Edgar Filing: LONE STAR STEAKHOUSE & SALOON INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.)

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LONE STAR STEAKHOUSE & SALOON, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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LONE STAR STEAKHOUSE & SALOON, INC.
224 EAST DOUGLAS
SUITE 700
WICHITA, KANSAS 67202-3414

November 5, 2004

To our Stockholders:

You are cordially invited to attend a Special Meeting of Stockholders of
Lone Star Steakhouse & Saloon, Inc. on Wednesday, December 15, 2004. The
meeting will begin at 10:00 a.m. local time at the offices of Olshan Grundman
Frome Rosenzweig & Wolosky LLP located at 65 East 55th Street, New York, New
York.

The official Notice of Special Meeting, Proxy Statement and Proxy Card are
enclosed with this letter. The Notice of the Special Meeting and Proxy
Statement describe the formal business to be transacted at the Special
Meeting.

The Special Meeting of Stockholders is being held to vote upon the adoption
of the proposed Lone Star Steakhouse & Saloon, Inc. 2004 Stock Option Plan.
Our reasons for requesting that the stockholders vote to approve the 2004
Stock Option Plan are as follows:

1) Our company has operated without a stock option plan for more than
two years, and we believe this lack of a stock option plan has
hindered our ability to retain and attract talented employees,
particularly since virtually all of our competitors have existing
plans.

2) The Board believes it is imperative that we retain the valuable
workforce now in the employ of our company and recruit well-
qualified persons who are motivated to put forth maximum effort on
our behalf and on behalf of our stockholders. The issuance of stock
options will help our company achieve these objectives; and

3) The Board of Directors and our Compensation/Stock Option Committee
have devoted significant effort to examining our compensation
programs. In November 2002, we engaged Hay Group, Inc., one of the
five largest management consulting firms in the world, to review our
compensation programs for executives and to make any recommendations
it deemed appropriate. Hay Group, Inc. advised us that, due to the
lack of equity incentives as a result of the expiration of the
company's stock option plans, the total direct compensation of our
executive officers fell below that of our competitors. Hay Group,
Inc. concluded that we should implement an equity compensation plan.

Accordingly, our Compensation/Stock Option Committee developed this plan we
are putting forth for adoption by the company's shareholders. The Board of
Directors believes it is of vital importance, as it will allow us to better
retain and recruit the best possible personnel to ensure our future growth and
success. Importantly, the proposed plan is also structured to meet or exceed
today's high corporate governance standards by including, amongst others, the
following provisions:

1) Prohibition of reducing the exercise price of options granted under
the plan or effecting their repricing through cancellation and re-
grants of new options;

2) Requirement that the exercise price per share for all options shall
be no less than the stock price at the time of grant; and

3) Limitations on the grants to any one person.

The Board of Directors strongly urges the company's stockholders to approve
the proposed 2004 Stock Option Plan.

THE VOTE OF EVERY STOCKHOLDER IS IMPORTANT. TO ENSURE PROPER REPRESENTATION
OF YOUR SHARES AT THE MEETING, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED
PROXY CARD AND RETURN IT AS SOON AS POSSIBLE, EVEN IF YOU CURRENTLY PLAN TO
ATTEND THE SPECIAL MEETING. This will not prevent you from voting in person
but will ensure that your vote will be counted if you are unable to attend.

Sincerely,

/s/ William B. Greene, Jr.

William B. Greene, Jr.
Chairman of the Board of Directors

LONE STAR STEAKHOUSE & SALOON, INC.
224 EAST DOUGLAS
SUITE 700
WICHITA, KANSAS 67202-3414

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

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 15, 2004
------------------------

To the Stockholders:

NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Meeting") of LONE STAR STEAKHOUSE & SALOON, INC., a Delaware corporation (the
"Company"), will be held at the offices of Olshan Grundman Frome Rosenzweig &
Wolosky LLP located at 65 East 55th Street, New York, New York 10022 on
December 15, 2004 at 10 a.m. local time, for the following purposes:

-- To approve the adoption of the Company's 2004 Stock Option
Plan; and

-- To transact such other business as may properly be brought
before the Meeting or any adjournment thereof.

The Board of Directors has fixed the close of business on November 4, 2004
as the record date for the Meeting. Only stockholders of record on the stock
transfer books of the Company at the close of business on that date are
entitled to notice of, and to vote at, the Meeting.

A complete list of our stockholders entitled to vote at the Meeting will be
available for inspection at the Company's corporate office at 224 East
Douglas, Suite 700, Wichita, Kansas 67202-3414, during normal business hours
for ten days prior to the Meeting. Our stockholder list also will be available
at the Meeting.

IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THIS MEETING. WE URGE YOU
TO PROMPTLY SIGN, DATE, AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED
ENVELOPE.

ANY STOCKHOLDER GIVING A PROXY MAY REVOKE IT AT ANY TIME BEFORE THE PROXY IS
VOTED BY GIVING WRITTEN NOTICE OF REVOCATION TO THE SECRETARY OF THE COMPANY,
BY SUBMITTING A LATER-DATED PROXY, OR BY ATTENDING THE MEETING AND VOTING IN
PERSON.

By Order of the Board of Directors

/s/ Gerald T. Aaron

GERALD T. AARON, Secretary

Dated: November 5, 2004

WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, YOU ARE URGED TO
SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE THAT IS PROVIDED,
WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.

LONE STAR STEAKHOUSE & SALOON, INC.
224 EAST DOUGLAS
SUITE 700
WICHITA, KANSAS 67202-3414

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

PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
DECEMBER 15, 2004
------------------------

INTRODUCTION

This Proxy Statement and the accompanying proxy are being furnished to
stockholders by the Board of Directors of Lone Star Steakhouse & Saloon, Inc.,
a Delaware corporation (the "Company"), in connection with the solicitation of
the accompanying proxy for use at a Special Meeting of Stockholders of the
Company (the "Meeting") to be held at the offices of Olshan Grundman Frome
Rosenzweig & Wolosky LLP on December 15, 2004 at 10 a.m., local time, or at
any adjournments thereof.

The principal executive offices of the Company are located at 224 East
Douglas, Suite 700, Wichita, Kansas 67202-3414. The approximate date on which
this Proxy Statement and the accompanying proxy will first be sent or given to
stockholders is on or about November 5, 2004.

RECORD DATE AND VOTING SECURITIES

Only stockholders of record at the close of business on November 4, 2004,
the record date (the "Record Date") for the Meeting, will be entitled to
notice of, and to vote at, the Meeting and any adjournments thereof. As of the
close of business on the Record Date, there were 20,384,294 outstanding shares
of the Company's common stock, $.01 par value (the "Common Stock"). Each
outstanding share of Common Stock is entitled to one vote. There was no other
class of voting securities of the Company outstanding on the Record Date. A
majority of the outstanding shares of Common Stock present in person or by
proxy is required for a quorum.

VOTING OF PROXIES

A stockholder may ensure that their shares are voted at the Meeting in
accordance with the Board of Directors' recommendations by completing,
signing, dating, and returning the enclosed proxy in the envelope provided.
Submitting your proxy will not affect your right to attend the Meeting and
vote in person. If the proxy is signed and returned without any direction
given, shares will be voted in accordance with the recommendations of the
Board of Directors as described in this Proxy Statement with respect to the
Proposal. Any stockholder giving a proxy may revoke it at any time before the
proxy is voted by giving written notice of revocation to the Secretary of the
Company, by submitting a later-dated proxy, or by attending the Meeting and
voting in person.

The Board of Directors is soliciting votes FOR the adoption of the 2004
Stock Option Plan (the "Plan"). The Board of Directors urges you to sign,
date, and return the enclosed proxy today.

If you have any questions, or need any assistance in voting your shares,
please call 888-750-5834 and the Company's proxy solicitors will be happy to
help you.

If your shares are held in "street-name", only your bank or broker can vote
your shares and only upon receipt of your specific instructions. Please
contact the person responsible for your account and instruct that individual
to vote the proxy card as soon as possible.

QUORUM

In order to conduct any business at the Meeting, a quorum must be present in
person or represented by valid proxies. A quorum consists of a majority of the
shares of Common Stock issued and outstanding on the Record

Date (excluding treasury stock). All shares that are voted "FOR" or "AGAINST"
on any matter will count for purposes of establishing a quorum and will be
treated as shares entitled to vote at the Meeting (the "Votes Present").

ABSTENTIONS

While there is no definitive statutory or case law authority in Delaware,
the Company's state of incorporation, as to the proper treatment of
abstentions, the Company believes that abstentions should be counted for
purposes of determining both: (i) the total number of Votes Present, for the
purpose of determining whether a quorum is present; and (ii) the total number
of Votes Present that are cast ("Votes Cast") with respect to a matter. In the
absence of controlling precedent to the contrary, the Company intends to treat
abstentions in this manner.

BROKER NON-VOTES

Shares of Common Stock held in street name that are present by proxy will be
considered as Votes Present for purposes of determining whether a quorum is
present. With regard to certain proposals, the holder of record of shares of
Common Stock held in street name is permitted to vote as they determine, in
their discretion, in the absence of direction from the beneficial holder of
the shares of Common Stock.

The term "broker non-vote" refers to shares held in street name that are not
voted with respect to a particular matter, generally because the beneficial
owner did not give any instructions to the broker as to how to vote such
shares and the broker is not permitted under applicable rules to vote such
shares in its discretion because of the subject matter of the proposal, but
whose shares are present on at least one matter. The Company intends to count
such shares as Votes Present for the purpose of determining whether a quorum
is present. However, under the rules of the National Association of Securities
Dealers, broker non-votes will not counted for any purpose in determining
whether the proposal has been approved.

VOTES REQUIRED FOR APPROVAL

A majority of the total votes cast at the Special Meeting by holders of
Common Stock is required to adopt the Plan. A vote to "ABSTAIN" will have the
same effect as a negative vote on the proposal.

SECURITY OWNERSHIP

The following table sets forth information concerning ownership of the
Company's Common Stock, as of the Record Date, by each person known by the
Company to be the beneficial owner of more than five percent of the Common
Stock, each director, each executive officer as defined in Item 402(a)(3) of
Regulation S-K and by all directors and executive officers of the Company as a
group. Unless otherwise indicated, the address for five percent stockholders,
directors and executive officers of the Company is 224 East Douglas, Suite
700, Wichita, Kansas 67202-3414. The percentage of shares owned is based on
20,384,294 shares outstanding as of November 4, 2004.

Name and Address Shares
of Beneficial Owner Beneficially Percentage
-------------------- Held of Class
------------ ----------

Jamie B. Coulter .................................. 3,847,782(1) 17.62%
John D. White ..................................... 898,025(2) 4.25%
Gerald T. Aaron ................................... 412,707(3) 1.99%
Tomlinson D. O'Connell ............................ 89,449(4) *
Fred B. Chaney .................................... 13,334(5) *
William B. Greene, Jr. ............................ 62,034(6) *
Clark R. Mandigo .................................. 41,334(7) *
Mark Saltzgaber ................................... 38,701(8) *
Thomas Lasorda .................................... 32,501(9) *
Michael Ledeen .................................... 31,201(9) *
Anthony Bergamo ................................... 3,086 *
Dimensional Fund Advisors Inc. .................... 1,579,000(10) 7.75%
Barclays Global Investors, NA, Barclays Global
Fund Advisors and Barclays Capital Inc........... 1,672,299(11) 8.20%
Pioneer Global Asset Management ................... 1,318,000(12) 6.47%
Brandywine Asset Management, LLC .................. 1,165,186(13) 5.72%
NFJ Investment Group L.P. ......................... 1,117,300(14) 5.48%
All directors and executive officers as a group
(16 persons) (1-9)............................... 5,554,730(15) 23.88%

---------------
* Less than 1%
(1) Includes presently exercisable options to purchase 1,452,389 shares of
Common Stock. Does not include 177,145 shares held by Intrust Bank as
Trustee of a Rabbi Trust for the Company. Under the terms of a Deferred
Compensation Agreement, Mr. Coulter defers receipt of the value of his
deferred compensation account until 30 days after the termination of his
employment with the Company.
(2) Includes presently exercisable options to purchase 750,000 shares of
Common Stock.
(3) Includes presently exercisable options to purchase 375,000 shares of
Common Stock.
(4) Includes presently exercisable options to purchase 88,449 shares of Common
Stock.
(5) Includes presently exercisable options to purchase 11,334 shares of Common
Stock.
(6) Includes presently exercisable options to purchase 11,334 shares of Common
Stock.
(7) Includes presently exercisable options to purchase 11,334 shares of Common
Stock.
(8) Consists of 7,500 shares held by a Family Trust and presently exercisable
options to purchase 31,201 shares of Common Stock.
(9) Includes or consists of presently exercisable options to purchase 31,201
shares of Common Stock.
(10)Based on a Schedule 13G filed in February 2004, Dimensional Fund Advisors
Inc. beneficially holds 1,579,000 shares of the Company's Common Stock.
The address of Dimensional Fund Advisors Inc. is 1299 Ocean Avenue, 11th
Floor, Santa Monica, CA 90401.
(11)Based on a Schedule 13G filed in February 2004, Barclays Global Investors,
N.A. beneficially holds 1,289,686 shares of the Company's Common Stock,
Barclays Global Fund Advisors beneficially holds 319,413 shares of the
Company's Common Stock and Barclays Capital Inc. beneficially holds 63,200
shares of the Company's Common Stock. The address of Barclays Global
Investors, N.A. and Barclays Global Fund Advisors is 45 Fremont Street,
San Francisco, CA 94105 and the address of Barclays Capital Inc. is 200
Park Avenue, New York, New York 10166.
(12)Based on a Schedule 13G filed in December 2001, Pioneer Global Asset
Management beneficially holds 1,318,000 shares of the Company's Common
Stock. The address of Pioneer Global Asset Management is Galleria San
Carlo 6, 20122 Milan, Italy.
(13)Based on a Schedule 13G filed in February 2004, Brandywine Asset
Management, LLC beneficially holds 1,165,186 shares of the Company's
Common Stock. The address of Brandywine Asset Management LLC is Three
Christina Center, Ste. 1200, 201 N. Walnut Street, Wilmington, DE 19801.
(14)Based on a Schedule 13G filed in February, 2004, NFJ Investment Group,
L.P. has sole dispositive power with respect to 1,117,300 shares of the
Company's Common Stock. The address of NFJ Investment Group L.P. is 2121
San Jancinto, Suite 1840, Dallas, TX 75201.
(15)Includes presently exercisable options to purchase 2,873,019 shares of
Common Stock, which includes presently exercisable options to purchase
79,576 shares of Common Stock held by an executive officer, who is not
specifically identified in the Security Ownership Table above. The
executive officer who is not specifically identified in the Security
Ownership Table also owns an additional 5,000 shares of Common Stock.

PROPOSAL -- APPROVAL OF THE ADOPTION OF THE
2004 STOCK OPTION PLAN

PURPOSE OF THE 2004 STOCK OPTION PLAN

The Board of Directors has unanimously approved for submission to a vote of
the stockholders a proposal to adopt the Plan. The reasons for requesting that
the stockholders vote to approve the Plan and the purpose for adopting the
Plan are as follows:

1) Prohibition of reducing the exercise price of options granted under
the plan or effecting their repricing through cancellation and re-
grants of new options;

2) Requirement that the exercise price per share for all options shall
be no less than the stock price at the time of grant; and

3) Limitations on the grants to any one person.

The Board of Directors strongly urges the company's stockholders to approve
the proposed 2004 Stock Option Plan.

A summary of the Plan is set forth below, and its full text is attached
hereto as ANNEX A. The following discussion is qualified in its entirety by
reference to ANNEX A.

ADMINISTRATION OF THE PLAN

The Plan will be administered by the Compensation/Stock Option Committee
(the "Committee") consisting of three or more "Non-Employee Directors" (as
such term is defined in Rule 16b-3 of the Securities Exchange Act of 1934, as
amended), "Outside Directors" (as such term is defined in Section 162(m) of
the Internal Revenue Code of 1986, as amended) and independent under the
standards set forth in Rule 4350 of the Rules of the National Association of
Securities Dealers, Inc. The Committee will have the power to determine
recipients of options, to determine the terms and conditions of respective
option agreements and to interpret the provisions and supervise the
administration of the Plan. In making such determinations, the Committee shall
take into account the nature and period of service of eligible persons, such
eligible person's degree of responsibility for and contribution to the growth
and success of the Company or any subsidiary, promotions potential and any
other factors the Committee deems relevant.

The Board of Directors is authorized to amend, suspend or terminate the
Plan, except that it is not authorized, without stockholder approval to (i)
(except with regard to adjustments resulting from changes in capitalization
and dividend equivalent rights) reduce the exercise price of outstanding
options or effect repricing through cancellation and re-grants of new options;
(ii) increase the number of shares issuable under the Plan; (iii) materially
increase the benefits accruing to the option holders under the Plan; (iv)
materially modify Plan eligibility requirements; (v) decrease the exercise
price of options below 100% or the underlying stock's fair market value on the
grant date or (vi) extend the term of any option beyond that provided for in
Section 6 of the Plan.

If approved by the stockholders, unless terminated earlier by the Committee,
the Plan will expire on December 15, 2014.

COMMON STOCK SUBJECT TO THE PLAN

The Plan provides that options may be granted with respect to a total of
3,000,000 shares of Common Stock, of which 500,000 shall be available for the
grants of options to non-employee directors. The maximum number of shares of
Common Stock that can be subject to options granted under the Plan to any
individual shall not exceed 600,000. In the event of a merger, reorganization,
consolidation, recapitalization, stock dividend, or other change in our
corporate structure that affects the Common Stock, the Committee shall make an
appropriate and equitable adjustment to the terms of any outstanding options
such that each option holder's proportionate interest in the Company remains
the same. If any options expire or terminate prior to being fully exercised,
the unpurchased underlying stock shall remain available for future option
grants. The current market value of the Company's Common Stock as of the close
of business on November 4, 2004 was $25.01 per share.

PARTICIPATION

Any employee, officer or director of, and any consultant or advisor to, the
Company or any of its subsidiaries shall be eligible to receive stock options
under the Plan. However, only employees of the Company or its subsidiaries can
receive incentive stock options.

OPTION PRICE

The exercise price of each option shall be determined by the Committee, but
may not be less than 100% of the Fair Market Value (as defined in the Plan) of
the underlying Common Stock on the option grant date. If an incentive stock
option is granted to an employee who owns more than 10% of the total combined
voting power of the Common Stock, then its exercise price may not be less than
110% of the Fair Market Value of the underlying Common Stock on the option
grant date.

GRANTS TO DIRECTORS

The current non-employee directors of the Company will receive nonqualified
options to purchase 15,000 shares of Common Stock upon the effectiveness of
the Plan and on an annual basis, the non-employee directors will receive non-
qualified options to purchase 7,500 shares of Common Stock as long as they
remain non-employee directors. In addition, the current Chairman of the Audit
Committee will receive nonqualified options to purchase 2,500 shares of Common
Stock upon the effectiveness of the Plan and on an annual basis, the Chairman
of the Audit Committee will receive nonqualified options to purchase 2,500
shares of Common Stock as long as he remains Chairman of the Audit Committee.

Upon the election to the Board of Directors of a new non-employee director,
such director will receive the grant of nonqualified options to purchase
40,000 shares of Common Stock and upon the appointment of a new non-employee
director as Chairman of the Audit Committee, such new Chairman will receive
options to purchase 2,500 shares of Common Stock. In addition, any non-
employee director who was initially elected or appointed to the Board of
Directors after the expiration of the 1992 Directors Stock Option Plan (the
"Directors Plan") will receive a grant of nonqualified options to purchase
40,000 shares of Common Stock.

TERM OF OPTIONS

The Committee shall, in its discretion, fix the term of each option;
provided, however, that the maximum term of any option shall not exceed 10
years. Moreover, incentive stock options granted to employees who own more
than 10% of the total combined voting power of our capital stock shall not
exceed five years. The Plan provides for the earlier expiration of options of
a participant in the event of certain terminations of employment or
engagement. In addition, upon a change of control of the Company, the
Committee shall accelerate the vesting and exercisability of outstanding
options.

RESTRICTIONS ON TRANSFER AND EXERCISE

Generally, an option may not be transferred or assigned other than by will
or the laws of descent and distribution and, during the lifetime of the option
holder, may be exercised solely by him. Unless otherwise determined by the
Committee at grant, the options become exercisable over the first four years
of the option term, with one-fourth becoming exercisable, on the one year
anniversary of the date of grant, one-fourth on the two year anniversary, one-
fourth on the three year anniversary and the final one-fourth on the four year
anniversary of the date of grant. In addition, any employee continuously
employed by the Company or any Subsidiary for a period of five years
immediately prior to their termination and terminated for any reason other
than cause will be able to exercise their options for a period equal to the
same term as originally granted. The Committee may impose any other conditions
to exercise as it deems appropriate.

DIVIDEND EQUIVALENTS

Simultaneously with the granting of an option the Committee may also grant
dividend equivalent rights equal to the number of shares of common stock
underlying the option multiplied by the per-share cash dividend or per-share
market value of a non-cash dividend. This provision shall only apply to
special dividends of the Company and not regular quarterly dividends of the
Company.

REGISTRATION OF SHARES

The Company will file a registration statement under the Securities Act of
1933, as amended, with respect to the common stock issuable pursuant to the
Plan following stockholder approval.

RULE 16B-3 COMPLIANCE

In all cases, the terms, provisions, conditions and limitations of the Plan
shall be construed and interpreted so as to be consistent with the provisions
of Rule 16b-3 of the Securities Exchange Act of 1934, as amended.

TAX TREATMENT OF INCENTIVE STOCK OPTIONS

In general, no taxable income for federal income tax purposes will be
recognized by an option holder upon receipt or exercise of an incentive stock
option, and the Company will not then be entitled to any tax deduction.
Assuming that the option holder does not dispose of the option shares before
the later of (i) two years after the date of grant or (ii) one year after the
exercise of the option, upon any such disposition, the option holder will
recognize capital gain equal to the difference between the sale price on
disposition and the exercise price.

If, however, the option holder disposes of his option shares prior to the
expiration of the required holding period, he will recognize ordinary income
for federal income tax purposes in the year of disposition equal to the lesser
of (i) the difference between the fair market value of the shares at the date
of exercise and the exercise price, or (ii) the difference between the sale
price upon disposition and the exercise price. Any additional gain on such
disqualifying disposition will be treated as capital gain. In addition, if
such a disqualifying disposition is made by the option holder, the Company
will be entitled to a deduction equal to the amount of ordinary income
recognized by the option holder provided that such amount constitutes an
ordinary and reasonable expense of ours.

TAX TREATMENT OF NONQUALIFIED STOCK OPTIONS

No taxable income will be recognized by an option holder upon receipt of a
nonqualified stock option, and the Company will not be entitled to a tax
deduction for such grant.

Upon the exercise of a nonqualified stock option, the option holder will
include in taxable income, for federal income tax purposes, the excess in
value on the date of exercise of the shares acquired pursuant to the
nonqualified stock option over the exercise price. Upon a subsequent sale of
the shares, the option holder will derive short-term or long-term gain or
loss, depending upon the option holder's holding period for the shares,
commencing upon the exercise of the option, and upon the subsequent
appreciation or depreciation in the value of the shares.

The Company generally will be entitled to a corresponding deduction at the
time that the participant is required to include the value of the shares in
his income.

WITHHOLDING OF TAX

The Company is permitted to deduct and withhold amounts required to satisfy
our withholding tax liabilities with respect to our employees.

TAX TREATMENT OF DIVIDEND EQUIVALENTS

Unless certain provisions of H.R. 4520, the American Jobs Creation Act of
2004 (the "Act") pertaining to nonqualified deferred compensation plans are
applicable, no taxable income will be recognized by an option holder upon
receipt of a dividend equivalent right and the Company will not be entitled to
a tax deduction upon the grant of such right.

Upon the exercise of the stock option and receipt of cash or property with
respect to the dividend equivalent right, the option holder will include in
taxable income, for federal income tax purposes, the fair market value of the
cash and other property received with the respect to the dividend equivalent
right and the Company will generally be entitled to a corresponding tax
deduction.

As indicated above, the tax treatment of dividend equivalent rights is not
clear. The Act contains provisions applicable to nonqualified deferred
compensation plans, which, if certain conditions are not met, could result in
the immediate taxation of income and the imposition of interest and
additional tax. The legislative history to the Act states that it is not
intended that the term "nonqualified deferred compensation plan" apply to
incentive stock options, or to nonqualified stock options with respect to
employer stock with an exercise price that is not less than the fair market
value of the underlying stock on the date of grant if such arrangement does
not include a deferral feature other than the feature that the option holder
has the right to exercise the option in the future. While there is no specific
discussion of rights similar to the dividend equivalent right, it should be
noted that the Secretary of the Treasury has been given authority to address
issues relating to stock appreciation rights in future regulations. The Plan
permits the Board to amend the Plan to conform to future Treasury regulations.

LOAN POLICY

The Company does not provide any type of loans to the Company's executive
officers or Directors to pay the exercise price of stock options held by them.

OPTION GRANTS

Options to purchase shares of the Company's Common Stock have not yet been
granted pursuant to the Plan, although it is anticipated that options will be
granted in the near future. The following table sets forth the number of
options currently held by each of the Company's Named Executive Officers (as
hereinafter defined), all Executives as a group, Non-Executive Officers as a
group and Non-Executive Officer Employees as a group.

OPTIONS HELD AS OF NOVEMBER 4, 2004

Name and Position Number of Options
----------------- -----------------

Jamie B. Coulter........................................... 1,452,389
Chief Executive Officer

John D. White.............................................. 750,000
Chief Financial Officer, Executive Vice President
and Treasurer

Tomlinson D. O'Connell..................................... 88,449
President and Chief
Operating Officer of
Lone Star Restaurants

Gerald T. Aaron............................................ 375,000
Senior Vice President,
Counsel & Secretary

Executive Group............................................ 2,745,414(1)

Non-Executive Director Group............................... 181,200

Non-Executive Officer Employee Group....................... 585,727

(1) Includes the options held by Messrs. Coulter, White, O'Connell and Aaron
plus one other executive officer.

Board Recommendation

The Board of Directors recommends that Stockholders vote for the adoption of
the 2004 Stock Option Plan.

EXECUTIVE COMPENSATION

The following table sets forth, for the fiscal years indicated, all
compensation awarded to, earned by or paid to the chief executive officer
("CEO") and the four most highly compensated executive officers of the Company
(collectively with the CEO the "Named Executive Officers") other than the CEO
whose salary and bonus exceeded $100,000 with respect to the fiscal year ended
December 30, 2003.

Annual Compensation Long Term Compensation
------------------- -----------------------------------
Number of
Securities
Other Annual Compensation Underlying Options All Other
Name and Principal Position Year Salary Bonus ($) (1) (# of Shares) Compensation (2)
--------------------------- ---- ------ --------- ------------------------- ------------- ----------------

Jamie B. Coulter ............ 2003 $823,558 $ 145,493 $110,104(4) -- $ 95,318
Chief Executive Officer 2002 $750,000 $1,051,500 $109,848(4) -- $180,150
2001 $750,000 $ 226,500(3) $ 97,473(4) -- $ 97,650

John D. White ............... 2003 $600,000 $ 158,583 $ 61,047(5) -- $ 74,704
Executive Vice President and 2002 $600,000 $ 270,353 $ 50,522(5) -- $ 87,035
Treasurer 2001 $600,000 $ 181,500(3) -- -- $ 78,150

Tomlinson D. O'Connell ...... 2003 $347,115 $ 151,500 -- -- $ 49,189
President and Chief 2002 $200,000 $ 301,500 $ 57,785(6) -- $ 50,150
Operating Officer of 2001 $200,000 $ 301,500(3) -- -- $ 50,150
Lone Star Restaurants

Jeff Bracken(7) ............. 2003 $248,558 $ 76,500 -- -- $ 32,025
Former Chief Operating 2002 $175,000 $ 131,582 -- -- $ 30,658
Officer 2001 $175,000 $ 89,000(3) -- -- $ 17,332

Gerald T. Aaron ............. 2003 $250,000 $ 66,951 -- -- $ 31,214
Senior Vice President, 2002 $250,000 $ 80,189 -- -- $ 25,000
Counsel & Secretary 2001 $250,000 $ 76,500(3) -- -- $ 25,000

---------------
(1) As to Named Executive Officers, except as set forth herein perquisites and
other personal benefits, securities or property received by each Named
Executive Officer did not exceed the lesser of $50,000 or 10% of such Named
Executive Officer's annual salary and bonus.
(2) Represents fifty percent matching contributions by the Company pursuant to
the Company's Deferred Compensation Plan which became effective October 7,
1999.
(3) Such bonus was paid in 2002 for services performed in 2001.
(4) During the fiscal years ended December 30, 2003, December 31, 2002 and
December 25, 2001, Mr. Coulter received benefits primarily relating to tax,
accounting and administrative services provided by Company personnel,
$87,038, $82,850 and $67,700, respectively. The balance was primarily for
reimbursement for certain automobile or medical insurance premiums and
expenses.
(5) During the fiscal year ended December 30, 2003 Mr. White received benefits
primarily relating to personal use of the Company's airplane ($38,209). The
balance was primarily for reimbursement for certain automobile or medical
insurance premiums and expenses. During the fiscal year ended December 31,
2002 Mr. White received benefits primarily relating to certain medical
insurance premiums and expenses ($28,909). The balance was primarily for
automobile expenses or the personal use of the Company's airplane.
(6) During the fiscal year ended December 31, 2002, Mr. O'Connell received
benefits primarily relating to the personal use of the Company's airplane
($54,396). The balance was primarily for certain automobile or medical
insurance premiums and expenses.
(7) Resigned as Chief Operating Officer on December 30, 2003.

OPTION GRANTS IN LAST FISCAL YEAR

Due to the fact that the Company's 1992 Incentive and Non-Qualified Stock
Option Plan (the "1992 Plan") had expired, no options were granted to the CEO
or any Named Executive Officer for services rendered during the fiscal year
ended December 30, 2003.

EQUITY COMPENSATION PLAN INFORMATION

The Company previously issued options under the Directors Plan and the 1992
Plan. The ability to issue options under both plans has expired. The following
table gives information about stock option awards under the plans as of
November 4, 2004.

Number of Securities
Remaining Available for
Number of Securities to be Future Issuance under Equity
Issued Upon Exercise of Weighted-Average Exercise Compensation Plans
Outstanding Options, Price of Outstanding Options, (Excluding Securities
Plan Category Warrants and Rights Warrants and Rights Reflected in Column (a))
------------- (a) (b) (c)
-------------------------- ----------------------------- ----------------------------

Equity compensation plans approved by
security holders................... 3,512,341 $9.10 0
Equity compensation plans not
approved by security holders....... 0 -- 0
--------- ----- -
Total............................... 3,512,341 $9.10 0
========= ===== =

OPTION EXERCISE TABLE

The following table provides information with respect to the exercise of
stock options by Named Executive Officers during the fiscal year ended
December 30, 2003, and also sets forth certain information concerning
unexercised options held as of December 30, 2003 by the CEO and the other
Named Executive Officers. At December 30, 2003, the closing price of the
Company's Common Stock, as reported by the Nasdaq National Market, was $23.11.

FISCAL YEAR-END OPTION VALUES

Number of Securities
Shares Underlying Unexercised Number of Securities
Acquired Value Options at December 30, In-the-Money Options at
on Exercise Realized (1) 2003 (3) December 30, 2003
----------- ------------ ---------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------

Jamie B. Coulter ...................... 700,000 $9,107,764(2) 1,900,000 -0- $27,818,375 -0-
John D. White ......................... 25,000 $ 340,476 825,000 -0- $12,079,031 -0-
Tomlinson D. O'Connell ................ -- -- 88,449 -0- $ 1,261,980 -0-
Jeff Bracken .......................... -- -- 76,429 -0- $ 1,104,319 -0-
Gerald T. Aaron ....................... -- -- 475,000 -0- $ 6,954,594 -0-

---------------
(1) Based on the difference between the exercise price of the options and the
fair market value of a share of Common Stock at exercise, as reported on
the Nasdaq National Market.
(2) Between October 2003 and December 2003, Mr. Coulter exercised options to
purchase 400,000 shares resulting in a value realized of $5,444,389. In
addition, in January 2003, Mr. Coulter exercised options to purchase
300,000 shares resulting in a value realized of $3,663,375. In connection
with the implementation of the Lone Star Steakhouse & Saloon, Inc. Stock
Option Deferred Compensation Plan, Mr. Coulter agreed to the Company's
request to defer receipt of income he was entitled to receive upon the
exercise of the options to purchase 300,000 shares until 30 days after the
termination of his employment with the Company.
(3) Subsequent to December 30, 2003 certain Named Executive Officers have
exercised stock options. (See Security Ownership Table for current options
held by Named Executive Officers.)

DIRECTORS COMPENSATION

Directors who are not employees receive an annual fee of $20,000; each
Chairman of a Committee receives an additional annual fee of $5,000; each
member of the Audit Committee receives an additional annual fee of $5,000;
directors who are not employees also receive $1,000 for each telephonic
meeting, $2,000 for each Committee Meeting attended (if no Board of Directors
Meeting is being held on the same day) and $2,500 for attending Board and
Committee Meetings held on the same day. In addition, the Chairman of the
Board is paid a Chairman's fee of $100,000 per year. The Company revised the
directors' fees as a result of the additional time and effort required from
the directors to ensure that they are fulfilling their increased obligations
under the Sarbanes-Oxley Act. The Company previously granted options to non-
employee directors under the Directors Plan. Currently, options to purchase an
aggregate of 274,800 shares of Common Stock are outstanding under the

Directors Plan at exercise prices ranging from $7.438 per share to $22.25 per
share. Assuming the approval of the Plan, the Non-Employee Directors will
receive options as described above under "Approval of the Adoption of the 2004
Stock Option Plan - Grants to Directors."

EMPLOYMENT AGREEMENTS

The Company entered into separate employment agreements, with each of
Messrs. White, Aaron, and O'Connell, on April 29, 2003, providing for the
employment of these individuals as Executive Vice President, Senior Vice
President - Counsel and Secretary and President of Lone Star Restaurants,
respectively. Each employment agreement provides that the officer shall devote
their entire business time to the business of the Company. The Employment
Agreements provide base salaries in the amounts of $600,000, $250,000 and
$350,000, respectively, for Messrs. White, Aaron and O'Connell, subject to
increases as determined by the Committee and ratified by the Board of
Directors. Each agreement terminates in April 2006. Additionally, each
agreement contains non-competition and non-solicitation provisions which apply
for twenty-four months after cessation of employment and confidentiality
provisions which apply for ten years after cessation of employment. Mr.
Coulter does not have an employment, non-competition, non-solicitation or
confidentiality agreement with the Company.

STOCKHOLDER PROPOSALS

In order to be considered for inclusion in the proxy materials to be
distributed in connection with the next Annual Meeting of Stockholders of the
Company, stockholder proposals for such meeting must be submitted to the
Company no later than January 5, 2005.

On May 21, 1998 the Securities and Exchange Commission adopted an amendment
to Rule 14a-4, as promulgated under the Securities and Exchange Act of 1934,
as amended. The amendment to Rule 14a-4(c)(1) governs the Company's use of its
discretionary proxy voting authority with respect to a stockholder proposal
which is not addressed in the Company's proxy statement. The amendment
provides that if the Company does not receive notice of the proposal at least
45 days prior to the first anniversary of the date of mailing of the prior
year's proxy statement, then the Company will be permitted to use its
discretionary voting authority when the proposal is raised at the annual
meeting, without any discussion of the matter in the proxy statement.

With respect to the Company's 2005 Annual Meeting of Stockholders, if the
Company is not provided notice of a stockholder proposal, which has not been
timely submitted, for inclusion in the Company's proxy statement by March 21,
2005 the Company will be permitted to use its discretionary voting authority
as outlined above.

PROXY SOLICITATION

The cost of soliciting proxies will be borne by the Company. The transfer
agent and registrar for the Company's Common Stock, Wachovia Bank, N.A., as a
part of its regular services and for no additional compensation other than
reimbursement for out-of-pocket expenses, has been engaged to assist in the
proxy solicitation. The Company has retained Innisfree M&A Incorporated for a
fee not to exceed $6,500, plus reimbursement of reasonable out-of-pocket
expenses to assist in the solicitation of proxies and revocations. Proxies may
be solicited through the mail and through telephonic or telegraphic
communications to, or by meetings with, stockholders or their representatives
by directors, officers, and other employees of the Company who will receive no
additional compensation therefor.

The Company requests persons such as brokers, nominees, and fiduciaries
holding stock in their names for others, or holding stock for others who have
the right to give voting instructions, to forward proxy material to their
principals and to request authority for the execution of the proxy, and the
Company will reimburse such persons for their reasonable expenses.

By Order of the Company,

/s/ Gerald T. Aaron

GERALD T. AARON
Secretary

Dated: Wichita, Kansas
November 5, 2004

The Company will furnish, without charge, a copy of its Annual Report on
Form 10-K for the fiscal year ended December 30, 2003 (without exhibits) as
filed with the Securities and Exchange Commission to stockholders of record on
the Record Date who make written request therefor to Gerald T. Aaron,
Secretary, Lone Star Steakhouse & Saloon, Inc., 224 E. Douglas, Suite 700,
Wichita, Kansas 67202-3414.

ANNEX A

LONE STAR STEAKHOUSE & SALOON INC.

2004 STOCK OPTION PLAN
----------------------

1. PURPOSE OF THE PLAN.

This 2004 Stock Option Plan (the "Plan") is intended as an incentive, to
retain a valuable workforce now in the employ of the Company (as hereinafter
defined) and recruit in the employ and as directors, consultants and advisors
to Lone Star Steakhouse & Saloon Inc. a Delaware corporation (the "Company")
with its principal office at 224 East Douglas, Suite 700, Wichita, Kansas
67202 and any Subsidiary of the Company, within the meaning of Section 424(f)
of the United States Internal Revenue Code of 1986, as amended (the "Code")
and 50% or more owned partnerships of the Company and its Subsidiaries,
persons of training, experience and ability, and to attract new employees,
directors, consultants and advisors whose services are considered valuable. In
addition, the Plan is intended to encourage the sense of proprietorship and to
stimulate the active interest of such persons in the development and financial
success of the Company and its Subsidiaries.

The Company intends that certain options granted under the Plan constitute
incentive stock options within the meaning of Section 422 of the Code (the
"Incentive Options"), while certain other options granted under the Plan shall
be nonqualified stock options (the "Nonqualified Options"). Incentive Options
and Nonqualified Options are hereinafter referred to collectively as
"Options."

The Company further intends that the Plan meet the requirements of Rule 16b-
3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and that transactions of the type specified in
subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and directors of
the Company under the Plan be exempt from the operation of Section 16(b) of
the Exchange Act. The Plan is intended to (i) satisfy the performance-based
compensation exception to the limitation on the Company's tax deductions
imposed by Section 162(m) of the Code with respect to those Options for which
qualification for such exception is intended and (ii) comply with the rules
applicable to non-qualified deferred compensation plans as set forth in
Section 409(A) of the Code to the extent such rules are applicable. In all
cases, the terms, provisions, conditions and limitations of the Plan shall be
construed and interpreted consistent with the Company's intent as stated in
this Section 1.

2. ADMINISTRATION OF THE PLAN.

The Board of Directors of the Company (the "Board") shall appoint and
maintain as administrator of the Plan the Compensation/Stock Option Committee
(the "Committee") consisting of three or more members of the Board who are (i)
"Non-Employee Directors" within the meaning of sub paragraph (b) of Rule 16b-
3, (ii) "Outside Directors" within the meaning of Section 162(m) of the Code
and (iii) independent under the standards set forth in Rule 4350 of the Rules
of the National Association of Securities Dealers, Inc. The fact that a member
of the Committee shall fail to qualify under the provisions of the preceding
sentence shall not invalidate any Option granted by the Committee that is
otherwise validly granted under the Plan. The members of the Committee shall
serve at the pleasure of the Board. The Committee, subject to Sections 3 and 6
hereof, shall have full power and authority to designate recipients of
Options, to determine the terms and conditions of respective Option agreements
(which need not be identical) and to interpret the provisions and supervise
the administration of the Plan. The Committee shall have the authority,
without limitation, to designate which Options granted under the Plan shall be
Incentive Options and which shall be Nonqualified Options. To the extent that
any Option does not qualify as an Incentive Option, it shall constitute and be
considered a Nonqualified Option.

Subject to the provisions of the Plan, the Committee shall interpret the
Plan and the terms of all Options granted under the Plan, shall make such
rules as it deems necessary for the proper administration of the Plan, shall
make all other determinations necessary or advisable for the administration of
the Plan and shall correct any defects or supply any omission or reconcile any
inconsistency in the Plan or in any Options granted under the Plan in the
manner and to the extent that the Committee deems desirable to carry into
effect the Plan or any

A-1

Options. The act or determination of a majority of the Committee shall be the
act or determination of the Committee and any decision reduced to writing and
signed by all of the members of the Committee shall be fully effective as if
it had been made by a majority at a meeting duly held. Subject to the
provisions of the Plan, any action taken or determination made by the
Committee pursuant to this and the other Sections of the Plan shall be
conclusive on all parties.

In the event that for any reason the Committee is unable to act or if the
Committee at the time of any grant, award or other acquisition under the Plan
of Options or Stock as hereinafter defined does not meet the requirements of
the first sentence of Section 2 hereof, or if there shall be no such
Committee, then the Plan shall be administered by the Board, and references
herein to the Committee (except in the proviso to this sentence) shall be
deemed to be references to the Board, and any such grant, award or other
acquisition may be approved or ratified in any other manner contemplated by
subparagraph (d) of Rule 16b-3; provided, however, that options granted to the
Company's five (5) most highly compensated officers that are intended to
qualify as performance-based compensation under Section 162(m) of the Code may
only be granted as provided herein.

A consultant shall not be eligible for the grant of an option if, at the
time of grant, a Registration Statement on Form S-8 (a "Form S-8") under the
Securities Act of 1933, as amended (the "Securities Act"), is not available to
register either the offer or the sale of the Company's securities to such
consultant because of the nature of the services that such consultant is
providing to the Company, or because the consultant is not a natural person,
or as otherwise provided by the rules governing the use of Form S-8, unless
the Company determines both (i) that such grant (A) shall be registered in
another manner under the Securities Act (e.g., on a Registration Statement on
Form S-3) or (B) does not require registration under the Securities Act in
order to comply with the requirements of the Securities Act, if applicable,
and (ii) that such grant complies with the securities laws of all other
relevant jurisdictions.

3. DESIGNATION OF OPTIONEES.

Except as set forth in Section 4 below relating to Option grants to Non-
Employee Directors, the persons eligible for participation in the Plan as
recipients of Options (the "Optionees") shall include employees, consultants
and advisors to the Company or any Subsidiary and 50% or more owned
partnerships of the Company and its Subsidiaries; provided that Incentive
Options may only be granted to employees of the Company and the Subsidiaries.
In selecting recipients of Options, and in determining the number of shares to
be covered by each Option granted to Optionees, the Committee may consider,
among other criteria deemed pertinent, the office or position held by the
Optionee or the Optionee's relationship to the Company, the Optionee's degree
of responsibility for and contribution to the growth and success of the
Company or any Subsidiary, the Optionee's length of service, promotions
potential and any other factors that the Committee may consider relevant. An
Optionee who has been granted an Option hereunder may be granted an additional
Option or Options, if the Committee shall so determine.

4. OPTION GRANTS TO DIRECTORS.

a. GRANTS UPON EFFECTIVENESS. Upon stockholder approval of this Plan, each
Non-Employee Director of the Company on such date will receive the grant of a
Nonqualified Option to purchase 15,000 shares of Stock.

b. INITIAL GRANTS. If a Non-Employee Director is first elected or appointed
to the Board after the adoption of the Plan, then on such date such Non-
Employee Director shall receive the grant of a Nonqualified Option to purchase
40,000 shares of Stock. In addition, to the extent that any Non-Employee
Director was elected or appointed to the Board after the termination of the
1992 Directors' Stock Option Plan and prior to stockholder approval of the
Plan, then on the date of stockholder approval of this Plan, such Non-Employee
Director shall receive (in addition to the Options set forth in Section 4(a)
hereof) the grant of a Nonqualified Option to purchase 40,000 shares of stock.

c. SUBSEQUENT GRANTS. Subsequent to stockholder approval of this Plan, on
each first day after the end of the Company's fiscal year, all Non-Employee
Directors who are serving on the Board on such dates shall receive the grant
of a Nonqualified Option to purchase 7,500 shares of Stock.

A-2

d. AUDIT COMMITTEE CHAIRMAN GRANTS. Upon stockholder approval of the Plan,
the current Chairman of the Audit Committee of the Company on such date will
receive the grant of a Nonqualified Option to purchase 2,500 shares of Stock.
In addition, such person will receive the grant of a Nonqualified Option to
purchase 2,500 shares of Stock on each first day after the end of the
Company's fiscal year provided that such person continues to be Chairman of
the Audit Committee on such dates. Subsequently, on the date any Non-Employee
Director is appointed Chairman of the Audit Committee, and on each first day
after the end of the Company's fiscal year that he remains Chairman of the
Audit Committee, such Chairman shall receive the grant of a Nonqualified
Option to purchase 2,500 shares of Stock.

e. COMPLIANCE WITH RULE 16B-3. The terms for the grant of Nonqualified
Options to a Non-Employee Director may only be changed if permitted under Rule
16b-3 of the Exchange Act.

5. STOCK RESERVED FOR THE PLAN.

Subject to adjustment as provided in Section 8 hereof, a total of three
million (3,000,000) shares of the Company's Common Stock, $0.01 par value per
share (the "Stock"), shall be subject to the Plan, of which five hundred
thousand (500,000) shall be available for the grants of Options to Non-
Employee Directors as set forth in Section 4. The maximum number of shares of
Stock that may be subject to options granted under the Plan to any individual
shall not exceed 600,000 (subject to adjustment under Section 8 hereof) and
the method of counting such shares shall conform to any requirements
applicable to performance-based compensation under Section 162(m) of the Code.
The shares of Stock subject to the Plan shall consist of unissued shares,
treasury shares or previously issued shares held by the Company or any
Subsidiary of the Company, and such amount of shares of Stock shall be and is
hereby reserved for such purpose. Any of such shares of Stock that may remain
unsold and that are not subject to outstanding Options at the termination of
the Plan shall cease to be reserved for the purposes of the Plan, but until
termination of the Plan, the Company shall at all times reserve a sufficient
number of shares of Stock to meet the requirements of the Plan. Should any
Option expire or be cancelled prior to its exercise in full or should the
number of shares of Stock to be delivered upon the exercise in full of an
Option be reduced for any reason, the shares of Stock theretofore subject to
such Option may be subject to future Options under the Plan, except where such
reissuance is inconsistent with the provisions of Section 162(m) of the Code.

6. TERMS AND CONDITIONS OF OPTIONS.

Options granted under the Plan shall be subject to the following conditions
and shall contain such additional terms and conditions, not inconsistent with
the terms of the Plan, as the Committee shall deem desirable:

a. OPTION PRICE. The purchase price of each share of Stock purchasable
under an Option shall be determined by the Committee at the time of grant, but
shall not be less than 100% of the Fair Market Value (as defined below) of
such share of Stock on the date the Option is granted; provided, however, that
with respect to an Optionee who, at the time such Incentive Option is granted,
owns (within the meaning of Section 424(d) of the Code) more than 10% of the
total combined voting power of all classes of stock of the Company or of any
Subsidiary, the purchase price per share of Stock shall be at least 110% of
the Fair Market Value per share of Stock on the date of grant. The exercise
price for each Option shall be subject to adjustment as provided in Section 8
below. "Fair Market Value" means the closing price of publicly traded shares
of Stock on the principal national securities exchange on which shares of
Stock are listed (if the shares of Stock are so listed), or on the Nasdaq
Stock Market (if the shares of Stock are regularly quoted on the Nasdaq Stock
Market), or, if not so listed or regularly quoted, the mean between the
closing bid and asked prices of publicly traded shares of Stock in the over-
the-counter market, or, if such bid and asked prices shall not be available,
as reported by any nationally recognized quotation service selected by the
Company, or as determined by the Committee in a manner consistent with the
provisions of the Code. Anything in this Section 6(a) to the contrary
notwithstanding, in no event shall the purchase price of a share of Stock be
less than the minimum price permitted under the rules and policies of any
national securities exchange on which the shares of Stock are listed.

b. OPTION TERM. The term of each Option shall be fixed by the Committee,
but no Option shall be exercisable more than ten (10) years after the date
such Option is granted and in the case of an Incentive Option granted to an
Optionee who, at the time such Incentive Option is granted, owns (within the
meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or

A-3

of any Subsidiary, no such Incentive Option shall be exercisable more than
five years after the date such Incentive Option is granted.

c. EXERCISABILITY. Subject to Section 6(j) hereof and unless otherwise
determined by the Committee on the date of grant, Options shall be exercisable
as follows: one-fourth of the aggregate shares of Stock purchasable under an
Option shall be exercisable commencing one year after the date of grant, an
additional one-fourth of the aggregate shares of Stock purchasable under an
Option shall be exercisable commencing two years after the date of grant, an
additional one-fourth of the aggregate shares of Stock purchasable under an
Option shall be exercisable commencing three years after the date of grant,
and the remaining one-fourth of the aggregate shares of Stock purchasable
under an Option shall be exercisable commencing four years after the date of
grant.

Upon the occurrence of a "Change in Control" (as hereinafter defined), the
Committee shall accelerate the vesting and exercisability of outstanding
Options, in whole or in part, as determined by the Committee in its sole
discretion. In its sole discretion, the Committee may also determine that,
upon the occurrence of a Change in Control, each outstanding Option shall
terminate within a specified number of days after notice to the Optionee
thereunder, and each such Optionee shall receive, with respect to each share
of Company Stock subject to such Option, an amount equal to the excess of the
Fair Market Value of such shares immediately prior to such Change in Control
over the exercise price per share of such Option; such amount shall be payable
in cash, in one or more kinds of property (including the property, if any,
payable in the transaction) or a combination thereof, as the Committee shall
determine in its sole discretion.

For purposes of the Plan, a Change in Control shall be deemed to have
occurred if:

i. a tender offer (or series of related offers) shall be made and
consummated for the ownership of 50% or more of the outstanding voting
securities of the Company, unless as a result of such tender offer more than
50% of the outstanding voting securities of the surviving or resulting
corporation shall be owned in the aggregate by the shareholders of the Company
(as of the time immediately prior to the commencement of such offer), any
employee benefit plan of the Company or its Subsidiaries, and their
affiliates;

ii. the Company shall be merged or consolidated with another corporation,
unless as a result of such merger or consolidation more than 50% of the
outstanding voting securities of the surviving or resulting corporation shall
be owned in the aggregate by the shareholders of the Company (as of the time
immediately prior to such transaction), any employee benefit plan of the
Company or its Subsidiaries, and their affiliates;

iii. the Company shall sell substantially all of its assets to another
corporation that is not wholly owned by the Company, unless as a result of
such sale more than 50% of such assets shall be owned in the aggregate by the
shareholders of the Company (as of the time immediately prior to such
transaction), any employee benefit plan of the Company or its Subsidiaries and
their affiliates; or

iv. a Person (as defined below) shall acquire 50% or more of the
outstanding voting securities of the Company (whether directly, indirectly,
beneficially or of record), unless as a result of such acquisition more than
50% of the outstanding voting securities of the surviving or resulting
corporation shall be owned in the aggregate by the shareholders of the Company
(as of the time immediately prior to the first acquisition of such securities
by such Person), any employee benefit plan of the Company or its Subsidiaries,
and their affiliates.

For purposes of this Section 6(c), ownership of voting securities shall take
into account and shall include ownership as determined by applying the
provisions of Rule 13d-3(d)(I)(i) (as in effect on the date hereof) under the
Exchange Act. In addition, for such purposes, "Person" shall have the meaning
given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections
13(d) and 14(d) thereof; however, a Person shall not include (A) the Company
or any of its Subsidiaries; (B) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any of its
Subsidiaries; (C) an underwriter temporarily holding securities pursuant to an
offering of such securities; or (D) a corporation owned, directly or
indirectly, by the shareholders of the Company in substantially the same
proportion as their ownership of stock of the Company.

d. METHOD OF EXERCISE. An option, to the extent then exercisable, may be
exercised in whole or in part at any time during the option period, by giving
written notice to the Company specifying the number of shares of Stock to be
purchased, accompanied by payment in full of the exercise price, in cash, or
by check or such other instrument as may be acceptable to the Committee. As
determined by the Committee, in its sole discretion, at or
A-4

after grant, payment in full or in part may be made at the election of the
Optionee (i) in the form of Stock owned by the Optionee (based on the Fair
Market Value of the Stock on the trading day before the Option is exercised)
that is not the subject of any pledge or security interest, (ii) in the form
of Stock withheld by the Company from the shares of Stock otherwise to be
received with such withheld shares of Stock having a Fair Market Value on the
date of exercise equal to the exercise price of the Option, or (iii) by a
combination of the foregoing, provided that the combined value of all cash and
cash equivalents and the Fair Market Value of any shares surrendered to the
Company is at least equal to such exercise price and except with respect to
(ii) above, such method of payment will not cause a disqualifying disposition
of all or a portion of the Stock received upon exercise of an Incentive
Option. An Optionee shall have the right to dividends and other rights of a
stockholder with respect to shares of Stock purchased upon exercise of an
Option after (i) the Optionee has given written notice of exercise and has
paid in full for such shares and (ii) the Optionee has satisfied such
conditions that may be imposed by the Company with respect to the withholding
of taxes.

e. NON-TRANSFERABILITY OF OPTIONS. Options are not transferable and may be
exercised solely by the Optionee during his lifetime or after his death by the
person or persons entitled thereto under his will or the laws of descent and
distribution. The Committee, in its sole discretion, may permit a transfer of
a Nonqualified Option to (i) a trust for the benefit of the Optionee or (ii) a
member of the Optionee's immediate family (or a trust for his or her benefit).
Any attempt to transfer, assign, pledge or otherwise dispose of, or to subject
to execution, attachment or similar process, any Option contrary to the
provisions hereof shall be void and ineffective and shall give no right to the
purported transferee.

f. TERMINATION BY DEATH. Except as otherwise provided in Section 6(i),
unless otherwise determined by the Committee if any Optionee's employment with
or service to the Company or any Subsidiary terminates by reason of death, any
Option held by such Optionee may thereafter be exercised, to the extent then
exercisable (or on such accelerated basis as the Committee shall determine at
or after grant), by the legal representative of the estate or by the legatee
of the Optionee under the will of the Optionee, for a period of one year after
the date of such death or until the expiration of the stated term of such
Option as provided under the Plan, whichever period is shorter.

g. TERMINATION BY REASON OF DISABILITY. Except as otherwise provided in
Section 6(i), unless otherwise determined by the Committee, if any Optionee's
employment with or service to the Company or any Subsidiary terminates by
reason of disability, any Option held by such Optionee may thereafter be
exercised, to the extent it was exercisable at the time of termination due to
disability (or on such accelerated basis as the Committee shall determine at
or after grant), for a period of one year after the date of such termination
of employment or service or the expiration of the stated term of such Option,
whichever period is shorter; provided, however, that, if the Optionee dies
within such one year period, any unexercised Option held by such Optionee
shall thereafter be exercisable to the extent to which it was exercisable at
the time of death for a period of one year after the date of such death or for
the stated term of such Option, whichever period is shorter. In the case of an
Optionee employed under an employment agreement with the Company or any
Subsidiary, the term disability as used herein shall have the meaning set
forth in such employment agreement. In all other cases, the term disability
shall have the meaning given it in any long-term disability plan of the
Company, or if the Company maintains no such plan, such term shall mean the
Optionee's inability to engage in any substantial gainful activity by reason
of a physical or mental impairment that can reasonably be expected to result
in death or that has lasted or can reasonably be expected to last for a
continuous period of not less than 180 days; provided, that when used in
connection with the exercise of an Incentive Option following termination of
employment, such term shall mean a disability within the meaning of Section
22(e)(3) of the Code.

h. OTHER TERMINATION. Except as otherwise provided in Section 6(i), unless
otherwise determined by the Committee if any Optionee's employment with or
service to the Company or any Subsidiary terminates for any reason other than
death or disability, the Option shall thereupon terminate, except that the
portion of any Option that was exercisable on the date of such termination of
employment may be exercised for the lesser of three months after the date of
termination or the balance of such Option's term, if the Optionee's employment
or service with the Company or any Subsidiary is terminated by the Company or
such Subsidiary without cause (the determination as to whether termination was
for cause to be made by the Committee). The transfer of an Optionee from the
employ of the Company to a Subsidiary, or vice versa, or from one Subsidiary
to another, shall not be deemed to constitute a termination of employment for
purposes of the Plan.

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i. NON-EMPLOYEE DIRECTOR OPTIONS. Notwithstanding anything else contained
herein, if a Non-Employee Director's service on the Board of Directors
terminates, any Options held by the Non-Employee Director may be exercised
until the expiration of the stated term of such Option.

j. FIVE YEAR EMPLOYEES. Notwithstanding anything contained in the Plan to
the contrary in sections 6(f), 6(g) and 6(h), to the extent that an Optionee
has been continuously employed by the Company or any Subsidiary in the five-
year period immediately preceding the date of termination, then in the event
of termination for any reason other than cause (as defined in Section 6 (h))
all Options held by the Optionee which are exercisable on the date of
termination may be exercised by the Optionee for a period equal to the same
term as originally granted (i.e., as if the Optionee remained employed by the
Company to the full option term), or in the case of death of the Optionee, by
the legal representative of the estate or by the legatee of the Optionee under
the will of the Optionee; provided, however, to the extent that any Option
which was an Incentive Option is exercised at a time when it no longer
qualifies as an Incentive Option, then, without further action on the part of
the Committee or the option holder, such Incentive Option shall be deemed a
Nonqualified Option.

k. LIMIT ON VALUE OF INCENTIVE OPTION. The aggregate Fair Market Value,
determined as of the date the Incentive Option is granted, of Stock for which
Incentive Options are exercisable for the first time by any Optionee during
any calendar year under the Plan (and/or any other stock option plans of the
Company or any Subsidiary) shall not exceed $100,000, unless otherwise changed
by the Code.

7. TERM OF PLAN.

No Option shall be granted under the Plan on or after [ ], 2014(1), but
the term of Options theretofore granted may extend beyond that date.

8. ASSUMPTION OF OPTIONS BY SUCCESSORS; ADJUSTMENTS UPON CHANGES IN
CAPITALIZATION.

a. Except as otherwise provided in Section 6(c) hereof, in the event of
(i) a merger or consolidation in which the Company is not the surviving
corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the stockholders
of the Company), (ii) the sale of all or substantially all of the assets of
the Company, or (iii) any other merger, consolidation, acquisition of property
or stock, separation or reorganization of or from the Company wherein the
stockholders of the Company give up all of their equity interest in the
Company, except for the acquisition, sale or transfer of all or substantially
all of the outstanding shares of the Company (each of the foregoing, a
"Corporate Transaction"), all outstanding Options shall be assumed by the
successor corporation, which assumption shall be binding on all Optionees. In
the alternative, the successor corporation may substitute equivalent options
or provide the same consideration to Optionees as was provided to stockholders
in the Corporate Transaction (after taking into account the existing
provisions of the Options). Should the successor corporation fail to assume
all outstanding Options or to substitute equivalent options or provide similar
consideration, the vesting of all outstanding Options shall be accelerated in
full and all Options shall become immediately exercisable and the Options
shall terminate if not exercised at or prior to the Corporate Transaction. If
the exercise of the foregoing right by the holder of an Incentive Option would
be deemed to result in a violation of the provisions of Subsection 6(k) of the
Plan, then, without further act on the part of the Committee or the option
holder, such Incentive Option shall be deemed a Nonqualified Option to the
extent necessary to avoid any such violation.

b. The existence of outstanding Options shall not affect in any way the
right or power of the Company or its stockholders to make or authorize any or
all adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issuance of Stock or subscription rights thereto, or any
merger or consolidation of the Company, or any issuance of bonds, debentures,
preferred or prior preference stock ahead of or affecting the Stock or the
rights thereof, or the dissolution or liquidation of the Company, or any sale
or transfer of all or any part of its assets or business, or any other
corporate act or proceeding, whether of a similar character or otherwise;
provided, however, that if the outstanding Stock or the number of shares
thereof outstanding shall at any time be changed or exchanged by or in
connection with a stock dividend, stock split, reverse split or combination of
shares, recapitalization, or similar

---------------
(1) The date that is ten years from the effective date of the Plan.

A-6

change in the capital structure of the Company without consideration, or if a
substantial portion of the assets of the Company is distributed to the
stockholders of the Company without consideration in a spin-off or other
similar transaction, the number and kind of Stock subject to the Plan and
subject to any Options theretofore granted, and the Option prices, shall be
appropriately and equitably adjusted. Any adjustment affecting an Incentive
Option shall satisfy the requirements of Section 424 of the Code.

c. Adjustments under this Section 8 shall be made by the Committee whose
determination as to what adjustments, if any, shall be made, and the extent
thereof, shall be final.

9. PURCHASE FOR INVESTMENT.

Unless the Options and shares covered by the Plan have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), or the Company
has determined that such registration is unnecessary, each person exercising
an Option under the Plan may be required by the Company to give a
representation in writing that he is acquiring the shares for his own account
for investment and not with a view to, or for sale in connection with, the
distribution of any part thereof.

10. TAXES.

The Company may make such provisions as it may deem appropriate, consistent
with applicable law, in connection with any Options granted under the Plan
with respect to the withholding of any taxes (including income or employment
taxes) or any other tax matters. As a condition of exercise of an Option, each
Optionee agrees that (i) no later than the date of exercise of such Option,
such Optionee shall pay to the Company or make arrangements satisfactory to
the Company regarding payment of all federal, state and local taxes of any
kind required by law to be withheld upon the exercise of such Option; and (ii)
the Company shall, to the extent required or permitted by law, have the right
to deduct federal, state and local and employment taxes required or permitted
by law to be withheld upon the exercise of such Option from payment of any
kind otherwise due to such Optionee.

11. EFFECTIVE DATE OF PLAN.

The Plan shall be effective on [ ], 2004, but no Options shall be
granted under the Plan until such time that the Plan shall be approved by
majority vote of the Company's stockholders, which approval shall not be later
than [ ], 2005.

12. AMENDMENT AND TERMINATION.

The Board may amend, suspend, or terminate the Plan, except that no
amendment shall be made that would impair the rights of any Optionee under any
Option theretofore granted without his consent, and except that no amendments
shall be made which, without the approval of the stockholders of the Company
would:

a. except as otherwise provided in Sections 8(b) and 13 hereof, reduce the
exercise price of outstanding Options or effect repricing through cancellation
and re-grants of new Options;

b. increase the number of shares that may be issued under the Plan, except
as is provided in Sections 8 and 13;

c. materially increase the benefits accruing to the Optionees under the
Plan;

d. materially modify the requirements as to eligibility for participation
in the Plan;

e. decrease the exercise price of an Option to less than 100% of the Fair
Market Value per share of Stock on the date of grant thereof; or

f. extend the term of any Option beyond that provided for in Section 6(b).

Subject to the foregoing, the Committee may amend the terms of any Option
theretofore granted, prospectively or retroactively, but no such amendment
shall impair the rights of any Optionee without his consent.

A-7

13. DIVIDEND EQUIVALENTS.

Simultaneously with the grant of any Option and under such terms and
conditions as the Committee deems appropriate, the Committee may grant special
dividend equivalent rights ("Dividend Equivalents") which amount shall be
determined by multiplying the number of shares of Stock subject to an Option
by the per-share cash dividend, or the per-share fair market value (as
determined by the Committee) of any dividend in consideration other than cash,
paid by the Company on its Stock on a dividend payment date (other than the
regular quarterly cash dividends of the Company). Unless otherwise determined
by the Committee at grant, the Dividend Equivalents (i) shall have the same
vesting schedule, if any, as the Options to which the Dividend Equivalents
relate and (ii) shall be payable upon exercise of the Options to which the
Dividend Equivalents relate. At the discretion of the Committee, Dividend
Equivalents shall be credited to accounts on the Company's records for
purposes of the Plan. Dividend Equivalents may be accrued as a cash
obligation, or may be converted to shares of Stock for the Participant. The
Committee shall determine whether any deferred Dividend Equivalents will
accrue interest. The Committee may provide that an Optionee may use Dividend
Equivalents to pay the Exercise Price. Dividend Equivalents may be payable in
cash or shares of Stock or in a combination of the two, as determined by the
Committee.

14. GOVERNMENT REGULATIONS.

The Plan, and the grant and exercise of Options hereunder, and the
obligation of the Company to sell and deliver Stock under such Options, shall
be subject to all applicable laws, rules and regulations, and to such
approvals by any governmental agencies, or national securities exchanges and
interdealer quotation systems as may be required.

15. GENERAL PROVISIONS.

a. CERTIFICATES. All certificates for shares of Stock delivered under the
Plan shall be subject to such stop transfer orders and other restrictions as
the Committee may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, or other securities
commission having jurisdiction, any applicable Federal or state securities
laws, any stock exchange or interdealer quotation system upon which the Stock
is then listed or traded and the Committee may cause a legend or legends to be
placed on any such certificates to make appropriate reference to such
restrictions.

b. CONTINUED SERVICE. The adoption of the Plan shall not confer upon any
Optionee who is an employee of the Company or any Subsidiary any right to
continued employment or, in the case of an Optionee who is a director,
continued service as a director, with the Company or a Subsidiary, as the case
may be, nor shall it interfere in any way with the right of the Company or any
Subsidiary to terminate the employment of any of its employees, the service of
any of its directors or the retention of any of its consultants or advisors at
any time.

c. LIMITATION OF LIABILITY. No member of the Board or the Committee, or any
officer or employee of the Company acting on behalf of the Board or the
Committee, shall be personally liable for any action, determination, or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Board or the Committee and each and any officer or employee of
the Company acting on their behalf shall, to the extent permitted by law, be
fully indemnified and protected by the Company in respect of any such action,
determination or interpretation.

d. REGISTRATION OF STOCK. Notwithstanding any other provision in the Plan,
no Option may be exercised unless and until the Stock to be issued upon the
exercise thereof has been registered under the Securities Act and applicable
state securities laws, or is, in the opinion of counsel to the Company, exempt
therefrom. The Company shall not be under any obligation to register under
applicable federal or state securities laws any Stock to be issued upon the
exercise of an Option granted hereunder in order to permit the exercise of an
Option and the issuance and sale of the Stock subject to such Option, although
the Company may in its sole discretion register such Stock at such time as the
Company shall determine. If the Company chooses to comply with such an
exemption from registration, the Stock issued under the Plan may, at the
direction of the Committee, bear an appropriate restrictive legend restricting
the transfer or pledge of the Stock represented thereby, and the Company may
also give appropriate stop transfer instructions with respect to such Stock to
the Company's transfer agent.

A-8

e. GOVERNING LAW. The laws of the State of Delaware shall govern all
questions concerning the construction, validity and interpretation of the
Plan, without regard to such State's choice of law rules.

f. INTERNAL REVENUE CODE OF 1986. All references herein to the Code shall
be deemed references to the Code and to all Treasury Regulations promulgated
thereunder.

LONE STAR STEAKHOUSE & SALOON INC.

_______________, 2004

A-9

LONE STAR STEAKHOUSE & SALOON, INC.
SPECIAL MEETING OF STOCKHOLDERS - DECEMBER 15, 2004
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned stockholder of Lone Star Steakhouse & Saloon, Inc., a
Delaware Corporation (the "Company"), hereby appoints Jamie B. Coulter and John
D. White with full power of substitution and to each substitute appointed
pursuant to such power, as proxy or proxies, to cast all votes as designated
hereon, which the undersigned stockholder is entitled to cast at the Special
Meeting of the Stockholders (the "Special Meeting") of Lone Star Steakhouse &
Saloon, Inc., to be held at 10:00 a.m., local time on December 15, 2004 at the
offices of Olshan Grundman Frome Rosenzweig & Wolosky LLP located at 65 East
55th Street, New York, New York 10022, and at any and all adjournments and
postponements thereof, with all powers which the undersigned would possess if
personally present (i) as designated below with respect to the matters set forth
below and described in the accompanying Notice and Proxy Statement, and (ii) in
their discretion with respect to any other business that may properly come
before the Special Meeting. The undersigned stockholder hereby revokes any proxy
or proxies heretofore given by the undersigned to others for such Special
Meeting.

This proxy when properly executed and returned will be voted in the manner
directed by the undersigned stockholder. If no direction is made, this proxy
will be voted (1) FOR the adoption of the Company's 2004 Stock Option Plan; and
(2) in accordance with the discretion of the proxies or proxy with respect to
any other business transacted at the Special Meeting.

THE BOARD RECOMMENDS A VOTE "FOR" PROPOSAL 1.

1. To adopt the Company's 2004 Stock Option Plan.

|_|FOR |_| AGAINST |_| ABSTAIN

-------------------------------------------------------------------------------
(Continued and to be signed on reverse side)

THIS PROXY MAY BE REVOKED PRIOR TO THE TIME IT IS VOTED BY DELIVERING TO THE
SECRETARY OF THE COMPANY EITHER A WRITTEN REVOCATION OR A PROXY BEARING A LATER
DATE OR BY APPEARING AT THE SPECIAL MEETING AND VOTING IN PERSON.

Dated: _____________________, 2004

___________________________ (L.S.)
(Signature)
___________________________ (L.S.)
(Signature)

Your signature should appear the
same as your name appears hereon.
In signing as attorney, executor,
administrator, trustee or guardian,
please indicate the capacity in
which signing. When signing as
joint tenants, all parties in the
joint tenancy must sign. When a
proxy is given by a corporation, it
should be signed by an authorized
officer and the corporate seal
affixed. No postage is required if
mailed in the United States.

PLEASE ACT PROMPTLY

PLEASE SIGN AND DATE THIS PROXY CARD
AND RETURN IT IN THE ENCLOSED ENVELOPE TODAY