STATEMENT REGARDING FORWARD LOOKING DISCLOSURE

The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward-looking statements that involve known and unknown risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-Q. Our actual results could differ materially from those discussed in forward-looking statements. Factors that could cause or contribute to such differences include, without limitation, those factors discussed herein: our ability to manage an increasing number of new restaurant openings; construction delays; labor shortages; ability to recruit, train and retain enough qualified managerial and hourly workers to correctly operate our restaurants; minimum wage increases; food quality and health concerns; factors that impact California, where 30 of our current 44 restaurants are located as of November 3, 2005; restaurant and brewery industry competition; impact of certain brewery business considerations, including without limitation, dependence upon suppliers and related hazards; consumer trends; potential uninsured losses and liabilities; fluctuating commodity costs including food and energy; trademark and service mark risks; government regulations; licensing costs; other general economic and regulatory conditions and requirements; beer and liquor regulations; loss of key personnel; success of key strategic and operational initiatives; inability to secure acceptable sites; limitations on insurance coverage; legal proceedings, if any and the amount of, and any changes to, tax rates and the success of various initiatives to minimize taxes; changes in accounting standards or interpretations of existing standards adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission, the Emerging Issues Task Force and the American Institute of Certified Public Accountants that could impact our reported financial results; and other risks and uncertainties referenced in this Form 10-Q or our Annual Report on Form 10-K for the fiscal year ended January 2, 2005.

GENERAL

On November 3, 2005, we owned and operated 44 restaurants located in California, Oregon, Colorado, Arizona, Texas and Nevada. A licensee also operates one licensed restaurant in Lahaina, Maui. Each of our restaurants is operated either as a BJ’s Restaurant & Brewery ^® which includes a brewery within the restaurant, a BJ’s Restaurant & Brewhouse ^® which receive the beer it sells from one of our breweries, or a BJ’s Pizza & Grill ^® which is a smaller format restaurant. Our menu features our BJ’s ^® award-winning, signature deep-dish pizza, our own hand-crafted beers as well as a wide selection of appetizers, entrees, pastas, sandwiches, specialty salads and desserts including our unique Pizookie ^® cookie. Our eleven BJ’s Restaurant & Brewery restaurants feature in-house brewing facilities where BJ’s hand-crafted beers are produced and sold. All of our restaurants do provide our hand crafted beers.

As is customary for the casual dining segment of the restaurant industry, in calculating comparable sales, we include a restaurant in the comparable base once it has been open for eighteen months.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, our unaudited Consolidated Statements of Income expressed as percentages of total revenues. The results of operations for the thirteen weeks and thirty-nine weeks ended October 4, 2005 and September 26, 2004 are not necessarily indicative of the results to be expected for the full fiscal year.

Effective this fiscal third quarter of 2005, we changed our fiscal week-end from Sunday to Tuesday. This change was completed to facilitate operational efficiencies by transferring certain administrative tasks away from the weekends when our restaurants are busiest. Accordingly, our third quarter of 2005 contains 93 days and ended on Tuesday, October 4, 2005 as compared to our third quarter of 2004, which contained 91 days, and ended on Sunday, September 26, 2004. Additionally, the thirty-nine weeks ended October 4, 2005 contain 275 days as compared to 273 days for the thirty-nine weeks ended September 26, 2004.

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Thirteen Weeks Ended October 4, 2005 Compared to Thirteen Weeks Ended September 26, 2004.

Revenues. Total revenues increased by $14.7 million, or 44.7%, to $47.6 million for the thirteen weeks ended October 4, 2005 from $32.9 million for the comparable thirteen week period of 2004. The $14.7 million increase in revenues consisted of $705,000 due to two additional days in the quarter compared to the same quarter as last year, an approximate $13.1 million increase in restaurant sales from the opening of new restaurants, and an approximate $1.6 million or 5.5% from comparable restaurant sales. The comparable restaurant sales increase consisted of approximately 1.2% of menu pricing with the majority of the increase due to increased customer counts. These revenue increases were partially offset by approximate $288,000 of revenues related to the closure of our Seal Beach BJ’s Pizza & Grill restaurant on January 3, 2005.

Cost of Sales. Cost of sales which generally consists of the cost of food, beverages and paper for our restaurants increased by $4.0 million, or 46.0%, to $12.7 million during the thirteen weeks ended October 4, 2005 from $8.7 million during the comparable thirteen week period of 2004. The $4.0 million increase was primarily attributable to new restaurant openings. As a percentage of revenues, cost of sales increased to 26.7% for the current thirteen week period from 26.4% for the prior-year comparable thirteen week period. This increase is primarily a result of increased costs for meat, produce, seafood and general grocery items, offset slightly by a reduction in poultry and cheese prices as compared to the comparable period of 2004 and the impact of menu price increases.

Additionally, in our new restaurants, our cost of sales will typically be higher during the first 90-120 days of operations versus our mature restaurants, as management teams become accustomed to optimally predicting, managing and servicing sales volumes typically experienced in our new restaurants. During the thirteen weeks ended October 4, 2005, we had four restaurants that were operating in the first 90-120 days of service compared to only three restaurants in the prior year’s comparable period.

We provide our customers a large variety of menu items which are not dependent on a single group of commodities. We continue to work with our suppliers to control food costs; however, there can be no assurance that future supplies and costs for commodities used in our restaurants will not fluctuate due to weather and other market conditions outside of our control.

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Labor and Benefits. Labor and benefit costs for our restaurants increased by $5.7 million, or 48.3%, to $17.5 million during the thirteen weeks ended October 4, 2005 from $11.8 million during the comparable thirteen week period of 2004. This increase was primarily due to the opening of nine new restaurants since the end of our third quarter in 2004, partially offset by the closing of our Seal Beach BJ’s Pizza & Grill restaurant on January 3, 2005. As a percentage of revenues, labor and benefit costs increased to 36.8% for the current thirteen week period from 35.9% for the prior-year comparable thirteen week period. This increase is primarily due to a higher number of managers and managers-in-training (MITs) in our restaurant operations in order to support a higher number of planned restaurant openings during the upcoming year.

For new restaurants, labor expenses will typically be higher than normal during the first 90-120 days of operations until our management team at each new restaurant becomes more accustomed to optimally predicting, managing and servicing the sales volumes expected at our restaurants. Accordingly, labor expenses as a percentage of revenues could be slightly higher in the fourth quarter of fiscal 2005 as a result of the opening of our three new restaurants in October.

Occupancy. Occupancy costs increased by $500,000, or 20.0%, to $3.0 million during the thirteen weeks ended October 4, 2005 from $2.5 million during the comparable thirteen week period of 2004. The increase reflects the nine additional restaurants we opened since the third quarter of 2004, partially offset by the closure of our Seal Beach BJ’s Pizza & Grill restaurant on January 3, 2005. As a percentage of revenues, occupancy costs decreased to 6.4% for the current thirteen week period from 7.5% for the prior-year comparable thirteen week period. This decrease is primarily due to lower rent payments as a result of a planned higher mix of ground-leased locations (versus both ground and building-leased locations) for many of our new restaurants over the last two years. We expect the higher mix of ground-leased locations for new restaurants to continue during the upcoming year.

Operating Expenses. Operating expenses increased by $1.7 million, or 45.9%, to $5.4 million during the thirteen weeks ended October 4, 2005 from $3.7 million during the comparable thirteen week period of 2004. As a percentage of revenues, operating expenses increased to 11.4% for the current thirteen week period as compared to 11.3% for the prior-year comparable thirteen week period. This slight increase is primarily due to higher energy costs and merchant credit card fees passed through to us by our transaction processor partially offset by our ability to leverage some of these fixed costs through our increase in same restaurant sales. We currently expect the increased costs of energy (natural gas and electric services) to continue throughout fiscal 2005 and 2006. Restaurant-level energy costs represented approximately 2.5% and 2.3% of revenues for the thirteen weeks ended October 4, 2005 and September 26, 2004, respectively

General and Administrative Expenses. General and administrative expenses increased by $600,000, or 24.0%, to $3.1 million during the thirteen weeks ended October 4, 2005 from $2.5 million during the comparable thirteen week period of 2004. This increase was the result of planned investments in our field supervision and corporate support infrastructure to support our growth. During the remainder of fiscal 2005 and 2006, we expect to continue to add resources to the corporate support and field supervision activities in preparation for the planned openings of as many as 11 new restaurants during fiscal 2006. As a percentage of revenues, general and administrative expenses decreased to 6.6% for the current thirteen week period from 7.5% for the prior-year comparable thirteen week period. This percentage decrease is primarily the result of our continued ability to leverage the fixed nature of many of these costs over our increased sales.

Depreciation and Amortization. Depreciation and amortization increased by $500,000, or 38.5%, to $1.8 million during the thirteen weeks ended October 4, 2005 from $1.3 million during the comparable thirteen week period of 2004. The increase was primarily due to our acquisition of restaurant equipment, furniture, leasehold improvements and brewery equipment related to new restaurant development, including three restaurants opened during the trailing 12 month period that were ground leases resulting in higher capitalized leasehold improvement expenditures.

Restaurant Opening Expense . Restaurant opening expense increased by $95,000, or 11.8%, to $899,000 during the thirteen weeks ended October 4, 2005 from $804,000 during the comparable thirteen week period of 2004. This increase is primarily due to opening costs related to one restaurant opening and three restaurants in-progress during the thirteen weeks ended October 4, 2005, as compared to one restaurant opening and two restaurants in progress during the thirteen weeks ended September 26, 2004. Our opening costs will fluctuate from period to period, depending upon, but not limited to, the number of restaurant openings, the size and concept of the restaurants being opened, the location of the restaurants and the complexity of the staff hiring and training process.

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Interest Income, Net. Net interest income increased by $259,000, or 23.5%, to $369,000 during the thirteen weeks ended October 4, 2005 from $110,000 during the comparable thirteen week period of 2004. This increase is primarily due to increased investments after the completion of our private placement on March 11, 2005 coupled with higher interest rates.

Income Tax Expense. Our effective income tax rate for the thirteen weeks ended October 4, 2005 was 32.6% compared to 31.3% for the comparable thirteen week period of 2004. The effective income tax rate for the thirteen weeks ended October 4, 2005 differs from the statutory income tax rate primarily due to FICA tip credits. We currently estimate our effective tax rate to be approximately at 32.5% for the rest of fiscal 2005. However, the actual effective tax rate for fiscal 2005 may be different than our current estimate due to actual revenues, pretax income and tax credits achieved during the year.

Thirty-nine Weeks Ended October 4, 2005 Compared to Thirty-nine Weeks Ended September 26, 2004.

Revenues. Total revenues for the thirty-nine weeks ended October 4, 2005 increased by $37.8 million, or 41.4%, to $129.0 million from $91.2 million during the comparable thirty-nine week period of 2004. The $37.8 million increase in revenues consisted of $705,000 due to two additional days of restaurant sales, an approximate $35.5 million increase from the opening of new restaurants, and an approximate $3.6 million from a 4.4% increase in same restaurant sales. The comparable restaurant sales increase consisted of approximately 1.2% of menu pricing with the majority of the increase due to increased customer counts. These revenue increases were partially offset by approximate $1.4 million of revenues related to the sale of our three Pietro’s restaurants on March 15, 2004, and our Seal Beach BJ’s Pizza & Grill restaurant, which was closed on January 3, 2005.

Cost of Sales. Cost of sales which generally consists of the cost of food, beverages and paper for our restaurants increased by $10.7 million, or 45.1%, to $34.4 million during the thirty-nine weeks ended October 4, 2005 from $23.7 million during the comparable thirty-nine week period of 2004. As a percentage of revenues, cost of sales increased to 26.6% for the current thirty-nine week period from 26.0% for the prior-year comparable thirty-nine week period. This increase is primarily a result of increased costs for meat, produce, seafood and general grocery items partially offset by a reduction in poultry and cheese costs as compared to the comparable period of 2004 and the impact of menu price increases.

Additionally, in our new restaurants, our cost of sales will typically be higher during the first 90-120 days of operations versus our mature restaurants, as management teams become accustomed to optimally predicting, managing and servicing sales volumes typically experienced in our new restaurants. During the thirty-nine weeks ended October 4, 2005, we had eight restaurants that were operating in the first 90-120 days of service versus only four restaurants in the prior year’s comparable period.

We provide our customers a large variety of menu items which are not dependent on a single group of commodities. We continue to work with our suppliers to control food costs; however, there can be no assurance that future supplies and costs for commodities used in our restaurants will not fluctuate due to weather and other market conditions outside of our control.

Labor and Benefits. Labor and benefit costs for our restaurants increased by $14.3 million, or 43.9%, to $46.9 million during the thirty-nine weeks ended October 4, 2005 from $32.6 million during the comparable thirty-nine week period of 2004. This increase was primarily due to the opening of nine new restaurants since the end of our third quarter in 2004, partially offset by the closing of our Pietro’s and Seal Beach restaurants. As a percentage of revenues, labor and benefit costs increased to 36.4% for the current thirty-nine week period from 35.7% for the prior-year comparable thirty-nine week period. This percentage increase is primarily due to the inefficiencies experienced with nine new restaurants we have opened to date in 2005 compared to the four new restaurants opened in the comparable period in 2004.

For new restaurants, labor expenses will typically be higher than normal during the first 90-120 days of operations until our management team at each new restaurant becomes more accustomed to optimally predicting, managing and servicing the sales volumes expected at our restaurants. Accordingly, labor expenses as a percentage of revenues could be slightly higher in the fourth quarter of fiscal 2005 as a result of our planned openings of three new restaurants.

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Occupancy. Occupancy costs increased by $1.6 million, or 23.2%, to $8.5 million during the thirty-nine weeks ended October 4, 2005 from $6.9 million during the comparable thirty-nine week period of 2004. The increase reflects the nine additional restaurants we opened since the third quarter of 2004, partially offset by the decrease in occupancy costs associated with our three Pietro’s restaurants that were sold on March 15, 2004 and the closure of our Seal Beach BJ’s Pizza & Grill restaurant on January 3, 2005. As a percentage of revenues, occupancy costs decreased to 6.6% for the current thirty-nine week period from 7.6% for the prior-year comparable thirty-nine week period. This decrease is primarily due to lower rent payments as a result of a planned higher mix of ground-leased locations (versus both ground and building-leased locations) for many of our new restaurants over the last two years. We expect the higher mix of ground-leased locations for new restaurants to continue during the upcoming year.

Operating Expenses. Operating expenses increased by $4.3 million, or 43.0%, to $14.3 million during the thirty-nine weeks ended October 4, 2005 from $10.0 million during the comparable thirty-nine week period of 2004. As a percentage of revenues, operating expenses increased to 11.1% for the current thirty-nine week period as compared to 11.0% for the prior-year comparable thirty-nine week period. This slight increase is primarily due to higher cost of supplies and merchant credit card fees passed through to us by our transaction processor. Restaurant-level energy costs represented approximately 2.2% and 2.1% of revenues for the thirty-nine weeks ended October 4, 2005 and September 26, 2004, respectively

General and Administrative Expenses. General and administrative expenses increased by $1.7 million, or 23.6%, to $8.9 million during the thirty-nine weeks ended October 4, 2005 from $7.2 million during the comparable thirty-nine week period of 2004. This increase was the result of planned investments in our field supervision and corporate support infrastructure to support our growth. During the remainder of fiscal 2005 and 2006, we expect to continue to add resources to the corporate support and field supervision activities in preparation for the planned openings of as many as 11 new restaurants during fiscal 2006. As a percentage of revenues, general and administrative expenses decreased to 6.9% for the current thirty-nine week period from 7.9% for the prior-year comparable thirty-nine week period. This percentage decrease is primarily the result of our continued ability to leverage the fixed nature of many of these costs over our increased revenues and the absence of severance payments to two corporate employees which were expensed during the first quarter of 2004.

Depreciation and Amortization. Depreciation and amortization increased by $1.2 million, or 32.4%, to $4.9 million during the thirty-nine weeks ended October 4, 2005 from $3.7 million during the comparable thirty-nine week period of 2004. The increase was primarily due to our acquisition of restaurant equipment, furniture, leasehold improvements and brewery equipment related to new restaurant development, including three restaurants opened during the trailing 12 month period that were ground leases resulting in higher capitalized leasehold improvement expenditures.

Restaurant Opening Expense . Restaurant opening expense increased by $1.2 million, or 66.7%, to $3.0 million during the thirty-nine weeks ended October 4, 2005 from $1.8 million during the comparable thirty-nine week period of 2004. This increase is primarily due to opening costs related to six restaurant openings and three restaurants in-progress during the thirty-nine weeks ended October 4, 2005, as compared to four restaurant openings and two in progress during the thirty-nine weeks ended September 26, 2004. Our opening costs will fluctuate from period to period, depending upon, but not limited to, the number of restaurant openings, the size and concept of the restaurants being opened, the location of the restaurants and the complexity of the staff hiring and training process.

Interest Income, Net. Net interest income increased by $428,000, or128.1%, to $762,000 during the thirty-nine weeks ended October 4, 2005 from $334,000 during the comparable thirty-nine week period of 2004. This increase is primarily due to increased investments after the completion of our private placement on March 11, 2005 coupled with higher interest rates.

Other Income, Net. Net other income decreased to $121,000 during the thirty-nine weeks ended October 4, 2005 from $156,000 in the comparable thirty-nine week period of 2004, a decrease of $35,000. This decrease is primarily due to the loss of gaming income from our Pietro’s restaurants, which we sold on March 15, 2004.

Income Tax Expense. Our effective income tax rate for the thirty-nine weeks ended October 4, 2005 was 32.3% compared to 33.0% for the comparable thirty-nine week period of 2004. The effective income tax rate for the thirty-nine weeks ended October 4, 2005 differs from the statutory income tax rate primarily due to FICA tip credits. We currently estimate our effective tax rate to be approximately at 32.5% for the rest of fiscal 2005. However, the actual effective

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tax rate for fiscal 2005 may be different than our current estimate due to actual revenues, pretax income and tax credits achieved during the year.

LIQUIDITY AND CAPITAL RESOURCES

Our capital requirements are principally related to restaurant growth plans. Similar to many restaurant chains, we utilize operating lease arrangements for substantially all of our restaurant locations. During fiscal 2005, we opened nine new restaurants. We currently expect to open as many as 11 new restaurants during fiscal 2006. We believe that our operating lease arrangements continue to provide appropriate leverage for our capital structure in a financially efficient manner. However, we are not limited to the use of lease arrangements as our only method of opening new restaurants. While our operating lease obligations are not required to be reflected as indebtedness on our consolidated balance sheets, the minimum rents and related fixed asset obligations under our lease agreements must be satisfied by cash flows from our ongoing operations. Accordingly, our lease arrangements reduce, to some extent, our capacity to utilize funded indebtedness in our capital structure. We also require capital resources to maintain our existing base of restaurants and to further expand and strengthen the capabilities of our corporate and information technology infrastructures. Our requirement for working capital is not significant, since our restaurant guests pay for their food and beverage purchases in cash or credit cards at the time of the sale. Thus, we are able to sell many of our inventory items before we have to pay our suppliers for such items.

Our cash flows from operating activities, as detailed in the consolidated statements of cash flows, provided $17.7 million of net cash during the thirty-nine weeks ended October 4, 2005, a $6.0 million increase from the $11.7 million generated during the comparable thirty-nine week period of 2004. The increase in cash from operating activities for the comparable thirty-nine week period of 2004 is primarily due to the gain on sale of Pietro’s restaurants; timing of payments to landlords included in prepaids and other assets, landlord tenant improvement contributions, and increased depreciation expense partially offset by payments to suppliers included in accounts payable.

Total capital expenditures for the acquisition of our restaurant and brewery equipment and leasehold improvements to construct new restaurants were $23.8 million for the thirty-nine weeks ended October 4, 2005. These expenditures were primarily related to the development of our new restaurants in Moreno Valley, Corona, Roseville and Rancho Cucamonga California, and Tucson and Mesa, Arizona all of which opened prior to October 4, 2005 and construction of our San Bruno, and San Mateo California, and our Sugar Land, Texas location, which have subsequently opened. In addition, for the thirty-nine weeks ended October 4, 2005, total capital expenditures related to the maintenance of existing restaurants were $2.6 million.

On March 11, 2005, we completed a $40.3 million (net of approximately $2.2 million in related fees and expenses) private placement of common stock with three large institutional investors. The transaction involved the sale of 2.75 million shares of common stock at a purchase price of $15.50 per share. Prior to this transaction, we funded our capital requirements primarily through cash flows from operations and proceeds received from the exercise of redeemable warrants during 2002. Our capital requirements related to opening additional restaurants will continue to be significant. For the full 52-week fiscal 2005 year, our original estimate at the beginning of the year for capital expenditures was in the range of $25 million to $27 million. That estimate contemplated two sale/leaseback transactions related to new restaurants. Now that we have raised an additional $40 million of proceeds from our equity offering this past March, we have decided not to proceed with those two transactions at this time. As a result, our full year capital expenditure estimate is now in the range of $35 to $38 million. The breakdown is as follows: approximately $27 to $28 million for 2005 new restaurant development, approximately $4 million to $5 million for maintenance, image enhancement and growth-related capital expenditures for existing restaurants, and $4 million to $5 million in construction in progress, or to take into account the timing of landlord contributions for restaurants anticipated to open during 2006. Our future cash requirements and the adequacy of available funds will depend on many factors, including the pace of expansion, real estate markets, site locations and the nature of the arrangements negotiated with landlords. We believe that our current cash flow and our cash and investments balances together with anticipated cash flows from operations should be sufficient to satisfy our working capital and capital expenditure requirements through fiscal 2006. We may seek additional funds to finance our future growth and operations. There can be no assurance that such funds will be available when required or available on terms acceptable to us.

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IMPACT OF INFLATION

The impact of inflation on food, labor, energy and occupancy costs can significantly affect our operations. Many of our employees are paid hourly rates related to Federal and State minimum wage laws. Minimum wages have been increased numerous times and remain subject to future increases.

While we have been able to react to inflation and other changes in our costs of key operating expenses by gradually increasing prices for our menu items, combined with reduced purchasing costs, and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future. Competitive conditions could limit our menu pricing flexibility. We cannot guarantee that all future cost increases can be offset by increased menu prices or that increased menu prices will be fully absorbed by our restaurant guests without any resulting changes in their visit frequencies or purchasing patterns. Many of the leases for our restaurants provide for contingent rent obligations based on a percentage of sales. As a result, rent expense will absorb a proportionate share of any menu price increases in our restaurants. There can be no assurance that we will continue to generate increases in comparable restaurant sales in amounts sufficient to offset inflationary or other cost pressures.

SEASONALITY AND ADVERSE WEATHER

Our results of operations have historically been impacted by seasonality, which directly impacts tourism at our coastal California locations. The summer months (June through August) have traditionally been higher volume periods than other periods of the year. Quarterly results have been and will continue to be significantly impacted by the timing of new restaurant openings and their associated restaurant opening costs and inefficiencies. As a result of these and other factors, our financial results for any given quarter may not be indicative of the results that may be achieved for a full fiscal year.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies require the greatest amount of subjective or complex judgments by management and are important to portraying our financial condition and results of operations. Judgments or uncertainties regarding the application of these policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements.

Property and Equipment

We record all property and equipment at cost. Property and equipment accounting requires estimates of the useful lives for the assets for depreciation purposes and selection of depreciation methods. We believe the useful lives reflect the actual economic life of the underlying assets. We have elected to use the straight-line method of depreciation over the estimated useful life of an asset or the primary lease term of the respective lease, whichever is shorter. Renewals and betterments that materially extend the useful life of an asset are capitalized while maintenance and repair costs are charged to operations as incurred. Judgment is often required in the decision to distinguish between an asset which qualifies for capitalization versus an expenditure which is for maintenance and repairs.

We review property and equipment (which includes leasehold improvements) and intangible assets with finite lives for impairment when events or circumstances indicate these assets might be impaired. We test impairment using historical cash flows and other relevant facts and circumstances as the primary basis for our estimates of future cash flows. The analysis is performed at the restaurant level for indicators of impairment. If impairment indicators were identified, then assets would be recorded at fair value. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets. As of October 4, 2005, no impairment indicators have been identified.

Self Insurance Liability

We are self-insured for a portion of our workers’ compensation program. We maintain coverage with a third party insurer to limit our total exposure for this program. The accrued liability associated with this program is based on our estimate of the ultimate costs to settle known claims as well as claims incurred but not yet reported to us (“IBNR claims”) as of the balance sheet date. Our estimated liability is not discounted and is based on information provided by our insurance broker and insurer, combined with our judgments regarding a number of assumptions and factors, including the frequency and severity of claims, our claims development history, case jurisdiction, related legislation, and our claims settlement practice. Significant judgment is required to estimate our total exposure and IBNR claims

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as parties have yet to assert such claims. If actual claims trends, including the severity or frequency of claims, differ from our estimates, our financial results could be significantly impacted.

Income Taxes

We provide for income taxes based on our estimate of federal and state income tax liabilities. Our estimates include, but are not limited to, effective state and local income tax rates, allowable tax credits for items such as FICA taxes paid on reported tip income and estimates related to depreciation expense allowable for tax purposes. We usually file our income tax returns several months after our fiscal year-end. We file our tax returns with the advice and consultations of tax consultants. All tax returns are subject to audit by federal and state governments, usually years after the returns are filed, and could be subject to differing interpretation of the tax laws.

Deferred tax accounting requires that we evaluate net deferred tax assets to determine if these assets will more likely than not be realized in the foreseeable future. This test requires projection of our taxable income into future years to determine if there will be taxable income sufficient to realize the tax assets (future tax deductions and FICA tax credit carryforwards). The preparation of the projections requires considerable judgment and is subject to change to reflect future events and changes in the tax laws.

Leases

We lease all of our restaurant locations except for our Sugarland, Texas and Rancho Cucamonga, California locations. We account for our leases under the provisions of FASB Statement No. 13, Accounting for Leases (SFAS 13) and subsequent amendments, which require that our leases be evaluated and classified as operating or capital leases for financial reporting purposes. All of our restaurant leases are classified as operating leases pursuant to the requirements of SFAS 13. We disburse cash for leasehold improvements and furniture fixtures and equipment to build out and equip our leased premises. We may also expend cash for permanent improvements that we make to leased premises that generally are reimbursed to us by our landlords as construction contributions (also known as tenant improvement allowances) pursuant to agreed-upon terms in our leases. Landlord construction contributions can take the form of up-front cash, full or partial credits against minimum or percentage rents otherwise payable by us, or a combination thereof.