UNITEDTable STATESof SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Contents

~~FORM~~UNITED ~~10-Q~~STATES

~~(Mark~~SECURITIES ~~One)~~AND EXCHANGE COMMISSION

~~[X]~~WASHINGTON, ~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934~~D.C.

~~For~~FORM ~~the~~10-Q ~~quarterly period ended April 3, 2005~~

OR(Mark One)

[x ]QUARTERLY ~~TRANSITION~~ REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ~~SECURITIESEXCHANGE~~SECURITIES EXCHANGE ACT OF 1934.

For the ~~transition~~ quarterly period ~~from~~ended ~~__________~~April 1, to2007 ~~__________~~

~~Commission~~OR ~~file number 0-22639~~

~~CHAMPPS~~¨ ~~ENTERTAINMENT,~~TRANSITION ~~INC.~~REPORT ~~(Exact~~PURSUANT ~~name~~TO ofSECTION ~~registrant~~13 asOR ~~specified~~15(d) inOF ~~its~~THE ~~charter)~~ SECURITIES EXCHANGE ACT OF 1934.

Delaware (State or other jurisdiction of incorporation or organization)	04-3370491 (I.R.S.Employer Identification No.)
10375 Park Meadows Drive, Suite 560, Littleton, Colorado (Address of principal executive offices)	80124(Zip Code)

For the transition period from to

~~(303)~~Commission ~~804-1333~~File ~~(Registrant’s telephone~~Number ~~number,~~000-22639 ~~including area code)~~

~~Indicate~~CHAMPPS 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)ENTERTAINMENT, ~~and (2) has been subject to such filing requirements for the past 90 days~~INC. ~~Yes X No __~~

~~Indicate~~(Exact byname ~~check~~of ~~mark whether the~~ registrant ~~is an accelerated filer (~~as ~~defined~~specified in ~~Rule~~its ~~12b-2 of the Exchange Act~~charter). ~~Yes X No __~~

Number of shares of Common Stock, $.01 par value, outstanding at May 10, 2005:12,936,988 (excluding 471,588 shares held in our treasury).

Delaware

04-3370491

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

CHAMPPS ENTERTAINMENT, INC.

10375 Park Meadows Drive, Suite 560

Littleton, Colorado

80124

(Address of principle executive offices)

(Zip Code)

~~INDEX~~(303) 804-1333

~~PART~~(Registrant’s Itelephone –number, ~~FINANCIAL~~including ~~INFORMATION~~area code)

~~ITEM~~Indicate 1.by ~~ITEM~~check 2.mark ~~ITEM~~whether 3.the ~~ITEM~~registrant ~~4. Financial Statements: Unaudited Consolidated Balance Sheets as of April 3, 2005 and June 27, 2004~~ (~~Restated~~1) has ~~Unaudited~~filed ~~Consolidated~~all ~~Statements~~reports ofrequired ~~Operations~~to -be ~~Three~~filed ~~and~~by ~~Nine~~Section 13 ~~Months~~or ~~Ended April 3, 2005 and March 28, 2004~~ 15(~~Restated~~d) ~~Unaudited Consolidated Statement~~ of ~~Shareholders'~~the ~~Equity~~Securities ~~and~~Exchange ~~Comprehensive~~Act ~~Income Nine Months Ended April 3, 2005 Unaudited Consolidated Statements~~ of ~~Cash~~1934 during ~~Flows~~the –preceding ~~Nine~~12 ~~Monhts~~months ~~Ended~~(or ~~April~~for 3,such ~~2005~~shorter ~~and~~period ~~March~~that ~~28,~~the ~~2004~~registrant ~~(Restated)~~was ~~Notes~~required to ~~Unaudited~~file ~~Consolidated~~such ~~Financial Statements – Three and Nine Months Ended April 3~~reports), ~~2005~~ and ~~March 28, 2004~~ (~~Restated~~2) has ~~Management’s~~been ~~Discussion~~subject ~~and~~to ~~Analysis~~such offiling ~~Financial~~requirements ~~Condition~~for ~~and~~the ~~Results~~past of90 ~~Operations~~days. Yes x No ¨ ~~Quantitative and Qualitative Disclosures about Market Risk Controls and Procedures 1 2 3 4 5 20 37 37~~

~~PART~~Indicate IIby –check ~~OTHER~~mark ~~INFORMATION~~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.

~~ITEM~~Large 1.Accelerated ~~ITEM~~Filer ¨ Accelerated 2.Filer x Non-Accelerated ~~ITEM~~Filer ¨ 3. ITEM 4. ITEM 5. ITEM 6. Legal Proceedings Unregistered Sales of Equity Securities and Use of Proceeds Defaults upon Senior Securities Submission of Matters to a Vote of Security Holders Other Information Exhibits 38 38 38 38 38 38

~~PART~~Indicate Iby –check ~~FINANCIAL~~mark ~~INFORMATIONITEM~~whether 1.the ~~Financial~~registrant ~~Statements~~is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

~~CHAMPPS~~Number ~~ENTERTAINMENT,~~of ~~INC.CONSOLIDATED~~shares ~~BALANCE SHEETS As~~ of ~~April~~Common 3Stock, ~~2005~~$.01 ~~and~~par ~~June 27~~value, ~~2004~~outstanding ~~(Restated~~at –May 4, ~~Note~~2007: 3)13,094,449. ~~(In thousands except share data)(Unaudited)~~

	April 3,2005			June 27,2004
				Restated - Note 3
ASSETS
Current assets:
Cash and cash equivalents	$	2,406		$	1,449
Restricted cash		--			101
Accounts receivable		2,826			3,046
Inventories		4,360			4,394
Prepaid expenses and other current assets (Note 8)		3,674			1,782
Deferred tax assets		1,168			2,825
Total current assets		14,434			13,597
Property and equipment, net		85,135			88,955
Goodwill		5,069			5,069
Deferred tax assets		27,782			23,547
Other assets, net (Note 9)		2,637			2,581
Total assets	$	135,057		$	133,749
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	3,843		$	4,315
Accrued expenses (Notes 5 and 10)		10,573			9,891
Current portion of long-term debt (Note 7)		163			942
Total current liabilities		14,579			15,148
Long-term debt, net of current portion (Note 7)		15,456			17,621
Other long-term liabilities (Notes 5 and 10)		29,257			25,972
Total liabilities		59,292			58,741
Commitments and contingencies (Note 5)
Shareholders' equity
Preferred stock ($.01 par value per share; authorized 5,000,000 shares;
none issued)		--			--
Common stock ($.01 par value per share; authorized 30,000,000
shares; 13,401,244 and 13,285,253 shares issued at April 3, 2005
and June 27, 2004, respectively)		134			133
Additional paid-in capital		91,100			90,393
Accumulated deficit		(11,886	)		(12,159	)
Accumulated other comprehensive income		--			224
Treasury stock, at cost (471,588 shares)		(3,583	)		(3,583	)
Total shareholders' equity		75,765			75,008
Total liabilities and shareholders' equity	$	135,057		$	133,749

~~See accompanying~~CHAMPPS ~~notes~~ENTERTAINMENT ~~to unaudited consolidated financial statements~~INC.

1 INDEX

CHAMPPS ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONSThree and Nine Months Ended April 3, 2005 and March 28, 2004(Restated – Note 3) (In thousands except per share data)(Unaudited)


	PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Unaudited Consolidated Balance Sheets as of April 1, 2007 and July 2, 2006	1

	Unaudited Consolidated Statements of Operations – Three and Nine Months Ended April 1, 2007 and April 2, 2006	2

	Unaudited Consolidated Statement of Shareholders’ Equity – Nine Months Ended April 1, 2007	3

	Unaudited Consolidated Statements of Cash Flows – Nine Months Ended April 1, 2007 and April 2, 2006	4

	Notes to Unaudited Consolidated Financial Statements – Three and Nine Months Ended April 1, 2007 and April 2, 2006	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33

Item 4.	Controls and Procedures	34

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults upon Senior Securities	35

Item 4.	Submission of Matters to a Vote of Security Holders	35

Item 5.	Other Information	35

Item 6.	Exhibits	35

	Signatures	36

	Three Months Ended					Nine Months Ended
	April 3,2005			March 28,2004		April 3,2005			March 28,2004
				Restated - Note 3					Restated - Note 3
Revenue
Sales	$	55,481		$	54,017	$	168,474		$	157,431
Franchising and royalty, net		150			148		437			430
Total revenue		55,631			54,165		168,911			157,861
Costs and expenses
Cost of sales and operating expenses:
Product costs		15,357			14,933		46,816			43,816
Labor costs		17,363			17,154		51,971			50,215
Other operating expenses		9,628			8,393		28,015			24,356
Occupancy		5,377			5,061		15,812			14,652
Pre-opening expenses		340			45		984			1,640
Total cost of sales and operating expenses:		48,065			45,586		143,598			134,679
Depreciation and amortization		2,857			2,551		8,320			7,230
General and administrative expenses		3,423			3,296		9,679			8,803
Severance (Note 11)		547			--		547			--
Impairment charges (Note 2)		6,567			--		6,567			--
Other (income) expense		26			63		(95	)		146
Income (loss) from operations		(5,854	)		2,669		295			7,003
Other (income) expense:
Interest expense and income, net		343			602		1,100			1,750
Expenses related to predecessor companies		50			54		315			259
Debt extinguishment costs		-			4		-			4
Income before income taxes		(6,247	)		2,009		(1,120	)		4,990
Income tax expense (benefit)(Note 12)		(2,675	)		395		(1,393	)		1,098
Net income (loss)	$	(3,572	)	$	1,614	$	273		$	3,892
Basic income (loss) per share (Note 4):		(0.28	)	$	0.13	$	0.02		$	0.30
Diluted income (loss) per share (Note 4):		(0.28	)	$	0.12	$	0.02		$	0.30
Basic weighted average shares outstanding		12,888			12,799		12,856			12,787
Diluted average shares outstanding		12,888			13,082		13,082			12,961

~~See accompanying~~ ~~notes~~PART toI ~~unaudited~~– ~~consolidated~~FINANCIAL ~~financial~~INFORMATION ~~statements.~~

2 ITEM 1. Financial Statements

CHAMPPS ENTERTAINMENT, INC. ~~CONSOLIDATED~~ ~~STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME Nine Months Ended April 3, 2005(In thousands except share data)(Unaudited)~~

	Common Stock				AdditionalPaid-in		Accum.			Accum.OtherCompre-hensive			Treasury Stock					TotalShare-holders'
	Shares		Amount		Capital		Deficit			Income			Shares		Amount			Equity
Balance as of June 27, 2004
as restated - Note 2		13,285,253		133		90,393		(12,159	)		224			471,588		(3,583	)		75,008
Net income		-		-		-		273			-			-		-			273
Reclassification adjustment for the
gain on sale of securities		-		-		-		-			(224	)		-		-			(224	)
Common shares issued		115,991		1		707		-			-			-		-			708
Balance as of April 3, 2005		13,401,244	$	134	$	91,100	$	(11,886	)	$	-			471,588	$	(3,583	)	$	75,765

CONSOLIDATED BALANCE SHEETS

~~See~~As ~~accompanying notes~~of toApril 1, ~~unaudited~~2007 ~~consolidated~~and ~~financial~~July 2, ~~statements.~~2006

3(In thousands except share data)

~~CHAMPPS ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWSNine Months Ended April 3, 2005~~ (~~In thousands)(~~Unaudited)

		April 3,2005			March 28,2004
	April 1,2007				July 2,2006
					Restated - Note 3
ASSETS
Cash flows from operating activities:
Current assets:
Net income		$	273		$	3,892
Cash and cash equivalents	$	17,309			$	9,449
Adjustments to reconcile net income to net cash provided by
Accounts receivable, net		2,378				2,208
operating activities:
Inventories		4,338				4,461
Depreciation and amortization			8,605			7,503
Prepaid expenses and other current assets (Note 2)		2,965				2,871
Amortization of notes payable discount			151			151
Assets held for sale (Note 10)		—				2,670
Impairment charges			6,567			--
Deferred tax assets		2,509				3,210
Loss on disposal of assets			174			146
Total current assets		29,499				24,869
Gain on sale of security			(279	)		--
Property and equipment, net (Note 3)		69,311				75,076
Income tax benefit of stock options exercised			--			14
Goodwill		5,069				5,069
Interest on loan for exercise of stock options			--			(2	)
Deferred tax assets		24,077				29,533
Deferred income tax expense			(2,523	)		552
Other assets, net (Note 4)		1,773				2,155
Accounts receivable			117			(581	)
Total assets	$	129,729			$	136,702
Accounts receivable from tenant improvement allowances			103			115
LIABILITIES AND SHAREHOLDERS’ EQUITY
Inventories			34			(523	)
Current liabilities:
Prepaid expenses and other current assets			(1,892	)		90
Accounts payable	$	4,048			$	3,793
Accounts payable			(472	)		92
Accrued expenses (Note 5)		8,170				9,584
Accrued expenses			682			2,065
Current portion of long-term debt (Note 6)		14,858				—
Other assets			(78	)		60
Total current liabilities		27,076				13,377
Other long-term liabilities			423			414
Long-term debt, net of current portion (Note 6)		—				14,707
Other long-term liabilities from tenant improvement allowances			(103	)		(115	)
Other long-term liabilities (Note 5)		32,814				31,890
Proceeds from tenant improvement allowances			2,965			3,935
Total liabilities		59,890				59,974
Net cash provided by operating activities			14,747			17,808
Shareholders’ equity (Note 8):
Cash flows from investing activities:
Common stock ($.01 par value per share; authorized 30,000,000 shares; 13,281,520 and 13,258,151 shares issued at April 1, 2007 and July 2, 2006, respectively)		133				133
Purchase of property and equipment			(11,536	)		(13,259	)
Additional paid-in capital		92,104				91,264
Proceeds from disposal of assets			32			24
Accumulated deficit		(21,092	)			(13,966	)
Restricted cash balances			101			641
Treasury stock, at cost (191,480 and 91,480 shares at April 1, 2007 and July 2, 2006, respectively)		(1,306	)			(703	)
Repayment of loan for exercise of stock options			-			316
Total shareholders’ equity		69,839				76,728
Net cash used in investing activities			(11,403	)		(12,278	)
Total liabilities and shareholders’ equity	$	129,729			$	136,702
Cash flows from financing activities:
Proceeds from issuance of common stock			708			187
Repayment of long-term debt and capitalized lease obligations			(18,095	)		(3,890	)
Proceeds from long-term debt			15,000			4,850
Net cash provided by (used in) financing activities			(2,387	)		1,147
Net change in cash and cash equivalents			957			6,677
Cash and cash equivalents, beginning of period			1,449			5,055
Cash and cash equivalents, end of period		$	2,406		$	11,732
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amount capitalized		$	511		$	1,306
Income taxes, net of refunds			412			391

See accompanying notes to unaudited consolidated financial statements.

CHAMPPSTable ENTERTAINMENT, INC.NOTESof TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSThree and Nine Months Ended April 3, 2005 and March 28, 2004(Unaudited) Contents

1. CHAMPPS ~~Nature~~ENTERTAINMENT, ofINC. ~~Business and Basis of Presentation~~

~~Nature~~CONSOLIDATED ofSTATEMENTS ~~Business~~ OF OPERATIONS

AsThree ofand ~~April~~Nine 3,Months ~~2005,~~Ended ~~Champps Entertainment~~April 1, ~~Inc.~~2007 ~~(the “Company,” “Champps,” “we,” “us,” or “our”) owned~~ and ~~operated 51 full-service~~April 2, ~~casual~~2006 dining restaurants under the names of “Champps Americana,” “Champps Restaurant” and “Champps Restaurant and Bar.” The Company also franchised 12 restaurants under the name “Champps Americana.” Champps operates in 22 states throughout the United States.

~~Basis~~(In ofthousands ~~Presentation~~except ~~of Consolidated~~per ~~Financial~~share ~~Statements~~ data)

The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of its financial position as of April 3, 2005 and the results of operations for the interim periods ended April 3, 2005 and March 28, 2004. These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and regulations of the Securities and Exchange Commission (~~“SEC”~~Unaudited). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such SEC rules and regulations. Operating results for the three and nine month periods ended April 3, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending July 3, 2005.

The balance sheet at June 27, 2004 reflects restated balances as a result of the adjustments described in Note 3. This restatement is further explained in our amended annual report on Form 10-K/A for the period ending June 27, 2004 filed with the Securities and Exchange Commission on May 5, 2005.


	Three Months Ended						Nine Months Ended
	April 1, 2007			April 2, 2006			April 1, 2007			April 2, 2006
Revenue
Sales	$	49,055		$	51,485		$	150,482		$	157,177
Franchising and royalty, net		173			174			525			468

Total revenue		49,228			51,659			151,007			157,645

Costs and expenses
Cost of sales and operating expenses
Product costs		13,868			14,462			42,959			44,082
Labor costs		16,191			16,192			48,944			49,428
Other operating expense		7,990			7,987			24,130			23,905
Occupancy		5,092			5,208			15,343			15,572
Pre-opening expense		—			78			—			157
General and administrative expense		3,164			3,710			9,906			10,539
Depreciation and amortization		2,586			2,739			7,778			8,262
Severance		—			5			(136	)		110
Asset impairment charges and restaurant closings/disposals		—			2,136			530			2,136
Potential company sale expense (Note 12)		499			—			499			—
Other expense		157			131			269			286

Income from operations		(319	)		(989	)		785			3,168
Interest expense, net		153			237			632			913
Expense (income) related to predecessor companies		—			(2	)		12			(5	)

Income (loss) from continuing operations, before tax		(472	)		(1,224	)		141			2,260
Income tax expense (benefit) (Note 11)		(133	)		(700	)		6,941			26

Income (loss) from continuing operations		(339	)		(524	)		(6,800	)		2,234
Loss on discontinued operations, net of tax (Note 10)		232			1,405			326			1,798

Net income (loss)	$	(571	)	$	(1,929	)	$	(7,126	)	$	436

Basic income (loss) per share (Note 9):
Income (loss) from continuing operations	$	(0.03	)	$	(0.04	)	$	(0.52	)	$	0.17
Loss from discontinued operations, net of tax		(0.01	)		(0.11	)		(0.02	)		(0.14	)

Net income (loss)	$	(0.04	)	$	(0.15	)	$	(0.54	)	$	0.03

Diluted income (loss) per share (Note 9):
Income (loss) from continuing operations	$	(0.03	)	$	(0.04	)	$	(0.52	)	$	0.17
Loss from discontinued operations, net of tax		(0.01	)		(0.11	)		(0.02	)		(0.14	)

Net income (loss)	$	(0.04	)	$	(0.15	)	$	(0.54	)	$	0.03

Basic weighted average shares outstanding		13,086			13,194			13,104			13,135

Diluted weighted average shares outstanding		13,086			13,194			13,104			13,188

~~Forty~~See ~~operating~~accompanying ~~weeks~~notes ~~in fiscal~~to ~~2005~~unaudited ~~year~~consolidated tofinancial ~~date~~ statements.

~~Champps~~2 utilizes a 52/53 week fiscal year ending on the Sunday closest to June 30th for financial reporting purposes. As a result, fiscal 2004 consisted of a 52 week year divided into four quarters of 13 weeks each. However, fiscal 2005 consists of 53 weeks. Therefore, our first quarter of fiscal 2005 contained 14 weeks while the remaining quarters in the fiscal year contain 13 weeks each. The extra week in fiscal 2005 will impact revenues compared to the prior year period, as well as expenses as a percent of revenues for fixed expenses such as occupancy, depreciation and amortization.

UseTable of Estimates Contents

~~The preparation of financial~~ ~~statements~~CHAMPPS ~~in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities~~ENTERTAINMENT, ~~disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period~~INC. ~~Actual results could differ significantly from those estimates.~~

~~Reclassifications~~ CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

~~Certain~~Nine ~~reclassifications~~Months ~~were~~Ended ~~made to the consolidated financial statements for prior periods to conform to the~~ April 3 1, ~~2005 presentation.~~2007

5(In thousands except share data)

2.(Unaudited) ~~Summary of Significant Accounting Policies~~

Accounting for Stock-Based Compensation


	Common Stock			Additional Paid-in Capital		Accum. Deficit			Treasury Stock				Total Shareholders’ Equity
	Shares	Amount		Additional Paid-in Capital		Accum. Deficit			Shares	Amount			Total Shareholders’ Equity
Balance as of July 2, 2006	13,258,151	$	133	$	91,264	$	(13,966	)	91,480	$	(703	)	$	76,728
Net loss	—		—		—		(7,126	)	—		—			(7,126	)
Common shares issued	23,369		—		122		—		—		—			122
Repurchase of common shares (Note 8)									100,000		(603	)		(603	)
Income tax benefit of stock options exercised	—		—		2		—		—		—			2
Stock-based compensation	—		—		716		—		—		—			716

Balance as of April 1, 2007	13,281,520	$	133	$	92,104	$	(21,092	)	191,480	$	(1,306	)	$	69,839

~~The~~See ~~Company~~accompanying ~~maintains~~notes ~~stock option plans under which the Company may grant incentive stock options and non-qualified stock options~~ to ~~associates,~~unaudited ~~consultants~~consolidated ~~and~~financial ~~non-employee directors~~statements. Stock options have been granted with exercise prices at or above the fair value on the date of grant. Options vest and expire according to the terms established at the grant date. The Company issued 420,700 options to purchase common stock at an exercise price of $7.85 in the first quarter of fiscal 2005.

The Company maintains an Employee Stock Purchase Plan (“The Plan”) under which the employees of the Company may purchase stock at a discount. The Plan requires our employees to make a contribution commitment prior to the start of a quarter and allows the employee to purchase stock at the lower of the closing price at the beginning of the quarter or the end of the quarter less a fifteen percent discount. For the nine months ended April 3, ~~2005, 20,874 shares of stock had been purchased under this Plan. Historically, we have not recognized an expense for the issuance of our stock at a discount to our employees under the Plan.~~

StatementTable of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, because the grant price equals or is above the market price on the date of grant for options issued by the Company, no compensation expense has been recognized for stock options issued to employees. Contents

~~On December 31, 2002, The Financial~~ ~~Accounting~~CHAMPPS ~~Standards Board (“FASB”) issued SFAS No. 148~~ENTERTAINMENT, ~~“Accounting for Stock Based Compensation – Transition and Disclosure,” which amends SFAS No~~INC. ~~123.~~ SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation. The Company intends to continue to account for its stock-based compensation according to the provisions of APB Opinion No. 25 until July 2005 when the Company will be required to comply with the provisions of SFAS No. 123 (R).

6CONSOLIDATED STATEMENTS OF CASH FLOWS

~~Had~~Nine ~~compensation~~Months ~~expense~~Ended ~~for our stock option grants and employee stock purchases been recognized based upon the estimated fair value on the grant date under the fair value methodology prescribed by SFAS No. 123~~April 1, as ~~amended~~2007 ~~by SFAS No. 148~~ and ~~SFAS No. 123 (R)~~April 2, ~~our~~2006 ~~net income (loss) and income (loss) per share would have been as follows:~~

	Three Months Ended						Nine Months Ended
	April 3,2005			March 28,2004			April 3,2005			March 28,2004
				Restated						Restated
Net income (loss), as reported	$	(3,572,000	)	$	1,614,000		$	273,000		$	3,892,000
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects		(230,000	)		(185,000	)		(691,000	)		(540,000	)
Pro forma net income (loss)	$	(3,802,000	)	$	1,429,000		$	(418,000	)	$	3,352,000
Basic shares		12,887,851			12,798,911			12,855,908			12,786,648
Dilutive shares		12,887,851			13,081,644			12,855,908			12,960,965
Earnings (loss) per share:
Basic - as reported	$	(0.28	)	$	0.13		$	0.02		$	0.30
Basic - pro forma		(0.30	)		0.11			(0.03	)		0.26
Diluted - as reported	$	(0.28	)	$	0.12		$	0.02		$	0.30
Diluted - pro forma		(0.30	)		0.11			(0.03	)		0.26

(In thousands)

~~For~~(Unaudited) the three months and nine months ended April 3, 2005, 1,336,667 and 1,321,790, respectively, of weighted stock options outstanding were anti-dilutive as a result of the proforma loss for the quarter. Therefore, these dilutive options were not considered in the computation of proforma diluted income per share. Had the stock options been dilutive, 265,048 and 226,069, respectively, for the three and nine months ended April 3, 2005, would have been included.

SFAS No. 123 (R) requires the recognition of compensation expense associated with the cost of employee services received in exchange for granting of stock options for the first annual reporting period that begins after June 15, 2005. The compensation expense will be recognized over the service period and will be based upon the grant date fair value of that award.


	Nine Months Ended
	April 1, 2007			April 2, 2006
Cash flows from operating activities:
Net income (loss)	$	(7,126	)	$	436
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		8,044			8,699
Amortization of notes payable discount		151			151
Asset impairment charges		683			4,271
Loss on disposal of assets		400			236
Stock-based compensation		716			554
Deferred income tax expense (benefit)		6,157			(2,021	)
Changes in assets and liabilities:
Accounts receivable		(170	)		(270	)
Inventories		123			(105	)
Prepaid expenses and other current assets		(94	)		89
Accounts payable		255			(1,752	)
Accrued expenses		(1,414	)		(1,541	)
Other assets		317			179
Other long-term liabilities		924			172
Proceeds from tenant improvement allowances		—			1,969

Net cash provided by operating activities		8,966			11,067

Cash flows from investing activities:
Purchase of property and equipment		(3,250	)		(3,296	)
Proceeds from disposal of assets		—			7
Proceeds from assets held for sale		2,623			—

Net cash used in investing activities		(627	)		(3,289	)

Cash flows from financing activities:
Proceeds from issuance of common stock		122			997
Income tax benefit of stock options exercised		2			106
Repurchase of common stock		(603	)		(209	)
Repayment of long-term debt		—			(143	)

Net cash provided by (used in) financing activities		(479	)		751

Net change in cash and cash equivalents		7,860			8,529
Cash and cash equivalents, beginning of period		9,449			2,702

Cash and cash equivalents, end of period	$	17,309		$	11,231

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amount capitalized	$	543		$	506
Income taxes, net of refunds		182			855

~~The~~See ~~Company~~accompanying ~~will~~notes ~~recognize~~to ~~additional compensation~~unaudited ~~expense~~consolidated ~~associated with unvested stock option grants at the date of adoption of SFAS No. 123 (R). The Company has not yet determined the~~ financial ~~impact from the adoption of SFAS 123 (R)~~statements.

~~Impairment~~4 ~~of long lived assets~~

WeTable evaluate the carrying value of long-lived assets including property, equipment and related identifiable intangible assets quarterly in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Under SFAS No. 144, an assessment is made to determine if the sum of the expected future undiscounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the sum of the expected undiscounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value. Contents

7 CHAMPPS ENTERTAINMENT, INC.

WeNOTES ~~separately~~TO ~~evaluate~~UNAUDITED ~~each individual~~CONSOLIDATED ~~restaurant~~FINANCIAL ~~for~~STATEMENTS impairment. Generally, a restaurant is not evaluated for impairment until it has been open a full six quarters as the initial two quarters of operations are generally characterized by operating inefficiencies associated with start-up operations. However, if business trends are materially down or there is a permanent competitive intrusion at an underperforming new restaurant, we consider four consective quarters of negative cash flow or losses to indicate a potential for an individual restaurant to be impaired. We estimate the future cash flows for such potentially impaired restaurants utilizing such factors as restaurant sales trends, local conditions, demographics and competition, management plans and initiatives and other factors deemed appropriate in the circumstances.

~~During~~Three ~~the~~and ~~quarter~~Nine ~~ended~~Months Ended April 3 1, ~~2005,~~2007 ~~the~~and ~~Company recorded an impairment charge of $6~~April 2,~~567,000~~ as2006 ~~the result of writing-down the asset value of four restaurants.~~

3.(Unaudited) ~~Restatement of Consolidated Financial Statements~~

~~Restatement~~1. ~~– Accounting~~Summary ~~for~~of ~~leases~~ Significant Accounting Policies

~~Following~~Nature ~~a review~~ of ~~its accounting~~Business policy, the Company has determined that it had incorrectly calculated its straight-line rent expense, its related deferred rent liability and its depreciation expense and has modified its financial statements to correct this issue. As a result, the Company has restated its financial statements for fiscal 2002, 2003, 2004 and for the first quarter of fiscal 2005.

~~The~~Champps ~~issue~~Entertainment, ~~requiring~~Inc. ~~restatement relates to how~~ (the “Company” ~~has~~or ~~historically defined the lease term for purposes of 1~~“Champps”) ~~determining~~, ~~whether a lease~~ is a ~~capital~~Delaware orcorporation ~~operating~~formed ~~lease, 2) calculating amortization expense~~ on ~~leasehold improvements related to operating leases~~May 27, 3)1997 ~~calculating~~in ~~straight-line~~connection ~~rent~~with ~~expense~~the ~~for~~spin-off ~~leases~~of ~~with~~DAKA ~~rent escalations~~International, ~~and~~Inc. 4(“DAKA”) ~~calculating the amortization of lease incentives~~. ~~The~~At ~~Company~~April 1, ~~has~~2007, ~~concluded that~~ the ~~accounting~~Company ~~literature should~~operated ~~have~~one ~~been~~business ~~interpreted~~segment. toThe ~~require that the~~ Company’s ~~use~~principal ~~the~~business ~~same~~activity ~~lease~~is ~~term for depreciating leasehold improvements as it uses in determining capital versus operating lease classifications and in calculating deferred rent related~~ to ~~the~~own, ~~recognition~~operate ~~of straight-line rent expense~~ and ~~the~~franchise/license ~~amortization~~casual ~~of lease incentive payments. The Company~~dining ~~has~~restaurants ~~also concluded~~ that ~~the~~serve ~~accounting~~customers ~~literature~~in ~~should~~upscale ~~have~~restaurant ~~been~~settings ~~interpreted~~in to21 ~~require the~~states ~~Company~~throughout ~~to include future rent increases where~~ the ~~future~~United ~~increases~~States ~~include~~with ~~escalation clauses~~larger ~~based~~concentrations ~~on the lesser~~ of arestaurants ~~specified~~in ~~percentage increase or~~ the ~~change~~upper inmidwest anand ~~index that~~mid-atlantic ~~includes a leverage factor~~regions.

~~The~~Basis ~~Company~~of ~~has~~Presentation ~~restated its financial statements through the first quarter~~ of ~~fiscal~~Consolidated ~~2005~~Financial ~~and~~Statements ~~has properly accounted for our leases as described above for our second and third quarters of fiscal 2005.~~

~~Solely~~The asaccompanying aunaudited ~~result~~consolidated financial statements reflect all adjustments, consisting of ~~this restatement~~normal recurring adjustments, ~~previously~~which ~~reported~~are, ~~net~~in ~~income~~the ~~and~~opinion ~~income~~of ~~per~~management, ~~diluted~~necessary ~~share~~for ~~were~~a ~~reduced~~fair bystatement of its financial position as of ~~$213~~April 1,~~000~~ or2007 ~~$0.02~~and ~~per~~the ~~diluted~~results ~~share~~of operations for the ~~three~~interim ~~months~~periods ~~ending~~ended ~~March~~April 1, 282007 and April 2, ~~2004~~2006. These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting ~~$592~~principles generally accepted in the United States of America,~~000~~ have been condensed or $0omitted pursuant to such SEC rules and regulations.05 ~~per~~However, ~~diluted~~in ~~share~~the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the three and nine ~~months~~month ~~ending~~periods ~~March~~ended 28April 1, ~~2004.~~2007 are not necessarily indicative of the results that may be expected for the fiscal year ending July 1, 2007.

8These statements should be read in conjunction with the consolidated financial statements and related notes to consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended July 2, 2006. The accounting policies used in preparing these consolidated financial statements are the same as those described in our Form 10-K.

~~The following~~Fiscal ~~tables~~Year present the changes to the Consolidated Statement of Operations for the three and nine months ended March 28, 2004, the Consolidated Statements of Cash Flows for the nine months ended March 28, 2004 and the Consolidated Balance Sheet for June 27, 2004:

Three Months Ending March 28, 2004
	As PreviouslyReported		Adjustment			As Restated
Statement of Operations
Revenue
Sales	$	54,017	$	--		$	54,017
Franchising and royalty, net		148		-			148
Total revenue		54,165		-			54,165
Costs and expenses
Product costs	$	14,933	$	--		$	14,933
Labor costs		17,350		(196	)		17,154
Other operating expenses		8,435		(42	)		8,393
Occupancy		4,798		263			5,061
Pre-opening expenses		45		-			45
Cost of sales and operating expenses	$	45,561	$	25		$	45,586
General and administrative expenses		3,058		238			3,296
Depreciation and Amortization		2,491		60			2,551
Other (income) expense, net		63		-			63
Income from operations		2,992		(323	)		2,669
Other (income) expense:
Interest expense and income, net		602		--			602
Expenses related to predecessor companies		54		--			54
Debt extinguishment costs		4		-			4
Income before income taxes		2,332		(323	)		2,009
Income tax expense		505		(110	)		395
Net income	$	1,827	$	(213	)	$	1,614
Basic income per share:	$	0.14	$	(0.01	)	$	0.13
Diluted income per share:	$	0.14	$	(0.02	)	$	0.12

Champps utilizes a 52/53 week fiscal year ending on the Sunday closest to June 30^th. Fiscal 2007 and fiscal 2006 are both comprised of 52 weeks. The three month periods ended April 1, 2007 and April 2, 2006, each consisted of 13 weeks and the nine month periods ended April 1, 2007 and April 2, 2006, each consisted of 39 weeks.

9Use of Estimates

Nine Months Ending March 28, 2004 (continued)
	As Previously Reported			Adjustment			As Restated
Statement of Operations
Revenue
Sales	$	157,431		$	--		$	157,431
Franchising and royalty, net		430			-			430
Total revenue		157,861			-			157,861
Costs and expenses
Product costs	$	43,816		$	--		$	43,816
Labor costs		50,674			(459	)		50,215
Other operating expenses		24,433			(77	)		24,356
Occupancy		13,876			776			14,652
Pre-opening expenses		1,640			-			1,640
Cost of sales and operating expenses	$	134,439		$	240		$	134,679
General and administrative expenses		8,267			536			8,803
Depreciation and Amortization		7,074			156			7,230
Other (income) expense, net		146			--			146
Income from operations		7,935			(932	)		7,003
Other (income) expense:
Interest expense and income, net		1,750			--			1,750
Expenses related to predecessor companies		259			--			259
Debt extinguishment costs		4			-			4
Income before income taxes		5,922			(932	)		4,990
Income tax expense		1,438			(340	)		1,098
Net income	$	4,484		$	(592	)	$	3,892
Basic income per share:	$	0.35		$	(0.05	)	$	0.30
Diluted income per share:	$	0.35		$	(0.05	)	$	0.30
Statement of Cash Flows Data
Net cash provided by operating activities	$	13,873			3,935			17,808
Net cash used in investing activities	$	(12,278	)		--			(12,278	)
Net cash provided by financing activities	$	5,082			(3,935	)		1,147

In the process of preparing its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, the Company estimates the carrying value of certain assets and liabilities that are subjective in nature. The primary estimates included in the Company’s consolidated financial statements include, but are not limited to, loss contingencies generally related to litigation and assessments, self-insured risks relating to workers’ compensation, general liability and medical claims, the useful lives and recoverability of our long-lived assets such as property and equipment, goodwill and other intangibles, lease accounting, fair value of stock based compensation including estimating forfeitures, valuation of deferred tax assets and the recording of income tax expense. Actual results could differ from those estimates.

105

As of June 27, 2004
	As Previously Reported			Adjustment			As Restated
Balance Sheet
ASSETS
Current assets:
Cash and cash equivalents	$	1,449			--		$	1,449
Restricted cash		101			--			101
Accounts receivable		3,046			--			3,046
Inventories		4,394			--			4,394
Prepaid expenses and other current assets		1,782			--			1,782
Deferred tax assets		2,825			-			2,825
Total current assets		13,597			--			13,597
Property and equipment, net		89,153			(198	)		88,955
Goodwill		5,069			--			5,069
Deferred tax assets		21,093			2,454			23,547
Other assets, net		2,581			-			2,581
Total assets	$	131,493			2,256		$	133,749
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	4,315			--		$	4,315
Accrued expenses		9,178			--			9,178
Current portion of long-term debt		942			--			942
Total current liabilities		14,435			--			14,435
Long-term debt, net of current portion		17,621			--			17,621
Other long-term liabilities		20,897			5,788			26,685
Total liabilities		52,953			5,788			58,741
Commitments and contingencies		--			--			--
Shareholders' equity:
Common stock		133			--			133
Additional paid-in capital		90,393			--			90,393
Accumulated deficit		(8,627	)		(3,532	)		(12,159	)
Accumulated other comprehensive income		224			--			224
Treasury stock, at cost		(3,583	)		-			(3,583	)
Total shareholders' equity		78,540			(3,532	)		75,008
Total liabilities and shareholders' equity		131,493			2,256			133,749

11Future Application of Accounting Standards

4In June 2006, the FASB issued Interpretation No. 48, ~~Earnings~~“Accounting ~~Per~~for ~~Share~~Uncertainty in Income Taxes” (“FIN 48”). FIN 48 defines the threshold for recognizing the benefits of tax-return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority, while earlier authoritative literature provided no specific guidance. FIN 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006. While we are still considering the implications of the pronouncement, the Company does not believe the adoption of FIN 48 will have a material impact on its financial statements.

~~The~~In ~~following~~September ~~table~~2006, ~~sets~~the ~~forth~~FASB ~~the~~issued SFAS No. 157, “Fair Value Measurements,” (“SFAS ~~computation~~157”). SFAS 157 clarifies the definition of ~~basic~~fair value, describes methods used to appropriately measure fair value, and ~~diluted~~expands ~~earnings~~fair ~~per~~value ~~share:~~disclosure requirements. This statement applies under other accounting pronouncements that currently require or permit fair value measurements and is effective as of the beginning of the first fiscal year beginning after November 15, 2007. While we are still considering the implications of the pronouncement, the Company does not believe the adoption of SFAS 157 will have a material impact on its financial statements.

	Three Months Ended						Nine Months Ended
	April 3,2005			March 28,2004			April 3,2005			March 28,2004
				Restated						Restated
Basic income (loss) per share:
Net income (loss)	$	(3,572,000	)	$	1,614,000		$	273,000		$	3,892,000
Weighted average shares outstanding		12,887,851			12,798,911			12,855,908			12,786,648
Net income (loss) per share - basic	$	(0.28	)	$	0.13		$	0.02		$	0.30
Diluted income (loss) per share:
Net income (loss)	$	(3,572,000	)	$	1,614,000		$	273,000		$	3,892,000
Plus impact of assumed conversion of 5.5%
convertible subordinated notes		(b	)		(b	)		(b	)		(b	)
Net income (loss) as adjusted	$	(3,572,000	)	$	1,614,000		$	273,000		$	3,892,000
Weighted average shares outstanding		12,887,851			12,798,911			12,855,908			12,786,648
Net effect of dilutive stock options based on the
treasury stock method using average market price (a)		--			282,733			226,069			174,317
Net effect of dilutive warrants based on the
treasury stock method using average market price		(c	)		(c	)		(c	)		(c	)
Assumed conversion of 5.5% convertible subordinated notes		(b	)		(b	)		(b	)		(b	)
Total shares outstanding for computation of per share earnings		12,887,851			13,081,644			13,081,977			12,960,965
Net income (loss) per share - diluted		(0.28	)		0.12			0.02			0.30

2.	Prepaid Expenses and Other Current Assets

~~(a)~~The components ~~For~~of ~~the~~prepaid ~~three~~expenses ~~months~~and ~~ended~~other ~~March~~current ~~28,~~assets ~~2004, 1,300 stock options~~ were ~~anti-dilutive~~as ~~and,~~follows ~~therefore, were not considered~~ (in ~~the computation of diluted income (loss~~thousands): ~~per share.~~

For the three months ended April 3, 2005, 1,337,967 of stock options were anti-dilutive and, therefore, were not considered in the computation of diluted income (loss) per share. Had the stock options been dilutive, 265,048 dilutive shares would have been included.


	April 1, 2007		July 2, 2006
Prepaid rents, real estate taxes and related costs	$	1,571	$	1,594
Prepaid insurance		451		312
Prepaid licenses and permits		271		211
Prepaid contracts and other		672		754

	$	2,965	$	2,871

~~For the nine months ended April~~ 3,. ~~2005~~Property and ~~March 28~~Equipment, ~~2004, 1,300 and 293,917, respectively, of stock options were anti-dilutive and, therefore, were not considered in the computation of diluted income (loss) per share.~~Net

~~(b)~~The ~~Not~~components ~~included in calculation because the assumed conversion~~ of property ~~convertible~~and ~~subordinated~~equipment, ~~notes~~net ~~into~~were ~~1,407,129~~as ~~common~~follows ~~shares~~(in ~~was~~thousands): ~~anti-dilutive.~~


	April 1, 2007			July 2, 2006
Land	$	2,923		$	2,923
Buildings and leasehold improvements		78,880			78,492
Software		1,336			1,327
Equipment		47,516			47,599
Construction in progress		197			377

		130,852			130,718
Accumulated depreciation and amortization		(61,541	)		(55,642	)

	$	69,311		$	75,076

12Total depreciation and amortization expense per the consolidated statement of cash flows includes depreciation and amortization expense on corporate assets of $231,000 and $220,000 which is included in general and administrative expense on the consolidated statements of operations for the nine months ended April 1, 2007 and April 2, 2006, respectively.

5.During ~~Commitments~~the nine months ended April 1, 2007, the Company recorded $530,000 for asset impairment charges and restaurant ~~Contingencies~~closings / disposals for one location whose future cash flows are not expected to cover its carrying value and to write-off the development costs for a new location project which will not be pursued.

~~Letters~~6 ~~of Credit~~

TheTable Company had outstanding letters of credit of $2,606,000 at April 3, 2005 to guarantee its performance primarily related to certain insurance contracts. The letters of credit are irrevocable and have one-year renewable terms. Contents

~~Indemnifications~~During ~~and~~the three months ended April 2, 2006, the Company recorded asset impairment charges of ~~Representations~~$4,271,000, ~~Related~~of towhich ~~Predecessor~~$2,135,000 ~~Companies~~ is recorded as discontinued operations, for three restaurants that closed in May 2006.

~~In fiscal 1997 in connection with the corporate restructuring of DAKA International, Inc~~4. ~~(“DAKA”),~~Other ~~DAKA spun-off its food service business. The remaining corporation continued to own Champps~~Assets, Fuddruckers and several other restaurant companies and renamed itself Unique Casual Restaurants, Inc. Fuddruckers was sold in 1998 and the other restaurant businesses were either sold or closed during 1998 or 1999, leaving Champps as the only restaurant group. The name of the Company was then changed to Champps Entertainment, Inc. As a result of these transactions, the Company remains responsible for liabilities of DAKA preceding its spin-off, as well as certain indemnification obligations assumed by the Company in connection with the sale of Fuddruckers. Certain matters arising in connection with these obligations are discussed in this section under the headings, “Accrued Insurance Costs,” “Litigation” And “Reserves.” Although the Company has incurred certain expenses in connection with these obligations and retained liabilities in the past, at this time, based upon the circumstances known to us at this time, the Company believes additional claims under these obligations and retained liabilities are unlikely to have a material effect on the Company’s financial position or results of operations. Net

~~Accrued~~The ~~Insurance~~components ~~Costs~~ of other assets, net were as follows (in thousands):

The Company is self-insured for certain losses related to workers’ compensation claims, general liability and medical/dental claims. The Company has purchased stop-loss coverage in order to limit its exposure to significant levels of such claims. Self-insured reserves are accrued based upon our estimates of the aggregate liability for uninsured claims incurred using certain assumptions that are based upon historical experience. Actual amounts required to settle such obligations may exceed those estimates.


	April 1, 2007		July 2, 2006
Deferred financing costs	$	307	$	585
Liquor licenses		660		728
Long-term deposits		117		98
Leasehold rights		555		582
Equity investment in licensee		122		141
Other		12		21

	$	1,773	$	2,155

~~Through~~The ~~June~~equity ~~29,~~investment ~~1997,~~in ~~the~~licensee ~~Company was~~reflects ~~self-insured~~the ~~for workers’ compensation, general liability, and various other risks up to specified limits. The~~ Company’s ~~share~~cash ofinvestment ~~prior workers’ compensation~~ and ~~general~~its ~~liability~~share ~~programs~~ of ~~DAKA through June 29, 1997 were allocated using labor~~ ~~costs~~losses ~~and the aggregate costs of such programs were determined~~ through ~~actuarial studies which determined the estimated amount required to be provided for incurred incidents. In connection with the spin-off transaction from DAKA~~April 1, ~~the~~2007 ~~Company~~in isa ~~liable~~Champps’ ~~for~~licensed ~~all~~location ~~claims made~~at ~~subsequent to~~ the ~~effective~~Dallas/Fort ~~date of the spin-off~~Worth, ~~including~~Texas ~~claims~~airport ~~related~~in ~~to associates~~which ~~of DAKA not continuing with~~ the Company ~~after~~has ~~the~~an ~~spin-off,~~eight ~~provided~~percent ~~the~~equity ~~claims relate to events occurring prior to the effective date of the spin-off~~interest. The Company believes that any claims related to its obligations resulting from the spin-off, including those listed under “Litigation” in this Note, are adequately accrued and are unlikely to have a material effect on the Company’s financial position or results of operations.

~~Tax~~5. ~~Contingencies~~ Accrued Expenses and Other Long-Term Liabilities

~~From~~The ~~time-to-time,~~components ~~the Company and its predecessors have been party to various assessments~~ of ~~taxes,~~accrued ~~penalties~~expenses ~~and~~were ~~interest from~~as ~~federal,~~follows ~~state and local agencies. As of April 3, 2005, the Company has no outstanding assessments but has a number of audits~~ (in ~~process~~thousands): ~~or about to begin. Tax reserves are accrued based upon our estimates of the ultimate settlement of the contingencies. Actual amounts required to settle those obligations may exceed our estimates.~~


	April 1, 2007		July 2, 2006
Salaries, wages, and related benefits	$	1,879	$	3,066
Accrued taxes, predominantly sales and property		2,197		2,542
Accrued insurance		996		1,159
Accrued severance		—		136
Accrued utilities		423		428
Gift card/certificate liability		1,428		1,184
Lease termination		220		220
Other		1,027		849

	$	8,170	$	9,584

~~Litigation~~ The decrease in salaries, wages and related benefits was due to timing of the payroll cycle. One week of payroll costs were accrued at April 1, 2007 compared to two weeks of payroll accrued as of July 2, 2006.

~~From~~The ~~time to time, lawsuits are filed~~components ~~against the Company in the ordinary course~~ of ~~business.~~other ~~Such~~long-term ~~lawsuits~~liabilities ~~typically~~were ~~involve claims~~as ~~from~~follows ~~customers,~~(in ~~former~~thousands): or current associates, and others related to issues common to the restaurant industry. A number of such claims may exist at any given time. Other than the matters described below, the Company is currently not a party to any litigation that management believes will have a material adverse effect on the Company’s consolidated financial position or results of operations.

In December 2004, the Company settled an action described in the following paragraph arising from our indemnification of DAKA in connection with the spin-off described above. We may also be required to assume other liabilities of DAKA in connection with the spin-off and we may be required to indemnify Fuddrucker’s in connection with future breaches of our representations and warranties that survived the closing of the sale of Fuddruckers. These indemnifications are discussed further in this section under the heading “Indemnifications and Representations Related to Predecessor Companies”. Based upon the circumstances known to us at this time, and the length of time that has elapsed since the spin-off of DAKA and the sale of Fuddruckers, the Company believes additional claims under these obligations and retained liabilities are unlikely to have a material effect on the Company's financial position or results of operations.


	April 1, 2007		July 2, 2006
Tenant improvement allowances	$	18,234	$	19,814
Deferred rents		11,435		10,688
Accrued insurance		949		884
Partnership buyout		1,673		417
Lease termination		523		87

	$	32,814	$	31,890

We7 assumed certain contingent liabilities of DAKA and its subsidiary, Daka, Inc. (“Daka”) in connection with their spin-off. In the third quarter of fiscal 2000, a Washington, D.C. superior court jury awarded a former Daka associate damages related to the associate’s claim of negligent supervision and retaliation, due to alleged conduct that occurred in 1996 at a former Daka food service location. The events at issue in the case took place while a predecessor company of Champps owned Daka. Daka filed a Notice of Appeal with the Court of Appeals for the District of Columbia. In the third quarter of fiscal 2004, the Court issued its decision affirming the award of compensatory damages and the attorneys’ fees and costs. The Company subsequently paid the compensatory damages and attorneys’ fees, costs and related interest. However, the Court held that the punitive damages award was unconstitutional, vacated the award and remanded the case to the trial court for re-determination of punitive damages in accordance with legal principles outlined in its opinion. In the fourth quarter of fiscal 2004, the trial court re-determined the amount of punitive damages to be $937,500 and we accrued a liability for the full amount of this re-determination. In September 2004, the court awarded additional attorney fees of $301,000 to plaintiff’s attorneys related to the appeal of this matter. We accrued a liability for the full amount of the additional judgment for attorney fees in our first quarter of fiscal 2005. In December 2004, we settled this matter and made a final payment of $1,174,000.

InTable connection with the spin-off of DAKA in late 1997 we assumed certain contingent liabilities of DAKA and its subsidiaries (see sections entitled “Indemnifications and Representations Related to Predecessor Companies” and Accrued Insurance Costs” in this Note) including liabilities of DAKA’s insurance coverage provided by American International Group, Inc. (“AIG”) or its subsidiaries for the 1994 through 1997 policy periods. DAKA’s insurance coverage included “Large Deductible” workers compensation policies that contained a “Final Premium” section, which set forth AIG’s obligations to determine the “Final Premium” once the policy period ends. While the insurance policies were in place, surety bonds were purchased as collateral for the policies. AIG was also provided with cash collateral in connection with the insurance policies of approximately $2.0 million. Champps eventually replaced the surety bond with an irrevocable standby letter of credit for the payment of claims under the insurance policies however AIG has not released the surety bond. Champps maintains that it has satisfied its obligations under the insurance policies, and that AIG has accepted final payment from Champps as evidenced by a letter agreement between Champps and AIG. AIG asserts that since the policies were with a subsidiary of AIG, the letter agreement is not valid. AIG, through its subsidiaries, has continued to request payments from Champps. Contents

OnTenant orimprovement ~~about~~allowances ~~June~~represent ~~24,~~cash ~~2004,~~received ~~Champps filed~~from ~~suit~~certain inlandlords ~~U.S. District Court~~ for ~~the~~initial ~~District~~construction costs ~~of Massachusetts against AIG~~ and ~~National~~ ~~Union~~are ~~Fire~~amortized ~~Insurance Company of Pittsburgh, PA (“National Union”)~~ as ~~defendants~~ ~~based on the defendants’ failure to release Champps from further liability under the insurance policies and for wrongfully withholding~~ a ~~$526,000~~reduction ~~irrevocable standby letter~~ of ~~credit~~rent ~~and~~expense on a ~~surety~~straight-line ~~bond~~basis ~~posted~~over in the ~~amount~~lease ~~of $526,254~~term.

14Deferred rents represent the cumulative difference between actual rent paid and rent expensed on a straight-line basis.

OnThe ~~August~~increase ~~9, 2004, National Union filed a motion to compel arbitration against Champps~~ in ~~U.S. District Court for~~ the ~~Southern~~partnership ~~District~~buyout ofwas ~~New York based on an Indemnity Agreement containing an~~due ~~arbitration~~primarily ~~clause.~~to Bycash ~~Order~~flow ~~dated~~bonus ~~December~~interest ~~13,~~purchases ~~2004~~by the ~~New~~new ~~York~~partners ~~District~~to ~~Court granted~~ the ~~Motion~~employee topartner ~~Compel~~cash ~~Arbitration~~flow asbonus ~~to National Union only~~program.

~~On February 11, 2005, Champps filed an Amended Complaint in Federal District Court for the District of Massachusetts naming AIG as the defendant~~6. OnLong ~~March~~Term 3, 2005, AIG filed a Motion to Dismiss Champps’ Amended Complaint due to lack of subject matter jurisdiction based on lack of diversity of citizenship since both Champps and AIG are Delaware corporations, or in the alternative, to stay the action pending arbitration. Debt

OnThe ~~March~~Company 24has a $25,000,000 senior ~~2005~~secured credit facility with LaSalle Bank that expires in September 2010. The facility provides up to $7,000,000 ~~Champps~~for ~~filed~~the ~~its Notice~~issuance of ~~Voluntary~~letters ~~Dismissal~~of credit. The facility provides for a $10,000,000 one-time increase in the ~~Massachusetts~~aggregate ~~Federal~~commitment amount ~~District~~if ~~Court~~requested ~~and~~by onthe ~~March~~Company 25between September 30, ~~2005~~ 2007 and December 31, ~~Champps~~2007 ~~filed~~and ~~suit~~approved inby ~~Trial~~the ~~Court~~lenders. The facility is secured by a blanket lien on all personal and real property of the ~~Commonwealth~~Company. ofBorrowings ~~Massachusetts~~under ~~naming~~the ~~AIG~~facility asbear ~~defendant~~interest ~~based~~at variable rates depending on ~~AIG’s~~a ~~failure~~total funded debt to ~~release~~EBITDA ~~Champps~~(earnings ~~from~~before ~~further~~interest, ~~liability~~taxes, ~~under~~depreciation and amortization prior to pre-opening expenses, as defined) ratio and range from the prime rate to prime plus 0.5 percent or, if ~~insurance~~elected, ~~policies~~LIBOR ~~and~~plus ~~for~~1.8 ~~wrongfully~~to ~~withholding~~3.0 apercent. The Company originally paid an up-front fee of $~~526~~188,000 ~~irrevocable~~and ~~standby~~is ~~letter~~required to pay an annual unused commitment fee of between 0.375 percent to 0.5 percent. The facility also requires the Company to maintain a ~~credit~~minimum fixed charge coverage ratio and not exceed certain thresholds for total funded debt to EBITDA and total senior debt to EBITDA ratios. As of April 1, 2007, we were in compliance with all debt covenants and financial ratios contained in the facility. Additionally, the facility limits the opening of new restaurants to a ~~surety~~maximum ~~bond~~of ~~posted~~eight in any fiscal year and also sets limits on the amount of dividends and/or stock repurchases that can be made by the Company to $~~526~~2,~~254.~~000,000 ~~The~~per ~~matter~~fiscal year ~~against~~if ~~AIG~~the total senior debt to EBITDA ratio is ~~currently~~ ~~pending~~equal into ~~Trial~~or ~~Court~~more inthan 1.00 to 1.00. As of April 1, 2007, the ~~Commonwealth~~Company had a senior debt to EBITDA ratio of ~~Massachusetts~~0.38 ~~The~~to ~~matter involving~~1.00. ~~National~~Also, ~~Union~~the isCompany ~~currently~~must ~~pending~~maintain ~~arbitration~~a inmargin ~~New~~of ~~York~~at least 0.25 ~~Based~~to ~~upon~~1.00 ~~the~~with each ~~facts~~of ~~known~~its financial covenants in order to usdeclare atdividends ~~this~~or ~~time,~~acquire westock dothrough ~~not~~share ~~believe~~repurchases. ~~that~~As of April 1, 2007, the ~~outcome~~Company had no outstanding borrowings and had placed letters of ~~the~~credit ~~case~~of ~~will~~$3,481,000 ~~have~~under athis facility. The ~~material~~available ~~adverse~~balance ~~effect~~for onborrowing ~~the~~under ~~Company’s~~this ~~financial~~facility ~~condition~~as of April 1, 2007 was $21,519,000.

~~Reserves~~ The Company has $15,000,000 of principal amount outstanding 5.5% convertible notes which are classified as “Current portion of long-term debt” on the Company’s consolidated balance sheet as of April 1, 2007 as the convertible notes mature in December 2007. The notes are convertible at the option of the holder at any time prior to maturity into shares of common stock at a conversion price of $10.66 per share, subject to adjustment upon certain events. The Company may redeem some or all of the notes at par plus accrued and unpaid interest. There are no assurances that the convertible debt holders will convert their debt into common shares prior to December 2007. If the debt is not converted, or repaid as part of a sale transaction (see Note 12), the Company expects to either pay the debt off with available cash, proceeds from credit facility borrowings, refinance term debt, or utilize a combination of these sources.

~~The Company previously recorded liabilities associated with the activities of certain predecessor companies which were either spun-off or sold to other entities~~7. ~~These~~Commitments ~~liabilities are discussed further in this section under the headings “Accrued Insurance Costs,” “Tax Contingencies”~~ and “Litigation.” The following table displays the activity and balances relating to these liabilities (in thousands) for the nine months ended April 3, 2005. This liability is included in accrued expenses and other long-term liabilities. While the Company believes its reserves are adequate as of April 3, 2005 based upon its examination of these matters and its experience to date, it cannot assure that the reserves will be sufficient for all future predecessor company liabilities. Contingencies

Balance at June 27, 2004	$	1,015
Expense recognition		315
Payments / Deletions		(1,193	)
Balance at April 3, 2005	$	137

Letters of Credit

~~Build-~~The Company had outstanding letters of credit of $3,481,000 as of April 1, 2007 primarily to~~-Suit~~ ~~and~~guarantee ~~Construction~~its performance pursuant to certain ~~Commitments~~insurance contracts. The letters of credit are irrevocable and have one-year renewable terms.

~~The~~8 Company entered into an agreement with AEI Fund Management, Inc. (“AEI”) that provides a maximum $24.5 million financing commitment for the completion of up to seven new restaurants. Under the agreement, AEI purchases the land and funds a substantial portion of the construction costs of new restaurants selected by the Company for participation under the agreement. The Company serves as the developer of the site and is responsible for completing the project on time and within budget. Once the project is completed per the terms of the development agreement, the Company finalizes its lease with AEI for the property. For accounting purposes, the Company is considered the owner of the property during the construction period due to the Company’s obligation to develop the property and AEI’s right to sell the funded assets to the Company in the event of a default under the development agreement. As of April 3, 2005 and June 27, 2004, the Company had no construction projects in process that were being financed by AEI.

AsTable of April 3, 2005, the Company had $3.2 million of other contractual construction commitments requiring payments in the next twelve months. Contents

15Indemnifications and Representations Related to Predecessor Companies

6In fiscal 1997 in connection with the corporate restructuring of DAKA, DAKA spun-off its food service business. The remaining corporation continued to own ~~Consolidated~~Champps, ~~Statements~~Fuddruckers and several other restaurant companies and renamed itself Unique Casual Restaurants, Inc. Fuddruckers was sold in 1998 and the other restaurant businesses were either sold or closed during 1998 or 1999, leaving Champps as the only owned and operating restaurant group. Through a merger, the name of ~~Cash~~the ~~Flows~~Company was then changed to Champps Entertainment, Inc. As a result of these transactions, the Company remains responsible for liabilities of DAKA preceding its spin-off, as well as certain indemnification obligations assumed by the Company in connection with the sale of Fuddruckers. Certain matters arising in connection with these obligations are discussed in this section under the headings, “Accrued Insurance Costs,” and “Litigation.” Although the Company has incurred certain expenses in connection with these obligations and retained liabilities in the past, based upon the circumstances known to us, the Company believes additional claims under these obligations and retained liabilities are unlikely to have a material effect on the Company’s financial position or results of operations.

~~Total~~Fuddruckers ~~depreciation~~Representations and ~~amortization~~ ~~expense~~Indemnity per the consolidated statement of cash flows includes depreciation and amortization expense on corporate assets of $285,000 and $273,000 which is included in general and administrative expense on the consolidated statements of operations for the nine months ended April 3, 2005 and March 28, 2004, respectively.

7The agreement whereby Fuddruckers was sold contains various representations and warranties by the Company, certain of which expired on December 31, 2000. ~~Long~~ ~~Term~~The ~~Debt~~remaining representations and warranties will continue in effect as stated in the agreement.

The ~~following~~maximum aggregate liability of the Company on account of any breach of any representation or warranty is limited to the amount of the final purchase ~~discussion~~price. ~~highlights~~There ~~major~~is ~~non-routine~~no ~~changes~~limit on the liability of the Company to the purchaser on account of any breach by the Company’s ~~debt~~of any of its covenants or agreements under the agreement or on account of indemnification obligations covering matters other than ~~balances~~breaches ~~for~~of representations and warranties, provided that, if the ~~nine~~purchaser ~~months~~is ~~ended~~entitled ~~April~~to 3recover any losses in excess of the final purchase price ($43,000,000), ~~2005~~the ~~and~~Company ~~material~~may ~~amounts~~require the purchaser to reconvey to the Company full ownership and control of the shares and all assets (to the extent then owned by the purchaser or Fuddruckers) that were transferred pursuant to the agreement in such a manner as to rescind the transactions contemplated by the agreement based upon a formula price. ~~borrowing~~During ~~availability~~2006 ~~under~~and 2007, no claims for indemnification were presented by the purchaser and the Company’s ~~credit~~believes ~~facility~~the risk for significant claims for indemnification being presented in the future by the purchaser is remote.

~~The~~Accrued ~~Company~~Insurance ~~previously~~Costs had a bank credit facility under which it could borrow up to $8.0 million. The facility had two components: $2.0 million was available to provide short-term working capital and to support the issuance of letters of credit; the remaining $6.0 million was available to provide interim financing associated with the construction of new restaurant locations. The $6.0 million interim construction financing facility was cancelled by the Company in April 2004 as a result of the placement of a new facility with a new lender described below. The working capital facility expired in January 2005. As of April 3, 2005, the Company had no borrowing capacity, no outstanding borrowings and no letters of credit under these facilities.

InThe ~~March 2004, the~~ Company ~~obtained~~is ~~a three~~self-~~year $25.0 million senior secured credit facility with LaSalle Bank. We intend to~~insured ~~use the facility to support our growth,~~ for ~~general~~certain ~~working~~losses ~~capital~~related ~~needs and provide up~~ to ~~$5,000,000~~workers’ ~~for the issuance of letters of credit. In our fourth quarter of fiscal 2004~~compensation, we ~~had~~general ~~net~~liability ~~borrowings under this facility of $2.5 million~~ and wemedical ~~prepaid $15~~claims.2 ~~million of our existing debt with these borrowings and our cash balance.~~ The ~~facility~~ ~~is secured by a blanket lien on all personal and real property of the~~ Company~~. Borrowings~~ ~~under~~has ~~the~~purchased ~~facility~~stop-loss ~~bear~~coverage ~~interest~~in atorder ~~variable rates depending on a total funded debt~~ to ~~EBITDA~~limit ~~(earnings~~its ~~before~~exposure ~~interest, taxes, depreciation and amortization prior~~ to ~~preopening~~ ~~expenses,~~significant aslevels ~~defined)~~of ~~ratio~~such ~~and range from prime to prime plus 0~~claims.5 ~~percent or, if elected, LIBOR plus 2.0 to 3.0 percent. The Company paid an up~~Self-~~front~~insured ~~fee~~reserves ~~of $188,000 and is required to pay an annual unused commitment fee of 0.375 percent to 0.5 percent. Outstanding borrowings under the facility~~ are ~~required~~accrued ~~to be converted to a five-year term loan if senior debt to EBITDA exceeds specified levels, however,~~ based upon our ~~current senior~~estimates ~~debt~~of ~~to EBITDA ratio this conversion is not required. The facility also requires~~ the ~~Company~~aggregate toliability ~~maintain~~for auninsured ~~minimum~~claims ~~fixed~~incurred ~~charge~~using ~~coverage~~certain ~~ratio~~assumptions ~~and~~that ~~tangible net worth level. Although the recent recognition of an impairment charge negatively impacts our tangible net worth, we~~ are ~~still~~based inupon ~~compliance~~historical ~~with these debt covenants~~experience. ~~The~~Actual ~~facility limits~~amounts ~~the~~required ~~opening of new restaurants~~ to asettle ~~maximum~~such ofobligations ~~twenty-four~~may ~~restaurants~~exceed over a three-year period and also sets limits on the amount of dividends and/or stock repurchases that can be made by the Company. As of April 3, 2005, the Company had $1.0 million of outstanding borrowings and had placed letters of credit of $2.6 million under this facility. The available balance under this facility at April 3, 2005 was $21.2 million. However, the use of those ~~proceeds would be restricted to the paydown of current liabilities or for funding capital expenditures~~estimates.

8Through June 29, 1997, the Company was self-insured for workers’ compensation, general liability, and various other risks up to specified limits. ~~Prepaid~~The ~~Expenses~~Company’s share of prior workers’ compensation and ~~Other~~general ~~Current~~liability ~~Assets~~programs of DAKA through June 29, 1997 were allocated using labor costs and the aggregate costs of such programs were determined through actuarial studies which determined the estimated amount required to be provided for incurred incidents. In connection with the spin-off transaction from DAKA, the Company is liable for all claims made subsequent to the effective date of the spin-off, including claims related to associates of DAKA not continuing with the Company after the spin-off, provided the claims relate to events occurring prior to the effective date of the spin-off. The Company believes that any claims related to its obligations resulting from the spin-off, including those listed under “Litigation” in this Note, are adequately accrued and are unlikely to have a material effect on the Company’s financial position or results of operations.

~~The~~9 ~~components of prepaid expenses and other current assets were as follows (in thousands):~~

	April 3,2005		June 27,2004
Prepaid rents, real estate taxes and other deferred costs	$	1,546	$	3
Prepaid insurance		1,111		981
Prepaid licenses and permits		246		187
Prepaid contracts and other		771		611
	$	3,674	$	1,782

16Litigation

~~Prepaid~~From ~~rents~~time to time, ~~real~~lawsuits ~~estate~~are ~~taxes~~filed ~~and related~~against ~~costs~~the ~~were~~Company ~~lower~~in atthe ~~June~~ordinary ~~27,~~course ~~2004~~of asbusiness. aSuch ~~result~~lawsuits oftypically ~~the~~involve ~~period~~claims ~~ending~~from ~~date~~customers, ~~being three~~former ~~days~~or ~~before~~current ~~the~~employees, ~~end~~and ofothers related to issues common to the ~~month~~restaurant industry. ~~The~~A ~~rent~~number ~~and~~of ~~real~~such ~~estate~~claims ~~tax~~may ~~payments~~exist ~~for~~at ~~July 2004~~any ~~were~~given ~~paid~~time. onThe ~~June~~Company ~~28,~~is ~~2004~~currently ~~after~~not ~~our~~a ~~period~~party ~~end,~~to ~~while~~any ~~the~~litigation ~~rent~~that ~~and~~management ~~real~~believes ~~estate~~is ~~taxes~~likely ~~for~~to ~~April 2005~~have ~~were~~a ~~paid~~material onadverse ~~April~~effect 1,on ~~2005~~the ~~which~~Company’s ~~was~~consolidated ~~before~~financial ~~our~~position ~~period~~or results ~~end~~of operations.

9In connection with the spin-off of DAKA in late 1997, the Company assumed certain contingent liabilities of DAKA and its subsidiaries (see sections entitled “Indemnifications and Representations Related to Predecessor Companies” and “Accrued Insurance Costs” in this Note) including liabilities of DAKA’s insurance coverage provided by American International Group, Inc. ~~Other~~(“AIG”) ~~Assets~~or its subsidiaries for the 1994 through 1997 policy periods. DAKA’s insurance coverage included “Large Deductible” workers compensation policies that contained a “Final Premium” section, ~~Net~~which set forth AIG’s obligations to determine the “Final Premium” once the policy period ends. While the insurance policies were in place, surety bonds were purchased as collateral for the policies. Champps eventually replaced the surety bond with an irrevocable standby letter of credit for the payment of claims under the insurance policies, however AIG has not released the surety bond or the letter of credit. Champps maintains that it has satisfied its obligations under the insurance policies, and that AIG has accepted final payment from Champps as evidenced by a letter agreement between Champps and AIG. AIG asserts that the policies were with National Union Fire Insurance Company of Pittsburgh, PA (“National Union”), a subsidiary of AIG, and that the letter agreement is not valid. National Union contends that it is owed more than $2 million by Champps. Champps intends to vigorously defend its position in this matter.

~~The~~In ~~components~~June 2004, Champps filed suit against AIG and National Union in the United States District Court for the District of ~~other~~Massachusetts based ~~assets~~on the defendants’ failure to release Champps from further liability under the insurance policies and for wrongfully withholding a $526,000 ~~net were~~irrevocable asstandby ~~follows~~letter of credit and a surety bond posted in the amount of $526,254 (the “Federal Court Action”). In August 2004, National Union filed a Petition to Compel Arbitration in ~~thousands~~the United States District Court for the Southern District of New York. In December 2004, the Court granted National Union’s Petition to Compel Arbitration (the “National Union Arbitration”):.

	April 3,2005		June 27,2004
Deferred financing costs	$	1,079	$	1,368
Liquor licenses		753		745
Available for sale securities		--		279
Long-term deposits		120		90
Leasehold rights		611		--
Other		74		99
	$	2,637	$	2,581

In February 2005, Champps filed an Amended Complaint in the Federal Court Action, in which it named only AIG as a defendant. In March 2005, Champps withdrew its Amended Complaint in the Federal Court Action, and filed suit against AIG in state court in Massachusetts (the “State Court Action”). In July 2005, the Court granted AIG’s motion to stay the State Court Action pending resolution of the National Union Arbitration in New York.

~~Available for sale securities~~The ~~decreased~~National asUnion ~~the~~Arbitration ~~result~~is ~~of the sale of securities~~ in ~~July~~its ~~2004.~~preliminary ~~The~~phase, ~~increase~~and ~~in leasehold rights resulted from~~ the ~~purchase~~Company ofintends ato ~~leasehold~~vigorously ~~right~~defend ~~from~~any ~~our~~claims ~~landlord~~of infurther ~~Addison,~~liability. ~~Texas during~~The ~~September~~Company ~~2004.~~has ~~Leasehold~~not ~~rights~~yet ~~are~~conducted ~~being~~discovery ~~amortized~~ on aAIG’s ~~straight-line~~liability ~~basis over the remaining 22 year lease term~~assertions. ~~This term coincides with the term for which we are depreciating our leasehold improvements and the term we use to calculate straight-line rent.~~

10The Company may also be required to assume other liabilities of DAKA in connection with the spin-off and may be required to indemnify Fuddruckers in connection with future breaches of our representations and warranties that survived the closing of DAKA’s sale of its Fuddruckers restaurant chain. ~~Accrued~~These ~~Expenses~~indemnifications are discussed further in this Note under the heading “Indemnifications and ~~Other~~Representations ~~Long~~Related to Predecessor Companies” and “Fuddruckers Representations and Indemnity”. Based upon the circumstances known to the Company at this time, and the length of time that has elapsed since the spin-~~Term~~off ~~Liabilities~~of DAKA and the sale of Fuddruckers, the Company believes any additional claims under these obligations and retained liabilities are unlikely to have a material effect on the Company’s financial position or results of operations.

~~The~~Tax ~~components~~Contingencies ~~of accrued expenses were as follows (in thousands):~~

	April 3,2005		June 27,2004
Salaries, wages, related taxes and benefits	$	2,330	$	2,721
Accrued taxes, predominantly payroll, sales and property		2,950		2,291
Accrued insurance		1,032		1,392
Predecessor obligations (legal and insurance)		137		1,015
Gift cards/certificates		1,042		447
Tenant improvement allowances		1,273		1,035
Other		1,809		990
	$	10,573	$	9,891

From time-to-time, the Company and its predecessors have been party to various assessments of taxes, penalties and interest from federal, state and local agencies. Tax reserves are accrued based upon our estimates of the ultimate settlement of the contingencies. Actual amounts required to settle those obligations may exceed the Company’s estimates.

~~The~~10 ~~increase in Other resulted primarily from an accrual for the severance expense of our former CEO of $520.~~

TheTable components of other long-term liabilities were as follows (in thousands): Contents

	April 3,2005		June 27,2004
Tenant improvement allowances	$	19,328	$	17,604
Deferred rents		9,245		8,036
Other		684		332
	$	29,257	$	25,972

8.	Shareholders’ Equity / Share Repurchase / Restricted Stock

17In January 2006, the Company’s Board of Directors approved a plan to expend up to $5,000,000 to repurchase its common stock from time to time over the next two years. Through April 1, 2007, the Company purchased 191,480 shares of common stock for $1,306,000 under this plan. No purchases occurred in the quarter ended April 1, 2007. Purchases under the program may be made in the open market or in private transactions. Future purchases under the program will depend, among other factors, on the prevailing stock price, market conditions, limitations under debt agreements, alternative investment opportunities and are expected to be funded primarily with available cash balances and operating cash flow. There is no minimum or maximum number of shares to be repurchased under the program. The repurchased shares will be held in treasury and used for issuance under the Company’s equity incentive plans.

~~Tenant~~On ~~improvement~~August 16, ~~allowances represent~~2006, ~~cash~~the Company received ~~from~~the ~~certain~~resignation, ~~landlords~~effective ~~for~~on ~~initial~~that ~~construction~~date, ~~costs~~of ~~and~~Rich ~~are amortized~~Scanlan, as athe ~~reduction~~Company’s chief operating officer (“COO”) and vice president. Mr. Scanlan agreed to remain an employee of ~~rent~~the ~~expense~~Company onin athe ~~straight-line~~capacity ~~basis~~of ~~over~~director of operations overseeing the ~~lease~~Illinois ~~term~~and asMinnesota markets. As a part of Mr. Scanlan’s resignation, he agreed ~~reduction~~to release all right, title and interest to any unvested restricted stock grants previously granted to him by the Company in ~~rent.~~connection ~~Tenant~~with ~~improvement~~his ~~allowances~~former ~~increased~~position as the ~~result~~Company’s COO. The return of ~~two~~the ~~tenant~~unvested restricted stock totaling 102,000 ~~improvement~~shares ~~allowances~~by ~~received~~Mr. Scanlan inwas ~~our~~accounted ~~second~~for ~~quarter~~as a forfeiture and previously accrued compensation of ~~fiscal~~$85,000 ~~2005~~related to this unvested restricted stock was reversed during the quarter ended October 1, 2006. No future compensation expense will be recorded related to these restricted stock awards.

~~Deferred~~11 ~~rents represent the cumulative difference between actual rent paid and rent expensed on a straight-line basis.~~

OtherTable primarilyof represents insurance accruals that we anticipate paying more than 12 months from April 3, 2005. Contents

119. ~~Severance~~Income ~~Expense~~(Loss) Per Share

~~Our~~The ~~former~~following ~~Chief~~table ~~Executive Officer,~~sets ~~President~~forth ~~and Chairman of~~ the ~~Board,~~computation ~~William H. Baumhauer had an amended Employment Agreement with the Company that entitled Baumhauer to one year continuation~~ of ~~pay~~basic inand ~~the event~~diluted ofincome ~~termination. On March 2, 2005, Baumhauer entered into a Separation Agreement~~ (~~“The Agreement”~~loss) ~~with~~per ~~the~~share: Company. The Agreement provides for an additional four months of salary after payments under the Employment Agreement would otherwise cease. These additional four months of payments are payable at the discretion of the Board and are contingent upon Baumhauer completing certain obligations to the Company.

12. Income Tax Expense (Benefit)


	Three Months Ended						Nine Months Ended
	April 1, 2007			April 2, 2006			April 1, 2007			April 2, 2006
Basic income (loss) per share:
Income (loss) from continuing operations	$	(339,000	)	$	(524,000	)	$	(6,800,000	)	$	2,234,000
Loss from discontinued operations, net of tax		(232,000	)		(1,405,000	)		(326,000	)		(1,798,000	)

Net income (loss)	$	(571,000	)	$	(1,929,000	)	$	(7,126,000	)	$	436,000

Weighted average shares outstanding		13,085,900			13,193,912			13,104,114			13,134,949

Income (loss) from continuing operations per share - basic	$	(0.03	)	$	(0.04	)	$	(0.52	)	$	0.17
Loss from discontinued operations per share - basic		(0.01	)		(0.11	)		(0.02	)		(0.14	)

Net income (loss) per share - basic	$	(0.04	)	$	(0.15	)	$	(0.54	)	$	0.03

Diluted income (loss) per share:
Income (loss) from continuing operations	$	(339,000	)	$	(524,000	)	$	(6,800,000	)	$	2,234,000
Plus income impact of assumed conversion of 5.5% convertible subordinated notes		(a	)		(a	)		(a	)		(a	)

Income (loss) from continuing operations plus assumed conversions		(339,000	)		(524,000	)		(6,800,000	)		2,234,000

Loss from discontinued operations, net of tax		(232,000	)		(1,405,000	)		(326,000	)		(1,798,000	)

Net income (loss) plus assumed conversions	$	(571,000	)	$	(1,929,000	)	$	(7,126,000	)	$	436,000


Weighted average shares outstanding		13,085,900			13,193,912			13,104,114			13,134,949
Net effect of dilutive stock options based on the treasury stock method using average market price (b)		—			—			—			53,045
Net effect of dilutive warrants based on the treasury stock method using average market price		(c	)		(c	)		(c	)		(c	)
Assumed conversion of 5.5% convertible subordinated notes		(a	)		(c	)		(a	)		(a	)

Total shares outstanding for computation of per share earnings		13,085,900			13,193,912			13,104,114			13,187,994

Income (loss) from continuing operations per share - diluted	$	(0.03	)	$	(0.04	)	$	(0.52	)	$	0.17
Loss from discontinued operations per share - diluted		(0.01	)		(0.11	)		(0.02	)		(0.14	)

Net income (loss) per share - diluted	$	(0.04	)	$	(0.15	)	$	(0.54	)	$	0.03

~~For the nine months ended April 3, 2005, we recorded~~ (a) ~~tax~~Not ~~benefit~~included ofin ~~$1,393,000. This~~calculation ~~benefit~~because ~~primarily~~the ~~consists~~assumed ofconversion ~~income tax benefit at statutory rates~~ of ~~$392,000~~convertible ~~based~~subordinated onnotes ~~the~~into ~~loss before taxes of $~~1,~~120~~407,~~000,~~129 ~~and~~common ashares ~~FICA~~was ~~tip tax credit of $965,000. The Company's FICA tip tax credits totaling $7.2 million may be used to offset federal income taxes. The Company determined that it is more likely than~~ not ~~that it would realize the tax benefits of its deferred tax assets based upon projections of future taxable income and the reversal of deferred tax liabilities~~dilutive.

~~13.~~(b) ~~Restricted~~For ~~Stock~~the ~~Award~~three months ended April 1, 2007 and April 2, 2006, 656,223 and 230,181 of stock options, respectively, were not dilutive and, therefore, were not considered in the computation of diluted income per share.

InFor ~~March~~the ~~2005,~~nine ~~our~~months ~~new~~ended ~~Chief Executive Officer~~April 1, ~~President~~2007 and ~~Chairman of the Board~~April 2, ~~Michael P. O’Donnell entered into an employment agreement with Champps Entertainment~~2006, ~~Inc. As part of the agreement~~656, ~~514,680~~223 ~~restricted shares of common stock will be awarded to Mr. O’Donnell over a seven year period. This award is subject to the availability of shares that have been authorized~~ and ~~are available~~ ~~under our 1997 Stock Option and Incentive Plan and our 2003 Stock Option and Incentive Plan. If shares are not available~~348,125 ~~the Company will seek shareholder approval that would permit the issuance~~ of ~~any shares not granted due to their lack of availability. If the shareholders of the Company fail to approve such resolution by the date any portion of the restricted~~ stock ~~award~~options, ~~would otherwise have vested~~respectively, ~~the~~were ~~Company~~not ~~shall~~dilutive ~~make a cash payment to Mr. O’Donnell equal to the economic value of the vesting shares. Restricted stock awards are expensed ratably over the vesting period. 128~~and,~~670~~ ~~shares of the restricted stock award vest on an equal annual basis over a three year period on the anniversary of the grant date. 386~~therefore,~~010~~ ~~shares~~were ofnot ~~the~~considered ~~restricted~~in ~~stock award vest on~~ the ~~seventh~~computation ~~anniversary~~ of ~~the~~diluted ~~grant~~income ~~date~~per share.

~~The~~(c) ~~restricted~~Not ~~stock~~included ~~may vest earlier upon a qualifying disability, death, retirement or change~~ in ~~control.~~calculation ~~The~~because 386,010 share restricted stock award includes a performance element that allows vesting to accelerate if certain Champps share price performance measures are met. Specifically, one-half of this restricted stock award vests over an eight quarter period if the ~~market~~assumed ~~price~~conversion of ~~the~~warrants ~~stock~~into ~~appreciates 200% or more for a sixty consecutive day period prior to the 2nd anniversary of the grant (approximately $18.00 by March 2~~386,961 ~~2007).~~common ~~The~~shares ~~remainder~~was ofnot ~~the grant vests over an eight quarter period if the market price of the stock appreciates 300% or more for a sixty consecutive day period prior to the 3rd anniversary of the award (approximately $27~~dilutive.~~00 by March 2, 2008).~~

1812

Currently,Table there are approximately 387,000 shares available under the 1997 Stock Option and Incentive Plan and our 2003 Stock Option and Incentive Plan. A compensation expense totaling $105,000 for the period of March 2, 2005 through April 3, 2005 has been recorded as a liability since there are not enough shares available to fulfill the restricted stock award, and it is not certain that the shareholders will authorize the additional shares to be awarded. The Company is obligated to make a cash payment to Mr. O’Donnell equal to the economic value of the vesting shares if the shareholders do not approve the authorization of additional incentive shares to be issued. Contents

1910. Discontinued Operations, Net of Tax and Assets Held for Sale

~~ITEM~~The 2.Company ~~Management's~~closed ~~Discussion~~three restaurants in May 2006 and ~~Analysis~~closed one restaurant in January 2007 whose financial results met the definition of ~~Financial~~a ~~Condition~~“component of an entity”. Operations and ~~Results~~cash flows were clearly distinguished and measured at the restaurant level and, when aggregated, the financial results of ~~Operations~~the closed restaurants were determined to be material to our consolidated financial statements. Loss from discontinued operations, net of tax, consisted of the following (in thousands):

Forward-Looking Statements


	Three Months Ended						Nine Months Ended
	April 1, 2007			April 2, 2006			April 1, 2007			April 2, 2006
Restaurant sales	$	41		$	2,519		$	1,177		$	7,565
Restaurant costs		(2	)		2,704			618			8,399
Asset impairment charges		—			2,135			—			2,135
Lease termination, closure costs and other		426			—			1,098			—

Loss from discontinued operations		383			2,320			539			2,969
Income tax benefit		(151	)		(915	)		(213	)		(1,171	)

Loss from discontinued operations, net of tax	$	232		$	1,405		$	326		$	1,798

~~The~~As ~~matters~~of ~~discussed~~April 1, in2007, the ~~following~~ ~~Management’s~~Company ~~Discussion~~had ~~and~~exited ~~Analysis~~two ofclosed ~~Financial~~locations ~~Condition~~through ~~and~~lease ~~Results of~~termination ~~Operations~~agreements ~~and~~at ~~elsewhere~~a incost ~~this~~of ~~Quarterly Report on Form 10-Q~~$1,599,000. ~~which~~In ~~are not historical information~~addition, ~~are~~the ~~forward-looking~~Company ~~statements~~had ~~within~~purchased ~~the~~a ~~meaning~~third ofclosed ~~Section~~location ~~27A~~from of the ~~Securities~~ ~~Act~~landlord offor ~~1933~~$3,161,000 ~~Section 21E of the Securities Exchange Act of 1934~~ and ~~the~~sold ~~safe harbor provisions of~~ the ~~Private~~location ~~Securities~~for ~~Litigation Reform Act of 1995. Words such as “may~~$2,~~” “believe~~623,~~” “estimate~~000,” ~~“expect,” “plan,” “intend,” “project,” “anticipate” and similar expressions are used to identify forward-looking statements~~net. ~~Readers~~With ~~are~~the ~~cautioned not~~exception toof ~~place~~$372,000 ~~undue~~in ~~reliance on these forward-looking statements. Forward-looking statements involve risks and uncertainties~~expense, ~~many~~all ofclosure ~~which~~costs ~~are beyond our control. Should~~associated ~~one~~with ~~or more of~~ these ~~risks~~transactions orwere ~~uncertainties~~recorded ~~materialize,~~in orfiscal ~~should~~year ~~any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated, estimated or projected~~2006. ~~These factors, risks and uncertainties include, but are not limited to the following factors:~~

•The fourth closed location is expected to be disposed of through a sublease arrangement and a $307,000 lease termination liability was previously recorded based on original sublease estimates. The ~~successful~~liability ~~implementation~~was increased to reflect the present value of ~~our~~the ~~strategic~~future ~~initiatives~~minimum lease obligations offset by the sublease rental as is currently being contemplated under the proposed sublease. The following table displays the activity and balances relating to this lease termination liability (in thousands):

• The highly competitive nature of the restaurant industry.


	Lease Termination Liability
Balance at July 2, 2006	$	307
Expense recognition		707
Payments		(271	)

Balance at April 1, 2007	$	743

•13 ~~Our ability to achieve and manage our planned expansion.~~

•Table Changes in the availability and costs of product.Contents

•11. ~~The~~Income ~~impact~~Tax ofExpense ~~work stoppages or lockouts of professional sports leagues such as the National Hockey League.~~(Benefit)

•The ~~Potential~~following schedule ~~fluctuation~~reflects inthe ~~our~~Company’s ~~quarterly~~income ~~operating~~tax ~~results~~expense ~~due~~(benefit) to(in ~~seasonality,~~thousands) ~~weather,~~and ~~preopening~~effective ~~expenses~~tax ~~and~~rates: ~~other factors.~~

• The continued service of key management personnel, including our new Chief Executive Officer.


	Three Months Ended										Nine Months Ended
	April 1, 2007			Effective Tax Rate		April 2, 2006			Effective Tax Rate		April 1, 2007			Effective Tax Rate		April 2, 2006			Effective Tax Rate
Income (loss) from continuing operations, before tax	$	(472	)			$	(1,224	)			$	141				$	2,260
Loss from discontinued operations		(383	)				(2,320	)				(539	)				(2,969	)

Income (loss) before tax	$	(855	)			$	(3,544	)			$	(398	)			$	(709	)

Income tax expense (benefit) from continuing operations	$	(133	)	28.2	%	$	(700	)	57.2	%	$	6,941		4922.7	%	$	26		1.2	%
Income tax (benefit) on loss from discontinued operations		(151	)	39.4	%		(915	)	39.4	%		(213	)	39.5	%		(1,171	)	39.4	%

Total income tax expense (benefit)	$	(284	)	33.2	%	$	(1,615	)	45.6	%	$	6,728		-1690.5	%	$	(1,145	)	161.5	%

•Historically, ~~Customer~~the ~~perceptions~~Company’s income tax provision is influenced significantly by benefits for FICA tip credits. In the three and nine months ended April 1, 2007, the Company recorded $404,000 and $7,785,000 of ~~food~~deferred ~~safety~~income tax expense, respectively, to provide a valuation allowance against a portion of its FICA tip tax credit carryforwards. The valuation allowance was recorded because the Company believes the full realization of such credits is not more likely than not based on the current trends of earnings.

•The ~~Changes~~valuation inallowance ~~consumer~~reflects ~~preferences~~the orbelief ~~consumer~~that ~~discretionary~~the ~~spending~~FICA tax expense is more likely than not to be used as a tax deduction instead of a tax credit. Consistent with this belief, it is anticipated that tax provisions for the immediate future will continue to reflect FICA tax expense as a deduction as opposed to a credit.

•Typically, ~~Our~~an ~~ability~~enterprise’s toeffective ~~attract,~~tax ~~motivate~~rate for interim periods is based on a reliable estimate of the effective tax rate for the full fiscal year. The rate used for the three and ~~retain~~nine ~~qualified~~months ~~financial~~ended April 2, ~~accounting~~2006 was based on this approach. However, partly due to a negative estimated annual tax rate currently expected for fiscal 2007 and other ~~executive~~variances ~~personnel~~in ~~and~~operating ~~restaurant~~results ~~level~~in ~~associates~~recent years, the Company believes that the use of a year-to-date provision is appropriate for the April 1, 2007 interim tax provision as permitted under FIN 18: “Accounting for Income Taxes in Interim Periods.” The use of such a method resulted in an income tax expense that differed from the statutory rate as follows (in thousands):

• Increased labor and payroll related expenses.


	Three Months Ended			Nine Months Ended
	April 1, 2007			April 1, 2007
Income tax expense (benefit) computed at statutory federal income tax rates	$	(165	)	$	49
FICA tip tax credit		(404	)		(1,144	)
Non-deductible costs		8			27
State income tax provision, net of federal benefit		20			234
Valuation allowance		404			7,785
Other, net		4			(10	)

Income tax expense (benefit)	$	(133	)	$	6,941

•14 ~~Our ability to protect our name, logo and other proprietary information.~~

•Table The impact of litigation against us.Contents

•12. ~~The~~Potential ~~impact~~Company ofSale ~~federal, state or local government regulations relating to our associates or the sale of food and alcoholic beverages.~~Expense

•On ~~The~~January 11, 2007, ~~ability~~the Company announced that a Special Committee of its Board of Directors (“special committee”) had entered into a letter of intent with Kinderhook Industries, LLC to ~~fully~~sell ~~utilize~~all ~~income~~of its assets (other than certain tax ~~operating~~assets) ~~loss~~to a new entity to be formed by Kinderhook. On March 1, 2007, the Company announced that the letter of intent expired pursuant to its terms and ~~credit~~that ~~carryforwards~~the special committee was continuing to pursue a sale of the Company and that it had received indications of interest from a number of potential purchasers. There can be no assurance that any transaction will be agreed upon or consummated. As of April 1, 2007, the Company had incurred $499,000 of potential company sale expense related to the above mentioned matter, primarily consisting of legal and special committee expenses.

•15 ~~Our failure to achieve and maintain effective internal controls in accordance with the Sarbanes-Oxley Act of 2002.~~

•Table The impact of our restatement related to lease accounting, our current asset impairment and possible future asset impairments.Contents

~~This~~ITEM ~~list is intended to identify some of the principal factors that could cause results to differ materially from those described in the forward-looking statements included elsewhere in this report~~2. ~~These factors~~Management’s ~~are~~Discussion ~~not~~and ~~intended~~Analysis ~~to represent a complete list~~ of ~~all~~Financial ~~risks~~Condition and ~~uncertainties inherent~~Results in our business, and should be read in conjunction with the more detailed cautionary statements and risk factors identified in our previously filed 2004 Annual Report on Form 10-K/A for the fiscal year ended June 27, 2004, our other Securities and Exchange Commission filings, and press releases. All forward-looking statements attributable to our officers, directors and employees, or to persons acting on our behalf, are expressly qualified in their entirety by such factors and other events, many of ~~which are outside of our control~~Operations. Any of these factors could have a material adverse effect on the Company’s results of operations. All forward-looking statements made in this quarterly report on Form 10-Q are based on information available to us on the date hereof, and we assume no obligation to update these statements.

20Forward-Looking Statements

~~Restatement~~This Quarterly Report on Form 10-Q and the documents incorporated by reference into the Quarterly Report on Form 10-Q include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We use words such as “may,” “believe,” “estimate,” “expect,” “plan,” “intend,” “project,” “anticipate” and similar expressions to identify forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events, activities or developments. Our actual results could differ materially from those discussed in or implied by these forward-looking statements. Forward-looking statements include, without limitation, statements relating to, among other things:

~~Following~~• ~~a January 2005 review of~~ the ~~accounting~~ability adjustments cited in several recent Form 8-K filings by other restaurant companies, and in consultation with our independent registered public accounting firm, KPMG LLP, we determined that one of the adjustments in those filings relating to ~~the treatment~~successfully ofdevelop ~~lease accounting~~ and ~~leasehold~~implement ~~depreciation~~strategies ~~applied~~ to ~~us,~~increase ~~and~~revenues ~~that our prior financial statements contained errors. As a result, we have restated our consolidated financial statements for the fiscal years 2002 through 2004~~ and ~~for the first quarter of fiscal 2005. Selected financial data for fiscal years 2000 and 2001 have also been restated.~~ profitability;

~~Historically,~~• the ~~Company’s accounting~~ability practice consisted of using the initial non-cancelable lease term when determining whether each of its leases was an operating lease or a capital lease and when calculating straight-line rent expense. In accordance with this policy, the Company had depreciated its leasehold improvements over a period that included both the initial non-cancelable term of the lease and its option periods but not longer than the useful life of the asset, if shorter. When accounting for leases with renewal options, we had recorded rent expense on a straight-line basis over the initial non-cancelable lease term. In addition, we previously did not include increases when calculating rent expense for leases where the increases in rent include escalation clauses based on the lesser of a specified percentage increase or the change in an index that includes a leverage factor. We previously believed that these longstanding accounting treatments were appropriate under generally accepted accounting principles. We now have restated our financial statements to ~~use~~achieve ~~the same lease term for depreciating leasehold improvements as we use in determining capital versus operating lease classifications and in calculating straight-line rent expense. We have restated~~ our ~~financial~~key ~~statements~~strategic ~~to recognize rent expense on a straight-line basis over the expected lease term~~initiatives, including ~~cancelable~~menu ~~option periods~~changes, ~~where~~bar ~~the~~reinvigoration ~~failure~~and toreal ~~exercise~~estate ~~such~~site ~~options~~selection ~~would result in an economic penalty.~~ strategy;

We• ~~have~~the ~~restated~~highly ~~our~~competitive ~~consolidated financial~~nature ~~statements~~of ~~through~~ the ~~first~~casual ~~quarter~~dining ofrestaurant ~~fiscal 2005 and have properly accounted for our leases as described above for our second and third quarters of fiscal 2005.~~ industry;

~~Solely~~• asour aability ~~result~~to ofopen ~~these accounting adjustments, net earnings~~ and ~~earnings~~operate ~~per~~additional ~~diluted~~restaurants ~~share were reduced by $213,000 or $0.02 per diluted share for the three months ending March 28, 2004 and $592,000 or $0.05 per diluted share for the nine months ending March 28, 2004.~~ profitably;

~~The~~• ~~adjustments~~our ~~made~~ability into ~~the restatement~~secure ~~are~~additional ~~all~~debt ~~non-cash~~or inequity ~~nature~~financing ~~and~~in ~~will have no material impact on~~ the ~~Company’s~~ ~~cash flows, cash position, revenues, same-store sales, or compliance with the covenants under its senior credit facility.~~ future;

~~The~~• ~~prior~~our ~~period~~ability ~~consolidated financial statements included in this Form 10-Q have been restated~~ to ~~reflect~~control ~~the adjustments~~restaurant ~~described~~operating ~~above.~~costs, Weincluding ~~have~~commodity ~~filed an amendment to our Annual Report on Form 10-K/A for the fiscal year ended June 27~~prices, ~~2004~~energy and aninsurance ~~amendment to our Quarterly Report on Form 10-Q/A for the quarterly period ended October 3, 2004 prior to the filing of this Form 10-Q.~~ costs;

~~Impairment~~• potential fluctuation in our quarterly operating results due to seasonality and other factors including the levels of pre-opening expenses for new restaurants;

~~Under~~• ~~SFAS No. 144, an assessment is made to determine if~~ the ~~sum~~continued ofservice ~~the expected future undiscounted cash flows from the use~~ of ~~the~~key ~~assets~~management and eventual disposition is less than the carrying value. If the sum of the expected undiscounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value. During our third quarter ended April 3, 2005 the Company recorded an impairment charge of $6.6 million. personnel;

21• consumer perceptions of food safety;

~~Historically,~~• wechanges evaluate the recoverability of our assets periodically to determine whether the undiscounted projected cash flows associated with each restaurant over the life of their lease are greater than the asset carrying value on our balance sheet. If the undiscounted projected cash flows of an asset, including maintenance capital expenditures, are less than the book value of the assets, we consider whether or not to recognize an impairment expense to write the asset down to its fair market value. Fair market value is estimated as the greater of the sum of the estimated discounted cash flows or the salvage value of the equipment. The total impairment expense recorded in ~~the~~consumer ~~period~~tastes ~~ended~~and ~~April~~trends 3,and ~~2005~~general ~~for~~business ~~four~~and ~~under~~economic ~~performing restaurants was $6.6 million.~~ conditions;

~~During~~• ~~the~~our ~~quarter~~ability ~~ended~~to ~~April 3~~attract, ~~2005,~~ ~~three~~motivate ~~additional restaurants located in Irvine, California, Skokie, Illinois~~ and ~~Richmond,~~ ~~Virginia~~retain ~~were~~qualified also reviewed for impairment. However, we have not recorded an impairment charge at this time because management believes certain changes can be made to improve the future prospects of those restaurants. We determined that each of these restaurants has the opportunity to improve their cash flows to a level sufficient to cover their asset value once external factors impacting their sales are properly addressed. However, there can be no assurance that we will not experience circumstances in the future that require us to write-down additional assets of these or other restaurants. employees;

~~Overview~~• labor shortages or increased labor charges;

We• are a casual dining restaurant chain. As of April 3, 2005, we owned and operated 51, and franchised 12, upscale, full-service, casual dining restaurants under the names Champps Americana, Champps Restaurant and Champps Restaurant and Bar. We operate in 22 states with larger concentrations of our ~~restaurants~~ability in the upper Midwest, mid-Atlantic and Texas. We provide an extensive menu of approximately 86 items consisting of high quality ingredients, freshly prepared and served with exceptional service in an exciting environment through the use of videos, music, sports and promotions. Champps restaurants generally are open seven days a week from approximately 11:00 a.m. to ~~1:00~~protect ~~a.m. We serve~~ our ~~guests in the dining room and bar area during lunch~~name, ~~after work~~trademarks, ~~during~~logo ~~dinner~~ and ~~after~~other ~~dinner~~proprietary ~~during our late night periods.~~ information;

We• ~~opened our first restaurant in 1984. Since June 1999, we have positioned ourselves to increase profitability while embarking on a strategic expansion in major metropolitan areas throughout~~ the ~~United States.~~impact ~~Prior to June 1999, we disposed~~ of ~~all~~litigation ~~non-Champps operating businesses~~ and began to concentrate solely on the Champps concept. At June 1999, we owned 18 restaurants. In fiscal year 2000, we opened four restaurants and acquired two franchised restaurants. In fiscal 2001, 2002, 2003, and 2004, we opened four, six, seven and seven restaurants, respectively. We anticipate opening four restaurants in fiscal 2005. As of April 3, 2005, we had opened three new locations in fiscal 2005 and had one location under construction which we expect to open during our fourth quarter of fiscal 2005. For fiscal 2006, we have begun construction on one new Champps restaurant to be opened in our first quarter, anticipate opening another new restaurant under a joint venture license and management agreement and have signed lease for a site that we intend to open in our third quarter of fiscal 2006. In addition, we are currently negotiating contracts on additional sites for restaurants to be opened in our fourth quarter of fiscal 2006. assessments;

~~Our~~• ~~newer~~the ~~restaurants~~impact ~~typically~~of ~~range in size from 7~~federal,~~500~~ ~~square~~state ~~feet~~or tolocal ~~9,000~~government ~~square~~regulations ~~feet.~~relating Restaurants with a ground lease require, on average, a net investment of approximately $1.9 million and average total invested capital of approximately $2.9 million per restaurant. Restaurants constructed with build-to~~-suit~~ ~~financing~~our ~~require~~associates, onsuch ~~average,~~as aincreases ~~net~~in ~~investment~~minimum ~~of $1.2 million and average total invested capital of approximately $4.9 million. Pre-opening expenses average approximately $360~~wage,~~000~~ ~~per~~or ~~restaurant. Total invested capital includes~~ the ~~cost~~sale ~~for the land, building, furniture, fixtures and equipment. Net investment includes only the cash invested and normally consists~~ of ~~the~~food ~~building, furniture, fixtures~~ and ~~equipment partially~~alcoholic ~~offset by any tenant improvement allowances received from our landlord.~~ beverages;

We• ~~are currently investigating~~ the ~~possibility~~ ofability ~~developing a smaller prototype of approximately 6,500 square feet. This smaller prototype will provide us the opportunity~~ to ~~construct~~fully ~~additional~~utilize ~~restaurants~~income ~~as site~~tax ~~availability~~operating ~~for~~loss ~~this~~and ~~size~~credit restaurant is much more prevalent. In addition, we will be able to improve on our economic model as the cost to build these smaller restaurants will be proportionally lower than our existing prototype. Our older restaurants built from 1987 through 1998 have typically ranged in size from 9,000 square feet to 12,000 square feet. carryforwards;

22• the inability to cancel or renegotiate unfavorable leases;

~~Historically,~~• ~~our~~the ~~primary~~ability ~~sources of liquidity for funding our operations and expansion have been net cash from operations and standard restaurant financing methods, such as build-~~to~~-suit~~ ~~transactions,~~repay ~~sale-leaseback transactions,~~or ~~mortgage~~refinance facilities, notes payable, tenant improvement allowances and equipment financing. We recently entered into a three-year $25.0 million senior secured credit facility giving us significantly greater financial flexibility and future interest expense savings. In that regard, certain of our higher interest rate notes payable were repaid in the fourth quarter of 2004 with excess cash and borrowings under this senior secured credit facility, although we were subject to prepayment penalties and we recorded a write-off of related debt issuance costs. indebtedness;

~~For~~• the ~~past~~ability ~~several years, we have been expanding the Champps concept. As a result, of this expansion, the timing of revenues and expenses associated with opening new restaurants is expected~~ to ~~result~~maintain ineffective ~~fluctuations in~~internal our quarterly and annual results. In addition, our results, and the results of the restaurant industry as a whole, may be adversely affected by changes in consumer tastes, discretionary spending priorities, national, regional and local economic conditions, demographic trends, consumer confidence in the economy, traffic patterns, weather conditions, employee availability, state and federal minimum wage requirements and the type, number and location of competing restaurants. Changes in any of these factors could adversely affect us and our financial results. controls;

~~The~~• ~~success~~the ~~of our business and our operating results are also dependent upon our~~ ability toof ~~anticipate and react to changes in food and liquor costs and the mix between food and liquor revenues. Various factors beyond~~ our ~~control,~~restaurants ~~such as adverse weather conditions, may affect food costs and increases in federal, state and local taxes may affect liquor costs. While we have been able~~ to ~~manage~~cover ~~our~~their ~~exposure~~asset tovalues ~~the risk of increasing food~~ and ~~liquor~~avoid ~~costs~~asset inimpairment ~~the~~charges; ~~past through certain purchasing practices, menu changes~~ and price adjustments, there can be no assurance that we will be able to do so in the future or that changes in our sales mix or our overall buying power will not adversely affect our results of operations. Many food product costs have increased substantially in recent months. The most notable products with higher costs that affect our operations include beef, chicken wings and produce.

~~Our~~• ~~sales~~the ~~fluctuate~~ability ~~seasonally~~to ~~and therefore~~locate ~~our~~a ~~quarterly~~purchaser ~~results are not necessarily indicative~~ of ~~results that may be achieved for~~ the ~~full~~Company ~~fiscal year. For fiscal years 2004~~ and ~~2003,~~if ~~our~~a ~~sales~~definitive ~~were~~agreement ~~highest in~~is ~~our second quarter (October through December)~~reached, ~~followed~~the byoccurrence ~~our~~of ~~third~~any ~~quarter (January through March)~~event, ~~then~~change byor ~~our~~other ~~fourth~~circumstance ~~quarter~~that ~~(April~~could ~~through~~result ~~June).~~in ~~Our first quarter (July through September) recorded~~ the ~~lowest~~inability ~~sales~~to ~~for~~consummate ~~those~~a ~~years.~~sale ~~Factors~~or ~~influencing~~merger ~~sales variability~~agreement inincluding ~~addition~~the inability to ~~those~~obtain ~~noted~~shareholder ~~above~~approval ~~include~~or the ~~frequency~~failure ~~and~~to ~~popularity~~satisfy ~~of sporting~~other ~~events,~~conditions ~~holidays~~required ~~(including~~to oncomplete ~~which~~a ~~day of the week the holiday occurs), seasonality and weather~~sale.

~~Our~~16 sales are somewhat dependent upon the timing and viewing of professional and college sporting events such football, basketball and hockey, and to a lesser extent baseball. Work stoppages or lockouts of a professional league can have an adverse impact on our sales. Currently the National Hockey League (“NHL”) is in the midst of a lockout. Although our sales were slightly impacted in the third quarter ended April 3, 2005, we are anticipating an impact to our annual sales of between 0.4 to 0.5 percent as the result of the cancellation of the NHL season. This equates to an annual sales loss of between $1.0 to 1.2 million.

AnTable important indicator of sales performance within the restaurant industry is comparable sales or same store sales. This indicator compares the revenue performance of our restaurants open for the first full month of operation after the restaurant is open 66 weeks to the same restaurants in the prior year thereby eliminating the impact of new openings in comparing the operations of existing stores. Small changes in comparable sales can have a proportionally higher impact on operating margins because of the high degree of fixed costs associated with restaurants, in general. Contents

~~Our~~These ~~comparable~~forward-looking ~~sales~~statements ~~trends~~are ~~have~~subject ~~been negative~~to ~~for~~numerous risks, uncertainties and assumptions about us, including the ~~past~~factors ~~three~~described ~~quarters~~under “Item 1A. ~~Although~~Risk ~~external~~Factors” ~~factors~~in ~~such~~our asAnnual Report on Form 10-K for the ~~sluggish economy~~year ended July 2, ~~declining~~2006 ~~consumer~~and ~~confidence,~~under ~~higher~~“Item ~~unemployment,~~1A. ~~decreases~~Risk Factors” in ~~discretionary income,~~this ~~increased~~Quarterly ~~competition~~Report inon ~~some~~Form ~~markets~~10-Q. ~~and~~The aforward-looking events ~~decline~~we discuss in ~~overall~~this Quarterly Report on Form 10-~~premise~~Q ~~liquor sales~~might ~~throughout~~not ~~our~~occur ~~industry~~in ~~may~~light ~~have~~of ~~had~~these anrisks, ~~impact~~uncertainties onand ~~our~~assumptions. ~~sales~~We undertake no obligation and disclaim any obligation to publicly update or revise any forward-looking statements, whether as a ~~number~~result of ~~our competitors~~new ~~have~~information, ~~performed~~future ~~better~~events ~~than~~or ~~Champps~~otherwise. ~~relative~~Readers toare ~~comparable~~cautioned ~~sales~~that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and, therefore, readers should not place undue reliance on these forward-looking statements.

23Overview

OnWe ~~March~~are 2a restaurant company competing in the upscale casual dining market. As of April 1, ~~2005~~2007, ~~our~~we ~~former~~owned ~~Chief Executive~~and ~~Officer,~~operated ~~President~~49 restaurants and ~~Chairman~~franchised/licensed 12 restaurants primarily under one of the ~~Board~~following names: Champps Americana, ~~William~~Champps HRestaurant or Champps Restaurant and Bar. ~~Baumhauer,~~The ~~resigned~~first Champps opened in 1984. ~~Concurrently,~~ ~~the~~We ~~Board~~operate and franchise / license restaurants in 21 states with larger concentrations of ~~Directors~~restaurants ~~appointed~~in ~~Michael~~the Pupper midwest and mid-atlantic regions. OChampps’~~Donnell~~ ~~our~~menu ~~new~~consists ~~Chief Executive~~of ~~Officer~~high quality ingredients, ~~President~~freshly prepared and ~~Chairman~~served ofwith exceptional service in an exciting environment through the ~~Board.~~use Mrof videos, music, sports and promotions. ~~O’Donnell~~Our ~~has~~restaurants ~~implemented some~~generally ~~key~~are ~~strategic~~open ~~initiatives~~seven indays a anweek ~~effort~~from 11:00 a.m. to ~~improve~~1:00 ~~these~~a.m. ~~negative~~We ~~trends~~serve our guests in ~~our comparable~~the ~~sales~~dining room and ~~our~~bar ~~profitability.~~area ~~The~~during ~~initiatives~~lunch, ~~consist~~after ~~of:~~work, during dinner and after dinner during our late night period.

•We ~~Streamlining~~opened ~~our~~one ~~menu~~Company-owned ~~with~~restaurant in fiscal 2006. Also, a ~~reduction~~licensee/joint ofventure ~~approximately~~restaurant, 30in which we own an eight percent ofequity interest, opened in the ~~items~~Dallas/Fort ~~—This~~Worth ~~menu~~airport ~~will~~in ~~allow~~October ~~for~~2005. ~~better~~We ~~execution~~do not expect to open any new stores in fiscal 2007. Our growth in fiscal 2006 and ~~increased~~thus ~~quality~~far ofin fiscal 2007 has been purposely modest as we concentrated on certain initiatives outlined below aimed at improving our ~~items~~existing operations and ~~ultimately~~redefining ~~greater~~our ~~guest~~growth ~~satisfaction~~plans and site selection criteria. We expect to resume modest growth in fiscal 2008.

•We ~~Recertification~~closed ~~and~~three ~~training~~underperforming atrestaurants ~~every~~in ~~level~~May of2006 ~~our~~and ~~organization~~we —closed ~~This~~one ~~will~~underperforming ~~allow~~restaurant usin January 2007. Financial results related to ~~evaluate~~these ~~our~~four ~~systems~~restaurants ~~and~~have ~~develop~~been ~~our~~classified ~~people~~as ~~and~~discontinued ~~culture~~operations in ~~while~~our ~~creating~~Consolidated Financial Statements. Also, a ~~heightened~~franchised ~~awareness~~location in Omaha, Nebraska closed in January 2007. No decisions have been made relative to the closure of ~~our~~any ~~mission~~further locations. The ultimate decision on whether or not to close restaurants will depend on various factors including, without limitation, reaching mutually acceptable termination or lease concession arrangements with the landlords; assessing the alternatives of ~~offering~~operating ~~exceptional~~or ~~food~~subleasing to third parties; analyzing the improvement or further deterioration in revenues or profitability; and ~~service~~reviewing tovarious ~~our~~other ~~customers~~financial, operational and market considerations.

•Our ~~Increase~~current ~~the~~restaurants ~~excitement~~range in ~~our~~size ~~bars~~from –approximately ~~In previous years~~7,000 ~~Champps~~square ~~alcoholic~~feet ~~beverage~~to ~~sales~~12,100 ~~were~~square afeet, ~~much~~with ~~greater~~an ~~portion~~average of ~~total~~about ~~revenues~~9,200 square feet. We ~~intend~~have tobuilt ~~implement~~smaller arestaurants ~~new~~starting ~~bar~~in ~~program~~fiscal to2003, ~~reinvigorate~~averaging approximately ~~that~~8,400 ~~portion~~square feet. Pre-opening expenses have historically averaged approximately $340,000 per restaurant but may increase in the future because of ~~our~~the ~~business~~new accounting requirement directing companies to expense rents during the construction period.

•Historically, ~~Implementation~~our primary sources of aliquidity ~~more~~for ~~aggressive~~funding ~~bonus~~our ~~plan~~operations ~~for~~and ~~our~~expansion ~~restaurant~~have ~~management~~been ~~-We~~cash ~~intend~~provided tofrom operations, ~~provide~~and ~~our~~standard restaurant ~~managers~~financing ~~with~~methods, ~~the~~such ~~ability~~as build-to-suit ~~have~~transactions, ~~greater~~sale-leaseback ~~control~~transactions, mortgage facilities, notes payable, tenant improvement allowances and equipment financing. Also, in 2003 we issued $15.0 million of ~~their~~5.5% ~~earnings~~convertible subordinated notes and warrants and in an2004 ~~effort~~we tosecured ~~provide~~a an$25.0 ~~increased~~million ~~sense~~revolving ofbank ~~ownership~~credit ~~for~~facility ~~our~~which ~~managers~~was amended and extended in October 2006. As of April 1, ~~which~~2007, we ~~believe~~did ~~will~~not ~~positively~~have ~~impact~~any ~~our~~outstanding ~~sales~~borrowings ~~and~~under ~~profitability~~the bank credit facility.

•Key ~~New~~factors ~~real~~that ~~estate~~can ~~strategy~~be –used ~~Our former real estate strategy was to build our restaurants almost exclusively~~ in orevaluating ~~near shopping malls. This has not been optimal in several markets~~ and weunderstanding believe this contributed to the asset impairment charges we are taking in this quarter. Going forward, we are developing an updated Champps specific site model and a new smaller prototype. We currently have three restaurants either under construction or under contract based upon the previous site selection criteria. In the future, we will be evaluating possible additional sites for our restaurants asand weassessing ~~refine~~ our ~~selection~~business ~~criteria.~~include ~~This~~the following: ~~may slow our growth initially as we continue to refine our model and work on our core business.~~

• ~~Develop~~Comparable asales ~~franchise~~or ~~network~~same –store Wesales—this ~~currently~~indicator ~~have~~compares athe ~~search~~revenue inperformance ~~process~~of ~~for~~our arestaurants ~~senior~~open ~~franchise~~for ~~development~~more ~~executive.~~than ~~Historically,~~18 ~~franchise~~full ~~development~~months ~~has~~to ~~not~~the ~~been~~same arestaurants ~~focus~~in ~~for~~ the ~~Company;~~prior ~~however,~~year wethereby ~~believe~~eliminating ~~experienced~~the ~~franchisees~~impact ~~can~~of benew aopenings ~~source~~in ofcomparing ~~growth~~the ~~for~~operations ~~the~~of ~~Company~~existing stores. ~~Franchisees~~Small ~~can~~changes ~~develop~~in ~~markets~~comparable ~~that~~sales ~~are~~can ~~not~~have a ~~priority~~proportionally ~~for~~higher ~~the~~impact ~~Company~~on ~~and~~operating ~~provide~~margins ~~Champps~~because of the ~~opportunity~~high todegree ~~acquire~~of ~~the~~fixed ~~developed~~costs ~~territory~~associated inwith ~~the~~operating ~~future~~restaurants.

~~The~~17 implementation of these initiatives will not have an immediate impact on the profitability of the Company. Although some of the initiatives can implemented quickly, such as a new bonus plan, others may take longer to implement, such as the streamlining of our menu and developing a franchise network. Ultimately we intend to improve the profitability of the Company due to the implementation of these initiatives. However, we may incur additional expenses and capital spending in the near term to achieve our long term objectives.

InTable March 2005, Michael P. O’Donnell entered into an employment agreement with us. As part of the agreement, 514,680 restricted shares of common stock are to be awarded to Mr. O’Donnell. This award is subject to the availability of shares that have been authorized and are available under our 1997 Stock Option and Incentive Plan and our 2003 Stock Option and Incentive Plan. If shares are not available, the Company will seek shareholder approval that would permit the issuance of any shares not granted due to their lack of availability. If the shareholders of the Company fail to approve such resolution by the date any portion of the Grants would otherwise have vested, the Company shall make a cash payment to Mr. O’Donnell equal to the economic value of the vesting shares. Restricted stock awards are expensed ratably over the vesting period. 128,670 shares of the restricted stock award vest on an equal annual basis over a three year period. 386,010 shares of the restricted stock award vest on the seventh anniversary of the grant date. As a result of this grant, we will incur additional compensation expense and a liability. Contents

24• Average unit volumes—a per store average sales amount. This indicator helps us assess the changes in customer traffic, pricing and impact of adding different sized restaurants.

On• ~~March~~Store ~~31,~~operating ~~2005,~~margin—restaurant ~~Nathaniel Rothchild~~sales ~~and~~less ~~Timothy~~restaurant-level R.operating ~~Barakett~~costs ~~resigned~~(product ~~from~~costs, ~~the~~labor ~~Company’s Board of Directors. In addition~~costs, onother ~~the~~operating ~~same~~expenses ~~date,~~and ~~the~~occupancy). ~~Company~~We ~~elected~~review ~~Karl~~store ~~Okamoto~~operating tomargins ~~fill~~both ain ~~vacancy~~absolute ondollar ~~its Board~~terms ~~of Directors~~ and ~~reduced~~as ~~the~~a ~~size~~percentage of ~~the~~restaurant ~~Board of Directors to six~~sales.

~~Food~~Our ~~safety~~results, ~~issues~~and ~~have received~~the ~~increased~~results ~~media~~of ~~attention over~~ the ~~past~~restaurant ~~few~~industry ~~years.~~as ~~Two~~a ~~prominent~~whole, ~~issues~~may ~~have~~be ~~been~~adversely ~~the identification~~affected ofby ~~green~~changes ~~onions grown~~ in ~~farms~~consumer intastes, ~~Mexico~~discretionary asspending ~~the~~priorities, ~~source~~national, ofregional ~~hepatitis~~ and ~~the first~~local ~~reported~~economic ~~case~~conditions, ofdemographic ~~“mad~~trends, ~~cow”~~consumer ~~disease~~confidence in the ~~United~~economy, customer ~~States.~~confidence Wein ~~know~~food ofsafety, ~~no known~~traffic ~~cases~~patterns, ~~related~~weather toconditions, ~~these~~employee ~~food~~availability, ~~safety~~state ~~concerns~~and ~~affecting~~federal ~~our~~minimum ~~restaurants.~~wage Werequirements ~~have received~~and ~~assurances~~the ~~from~~type, ~~our~~number ~~produce~~and ~~provider~~location of ~~green~~competing ~~onions~~restaurants. ~~that~~Our ~~their~~operating ~~sources~~margins are ~~safe. Also,~~also wesusceptible ~~have reinforced~~ to fluctuations ~~our~~in ~~restaurant~~prices ~~managers~~of ~~the~~food ~~procedures~~commodities, tocosts beassociated ~~followed~~with ~~for~~delivering the ~~safe~~ ~~food~~products ~~handling~~to ofour ~~green~~stores ~~onions.~~and Toother ~~date,~~operating ~~the~~necessities ~~“mad~~such ~~cow”~~as ~~disease~~natural ~~issue~~gas ~~has~~and ~~not been~~other ~~shown~~utility tosupplies. ~~influence~~The ~~the~~timing ~~beef-eating~~of ~~habits~~revenues ofand ~~customers~~expenses ~~per~~associated ~~industry~~with ~~reports,~~opening ~~although~~new ~~future~~restaurants ~~cases~~is ~~could~~also ~~certainly~~expected ~~influence~~to ~~our~~result ~~customers~~in ~~eating~~fluctuations ~~habits.~~in ~~The~~our ~~USDA~~quarterly and ~~the~~annual ~~beef industry~~results. ~~have~~Changes ~~taken~~in aany ~~number~~ of ~~actions~~these tofactors ~~reduce~~could ~~the~~adversely ~~risk~~affect ofus ~~“mad~~and ~~cow”~~our ~~diseased beef~~financial ~~from entering consumer markets~~results.

~~Recently,~~Our ~~the~~comparable ~~popularity~~sales oftrends ~~the Atkins~~have ~~diet~~been ~~and~~negative ~~the~~for ~~South~~eleven ~~Beach~~consecutive ~~diet~~quarters ~~have~~after ~~resulted~~being inmodestly ~~many~~positive ~~restaurant~~for ~~chains~~fiscal ~~incorporating and~~year ~~promoting~~2004. ~~menu~~We ~~items~~believe that certain ~~incorporate~~site ~~the~~selection ~~philosophies~~factors ofmay ~~these~~have ~~diets.~~contributed ~~We responded~~ to ~~this~~the ~~trend~~lower bysales, ~~adding~~as awell ~~“carb~~as ~~conscious”~~other ~~section~~external tofactors, ~~our~~(such ~~menu~~ as ~~of June~~the NHL hockey strike for the entire 2004./2005 ~~Sales~~NHL ofseason) ~~our~~and ~~“carb~~macro-economic ~~conscious”~~factors ~~items~~affecting ~~have~~consumer ~~met~~spending ~~our~~through ~~expectations~~fiscal year 2007.

WeOur average weekly sales per restaurant have also been ~~liable~~decreasing ~~for~~over athe ~~loss~~last several years as our new stores have lower average ~~contingency~~weekly ~~related~~sales tothan aour ~~predecessor~~existing ~~company~~stores ~~(see~~due ~~Note~~in 5part to their reduced size. However, the average sales per square foot for our ~~unaudited~~newer ~~consolidated financial~~stores ~~statements).~~have Asbeen asubstantially ~~result~~lower than those of ~~recent~~our ~~significant~~more ~~developments,~~established welocations. We believe this ~~contingency~~ is ~~resolved.~~due Inlargely to certain underperforming sites selected over the ~~second~~past ~~quarter~~years. ofWe ~~fiscal~~have ~~2005~~implemented wea ~~paid~~new ~~approximately~~site ~~$1.2 million~~selection ~~related~~process towhich ~~the~~incorporates ~~punitive~~an ~~damages~~improved ~~judgment~~analytical ~~and~~evaluation, ~~attorney~~which ~~fees~~we ~~award~~believe aswill ~~final settlement~~lead ~~for~~to ~~this~~better ~~matter~~site selection and ultimately to more positive restaurant results.

~~Our~~From ~~financial~~a ~~results~~store ~~for~~operating margin perspective, we believe we have generally been successful in controlling our product costs and labor costs over the ~~quarter~~past several years, however, other operating expenses and occupancy have increased as a percent of restaurant sales primarily due to the fixed nature of these costs over lower average sales volumes for our restaurants. ~~ended~~Rising ~~April~~costs 3coupled with negative comparable sales have also contributed to the decrease in operating margin. In particular, ~~2005~~over ~~included:~~the last 18 months, we have experienced significantly higher utility costs.

—Minimum ~~Growth~~wage increases have occurred in both the current and the last fiscal year in a number of ~~consolidated~~states ~~revenues~~where bywe 2operate.7% toIn ~~$55~~addition, effective January 1, 2007, the tipped minimum wage increased in the following states where the Company operates: California, Colorado, Florida, New York, North Carolina, and Ohio.6 ~~million~~The ~~compared~~Company tohas 16 restaurants in those states. Most of our kitchen staff are paid in excess of minimum wage levels and are typically not affected by the ~~same~~increases, ~~quarter~~however, ~~last~~our ~~year~~servers and bar staff are generally paid the tipped minimum wage and we generally must pay a higher hourly wage to those individuals as a result of any state mandated tipped minimum wage increase.

—Over Anthe ~~impairment~~last ~~charge~~24 months, we have been working on certain key strategic initiatives outlined herein. We believe we have made significant progress in many of $6these areas, but our goal of reversing our negative comparable sales trends and ultimately improving our long-term profitability has not yet materialized.6 ~~million~~We believe that beginning in the second half of fiscal 2006 our efforts were hampered by macroeconomic factors that, were generally believed to negatively impact sales of many companies in the full-service casual restaurant industry. These macroeconomic factors include higher gas prices, higher health care costs, higher interest rates and lower consumer confidence. We plan to continue to pursue our key strategic initiatives and enhancements thereto, described below, as we believe our goals will ultimately be achieved through these initiatives.

—18 ~~Net loss of $3.6 million compared to Net income of $1.6 million for the same quarter last year.~~

—Table Diluted loss per share of $0.28 compared to a diluted income per share of $0.12 for the same quarter last year.Contents

~~Financial~~• ~~Definitions~~Menu Changes: Our main goal has been to renew the focus in the menu on popular, memorable and craveable items favored by our customers. We have been and plan to continue revising and improving our menu. The menu changes are intended to allow for better execution, increased quality of our menu items and ultimately greater guest satisfaction. Improving our consistency in food execution will be a key focus to improve guest satisfaction during fiscal 2007.

~~Revenue~~Also, —we ~~Our~~revamped ~~revenue~~our ~~is comprised~~menu ofspecials ~~restaurant~~program ~~sales~~in ~~and~~fiscal ~~net~~2006 ~~franchise royalties~~ and ~~fees. Restaurant sales~~ are ~~comprised~~using ~~almost~~the ~~entirely~~same ofprogram ~~food~~in ~~and~~fiscal ~~beverage~~2007. ~~sales~~Our ~~with~~specials ~~less~~have ~~than~~been ~~0.2%~~developed ofwith the ~~restaurant sales~~assistance ~~represented~~of byoutside ~~sales~~culinary ofexperts ~~Champps’~~and ~~merchandise~~are ~~and~~now ~~other~~featured ~~revenue.~~more Inprominently ~~calculating~~ within our ~~company-owned~~menu ~~comparable~~utilizing ~~restaurant~~a ~~sales,~~full wecolor ~~include~~layout. ~~revenues~~The ~~for~~specials ~~our~~are ~~restaurants~~also ~~for~~being rotated less ~~the~~frequently ~~first~~than ~~full~~in ~~month~~past ofyears ~~operation~~to ~~after~~build ~~the~~consumer ~~restaurant~~trial isand ~~open~~improve 66operational ~~weeks~~execution. ~~For~~We ~~the~~have ~~third quarter~~seen ofan ~~fiscal~~increase ~~2005,~~in ~~46 of~~ our ~~total~~menu 51mix ~~restaurants~~associated inwith ~~operation~~specials atas ~~quarter-end~~a ~~were included~~result inof ~~our~~these ~~comparable sales calculation~~efforts.

~~Cost~~Because of ~~Sales~~our ~~and~~confidence ~~Operating Expenses~~in —our ~~Product~~product ~~costs are composed primarily of food and beverage expenses. Labor costs include direct hourly and management wages~~offerings, ~~wages~~we ~~during~~increased ~~training for~~ our ~~hourly~~ ~~associates,~~menu ~~bonuses,~~prices ~~workers’~~by ~~compensation~~approximately ~~and payroll taxes and benefits for restaurant employees~~1.6% ~~Other~~in ~~operating~~September ~~expenses include restaurant supplies~~2006, ~~marketing costs specifically related to the restaurants’ activities, utilities, repairs~~ and ~~maintenance,~~ ~~banking~~will ~~and~~consider ~~credit card fees and other directly related restaurant costs.~~additional ~~Occupancy~~increases ~~costs~~throughout ~~include~~fiscal ~~equipment operating leases, fixed rent, percentage rent, common area maintenance charges, general liability and property insurance and real estate and personal property taxes~~2007. Pre-opening expenses, which are expensed as incurred, consist of direct costs related to hiring and training the initial restaurant workforce and other expenses incurred prior to the opening of a new restaurant that are directly associated with opening the new restaurants.

25• Validation and Training Programs: This continuous improvement effort is aimed at improving our systems and developing our people and culture while creating a heightened awareness of Champps’ mission of offering exceptional food and hospitality to our customers.

~~Depreciation~~Last year, we recertified and ~~Amortization —~~validated ~~Depreciation~~all of our restaurant managers and ~~amortization~~we ~~principally~~also ~~includes~~targeted ~~depreciation~~certain ontraining ~~capital expenditures~~toward our hourly employees. Heightened and enhanced training will be a key focus for ~~restaurants~~us in fiscal 2007. ~~Depreciation~~We are revamping a number of our training programs including use of new training tools and ~~amortization~~techniques ~~excludes~~and ~~corporate~~also providing leadership development programs for select management level employees. We completed a “visioneering” process near the end of fiscal 2006 to define and ~~depreciation~~communicate our foundational ideas, principles and ~~amortization~~stakeholder ~~which~~commitments ~~are~~with ~~included~~the inhelp ~~general~~of ~~and~~a ~~administrative~~consultant ~~expense~~who pioneered the process. The visioneering program is being rolled-out system-wide in fiscal 2007 as a key focus in our 2007 training program.

~~General~~• ~~and~~Bar ~~Administrative Expenses~~Reinvigoration: —For ~~General~~several ~~and~~years ~~administrative~~prior ~~expenses~~to ~~include~~fiscal ~~all~~2006, ~~corporate~~our ~~and administrative~~alcohol ~~functions~~sales ~~that~~had ~~support~~declined ~~existing~~as ~~operations~~a percentage of overall revenues. In fiscal 2006 we reversed this trend and ~~provide~~for ~~infrastructure~~the ~~to facilitate~~fiscal ~~our~~2006 ~~future~~period ~~growth~~approximately 28.9% ~~Components~~of ~~include~~our ~~executive~~restaurant food and ~~management~~beverage ~~salaries~~sales were attributable to the sale of alcoholic beverages, ~~regional~~ ~~supervisory~~which is one of the highest alcohol sales percentages in the upscale casual dining market and ~~staff~~we ~~salaries,~~have ~~training~~maintained ~~wages~~the ~~for~~improvement in fiscal 2007. Our goal has been to attract new customers to our ~~management~~bars ~~employees~~by improving service levels, ~~bonuses~~ ingredient quality and ~~related~~drink ~~associate~~presentation. ~~payroll~~Over ~~taxes~~the last year and ~~benefits,~~a ~~travel~~half, ~~temporary~~we ~~housing~~have ~~for our~~implemented ~~managers~~a in training program aimed at improving customer service levels, ~~information~~updated or replaced draft beer systems, ~~communication~~and ~~expenses,~~added ~~corporate~~beer ~~rent~~mug ~~and related~~chillers ~~occupancy~~in ~~and~~all ~~operating~~of ~~costs,~~our ~~corporate~~restaurants. ~~depreciation~~We ~~and~~also ~~amortization~~reworked many of our recipes and ~~professional~~ drink mixes and ~~consulting~~developed ~~fees~~new specialty drinks for promotions. Prices were adjusted based on competitive considerations and we modified happy hour programs in a number of stores to enhance the guest experience.

~~Other~~• ~~Items~~Revised —General ~~Severance expense~~Manager ~~consists~~Bonus ofPlan: ~~the~~In ~~cost~~fiscal ~~associated~~2006, ~~with~~we ~~the~~implemented ~~company’s~~a ~~separation~~more ~~agreement~~aggressive ~~with the~~and ~~former~~performance-based ~~chief~~bonus ~~Executive~~plan ~~Officer.~~for ~~Impairment~~our ~~charges~~managers ~~relate~~based toon ~~the~~monthly ~~write-down~~unit oflevel cash flow improvements over the ~~assets~~ ofprior ~~certain~~year. ~~under~~We ~~performing~~believe ~~stores~~this toplan ~~their~~provides ~~estimated~~our ~~fair~~restaurant ~~value.~~managers ~~Other~~with ~~(income) expense,~~greater ~~net~~performance-based ~~generally~~compensation ~~consists~~and an increased sense of ~~losses~~accountability onand ~~asset~~ownership ~~disposals~~in ~~from~~their ~~asset~~restaurant’s ~~replacements~~success. ~~Interest~~ ~~expense~~This ~~and~~bonus ~~income,~~plan ~~net~~has ~~consists~~been offurther ~~interest~~enhanced ~~expense~~by oncreating ~~notes~~cash-flow ~~payable~~arrangements ~~and capitalized~~under ~~lease~~which ~~obligations~~selected general managers and ~~amortization~~directors of ~~loan~~operations ~~fees~~may ~~partially~~purchase ~~offset~~a bycash flow interest ~~income~~ ~~earned~~in onthe ~~cash~~restaurants ~~balances~~they operate and oversee. ~~Expenses~~As ~~related~~of tothe ~~predecessor~~end ~~companies~~of ~~consist~~March 2007, 20 of ~~expenses~~ ~~for~~our ~~indemnity~~general ~~obligations~~managers ~~related~~and tofive ~~the~~of ~~Company’s~~our ~~spin-off~~directors inof ~~1997~~operations had executed such agreements. ~~Debt extinguishment~~We ~~costs~~expect ~~consist~~to ofcontinue ~~expenses~~to ~~for~~offer ~~the~~this ~~termination~~opportunity to a number of ~~the~~other ~~company’s~~general ~~capital leases~~managers inover ~~fiscal~~the ~~year~~balance ~~2004.~~of fiscal 2007.

~~Fiscal~~19 Calendar — We utilize a 52/53 week fiscal year ending on the Sunday closest to June 30 for financial reporting purposes. Fiscal 2004 consisted of 52 weeks and ended on Sunday, June 27, 2004. Fiscal 2005 will consist of 53 weeks and will end on Sunday, July 3, 2005. The quarter ending March 28, 2004 had thirteen operating weeks and is referred to as the third quarter of fiscal 2004. The quarter ending April 3, 2005 also had thirteen operating weeks and is referred to as the third quarter of fiscal 2005.

ReclassificationTable of expenses related to Management Training, and Travel and Temporary Housing related to Management Training — For fiscal 2005, expenses related to the training of new restaurant managers and their travel and temporary housing during their training periods have been reclassified from restaurant operating expenses to general and administrative expenses. This reclassification was made to provide better comparability with other restaurant companies. As a result, amounts on the 2004 statement of operations have been reclassified to conform to the fiscal 2005 presentation. The amounts reclassified to general and administrative expense on the 2004 statement of operations were $196,000 of labor costs and $42,000 of other operating expenses for the third quarter and, on a year to date basis, $459,000 and $77,000 respectively. The Company incurred $335,000 and $40,000 for management training, travel and temporary housing during training in the third quarter of fiscal 2005 and a total of $862,000 and $108,000, respectively, for the forty weeks ended April 3, 2005. Contents

26• Real Estate Strategy: While we do not expect to open any new restaurants in fiscal 2007, our site selection process has been upgraded to include more rigorous evaluation of the success factors for new site development to allow us to achieve our expected investment returns on renewed future growth. To aid in this process, we are using a multi-factor, risk-analysis regression software model, developed by an outside consultant, aimed at accurately predicting sales levels and decreasing the risks associated with opening new restaurants. We expect to resume opening new restaurants in fiscal 2008. Also, as part of our real estate strategy, we closed three underperforming restaurants in May 2006 and closed one underperforming location in January 2007. We also plan to actively monitor and evaluate our restaurant portfolio on an ongoing basis to determine if further closures are warranted.

~~Results~~• ofFranchise ~~Operations~~Development: We value franchising as a potentially profitable function but we purposely did not actively pursue this initiative in fiscal 2006 as we viewed the other initiatives (such as menu design and prototype development) as important precursors to our franchising efforts. We have started to increase our franchising sales efforts in fiscal 2007.

~~The~~On ~~following~~January 11, ~~table~~2007, ~~sets~~we ~~forth,~~announced ~~for~~that a Special Committee of our Board of Directors (“special committee”) had entered into a letter of ~~the~~intent ~~periods~~with ~~presented~~Kinderhook Industries, LLC to sell all of our assets (other than certain ~~unaudited~~tax ~~consolidated~~assets) ~~financial~~to ~~information~~a ~~for~~new entity to be formed by Kinderhook. On March 1, 2007, we announced that letter of intent expired pursuant to its terms and that the special committee was continuing to pursue a sale of the Company ~~(dollars~~and inthat ~~thousands~~it ~~except~~had ~~for~~received ~~restaurant~~indications ~~sales~~of ~~per~~interest ~~operating~~from ~~week~~a number of potential purchasers. There can be no assurance that any transaction agreement will be reached or consummated (see “Part II, Item 1A. Risk Factors”).

	Three Months Ended									Nine Months Ended
	April 3,2005					March 28,2004				April 3,2005					March 282004
						Restated									Restated
Revenue:
Sales	$	55,481		99.7	%	$	54,017	99.7	%	$	168,474		99.7	%	$	157,431	99.7	%
Franchising and royalty, net		150		0.3			148	0.3			437		0.3			430	0.3
Total revenue		55,631		100.0	%		54,165	100.0	%		168,911		100.0	%		157,861	100.0	%
Cost of sales and operating expenses:
(as a percentage of restaurant sales)
Product costs		15,357		27.7			14,933	27.6			46,816		27.8			43,816	27.8
Labor costs		17,363		31.3			17,154	31.8			51,971		30.8			50,215	31.9
Other operating expenses		9,628		17.3			8,393	15.5			28,015		16.6			24,356	15.5
Occupancy		5,377		9.7			5,061	9.4			15,812		9.4			14,652	9.3
Pre-opening expenses		340		0.6			45	0.1			984		0.6			1,640	1.0
Total cost of sales and operating expenses		48,065		86.6			45,586	84.4			143,598		85.2			134,679	85.5
(as a percentage of total revenue)
Depreciation and amortization		2,857		5.1			2,551	4.7			8,320		4.9			7,230	4.6
General and administrative expenses		3,423		6.2			3,296	6.1			9,679		5.7			8,803	5.6
Severance		547		1.0			--	0.0			547		0.3			--	0.0
Impairment Charges		6,567		11.8			--	0.0			6,567		3.9			--	0.0
Other (income) expense, net		26		0.0			63	0.1			(95	)	(0.1	)		146	0.1
Income (loss) from operations		(5,854	)	(10.5	)		2,669	4.9			295		0.2			7,003	4.4
Other (income) expense:
Interest expense and income, net		343		0.6			602	1.1			1,100		0.6			1,750	1.1
Expenses related to predecessor companies		50		0.1			54	0.1			315		0.2			259	0.1
Debt extinguishment costs		--		0.0			4	0.0			--		0.0			4	0.0
Income (loss) before income taxes		(6,247	)	(11.2	)		2,009	3.7			(1,120	)	(0.6	)		4,990	3.2
Income tax expense (benefit)		(2,675	)	(4.8	)		395	0.7			(1,393	)	(0.8	)		1,098	0.7
Net income (loss)	$	(3,572	)	(6.4	)%	$	1,614	3.0	%	$	273		0.2	%	$	3,892	2.5	%
Restaurant operating weeks		656					611				1,969					1,758
Restaurant sales per operating week	$	84,575			$		88,408		$		85,563			$		89,551
Number of restaurants (end of period)
Company-owned		51					47				51					47
Franchised		12					12				12					12
Total restaurants		63					59				63					59

Our financial results for third quarter of fiscal 2007 ended April 1, 2007 included:

~~Historically,~~• weConsolidated ~~have~~revenues ~~experienced volatility~~decreased ~~quarter~~by to4.8% ~~quarter in the amount of pre-opening expenses and the percentage of these expenses~~ to ~~revenues~~$49.2 Wemillion ~~typically~~reflective ~~incur the most significant portion~~ of ~~our pre-opening expenses associated with~~ the ~~opening~~decreased ofcomparable astore ~~new~~sales ~~restaurant within the two months immediately preceding and during the month following the opening~~ of ~~a new restaurant~~4. In addition, product costs, labor and operating costs associated with a newly opened restaurant are usually higher in the first three to four months of operation, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had, and is expected to continue to have, a meaningful impact on pre-opening expenses, product costs, labor and operating costs. We opened one restaurant during the quarter ended April 3~~, 2005 and did not open any new restaurants in the quarter ended March 28, 2004~~%. ~~We opened three restaurants in the forty weeks ended March 28, 2004 and five restaurants in the thirty-nine weeks ended March 28, 2004.~~

27• A loss from continuing operations before income taxes of $0.5 million was recorded in third quarter of fiscal 2007 compared to a loss from continuing operations before income taxes of $1.2 million in the same quarter of the prior fiscal year. Included in continuing operations results for 2007 was a $0.5 million potential company sale expense and included in continuing operations results for 2006 was a $2.1 million asset impairment charge.

~~Third~~• ~~Quarter~~A ofloss ~~Fiscal~~from ~~2005~~discontinued ~~Ended April~~operations, 3net of tax, ~~2005~~of ~~Compared~~$0.2 tomillion was recorded during the ~~Third~~quarter ~~Quarter~~compared to a loss of ~~Fiscal~~$1.4 ~~2004~~million ~~Ended~~during ~~March~~the ~~28,~~third ~~2004~~quarter ~~(Restated)~~of fiscal 2006.

~~Total~~• ~~revenue.~~Net ~~Total~~loss ~~revenue increased~~of ~~approximately~~ $10.46 million, or ~~2.5%, to~~ $550.604 ~~million~~diluted inloss ~~the~~per ~~quarter ended April 3~~share, ~~2005~~was ~~from~~reported ~~$54.2 million for comparable quarter~~ in the ~~prior year. Comparable same store sales decreased 3.8% for the~~ third quarter of fiscal ~~2005~~2007 compared to ~~our~~a ~~third~~net ~~quarter~~loss of ~~last~~ ~~year. Comparable same store food sales decreased 4.6% while comparable same store alcohol sales decreased~~ $1.~~8%.~~9 ~~Restaurant sales per operating week for all restaurants decreased $3~~million,~~833,~~ or ~~4.3%, to~~ $~~84,575 for the quarter ended April 3, 2005 from $88,408 for the comparable quarter in the prior year~~0.15 ~~This~~diluted ~~decrease~~loss ~~resulted~~per ~~primarily from a decrease in comparable same store sales and~~share, in ~~part, due to our newer restaurants open in fiscal 2004 generating lower revenues than~~ the ~~restaurants~~third ~~opened~~quarter ~~prior~~of to fiscal ~~2004~~2006.

~~The~~20 average guest check in our dining room, excluding alcoholic beverages, was approximately $13.69 for the third quarter of fiscal 2005 compared to $13.38 for the third quarter of fiscal 2004. During the third quarter of fiscal 2005, food sales and alcoholic beverage sales represented 72.0% and 28.0% of our total food and beverage sales, respectively. During the third quarter of fiscal 2004, food and alcoholic beverage sales represented 72.2% and 27.8% of our total food and beverage sales, respectively.

RevenuesTable were negatively impacted by New Year’s weekend falling on our second quarter of fiscal 2005 versus our third quarter last year. Additionally, our revenues in the third quarter of fiscal 2005 were also adversely impacted by Easter Sunday falling in our third quarter of fiscal 2005 versus our fourth quarter last year. Although comparable same store sales were down approximately $2.0 million or 3.8% for the quarter ended April 3, 2005, the impact of the change in holidays impacted comparable same store sales by approximately $1.0 million or 1.9% of the 3.8% decline. The hockey lockout also negatively impacted revenues. This was the third consecutive quarter that both food and liquor comparable same store sales were negative. Contents

~~Cost~~Financial ofDefinitions ~~Sales and Operating Expenses~~

~~Product~~Revenue—Our ~~costs~~revenue is comprised of restaurant sales and net franchise royalties and fees. ~~Product~~Restaurant ~~costs~~sales ~~increased~~are bycomprised $almost entirely of food and beverage sales with approximately 0.51% ~~million,~~of orthe restaurant 3sales represented by sales of Champps’ merchandise and other revenue.4% In calculating our Company-owned comparable restaurant sales, towe ~~$15~~include restaurants open at least 18 months.4 ~~million~~As inof ~~the~~April 1, ~~third~~2007, ~~quarter~~48 of ~~fiscal~~our ~~2005~~49 ~~from~~restaurants ~~$14.9~~in operation ~~million~~were included in ~~the~~our comparable ~~prior~~sales ~~year period~~calculation. ~~Product~~In ~~costs~~January as2007, one of the Company-owned locations in Pennsylvania was converted from a ~~percentage~~Champps ofAmericana restaurant ~~sales~~to ~~were~~a 27local tavern concept.7% ~~for~~The ~~fiscal~~Company ~~2005~~is ~~and~~treating ~~27.6%~~this ~~for~~conversion ~~fiscal~~as a ~~2004.~~new ~~The~~opening ~~increase~~from ~~was~~a ~~primarily~~comparative ~~due~~sales toperspective, ~~increases~~and therefore, the new tavern will not be included in ~~produce~~the ~~costs~~comparative ~~during~~sales base until eighteen months following the ~~quarter~~conversion.

~~Labor~~Cost ~~costs.~~of ~~Labor~~Sales and Operating Expenses—Product costs ~~increased~~are bycomposed ~~$0.2~~primarily ~~million,~~of orfood ~~1.2%,~~and tobeverage ~~$17~~expenses.4 ~~million~~Labor incosts ~~the~~include ~~quarter~~direct ~~ended~~hourly and ~~April~~management 3wages, ~~2005~~our ~~from~~restaurant ~~$17.2~~employees’ ~~million~~wages induring ~~the~~training, ~~comparable~~bonuses, ~~prior~~workers’ ~~year~~compensation ~~period.~~and ~~Labor~~payroll ~~costs~~taxes asand abenefits ~~percentage~~for of restaurant ~~sales~~employees. ~~decreased~~Other tooperating ~~31.3%~~expenses inincludes ~~fiscal~~restaurant ~~2005~~supplies, ~~from~~marketing ~~31.8%~~costs specifically inrelated ~~fiscal~~to ~~2004~~the ~~due~~restaurants’ toactivities, ~~lower~~utilities, ~~staff~~repairs and ~~management~~maintenance, ~~costs.~~banking ~~The~~and ~~lower~~credit ~~staff~~card ~~costs~~fees ~~were~~and ~~due~~other ~~largely~~directly torelated arestaurant ~~focus~~costs. onOccupancy ~~improved~~costs ~~productivity~~include atland ~~our~~and ~~restaurants~~building ~~while~~operating ~~the~~lease ~~reduced~~rents, ~~management~~percentage ~~costs~~rent, common ~~were~~area ~~due~~maintenance tocharges, ~~actions~~general toliability ~~automate~~and property insurance and ~~reorganize~~real ~~restaurant~~estate ~~administrative~~and ~~duties~~personal asproperty ~~well~~taxes. Pre-opening expenses, which are expensed as ~~properly~~incurred, ~~align~~consist ~~management~~of ~~levels~~direct ~~according~~costs related to ~~relative~~hiring and training the initial restaurant ~~sales~~workforce ~~volumes.~~and ~~Management~~other ~~wages~~expenses ~~also~~incurred ~~decreased~~prior asto the ~~result~~opening of a ~~lower~~new ~~bonus~~restaurant ~~payout~~that inare directly associated with opening the ~~quarter~~new restaurants. Pre-opening expense, starting January 2, 2006, also includes rental costs under operating leases incurred during a construction period.

~~Other~~Depreciation ~~operating~~and ~~expense.~~Amortization—Depreciation ~~Other~~and ~~operating~~amortization ~~expense~~principally ~~increased~~includes depreciation ~~$1.2~~on ~~million,~~capital orexpenditures ~~14.3%,~~for ~~to $9~~restaurants.6 ~~million~~Depreciation inand ~~quarter~~amortization ~~ended~~excludes ~~April~~corporate 3,level ~~2005~~depreciation ~~from~~and $8.4 million in the comparable prior year period. Operating expense as a percentage of restaurant sales increased to 17.3% in fiscal 2005 from 15.5% in fiscal 2004. The increase was due to an increase in promotional mealsamortization, ~~gift~~which ~~card~~are ~~expense,~~included ~~an increase~~ in ~~utility~~general ~~costs, as well as approximately $0.2 million in costs for inventory reconciliations primarily associated with serviceware~~ and ~~smallware~~administrative ~~inventories~~expense.

~~Occupancy.~~General ~~Occupancy~~and ~~expense~~Administrative ~~increased~~Expenses—General ~~$0.3~~and ~~million,~~administrative orexpenses ~~5.9%,~~include toall ~~$5.4~~corporate ~~million~~and inadministrative ~~the~~functions ~~quarter~~that ~~ended~~support existing ~~April~~operations 3,and ~~2005~~provide ~~from~~infrastructure $5to facilitate our future growth.1 ~~million~~Components ininclude ~~the~~executive ~~comparable~~and ~~prior~~management ~~year~~salaries, ~~period.~~regional ~~Occupancy~~supervisory ~~expense~~and asstaff asalaries, ~~percentage~~stock ofaward costs, restaurant ~~sales~~manager-in-training ~~increased~~wages toand ~~9.7%~~costs, inbonuses and ~~fiscal~~related ~~2005~~employee ~~from~~payroll ~~9.4%~~taxes inand ~~fiscal~~benefits, ~~2004.~~travel, ~~Occupancy~~information systems, communication expenses, ~~increased~~corporate asrent aand ~~percent~~related ofoccupancy ~~revenues,~~and inoperating ~~part~~costs, ascorporate ~~the~~depreciation ~~result~~and ofamortization ~~lower~~and ~~average~~professional ~~restaurant~~and ~~revenues~~consulting fees.

28Other Financial Definitions—Severance expense consists of the cost associated with the separation agreements with certain former employees. Asset impairment charges and restaurant closings / disposals relate to the write-down of assets of certain under-performing restaurants to their estimated fair value and costs for exits and closures which are not classified as discontinued operations. Other (income) expense, net generally consists of gains or losses on asset disposals primarily from asset replacements. Interest expense and income, net consists of interest expense on notes payable and capitalized lease obligations and amortization of loan fee costs partially offset by interest income earned on excess cash balances and interest capitalized as part of the construction process. Expenses related to predecessor companies consist of expenses for indemnity obligations related to the spin-off of DAKA in 1997. Discontinued operations consist of operating results, asset impairment charges and exit and closure costs for the three restaurants closed in May 2006 and the one restaurant closed in January 2007. Discontinued operations are reported on a basis net of income taxes.

~~Pre-opening~~Fiscal ~~expenses.~~Calendar—We ~~Pre-opening~~utilize ~~expenses~~a ~~were~~52/53 ~~$0.3~~week fiscal ~~million for the quarter ended April 3, 2005 and $0.0 million for the comparable prior~~ year ~~period.~~ending Weon ~~opened one restaurant in~~ the ~~third~~Sunday ~~quarter~~closest ofto ~~fiscal 2005~~June 30th. WeThe ~~did not open any restaurants in the~~ third ~~quarter~~quarters of fiscal ~~2004.~~2007 ~~Pre-opening~~and ~~costs for our third quarter of 2005 resulted primarily from the one restaurant opened in our third quarter of~~ fiscal ~~2005.~~2006 ~~Pre-opening~~both ~~expenses~~consisted ~~as a percentage~~ of ~~revenue~~13 ~~were 0~~weeks.6% ~~for fiscal 2005 and 0.1% for fiscal 2004.~~

~~Total~~21 Cost of Sales and Operating Expenses. Total cost of sales and operating expenses increased $2.5 million, or 5.5%, to $48.1 million for the quarter ended April 3, 2005 from $45.6 million in the comparable prior year quarter primarily for the reasons described above.

DepreciationTable and amortization. Depreciation and amortization expense increased $0.3 million, or 11.5%, to $2.9 million for the quarter ended April 3, 2005 from $2.6 million in the comparable prior year period primarily due to an increase in assets associated with the opening of new restaurants. Depreciation and amortization expense as a percentage of restaurant sales increased to 5.1% in fiscal 2005 from 4.7% in fiscal 2004 due to lower average restaurant revenues associated with new restaurants and the additional depreciation associated with the buy-out of two restaurant operating equipment leases. As the result of the impairment charge recognized this quarter, we anticipate that future depreciation expense will decrease by approximately $80,000 per month beginning in our fourth quarter of fiscal 2005. Contents

~~General~~Results and administrative expenses. General and administrative expenses increased $0.1 million, or 3.0%, to $3.4 million in the quarter ended April 3, 2005 from $3.3 million in the comparable prior year period. General and administrative expenses increased as a result of ~~increased personnel~~operations ~~costs to support our growth. General and administrative expenses as a percentage of total revenue increased to 6.2% for fiscal 2005 from 6.1% in fiscal 2004.~~

~~Severance. Severance expenses~~The ~~totaled~~following ~~$0.5~~table ~~million~~sets ~~for~~forth ~~the~~certain ~~quarter~~financial ~~ended~~information ~~April~~for 3,the ~~2005 compared~~Company ~~to no~~(dollars ~~expenses~~ in ~~the comparable prior year quarter~~thousands). ~~Severance expenses were the result of the company’s separation agreement with the former chief Executive Officer.~~

Impairment Charges. Asset impairment charges totaled $6.6 million for the quarter ended April 3, 2005 compared to no impairment charge in the comparable prior year quarter. The asset impairment charge was the result of recognition of an asset impairment at two locations in Houston, Texas, one in Phoenix, Arizona, and one in Wilmington, Delaware. Our previous efforts to increase sales or reduce costs and improve current cash flow trends at these restaurants were ineffective. These restaurants have long term leases and we intend to continue operating at these sites to defray lease costs. There can be no assurance that we will not experience future circumstances that require us to write-down additional assets.


	Three Months Ended										Nine Months Ended
	April 1, 2007					April 2, 2006					April 1, 2007					April 2, 2006
Revenue:
Sales	$	49,055		99.6	%	$	51,485		99.7	%	$	150,482		99.7	%	$	157,177		99.7	%
Franchising and royalty, net		173		0.4			174		0.3			525		0.3			468		0.3

Total revenue		49,228		100.0	%		51,659		100.0	%		151,007		100.0	%		157,645		100.0	%

Cost of sales and operating expenses (as a percentage of sales)
Product costs		13,868		28.2	%		14,462		28.1	%		42,959		28.6	%		44,082		28.1	%
Labor costs		16,191		33.0			16,192		31.4			48,944		32.5			49,428		31.4
Other operating expenses		7,990		16.3			7,987		15.5			24,130		16.0			23,905		15.2
Occupancy		5,092		10.4			5,208		10.1			15,343		10.2			15,572		9.9
Pre-opening expenses		—		—			78		0.2			—		—			157		0.1

Total cost of sales and operating expenses		43,141		87.9			43,927		85.3			131,376		87.3			133,144		84.7
(as a percentage of total revenue)
General and administrative expenses		3,164		6.4			3,710		7.2			9,906		6.6			10,539		6.7
Depreciation and amortization		2,586		5.3			2,739		5.3			7,778		5.2			8,262		5.2
Severance		—		—			5		—			(136	)	(0.1	)		110		0.1
Asset impairment charges and restaurant closings/disposals		—		—			2,136		4.1			530		0.4			2,136		1.4
Potential company sale expense		499		1.0			—		—			499		0.3			—		—
Other expense, net		157		0.3			131		0.3			269		0.2			286		0.2

Income from operations		(319	)	(0.6	)		(989	)	(1.9	)		785		0.5			3,168		2.0

Other expense:
Interest expense, net		153		0.4			237		0.5			632		0.4			913		0.6
Expense (income) related to predecessor companies		—		—			(2	)	—			12		—			(5	)	—

Income (loss) from continuing operations, before tax		(472	)	(1.0	)		(1,224	)	(2.4	)		141		0.1			2,260		1.4
Income tax expense (benefit)		(133	)	(0.3	)		(700	)	(1.4	)		6,941		4.6			26		—

Income (loss) from continuing operations		(339	)	(0.7	)		(524	)	(1.0	)		(6,800	)	(4.5	)		2,234		1.4
Loss on discontinued operations, net of tax		232		0.5			1,405		2.7			326		0.2			1,798		1.1

Net income (loss)	$	(571	)	(1.2	)%	$	(1,929	)	(3.7	)%	$	(7,126	)	(4.7	)%	$	436		0.3	%

Restaurant operating weeks (a)		637					637					1,911					1,911
Restaurant sales per operating week	$	77.0				$	80.8				$	78.7				$	82.2
Number of restaurants (end of period)
Company-owned (a)												49					49
Franchised												12					13

Total restaurants												61					62

~~Other~~(a) ~~Income/Expense.~~Excludes ~~There were~~three norestaurants ~~other~~closed ~~expenses~~in ~~for~~May ~~the~~2006 ~~quarter~~and ~~ended~~one ~~April~~restaurant 3,closed ~~2005~~in ~~compared~~January to2007, ~~$0.1~~whose ~~million~~results inhave ~~the comparable~~been ~~prior~~classified ~~year~~as ~~quarter.~~discontinued operations.

~~Interest~~Our ~~expense~~sales fluctuate seasonally and ~~income,~~therefore ~~net~~our quarterly results are not necessarily indicative of results that may be achieved for a full fiscal year. ~~Interest~~For ~~expense~~fiscal years 2006 and ~~income~~2005, ~~net~~our ~~was~~relative ~~approximately~~sales ~~$0.3~~were ~~million~~highest in ~~the~~our ~~third~~second quarter of ~~fiscal~~(October ~~2005~~through ~~and~~December), ~~$0.6~~followed ~~million~~by inour ~~fiscal~~third ~~2004.~~quarter ~~The~~(January ~~decrease~~through ~~resulted~~March), ~~from~~then ~~lower outstanding~~by ~~debt~~our ~~balances~~first ~~and~~quarter a(July ~~lower~~through ~~effective~~September). ~~interest~~Our ~~rate~~fourth ~~this~~ quarter ~~compared~~(April through toJune) recorded the ~~prior~~ ~~year~~lowest relative sales for those years. AtFactors ~~April~~influencing 3,sales ~~2005~~variability wein ~~had~~addition ~~$15.6~~to ~~million~~those noted above include the frequency and popularity of ~~debt~~sporting ~~outstanding~~events, ~~compared~~holidays to(including ~~$29.7 million~~which day of ~~debt~~the atweek ~~March~~the ~~28,~~holiday occurs) ~~2004~~and weather.

~~Expenses~~22 ~~related to predecessor companies. Expenses related to predecessor companies totaled $0.1 million for the quarter ended April 3, 2005 compared to $0.1 million in the comparable prior year quarter.~~

DebtTable Extinguishmentof Costs. We incurred no debt extinguishment expenses for the quarter ended April 3, 2005 and only minimal expense for the quarter ended March 28, 2004. Contents

29Third Quarter (13 Weeks) of Fiscal 2007 Ended April 1, 2007 Compared to the Third Quarter (13 Weeks) of Fiscal 2006 Ended April 2, 2006

~~Income~~Total ~~before~~revenue. ~~income~~Total ~~taxes~~revenue decreased by $2. ~~Income~~5 ~~before~~million, ~~income~~or ~~taxes~~4.8%, ~~decreased~~to $849.2 million toin athe ~~loss~~third quarter of fiscal 2007 from $651.27 million for the comparable prior year period. The decrease was due to a comparable same store sales decrease of 4.3% for the third quarter of fiscal 2007 compared to our third quarter of last year. During the third quarter ~~ended~~of ~~April~~fiscal 32007, ~~2005~~comparable ~~from~~same astore ~~profit~~food ofsales decreased 3.4% while comparable same store alcohol sales decreased 6.5%. Restaurant sales per operating week for all restaurants decreased $23,815, or 4.07%, ~~million~~to $77,009 in the ~~comparable~~third ~~prior~~quarter ~~year~~of ~~quarter~~fiscal ~~primarily~~2007 from $80,824 for the ~~reasons~~comparable ~~described~~quarter ~~above~~in the prior year.

~~Income~~The ~~tax~~average ~~expense/benefit. For~~guest ~~the~~check ~~quarter~~in ~~ended~~our ~~April~~dining 3room, ~~2005~~excluding alcoholic beverages, wewas ~~recorded~~approximately ~~an income tax benefit of~~ $214.707 ~~million compared~~for tothe anthird ~~expense~~quarter of ~~$0.4~~fiscal ~~million~~2007 incompared ~~the~~to ~~comparable prior year quarter~~$13.73 ~~The effective tax rate~~ for ~~our~~the third quarter ~~this~~of ~~year~~fiscal ~~was~~2006, 42a 2.85% ~~versus 19~~increase.7% ~~for~~During the ~~comparable~~third ~~period last~~quarter ~~year.~~of Wefiscal ~~anticipate~~2007, wefood ~~will~~sales beand ~~able~~alcoholic tobeverage ~~use~~sales ~~this~~represented ~~tax~~71.5% ~~benefit~~and 28.5% inof ~~future~~our ~~periods~~total assales, ~~the profitability~~respectively. ofDuring the ~~Company~~third isquarter ~~not~~of ~~anticipated~~fiscal to2006, befood ~~burdened~~and ~~with~~alcoholic ~~additional~~beverage ~~asset write-downs.~~sales ~~However,~~represented ~~there~~70.9% ~~can~~and be29.1% noof ~~assurances~~our ~~that~~total ~~future~~food ~~write-downs~~and ~~will~~beverage ~~not~~sales, ~~occur~~respectively.

~~Forty~~Our ~~Weeks~~sales ~~Ended~~in ~~April~~the third quarter of fiscal 2007 were affected by adverse weather conditions in many of the markets where the Company operates. As a whole, 3companies in the casual dining industry, ~~2005~~especially ~~Compared~~those towith a substantial presence in the ~~Thirty-nine~~Midwestern ~~Weeks~~and ~~Ended~~Eastern ~~March~~markets 28of the United States, ~~2004~~experienced ~~(Restated)~~ a decline in same store sales during the months of January and February due in part to the inclement weather conditions.

~~Total~~Cost revenue. Total revenue increased approximately $11.0 million, or 7.0%, to $168.9 million for the forty weeks ended April 3, 2005 from $157.9 million for the thirty-nine week comparable prior year period. Comparable same store sales decreased 2.6% for the first nine months of ~~fiscal 2005~~Sales compared to the first nine months of last year. Comparable food sales decreased 3.0% while comparable alcohol sales decreased 1.8%. Restaurant sales per operating week for all restaurants decreased $3,988, or 4.5%, to $85,563 for the forty weeks ended April 3, 2005 from $89,551 for the thirty-nine weeks ended for the comparable prior period. This decrease resulted primarily from a decrease in comparable same store sales and, inOperating ~~part, due~~Expenses ~~to our newer restaurants open in fiscal 2004 generating lower revenues than the restaurants that opened prior to fiscal 2004.~~

~~The~~Product ~~average~~costs. ~~guest~~Product ~~check~~costs indecreased ~~our~~by ~~dining room~~$0.5 million, ~~excluding~~or ~~alcoholic beverages~~3.5%, ~~was~~to ~~approximately~~ $13.619 ~~for~~million in the ~~first~~third ~~nine~~quarter ~~months ended~~ of fiscal ~~2005~~2007 ~~compared~~from to $1314.264 million ~~for~~in the ~~first~~comparable ~~nine~~prior ~~months~~year ~~ended of fiscal 2004~~period. ~~During~~ ~~the~~Product ~~first~~costs ~~nine~~as ~~months~~a percentage of ~~fiscal~~restaurant ~~2005, food~~ sales ~~and~~were ~~alcoholic~~28.2% ~~beverage~~for ~~sales represented~~fiscal ~~71.9%~~2007 and 28.1% offor ~~our~~fiscal ~~total~~2006. ~~food~~The ~~and~~increased ~~beverage~~product ~~sales,~~cost ~~respectively.~~as ~~During~~a ~~the third~~percentage ~~quarter~~ of ~~fiscal~~restaurant ~~2004,~~sales ~~food~~resulted ~~and~~primarily ~~alcoholic~~from ~~beverage~~higher ~~sales~~costs spread ~~represented~~across ~~71.7%~~many ~~and 28.3%~~ of ~~our~~the ~~total~~ food ~~and~~cost ~~beverage sales, respectively~~categories.

~~Revenues~~Labor costs. Labor costs were ~~positively~~$16.2 ~~impacted~~million in both the third ~~from~~quarter anof ~~additional~~fiscal ~~operating~~2007 ~~week~~and in the comparable prior year period. ~~However,~~Labor ~~our~~costs ~~revenues~~as ~~were~~a ~~adversely~~percentage ~~impacted~~of byrestaurant ~~Easter Sunday,~~sales ~~which~~increased isto ~~typically~~33.0% ain ~~slow~~the ~~day~~third ~~for~~quarter ~~restaurants,~~of ~~falling~~fiscal 2007 from 31.4% in ~~our~~the ~~first~~comparable ~~nine~~prior ~~months~~year ofperiod. The increase was due primarily to ~~fiscal~~higher ~~2005~~server ~~versus~~and bartender costs from tipped minimum wage increases principally in our ~~last~~eleven ~~three~~stores ~~months~~in Ohio and Colorado, higher kitchen and management labor costs as a percentage of ~~the~~restaurant ~~prior~~sales ~~year,~~resulting byprimarily from the ~~presidential~~lower ~~debates,~~average sales per restaurant and ~~the~~higher ~~economic~~bonus ~~impact~~costs ~~associated~~as ~~with~~a result of the ~~uncertainty~~rollout ~~surrounding~~of the ~~election.~~partnership ~~The hockey~~bonus ~~lockout~~program, ~~also~~which ~~negatively~~started ~~impacted~~in ~~revenues~~March 2006.

~~Cost~~Other operating expense. Other operating expense was $8.0 million in both the third quarter of ~~Sales~~fiscal 2007 and in the comparable prior year period. Other operating expense as a percentage of restaurant sales ~~Operating~~increased ~~Expenses~~ to 16.3% in the third quarter of fiscal 2007 from 15.5% in the same prior year quarter. The increase as a percent of sales resulted primarily from higher marketing costs and the impact of lower average sales per restaurant on utility costs.

~~Product costs~~Occupancy. ~~Product~~Occupancy ~~costs~~expense ~~increased~~decreased by $3.0.1 million, or 61.9%, to $465.81 million ~~for~~in the ~~forty~~third ~~weeks~~quarter ~~ended~~of fiscal 2007 ~~2005~~ from $435.82 million ~~for~~in the ~~thirty~~comparable ~~nine~~prior ~~weeks~~year ~~ended~~period. inOccupancy ~~the~~expense ~~prior~~decreased ~~year.~~due ~~Product~~primarily to reduced property tax and general insurance costs. Occupancy expense as a percentage of restaurant sales ~~were~~was 2710.84% ~~for~~in ~~fiscal~~the ~~2005~~third quarter of fiscal 2007 and 2710.81% ~~for~~in ~~fiscal~~the ~~2004~~comparable prior year period.

~~Labor~~Total ~~costs~~Cost of Sales and Operating Expenses. ~~Labor~~Total ~~costs~~cost ~~increased~~of bysales and operating expenses decreased $10.8 million, or 31.68%, to $5243.01 million in the ~~forty~~third ~~weeks~~quarter ~~ended~~of ~~April~~fiscal 3,2007 ~~2005~~ from $5043.29 million in the ~~thirty-nine~~comparable ~~weeks ended in the~~ prior year. ~~Labor~~quarter ~~costs~~primarily asfor a percentage of restaurant sales decreased to 30.8% in fiscal 2005 from 31.9% in fiscal 2004 due to lower staff and management costs. The lower staff costs were due largely to a focus on improved productivity at our restaurants while the ~~reduced~~reasons ~~management~~described ~~costs were due to actions to automate and reorganize restaurant administrative duties as well as properly align management levels according to relative restaurant sales volumes~~above. ~~Management wages also decreased as the result of a lower bonus payout for the year.~~

~~Other~~23 operating expense. Other operating expense increased $3.6 million, or 14.8%, to $28.0 million in the forty weeks ended April 3, 2005 from $24.4 million in the thirty-nine weeks ended in the prior year. Operating expense as a percentage of restaurant sales increased to 16.6% in fiscal 2005 from 15.5% in fiscal 2004. The increase was due to an increase in promotional meals, gift card expense, as well as about $0.2 million in costs for new store opening inventory reconciliations from prior openings.

30Table of Contents

~~Occupancy~~General and administrative expenses.~~Occupancy~~ ~~expense~~General ~~increased~~and administrative expenses decreased by $10.1 5 million, or 713.5%, to $153.82 million in the ~~forty~~third ~~weeks~~quarter ~~ended~~of ~~April~~fiscal 3,2007 ~~2005~~ from $143.7 million in the ~~thirty-nine~~comparable ~~weeks~~prior ~~ended~~year inperiod. ~~the~~General ~~prior~~and ~~year.~~administrative ~~Occupancy~~expenses decreased as a result of lower legal costs and reduced support staff levels partially offset by higher bonus expense as a ~~percentage~~result of ~~restaurant~~the ~~sales~~rollout ~~increased~~of tothe ~~9.4%~~partnership inbonus ~~fiscal~~program ~~2005~~to ~~from~~directors ~~9.3%~~of operations, which started in ~~fiscal~~May ~~2004~~2006. ~~Occupancy~~General ~~expenses~~and ~~increased~~administrative expenses as a ~~percent~~percentage of ~~revenues,~~total inrevenue ~~part,~~decreased asto 6.4% for the ~~result~~third quarter of ~~lower~~fiscal ~~average~~2007 ~~restaurant~~from ~~revenues~~7.2% in the third quarter of fiscal 2006.

~~Pre-opening~~Depreciation ~~expenses~~and amortization. ~~Pre-opening~~Depreciation ~~expenses~~and amortization ~~were~~expense decreased $1.0.1 million, ~~for~~or ~~the forty weeks ended April~~ 3.7%, ~~2005~~to ~~and~~ $12.6 million for the ~~thirty-nine~~third ~~weeks~~quarter ~~ended~~of fiscal 2007 from $2.7 million in the comparable prior year period. WeThe ~~opened~~decrease ~~three~~was ~~restaurants~~primarily ~~during~~due to reduced depreciation on assets whose values were written down in conjunction with an asset impairment charge of $2.1 million recorded in the ~~forty~~third ~~weeks~~quarter ~~ended~~of fiscal ~~2005~~2006. We ~~opened~~estimate ~~six~~that ~~restaurants~~an ~~during~~additional ~~the~~$0.2 ~~thirty-nine~~million ~~weeks~~of ~~ended~~depreciation and amortization expense would have been recorded in the third quarter of fiscal ~~2004~~2007 absent the asset impairment charge. ~~Pre-opening~~Depreciation ~~expenses~~and amortization expense as a percentage of revenue ~~were~~was 05.63% ~~for~~in both the third quarter of fiscal ~~2005~~2007 and ~~1.0%~~in ~~for~~the third quarter of fiscal ~~2004~~2006.

~~Total~~Asset ~~Cost~~impairment ofcharges ~~Sales~~ and ~~Operating Expenses.~~restaurant ~~Total~~closings ~~cost~~/ ofdisposals. ~~sales~~An ~~and~~asset ~~operating~~impairment ~~expenses~~/ ~~increased~~disposal ~~$8.9~~charge ~~million,~~of ~~or 6.6%, to~~ $~~143~~2.61 million ~~for~~was ~~the~~recorded ~~forty~~in ~~weeks~~the ~~ended~~third quarter ~~April~~of 3,fiscal ~~2005~~2006 ~~from~~for ~~$134.7~~two ~~million~~locations inwhose ~~the thirty-nine~~future ~~weeks~~cash ~~ended~~flows inare ~~the~~not ~~prior~~expected ~~year~~to ~~primarily~~cover ~~for~~their ~~the~~carrying ~~reasons described above~~values.

~~Depreciation~~Potential ~~and amortization.~~company ~~Depreciation~~sale ~~and amortization~~ expense ~~increased $1~~.1 ~~million,~~Potential orcompany ~~15.3%,~~sale toexpense ~~$8.3 million~~of ~~for the forty weeks ended April 3, 2005 from~~ $70.25 million inwas ~~the~~recorded ~~thirty-nine weeks ended~~ in the ~~prior~~third ~~year~~quarter ~~primarily~~of ~~due~~fiscal to2007 anversus ~~increase~~none in ~~assets associated with~~ the ~~opening of~~comparable ~~new~~prior ~~restaurants~~year period. ~~Depreciation~~The ~~and amortization~~ expense asrelated ~~a percentage of restaurant sales increased~~ to ~~4.9%~~legal inand ~~fiscal~~board ~~2005~~of ~~from~~directors’ ~~4.6%~~special incommittee ~~fiscal 2004 due to lower average~~costs ~~restaurant revenues~~ associated with ~~new restaurants and~~ the ~~additional~~potential ~~depreciation associated~~sale ~~with the buy-out~~ of ~~two restaurant operating equipment leases. As~~ the ~~result of the impairment charge recognized this quarter, we anticipate that future depreciation expense will decrease by approximately $80,000 per month beginning in our fourth quarter of fiscal 2005~~Company.

~~General~~Income ~~and~~(loss) ~~administrative expenses.~~from ~~General~~continuing ~~and~~operations, ~~administrative~~before ~~expenses~~income ~~increased $0~~taxes.9 ~~million,~~Income (loss) orbefore ~~10.2%, to~~income taxes improved $90.7 million into ~~the~~a ~~forty~~loss ~~weeks~~of ~~ended April 3, 2005 from~~ $80.85 million in the ~~thirty-nine~~ ~~weeks~~third ~~ended~~quarter inof ~~the~~fiscal ~~prior~~2007 ~~year.~~compared ~~General~~to ~~and administrative expenses increased as~~ a ~~result~~loss of ~~increased personnel costs to support our growth~~$1.2 ~~General~~million ~~and~~in ~~administrative expenses~~the ascomparable aprior ~~percentage~~year ofquarter ~~total~~primarily ~~revenue increased to 5.7%~~ for ~~fiscal~~the ~~2005~~reasons ~~from~~described 5above.~~6% in fiscal 2004.~~

~~Severance~~Income tax expense (benefit). ~~Severance~~ For the third quarter of fiscal 2007, we recorded an income tax benefit of $0.1 million compared to an income tax ~~expenses~~benefit ~~totaled~~of $0.57 million ~~for~~in the ~~forty~~comparable ~~weeks~~prior ~~ended~~year ~~April 3~~quarter, ~~2005~~ ~~compared to~~largely noreflective ~~expenses~~of in the ~~thirty~~different levels of pre-~~nine~~tax ~~weeks~~loss ~~ended~~recorded in ~~the~~each ~~prior~~respective year and a $0. ~~Severance expenses~~4 ~~were~~million charge in the ~~result~~third quarter of ~~the~~fiscal ~~Company’s~~2007 ~~separation~~for ~~agreement with~~a ~~the~~valuation allowance placed ~~former~~against ~~chief~~our ~~Executive~~FICA ~~Officer~~tip tax credit carryforwards because full realization of such credits is not more likely than not because of the trend in earnings.

~~Impairment~~Loss ~~Charges.~~on ~~Asset impairment~~discontinued ~~charges~~operations, ~~totaled~~net $6of tax.6 ~~million~~Loss ~~for~~on ~~the~~discontinued ~~forty~~operations, ~~weeks~~net ~~ended~~of ~~April~~tax 3,was ~~2005~~$0.2 ~~compared to~~million noin ~~impairement~~the ~~charges~~third inquarter ~~the~~of ~~thirty-nine~~fiscal ~~weeks~~2007 ~~ended~~and $1.4 million in the ~~prior~~third ~~year~~quarter of fiscal 2006. ~~See~~The ~~discussion~~net ofloss ~~impairment~~in ~~charges~~fiscal in2007 ~~this~~was ~~section~~due ~~under~~largely ~~“Third~~to ~~Quarter~~costs associated with the closure of ~~Fiscal~~one ~~2005 Ended~~restaurant ~~April~~in 3January 2007, ~~2005~~net ~~Compared~~of totax ~~the~~benefit. ~~Third~~The ~~Quarter~~net ofloss ~~Fiscal~~in ~~2004~~fiscal ~~Ended~~2006 ~~March~~largely ~~28, 2004.”,~~relates ~~“Impairment~~to ~~Charges”~~asset ~~and~~impairment ~~“Impairment~~costs ofassociated ~~Long~~with ~~Lived~~one ~~Assets”~~restaurant ~~under~~which ~~Item~~ultimately 2closed in May 2006, net of tax benefit.

~~Other~~Nine ~~Income/Expense.~~Months ~~Other income~~(Thirty-Nine ~~totaled~~Weeks) ~~$0.1~~of ~~million~~Fiscal ~~for~~2007 ~~the~~Ended ~~forty weeks ended~~ April 3 1, ~~2005~~2007 ~~compared~~Compared to ~~other expense~~the ofNine ~~$0.1~~Months ~~million in the thirty~~(Thirty-~~nine~~Nine Weeks) ~~weeks~~of ~~ended~~Fiscal in2006 ~~the~~Ended ~~prior~~April 2, ~~year.~~2006

~~Interest~~Total ~~expense~~revenue. ~~and~~Total ~~income,~~revenue ~~net~~decreased $6. ~~Interest~~6 ~~expense~~million, ~~and~~or ~~income~~4.2%, ~~net~~to ~~was approximately~~ $1151.10 million in the ~~forty~~first ~~weeks ended~~nine ~~April~~months 3,of ~~2005~~fiscal ~~and~~2007 from $1157.86 million infor the ~~thirty-nine~~comparable ~~weeks~~period ~~ended~~ in the prior fiscal year. The decrease ~~resulted~~was ~~from~~due ~~lower~~to ~~outstanding~~a ~~debt~~comparable ~~balances~~same ~~and~~store asales ~~lower~~decrease ~~effective~~of ~~interest~~4.0% ~~rate this~~for ~~quarter~~the first nine months of fiscal 2007 compared to our first nine months of last year. During the first nine months of fiscal 2007, comparable same store food sales decreased 3.9% while comparable same store alcohol sales decreased 4.3%. Restaurant sales per operating week for all restaurants decreased $3,504, or 4.3%, to $78,745 in the first nine months of fiscal 2007 from $82,249 for the comparable period in the prior year.

~~Expenses~~The ~~related~~average guest tocheck ~~predecessor companies.~~in ~~Expenses~~our ~~related~~dining toroom, ~~predecessor~~excluding ~~companies~~alcoholic ~~totaled~~beverages, was approximately $014.304 ~~million~~ for the ~~forty~~ ~~weeks~~first ~~ended~~nine ~~April~~months 3,of ~~2005~~fiscal 2007 compared to $013.371 ~~million~~for inthe first nine months of fiscal 2006, a 2.4% increase. During the ~~thirty-~~first nine ~~weeks~~months ~~ended~~of infiscal 2007, food sales and alcoholic beverage sales represented 71.0% and 29.0% of our total sales, respectively. During the ~~prior~~first ~~year~~nine months of fiscal 2006, food and alcoholic beverage sales represented 70.9% and 29.1% of our total food and beverage sales, respectively.

~~Debt~~24 ~~Extinguishment Costs. Debt extinguishment expenses totaled nothing for the forty weeks ended April 3, 2005 compared to a minimal amount in the thirty-nine weeks ended in the prior year.~~

31Table of Contents

~~Income~~In ~~before~~addition ~~income~~to ~~taxes. Income~~the ~~before~~inclement ~~income~~weather ~~taxes~~in ~~decreased~~the ~~$6.1~~third ~~million~~quarter toof afiscal ~~loss~~2007, ofwe ~~$1.1~~also ~~million~~believe ~~for~~that ~~the~~our ~~forty~~sales ~~weeks~~were ~~ended~~negatively ~~April~~impacted 3,in ~~2005~~the ~~from~~first anine ~~profit~~months of ~~$5.0~~fiscal ~~million~~2007 inby ~~the~~lower ~~thirty-nine~~consumer ~~weeks~~discretionary ~~ended~~spending ~~in the~~due ~~prior~~to ~~year~~higher ~~primarily~~fuel ~~for~~and ~~the~~utility ~~reasons~~costs, ~~described~~higher ~~above~~interest rates, and rising health care costs.

~~Income~~Cost ~~tax expense/benefit. For the forty weeks ended April 3, 2005, we recorded an income tax benefit~~ of ~~$1.4~~Sales ~~million compared~~and toOperating anExpenses expense of $1.1 million in the thirty-nine weeks ended in the prior year. The effective tax rate for the first nine months of this year was 124.4% versus 22.0% for the first nine months of last year. As the result of the impact of the large FICA tip tax credit on a lower profit, our effective tax rate is higher than anticipated.

~~Liquidity~~Product costs. Product costs decreased by $1.1 million, or 2.5%, to $43.0 million in the first nine months of fiscal 2007 from $44.1 million in the comparable prior year period. Product costs as a percentage of restaurant sales increased to 28.6% for fiscal 2007 from 28.1% for fiscal 2006. The increased product cost as a percentage of restaurant sales resulted from higher produce, grocery and ~~Capital~~seafood ~~Resources~~costs partially offset by lower poultry and beef costs.

AsLabor ofcosts. ~~April~~Labor 3costs decreased by $0.5 million, ~~2005~~or 1.0%, ~~our~~to ~~unrestricted cash~~$48.9 ~~balance~~million ~~was~~in the first nine months of fiscal 2007 from $249.4 million in the comparable prior year period. WeLabor ~~have~~costs as a ~~$25.0~~percentage ~~million~~of ~~secured~~restaurant ~~credit~~sales ~~facility~~increased ~~that provides~~to us32.5% ~~with~~in ~~immediately~~the ~~available~~first ~~funds~~nine ~~should~~months weof ~~require~~fiscal ~~them~~2007 from 31.4 % Atin ~~April~~the 3,comparable ~~2005,~~prior weyear period due primarily to higher ~~had~~kitchen ~~$21.2~~and ~~million~~management ~~available~~labor ~~under~~costs ~~this~~as ~~facility.~~a ~~However,~~percentage of restaurant sales resulting primarily from the ~~use~~lower ofaverage ~~those~~sales ~~proceeds~~per ~~would be~~restaurant, ~~restricted~~increases toin the ~~pay~~tipped ~~down~~minimum ofwage ~~current~~in ~~liabilities~~certain orstates, ~~for~~higher bonus costs as a result of the ~~funding~~rollout of ~~capital~~the partnership ~~expenditures~~bonus program, which started in March 2006 and higher workers compensation costs.

AtOther ~~the~~operating expense. ~~end~~Other ofoperating ~~the~~expense ~~quarter,~~increased weby ~~showed a~~$0.2 ~~working~~million, ~~capital~~or ~~deficit~~0.8%, ofto $024.21 million. ~~Our~~in ~~working~~the ~~capital~~first ~~needs~~nine ~~are~~months ~~generally~~of ~~low,~~fiscal ~~as sales~~2007 ~~are~~from ~~made~~$23.9 ~~for~~million ~~cash~~in orthe ~~through~~comparable ~~credit~~prior ~~cards~~year ~~that~~period. ~~are~~Other ~~quickly~~operating ~~converted~~expense toas ~~cash,~~a ~~and~~percentage of restaurant sales ~~purchases~~increased to 16.0% in the first nine months of ~~food,~~fiscal ~~supplies~~2007 ~~and~~from ~~other~~15.2% ~~operating~~in ~~expenses~~the ~~are~~same ~~generally~~prior ~~paid~~year ~~within~~quarter. 30The ~~to 60~~increase ~~days~~as ~~after~~a ~~receipt~~percent of ~~invoices~~sales ~~and~~resulted ~~labor~~primarily from higher marketing costs. ~~are~~In ~~paid~~the ~~bi-weekly~~first quarter of fiscal 2007, $0.3 ~~This~~million iswas ~~consistent~~spent on ~~with~~testing ~~other~~radio ~~companies~~advertising ~~engaged~~ in ~~the~~two ~~restaurant industry~~markets.

~~For~~Occupancy. ~~the~~Occupancy ~~quarter~~expense ~~ended~~decreased ~~April~~by $0.3, ~~2005~~million, we ~~generated~~or ~~cash flow from operating activities of $14~~1.79%, ~~million compared~~ to $1715.83 million ~~for~~in the ~~prior~~first ~~year~~nine ~~comparable~~months ~~period.~~of ~~The~~fiscal ~~decreased~~2007 ~~cash flow~~ from ~~operating activities was due primarily to an increase in prepaid expenses of~~ $115.96 million, ~~less~~in ~~receipts~~the ofcomparable ~~tenant~~prior ~~improvement allowances~~year inperiod. ~~the~~Occupancy ~~quarter~~expense ~~partially~~decreased ~~offset~~primarily bydue anto ~~increase~~reduced ingeneral ~~accrued~~and ~~expenses~~property ofinsurance $1costs.~~4 million.~~ ~~The~~Occupancy ~~prepaid~~expense ~~expenses increased primarily~~ as ~~the~~a ~~result~~percentage of ~~paying~~ ~~our~~restaurant ~~rent~~sales increased ~~expense~~to ~~for~~10.2% ~~April~~in bythe ~~our~~first ~~month~~nine ~~end~~months ~~while~~of ~~not~~fiscal ~~issuing~~2007 ~~our~~from ~~checks~~9.9% atin ~~our year~~the ~~end~~comparable onprior ~~June~~year ~~27,~~period ~~2004.~~due ~~Accrued~~to ~~expenses~~the ~~increased~~lower ~~primarily~~average ~~from~~restaurant ~~gift card~~ sales. ~~and insurance~~

~~During~~Total ~~the~~Cost ~~first~~of ~~nine~~Sales ~~months~~and Operating Expenses. Total cost of ~~fiscal~~sales ~~2005, we~~and ~~received~~operating expenses decreased by $31.07 million, inor ~~tenant~~1.3%, ~~improvement allowances~~to $131. We4 ~~are~~million ~~anticipating~~in ~~tenant~~the ~~improvement~~first ~~allowances~~nine months of ~~approximately~~fiscal 2007 from $0133.31 million ~~for~~ in the ~~remainder~~comparable ofprior ~~fiscal~~year period ~~2005~~primarily for ~~projects~~the toreasons bedescribed ~~completed in fiscal 2005~~above.

~~Capital~~General ~~expenditures~~and ~~were~~administrative ~~$11~~expenses.~~5 million~~ ~~for~~General ~~the~~and ~~forty~~administrative ~~weeks~~expenses decreased ~~ended~~by ~~April~~$0.6 3million, ~~2005~~or 5.7%, ~~Capital~~to ~~expenditures were comprised of~~ $89.89 million ~~for~~in ~~new~~the ~~restaurants,~~first ~~$2.5~~nine ~~million~~months ~~for~~of ~~existing~~fiscal ~~restaurant~~2007 ~~improvements~~from ~~and replacements, and~~ $010.25 million ~~for~~in ~~corporate~~the ~~related~~comparable ~~capital~~prior ~~expenditures. Funding for expansion during fiscal~~ year ~~2005~~period. General and ~~fiscal~~administrative ~~year~~expenses ~~2004~~decreased ~~was~~as ~~generally~~a ~~provided~~result ~~through available~~of ~~cash~~reduced ~~balances,~~support ~~use~~staff ~~of build-to-suit facilities~~levels, ~~and tenant improvement~~reduced ~~allowances.~~compensation ~~Capital~~expense ~~expenditures~~ for ~~the~~stock-based ~~balance~~compensation, ofreduced ~~fiscal~~legal ~~year~~costs ~~2005~~and ~~are~~reduced ~~anticipated~~relocation toexpense ~~be approximately~~partially anoffset ~~additional~~by ~~$3.2~~higher ~~million,~~professional ~~before tenant improvement allowances~~fees, ~~based~~bonus ~~upon current~~and ~~estimates~~tax costs. ~~These~~The ~~expenditures~~higher ~~will~~bonus ~~primarily~~expense beresulted ~~for~~from the ~~construction~~rollout of ~~one~~the ~~new~~partnership bonus ~~restaurant~~program ~~expected~~ to ~~open~~directors inof ~~the~~operations, ~~fourth~~which ~~quarter~~started ofin ~~fiscal~~May ~~2005,~~2006. ~~for~~General ~~upgrades~~and toadministrative ~~existing restaurants~~expenses ~~and~~as ~~for~~a ~~the~~percentage ~~start~~ of ~~construction~~total onrevenue ~~one~~decreased ~~restaurant expected~~ to ~~open~~6.6% infor the first ~~half~~nine months of fiscal ~~2006.~~2007 Wefrom ~~review~~6.7% ~~our~~in ~~capital~~the ~~expenditures~~first ~~budget~~nine onmonths aof ~~monthly~~fiscal ~~basis and amounts are subject to change~~2006.

WeDepreciation ~~have~~and aamortization. ~~build-to-suit~~Depreciation ~~facility~~and ~~with AEI~~amortization ~~Fund~~expense ~~Management,~~decreased ~~Inc~~by $0.5 ~~This~~million, ~~agreement~~or ~~provides~~6.0%, ato ~~commitment~~$7.8 ~~for~~million for the ~~completion~~first nine months of ~~seven new~~fiscal ~~restaurants~~2007 ~~with~~from a$8.3 ~~total~~million ~~funding~~in ~~commitment~~the ofcomparable ~~$24.5~~prior ~~million~~year period. AtThe ~~April~~decrease 3,was ~~2005,~~primarily wedue ~~had~~to reduced depreciation on assets whose value was written down in conjunction with an asset impairment charge of $2.1 million ~~completed~~recorded in the ~~construction~~third quarter of ~~three~~fiscal ~~restaurants~~2006. ~~under~~We ~~this~~estimate ~~commitment~~that ~~and~~an ~~had~~additional $~~14.~~0 .5 million ~~available~~of ~~for~~depreciation ~~the~~and ~~construction~~amortization ofexpense ~~four~~would ~~restaurants.~~have ~~The~~been ~~commitment~~recorded ~~expires~~in the ~~earlier~~ first nine months of ~~November~~fiscal ~~30,~~2007 ~~2005~~absent orthe ~~upon~~asset ~~AEI’s~~impairment ~~acceptance~~charge. orDepreciation ~~rejection~~and amortization expense as a percentage of ~~seven restaurant~~revenues ~~sites~~was 5.2% ~~The~~in ~~funding~~the offirst ~~this~~nine ~~build-to-suit~~months ~~facility~~of isboth ~~subject~~fiscal to2007 ~~various pre-closing~~and ~~conditions~~fiscal 2006.

3225

InTable March 2004, we obtained a three-year $25.0 million senior secured credit facility with LaSalle Bank. We intend to use the facility to support our growth, for general working capital needs and provide up to $5.0 million for the issuance of letters of credit. In our fourth quarter of fiscal 2004, we had net borrowings under this facility of $2.5 million and we prepaid $15.2 million of our existing debt with these borrowings and cash balance. The facility is secured by a blanket lien on all personal and real property of the Company. Borrowings under the facility bear interest at variable rates depending on a total funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization prior to preopening expenses, as defined) ratio and range from prime to prime plus 0.5 percent or, if elected, LIBOR plus 2.0 to 3.0 percent. We paid an up-front fee of $188,000 and is required to pay an annual unused commitment fee of 0.375 percent to 0.5 percent. Outstanding borrowings under the facility are required to be converted to a five-year term loan if senior debt to EBITDA exceeds specified levels, however, based upon our current senior debt to EBITDA ratio this conversion is not required. The facility also requires us to maintain a minimum fixed charge coverage ratio and tangible net worth level. Although the recent recognition of an impairment charge negatively impacts our tangible net worth, we are still in compliance with these debt covenants. The facility limits the opening of new restaurants to a maximum of twenty-four restaurants over a three-year period and also sets limits on the amount of dividends and/or stock repurchases that can be made by the Company. For the nine months ended April 3, 2005, we borrowed $15.0 million under this facility and paid back $16.5 million. As a result our outstanding borrowings under this facility decreased from $2.5 million at June 27, 2004 to $1.0 million at April 3, 2005. These borrowings were normally in increments of $1.0 to 2.0 million each. As of April 3, 2005, we had $1.0 million of outstanding borrowings and had placed letters of credit of $2.6 million under this facility. The available balance under this facility at April 3, 2005 was $21.2 million. However, the use of those proceeds would be restricted to the pay down of current liabilities or for the funding of capital expenditures. Contents

~~There~~Severance. ~~may~~A beseverance ~~cash~~expense ~~payments~~of ~~during~~negative ~~the next~~$0.1 ~~twelve~~million ~~months~~was ~~associated with liabilities previously~~ recorded ~~and~~in ~~related to~~ the ~~sale of~~first ~~predecessor~~nine ~~companies.~~months ~~Such liabilities include prior year insurance claims, litigation~~of ~~associated~~fiscal ~~with~~2007 ~~predecessor~~compared ~~companies~~to ~~and potential legal settlements~~$0.1 Atmillion ~~April~~in 3,the ~~2005, we~~first ~~had~~nine ~~accrued~~months ~~approximately $137,000 for the settlement~~ of ~~these~~fiscal ~~liabilities~~2006. ~~During the~~The ~~third~~$0.1 ~~quarter~~million wecredit ~~did not make any cash payments in legal expenses, awards, and judgments~~ related to ~~these matters. During~~ the ~~next~~reversal ~~twelve~~of ~~months~~a wepreviously ~~expect~~accrued ~~payments~~severance ~~for these~~expense ~~liabilities~~that towill benot ~~equal to our accrual, however, the amounts could~~ be ~~higher depending~~paid. onThe ~~whether~~fiscal we2006 ~~incur~~severance ~~additional~~expense ~~legal expenses or additional awards or judgments are rendered~~ related to ~~these~~payments ~~matters~~to six oremployees ~~other~~whose ~~matters.~~services ~~This~~with ~~issue is discussed in Note 4 to~~ the ~~consolidated~~Company ~~financial~~were ~~statements~~terminated.

WeAsset ~~believe~~impairment ~~that~~charges ~~the~~and ~~available~~restaurant ~~funding for~~closings ~~our~~/ ~~expansion,~~disposals. ~~other~~An asset ~~capital~~impairment ~~expenditures,~~charge ~~required~~of ~~debt~~$0.5 ~~service~~million ~~requirements~~was ~~and other~~recorded ~~working~~in ~~capital needs for~~ the ~~next~~first ~~twelve~~nine months ~~will~~of befiscal ~~sufficient.~~2007 ~~The~~for ~~funding~~one ~~is anticipated~~location towhose befuture ~~provided from~~ cash flows ~~from~~are ~~operations,~~not ~~tenant~~expected ~~improvement~~to ~~allowances and~~cover ~~our~~its ~~credit~~carrying ~~sources~~value ~~including~~and ~~our~~to ~~$25.0~~write-off ~~million~~the ~~senior~~development ~~secured~~costs ~~credit~~for ~~facility. Although~~a wenew dolocation ~~not~~project which ~~believe~~will itnot isbe ~~likely,~~pursued. inAn ~~the~~asset ~~event~~impairment ~~that~~charge ~~such~~of ~~funds~~$2.1 ~~are~~million ~~not~~was ~~available, we~~recorded ~~have~~in the ~~ability~~first tonine ~~curtail~~months ~~our~~of ~~expansion~~fiscal ~~program,~~2006 ~~draw~~for ontwo ~~additional~~locations ~~funds~~whose ~~available under~~future ~~our~~cash ~~credit~~flows ~~facility~~were ~~and~~not ~~reduce~~expected ~~non-essential~~to ~~operating~~cover ~~costs~~their tocarrying ~~conserve working capital~~value.

~~Inflation~~Potential ~~and~~company ~~changing~~sale ~~prices~~expense. ~~have~~Potential company sale expense of $0.5 million was recorded in the third quarter of fiscal 2007 versus none in the ~~had~~comparable noprior ~~measurable~~year ~~impact~~period. onThe ~~net~~expense ~~sales~~related to legal and ~~revenue~~board orof ~~income~~directors’ ~~during~~special committee costs associated with the ~~last~~potential ~~three~~sale ~~fiscal years~~of the Company.

Interest expense, net. Interest expense, net decreased by $0.3 million, or 33.3%, to $0.6 million for the first nine months of fiscal 2007 from $0.9 million in the comparable prior year period. The decrease was due to higher interest income from larger invested excess cash balances.

~~Contractual~~Income ~~obligations~~from ~~and~~continuing ~~commitments~~operations, before income taxes. Income before income taxes decreased by $2.2 million to income of $0.1 million in the first nine months of fiscal 2007 compared to income of $2.3 million in the comparable prior year period primarily for the reasons described above.

~~Payments,~~Income ~~including~~tax ~~interest~~expense/(benefit). For the first nine months of fiscal 2007, ~~due~~we byrecorded an income tax expense of $6.9 million compared to an income tax expense of approximately zero in the comparable prior year period. asThe tax expense for the first nine months of ~~April~~fiscal 3,2007 ~~2005~~included (a $7.8 million charge for a valuation allowance placed against our FICA tip tax credit carryforwards because full realization of such credits is not more likely than not because of the trend in ~~thousands)~~earnings.


Operating leases	225,194	15,274	31,315	32,407	146,198
Notes payable	18,803	1,192	17,611	-	-
Letters of credit	2,606	2,606	-	-	-
Construction
commitments	3,243	3,243	-	-	-
Licensing fees	20,644	359	722	764	18,799
	270,490	22,674	49,648	33,171	164,997

Loss on discontinued operations, net of tax. Loss on discontinued operations, net of tax was $0.3 million in the first nine months of fiscal 2007 and $1.8 million in the comparable period of fiscal 2006. The net loss in fiscal 2007 was due largely to costs associated with the closure of one restaurant in January 2007 and the change in estimate of sublease costs for one restaurant closed in fiscal 2006, net of tax benefit. The net loss in fiscal 2006 largely relates to asset impairment costs associated with one restaurant which ultimately closed in May 2006, net of tax benefit.

WeLiquidity ~~are obligated under non-cancelable operating leases for our headquarters~~ and ~~all~~Capital ~~but~~Resources one of our restaurants. The fixed terms of the restaurant leases range up to 20 years and generally contain multiple renewal options for various periods ranging from five to 20 years. Amounts presented above reflect all payments during the defined lease term. Our restaurant leases also contain provisions that require additional payments based on sales performance and the payment of common area maintenance charges and real estate taxes. Amounts in this table do not reflect any of these additional amounts.

WeAs ~~have~~of April 1, 2007, our cash balance was $1517.03 million, ofwhich ~~convertible~~reflects ~~notes~~a ~~payable that~~$7.9 ~~mature~~million onincrease ~~December~~during ~~15,~~the ~~2007~~fiscal year. ~~The~~ ~~notes~~Our cash balance and working capital needs are ~~convertible~~generally atlow, ~~any~~as ~~time~~sales ~~prior~~are tomade ~~maturity~~for ~~into~~cash ~~shares~~or through credit cards that are quickly converted to cash, purchases of ~~our~~food ~~common~~and ~~stock~~supplies atand another ~~initial conversion~~operating ~~price~~expenses are generally paid within 30 to 60 days after receipt of ~~$10~~invoices and labor costs are paid bi-weekly.66 ~~per~~The ~~share,~~timing ~~subject~~of toour ~~adjustment~~sales oncollections ~~certain~~and ~~events~~vendor and labor payments are consistent with other companies in the restaurant industry.

WeIn ~~have~~the ~~letters~~first three quarters of ~~credit~~fiscal ~~outstanding~~year 2007, we generated cash flow from operating activities of $9.0 million and in the first three quarters of fiscal year 2006, we generated cash flow from operating activities of $11.1 million. The decrease in cash flow from operations from the first three quarters of 2007 compared to ~~guarantee~~same ~~performance~~period ~~under~~in ~~insurance~~2006 ~~contracts~~was ~~and~~primarily due to ~~secure~~reduced ~~other~~profitability ~~arrangements~~and $2.0 ~~The~~million of proceeds from tenant improvement allowances received in ~~letters~~the first three quarters of ~~credit~~fiscal ~~are~~2006, ~~irrevocable~~partially ~~and~~offset ~~have~~by ~~one-year~~increased ~~renewable~~cash ~~terms~~from working capital changes. Tenant improvement allowances are reimbursements received from certain of our

We26 have commitments under contracts for the purchase of property and equipment and for the construction of buildings under build-to-suit arrangements or otherwise. Portions of such contracts not completed at April 3, 2005, as stated above, were not reflected in the consolidated financial statements.

CriticalTable accountingof policiesContents

~~The~~ landlords ~~preparation~~for a portion of our ~~consolidated financial~~initial ~~statements~~construction ~~requires~~expenditures. usOur tooperating ~~make~~cash ~~estimates~~flow ~~and~~is ~~assumptions~~enhanced ~~that~~by ~~affect~~our ~~the reported~~ability ~~amounts~~to utilize net operating loss carryforwards and ~~disclosures~~other intax ~~the~~credits ~~consolidated~~to ~~financial~~offset ~~statements~~our federal income tax liability. ~~The~~At ~~estimates and~~April 1, ~~assumptions~~2007, ~~are~~we ~~evaluated~~had on$36.5 anmillion ~~ongoing~~of ~~basis~~such ~~and~~gross ~~are~~net ~~based~~operating onloss ~~historical~~carryforwards ~~experience~~ and on$12.0 ~~various~~million ~~other~~of ~~factors~~tax wecredits ~~believe~~available through 2027 to beoffset ~~reasonable~~federal taxes.

~~Items~~Historically, ~~significantly~~a ~~impacted~~significant ~~by estimates~~portion ~~and~~of ~~judgments~~our ~~include,~~cash ~~but~~flow ~~are~~generated ~~not~~from ~~limited~~operating ~~to,~~activities ~~representations,~~has ~~warranties~~been ~~and~~invested in capital expenditures, ~~indemnities~~the ~~provided~~majority inof ~~connection~~which ~~with~~was for the ~~Company’s~~construction ~~spin-off~~of ~~from~~new ~~DAKA International~~restaurants. However, ~~Inc.~~we significantly reduced our new restaurant growth in ~~1997~~fiscal 2006 and ~~the~~fiscal ~~subsequent~~2007. ~~sale~~We ofopened ~~the~~only ~~Fuddruckers~~one ~~business~~new ~~unit~~restaurant in ~~1998,~~ ~~self-insured~~fiscal ~~risks~~2006, ~~relating~~the tocapital ~~workers’~~expenditures ~~compensation~~of ~~and~~which ~~general liability~~were ~~claims~~mostly ~~and~~incurred ~~legal~~in ~~liabilities,~~ the ~~useful~~prior ~~lives~~year and ~~recoverability~~we ofdo ~~our~~not ~~long-lived~~expect ~~assets such~~to asopen ~~property,~~any ~~equipment~~new ~~and~~restaurants ~~intangibles,~~in ~~fair~~fiscal ~~value~~2007. ~~attributed~~We expect to ~~assets~~resume ~~and liabilities~~modest ofgrowth ~~acquired~~in ~~businesses,~~fiscal ~~valuation~~2008. ofThe ~~deferred~~following ~~tax~~table, ~~assets~~in ~~and~~thousands, ~~the~~details ~~recording~~our ~~of income~~capital ~~tax expense~~expenditures.

Loss contingencies and self-insurance reserves


	Nine Months Ended
	April 1, 2007		April 2, 2006
New store construction	$	110	$	424
Existing store remodel and refurbishment		3,026		2,679
Corporate related capital expenditures		114		193

Purchase of property and equipment	$	3,250	$	3,296

We ~~maintain~~expect ~~accrued liabilities and reserves relating~~ to ~~the~~spend ~~resolution~~from ~~of certain contingent obligations and reserves for self-insurance~~$4.5 ~~Significant~~million ~~contingencies include those related~~ to ~~litigation and state tax assessments~~$5.0 Wemillion ~~account~~ for ~~contingent~~capital ~~obligations~~expenditures infor ~~accordance~~fiscal ~~with Statement of~~2007. ~~Financial~~These ~~Accounting~~expenditures ~~Standards~~will ~~(“SFAS”)~~primarily ~~No.~~be 5,used ~~“Accounting~~ for ~~Contingencies,”~~ ~~which~~upgrades ~~requires~~to ~~that~~existing werestaurants ~~assess~~but ~~each~~are ~~contingency~~expected to ~~determine~~include ~~estimates of~~expenditures ~~the~~for ~~degree~~a ofnew ~~probability~~restaurant ~~and~~expected ~~range of possible settlement. Contingencies which are deemed~~ to beopen ~~probable and where the amount of such settlement is reasonably estimable are accrued~~ in ~~our~~fiscal ~~financial statements~~2008. IfWe ~~only~~review aour ~~range~~capital ofexpenditures ~~loss~~budget ~~can~~frequently beand ~~determined~~accordingly, ~~we accrue~~ tostated ~~the~~amounts ~~best~~are ~~estimate~~subject ~~within that range; if none of the estimates within that range is better than another, we accrue~~ to ~~the low end of the range~~change.

34We have a $25.0 million senior secured credit facility, which expires in September 2010. We initially used a portion of the facility to refinance certain of our existing debt, and the facility may also be used to support opening new restaurants and general working capital needs and provide up to $7.0 million for the issuance of letters of credit. The facility provides for a $10.0 million one-time increase in the aggregate commitment amount if requested by us between September 30, 2007 and December 31, 2007 and approved by the lenders. The facility is secured by a blanket lien on all of our personal assets and real property. Borrowings under the facility will bear interest depending on a total funded debt to EBITDA ratio and can range from the prime rate to prime plus 0.5 percent or, if elected by us, LIBOR plus 1.8 to 3.0 percent. Total funded debt is defined as all indebtedness of our consolidated entities, including senior and subordinated debt, capital lease obligations and contingent liabilities. We originally paid an up-front fee of $188,000 and are required to pay an annual unused commitment fee of 0.375 to 0.5 percent.

WeThe ~~are~~facility ~~self-insured~~limits ~~for~~our aopening ~~significant portion~~ of ~~our~~new ~~employee~~company-owned ~~health~~restaurants to ~~benefit,~~a ~~workers’~~maximum ~~compensation~~of ~~and~~eight ~~general~~in ~~liability programs.~~any ~~However,~~fiscal weyear ~~maintain~~and ~~stop-loss~~also ~~coverage~~sets ~~with~~limits ~~third~~on ~~party~~the ~~insurers~~amount toof ~~limit~~dividends ~~our total~~and/or ~~exposure~~stock ~~under~~repurchases ~~these~~that ~~programs~~can ~~and~~be ~~individual~~made ~~claim~~by ~~maximums~~us to $2.0 Wemillion ~~estimate~~per ~~our~~fiscal ~~accrued liability~~year ~~for~~if the ~~ultimate~~total ~~costs~~senior debt to ~~close~~EBITDA ~~known~~ratio ~~claims,~~is ~~including~~equal ~~claims~~to ~~incurred~~or ~~but~~more ~~not yet~~than ~~reported~~1.00 to us1.00. Also, aswe must maintain a margin of ~~the~~at ~~balance~~least ~~sheet~~.25 ~~date~~to 1.00 ~~Our~~with ~~recorded~~each ~~estimated~~of ~~liability~~our ~~for self-insurance~~financial iscovenants ~~based~~in onorder ~~the~~to ~~insurance~~declare ~~companies~~dividends ~~incurred~~or ~~loss~~re-acquire ~~estimates~~stock ~~and management’s~~through ~~judgment~~share repurchases. As of April 1, ~~including~~2007, ~~assumptions~~we ~~and~~had ~~factors~~no ~~related~~outstanding toborrowings ~~the~~under ~~frequency~~this ~~and~~facility ~~severity~~and had placed letters of ~~claims,~~credit ~~our~~of ~~claims~~$3.5 ~~development~~million ~~history~~under ~~and~~the ~~our~~facility ~~claims~~with ~~settlement~~$21.5 ~~practice~~million available for additional borrowing.

The ~~assessment~~facility requires ofus ~~loss~~to ~~contingencies~~ maintain a minimum fixed charge coverage ratio and ~~self-insurance~~tangible ~~reserves~~net isworth alevel ~~highly~~and ~~subjective~~not ~~process~~exceed ~~that~~certain ~~requires~~thresholds ~~judgments~~for ~~about future~~total ~~events.~~funded ~~Contingencies~~debt ~~are~~to ~~reviewed~~EBITDA atand ~~least~~total ~~quarterly~~senior debt to ~~determine~~EBITDA ratios. EBITDA is defined in the ~~adequacy~~facility ofas “(the) Consolidated Entities’ net income for such period, plus (a) without duplication the ~~accruals~~sum of (i) interest expense, (ii) federal and ~~related~~state ~~financial~~income ~~statement~~taxes, ~~disclosure.~~(iii) depreciation ~~The~~and ~~ultimate~~amortization ~~settlement~~expenses, (iv) start-up costs associated with the opening of ~~loss~~new restaurants, (v) one-time prepayment fees associated with payment in full of all Indebtedness of Borrower that is pre-paid at the Closing Date with proceeds from the 3-Year Loan, (vi) non-cash impairment ~~contingencies~~expenses associated with write down of assets, and ~~self~~(vii) non-~~insurance~~cash ~~reserves~~stock-based compensation expenses; minus (b) without duplication, extraordinary gains, in each case as charged against (or added to, as the case may ~~differ~~be) ~~significantly~~revenues ~~from~~to ~~amounts~~arrive at net income for such period, all as determined in accordance with GAAP.” As of April 1, 2007, we ~~have accrued~~were in ~~our~~compliance with all debt covenants and financial ~~statements~~ratios contained in the facility.

~~Useful~~27 ~~lives of property and equipment~~

Land,Table buildings, leasehold improvements and equipment are recorded at cost less accumulated depreciation. These assets are depreciated using the straight-line method over the estimated useful lives of the assets or the shorter of their useful life or lease term for leasehold improvements. These estimates may produce materially different amounts of reported depreciation and amortization expense if different assumptions were used. As discussed further below, these judgments may also impact our need to recognize an impairment charge on the carrying amount of these assets as the cash flows associated with the assets are realized. Contents

~~Valuation~~In addition, we have $15.0 million of ~~long-lived~~principal amount outstanding 5.5% convertible notes due December ~~assets~~ 2007. The notes are convertible at the option of the holder at any time prior to maturity into shares of common stock at a conversion price of $10.66 per share, subject to adjustment upon certain events. At any time on or after December 15, 2005, we may redeem some or all of the notes at par plus accrued and unpaid interest. There are no assurances that the convertible debt holders will convert their debt into common shares prior to December 2007, nor are there any assurances that the stock price will rise, allowing us to automatically convert the debt. If the debt is not converted, or repaid as part of a sale transaction discussed below, we expect to either pay the debt off with available cash, proceeds from borrowings under our facility, refinanced term debt, or by a combination of these sources. If we seek additional financing there are no assurances that we will be able to obtain new financing at that time, and the terms of any new debt may not be as favorable as our existing financing arrangements.

WeIn ~~evaluate~~January ~~the~~2006, ~~carrying~~our ~~value~~Board of ~~long-lived~~ ~~assets~~Directors ~~including~~approved ~~property,~~and ~~equipment~~announced ~~and~~a ~~related~~plan ~~identifiable~~to ~~intangible~~use ~~assets~~up to $5 million to ~~quarterly~~repurchase inour ~~accordance~~common ~~with~~stock ~~SFAS~~from Notime to time over the next two years. ~~144~~Through April 1, ~~“Accounting~~2007, ~~for~~we ~~the~~purchased ~~Impairment~~191,480 ~~or Disposal~~shares of ~~Long-Lived~~common ~~Assets~~stock for $1.”3 ~~Under~~million ~~SFAS~~under Nothis plan. ~~144,~~No anpurchases ~~assessment~~occurred isin ~~made~~the ~~to determine~~quarter ifended ~~the~~April 1, ~~sum~~2007. ofPurchases under the ~~expected~~program ~~future~~may ~~undiscounted~~be ~~cash~~made ~~flows~~in ~~from~~ the ~~use~~open ofmarket or in private transactions. Purchases under the ~~assets~~ ~~and~~program ~~eventual~~depend, ~~disposition~~among isother ~~less~~factors, ~~than~~on the ~~carrying~~prevailing ~~value.~~stock Ifprice, ~~the~~market ~~sum~~conditions, oflimitations ~~the~~under debt agreements, alternative investment opportunities and are expected ~~undiscounted~~to be funded primarily with available cash ~~flows~~balances and operating cash flow. There is ~~less~~no ~~than~~minimum or maximum number of shares to be repurchased under the ~~carrying~~program. ~~value,~~The anrepurchased ~~impairment~~shares ~~loss~~will isbe held in treasury and used ~~recognized~~for ~~based~~issuance under our equity incentive plans. We have never declared or paid dividends on ~~fair~~our ~~value~~common stock and currently have no plans to do so.

We ~~separately~~closed ~~evaluate~~three ~~each individual~~restaurants in May 2006 and closed another restaurant ~~for~~in ~~impairment~~January 2007. ~~Generally,~~We aresolved ~~restaurant~~our islease ~~not~~obligations ~~evaluated~~with ~~for impairment~~respect ~~until~~to itone ~~has~~location ~~been~~in ~~open~~June 2006 and one in January 2007 through lease terminations at a ~~full~~cost ~~six~~of ~~quarters~~$1.6 asmillion, which was recognized during the ~~initial~~fourth ~~two~~quarter ~~quarters~~of fiscal year 2006. We purchased one of ~~operations~~ ~~are~~the ~~generally~~closed ~~characterized~~locations byfrom ~~operating~~the ~~inefficiencies~~owner ~~associated~~for ~~with start-up~~$3.2 ~~operations~~million and we subsequently sold the property for $2.6 ~~However,~~million ifin ~~business~~November ~~trends~~2006. We are ~~materially~~still ~~down~~paying orrent ~~there~~for ~~is a~~the ~~permanent~~other ~~competitive~~closed ~~intrusion~~location, atwhich anwe ~~underperforming~~expect ~~new~~to ~~restaurant~~sublease. Ultimately, we ~~consider~~believe ~~four consecutive~~that ~~quarters~~the ofnet ~~negative~~ cash ~~flow~~cost orwill ~~losses~~be toapproximately ~~indicate~~$3 ato ~~potential~~$4 ~~for~~million ~~an individual~~to ~~restaurant~~exit toall befour ~~impaired~~locations. WeNo ~~estimate~~decisions have been made regarding the ~~future~~closure ~~cash~~of ~~flows~~any ~~for~~further ~~such~~locations. The ~~potentially~~ultimate ~~impaired~~decision on whether or not to close additional restaurants ~~utilizing~~will ~~such~~depend ~~factors~~on asvarious ~~restaurant~~factors ~~sales~~including, ~~trends~~without limitation, ~~local~~reaching mutually acceptable closure or lease concession arrangements with the landlords; assessing the alternatives of ~~conditions,~~operating ~~demographics~~or ~~and~~subleasing ~~competition,~~to ~~management~~third ~~plans~~parties; ~~and~~analyzing ~~initiatives~~the improvement or further deterioration in revenues or profitability; and reviewing various other ~~factors~~ ~~deemed~~financial, ~~appropriate~~market, inand ~~the~~operational ~~circumstances~~considerations.

WeDuring ~~evaluate~~the ~~impairment~~first ofthree ~~goodwill and~~quarters ~~other~~of ~~unidentifiable~~fiscal ~~intangible~~2007 ~~assets~~and inall ~~accordance~~of ~~with~~fiscal ~~SFAS~~2006, ~~No.~~we ~~142~~did ~~“Goodwill and~~not ~~Other~~incur ~~Intangible~~any ~~Assets.”~~significant ~~Under~~costs ~~the~~related ~~provisions~~to ofpredecessor ~~SFAS~~company Nomatters. During ~~142,~~fiscal we2005 ~~are~~and ~~required to~~fiscal ~~assess~~2004, ~~impairment~~we atexpended ~~least~~approximately ~~annually~~$2.2 bymillion ~~means~~for ofsettlements aand ~~fair value~~on-~~based~~going ~~test.~~legal Atcosts ~~June~~related ~~27, 2004,~~to wethe ~~evaluated~~predecessor ~~our~~company ~~goodwill~~matters. ~~and~~We ~~determined~~believe that such costs in the ~~goodwill~~future ~~was~~will not ~~impaired~~be significant. ~~The~~For additional ~~determination~~information ofregarding ~~fair~~our ~~value~~commitments ~~requires~~and uscontingencies, toincluding ~~make~~our ~~certain~~payments ~~assumptions~~associated ~~and~~with ~~estimates related to~~ our ~~business~~predecessor ~~and~~company isactivities, ~~highly~~please ~~subjective.~~refer ~~Actual~~to ~~amounts~~the ~~realized~~information ~~through~~provided ~~operations~~under ~~or upon~~Note ~~disposition~~9 of“Commitments ~~related~~and ~~assets~~Contingencies”, ~~may~~to ~~differ~~the ~~significantly~~accompanying unaudited ~~from~~consolidated ~~our~~financial ~~estimate~~statements.

35We believe our cash flow from operations, together with funds available under our $25.0 million credit facility (under which we have $21.5 million available as of April 1, 2007) will be sufficient to fund our operations, debt repayment, share repurchases, expansion and any additional potential restaurant closure costs at least through the the next twelve months. However, changes in our operating plans, acceleration of our expansion plans, lower than anticipated sales, increased expenses or other events, including those described previously under “Forward Looking Statements” and in “Part II, Item 1A. Risk Factors” may cause us to seek additional debt or equity financing on an accelerated basis. Additional financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth plans and our financial condition and results of operations. Any additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, may involve significant cash payment obligations and covenants and/or financial ratios that could restrict our ability to operate or grow our business.

~~Leases~~ 28

TheTable Company leases most of its properties including its corporate office. Leases are accounted for under the provisions of SFAS No. 13 and SFAS No. 98, both entitled “Accounting for Leases”, as well as other subsequent amendments and authoritative literature. The Company uses the same lease term for determining capital versus operating lease classifications and for calculating straight-line rent expense. The lease term is a minimum of the non-cancelable period but may include option periods if the Company would incur an economic penalty associated with the cancellation of the lease. Lease incentive payments (“tenant improvement allowances”) received from landlords are recorded as deferred rent liabilities and are amortized on a straight-line basis over the lease term as a reduction in rent. Contents

~~The~~On ~~Company~~January 11, ~~also~~2007, ~~estimates~~we ~~future~~announced that a Special Committee of our Board of Directors (“special ~~rent~~committee”) ~~expenses~~had ~~where~~entered ~~the~~into ~~future~~a ~~increases~~letter ~~include~~of ~~escalation~~intent ~~clauses~~with ~~based~~Kinderhook onIndustries, ~~the~~LLC ~~lesser~~to sell all of our assets (other than certain tax assets) to a ~~specified~~new ~~percentage~~entity ~~increase~~to be formed by Kinderhook. On March 1, 2007, we announced that the letter of intent expired pursuant to its terms and that the ~~change~~special incommittee anwas ~~index~~continuing to pursue a sale of the Company and that ~~includes~~it had received indications of interest from a ~~leverage~~number ~~factor~~of potential purchasers. ~~These~~ ~~future~~There ~~estimated~~can ~~rent~~be ~~expenses~~no ~~are~~assurance ~~used~~that toany ~~calculate~~transaction agreement ~~straight-line~~will ~~rent~~be ~~expense~~reached or consummated.

~~The~~Contractual ~~Company~~obligations periodically enters into sale/leaseback transactions with unrelated third parties in connection with the construction of new restaurants. Such transactions qualify as sales under SFAS No. 66, “Sales of Real Estate” because they include a normal leaseback, adequate initial and ~~continuing~~commitments investment by the buyer/lessor and the transfer of all risks and rewards of ownership to the buyer/lessor. The Company has not incurred gains or losses in connection with its sale/leaseback transactions.

~~Valuation~~Payments, including interest, due by period as of ~~deferred~~April 1, ~~tax assets~~ 2007 (in thousands).

We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the carrying value for financial reporting purposes and the tax basis of assets and liabilities in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recorded using the enacted tax rates expected to apply to taxable income in the years in which such differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities, resulting from a change in tax rates, is recognized as a component of income tax expense (benefit) in the period that such change occurs. Net operating loss and other credit carryforwards, including FICA tip tax credits, are recorded as deferred tax assets. A valuation allowance is recorded for the tax benefit of the deferred tax assets not expected to be utilized based on projected future taxable income. As of April 3, 2005, we had a net deferred tax asset of $29.0 million. As a result of our improved profitability in recent years and our estimates of projected future taxable income, we believe that it is more likely than not that we will be able to realize these net deferred tax assets. As of April 3, 2005, we had federal net operating loss carryforwards of approximately $41.9 million, expiring at various dates through 2020 and unused FICA tip tax credits totaling $7.2 million, expiring at various dates through 2024.


Contractual obligations	Total		One year and less		Two to three years		Four to five years		After five years
Operating leases	$	179,820	$	15,758	$	31,948	$	29,770	$	102,344
Long-term debt		15,859		15,859		—		—		—
Letters of credit		3,481		3,481		—		—		—
Royalties		20,709		370		783		847		18,709

	$	219,869	$	35,468	$	32,731	$	30,617	$	121,053

~~Income~~We ~~tax~~are ~~provision~~ obligated under non-cancelable operating leases for our headquarters and all but one of our restaurants. The fixed terms of the restaurant leases range up to 20 years and generally contain multiple renewal options for various periods ranging from five to 20 years. The table, as presented above, includes only the non-cancelable portion of our leases as we are only obligated for that period. Our restaurant leases also contain provisions that require additional percentage rent payments based on achieving threshold sales performance and the payment of common area maintenance charges and real estate taxes. Amounts in this table do not reflect any of these additional amounts.

~~Certain~~Our ~~components~~debt is comprised of ~~our~~a ~~provision~~$15.0 million issuance ~~for~~of ~~income~~5.5% ~~taxes~~convertible ~~are~~notes ~~estimated~~due December 2007. ~~These~~The ~~estimates~~notes ~~include~~are convertible at the option of the holder at any time prior to maturity into shares of common stock, ~~among~~at ~~other~~a ~~items~~conversion price of $10.66 per share, ~~effective~~subject to adjustment upon certain events. At ~~rates~~any ~~for~~time ~~local~~on ~~and~~or ~~state~~after ~~taxes~~December 15, ~~allowable~~2005, ~~tax~~we ~~credits~~may ~~for~~redeem ~~items~~some ~~such~~or asall ~~FICA~~of ~~taxes~~the ~~paid~~notes at par plus accrued and unpaid interest. There are no assurances that the convertible debt holders will convert their debt into common shares prior to December 2007, onnor ~~reported~~are ~~tip~~there ~~income~~any assurances that the stock price will rise, ~~estimates~~allowing ~~related~~us to ~~depreciation~~automatically ~~and~~convert ~~amortization~~the ~~allowable~~debt. If the debt is not converted, or repaid as part of a sale transaction, it may be necessary for us to seek additional financing when this debt ~~tax~~matures. ~~purposes~~If we seek additional financing there are no assurances that we will be able to do so at that time, and the ~~tax~~terms ~~deductibility~~ of ~~certain~~the ~~other~~debt ~~items~~may not be as favorable as our existing debt.

~~Our~~We ~~estimates~~have ~~are~~letters ~~based~~of oncredit ~~the~~outstanding ~~best available~~to ~~information~~guarantee atperformance ~~the~~under ~~time~~insurance ~~that~~contracts weand ~~prepare~~to ~~the~~secure ~~provision.~~other ~~We generally file our annual income tax returns many months after our fiscal year-end~~arrangements. ~~Income~~The ~~tax~~letters ~~returns~~of credit are ~~subject~~irrevocable ~~to audit by federal, state~~ and ~~local~~have ~~governments,~~one-year ~~generally~~renewable ~~years after the returns are filed~~terms. ~~These returns could be subject to material adjustments or differing interpretations of the tax laws.~~

36We are obligated to pay a licensing fee for the use of the “Champ’s” and “Champps” service marks, trademarks and trade names. Although this agreement runs in perpetuity as long as we are using the names, under “royalties” in the schedule above we have presented only 30 years of our obligation.

~~ITEM~~29 ~~3. Quantitative and Qualitative Disclosures about Market Risk~~

WeTable areof exposed to market risk primarily from changes in interest rates and changes in commodity prices. Contents

AtCritical ~~April~~Accounting 3,Policies 2005, we were exposed to interest rate fluctuations on approximately $1.0 million of notes payable carrying variable interest rates. A hypothetical 100 basis point increase in interest rates for these notes payable would increase our annual interest expense by approximately $10,000.

~~Many~~The preparation of ~~the ingredients purchased for use in the products sold to~~ our ~~guests~~consolidated ~~are~~financial ~~subject~~statements torequires ~~unpredictable~~us ~~price volatility outside of our control. We try~~ to ~~manage~~make ~~this~~estimates ~~risk~~and byassumptions ~~entering~~that ~~into~~affect ~~selective short-term agreements for~~ the ~~products~~reported weamounts ~~use most extensively. Also, we believe that our commodity cost risk is diversified as many of our food products are available from several sources~~ and wedisclosures ~~have~~in the ~~ability~~consolidated tofinancial ~~modify~~statements. ~~product~~The ~~recipes~~estimates ~~or vary our menu items offered.~~and ~~Historically,~~assumptions weare ~~have~~evaluated ~~also~~on ~~been~~an ~~able~~on-going tobasis ~~increase certain menu prices in response to food commodity price increases~~ and ~~believe~~are ~~the~~based ~~opportunity~~on ~~may~~historical ~~exist~~experience ~~in the future. To compensate for a hypothetical price increase of 10% for food~~ and ~~beverages,~~on wevarious ~~would~~other ~~need to~~factors ~~increase~~that ~~prices~~are ~~charged~~believed ~~to our guests~~ by anus ~~average of approximately 2.8%. We have not used financial instruments~~ to ~~hedge~~be ~~our~~reasonable ~~commodity~~under ~~product~~the ~~prices~~circumstances.

~~ITEM~~Items 4.significantly ~~Controls~~impacted by estimates and ~~Procedures~~judgments include, but are not limited to, loss contingencies generally related to litigation and assessments, self-insured risks relating to workers’ compensation, general liability and medical claims, the useful lives and recoverability of our long-lived assets such as property and equipment, goodwill and other intangibles, lease accounting, fair value of stock based compensation including estimating forfeitures, valuation of deferred tax assets and the recording of income tax expense.

~~Under~~Loss ~~the~~contingencies ~~supervision~~ and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13aself-~~15(e)~~insurance ~~and~~reserves 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of April 3, 2005, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of April 3, 2005 for the reasons discussed in the following paragraph.

~~Subsequent~~We tomaintain ~~the~~accrued ~~period~~liabilities ~~covered by this report,~~ and ~~following~~reserves arelating ~~January~~to ~~2005~~the ~~review~~resolution of certain ~~the~~contingent ~~accounting~~obligations ~~adjustments~~and ~~cited~~reserves ~~in several~~for ~~recent Form 8~~self-Kinsurance. ~~filings~~Significant bycontingencies ~~other~~may ~~restaurant~~include ~~companies we determined that one of the adjustments in~~ those ~~filings~~related ~~relating~~ to ~~the~~litigation ~~treatment of lease accounting~~ and ~~leasehold~~ ~~depreciation~~state ~~applied~~tax toassessments. ~~us,~~We ~~and~~account ~~that~~for itcontingent ~~was~~obligations ~~appropriate~~in toaccordance ~~adjust~~with ~~certain~~Statement of ~~our~~Financial Accounting ~~prior~~Standards ~~financial~~(“SFAS”) ~~statements~~No. 5, As“Accounting afor ~~result~~Contingencies,” onas ~~January~~interpreted ~~26,~~by ~~2005,~~FASB ~~the~~Interpretation ~~Audit~~No. 14: ~~Committee~~Reasonable ofEstimation ~~our Board~~ of ~~Directors concluded that~~ the ~~financial~~Amount ~~statements~~of ~~contained~~a inLoss ~~the~~which ~~Company’s prior~~requires ~~filings~~that ~~with~~we ~~the~~assess ~~Securities~~each ~~and~~contingency ~~Exchange~~to ~~Commission,~~determine ~~including the Company’s~~estimates ~~10-K~~of ~~for~~ the ~~period~~degree ~~ending~~of ~~June~~probability ~~27,~~and ~~2004,~~range ~~and~~of ~~10-Q~~possible ~~for~~settlement. ~~the~~Contingencies ~~period~~which ~~ending~~are ~~October~~deemed 3,to ~~2004, could~~be noprobable ~~longer~~and bewhere ~~relied~~the ~~upon.~~amount ~~The~~of ~~Restatement~~such settlement is ~~further~~reasonably ~~discussed~~estimable inare ~~the~~accrued ~~section entitled~~for ~~“Restatement”~~ in ~~Management’s~~our ~~Discussion~~financial ~~and~~statements. ~~Analysis~~If ofonly ~~Financial Condition~~a ~~and~~range ~~Results~~ of ~~Operations~~loss ~~included~~can inbe determined, ~~Item~~we 3accrue ofto ~~this~~the ~~Form~~best ~~10-Q~~estimate ~~and~~within inthat ~~Note~~range; ~~3, “Restatement~~if none of ~~Consolidated~~the ~~Financial~~estimates ~~Statements~~within ~~and~~that ~~Summary~~range ofis ~~Significant Accounting~~better ~~Policies”~~than ~~under~~another, ~~Notes~~we accrue to ~~Consolidated~~the ~~Financial~~low ~~Statements~~end ~~included in Item 1, “Financial Statements”~~ of ~~this~~the ~~Form 10-Q~~range.

~~Our~~We ~~management~~are ~~has~~self-insured ~~concluded~~for ~~that there~~a ~~were~~significant ~~material~~portion ~~weaknesses~~of in our ~~internal~~employee ~~controls~~health asbenefits, ofworkers’ ~~the~~compensation ~~end~~and ofgeneral ~~the~~liability ~~third~~programs. ~~quarter of~~However, ~~2005~~we ~~due~~maintain tostop-loss ~~the~~coverage ~~previously~~with ~~described~~third ~~material~~party ~~weakness~~insurers ~~involving~~to ~~lease~~limit ~~accounting and~~our ~~also~~individual ~~due~~claim ~~to the inadequate accounting~~ and ~~financial~~total ~~reporting~~exposure ~~staffing~~under ~~including insufficent~~those ~~senior level accounting employees~~programs. ~~This~~We ~~situation~~estimate ~~resulted in~~ our ~~conclusion~~accrued ~~that~~liability wefor ~~had~~the anultimate ~~ineffective control~~costs ~~environment due~~ to ~~our~~close ~~inadequate~~known ~~staffing~~claims, ~~lack~~including ofclaims ~~segregation~~incurred ofbut ~~duties~~not inyet ~~the accounting~~reported ~~department~~to ~~and~~us ~~lack~~as of ~~timely~~the ~~review~~balance ~~and~~sheet ~~analysis~~date. ofOur ~~certain transactions and the extraordinary events~~ recorded ~~in our current quarter given our resource constraints.~~estimated ~~This~~liability ~~situation~~for ~~resulted~~self-insurance ~~primarily~~is ~~from~~based ~~the~~on ~~extended period of time that~~ the ~~Company~~insurance ~~has not~~companies ~~had~~incurred aloss ~~Controller.~~estimates Aand ~~material~~management’s ~~weakness is a control deficiency~~judgment, orincluding ~~combination~~assumptions ~~of control~~and ~~deficiencies,~~factors ~~that~~related ~~results~~to inthe ~~more~~frequency ~~than~~and aseverity ~~remote likelihood that a material misstatement~~ of ~~the~~claims, ~~annual~~our orclaims ~~interim~~development ~~financial~~history ~~statements~~and ~~will~~our ~~not be prevented or~~claims ~~detected~~settlement practices.

~~During~~The ~~the~~assessment ~~quarter~~of ~~ended~~loss ~~April~~contingencies ~~3, 2005, we effected a material change in our internal control over financial reporting (as defined in Rules 13a-15(f)~~ and ~~15d~~self-~~15(f)~~insurance ~~under~~reserves ~~the~~is ~~Exchange~~a ~~Act)~~highly tosubjective ~~remediate~~process ~~internal~~that requires ~~control~~judgments ~~deficiencies~~about infuture ~~our~~events. ~~lease~~Contingencies ~~accounting~~are ~~policies~~reviewed ~~and~~at ~~practices~~least ~~that~~quarterly ~~lead~~ to ~~the restatement~~determine ~~discussed herein. To remediate~~ the ~~material~~adequacy ~~weakness~~of in the ~~Company’s internal~~accruals ~~control~~and ~~over~~related financial ~~reporting~~statement wedisclosure. ~~have~~The ~~implemented~~ultimate ~~additional~~settlement ~~review procedures over the selection and monitoring~~ of ~~appropriate~~loss ~~assumptions~~contingencies and ~~factors~~self-insurance ~~affecting~~reserves ~~lease accounting~~may ~~and leasehold depreciation practices. To remediate our weakness relative to~~differ ~~inadequate~~significantly ~~staffing,~~from amounts we have ~~made~~accrued ~~an employment offer to a Controller candidate and the offer has been accepted. We anticipate the new Controller will start~~ in ~~June~~our ~~2005.~~consolidated ~~No other~~financial ~~material weaknesses have been identified as a result of management’s assessment~~statements.

37Useful lives of property and equipment

~~PART~~Land, IIbuildings, —leasehold ~~OTHER~~improvements ~~INFORMATION~~and equipment are recorded at cost less accumulated depreciation. These assets are depreciated using the straight-line method over the shorter of the estimated useful lives of the assets or reasonably assured lease term for leasehold improvements. These estimates may produce materially different amounts of reported depreciation and amortization expense if different assumptions were used. As discussed further below, these judgments may also impact our need to recognize an impairment charge on the carrying amount of these assets as the cash flows associated with the assets are realized. The annualized effect of a one year increase in the estimated useful lives of our property and equipment would decrease our depreciation expense by approximately $0.9 million. The effect of a one year decrease in the estimated useful lives would increase our depreciation expense by approximately $1.1 million.

~~ITEM~~30 ~~1. Legal Proceedings~~

See “NoteTable 5. Commitments and Contingencies –Litigation” in “Notes to Unaudited Consolidated Financial Statements” for a discussion related to the payment and final settlement relative to the indemnification of DAKA. Contents

~~ITEM~~Valuation ~~2. Unregistered Sales~~ of ~~Equity~~long-lived ~~Securities~~assets ~~and Use of Proceeds~~

~~None~~We evaluate the carrying value of long-lived assets including property, equipment and related identifiable intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Under SFAS No. 144, an assessment is made to determine if the sum of the expected future undiscounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the sum of the expected undiscounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value.

~~ITEM~~We 3separately evaluate each individual restaurant for impairment. ~~Defaults~~Generally, ~~upon~~a ~~Senior~~restaurant ~~Securities~~is not evaluated for impairment until it has been open a full six quarters, as the initial two quarters of operations are generally characterized by operating inefficiencies associated with start-up operations. However, we may review a restaurant sooner for impairment if it is operating significantly below our expectations or other factors indicate that impairment could be likely. We consider a total of four trailing quarters of negative cash flow or losses to be an indication that an individual restaurant may be impaired. In evaluating whether an impairment charge is appropriate, we estimate the future cash flows for such potentially impaired restaurants utilizing such factors as restaurant sales trends, local conditions, demographics and competition, management plans and initiatives and other factors deemed appropriate in the circumstances.

~~Not~~During ~~applicable~~the second quarter of fiscal 2007, we recorded an asset impairment charge of $0.3 million covering one restaurant. During the third quarters of fiscal 2006 and 2005, we recorded asset impairment charges of $4.3 million covering six restaurants and $6.6 million covering four restaurants, respectively, part of which was classified as discontinued operations. Additionally, six restaurants open for at least six quarters had cash flows which would not cover any of the restaurants’ long-term asset values if such cash flows continue for the remainder of the restaurants’ lives. As of April 1, 2007, the long-lived asset value of these six restaurants was $7.0 million. We have not recorded an impairment charge at this time for these restaurants because our management believes certain plans can be implemented to improve the future prospects of those restaurants.

~~ITEM~~We 4evaluate impairment of goodwill and other unidentifiable intangible assets in accordance with SFAS No. 142 ~~Submission~~“Goodwill and Other Intangible Assets.” Under the provisions of ~~Matters~~SFAS No. 142, we are required to assess impairment at least annually by means of a ~~Vote~~fair value-based test. At July 2, 2006, we evaluated our goodwill and determined that the goodwill was not impaired. The determination of ~~Security~~fair ~~Holders~~value requires us to make certain assumptions and estimates related to our business and is highly subjective, and accordingly, actual amounts realized may differ significantly from our estimate.

~~None.~~Leases

~~ITEM~~We 5lease most of our properties including our corporate office. ~~Other~~We ~~Information~~account for our leases under the provisions of SFAS No. 13 and SFAS No. 98, both entitled “Accounting for Leases”, as well as other subsequent amendments and authoritative literature. To classify the lease as either an operating or a capital lease we use the non-cancelable term of the lease if there is no penalty to cancel the lease at the conclusion of the non-cancelable period. If a penalty exists, we use the non-cancelable period plus option(s) in determining the term to use when classifying the lease. A penalty is deemed to occur if we would forego an economic benefit, or suffer an economic detriment by not renewing the lease. This penalty can either be pursuant to the lease provisions or can arise from the retirement of an asset with value. This same lease term is used to calculate straight-line rent and in calculating depreciation expense for our leasehold improvements. We record the total rent payable during the lease term on a straight-line basis over the term of the lease and record the difference between the rent paid and the straight-line rent as a deferred rent liability. Lease incentive payments (“tenant improvement allowances”) received from landlords are recorded as deferred rent liabilities and are amortized on a straight-line basis over the lease term as a reduction in rent. The FASB has announced its intention to review lease accounting standards and future authoritative changes to the methods of accounting for leases could have a material impact on the Company’s reported results of operations and financial position.

~~Not~~31 ~~applicable.~~

ITEMTable 6.of ExhibitsContents

~~(a)~~Stock-based ~~Exhibits~~compensation

~~Exhibit~~We ~~Number~~have ~~Description~~granted stock options and restricted stock awards to certain employees and non-employee directors. Effective at the beginning of fiscal 2006, we account for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123 (Revised), “Accounting for Stock-Based Compensation.” Under the fair value provisions of SFAS No. 123(R), stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period (usually the vesting period). Determining the fair value of stock-based awards at the date requires judgment, including estimating the expected term of stock options, the expected volatility of our stock and expected dividends. In addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

~~10.1~~Valuation ~~Separation~~of ~~Agreement~~deferred ~~for~~tax ~~Donnie~~assets ~~N. Lamb, Chief Operating Officer~~

31We recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the carrying value for financial reporting purposes and the tax basis of assets and liabilities in accordance with SFAS No.1 109, ~~Certification~~“Accounting byfor ~~Michael~~Income PTaxes.” ~~O'Donnell~~Deferred ~~pursuant~~tax assets and liabilities are recorded using the enacted tax rates expected to ~~Rule~~apply ~~13a-14(~~to taxable income in the years in which such differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities, resulting from a~~)/15d-14(~~ change in tax rates, is recognized as a component of income tax expense (benefit) in the period of enactment. Net operating loss and other credit carryforwards, including FICA tip tax credits, are recorded as deferred tax assets. A valuation allowance is recorded for the tax benefit of the deferred tax assets that are not considered more likely than not to be utilized based on projected future taxable income, feasible tax planning strategies and the reversal of temporary taxable differences. As of April 1, 2007, we had net deferred tax assets of $26.6 million. In the first three quarters of fiscal 2007 ended April 1, 2007, we recorded a $7.8 million income tax expense to provide a valuation allowance against our FICA tip tax credit carryforwards we now believe are less than likely to be fully realized over the carryforward period based on current trends of income. We currently believe that it is still more likely than not that we will be able to realize our deferred tax assets related to our net operating loss carryforwards. However, negative evidence such as cumulative net losses over a period of time or continued reductions in the level of operating results may cause us to conclude that it is not likely that we are going to be able to realize all or a portion of our net deferred tax assets and we would record additional valuation allowance accordingly. As of April 1, 2007, we had federal net operating loss carryforwards of approximately $36.5 million, expiring at various dates through 2023 and gross FICA tip credit carryforwards of approximately $12.0 million, expiring at various dates through 2027.

~~31.2~~Income ~~Certification~~tax byprovision ~~Frederick J. Dreibholz pursuant to Rule 13a-14(a)/15d-14(a).~~

~~32.1~~Certain ~~Certification~~components byof ~~Michael~~our Pprovision for income taxes are estimated. ~~O'Donnell~~These ~~pursuant~~estimates include, among other items, effective rates for local and state taxes, allowable tax credits for items such as FICA taxes paid on reported tip income, estimates related to ~~Section~~depreciation ~~906~~and ofamortization allowable for tax purposes, and the ~~Sarbanes-Oxley~~tax ~~Act~~deductibility of ~~2002~~certain other items.

32Our estimates are based on the best available information at the time that we prepare the provision.2 ~~Certification~~We bygenerally ~~Frederick~~file Jour annual income tax returns many months after our fiscal year-end. ~~Dreibholz~~Income ~~pursuant~~tax returns are subject to ~~Section~~audit ~~906~~by offederal, state and local governments, generally years after the ~~Sarbanes-Oxley~~returns ~~Act~~are filed. These returns could be subject to material adjustments or differing interpretations of the ~~2002~~tax laws.

3832

SIGNATURESTable of Contents

~~Pursuant~~New toand ~~the~~Future ~~requirements~~Accounting ofPronouncements ~~the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.~~

~~CHAMPPS~~In ~~ENTERTAINMENT~~June 2005, ~~INC~~the FASB issued SFAS No. 154, ~~(Registrant)~~“Accounting ~~By:~~Changes /and Error Corrections,” which requires entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior period’s~~/Michael~~ P.financial ~~O'Donnell~~statements, ~~Michael~~unless Pthis would be impracticable. ~~O'Donnell~~SFAS ~~Chairman~~No. 154 ofsupersedes ~~the~~Accounting Principles Board Opinion No. 20, ~~President~~“Accounting Changes” ~~and~~(“APB ~~Chief~~20”), ~~Executive~~which ~~Officer~~previously ~~By:~~required /that most voluntary changes in accounting principle be recognized by including in the current period’s/ ~~Frederick~~net Jincome the cumulative effect of changing to the new accounting principle. SFAS ~~Dreibholz~~No. 154 ~~Frederick~~also Jmakes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. ~~Dreibholz~~SFAS ~~Chief~~No. 154 ~~Financial~~applies ~~Officer~~to accounting changes and ~~Treasurer~~error ~~(Principal~~corrections ~~Financial~~that are made in fiscal years beginning after December 15, 2005. The Company adopted SFAS No. 154 in fiscal 2007 and ~~Accounting~~the ~~Officer)~~adoption did not have a material impact on its financial statements.

~~May~~In 13September 2006, ~~2005~~the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material impact on our Condensed Consolidated Financial Statements.

39In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 defines the threshold for recognizing the benefits of tax-return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority, while earlier authoritative literature provided no specific guidance. FIN 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006. While we are still considering the implications of the pronouncement, the Company does not believe the adoption of FIN 48 will have a material impact on its financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 clarifies the definition of fair value, describes methods used to appropriately measure fair value, and expands fair value disclosure requirements. This statement applies under other accounting pronouncements that currently require or permit fair value measurements and is effective as of the beginning of the first fiscal year beginning after November 15, 2007. While we are still considering the implications of the pronouncement, the Company does not believe the adoption of SFAS 157 will have a material impact on its financial statements.

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk primarily from changes in interest rates and changes in commodity prices.

We are subject to interest rate market risk for short-term invested cash and cash equivalents. The principal of such invested funds is not subject to fluctuating value because of their highly liquid short-term nature. As of April 1, 2007, we had $18.7 million of such funds invested in short-term maturing investments.

Many of the ingredients purchased for use in the food and beverages sold to our guests are subject to unpredictable price volatility outside of our control. We try to manage this risk by entering into selective short-term pricing agreements for the products we use extensively. Also, we believe that our commodity cost risk is diversified as many of our food products are available from several sources and we have the ability to modify product recipes or vary our menu items offered. Historically, we have also been able to increase certain menu prices in response to food commodity price increases and believe the opportunity may exist in the future. To compensate for a hypothetical price increase of 10% for food and beverages, we would need to increase prices charged to our guests by an average of approximately 2.9%. We have not used financial instruments to hedge our commodity product prices.

ITEM 4.

Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The effectiveness of our disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate errors or misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. By their nature, any system of internal control, including our system, can provide only reasonable assurance regarding management’s control objectives.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of April 1, 2007, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of April 1, 2007.

Changes in Internal Control Over Financial Reporting

During the fiscal quarter ended April 1, 2007, there was no change in our internal control and procedures over financial reporting (as defined in Rule 13a-15(f) under the Securities and Exchange Act, as amended) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1.

Legal Proceedings

See “Note 7. Commitments and Contingencies–Litigation” in “Notes to Unaudited Consolidated Financial Statements.”

ITEM 1A.

Risk Factors

Information regarding risk factors appears in “Item 2. MD&A – Forward-Looking Statements,” and various risks faced by us are also discussed elsewhere in “Item 2. MD&A” of this Report on Form 10-Q. In addition, risk factors are included in Part I-Item 1 of our Report on Form 10-K for the fiscal year ended July 2, 2006. In addition to these risk factors, the failure to complete a proposed sale with the investment entity (or other party) could likely have an adverse effect on us.

On January 11, 2007, we announced that a Special Committee of our Board of Directors (“special committee”) had entered into a letter of intent with Kinderhook Industries, LLC to sell all of our assets (other than certain tax assets) to a new entity to be formed by Kinderhook. On March 1, 2007, we announced that the letter of intent expired pursuant to its terms and that the special committee was continuing to pursue a sale of the Company and that it had received indications of interest from a number of potential purchasers. There can be no assurance that any transaction agreement will be reached or consummated. We would be subject to several risks as a result of a merger or sale agreement, including the following:

•

If a definitive agreement is not signed and a sale is not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that the sale would be completed;

•

Certain costs related to the sale, including legal, accounting and financial advisory fees, must be paid even if the sale is not completed;

•

Shareholder lawsuits may be filed against us in the event the Company enters into an agreement for a sale transaction; and

•

Our management and employees’ attention may be diverted from day-to-day operations;

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Shares

In January 2006, our Board of Directors approved a plan to use up to $5.0 million to repurchase our common stock from time to time over the next two years. Purchases under the program may be made in the open market or in private transactions. Purchases under the program will depend, among other factors, on the prevailing stock price, market conditions, alternative investment opportunities and are expected to be funded primarily with available cash balances and operating cash flow. There is no minimum or maximum number of shares to be repurchased under the program. The repurchased shares will be held in treasury and used for issuance under our equity incentive plans. No shares were repurchased during the third quarter ended April 1, 2007. As of April 1, 2007, under this authorization we have repurchased a total of 191,480 shares of our common stock for approximately $1.3 million.

ITEM 3.

Defaults upon Senior Securities

Not applicable.

ITEM 4.

Submission of Matters to a Vote of Security Holders

Not applicable.

ITEM 5.

Other Information

Not applicable.

ITEM 6.

Exhibits


Exhibit Number		Description
2.1		Kinderhook Industries, LLC letter of intent to purchase assets of Champps Entertainment, Inc., incorporated herein by reference to the Company’s Current Report on Form 8-K filed January 17, 2007.

31.1		Certification of Michael P. O’Donnell pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

31.2		Certification of David D. Womack pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

32.1		Certification of Michael P. O’Donnell pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

32.2		Certification of David D. Womack pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

SIGNATURES

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


	CHAMPPS ENTERTAINMENT, INC.
	(Registrant)

May 9, 2007	By:	/s/ Michael P. O’Donnell
		Michael P. O’Donnell
		Chairman of the Board, President and Chief Executive Officer
		(Principal Executive Officer)

May 9, 2007	By:	/s/ David D. Womack
		David D. Womack
		Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

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