
                                                       ----------------------
                                                        340,428       320,805

Deferred compensation plan investments                   17,646        13,903

Other assets:
   Goodwill                                              12,219        11,513
   Intangible assets, net                                 8,960         9,964
   Deferred income taxes                                 24,013        24,434
   Other                                                  3,976         4,599
                                                       ----------------------
                                                         49,168        50,510
                                                       ----------------------
Total assets                                           $517,813      $498,292
                                                       ======================


                                                                             F-2


                                                                       December 27,    December 28,
                                                                          2005            2004
                                                                       ------------    ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                     $  12,655       $  13,845
   Sales tax payable                                                        3,110           2,817
   Accrued payroll                                                         10,322           9,947
   Real estate taxes                                                        3,315           3,239
   Accrued self-insurance                                                  21,406          15,094
   Gift certificates                                                       11,156          10,973
   Income taxes payable                                                        --           9,786
   Other                                                                    7,952           8,051
                                                                        -------------------------
Total current liabilities                                                  69,916          73,752

Long-term liabilities, principally deferred compensation
   obligations                                                             24,290          21,263
Deferred rent obligations                                                  11,266          10,496
                                                                        -------------------------
Total liabilities                                                         105,472         105,511

Stockholders' equity:
   Preferred stock, $0.01 par value, 2,000,000 shares
     authorized; none issued                                                   --              --
   Common stock, $0.01 par value, 98,000,000 shares authorized;
     20,716,726 shares issued and outstanding (20,469,540 in 2004)            207             205
   Additional paid-in capital                                             143,797         139,570
   Retained earnings                                                      272,000         256,669
   Common stock held by trust                                              (3,663)         (3,663)
                                                                        -------------------------
Total stockholders' equity                                                412,341         392,781

                                                                        -------------------------
Total liabilities and stockholders' equity                              $ 517,813       $ 498,292
                                                                        =========================

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                                                             F-3


                       Lone Star Steakhouse & Saloon, Inc.

                        Consolidated Statements of Income
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                                          Year Ended
                                                          --------------------------------------------
                                                          December 27,    December 28,    December 30,
                                                              2005            2004            2003
                                                          --------------------------------------------
Net sales                                                  $ 669,355       $ 667,546       $ 589,235

Costs and expenses:
   Costs of sales                                            235,903         238,925         211,785
   Restaurant operating expenses                             332,648         315,621         273,640
   Depreciation and amortization                              19,362          20,181          20,638
   Provision for impaired assets                                 410           1,167              --
                                                           -----------------------------------------
   Restaurant costs and expenses                             588,323         575,894         506,063

   General and administrative expenses                        46,650          45,269          43,346
   Hurricane disaster relief donation                          1,853              --              --
   Provision for casualty losses                                 535              --              --
   Noncash stock compensation expense                          1,575           1,193           1,474
                                                           -----------------------------------------
Income from operations                                        30,419          45,190          38,352

Other income, net                                              1,258           1,737             553
                                                           -----------------------------------------
Income from continuing operations before income taxes         31,677          46,927          38,905

Provision for income taxes                                    10,371          15,503          11,850
                                                           -----------------------------------------
Income from continuing operations                             21,306          31,424          27,055

Discontinued operations:
   Loss from operations of discontinued restaurants             (627)           (311)        (11,017)
   Income tax benefit                                         10,282             100           2,207
                                                           -----------------------------------------
Income (loss) on discontinued operations                       9,655            (211)         (8,810)
                                                           -----------------------------------------
Net income                                                 $  30,961       $  31,213       $  18,245
                                                           =========================================

Basic earnings per share:
   Continuing operations                                   $    1.04       $    1.50       $    1.30
   Discontinued operations                                      0.47           (0.01)          (0.42)
                                                           -----------------------------------------
Basic earnings per share                                   $    1.51       $    1.49       $    0.88
                                                           =========================================

Diluted earnings per share:
   Continuing operations                                   $    0.93       $    1.34       $    1.14
   Discontinued operations                                      0.43           (0.01)          (0.37)
                                                           -----------------------------------------
Diluted earnings per share                                 $    1.36       $    1.33       $    0.77
                                                           =========================================

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                                                             F-4


                       Lone Star Steakhouse & Saloon, Inc.

                 Consolidated Statements of Stockholders' Equity
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)


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

Balance, December 31, 2002                             --     20,994,608      $210    $189,908
Stock options exercised                                --      1,210,682        12      10,232
Tax effect related to options exercised                --             --        --         483
Common stock purchased and retired                     --     (1,132,500)      (11)    (23,822)
Cash dividends ($0.645 per share)                      --             --        --          --
Noncash stock compensation expense                     --             --        --       1,043
Common stock held by trust (177,145 shares)            --             --        --          --
Comprehensive income:
   Net income                                          --             --        --          --
   Foreign currency translation adjustments            --             --        --          --

Comprehensive income
                                                   ---------------------------------------------
Balance, December 30, 2003                             --     21,072,790       211     177,844
Stock options exercised                                --      1,350,065        14      11,440
Tax effect related to options exercised                --             --        --      (1,365)
Common stock purchased and retired                     --     (2,072,800)      (21)    (51,389)
Cash dividends ($0.70 per share)                       --             --        --          --
Noncash stock compensation expense                     --             --        --         362
Common stock issued in purchase of TXCC                --        119,485         1       2,678
Net income                                             --             --        --          --
                                                   ---------------------------------------------
Balance, December 28, 2004                             --     20,469,540       205     139,570
Stock options exercised                                --        247,186         2       2,451
Tax effect related to options exercised                --             --        --       1,148
Tax effect of upward repricing of stock options        --             --        --      (1,744)
Cash dividends ($0.76 per share)                       --             --        --          --
Noncash stock compensation expense                     --             --        --       2,372
Net income                                             --             --        --          --
                                                   ---------------------------------------------
Balance, December 27, 2005                             --     20,716,726      $207    $143,797
                                                   =============================================

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                                                             F-5



                       Lone Star Steakhouse & Saloon, Inc.

                 Consolidated Statements of Stockholders' Equity
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                                                             Accumulated
                                                                Common          Other
                                                  Retained    Stock Held    Comprehensive
                                                  Earnings   Held by Trust   (Loss) Income   Total
                                                  --------------------------------------------------

Balance, December 31, 2002                         $235,603     $    --         $(11,960)   $413,761
Stock options exercised                                  --          --               --      10,244
Tax effect related to options exercised                  --          --               --         483
Common stock purchased and retired                       --          --               --     (23,833)
Cash dividends ($0.645 per share)                   (13,560)         --               --     (13,560)
Noncash stock compensation expense                       --          --               --       1,043
Common stock held by trust (177,145 shares)              --      (3,663)              --      (3,663)
Comprehensive income:
   Net income                                        18,245          --               --      18,245
   Foreign currency translation adjustments              --          --           11,960      11,960
                                                                                            --------
Comprehensive income                                                                          30,205
                                                  --------------------------------------------------
Balance, December 30, 2003                          240,288      (3,663)              --     414,680
Stock options exercised                                  --          --               --      11,454
Tax effect related to options exercised                  --          --               --      (1,365)
Common stock purchased and retired                       --          --               --     (51,410)
Cash dividends ($0.70 per share)                    (14,832)         --               --     (14,832)
Noncash stock compensation expense                       --          --               --         362
Common stock issued in purchase of TXCC                  --          --               --       2,679
Net income                                           31,213          --               --      31,213
                                                  --------------------------------------------------
Balance, December 28, 2004                          256,669      (3,663)              --     392,781
Stock options exercised                                  --          --               --       2,453
Tax effect related to options exercised                  --          --               --       1,148
Tax effect of upward repricing of stock options          --          --               --      (1,744)
Cash dividends ($0.76 per share)                    (15,630)         --               --     (15,630)
Noncash stock compensation expense                       --          --               --       2,372
Net income                                           30,961          --               --      30,961
                                                  --------------------------------------------------
Balance, December 27, 2005                         $272,000     $(3,663)        $     --    $412,341
                                                  ==================================================

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                                                             F-5A
















                       Lone Star Steakhouse & Saloon, Inc.

                      Consolidated Statements of Cash Flows
                                 (IN THOUSANDS)

                                                                    Year Ended
                                                     ------------------------------------------
                                                     December 27,   December 28,   December 30,
                                                         2005            2004           2003
                                                     ------------------------------------------

OPERATING ACTIVITIES
Net income                                             $ 30,961       $ 31,213       $ 18,245
Adjustments to reconcile net income to net cash
   provided by operating activities of continuing
   operations:
     Depreciation                                        21,387         21,796         22,700
     Amortization                                         1,038          1,067          1,047
     Noncash stock compensation                           1,575          1,193          1,474
     Provision for impaired assets                          410          1,167             --
     Loss (gain) on sales of assets                         164         (1,250)            42
     Provision for casualty losses                          535             --             --
     Deferred income taxes                               (2,746)         2,964         (5,323)
     (Income) loss from discontinued operations          (9,655)           211          8,810
     Changes in operating assets and liabilities,
       net of the effects of the acquisitions:
         Inventories                                        (94)           598           (490)
         Prepaid insurance deposits                      (1,809)        (7,624)        (6,913)
         Other current assets                              (337)            43            407
         Accounts payable                                (1,190)            45         (1,212)
         Accrued self-insurance                           5,777          7,573          7,296
         Income taxes payable                            (2,000)          (806)         7,017
         Other liabilities                                3,127          2,869            977
                                                       --------------------------------------
Net cash provided by operating activities of
   continuing operations                                 47,143         61,059         54,077

INVESTING ACTIVITIES
Acquisitions, net of cash acquired                       (1,200)       (12,579)            --
Purchases of short-term investments                     (11,525)       (33,500)            --
Purchases of property and equipment                     (44,725)       (22,245)        (6,928)
Proceeds from sales of assets                             1,036          2,035          1,730
Other                                                       590            955         (2,908)
                                                       --------------------------------------
Net cash used in investing activities of
   continuing operations                                (55,824)       (65,334)        (8,106)

FINANCING ACTIVITIES
Net proceeds from issuance of common stock                2,453         11,454         10,244
Common stock repurchased and retired                         --        (51,410)       (23,833)
Dividends paid                                          (15,630)       (14,832)       (13,560)
                                                       --------------------------------------
Net cash used in financing activities of
   continuing operations                                (13,177)       (54,788)       (27,149)


                                                                             F-6


                       Lone Star Steakhouse & Saloon, Inc.

                Consolidated Statements of Cash Flows (continued)
                                 (IN THOUSANDS)

                                                                     Year Ended
                                                      ------------------------------------------
                                                      December 27,   December 28,   December 30,
                                                         2005           2004           2003
                                                      ------------------------------------------

Effect of exchange rate changes on cash                $     --       $     --       $  1,486

Cash flow of discontinued operations
   (revised):
    Operating cash flows                                   (300)          (277)         2,525
    Investing cash flows                                  2,220          1,625          8,028
                                                       --------------------------------------
Total                                                     1,920          1,348         10,553
                                                       --------------------------------------

Net (decrease) increase in cash and cash
   equivalents                                          (19,938)       (57,715)        30,861
Cash and cash equivalents at beginning of year           38,515         96,230         65,369
                                                       --------------------------------------
Cash and cash equivalents at end of year               $ 18,577       $ 38,515       $ 96,230
                                                       ======================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes                             $ 13,744       $ 14,610       $  6,875
                                                       ======================================

NONCASH OPERATING ACTIVITIES
Reversal of income tax contingency reserves            $ 10,100       $     --       $     --
                                                       ======================================

NONCASH INVESTING AND FINANCING ACTIVITIES
Shares issued in connection with acquisition           $     --       $  2,679       $     --
                                                       ======================================

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

Impact of litigation settlement on deferred taxes
   and additional paid-in capital                      $  1,744       $     --       $     --
                                                       ======================================

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                                                             F-7


                       Lone Star Steakhouse & Saloon, Inc.

                   Notes to Consolidated Financial Statements
         (ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

                                December 27, 2005

1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES

BACKGROUND

Lone  Star  Steakhouse  & Saloon,  Inc.  (the  Company)  owns and  operates  two
mid-priced full service,  casual dining restaurant concepts in the United States
which  operate  under the names Lone Star  Steakhouse  & Saloon and Texas Land &
Cattle Steak House (TXCC). 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 27, 2005,  the Company owns and operates
250 Lone Star  Steakhouse & Saloons and 20 Texas Land & Cattle  Steakhouses.  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. All of the
Company's  restaurants  are in the United  States.  The  Company  acquired  TXCC
effective January 28, 2004 (see Note 19).

SIGNIFICANT ACCOUNTING POLICIES

      o     Principles of Consolidation

            The consolidated  financial  statements  include the accounts of the
            Company  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 revenues
            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.

      o     Concentration of Credit Risk

            The Company's  financial  instruments  exposed to  concentration  of
            credit  risk  consist  primarily  of  cash,  cash  equivalents,  and
            short-term investments. The Company places its cash with high credit
            quality financial institutions, and at times, such cash may be


                                                                             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)

            in excess of the federal depository insurance limit. The Company has
            cash equivalents of approximately $6,726 and $13,626 at December 27,
            2005,  and December 28, 2004,  respectively,  in money market mutual
            funds. The Company's  short-term  investments of $45,025 and $33,500
            at December 27, 2005, and December 28, 2004, respectively, primarily
            include  auction-rate,  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

            Cash and cash equivalents  include currency on hand, demand deposits
            with banks or other financial institutions, credit card receivables,
            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     Short-Term Investments

            The  Company's  short-term  investments  of $45,025  and  $33,500 at
            December 27, 2005,  and December 28, 2004,  respectively,  primarily
            consist of investments in auction-rate  securities with  contractual
            maturities of up to 30 years.  These  auction-rate  securities  have
            interest  reset  dates  that  occur  every 7 to 90  days  and can be
            actively marketed at ongoing auctions that occur every 7 to 90 days.
            These  investments are  investment-grade  debt  instruments  such as
            government-backed securities. Auction-rate securities are classified
            as  available-for-sale  and are reported on the balance sheet at par
            value,  which equals  market value,  as the rate on such  securities
            resets every 7 to 90 days. Consequently,  interest rate movements do
            not affect the balance sheet valuation of these investments.


                                                                             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)

      o     Financial Instruments

            The Company considers carrying amounts of cash and cash equivalents,
            short-term  investments,   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  derivative  instruments  have not
            been significant.  The Company had no positions in futures contracts
            as of December 27, 2005, and December 28, 2004.  These  instruments,
            when  used,  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 using the first-in, first-out method, or market.

      o     Prepaid Insurance Deposits

            In  connection  with its  self-insurance  programs,  the  Company is
            required to make deposits with its insurance carrier pursuant to the
            terms of its insurance  agreements.  The funds held by the insurance
            carrier may be used solely to reimburse  the  insurance  carrier for
            any  amounts  paid  or  advanced  by the  insurance  carrier  in its
            capacity as the administrative agent for the Company relative to any
            claims or expenses under its insurance program.

      o     Property and Equipment

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


                                                                            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)

            Buildings are depreciated using the straight-line  method over their
            estimated  useful  lives of 20  years.  Leasehold  improvements  are
            amortized  on  the  straight-line  method  over  the  lesser  of the
            estimated  useful  lives of the  assets of 20 years or the  expected
            term of the lease,  including cancelable option periods when failure
            to exercise such options would result in an economic  penalty to the
            Company.  Equipment and furniture and fixtures are depreciated using
            the  straight-line  method over three to seven  years,  which is the
            estimated useful life of the assets.

      o     Rent Expense

            Rent  expense  is  recognized  on a  straight-line  basis  over  the
            expected  term of the  lease,  which  includes  cancelable  optional
            renewal  periods that are  reasonably  assured to be  exercised  and
            where  failure to exercise  such renewal  options would result in an
            economic penalty to the Company.

      o     Preopening Costs

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

      o     Intangible Assets

            Intangible   assets  include  goodwill,   trademarks,   intellectual
            properties,   and  licensing   permits.   The  Company  applies  the
            provisions of Statement of Financial Accounting Standards (SFAS) No.
            142  requiring  that goodwill and  intangible  assets deemed to have
            indefinite  lives are not  amortized  but are subjected to an annual
            impairment  test or more frequent  tests if indicators of impairment
            exist.  The Company  amortizes other  intangibles 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


                                                                            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)

            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 finite-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.

            As  noted  above,  goodwill  and  indefinite-life   intangibles  are
            reviewed  annually for impairment,  or more frequently if indicators
            of impairment  exist.  Goodwill is initially 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.


                                                                            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)

      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  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 27, 2005,  December 28, 2004, and December
            30, 2003, was $19,782, $17,502, and $15,033, respectively.

      o     Accounting for Stock-Based Compensation

            The Company 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     Revenue Recognition

            Revenue from  restaurant  sales is recognized when food and beverage
            products are sold.  Proceeds from the sale of gift  certificates and
            gift cards are  recorded  as a liability  at the time of sale.  Upon
            redemption of gift certificates, sales are recognized.


                                                                            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     Earnings per Share

            Basic   earnings  per  share  amounts  are  computed  based  on  the
            weighted-average  number  of shares  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  that
            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 shares
            issuable to settle the deferred  compensation  liabilities have been
            included only for periods where their effect has been dilutive.

      o     Segment Reporting

            Due to the  similar  economic  characteristics,  as well as a single
            type  of  product,  production  process,  distribution  system,  and
            similar  customers,  the  Company  reports  the  operations  of  its
            different  concepts on an aggregated  basis and does not  separately
            report  segment  information.  Revenues from external  customers are
            derived  primarily  from the sale of food and  beverage  sales.  The
            Company does not rely on any major customers as a source of revenue.

      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  which  include  12, 12, 12, and 16 or 17 weeks,
            respectively.  Fiscal 2005, 2004, and 2003 each included 52 weeks of
            operations.

      o     Cash Flows from Discontinued Operations

            In fiscal 2005, the Company has separately  disclosed the operating,
            investing,  and financial position of the cash flows attributable to
            its discontinued operations, which in prior periods were reported on
            a combined basis as a single amount.


                                                                            F-14


                       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     Recently Issued Accounting Standards

            In October 2005,  the Financial  Accounting  Standards  Board (FASB)
            issued  FASB  Staff  Position  13-1,  ACCOUNTING  FOR  RENTAL  COSTS
            INCURRED DURING A CONSTRUCTION  PERIOD (FSP 13-1). FSP 13-1 requires
            rental costs  associated  with ground or building  operating  leases
            incurred  during a  construction  period to be  recognized as rental
            expense. FSP 13-1 is effective for reporting periods beginning after
            December 15, 2005.  Retroactive  application  is permitted,  but not
            required.  Had FSP 13-1 been  effective,  the impact would have been
            insignificant to the Company's financial statements for fiscal years
            2005, 2004, and 2003.

            In  December  2004,  the FASB issued  SFAS No. 123  (revised  2004),
            Share-Based Payment (SFAS 123R). SFAS 123R is a revision of SFAS No.
            123,  Accounting for  Stock-Based  Compensation.  Among other items,
            SFAS  123R  eliminates  the use of the  intrinsic  value  method  of
            accounting and requires companies to recognize the cost of awards of
            equity  instruments   granted  in  exchange  for  employee  services
            received, based on the grant date fair value of those awards, in the
            financial statements.  The effective date of SFAS 123R was the first
            interim period beginning after June 15, 2005;  however, on April 14,
            2005,  the  Securities  and Exchange  Commission  announced that the
            effective  date of SFAS 123R was  postponed  until the first  annual
            period  beginning  after  June  15,  2005.  The  Company   currently
            recognizes the cost of its awards of equity  instruments  granted in
            exchange for  employee  services  received,  based on the grant date
            fair value of those  awards in  accordance  with SFAS No. 123 in its
            financial  statements.  Therefore,  the Company does not believe the
            adoption  of  SFAS  123R  will  have  a  significant  impact  to its
            financial statements.

      o     Reclassifications

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


                                                                            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

                                            Estimated
                                              Useful
                                              Lives         2005          2004
                                            -----------------------------------
Amortized intangible assets:
  Gross carrying amount:
    Licenses                                20 years      $  9,004     $  8,970
    Intellectual properties                 10 years         9,839        9,839
                                                          ---------------------
  Subtotal                                                  18,843       18,809

Accumulated amortization:
  Licenses                                                  (3,122)      (3,034)
  Intellectual property                                     (6,917)      (5,967)
                                                          ---------------------
Subtotal                                                   (10,039)      (9,001)
                                                          ---------------------
Net amortized intangible assets                           $  8,804     $  9,808
                                                          =====================

Unamortized intangible assets:
  Goodwill                                                $ 12,219     $ 11,513
  Other                                                        156          156
                                                          ---------------------
                                                          $ 12,375     $ 11,669
                                                          =====================

Aggregate amortization expense                            $  1,038     $  1,067
                                                          =====================

The Company has estimated that amortization expense will amount to approximately
$1,054 annually for 2006, 2007, and 2008, $158 for 2009, and $69 for 2010.

Licenses  primarily  consist of liquor licenses,  which are amortized over their
estimated  useful lives to their estimated  residual values and are reviewed for
impairment  in  accordance  with SFAS No.  144,  ACCOUNTING  FOR  IMPAIRMENT  OR
DISPOSAL OF LONG-LIVED ASSETS.

The  Company  applies  the  provisions  of SFAS  No.  142,  GOODWILL  AND  OTHER
INTANGIBLE  ASSETS,  which requires that goodwill and certain  intangible assets
deemed to have  indefinite  lives are not  amortized  but are  subject to annual
impairment  tests. The Company performed annual tests for impairment of goodwill
and has concluded  that no  impairment  existed for the fiscal years ended 2005,
2004, and 2003; accordingly, no impairment losses were recorded.


                                                                            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

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.  During fiscal 2005,  the Company made no purchases of
its common stock.  The Company  purchased  2,072,800 and 1,132,500 shares of its
common stock at average  prices of $24.80 and $21.05 per share during the fiscal
years  ended 2004 and 2003,  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.  At
December 27, 2005, the Company may purchase up to 2,026,190 shares of its common
stock pursuant to its current authorization by the Board of Directors.

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
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.
Accordingly,  shares  issued to the Trust were  recorded at fair market value on
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 27, 2005,


                                                                            F-17


                       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)

the Trust held 177,145 shares of the Company's common stock. Included in noncash
stock compensation  expense for the years ended December 27, 2005,  December 28,
2004, and December 30, 2003, were (credits)  charges of $(797),  $831, and $431,
respectively, relating to the changes in market price for such shares.

4. TERM REVOLVERS

The Company has an unsecured  revolving  credit  agreement with a group of banks
led by SunTrust  Bank.  The credit  facility  allows the Company to borrow up to
$30,000 with an accordion feature  permitting an increase in the credit facility
in an amount up to $20,000  such that the total  amount of the  credit  facility
does not exceed $50,000.  The additional borrowing is subject to the approval of
the lenders.  The credit agreement  terminates in October 2007;  however,  it is
subject to  acceleration  in the event of a change of control of the  Company as
that term is defined in the credit agreement. At the time of each borrowing, the
Company may elect to pay  interest at the higher of  SunTrust  Bank's  published
prime rate or the Federal  Funds Rate plus  one-half  of one percent  (0.50%) or
LIBOR rate plus one and  one-half  percent  (1.50%).  The Company is required to
achieve certain financial ratios and to maintain certain net worth  requirements
as  defined  in the  credit  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 27, 2005, and at December 28, 2004,
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 27, 2005,  and
December 28, 2004. The term loan agreement matures in October 2007. 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.

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.


                                                                            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

In December 2004, the stockholders of the Company approved the 2004 Stock Option
Plan (the 2004  Plan).  The 2004  Plan  provides  for  grants of  incentive  and
nonqualified stock options to employees, directors, consultants, and advisors. A
total of 3,000,000 shares are available for issuance  pursuant to the 2004 Plan,
of which 500,000 are available for nonemployee directors.  The maximum number of
shares  that may be  granted  under  the 2004 Plan to any  individual  shall not
exceed  600,000.  Options  granted under the 2004 Plan have  ten-year  terms and
generally  vest equally over a four-year  period  commencing  one year after the
date of grant.

As  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.  The fair  value of stock
options is  determined  at the date of grant under the  Company's  stock  option
plans and is charged to  compensation  expense  over the  vesting  period of the
options.

The aggregate noncash stock compensation expense, including amounts attributable
to noncash stock  compensation  arising from the common shares held by the Trust
as  described in Note 3, for the years ended  December  27,  2005,  December 28,
2004, and December 30, 2003, was $1,575, $1,193, and $1,474, respectively.

The fair values 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 2005 and 2004,  respectively:
risk-free  interest rates of 4.2% and 4.0%,  volatility  factors of the expected
market   price  of  the   Company's   common   stock  of  0.295  and  0.201,   a
weighted-average expected life of the option of four years and five years, and a
dividend yield of 2.5% and 2.5%.  There were no stock options  granted in fiscal
2003.

                                                             2005            2004            2003
                                                            -------------------------------------

Weighted-average fair value of options granted during
  the year                                                  $6.625          $5.80            $ --


                                                                            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)

A summary of the Company's stock option activity and related information for the
years ended  December 27, 2005,  December 28, 2004, and December 30, 2003, is as
follows:

                                            2005                    2004                  2003
                                    -----------------------------------------------------------------
                                    Weighted-              Weighted-              Weighted-
                                     Average                Average                Average
                                    Exercise    Options    Exercise    Options    Exercise    Options
                                      Price     (000's)      Price     (000's)      Price     (000's)
                                    -----------------------------------------------------------------

Outstanding at beginning of year     $15.02      4,597     $  8.98       4,519      $8.98       5,867
Granted                               27.25        305       27.67       1,453          -           -
Exercised                              9.46       (247)       8.48      (1,350)      9.58      (1,334)
Canceled                              27.06       (226)      11.95         (25)      9.84         (14)
                                               -------                 -------                -------
Outstanding at end of year            16.61      4,429       15.02       4,597       8.98       4,519
                                               =======                 =======                =======

For  options  outstanding  as of  December  27,  2005,  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 27,        Exercise        Remaining
Range of Prices                      2005              Price       Contract Life
--------------------------------------------------------------------------------
                                (In Thousands)

$7.43 to $9.00                       1,496           $  8.54         1.9 years
$12.47 to $18.81                     1,379             13.03         1.5 years
$22.25 to $31.24                     1,554             27.55         9.1 years


                                                                            F-20


                       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)

The number of shares and weighted-average  exercise price of options exercisable
at December 27, 2005, are as follows:

                               Options Exercisable
--------------------------------------------------------------------------------
                                                     Number            Weighted-
                                                 Exercisable at         Average
                                                  December 27,         Exercise
Range of Prices                                       2005               Price
--------------------------------------------------------------------------------
                                                 (In Thousands)

$7.43 to $9.00                                       1,496              $  8.54
$12.47 to $18.81                                     1,379                13.03
$22.25 to $31.24                                        44                25.85

7. RELATED-PARTY TRANSACTIONS

The Company leases on a month-to-month  basis document storage space and parking
space for 2004 and 2003 from entities  owned by Jamie B. Coulter,  the Company's
Chief  Executive  Officer.  Total rental fees paid to these related  entities in
2005, 2004, and 2003 were $12, $19, and $26, 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.

8. LEASES

The Company leases  certain  facilities  under  noncancelable  operating  leases
having terms expiring  between 2005 and 2029. 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 2005, 2004, and 2003
was $16,455, $16,017, and $12,270, respectively, including contingent rentals of
approximately $1,759, $1,456, and $832, respectively.


                                                                            F-21


                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

8. LEASES (CONTINUED)

Lease  payments under  noncancelable  operating  leases  include  renewal option
periods for certain leases when such option periods are included for purposes of
calculating  straight-line rents. Such rents for each of the next five years and
in the aggregate are as follows at December 27, 2005:

       2006                                                      $  14,519
       2007                                                         14,071
       2008                                                         14,220
       2009                                                         14,179
       2010                                                         13,833
       Thereafter                                                  113,332
                                                                  --------
       Total minimum lease payments                               $184,154
                                                                  ========

9. EARNINGS PER SHARE

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

                                                          2005              2004               2003
                                                     -------------------------------------------------

Basic earnings per share computation:
  Numerator:
    Income from continuing operations                $     21,306      $     31,424       $     27,055
    Discontinued operations, net of income tax              9,655              (211)            (8,810)
                                                     -------------------------------------------------
Net income                                           $     30,961      $     31,213       $     18,245
                                                     =================================================

Denominator:
  Weighted-average number of shares outstanding        20,416,840        20,962,919         20,801,894
                                                     =================================================

Basic earnings per share:
  Continuing operations                              $       1.04      $       1.50       $       1.30
  Discontinued operations                                    0.47             (0.01)             (0.42)
                                                     -------------------------------------------------
Basic earnings per share                             $       1.51      $       1.49       $       0.88
                                                     =================================================


                                                                            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 (CONTINUED)

                                                          2005               2004               2003
                                                     --------------------------------------------------

Diluted earnings per share computation:
  Numerator:
    Income from continuing operations                $     21,306       $     31,424       $     27,055
    Adjustment for assumed settlement of
      deferred compensation liabilities                      (498)                --                 --
                                                     --------------------------------------------------
Diluted income from continuing operations                  20,808             31,424             27,055

Discontinued operations, net of income tax                  9,655               (211)            (8,810)
                                                     --------------------------------------------------
Diluted net income                                   $     30,463       $     31,213       $     18,245
                                                     ==================================================

Denominator:
  Weighted-average number of shares outstanding        20,416,840         20,962,919         20,801,894
  Effect of dilutive employee stock options             1,815,561          2,433,792          2,961,703
  Effect of shares issuable to settle deferred
    compensation liabilities                              177,145                 --                 --
                                                     --------------------------------------------------
                                                       22,409,546         23,396,711         23,763,597
                                                     ==================================================

Diluted earnings per share:
  Continuing operations                              $       0.93       $       1.34       $       1.14
  Discontinued operations                                    0.43              (0.01)             (0.37)
                                                     --------------------------------------------------
Diluted earnings per share                           $       1.36       $       1.33       $       0.77
                                                     ==================================================

10. INCOME TAXES

The  components  of the provision  for income taxes from  continuing  operations
consist of the following:

                                             2005           2004          2003
                                          -------------------------------------
Current tax (benefit) expense:
  Federal                                 $ 10,803       $ 11,039      $ 15,180
  State                                      2,314          1,500         1,993
                                          -------------------------------------
Total current tax expense                   13,117         12,539        17,173

Deferred tax (benefit) expense:
  Federal                                   (2,423)         2,660        (5,129)
  State                                       (323)           304          (194)
                                          -------------------------------------
Total deferred tax (benefit) expense        (2,746)         2,964        (5,323)
                                          -------------------------------------
Total provision for income taxes          $ 10,371       $ 15,503      $ 11,850
                                          =====================================


                                                                            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 total (benefit) provision for income taxes is as follows:

                                                     2005           2004           2003
                                                   --------------------------------------

Total (benefit) provision for income taxes is
  as follows:
  Continuing operations                            $ 10,371       $ 15,503       $ 11,850
  Discontinued operations                           (10,282)          (100)        (2,207)
                                                   --------------------------------------
                                                   $     89       $ 15,403       $  9,643
                                                   ======================================

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 from continuing operations is reconciled as follows:

                                               2005                      2004                       2003
                                        ----------------------------------------------------------------------
                                         Amount      Rate          Amount      Rate         Amount        Rate
                                        ----------------------------------------------------------------------

Income tax expense at federal
  statutory rate                        $11,087       35%         $16,425       35%        $13,616         35%
State tax expense, net                      919        3            1,173        2             973          2
Nondeductible foreign losses                  -        -                -        -           1,239          3
TIP and work opportunity credits         (2,990)      (9)          (2,843)      (6)         (2,479)        (6)
Other items, net                          1,355        4              748        2          (1,499)        (4)
                                        ----------------------------------------------------------------------
Provision for income taxes              $10,371       33%         $15,503       33%        $11,850         30%
                                        ======================================================================

In the fourth  quarter of fiscal  2005,  the  Company  recognized  an income tax
benefit of $10,100 resulting from the release of tax contingency  reserves.  The
adjustment of the tax contingency  reserves related  primarily to the resolution
of the Company's  investments in Australia,  which were  discontinued  in fiscal
2003.  The tax  benefits  are  included in the tax  provision  for  discontinued
operations.


                                                                            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)

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 27,      December 28,
                                                      2005              2004
                                                  ------------------------------
Deferred tax assets:
  TXCC NOL carryforward                             $ 4,340           $ 5,282
  Deferred rent liabilities                           3,700             3,387
  Accrued liabilities                                10,893             8,238
  Stock-based compensation                           13,254            15,158
  Deferred compensation                               7,244             5,818
  Other                                                  --             1,050
                                                    -------------------------
Total deferred tax assets                            39,431            38,933

Deferred tax liabilities:
  Property and equipment                              1,003             4,635
  Intangible assets                                   2,191             1,596
  Other                                               3,336               736
                                                    -------------------------
Total deferred tax liabilities                        6,530             6,967
                                                    -------------------------
Net deferred tax assets                             $32,901           $31,966
                                                    =========================

In connection  with the  acquisition of TXCC, the Company has net operating loss
carryforwards  of  approximately  $12,401 to reduce future taxable income.  Such
carryforwards  expire at various times  through 2023. At December 27, 2005,  the
Company  has  recorded  a  deferred  tax asset of $4,340  pertaining  to the net
operating  loss  carryforward.  The  Company  has  not  provided  any  valuation
allowance with respect to this amount, as management believes its realization is
"more likely than not" based upon its  expectations  that future  taxable income
will be sufficient to utilize the net operating loss carryforward.


                                                                            F-25


                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

11. PROVISION FOR IMPAIRED ASSETS

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,
including management's  estimates and judgments,  independent appraisals of fair
value, and projections as considered necessary.

During the fourth quarter of 2005 and 2004, the Company  recorded a provision of
$410 and  $1,167,  respectively,  to  write  down the  estimated  fair  value of
impaired properties relating to five underperforming restaurants in each year.

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
carrying value of the related assets is not significant.

12. DISCONTINUED OPERATIONS

In December of fiscal 2003, the Company  announced its plan to divest all of its
Australian  operations.  Prior to and including  2003,  the Company  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


                                                                            F-26


                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

12. DISCONTINUED OPERATIONS (CONTINUED)

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 domestic  restaurants closed subsequent to
fiscal 2001, which meet the criteria for such presentation.

                                                       2005           2004           2003
                                                    --------------------------------------

Loss from operations                                $   (627)      $   (311)      $(11,017)
Income tax benefit                                    10,282            100          2,207
                                                    --------------------------------------
Net income (loss) from discontinued operations      $  9,655       $   (211)      $ (8,810)
                                                    ======================================

Net sales from discontinued operations              $  1,353       $  1,981       $ 27,797
                                                    ======================================

The  income  tax  benefit  includes  $10,100  reflecting  the  release  of a tax
contingency  reserve  related to  Australian  tax matters which were resolved in
fiscal 2005 (see Note 10).

13. RETIREMENT PLANS

In August  1999,  the Company  approved  the  adoption of two plans that 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.  During 2005, 2004, and 2003, the Company's contributions to
the Plans were $3,142, $3,509, and $2,146, respectively.


                                                                            F-27


                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

14. HURRICANE RELATED COSTS

In connection  with disaster  relief for the victims of Hurricane  Katrina,  the
Company  donated  to the  American  Red Cross an amount of  $1,853.  The  amount
donated was 100% of its restaurant sales on Labor Day, September 5, 2005.

In addition,  the Company provided $535 as a casualty loss provision  associated
with its  restaurants  that were damaged by  Hurricane  Katrina.  The  principal
amount of such losses relate to estimated  property  damages for which insurance
recoveries  will not be available  due to  limitations  of insurance  deductible
amounts.

15. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED)

The table below sets forth  consolidated  quarterly  results of  operations  for
fiscal 2005 and 2004.  The results  have been  adjusted to reflect the impact of
certain discontinued operations to the extent such amounts were reclassified.

Fiscal 2005 and 2004 each include 52 weeks of operations. Quarters one, two, and
three each include 12 weeks of operations,  and the fourth  quarter  includes 16
weeks of operations.

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

2005
Net sales                               $164,899     $153,189     $148,409      $202,858
Income from continuing operations         11,020        5,387        1,063         3,836
Net income (C)                            10,909        5,257          963        13,832
Basic earnings per share (B):
   Continuing operations                    0.54         0.26         0.05          0.19
   Net income                               0.54         0.26         0.05          0.67
Diluted earnings per share (B):
   Continuing operations                    0.50         0.24         0.05          0.15
   Net income                               0.49         0.24         0.04          0.60


                                                                            F-28


                       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)

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

2004
Net sales (A)                           $160,040     $155,068     $147,608      $204,830
Income from continuing operations         10,945        5,309        4,505        10,665
Net income                                11,002        5,261        4,409        10,541
Basic earnings per share (B):
   Continuing operations                    0.52         0.25         0.21          0.52
   Net income                               0.52         0.25         0.21          0.52
Diluted earnings per share (B):
   Continuing operations                    0.46         0.22         0.17          0.47
   Net income                               0.46         0.22         0.17          0.47

(A)   On January 28, 2004, the Company  acquired  TXCC,  which operated 20 Texas
      Land & Cattle Steak House restaurants. The operations of TXCC are included
      in the Company's  consolidated results since the date of acquisition.  See
      Note 19 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 does not
      necessarily  equal  the  total  for the  year due to the  impact  of stock
      transactions that occurred during the periods presented.

(C)   Income for the fourth quarter of fiscal 2005 includes tax benefits arising
      from the release of tax  contingency  reserves in the aggregate  amount of
      $10,100 which is included in discontinued operations (see Note 10).

16. OTHER INCOME, NET

The components of other income, net are as follows:

                                              2005          2004          2003
                                            -----------------------------------

Interest income                             $ 2,028       $ 1,394       $   789
Interest expense, principally credit
  availability fees                            (167)         (185)         (194)
(Loss) gain on sale of assets                  (164)        1,250           (42)
Foreign exchange loss                          (390)         (521)           --
Other expense                                   (49)         (201)           --
                                            -----------------------------------
                                            $ 1,258       $ 1,737       $   553
                                            ===================================


                                                                            F-29


                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

17. LITIGATION

On August 15, 2005,  the Company  received an Order and Final  Judgment from the
Court of  Chancery  of the State of  Delaware  relating  to the  Stipulation  of
Settlement of the class action and derivative  lawsuit brought by the California
Public Employees Retirement System (CalPERS) against the Company. The settlement
resolves all claims raised by the parties in litigation.  In connection with the
settlement,  the parties  agreed to release  each other from any and all current
and future claims related to the litigation. As part of the settlement,  certain
of the Company's  current and former  Directors agreed to an upward repricing of
certain stock  options or personally  make payments to the Company as additional
proceeds in connection with certain options previously  exercised.  In addition,
the  Company's  insurance  provider made a payment in the amount of $3,000 under
the Company's  Directors,  Officers,  and Corporate  insurance  policy, of which
$2,500 was an award for attorneys'  fees and expenses on behalf of CalPERS.  The
remaining  $500 was paid to the  Company  for  reimbursement  of legal costs and
expenses  and  is  included  in  general  and  administrative  expenses  in  the
accompanying consolidated financial statements.

The aggregate  effect of the repricing  provisions of the settlement will result
in additional proceeds to the Company of approximately $4,700 if all options are
ultimately  exercised.  The Company received $115 in cash from certain Directors
which represented  additional  proceeds from options previously  exercised,  and
accordingly,  such amounts were  recorded as  additional  paid-in  capital.  The
upward  repricing  of the  remaining  stock  options  will result in  additional
proceeds  when the options are  exercised  which will be credited to  additional
paid-in  capital.  In connection with the upward repricing of the stock options,
the Company  recorded a charge to  additional  paid-in  capital in the amount of
$1,744 to reflect a reduction of the related  deferred tax assets  applicable to
such repricing.

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

18. DIVIDEND DECLARATION

On December 15, 2005,  the Board of Directors  declared the Company's  quarterly
cash dividend of $0.195 per share,  payable January 10, 2006, to stockholders of
record on December  27,  2005.  In  addition,  on January 9, 2006,  the Board of
Directors  increased its quarterly  dividend from $0.195 to $0.205  beginning in
the first quarter of 2006.


                                                                            F-30


                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

19. ACQUISITION OF TEXAS LAND AND CATTLE STEAK HOUSE

On January 28, 2004, the Company's  Joint Plan of  Reorganization  (the Plan) 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,  and the Company
acquired  100% of  TXCC  on that  date.  The  Company's  consolidated  financial
statements  include TXCC's  operations  from January 28, 2004.  TXCC operates 20
Texas Land & Cattle Steak House(R)  restaurants  located primarily in Texas. The
acquisition  of TXCC  allows  the  Company to expand  its  steakhouse  concepts,
provides  strategic  growth  opportunities,   and  significantly  increases  its
presence in the Texas market. Pursuant to the terms of the Plan, the prepetition
creditors at their option were  entitled to receive  either cash or common stock
of Lone Star Steakhouse & Saloon,  Inc. in settlement of their claims.  The cash
portion of the acquisition was funded from the Company's existing cash balances.

The aggregate  purchase  price was $23,496 and consisted of $12,579 of cash, net
of $2,145 in cash acquired, $6,093 of assumed liabilities, and 119,485 shares of
the Company's common stock valued at $2,679.

The  following  table  summarizes  the fair  values of the assets  acquired  and
liabilities assumed at the date of acquisition:

      Current assets (net of cash acquired of $2,145)              $ 1,221
      Property, plant, and equipment                                14,027
      Deferred income taxes                                          5,762
      Other assets                                                     341
                                                                   -------
      Total assets acquired                                         21,351
      Total liabilities assumed                                      6,093
                                                                   -------
      Net assets acquired                                          $15,258
                                                                   =======

Pro forma results giving effect to the acquisition of TXCC are not presented for
the periods, as such amounts are not significant.

In May 2005, the Company  acquired for $1,200 in cash the remaining 40% interest
of certain limited partners in TXCC-Preston,  L.P., a Texas limited  partnership
in which the Company owned a 60% interest. The limited partnerships owned two of
the TXCC restaurants that were operated by the Company.


                                                                            F-31


                       Lone Star Steakhouse & Saloon, Inc.

             Notes to Consolidated Financial Statements (continued)
         (ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

20. SUBSEQUENT EVENT

On March 11,  2006,  the  Company's  Board of  Directors  approved  management's
recommendation  to close  certain  Lone Star  Steakhouse & Saloon  stores.  As a
result, the Company will immediately close 30 underperforming stores. This group
of stores consists of 13 owned locations and 17 leased  locations with aggregate
net carrying values of land, buildings,  leasehold improvements and equipment of
approximately $10,577,  $6,014, $3,984 and $812,  respectively and deferred rent
obligations  of  $1,343.   These   identified   store  closings   resulted  from
management's  analysis  of not only the  performance  of these  stores  but also
related return on investment targets, the geographical  location of these stores
as compared to other  Company  owned stores,  and  demographical  changes in the
local markets surrounding these stores.

Additionally,  the Company  expects to exit these stores through the abandonment
or sale of such  locations.  The operations of these closed stores for the years
ended  December 27,  2005,  December  28,  2004,  and December 30, 2003,  are as
follows:

                                         2005          2004          2003
                                       -----------------------------------

      Net sales                        $32,900       $35,589       $36,787
      Loss from operations               4,637         2,298         1,267




                                                                            F-32