SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2006
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

(Mark One)

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

For the quarterly period ended April 1, 2007

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-13579

FRIENDLY ICE CREAM CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Massachusetts		04-2053130
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)

1855 Boston Road
Wilbraham, Massachusetts		01095
(Address of Principal Executive Offices)		(Zip Code)

(413) 731-4000

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x ý 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.

Large Accelerated Filer o Accelerated Filer ýx Non-Accelerated Filer o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Class		Outstanding at April 2830, ~~2006~~2007
Common Stock, $.01 par value		78,~~902~~162,~~298~~232 shares

PART I –— FINANCIAL INFORMATION

Item 1. Financial Statements

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)

(Unaudited)

	April 1,			December 31,
	2007			2006

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	21,860		$	25,077
Restricted cash	380			517
Accounts receivable, net	12,264			11,435
Inventories	15,967			17,059
Assets held for sale	896			896
Prepaid expenses and other current assets	3,375			3,127
TOTAL CURRENT ASSETS	54,742			58,111
DEFERRED INCOME TAXES	928			928
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization	133,997			137,425
INTANGIBLE ASSETS AND DEFERRED COSTS, net of accumulated amortization	17,350			17,783
OTHER ASSETS	5,889			5,920
TOTAL ASSETS	$	212,906		$	220,167

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt	$	1,592		$	1,563
Current maturities of capital lease and finance obligations	1,583			1,541
Accounts payable	20,532			22,247
Accrued salaries and benefits	9,394			8,230
Accrued interest payable	4,825			1,173
Insurance reserves	12,514			11,462
Other accrued expenses	16,296			22,475
TOTAL CURRENT LIABILITIES	66,736			68,691
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities	4,270			4,682
LONG-TERM DEBT, less current maturities	222,236			222,650
LIABILITY FOR PENSION BENEFITS	20,639			20,302
OTHER LONG-TERM LIABILITIES	31,845			30,738
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT:
Common stock	82			81
Additional paid-in capital	146,647			146,398
Accumulated other comprehensive loss	(23,514		)	(23,514		)
Accumulated deficit	(256,035		)	(249,861		)
TOTAL STOCKHOLDERS’ DEFICIT	(132,820		)	(126,896		)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	212,906		$	220,167

(In thousands)

	April 2, 2006			January 1, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	19,771		$	14,597
Restricted cash	1,927			2,549
Accounts receivable, net	11,788			10,757
Inventories	15,974			15,775
Assets held for sale	1,554			1,628
Prepaid expenses and other current assets	4,740			5,044
TOTAL CURRENT ASSETS	55,754			50,350
DEFERRED INCOME TAXES	—			—
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization	137,631			142,819
INTANGIBLE ASSETS AND DEFERRED COSTS, net of accumulated amortization	18,781			19,063
OTHER ASSETS	5,465			6,010
TOTAL ASSETS	$	217,631		$	218,242
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt	$	1,490		$	1,426
Current maturities of capital lease and finance obligations	1,392			1,419
Accounts payable	22,171			24,968
Accrued salaries and benefits	9,778			8,212
Accrued interest payable	4,850			1,324
Insurance reserves	9,949			9,002
Restructuring reserves	—			72
Other accrued expenses	18,518			19,866
TOTAL CURRENT LIABILITIES	68,148			66,289
CAPITAL LEASE AND FINANCE OBLIGATIONS, less current maturities	5,810			6,173
LONG-TERM DEBT, less current maturities	224,491			224,894
ACCRUED PENSION COST	29,374			28,904
OTHER LONG-TERM LIABILITIES	33,368			33,820
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT:
Common stock	79			79
Additional paid-in capital	144,773			144,675
Accumulated other comprehensive loss	(31,785		)	(31,785		)
Accumulated deficit	(256,627		)	(254,807		)
TOTAL STOCKHOLDERS’ DEFICIT	(143,560		)	(141,838		)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	217,631		$	218,242

The accompanying notes are an integral part of these condensed consolidated financial statements.

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data)

(Unaudited)

	For the Three Months Ended
	April 1,			April 2,
	2007			2006

REVENUES:
Restaurant	$	93,187		$	95,276
Foodservice	25,944			26,894
Franchise	3,495			3,545
TOTAL REVENUES	122,626			125,715

COSTS AND EXPENSES:
Cost of sales	47,103			48,385
Labor and benefits	34,397			36,012
Operating expenses	25,012			23,999
General and administrative expenses	10,633			11,097
Write-downs of property and equipment	206			215
Depreciation and amortization	6,160			5,780
Gain on franchise sales of restaurant operations and properties	—			(866		)
Loss on disposals of other property and equipment, net	35			109


OPERATING (LOSS) INCOME	(920		)	984

Interest expense, net	4,924			5,420

LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES	(5,844		)	(4,436		)

Provision for income taxes	(94		)	—

LOSS FROM CONTINUING OPERATIONS	(5,938		)	(4,436		)

(LOSS) INCOME FROM DISCONTINUED OPERATIONS, net of income tax effect of $0 and $0 for the three months ended April 1, 2007 and April 2, 2006, respectively	(14		)	2,616

NET LOSS	$	(5,952	)	$	(1,820	)

BASIC AND DILUTED NET LOSS PER SHARE:
Loss from continuing operations	$	(0.73	)	$	(0.56	)
(Loss) income from discontinued operations	(0.00		)	0.33
Net loss	$	(0.73	)	$	(0.23	)

WEIGHTED AVERAGE SHARES:
Basic and Diluted	8,122			7,901

(In thousands, except per share data)

	For the Three Months Ended
	April 2, 2006			April 3, 2005
REVENUES:
Restaurant	$	95,276		$	93,107
Foodservice	26,894			25,306
Franchise	3,545			3,250
TOTAL REVENUES	125,715			121,663
COSTS AND EXPENSES:
Cost of sales	48,385			46,889
Labor and benefits	36,012			35,084
Operating expenses	23,999			23,401
General and administrative expenses	11,097			9,449
Write-downs of property and equipment	215			—
Depreciation and amortization	5,780			6,151
Gain on franchise sales of restaurant operations and properties	(866		)	(1,309		)
Loss on disposals of other property and equipment, net	109			69
OPERATING INCOME	984			1,929
Interest expense, net	5,420			5,286
LOSS FROM CONTINUING OPERATIONS BEFORE BENEFIT FROM INCOME TAXES	(4,436		)	(3,357		)
Benefit from income taxes	—			739
LOSS FROM CONTINUING OPERATIONS	(4,436		)	(2,618		)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of income tax effect of $0 and $255 for the three months ended April 2, 2006 and April 3, 2005, respectively	2,616			(368		)
NET LOSS	$	(1,820	)	$	(2,986	)
BASIC AND DILUTED NET LOSS PER SHARE:
Loss from continuing operations	$	(0.56	)	$	(0.34	)
Income (loss) from discontinued operations	0.33			(0.05		)
Net loss	$	(0.23	)	$	(0.39	)
WEIGHTED AVERAGE BASIC AND DILUTED SHARES	7,901			7,717

The accompanying notes are an integral part of these condensed consolidated financial statements.

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)

(Unaudited)

	For the Three Months Ended
	April 1,			April 2,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,952	)	$	(1,820	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock compensation expense	214			79
Depreciation and amortization	6,160			5,780
Non-cash income from discontinued operations	—			(2,864		)
Write-downs of property and equipment	206			215
Loss (gain) on disposals of property and equipment, net	35			(772		)
Changes in operating assets and liabilities:
Accounts receivable	(829		)	(1,031		)
Inventories	1,092			(199		)
Other assets	(80		)	1,471
Accounts payable	(1,715		)	(2,797		)
Accrued expenses and other long-term liabilities	910			4,637
NET CASH PROVIDED BY OPERATING ACTIVITIES	41			2,699

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(2,530		)	(2,404		)
Proceeds from sales of property and equipment	—			5,794
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES	(2,530		)	3,390

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under revolving credit facility	—			8,000
Repayments of debt	(385		)	(8,338		)
Payments of deferred financing costs	(9		)	(205		)
Repayments of capital lease and finance obligations	(370		)	(391		)
Stock options exercised	36			19
NET CASH USED IN FINANCING ACTIVITIES	(728		)	(915		)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(3,217		)	5,174

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	25,077			14,597

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	21,860		$	19,771

SUPPLEMENTAL DISCLOSURES:
Cash paid (refunded) during the period for:
Interest	$	1,269		$	1,528
Income taxes	232			(503		)

(In thousands)

	For the Three Months Ended
	April 2, 2006			April 3, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,820	)	$	(2,986	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock compensation expense	79			—
Depreciation and amortization	5,780			6,151
Non-cash (income) loss from discontinued operations	(2,864		)	174
Write-downs of property and equipment	215			—
Deferred income tax benefit	—			(995		)
Gain on disposals of other property and equipment, net	(772		)	(1,244		)
Changes in operating assets and liabilities:
Accounts receivable	(1,031		)	(1,958		)
Inventories	(199		)	1,679
Other assets	1,471			92
Accounts payable	(2,797		)	(222		)
Accrued expenses and other long-term liabilities	4,637			2,555
NET CASH PROVIDED BY OPERATING ACTIVITIES	2,699			3,246
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(2,404		)	(2,408		)
Proceeds from sales of property and equipment	5,794			1,706
Purchases of marketable securities	—			(183		)
Proceeds from sales of marketable securities	—			42
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	3,390			(843		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility	8,000			15,250
Repayments of debt	(8,338		)	(19,656		)
Payments related to deferred financing costs	(205		)	(11		)
Repayments of capital lease and finance obligations	(391		)	(377		)
Stock options exercised	19			136
NET CASH USED IN FINANCING ACTIVITIES	(915		)	(4,658		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	5,174			(2,255		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	14,597			13,405
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	19,771		$	11,150
SUPPLEMENTAL DISCLOSURES:
Cash paid (refunded) during the period for:
Interest	$	1,528		$	1,755
Income taxes	(503		)	(5		)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. NATURE OF OPERATIONS

As of April 21, ~~2006~~2007, Friendly’s operated ~~312~~317 full-service restaurants and franchised ~~207~~ 198 full-service restaurants and seven non-traditional units. The Company manufactures and distributes a full line of premium ice cream dessert products. These products are distributed to Friendly’s restaurants, supermarkets and other retail locations in 1312 states. The restaurants offer a wide variety of breakfast, lunch and dinner menu items as well as premium ice cream dessert products.

References herein to “Friendly’s” or the “Company” refer to Friendly Ice Cream Corporation, its predecessor and its consolidated subsidiaries; references herein to “FICC” refer to Friendly Ice Cream Corporation and not its subsidiaries; and as used herein, “Northeast” refers to the Company’s core markets, which include Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont.

Following is a summary of ~~the~~ Company-operated and franchised units:

	For the Three Months Ended
	April 2, 2006		April 3, 2005
	April 1,		April 2,
	2007		2006
Company Units:
Beginning of period	~~314~~316		~~347~~314
Openings	1		—1
Refranchised closings	(1	)	(7	)
Acquired from franchisees	1		—
Closings	(2	)	(3	)
Acquired by franchisees	—		(1	)
End of period	312		337
Closings	(1	)	(2	)
End of period	317		312
Franchised Units:
Beginning of period	~~213~~205		~~195~~213
Refranchised openings	1		7
Openings	1		—
Closings	—		(1	)
Acquired by franchisees	—		1
End of period	214		201
Acquired from franchisees	(1	)	—
Closings	—		—
End of period	205		214

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Information –

The accompanying condensed consolidated financial statements as of April 2, 2006 and for the three months ended April 2, 2006 and April 3, 2005 are unaudited, but have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations, cash flows and comprehensive loss of Friendly Ice Cream Corporation (“FICC”) and subsidiaries (unless the context indicates otherwise, collectively, the “Company”) have been included. Such adjustments consist solely of normal recurring accruals. Operating results for the three month periods ended April 2, 2006 and April 3, 2005 are not necessarily indicative of the results that may be expected for the entire year due, in part, to the seasonality of the Company’s business. Historically, higher revenues and operating income have been experienced during the second and third fiscal quarters. The Company’s consolidated financial statements, including the notes thereto, which are contained in the 2005 Annual Report on Form 10-K for the fiscal year ended January 1, 2006 (“2005 Annual Report on Form 10-K”) should be read in conjunction with these condensed, consolidated financial statements. Capitalized terms not otherwise defined herein should be referenced to the 2005 Annual Report on Form 10-K.

~~Use~~2. ofBASIS ~~Estimates~~OF PRESENTATION inAND ~~the~~SIGNIFICANT ~~Preparation~~ACCOUNTING ~~of Financial Statements -~~POLICIES

~~The preparation of financial statements in conformity with~~Interim ~~accounting~~Financial ~~principles~~Information generally accepted in the United States requires 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The critical accounting policies and most significant estimates and assumptions relate to revenue recognition, insurance reserves, recoverability of accounts receivable, pension and post-retirement medical and life insurance benefits expense, asset impairment analysis, stock compensation expense and income tax valuation allowances and tax contingency reserves. Actual amounts could differ significantly from the estimates.—

~~Inventories~~The accompanying condensed consolidated financial statements as of April 1, 2007 and for the three months ended April 1, 2007 and April 2, 2006 are unaudited, but have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments which are necessary for a fair presentation of the consolidated financial position, results of operations, cash flows and comprehensive loss of the Company have been included. Such adjustments consist solely of normal recurring accruals. Operating results for the three month periods ended April 1, 2007 and April 2, 2006 are not necessarily indicative of the results that may be expected for the entire year due, in part, to the seasonality of the Company’s business. Historically, higher revenues and operating income have been experienced during the second and third fiscal quarters. The Company’s consolidated financial statements, including the notes thereto, which are contained in the 2006 Annual Report on Form 10-K for the fiscal year ended December 31, 2006 as amended (“2006 Annual Report on Form 10-K/A”) should be read in conjunction with these condensed, consolidated financial statements. Capitalized terms not otherwise defined herein should be referenced to the 2006 Annual Report on Form 10-K/A.

~~Inventories are~~Use ~~stated at the lower~~ of Estimates ~~first-~~in, ~~first-out~~the ~~cost~~Preparation ~~or market and consisted~~ of ~~the~~ ~~following~~Financial atStatements ~~April 2, 2006 and January 1, 2006 (in thousands):~~—

	April 2, 2006		January 1, 2006
Raw materials	$	1,015	$	1,657
Goods in process	190		106
Finished goods	14,769		14,012
Total	$	15,974	$	15,775

The preparation of financial statements in conformity with GAAP requires 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The critical accounting policies and most significant estimates and assumptions relate to revenue recognition, insurance reserves, recoverability of accounts receivable and notes receivable, pension and post-retirement medical and life insurance benefits expense, asset impairment analysis, income tax valuation allowances and tax contingency reserves. Actual amounts could differ significantly from the estimates.

~~Other~~Inventories ~~Accrued Expenses-~~—

~~Other~~Inventories ~~accrued~~are ~~expenses~~stated ~~consisted~~at the lower of first-in, first-out cost or market and consisted of the following at April 2 1, ~~2006~~2007 and ~~January~~December 131, 2006 (in thousands):

	April 2, 2006		January 1, 2006
	April 1,		December 31,
Accrued rent	$	4,615	$	4,739
	2007		2006
Gift cards outstanding	2,858		4,280
Raw materials	$	1,654	$	1,640
Accrued meals and other taxes	2,474		2,219
Goods in process	100		158
Income taxes payable	2,034		2,761
Finished goods	14,213		15,261
Unearned revenues	1,179		1,205
Total	$	15,967	$	17,059
Accrued bonus	1,106		58
Accrued advertising	1,063		1,211
Current portion of deferred gains	638		638
Accrued construction costs	578		1,335
All other	1,973		1,420
Total	$	18,518	$	19,866

~~Income~~Other ~~Taxes~~Accrued -Expenses —

~~The Company~~Other ~~accounts~~accrued ~~for income taxes in accordance with Statement of Financial~~expenses ~~Accounting~~consisted ~~Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” which requires recognition~~ of ~~deferred tax assets and liabilities for~~ the ~~expected future~~following ~~tax~~at ~~consequences~~April of events that have been included in the financial statements or tax returns. The Company records deferred tax assets to the extent it believes there will be sufficient future taxable income to utilize those assets prior to their expiration. To the extent deferred tax assets may be unable to be utilized1, ~~the~~2007 ~~Company records a valuation allowance against the potentially unrealizable amount~~ and ~~records~~December a31, ~~charge~~2006 ~~against earnings. The calculation of the Company’s tax liabilities involves uncertainties~~ (in ~~the~~ application of complex tax regulations in several different tax jurisdictions. The Company is periodically reviewed by tax authorities. These reviews include questions regarding the timing and amount of deductions. In evaluating the exposure associated with various filing positions, the Company records estimated reserves for probable exposures.thousands):

Due to ever-changing tax laws and income tax rates, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future. The Company must also make estimates about the sufficiency of taxable income in future periods to offset any deductions related to deferred tax assets currently recorded. Accordingly, the Company believes estimates related to income taxes are critical.

	April 1,		December 31,
	2007		2006

Accrued rent	$	4,992	$	5,178
Gift cards outstanding	2,915		4,317
Accrued meals and other taxes	2,443		2,241
Unearned revenues	1,147		1,153
Accrued advertising	916		1,150
Accrued construction costs	780		918
Accrued bonus	752		3,635
Current portion of deferred gains	638		638
Income taxes payable	467		1,962
All other	1,246		1,283
Total	$	16,296	$	22,475

~~During~~Income ~~the~~Taxes fourth quarter of 2005, the Company entered a three-year cumulative loss position and revised its projections of the amount and timing of profitability in future periods. As a result, the Company increased the valuation allowance during the fourth quarter of 2005 by approximately $26.7 million ($22.2 million to income tax expense and $4.5 million to stockholders’ deficit) to reduce the carrying value of deferred tax assets to zero. The Company expects to record a full valuation allowance on tax benefits until it can sustain an appropriate level of profitability.—

~~Lease~~The ~~Guarantees~~Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax assets and ~~Contingencies~~liabilities –for the expected future tax consequences of events that have been included in the financial statements or tax returns. The Company records deferred tax assets to the extent it believes there will be sufficient future taxable income to utilize those assets prior to their expiration. To the extent deferred tax assets may be unable to be utilized, the Company records a valuation allowance against the potentially unrealizable amount and records a charge against earnings. The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in several different tax jurisdictions. The Company is periodically reviewed by tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions. In evaluating the exposure associated with various filing positions, the Company records estimated reserves for probable exposures.

~~Primarily~~As ~~as a result~~ of ~~the~~December ~~Company’s re-franchising efforts~~31, 2006 the Company ~~remains~~remained ~~liable~~in ~~for certain~~a ~~lease~~three-year ~~assignments~~cumulative ~~and~~loss ~~guarantees.~~position ~~These~~and ~~leases~~expected ~~have varying terms, the~~to ~~latest~~record ofvaluation ~~which~~allowances ~~expires~~on infuture ~~2020.~~tax Asbenefits ofuntil ~~April~~it 2,can ~~2006,~~sustain ~~the~~an appropriate ~~potential~~level ~~amount~~ of ~~undiscounted~~ ~~payments~~profitability. However, the Company ~~could~~incurred ~~be required to make in the event of~~approximately ~~non-payment by the primary lessees was~~ $71,~~896~~093,~~500.~~000 ~~The present value~~ of ~~these potential~~federal ~~payments discounted at the Company’s pre-~~tax ~~cost~~liabilities offor ~~debt~~2005 atand ~~April 2,~~ 2006 ~~was~~combined. Approximately $5928,~~982,400.~~000 ~~The~~of ~~Company~~the ~~generally~~$1,093,000 ~~has~~would ~~cross-default~~be ~~provisions~~available ~~with franchisees~~for ~~that~~refund ~~would~~if ~~put~~2007 ~~them~~results in ~~default~~a loss offor ~~their~~income ~~franchise~~tax ~~agreement~~purposes. inAs ~~the event~~a ofresult, ~~non-payment under~~ the ~~lease.~~valuation ~~The~~allowances ~~Company~~as ~~believes these cross-default~~of ~~provisions~~December ~~significantly~~31, ~~reduce~~2006 ~~the~~of ~~risk~~$27,429,000 ~~that~~reduced the ~~Company~~carrying ~~will~~value beof ~~required~~net todeferred tax ~~make~~assets ~~payments~~to ~~under these leases and~~$928,000. ~~historically,~~Should the Company’s ~~has~~future ~~not~~profitability ~~been~~provide ~~required~~sufficient toevidence, ~~make~~in ~~such~~accordance ~~payments.~~with ~~However,~~SFAS asNo. ~~of April 2~~109, ~~2006,~~to support the ~~Company believes~~ultimate ~~that~~realization ~~one~~of ~~franchisee~~income ~~may~~tax bebenefits ~~unable~~attributable to ~~fulfill~~net ~~its~~operating ~~lease~~loss ~~obligations during 2006.~~(“NOL”) ~~Under~~and ~~the~~credit ~~terms~~carryforwards ofand ~~the~~other ~~assignment~~deductible oftemporary ~~the leases to this franchisee~~differences, ~~the Company~~a ~~has~~reduction ~~the~~in ~~right to recover possession of~~ the ~~premises~~valuation ~~before~~allowance ~~lease~~may ~~default.~~be ~~The Company~~recorded ~~believes~~and ~~that it has~~ the ~~management~~carrying ~~resources~~value ~~to assume operation~~ of ~~the~~deferred ~~restaurants~~tax ifassets itmay ~~were~~be ~~to take back possession of this franchisee’s locations. Accordingly~~restored, noresulting ~~liability~~in ~~has~~a ~~been~~non-cash ~~recorded~~credit ~~for exposure under such~~to ~~leases at April 2, 2006 and January 1, 2006~~earnings.

Net Loss Per Share –

Basic net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents are dilutive stock options and warrants that are assumed exercised for calculation purposes. There were no common stock equivalents included in diluted net loss per share for the three months ended April 2, 2006 and April 3, 2005. The number of common stock options which could dilute basic earnings per share in the future, that were not included in the computation of diluted earnings per share because to do so would have been antidilutive, was 316,000 and 376,000 for the three months ended April 2, 2006 and April 3, 2005, respectively.

~~Stock-Based~~Lease ~~Compensation~~Guarantees –and Contingencies —

~~Prior~~Primarily toas ~~January~~a 2,result ~~2006,~~of the Company’s ~~accounted~~strategy ~~for~~to ~~stock~~sell Company-~~based~~operated ~~compensation~~restaurants ~~for~~to ~~employees~~franchisees, ~~under~~the ~~Accounting~~Company ~~Principles~~remains ~~Board~~liable ~~(“APB”)~~for ~~Opinion~~certain Nolease assignments and guarantees. 25These leases have varying terms, ~~“Accounting~~the latest of which expires in ~~for~~2020. ~~Stock~~As ~~Issued~~of toApril ~~Employees~~1,” ~~and~~2007, ~~related~~the ~~interpretations.~~potential ~~The~~amount ~~Company~~of ~~had~~undiscounted payments the ~~adopted~~Company could be required to make in the ~~disclosure~~event of non-~~only~~payment ~~provisions~~by ofthe ~~SFAS~~primary lessees ~~No.~~was ~~123~~$6,203,000. ~~“Accounting~~The ~~for~~present ~~Stock-Based~~value of these potential payments ~~Compensation”~~discounted ~~and~~at the ~~disclosures~~Company’s ~~required~~pre-tax bycost ~~SFAS~~of ~~No.~~debt ~~148~~at April 1, ~~“Accounting~~2007 ~~for~~was ~~Stock-Based~~$4,699,000. ~~Compensation—Transition~~The ~~and~~Company ~~Disclosure.” In~~generally ~~accordance~~has cross-default provisions with ~~APB~~franchisees that ~~Opinion~~would ~~No.~~put ~~25,~~them ~~no stock-based~~in ~~compensation~~default ~~cost~~of ~~was~~their ~~included~~franchise agreement in ~~net~~the ~~loss~~event ~~for~~of non-payment under the ~~three~~lease. ~~months~~The Company believes these cross-default provisions ~~ended~~significantly ~~April~~reduce 3,the ~~2005~~risk ~~for~~that the Company’s ~~Stock~~will ~~Option~~be ~~Plan~~required orto make payments under these leases and, historically, the Company’s ~~2003 Incentive~~has ~~Plan,~~not asbeen required ~~all~~to ~~options~~make ~~granted~~such ~~during~~payments. ~~that~~Accordingly, ~~period~~no ~~had~~liability anhas ~~exercise~~been ~~price~~recorded for ~~equal~~exposure tounder ~~the~~such ~~market~~leases ~~value~~at ofApril ~~the~~1, ~~stock~~2007 onand ~~the~~December ~~date~~31, ~~of grant~~2006.

OnNet ~~December~~Loss ~~16,~~Per ~~2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), “~~Share~~-Based Payment”~~ (“SFAS No. 123R”). SFAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative.—

OnBasic ~~January~~net 2,loss ~~2006~~per (share is calculated by dividing net loss by the ~~first~~weighted ~~day~~average number of ~~its~~common ~~2006~~shares ~~fiscal~~outstanding ~~year),~~during the ~~Company~~ ~~adopted~~period. ~~SFAS~~Diluted ~~No.~~net ~~123R~~loss ~~using~~per ~~the~~share ~~modified~~is ~~prospective~~calculated ~~method~~by asdividing ~~permitted~~net ~~under~~loss by the ~~SFAS~~weighted ~~No.~~average ~~123R.~~number ~~Under~~of ~~this~~shares ~~transition~~of ~~method,~~common ~~compensation~~stock ~~cost~~and ~~recognized~~common instock equivalents ~~the~~outstanding ~~first~~during ~~quarter~~the ofperiod. ~~fiscal~~Common ~~2006~~stock ~~included:~~equivalents ~~(a) compensation~~are ~~cost~~dilutive ~~for all~~stock ~~share-based~~options ~~payments~~and ~~granted~~warrants ~~prior~~that toare ~~but~~assumed ~~not~~exercised ~~yet~~for ~~vested~~calculation aspurposes. ofThere were ~~January~~no 1,common ~~2006, based~~stock onequivalents ~~the~~included ~~grant-date~~in ~~fair~~diluted ~~value~~net ~~estimated~~loss inper ~~accordance~~share ~~with~~for the ~~provisions~~ ofthree ~~SFAS~~months ~~No.~~ended ~~123~~April 1, 2007 and ~~(b)~~April ~~compensation~~2, ~~cost~~2006. The ~~for~~number ~~all~~of ~~share-based~~common ~~payments~~stock ~~granted~~options which ~~subsequent~~could todilute ~~January~~basic 1,earnings ~~2006,~~per ~~based~~share onin the ~~grant-date~~future, ~~fair~~that ~~value~~were ~~estimated~~not included in ~~accordance with~~ the ~~provisions~~computation of ~~SFAS~~diluted ~~No.~~earnings ~~123R.~~per Inshare ~~accordance~~because ~~with~~to ~~the modified~~do ~~prospective~~so ~~method~~would ofhave ~~adoption~~been antidilutive, ~~the~~was ~~Company’s~~240,000 ~~results~~and of316,000 ~~operations and~~for ~~financial~~the ~~position~~three ~~for~~months ~~prior~~ended ~~periods~~April ~~have~~1, ~~not~~2007 and ~~been~~April ~~restated~~2, 2006, respectively.

Stock-Based Compensation —

Prior to January 2, 2006, the Company accounted for stock-based compensation for employees under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company had adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and the disclosures required by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” In accordance with APB Opinion No. 25, the Company generally recognized no stock-based compensation cost, as all options granted during that period had an exercise price equal to the market value of the stock on the date of grant.

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R supersedes APB Opinion No. 25 and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative.

On January 2, 2006 (the first day of its 2006 fiscal year), the Company adopted SFAS No. 123R using the modified prospective method as permitted under SFAS No. 123R. Under this transition method, compensation cost recognized in the three months ended April 1, 2007 and April 2, 2006 included: (a) compensation cost for all share-based payments granted prior to but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.

3. STOCK BASED COMPENSATION

Equity Compensation Plans - —

The Company currently grants stock awards under the following equity compensation plans:

1997 Stock Option Plan (“1997 Plan”) - The 1997 Plan was adopted by the Company’s Board of Directors and stockholders in November 1997 and was subsequently amended on March 27, 2000 and October 24, 2001. Under the 1997 Plan, the Company’s Board of Directors may grant options to purchase up to 1,034,970 shares of common stock to employees, executive officers and directors. The 1997 Plan provides for the issuance of nonqualified stock options and incentive stock options (which are intended to satisfy the requirements of Section 422 of the Internal Revenue Code) and stock appreciation rights (“SARs”). The Compensation Committee of the Board of Directors determines the employees who will receive awards under the 1997 Plan and the terms of such awards. The exercise price of a stock option or SAR granted ~~shall~~or awarded under the 1997 Plan may not be less than the fair market value of one share of common stock on the date the stock option or SAR is granted.

7The 2003 Equity Incentive Plan (the “2003 Incentive Plan”) - On April 9, 2003, the Board of Directors adopted an equity incentive plan, which was approved by shareholders on May 14, 2003. On May 10, 2006, the shareholders approved an amendment to the 2003 Incentive Plan to increase the number of shares of common stock reserved for issuance under the 2003 Incentive Plan from 307,000 to 607,000 shares. The 2003 Incentive Plan provides for the issuance of nonqualified stock options and incentive stock options (which are intended to satisfy the requirements of Section 422 of the Internal Revenue Code), SARs, bonus stock, stock units, performance shares, performance units, restricted stock and restricted stock units. The Compensation Committee of the Board of Directors determines the employees who will receive awards under the 2003 Incentive Plan and the terms of such awards. The exercise price of a stock option or SAR granted or awarded under the 2003 Incentive Plan may not be less than the fair market value of one share of common stock on the date the stock option or SAR is granted.

~~The~~Key ~~2003~~Executive ~~Long-Term Incentive~~Stock ~~Plan~~Option ~~(the “2003 Incentive Plan”)~~ - On ~~April 9~~January 8, ~~2003~~2007, ~~the~~as ~~Board~~a ofmaterial ~~Directors~~inducement ~~adopted~~to athe ~~long-term~~employment ~~incentive~~of ~~plan~~George ~~(the “2003~~M. ~~Incentive Plan”)~~Condos, ~~subject to approval by~~ the Company’s ~~shareholders.~~President Onand ~~May~~Chief 14Executive Officer, ~~2003,~~ the ~~shareholders~~Company granted ~~approved~~Mr. ~~the~~Condos ~~2003~~stock ~~Incentive~~options ~~Plan,~~to ~~which~~purchase ~~became~~an ~~effective as~~aggregate of ~~March 30~~75,000 ~~2003.~~shares ~~The~~of the ~~2003~~Company’s ~~Incentive~~common ~~Plan~~stock, ~~provides~~at ~~for~~an ~~the~~exercise ~~issuance~~price of ~~nonqualified~~ ~~stock~~$11.80 ~~options~~per ~~and~~share ~~incentive stock options~~ (~~which~~equal ~~are intended~~ to ~~satisfy~~ the ~~requirements~~closing ofprice ~~Section 422~~ of the ~~Internal~~Company’s ~~Revenue~~common ~~Code), SARs, bonus~~ stock, ~~stock~~on ~~units,~~the ~~performance~~American ~~shares,~~Stock ~~performance units, restricted~~Exchange ~~stock~~on ~~and~~the ~~restricted~~date ~~stock~~of ~~units~~grant). These Nostock options ~~more~~were ~~than~~granted ~~307,000~~outside ~~shares~~ of ~~common~~any ~~stock may~~of bethe ~~delivered~~Company’s toequity ~~participants~~incentive and ~~their beneficiaries under the 2003 Incentive~~stock ~~Plan.~~option ~~The~~plans, ~~Compensation~~pursuant ~~Committee~~to ofan ~~the~~exemption ~~Board~~from ofstockholder ~~Directors~~approval ~~determines~~set ~~the~~forth in ~~employees~~Section ~~who~~711 ~~will~~of ~~receive awards under~~ the ~~2003~~American ~~Incentive~~Stock ~~Plan~~Exchange ~~and~~Company ~~the terms of such awards~~Guide. The ~~exercise price of a~~ stock ~~option~~options orvest ~~SAR~~in ~~shall~~three ~~not~~equal ~~be less~~annual ~~than~~installments ~~the~~and ~~fair~~expire ~~market~~five ~~value~~years ofafter ~~one share of common stock on~~ the date ~~the~~of ~~stock option or SAR is granted~~grant.

~~On December~~Options ~~20, 2004, the Company’s Board of Directors approved the vesting of all~~issued ~~outstanding~~pursuant ~~and~~to ~~unvested options for~~ the ~~Company’s~~ 1997 Plan and the 2003 Incentive Plan. ~~This~~generally ~~action~~vest ~~was~~over ~~taken to reduce, or eliminate to the extent~~three ~~permitted~~years, the transition expense related to outstanding stock option awards under SFAS No. 123R. The 259,850 options that were vested included 145,239 options with exercise prices greater than the Company’s closing stock price on the modification date. Under the accounting guidance of APB Opinion No. 25, the accelerated vesting resulted in stock-based compensation cost of $9,400 (net of related income tax benefit of $6,600), which was included in net loss for the year ended January 2, 2005. Additionally, the effect of the accelerated vesting in the Company’s pro-forma disclosure was incremental stock-based compensation of approximately $666,000 (net of related income tax benefit of $463,000). Stock-based compensation expense of $434,000 and ~~$96,000 would otherwise~~ have ~~been recognized~~a infive ~~accordance~~year ~~with~~expiration ~~SFAS No~~date. ~~123R in the Company’s consolidated statements of operations during the 2006 and 2007 fiscal years, respectively.~~

Options issued subsequent to December 20, 2004 vest over three years. Options issued prior to July 24, 2002 expire 10 years from the date of grant. Options issued subsequent to that date have a five-year expiration date.

Grant-Date Fair Value -

The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair value of options granted during the first quarter of fiscal 2006 and the first quarter of fiscal 2005 were calculated using the following estimated weighted average assumptions:

	Three Months Ended
	April 2, 2006			April 3, 2005
Options granted	145,409			113,953
Weighted-average exercise price	$	8.10		$	8.86
Weighted-average grant date fair value	$	3.82		$	4.70
Assumptions:
Risk free interest rate	4.68		%	3.58%-4.50		%
Expected life (in years)	4			4-5
Expected volatility	54.86		%	55.98%-58.16		%
Expected dividend yield	0.00		%	0.00		%

~~Risk~~Grant-~~free~~Date ~~interest~~Fair ~~rate~~Value ~~– the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption is used as the risk-free interest rate.~~—

~~Expected life – the~~ The Company uses ~~historical~~the ~~employee~~Black-Scholes ~~exercise and~~ option ~~expiration~~pricing ~~data~~model to ~~estimate~~calculate the ~~expected life assumption for the Black-Scholes~~ grant-date fair ~~valuation~~value of an award. The ~~Company~~fair ~~believes~~value ~~that~~of ~~this~~options ~~historical~~granted during the three ~~data~~months isended ~~currently~~April ~~the~~1, ~~best~~2007 ~~estimate~~and ofApril ~~the~~2, ~~expected~~2006 ~~life~~were ofcalculated ausing ~~new~~the following ~~option.~~estimated weighted average assumptions:

Expected volatility – the Company is responsible for estimating volatility and has used historical volatility to estimate the grant-date fair value of stock options. Management considered the guidance in SFAS No. 123R and believes that the historical estimated volatility is materially indicative of expectations about future volatility.

	Three Months Ended
	April 1, 2007			April 2, 2006
Options granted	136,720			145,409
Weighted-average exercise price	$	13.02		$	8.10
Weighted-average grant date fair value	$	4.90		$	3.82
Assumptions:
Risk free interest rate	4.45%-4.6		6%	4.68		%
Expected life (in years)	4			4
Expected volatility	40.13		%	54.86		%
Expected dividend yield	0.00		%	0.00		%

~~Expected~~Risk-free interest ~~dividend~~rate ~~yield~~— – the ~~Company~~yield ~~has~~on ~~not~~zero-coupon ~~paid~~U.S. ~~any dividends~~Treasury insecurities ~~the~~for ~~last~~a ~~five years and currently intends to retain any earnings~~period tothat ~~finance~~is ~~future~~commensurate ~~growth~~with ~~and,~~the ~~therefore,~~expected ~~does~~term ~~not~~assumption ~~anticipate~~is ~~paying~~used ~~any~~as ~~cash dividends on its common stock in~~ the ~~foreseeable~~risk-free interest ~~future~~rate.

~~Expense~~Expected life — the Company uses historical employee exercise and option expiration data to estimate the expected life assumption for the Black-Scholes grant-date valuation. The Company believes that this historical data is currently the best estimate of the expected life of a new option.

~~The~~Expected volatility — the Company is responsible for estimating volatility and has used historical volatility to estimate the ~~straight~~grant-~~line~~date ~~attribution~~fair ~~method~~value toof ~~recognize~~stock options. ~~expense~~Management ~~for~~considered ~~all~~the ~~options~~guidance ~~granted~~in SFAS No. 123R and believes that the historical estimated volatility is materially indicative of expectations about future volatility.

~~The~~Expected ~~amount~~dividend ofyield ~~stock-based~~— ~~compensation~~the ~~recognized during a period is~~Company ~~based~~has onnot ~~the~~paid ~~value~~any ofdividends ~~the~~in ~~portion of~~ the ~~awards~~last ~~that~~five ~~are~~years ~~ultimately~~and ~~expected~~currently intends to ~~vest.~~retain ~~SFAS~~any ~~No.~~earnings ~~123R requires forfeitures~~ to befinance ~~estimated~~future atgrowth ~~the time of grant~~ and ~~revised~~, ~~if necessary~~therefore, indoes ~~subsequent periods if actual forfeitures differ~~not ~~from~~anticipate ~~those~~paying ~~estimates.~~any ~~The~~cash ~~term~~dividends ~~“forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. The Company currently expects, based~~ on ~~an analysis of~~ its ~~historical forfeitures~~common ~~that~~stock ~~approximately~~in ~~97% of its options will actually vest, and therefore has applied an annual forfeiture rate of 3% to unvested options as of April 2, 2006. This analysis will be re-evaluated quarterly and~~ the ~~forfeiture~~foreseeable ~~rate will be adjusted as necessary~~future. ~~Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.~~

The adoption of SFAS No. 123R on January 2, 2006 resulted in lower operating profit before tax and higher net loss of $79,300 for the three months ended April 2, 2006.

~~The~~Expense following table details the effect on net loss and loss per share had stock-based compensation expense been recorded for the first three months of fiscal 2005 based on the fair-value method under SFAS No. 123, “Accounting for Stock-Based Compensation” (in thousands, except per share data). The reported and pro forma net loss and loss per share for the first quarter of fiscal 2006 are the same since stock-based compensation expense was calculated under the provisions of SFAS No. 123R.—

	Three Months Ended
	April 3, 2005
Net loss as reported	$	(2,986	)
Add stock-based compensation expense included in reported net loss, net of related income tax benefit	—
Less stock-based compensation expense determined under fair value method for all stock options, net of related income tax benefit	(14		)
Pro forma net loss	$	(3,000	)
Basic and diluted net loss per share:
Basic and diluted net loss per share, as reported	$	(0.39	)
Basic and diluted net loss per share, pro forma	$	(0.39	)

The Company used the straight-line attribution method to recognize expense for all options granted. Stock-based compensation is included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

~~Option~~The amount ~~Activity~~of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. In September 2006, John Cutter, the Company’s former President and Chief Executive Officer, resigned. As of December 31, 2006, the Company adjusted its stock compensation expense to reflect his forfeitures. The Company currently expects, based on an analysis of its historical forfeitures, that approximately 95% of its options will actually vest and therefore has applied an annual forfeiture rate of 5% to options granted as of April 1, 2007. This analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will only be for those shares that vest.

~~A summary of the activity under the Company’s stock option plans as of~~Option ~~April~~Activity ~~2, 2006 and changes during the three-month period then ended is presented below:~~—

	Options Outstanding		Weighted- Average Remaining Contractual Life in Years	Weighted- Average Exercise Price		Aggregate Intrinsic Value
Options outstanding at January 1, 2006	621,450			$	7.82
Granted	145,409			$	8.10
Cancelled	(11,140	)		$	13.12
Exercised	(3,707	)		$	5.15
Options outstanding at April 2, 2006	752,012		3.83	$	7.81	$	895,771
Options fully vested and exercisable at April 2, 2006	509,106		3.46	$	7.48	$	895,771

A summary of the stock option activity under the Company’s equity compensation plans as of April 1, 2007 and changes during the three-month period then ended is presented below:

During the three months ended April 2, 2006, the total intrinsic value of options exercised (i.e. the difference between the market price at exercise and the price paid by the employee to exercise the options) was $14,648 and the total amount of cash received from exercise of stock options was $19,090.

			Weighted-
			Average
			Remaining	Weighted-		Aggregate
	Options		Contractual	Average		Intrinsic
	Outstanding		Life in Years	Exercise Price		Value

Options outstanding at December 31, 2006	452,280			$	8.83
Granted	136,720			$	13.02
Cancelled	(800	)		$	17.37
Forfeited	(7,776	)		$	8.31
Exercised	(3,250	)		$	11.26
Options outstanding at April 1, 2007	577,174		3.55	$	9.80	$	4,509,485

Options fully vested and exercisable at April 1, 2007	321,331		2.80	$	8.75	$	2,048,561

AsDuring the ofthree months ended April 1, 2007 and April 2, 2006, ~~there~~the ~~was~~total ~~$873,000~~intrinsic value of ~~average~~options ~~unrecognized~~exercised (i.e., the difference between the market price at ~~compensation~~exercise ~~cost~~and ~~related~~the price paid by the employee to ~~unvested~~exercise ~~stock~~the options.) ~~That~~was ~~cost~~$9,518 and is$14,648, ~~expected~~respectively, ~~to be~~and ~~recognized~~the ~~over~~total aamount ~~weighted-average~~of ~~period~~cash received from exercise of ~~2.66~~stock ~~years~~options was $36,607 and $19,090, respectively.

As of April 1, 2007, there was $1,094,000 of unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted-average period of 2.44 years.

Restricted Stock and Restricted Stock Unit Activity - —

On December 2, 2005, 30,000 restricted stock units were issued to directors with a weighted average fair value of $8.90 at grant date. On November 1, 2006, 30,000 restricted stock units were issued to directors with a weighted average fair value of $10.61 at grant date. The restricted ~~During~~stock ~~the~~units ~~three~~were ~~months~~issued ~~ended~~pursuant ~~April~~to 2,and ~~2006,~~subject ~~stock-based~~to the terms of the ~~compensation~~Company’s ~~cost~~2003 Incentive Plan. Subject to the terms of ~~$21~~the 2003 Incentive Plan,~~894~~ ~~was~~each ~~recorded~~restricted ~~related~~stock unit provides the holder with the right to ~~these~~receive ~~units.~~one Noshare ~~additional~~of Common Stock of the Company ~~units~~when ~~were~~the ~~granted~~restrictions lapse or ~~forfeited~~vest. ~~during~~The restricted stock units granted to the directors vest three ~~months~~years ~~ended~~after ~~April~~the 2date of grant if the recipient is a member of the Company’s Board of Directors on such date, ~~2006~~subject to accelerated vesting in the event of a change in control or the director’s death, disability or retirement.

AsPursuant to ofa ~~April~~long-term 2,incentive plan for fiscal 2006, ~~there~~approved ~~was~~by ~~$248,000~~the Compensation Committee of ~~total~~the ~~unrecognized~~Board of Directors under the Company’s 2003 Incentive Plan, ~~compensation~~the ~~cost~~Compensation ~~related~~Committee toestablished ~~unvested~~target ~~restricted~~EBITDA ~~stock~~levels ~~units.~~for ~~That~~the ~~cost~~Company isfor ~~expected~~fiscal to2006 beand ~~recognized~~target ~~over~~awards for each officer named below based on a percentage ~~weighted-average~~(ranging ~~period~~from 50% to 100%) of ~~2.67~~each ~~years~~such officer’s base salary.

4On February 28, 2007 the Compensation Committee determined that the Company exceeded the threshold EBITDA for fiscal 2006, and awarded shares of restricted Common Stock under the Company’s 2003 Incentive Plan to each of the officers named below. The ~~EMPLOYEE~~number ~~BENEFIT~~of ~~PLANS~~shares of restricted Common Stock issued to each officer listed below was determined by dividing the officer’s 2006 Award Value (set forth below) by 90% of the closing price of the Company’s Common Stock on the date of grant as reported on the American Stock Exchange. 25% of the shares of restricted Common Stock issued to each officer were fully vested upon issuance. The remaining 75% of the shares of restricted Common Stock will vest in three equal annual installments following issuance if the officer remains employed by the Company. The unvested shares will also fully vest upon a change in control, as provided in the 2003 Incentive Plan.

The ~~components~~ offollowing ~~net~~table ~~periodic~~sets ~~pension~~forth ~~cost~~for ~~(benefit)~~each ~~for~~officer listed below the ~~three~~2006 ~~months~~Award ~~ended~~Value and the number of shares of restricted Common Stock ~~April~~such 2,officer ~~2006~~received ~~and~~under ~~April~~the 3,long-term ~~2005~~incentive ~~were~~plan ~~(in~~for ~~thousands):~~fiscal 2006.

	For the Three Months Ended
Name	Award Value			Number of Shares
	April 2, 2006			April 3, 2005
Paul Hoagland	$	188,664		17,469
Interest cost	$	1,720		$	1,627
Gregory Pastore	$	79,207		7,334
Expected return on assets	(1,969		)	(2,097		)
Kenneth Green	$	91,304		8,454
Net amortization of unrecognized net actuarial loss	719			414
Garrett Ulrich	$	91,690		8,490
Net periodic pension cost (benefit)	$	470		$	(56	)

~~The~~During the three months ended April 1, 2007 and April ~~components~~2, 2006, stock-based compensation cost of $81,560 and $21,894, respectively, was recorded related to the ~~net~~restricted ~~postretirement~~stock ~~medical~~units and ~~life~~shares ~~insurance~~of ~~benefit cost~~restricted ~~for~~Common Stock issued pursuant to the ~~three~~long-term ~~months~~incentive ~~ended~~plan for fiscal 2006. As of April 21, ~~2006~~2007, there was $788,560 of total unrecognized compensation cost related to unvested restricted stock units and ~~April~~shares 3,of ~~2005~~restricted ~~were~~Common ~~(in~~Stock. That ~~thousands):~~cost is expected to be recognized over a weighted-average period of 2.45 years.

	For the Three Months Ended
	April 2, 2006			April 3, 2005
Service cost	$	41		$	40
Interest cost	95			115
Recognized actuarial loss	4			21
Net amortization of unrecognized prior service benefit	(36		)	(36		)
Net postretirement benefit cost	$	104		$	140

5.2007 ~~ASSET~~Long-Term ~~IMPAIRMENT~~Incentive ~~AND DISCONTINUED OPERATIONS~~Plan

AsOn February ~~of January 1~~28, ~~2006,~~2007 the ~~Company~~Compensation ~~had~~Committee ~~11 restaurants~~approved ~~that~~a ~~were~~long-term ~~reported as “held for sale” in accordance with SFAS No.~~incentive ~~144,~~plan ~~“Accounting~~ for ~~the~~fiscal ~~Impairment~~2007 orunder ~~Disposal of Long-Lived Assets.” During~~ the ~~three months ended April 2, 2006, the~~ Company’s ~~sold~~2003 ~~five~~Incentive ~~of these restaurants. Gross proceeds from these transactions were $5~~Plan,~~093,000.~~ ~~The~~pursuant ~~Company recognized a net gain related~~ to which the ~~sales~~Compensation ofCommittee ~~the~~established ~~assets~~target ofEBITDA ~~$2,864,000.~~levels Atfor ~~April 2, 2006,~~ the ~~remaining~~Company ~~six~~for fiscal ~~properties,~~2007 and ~~one~~target ~~additional property~~awards ~~that~~for ~~closed~~each ~~during~~officer ~~the~~named ~~three~~below ~~months~~based ~~ended~~on ~~April 2, 2006, met the~~a ~~criteria~~percentage ~~for~~(ranging ~~“held~~from ~~for~~50% ~~sale”~~to as100%) ~~defined~~of ineach ~~SFAS~~officer’s ~~No.~~base ~~144~~salary. The ~~carrying values~~actual ofawards ~~these~~for ~~seven~~each ~~properties~~officer ofare payable ~~$1,554,000~~in ~~and~~shares ~~$1,628,000 as~~ of ~~April~~restricted ~~2, 2006~~stock ~~and~~(representing ~~January~~approximately 1,two-thirds ~~2006,~~of the ~~respectively,~~value ~~were~~of ~~reported~~the astarget ~~assets~~award) ~~held~~and ~~for~~stock ~~sale in~~options ~~the~~to ~~accompanying~~purchase ~~condensed~~shares ~~consolidated~~of ~~balance~~Common Stock ~~sheets.~~(representing ~~The~~approximately ~~carrying~~one-third ~~values~~ of ~~these properties were not adjusted since~~ the ~~carrying~~value ~~values~~of ~~were less than~~ the ~~estimated~~target ~~fair market values less costs to sell~~award).

~~The~~With ~~table~~respect to the potential restricted stock awards, the Compensation Committee approved the issuance of restricted stock unit award agreements (the “Restricted Stock Units Award Agreements”) for each of the officers named below, ~~identifies~~pursuant to which each officer is eligible to receive a certain number of shares of restricted Common Stock of the ~~components~~Company calculated in accordance with the terms of the officer’s individual Restricted Stock Unit Award Agreement. If the Company meets or exceeds a certain threshold EBITDA for fiscal 2007 (the “~~Loss~~2007 Threshold onEBITDA”), ~~disposals~~then the officer will receive an award payable in shares of restricted ~~other~~Common Stock having a value determined based on the Company’s actual ~~property~~EBITDA for fiscal 2007 compared to projected EBITDA for fiscal 2007 and ~~equipment,~~the percentage ~~net~~(ranging from 50% to 150%) of the officer’s target award applicable to those results (the “2007 Award Value”). In asthe ~~shown~~event of a Change in Control, as provided under the ~~accompanying~~2003 Incentive ~~condensed~~Plan, prior to the Compensation Committee’s determination of the 2007 ~~consolidated~~Award ~~statements~~Value, the 2007 Threshold EBITDA shall be deemed to have been achieved and the 2007 Award Value shall be deemed to be equal to the target EBITDA for fiscal 2007. The number of ~~operations~~shares of Common Stock to be issued to the officer, if any, will be calculated by dividing the 2007 Award Value by 90% of the closing price of the Company’s Common Stock on the date of grant as reported by the American Stock Exchange (inor ~~thousands~~such other exchange on which the Company’s Common Stock is traded): (the “Award Shares”).

	For the Three Months Ended
	April 2, 2006		April 3, 2005
Restaurant equipment assets retired due to replacement	$	75	$	52
Loss due to restaurant fire	30		—
All other	4		17
Loss on disposals of other property and equipment, net	$	109	$	69

The following table sets forth the range of 2007 Award Values each officer may receive under the long-term incentive plan for fiscal 2007:

SFAS No. 144 also requires the results of operations of a component of an entity that is classified as held for sale or that has been disposed of to be reported as discontinued operations in the statement of operations if certain conditions are met. These conditions include commitment to a plan of disposal after the effective date of this statement, elimination of the operations and cash flows of the entity component from the ongoing operations of the company and no significant continuing involvement in the operations of the entity component after the disposal transaction.

Name	Value of Award
George M. Condos	$	159,125	To	$	477,375
Paul Hoagland	$	83,670	To	$	251,009
Gregory Pastore	$	35,477	To	$	106,430
Kenneth Green	$	44,053	To	$	132,158
Garrett Ulrich	$	41,071	To	$	123,213

InThe ~~accordance~~2007 ~~with~~Award ~~SFAS~~Value ~~No.~~will ~~144~~be determined, and the ~~results~~date of ~~operations~~grant of ~~the~~any ~~five~~Award ~~properties~~Shares ~~that~~will ~~were~~occur, ~~disposed~~upon the earlier of ~~during~~(i) the ~~three~~date ~~months~~of ~~ended~~the ~~April~~Compensation 2,Committee’s first ~~2006~~regularly ~~and~~scheduled meeting held after the completion of the Company’s ~~related~~independent ~~net~~audit ~~gain~~for onfiscal 2007 and the ~~disposals,~~Company’s asAudit ~~well~~Committee’s recommendation asto include the ~~results~~Company’s ofaudited ~~operations~~financial ofstatements in the ~~properties~~Company’s ~~held~~Annual ~~for~~Report ~~sale~~on atForm ~~April~~10-K 2,or ~~2006,~~(ii) ~~were~~immediately ~~reported~~prior ~~separately~~to asthe ~~discontinued~~consummation ~~operations~~of ina ~~the~~Change ~~accompanying~~in ~~condensed~~Control ~~consolidated statements~~ of ~~operations~~the ~~for~~Company ~~all~~(the ~~periods~~“Issue ~~presented~~Date”). If ~~Operating~~the ~~results~~officer’s ~~for~~employment with the ~~three months~~Company ~~ended~~or ~~April~~one 2,of ~~2006~~its ~~and~~affiliates ~~the~~is ~~net~~terminated ~~gain~~due onto ~~disposals~~death, ofdisability, ~~the~~retirement, involuntary ~~properties~~(with asor ~~well~~without ~~as operating~~cause) ~~results~~or ~~that~~voluntary ~~were~~termination ~~included~~prior into the ~~restaurant~~Issue Date, ~~segment~~then in the ~~previously~~ ~~issued~~officer’s ~~Quarterly~~Restricted ~~Report~~Stock onUnit ~~Form~~Award ~~10-Q~~Agreement ~~for~~shall terminate and the ~~three~~officer ~~months~~shall ~~ended April~~have 3,no ~~2005~~right ~~are~~to ~~summarized~~receive ~~below~~any ~~(in~~Award ~~thousands):~~Shares.

	For the Three Months Ended
	April 2, 2006			April 3, 2005
Net sales	$	—		$	2,985
Operating loss	(248		)	(623		)
Gain on disposals of property and equipment	2,864			—
Income tax benefit	—			255
Income (loss) from discontinued operations	$	2,616		$	(368	)

If Award Shares are issued to the officer, 25% of the shares of restricted Common Stock issued to each officer will be fully vested upon issuance. The remaining 75% of the shares of restricted Common Stock will vest in three equal annual installments following issuance if the officer remains employed by the Company. The unvested shares will also fully vest upon a change in control, as provided in the 2003 Incentive Plan.

During the three months ended April 1, 2007, stock-based compensation of $45,000 was recorded related to the foregoing awards.

~~During~~4. ~~the~~EMPLOYEE ~~three~~BENEFIT months ended April 2, 2006, the Company determined that the carrying value of one operating restaurant property exceeded its estimated fair value less costs to sell and the carrying value was reduced by $215,000 accordingly.PLANS

6.The ~~SEGMENT~~components ~~REPORTING~~of net periodic pension cost for the three months ended April 1, 2007 and April 2, 2006 were (in thousands):

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision-maker is the Chief Executive Officer and President of the Company. The Company’s operating segments include restaurant, foodservice and franchise. The revenues from these segments include both sales to unaffiliated customers and inter-segment sales, which generally are accounted for on a basis consistent with sales to unaffiliated customers. Intersegment sales and other inter-segment transactions have been eliminated in the accompanying condensed consolidated financial statements.

	For the Three Months Ended
	April 1,			April 2,
	2007			2006

Interest cost	$	1,702		$	1,720
Expected return on assets	(1,975		)	(1,969		)
Net amortization of unrecognized net actuarial loss	610			719

Net periodic pension cost	$	337		$	470

The ~~Company’s~~components ~~restaurants target families with kids and adults who desire a reasonably-priced meal in a full-service setting. The Company’s menu offers a broad selection~~ of ~~freshly-prepared~~the ~~foods~~net ~~which~~postretirement ~~appeal~~medical ~~to customers throughout all dayparts. The menu currently features over 100 items comprised of a broad selection of breakfast, lunch, dinner~~ and ~~afternoon~~ ~~and~~life ~~evening~~insurance ~~snack~~benefit ~~items.~~cost ~~Foodservice~~for ~~operations~~the ~~manufactures~~three ~~premium~~months ~~ice~~ended ~~cream~~April ~~dessert products and distributes such manufactured products and purchased finished goods to Company-operated and franchised restaurants. Additionally~~1, it2007 ~~sells premium ice cream dessert products to distributors~~ and ~~retail~~ ~~locations.~~April ~~The Company’s franchise segment includes a royalty based on franchise restaurant revenue. In addition~~2, ~~the~~2006 ~~Company~~were ~~receives~~(in rental income from various franchised restaurants. The Company does not allocate general and administrative expenses associated with its headquarters operations to any business segment. These costs include expenses of the following functionsthousands): ~~legal, accounting, personnel not directly related to a segment, information systems and other headquarter activities.~~

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that the financial results for the foodservice operating segment, prior to inter-segment eliminations, have been prepared using a management approach, which is consistent with the basis and manner in which the Company’s management internally reviews financial information for the purpose of assisting in making internal operating decisions. Using this approach, the Company evaluates performance based on stand-alone operating segment income (loss) before income taxes and generally accounts for inter-segment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices.

	For the Three Months Ended
	April 1,			April 2,
	2007			2006

Service cost	$	36		$	41
Interest cost	105			95
Recognized actuarial loss	10			4
Net amortization of unrecognized prior service benefit	(36		)	(36		)

Net postretirement benefit cost	$	115		$	104

Adjusted EBITDA represents net income (loss) before (i) (provision for) benefit from income taxes, (ii) interest expense, net, (iii) depreciation and amortization, (iv) write-downs of property and equipment, (v) net periodic pension cost (benefit) and (vi) other non-cash items5. ~~The Company has included~~ASSET ~~information~~IMPAIRMENT ~~concerning~~AND ~~adjusted~~DISCONTINUED EBITDA in this Form 10-Q because the Company’s management incentive plan pays bonuses based on achieving adjusted EBITDA targets and the Company believes that such information is used by certain investors as one measure of a company’s historical ability to service debt. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, earnings (loss) from operations or other traditional indications of a company’s operating performance.OPERATIONS

	For the Three Months Ended
	April 2, 2006			April 3, 2005
	(in thousands)
Revenues:
Restaurant	$	95,276		$	93,107
Foodservice	54,958			54,163
Franchise	3,545			3,250
Total	$	153,779		$	150,520
Intersegment revenues:
Restaurant	$	—		$	—
Foodservice	(28,064		)	(28,857		)
Franchise	—			—
Total	$	(28,064	)	$	(28,857	)
External revenues:
Restaurant	$	95,276		$	93,107
Foodservice	26,894			25,306
Franchise	3,545			3,250
Total	$	125,715		$	121,663

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires the results of operations of a component of an entity that is classified as held for sale or that has been disposed of to be reported as discontinued operations in the statement of operations if certain conditions are met. These conditions include commitment to a plan of disposal after the effective date of this statement, elimination of the operations and cash flows of the entity component from the ongoing operations of the Company and no significant continuing involvement in the operations of the entity component after the disposal transaction.

In accordance with SFAS No. 144, the results of operations of the eight properties that were disposed of during 2006 and any related net gain on the disposals, as well as the results of operations of three properties held for sale at April 1, 2007 were reported separately as discontinued operations in the accompanying condensed consolidated statements of operations for the three months ended April 1, 2007 and April 2, 2006.

During 2006, the Company closed one restaurant and committed to a plan to sell that restaurant. At April 1, 2007, this property met the criteria for “held for sale” as defined in SFAS No. 144. The results of operations associated with this restaurant were not material and therefore were reported within continuing operations in the accompanying condensed consolidated statements of operations for all periods presented.

For the three months ended April 1, 2007 and April 2, 2006, these discontinued results consisted of the following (in thousands):

	For the Three Months Ended
	April 1,			April 2,
	2007			2006

Net sales	$	—		$	—

Operating loss	$	(14	)	$	(248	)
Gain on disposals of property and equipment	—			2,864
Income tax benefit	—			—
(Loss) income from discontinued operations	$	(14	)	$	2,616

The table below identifies the components of the “Loss on disposals of other property and equipment, net” as shown in the accompanying condensed consolidated statements of operations (in thousands):

	For the Three Months Ended
	April 1,		April 2,
	2007		2006

Restaurant equipment assets retired due to replacement	$	35	$	75
Loss due to restaurant fire	—		30
All other	—		4
Loss on disposals of other property and equipment, net	$	35	$	109

During each of the three month periods ended April 1, 2007 and April 2, 2006, the Company determined that the carrying value of one operating restaurant property exceeded its estimated fair value less costs to sell and the carrying values were reduced by $206,000 and $215,000, respectively.

	For the Three Months Ended
	April 2, 2006			April 3, 2005
	(in thousands)
Adjusted EBITDA:
Restaurant	$	6,834		$	7,276
Foodservice	2,547			2,148
Franchise	2,418			2,266
Corporate	(5,578		)	(4,844		)
Gain on property and equipment, net	758			1,234
Pension cost (benefit) included in reporting segments	470			(56		)
Total	$	7,449		$	8,024
Interest expense, net-Corporate	$	5,420		$	5,286
Depreciation and amortization:
Restaurant	$	4,143		$	4,470
Foodservice	736			823
Franchise	68			40
Corporate	833			818
Total	$	5,780		$	6,151
Other non-cash expenses (income):
Net periodic pension cost (benefit)	$	470		$	(56	)
Write-downs of property and equipment	215			—
Total	$	685		$	(56	)
Income (loss) from continuing operations before benefit from income taxes:
Restaurant	$	2,691		$	2,806
Foodservice	1,811			1,325
Franchise	2,350			2,226
Corporate	(11,831		)	(10,948		)
Gain on property and equipment, net	543			1,234
Total	$	(4,436	)	$	(3,357	)

6. INCOME TAXES

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48 on January 1, 2007, the Company recognized an additional $221,000 as a decrease to retained earnings. As of the date of adoption, the Company’s unrecognized tax benefits totaled $1,579,000, which would affect the Company’s tax rate if recognized. During the three months ended April 1, 2007, the Company recognized $94,000 in potential tax and interest associated with uncertain tax positions and settled one previously uncertain tax position which resulted in the payment of $72,065 of tax and $7,324 of interest.

The Company files numerous consolidated and separate income tax returns in the United States Federal jurisdiction and in many state jurisdictions. With few exceptions, the Company is no longer subject to US Federal and state and local income tax examinations for years before 2003.

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within its operations as income tax expenses. As of the date of implementation of FIN 48, the Company had approximately $580,000 accrued for interest and penalties. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

The Company anticipates that the total unrecognized tax benefits will decrease by approximately $500,000 due to the settlement of ongoing state voluntary disclosure processes prior to March 30, 2008.

7. SEGMENT REPORTING

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s operating segments include restaurant, foodservice and franchise. The revenues from these segments include both sales to unaffiliated customers and intersegment sales, which generally are accounted for on a basis consistent with sales to unaffiliated customers. Intersegment sales and other intersegment transactions have been eliminated in the accompanying consolidated financial statements.

The Company’s restaurants target families with children and adults who desire a reasonably-priced meal in a full-service setting. The Company’s menu offers a broad selection of freshly-prepared foods which appeal to customers throughout all dayparts. The menu currently features over 100 items comprised of a broad selection of breakfast, lunch, dinner and afternoon and evening snack items. The Company’s foodservice operations manufactures premium ice cream dessert products and distributes such manufactured products and purchased finished goods to Company-operated and franchised restaurants. Additionally, it sells premium ice cream dessert products to distributors and retail locations. The Company’s franchise segment includes a royalty based on franchise restaurant revenue. In addition, the Company receives rental income from various franchised restaurants. The Company does not allocate general and administrative expenses associated with its headquarters operations to any business segment. These costs include expenses of the following functions: legal, accounting, personnel not directly related to a segment, information systems and other headquarter activities.

	For the Three Months Ended April 2, 2006		For the Year Ended January 1, 2006
	(in thousands)
Capital expenditures, including assets acquired under capital leases:
Restaurant	$	2,215	$	14,674
Foodservice	68		1,516
Corporate	121		968
Total	$	2,404	$	17,158

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that the financial results for the foodservice operating segment, prior to intersegment eliminations, have been prepared using a management approach, which is consistent with the basis and manner in which the Company’s management internally reviews financial information. Using this approach, the Company evaluates performance based on stand-alone operating segment income (loss) before income taxes and generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices.

	April 2, 2006		January 1, 2006
	(in thousands)
Total assets:
Restaurant	$	128,276	$	131,810
Foodservice	34,214		38,609
Franchise	11,909		7,634
Corporate	43,232		40,189
Total	$	217,631	$	218,242

Adjusted EBITDA represents net income (loss) from continuing operations before (i) (provision for) benefit from income taxes, (ii) interest expense, net, (iii) depreciation and amortization, (iv) write-downs of property and equipment, (v) net periodic pension cost and (vi) other non-cash items. Adjusted EBITDA is a non-GAAP financial measure. The Company has included information concerning adjusted EBITDA in this Form 10-Q because the Company’s management incentive plan pays bonuses based on achieving operating segment adjusted EBITDA targets and the Company believes that such information is used by certain investors as one measure of a company’s historical ability to service debt. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, earnings (loss) from continuing operations or other traditional indications of the Company’s operating performance.

7Due to a reorganization of the finance group, positions within the foodservice accounting department were absorbed by various corporate finance departments. The ~~RELATED~~costs related ~~PARTY~~to ~~TRANSACTIONS~~those positions are now included in general and administrative corporate expenses. Results for the three months ended April 2, 2006 have been restated accordingly. Adjusted EBITDA and loss from continuing operations before benefit from income taxes have been restated to remove the costs associated with this department of $120,000 during the three month period ended April 2, 2006.

The Ice Cream Company (“TICC”) operates three Friendly’s restaurants under franchise agreements with Friendly’s Restaurants Franchise, Inc. (“FRFI”), a subsidiary of Friendly’s. The owners of TICC are family members of the Company’s Chairman of the Board of Directors. The franchise agreement terms with TICC are identical in all material respects to the terms generally offered to unrelated franchisees of FRFI in the ordinary course of Friendly’s business. TICC purchases certain food products used in the normal course of its franchise business from Friendly’s. For the year ended January 1, 2006, TICC paid Friendly’s approximately $2,110,122 for franchise royalty fees, marketing fees, food purchases and miscellaneous other products and services.

	For the Three Months Ended
	April 1,			April 2,
	2007			2006
	(in thousands)
Revenues:
Restaurant	$	93,187		$	95,276
Foodservice	53,588			54,958
Franchise	3,495			3,545
Total	$	150,270		$	153,779

Intersegment revenues:
Restaurant	$	—		$	—
Foodservice	(27,644		)	(28,064		)
Franchise	—			—
Total	$	(27,644	)	$	(28,064	)

External revenues:
Restaurant	$	93,187		$	95,276
Foodservice	25,944			26,894
Franchise	3,495			3,545
Total	$	122,626		$	125,715

On March 20, 2006, Friendly’s and TICC entered into a preliminary agreement whereby TICC would purchase three existing Company-operated restaurants and develop six new restaurants, all in the Lancaster and York, Pennsylvania areas. The transaction is dependent on approval by the Company’s Board of Directors, which is conducting a transaction value appraisal through an independent appraiser.

	For the Three Months Ended
	April 1,			April 2,
	2007			2006
	(in thousands)

Adjusted EBITDA:
Restaurant	$	5,728		$	6,834
Foodservice	3,175			2,668
Franchise	2,116			2,418
Corporate	(5,539		)	(5,699		)
(Loss) gain on property and equipment, net	(34		)	758
Pension cost included in reporting segments	337			470
Total	$	5,783		$	7,449

Interest expense, net-Corporate	$	4,924		$	5,420

Depreciation and amortization:
Restaurant	$	3,897		$	4,143
Foodservice	1,274			736
Franchise	137			68
Corporate	852			833
Total	$	6,160		$	5,780

Other non-cash expenses:
Net periodic pension cost	$	337		$	470
Write-downs of property and equipment	206			215
Total	$	543		$	685

Income (loss) from continuing operations before provision for income taxes:
Restaurant	$	1,831		$	2,691
Foodservice	1,901			1,932
Franchise	1,979			2,350
Corporate	(11,315		)	(11,952		)
Gain on property and equipment, net	(240		)	543
Total	$	(5,844	)	$	(4,436	)

	For the Three		For the
	Months Ended		Year Ended
	April 1, 2007		December 31, 2006
	(in thousands)
Capital expenditures, including assets acquired under capital leases:
Restaurant	$	1,757	$	16,068
Foodservice	692		4,306
Corporate	81		1,350
Total	$	2,530	$	21,724

	April 1,		December 31,
	2007		2006
	(in thousands)
Total assets:
Restaurant	$	117,968	$	119,787
Foodservice	40,464		40,875
Franchise	11,472		11,827
Corporate	43,002		47,678
Total	$	212,906	$	220,167

8. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

FICC’s obligation related to its $175~~,000,000~~ million of 8.375% senior notes (the “Senior Notes”) ~~issued in March 2004~~ is ~~guaranteed~~ guaranteed fully and unconditionally by one of FICC’s wholly owned subsidiaries. There are no restrictions on FICC’s ability to obtain dividends or other distributions of funds from this subsidiary, except those imposed by applicable law. The following supplemental financial information sets forth, on a condensed consolidating basis, balance sheets, statements of operations and statements of cash flows for FICC (the “Parent Company”), Friendly’s Restaurants Franchise, ~~Inc.~~ LLC (the “Guarantor Subsidiary”) and Friendly’s International, Inc., Restaurant Insurance Corporation, Friendly’s Realty I, LLC, Friendly’s Realty II, LLC and Friendly’s Realty III, LLC (collectively, the “Non-guarantor Subsidiaries”). All of the ~~LLCs~~limited liability companies’ (the “LLCs”) assets were owned by the LLCs, which are separate entities with separate creditors which will be entitled to be satisfied out of the LLCs’ assets. Separate complete financial statements and other disclosures of the Guarantor Subsidiary as of April 21, ~~2006~~2007 and ~~January~~December 131, 2006 and for the three months ended April 21, ~~2006~~2007 and April 32, ~~2005~~2006 were not presented because management has determined that such information is not material to investors.

Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of the subsidiaries are, therefore, reflected in the Parent Company’s investment accounts and earnings. The principal elimination entries eliminate the Parent Company’s investments in subsidiaries and intercompany balances and transactions.

FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Supplemental Condensed Consolidating Balance Sheet

As of April 2, 2006

(In thousands)

						Non-
	Parent			Guarantor		guarantor
	Company			Subsidiary		Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	16,625		$	790	$	2,356		$	—		$	19,771
Restricted cash	—			—		1,927			—			1,927
Accounts receivable, net	9,774			2,014		—			—			11,788
Inventories	15,974			—		—			—			15,974
Assets held for sale	1,554			—		—			—			1,554
Deferred income taxes	—			26		—			(26		)	—
Prepaid expenses and other current assets	5,374			656		7,785			(9,075		)	4,740
Total current assets	49,301			3,486		12,068			(9,101		)	55,754
Deferred income taxes	—			381		—			(381		)	—
Property and equipment, net	95,606			—		42,025			—			137,631
Intangibles and deferred costs, net	16,584			—		2,197			—			18,781
Investments in subsidiaries	5,795			—		—			(5,795		)	—
Other assets	4,550			5,856		915			(5,856		)	5,465
Total assets	$	171,836		$	9,723	$	57,205		$	(21,133	)	$	217,631
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
Current maturities of long-term obligations	$	9,229		$	—	$	1,429		$	(7,776	)	$	2,882
Accounts payable	22,171			—		—			—			22,171
Deferred income taxes	131			—		—			(131		)	—
Accrued expenses	40,111			2,488		1,560			(1,064		)	43,095
Total current liabilities	71,642			2,488		2,989			(8,971		)	68,148
Deferred income taxes	276			—		—			(276		)	—
Long-term obligations, less current maturities	181,841			—		48,460			—			230,301
Other long-term liabilities	61,637			970		6,226			(6,091		)	62,742
Stockholders’ (deficit) equity	(143,560		)	6,265		(470		)	(5,795		)	(143,560		)
Total liabilities and stockholders’ (deficit) equity	$	171,836		$	9,723	$	57,205		$	(21,133	)	$	217,631

~~FRIENDLY~~Supplemental ~~ICE~~Condensed ~~CREAM~~Consolidating ~~CORPORATION~~Balance ~~AND~~Sheet As ~~SUBSIDIARIES~~of April 1, 2007 (In thousands)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

						Non-
	Parent			Guarantor		guarantor
	Company			Subsidiary		Subsidiaries			Eliminations			Consolidated

Assets

Current assets:
Cash and cash equivalents	$	18,546		$	1,113	$	2,201		$	—		$	21,860
Restricted cash	—			—		380			—			380
Accounts receivable, net	10,529			1,735		—			—			12,264
Inventories	15,967			—		—			—			15,967
Assets held for sale	896			—		—			—			896
Deferred income taxes	—			156		—			(156		)	—
Prepaid expenses and other current assets	3,899			49		7,785			(8,358		)	3,375
Total current assets	49,837			3,053		10,366			(8,514		)	54,742
Deferred income taxes	928			288		—			(288		)	928
Property and equipment, net	93,902			—		40,095			—			133,997
Intangibles and deferred costs, net	15,381			—		1,969			—			17,350
Investments in subsidiaries	(287		)	—		—			287			—
Other assets	4,974			974		915			(974		)	5,889

Total assets	$	164,735		$	4,315	$	53,345		$	(9,489	)	$	212,906

Liabilities and Stockholders’ (Deficit) Equity

Current liabilities:
Current maturities of long-term obligations	$	9,427		$	—	$	1,524		$	(7,776	)	$	3,175
Accounts payable	20,532			—		—			—			20,532
Deferred income taxes	156			—		—			(156		)	—
Accrued expenses	39,349			2,739		1,523			(582		)	43,029
Total current liabilities	69,464			2,739		3,047			(8,514		)	66,736
Deferred income taxes	288			—		—			(288		)	—
Long-term obligations, less current maturities	180,240			—		46,266			—			226,506
Other long-term liabilities	47,563			683		5,212			(974		)	52,484
Stockholders’ (deficit) equity	(132,820		)	893		(1,180		)	287			(132,820		)

Total liabilities and stockholders’ (deficit) equity	$	164,735		$	4,315	$	53,345		$	(9,489	)	$	212,906

(Unaudited)

Supplemental Condensed Consolidating Statement of Operations

For the Three Months Ended April 2, 2006

(In thousands)

							Non-
	Parent			Guarantor			guarantor
	Company			Subsidiary			Subsidiaries			Eliminations			Consolidated
Revenues	$	123,097		$	2,618		$	—		$	—		$	125,715
Costs and expenses:
Cost of sales	48,385			—			—			—			48,385
Labor and benefits	36,012			—			—			—			36,012
Operating expenses and write- downs of property and equipment	25,920			—			(1,706		)	—			24,214
General and administrative expenses	9,942			1,155			—			—			11,097
Depreciation and amortization	5,237			—			543			—			5,780
Gain on franchise sales of restaurant operations and properties	(866		)	—			—			—			(866		)
Loss on disposals of other property and equipment, net	109			—			—			—			109
Interest expense, net	4,337			—			1,083			—			5,420
(Loss) income before benefit from (provision for) income taxes and equity in net income of consolidated subsidiaries	(5,979		)	1,463			80			—			(4,436		)
Benefit from (provision for) income taxes	654			(600		)	(54		)	—			—
(Loss) income from continuing operations	(5,325		)	863			26			—			(4,436		)
Income from discontinued operations	2,616			—			—			—			2,616
(Loss) income before equity in net income of consolidated subsidiaries	(2,709		)	863			26			—			(1,820		)
Equity in net income of consolidated subsidiaries	889			—			—			(889		)	—
Net (loss) income	$	(1,820	)	$	863		$	26		$	(889	)	$	(1,820	)

~~FRIENDLY~~Supplemental ~~ICE~~Condensed ~~CREAM~~Consolidating ~~CORPORATION~~Statement ~~AND~~of Operations For ~~SUBSIDIARIES~~the Three Months Ended April 1, 2007 (In thousands)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

							Non-
	Parent			Guarantor			guarantor
	Company			Subsidiary			Subsidiaries			Eliminations			Consolidated

Revenues	$	120,183		$	2,443		$	—		$	—		$	122,626

Costs and expenses:
Cost of sales	47,103			—			—			—			47,103
Labor and benefits	34,397			—			—			—			34,397
Operating expenses and write-
downs of property and equipment	26,824			—			(1,606		)	—			25,218
General and administrative expenses	9,478			1,155			—			—			10,633
Depreciation and amortization	5,626			—			534			—			6,160
Gain on franchise sales of restaurant operations and properties	—			—			—			—			—
Loss on disposals of other property and equipment, net	35			—			—			—			35
Interest expense, net	3,877			—			1,047			—			4,924

(Loss) income before benefit from (provision for) income taxes and equity in net income of consolidated subsidiaries	(7,157		)	1,288			25			—			(5,844		)

Benefit from (provision for) income taxes	488			(528		)	(54		)	—			(94		)

(Loss) income from continuing operations	(6,669		)	760			(29		)	—			(5,938		)

Loss from discontinued operations	(14		)	—			—			—			(14		)

(Loss) income before equity in net income of consolidated subsidiaries	(6,683		)	760			(29		)	—			(5,952		)

Equity in net income of consolidated subsidiaries	731			—			—			(731		)	—

Net (loss) income	$	(5,952	)	$	760		$	(29	)	$	(731	)	$	(5,952	)

(Unaudited)

Supplemental Condensed Consolidating Statement of Cash Flows

For the Three Months Ended April 2, 2006

(In thousands)

						Non-
	Parent			Guarantor		guarantor
	Company			Subsidiary		Subsidiaries			Eliminations			Consolidated
Net cash provided by operating activities	$	1,998		$	10	$	926		$	(235	)	$	2,699
Cash flows from investing activities:
Purchases of property and equipment	(2,404		)	—		—			—			(2,404		)
Proceeds from sales of property and equipment	5,794			—		—			—			5,794
Return of investment in subsidiary	282			—		—			(282		)	—
Net cash provided by investing activities	3,672			—		—			(282		)	3,390
Cash flows from financing activities:
Proceeds from revolving credit facility	8,000			—		—			—			8,000
Repayments of obligations	(8,405		)	—		(324		)	—			(8,729		)
Payments of deferred financing costs	(205		)	—		—			—			(205		)
Stock options exercised	19			—		—			—			19
Reinsurance payments made from deposits	—			—		(235		)	235			—
Dividends paid	—			—		(282		)	282			—
Net cash used in financing activities	(591		)	—		(841		)	517			(915		)
Net increase in cash and cash equivalents	5,079			10		85			—			5,174
Cash and cash equivalents, beginning of year	11,546			780		2,271			—			14,597
Cash and cash equivalents, end of year	$	16,625		$	790	$	2,356		$	—		$	19,771
Supplemental disclosures:
Interest paid	$	505		$	—	$	1,023		$	—		$	1,528
Income taxes (refunded) paid	(3,094		)	2,534		57			—			(503		)

~~FRIENDLY~~Supplemental Condensed ~~ICE~~Consolidating ~~CREAM~~Statement ~~CORPORATION~~of ~~AND~~Cash ~~SUBSIDIARIES~~Flows For the Three Months Ended April 1, 2007 (In thousands)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

						Non-
	Parent			Guarantor		guarantor
	Company			Subsidiary		Subsidiaries			Eliminations			Consolidated

Net cash (used in) provided by operating activities	$	(749	)	$	315	$	633		$	(158	)	$	41

Cash flows from investing activities:
Purchases of property and equipment	(2,530		)	—		—			—			(2,530		)
Proceeds from sales of property and equipment	—			—		—			—			—
Return of investment in subsidiary	125			—		—			(125		)	—
Net cash used in investing activities	(2,405		)	—		—			(125		)	(2,530		)

Cash flows from financing activities:
Proceeds from borrowings under revolving credit facility	—			—		—			—			—
Repayments of obligations	(385		)	—		(370		)	—			(755		)
Payments of deferred financing costs	(9		)	—		—			—			(9		)
Stock options exercised	36			—		—			—			36
Reinsurance payments made from deposits	—			—		(158		)	158			—
Dividends paid	—			—		(125		)	125			—
Net cash used in financing activities	(358		)	—		(653		)	283			(728		)

Net (decrease) increase in cash and cash equivalents	(3,512		)	315		(20		)	—			(3,217		)

Cash and cash equivalents, beginning of period	22,058			798		2,221			—			25,077

Cash and cash equivalents, end of period	$	18,546		$	1,113	$	2,201		$	—		$	21,860

Supplemental disclosures:
Interest paid	$	219		$	—	$	1,050		$	—		$	1,269
Income taxes paid	41			130		61			—			232

(Unaudited)

Supplemental Condensed Consolidating Balance Sheet

As of January 1, 2006

(In thousands)

						Non-
	Parent			Guarantor		guarantor
	Company			Subsidiary		Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	11,546		$	780	$	2,271		$	—		$	14,597
Restricted cash	—			—		2,549			—			2,549
Accounts receivable, net	9,036			1,721		—			—			10,757
Inventories	15,775			—		—			—			15,775
Assets held for sale	1,628			—		—			—			1,628
Deferred income taxes	(131		)	26		—			105			—
Prepaid expenses and other current assets	7,571			2,565		7,785			(12,877		)	5,044
Total current assets	45,425			5,092		12,605			(12,772		)	50,350
Deferred income taxes	(276		)	381		—			(105		)	—
Property and equipment, net	100,309			—		42,510			—			142,819
Intangibles and deferred costs, net	16,808			—		2,255			—			19,063
Investments in subsidiaries	5,188			—		—			(5,188		)	—
Other assets	5,095			5,118		915			(5,118		)	6,010
Total assets	$	172,549		$	10,591	$	58,285		$	(23,183	)	$	218,242
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
Current maturities of long-term obligations	$	9,253		$	—	$	1,368		$	(7,776	)	$	2,845
Accounts payable	24,968			—		—			—			24,968
Accrued expenses	37,237			4,258		1,825			(4,844		)	38,476
Total current liabilities	71,458			4,258		3,193			(12,620		)	66,289
Long-term obligations, less current maturities	182,221			—		48,846			—			231,067
Other long-term liabilities	60,708			930		6,461			(5,375		)	62,724
Stockholders’ (deficit) equity	(141,838		)	5,403		(215		)	(5,188		)	(141,838		)
Total liabilities and stockholders’ (deficit) equity	$	172,549		$	10,591	$	58,285		$	(23,183	)	$	218,242

~~FRIENDLY~~Supplemental Condensed ~~ICE~~Consolidating ~~CREAM~~Balance ~~CORPORATION~~Sheet As ~~AND~~of ~~SUBSIDIARIES~~December 31, 2006 (In thousands)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

							Non-
	Parent			Guarantor			guarantor
	Company			Subsidiary			Subsidiaries			Eliminations			Consolidated

Assets

Current assets:
Cash and cash equivalents	$	22,057		$	798		$	2,222		$	—		$	25,077
Restricted cash	—			—			517			—			517
Accounts receivable, net	9,593			1,842			7,776			(7,776		)	11,435
Inventories	17,059			—			—			—			17,059
Assets held for sale	896			—			—			—			896
Deferred income taxes	—			156			—			(156		)	—
Prepaid expenses and other current assets	3,181			(2		)	9			(61		)	3,127
Total current assets	52,786			2,794			10,524			(7,993		)	58,111
Deferred income taxes	928			288			—			(288		)	928
Property and equipment, net	96,850			—			40,575			—			137,425
Intangibles and deferred costs, net	15,759			—			2,024			—			17,783
Investments in subsidiaries	107			—			—			(107		)	—
Other assets	5,005			851			915			(851		)	5,920

Total assets	$	171,435		$	3,933		$	54,038		$	(9,239	)	$	220,167

Liabilities and Stockholders’ (Deficit) Equity

Current liabilities:
Current maturities of long-term obligations	$	9,387		$	—		$	1,493		$	(7,776	)	$	3,104
Accounts payable	22,247			—			—			—			22,247
Accrued expenses	39,926			2,098			1,533			(217		)	43,340
Total current liabilities	71,560			2,098			3,026			(7,993		)	68,691
Long-term obligations, less current maturities	180,665			—			46,667			—			227,332
Other long-term liabilities	46,106			702			5,371			(1,139		)	51,040
Stockholders’ (deficit) equity	(126,896		)	1,133			(1,026		)	(107		)	(126,896		)

Total liabilities and stockholders’ (deficit) equity	$	171,435		$	3,933		$	54,038		$	(9,239	)	$	220,167

(Unaudited)

Supplemental Condensed Consolidating Statement of Operations

For the Three Months Ended April 3, 2005

(In thousands)

							Non-
	Parent			Guarantor			guarantor
	Company			Subsidiary			Subsidiaries			Eliminations			Consolidated
Revenues	$	119,191		$	2,472		$	—		$	—		$	121,663
Costs and expenses:
Cost of sales	46,889			—			—			—			46,889
Labor and benefits	35,084			—			—			—			35,084
Operating expenses	25,140			—			(1,739		)	—			23,401
General and administrative expenses	8,293			1,156			—			—			9,449
Depreciation and amortization	5,593			—			558			—			6,151
Gain on franchise sales of restaurant operations and properties	(1,309		)	—			—			—			(1,309		)
Loss on disposals of other property and equipment, net	69			—			—			—			69
Interest expense, net	4,167			—			1,119			—			5,286
(Loss) income before benefit from (provision for) income taxes and equity in net income of consolidated subsidiaries	(4,735		)	1,316			62			—			(3,357		)
Benefit from (provision for) income taxes	1,330			(540		)	(51		)	—			739
(Loss) income from continuing operations	(3,405		)	776			11			—			(2,618		)
Loss from discontinued operations, net of income taxes	(368		)	—			—			—			(368		)
(Loss) income before equity in net income of consolidated subsidiaries	(3,773		)	776			11			—			(2,986		)
Equity in net income of consolidated subsidiaries	787			—			—			(787		)	—
Net (loss) income	$	(2,986	)	$	776		$	11		$	(787	)	$	(2,986	)

~~FRIENDLY~~Supplemental ~~ICE~~Condensed ~~CREAM~~Consolidating ~~CORPORATION~~Statement ~~AND~~of Operations For ~~SUBSIDIARIES~~the Three Months Ended April 2, 2006 (In thousands)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

							Non-
	Parent			Guarantor			guarantor
	Company			Subsidiary			Subsidiaries			Eliminations			Consolidated

Revenues	$	123,097		$	2,618		$	—		$	—		$	125,715

Costs and expenses:
Cost of sales	48,385			—			—			—			48,385
Labor and benefits	36,012			—			—			—			36,012
Operating expenses and write-
downs of property and equipment	25,920			—			(1,706		)	—			24,214
General and administrative expenses	9,942			1,155			—			—			11,097
Depreciation and amortization	5,237			—			543			—			5,780
Gain on franchise sales of restaurant operations and properties	(866		)	—			—			—			(866		)
Loss on disposals of other property and equipment, net	109			—			—			—			109
Interest expense, net	4,337			—			1,083			—			5,420

(Loss) income before benefit from (provision for) income taxes and equity in net income of consolidated subsidiaries	(5,979		)	1,463			80			—			(4,436		)

Benefit from (provision for) income taxes	654			(600		)	(54		)	—			—

(Loss) income from continuing operations	(5,325		)	863			26			—			(4,436		)

Income from discontinued operations	2,616			—			—			—			2,616

(Loss) income before equity in net income of consolidated subsidiaries	(2,709		)	863			26			—			(1,820		)

Equity in net income of consolidated subsidiaries	889			—			—			(889		)	—

Net (loss) income	$	(1,820	)	$	863		$	26		$	(889	)	$	(1,820	)

(Unaudited)

Supplemental Condensed Consolidating Statement of Cash Flows

For the Three Months Ended April 3, 2005

(In thousands)

							Non-
	Parent			Guarantor			guarantor
	Company			Subsidiary			Subsidiaries			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	3,638		$	(534	)	$	383		$	(241	)	$	3,246
Cash flows from investing activities:
Purchases of property and equipment	(2,408		)	—			—			—			(2,408		)
Proceeds from sales of property and equipment	1,706			—			—			—			1,706
Purchases of marketable securities	(183		)	—			—			—			(183		)
Proceeds from sales of marketable securities	42			—			—			—			42
Return of investment in subsidiary	162			—			—			(162		)	—
Net cash used in investing activities	(681		)	—			—			(162		)	(843		)
Cash flows from financing activities:
Proceeds from revolving credit facility	15,250			—			—			—			15,250
Repayments of obligations	(19,627		)	—			(406		)	—			(20,033		)
Payments related to deferred financing costs	(11		)	—			—			—			(11		)
Stock options exercised	136			—			—			—			136
Reinsurance payments made from deposits	—			—			(241		)	241			—
Dividends paid	—			—			(162		)	162			—
Net cash used in financing activities	(4,252		)	—			(809		)	403			(4,658		)
Net decrease in cash and cash equivalents	(1,295		)	(534		)	(426		)	—			(2,255		)
Cash and cash equivalents, beginning of period	9,873			1,360			2,172			—			13,405
Cash and cash equivalents, end of period	$	8,578		$	826		$	1,746		$	—		$	11,150
Supplemental disclosures:
Interest paid	$	198		$	—		$	1,557		$	—		$	1,755
Income taxes (refunded) paid	(2,552		)	2,495			52			—			(5		)

Supplemental Condensed Consolidating Statement of Cash Flows
For the Three Months Ended April 2, 2006
(In thousands)

						Non-
	Parent			Guarantor		guarantor
	Company			Subsidiary		Subsidiaries			Eliminations			Consolidated

Net cash provided by operating activities	$	1,998		$	10	$	926		$	(235	)	$	2,699

Cash flows from investing activities:
Purchases of property and equipment	(2,404		)	—		—			—			(2,404		)
Proceeds from sales of property and equipment	5,794			—		—			—			5,794
Return of investment in subsidiary	282			—		—			(282		)	—
Net cash provided by investing activities	3,672			—		—			(282		)	3,390

Cash flows from financing activities:
Proceeds from revolving credit facility	8,000			—		—			—			8,000
Repayments of obligations	(8,405		)	—		(324		)	—			(8,729		)
Payments of deferred financing costs	(205		)	—		—			—			(205		)
Stock options exercised	19			—		—			—			19
Reinsurance payments made from deposits	—			—		(235		)	235			—
Dividends paid	—			—		(282		)	282			—
Net cash used in financing activities	(591		)	—		(841		)	517			(915		)

Net increase in cash and cash equivalents	5,079			10		85			—			5,174

Cash and cash equivalents, beginning of year	11,546			780		2,271			—			14,597

Cash and cash equivalents, end of year	$	16,625		$	790	$	2,356		$	—		$	19,771

Supplemental disclosures:
Interest paid	$	505		$	—	$	1,023		$	—		$	1,528
Income taxes (refunded) paid	(3,094		)	2,534		57			—			(503		)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements of the Company and the notes thereto included elsewhere herein.

Forward Looking Statements

Statements contained herein that are not historical facts constitute “forward looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “plans,” “anticipates,” “expects,” “will” and similar expressions are intended to identify forward looking statements. Forward looking statements include, but are not limited to, statements relating to the sufficiency of our capital resources, ~~changes in~~trends ~~commodity~~relating ~~prices,~~to ~~anticipated capital expenditures and~~ our ~~plans~~results ~~with~~of ~~respect to restaurant openings~~operations, ~~closings,~~changes ~~re-imagings~~in ~~and~~commodity ~~re-franchisings. All forward looking statements are subject to known and unknown risks~~prices, ~~uncertainties~~ ~~and other factors which could cause actual results to differ materially from those~~ anticipated~~. These factors include: our highly~~ ~~competitive~~capital ~~business environment; exposure to fluctuating commodity prices; risks associated with the foodservice industry~~expenditures, ~~such as changes in consumer tastes~~ and ~~adverse~~estimates ~~publicity resulting from food quality, illness, injury or other health concerns; the ability to retain~~ and ~~attract~~assumptions ~~new~~used ~~employees; government regulations; high geographic concentration~~ in the ~~Northeast~~preparation ~~and its attendant weather patterns; conditions needed to meet restaurant re-imaging and new opening targets; risks and uncertainties arising out~~ of ~~accounting adjustments;~~ our ~~ability to service our debt and other obligations; our ability to meet ongoing~~ financial covenants contained in our debt instruments, loan agreements, leases and other long-term commitments; and costs associated with improved service and other initiatives. Other factors that may cause actual results to differ from the forward looking statements ~~contained herein and that may affect our prospects in general are included in our other filings with the Securities and Exchange Commission~~. ~~We are not obligated to update any forward looking statements, whether as a result of new information, future events or otherwise.~~

All forward looking statements are subject to known and unknown risks, uncertainties and other factors which could cause our or the foodservice industry’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These factors include: our highly competitive business environment; exposure to fluctuating commodity prices; risks associated with the foodservice industry, such as changes in consumer tastes and adverse publicity resulting from food quality, illness, injury or other health concerns; the ability to retain and attract new and qualified employees; government regulations; high geographic concentration in the Northeast and its attendant weather patterns; conditions needed to meet restaurant re-imaging and new opening targets; risks and uncertainties arising out of accounting estimates and adjustments; our ability to service our debt and other obligations; our ability to meet ongoing financial covenants contained in our debt instruments, loan agreements, leases and other long-term commitments; unforeseen or increased costs associated with litigation and similar matters; and costs associated with improved service and other initiatives. On March 7, 2007, we announced that our Board of Directors is exploring strategic alternatives for enhancing shareholder value, including a possible sale of the Company. There is no assurance that the process will result in any specific transaction. However, the implementation of certain strategic alternatives could affect our current plans and strategies, and any forward-looking statements in this report are qualified by reference to our ongoing analysis. Other factors that could adversely affect our business and prospects are described in our filings with the Securities and Exchange Commission, including our 2006 Annual Report on Form 10-K/A.

Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based.

Overview

~~Our~~We ~~revenues~~ are ~~derived~~a ~~primarily~~leading ~~from the operation of~~ full-service ~~restaurants~~, ~~the~~casual ~~distribution~~dining restaurant company and ~~sale~~provider of premium ice cream ~~desserts~~ ~~through~~products ~~retail~~with locations primarily ~~and~~in ~~franchising.~~the Northeast. As of April 2 1, ~~2006~~2007, we operated ~~312~~317 full-service restaurants, and franchised ~~207~~198 full-service ~~restaurants~~ restaurants and seven non-traditional units ~~and manufactured a full line of premium ice cream desserts distributed through more than 4~~,~~500~~ ~~supermarkets~~located ~~and other retail locations~~ in 1316 states.

24Our revenues are derived from three primary sources:

· Restaurant revenue, which consists of sales from Company-operated full-service restaurants;

· Foodservice revenue, which consists of sales of food and premium ice cream products that we distribute and sell to our franchisees and to more than 4,000 supermarkets and other retail locations in 12 states; and

· Franchise revenue, which consists of franchise fees, royalty income we receive from our franchisees, and other franchise income. Initial franchise fees typically range from $30,000 to $35,000 for each restaurant opened. Franchise royalties are generally 4% of each franchise restaurant’s monthly net sales. Other franchise income includes rental income on any properties we own and lease or sublease to franchisees.

Following is a summary of the Company-operated and franchised units:

	For the Three Months Ended
	April 2,		April 3,
	April 1,		April 2,
	2006		2005
	2007		2006
Company Units:
Beginning of period	~~314~~316		~~347~~314
Openings	1		—1
Refranchised closings	(1	)	(7	)
Acquired from franchisees	1		—
Closings	(2	)	(3	)
Acquired by franchisees	—		(1	)
End of period	312		337
Closings	(1	)	(2	)
End of period	317		312
Franchised Units:
Beginning of period	~~213~~205		~~195~~213
Refranchised openings	1		7
Openings	1		—
Closings	—		(1	)
Acquired by franchisees	—		1
End of period	214		201
Acquired from franchisees	(1	)	—
Closings	—		—
End of period	205		214

Discontinued Operations

~~During~~SFAS ~~December~~No. ~~2005~~144, we“Accounting for ~~closed~~the ~~seven~~Impairment ~~restaurants and~~or ~~committed~~Disposal toof Long-Lived Assets,” requires the results of operations of a ~~plan~~component toof ~~sell~~an ~~the~~entity ~~seven~~that ~~restaurants~~is classified as ~~well~~held asfor ~~four restaurants~~sale or that ~~were~~has ~~closed~~been indisposed ~~2004.~~of ~~During~~to ~~the~~be ~~three~~reported ~~months~~as ~~ended~~discontinued ~~April~~operations 2,in the ~~2006,~~statement weof ~~sold~~operations ~~five~~if ofcertain ~~these~~conditions ~~restaurants~~are met. AtThese ~~April~~conditions 2,include commitment ~~2006,~~to a plan of disposal after the ~~remaining~~effective ~~six~~date of this statement, ~~properties~~elimination ~~and~~of ~~one~~the ~~additional~~operations ~~property~~and ~~closed~~cash ~~during~~flows of the ~~three~~entity ~~months~~component ~~ended~~from our ~~April~~ongoing 2,operations ~~2006~~and ~~met~~no ~~the~~significant ~~criteria~~continuing ~~for~~involvement ~~“held~~in ~~for~~the ~~sale”~~operations of asthe ~~defined~~entity incomponent ~~SFAS~~after ~~No.~~the ~~144~~disposal transaction.

In accordance with SFAS No. 144, the results of operations of the ~~five~~eight properties that were disposed of during ~~the three months ended April 2,~~ 2006 and ~~the~~any related net gain on the disposals, as well as ~~the~~ the results of operations of ~~the~~three properties held for sale at April 21, ~~2006, were~~2007 were reported separately as discontinued operations in the accompanying condensed consolidated statements of operations for the three months ended April 1, 2007 and April 2, 2006.

~~Three~~During ~~Months~~2006, ~~Ended~~we ~~April~~closed 2,one ~~2006~~restaurant ~~Compared~~and committed to a ~~With~~plan ~~Three~~to ~~Months~~sell ~~Ended~~that restaurant. At April 1, 32007, ~~2005~~this property met the criteria for “held for sale” as defined in SFAS No. 144. The results of operations associated with this restaurant were not material and therefore were reported within continuing operations in the accompanying condensed consolidated statements of operations for all periods presented.

Three Months Ended April 1, 2007 Compared With Three Months Ended April 2, 2006

Revenues:

Total revenues -— Total revenues ~~increased~~decreased $43.01 million, or 32.35%, to $~~125~~122.76 million for the ~~first~~ ~~quarter~~three months ended April 21, ~~2006~~2007 from $~~121~~125.7 million for the same quarter in ~~2005~~ 2006.

Restaurant revenues -— Restaurant revenues ~~increased~~decreased $2.21 million, or 2.32%, to $9593.32 million for the three months ended April 21, ~~2006~~2007 from $9395.1 3 million for the same period in ~~2005~~ 2006. Comparable Company-operated restaurant revenues ~~increased~~during this period decreased by $3.6 million, or 4.81%, ~~from~~compared ~~the~~to an ~~2005~~increase ~~quarter~~of to4.8% experienced during the ~~2006~~same ~~quarter~~period asin ~~increases~~2006. ~~occurred~~Colder weather in 2007, ~~all~~especially ~~dayparts~~at night, combined with ~~the largest~~a ~~occurring~~greater ~~during~~number ~~the~~of ~~dinner~~operating days with significant snow and ~~afternoon~~rain ~~snack~~events, ~~periods.~~had ~~Operating~~a ~~days lost~~negative ~~due~~impact toon ~~weather~~sales. ~~closings~~The closing ~~were~~of ~~lower~~six inlocations ~~2006~~and ~~when~~the ~~compared~~acquisition toof ~~2005~~six asCompany-operated ~~most~~locations ~~markets~~by infranchisees ~~New~~over ~~England~~the ~~recorded~~past ~~higher~~15 ~~than~~months ~~normal~~resulted ~~snowfall~~in ~~during~~declines ~~2005~~of $0.8 million and ~~Additionally~~$1.7 million, ~~the~~respectively, ~~opening~~in ofrestaurant revenues in the three ~~new~~months ~~restaurants~~ended April ~~over~~1, ~~the~~2007 ~~past~~as 15compared ~~months increased~~to ~~revenues~~the bysame ~~$1.1~~period ~~million~~in 2006. These ~~increases~~decreases were partially offset by ~~the~~ ~~closing~~our ofopening ~~two~~three ~~locations~~new restaurants and ~~the~~taking ~~re-franchising~~over operation of 16twelve formerly ~~locations~~franchised restaurants over the past 15 months, ~~resulting~~which resulted in increased ~~declines~~revenues of $04.20 million. We began operating the twelve restaurants in December 2006 following a default and peaceful $3surrender by a former franchisee under its leases and franchise agreements with us.2 ~~million,~~We are currently operating these restaurants while we ~~respectively,~~search infor ~~restaurant~~a ~~revenues~~new infranchisee ~~the~~to ~~first~~take ~~quarter~~over oftheir ~~2006~~operation. If asthe ~~compared~~properties are not re-franchised, we tomay acquire or close the ~~same~~restaurants, ~~period~~at inour ~~2005~~option.

There was one new restaurant opened during ~~the~~each ~~first three months~~ of ~~2006. There were no new restaurants opened during~~ the first ~~three~~quarters ~~months~~ of ~~2005;~~2007 ~~however,~~and ~~two mall restaurants were remodeled during the quarter~~2006.

Foodservice revenues - Foodservice (product sales to franchisees and retail customers) revenues increased $1.6 million, or 6.3%, to $26.9 million for the three months ended April 2, 2006 from $25.3 million for the three months ended April 3, 2005. This increase was primarily due to a $1.3 million increase in franchised restaurant product revenue resulting from the increased number of franchised restaurants in the first quarter of 2006 compared to the same period in 2005. Sales to foodservice retail supermarket customers increased $0.3 million in the three months ended April 2, 2006 compared to the same period in 2005 as case volume in our retail supermarket business increased 8.0% for the three months ended April 2, 2006 when compared to the three months ended April 3, 2005. Discounting and sales allowances were 3.2% greater as a percentage of gross revenues in the 2006 period when compared to the same period in 2005.

Franchise revenues - Franchise royalty and fee revenues increased $0.2 million, or 9.1%, to $3.5 million for the three months ended April 2, 2006 compared to $3.3 million for the same period in 2005.

Royalties on franchised sales increased $0.2 million in the first quarter of 2006 as compared to the same period in 2005 due primarily to the opening of six new franchise restaurants and 16 re-franchised restaurants during the last 15 months. The closing of three under-performing locations during the same period had little impact. Comparable franchised revenues grew 0.6% from the three months ended April 3, 2005 to the three months ended April 2, 2006.

Initial franchise fees declined by $0.1 million during the three months ended April 2, 2006 when compared to the same period in 2005 due to the refranchising of seven Company-operated locations during the quarter ended April 3, 2005 versus one re-franchise opening during the quarter ended April 2, 2006.

An increase in rental income for leased and subleased franchise locations of $0.1 million contributed to the higher revenues. There were 214 and 201 franchise units open at April 2, 2006 and April 3, 2005, respectively.

Cost of sales:

Cost of sales increased $1.5 million, or 3.2%, to $48.4 million for the three months ended April 2, 2006 from $46.9 million for the same period in 2005. Cost of sales as a percentage of total revenues was 38.5% for both three month periods. A shift in sales mix from Company-operated restaurant sales to foodservice sales had an unfavorable impact on the overall cost of sales as a percentage of total revenues. Foodservice sales to franchisees and retail supermarket customers (21.4% and 20.8% of total revenues for the three months ended April 2, 2006 and April 3, 2005, respectively) have a higher food cost as a percentage of revenue, at 92.6%, than sales in Company-operated restaurants to restaurant patrons. Foodservice retail sales promotional allowances, recorded as offsets to revenues, increased by 3.2% in the 2006 quarter as a percentage of gross retail sales when compared to the 2005 quarter as a result of a competitive climate in the northeast. This increase also had an unfavorable impact on the overall cost of sales as a percentage of total revenues. These increases were mostly offset by lower cream costs and growth in franchise revenues.

The cost of cream was approximately $0.7 million lower in the three month period ended April 2, 2006 when compared to the same period in 2005; however, market losses on cash-settled butter futures contracts were $0.2 greater than the losses experienced on butter future contracts during the first quarter of 2005. We enter into commodity option contracts from time to time to manage dairy cost pressures. Our commodity option contracts do not meet hedge accounting criteria as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related amendment, SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, and, accordingly, are marked to market each period with the resulting gains or losses recognized in cost of sales.

Restaurant cost of sales as a percentage of restaurant revenues decreased to 26.8% in the first quarter of 2006 from 27.4% in the first quarter of 2005. The decrease in the 2006 quarter when compared to the 2005 quarter was in part due to lower cream costs, re-formulation of certain products and menu price increases.

Increases in franchise revenues, which have no associated product cost, reduced cost of sales as a percentage of total revenues by 0.1% for the three months ended April 2, 2006 when compared to the 2005 quarter. Manufacturing efficiencies improved in the current period when compared to the same period a year ago.

For the remainder of 2006, we expect that cream prices will be lower than the prices experienced in 2005. Additionally, the results derived from options for butter futures contracts are more likely to be unfavorable in 2006 when compared to 2005.

The table below shows the average monthly price of a pound of AA butter. Futures and options on AA butter are traded on the Chicago Mercantile Exchange and AA butter is the commodity used to derive the price of cream. The prices shown were obtained from market quotes provided by the United States Department of Agriculture’s (“USDA”) Agricultural Marketing Service.

Month:	2006			2005		2004		2003		2002		2001
January	$	1.3368		$	1.5775	$	1.4320	$	1.0815	$	1.3454	$	1.2531
February	1.1930			1.6145		1.7132		1.0405		1.2427		1.3852
March	1.1663			1.5527		2.1350		1.0915		1.2473		1.5708
April				1.4933		2.2204		1.0906		1.1712		1.8217
May				1.4044		2.0363		1.0919		1.0590		1.8713
June				1.5313		1.9300		1.1142		1.0427		1.9783
July				1.6210		1.7458		1.1985		1.0302		1.8971
August				1.6861		1.5408		1.1708		0.9752		2.0880
September				1.6988		1.7656		1.1731		0.9635		2.0563
October				1.6204		1.6475		1.1846		1.0315		1.4070
November				1.4260		1.9238		1.2057		1.0425		1.3481
December				1.3552		1.7083		1.2969		1.1198		1.2793
Mathematical Avg	$		1.2320	$	1.5484	$	1.8166	$	1.1450	$	1.1059	$	1.6630

The cost of cream, the principal ingredient used in making ice cream, affects cost of sales as a percentage of total revenues, especially in foodservice’s retail business. A $0.10 increase in the cost of a pound of AA butter adversely affects our annual cost of sales by approximately $0.9 million. This adverse impact may be offset by price increases or other factors. However, no assurance can be given that we will be able to offset any cost increases in the future and future increases in cream prices could have a material adverse effect on our results of operations. To minimize risk, alternative supply sources continue to be pursued.

On September 19, 2005, the Chicago Mercantile Exchange launched the first electronically traded, cash-settled butter futures contract. This new futures contract is designed to meet the needs of food and dairy companies that have exposure to butterfat price risk but do not want to expose themselves to the possibility of being compelled to take physical delivery of butter. The size of the contract is 20,000 pounds of AA butter, versus the traditional butter futures contract, which is 40,000 pounds. The contract is cash settled based upon the USDA monthly weighted average price for butter in the United States. With this new type of futures contract, there is no risk of delivery of butter; therefore it offers us the ability to hedge the price risk of cream (on a butter basis) without having to take delivery of commodity butter. We have evaluated this new hedging instrument and believe it is an attractive way to hedge the price risk related to cream. At April 2, 2006, we held 83 contracts spread over the remaining months of the year. These contracts correspond to approximately 20% of our anticipated cream purchases for the remainder of the year.

Foodservice revenues — Foodservice revenues (product sales to franchisees and retail customers) decreased $1.0 million, or 3.5%, to $25.9 million for the three months ended April 1, 2007 from $26.9 million for the three months ended April 2, 2006. Sales to foodservice retail supermarket customers decreased $0.7 million in the three months ended April 1, 2007 compared to the same period in 2006 primarily due to lower case volume of 5.8% and higher promotional trade spending and sales allowances of 0.7% of sales during the period. Franchised restaurant product revenue decreased $0.3 million. Revenues from product sales to franchisees decreased due primarily to a lower average number of operating franchised restaurants throughout the quarter, 205 for the 2007 quarter compared to 214 for the 2006 quarter. The lower average number of operating franchised restaurants was primarily due to the default by a former franchisee under its leases and franchise agreements with us with respect to twelve franchised restaurants. We are currently operating these restaurants while we seek a substitute franchisee. Additionally, a 4.6% reduction in comparable franchised restaurant revenues was experienced during the three months ended April 1, 2007, compared to the 0.6% increase in comparable franchised restaurant revenues experienced in the three months ended April 2, 2006.

Franchise revenues — Franchise revenues were $3.5 million for both three month periods in 2007 and 2006.

Royalties of $2.4 million decreased $0.1 million for the three months ended April 1, 2007 as compared to the same period in 2006 due primarily to a lower average number of operating franchised restaurants throughout the quarter, 205 for the 2007 quarter compared to 214 for the 2006 quarter. Additionally, a 4.6% reduction in comparable franchised restaurant revenues was experienced during the three months ended April 1, 2007, compared to the 0.6% increase in comparable franchised restaurant revenues experienced in the three months ended April 2, 2006.

Initial franchise fees were minimal during the three months ended April 1, 2007 and April 2, 2006.

Rental income for leased and subleased franchise locations increased $0.1 million, to a total of $1.1 million, for the three months ended April 1, 2007 primarily due to increases in miscellaneous occupancy revenues, which were partially offset by a decrease in the number of operating franchised locations.

Cost of sales:

Cost of sales decreased $1.3 million, or 2.6%, to $47.1 million for the three months ended April 1, 2007 from $48.4 million for the same period in 2006. Cost of sales as a percentage of total revenues was 38.4% and 38.5% for the three months ended April 1, 2007 and April 2, 2006, respectively. This improvement resulted primarily from a 0.8% improvement in cost of sales experienced within the foodservice segment, as the overall sales mix between restaurants and foodservice remained essentially the same year over year. The improvement in foodservice cost of sales more than offset the 0.3% increase experienced in restaurant cost of sales.

Restaurant cost of sales as a percentage of restaurant revenues increased to 27.1% for the three months ended April 1, 2007 from 26.8% for the same period in 2006. This increase was due primarily to normal increases in prices for commodities, as menu pricing was only marginally up year over year.

Foodservice cost of sales as a percentage of foodservice revenues decreased to 84.2% in the three months ended April 1, 2007 from 85.0% in the three months ended April 2, 2006. This improvement was primarily a result of lower cream costs in the 2007 period compared to the same period in 2006.

The cost of cream, the principal ingredient used in making ice cream, affects our costs of sales as a percentage of total revenues, especially in our foodservice retail business. The price of cream is directly affected by changes in the market price for AA butter traded on the Chicago Mercantile Exchange. As an example, a $0.10 increase in the cost of a pound of AA butter affects our annual costs of sales by approximately $0.9 million. This adverse impact may be offset by price increases or other factors. However, no assurance can be given that we will be able to offset any cost increases in the future and future increases in cream prices could have a material adverse effect on our results of operations. To minimize risk, alternative supply sources continue to be pursued.

The overall cost of cream was approximately $0.3 million lower in the three month period ended April 1, 2007 (weighted average price of $1.24 per pound) when compared to the same period in 2006 (weighted average price of $1.35 per pound). Additionally, market losses on cash-settled butter futures contracts were $0.4 million lower than the losses experienced on butter future contracts during the three months ended April 2, 2006. Approximately 70% of this $0.7 million net cost of sales benefit on a year to date basis, or approximately $0.5 million, was reported within our foodservice segment.

When available, we purchase butter option and/or futures contracts to minimize the impact of increases in the cost of cream. Our strategy related to hedging is never to hedge more than 50% of our needs using these instruments, so as not to put us in an uncompetitive position. Option contracts are offered in the months of March, May, July, September, October and December; however, there is often not enough open interest in them to allow us to buy even very limited coverage without paying high premiums. Our commodity option contracts and cash-settled butter futures contracts do not meet hedge accounting criteria as defined by SFAS No. 133, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” and its related amendment, SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” and accordingly, are marked to market each period with the resulting gains or losses recognized in cost of sales.

At April 1, 2007, we held 55 contracts, spread over the remaining months of 2007. These contracts correspond to approximately 20% of our anticipated cream purchases for the periods represented.

For the remainder of 2007, we expect that cream prices will be higher than the prices experienced for the same period in 2006 due to the spread in the futures market compared to the actual prices of last year.

Labor and benefits:

Labor and benefits, ~~increased~~which were only reported within our restaurant segment, decreased $01.96 million, or 24.65%, to $3634.04 million for the three months ended April 21, ~~2006~~2007 from $3536.10 million for the three months ended April 3 2, ~~2005~~2006. ~~Labor~~As ~~and benefits as~~ a percentage of total revenues, labor and benefits decreased to 28.61% infor the ~~2006~~three ~~quarter~~months ended April 1, 2007 from 28.86% infor the three ~~2005~~months ~~quarter~~ended April 2, 2006. AsLabor and benefits, as a percentage of Company restaurant ~~revenues~~revenue only, ~~labor~~decreased ~~and benefits increased~~ to 3736.89% infor the ~~2006~~three ~~quarter~~months ended April 1, 2007 from 37.78% infor the ~~2005~~same ~~quarter.~~period ~~The increase~~ in ~~labor~~2006. ~~dollars~~The decrease was partially ~~primarily~~ a result of ~~higher~~lower general manager bonus ~~and~~of ~~restaurant pension expense~~$0.4 ~~Revenue~~million resulting ~~increases~~from ~~derived~~the ~~from~~negative ~~franchised~~comparable ~~locations~~restaurant ~~and~~revenues ~~retail~~generated ~~customers~~during the quarter. In addition, ~~which~~fringe dobenefits ~~not have~~decreased ~~any~~by ~~associated~~0.4% ~~restaurant~~of ~~labor~~Company ~~and~~restaurant ~~benefits~~revenues, due ~~contributed~~mostly to ~~the~~a ~~lower restaurant~~slight ~~labor~~reduction ~~and~~in ~~benefits~~non-group asrelated ainsurance ~~percentage~~costs ofsuch ~~total~~as workers ~~revenues~~compensation.

Operating expenses:

Operating expenses increased $01.60 million, or 24.62%, to $2425.0 million for the three months ended April 21, ~~2006~~2007 from $2324.40 million for the three months ended April 32, ~~2005.~~ 2006. Operating expenses as a percentage of total revenues were 1920.14% and 19.21% in the ~~2006~~2007 and ~~2005~~2006 periods, respectively. ~~The~~A ~~dollar~~significant ~~increase~~portion ~~resulted from~~of ~~higher~~these ~~advertising~~expenses ($24.3 million in 2007 and $22.9 million in 2006) were reported within our restaurant ~~utility~~segment. In the three months ended April 1, 2007, these costs consisted of $03.7 million in supplies, $5.3 million ~~and~~in utilities, $02.47 million in maintenance, ~~respectively~~$2.7 ~~These~~million ~~increases~~in ~~were~~advertising, ~~partially~~$5.6 ~~offset~~million byin ~~lower~~occupancy and ~~costs~~$4.3 ~~for snow~~million ~~removal~~in ~~and~~other ~~maintenance~~restaurant asexpenses. aThe ~~result~~increase ofis ~~better~~primarily ~~weather~~due to increases in advertising ($0.5 million) resulting from two additional weeks of television advertising during the ~~2006~~first ~~period~~quarter of 2007, occupancy ($0.4 million), ~~when~~utility ~~compared~~costs to($0.3 million) and supplies ($0.2 million). These increases were partially offset by lower selling expenses in the ~~2005~~foodservice ~~period~~segment of $0.5 million.

General and administrative expenses:

General and administrative expenses were $1110.16 million and $911.41 million for the three months ended April 21, ~~2006~~2007 and April 32, ~~2005~~2006, respectively. General and administrative expenses as a percentage of total revenues ~~increased~~decreased to 8.87% in the ~~2006~~2007 period from 78.8% in the ~~2005~~2006 period. The $10.75 million ~~increase~~decrease is was primarily the result of ~~increases~~lower insalary, ~~bonuses~~severance, fringe ~~($0.5 million)~~benefit, ~~severance~~and bonus costs ( of $0.37 million), ~~salaries~~partially ~~($0.4~~offset ~~million),~~by ~~pension~~increased legal ~~costs~~fees (and stock compensation expense of $0.1 million) and ~~legal fees (~~$0.1 million), respectively.

Write-downs of property and equipment:

~~During~~Write-downs of property and equipment were $0.2 million in each of the three ~~months~~month periods ended April 1, 2007 and April 2, 2006. During each of the three month periods ended April 1, 2007 and April 2, 2006, we determined that the carrying value of one restaurant property exceeded its estimated fair ~~values~~value less costs to sell and each of the carrying ~~value~~values were ~~was~~ reduced by $0.2 million accordingly.

Stock-based compensation expense:

On January 2, 2006, we adopted the Financial Accounting Standards Board’s Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”), using the modified prospective application method. Compensation cost is calculated on the date of grant using the fair value of the options as determined by the Black-Scholes valuation model. The Black-Scholes valuation model requires us to make several assumptions including volatility. We have considered the guidance in SFAS No. 123R and believe that our historical estimated volatility is materially indicative of expectations about future volatility.

During the three months ended April 2, 2006, we recognized $0.1 million of total stock-based compensation expense as a result of the adoption of SFAS No. 123R, which was included in general and administrative expenses. We expect to recognize an additional $0.4 million of stock compensation expense during the remainder of 2006 related to the awards outstanding at April 2, 2006.

Prior to the adoption of SFAS No. 123R, we accounted for share-based payments to employees using APB Opinion No. 25’s, “Accounting for Stock Issued to Employees,” intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. The adoption of SFAS No. 123R under the modified prospective application method allowed us to recognize compensation cost (a) based on the requirement of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. Under the modified prospective application method, prior periods were not restated for the effect of SFAS No. 123R. We used the straight-line attribution method to recognize expense for all grants made.

On December 20, 2004, our Board of Directors approved the vesting of all outstanding and unvested options for our 1997 Plan and our 2003 Incentive Plan. This action was taken to reduce, or eliminate to the extent permitted, the transition expense related to outstanding stock option awards under SFAS No. 123R. The 259,850 options that were vested included 145,239 options with exercise prices greater than our closing stock price on the modification date. Under the accounting guidance of APB Opinion No. 25, the accelerated vesting resulted in stock-based compensation cost of $9,400 (net of related income tax benefit of $6,600), which was included in net loss for the year ended January 2, 2005. Additionally, the effect of the accelerated vesting in the Company’s pro-forma disclosure was incremental stock-based compensation of approximately $0.7 million (net of related income tax benefit of $0.5 million). Stock-based compensation expense of $0.4 million and $0.1 million would otherwise have been recognized in accordance with SFAS No. 123R in our consolidated statements of operations during the 2006 and 2007 fiscal years, respectively.

As of April 2, 2006, there was $1.1 million of total unrecognized compensation cost related to unvested share-based awards. That cost is expected to be recognized over a weighted-average period of 2.7 years.

See Note 3 of Notes to Condensed Consolidated Financial Statements contained in Item 1 of this Quarterly Report on Form 10-Q for further information regarding our adoption of SFAS No. 123R.

Depreciation and amortization:

Depreciation and amortization was $56.82 million and $65.28 million for the three months ended April 21, ~~2006~~2007 and April 32, ~~2005~~2006, respectively. Depreciation and amortization as a percentage of total revenues was 45.60% and 54.16% in the ~~2006~~ 2007 and ~~2005~~2006 ~~quarters~~periods, respectively. The ~~2005~~increase ~~quarter~~in ~~was~~depreciation and ~~higher~~amortization was primarily ~~due~~ related to aaccelerated ~~reduction~~depreciation ofon equipment associated with the ~~lives~~conversion of ~~leasehold~~our ~~improvement~~56 ~~assets~~oz aspackaging aformat ~~result~~from ofthe ~~management~~traditional ~~decisions~~“brick” container to ~~close~~the ~~certain~~more ~~leased~~contemporary ~~properties~~and ~~sooner~~consumer-friendly ~~than previously~~“sqround” ~~anticipated~~package.

Gain on franchise sales of restaurant operations and properties:

Gain on franchise sales of restaurant operations and properties was $0.9 million ~~and $1.3 million~~ in ~~the three months ended April 2, 2006 and April~~ ~~3, 2005, respectively. During~~ the three months ended April 2, 2006, ~~we recognized a gain of $0.9 million~~ associated with the sale of certain ~~equipment~~ equipment assets, lease and sublease rights and franchise rights in one ~~existing~~ existing Friendly’s restaurant. ~~During the three months ended April 3, 2005, we~~ There ~~recognized~~was ano gain ofon ~~$1.3~~sales ~~million associated with the sale~~ of ~~certain~~restaurant ~~equipment assets,~~operations ~~lease~~ and ~~sublease~~properties ~~rights~~during ~~and~~the ~~franchise~~three months ~~rights~~ended inApril ~~one~~1, ~~existing Friendly’s restaurant~~2007.

Loss on disposals of other property and equipment, net:

The loss on disposals of other property and equipment , net was $35 thousand and $0.1 million for ~~both~~the three ~~month~~months ~~periods~~ ended April 21, ~~2006~~ 2007 and April 32, ~~2005.~~2006, respectively. The table below identifies the components of the loss on disposals of other property and equipment, net as shown on the accompanying condensed consolidated statements of operations (in thousands):

	For the Three Months Ended
	April 2,		April 3,
	April 1,		April 2,
	2006		2005
	2007		2006
Restaurant equipment assets retired due to replacement	$	7535	$	5275
Loss due to restaurant fire	30—		—30
All other	4—		174
Loss on disposals of other property and equipment, net	$	~~109~~35	$	69109

Interest expense, net:

Interest expense, net of capitalized interest and interest income, was $5.4.9 million and $5.34 million for the three months ended April 21, ~~2006~~2007 and April 32, ~~2005~~2006, respectively. The ~~increase~~decrease in interest expense in the ~~first~~2007 ~~quarter~~period ~~of 2006~~ compared to the same period in ~~2005~~2006 iswas primarily due to reduced aamounts ~~fee~~ of ~~$0.2~~interest ~~million associated~~on ~~with the assignment~~ our ~~Credit~~revolving ~~Facility~~credit ~~from~~facility ~~Bank~~as ofthere ~~America~~were ~~and~~no ~~certain~~borrowings ~~other~~against ~~lenders~~the torevolving ~~Wells~~credit ~~Fargo~~facility ~~Foothill.~~during ~~This~~the ~~fee~~2007 ~~was~~period ~~partially offset by~~as ~~reduced~~compared ~~amounts~~to borrowings of

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