UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~May~~August 135, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ~~_______~~_________ to _________ ~~_______~~

Commission file number 0-1154

MAX & ERMA’S RESTAURANTS, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		31-1041397 (I.R.S. Employer identification no.)

4849 Evanswood Drive, Columbus, Ohio (Address of principal executive offices)		43229 (Zip Code)

Registrant’s telephone number, including area code: (614) 431-5800

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

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of ~~May~~August 135, 2007, there were 2,~~554~~551,~~474~~974 shares of common stock outstanding.

TABLE OF CONTENTS

~~PART I — FINANCIAL INFORMATION~~	PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
	ITEM 1 — FINANCIAL STATEMENTS MAX & ERMA’S RESTAURANTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
	Item 2 — \| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3 — \| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	Item 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	Item 4 — CONTROLS AND PROCEDURES
	PART II — OTHER INFORMATION
	Item 1 — LEGAL PROCEEDINGS
	Item 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	Item 6 — EXHIBITS
SIGNATURES
EXHIBIT INDEX
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS MAX & ERMA’S RESTAURANTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS

MAX & ERMA’S RESTAURANTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS


	August 5, 2007
	(UNAUDITED)		October 29, 2006
ASSETS
Current Assets:
Cash and Equivalents	$	2,182,210	$	2,491,877
Inventories		1,238,260		1,260,537
Other Current Assets		2,874,786		3,820,938

Total Current Assets		6,295,256		7,573,352

Property — At Cost		108,067,125		103,704,895
Less Accumulated Depreciation and Amortization		56,496,990		52,896,054

Property — Net		51,570,135		50,808,841

Deferred Income Taxes and Other Assets		16,158,537		13,972,472

Total	$	74,023,928	$	72,354,665


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Current Maturities of Long-Term Obligations	$	2,795,843	$	2,729,989
Accounts Payable		6,707,446		4,829,677
Accrued Payroll and Related Taxes		2,638,174		2,770,583
Accrued Liabilities		5,690,203		5,925,532

Total Current Liabilities		17,831,666		16,255,781

Long-Term Obligations — Less Current Maturities		43,277,774		43,065,227

Stockholders’ Equity:
Preferred Stock — $.10 Par Value;
Authorized 500,000 Shares — None Outstanding
Common Stock — $.10 Par Value;
Authorized 5,000,000 Shares, Issued and Outstanding 2,554,474 Shares At 08/5/07 and 2,551,974 Shares at 10/29/06		255,446		255,196
Additional Paid-In Capital		1,184,040		982,697
Retained Earnings		11,475,002		11,795,764

Total Stockholders’ Equity		12,914,488		13,033,657

Total	$	74,023,928	$	72,354,665

	May 13, 2007
	(UNAUDITED)		October 29, 2006
ASSETS
Current Assets:
Cash and Equivalents	$	2,809,072	$	2,491,877
Inventories		1,274,500		1,260,537
Other Current Assets		2,968,747		3,820,938
Total Current Assets		7,052,319		7,573,352
Property — At Cost		106,998,310		103,704,895
Less Accumulated Depreciation and Amortization		55,617,931		52,896,054
Property — Net		51,380,379		50,808,841
Deferred Income Taxes and Other Assets		14,790,109		13,972,472
Total	$	73,222,807	$	72,354,665
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current Maturities of Long-Term Obligations	$	2,764,393	$	2,729,989
Accounts Payable		5,729,105		4,829,677
Accrued Payroll and Related Taxes		2,661,740		2,770,583
Accrued Liabilities		6,502,082		5,925,532
Total Current Liabilities		17,657,320		16,255,781
Long-Term Obligations — Less Current Maturities		41,731,609		43,065,227
Stockholders’ Equity:
Preferred Stock — $.10 Par Value;
Authorized 500,000 Shares — None Outstanding
Common Stock — $.10 Par Value;
Authorized 5,000,000 Shares, Issued and Outstanding 2,554,474 Shares at 05/13/07 and 2,551,974 Shares at 10/29/06		255,446		255,196
Additional Paid-In Capital		1,135,154		982,697
Retained Earnings		12,443,278		11,795,764
Total Stockholders’ Equity		13,833,878		13,033,657
Total	$	73,222,807	$	72,354,665

(See notes to interim unaudited condensed consolidated financial statements.)

MAX & ERMA’S RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Twelve Weeks Ended						~~Twenty-eight~~Forty Weeks Ended
	May 13, 2007			May 14, 2006			May 13, 2007			May 14, 2006
	August 5, 2007			August 6, 2006			August 5, 2007			August 6, 2006
REVENUES	$	41,134,932		$	42,781,321		$	96,655,791		$	100,398,728
REVENUES:	$	39,201,281		$	40,646,117		$	135,857,076		$	141,044,845
COSTS AND EXPENSES:
Costs of Goods Sold		109,~~312~~813,~~159~~242			10,~~819~~226,~~642~~514			2433,~~159~~973,~~772~~015			2535,~~753~~979,~~263~~771
Payroll and Benefits		13,~~443~~025,~~100~~873			13,~~773~~325,~~438~~262			3043,~~912~~938,~~900~~773			3145,~~947~~273,~~741~~003
Other Operating Expenses		13,~~874~~443,~~815~~840			1413,~~116~~414,~~571~~347			3145,~~763~~206,~~122~~962			3346,~~345~~760,~~853~~200
Pre-Opening Expenses		139,~~190~~599			828,~~149~~139			1352,~~068~~667			836,~~149~~288
Impairment of Assets		431,000			339,000			431,000			~~504~~843,524
Administrative Expenses		3,~~224~~540,~~615~~209			3,~~408~~298,~~131~~643			711,~~679~~219,~~407~~616			711,~~852~~151,~~711~~354
Total Operating Expenses		40,~~855~~293,~~879~~763			4240,~~125~~631,~~931~~905			94134,~~528~~822,~~269~~033			99140,~~412~~044,~~241~~140
Operating Income		279,053			655,390			2,127,522			986,487
Operating Income (Loss)		(1,092,482	)		14,212			1,035,043			1,000,705
Interest Expense		~~771~~777,~~614~~546			~~646~~806,~~202~~152			12,~~841~~619,~~505~~051			12,~~470~~276,~~055~~207
Minority Interest in Income of Affiliated Partnerships		19,252			38,503			38,503			38,503
Minority Interest in Income of Affiliated Partnership		19,252			19,251			57,755			57,754
INCOME (LOSS) BEFORE INCOME TAXES		(511,813	)		(29,315	)		247,514			(522,071	)
LOSS BEFORE INCOME TAXES		(1,889,280	)		(811,191	)		(1,641,763	)		(1,333,256	)
INCOME TAXES (CREDIT)		(~~410~~921,000	)		(~~191~~516,000	)		(~~400~~1,321,000	)		(~~652~~1,168,000	)
NET INCOME (LOSS)	$	(101,813	)	$	161,685		$	647,514		$	129,929
NET LOSS	$	(968,280	)	$	(295,191	)	$	(320,763	)	$	(165,256	)
NET INCOME (LOSS) PER SHARE
NET LOSS PER SHARE:
Basic	$	(0.0438	)	$	(0.0612	)	$	(0.2513	)	$	(0.0506	)
Diluted	$	(0.0438	)	$	(0.0612	)	$	(0.2513	)	$	(0.0506	)
SHARES OUTSTANDING:
Basic		2,555,664			2,551,974			2,554,~~066~~545			2,550,~~198~~731
Diluted		2,555,664			2,~~556~~551,~~195~~974			2,554,~~066~~545			2,~~559~~550,~~169~~731

(See notes to interim unaudited condensed consolidated financial statements.)

MAX & ERMA’S RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Twenty-eight Weeks Ended
	Forty Weeks Ended
	May 13, 2007			May 14, 2006
	August 5, 2007			August 6, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	647,514		$	129,929
Net loss	$	(320,763	)	$	(165,256	)
Depreciation and amortization		46,~~243~~092,~~527~~586			46,~~359~~230,~~082~~312
Minority interest in income of Affiliated Partnerships		3857,~~503~~755			3857,~~503~~755
Loss on disposition of assets		183,276			148,649
Decrease (increase) in deferred tax asset		(1,666,000	)		(1,537,000	)
Impairment of fixed assets					45,598
Loss on disposition of assets		282,456			192,456
Stock based compensation		132,332			46,269
Impairment of fixed assets		431,000			465,600
Decrease (increase) in inventories		(13,963	)		194,568
Stock based compensation		181,218			74,981
Increase (decrease) in accounts payable		495,783			(1,184,503	)
Decrease in inventories		22,277			126,828
Increase (decrease) in accrued liabilities		467,707			(246,209	)
Increase (decrease) in accounts payable		877,015			(1,115,171	)
Changes in other assets and liabilities		(158,201	)		(1,262,615	)
Decrease in accrued liabilities		(367,738	)		(929,119	)
Net cash provided by operating activities		6,036,478			2,269,271
Changes in other assets and liabilities		1,719,500			(231,831	)
Net cash provided by operating activities		7,309,306			3,169,555
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions		(35,~~237~~229,~~650~~357	)		(23,~~326~~681,~~157~~830	)
Proceeds from sale of assets		46,716
Net decrease (increase) in other assets		(87701,~~490~~205	)		2426,~~764~~663
Net cash used by investing activities		(35,~~278~~883,~~424~~846	)		(23,~~301~~655,~~393~~167	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations		(3654,~~229~~091,~~258~~504	)		(2438,~~943~~010,~~097~~732	)
Proceeds from long-term obligations		3352,~~825~~418,000			2538,~~767~~434,000
Proceeds from exercise of stock options		20,375			64,171
Debt issue costs		(1824,~~473~~243	)		(~~606~~631,~~813~~897	)
Distributions to minority interests in Affiliated Partnerships		(3857,~~503~~755	)		(3857,~~503~~755	)
Net cash provided by (used by) financing activities		(2,440,859	)		242,758
Net cash used by financing activities		(1,735,127	)		(202,213	)
NET INCREASE IN CASH AND EQUIVALENTS		317,195			210,636
NET DECREASE IN CASH AND EQUIVALENTS		(309,667	)		(687,825	)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD		2,491,877			2,910,889
CASH AND EQUIVALENTS AT END OF PERIOD	$	2,~~809~~182,~~072~~210		$	32,~~121~~223,~~525~~064
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest	$	2,~~200~~987,~~447~~195		$	1,~~550~~137,~~922~~048
Income taxes	$	22242,~~832~~260		$	124,~~188~~915
Non-cash activities:
Property additions financed by accounts payable	$	~~784~~1,~~029~~302,868		$	~~553~~462,~~583~~843
Property additions financed by financing lease obligations	$	1,537,500

(See notes to interim unaudited condensed consolidated financial statements.)

MAX & ERMA’S RESTAURANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Presentation

1.		Presentation

		The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by accounting principles generally accepted in the United States of America for interim reporting, which are less than those required for annual reporting. In the opinion of management, all adjustments, consisting of only normal recurring accruals, considered necessary for a fair presentation have been included.

		The Company and its Affiliated Partnership each have a 52-53 week fiscal year, which ends on the last Sunday in October. Fiscal 2007 and 2006 each consists of 52 weeks and includes one sixteen-week and three twelve-week quarters.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by accounting principles generally accepted in the United States of America for interim reporting, which are less than those required for annual reporting. In the opinion of management, all adjustments, consisting of only normal recurring accruals, considered necessary for a fair presentation have been included.

2.		New Financial Accounting Standards

		In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective as of the beginning of the Company’s 2008 fiscal year. The Company is currently evaluating the impact of FIN 48 on its consolidated financial statements.

		In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), to eliminate the diversity in practice that exists due to the different definition of fair value and the limited guidance for applying those definitions in accounting principles generally accepted in the United States of America that are dispersed among the many accounting pronouncements that require fair value measurements. SFAS 157 will apply to fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 157 on its consolidated financial statements.

		In June 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) position EITF 06-3, “How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is Gross Versus Net Presentation)” (“EITF 06-3”), that addresses disclosure requirements for taxes assessed by a governmental authority that is both imposed concurrently with a specific revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value-added, and some excise taxes. EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of assessed taxes that are included in revenues if they are accounted for under the gross method. The provisions of EITF 06-3 are effective for interim and annual reporting periods beginning after December 15, 2006, with earlier application permitted. The Company presents sales and other taxes collected from customers on a net basis, accordingly such taxes are not included in revenues and cost of goods sold.

The Company and its Affiliated Partnership each have a 52-53 week fiscal year, which ends on the last Sunday in October. Fiscal 2007 and 2006 each consists of 52 weeks and include one sixteen-week and three twelve-week quarters.

2. New Financial Accounting Standards

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective as of the beginning of the Company’s 2008 fiscal year. The Company is currently evaluating the impact of FIN 48 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), to eliminate the diversity in practice that exists due to the different definition of fair value and the limited guidance for applying those definitions in accounting principles generally accepted in the United States of America that are dispersed among the many accounting pronouncements that require fair value measurements. SFAS 157 will apply to fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 157 on its consolidated financial statements.

In June 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) position EITF 06-3, “How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is Gross Versus Net Presentation)” (“EITF 06-3”), that addresses disclosure requirements for taxes assessed by a governmental authority that is both imposed concurrently with a specific revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value-added, and some excise taxes. EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of assessed taxes that are included in revenues if they are accounted for under the gross method. The provisions of EITF 06-3 are effective for interim and annual reporting periods beginning after December 15, 2006, with earlier

~~application~~In ~~permitted~~September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. ~~The~~108, ~~Company~~“Quantifying ~~presents~~Misstatements” ~~sales~~(“SAB 108”). SAB 108 provides guidance on quantifying and ~~other~~evaluating ~~taxes~~the ~~collected~~materiality ~~from~~of ~~customers~~unrecorded onmisstatements requiring the use of both a ~~net~~ ~~basis~~balance sheet and an income statement approach when quantifying and evaluating the materiality of a misstatement. SAB 108 is effective for fiscal years ending after November 15, ~~accordingly~~2006. ~~such~~The ~~taxes~~adoption ~~are~~of SAB 108 did not ~~included~~have ina ~~revenues~~material effect on the Company’s financial statements. In February 2007, the FASB issued SFAS No. 159, “Establishing the Fair Value Option for Financial Assets and ~~cost~~Liabilities,” to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of ~~goods~~SFAS ~~sold~~No. 157, “Fair Value Measurements.” An entity is prohibited from retrospectively applying SFAS No. 159, unless it chooses early adoption. Management is currently evaluating the impact of SFAS No. 159 on its consolidated financial statements.

In3. ~~September 2006,~~Net Income Per Share Basic income per share amounts are based on the ~~Securities~~weighted ~~and~~average ~~Exchange~~number ~~Commission~~of ~~(“SEC”)~~shares ~~issued~~of ~~Staff~~common ~~Accounting Bulletin~~stock ~~No. 108,~~outstanding ~~“Quantifying~~during ~~Misstatements”~~the ~~(“SAB~~periods ~~108”)~~presented. ~~SAB~~Diluted ~~108~~income ~~provides~~per ~~guidance~~share amounts are based on ~~quantifying~~ the weighted average number of shares of common stock and ~~evaluating~~dilutive stock options outstanding during the ~~materiality~~periods presented. Options to purchase 391,450 shares of ~~unrecorded~~common ~~misstatements~~stock ~~requiring~~were outstanding at August 5, 2007, but were not included in the ~~use~~computation of ~~both a~~diluted ~~balance~~earnings ~~sheet~~per ~~and~~share anbecause ~~income~~the ~~statement~~Company ~~approach~~reported ~~when~~a ~~quantifying~~net loss for the quarter and ~~evaluating~~year-to-date periods and, therefore, the ~~materiality of~~effect awould ~~misstatement~~be antidilutive. ~~SAB~~Options ~~108~~to ispurchase ~~effective~~310,950 ~~for~~shares ~~fiscal~~of ~~years~~common ~~ending~~stock ~~after~~were ~~November 15~~outstanding at August 6, 2006., ~~The adoption~~but were not included in the computation of ~~SAB~~diluted ~~108~~earnings ~~did~~per ~~not~~share ~~have~~because the Company reported a ~~material~~net ~~effect~~loss onfor the ~~Company’s~~quarter ~~financial~~and ~~statements~~year-to-date periods and, therefore, the effect would be antidilutive. The difference between basic shares outstanding and diluted shares outstanding were as follows:

In February 2007, the FASB issued SFAS No. 159, “Establishing the Fair Value Option for Financial Assets and Liabilities,” to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157, “Fair Value Measurements.” An entity is prohibited from retrospectively applying SFAS No. 159, unless it chooses early adoption. Management is currently evaluating the impact of SFAS No. 159 on its consolidated financial statements.


	Twelve Weeks Ended				Forty Weeks Ended
	August 5, 2007		August 6, 2006		August 5, 2007		August 6, 2006

Basic Shares Outstanding		2,555,664		2,551,974		2,554,545		2,550,731

Dilutive Effect of Stock Options


Diluted Shares Outstanding		2,555,664		2,551,974		2,554,545		2,550,731

3. Net Income Per Share

Basic income per share amounts are based on the weighted average number of shares of common stock outstanding during the periods presented. Diluted income per share amounts are based on the weighted average number of shares of common stock and dilutive stock options outstanding during the periods presented. Options to purchase 391,450 shares of common stock were outstanding at May 13, 2007, however no options were included in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common shares or the assumed proceeds resulted in a lower number of shares outstanding and, therefore, the effect would be antidilutive. Options to purchase 305,950 shares of common stock were outstanding at May 14, 2006, but options to purchase 296,979 were not included in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. The difference between basic shares outstanding and diluted shares outstanding were as follows:

	Twelve Weeks Ended				Twenty-eight Weeks Ended
	May 13, 2007		May 14, 2006		May 13, 2007		May 14, 2006
Basic Shares Outstanding		2,555,664		2,551,974		2,554,066		2,550,198
Dilutive Effect of Stock Options				4,221				8,971
Diluted Shares Outstanding		2,555,664		2,556,195		2,554,066		2,559,169

4. Stock Options During the forty weeks ended August 5, 2007, the Company’s stock option activity and weighted average exercise prices were as follows:

During the twenty-eight weeks ended May 13, 2007, the Company’s stock option activity and weighted average exercise prices were as follows:


	Shares			Exercise Price
Outstanding, October 29, 2006		288,950		$	13.22
Granted		105,000			8.48
Exercised		(2,500	)		(8.15	)

Outstanding, August 5, 2007		391,450		$	11.98

	Shares			Exercise Price
Outstanding, October 29, 2006		288,950		$	13.22
Granted		105,000			8.48
Exercised		(2,500	)		(8.15	)
Outstanding, May 13, 2007		391,450		$	11.98

Stock-based employee compensation expense for the forty weeks ended August 5, 2007 was $181,218 leaving a remaining unrecognized compensation expense at August 5, 2007 of $451,457 to be recognized over a weighted average period of 3.8 years. Stock-based employee compensation expense for the forty weeks ended August 6, 2006 was $74,981.

~~The~~5. ~~options~~Income ~~granted~~Taxes ~~during~~For the ~~second~~first ~~quarter~~40 weeks of 2007, we reported a tax credit of $1,321,000, which reflects the tax benefit of the reported loss before income taxes and ~~not~~the ~~exercised~~FICA ~~were~~tax on ~~102~~tips credit of approximately $880,~~500~~000. ~~shares and~~For ~~had~~2006, anwe ~~intrinsic~~recorded ~~value~~a tax credit of $251,~~625~~168,000 which reflected the tax benefit of the reported loss before income taxes and the FICA tax on tips credit of approximately $715,000. Fluctuations in pre-tax income or a ~~fair~~pre-tax ~~market~~loss ~~value~~may cause our effective tax rate or tax credits recorded to vary from quarter to quarter. Included in the total net deferred tax asset balance of $~~217~~13,~~500~~068,000 at August 5, 2007 is $5,150,000 related to FICA tax on tips credits that begin expiring in 2023. The Company has considered all available evidence, including expected future taxable income and ongoing prudent and feasible tax planning strategies, in assessing the need for a valuation allowance. Due to changes in facts and circumstances and the significant management judgments and estimates involved in determining the proper valuation allowance, differences between actual future events and prior judgments and estimates could result in adjustments. Decreases in the expected future taxable income of the Company may trigger adjustments in future periods. In the event the Company were to determine it is more likely than not that it will not fully recognize deferred tax assets, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

~~Stock-based~~6. ~~employee~~Asset ~~compensation~~Impairment ~~expense~~During ~~for~~ the ~~twenty-eight~~third ~~weeks~~quarter ~~ended~~of ~~May 13~~2007, ~~2007~~the ~~was $132,332~~Company ~~leaving~~recorded a ~~remaining~~$431,000 ~~unrecognized~~asset ~~compensation~~impairment ~~expense~~charge atfor ~~May 13,~~the ~~2007~~write down of ~~$501,268~~restaurant toassets ~~be recognized~~at ~~over~~three aunder-performing ~~weighted~~locations. ~~average~~Testing ~~period~~for impairment of ~~4.03 years. Stock~~long-~~based~~lived ~~employee~~assets ~~compensation expense~~requires ~~for~~significant ~~the~~management ~~twenty-eight~~judgement ~~weeks~~regarding ~~ended~~future ~~May 14~~cash flows, ~~2006~~asset ~~was~~lives ~~$46,269~~and discount rates. Changes in estimates could result in future impairment charges.

7. Bank Covenants At August 5, 2007, the Company was not in compliance with the liabilities to tangible net worth, fixed charge coverage and financial ratio covenants of its bank loan agreement. ~~Income~~The ~~Taxes~~Company has obtained waivers for the defaults for the period ended August 5, 2007, and the debt covenants have been amended on a go forward basis. Accordingly, the Company has classified amounts due under its bank loan agreement as long-term obligations less amounts appropriately classified as current maturities. The Company must improve its operating results and cash flows or take other actions to improve its capitalization to meet the debt covenants in the future. Any failure to comply with the debt covenants in the future could result in an event of default under the borrowing agreements, in which case the lenders could elect to declare all amounts outstanding thereunder to be due and payable, which could have a material adverse effect on the Company’s financial condition.

During the twenty-eight weeks ended May 13, 2007, the Company recorded a tax credit of $400,000, which reflects the benefit of the FICA tax on tips credit of approximately $500,000. A valuation allowance against deferred assets at May 13, 2007 is not considered necessary because it is not more likely than not the deferred tax asset will not be fully realized.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We derive revenues and income from the operation and franchising of restaurants. Our Company-owned and franchised restaurants sell both food and alcoholic beverages. Our restaurants are primarily located in the mid-west, within a 400 mile radius surrounding Columbus, Ohio, our Company’s headquarters, and to a lesser extent in the southeast. Existing franchised restaurants tend to be located on the outer edge of the mid-west, e.g., Philadelphia, Richmond, Virginia and St. Louis, with selective markets or locations within the mid-west also operated by franchisees. In late 2005, we signed a ten-restaurant franchise development agreement for Las Vegas, Nevada. The first Las Vegas location is scheduled to open in the ~~first~~second quarter of 2008. In 2006, we hired a Director of Franchise Development to more aggressively market franchises because we believe it is a key element of our growth. During the first quarter of 2007, we signed a four-restaurant franchise development agreement for the Coastal Carolinas and a ten-restaurant agreement for Southeast Florida. Franchisees generally pay an initial franchise fee of $40,000 per location, plus an annual royalty of 4% of sales. We anticipate that each additional franchised location will pay annual royalties of approximately $100,000.

We generally lease the real estate for our restaurants and invest approximately $1.0 million dollars in furniture, fixtures, and equipment and building costs not totally funded by landlords. In 2006, we opened one restaurant (none through the third quarter of 2007). Our cash investment in that restaurant was $1,033,000 because we lease the real estate. We expect that the average cash investment in future restaurants will be between $750,000 and $1.0 million as all restaurants are expected to be leased. We anticipate that new restaurants will generate annual sales of approximately $2.5 million each and an average restaurant level profit of at least $300,000.

The restaurant industry is very competitive. We typically compete favorably with several larger, national restaurant chains in most of our locations. Nonetheless the amount of competition is one of the most significant factors affecting the success of a restaurant location. While we seek out less competitive sites, highly successful locations quickly attract competition, which may affect sales. Since late 2004 and continuing through the ~~second~~third quarter of 2007, same-store sales have been negative. Increased competition is a major factor affecting same-store sales. Other factors such as the mid-western economy, gas prices, utility costs and rising interest rates may also have affected consumer spending at casual dining restaurants. In addition, we have reduced the use of couponing and discounting to build sales. At the start of 2006, we established a plan to increase average unit sales volumes by approximately 15% over a five-year period. This plan includes i) exiting lower sales volume restaurants generally at the end of leases if the outlook for sales improvement is low, ii) remodeling approximately up to five locations per year to our new prototype look, iii) opening higher sales volume locations at a controlled pace and iv) generating same-store sales increases from improved operations and effective marketing.

Periodically we experience fluctuations in cost of goods sold, as a percentage of revenues, due to rising commodity prices. Our approach to rising commodity prices has always been to cautiously raise prices periodically at a rate consistent with inflation and not over react to shorter-term price spikes. As a result of this policy, we have generally maintained a gradually declining cost of sales percentage. This approach along with improved purchasing and more favorable commodity

~~Periodically we experienced fluctuations in cost of goods sold, as a percentage of revenues, due to rising commodity~~ prices. ~~Our approach to rising commodity prices~~ has always been to cautiously raise prices periodically at a rate consistent with inflation and not over react to shorter-term price spikes. As a result of this policy, we have generally maintained a gradually declining cost of sales percentage. This approach along with improved purchasing and more favorable commodity prices has allowed us to reduce our cost of sales percentage to the low end of its historical range at 25.4% for 2006 and 25.0% for the first ~~half~~forty weeks of 2007.

We have experienced sharply rising health insurance costs over the past several years. During the first quarter of 2004, we implemented a new health insurance program and increased our employee contribution rates in an effort to reduce our health insurance costs. By increasing employee contribution levels in 2005 and 2006, we reduced health insurance costs 6.5% in 2006 and 2329% year-to-date in 2007. We believe that the rising cost of healthcare will continue to be a challenge.

We have debt borrowings of approximately $2829.74 million. Three fourths of the related notes carry variable interest rates. As a result, our Company is exposed to a risk associated with rising interest rates. Rising interest rates in 2006 resulted in higher interest expense and reduced profitability. Further increases in interest rates could subject us to even higher interest expense ~~during 2007~~. The remaining debt is a $7.0 million senior subordinated note issued on May 5, 2006. The note carries a fixed interest rate of 14.5%. The principal balance of the note is due May 5, 2012.

As Presently awe ~~result~~expect ofannual ~~the reduced~~ debt service ~~resulting~~and ~~from~~replacement ~~our~~capital ~~second~~expenditures ~~quarter~~will ~~2006 debt~~total ~~restructuring~~approximately ~~and~~$6.4 million ~~the~~for ~~increased~~2007 ~~availability~~and ~~under~~$5.4 million ~~our~~for ~~credit~~2008. ~~line~~At breakeven, we ~~anticipate an increased~~generate ~~growth~~approximately ~~rate~~$8.0 million inof ~~2007~~after totax ~~three~~cash ~~restaurants~~flow. ~~Presently,~~At wecurrent ~~expect~~levels ~~annual~~of profitability, cash flow after debt service and replacement capital expenditures ~~will~~may ~~total~~be ~~approximately~~less than $62.40 million ~~per~~annually. Because ~~year~~of this, we have reduced our expected growth rate to two restaurants in 2007 and to one to two restaurants in 2008. ~~The~~We believe we will have adequate funding to meet our capital needs through 2008. However, the availability of landlord construction allowances and the sale-leaseback of real estate, both of which result in a reduced ~~cash~~ investment per new restaurant, will likely affect our future growth rate. If we do not have adequate cash flow after debt service and replacement capital expenditures, we may have to curtail our growth plans even further unless we are able to obtain cash from new sources such as new equity or debt financing or the sale of restaurants to franchisees. There can be no assurance that we can obtain additional cash from such sources.

During the third quarter of 2007, we incurred approximately $130,000 of costs exploring strategic alternatives for our Company, which might include the possible sale of the Company, equity investment in the Company or the possible sale of Company-owned restaurants to a franchisee or group of franchisees. The combination of our operating results for the third quarter of 2007 and volatility in the debt markets has delayed pursuit of any of these alternatives. We expect to incur additional costs related to this in the fourth quarter of 2007 and will continue to consider these and other alternatives for our Company. There can be no assurance that we will be successful in securing an equity investment, the sale of the Company, the sale of restaurants to franchisees or other third parties, or in securing any other transaction affecting the capitalization of the Company. In the interim, we have developed a plan to improve profitability. This plan includes a reduction in corporate staff, certain salary adjustments and a restructuring of our operations department. In conjunction with that restructuring, we have hired a seasoned industry operations executive to head our operations department. We believe these changes will result in an annual savings in excess of $1.5 million. In addition to this, we plan to limit growth to the four restaurants to which we are contractually committed and will not resume growth until we return to profitability. In 2008, we will limit replacement capital expenditures to $3.0 million or less, which may limit the number of restaurants that we are able to remodel to the new prototype look. We believe these changes will return our Company to profitability. If we are successful in obtaining equity capital, growth and remodeling plans may change.

YEAR-TO-YEAR COMPARISONS AND ANALYSIS

RESULTS OF OPERATIONS

The following table sets forth our operating results as a percentage of revenues:

	Twelve			Twelve			Twenty-eight			Twenty-eight
	Twelve Weeks Ended						Forty Weeks Ended
	Weeks Ended			Weeks Ended			Weeks Ended			Weeks Ended
	August 5, 2007			August 6, 2006			August 5, 2007			August 6, 2006
	May 13, 2007			May 14, 2006			May 13, 2007			May 14, 2006
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of Goods Sold		(25.10	)		(25.32	)		(25.0	)		(25.75	)
Payroll & Benefits		(3233.73	)		(32.28	)		(32.03	)		(3132.81	)
Other Operating Expenses		(3334.73	)		(33.0	)		(3233.93	)		(33.2	)
Pre-Opening Expenses		—(0.1	)		—(0.1	)		—			—
Impairment of Assets		—(1.1	)		—(0.8	)		—(0.3	)		(0.56	)
Administrative Expenses		(79.80	)		(78.91	)		(78.92	)		(7.89	)
Interest Expense		(12.90	)		(12.50	)		(1.9	)		(1.56	)
Minority Interest		—			~~(0.1~~—	)		—			—
Income Tax Credit		12.03			01.43			01.40			0.68
Net Income (Loss)		(0.2.5	)%		(0.47	)%		(0.72	)%		(0.1	)%

REVENUES

Revenues for the ~~second~~third quarter of 2007 decreased $1,~~646~~445,000 or 3.86% from the ~~second~~third quarter of of 2006. The decrease was a result of i) the closing of one restaurant during the fourth quarter of of 2006 and one during the first quarter of 2007 and ii) a $1,~~397~~414,000 or 3.46% decline in sales at restaurants opened at least eighteen months, the effect of which was partially offset by the opening of one higher sales volume restaurant in late 2006 and aan 158% increase in franchise fees and royalties from $~~426~~425,000 for the ~~second~~third quarter of 2006 to $~~482~~448,000 for the ~~second~~third quarter of 2007. No Company-owned or franchised restaurants opened during the ~~second~~third quarter of 2007.

Year-to-date revenues decreased $~~3.7 million~~5,188,000 or 3.7% from 2006 to 2007. The decrease was a result of i) the closing of two restaurants during 2006 and one during the first quarter of 2007 and ii) a $34,~~235~~456,000 or 3.54% decline in same-store sales from 2006 to 2007. Year-to-date franchise ~~royalties~~ royalties increased 3023% to $1,~~220~~667,000 for 2007 from $~~940~~1,365,000 for 2006.

During the ~~second~~third quarter of 2007, we closed two ~~above~~restaurants ~~average~~for ~~sales~~a ~~volume~~combined ~~locations~~ten days for remodeling to our new prototype look. ~~for~~This resulted in a ~~combined~~sales ~~25 days.~~decline Inof $68,000 during the ~~comparable~~third quarter ~~time~~of ~~period~~2007. ~~last year~~Year-to-date, ~~the~~six ~~two~~ restaurants ~~reported~~have been remodeled in 2007, resulting in a sales decline of $~~164~~293,000. ~~during~~Three ~~that~~restaurants ~~period.~~were ~~During~~remodeled ~~the~~prior ~~first~~to ~~three weeks~~the start of ~~the~~2007. During the third quarter of 2007, the ~~two restaurants reported a 15% or $43,000 same-store sales increase. Additionally, all~~ seven restaurants remodeled toprior ~~date~~ to the ~~new~~start ~~prototype~~of ~~look,~~the quarter ~~reported~~experienced a ~~combined~~3.2% increase in same-store sales, ~~increase~~or ofalmost ~~4.8%~~a ~~for~~seven ~~the~~percentage ~~first~~point ~~three~~improvement over ~~weeks of~~ the ~~third quarter~~entire ~~of 2007~~chain. We believe the continued remodeling of our restaurants ~~to the new prototype look~~ is a key to ~~improving~~ improving same-store sales.

During 2007, the per person guest check average increased 5.7% due to an approximately 3.0% ($4.0 million) menu price increase over 2006 and the introduction of higher priced menu items. However, a decline in customer counts of 8.8% more than offset the check average increase and resulted in the 3.4% decrease in same-store sales. We believe that the decline in customer counts is primarily the result of problems affecting consumer spending and the casual dining industry, such as

During 2007, the per person guest check average increased 6.3% due to an approximately 3.0% ($2.8 million) menu price increase over 2006 and the introduction of higher priced menu items. However, a decline in customer counts of 9.5% more than offset the check average increase and resulted in the 3.7% decrease in same-store sales. We believe that the decline in customer counts is primarily the result of problems affecting consumer spending and the casual dining industry, such as gas prices, utility costs, interest rates and the overall economy. Our sales are further impacted by our concentration of restaurants in the mid-west, where the economy significantly lags the national economy. Additionally, during the first quarter of 2007, we curtailed the use of ~~television~~ television advertising. As a result, the cost of television advertising declined $~~650~~792,000 or ~~approximately~~ 83approximately 86%, from 2006 to 2007. We believe some portion of our customer count and same-store sales decline was related to the reduction in television advertising. We also believe that the advertising was not cost effective as year-to-date restaurant profit margins ~~and profit dollars~~ improved ~~over~~slightly ~~last~~over last year and that some of that improvement was a result of reduced advertising expense.

We expect to open ~~three~~two restaurants in the fourth quarter of 2007 and ~~three~~one to two additional restaurants in 2008. We were under contract to purchase or lease four sites at the end of the ~~second~~third quarter of 2007 ~~and are negotiating for the purchase of three additional locations~~.

We also expect continued increases in franchise fees and royalties. The number of franchised restaurants increased from twenty-one at the end of the ~~second~~third quarter of ~~2007 and~~ 2006 ~~remained~~to at twenty-three at the end of the third quarter of 2007. Three franchised restaurants closed during 2006. Two of the closed franchised locations were test sites on the Ohio Turnpike involving limited table service and no alcoholic beverages. Ultimately, the locations did not generate sufficient sales to expand the test and the locations were closed. One franchised restaurant opened in the Detroit, Michigan airport, during the second quarter of 2006. Three franchised restaurants opened during the first quarter of 2007 in Findlay, Ohio, the Norfolk Hilton Hotel, and the Virginia Beach Doubletree Hotel. One franchised restaurant closed during the second quarter of 2007 in Green Bay, Wisconsin. We anticipate the opening of ~~four~~one additional ~~franchise~~ ~~restaurants~~franchised restaurant during the ~~remainder~~fourth ofquarter of 2007 and eight during 2008. During the first quarter of 2007, the Company signed franchise area development agreements for four restaurants in the Coastal Carolinas and ten restaurants in Southeastern Florida.

COSTS AND EXPENSES

Cost of goods sold, as a percentage of revenues, decreased from 25.32% for the ~~second~~third quarter of of 2006 to 25.10% for the second quarter of 2007 due to a 4050 basis point ($~~165~~195,000) reduction in ~~meat~~ meat cost. ~~and~~A 50 basis point ~~($205,000)~~increase ~~reduction~~in dairy costs was generally offset by slight declines in ~~seafood~~most other commodity costs. Year-to-date cost of goods sold, as a percentage of revenues, decreased from 25.75% for 2006 to 25.0% for 2007. The decrease was primarily due to the fact that the bundled discount in last year’s first quarter “Pick Three” promotion (approximately 30%) was higher than the discount built into 2007’s “Three Degrees of Temptation” promotion (approximately 15%) and a 40 basis point ($536,000) decline in our year-to-date seafood costs. A 3% menu price increase over last year also helped reduce cost of goods sold, as a percentage of revenues, for both the quarter and year-to-date periods.

Payroll and benefits, as a percentage of revenues, increased from 32.28% for the ~~second~~third quarter of 2006 to 3233.73% for the ~~second~~third quarter of 2007. Payroll expense rose approximately 90100 basis points ($380,000) in the third quarter of 2007 due to the decline in same-store sales during the quarter and due to the increase in the Ohio minimum wage (approximately $200,000), which went into effect January 1, 2007. Benefits expense declined approximately 40 basis points (approximately $200,000) due primarily to reduced healthcare costs. Year-to-date, payroll and benefits increased from 32.1% for 2006 to 32.3% for 2007. The year-to-date increase was due to the effect of the Ohio minimum wage increase referred to above (approximately $580,000) which was partially offset by a combined 28% or $675,000 decline in Worker’s Compensation and health insurance expense due to the effectiveness of our self-funded programs and increase in the employee contribution levels for health insurance.

~~basis points~~ Other ~~($370~~operating expenses,~~000)~~ inas a percentage of revenues, increased from 33.0% for the ~~second~~third quarter of 2006 to 34.3% for the third quarter of 2007. ~~due~~The toincrease ~~the~~was primarily a result of the decline in same-store sales during the quarter and ~~due~~higher torepair ~~the~~and ~~increase~~maintenance ~~in the Ohio minimum wage (approximately $200~~expenses,~~000),~~ which ~~went into~~ ~~effect~~was ~~January 1,~~up ~~2007. Benefits expense declined~~ approximately 4050 basis points ~~(approximately~~ or $~~200~~190,000) ~~due~~over ~~primarily~~the tothird ~~reduced~~quarter ~~healthcare~~of ~~costs~~2007. Year-to-date, other ~~payroll~~operating ~~and~~expenses, ~~benefits~~as ~~increased~~ a percentage of revenues, rose slightly from 3133.82% for 2006 to 3233.03% for ~~2007~~2006. The ~~year-to-date~~ increase was ~~due~~primarily to the effect of ~~the~~declining ~~Ohio minimum~~same-store ~~wage~~sales ~~increase~~on ~~referred~~fixed toexpenses. A ~~above~~20 basis point (~~approximately~~$270,000) decline in advertising expense and a 10 basis point ($~~380~~135,000) ~~which~~decline in ~~was~~linen ~~partially~~expense was offset by a ~~combined~~ ~~23%~~30 orbasis point ($~~410~~405,000) ~~decline~~increase in ~~Worker’s~~repair ~~Compensation~~ and ~~health insurance~~ maintenance expense.

~~Other~~ Pre-opening ~~operating~~ expenses, as a percentage of revenues, ~~increased~~remained ~~from~~at ~~33.~~0.1% for the ~~second~~ quarter ofand ~~2006 to 33.7~~0% for ~~the second quarter of 2007. The increase was primarily a result of~~ ~~higher utilities and repair and maintenance expenses, each of which was up approximately 40 basis points or $140,000 over the second quarter of 2006. Year~~year-to-date, ~~other~~periods ~~operating expenses as a percentage~~ of ~~revenues~~both ~~declined from 33~~years.2% ~~for~~No ~~2006~~restaurants towere ~~32.9%~~opened ~~for~~during ~~2007.~~the ~~The~~first ~~reduction~~forty ~~was~~weeks ~~a result~~ of either ~~a $525,000 (0~~year.~~5%,~~ asExpenditures aduring ~~percentage~~the ofthird ~~revenues)~~quarters ~~decline~~were in ~~advertising~~anticipation ~~expense, as we curtailed the use~~ of ~~television~~opening ~~advertising and reduced menu ($143,000) and linen ($155,000) expense. These~~restaurants ~~reductions~~during ~~were~~the ~~partially~~fourth ~~offset~~quarter ~~by higher repair and maintenance expense ($120,000 or 0.2% as a percentage~~ of ~~revenues)~~each ~~and the effect of declining same-store sales on fixed expenses~~year.

Pre-opening expenses, as a percentage of revenues, remained at 0% for the quarter and year-to-date periods of both years as no restaurants were opened during the first half of either year.

ASSET IMPAIRMENT

During the ~~first~~third quarter of ~~2006~~2007, we recorded a $~~505~~431,000 asset impairment charge ~~related~~for to the ~~closing and~~ write~~-off~~ down of restaurant assets at ~~one~~three ~~restaurant~~under-performing locations. ~~The~~Testing ~~charge~~for ~~consisted~~impairment ~~primarily~~ of long-lived ~~the~~assets ~~payment~~requires ofsignificant amanagement ~~$440,000~~judgement ~~lease~~regarding ~~termination~~future ~~fee.~~cash ~~The~~flows, ~~restaurant had operating losses of~~asset ~~$146,000,~~lives ~~including~~and ~~the~~discount ~~cost~~rates. ofChanges ~~closing,~~in ~~during~~estimates ~~the~~could ~~first~~result ~~quarter~~in offuture ~~2006~~impairment charges.

During the third quarter of 2006, we recorded a $339,000 asset impairment charge primarily for the expected end of lease closings of two restaurants. One of the restaurants closed shortly after the end of the quarter and the other closed in early 2007. The charge primarily consisted of the write-off of restaurant assets at the two restaurants scheduled to close and smaller charges for three under-performing locations.

During the first quarter of 2006, we recorded a $505,000 asset impairment charge related to the closing and write-off of restaurant assets at one restaurant. The charge consisted primarily of the payment of a $440,000 lease termination fee.

ADMINISTRATIVE EXPENSES

Administrative expenses, as a percentage of revenues, ~~remained~~increased ~~relatively~~from ~~stable~~8.1%, atas a ~~approximately~~percentage of revenues, for the third quarter of 2006 to 9.0% for the third quarter of 2007 and year-to-date increased from 7.9% ~~over~~for ~~the~~2006 ~~periods~~to ~~reported~~8.2% for 2007. In dollar terms, administrative expenses ~~declined slightly~~increased ~~for~~$241,000 ~~both~~or 7% from the third quarter ~~and~~of ~~year~~2006 to the third quarter of 2007. Year-to-date ~~periods.~~administrative expenses increased $69,000 or less than 1% from 2006 to 2007. Administrative expenses include stock based compensation totaling approximately $6548,~~000~~885 and $2428,~~000~~ 712 for the ~~second~~third quarter of 2007 and 2006, respectively, and $~~132~~181,~~000~~218 and $4674,~~000~~981 for the year-to-date periods of 2007 and 2006, respectively. Additionally, the increase in administrative expenses was a result of professional fees and costs associated with the exploration of strategic alternatives for our Company’s future.

INTEREST EXPENSE

Interest expense ~~increased~~decreased 194% from the ~~second~~third quarter of 2006 to the ~~second~~third quarter of 2007 due ~~and~~to ~~25%~~a ~~year~~reduction in the outstanding balance under our revolving credit agreement. Year-to-date interest expenses increased 15% due to the increase in the prime interest rate and LIBOR during 2006 and the issuance of a higher rate senior subordinated note in the second quarter of 2006. The interest rate under our revolving credit agreement is based upon the ratio of bank indebtedness plus rent expense multiplied by 8 to earnings before interest, taxes, depreciation, amortization and rent expense. Based upon results for fiscal 2005 and 2006, the interest rate under our credit agreement was LIBOR plus 3.5% or prime plus 3/4 percent for both 2006 and 2007. As a result of increases in prime and LIBOR during 2006, the interest rate under our revolving credit agreement was 9.0% at ~~May~~August 136, ~~2007~~2006 asand ~~compared to~~remained ~~8.5%~~ at ~~May~~that rate through August 145, ~~2006~~2007.

Total interest bearing debt (excluding lease obligations) decreased from $3231.06 million at ~~May~~ 14August 5, 2006 to $2829.74 million at ~~May~~August 135, 2007. The decrease was due to scheduled principal amortization and a reduction in the outstanding balance of our revolving credit line. As a result of our May 5, 2006 debt restructuring, one of two term loans was repaid in full. The interest rate on both the second term loan, with a $109.48 million balance at ~~May~~August 135, 2007 and our revolving ~~credit~~ credit line, with a $1112.36 million balance at ~~May~~August 135, 2007, was 9.0%. The interest rate on the $7.0 million senior subordinated note issued May 5, 2006 was fixed at 14.5%. At ~~May~~August 146, 2006, ~~the~~ the interest rate on the $2524.06 million balance outstanding under our revolving credit agreement was 89.50%. During the first quarter of 2007, we incurred a $1.5 million financing lease obligation, with an 8.35% fixed interest rate, in connection with the funding of construction costs for our Springboro, Ohio restaurant, which opened in October 2006. We anticipate ~~that subsequent to the second quarter of 2007,~~ interest expense will decline as we reduce the outstanding balance of our term loan.

We capitalized $1540,000 of construction period interest during the first 2840 weeks of 2007 versus $515,000 during the first 2840 weeks of 2006.

INCOME TAXES

For the first 2840 weeks of 2007, we reported a tax credit of $~~400~~1,321,000, which reflects the tax benefit of the reported loss before income taxes and the FICA tax on tips credit of approximately $~~500~~880,000. For 2006, we recorded a tax credit of $~~652~~1,168,000 which ~~reflects~~reflected the tax benefit of the reported loss before income taxes and the FICA tax on tips credit of approximately $~~475~~715,000. Fluctuations Wein ~~believe~~pre-tax weincome ~~have~~or ~~appropriately~~a ~~estimated~~pre-tax ~~the~~loss may cause our effective tax rate or tax credits ~~effect~~recorded to vary from quarter to quarter. Included in the total net deferred tax asset balance of $13,068,000 ~~this~~at ~~credit~~August 5, on2007 ~~our~~is $5,150,000 related to FICA tax ~~provisions~~on tips credits that begin expiring in 2023. ~~However~~The Company has considered all available evidence, ~~unusual~~including ~~fluctuation~~expected infuture ~~pre-~~taxable income and ongoing prudent and feasible tax ~~income~~planning orstrategies, in assessing the need for a ~~pre-tax~~valuation ~~loss~~allowance. ~~make~~Due ~~this~~to achanges ~~difficult~~in ~~calculation~~facts and circumstances and the significant management judgments and estimates involved in determining the proper valuation allowance, differences between actual future events and prior judgments and estimates could result in adjustments. Decreases in the expected future taxable income of the Company may ~~cause~~trigger ~~our~~adjustments ~~effective~~in ~~tax~~future periods. ~~rate~~In orthe ~~tax~~event ~~credits~~the Company were to determine it is more likely than not that it will not fully recognize deferred tax assets, an adjustment to ~~vary~~the ~~from~~deferred ~~quarter~~tax assets would be charged to income ~~quarter~~in the period such determination was made.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital ratio declined from 0.5 to 1 at October 29, 2006 to 0.4 to 1 at May 13, 2007. The decline was due to the collection of a $1.5 million receivable early in the first quarter of 2007 for reimbursement of the construction costs of a restaurant which opened late in the fourth quarter of 2006. Historically, we have been able to operate with a working capital deficiency because 1) restaurant operations are primarily conducted on a cash basis, 2) high turnover (about

~~once~~LIQUIDITY ~~every~~AND ~~10 days)~~CAPITAL ~~permits a limited investment in inventory, and 3) trade payables for food~~RESOURCES ~~purchases usually become due after receipt of cash from the related sales.~~

~~During~~ Our ~~the~~working ~~first~~capital ~~twenty-eight~~ratio ~~weeks~~declined offrom ~~2007,~~0.5 weto ~~expended~~1 ~~approximately~~at $3October 29,~~103,000~~ ~~for~~2006 ~~property additions~~to ~~and~~0.4 ~~$36,229,000~~ to ~~reduce~~1 ~~long-term~~at ~~obligations~~August 5, 2007. ~~and~~The ~~increased~~decline ~~cash~~was ondue ~~hand~~to bythe collection of a $~~317,000~~1.5 million receivable early in the first ~~Funds~~quarter of 2007 for ~~such~~reimbursement ~~expenditures~~of ~~were~~the ~~provided~~construction ~~primarily~~costs byof ~~$33,825,000~~a ~~from~~restaurant ~~proceeds~~which ofopened ~~long-term~~late in ~~obligations~~the ~~and~~fourth ~~$6,036,000~~quarter ~~from~~of ~~operations~~2006. WeHistorically, ~~routinely~~we ~~draw~~have ~~down~~been ~~and~~able ~~repay~~to ~~balances~~operate ~~under~~with ~~our~~a working capital ~~revolving~~deficiency ~~credit~~because ~~agreement~~1) restaurant operations are primarily conducted on a cash basis, ~~the~~2) ~~gross~~high turnover ~~amounts~~(about ofonce ~~which~~every ~~are~~10 days) ~~included~~permits a limited investment in inventory, and 3) trade payables for food purchases usually become due after receipt of cash from the ~~above~~related ~~numbers~~sales.

We During ~~intend~~the tofirst ~~open~~forty ~~three~~weeks ~~Max~~of &2007, ~~Erma’s~~we ~~restaurants~~expended ~~during~~approximately ~~the~~$5,229,000 ~~fourth~~for ~~quarter~~property additions ofand ~~2007~~$54,062,000 ~~and~~to ~~three per~~reduce ~~year~~long-term ~~thereafter~~obligations. AtFunds ~~May 13,~~for ~~2007,~~such weexpenditures were provided ~~contractually~~primarily ~~committed~~by to$52,418,000 ~~the~~from ~~purchase~~proceeds orof ~~lease~~long-term ofobligations, $7,339,000 from ~~four~~operations ~~sites.~~and ~~Three~~$310,000 ~~additional~~from ~~sites~~cash ~~had~~on ~~been~~hand. ~~approved~~We routinely draw down and ~~were~~repay inbalances ~~some~~under ~~stage~~our revolving credit agreement, the gross amounts of ~~negotiations~~which are included in the above numbers.

~~The~~ We ~~estimated~~intend ~~cost~~ to ~~complete~~open ~~the~~two ~~four~~Max ~~restaurants~~& ~~that~~Erma’s werestaurants ~~are~~during ~~contractually~~the ~~committed~~fourth toquarter ~~is approximately $10.2 million as~~ of ~~May 13,~~ 2007. ~~Additionally,~~and weone ~~plan~~ to ~~remodel up to five~~ ~~restaurants~~two ~~per year at an estimated cost of $200,000 per remodel. Funding for new~~ restaurants ~~and restaurant~~during ~~remodels is expected to be provided by cash flow from operations, the sale-leaseback of real estate under financing lease obligations, landlord construction allowances and our revolving credit line~~2008. At ~~May~~August 135, 2007, we ~~had~~were ~~approximately~~contractually ~~$3.7 million~~committed ~~available~~to ~~under~~the ~~our~~purchase ~~$15.0 million~~or ~~revolving~~lease ~~credit~~of ~~line,~~four ~~and $2~~sites.~~5 million~~ ofWe ~~landlord~~anticipate ~~construction~~that ~~allowances~~each ~~committed~~restaurant towill ~~us.~~incur ~~On March 2,~~approximately ~~2007~~$150,000 ~~we received a $10.0 million sale~~in pre-~~leaseback~~opening ~~commitment~~expense ~~for~~prior ~~four~~to ~~new~~its ~~restaurants. Typically~~opening, ~~these~~but ~~have~~should ~~been~~generate ~~the~~annual ~~sources~~operating ofcash ~~funding~~flow ~~for capital expenditures and we expect that they~~of ~~will~~$300,000 ~~remain~~or somore.

In The ~~addition~~estimated cost to ~~expenditures~~complete ~~for~~the ~~new~~four restaurants that we are contractually committed to is approximately $8.8 million as of August 5, ~~our~~2007. ~~other~~Additionally, ~~significant~~we ~~uses~~plan to remodel up to five restaurants per year at an estimated cost of ~~cash~~$200,000 ~~are~~per remodel. Funding for new restaurants and ~~fixed~~restaurant ~~asset~~remodels ~~replacements~~is expected to be provided by cash flow from operations, the sale-leaseback of real estate under financing lease obligations, landlord construction allowances and ~~debt~~our ~~repayment~~revolving credit line. WeAt ~~expect~~August 5, to2007, ~~expend~~we had approximately $2.4 million available under our $15.0 million revolving credit line, and $2.45 million ~~annually~~of onlandlord ~~fixed~~construction ~~asset~~allowances ~~replacement~~committed ~~and~~to us. ~~debt repayment~~Additionally, ~~respectively.~~we Wehad ~~believe that~~available ~~cash~~a ~~flow~~minimum ~~from~~of ~~operations~~$8.7 million ~~will~~under bea ~~sufficient~~sale-leaseback tocommitment ~~fund~~for four ~~these~~restaurants, ~~expenditures~~one ~~and~~of ~~that~~which ~~remaining cash~~was ~~flow~~under ~~from~~construction ~~operations~~at ~~along~~August 5, ~~with~~2007. ~~our~~Typically, ~~other~~these ~~cash~~have been the sources ~~will~~of befunding ~~sufficient~~for tocapital ~~fund~~ expenditures ~~for~~ ~~new~~and ~~restaurants~~we expect that they will remain so.

~~CRITICAL~~ In ~~ACCOUNTING~~addition ~~POLICIES~~to ~~AND~~expenditures ~~ESTIMATES~~for new restaurants, our other significant uses of cash are for fixed asset replacements and debt repayment. We expect to expend approximately $4.0 million and $2.4 million in 2007 on fixed asset replacement and debt repayment, respectively. Expenditures for new restaurants, prior to signing the related contract to purchase or lease, and restaurant remodels are of a more discretionary nature and may be curtailed if cash flow from operations and other financing sources were diminished. While we have not experienced any problems in obtaining funding for new restaurants, in response to reduced operating margins and profitability, we have reduced our growth plans to two restaurants in 2007 and one to two in 2008 so as to match our growth to available cash flow. Based upon the first forty weeks of 2007, cash flow from operations was $7,279,000 (due primarily to depreciation and an increase in accounts payable) which was more than capital expenditures for the period. Accordingly, we believe our Company could operate at an approximate break even for an extended period of time and still generate adequate cash flow from operations to meet required debt repayment and fund necessary fixed asset replacements.

~~Management’s~~ At ~~Discussion~~August 5, ~~and~~2007, ~~Analysis~~we ofwere ~~Operations~~not ~~and~~in ~~Financial~~compliance ~~Condition~~with ~~discusses~~the ~~our~~liabilities to tangible net worth, fixed ~~consolidated~~charge coverage and financial ~~statements~~ratio covenants of our bank loan agreement. We have obtained waivers for the defaults for the period ended August 5, ~~which~~2007, and the covenants have been ~~prepared~~amended inon ~~accordance~~a ~~with~~go ~~accounting~~forward basis. Accordingly, we have ~~principles~~classified ~~generally~~amounts ~~accepted~~due inunder ~~the~~our ~~United~~loan ~~States~~agreement as long-term obligations less amounts appropriately classified as current maturities. ~~The~~However, ~~preparation~~we ofmust ~~these~~improve ~~consolidated~~our ~~financial~~operating results and ~~statements~~cash ~~requires~~flows or take other actions to improve our ~~management~~capitalization to ~~make~~meet ~~estimates~~the ~~and~~loan ~~assumptions~~covenants in the future. There can be no assurance that ~~affect~~we ~~the~~will ~~reported amounts~~be ofable ~~assets~~to ~~and~~improve ~~liabilities~~our operating results and ~~the~~cash flows ~~disclosure~~or ofimprove ~~contingent~~our ~~assets~~capitalization ~~and~~(e.g., ~~liabilities~~from atproceeds from the ~~date~~ sale of ~~the~~equity, ~~consolidated~~convertible ~~financial~~debt, or ~~statements~~debt ~~and~~securities, ~~the~~new ~~reported~~bank ~~amounts~~or institutional loans, the sale of ~~revenues~~restaurants ~~and~~to ~~expenses~~franchisees or ~~during~~other ~~the~~third ~~reporting~~parties, ~~period~~or other transactions). OnAny anfailure ~~ongoing~~to ~~basis,~~comply ~~our~~with ~~management~~the ~~evaluates~~loan ~~its~~covenants ~~estimates~~in ~~and~~the ~~judgments.~~future Wecould ~~believe~~result ~~that~~in an event of ~~our~~default ~~significant~~under ~~accounting~~the ~~policies~~borrowing agreements, in which case the lenders ~~following~~could ~~may~~elect ~~involve~~to adeclare ~~higher~~all ~~degree~~amounts ~~of judgment~~outstanding thereunder to be due and ~~complexity~~payable, which could have a material adverse effect on the Company’s financial condition.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Operations and Financial Condition discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, our management evaluates its estimates and judgments. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and complexity.

Same-Store Sales

Our Company discloses certain information regarding the performance of certain restaurants in operation at least 18 consecutive months in our management’s discussion and analysis. We exclude restaurants from this calculation that do not meet this definition. In addition, restaurants are excluded when unusual events or circumstances outside our control significantly change the business of the restaurant.

Asset Impairment

Annually or more frequently, if events or circumstances change, we review each restaurant to ascertain whether property and equipment and intangibles have been impaired based on the sum of expected future undiscounted cash flows from operating activities. If the estimated net cash flows are less than the carrying amount of such assets, we will recognize an impairment loss in an amount necessary to write down the assets to a fair value as determined from expected future discounted cash flow. Testing for impairment of long-lived assets requires significant management judgement regarding future cash flows, asset lives and discount rates. Changes in estimates could result in future impairment charges.

Self-Insurance Reserves

We self fund our health insurance and worker’s compensation insurance for the State of Ohio. Both programs include stop loss coverage, which limits our loss exposure to maximum amounts for any single claim. Additionally, both programs are administered by independent third-party administrators. At the end of each reporting period, we adjust the reserves for future claims based upon either reserves established by the administrator or the history and timing of claim payments.

Income Taxes and Deferred Tax Asset

We For ~~have~~the ~~accounted~~first ~~for~~40 weeks ~~income~~of ~~taxes~~2007, inwe ~~accordance~~reported ~~with~~a ~~SFAS~~tax ~~No. 109~~credit of $1,321,000, ~~“Accounting~~which ~~for~~reflects ~~Income~~the tax ~~Taxes.”~~benefit Inof ~~doing~~the ~~so,~~reported weloss ~~have~~before ~~recorded~~income ataxes ~~deferred~~and the FICA tax ~~asset~~on intips ~~excess~~credit of approximately $11880,000. For 2006,~~000~~ ~~(included~~we ~~in other~~recorded ~~assets).~~a ~~The~~tax ~~major~~credit ~~components~~of $1,168,000 which reflected the tax benefit of the reported ~~deferred~~loss ~~tax~~before ~~asset~~income ~~are~~taxes and the FICA tax ~~effect~~on tips credit of ~~expensing~~approximately ~~rent~~$715,000. ~~and~~Fluctuations ~~depreciation~~in ~~for~~pre-tax ~~financial~~income ~~reporting~~or ~~purposes~~a inpre-tax ~~excess~~loss ofmay ~~that~~cause ~~expensed~~our ~~for~~effective tax ~~purposes~~rate ~~and the~~or ~~FICA~~ tax oncredits recorded ~~tips~~to ~~credit.~~vary ~~Annually,~~from wequarter ~~assess~~to ~~the~~quarter. ~~realization~~Included ofin the total net deferred tax ~~assets~~asset ~~based~~balance of ~~upon~~$13,068,000 ~~recent~~at ~~trends~~August 5, in2007 ~~income~~is $5,150,000 ~~income~~related ~~projections~~to ~~for~~FICA ~~future~~tax ~~years,~~on ~~projected~~tips ~~book/tax~~credits ~~differences~~that begin expiring in ~~the~~2023. ~~items~~The ~~comprising~~Company ~~our~~has ~~deferred~~considered ~~tax~~all ~~assets~~available ~~and~~evidence, ~~the~~including expected future ~~expiration~~taxable income ~~dates~~and ofongoing ~~tax~~prudent ~~credits. Based~~and ~~upon~~feasible ~~our~~tax ~~most~~planning ~~recent assessment~~strategies, atin ~~May 13,~~assessing ~~2007,~~the aneed for a valuation in allowance. ~~against~~Due ~~deferred tax~~to ~~assets~~changes isin ~~not~~facts ~~considered~~and ~~necessary~~circumstances ~~because~~and itthe issignificant ~~not~~management judgments ~~more~~and ~~likely~~estimates ~~than~~involved ~~not~~in ~~that~~determining the ~~deferred~~proper ~~tax~~valuation allowance, differences ~~asset~~between ~~will~~actual ~~not~~future beevents ~~fully~~and ~~realized~~prior judgments and estimates could result in adjustments. Decreases in the expected future taxable income of the Company may trigger adjustments in future

INFLATION

We believe the effects of inflation have not had a material impact on our results of operations.

periods. In the event the Company were to determine it is more likely than not that it will not fully recognize deferred tax assets, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

INFLATION

We believe the effects of inflation have not had a material impact on our results of operations.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words “plan,” “anticipate,” “believe,” “expect,” “estimate,” and “project” and similar words and expressions identify forward-looking statements which speak only as of the date hereof. Forward-looking statements in this MD&A include statements regarding the belief that franchising is a key element of our growth (paragraph 1), regarding the amount of additional franchise royalties from new franchised locations (paragraphs 1 and 1415), expectations regarding our average cash investment in new restaurants (paragraph 2), the expectations that new restaurants will be leased (paragraph 2), annual sales at new Company-owned locations (paragraph 2), the belief that rising costs of healthcare will continue to be a challenge (paragraph 5), the ~~anticipated~~expectation ~~increase~~that inannual ~~our~~debt service ~~growth~~and ~~rate~~replacement ascapital aexpenditures ~~result~~will oftotal ~~our~~$6.4 million ~~debt restructuring~~ (paragraph 7), the ~~expectation~~belief that we ~~annual~~have ~~debt~~adequate ~~service~~funding ~~and~~to ~~replacement~~meet our capital ~~expenditures~~needs ~~will~~through 2008 (paragraph 7), the belief that our ~~total~~corporate restructuring will save $61.45 million and that we will return to profitability (paragraph 7 8), the belief that remodeling of restaurants to the new prototype look is key to improving same-store sales (paragraph 1112), the belief that our customer count decline was primarily the result of problems affecting consumer spending and the casual dining industry, such as gas prices, utility costs, interest rates, and the overall economy (paragraph 1213), the belief that some portion of our customer count and same-store sales decline was a result of reduced television advertising (paragraph 1213), the belief that television advertising was not cost effective (paragraph 1213), the expectation of future restaurant openings (paragraph 1314 and 2730), the expectation of increased franchise fees and royalties and the opening of franchised restaurants (paragraph 1415), the anticipated decline in interest expense ~~subsequent~~as towe reduce the ~~second~~outstanding ~~quarter~~balance of ~~2007~~our term loan (paragraph 2225), the belief that we have appropriately estimated the effect of the FICA tax on tips ~~credit~~ credit (paragraph 2427), the estimated cost to complete restaurants currently under contract (paragraph 2831), the planned remodeling of up to five restaurants per year (paragraph 2831), the source of funds for new restaurants and restaurant remodels (paragraph 2831), the expectation that we will expend $4.0 million and $2.4 million on fixed asset replacements and debt service, respectively (paragraph 2932), the belief that ~~cash~~we ~~flow~~could ~~from~~operate ~~operations~~at ~~and~~a ~~our~~break-even ~~other~~and still generate cash ~~sources~~flow ~~will~~from beoperations sufficient to meet our cash needs (paragraph 2932), the belief that we will realize the full value of our deferred tax asset (paragraph 3437) and the belief that inflation had no material impact on our results of operations (paragraph 3538).

Investors are cautioned that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated results due to many factors, including, but not limited to, our ability to open or franchise new restaurants as planned, changes in competition in markets where we operate restaurants, the availability of restaurant workers, our ability to control administrative expenses, changes in interest rates, changes in cash flows from operations, the availability of real estate for purchase or lease, and other risks, uncertainties and factors described in our most recent Annual Report on Form 10-K and other filings from time to time with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements.

Item 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our Company’s primary market risk results from fluctuations in interest rates. We are exposed to interest rate risk through borrowings under our revolving credit agreement, which permits borrowings up to $2524.48 million. At ~~May~~August 135, 2007, there was approximately $2122.74 million ~~outstanding~~ outstanding under the agreement. A one-percentage point increase in interest rates would increase ~~annual~~ annual interest expense by approximately $~~217~~224,000 annually.

We purchase certain products in the normal course of business, which are affected by commodity prices. These products may include food items such as ground beef, steak, chicken, produce, cheese, and shrimp, or commodities such as natural gas and electricity. We are exposed to market price volatility on these items. We do not utilize financial instruments to hedge our risk associated with these commodities. In an effort to minimize price volatility, we may enter into purchasing contracts for periods of time of a year or less at fixed prices or with floor and ceiling prices. Approximately 80% of all food items purchased for our restaurants are purchased under some type of contract that attempts to minimize price volatility. Prolonged price increases could impact our profitability, but would allow sufficient time to seek alternative suppliers or to increase selling prices, if possible.

Item 4 — CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, our management, with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Exchange Act. Based upon this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were (1) designed to ensure that material information relating to our company is accumulated and made known to our management, including our chief executive officer and ~~chief financial officer, in a timely manner, particularly~~ during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and

nochief ~~evaluation~~financial ofofficer, ~~controls~~in ~~can~~a timely manner, particularly during the period in which this report was being prepared and (2) effective, in that they provide ~~absolute~~reasonable assurance that ~~all~~information ~~control~~we ~~issues~~are ~~and~~required ~~instances of~~to ~~fraud,~~disclose ifin ~~any~~the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within athe ~~company~~time ~~have~~periods ~~been~~specified ~~detected~~in the SEC’s rules and forms.

~~Internal~~ Management ~~Controls.~~believes, ~~There~~however, ~~has~~that ~~been~~a nocontrols ~~change~~system, inno ~~our~~matter ~~internal~~how ~~control~~well ~~over~~designed ~~financial reporting~~and ~~(as~~operated, ~~defined~~cannot inprovide ~~Rules 13a-15(f)~~absolute ~~and~~assurance ~~15d-15(f)~~that ~~promulgated~~the ~~under~~objectives of the ~~Exchange~~controls ~~Act)~~system ~~during~~are ~~our~~met, ~~fiscal~~and ~~quarter~~no ~~ended~~evaluation ~~May 13,~~of ~~2007~~controls ~~that~~can ~~has~~provide ~~materially~~absolute ~~affected,~~assurance orthat isall ~~reasonably~~control ~~likely~~issues toand ~~materially~~instances of ~~affect~~fraud, ~~our~~if ~~internal~~any, ~~control~~within ~~over~~a ~~financial~~company ~~reporting~~have been detected.

Internal Controls. There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ended August 5, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1 — LEGAL PROCEEDINGS

In March 2007, a class action complaint was filed against us in the United States District Court for the Western District of Pennsylvania, alleging violations of The Fair Credit Reporting Act (or “the Act”). The Act provides in part that expiration dates may not be printed on credit or debit card receipts given to customers. The Act imposes significant penalties upon violators of these rules and regulations where the violation is deemed to have been willful. Otherwise, damages are limited to actual losses incurred by the card holder and attorneys fees. The Company does not believe that it has any liability for the violations alleged in the complaint and will vigorously contest these allegations. We do not believe the outcome will have a material adverse effect on our results of operations or financial condition.

Item 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its Annual Meeting of Stockholders on March 13, 2007 for the purpose of (i) electing two class III directors for three-year terms expiring in 2010 or until their successors are duly elected and qualified, (ii) approving the 2007 Stock Incentive Plan and (iii) ratifying Deloitte & Touche LLP as the Company’s independent public accountants for the 2007 fiscal year. A total of 2,377,285 shares were represented in person or by proxy at the Annual Meeting. The number of shares that were voted for, and that were withheld from, each of the director nominees is as follows:

Director Nominee	For		Withheld
Todd B. Barnum		2,253,421		123,802
Jay B. Barney		2,259,314		117,909

Thus, Messrs. Barnum and Barney were duly elected Class III directors to serve for three-year terms expiring in 2010 or until their successors are duly elected and qualified. The terms of Class I directors William C. Niegsch, Jr. and Curtis A. Loveland and Class II directors Donal H. Malenick, Mark E. Emerson and Michael G. Giulioli continued after the Annual Meeting.

The 2007 Stock Incentive Plan was approved and adopted by a vote of 1,111,758 shares for, 175,337 against and 16,200 shares abstained with 696,040 broker non-votes.

Additionally, Deloitte & Touche LLP was ratified as the Company’s independent public accountants for the 2007 fiscal year by a vote of 1,993,829 shares for, 14,402 against and 1,104 shares abstained.

Item 6 — EXHIBITS

Exhibit 3 31.1* — ~~Amended~~Rule 13a-14(a) ~~and~~Certification ~~Restated~~of ~~Bylaws,~~Principal ~~effective~~Executive ~~March~~Officer Exhibit 31.2* ~~16,~~— ~~2007~~ Rule 13a-14(~~Reference~~a) isCertification ~~made~~of toPrincipal Financial Officer Exhibit 32.1+ 3— onSection 1350 ~~Report~~Certification onof ~~Form~~Principal ~~8-K~~Executive ~~filed~~Officer Exhibit 32.2+ on— ~~March 21,~~Section 1350 ~~2007)~~Certification of Principal Financial Officer

Exhibit 10.1* — Form of Stock Option Agreement under 2007 Stock Incentive Plan

Exhibit 31.1* — Rule 13a-14(a) Certification of Principal Executive Officer

Exhibit 31.2* — Rule 13a-14(a) Certification of Principal Financial Officer

Exhibit 32.1+ — Section 1350 Certification of Principal Executive Officer

Exhibit 32.2+ — Section 1350 Certification of Principal Financial Officer


*		Filed with this report.
+		Furnished with this report.

1918

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MAX & ERMA’S RESTAURANTS, INC. Registrant /s/ Todd B. Barnum Todd. B. Barnum Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ William C. Niegsch, Jr. William C. Niegsch, Jr. Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

~~June 20~~September 19, 2007 Date

2019

EXHIBIT INDEX

Exhibit No.	Exhibit	Page No.
3	Amended and Restated Bylaws, effective March 16, 2007 (reference is made to Exhibit 3 of Report on Form 8-K filed on March 21, 2007)	N/A
31.1*	Rule 13a-14(a) Certification of Principal Executive Officer	Page
10.1*	Form of Stock Option Agreement under 2007 Stock Incentive Plan	Page 22
31.2*	Rule 13a-14(a) Certification of Principal Financial Officer	Page
31.1*	Rule 13a-14(a) Certification of Principal Executive Officer	Page 24
32.1+	Section 1350 Certification of Principal Executive Officer	Page
31.2*	Rule 13a-14(a) Certification of Principal Financial Officer	Page 26
32.2+	Section 1350 Certification of Principal Financial Officer	Page
32.1+	Section 1350 Certification of Principal Executive Officer	Page 28
32.2+	Section 1350 Certification of Principal Financial Officer	Page 29


*		Filed with this report.

+		Furnished with this report.

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Filing Compare · MAX & ERMAS RESTAURANTS INC