Edgar Filing: MEXICAN RESTAURANTS INC

SCHEDULE 14A

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

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Check the appropriate box:

[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2)).

[X] Definitive proxy statement.

[ ] Definitive additional materials.

[ ] Soliciting material pursuant to Section 240.14a-12

Mexican Restaurants, Inc.
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(Name of Registrant as Specified in Its Charter)

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(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)

Payment of filing fee (check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.

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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
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MEXICAN RESTAURANTS, INC.

1135 EDGEBROOK DRIVE
HOUSTON, TEXAS 77034

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 8, 2005

DEAR SHAREHOLDER:

You are cordially invited to attend a Special Meeting of Shareholders
of Mexican Restaurants, Inc. (the "Company") at the Casa Ole restaurant located
at 20131 Highway 59 North, Suite 2004, Humble, Texas 77338 on Tuesday, November
8, 2005 at 9:30 a.m., Houston, Texas time, for the following purposes:

1. To consider and vote upon a proposal to adopt and approve the
Mexican Restaurants, Inc. 2005 Long Term Incentive Plan; and

2. To transact such other business as may properly come before the
meeting.

Shareholders of record of the Company's Common Stock at the close of
business on September 1, 2005 are entitled to vote at the Special Meeting or any
adjournment thereof. Any shareholder attending the meeting may vote in person
even if he or she previously returned a proxy. Each share of the Company's
Common Stock entitles the holder to one vote.

By Order of the Board of Directors,

----------------------------------------
Louis P. Neeb
Chairman of the Board

October 3, 2005

YOUR VOTE IS IMPORTANT

YOU ARE URGED TO SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD, SO THAT
IF YOU ARE UNABLE TO ATTEND THE MEETING YOUR SHARES MAY NEVERTHELESS BE VOTED.
EVEN IF YOU HAVE GIVEN YOUR PROXY, THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO
EXERCISE BY FILING WITH THE SECRETARY OF THE COMPANY A WRITTEN REVOCATION, BY
EXECUTING A PROXY WITH A LATER DATE, OR BY ATTENDING AND VOTING AT THE MEETING.

MEXICAN RESTAURANTS, INC.

1135 EDGEBROOK DRIVE
HOUSTON, TEXAS 77034

PROXY STATEMENT FOR
SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON NOVEMBER 8, 2005

This proxy statement and the accompanying form of proxy are being
furnished to shareholders in connection with the solicitation of proxies on
behalf of the Board of Directors (the "Board") of Mexican Restaurants, Inc., a
Texas corporation (the "Company"), for use at the Special Meeting of
Shareholders, to be held on Tuesday, November 8, 2005 at 9:30 a.m., Houston,
Texas time, at the Casa Ole restaurant located at 20131 Highway 59 North, Suite
2004, Humble, Texas 77338, and at any adjournment, continuation or postponement
thereof. The Notice of Special Meeting, this Proxy Statement and the
accompanying proxy are first being sent to shareholders on or about October 3,
2005.

At the Special Meeting, the Company's shareholders will be asked to
consider and vote upon (i) the proposal to adopt and approve the Mexican
Restaurants, Inc. 2005 Long Term Incentive Plan (the "2005 Plan"), and (ii) such
other business as may properly come before the special meeting.

SOLICITATION

The solicitation of proxies is made by and on behalf of the Board. The
cost of the solicitation will be borne by the Company, including the reasonable
expenses of brokerage firms or other nominees for forwarding proxy materials to
beneficial owners. In addition to solicitation by mail, proxies may be solicited
by telephone, telecopy or personally. Proxies may be solicited by directors,
officers and employees of the Company without additional compensation.

RECORD DATE, OUTSTANDING SHARES AND VOTING RIGHTS

The close of business on September 1, 2005, has been fixed as the
record date for the determination of shareholders entitled to notice of and to
vote at the meeting (the "Record Date"). On the Record Date, the Company had
outstanding 3,451,102 shares of Common Stock, $.01 par value ("Common Stock"),
each of which will be entitled to one vote.

In order to transact business at the Special Meeting, a quorum
consisting of a majority of all outstanding shares entitled to vote must be
present. Abstentions and proxies returned by brokerage firms for which no voting
instructions have been received from their principals will be counted for the
purpose of determining whether a quorum is present, but will not be voted on the
matters presented at the meeting. Once a share is represented for any purpose at
the Special Meeting, it will be deemed present for quorum purposes for the
entirety of the meeting. A majority of the outstanding shares entitled to vote
that are represented at the meeting in person or by proxy is required for
approval of the other matters that may be presented at the meeting.

If the enclosed proxy is executed and returned, the shares represented
thereby will be voted in accordance with any specifications made by the
shareholder. In the absence of any such specification, they will be voted for
the proposal to adopt and approve the 2005 Plan and in the transaction of any
other business which properly comes before the meeting or any adjournment
thereof. Pursuant to applicable law, broker nonvotes and abstaining votes will
not be counted in favor of or against any proposal to be presented at the
meeting.

The presence of a shareholder at the meeting will not operate to
revoke his proxy. A proxy may be revoked at any time insofar as it has not been
exercised by giving written notice of revocation to the Company, executing and
returning a proxy with a later date, or by attending the Special Meeting and
voting in person.

If any other matters come before the meeting, the persons named in the
proxy, or their substitutes, will vote thereon in accordance with their best
judgment. The Board does not know of any matters other than the proposal for the
adoption and approval of the 2005 Plan that will be presented for action at the
meeting.

SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS, DIRECTORS AND MANAGEMENT

The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of September 1, 2005 by
each person known to the Company to own beneficially more than 5% of the
Company's Common Stock, each director, each executive officer and all executive
officers and directors as a group.

Shares Percent
Beneficially of
Name of Beneficial Owner Owned (1) Class
------------------------ ------------ -------

Larry N. Forehand and Forehand
Family Partnership, Ltd. (2)(3)(6) .......... 712,739 20.7%
David Nierenberg, The D3 Family Funds (4)(8) ... 1,090,510 31.4%
19605 N.E. 8th Street
Camas, Washington 98607
Michael D. Domec (2)(9) ........................ 203,555 5.9%
Louis P. Neeb (2)(5)(6)(10) .................... 469,737 11.6%
John C. Textor (5)(6)(7) ....................... 351,487 9.7%
Wyndcrest Partners
11450 S.E. Dixie Hwy, Suite 204
Hobe Sound, Florida 33455
Osmium Capital, LP (12 ) ....................... 221,329 6.4%
388 Market Street, Suite 920
San Francisco, California 94111
J.J. Fitzsimmons (11) .......................... 34,442 1.0%
Wal-Mart Stores, Inc.
702 Southwest 8th Street
Bentonville, Arkansas 72716
Curt Glowacki (2)(13) .......................... 125,778 3.5%
Thomas E. Martin (2)(14) ....................... 16,000 *
Andrew J. Dennard (2)(15) ...................... 25,000 *
All executive officers and directors as
a group (nine persons) (17) ................. 2,481,159 61.5%

----------
* Less than 1%

(1) The named shareholders have sole voting and dispositive power with respect
to all shares shown as being beneficially owned by them, except as
otherwise indicated.

(2) The business address is 1135 Edgebrook Drive, Houston, Texas 77034.

(3) Includes 406,273 shares held directly by Mr. Forehand and 306,466 held by
Forehand Family Partnership, Ltd., a limited partnership of which Mr.
Forehand is the sole managing general partner and of which Mr. Forehand and
his spouse are the sole limited partners.

(4) Based on Schedule 13D/A filed on September 9, 2005, filed by David
Nierenberg, and The D3 Family Funds with the Securities and Exchange
Commission. The form discloses that Mr. Nierenberg has sole voting and sole
dispositive power over 1,073,010 shares of Common Stock.

(5) Mr. Neeb and Tex-Mex Partners, L.C. have warrants to purchase, at a per
share price of $10.90, up to 179,885 and 179,885 shares, respectively, from
the Company. Under the terms of the warrants, that portion of each of the
warrants allocable to the membership interest in Tex-Mex Partners, L.C.
(currently 54%) of Mr. Textor, a former director of the Company, became
exercisable on April 25, 1998.

(6) Mr. Neeb and Tex-Mex Partners, L.C. have warrants to purchase, at a per
share price of $10.90, up to 196,602 and 171,602 shares, respectively, from
Larry N. Forehand. Under the terms of the warrants, that portion of each of
the warrants allocable to the membership interest in Tex-Mex Partners, L.C.
(currently 54%) of Mr. Textor, a former director of the Company, became
exercisable on April 25, 1998.

(7) Mr. Textor, a former director of the Company, is a principal of Tex-Mex
Partners, L.C., of which he presently has a 54% membership interest. Mr.
Textor has sole voting power and sole dispositive power of the warrants

held by Tex-Mex Partners, L.C. Mr. Textor has no ownership rights in the
balance of the membership interests of Tex-Mex Partners, L.C. and he
disclaims beneficial ownership of the warrants to acquire shares held by
Tex-Mex Partners, L.C. and allocable to such other membership interests.

(8) Includes 17,500 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.

(9) Includes 23,000 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.

(10) Includes 26,250 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.

(11) Includes 33,000 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.

(12) Based on Schedule 13G filed February 9, 2005, filed by John Lewis and
Osmium Capital, LP with the Securities and Exchange Commission. The form
discloses that Mr. Lewis has sole voting and sole dispositive power over
221,329 shares of Common Stock.

(13) Includes 97,778 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.

(14) Includes 16,000 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.

(15) Includes 15,000 shares issuable pursuant to the exercise of stock options
exercisable within 60 days of the Record Date.

(16) Includes an aggregate of 405,413 shares issuable pursuant to the exercise
of stock options and warrants exercisable within 60 days of the Record
Date.

PROPOSAL 1
ADOPTION AND APPROVAL
OF 2005 PLAN

The Board of Directors has adopted, and is submitting to the Company's
shareholders for approval at the Special Meeting, the Mexican Restaurants, Inc.
2005 Long Term Incentive Plan (the "2005 Plan").

A description of the provisions of the 2005 Plan is set forth below.
This summary is qualified in its entirety by the detailed provisions of the 2005
Plan, a copy of which is attached as Appendix A to this proxy statement.

BACKGROUND

The purpose of the 2005 Plan is to benefit and advance the interests
of the Company by attracting and retaining qualified directors and key executive
and managerial employees; motivating employees, by making appropriate awards, to
achieve long-range goals; providing incentive compensation that is competitive
with other corporations; and further aligning the interests of directors,
employees and other participants with those of other shareholders. There are
currently approximately 434,403 shares of Common Stock underlying outstanding
stock options previously granted under the Company's 1996 Casa Ole Long Term
Incentive Plan (the "1996 Plan"), and approximately 52,550 shares remain
available for grants under the 1996 Plan. The limited number of remaining
available shares under the 1996 Plan limits the Company's ability to (a) provide
incentive compensation to its key employees, (b) attract new employees and (c)
provide compensation to its consultants, advisors and non-employee directors. It
is anticipated that the 350,000 shares proposed to be authorized under the 2005
Plan, together with the shares remaining under the 1996 Plan, will enable the
Company to provide sufficient grants of awards for the foreseeable future. Also,
the inclusion of authority to grant various forms of equity compensation in
addition to stock options, including restricted stock, will allow the Company to
tailor future awards to the Company's specific needs and circumstances at that
time.

SUMMARY OF THE 2005 PLAN

Eligibility. Executives, managerial employees, non-employee directors,
consultants or independent contractors of the Company and/or its subsidiaries,
as determined by the Board of Directors, are eligible to receive awards under
the 2005 Plan. In the discretion of the Board of Directors, an eligible employee
may be awarded incentive stock options, non-qualified options, restricted stock,
performance units and/or stock appreciation rights, or any combination thereof,
and more than one award may be granted to a participant. In addition, the Board
of Directors may authorize non-employee directors, consultants or independent
contractors to receive awards of non-

qualified options, restricted stock, performance units or stock appreciation
rights, or any combination thereof, and more than one award may be granted to a
non-employee director, consultant or independent contractor who is designated as
a participant. Participants will be required to enter into award agreements
(each, an "Award Agreement") with the Company agreeing to the terms of the 2005
Plan. Any Award Agreement documenting an award subject to Internal Revenue Code
Section 409A shall contain terms and conditions which will permit the award to
satisfy the operational and documentary requirements of Code Section 409A.

Shares Available for Awards. Subject to adjustment as described under
"Adjustment" below, the number of shares of Common Stock that may be issued
under the 2005 Plan will be 350,000, and the number of shares with respect to
which options, performance units or stock appreciation rights under the 2005
Plan may be granted in any calendar year to any employee shall not exceed
150,000.

Effective Date. If approved at the Special Meeting, the 2005 Plan
shall be effective as of November 8, 2005; provided, however, that awards made
under the 2005 Plan prior to such approval of the Plan by shareholders of the
Company, including without limitation the performance units granted to Messrs.
Glowacki and Dennard as described under "Executive Compensation and Other
Information" in this proxy statement, are contingent on such approval of the
2005 Plan by the shareholders of the Company and shall be null and void if such
approval of the shareholders of the Company is withheld. The Plan shall
terminate on November 8, 2015, ten (10) years after the Plan's proposed
effective date.

Permissible Awards. The 2005 Plan provides for awards of stock options
to purchase shares of the Company's Common Stock, stock appreciation rights,
restricted Common Stock and performance units, the terms and conditions of which
are described in more detail below.

Administration of the Plan. The 2005 Plan will be administered by the
Company's Board of Directors. The Board of Directors will have full authority to
manage and control the operation and administration of the Plan, including,
without limitation, the authority to determine who will receive awards, the
types of awards and the number of shares covered by the awards, to establish the
terms, conditions, performance criteria, restrictions and other provisions of
such awards, to determine the number and value of performance units awarded and
earned and to cancel or suspend awards. The Board of Directors is authorized to
interpret the 2005 Plan, to establish, amend and rescind any rules and
regulations relating to the 2005 Plan, to determine the terms and provisions of
any agreements made pursuant to the 2005 Plan, and to make all other
determinations that may be necessary or advisable for the administration of the
2005 Plan. The Board of Directors may, from time to time, delegate its authority
to manage and control the operation and administration of the 2005 Plan to the
Compensation/Stock Option Committee of the Board of Directors (the "Committee").

All authority to exercise discretion with respect to the participation
in the 2005 Plan of persons who are "10 percent shareholders" or "officers"
within the meaning of the applicable Securities and Exchange Commission rules
relating to Section 16 of the Securities Exchange Act of 1934 ("Insiders"),
and/or directors of the Company, or the timing, pricing and amounts of awards
granted under the 2005 Plan to such officers and directors, shall be vested in
(i) the Board of Directors, or (ii) the Committee, if consisting of two or more
directors each of whom is a non-employee director within the meaning ascribed to
such term in Rule 16b-3 promulgated under the Exchange Act, or within any
successor definition or any successor rule.

New Plan Benefits. Awards to be received by individual participants
under the 2005 Plan are not determinable because the Board of Directors
determines the amount and nature of any award under the 2005 Plan in its sole
discretion at the time of grant. As a result, the benefits that might be
received by participants receiving discretionary grants under the 2005 Plan are
not determinable. For similar reasons, the Company cannot determine the awards
that would have been granted to executive officers during the 2004 fiscal year
under the 2005 Plan, if it had been in place during that year. As of September
1, 2005, the closing market price for a share of the Company's Common Stock was
$9.90

Limitation on Transferability. Incentive stock options, performance
units, stock appreciation rights and, during the period of restriction, shares
of restricted stock awarded under the 2005 Plan are not transferable except as
designated by the participant by will or by the laws of descent and
distribution. Incentive stock options may be exercised during the lifetime of
the participant only by the participant or his guardian or legal representative.
If expressly permitted by the terms of the Award Agreement, a participant may
transfer non-qualified options to certain permitted transferees, provided that
there is not any consideration for the transfer.

Compliance With Laws and Tax Withholding. The Company shall have no
liability to issue any shares under the 2005 Plan unless such issuance would
comply with all applicable laws and the applicable requirements of any
securities exchange or similar authority. The Company may require a written
statement that the recipient of any shares under the 2005 Plan is acquiring the
shares for investment and not for the purpose or with the intention of
distributing the shares. All awards and payments under the 2005 Plan to
employees are subject to withholding of all applicable taxes, which withholding
obligations may be satisfied, with the consent of the Board of Directors,
through the surrender of shares which the participant already owns, or to which
a participant is otherwise entitled under the 2005 Plan.

Upon termination of the restricted period with respect to an award of
restricted stock (or such earlier time, if any, as an election is made by the
participant under Internal Revenue Code Section 83(b), or any successor
provisions thereto, to include the value of such stock in taxable income), the
Company shall have the right to require the participant to pay to the Company
the amount of taxes that the Company is required to withhold with respect to
such stock or, in lieu thereof, to retain or sell without notice a sufficient
number of shares held by it to cover the amount required to be withheld. The
Company shall have the right to deduct from all distributions paid with respect
to a restricted stock award the amount of taxes that the Company is required to
withhold with respect to such distribution payments, if any.

Adjustment. In the event of any change in the outstanding stock of the
Company by reason of any recapitalization, merger, consolidation, combination,
exchange of shares or other similar change, the aggregate number of shares with
respect to which awards may be made under the 2005 Plan, the terms and the
number of shares under any outstanding options, performance units or restricted
stock, and the purchase price of a share under options, may be equitably
adjusted by the Board in its sole discretion. In addition, the Board may, in its
sole discretion, make appropriate adjustment as to the kind of shares or other
securities deliverable with respect to outstanding awards under the 2005 Plan.

Business Combinations. In the event of a "Business Combination"
involving the Company, if provision is made in writing in connection with such
transaction for the continuance, substitution or assumption of the options,
restricted stock, performance units and/or stock appreciation rights that are
outstanding under the 2005 Plan, then such awards outstanding at the time of the
Business Combination shall continue, subject to adjustment, in the manner and on
the terms provided in the respective agreements. If provision is not made in
writing for the continuation and/or assumption of any outstanding awards in the
event of such a Business Combination, then (i) any outstanding stock
appreciation right shall generally become exercisable, (ii) all restrictions on
the transferability of restricted stock shall lapse, (iii) any performance
requirements with respect to performance units shall lapse and the performance
units shall be settled immediately prior to the effective date of the
transaction, and (iv) with respect to options, the Committee shall cancel any
outstanding options in exchange for shares of Common Stock or shares of a
successor and/or cash equal in value to the excess of the fair market value of
the shares that could be purchased subject to the options less the aggregate
exercise price for the options, or cancel the options after providing the
holders thereof with an opportunity to exercise the options within a specified
period of time. Payment of cash in lieu of whole or fractional shares of Common
Stock or shares of a successor may only be made to the extent that such payment
has met the requirements of an exemption under Section 16(b) of the Securities
Exchange Act of 1934 or the rules promulgated with respect to such section or is
a subsequent transaction the terms of which were provided for in a transaction
initially meeting the requirements of an exemption under Rule 16b-3 promulgated
under the Exchange Act.

For purposes of the 2005 Plan, a "Business Combination " shall be any
of the following: (i) a merger or consolidation of the Company with or into
another corporation in which the Company shall not be the surviving corporation
(the Company shall not be deemed the surviving corporation in any such
transaction if, as the result thereof, it becomes a wholly-owned subsidiary of
another corporation), (ii) a dissolution of the Company, (iii) a transfer of all
or substantially all of the assets or shares of stock of the Company in one
transaction or a series of related transactions to one or more other person or
entities, or (iv) if any "person" or "group" as those terms are used in Sections
13(d) and 14(d) of the Exchange Act, other than Excluded Persons, becomes the
"beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or
indirectly, of securities of the Company representing 50% or more of the
combined voting power of the Company's then outstanding securities. The term
"Excluded Persons" means each of Larry N. Forehand, Michael D. Domec, Louis P.
Neeb and David Nierenberg, and any person, entity or group under the control of
any of them, or a trustee or other fiduciary holding securities under an
employee benefit plan of the Company.

Employment and Shareholder Status. Selection as a participant under
the 2005 Plan shall not (i) give any employee the right to be retained in the
employ of the Company, (ii) create or serve as evidence of an agreement to
retain a consultant or independent contractor for any period of time, or, (iii)
except as expressly provided, confer upon the holder of any award under the 2005
Plan any right as a shareholder.

Incentive Stock Options. The Committee shall designate the
participants to whom incentive stock options, as described in Internal Revenue
Code Section 422(b) or any successor section thereto, are to be awarded under
the 2005 Plan and shall determine the number of option shares to be offered to
each of them. Only employees of the Company shall be eligible to receive
incentive stock options. The aggregate fair market value of Common Stock with
respect to which incentive stock options are exercisable for the first time by
an individual during a calendar year, including all plans of the Company and
subsidiaries, shall not exceed $100,000 determined at the time of the award of
the option. The Committee shall set the price of a share under each incentive
stock option, which price shall not be less than 100% of the fair market value
of the share as of the option date. Each incentive stock option shall be
exercisable until the earliest of ten years after the date on which it is
awarded, the date established by the Committee at the time of the award, thirty
days after the participant's employment with the Company terminates for reasons
other than death or disability, or one year after the death or total disability
of the participant.

Non-Qualified Options. The Board of Directors shall designate the
participants to whom non-qualified options are to be awarded and shall determine
the number of shares to be awarded to each of them. A non-qualified option
entitles the participant to purchase a share of Common Stock at a price fixed at
the time the option is awarded, which price shall not be less than the fair
market value of the share at the time the option is awarded. Each non-qualified
option shall be exercisable until the earliest of the date established by the
Committee at the time of the award, thirty days after the participant's
employment or service as a consultant, independent contractor or non-employee
director with the Company or subsidiary terminates for reasons other than death
or disability, or one year after the death or total disability of the
participant.

Restricted Stock. A restricted stock award is an award of shares of
Common Stock subject to a restriction on transferability, the vesting of which
is subject to a required period of employment or other conditions established by
the Board of Directors or the 2005 Plan. The Board of Directors shall designate
the participants to whom restricted stock is to be awarded and shall determine
the number of shares that are subject to the award. Except for the restrictions
on transferability, the participant as owner of restricted stock shall have all
the rights of a shareholder. The restriction on transferability will lapse
following a period of time (the "Restricted Period") as set forth in the Award
Agreement, which period shall not be longer than ten years or shorter than three
years. The Board of Directors may adjust the Restricted Period after the award
of the restricted stock to account for individual circumstances, but the
Restricted Period shall not be less than one year. Unless otherwise determined
by the Board of Directors, the termination of a participant's employment or
service with the Company or subsidiaries prior to the end of the Restricted
Period shall cause the forfeiture of all restricted stock which has not yet
vested under the Award Agreement. Each certificate issued in respect of
restricted stock shall bear a legend noting that such stock is subject to the
terms of the 2005 Plan.

Performance Units. Performance units are awards to participants who
may receive value (in cash and/or shares of Common Stock) for the units at the
end of a fixed period of time (the "Performance Period"). The number of units
earned, and the value received for them, will be contingent upon the degree to
which the performance measures established at the time of the initial award are
met. The Board of Directors shall designate the participants to whom performance
units are to be awarded and shall determine the timing of awards, the number of
units awarded, the value of units (in cash and/or shares of Common Stock), the
performance measures used for determining whether the performance units are
earned, the Performance Period during which the performance measures will apply,
the relationship between the level of achievement of the performance measures
and the number of performance units earned, whether any adjustment to the
performance measures should be made to reflect significant events or changes
during the Performance Period, and the number of performance units that will be
paid in cash or in shares as described in the Award Agreement. A participant
whose employment with the Company and its subsidiaries terminates during a
Performance Period because of retirement or death shall be entitled to the
prorated value of earned performance units. If a participant's employment with
the Company and its subsidiaries terminates during a Performance Period for any
reason other than retirement or death, the performance units earned shall be
forfeited, unless otherwise determined by the Board of Directors.

Stock Appreciation Rights. A stock appreciation right entitles the
participant to receive an amount (in cash and/or shares of Common Stock) equal
to the difference between the fair market value of shares of Common Stock at the
time of exercise of the stock appreciation right and the fair market value of
such shares at the date of award of

the stock appreciation right, as prescribed by the Board of Directors and as set
forth in the Award Agreement. The Board of Directors may award stock
appreciation rights to participants independent of, concurrent with, or
subsequent to, any other award under the 2005 Plan. The Board of Directors shall
set the expiration date with respect to a stock appreciation right, which date
shall be documented in the Award Agreement. If the stock appreciation right is
not exercised before the end of the day on the expiration date, such right shall
be deemed exercised as of such date and payment shall be made to the holder in
shares of Common Stock.

FEDERAL INCOME TAX CONSEQUENCES

The following discussion is intended only as a brief summary of the
material U.S. Federal income tax rules that are applicable to 2005 Plan awards
under current laws and regulations. It does not purport to be complete and does
not discuss the tax consequences arising in the context of a participant's death
or the income tax laws of any municipality, state or foreign country in which
the participant's income or gain may be taxable.

Incentive Stock Options. Upon the grant of an incentive stock option,
no taxable income will be realized by a participant and the Company will not be
entitled to any deduction. If a participant exercises an option, without having
ceased to be an employee of the Company or any of its subsidiaries at any time
during the period from the grant of the option until ninety days before its
exercise, then, generally, no taxable income will result at the time of the
exercise of such option. If no "disqualifying disposition" of the stock
transferred to a participant upon exercise of the option is made by him or her
(i.e., a disposition within the period that ends on the last to occur of one
year after such stock is so transferred and two years after the grant of the
option), any profit (or loss) realized by a participant from a sale or exchange
of such stock will be treated as long-term capital gain (or capital loss), and
no deduction will be allowable to the Company with respect thereto. When a
participant exercises an incentive stock option, he or she will realize
"alternative minimum taxable income" equal to the amount by which the fair
market value of the Common Stock at the time of exercise exceeds the option
exercise price. If a disqualifying disposition of such stock is made by a
participant, the disposition generally will result in ordinary income at the
time of the disposition in an amount equal to the lesser of (1) the gain on the
sale or (2) the difference between the option exercise price and the fair market
value of the Common Stock on the date of exercise (the "bargain element"). If
the gain exceeds the bargain element, the excess is a short-term or long-term
capital gain depending upon how long the shares are held prior to the sale. If
the stock is sold for less than the exercise price, failure to meet the holding
period requirement generally will result in a short-term or long-term capital
loss, again depending upon how long the shares are held prior to the sale, equal
to the difference between the exercise price and the sale price.

Non-Qualified Options. Upon the grant of a non-qualified option under
the 2005 Plan, no taxable income will be realized by a participant and the
Company will not be entitled to any deduction. Upon exercise of the option, a
participant will realize ordinary taxable income on the date of exercise. Such
taxable income will equal the difference between the option exercise price and
the fair market value of the Common Stock on the date of exercise. The Company
will be entitled to a corresponding deduction.

Restricted Stock and Performance Units. The recipient of shares of
restricted stock or performance units under the 2005 Plan will not recognize
taxable income at the time of grant as long as the award is subject to a
substantial risk of forfeiture as a result of performance based vesting targets,
continued service requirements or other conditions that must be satisfied before
payment, vesting or delivery of shares can occur. The recipient will generally
recognize taxable ordinary income and be subject to wage and employment tax
withholding when the substantial risk of forfeiture expires or is removed. The
Company will generally be entitled to a corresponding deduction equal to the
amount of income the recipient recognizes.

Stock Appreciation Rights. Upon the exercise of a stock appreciation
right granted under the 2005 Plan, an award recipient realizes ordinary taxable
income equal to the amount of cash or the fair market value of Common Stock
received. The Company will generally be entitled to a corresponding deduction
equal to the amount of ordinary income that the recipient recognizes. Upon the
sale of Common Stock acquired upon exercise of a stock appreciation right, the
recipient will recognize long or short-term capital gain or loss, depending on
whether the recipient held the stock for more than one year from the date of
exercise. As a result of the enactment of new federal tax legislation, the tax
treatment of SARs that are not exempt from the new law under the transitional
rules is unclear. SARs granted under the 2005 Plan may be subject to this new
law. The Internal Revenue Service is expected to address this issue in
regulations.

Section 162(m) Limitations. Section 162(m) of the Internal Revenue
Code generally places a $1 million annual limit on a company's tax deduction for
compensation paid to a "covered employee." A "covered employee"

is an employee who is, on the last day of the company's taxable year in which
the deduction would otherwise be claimed, the company's chief executive officer
or one of the other four highest paid officers named in its proxy statement.
This limit does not apply to compensation that satisfies the applicable
requirements for performance-based compensation, one of which is that
shareholders approve the material terms of the compensation.

The 2005 Plan incorporates the requirements for the performance-based
compensation exception applicable to options, so that all such awards should
qualify for the exception. In addition, the Board of Directors may grant other
awards designed to qualify for this exception. However, the Board reserves the
right to grant awards that do not qualify for this exception, and in some cases,
including a change in control, the exception may cease to be available for some
or all awards (including options) that otherwise so qualify. Thus, it is
possible that Section 162(m) may disallow compensation deductions that would
otherwise be available to the Company.

THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATIONAL PURPOSES ONLY AND MAY NOT BE APPLICABLE TO ALL
INDIVIDUALS. PARTICIPANTS SHOULD CONSULT THEIR OWN TAX ADVISORS FOR A
DETERMINATION AS TO THE SPECIFIC TAX CONSEQUENCES APPLICABLE TO THEM.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE 2005
LONG TERM INCENTIVE PLAN.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides the indicated information as of September
16, 2005, regarding the Company's equity compensation plans.

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

Equity compensation
plans approved by
security holders 434,403(1) $ 4.52 52,550

Equity compensation
plans not approved by
security holders 233,760(2) $10.12 135,500

Total 668,163 $ 6.48 188,050

----------
(1) Represents 434,403 shares of underlying options. At January 2, 2005,
549,000 shares were issuable upon exercise at a weighted average exercise
price of $4.38 per share, and 151,000 shares were available for future
issuances.

(2) Represents 53,875 shares of underlying options and 179,885 shares of
underlying warrants. Such warrants, when issued, have been issued outside
of the Company's Incentive Plan, contemporaneously with the Company's
initial public offering in 1996, as described in footnote (5) of the table
entitled "Security Ownership of Principal Shareholders, Directors and
Management." At January 2, 2005, 247,385 shares were issuable upon exercise
at a weighted-average exercise price of $9.80 per share, and 132,500 shares
were available for future issuances.

EXECUTIVE COMPENSATION
AND OTHER INFORMATION

The following table sets forth summary information with respect to
compensation paid by the Company and its subsidiaries to the Chief Executive
Officer, and to the other most highly paid executive officers for the fiscal
year ended January 2, 2005 and whose total annual salary and bonus exceeded
$100,000 (collectively the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------ ------------------------
RESTRICTED
STOCK ALL OTHER
NAME & PRINCIPAL POSITION YEAR SALARY BONUS(1) OTHER(2) OPTIONS (#) AWARDS COMPENSATION
------------------------- ---- -------- -------- -------- ----------- ---------- ------------

Curt Glowacki 2004 $238,506 $ 18,717 $12,000 -- -- --
President, Chief 2003(3) $216,058 $137,481 $ 9,000 -- -- --
Executive Officer and 2002 $209,621 $ 87,808 $ 9,000 -- -- --
Chief Operating Officer

Andrew J. Dennard 2004 $134,555 $ 19,451 $ 9,000 -- -- --
Exec. Vice President 2003(3) $118,317 $ 57,269 $ 9,000 -- -- --
and Chief Financial Officer 2002 $114,423 $ 52,554 $ 9,000 5,000 -- --

(1) Bonus includes $18,717 for Mr. Glowacki and $9,451 for Mr. Dennard in 2004,
$34,841 for Mr. Glowacki and $17,377 for Mr. Dennard in 2003 and $21,539
for Mr. Glowacki and $10,769 for Mr. Dennard in 2002 for the payment of
interest expense and principal amounts of the loans to purchase stock under
the executive and key employee stock purchase plan adopted May 1998.

(2) Other annual compensation consists primarily of a car allowance.

(3) Bonus other than amount described in note (1) was paid in fiscal year 2003
for performance earned in fiscal year 2002.

In fiscal year 2004, the Company did not grant stock options to either
of its Named Executive Officers.

No stock options were exercised during 2004 by the Named Executive
Officers. The following table shows information concerning the stock options
exercisable and unexercisable during 2004 that have been granted to the Named
Executive Officers and the estimated value of unexercised options held by such
individuals at year end.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES UNDERLYING VALUE OF
SHARES UNEXERCISED UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS AT FY-END OPTIONS AT FY-END ($) (1)
EXERCISE REALIZED ------------------------------- ---------------------------
NAME # $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------

Curt Glowacki (2) -- -- 145,000 105,000 568,668 539,300
Andrew J. Dennard (3) -- -- 31,250 8,750 89,445 51,400

----------
(1) Based on the closing price per share of Common Stock on December 31, 2004
(the last day the stock traded in fiscal year 2004), of $8.96 as reported
by the NASDAQ SmallCap Market.

(2) Options to acquire 190,000 shares of common stock were granted to Mr.
Glowacki from 1997 to 2001 under the Company's 1996 Long Term Incentive
Plan, of which 100,000 options vest in accordance with note (3) and 90,000
options vest at the rate of 10%, 20%, 30% and 40% respectively over the
four-year period. An additional 60,000 options were granted in fiscal year
2000 that vest in ten years, and are discussed below under the Compensation
Stock Option Committee report.

(3) These options to acquire common stock were granted from 1997 to 2002 under
the Company's 1996 Long Term Incentive Plan. The options vest and become
exercisable 10% on the first anniversary of the date of grant, 15% on the
second anniversary of the date of grant and 25% on each of the third
through fifth anniversaries of the date of grant.

On August 16, 2005, the Company's Compensation/Stock Option Committee approved
the issuance of, subject to the approval and adoption of the 2005 Plan by the
Company's shareholders, a total of 225,000 performance units under the 2005
Plan, with awards to the following Named Executive Officers in the following
amounts:

NAME NUMBER OF PERFORMANCE UNITS
---- ---------------------------

Curt Glowacki 60,000
Andrew J. Dennard 50,000

The performance units, which expire in August 2010, vest upon a Business
Combination (as defined in the 2005 Plan) and are payable in cash in an amount
equal to the product of the number of units vested and the average of the high
and low prices of the Common Stock as of the last business day preceding the
Business Combination, which average price must be in excess of $20.00 per share.

DIRECTOR COMPENSATION

As approved by the Company's shareholders at the 2002 Annual Meeting
of Shareholders, the Stock Option Plan for Non-Employee Directors ("Directors
Option Plan") was amended to allow the grant of up to 200,000 shares in total
options to the Company's outside directors. Through the first two quarters of
fiscal year 2002, outside directors were compensated with quarterly option
grants to acquire 1,500 shares. In addition, each director received one option
grant for 100 shares of Common Stock for each committee meeting attended which
was not held in conjunction with a Board meeting. Approximately 80,000 shares
are presently available for issuance under the Directors Option Plan.

Effective with the third quarter of fiscal year 2002, upon
recommendation of the Company's Audit and Compensation/Stock Option Committees,
the Company changed its director compensation plan to a cash-based compensation
plan. Each director who is not an employee of the Company receives a retainer of
$2,000 per fiscal quarter, plus $1,000 per meeting attended. Effective with
fiscal year 2005 each director who is not an employee of the Company will
receive a retainer of $2,500 per fiscal quarter, plus $1,250 per meeting
attended. The Chairman of the Audit Committee received a quarterly retainer of
$5,000 and is not paid any other meeting fees. Effective with fiscal year 2005
the Audit Chairman retainer was set at $6,250 per quarter. The Chairman of the
Board of Directors is compensated at the rate of $60,000 per year and is not
paid any other meeting fees.

COMPENSATION/STOCK OPTION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION

The Compensation/Stock Option Committee consists of David Nierenberg,
Michael D. Domec and J. Stuart Sargent. Mr. Nierenberg serves as Chairman of the
Committee.

No member of the Company's Compensation/Stock Option Committee: (i)
was, during the last fiscal year, an officer or employee of the Company or any
of its subsidiaries or (ii) was formerly an officer of the Company or any of its
subsidiaries. The Company has engaged in a related party transaction related to
Messrs. Forehand and Domec. For a complete description of this transaction see
"Certain Relationships and Related Transactions."

Pursuant to Item 402 of the SEC's Regulation S-K, no executive officer
of the Company served as a member of the Compensation/Stock Option Committee (or
other board committee performing similar functions or, in the absence of any
such committee, the entire Board of Directors) of another corporation, one of
whose executive officers served on the Company's Compensation/Stock Option
Committee. No executive officer of the Company served as a director of another
corporation, one of whose executive officers served on the Compensation/Stock
Option Committee. No executive officer of the Company served as a member of the
Compensation/Stock Option Committee (or other board committee performing
equivalent functions or, in the absence of any such committee, the entire Board
of Directors) of another corporation, one of whose executive officers served as
a director of the Company.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Related party transactions are subject to the review and approval of
the Company's Audit Committee, which is comprised exclusively of three
independent directors who are not otherwise involved in the day-to-day
management of the Company or officers of the Company, and who do not have a
personal financial interest in the matter in which they are acting. The Audit
Committee members are Thomas E. Martin, Joseph J. Fitzsimmons and Louis P. Neeb.

LEASE OF HEADQUARTERS BUILDING

Prior to February 20, 2004, the Company leased its executive offices
in Houston, Texas from CO Properties No. 3, a Texas partnership owned by Larry
N. Forehand and Michael D. Domec. The lease, which was originally set to expire
in December 2006, was a gross lease (where the landlord pays utilities and
property taxes) with monthly rental payments of $10,416 per month in 2004. In
2004 the Company leased 10,015 square feet under the lease for aggregate rental
payments of $10,416. The Company believes that this lease is on terms at least
as favorable as could be obtained from an unrelated third party.

On February 20, 2004, CO Properties No. 3 sold the executive offices
to a third party. In exchange for two months of free rent, the Company exercised
one of its options, extending the office lease through December 2009. In 2005
the Company's monthly rental payments will be $10,615.90 per month.

INFORMATION

If you have questions or need more information about the Special
Meeting, you may write to or call the Company at:

Corporate Secretary
Mexican Restaurants, Inc.
1135 Edgebrook Drive
Houston, Texas 77034
(713) 943-7574
Attn: Mr. Andrew J. Dennard

A copy of the Company's 2005 Plan is attached to this proxy statement. The
Company will also send you, at no charge, any other document which it refers to
in this proxy statement, if requested in writing by a person who was a
shareholder (of record or beneficially) at the close of business on September 1,
2005. You should send your request to the Company's Corporate Secretary at the
address listed above.

HOUSEHOLDING INFORMATION

Unless the Company has received contrary instructions, the Company may
send a single copy of this proxy statement, and notice of special meeting to any
household at which two or more shareholders reside if the Company believes the
shareholders are members of the same family. Each shareholder in the household
will continue to receive a separate proxy card. This process, known as
"householding," reduces the volume of duplicate information received at any one
household and helps to reduce the Company's expenses. The Company will deliver
promptly upon request a separate copy of the proxy statement to a shareholder at
a shared address to which a single copy of the documents was delivered. Such
requests should be delivered to the Company's address or made by telephone, as
set forth below. In addition, if shareholders prefer to receive multiple sets of
the Company's disclosure documents at the same address this year or in future
years, the shareholders should follow the instructions described below.
Similarly, if an address is shared with another shareholder and together both of
the shareholders would like to receive only a single set of the Company's
disclosure documents, the shareholders should follow these instructions:

If the shares are registered in the name of the shareholder, the
shareholder should contact the Company at its offices at 1135 Edgebrook Drive,
Houston, Texas 77034, Attention: Andrew J. Dennard, telephone number: 713-

943-7574, to inform the Company of their request. If a bank, broker or other
nominee holds the shares, the shareholder should contact the bank, broker or
other nominee directly.

SHAREHOLDER PROPOSALS

Any shareholder who intends to present a proposal at the 2006 Annual
Meeting of Shareholders for inclusion in the proxy statement and form of proxy
relating to that meeting is advised that the proposal must be received by the
Company at its principal executive offices not later than January 1, 2006. The
Company will not be required to include in its proxy statement or form of proxy
a shareholder proposal which is received after that date or which otherwise
fails to meet requirements for shareholder proposals established by regulations
of the Securities and Exchange Commission.

By Order of the Board of Directors,

----------------------------------------
Louis P. Neeb
Chairman

October 3, 2005

ALL SHAREHOLDERS ARE URGED TO DATE, SIGN AND RETURN THE ENCLOSED PROXY OR VOTING
INSTRUCTION FORM.

APPENDIX A

MEXICAN RESTAURANTS, INC.
2005 LONG TERM INCENTIVE PLAN

I. GENERAL

1. Purpose. The Mexican Restaurants, Inc. 2005 Long Term Incentive Plan
(the "Plan") is maintained by Mexican Restaurants, Inc., a Texas corporation
(the "Company") to:

(a) attract and retain key executive and managerial employees;

(b) motivate participating employees, by means of appropriate
incentive, to achieve long-range goals;

(c) attract and retain well-qualified individuals to serve as members
of the Company's Board of Directors, and as independent contractors and
consultants;

(d) provide incentive compensation opportunities which are competitive
with those of other corporations; and

(e) further identify Participants' interests with those of the
Company's other shareholders through compensation alternatives based on the
Company's common stock;

and thereby promote the long term financial interest of the Company and its
Subsidiaries, including the growth in value of the Company's equity and
enhancement of long term returns.

2. Effective Date. Subject to the approval of the holders of a majority of
the voting Stock of the Company, the Plan shall be effective as of November 8,
2005, provided, however, that awards made under the Plan prior to such approval
of the Plan by shareholders of the Company are contingent on such approval of
the Plan by the shareholders of the Company and shall be null and void if such
approval of the shareholders of the Company is withheld. The Plan shall
terminate on November 8, 2015, ten (10) years after the Plan's effective date.

3. Definitions. The following definitions are applicable to the Plan.

(a) "Award Agreement" means the agreement between the Company and a
Participant described in Section I.11 hereof.

(b) "Board" means the Board of Directors of the Company.

(d) "Code" means the Internal Revenue Code of 1986, as amended.

A-1

(e) "Committee" means the Compensation/Stock Option Committee of the
Board.

(f) "Disability" means the inability of a Participant, by reason of a
physical or mental impairment, to engage in any substantial gainful
activity, of which the Board shall be the sole judge.

(g) "Effective Date" means November 8, 2005.

(h) "Exchange Act" means the Securities Exchange Act of 1934, as
amended

(i) "Fair Market Value" of any Stock means (i) if the Stock is listed
on a national securities exchange, the closing price on the Stock on a
given date; (ii) if the Stock is traded on an exchange or market in which
prices are reported on a bid and asked price, the average of the mean
between the bid and asked price for the Stock on a given date; and (iii) if
the Stock is not listed on a national securities exchange nor traded on the
over-the-counter market, such value as the Board, in good faith, shall
determine.

(j) "Non-employee Director" means each member of the Board who is not
a full-time employee of the Company.

(k) "Option" means the right of a Participant to purchase Shares
pursuant to an Incentive Option under Part II or a Non-Qualified Option
under Part III, each awarded pursuant to the provisions of the Plan.

(l) "Option Date" means, with respect to any Option, the date on which
the Option is awarded under the Plan.

(m) "Participant" means (i) any employee of the Company or any
Subsidiary who is selected by the Board or Committee to participate in the
Plan; (ii) any Non-employee Director, to the extent provided in Section
I.5; and (iii) any consultant or independent contractor selected by the
Board or Committee to participate in the Plan.

(n) "Performance Unit" shall have the meaning ascribed to it in Part
V.

(o) "Permitted Transferees" means members of the immediate family of
the Participant, trusts for the benefit of such immediate family members,
and partnerships in which substantially all of the interests are held by
the Participant and members of his or her immediate family. An immediate
family member shall mean any descendant (children, grandchildren and more
remote descendants), including step-children and relationships arising from
legal adoption, and any spouse of a Participant or a Participant's
descendant.

(p) "Related Company" means any corporation during any period in which
it is a Subsidiary, or during any period in which it directly or indirectly
owns fifty percent (50%) or more of the total combined voting power of all
classes of stock of the Company that are entitled to vote.

A-2

(q) "Restricted Period" has the meaning ascribed to it in Part IV.

(r) "Restricted Stock" has the meaning ascribed to it in Part IV.

(s) "Retirement" means (i) termination of employment in accordance
with the retirement procedures set by the Company from time to time; (ii)
an employee's termination of employment or a Non-employee Director's
ceasing to serve as a member of the Board because of Disability; or (iii)
an employee's termination of employment, a Non-employee Director's ceasing
to serve as a member of the Board, or a consultant's or independent
contractor's ceasing to provide services to the Company voluntarily with
the consent of the Company (of which the Board shall be the sole judge).

(t) "Shares" means shares of the Company's Stock.

(u) "Stock" means the Company's $ .01 par value common stock, and any
class of shares into which such Stock may be changed or exchanged (whether
through merger, reorganization or otherwise).

(v) "Stock Appreciation Right" means the right of a holder of a
Participant to receive Stock or cash as described in Part VI.

(w) "Subsidiary" means any corporation during any period of which
fifty percent (50%) or more of the total combined voting power of all
classes of stock entitled to vote is owned, directly or indirectly, by the
Company.

4. Administration. The authority to manage and control the operation and
administration of the Plan shall be vested in the Board. Subject to the
provisions of the Plan, the Board will have authority to select employees,
consultants, Non-employee Directors and independent contractors to receive
awards of Options, Restricted Stock, Performance Units and/or Stock Appreciation
Rights, to determine the time or times of receipt, to determine the types of
awards and the number of Shares covered by the awards, to establish the terms,
conditions, performance criteria, restrictions, and other provisions of such
awards, to determine the number and value of Performance Units awarded and
earned and to cancel or suspend awards. In making such award determinations, the
Board may take into account the nature of services rendered by the employee,
consultant or independent contractor or Non-employee Director, his or her
present and potential contribution to the Company's success and such other
factors as the Board deems relevant. The Board is authorized to interpret the
Plan, to establish, amend and rescind any rules and regulations relating to the
Plan, to determine the terms and provisions of any agreements made pursuant to
the Plan, and to make all other determinations that may be necessary or
advisable for the administration of the Plan. The Board may, from time to time,
delegate its authority to manage and control the operation and administration of
the Plan to the Committee. In such case, all references herein to the "Board"
shall be deemed to refer to the "Committee."

A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved in writing by all

A-3

members of the Committee, shall be the acts of the Committee, unless provisions
to the contrary are embodied in the Company's Bylaws or resolutions duly adopted
by the Board. All actions taken and decisions and determinations made by the
Board or the Committee pursuant to the Plan shall be binding and conclusive on
all persons interested in the Plan. No member of the Board or the Committee
shall be liable for any action or determination taken or made in good faith with
respect to the Plan.

Notwithstanding the foregoing, all authority to exercise discretion with
respect to the participation in the Plan of persons who are "10 percent
shareholders" or "officers" within the meaning of the applicable Securities and
Exchange Commission rules relating to Section 16 of the Exchange Act
("Insiders"), and/or directors of the Company, or the timing, pricing and
amounts of awards granted under the Plan to such officers and directors, shall
be vested in (i) the Board, or (ii) the Committee, if consisting of two or more
directors each of whom is a non-employee director within the meaning ascribed to
such term in Rule 16b-3 promulgated under the Exchange Act, or within any
successor definition or any successor rule.

5. Participation. The Board shall determine and designate, from time to
time, the key executives and managerial employees, consultants or independent
contractors of the Company and/or its Subsidiaries who may receive awards under
the Plan. In the discretion of the Board, an eligible employee, consultant or
independent contractor may be awarded Options, Restricted Stock, Performance
Units and/or Stock Appreciation Rights, or any combination thereof, and more
than one award may be granted to a Participant. Except as otherwise agreed to by
the Company and the Participant, any award under the Plan shall not affect any
previous award to the Participant under the Plan or any other plan maintained by
the Company or its Subsidiaries. In addition, the Board may authorize certain
Non-employee Directors to receive awards of Non-Qualified Options, Restricted
Stock, Performance Units or Stock Appreciation Rights, or any combination
thereof, and more than one award may be granted to a Non-employee Director who
is designated as a Participant.

6. Stock Subject to the Plan.

(a) Subject to the provisions of Section I.10, the number of Shares
available under the Plan for awards to Participants shall not exceed
350,000 shares of common stock, in the aggregate. If, for any reason, any
award under the Plan otherwise distributable in Shares, or any portion of
the award, shall expire, terminate or be forfeited or canceled, or be
settled in cash pursuant to the terms of the Plan and, therefore, any such
Shares are no longer distributable under the award, such Shares shall again
be available for award under the Plan. Awards to Participants under the
Plan which may be settled solely in cash shall not reduce the number of
Shares remaining available under the Plan.

(b) Subject to the provisions of Section I.10, the number of Shares
with respect to which Options, Performance Units or Stock Appreciation
Rights under the Plan may be granted in any calendar year to any employee
shall not exceed 150,000 Shares.

7. Compliance With Applicable Laws and Withholding of Taxes.
Notwithstanding any other provision of the Plan, the Company shall have no
liability to issue any Shares under the

A-4

Plan unless such issuance would comply with all applicable laws and the
applicable requirements of any securities exchange or similar authority. Prior
to the issuance of any Shares under the Plan, the Company may require a written
statement that the recipient is acquiring the Shares for investment and not for
the purpose or with the intention of distributing as amended, the Shares. All
awards and payments under the Plan to employees are subject to withholding of
all applicable taxes, which withholding obligations may be satisfied, with the
consent of the Board, through the surrender of Shares which the Participant
already owns, or to which a Participant is otherwise entitled under the Plan.

Upon termination of the Restricted Period with respect to an award of
Restricted Stock (or such earlier time, if any, as an election is made by the
Participant under Code Section 83(b), or any successor provisions thereto, to
include the value of such Stock in taxable income), the Company shall have the
right to require the Participant to pay to the Company the amount of taxes that
the Company is required to withhold with respect to such Stock or, in lieu
thereof, to retain or sell without notice a sufficient number of Shares held by
it to cover the amount required to be withheld. The Company shall have the right
to deduct from all distributions paid with respect to a Restricted Stock award
the amount of taxes that the Company is required to withhold with respect to
such distribution payments, if any.

8. Transferability. Incentive Stock Options, Performance Units, Stock
Appreciation Rights and, during the period of restriction, Restricted Stock
awarded under the Plan are not transferable except as designated by the
Participant by will or by the laws of descent and distribution. Incentive Stock
Options may be exercised during the lifetime of the Participant only by the
Participant or his guardian or legal representative. If expressly permitted by
the terms of the Award Agreement, a Participant may transfer Non-Qualified
Options to Permitted Transferees, provided that there is not any consideration
for the transfer.

9. Employment and Shareholder Status. The Plan does not constitute a
contract of employment, and selection as a Participant will not give any
employee the right to be retained in the employ of the Company or any
Subsidiary. The Plan does not constitute or serve as evidence of an agreement or
understanding, express or implied, that the Company will retain a consultant,
independent contractor or Non-employee Director for any period of time. Subject
to the provisions of Section IV.3(a), no award under the Plan shall confer upon
the holder thereof any right as a shareholder prior to the date on which he
fulfills all service requirements and other conditions for receipt of Stock. If
the redistribution of Shares is restricted pursuant to Section I.8, certificates
representing such Shares may bear a legend referring to such restrictions.

10. Adjustments to Number and Kind of Securities Subject to the Plan. In
the event of any change in the outstanding Stock of the Company by reason of any
recapitalization, merger, consolidation, combination, exchange of shares, or
other similar change, the aggregate number of Shares with respect to which
awards may be made under the Plan, the terms and the number of Shares under any
outstanding Options, Performance Shares, Performance Units or Restricted Stock,
and the purchase price of a Share under Options, may be equitably adjusted by
the Board in its sole discretion. In addition, the Board may, in its sole
discretion, make appropriate adjustment as to the kind of shares or other
securities deliverable with respect to outstanding awards under the Plan.

A-5

11. Agreement With Company. At the time of any awards under the Plan, the
Board will require a Participant to enter into an "Award Agreement" with the
Company in a form specified by the Board, agreeing to the terms and conditions
of the Plan and to such additional terms and conditions, not inconsistent with
the Plan, as the Board may, in its sole discretion, prescribe. To the extent
that any award under this Plan is subject to Code Section 409A or any successor
section, the Award Agreement documenting such award shall contain terms and
conditions which will permit the award to satisfy the operational and
documentary requirements of Code Section 409A or any such successor section.

12. Amendment and Termination of Plan. The Board may at any time and in any
way amend, suspend or terminate the Plan; provided, however, that no amendment
of the Plan shall be made without shareholder approval if shareholder approval
is required by law, regulations or stock exchange rule. No amendment, suspension
or termination of the Plan shall alter or impair any Options, Restricted Stock,
Performance Units or Stock Appreciation Rights previously awarded under the Plan
without the consent of the holder thereof. Notwithstanding the preceding, no
amendment under this Section I.12 shall be effective if it would cause an Award
to be subject to Code Section 409A.

13. Business Combinations. In addition to the rights and obligations of the
Committee to modify, adjust or accelerate exercisability of outstanding Options,
in the event that, while any Options, Restricted Stock, Performance Units or
Stock Appreciation Rights are outstanding under the Plan, there shall occur a
Business Combination, then, with respect to each award of Options, Restricted
Stock, Performance Units and/or Stock Appreciation Rights outstanding
immediately prior to the consummation of such transaction and, except as
provided below, without the necessity of any action by the Committee:

(a) If provision is made in writing in connection with such
transaction for the continuance and/or assumption of the Options,
Restricted Stock, Performance Units and/or Stock Appreciation Rights
granted under the Plan, or the substitution for such Stock Options,
Performance Units, Stock Appreciation Rights, and Restricted Stock of new
Options, Performance Units, Restricted Stock, and/or Stock Appreciation
Rights, with appropriate adjustment as to the number and kind of shares or
other securities deliverable with respect thereto, the Options, Restricted
Stock, Performance Units, and/or Stock Appreciation Rights granted under
the Plan, or the new Options, Restricted Stock, Performance Units, and/or
Stock Appreciation Rights substituted therefor, shall continue, subject to
such adjustment, in the manner and under the terms provided in the
respective agreements.

(b) In the event provision is not made in connection with such
transaction for the continuance and/or assumption of the Options,
Restricted Stock, Performance Units, and/or Stock Appreciation Rights
granted under the Plan, or for the substitution of equivalent options,
rights, units and awards, then:

(1) The holder of any Stock Appreciation Right shall be entitled,
immediately prior to the effective date of such transaction, to
exercise such right

A-6

(provided, if applicable, that the exercise of a Stock Appreciation
Right granted in tandem with an Option shall be exercisable only to
the extent the related Option is or becomes exercisable at such time
in accordance with its terms), provided that the unexercised portion
of any right shall be deemed cancelled and terminated as of the
effective date of such transaction;

(2) All restrictions on any award of Restricted Stock shall lapse
immediately prior to the transaction;

(3) Any performance requirements, restrictions or risks of
forfeiture imposed under the Plan on an award of Performance Units
shall lapse immediately prior to the effective date of such
transaction and the Performance Units shall be settled at that time.

(4) The Committee, in its sole and absolute discretion, shall,
with respect to any or all outstanding Options, take any or all of the
following actions to be effective as of the date of the Business
Combination (or as of any other date fixed by the Committee occurring
within the thirty (30) day period immediately preceding the date of
the Business Combination, but only if such action remains contingent
upon the effectuation of the Business Combination):

(A) Unilaterally cancel such non-assumed Option in exchange
for: (i) whole and/or fractional Shares (or for whole Shares and
cash in lieu of any fractional Share) or whole and/or fractional
shares of a successor (or for whole shares of a successor and
cash in lieu of any fractional share) that, in the aggregate, are
equal in value to the excess of the Fair Market Value of the
Shares that could be purchased subject to such non-assumed Option
less the aggregate exercise price for the options with respect to
such Shares; or (ii) cash or other property equal in value to the
excess of the Fair Market Value of the Shares that could be
purchased subject to such non-assumed Option less the aggregate
exercise price for the Options with respect to such Shares;
and/or

(B) Unilaterally cancel such non-assumed Option after
providing the holder of such Option with (1) an opportunity to
exercise the option within a specified period prior to the date
of the Business Combination, and (2) notice of such opportunity
to exercise prior to the commencement of such specified period.
However, notwithstanding the foregoing, to the extent that the
recipient of a non-assumed Option is an Insider, payment of cash
in lieu of whole or fractional Shares or shares of a successor
may only be made to the extent that such payment (1) has met the
requirements of an exemption under Section 16(b) of the Exchange
Act or the rules promulgated with respect to such section, or (2)
is a subsequent transaction the terms of which were provided for
in a transaction initially meeting the requirements of an
exemption under Rule 16b-3 promulgated under the Exchange Act.
Unless an Award Agreement

A-7

provides otherwise, the payment of cash in lieu of whole or
fractional Shares or in lieu of whole or fractional shares of a
successor shall be considered a subsequent transaction approved
by the original grant of an Option.

(c) Notwithstanding the preceding, the Business Combination provisions
contained in a Participant's Award Agreement shall govern in lieu of any
provisions contained in this Section I.13.

(d) For purposes of this Plan a "Business Combination" shall be any of
the following: (a) a merger or consolidation of the Company with or into
another corporation in which the Company shall not be the surviving
corporation (for purposes of this Section I.13(d), the Company shall not be
deemed the surviving corporation in any such transaction if, as the result
thereof, it becomes a wholly-owned subsidiary of another corporation), (b)
a dissolution of the Company, (c) a transfer of all or substantially all of
the assets or shares of stock of the Company in one transaction or a series
of related transactions to one or more other person or entities, or (d) if
any "person" or "group" as those terms are used in Sections 13(d) and 14(d)
of the Exchange Act, other than Excluded Persons, becomes the "beneficial
owner" (as defined in Rule 13d-3 of the Exchange Act), directly or
indirectly, of securities of the Company representing fifty percent (50%)
or more of the combined voting power of the Company's then outstanding
securities. The term "Excluded Persons" means each of Larry N. Forehand,
Michael D. Domec, Louis P. Neeb and David Nierenberg, and any person,
entity or group under the control of any of them, or a trustee or other
fiduciary holding securities under an employee benefit plan of the Company.

II. INCENTIVE STOCK OPTIONS

1. Definition. The award of an Incentive Stock Option under the Plan
entitles the Participant to purchase Shares at a price fixed at the time the
Option is awarded, subject to the following terms of this Part II.

2. Eligibility. The Committee shall designate the Participants to whom
Incentive Stock Options, as described in Code Section 422(b) or any successor
section thereto, are to be awarded under the Plan and shall determine the number
of option shares to be offered to each of them. Incentive Stock Options shall be
awarded only to key employees of the Company, and no Non-employee Director shall
be eligible to receive an award of an Incentive Stock Option. In no event shall
the aggregate Fair Market Value (determined at the time the option is awarded)
of Stock with respect to which Incentive Stock Options are exercisable for the
first time by an individual during any calendar year (under all plans of the
Company and all Subsidiaries) exceed $100,000 (subject to any increases that may
occur in future years as a result of changes in law).

3. Price. The purchase price of a Share under each Incentive Stock Option
shall be determined by the Committee, provided, however, that in no event shall
such price be less than the greater of (i) one hundred percent (100%) of the
Fair Market Value of a Share as of the Option

A-8

Date (or one hundred ten percent (110%) of such Fair Market Value if the holder
of the Incentive Stock Option owns stock possessing more than ten percent (10%)
of the combined voting power of all classes of stock of the Company or any
Related Company) or (ii) the par value of a Share on such date.

4. Exercise.

(a) A Participant may not exercise an Incentive Stock Option after the
Expiration Date (as defined in Section II.5 below) applicable to that
Option. Each Incentive Stock Option shall become and be exercisable at such
time or times and during such period or periods, in full or in such
installments as may be determined by the Committee at the Option Date.

(b) A Participant shall exercise his or her Incentive Stock Options by
delivering an exercise notice to the Company and paying the full exercise
price for such exercised Incentive Stock Options. Participants may elect to
pay the exercise price for Shares purchased upon the exercise of Incentive
Stock Options in cash or through tendering, either through actual delivery
or attestation, of shares of Stock (valued at Fair Market Value as of the
day of exercise) owned by the Participant, or any combination thereof,
equivalent to the purchase price of such Incentive Stock Options. As soon
as practicable thereafter, a certificate representing the shares so
purchased shall be delivered to the person entitled thereto. Any Shares
that are tendered must have been held by the Participant for at least six
(6) months prior to their tender or have been purchased on the open market.
If the Company shall have a class of its Stock registered pursuant to
Section 12 of the Exchange Act, an Option holder may also make payment at
the time of exercise of an Incentive Stock Option by delivering to the
Company a properly executed exercise notice together with irrevocable
instructions to a broker approved by the Company, that upon such broker's
sale of Shares with respect to which such Option is exercised, it is to
deliver promptly to the Company the amount of sale proceeds necessary to
satisfy the Option exercise price and any required withholding taxes.

5. Option Expiration Date. The "Expiration Date" with respect to an
Incentive Stock Option or any portion thereof awarded to a Participant under the
Plan means the earliest of:

(a) the date that is ten (10) years after the date on which the
Incentive Stock Option is awarded;

(b) the date established by the Committee at the time of the award;

(c) the date that is thirty (30) days after the date the Participant's
employment with the Company and all Subsidiaries is terminated for reasons
other than death or permanent and total disability; or

(d) the date that is one (1) year after the Participant's employment
with the Company and all Subsidiaries is terminated because of death or
permanent and total disability (as defined in Code Section 22(e)(3)).

A-9

III. NON-QUALIFIED OPTIONS

1. Definition. The award of a Non-Qualified Option under the Plan entitles
the Participant to purchase Shares at a price fixed at the time the Option is
awarded, subject to the following terms of this Part III.

2. Eligibility. The Board shall designate the Participants to whom
Non-Qualified Options are to be awarded under the Plan and shall determine the
number of Shares to be awarded to each of them.

3. Price. The purchase price of a Share under each Non-Qualified Option
shall be determined by the Board; provided, however, that in no event shall such
price be less than the Fair Market Value of a Share as of the Option Date.

4. Exercise.

(a) A Participant may not exercise a Non-Qualified Option after the
Expiration Date applicable to that Option. Unless otherwise specified
herein, each Non-Qualified Option shall become and be exercisable at such
time or times and during such period or periods, in full or in such
installments as may be determined by the Board at the Option Date.

(b) A Participant shall exercise his or her Non-Qualified Options by
delivering an exercise notice to the Company and paying the full exercise
price for such exercised Options. Participants may elect to pay the
purchase price of Shares purchased upon the exercise of Non-Qualified Stock
Options by tendering, either through actual delivery of Shares or though
attestation, Shares (valued at Fair Market Value as of the day of exercise)
owned by the Participant, or any combination thereof, equivalent to the
purchase price of such Non-Qualified Stock Options. Any Shares that are
tendered must have been held by the Participant for at least six (6) months
prior to their tender or have been purchased on the open market. Shares
acquired pursuant to the exercise of a Non-Qualified Option shall be
subject to such conditions, restrictions and contingencies as the Board may
establish in the Award Agreement. If the Company shall have a class of its
Stock registered pursuant to Section 12 of the Exchange Act, an Option
holder may also make payment at the time of exercise of a Non-Qualified
Stock Option by delivering to the Company a properly executed exercise
notice together with irrevocable instructions to a broker approved by the
Company, that upon such broker's sale of Shares with respect to which such
Option is exercised, it is to deliver promptly to the Company the amount of
sale proceeds necessary to satisfy the Option exercise price and any
required withholding taxes.

5. Option Expiration Date. The "Expiration Date" with respect to a
Non-Qualified Option or any portion thereof awarded to a Participant under the
Plan means the earliest of:

(a) the date established by the Board at the time of the award or set
forth in Section III.5(b), as applicable;

A-10

(b) the date that is thirty (30) days after the employee Participant's
employment with the Company and all Subsidiaries or the consultant,
independent contractor or Non-employee Director Participant's service is
terminated for reasons other than Retirement or death; or

(c) the date that is one (1) year after the date the employee
Participant's employment with the Company and all Subsidiaries or the
consultant, independent contractor or Non-employee Director Participant's
service is terminated by reason of Retirement or death.

IV. RESTRICTED STOCK

1. Definition. Restricted Stock awards are grants of Shares to
Participants, the vesting of which is subject to a required period of employment
and any other conditions established by the Board or by the terms of this Plan.

2. Eligibility. The Board shall designate the Participants to whom
Restricted Stock is to be awarded and the number of Shares that are subject to
the award.

3. Terms and Conditions of Awards. All Restricted Stock awarded to
Participants under the Plan shall be subject to the following terms and
conditions and to such other terms and conditions, not inconsistent with the
Plan, as shall be prescribed by the Board in its sole discretion and as shall be
contained in the agreement referred to in Section I.11.

(a) Restricted Stock awarded to Participants may not be sold,
assigned, transferred, pledged or otherwise encumbered, except as
hereinafter provided, for a period of ten years or such shorter period as
the Board may determine, but no less than three years, after the time of
the award of such Stock (the "Restricted Period"). Such restrictions shall
lapse as to the Restricted Stock in accordance with the time(s) and
number(s) of Shares as to which the Restricted Period expires, as set forth
in the Agreement with the Participant. Except for such restrictions, the
Participant as owner of such Stock shall have all the rights of a
shareholder, including but not limited to the right to receive all
dividends on such Stock.

(b) The Board may in its discretion, at any time after the date of the
award of Restricted Stock, adjust the length of the Restricted Period to
account for individual circumstances of a Participant or group of
Participants, but in no case shall the length of the Restricted Period be
less than one (1) year.

(c) Except as otherwise determined by the Board in its sole
discretion, a Participant whose employment or service with the Company and
all Subsidiaries terminates prior to the end of the Restricted Period for
any reason shall forfeit all Restricted Stock remaining subject to any
outstanding Restricted Stock award which have not then vested in accordance
with the agreement entered into under Section I.11.

A-11

(d) Each certificate issued in respect of Restricted Stock awarded
under the Plan shall be registered in the name of the Participant and, at
the discretion of the Board, each such certificate may be deposited with
the Company or in a bank designated by the Board. Each such certificate
shall bear the following (or a similar) legend:

"The transferability of this certificate and the Shares represented
hereby are subject to the terms and conditions (including forfeiture)
contained in the Mexican Restaurants, Inc. 2005 Long Term Incentive
Plan and an agreement entered into between the registered owner and
Mexican Restaurants, Inc. A copy of such plan and agreement is on file
in the office of the Secretary of Mexican Restaurants, Inc., 1135
Edgebrook, Houston, Texas 77034, or if the Company changes its
principal office, at the address of such new principal office."

(e) As the Restricted Period for Restricted Stock expires and such
restrictions lapse, such Restricted Stock shall be held by a Participant
(or his or her legal representative, beneficiary or heir) free of all
restrictions imposed by the Plan and the Award Agreement. Such Shares shall
nevertheless continue to be subject to any restriction imposed under
applicable securities laws.

V. PERFORMANCE UNITS

1. Definition. Performance Units are awards to Participants who may receive
value for the units at the end of a fixed period of time (a "Performance
Period"). The number of units earned, and value received for them, will be
contingent on the degree to which the performance measures established at the
time of the initial award are met.

2. Eligibility. The Board shall designate the Participants to whom
Performance Units are to be awarded, and the number of units to be the subject
of such awards.

3. Terms and Conditions of Awards. For each Participant, the Board will
determine the timing of awards; the number of units awarded; the value of units,
which may be stated either in cash or in shares of Stock; the performance
measures used for determining whether the Performance Units are earned; the
Performance Period during which the performance measures will apply; the
relationship between the level of achievement of the performance measures and
the degree to which Performance Units are earned; whether, during or after the
Performance Period, any revision to the performance measures or Performance
Period should be made to reflect significant events or changes that occur during
the Performance Period; and the number of earned Performance Units that will be
paid in cash and/or Shares, as shall be prescribed by the Board in its sole
discretion and as shall be contained in the Participant's Award Agreement.

4. Payment. The Board will compare the actual performance to the
performance measures established for the Performance Period and determine the
number of units to be paid and their value. Payment for units earned shall be
wholly in cash, wholly in Shares or in a combination of the two, in a lump sum
or installments, and subject to vesting requirements and such other conditions
as the Board shall provide. The Board will determine the number of earned units
to be paid in cash and the number to be paid in Shares. For Performance Units
valued when awarded in Shares, one Share will be paid for each unit earned, or
cash will be paid for each unit earned equal to either (i) the Fair Market Value
of a Share at the end of the

A-12

Performance Period or (ii) the Fair Market Value of the Stock averaged for a
number of days determined by the Board. For Performance Units valued when
awarded in cash, the value of each unit earned will be paid in its initial cash
value, or shares of Stock will be distributed based on the cash value of the
units earned divided by (i) the Fair Market Value of a Share at the end of the
Performance Period or (ii) the Fair Market Value of a Share averaged for a
number of days determined by the Board.

5. Retirement, Death or Termination. A Participant whose employment with
the Company and its Subsidiaries terminates during a Performance Period because
of Retirement or death shall be entitled to the prorated value of earned
Performance Units, issued with respect to that Performance Period, at the
conclusion of the Performance Period based on the ratio of the months employed
during the period to the total months of the Performance Period. If the
Participant's employment with the Company and its Subsidiaries terminates during
a Performance Period for any reason other than Retirement or death, the
Performance Units issued with respect to that Performance Period will be
forfeited on the date his employment with the Company and its Subsidiaries
terminates. Notwithstanding the foregoing provisions of this Part V, if a
Participant's employment with the Company and its Subsidiaries terminates before
the end of the Performance Period with respect to any Performance Units awarded
to him, the Board may determine that the Participant will be entitled to receive
all or any portion of the units that he or she would otherwise receive, and may
accelerate the determination and payment of the value of such units or make such
other adjustments as the Board, in its sole discretion, deems desirable.

VI. STOCK APPRECIATION RIGHTS

1. Definition. A Stock Appreciation Right is an award that entitles the
Participant to receive an amount equal to the difference between the Fair Market
Value of Shares at the time of exercise of the Stock Appreciation Right and the
Fair Market Value of such Shares at the date of award of the Stock Appreciation
Right, subject to the applicable terms and conditions of the Stock Appreciation
Right and the following provisions of this Part VI.

2. Eligibility. The Board may, in its discretion, award Stock Appreciation
Rights under this Part VI independently, concurrent with, or subsequent to, any
other award under the Plan.

3. Exercise. A Stock Appreciation Right shall entitle the holder to
receive, upon the exercise of the Stock Appreciation Right, Shares (valued at
their Fair Market Value at the time of exercise), cash or a combination thereof,
in an amount equal in value to the excess of the Fair Market Value of the Shares
subject to the Stock Appreciation Right as of the date of such exercise over the
Fair Market Value of the Shares subject to the Stock Appreciation Right at the
date of award, as shall be prescribed by the Board in its sole discretion and as
shall be contained in the Participant's Award Agreement.

4. Expiration Date. The "Expiration Date" with respect to a Stock
Appreciation Right shall be determined by the Board and documented in the
Participant's Award Agreement. If the right is not exercised before the end of
the day on which the right ceases to be exercisable, such right shall be deemed
exercised as of such date and payment shall be made to the holder in Shares.

A-13

MEXICAN RESTAURANTS, INC.

MR. A SAMPLE
DESIGNATION (IF ANY)
ADD 1
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!123456564525! C 1234567890 J N T

[ ] Mark this box with an X if you have made
changes to your name or address details above.

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SPECIAL MEETING PROXY CARD
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(A) ISSUE

The Board of Directors recommends a vote FOR the following proposal.

For Against Abstain

1. To approve the 2005 Long Term Incentive Plan. [ ] [ ] [ ]

Check this box if you plan to attend the Special
Meeting of Shareholders. [ ]

(B) AUTHORIZED SIGNATURES -- SIGN HERE -- THIS SECTION MUST BE COMPLETED FOR
YOUR INSTRUCTIONS TO BE EXECUTED.

The undersigned acknowledges receipt of the Notice of the Company's Special
Meeting of Shareholders and of the Proxy Statement.

Please sign exactly as your name appears. Joint owners should each sign
personally. Where applicable, indicate your official position or representation
capacity. Please date, sign and return this Proxy in the enclosed business
envelope.

Signature 1 -- Please keep signature within the box Signature 2 -- Please keep signature within the box Date (mm/dd/yyy)
--------------------------------------------------- --------------------------------------------------- -----------------------
/ /
--------------------------------------------------- --------------------------------------------------- -----------------------

3 U P X H H H P P P P 006491

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PROXY - MEXICAN RESTAURANTS, INC.
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PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS-NOVEMBER 8, 2005

The undersigned hereby appoints LOUIS P. NEEB, CURT GLOWACKI and ANDREW J.
DENNARD, and each or any of them, as attorneys, agents and proxies of the
undersigned with full power of substitution, for and in the name, place and
stead of the undersigned, to attend the Special Meeting of Shareholders of
Mexican Restaurants, Inc. (the "Company") to be held in the Casa Ole
restaurant located at 20131 Hwy. 59 N., Ste. 2004, Humble, Texas, 77338 on
Tuesday, November 8, 2005, at 9:30 a.m., Houston time, and any adjournment(s)
thereof, and to vote there at the number of shares of Common Stock of the
Company which the undersigned would be entitled to vote if personally present
as indicated on the reverse side hereof and, in their discretion, upon any
other business which may properly come before said meeting. This Proxy when
properly executed will be voted in accordance with your indicated directions.
If no direction is made, this proxy will be voted FOR the proposal.

PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.

(Continue and to be signed on reverse side.)