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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-Q



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

For the quarterly period ended October 1, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------

Commission File Number: 0-25629



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CARROLS CORPORATION

(Exact name of
registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 16-0958146                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                         |  |           
|---------------------------------------- |  | ----------
|968 James Street Syracuse, New York      |  | 13203     
|(Address of principal executive offices) |  | (Zip Code)

Registrants telephone number including area code: (315) 424-0513



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

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

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

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

The number of shares of the registrants common stock (par value $1 per share) outstanding as of November 10, 2006 is 10.



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006



|        |  |                                                                                              |  |     
|------- |  | -------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                              |  | Page
|PART I  |  | FINANCIAL INFORMATION                                                                        |  |     
|        |  |                                                                                             
|Item 1  |  | Consolidated Financial Statements (unaudited):                                               |  |     
|        |  |                                                                                             
|        |  | Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005                   |  | 3   
|        |  |                                                                                             
|        |  | Consolidated Statements of Operations for the Three Months Ended September 30, 2006 and 2005 |  | 4   
|        |  |                                                                                             
|        |  | Consolidated Statements of Operations for the Nine Months Ended September 30, 2006 and 2005  |  | 5   
|        |  |                                                                                             
|        |  | Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2006 and 2005  |  | 6   
|        |  |                                                                                             
|        |  | Notes to Consolidated Financial Statements (unaudited)                                       |  | 7   
|        |  |                                                                                             
|Item 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations        |  | 25  
|        |  |                                                                                             
|Item 3  |  | Quantitative and Qualitative Disclosures About Market Risk                                   |  | 42  
|        |  |                                                                                             
|Item 4  |  | Controls and Procedures                                                                      |  | 42  
|        |  |                                                                                             
|PART II |  | OTHER INFORMATION                                                                            |  |     
|        |  |                                                                                             
|Item 1  |  | Legal Proceedings                                                                            |  | 44  
|        |  |                                                                                             
|Item 1A |  | Risk Factors                                                                                 |  | 44  
|        |  |                                                                                             
|Item 2  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                  |  | 54  
|        |  |                                                                                             
|Item 3  |  | Default Upon Senior Securities                                                               |  | 54  
|        |  |                                                                                             
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                          |  | 54  
|        |  |                                                                                             
|Item 5  |  | Other Information                                                                            |  | 54  
|        |  |                                                                                             
|Item 6  |  | Exhibits                                                                                     |  | 54  



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##### Table of Contents

PART IFINANCIAL INFORMATION

ITEM 1INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except share and per share amounts)

(Unaudited)



|                                                                                                      |  |                   |         |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | -------- | -
|                                                                                                      |  | September 30,2006 |         |   | December 31,2005 |  
|ASSETS                                                                                                |  |                   |         |   |                  |   |          |  
|Current assets:                                                                                       |  |                   |         |   |                  |   |          |  
|Cash and cash equivalents                                                                             |  | $                 | 2,786   |   |                  | $ | 9,331    |  
|Trade and other receivables                                                                           |  |                   | 4,322   |   |                  |   | 3,017    |  
|Inventories                                                                                           |  |                   | 4,712   |   |                  |   | 5,333    |  
|Prepaid rent                                                                                          |  |                   | 5,487   |   |                  |   | 4,476    |  
|Prepaid expenses and other current assets                                                             |  |                   | 5,423   |   |                  |   | 4,635    |  
|Refundable income taxes                                                                               |  |                   |        |   |                  |   | 593      |  
|Deferred income taxes                                                                                 |  |                   | 4,867   |   |                  |   | 4,867    |  
|                                                                                                      |  |                   |         |   |                  |   |          |  
|Total current assets                                                                                  |  |                   | 27,597  |   |                  |   | 32,252   |  
|Property and equipment, net (Note 3)                                                                  |  |                   | 181,268 |   |                  |   | 217,506  |  
|Franchise rights, at cost less accumulated amortization of $55,057 and $52,649, respectively (Note 4) |  |                   | 84,073  |   |                  |   | 86,490   |  
|Goodwill (Note 4)                                                                                     |  |                   | 124,934 |   |                  |   | 124,934  |  
|Intangible assets, net (Note 4)                                                                       |  |                   | 1,249   |   |                  |   | 1,465    |  
|Franchise agreements, at cost less accumulated amortization of $5,478 and $5,208, respectively        |  |                   | 5,693   |   |                  |   | 5,869    |  
|Deferred income taxes                                                                                 |  |                   | 13,120  |   |                  |   | 13,279   |  
|Other assets                                                                                          |  |                   | 15,792  |   |                  |   | 15,150   |  
|                                                                                                      |  |                   |         |   |                  |   |          |  
|Total assets                                                                                          |  | $                 | 453,726 |   |                  | $ | 496,945  |  
|                                                                                                      |  |                   |         |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                 |  |                   |         |   |                  |   |          |  
|Current liabilities:                                                                                  |  |                   |         |   |                  |   |          |  
|Current portion of long-term debt (Note 5)                                                            |  | $                 | 2,499   |   |                  | $ | 2,588    |  
|Accounts payable                                                                                      |  |                   | 18,724  |   |                  |   | 19,022   |  
|Accrued interest                                                                                      |  |                   | 7,544   |   |                  |   | 7,615    |  
|Accrued payroll, related taxes and benefits                                                           |  |                   | 16,507  |   |                  |   | 15,703   |  
|Accrued income taxes payable                                                                          |  |                   | 1,314   |   |                  |   |         |  
|Accrued real estate taxes                                                                             |  |                   | 4,646   |   |                  |   | 3,933    |  
|Other liabilities                                                                                     |  |                   | 12,182  |   |                  |   | 8,832    |  
|                                                                                                      |  |                   |         |   |                  |   |          |  
|Total current liabilities                                                                             |  |                   | 63,416  |   |                  |   | 57,693   |  
|Long-term debt, net of current portion (Note 5)                                                       |  |                   | 366,041 |   |                  |   | 391,108  |  
|Lease financing obligations (Note 9)                                                                  |  |                   | 58,440  |   |                  |   | 110,898  |  
|Deferred incomesale-leaseback of real estate                                                         |  |                   | 31,420  |   |                  |   | 10,660   |  
|Accrued postretirement benefits (Note 8)                                                              |  |                   | 4,519   |   |                  |   | 4,068    |  
|Other liabilities (Note 7)                                                                            |  |                   | 23,654  |   |                  |   | 26,029   |  
|                                                                                                      |  |                   |         |   |                  |   |          |  
|Total liabilities                                                                                     |  |                   | 547,490 |   |                  |   | 600,456  |  
|                                                                                                      |  |                  
|Commitments and contingencies (Note 11)                                                               |  |                   |         |   |                  |   |          |  
|                                                                                                      |  |                  
|Stockholders deficit:                                                                                |  |                   |         |   |                  |   |          |  
|Common stock, par value $1; authorized 1,000 shares, issued and outstanding10 shares                 |  |                   |        |   |                  |   |         |  
|Additional paid-in capital                                                                            |  |                   | (75,948 | ) |                  |   | (75,948  | )
|Accumulated deficit                                                                                   |  |                   | (17,816 | ) |                  |   | (27,563  | )
|                                                                                                      |  |                   |         |   |                  |   |          |  
|Total stockholders deficit                                                                           |  |                   | (93,764 | ) |                  |   | (103,511 | )
|                                                                                                      |  |                   |         |   |                  |   |          |  
|Total liabilities and stockholders deficit                                                           |  | $                 | 453,726 |   |                  | $ | 496,945  |  
|                                                                                                      |  |                   |         |   |                  |   |          |  

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



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(In thousands of dollars)

(Unaudited)



|                                      |  |      |         |   |      |   |        
|------------------------------------- |  | ---- | ------- | - | ---- | - | -------
|                                      |  | 2006 |         |   | 2005
|Revenues:                             |  |      |         |   |      |   |        
|Restaurant sales                      |  | $    | 189,254 |   |      | $ | 180,911
|Franchise royalty revenues and fees   |  |      | 343     |   |      |   | 375    
|                                      |  |      |         |   |      |   |        
|Total revenues                        |  |      | 189,597 |   |      |   | 181,286
|                                      |  |      |         |   |      |   |        
|Costs and expenses:                   |  |      |         |   |      |   |        
|Cost of sales                         |  |      | 53,000  |   |      |   | 52,068 
|Restaurant wages and related expenses |  |      | 55,211  |   |      |   | 51,618 
|Restaurant rent expense               |  |      | 9,004   |   |      |   | 8,054  
|Other restaurant operating expenses   |  |      | 28,577  |   |      |   | 26,662 
|Advertising expense                   |  |      | 6,608   |   |      |   | 6,243  
|General and administrative            |  |      | 11,675  |   |      |   | 9,848  
|Depreciation and amortization         |  |      | 8,397   |   |      |   | 8,202  
|Impairment losses (Note 3)            |  |      | 588     |   |      |   | 574    
|Other income (Note 7)                 |  |      | (1,389  | ) |      |   |       
|                                      |  |      |         |   |      |   |        
|Total operating expenses              |  |      | 171,671 |   |      |   | 163,269
|                                      |  |      |         |   |      |   |        
|Income from operations                |  |      | 17,926  |   |      |   | 18,017 
|Interest expense (Note 9)             |  |      | 10,216  |   |      |   | 10,916 
|                                      |  |      |         |   |      |   |        
|Income before income taxes            |  |      | 7,710   |   |      |   | 7,101  
|Provision for income taxes (Note 6)   |  |      | 2,580   |   |      |   | 1,839  
|                                      |  |      |         |   |      |   |        
|Net income                            |  | $    | 5,130   |   |      | $ | 5,262  
|                                      |  |      |         |   |      |   |        

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



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(In thousands of dollars)

(Unaudited)



|                                                                                                                |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                |  | 2006 |         |   | 2005 |  
|Revenues:                                                                                                       |  |      |         |   |      |   |         |  
|Restaurant sales                                                                                                |  | $    | 561,719 |   |      | $ | 531,442 |  
|Franchise royalty revenues and fees                                                                             |  |      | 1,002   |   |      |   | 1,160   |  
|                                                                                                                |  |      |         |   |      |   |         |  
|Total revenues                                                                                                  |  |      | 562,721 |   |      |   | 532,602 |  
|                                                                                                                |  |      |         |   |      |   |         |  
|Costs and expenses:                                                                                             |  |      |         |   |      |   |         |  
|Cost of sales                                                                                                   |  |      | 158,299 |   |      |   | 154,424 |  
|Restaurant wages and related expenses                                                                           |  |      | 164,400 |   |      |   | 153,740 |  
|Restaurant rent expense                                                                                         |  |      | 27,183  |   |      |   | 25,818  |  
|Other restaurant operating expenses                                                                             |  |      | 82,466  |   |      |   | 75,976  |  
|Advertising expense                                                                                             |  |      | 20,768  |   |      |   | 19,791  |  
|General and administrative (including stock-based compensation expense of $0 and $16,432, respectively (Note 2) |  |      | 35,794  |   |      |   | 47,832  |  
|Depreciation and amortization                                                                                   |  |      | 25,177  |   |      |   | 24,929  |  
|Impairment losses (Note 3)                                                                                      |  |      | 832     |   |      |   | 1,427   |  
|Other income (Note 7)                                                                                           |  |      | (1,389  | ) |      |   |        |  
|                                                                                                                |  |      |         |   |      |   |         |  
|Total operating expenses                                                                                        |  |      | 513,530 |   |      |   | 503,937 |  
|                                                                                                                |  |      |         |   |      |   |         |  
|Income from operations                                                                                          |  |      | 49,191  |   |      |   | 28,665  |  
|Interest expense (Note 9)                                                                                       |  |      | 34,616  |   |      |   | 31,830  |  
|                                                                                                                |  |      |         |   |      |   |         |  
|Income (loss) before income taxes                                                                               |  |      | 14,575  |   |      |   | (3,165  | )
|Provision for income taxes (Note 6)                                                                             |  |      | 4,828   |   |      |   | 2,054   |  
|                                                                                                                |  |      |         |   |      |   |         |  
|Net income (loss)                                                                                               |  | $    | 9,747   |   |      | $ | (5,219  | )
|                                                                                                                |  |      |         |   |      |   |         |  

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



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(In thousands of dollars)

(Unaudited)



|                                                                                           |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                           |  | 2006 |         |   | 2005 |  
|Cash flows provided from (used for) operating activities:                                  |  |      |         |   |      |   |         |  
|Net income (loss)                                                                          |  | $    | 9,747   |   |      | $ | (5,219  | )
|Adjustments to reconcile net income (loss) to net cash provided from operating activities: |  |      |         |   |      |   |         |  
|Gain on disposal of property and equipment                                                 |  |      |        |   |      |   | (585    | )
|Stock-based compensation                                                                   |  |      |        |   |      |   | 16,310  |  
|Other income (Note 7)                                                                      |  |      | (1,389  | ) |      |   |        |  
|Depreciation and amortization                                                              |  |      | 25,177  |   |      |   | 24,929  |  
|Amortization of deferred financing costs                                                   |  |      | 1,098   |   |      |   | 1,154   |  
|Amortization of unearned purchase discounts                                                |  |      | (1,616  | ) |      |   | (1,616  | )
|Amortization of deferred gains from sale-leaseback transactions                            |  |      | (897    | ) |      |   | (377    | )
|Accretion of interest on lease financing obligations                                       |  |      | 281     |   |      |   | 257     |  
|Impairment losses                                                                          |  |      | 832     |   |      |   | 1,427   |  
|Gain on settlements of lease financing obligations                                         |  |      | (120    | ) |      |   |        |  
|Deferred income taxes                                                                      |  |      | 159     |   |      |   | (876    | )
|Decrease in accrued bonus to employees and director                                        |  |      |        |   |      |   | (20,860 | )
|Increase (decrease) in accrued payroll, related taxes and benefits                         |  |      | 835     |   |      |   | (10,506 | )
|Changes in other operating assets and liabilities                                          |  |      | 2,745   |   |      |   | 6,585   |  
|                                                                                           |  |      |         |   |      |   |         |  
|Net cash provided from operating activities                                                |  |      | 36,852  |   |      |   | 10,623  |  
|                                                                                           |  |     
|Cash flows used for investing activities:                                                  |  |      |         |   |      |   |         |  
|Capital expenditures:                                                                      |  |      |         |   |      |   |         |  
|New restaurant development                                                                 |  |      | (20,370 | ) |      |   | (15,497 | )
|Restaurant remodeling                                                                      |  |      | (4,885  | ) |      |   | (2,093  | )
|Other restaurant capital expenditures                                                      |  |      | (5,478  | ) |      |   | (6,188  | )
|Corporate and restaurant information systems                                               |  |      | (1,324  | ) |      |   | (985    | )
|Acquisition of Taco Cabana restaurants (Note 4)                                            |  |      |        |   |      |   | (4,220  | )
|                                                                                           |  |      |         |   |      |   |         |  
|Total capital expenditures                                                                 |  |      | (32,057 | ) |      |   | (28,983 | )
|Properties purchased for sale-leaseback                                                    |  |      | (2,663  | ) |      |   | (275    | )
|Proceeds from sale-leaseback transactions                                                  |  |      | 31,693  |   |      |   | 1,137   |  
|Proceeds from sales of other properties                                                    |  |      |        |   |      |   | 669     |  
|                                                                                           |  |      |         |   |      |   |         |  
|Net cash used for investing activities                                                     |  |      | (3,027  | ) |      |   | (27,452 | )
|                                                                                           |  |     
|Cash flows used for financing activities:                                                  |  |      |         |   |      |   |         |  
|Scheduled principal payments on term loans                                                 |  |      | (1,650  | ) |      |   | (1,650  | )
|Principal pre-payments on term loans                                                       |  |      | (23,200 | ) |      |   | (6,000  | )
|Principal payments on capital leases                                                       |  |      | (305    | ) |      |   | (311    | )
|Financing costs associated with issuance of debt and lease financing obligations           |  |      |        |   |      |   | (304    | )
|Settlement of lease financing obligations                                                  |  |      | (15,215 | ) |      |   | (1,074  | )
|                                                                                           |  |      |         |   |      |   |         |  
|Net cash used for financing activities                                                     |  |      | (40,370 | ) |      |   | (9,339  | )
|Net decrease in cash and cash equivalents                                                  |  |      | (6,545  | ) |      |   | (26,168 | )
|Cash and cash equivalents, beginning of period                                             |  |      | 9,331   |   |      |   | 31,466  |  
|                                                                                           |  |      |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                   |  | $    | 2,786   |   |      | $ | 5,298   |  
|                                                                                           |  |      |         |   |      |   |         |  
|Supplemental disclosures:                                                                  |  |      |         |   |      |   |         |  
|Interest paid on long-term debt                                                            |  | $    | 24,752  |   |      | $ | 19,843  |  
|Interest paid on lease financing obligations                                               |  | $    | 8,665   |   |      | $ | 8,020   |  
|Increase (decrease) in accruals for capital expenditures                                   |  | $    | 601     |   |      | $ | (44     | )
|Income taxes paid (refunded), net                                                          |  | $    | 2,753   |   |      | $ | (2,229  | )
|Capital lease obligations acquired and incurred                                            |  | $    |        |   |      | $ | 987     |  
|Non-cash reduction of assets under lease financing obligations due to lease amendments     |  | $    | 24,707  |   |      | $ |        |  
|Non-cash reduction of lease financing obligations due to lease amendments                  |  | $    | 37,544  |   |      | $ |        |  

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



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars, except share amounts)

1.
Basis of Presentation

Basis of Consolidation.The unaudited consolidated financial statements include the accounts of Carrols
Corporation and its subsidiaries (Carrols or the Company). All intercompany transactions have been eliminated in consolidation. The Company is a wholly-owned subsidiary of Carrols Holdings Corporation (Holdings).

Business Description.At September 30, 2006 the Company operated, as franchisee, 328 quick-service restaurants under the trade
name Burger King in 12 Northeastern, Midwestern and Southeastern states. At September 30, 2006, the Company also owned and operated 73 Pollo Tropical restaurants; 72 in Florida and one Pollo Tropical restaurant in the New York City
metropolitan area in northern New Jersey and franchised a total of 26 Pollo Tropical restaurants; consisting of 22 in Puerto Rico, two in Ecuador and two on college campuses in Florida. At September 30, 2006, the Company owned and operated 141
Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico and one in Georgia.

Fiscal
Year.The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to the fiscal years ended January 1, 2006 and January 2, 2005 will be referred to as the fiscal years ended
December 31, 2005 and 2004, respectively. Similarly, all references herein to the three and nine months ended October 1, 2006 and October 2, 2005 will be referred to as the three and nine months ended September 30, 2006 and
September 30, 2005, respectively. The years ended December 31, 2005 and 2004 contained 52 weeks and 53 weeks, respectively, and the three and nine months ended September 30, 2006 and 2005 each contained 13 and 39 weeks, respectively.

Basis of Presentation.The accompanying unaudited consolidated financial statements for the three and nine months ended
September 30, 2006 and 2005 have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission and do not include certain of the information and the footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation of such financial statements have been included.
The results of operations for the three and nine months ended September 30, 2006 and 2005 are not necessarily indicative of the results to be expected for the full year.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year
ended December 31, 2005 contained in the Companys 2005 Annual Report on Form 10-K. The December 31, 2005 balance sheet data is derived from those audited financial statements.

Use of Estimates.The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Significant items subject to such estimates include: accrued occupancy costs, insurance liabilities, legal obligations, income taxes, evaluation for impairment of goodwill, long-lived assets and
Burger King franchise rights and lease accounting matters. Actual results could differ from those estimates.

2. Stock-Based Compensation

Effective May 3, 2005, Holdings issued an aggregate of 260,600 shares of Holdings common stock in exchange for the cancellation
and termination of an identical number of outstanding options to purchase shares of Holdings common stock. During the second quarter of 2005, Holdings also issued an additional 5,440 shares of Holdings common stock in separate awards. As a
consequence of the exchange, all outstanding stock options were cancelled and terminated. All shares were issued pursuant to stock award agreements, which provided that such shares were fully vested and non-forfeitable upon issuance, but may not be
sold or otherwise disposed of until the earlier of (i) May 3, 2007 or (ii) a change in control (as defined in the stock award agreement). Such agreements also provided that up to an aggregate of 16% of each
recipients shares (for those recipients that were issued 100 or more shares) are subject to repurchase by Holdings (at its option) after December 31, 2006 under certain circumstances described in the award agreements. In addition, such
shares may be subject to repurchase by Holdings (at its option) in the event of a termination of employment before the occurrence of certain events. The Company recorded a pre-tax compensation charge, including applicable payroll taxes, of $16.4
million in the second quarter of 2005 due to these stock awards.

Statement of Financial Accounting Standards (SFAS) 123,
Accounting for Stock-Based Compensation, (SFAS 123) permitted entities to recognize as an expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123, as amended,
allowed entities to continue to apply the provisions of Accounting Principles Board No. 25, Accounting for Stock Issued to Employees, (APB 25) and provide pro forma net income disclosures for employee stock option grants
as if the fair-value-based method defined in SFAS 123 has been applied. The Company elected to continue applying the provisions of APB 25 and to provide the pro forma disclosure provisions of SFAS 123 during 2005.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment (SFAS
123R) which requires companies to measure and recognize compensation expense for all share-based



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

payments at fair value. In addition, the FASB has issued a number of supplements to SFAS 123R to guide the
implementation of this new accounting pronouncement. Share-based payments include stock option grants and other equity-based awards granted under the Companys long-term incentive and stock option plans. SFAS 123R was effective for the Company
beginning January 1, 2006. The Company used the modified prospective transition method, which requires that compensation cost be recognized in the financial statements for all awards granted after the date of adoption as well as for existing
awards for which the requisite service has not been rendered as of the date of adoption (the Existing Awards) and requires that prior periods not be restated. However, as all shares of stock issued in the stock award in the second
quarter of 2005 were fully vested and the Company did not have a stock option plan or any stock options outstanding at December 31, 2005 and September 30, 2006, the Company has not recorded any stock-based compensation expense related to
the adoption of SFAS 123R. The Company is currently evaluating valuation models to be utilized in connection with any future adoption of a stock option or other stock incentive plan.

SFAS 123R also requires an entity to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adopting
SFAS 123R (the APIC Pool). In November 2005, the FASB issued FSP No. FAS 123(R)-3 Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. This FSP provides an elective alternative
simplified method for calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R and reported in the consolidated statements of cash flows. Companies may take up to one year
from the effective date of the FSP to evaluate the available transition alternatives and make a one-time election as to which method to adopt. The Company is currently in the process of evaluating the alternative methods.

The following table presents the Companys pro forma net loss for the nine months ended September 30, 2005 had compensation cost been
determined based upon the fair value of the stock options at the grant date consistent with the fair-value based method of SFAS 123R:



|                                                                                                                                 |  |                                   |         |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | ------- | -
|                                                                                                                                 |  | Nine MonthsEndedSeptember 30,2005 |        
|Net loss, as reported                                                                                                            |  | $                                 | (5,219  | )
|Add: Stock-based compensation expense included in reported net loss, net of related tax effects (1)                              |  |                                   | 13,188  |  
|Deduct: Stock-based compensation expense determined under the fair-value based method for all awards, net of related tax
effects |  |                                   | (12,011 | )
|                                                                                                                                 |  |                                   |         |  
|Pro forma net loss                                                                                                               |  | $                                 | (4,042  | )
|                                                                                                                                 |  |                                   |         |  

---

|(1) | The amount of stock-based compensation included in reported net loss represents stock-based compensation expense for certain stock options requiring variable accounting and, in the
nine months ended September 30, 2005, included the $16.4 million stock award expense, net of tax. The $16.4 million stock award expense, net of tax, has also been included in the determination of compensation expense under the fair-value
based method for the nine months ended September 30, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3. Impairment of Long-Lived Assets

The Company reviews its long-lived assets, principally property and equipment, for impairment at the restaurant level. If an indicator of
impairment exists for any of its assets, an estimate of undiscounted future cash flows from the related long-lived assets is compared to that assets carrying value. If the carrying value is greater than the undiscounted cash flow, the Company
then determines the fair value of the asset. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value.

For the three months and nine months ended September 30, 2006 and 2005, the Company recorded impairment losses on long-lived assets for its segments
as follows:



|            |               |                    |               |                   |   |      |  |      |     |  |   |      
|----------- | ------------- | ------------------ | ------------- | ----------------- | - | ---- |  | ---- | --- |  | - | -----
|            |               | Three Months Ended |               | Nine Months Ended
|            | September 30, |                    | September 30,
|            |               | 2006               |               | 2005              |   | 2006 |  | 2005
|Burger King |               | $                  |              |                   | $ | 574  |  | $    | 224 |  | $ | 1,332
|Taco Cabana |               |                    | 588           |                   |   |     |  |      | 608 |  |   | 95   
|            |               |                    |               |                   |   |      |  |      |     |  |   |      
|            |               | $                  | 588           |                   | $ | 574  |  | $    | 832 |  | $ | 1,427
|            |               |                    |               |                   |   |      |  |      |     |  |   |      



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

4. Goodwill, Franchise Rights and Intangible Assets

Goodwill.Goodwill is reviewed for impairment annually, or more frequently when events and circumstances indicate that the carrying amounts may be
impaired. The Company performs its annual impairment assessment as of December 31 and does not believe circumstances have changed since the last assessment date which would make it necessary to reassess their values. Goodwill balances are
summarized below:



|                                                     |  |               |        |            |   |            |  |       |       |  |   |        
|---------------------------------------------------- |  | ------------- | ------ | ---------- | - | ---------- |  | ----- | ----- |  | - | -------
|                                                     |  | PolloTropical |        | TacoCabana |   | BurgerKing |  | Total
|Goodwill at September 30, 2006 and December 31, 2005 |  | $             | 56,307 |            | $ | 67,177     |  | $     | 1,450 |  | $ | 124,934

Burger King Franchise Rights.Amounts allocated to franchise rights for each Burger King
acquisition are amortized using the straight-line method over the average remaining term of the acquired franchise agreements at January 1, 2002 plus one twenty-year renewal period. The Company assesses the potential impairment of franchise
rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists, an estimate of the aggregate undiscounted future cash flows from the acquired restaurants is compared
to the respective carrying value of franchise rights for each Burger King acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. There were no impairment
charges against franchise rights for the three and nine months ended September 30, 2006. The Company recorded impairment charges related to Burger King franchise rights of $0 and $316 for the three and nine months ended September 30, 2005,
respectively.

Amortization expense related to Burger King franchise rights was $804 and $706 for the three months ended September 30,
2006 and 2005, respectively. Amortization expense related to Burger King franchise rights for the nine months ended September 30, 2006 and 2005 was $2,412 and $2,313, respectively. The estimated amortization expense for the year ending
December 31, 2006 and for each of the five succeeding years is $3,215.

Intangible Assets. In the third quarter of 2005, the
Company acquired four Taco Cabana restaurants from a franchisee. Under Emerging Issues Task Force Issue No. 04-1, Accounting for Preexisting Relationships between the Parties to a Business Combination (EITF 04-1), certain
reacquired rights, including the right to the acquirers trade name, are required to be recognized as intangible assets apart from goodwill. The Company allocated $1.6 million of the purchase price to this intangible asset. The Company recorded
amortization expense relating to the intangible asset of approximately $72 for the three months ended September 31, 2006 and 2005. Amortization for the nine months ended September 30, 2006 and 2005 was $216 and $72, respectively. The
Company expects the annual amortization expense for the year ending December 31, 2006 and for each of five years ending 2007 through 2011 to be $289, $289, $211, $133, $125 and $117, respectively.



|                  |  |                     |       |                         |   |                     |  |                         |       |  |   |    
|----------------- |  | ------------------- | ----- | ----------------------- | - | ------------------- |  | ----------------------- | ----- |  | - | ---
|                  |  | September 30, 2006  |       | December 31, 2005      
|                  |  | GrossCarryingAmount |       | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|Intangible assets |  | $                   | 1,610 |                         | $ | 361                 |  | $                       | 1,610 |  | $ | 145

5. Long-term Debt

The Companys senior credit facility provides for a revolving credit facility under which it may borrow up to $50.0 million (including a sub limit of up to $20.0 million for letters of credit and up to $5.0
million for swingline loans), a $220.0 million term loan B facility and incremental facilities (as defined in the senior credit facility), at its option, of up to $100.0 million, subject to the satisfaction of certain conditions. At
September 30, 2006, $187.0 million principal amount of term loan borrowings were outstanding under the term B facility and no amounts were outstanding under the revolving credit facility. After reserving $14.6 million for letters of credit
guaranteed by the facility, $35.4 million was available for borrowings under the revolving credit facility at September 30, 2006. The Company was in compliance with the covenants under its senior credit facility as of September 30, 2006.

On December 15, 2004, the Company issued $180 million of 9% Senior Subordinated Notes due 2013, which we refer to herein as the
senior subordinated notes or Notes. Restrictive covenants under the senior subordinated notes include limitations with respect to the Companys ability to issue additional debt, incur liens, sell or acquire assets or
businesses, pay dividends and make certain investments.



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

6. Income Taxes

The income tax provision for the three and nine months ended September 30, 2006 and 2005 was comprised of the following:



|                    |  |                                 |       |      |                                |       |      |  |      |       |  |   |        |  
|------------------- |  | ------------------------------- | ----- | ---- | ------------------------------ | ----- | ---- |  | ---- | ----- |  | - | ------ | -
|                    |  | Three Months EndedSeptember 30, |       |      | Nine Months EndedSeptember 30, |      
|                    |  | 2006                            |       | 2005 |                                |       | 2006 |  | 2005 |      
|Current             |  | $                               | 1,072 |      | $                              | 2,475 |      |  | $    | 4,669 |  | $ | 2,930  |  
|Deferred            |  |                                 | 1,508 |      |                                | (636  | )    |  |      | 159   |  |   | (1,353 | )
|Valuation allowance |  |                                 |      |      |                                |      |      |  |      |      |  |   | 477    |  
|                    |  |                                 |       |      |                                |       |      |  |      |       |  |   |        |  
|                    |  | $                               | 2,580 |      | $                              | 1,839 |      |  | $    | 4,828 |  | $ | 2,054  |  
|                    |  |                                 |       |      |                                |       |      |  |      |       |  |   |        |  

The provision for income taxes for the three and nine months ended September 30, 2006 was
derived using an estimated effective annual income tax rate for 2006 of 33.5% as well as the effect of any discrete tax items occurring in those periods.

On May 18, 2006 the state of Texas enacted House Bill 3, which replaces the states current franchise tax with a margin tax. This legislation significantly affects the tax system for most
corporate taxpayers. The margin tax, which is based on revenues less certain allowed deductions, will be accounted for as an income tax, following the provisions of SFAS Statement No. 109, Accounting for Income Taxes. The
Company has reviewed the provisions of this legislation and has concluded that the impact on its deferred taxes, due to the changes in the Texas tax law, is immaterial.

The provision for income taxes for the three and nine months ended September 30, 2005 was derived using an estimated effective annual income tax rate for 2005 of 33.2%, such rate excluding those items where a
discrete tax expense has been recorded. The tax provision for the nine months ended September 30, 2005 also includes $3.8 million for the non-deductible portion of stock-based compensation expense related to stock awards in the second quarter
of 2005 and $0.5 million of income tax expense associated with Ohio state tax legislation enacted in the second quarter of 2005, as discussed below. The discrete tax expense for each of these items was recorded in the second quarter.

On June 30, 2005, tax legislation in the state of Ohio was enacted that significantly restructured the states tax system for most corporate
taxpayers. Included in the legislation is a multi-year phase-out of the state franchise tax and tangible personal property tax. These taxes will be replaced with a Commercial Activity Tax that will be phased-in over a five-year period. In the second
quarter of 2005, the Company recorded a tax expense of $0.5 million related to the impact of this legislation due to the reduction of deferred tax assets associated with the future utilization of Ohio net operating loss carryforwards.

7. Other Liabilities, Long-Term

Other liabilities, long-term, at September 30, 2006 and December 31, 2005 consisted of the following:



|                                    |  |                   |        |                  |   |       
|----------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                    |  | September 30,2006 |        | December 31,2005
|Unearned purchase discounts         |  | $                 | 5,030  |                  | $ | 6,686 
|Accrued occupancy costs             |  |                   | 8,532  |                  |   | 10,674
|Accrued workers compensation costs |  |                   | 4,666  |                  |   | 4,615 
|Other                               |  |                   | 5,426  |                  |   | 4,054 
|                                    |  |                   |        |                  |   |       
|                                    |  | $                 | 23,654 |                  | $ | 26,029
|                                    |  |                   |        |                  |   |       

In 2001, management made the decision to close seven Taco Cabana restaurants in the Phoenix,
Arizona market and discontinue restaurant development underway in that market. At September 30, 2006, the Company had $0.7 million in lease liability reserves for three remaining locations that are included in accrued occupancy costs and $1.1
million of such reserves at December 31, 2005.



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

The following table presents the activity in the exit cost reserve for the nine months
ended September 30, 2006:



|                                           |  |   |       |  
|------------------------------------------ |  | - | ----- | -
|Balance, beginning of period               |  | $ | 1,083 |  
|Changes in estimates of accrued costs, net |  |   | (295  | )
|Payments                                   |  |   | (97   | )
|                                           |  |   |       |  
|Balance, end of period                     |  | $ | 691   |  
|                                           |  |   |       |  

During the third quarter of 2006, the Company reduced its lease liability reserves by $0.3 million
due to an increase in the Companys estimates for future sublease income at such locations and also reduced collection reserves previously established for a $1.1 million note receivable related to the sale of leasehold improvements at two of
the closed locations that were written off as part of the restructuring charge in 2001. This note was paid in full in the fourth quarter of 2006. The effect of these transactions is presented in other income in the Consolidated Statements of
Operations.

8. Postretirement Benefits

The Company provides postretirement medical and life insurance benefits covering substantially all Burger King administrative and restaurant management salaried employees. A December 31 measurement date is used for postretirement
benefits.

The following summarizes the components of net periodic benefit cost:



|                                                |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |     |  
|----------------------------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                                                |  | Three Months EndedSeptember 30, |     |   | Nine Months EndedSeptember 30, |  
|                                                |  | 2006                            |     |   | 2005                           |   |     | 2006 |  |   | 2005 |  
|Components of net periodic benefit cost:        |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |     |  
|Service cost                                    |  | $                               | 118 |   |                                | $ | 149 |      |  | $ | 354  |   |  | $ | 296 |  
|Interest cost                                   |  |                                 | 85  |   |                                |   | 90  |      |  |   | 251  |   |  |   | 205 |  
|Amortization of gains and losses                |  |                                 | 21  |   |                                |   | 35  |      |  |   | 63   |   |  |   | 41  |  
|Amortization of unrecognized prior service cost |  |                                 | (8  | ) |                                |   | (7  | )    |  |   | (22  | ) |  |   | (22 | )
|                                                |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |     |  
|Net periodic postretirement benefit cost        |  | $                               | 216 |   |                                | $ | 267 |      |  | $ | 646  |   |  | $ | 520 |  
|                                                |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |     |  

During the three and nine months ended September 30, 2006, the Company made contributions of
$94 and $174 to its postretirement plan, respectively. The Company expects to make additional contributions in the fourth quarter of 2006.

9. Lease
Financing Obligations

The Company entered into sale-leaseback transactions in various years involving certain restaurant properties
that did not qualify for sale-leaseback accounting and as a result, have been classified as financing transactions under SFAS No. 98, Accounting for Leases (SFAS 98). Under the financing method, the assets remain on the
consolidated balance sheet and proceeds received by the Company from these transactions are recorded as a financing liability. Payments under these leases are applied as payments of imputed interest and deemed principal on the underlying financing
obligations. Purchase options related to 44 properties sold in real estate transactions accounted for under the financing method are held by an entity wholly-owned by the nephew of the Chairman and Chief Executive Officer of the Company and such
entity is deemed a related party for accounting purposes.

During the nine months ended September 30, 2006, the Company exercised its
right of first refusal under the leases for 14 restaurant properties following the exercise of purchase options held by the related party and the Company purchased these 14 restaurant properties from the respective lessors. Concurrently with these
purchases, the properties were sold in qualified sale-leaseback transactions. The Company recorded deferred gains representing the amounts by which the sales prices exceeded the net book value of the underlying assets. Deferred gains are being
amortized as an adjustment to rent expense over the term of the leases, which is generally 20 years.

The Company also amended lease
agreements for 21 restaurant properties in the second quarter of 2006 and amended a master lease agreement covering 13 restaurant properties in the third quarter of 2006, all of which were previously accounted for as lease financing obligations, to
eliminate or otherwise cure the provisions that precluded the original sale-leaseback accounting under SFAS 98. As a result of such amendments, the Company recorded these sale-leaseback transactions as sales, removed all of the respective assets
under lease financing obligations and related liabilities from its consolidated balance sheet and recognized gains from the sales, which were generally deferred and are being amortized as an adjustment to rent expense over the remaining term of the
underlying leases.



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

As a result of the above transactions that occurred during the nine months ended
September 30, 2006, the Company reduced its lease financing obligations by $52.8 million, reduced its assets under lease financing obligations by $36.2 million and recorded deferred gains of $18.3 million. The Company also recorded interest
expense of $2.0 million which represents the net amount by which the purchase price for the restaurant properties sold exceeded the lease financing obligations. Of these amounts, $37.5 million of lease financing obligations and $24.7 million of
assets under lease financing obligations have been reflected as non-cash transactions in the consolidated statements of cash flows for the nine months ended September 30,2006.

10. Business Segment Information

The Company is engaged in the quick-service and quick-casual
restaurant industry, with three restaurant concepts: Burger King operating as a franchisee and Pollo Tropical and Taco Cabana, both Company-owned concepts. The Companys Burger King restaurants are all located in the United States, primarily in
the Northeast, Southeast and Midwest. Pollo Tropical is a quick-casual restaurant chain featuring grilled marinated chicken and Caribbean style made from scratch side dishes. Pollo Tropicals core markets are located in South and
Central Florida. Taco Cabana is a quick-casual restaurant chain featuring fresh Mexican style food, including flame-grilled beef and chicken fajitas, quesadillas and other Tex-Mex dishes. Taco Cabanas core markets are primarily located in
Texas.

The accounting policies of each segment are the same as those described in the summary of significant accounting policies. The
following table includes Segment EBITDA which is the measure of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing their performance. Segment EBITDA is defined as
earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and a director in connection with the Companys December 2004
refinancing, other income and expense and loss on extinguishment of debt.

The Other column includes corporate related items
not allocated to reportable segments, including stock-based compensation expense. Other identifiable assets consist primarily of cash, certain other assets, corporate property and equipment, goodwill and deferred income taxes.



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)



|                                             |  |               |         |            |   |            |  |       |         |              |   |         |  |   |        
|-------------------------------------------- |  | ------------- | ------- | ---------- | - | ---------- |  | ----- | ------- | ------------ | - | ------- |  | - | -------
|Three Months Ended                           |  | PolloTropical |         | TacoCabana |   | BurgerKing |  | Other |         | Consolidated
|September 30, 2006:                          |  |               |         |            |   |            |  |       |         |              |   |         |  |   |        
|Total revenues                               |  | $             | 38,239  |            | $ | 58,062     |  | $     | 93,296  |              | $ |        |  | $ | 189,597
|Cost of sales                                |  |               | 12,178  |            |   | 16,835     |  |       | 23,987  |              |   |        |  |   | 53,000 
|Restaurant wages and related expenses        |  |               | 10,033  |            |   | 16,493     |  |       | 28,685  |              |   |        |  |   | 55,211 
|General and administrative expense (1)       |  |               | 1,883   |            |   | 2,749      |  |       | 7,043   |              |   |        |  |   | 11,675 
|Depreciation and amortization                |  |               | 1,256   |            |   | 2,517      |  |       | 4,297   |              |   | 327     |  |   | 8,397  
|Segment EBITDA                               |  |               | 6,491   |            |   | 9,854      |  |       | 9,177   |              |   |         |  |   |        
|Capital expenditures, including acquisitions |  |               | 5,047   |            |   | 4,795      |  |       | 1,771   |              |   | 322     |  |   | 11,935 
|                                             |  |               |         |            |  
|September 30, 2005:                          |  |               |         |            |   |            |  |       |         |              |   |         |  |   |        
|Total revenues                               |  | $             | 34,907  |            | $ | 53,701     |  | $     | 92,678  |              | $ |        |  | $ | 181,286
|Cost of sales                                |  |               | 11,412  |            |   | 15,483     |  |       | 25,173  |              |   |        |  |   | 52,068 
|Restaurant wages and related expenses        |  |               | 8,327   |            |   | 14,998     |  |       | 28,293  |              |   |        |  |   | 51,618 
|General and administrative expense (1)       |  |               | 1,871   |            |   | 2,582      |  |       | 5,395   |              |   |        |  |   | 9,848  
|Depreciation and amortization                |  |               | 1,340   |            |   | 2,050      |  |       | 4,535   |              |   | 277     |  |   | 8,202  
|Segment EBITDA                               |  |               | 7,534   |            |   | 8,366      |  |       | 10,893  |              |   |         |  |   |        
|Capital expenditures, including acquisitions |  |               | 4,336   |            |   | 8,900      |  |       | 2,466   |              |   | 282     |  |   | 15,984 
|                                             |  |               |         |            |  
|Nine Months Ended                            |  |               |         |            |   |            |  |       |         |             
|September 30, 2006:                          |  |               |         |            |   |            |  |       |         |              |   |         |  |   |        
|Total revenues                               |  | $             | 115,303 |            | $ | 171,983    |  | $     | 275,435 |              | $ |        |  | $ | 562,721
|Cost of sales                                |  |               | 37,151  |            |   | 49,860     |  |       | 71,288  |              |   |         |  |   | 158,299
|Restaurant wages and related expenses        |  |               | 29,235  |            |   | 48,728     |  |       | 86,437  |              |   |        |  |   | 164,400
|General and administrative expense (1)       |  |               | 5,917   |            |   | 8,606      |  |       | 21,271  |              |   |        |  |   | 35,794 
|Depreciation and amortization                |  |               | 4,038   |            |   | 6,580      |  |       | 13,573  |              |   | 986     |  |   | 25,177 
|Segment EBITDA                               |  |               | 21,797  |            |   | 25,669     |  |       | 26,345  |              |   |         |  |   |        
|Capital expenditures, including acquisitions |  |               | 13,050  |            |   | 11,633     |  |       | 6,050   |              |   | 1,324   |  |   | 32,057 
|                                             |  |               |         |            |  
|September 30, 2005:                          |  |               |         |            |   |            |  |       |         |              |   |         |  |   |        
|Total revenues                               |  | $             | 103,954 |            | $ | 156,796    |  | $     | 271,852 |              | $ |        |  | $ | 532,602
|Cost of sales                                |  |               | 34,308  |            |   | 45,516     |  |       | 74,600  |              |   |        |  |   | 154,424
|Restaurant wages and related expenses        |  |               | 24,326  |            |   | 43,997     |  |       | 85,417  |              |   |        |  |   | 153,740
|General and administrative expense (1)       |  |               | 5,535   |            |   | 7,709      |  |       | 18,156  |              |   | 16,432  |  |   | 47,832 
|Depreciation and amortization                |  |               | 3,620   |            |   | 5,995      |  |       | 14,312  |              |   | 1,002   |  |   | 24,929 
|Segment EBITDA                               |  |               | 22,374  |            |   | 23,584     |  |       | 25,495  |              |   |         |  |   |        
|Capital expenditures, including acquisitions |  |               | 10,293  |            |   | 13,467     |  |       | 4,238   |              |   | 985     |  |   | 28,983 
|                                             |  |               |         |            |  
|Identifiable Assets:                         |  |               |         |            |   |            |  |       |         |              |   |         |  |   |        
|At September 30, 2006                        |  | $             | 43,240  |            | $ | 70,627     |  | $     | 158,424 |              | $ | 181,435 |  | $ | 453,726
|At December 31, 2005                         |  |               | 59,761  |            |   | 70,883     |  |       | 182,902 |              |   | 183,399 |  |   | 496,945

---

|(1) | For the Pollo Tropical and Taco Cabana segments, such amounts include general and administrative expenses related directly to each segment. For the Burger King segment such amounts
include general and administrative expenses related directly to the Burger King segment as well as expenses associated with administrative support to all of the Companys segments including executive management, information systems and certain
accounting, legal and other administrative functions.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

A reconciliation of segment EBITDA to consolidated net income (loss) is as follows:



|                                 |  |                                 |        |                                |      |   |        |  |   |        |   |  |   |        |  
|-------------------------------- |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ------ |  | - | ------ | - |  | - | ------ | -
|                                 |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30, |     
|                                 |  | 2006                            |        |                                | 2005 |   | 2006   |  |   | 2005   |  
|Segment EBITDA:                  |  |                                 |        |                                |      |   |        |  |   |        |   |  |   |        |  
|Pollo Tropical                   |  | $                               | 6,491  |                                |      | $ | 7,534  |  | $ | 21,797 |   |  | $ | 22,374 |  
|Taco Cabana                      |  |                                 | 9,854  |                                |      |   | 8,366  |  |   | 25,669 |   |  |   | 23,584 |  
|Burger King                      |  |                                 | 9,177  |                                |      |   | 10,893 |  |   | 26,345 |   |  |   | 25,495 |  
|                                 |  |                                 |        |                                |      |   |        |  |   |        |   |  |   |        |  
|Subtotal                         |  |                                 | 25,522 |                                |      |   | 26,793 |  |   | 73,811 |   |  |   | 71,453 |  
|                                 |  |                                 |        |                               
|Less:                            |  |                                 |        |                                |      |   |        |  |   |        |   |  |   |        |  
|Depreciation and amortization    |  |                                 | 8,397  |                                |      |   | 8,202  |  |   | 25,177 |   |  |   | 24,929 |  
|Impairment losses                |  |                                 | 588    |                                |      |   | 574    |  |   | 832    |   |  |   | 1,427  |  
|Interest expense                 |  |                                 | 10,216 |                                |      |   | 10,916 |  |   | 34,616 |   |  |   | 31,830 |  
|Provision for income taxes       |  |                                 | 2,580  |                                |      |   | 1,839  |  |   | 4,828  |   |  |   | 2,054  |  
|Stock-based compensation expense |  |                                 |       |                                |      |   |       |  |   |       |   |  |   | 16,432 |  
|Other income                     |  |                                 | (1,389 | )                              |      |   |       |  |   | (1,389 | ) |  |   |       |  
|                                 |  |                                 |        |                                |      |   |        |  |   |        |   |  |   |        |  
|Net income (loss)                |  | $                               | 5,130  |                                |      | $ | 5,262  |  | $ | 9,747  |   |  | $ | (5,219 | )
|                                 |  |                                 |        |                                |      |   |        |  |   |        |   |  |   |        |  

11. Commitments and Contingencies

On November 16, 1998, the Equal Employment Opportunity Commission (EEOC) filed suit in the United States District Court for the Northern
District of New York (the Court), under Title VII of the Civil Rights Act of 1964, as amended, against Carrols. The complaint alleged that Carrols engaged in a pattern and practice of unlawful discrimination, harassment and retaliation
against former and current female employees. The EEOC identified approximately 450 individuals ( subsequently increased to 511 individuals) that it believed represented the class of claimants and was seeking monetary and injunctive relief from
Carrols.

On April 20, 2005, the Court issued a decision and order granting Carrols Motion for Summary Judgment that Carrols
filed in January 2004. Subject to possible appeal by the EEOC, the case is dismissed; however the Court noted that it was not ruling on the claims, if any, that individual employees might have against Carrols. The Company does not believe that any
individual claim, if any, would have a material adverse impact on its consolidated financial condition or consolidated results of operations and cash flows.

On February 27, 2006, Carrols filed a motion for summary judgment to dismiss all but between four and 17 of the individual claims. On July 10, 2006, in its response to that motion, the EEOC asserted that,
notwithstanding the Courts dismissal of the case as a class action, the EEOC may still maintain some kind of collective action on behalf of these claimants. Oral argument before the Court was held on October 4, 2006 and the Company is
awaiting the Courts decision on Carrols summary judgment motion. Although the Company believes that the EEOCs continued class litigation argument is without merit, it is not possible to predict the outcome of the pending motion.

On November 30, 2002, four former hourly employees commenced a lawsuit against Carrols in the United States District Court for the
Western District of New York entitled Dawn Seever, et al. v. Carrols Corporation. The lawsuit alleges, in substance, that Carrols violated certain minimum wage laws under the federal Fair Labor Standards Act and related state laws by requiring
employees to work without recording their time and by retaliating against those who complained. The plaintiffs seek damages, costs and injunctive relief. They also seek to notify, and eventually certify, a class consisting of current and former
employees who, since 1998, have worked, or are working, for Carrols. As a result of the July 21, 2005 Status Conference, the parties agreed to withdraw Plaintiffs Motions to certify and for National Discovery, and Defendants Motion
to Disqualify Counsel and related motions, to allow both sides limited additional discovery. Carrols has since filed a Motion for Summary Judgment as to the existing plaintiffs that the Court has under consideration. The plaintiffs have indicated
that they will re-file a Motion to certify and for National Discovery and Carrols intends to oppose such Motion. It is too early to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss. Consequently, it
is not possible to predict what adverse impact, if any, this case could have on the Companys consolidated financial condition or consolidated results of operations and cash flows. Carrols intends to continue to contest this case vigorously.



14



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

The Company is a party to various other litigation matters incidental to the conduct of
business. The Company does not believe that the outcome of any of these other matters will have a material adverse effect on its consolidated financial condition or results of operations and cash flows.

12. Recent Accounting Developments

In March 2006,
the Emerging Issues Task Force (EITF) issued EITF Issue 06-3, How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement. This Issue discussed how entities
are to adopt a policy of presenting sales taxes in the income statement on either a gross or net basis. If taxes are significant, an entity should disclose its policy of presenting taxes and the amounts of taxes. The guidance is effective for
periods beginning after December 15, 2006. The Company presents restaurant sales net of sales taxes and therefore Issue 06-3 will not impact the method for recording these sales taxes in the Companys consolidated financial statements.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 (FIN 48), FIN 48 prescribes a comprehensive recognition threshold and measurement attribute for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 requires that only income tax benefits that meet the more likely than not recognition threshold be recognized or continue to be recognized on the effective
date. Initial derecognition amounts would be reported as a cumulative effect of a change in accounting principle. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact on its consolidated financial statements of adopting FIN 48.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement
Benefits, an amendment of FAS 87, 88, 106 and 132(R) (SFAS 158) which is effective for fiscal years ending after December 15, 2006. SFAS No. 158 requires an employer that sponsors postretirement plans to recognize an
asset or liability on its balance sheet for the overfunded or underfunded status of the plan and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 does not change the amount of
actuarially determined expense that is recorded in the Companys consolidated statement of operations. SFAS 158 also requires an employer to measure plan assets and benefit obligations as of the date of the employers balance sheet, which
is consistent with the Companys historical measurement date. The impact of the adoption of SFAS 158 will be to record a liability and a charge to accumulated other comprehensive income, a component of stockholders deficit, at
December 31, 2006 equal to the difference between the Companys accrued benefit cost and the Companys projected benefit obligation which was $2.0 million at December 31, 2005.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157). This statement defines fair value,
establishes a framework for using fair value to measure assets and liabilities and expands disclosures about fair value measurements. The statement applies whenever other pronouncements require or permit assets or liabilities to be measured at fair
value. SFAS 157 is effective for the Companys fiscal year beginning January 1, 2008. The Company is evaluating the impact the adoption of SFAS 157 will have on the Companys consolidated financial statements.

In September 2006, 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) to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that we quantify misstatements based
on their impact on each of our financial statements (both the statement of operations and statement of financial position) and related disclosures. The application of SAB 108 in the fourth quarter of 2006 is not expected to have any impact on the
Companys consolidated financial statements.



15



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

13. Recent Developments

On September 22, 2006, our parent company, Carrols Holdings Corporation, filed a registration statement on Form S-1 to register an initial public
offering of its common stock and common stock of certain stockholders of Holdings. This registration statement was subsequently amended on October 25, 2006 and November 9, 2006.

14. Guarantor Financial Statements

The
Companys obligations under the $180.0 million 9% senior subordinated notes are jointly and severally guaranteed in full on an unsecured senior subordinated basis by certain of the Companys subsidiaries (Guarantor
Subsidiaries), all of which are directly or indirectly wholly-owned by the Company. These subsidiaries are:

Cabana
Beverages, Inc.

Cabana Bevco LLC

Carrols Realty Holdings Corp.

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Quanta Advertising Corp.

Taco Cabana, Inc.

TP Acquisition Corp.

TC Bevco LLC

TC Lease Holdings III, V and VI, Inc.

T.C. Management, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.

The following supplemental financial information sets forth on a condensed consolidating basis, balance
sheets as of September 30, 2006 and December 31, 2005 for the Parent Company Only, Guarantor Subsidiaries and for the Company and the related statements of operations for the three and nine months ended September 30, 2006 and 2005 and
statements of cash flows for the nine months ended September 30, 2006 and 2005.

For certain of the Companys sale-leaseback
transactions, the Company has guaranteed on an unsecured basis the rental payments of its subsidiaries. In accordance with EITF Issue No. 90-14, Unsecured Guarantee by Parent of Subsidiarys Lease Payments in a Sale/Leaseback
Transaction, the Company has included in the following Guarantor Financial Statements amounts pertaining to these leases as if they were accounted for as financing transactions of the Guarantor subsidiaries. These adjustments are eliminated in
consolidation.

For purposes of the guarantor financial statements, the Company and its subsidiaries determine the applicable tax provision
for each entity generally using the separate return method. Under this method, current and deferred taxes are allocated to each reporting entity as if it were to file a separate tax return. The rules followed by the reporting entity in computing its
tax obligation or refund, including the effects of the alternative minimum tax, would be the same as those followed in filing a separate return with the Internal Revenue Service. However, for purposes of evaluating an entitys ability to
realize its tax attributes, the Company assesses whether it is more likely than not that those assets will be realized at the consolidated level. Any differences in the total of the income tax provision (benefit) for the Parent Company Only and the
Guarantor Subsidiaries, as calculated on the separate return method, and the consolidated income tax provision (benefit) are eliminated in consolidation.

The Company provides some administrative support to its subsidiaries related to executive management, information systems and certain accounting, legal and other administrative functions. For purposes of the guarantor
financial statements, the Company allocates such corporate costs on a specific identification basis, where applicable, or based on revenues or the number of restaurants for each subsidiary. Management believes that these allocations are reasonable
based on the nature of costs incurred.



16



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING BALANCE SHEET

September 30, 2006

(In thousands of dollars)

(Unaudited)



|                                                     |  |                   |         |   |                       |   |          |              |  |   |                   |   |  |   |         |  
|---------------------------------------------------- |  | ----------------- | ------- | - | --------------------- | - | -------- | ------------ |  | - | ----------------- | - |  | - | ------- | -
|                                                     |  | ParentCompanyOnly |         |   | GuarantorSubsidiaries |   |          | Eliminations |  |   | ConsolidatedTotal |  
|ASSETS                                               |  |                   |         |   |                       |   |          |              |  |   |                   |   |  |   |         |  
|Current assets:                                      |  |                   |         |   |                       |   |          |              |  |   |                   |   |  |   |         |  
|Cash and cash equivalents                            |  | $                 | 1,683   |   |                       | $ | 1,103    |              |  | $ |                  |   |  | $ | 2,786   |  
|Trade and other receivables, net                     |  |                   | 1,139   |   |                       |   | 3,183    |              |  |   |                  |   |  |   | 4,322   |  
|Inventories                                          |  |                   | 3,073   |   |                       |   | 1,639    |              |  |   |                  |   |  |   | 4,712   |  
|Prepaid rent                                         |  |                   | 3,105   |   |                       |   | 2,382    |              |  |   |                  |   |  |   | 5,487   |  
|Prepaid expenses and other current assets            |  |                   | 1,835   |   |                       |   | 3,588    |              |  |   |                  |   |  |   | 5,423   |  
|Deferred income taxes                                |  |                   | 3,081   |   |                       |   | 1,786    |              |  |   |                  |   |  |   | 4,867   |  
|                                                     |  |                   |         |   |                       |   |          |              |  |   |                   |   |  |   |         |  
|Total current assets                                 |  |                   | 13,916  |   |                       |   | 13,681   |              |  |   |                  |   |  |   | 27,597  |  
|                                                     |  |                   |         |  
|Property and equipment, net                          |  |                   | 65,334  |   |                       |   | 167,840  |              |  |   | (51,906           | ) |  |   | 181,268 |  
|Franchise rights, net                                |  |                   | 84,073  |   |                       |   |         |              |  |   |                  |   |  |   | 84,073  |  
|Goodwill                                             |  |                   | 1,450   |   |                       |   | 123,484  |              |  |   |                  |   |  |   | 124,934 |  
|Intangible assets, net                               |  |                   |        |   |                       |   | 1,249    |              |  |   |                  |   |  |   | 1,249   |  
|Franchise agreements, net                            |  |                   | 5,693   |   |                       |   |         |              |  |   |                  |   |  |   | 5,693   |  
|Intercompany receivable (payable)                    |  |                   | 150,547 |   |                       |   | (151,391 | )            |  |   | 844               |   |  |   |        |  
|Investment in subsidiaries                           |  |                   | 32,116  |   |                       |   |         |              |  |   | (32,116           | ) |  |   |        |  
|Deferred income taxes                                |  |                   | 5,476   |   |                       |   | 8,342    |              |  |   | (698              | ) |  |   | 13,120  |  
|Other assets                                         |  |                   | 10,265  |   |                       |   | 7,311    |              |  |   | (1,784            | ) |  |   | 15,792  |  
|                                                     |  |                   |         |   |                       |   |          |              |  |   |                   |   |  |   |         |  
|Total assets                                         |  | $                 | 368,870 |   |                       | $ | 170,516  |              |  | $ | (85,660           | ) |  | $ | 453,726 |  
|                                                     |  |                   |         |   |                       |   |          |              |  |   |                   |   |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)       |  |                   |         |   |                       |   |          |              |  |   |                   |   |  |   |         |  
|                                                     |  |                   |         |  
|Current liabilities:                                 |  |                   |         |   |                       |   |          |              |  |   |                   |   |  |   |         |  
|Current portion of long-term debt                    |  | $                 | 2,283   |   |                       | $ | 216      |              |  | $ |                  |   |  | $ | 2,499   |  
|Accounts payable                                     |  |                   | 8,269   |   |                       |   | 10,455   |              |  |   |                  |   |  |   | 18,724  |  
|Accrued interest                                     |  |                   | 7,544   |   |                       |   |         |              |  |   |                  |   |  |   | 7,544   |  
|Accrued payroll, related taxes and benefits          |  |                   | 9,370   |   |                       |   | 7,137    |              |  |   |                  |   |  |   | 16,507  |  
|Accrued income taxes payable                         |  |                   | 1,314   |   |                       |   |         |              |  |   |                  |   |  |   | 1,314   |  
|Accrued real estate taxes                            |  |                   | 1,206   |   |                       |   | 3,440    |              |  |   |                  |   |  |   | 4,646   |  
|Other liabilities                                    |  |                   | 8,279   |   |                       |   | 3,903    |              |  |   |                  |   |  |   | 12,182  |  
|                                                     |  |                   |         |   |                       |   |          |              |  |   |                   |   |  |   |         |  
|Total current liabilities                            |  |                   | 38,265  |   |                       |   | 25,151   |              |  |   |                  |   |  |   | 63,416  |  
|                                                     |  |                   |         |  
|Long-term debt, net of current portion               |  |                   | 364,981 |   |                       |   | 1,060    |              |  |   |                   |   |  |   | 366,041 |  
|Lease financing obligations                          |  |                   | 19,401  |   |                       |   | 102,937  |              |  |   | (63,898           | ) |  |   | 58,440  |  
|Deferred incomesale-leaseback of real estate        |  |                   | 18,878  |   |                       |   | 4,369    |              |  |   | 8,173             |   |  |   | 31,420  |  
|Accrued postretirement benefits                      |  |                   | 4,519   |   |                       |   |         |              |  |   |                  |   |  |   | 4,519   |  
|Other liabilities                                    |  |                   | 16,590  |   |                       |   | 6,832    |              |  |   | 232               |   |  |   | 23,654  |  
|                                                     |  |                   |         |   |                       |   |          |              |  |   |                   |   |  |   |         |  
|Total liabilities                                    |  |                   | 462,634 |   |                       |   | 140,349  |              |  |   | (55,493           | ) |  |   | 547,490 |  
|                                                     |  |                   |         |  
|Commitments and contingencies                        |  |                   |        |   |                       |   |         |              |  |   |                  |   |  |   |        |  
|                                                     |  |                   |         |  
|Stockholders equity (deficit)                       |  |                   | (93,764 | ) |                       |   | 30,167   |              |  |   | (30,167           | ) |  |   | (93,764 | )
|                                                     |  |                   |         |   |                       |   |          |              |  |   |                   |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                 | 368,870 |   |                       | $ | 170,516  |              |  | $ | (85,660           | ) |  | $ | 453,726 |  
|                                                     |  |                   |         |   |                       |   |          |              |  |   |                   |   |  |   |         |  



17



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING BALANCE SHEET

December 31, 2005

(In thousands of dollars)

(Unaudited)



|                                                     |  |                   |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|---------------------------------------------------- |  | ----------------- | -------- | - | --------------------- | - | -------- | ------------ |  | - | ----------------- | - |  | - | -------- | -
|                                                     |  | ParentCompanyOnly |          |   | GuarantorSubsidiaries |   |          | Eliminations |  |   | ConsolidatedTotal |  
|ASSETS                                               |  |                   |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Current assets:                                      |  |                   |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Cash and cash equivalents                            |  | $                 | 7,493    |   |                       | $ | 1,838    |              |  | $ |                  |   |  | $ | 9,331    |  
|Trade and other receivables, net                     |  |                   | 608      |   |                       |   | 2,409    |              |  |   |                  |   |  |   | 3,017    |  
|Inventories                                          |  |                   | 3,767    |   |                       |   | 1,566    |              |  |   |                  |   |  |   | 5,333    |  
|Prepaid rent                                         |  |                   | 2,600    |   |                       |   | 1,876    |              |  |   |                  |   |  |   | 4,476    |  
|Prepaid expenses and other current assets            |  |                   | 1,292    |   |                       |   | 3,343    |              |  |   |                  |   |  |   | 4,635    |  
|Refundable income taxes                              |  |                   | 593      |   |                       |   |         |              |  |   |                  |   |  |   | 593      |  
|Deferred income taxes                                |  |                   | 3,081    |   |                       |   | 2,225    |              |  |   | (439              | ) |  |   | 4,867    |  
|                                                     |  |                   |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total current assets                                 |  |                   | 19,434   |   |                       |   | 13,257   |              |  |   | (439              | ) |  |   | 32,252   |  
|                                                     |  |                   |          |  
|Property and equipment, net                          |  |                   | 85,999   |   |                       |   | 155,078  |              |  |   | (23,571           | ) |  |   | 217,506  |  
|Franchise rights, net                                |  |                   | 86,490   |   |                       |   |         |              |  |   |                  |   |  |   | 86,490   |  
|Goodwill                                             |  |                   | 1,450    |   |                       |   | 123,484  |              |  |   |                  |   |  |   | 124,934  |  
|Intangible assets, net                               |  |                   |         |   |                       |   | 1,465    |              |  |   |                  |   |  |   | 1,465    |  
|Franchise agreements, net                            |  |                   | 5,869    |   |                       |   |         |              |  |   |                  |   |  |   | 5,869    |  
|Intercompany receivable (payable)                    |  |                   | 159,161  |   |                       |   | (159,735 | )            |  |   | 574               |   |  |   |         |  
|Investment in subsidiaries                           |  |                   | 21,478   |   |                       |   |         |              |  |   | (21,478           | ) |  |   |         |  
|Deferred income taxes                                |  |                   | 5,611    |   |                       |   | 7,668    |              |  |   |                  |   |  |   | 13,279   |  
|Other assets                                         |  |                   | 10,231   |   |                       |   | 5,968    |              |  |   | (1,049            | ) |  |   | 15,150   |  
|                                                     |  |                   |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total assets                                         |  | $                 | 395,723  |   |                       | $ | 147,185  |              |  | $ | (45,963           | ) |  | $ | 496,945  |  
|                                                     |  |                   |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)       |  |                   |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|                                                     |  |                   |          |  
|Current liabilities:                                 |  |                   |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Current portion of long-term debt                    |  | $                 | 2,340    |   |                       | $ | 248      |              |  | $ |                  |   |  | $ | 2,588    |  
|Accounts payable                                     |  |                   | 7,327    |   |                       |   | 11,695   |              |  |   |                  |   |  |   | 19,022   |  
|Accrued interest                                     |  |                   | 7,615    |   |                       |   |         |              |  |   |                  |   |  |   | 7,615    |  
|Accrued payroll, related taxes and benefits          |  |                   | 8,940    |   |                       |   | 6,763    |              |  |   |                  |   |  |   | 15,703   |  
|Accrued real estate taxes                            |  |                   | 1,362    |   |                       |   | 2,571    |              |  |   |                  |   |  |   | 3,933    |  
|Other liabilities                                    |  |                   | 6,571    |   |                       |   | 2,261    |              |  |   |                  |   |  |   | 8,832    |  
|                                                     |  |                   |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total current liabilities                            |  |                   | 34,155   |   |                       |   | 23,538   |              |  |   |                  |   |  |   | 57,693   |  
|                                                     |  |                   |          |  
|Long-term debt, net of current portion               |  |                   | 389,892  |   |                       |   | 1,216    |              |  |   |                  |   |  |   | 391,108  |  
|Lease financing obligations                          |  |                   | 48,817   |   |                       |   | 90,613   |              |  |   | (28,532           | ) |  |   | 110,898  |  
|Deferred incomesale-leaseback of real estate        |  |                   | 5,664    |   |                       |   | 2,327    |              |  |   | 2,669             |   |  |   | 10,660   |  
|Accrued postretirement benefits                      |  |                   | 4,068    |   |                       |   |         |              |  |   |                  |   |  |   | 4,068    |  
|Other liabilities                                    |  |                   | 16,638   |   |                       |   | 9,222    |              |  |   | 169               |   |  |   | 26,029   |  
|                                                     |  |                   |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total liabilities                                    |  |                   | 499,234  |   |                       |   | 126,916  |              |  |   | (25,694           | ) |  |   | 600,456  |  
|                                                     |  |                   |          |  
|Commitments and contingencies                        |  |                   |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|                                                     |  |                   |          |  
|Stockholders equity (deficit)                       |  |                   | (103,511 | ) |                       |   | 20,269   |              |  |   | (20,269           | ) |  |   | (103,511 | )
|                                                     |  |                   |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total liabilities and stockholders equity (deficit) |  | $                 | 395,723  |   |                       | $ | 147,185  |              |  | $ | (45,963           | ) |  | $ | 496,945  |  
|                                                     |  |                   |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2006

(In thousands of dollars)

(Unaudited)



|                                      |  |                   |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|------------------------------------- |  | ----------------- | ------ | - | --------------------- | - | ------ | ------------ |  | - | ----------------- | - |  | - | ------- | -
|                                      |  | ParentCompanyOnly |        |   | GuarantorSubsidiaries |   |        | Eliminations |  |   | ConsolidatedTotal |  
|Revenues:                             |  |                   |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Restaurant sales                      |  | $                 | 93,296 |   |                       | $ | 95,958 |              |  | $ |                  |   |  | $ | 189,254 |  
|Franchise royalty revenues and fees   |  |                   |        |   |                       |   | 343    |              |  |   |                  |   |  |   | 343     |  
|                                      |  |                   |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Total revenues                        |  |                   | 93,296 |   |                       |   | 96,301 |              |  |   |                  |   |  |   | 189,597 |  
|                                      |  |                   |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Costs and expenses:                   |  |                   |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Cost of sales                         |  |                   | 23,987 |   |                       |   | 29,013 |              |  |   |                  |   |  |   | 53,000  |  
|Restaurant wages and related expenses |  |                   | 28,685 |   |                       |   | 26,526 |              |  |   |                  |   |  |   | 55,211  |  
|Restaurant rent expense               |  |                   | 5,781  |   |                       |   | 3,223  |              |  |   |                  |   |  |   | 9,004   |  
|Other restaurant operating expenses   |  |                   | 14,606 |   |                       |   | 12,735 |              |  |   | 1,236             |   |  |   | 28,577  |  
|Advertising expense                   |  |                   | 4,017  |   |                       |   | 2,591  |              |  |   |                  |   |  |   | 6,608   |  
|General and administrative            |  |                   | 6,299  |   |                       |   | 5,376  |              |  |   |                  |   |  |   | 11,675  |  
|Depreciation and amortization         |  |                   | 4,452  |   |                       |   | 4,247  |              |  |   | (302              | ) |  |   | 8,397   |  
|Impairment losses                     |  |                   |       |   |                       |   | 588    |              |  |   |                  |   |  |   | 588     |  
|Other income                          |  |                   |       |   |                       |   | (1,389 | )            |  |   |                  |   |  |   | (1,389  | )
|                                      |  |                   |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Total operating expenses              |  |                   | 87,827 |   |                       |   | 82,910 |              |  |   | 934               |   |  |   | 171,671 |  
|                                      |  |                   |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Income from operations                |  |                   | 5,469  |   |                       |   | 13,391 |              |  |   | (934              | ) |  |   | 17,926  |  
|Interest expense                      |  |                   | 8,936  |   |                       |   | 2,505  |              |  |   | (1,225            | ) |  |   | 10,216  |  
|Intercompany interest allocations     |  |                   | (4,557 | ) |                       |   | 4,557  |              |  |   |                  |   |  |   |        |  
|                                      |  |                   |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Income before income taxes            |  |                   | 1,090  |   |                       |   | 6,329  |              |  |   | 291               |   |  |   | 7,710   |  
|Provision for income taxes            |  |                   | 480    |   |                       |   | 2,207  |              |  |   | (107              | ) |  |   | 2,580   |  
|Equity income from subsidiaries       |  |                   | 4,520  |   |                       |   |       |              |  |   | (4,520            | ) |  |   |        |  
|                                      |  |                   |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Net income                            |  | $                 | 5,130  |   |                       | $ | 4,122  |              |  | $ | (4,122            | ) |  | $ | 5,130   |  
|                                      |  |                   |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2005

(In thousands of dollars)

(Unaudited)



|                                      |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|------------------------------------- |  | ----------------- | ------ | - | --------------------- | - | ------------ |  | - | ----------------- | - |  | - | -------
|                                      |  | ParentCompanyOnly |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | ConsolidatedTotal
|Revenues:                             |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Restaurant sales                      |  | $                 | 92,678 |   |                       | $ | 88,233       |  | $ |                  |   |  | $ | 180,911
|Franchise royalty revenues and fees   |  |                   |       |   |                       |   | 375          |  |   |                  |   |  |   | 375    
|                                      |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Total revenues                        |  |                   | 92,678 |   |                       |   | 88,608       |  |   |                  |   |  |   | 181,286
|                                      |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Costs and expenses:                   |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Cost of sales                         |  |                   | 25,173 |   |                       |   | 26,895       |  |   |                  |   |  |   | 52,068 
|Restaurant wages and related expenses |  |                   | 28,293 |   |                       |   | 23,325       |  |   |                  |   |  |   | 51,618 
|Restaurant rent expense               |  |                   | 5,118  |   |                       |   | 2,351        |  |   | 585               |   |  |   | 8,054  
|Other restaurant operating expenses   |  |                   | 14,308 |   |                       |   | 12,354       |  |   |                  |   |  |   | 26,662 
|Advertising expense                   |  |                   | 3,496  |   |                       |   | 2,747        |  |   |                  |   |  |   | 6,243  
|General and administrative            |  |                   | 4,933  |   |                       |   | 4,915        |  |   |                  |   |  |   | 9,848  
|Depreciation and amortization         |  |                   | 4,707  |   |                       |   | 3,615        |  |   | (120              | ) |  |   | 8,202  
|Impairment losses                     |  |                   | 574    |   |                       |   |             |  |   |                  |   |  |   | 574    
|                                      |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Total operating expenses              |  |                   | 86,602 |   |                       |   | 76,202       |  |   | 465               |   |  |   | 163,269
|                                      |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Income from operations                |  |                   | 6,076  |   |                       |   | 12,406       |  |   | (465              | ) |  |   | 18,017 
|Interest expense                      |  |                   | 9,212  |   |                       |   | 2,352        |  |   | (648              | ) |  |   | 10,916 
|Intercompany interest allocations     |  |                   | (4,557 | ) |                       |   | 4,557        |  |   |                  |   |  |   |       
|                                      |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Income before income taxes            |  |                   | 1,421  |   |                       |   | 5,497        |  |   | 183               |   |  |   | 7,101  
|Provision for income taxes            |  |                   | 298    |   |                       |   | 1,784        |  |   | (243              | ) |  |   | 1,839  
|Equity income from subsidiaries       |  |                   | 4,139  |   |                       |   |             |  |   | (4,139            | ) |  |   |       
|                                      |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Net income                            |  | $                 | 5,262  |   |                       | $ | 3,713        |  | $ | (3,713            | ) |  | $ | 5,262  
|                                      |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2006

(In thousands of dollars)

(Unaudited)



|                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|------------------------------------- |  | ----------------- | ------- | - | --------------------- | - | ------- | ------------ |  | - | ----------------- | - |  | - | ------- | -
|                                      |  | ParentCompanyOnly |         |   | GuarantorSubsidiaries |   |         | Eliminations |  |   | ConsolidatedTotal |  
|Revenues:                             |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Restaurant sales                      |  | $                 | 275,435 |   |                       | $ | 286,284 |              |  | $ |                  |   |  | $ | 561,719 |  
|Franchise royalty revenues and fees   |  |                   |        |   |                       |   | 1,002   |              |  |   |                  |   |  |   | 1,002   |  
|                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Total revenues                        |  |                   | 275,435 |   |                       |   | 287,286 |              |  |   |                  |   |  |   | 562,721 |  
|                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Costs and expenses:                   |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Cost of sales                         |  |                   | 71,288  |   |                       |   | 87,011  |              |  |   |                  |   |  |   | 158,299 |  
|Restaurant wages and related expenses |  |                   | 86,437  |   |                       |   | 77,963  |              |  |   |                  |   |  |   | 164,400 |  
|Restaurant rent expense               |  |                   | 16,329  |   |                       |   | 9,522   |              |  |   | 1,332             |   |  |   | 27,183  |  
|Other restaurant operating expenses   |  |                   | 42,089  |   |                       |   | 39,141  |              |  |   | 1,236             |   |  |   | 82,466  |  
|Advertising expense                   |  |                   | 11,676  |   |                       |   | 9,092   |              |  |   |                  |   |  |   | 20,768  |  
|General and administrative            |  |                   | 19,058  |   |                       |   | 16,736  |              |  |   |                  |   |  |   | 35,794  |  
|Depreciation and amortization         |  |                   | 14,057  |   |                       |   | 11,706  |              |  |   | (586              | ) |  |   | 25,177  |  
|Impairment losses                     |  |                   | 224     |   |                       |   | 608     |              |  |   |                  |   |  |   | 832     |  
|Other income                          |  |                   |        |   |                       |   | (1,389  | )            |  |   |                  |   |  |   | (1,389  | )
|                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Total operating expenses              |  |                   | 261,158 |   |                       |   | 250,390 |              |  |   | 1,982             |   |  |   | 513,530 |  
|                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Income from operations                |  |                   | 14,277  |   |                       |   | 36,896  |              |  |   | (1,982            | ) |  |   | 49,191  |  
|Interest expense                      |  |                   | 29,333  |   |                       |   | 7,993   |              |  |   | (2,710            | ) |  |   | 34,616  |  
|                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Intercompany interest allocations     |  |                   | (13,669 | ) |                       |   | 13,669  |              |  |   |                  |   |  |   |        |  
|Income (loss) before income taxes     |  |                   | (1,387  | ) |                       |   | 15,234  |              |  |   | 728               |   |  |   | 14,575  |  
|Provision (benefit) for income taxes  |  |                   | (496    | ) |                       |   | 5,336   |              |  |   | (12               | ) |  |   | 4,828   |  
|Equity income from subsidiaries       |  |                   | 10,638  |   |                       |   |        |              |  |   | (10,638           | ) |  |   |        |  
|                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Net income                            |  | $                 | 9,747   |   |                       | $ | 9,898   |              |  | $ | (9,898            | ) |  | $ | 9,747   |  
|                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2005

(In thousands of dollars)

(Unaudited)



|                                      |  |                   |         |   |                       |   |              |  |   |                   |   |  |   |         |  
|------------------------------------- |  | ----------------- | ------- | - | --------------------- | - | ------------ |  | - | ----------------- | - |  | - | ------- | -
|                                      |  | ParentCompanyOnly |         |   | GuarantorSubsidiaries |   | Eliminations |  |   | ConsolidatedTotal |  
|Revenues:                             |  |                   |         |   |                       |   |              |  |   |                   |   |  |   |         |  
|Restaurant sales                      |  | $                 | 271,852 |   |                       | $ | 259,590      |  | $ |                  |   |  | $ | 531,442 |  
|Franchise royalty revenues and fees   |  |                   |        |   |                       |   | 1,160        |  |   |                  |   |  |   | 1,160   |  
|                                      |  |                   |         |   |                       |   |              |  |   |                   |   |  |   |         |  
|Total revenues                        |  |                   | 271,852 |   |                       |   | 260,750      |  |   |                  |   |  |   | 532,602 |  
|                                      |  |                   |         |   |                       |   |              |  |   |                   |   |  |   |         |  
|Costs and expenses:                   |  |                   |         |   |                       |   |              |  |   |                   |   |  |   |         |  
|Cost of sales                         |  |                   | 74,600  |   |                       |   | 79,824       |  |   |                  |   |  |   | 154,424 |  
|Restaurant wages and related expenses |  |                   | 85,417  |   |                       |   | 68,323       |  |   |                  |   |  |   | 153,740 |  
|Restaurant rent expense               |  |                   | 15,977  |   |                       |   | 8,085        |  |   | 1,756             |   |  |   | 25,818  |  
|Other restaurant operating expenses   |  |                   | 41,339  |   |                       |   | 34,637       |  |   |                  |   |  |   | 75,976  |  
|Advertising expense                   |  |                   | 10,864  |   |                       |   | 8,927        |  |   |                  |   |  |   | 19,791  |  
|General and administrative            |  |                   | 27,303  |   |                       |   | 20,529       |  |   |                  |   |  |   | 47,832  |  
|Depreciation and amortization         |  |                   | 14,827  |   |                       |   | 10,461       |  |   | (359              | ) |  |   | 24,929  |  
|Impairment losses                     |  |                   | 1,332   |   |                       |   | 95           |  |   |                  |   |  |   | 1,427   |  
|                                      |  |                   |         |   |                       |   |              |  |   |                   |   |  |   |         |  
|Total operating expenses              |  |                   | 271,659 |   |                       |   | 230,881      |  |   | 1,397             |   |  |   | 503,937 |  
|                                      |  |                   |         |   |                       |   |              |  |   |                   |   |  |   |         |  
|Income from operations                |  |                   | 193     |   |                       |   | 29,869       |  |   | (1,397            | ) |  |   | 28,665  |  
|Interest expense                      |  |                   | 26,763  |   |                       |   | 7,013        |  |   | (1,946            | ) |  |   | 31,830  |  
|Intercompany interest allocations     |  |                   | (13,669 | ) |                       |   | 13,669       |  |   |                  |   |  |   |        |  
|                                      |  |                   |         |   |                       |   |              |  |   |                   |   |  |   |         |  
|Income (loss) before income taxes     |  |                   | (12,901 | ) |                       |   | 9,187        |  |   | 549               |   |  |   | (3,165  | )
|Provision (benefit) for income taxes  |  |                   | (2,505  | ) |                       |   | 4,218        |  |   | 341               |   |  |   | 2,054   |  
|Equity income from subsidiaries       |  |                   | 5,177   |   |                       |   |             |  |   | (5,177            | ) |  |   |        |  
|                                      |  |                   |         |   |                       |   |              |  |   |                   |   |  |   |         |  
|Net income (loss)                     |  | $                 | (5,219  | ) |                       | $ | 4,969        |  | $ | (4,969            | ) |  | $ | (5,219  | )
|                                      |  |                   |         |   |                       |   |              |  |   |                   |   |  |   |         |  



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2006

(In thousands of dollars)

(Unaudited)



|                                                                                    |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | ----------------- | ------- | - | --------------------- | - | ------- | ------------ |  | - | ----------------- | - |  | - | ------- | -
|                                                                                    |  | ParentCompanyOnly |         |   | GuarantorSubsidiaries |   |         | Eliminations |  |   | ConsolidatedTotal |  
|Cash flows provided from operating activities:                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Net income                                                                          |  | $                 | 9,747   |   |                       | $ | 9,898   |              |  | $ | (9,898            | ) |  | $ | 9,747   |  
|Adjustments to reconcile net income to net cash provided from operating activities: |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Other income                                                                        |  |                   |        |   |                       |   | (1,389  | )            |  |   |                  |   |  |   | (1,389  | )
|Depreciation and amortization                                                       |  |                   | 14,057  |   |                       |   | 11,706  |              |  |   | (586              | ) |  |   | 25,177  |  
|Amortization of deferred financing costs                                            |  |                   | 1,027   |   |                       |   | 198     |              |  |   | (127              | ) |  |   | 1,098   |  
|Amortization of unearned purchase discounts                                         |  |                   | (1,616  | ) |                       |   |        |              |  |   |                  |   |  |   | (1,616  | )
|Amortization of deferred gains from sale-leaseback transactions                     |  |                   | (505    | ) |                       |   | (160    | )            |  |   | (232              | ) |  |   | (897    | )
|Accretion of interest on lease financing obligations                                |  |                   | (53     | ) |                       |   | 343     |              |  |   | (9                | ) |  |   | 281     |  
|Impairment losses                                                                   |  |                   | 224     |   |                       |   | 608     |              |  |   |                  |   |  |   | 832     |  
|Gain on settlement of lease financing obligations, net                              |  |                   | (309    | ) |                       |   |        |              |  |   | 189               |   |  |   | (120    | )
|Deferred income taxes                                                               |  |                   | 123     |   |                       |   | (222    | )            |  |   | 258               |   |  |   | 159     |  
|Increase in accrued payroll, related taxes and benefits                             |  |                   | 430     |   |                       |   | 405     |              |  |   |                  |   |  |   | 835     |  
|Changes in other operating assets and liabilities                                   |  |                   | 2,385   |   |                       |   | (10,045 | )            |  |   | 10,405            |   |  |   | 2,745   |  
|                                                                                    |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Net cash provided from operating activities                                         |  |                   | 25,510  |   |                       |   | 11,342  |              |  |   |                  |   |  |   | 36,852  |  
|                                                                                    |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Cash flows provided from (used for) investing activities:                           |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Capital expenditures:                                                               |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|New restaurant development                                                          |  |                   | (87     | ) |                       |   | (20,283 | )            |  |   |                  |   |  |   | (20,370 | )
|Restaurant remodeling                                                               |  |                   | (3,474  | ) |                       |   | (1,411  | )            |  |   |                  |   |  |   | (4,885  | )
|Other restaurant capital expenditures                                               |  |                   | (2,489  | ) |                       |   | (2,989  | )            |  |   |                  |   |  |   | (5,478  | )
|Corporate and restaurant information systems                                        |  |                   | (982    | ) |                       |   | (342    | )            |  |   |                  |   |  |   | (1,324  | )
|                                                                                    |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Total capital expenditures                                                          |  |                   | (7,032  | ) |                       |   | (25,025 | )            |  |   |                  |   |  |   | (32,057 | )
|Properties purchased for sale-leaseback                                             |  |                   | (1,008  | ) |                       |   | (1,655  | )            |  |   |                  |   |  |   | (2,663  | )
|Proceeds from sale-leaseback transactions                                           |  |                   | 10,348  |   |                       |   | 10,801  |              |  |   | 10,544            |   |  |   | 31,693  |  
|                                                                                    |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Net cash provided from (used for) investing activities                              |  |                   | 2,308   |   |                       |   | (15,879 | )            |  |   | 10,544            |   |  |   | (3,027  | )
|                                                                                    |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Cash flows provided from (used for) financing activities:                           |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Scheduled principal payments on term loans                                          |  |                   | (1,650  | ) |                       |   |        |              |  |   |                  |   |  |   | (1,650  | )
|Principal payments on capital leases                                                |  |                   | (118    | ) |                       |   | (187    | )            |  |   |                  |   |  |   | (305    | )
|Principal pre-payments on term loans                                                |  |                   | (23,200 | ) |                       |   |        |              |  |   |                  |   |  |   | (23,200 | )
|Financing costs associated with issuance of debt and lease financing obligations    |  |                   |        |   |                       |   | (586    | )            |  |   | 586               |   |  |   |        |  
|Settlement of lease financing obligations                                           |  |                   | (8,660  | ) |                       |   | (6,555  | )            |  |   |                  |   |  |   | (15,215 | )
|Proceeds from lease financing obligations                                           |  |                   |        |   |                       |   | 11,130  |              |  |   | (11,130           | ) |  |   |        |  
|                                                                                    |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Net cash provided from (used for) financing activities                              |  |                   | (33,628 | ) |                       |   | 3,802   |              |  |   | (10,544           | ) |  |   | (40,370 | )
|                                                                                    |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Decrease in cash and cash equivalents                                               |  |                   | (5,810  | ) |                       |   | (735    | )            |  |   |                  |   |  |   | (6,545  | )
|Cash and cash equivalents, beginning of period                                      |  |                   | 7,493   |   |                       |   | 1,838   |              |  |   |                  |   |  |   | 9,331   |  
|                                                                                    |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Cash and cash equivalents, end of period                                            |  | $                 | 1,683   |   |                       | $ | 1,103   |              |  | $ |                  |   |  | $ | 2,786   |  
|                                                                                    |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2005

(In thousands of dollars)

(Unaudited)



|                                                                                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | --------------------- | - | ------- | ------------ |  | - | ----------------- | - |  | - | ------- | -
|                                                                                                      |  | ParentCompanyOnly |         |   | GuarantorSubsidiaries |   |         | Eliminations |  |   | ConsolidatedTotal |  
|Cash flows provided from (used for) operating activities:                                             |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Net income (loss)                                                                                     |  | $                 | (5,219  | ) |                       | $ | 4,969   |              |  | $ | (4,969            | ) |  | $ | (5,219  | )
|Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities: |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Gain on sales of properties                                                                           |  |                   |        |   |                       |   | (585    | )            |  |   |                  |   |  |   | (585    | )
|Stock based compensation                                                                              |  |                   | 10,808  |   |                       |   | 5,502   |              |  |   |                  |   |  |   | 16,310  |  
|Depreciation and amortization                                                                         |  |                   | 14,827  |   |                       |   | 10,461  |              |  |   | (359              | ) |  |   | 24,929  |  
|Amortization of deferred financing costs                                                              |  |                   | 1,047   |   |                       |   | 200     |              |  |   | (93               | ) |  |   | 1,154   |  
|Amortization of unearned purchase discounts                                                           |  |                   | (1,616  | ) |                       |   |        |              |  |   |                  |   |  |   | (1,616  | )
|Amortization of deferred gains from sale-leaseback transactions                                       |  |                   | (153    | ) |                       |   | (109    | )            |  |   | (115              | ) |  |   | (377    | )
|Accretion of interest on lease financing obligations                                                  |  |                   | (54     | ) |                       |   | 342     |              |  |   | (31               | ) |  |   | 257     |  
|Impairment losses                                                                                     |  |                   | 1,332   |   |                       |   | 95      |              |  |   |                  |   |  |   | 1,427   |  
|Deferred income taxes                                                                                 |  |                   | 1       |   |                       |   | (1,069  | )            |  |   | 192               |   |  |   | (876    | )
|Decrease in accrued bonus to employees and director                                                   |  |                   | (20,860 | ) |                       |   |        |              |  |   |                  |   |  |   | (20,860 | )
|Decrease in accrued payroll, related taxes and benefits                                               |  |                   | (8,710  | ) |                       |   | (1,796  | )            |  |   |                  |   |  |   | (10,506 | )
|Changes in other operating assets and liabilities                                                     |  |                   | (6,160  | ) |                       |   | 7,370   |              |  |   | 5,375             |   |  |   | 6,585   |  
|                                                                                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Net cash provided from (used for) operating activities                                                |  |                   | (14,757 | ) |                       |   | 25,380  |              |  |   |                  |   |  |   | 10,623  |  
|                                                                                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Cash flows used for investing activities:                                                             |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Capital expenditures:                                                                                 |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|New restaurant development                                                                            |  |                   | (860    | ) |                       |   | (14,637 | )            |  |   |                  |   |  |   | (15,497 | )
|Restaurant remodeling                                                                                 |  |                   | (1,407  | ) |                       |   | (686    | )            |  |   |                  |   |  |   | (2,093  | )
|Other restaurant capital expenditures                                                                 |  |                   | (1,971  | ) |                       |   | (4,217  | )            |  |   |                  |   |  |   | (6,188  | )
|Corporate and restaurant information systems                                                          |  |                   | (614    | ) |                       |   | (371    | )            |  |   |                  |   |  |   | (985    | )
|Acquisition of Taco Cabana restaurants                                                                |  |                   |        |   |                       |   | (4,220  | )            |  |   |                  |   |  |   | (4,220  | )
|                                                                                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Total capital expenditures                                                                            |  |                   | (4,852  | ) |                       |   | (24,131 | )            |  |   |                  |   |  |   | (28,983 | )
|Properties purchased for sale-leaseback                                                               |  |                   | (275    | ) |                       |   |        |              |  |   |                  |   |  |   | (275    | )
|Proceed from sale-leaseback transactions                                                              |  |                   | 1,137   |   |                       |   |        |              |  |   |                  |   |  |   | 1,137   |  
|Proceeds from sales of other properties                                                               |  |                   |        |   |                       |   | 669     |              |  |   |                  |   |  |   | 669     |  
|                                                                                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Net cash used for investing activities                                                                |  |                   | (3,990  | ) |                       |   | (23,462 | )            |  |   |                  |   |  |   | (27,452 | )
|                                                                                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Cash flows used for financing activities:                                                             |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Scheduled principal payments on term loans                                                            |  |                   | (1,650  | ) |                       |   |        |              |  |   |                  |   |  |   | (1,650  | )
|Purchase of properties under lease financing obligations                                              |  |                   |        |   |                       |   | (1,074  | )            |  |   |                  |   |  |   | (1,074  | )
|Principal payments on capital leases                                                                  |  |                   | (107    | ) |                       |   | (204    | )            |  |   |                  |   |  |   | (311    | )
|Principal pre-payments on term loans                                                                  |  |                   | (6,000  | ) |                       |   |        |              |  |   |                  |   |  |   | (6,000  | )
|Financing costs associated with issuance of debt                                                      |  |                   | (304    | ) |                       |   |        |              |  |   |                  |   |  |   | (304    | )
|                                                                                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Net cash used for financing activities                                                                |  |                   | (8,061  | ) |                       |   | (1,278  | )            |  |   |                  |   |  |   | (9,339  | )
|                                                                                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Increase (decrease) in cash and cash equivalents                                                      |  |                   | (26,808 | ) |                       |   | 640     |              |  |   |                  |   |  |   | (26,168 | )
|Cash and cash equivalents, beginning of period                                                        |  |                   | 29,195  |   |                       |   | 2,271   |              |  |   |                  |   |  |   | 31,466  |  
|                                                                                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  
|Cash and cash equivalents, end of period                                                              |  | $                 | 2,387   |   |                       | $ | 2,911   |              |  | $ |                  |   |  | $ | 5,298   |  
|                                                                                                      |  |                   |         |   |                       |   |         |              |  |   |                   |   |  |   |         |  



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ITEM 2MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Throughout this Quarterly Report on Form 10-Q, we refer to Carrols Corporation, a Delaware corporation, as Carrols and, together with its consolidated subsidiaries, as we, our and us unless
otherwise indicated. Any reference to Carrols Holdings or Holdings refers to our sole stockholder and corporate parent, Carrols Holdings Corporation, a Delaware corporation, unless otherwise indicated.

We use a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to the fiscal years ended January 1, 2006
and January 2, 2005 will be referred to as the fiscal years ended December 31, 2005 and 2004, respectively. Similarly, all references herein to the three and nine months ended October 1, 2006 and October 2, 2005 will be referred
to as the three and nine months ended September 30, 2006 and September 30, 2005, respectively. The years ended December 31, 2005 and 2004 contained 52 weeks and 53 weeks, respectively, and the three and nine months ended
September 30, 2006 and 2005 each contained 13 and 39 weeks, respectively.

Introduction

The following Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is written to help the
reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with our unaudited interim consolidated financial statements and the accompanying financial statement notes appearing elsewhere in this
report and our Annual Report on Form 10-K for the year ended December 31, 2005. The overview provides our perspective on the individual sections of MD&A, which include the following:

Company Overviewa general description of our business and our key financial measures.

Recent and Future Events Affecting Our Results of Operationsa description of recent events that affect, and future events that may affect
our results of operations.

Executive Summaryan executive review of our performance for the three and nine months ended
September 30, 2006.

Liquidity and Capital Resourcesan analysis of historical information regarding our sources of cash
and capital expenditures, the existence and timing of commitments and contingencies, changes in capital resources and a discussion of cash flow items affecting liquidity.

Results of Operationsan analysis of our results of operations for the three and nine months ended September 30, 2006 compared to the three and nine months ended September 30, 2005.

Application of Critical Accounting Policiesan overview of accounting policies that require critical judgments and estimates.

Effects of New Accounting Standardsa discussion of new accounting standards and any implications related to our financial statements.

Forward Looking Statementscautionary information about forward-looking statements and a description of certain risks and
uncertainties that could cause our actual results to differ materially from our historical results or our current expectations or projections.

Company Overview

We are one of the largest restaurant companies in the United States operating three restaurant
brands in the quick-casual and quick-service restaurant segments with 542 restaurants located in 16 states as of September 30, 2006. We have been operating restaurants for more than 45 years. We own and operate two Hispanic restaurant brands,
Pollo Tropical and Taco Cabana (together referred to by us as our Hispanic Brands), which we acquired in 1998 and 2000, respectively. We are also the largest Burger King franchisee, based on the number of restaurants, and have operated Burger King
restaurants since 1976. As of September 30, 2006, our company-owned restaurants included 73 Pollo Tropical restaurants and 141 Taco Cabana restaurants, and we operated 328 Burger King restaurants under franchise agreements. We also franchise
our



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Hispanic Brand restaurants with 29 franchised restaurants located in Puerto Rico, Ecuador and the United States as of
September 30, 2006. We believe that the diversification and strength of our restaurant brands as well as the geographic dispersion of our restaurants provide us with stability and enhanced growth opportunities. Our primary growth strategy is to
develop new company-owned Hispanic Brand restaurants. For the year ended December 31, 2005 and the nine months ended September 30, 2006, we had total revenues of $706.9 million and $562.7 million, respectively.

Hispanic Brands

Our Hispanic Brands
operate in the quick-casual restaurant segment, combining the convenience of quick-service restaurants with the menu variety, use of fresh ingredients and food quality more typical of casual dining restaurants. As of September 30, 2006, our
Hispanic Brands were comprised of 214 company-owned and 29 franchised restaurants and for the three and nine months ended September 30, 2006 accounted for 50.8% and 51.1% of our consolidated revenues, respectively.

Pollo Tropical.Our Pollo Tropical restaurants are known for their fresh grilled chicken marinated in our own blend of tropical fruit juices and
spices. Our menu also features other items including roast pork, sandwiches, grilled ribs offered with a selection of sauces, Caribbean-style made from scratch side dishes and salads. Most menu items are made fresh daily in each of our
Pollo Tropical restaurants, which feature open display cooking that enables customers to observe the preparation of menu items, including chicken grilled on large, open-flame grills. As of September 30, 2006, we owned and operated a total of 73
Pollo Tropical restaurants, with 72 located in Florida, including 60 in South Florida, and one in the New York City metropolitan area, in northern New Jersey. For the three and nine months ended September 30, 2006, our company-owned Pollo
Tropical restaurants generated total restaurant sales of $38.0 million and $114.5 million, respectively, and segment EBITDA of $6.5 million and $21.8 million, respectively.

Taco Cabana.Our Taco Cabana restaurants serve fresh Tex-Mex and traditional Mexican style food, including sizzling fajitas, quesadillas,
enchiladas, burritos, tacos, other Tex-Mex dishes, fresh-made flour tortillas, frozen margaritas and beer. Most menu items are made fresh daily in each of our Taco Cabana restaurants, which feature open display cooking that enables customers to
observe the preparation of menu items, including fajitas cooking on a grill and a machine making fresh tortillas. A majority of our Taco Cabana restaurants are open 24 hours a day, generating customer traffic and restaurant sales across multiple day
parts by offering a convenient and quality experience to our customers. Taco Cabana pioneered the Mexican patio café concept with its first restaurant in San Antonio, Texas in 1978. As of September 30, 2006, we owned and operated 141
Taco Cabana restaurants located in Texas, Oklahoma and New Mexico. For the three and nine months ended September 30, 2006, our company-owned Taco Cabana restaurants generated total restaurant sales of $58.0 million and $171.8 million,
respectively, and segment EBITDA of $9.9 million and $25.7 million, respectively.

Burger King.Burger King is the second largest
hamburger restaurant chain in the world (as measured by the number of restaurants and system-wide sales) and we are the largest franchisee in the Burger King system, based on number of restaurants. Burger King restaurants are part of the
quick-service restaurant segment which is the largest of the five major segments of the U.S. restaurant industry based on 2005 sales. Burger King restaurants feature the popular flame-broiled Whopper® sandwich, as well as a variety of hamburgers and other sandwiches, fries, salads,
breakfast items and other offerings. As of September 30, 2006, we operated 328 Burger King restaurants located in 12 Northeastern, Midwestern and Southeastern states. For the three and nine months ended September 30, 2006, our Burger King
restaurants generated total restaurant sales of $93.3 million and $275.4 million, respectively, and segment EBITDA of $9.2 million and $26.3 million, respectively.

The following is an overview of the key financial measures discussed in our results of operations:



| |  |  | Restaurant sales consist of food and beverage sales, net of discounts, at our company-owned Hispanic Brand restaurants and the Burger King restaurants we operated under
franchise agreements. Restaurant sales are influenced by menu price increases, new restaurant openings, closures of underperforming restaurants, and changes in comparable restaurant sales. The changes in comparable restaurant sales noted below are
calculated using only those restaurants open since the beginning of the earliest period being compared and for the entirety of both periods being compared. Restaurants are included in comparable restaurant sales after they have been open for 12
months for our Burger King restaurants and 18 months for our Pollo Tropical and Taco Cabana restaurants.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cost of sales consists of food, paper and beverage costs including packaging costs, less purchase discounts. Cost of sales is generally influenced by changes in commodity
costs and the effectiveness of our restaurant-level
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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controls to manage food and paper costs. For our Pollo Tropical and Taco Cabana restaurants, we have
negotiated directly with local and national suppliers for the purchase of food and beverage products and supplies. Pollo Tropical and Taco Cabana restaurants food and supplies are ordered from approved suppliers and are shipped via
distributors to our restaurants. Key commodities for Pollo Tropical and Taco Cabana restaurants are generally purchased under annual contracts. We are a member of a national purchasing cooperative, Restaurant Services, Inc., a non-profit independent
cooperative that serves as the purchasing agent for most of the commodities for the Burger King franchise system and which also contracts with various distributors to receive and ship orders for our Burger King restaurants.



| |  |  | Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and benefits.
Payroll and benefits are subject to inflation, including minimum wage increases and expenses for health insurance and workers compensation insurance. A significant number of our hourly staff is paid at rates consistent with the applicable
state minimum wage and, accordingly, increases in minimum wage rates will increase our labor costs. We are insured for workers compensation, general liability and medical insurance claims under policies where we pay all claims, subject to
annual stop-loss limitations both for individual claims and claims in the aggregate.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Restaurant rent expense includes base rent, contingent rent, common area maintenance on our leases characterized as operating leases, reduced by the amortization of gains on
sale-leaseback transactions.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are royalty expenses for our Burger King restaurants,
utilities, repairs and maintenance, real estate taxes and credit card fees.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Advertising expense includes all promotional expenses including television, radio, billboards and other media. Pollo Tropical and Taco Cabana utilize an integrated,
multi-level marketing approach that includes periodic chain-wide promotions, direct mail, in-store promotions, local store marketing and other strategies, including the use of radio and television advertising in their major markets. We are generally
required to contribute 4% of restaurant sales from our Burger King restaurants to an advertising fund utilized by the Burger King franchise system for its advertising, promotional programs and public relations activities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General and administrative expenses are comprised primarily of (1) salaries and expenses associated with corporate and administrative functions that support the
development and operations of our restaurants, (2) legal and professional fees, including external auditing costs, and (3) stock-based compensation expense.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Segment EBITDA, which is the measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our segments and assessing
their performance, is defined as earnings attributable to the applicable segment before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and a director in connection with
our December 2004 refinancing, other income and expense and loss on extinguishment of debt. Segment EBITDA may not be necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Segment
EBITDA for our Burger King restaurants includes general and administrative expenses related directly to the Burger King segment as well as the expenses associated with administrative support to all three of our segments including executive
management, information systems and certain accounting, legal and other administrative functions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment and leasehold improvements, depreciation of assets under lease
financing obligations and the amortization of Burger King franchise rights and franchise fees.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest expense consists primarily of interest expense associated with the $180.0 million of our 9% Senior Subordinated Notes due 2013, which we to herein as the
Notes and on borrowings under our senior credit facility, and imputed interest expense on certain leases entered into in connection with sale-leaseback transactions which are accounted for as lease financing obligations. Interest expense
may also include gains and losses from the settlement of lease financing obligations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We use the term Consolidated
Adjusted EBITDA because we believe it is a useful financial indicator for measuring our ability, on a consolidated basis, to service and/or incur indebtedness. Consolidated Adjusted EBITDA (defined as earnings before interest, income taxes,
depreciation and amortization, impairment losses, stock-based compensation expense, bonus to employees and a director in connection with our December 2004 refinancing, other income and expense and loss on extinguishment of debt) should not be
considered as an alternative to consolidated cash flows as a measure of liquidity in accordance with generally accepted accounting principles (GAAP). Consolidated Adjusted EBITDA is not necessarily comparable to other similarly titled
captions of other companies due to differences in methods of calculation. Management believes the most directly comparable measure to Consolidated Adjusted EBITDA calculated in accordance with GAAP is



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net cash provided from operating activities. Our utilization of a non-GAAP financial measure is not meant to be
considered in isolation or as a substitute for net income, income from operations, cash flow, gross margin and other measures of financial performance prepared in accordance with GAAP. See Reconciliation of Non-GAAP Financial Measures on
page 38.

Recent and Future Events Affecting our Results of Operations

Lease Financing Obligations

We have, in the past, entered into sale-leaseback transactions involving
certain restaurant properties that have been classified as financing transactions under Statement of Financial Accounting Standards No. 98, Accounting for Leases (SFAS 98). Under the financing method, the assets remain
on our consolidated balance sheet and continue to be depreciated and proceeds received by us from these transactions are recorded as a financing liability. Payments under these leases are applied as payments of imputed interest and deemed principal
on the underlying financing obligations.

During the nine months ended September 30, 2006, we exercised our right of first refusal
under the leases for 14 restaurant properties and purchased these 14 restaurant properties from the respective lessors. Concurrently with these purchases, the properties were sold in qualified sale-leaseback transactions. We recorded deferred gains
representing the amounts by which the sales prices exceeded the net book value of the underlying assets. Deferred gains are being amortized as an adjustment to rent expense over the term of the leases, which is generally 20 years.

We also amended lease agreements for 21 restaurant properties in the second quarter of 2006 and amended a master lease agreement covering 13 restaurant
properties in the third quarter of 2006, all of which were previously accounted for as lease financing obligations, to eliminate or otherwise cure the provisions that precluded the original sale-leaseback accounting under SFAS 98. As a result of
such amendments, we recorded these sale-leaseback transactions as sales, removed all of the respective assets under lease financing obligations and related liabilities from our consolidated balance sheet and recognized gains from the sales, which
were generally deferred and are being amortized as an adjustment to rent expense over the remaining term of the underlying leases.

As a
result of the above transactions that occurred during the nine months ended September 30, 2006, we reduced our lease financing obligations by $52.8 million, reduced our assets under lease financing obligations by $36.2 million and recorded
deferred gains of $18.3 million. We also recorded interest expense of $2.0 million which represents the net amount by which the purchase price for the restaurant properties sold exceeded the lease financing obligations. Of these amounts, $37.5
million of lease financing obligations and $24.7 million of assets under lease financing obligations have been reflected as non-cash transactions in the consolidated statements of cash flows for the nine months ended September 30, 2006.

Beginning in the third quarter of 2006 the effect of the recharacterization of all of the transactions described above as qualified sales
under SFAS 98 and the payments associated with the related operating leases as restaurant rent expense, rather than as payments of interest and principal associated with lease financing obligations, has been to reduce interest expense, reduce
depreciation expense and increase restaurant rent expense.

Future Burger King Restaurant Closures

We evaluate the performance of our Burger King restaurants on an ongoing basis. Such evaluation depends on many factors, including our assessment of the
anticipated future operating results of the subject restaurants and the cost of required capital improvements that we would need to commit for such restaurants. If we determine that a Burger King restaurant is underperforming, we may elect to close
such restaurant. We closed two Burger King restaurants in the third quarter of 2006 and we currently anticipate that we will likely elect to close an aggregate of approximately four Burger King restaurants in 2007. These restaurant closures will
reduce total restaurant sales for our Burger King restaurants. However, based on the current operating results of such restaurants, we believe that the impact on our results of operations as a result of such restaurant closures will not be material,
although there can be no assurance in this regard. Our determination of whether to close such restaurants is not final and is subject to further evaluation and may change. We may also elect to close additional Burger King restaurants in the future.

Executive Summary - Operating Performance for the Three Months Ended September 30, 2006

Total revenues for the third quarter of 2006 increased 4.6% to $189.6 million from $181.3 million in the third quarter of 2005, and Consolidated Adjusted
EBITDA decreased to $25.5 million in the third quarter of 2006 from $26.8 million in the third quarter of 2005. Net cash provided from operations was $14.3 million in the third quarter of 2006 compared to $11.5 million in the third quarter of 2005.
Revenues from our Hispanic Brand restaurants increased 8.7% to $96.3 million in the third quarter of 2006 compared to $88.6 million in the third quarter of 2005.



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We have continued to open new Hispanic Brand restaurants, and at September 30, 2006, we owned a
total of 214 restaurants under the Pollo Tropical and Taco Cabana brand names. Sales have grown from the continued expansion of both brands, as well as continued sales increases from existing Hispanic Brand restaurants. Since September 30,
2005, we have opened seven new Pollo Tropical restaurants, including one new Pollo Tropical restaurant in the New York City metropolitan area and opened ten new Taco Cabana restaurants. We also closed one underperforming Taco Cabana restaurant in
the third quarter of 2006. In the first nine months of 2006, we opened four new Pollo Tropical restaurants and seven new Taco Cabana restaurants. However, although quarterly comparable restaurant sales at our Hispanic Brand restaurants have
continued to increase, and, in the third quarter of 2006 were up 1.0% for Pollo Tropical and up 2.1% for Taco Cabana compared to the third quarter of 2005, these increases were lower than the increases in comparable restaurant sales in the first six
months of 2006 of 3.5% for our Pollo Tropical restaurants and 2.6% for our Taco Cabana restaurants.

Restaurant sales from our Burger King
restaurants increased 0.7% to $93.3 million in the third quarter of 2006 from $92.7 million in the third quarter of 2005, due to an increase in comparable Burger King restaurant sales of 2.4% in the third quarter of 2006. This increase was partially
offset by the closure of 13 Burger King restaurants since the beginning of the third quarter of 2005. As of September 30, 2006, we were operating a total of 328 Burger King restaurants.

Segment EBITDA for our Hispanic Brands increased to $16.3 million in the third quarter of 2006 from $15.9 million in the third quarter of 2005, an
increase of 2.8%. Operating results in the third quarter of 2006 for our Hispanic Brands included an increase over the third quarter of 2005 in segment EBITDA for our Taco Cabana restaurants of $1.5 million due primarily to lower advertising
expenditures, lower utility costs and a reduction in restaurant rent expense accruals due to the termination of a lease. This increase was partially offset by a $1.0 million decrease in segment EBITDA for our Pollo Tropical restaurants in the third
quarter of 2006, compared to the third quarter of 2005, due primarily to the impact of higher restaurant hourly labor rates due to labor market conditions in Florida, including an increase in the Florida minimum wage rate, higher medical insurance
costs and increased rent expense of $0.4 million from the recharacterization in 2006 of restaurant leases previously accounted for as lease financing obligations as described above under Recent and Future Events Affecting our Results of
Operations. Segment EBITDA for our Burger King restaurants decreased in the third quarter of 2006 to $9.2 million from $10.9 million in the third quarter of 2005 due primarily to higher restaurant and administrative bonus accruals of $1.1
million in the third quarter of 2006 and increased rent expense of $0.5 million from the recharacterization in 2006 of restaurant leases previously accounted for as lease financing obligations.

During the third quarter of 2006, we continued to reduce our outstanding term loan borrowings under our senior credit facility by making principal
prepayments of $6.2 million. For the nine months ended September 30, 2006 we have made principal prepayments of $23.2 million. The total principal amount of outstanding borrowings under our senior credit facility has decreased from $211.8
million at December 31, 2005 to $187.0 million at September 30, 2006.

Liquidity and Capital Resources

We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies.
We are able to operate with a substantial working capital deficit because:



| |  |  | restaurant operations are primarily conducted on a cash basis;
| | - |  | --------------------------------------------------------------



| |  |  | rapid turnover results in a limited investment in inventories; and
| | - |  | ------------------------------------------------------------------



| |  |  | cash from sales is usually received before related liabilities for food, supplies and payroll become due.
| | - |  | ---------------------------------------------------------------------------------------------------------

Interest payments under our debt obligations and capital expenditures represent significant liquidity requirements for us. We believe cash generated from
our operations, availability under our revolving credit facility and proceeds from anticipated sale-leaseback transactions will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures (which include
new restaurant development and represent a major investment of cash for us), and debt service requirements for the next 12 months. We may be required to obtain additional financing in the future to fund the growth of our business or to meet other
capital needs. There can be no assurance that we will be able to obtain additional financing on acceptable terms or at all. Both the senior credit facility and indenture, which we and certain of our subsidiaries entered into with the Bank of New
York, governing the Notes (the Indenture) contain restrictive covenants that may prevent us from incurring additional debt.

Operating activities. Net cash provided from operating activities for the nine months ended September 30, 2006 was $36.9 million due primarily to net income of $9.7 million and depreciation and amortization expense of $25.2
million. Net cash provided from operating activities for the nine months ended September 30, 2005 was $10.6 million due primarily to a net loss of $5.2 million, non-cash stock-based compensation expense of $16.3 million and depreciation and
amortization



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expense of $24.9 million. In addition, net cash provided from operating activities was reduced $26.4 million in 2005 due
to payments in the first quarter of 2005 associated with the December 2004 refinancing, which included a $20.3 million bonus to employees (including management) and a director, the applicable payroll taxes of $0.6 million and $5.5 million of tax
withholdings related to the dividend payment in late December of 2004.

Our income tax payments included in operating activities have been
historically reduced due to the utilization of net operating loss carryforwards. For tax years beginning in 2006 we have available Federal alternative minimum tax credit carryforwards of $2.1 million with no expiration date and Federal employment
tax credit carryforwards of $2.1 million that begin to expire in 2021. We had no Federal net operating loss carryforwards as of December 31, 2005.

Investing activities including capital expenditures and qualified sale-leaseback transactions. Net cash used for investing activities for the nine months ended September 30, 2006 and 2005 was $3.0 million
and $27.5 million, respectively. Capital expenditures represent a major investment of cash for us, and, excluding acquisitions, for the nine months ended September 30, 2006 and 2005 were $32.1 million and $24.8 million, respectively. Our
capital expenditures included expenditures for development of new Pollo Tropical and Taco Cabana restaurants for the nine months ended September 30, 2006 and 2005 of $20.3 million and $14.6 million, respectively. In addition, we acquired four
Taco Cabana restaurants from a franchisee for a cash purchase price of $4.2 million in the third quarter of 2005. We sold other properties, primarily non-operating restaurant properties in the first nine months of 2005 for net proceeds of $0.7
million. The net proceeds from these sales were used to reduce outstanding borrowings under our senior credit facility.

In the first nine
months of 2006, we sold 21 restaurant properties in sale-leaseback transactions for net proceeds of $31.7 million. Thirteen of these properties were acquired on June 30, 2006 from the lessor for $16.2 million when we exercised our right of
first refusal under the subject leases. The underlying leases for these 13 properties were previously treated as lease financing obligations and the purchases of these properties are shown in our consolidated statements of cash flows under financing
activities as settlements of lease financing obligations. The proceeds from these sales, net of costs of the properties acquired and other transaction costs, were used to reduce outstanding borrowings under on our senior credit facility. For all of
2006, we anticipate cash provided from sale-leaseback proceeds, after deducting the cost of any acquired properties to be sold in sale-leaseback transactions, will be approximately $18 million to $20 million, although there can be no assurance
in this regard. We also had expenditures related to the purchase of other restaurant properties to be sold in sale-leaseback transactions of $2.7 million and $0.3 million in the nine months ended September 30, 2006 and 2005, respectively.



30



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##### Table of Contents

Our capital expenditures are primarily for (1) new restaurant development, which includes the purchase of
related real estate; (2) restaurant remodeling, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants, including expenditures associated with Burger King franchise renewals; (3) other restaurant capital
expenditures, which include capital restaurant maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants; and (4) corporate and restaurant information systems. The following table sets forth our capital expenditures
for the periods presented (in thousands):



|                                             |  |               |        |            |   |            |  |       |       |              |   |       |  |   |       
|-------------------------------------------- |  | ------------- | ------ | ---------- | - | ---------- |  | ----- | ----- | ------------ | - | ----- |  | - | ------
|                                             |  | PolloTropical |        | TacoCabana |   | BurgerKing |  | Other |       | Consolidated
|Nine months ended September 30, 2006:        |  |               |        |            |   |            |  |       |       |              |   |       |  |   |       
|New restaurant development                   |  | $             | 10,826 |            | $ | 9,457      |  | $     | 87    |              | $ |      |  | $ | 20,370
|Restaurant remodeling                        |  |               | 1,150  |            |   | 261        |  |       | 3,474 |              |   |      |  |   | 4,885 
|Other restaurant capital expenditures (1)    |  |               | 1,074  |            |   | 1,915      |  |       | 2,489 |              |   |      |  |   | 5,478 
|Corporate and restaurant information systems |  |               |       |            |   |           |  |       |      |              |   | 1,324 |  |   | 1,324 
|                                             |  |               |        |            |   |            |  |       |       |              |   |       |  |   |       
|Total capital expenditures                   |  | $             | 13,050 |            | $ | 11,633     |  | $     | 6,050 |              | $ | 1,324 |  | $ | 32,057
|                                             |  |               |        |            |   |            |  |       |       |              |   |       |  |   |       
|Number of new restaurant openings            |  |               | 4      |            |   | 7          |  |       |      |              |   |       |  |   | 11    
|                                             |  |               |        |            |  
|Nine months ended September 30, 2005:        |  |               |        |            |   |            |  |       |       |              |   |       |  |   |       
|New restaurant development                   |  | $             | 8,080  |            | $ | 6,557      |  | $     | 860   |              | $ |      |  | $ | 15,497
|Restaurant remodeling                        |  |               | 686    |            |   |           |  |       | 1,407 |              |   |      |  |   | 2,093 
|Restaurant maintenance expenditures (1)      |  |               | 1,527  |            |   | 2,690      |  |       | 1,971 |              |   |      |  |   | 6,188 
|Other capital expenditures                   |  |               |       |            |   |           |  |       |      |              |   | 985   |  |   | 985   
|Acquisition of Taco Cabana restaurants       |  |               |       |            |   | 4,220      |  |       |      |              |   |      |  |   | 4,220 
|                                             |  |               |        |            |   |            |  |       |       |              |   |       |  |   |       
|Total capital expenditures                   |  | $             | 10,293 |            | $ | 13,467     |  | $     | 4,238 |              | $ | 985   |  | $ | 28,983
|                                             |  |               |        |            |   |            |  |       |       |              |   |       |  |   |       
|Number of new restaurant openings            |  |               | 3      |            |   | 3          |  |       |      |              |   |       |  |   | 6     

---

|1) | Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the nine months ended
September 30, 2006 and 2005, restaurant repair and maintenance expenses were approximately $13.3 million and $13.5 million, respectively.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In 2006, we anticipate that total capital expenditures will be approximately $45 million to $47 million (of which $32.1 million had been expended through September 30, 2006), although the actual amount of capital
expenditures may differ from these estimates. These capital expenditures are expected to include approximately $28 million to $29 million for the development of new restaurants and purchase of related real estate applicable to our Taco Cabana and
Pollo Tropical restaurant concepts, of which $20.4 million had been expended through September 30, 2006. We currently anticipate that we will open four new Pollo Tropical restaurants and three new Taco Cabana restaurants in the fourth quarter
of 2006. Capital expenditures in 2006 also are expected to include expenditures of approximately $15 million to $16 million for the ongoing reinvestment in our three restaurant concepts for remodeling costs and capital maintenance expenditures, of
which $10.4 million had been expended through September 30, 2006, and approximately $2 million in other capital expenditures.

Financing activities. Net cash used for financing activities for the nine months ended September 30, 2006 and 2005 was $40.4 million and $9.3 million, respectively. Financing activities in these periods consisted of repayments
under our debt arrangements and, in the first nine months of 2006 and 2005, included principal repayments on borrowings under our senior credit facility of $23.2 million and $6.0 million, respectively. Financing activities in the first nine months
of 2006 also included the payment of $17.2 million, which was comprised of $15.2 million of lease financing obligations and $2.0 million of interest, to acquire fourteen leased properties previously accounted for as lease financing obligations. This
purchase is shown as a principal payment in the statement of cash flows as it relates to a previously recorded lease financing obligation. In addition, in the first nine months of 2005 we purchased one restaurant property subject to a lease
financing obligation for $1.1 million under our right of first refusal included in the subject lease.

Indebtedness. On
December 15, 2004, we completed a debt offering and also entered into a new senior credit facility in which we received $400.0 million in total gross proceeds, including $180.0 million from the sale of our Notes in a private placement and term
loan borrowings of $220.0 million under the new senior credit facility. At September 30, 2006, we had total debt outstanding of $427.0 million comprised of $180.0 million of Notes, term loan borrowings of $187.0 million under the senior credit
facility, lease financing obligations of $58.4 million and capital lease obligations of $1.6 million.



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Senior Credit Facility. Our senior credit facility provides for a revolving credit facility under
which we may borrow up to $50.0 million (including a sub limit of up to $20.0 million for letters of credit and up to $5.0 million for swingline loans), a $220.0 million term loan facility and incremental facilities (as defined in the senior credit
facility), at our option, of up to $100.0 million, subject to the satisfaction of certain conditions, which we refer to herein as the senior credit facility. At September 30, 2006, $187.0 million was outstanding under the term loan
facility and no amounts were outstanding under our revolving credit facility. After reserving $14.6 million for outstanding letters of credit guaranteed by the facility, $35.4 million was available for borrowings under our revolving credit facility
at September 30, 2006. We were in compliance with the covenants under our senior credit facility as of September 30, 2006.

Contractual Obligations.

The following table summarizes our contractual obligations and commitments as of September 30, 2006 (in thousands):



|                                                   |  |                        |           |                                   |   |             |  |             |         |            |   |         |  |   |        
|-------------------------------------------------- |  | ---------------------- | --------- | --------------------------------- | - | ----------- |  | ----------- | ------- | ---------- | - | ------- |  | - | -------
|                                                   |  | Payments due by period
|Contractual Obligations                            |  | Total                  |           | October 2006through December 2006 |   | 2007  2008 |  | 2009  2010 |         | Thereafter
|Long-term debt obligations, including interest (1) |  | $                      | 523,156   |                                   | $ | 5,847       |  | $           | 62,627  |            | $ | 234,182 |  | $ | 220,500
|Capital lease obligations, including interest (2)  |  |                        | 2,876     |                                   |   | 155         |  |             | 644     |            |   | 357     |  |   | 1,720  
|Operating lease obligations (3)                    |  |                        | 445,056   |                                   |   | 10,057      |  |             | 76,002  |            |   | 68,450  |  |   | 290,547
|                                                   |  |                        |           |                                   |  
|Lease financing obligations, including interest(4) |  |                        | 136,842   |                                   |   | 1,677       |  |             | 10,729  |            |   | 11,143  |  |   | 113,293
|                                                   |  |                        |           |                                   |   |             |  |             |         |            |   |         |  |   |        
|Total contractual obligations                      |  | $                      | 1,107,930 |                                   | $ | 17,736      |  | $           | 150,002 |            | $ | 314,132 |  | $ | 626,060
|                                                   |  |                        |           |                                   |   |             |  |             |         |            |   |         |  |   |        

---

|(1) | Our long-term debt obligations include $180.0 million principal amount of Notes and $187.0 million principal amount of term loan borrowings outstanding under the senior credit
facility. Interest payments on our Notes of $107.3 for all periods presented are included at the coupon rate of 9.0%. Interest payments included above totaling $48.9 for all periods presented on our term loan borrowings under the senior credit
facility are variable in nature and have been calculated using an interest rate of 7.0% for each year.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes interest of $1.3 million in total for all years presented.
|--- | -------------------------------------------------------------------

|(3) | Represents aggregate minimum lease payments. Many of our leases also require contingent rent in addition to the minimum base rent based on a percentage of sales and require expenses
incidental to the use of the property which have been excluded from this table.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes interest of $78.4 million in total for all years presented. We reduced our lease financing obligations by $52.8 million during the nine months ended September 30, 2006 by
exercising our right of first refusal and purchasing fourteen restaurant properties which were concurrently sold in a qualified sale-leaseback transactions and amending lease agreements for thirty-four properties accounted for as lease financing
obligations to eliminate or otherwise cure the provisions that precluded the original sale-leaseback accounting under SFAS 98. These leases are reflected as operating lease obligations in the above table.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have not included obligations under our postretirement medical benefit plans in the contractual obligations table as our postretirement plan is not
required to be funded in advance, but is funded as retiree medical claims are paid. Also excluded from the contractual obligations table are payments we may make for workers compensation, general liability and employee healthcare claims for
which we pay all claims, subject to annual stop-loss limitations both for individual claims and claims in the aggregate. The majority of our recorded liabilities related to our employee health and insurance plans represent estimated reserves for
incurred claims that have yet to be filed or settled.



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Results of Operations

Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005

The following
table sets forth, for the three months ended September 30, 2006 and 2005, selected operating results as a percentage of consolidated restaurant sales:



|                                      |  |       |   |  |       |  
|------------------------------------- |  | ----- | - |  | ----- | -
|                                      |  | 2006  |   |  | 2005  |  
|Restaurant sales:                     |  |       |   |  |       |  
|Pollo Tropical                        |  | 20.1  | % |  | 19.1  | %
|Taco Cabana                           |  | 30.6  | % |  | 29.7  | %
|Burger King                           |  | 49.3  | % |  | 51.2  | %
|                                      |  |       |   |  |       |  
|Total restaurant sales                |  | 100.0 | % |  | 100.0 | %
|                                      |  |      
|Costs and expenses:                   |  |       |   |  |       |  
|Cost of sales                         |  | 28.0  | % |  | 28.8  | %
|Restaurant wages and related expenses |  | 29.2  | % |  | 28.5  | %
|Restaurant rent expense               |  | 4.8   | % |  | 4.5   | %
|Other restaurant operating expenses   |  | 15.1  | % |  | 14.7  | %
|Advertising expense                   |  | 3.5   | % |  | 3.5   | %
|General and administrative            |  | 6.2   | % |  | 5.4   | %

Since September 30, 2005 through September 30, 2006, we have opened seven new Pollo
Tropical restaurants, ten new Taco Cabana restaurants and one new Burger King restaurant. During the same period we closed eleven Burger King restaurants and one Taco Cabana restaurant.

Restaurant Sales. Total restaurant sales for the third quarter of 2006 increased $8.3 million, or 4.6%, to $189.3 million from $180.9 million in
the third quarter of 2005 due primarily to sales increases at our Hispanic Brand restaurants of $7.7 million, or 8.8%, to $96.0 million in the third quarter of 2006.

Pollo Tropical restaurant sales increased $3.4 million, or 9.7%, to $38.0 million in the third quarter of 2006 due primarily to the opening of eight new Pollo Tropical restaurants since the beginning of the third
quarter of 2005, which contributed $3.1 million in additional sales in the third quarter of 2006 compared to the third quarter of 2005. In addition, comparable restaurant sales at our Pollo Tropical restaurants increased 1.0% in the third quarter of
2006 which included the effect of menu price increases of approximately 4% near the end of the second quarter of 2005.

Taco Cabana
restaurant sales increased $4.4 million, or 8.1%, to $58.0 million in the third quarter of 2006 due primarily to the opening of ten new Taco Cabana restaurants since the beginning of the third quarter of 2005 and the acquisition of four Taco Cabana
restaurants from a franchisee in the third quarter of 2005. These 14 additional restaurants contributed $3.6 million of additional sales in the third quarter of 2006 compared to the third quarter of 2005. In addition, comparable restaurant sales at
our existing Taco Cabana restaurants increased 2.1% in the third quarter of 2006.

Burger King restaurant sales increased $0.6 million, or
0.7%, to $93.3 million in the third quarter of 2006 due to a comparable restaurant sales increase of 2.4% at our Burger King restaurants in the third quarter of 2006 which included the effect of menu price increases of approximately 4% at the
beginning of 2006. These factors were offset in part by the closure of 13 Burger King restaurants since the beginning of the third quarter of 2005.

Operating Costs and Expenses.Cost of sales (food and paper costs), as a percentage of total restaurant sales, decreased to 28.0% in the third quarter of 2006 from 28.8% in the third quarter of 2005. Pollo Tropical cost of sales, as
a percentage of Pollo Tropical restaurant sales, decreased to 32.1% in the third quarter of 2006 from 33.0% in the third quarter of 2005 due



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primarily to lower whole chicken commodity prices (0.6% of Pollo Tropical sales). Taco Cabana cost of sales, as a
percentage of Taco Cabana restaurant sales, increased slightly to 29.0% in the third quarter of 2006 from 28.9% in the third quarter of 2005. Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased to 25.7% in the third
quarter of 2006 from 27.2% in the third quarter of 2005 due primarily to the effect of menu price increases since the end of the first quarter of 2005 (0.9% of Burger King sales in the third quarter of 2006) and lower promotional discounting in 2006
(0.5% of Burger King sales).

Restaurant wages and related expenses, as a percentage of total restaurant sales, increased to 29.2% in the
third quarter of 2006 from 28.5% in the third quarter of 2005. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, increased to 26.4% in the third quarter of 2006 from 24.1% in the third quarter
of 2005 due primarily to increases in restaurant hourly labor rates in response to labor market conditions in Florida including an increase in the Florida minimum wage rate (1.1% of Pollo Tropical sales), higher medical insurance costs (0.6% of
Pollo Tropical sales) and increased manager training to support new restaurant openings (0.3% of Pollo Tropical sales). Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, increased to 28.4% in the
third quarter of 2006 from 28.0% in the third quarter of 2005 due primarily to higher medical insurance costs (0.2% of Taco Cabana sales). Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, increased
to 30.7% in the third quarter of 2006 from 30.5% in the third quarter of 2005 due primarily to higher restaurant incentive bonuses (0.2% of Burger King sales).

Restaurant rent expense, as a percentage of total restaurant sales, increased to 4.8% in the third quarter of 2006 from 4.5% in the third quarter of 2005 due primarily to the recharacterization of leases as qualified
sale-leasebacks rather than lease financing obligations in the second and third quarters of 2006 as described above under Recent and Future Events Affecting our Results of Operations - Lease Financing Obligations which increased rent
expense by $0.9 million compared to the third quarter of 2005 (0.5% of total restaurant sales) and the effect of sale-leaseback transactions entered into since the beginning of the fourth quarter of 2005 (0.2% of total restaurant sales). This
increase was partially offset by the reduction in restaurant rent expense accruals related to the termination of a Taco Cabana lease (0.4% of total restaurant sales ) and, to a much lesser extent, the effect of higher comparable restaurant sales
volumes at all three of our brands in the third quarter of 2006 on fixed rent costs.

Other restaurant operating expenses, as a percentage
of total restaurant sales, increased to 15.1% in the third quarter of 2006 from 14.7% in the third quarter of 2005. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 13.3% in the
third quarter of 2006 from 12.7% in the third quarter of 2005 due primarily to increased utility costs from higher natural gas and electricity prices (0.5% of Pollo Tropical sales). Taco Cabana other restaurant operating expenses, as a percentage of
Taco Cabana restaurant sales, increased to 15.4% in the third quarter of 2006 from 14.9% in the third quarter of 2005 due primarily to higher general liability insurance costs (0.2% of Taco Cabana sales) and higher credit card fees (0.2% of Taco
Cabana sales). Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales increased to 15.7% in the third quarter of 2006 from 15.4% in the third quarter of 2005 due primarily to higher fees associated with the
acceptance of credit cards (0.2% of Burger King sales).

Advertising expense, as a percentage of total restaurant sales, was 3.5% in both
the third quarter of 2006 and the third quarter of 2005. Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales, increased to 1.8% in the third quarter of 2006 from 1.2% in the third quarter of 2005 due to radio
expenditures in the third quarter of 2006. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, decreased to 3.3% in the third quarter of 2006 from 4.4% in the third quarter of 2005 due primarily to the timing of
promotions. Burger King advertising expense, as a percentage of Burger King restaurant sales, increased to 4.3% in the third quarter of 2006 from 3.8% in the third quarter of 2005 due to increased promotional activities in the third quarter of 2006
in certain of our Burger King markets.

General and administrative expenses, including stock-based compensation expense, as a percentage of
total restaurant sales, increased to 6.2% in the third quarter of 2006 from 5.4% in the third quarter of 2005 due to higher administrative bonuses (0.5% of total restaurant sales) and higher administrative payroll and benefit costs (0.3% of total
restaurant sales). There was no stock-based compensation expense in the third quarter of 2006 or 2005.

Segment EBITDA.Segment
EBITDA for our Pollo Tropical restaurants decreased 13.8% to $6.5 million in the third quarter of 2006 from $7.5 million in the third quarter of 2005. Segment EBITDA for our Taco Cabana restaurants increased 17.8% to $9.9 million in the third
quarter of 2006 from $8.4 million in the third quarter of 2005. Segment EBITDA for our Burger King restaurants decreased 15.8% to $9.2 million in the third quarter of 2006 from $10.9 million in the third quarter of 2005.

Depreciation and Amortization and Impairment Losses. Depreciation and amortization expense increased to $8.4 million in the third quarter of 2006
from $8.2 million in the third quarter of 2005. Impairment losses were $0.6 million in the



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third quarter of 2006 and were related to property and equipment of certain underperforming Taco Cabana restaurants.
Impairment losses were $0.6 million in the third quarter of 2005 and were related to property and equipment of certain underperforming Burger King restaurants and planned future closings of Burger King restaurants.

Interest Expense. Interest expense decreased $0.7 million to $10.2 million in the third quarter of 2006 from $10.9 million in the third quarter of
2005 due primarily to recharacterization of leases as qualified sale-leasebacks rather than lease financing obligations in the second and third quarters of 2006 as described above under Recent and Future Events Affecting our Results of
OperationsLease Financing Obligations, which decreased interest expense by $1.3 million compared to the third quarter of 2005. This decrease was partially offset by higher effective interest rates on our floating rate borrowings under
our senior credit facility. The weighted average interest rate on our long-term debt, excluding lease financing obligations, for the third quarter of 2006 increased to 8.5% from 7.4% in the third quarter of 2005. Interest expense on lease financing
obligations was $1.7 million in the third quarter of 2006 and $2.8 million in the third quarter of 2005.

Provision for Income
Taxes. The provision for income taxes in the third quarter of 2006 was derived using an estimated effective annual income tax rate for 2006 of 33.5% as well as the effect of any discrete tax items occurring in the third quarter of 2006. The
provision for income taxes in the three and nine months ended September 30, 2005 was derived using an estimated effective annual income tax rate of 33.2%.

Net Income.As a result of the foregoing, net income was $5.1 million in the third quarter of 2006 and $5.3 million in the third quarter of 2005.

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005

The following table sets forth for the nine months ended September 30, 2006 and 2005, selected operating results as a percentage of consolidated restaurant sales:



|                                                                  |  |       |   |  |       |  
|----------------------------------------------------------------- |  | ----- | - |  | ----- | -
|                                                                  |  | 2006  |   |  | 2005  |  
|Restaurant sales:                                                 |  |       |   |  |       |  
|Pollo Tropical                                                    |  | 20.4  | % |  | 19.4  | %
|Taco Cabana                                                       |  | 30.6  | % |  | 29.5  | %
|Burger King                                                       |  | 49.0  | % |  | 51.1  | %
|                                                                  |  |       |   |  |       |  
|Total restaurant sales                                            |  | 100.0 | % |  | 100.0 | %
|                                                                  |  |      
|Costs and expenses:                                               |  |       |   |  |       |  
|Cost of sales                                                     |  | 28.2  | % |  | 29.1  | %
|Restaurant wages and related expenses                             |  | 29.3  | % |  | 28.9  | %
|Restaurant rent expense                                           |  | 4.8   | % |  | 4.9   | %
|Other restaurant operating expenses                               |  | 14.7  | % |  | 14.3  | %
|Advertising expense                                               |  | 3.7   | % |  | 3.7   | %
|General and administrative (including stock compensation expense) |  | 6.4   | % |  | 9.0   | %

Restaurant Sales. Total restaurant sales for the first nine months of 2006 increased $30.3
million, or 5.7%, to $561.7 million from $531.4 million in the first nine months of 2005 due primarily to sales increases at our Hispanic Brand restaurants of $26.7 million, or 10.3%, to $286.3 million in the first nine months of 2006.

Pollo Tropical restaurant sales increased $11.4 million, or 11.1%, to $114.5 million in the first nine months of 2006 due primarily to the opening of
ten new Pollo Tropical restaurants since the beginning of 2005, which contributed $8.8 million in sales in the first nine months of 2006, and a 2.6% increase in comparable restaurant sales at our Pollo Tropical restaurants in the first nine months
of 2006 which included the effect of menu price increases of approximately 4% near the end of the second quarter of 2005.

Taco Cabana
restaurant sales increased $15.3 million, or 9.8%, to $171.8 million in the first nine months of 2006 due primarily to the addition of thirteen new Taco Cabana restaurants since the beginning of 2005 and the acquisition of four Taco Cabana
restaurants from a franchisee in July 2005. These 17 additional restaurants contributed $11.9 million of sales in the first nine months of 2006. In addition, comparable restaurant sales at our Taco Cabana restaurants increased 2.4% in the first nine
months of 2006.

Burger King restaurant sales increased $3.6 million, or 1.3%, to $275.4 million in the first nine months of 2006 due to a
3.1% increase in comparable restaurant sales at our Burger King restaurants in the first nine months of 2006 which included the effect of menu price increases of approximately 4% at the beginning of 2006. These factors were offset in part by the
closure of 21 Burger King restaurants since the beginning of 2005.



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Operating Costs and Expenses. Cost of sales (food and paper costs), as a percentage of total
restaurant sales, decreased to 28.2% in the first nine months of 2006 from 29.1% in the first nine months of 2005. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, decreased to 32.5% in the first nine months of 2006
from 33.3% in the first nine months of 2005 due primarily to lower whole chicken commodity prices (1.2% of Pollo Tropical sales) offset by price increases in other commodities including produce (0.5% of Pollo tropical sales). Taco Cabana cost of
sales, as a percentage of Taco Cabana restaurant sales, decreased slightly to 29.0% in the first nine months of 2006 from 29.1% in the first nine months of 2005 due primarily to higher vendor rebates. Burger King cost of sales, as a percentage of
Burger King restaurant sales, decreased to 25.9% in the first nine months of 2006 from 27.4% in the first nine months of 2005 due primarily to the effect of menu price increases since the beginning of 2005 (0.9% of Burger King sales), lower beef
commodity costs in 2006 (0.4% of Burger King sales) and lower promotional discounting in 2006 (0.4%of Burger King sales).

Restaurant wages
and related expenses, as a percentage of total restaurant sales, increased to 29.3% in the first nine months of 2006 from 28.9% in the first nine months of 2005. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical
restaurant sales, increased to 25.5% in the first nine months of 2006 from 23.6% in the first nine months of 2005 due primarily to increases in restaurant hourly labor rates in response to labor market conditions in Florida (1.1% of Pollo Tropical
sales), higher medical insurance costs (0.5% of Pollo Tropical sales) and increased manager training to support new restaurant openings (0.2% of Pollo Tropical sales). Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana
restaurant sales, increased to 28.4% in the first nine months of 2006 from 28.1% in the first nine months of 2005 due primarily to higher medical insurance costs (0.1% of Taco Cabana sales). Burger King restaurant wages and related expenses, as a
percentage of Burger King restaurant sales, was 31.4% in both the first nine months of 2006 and 2005.

Restaurant rent expense, as a
percentage of total restaurant sales, decreased to 4.8% in the first nine months of 2006 from 4.9% in the first nine months of 2005 due primarily to the effect of higher comparable restaurant sales volumes at all three of our brands in the first
nine months of 2006 on fixed rent costs. This decrease was offset by the effect of sale-leaseback transactions entered into since the beginning of the fourth quarter of 2005 (0.1% of total restaurant sales).

Other restaurant operating expenses, as a percentage of total restaurant sales, increased to 14.7% in the first nine months of 2006 from 14.3% in the
first nine months of 2005. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 12.9% in the first nine months of 2006 from 11.8% in the first nine months of 2005 due primarily to
increased utility costs from higher natural gas and electricity prices (0.7% of Pollo Tropical sales), higher repair and maintenance expenses from non-structural hurricane damage in 2005 (0.1% of Pollo Tropical sales) and higher credit card fees.
Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, increased to 14.9% in the first nine months of 2006 from 14.4% in the first nine months of 2005 due primarily to increased utility costs from higher
natural gas and electricity prices (0.6% of Taco Cabana sales). Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, increased slightly to 15.3% in the first nine months of 2006 from 15.2% in the first
nine months of 2005 due primarily to higher fees associated with the acceptance of credit cards (0.2% of Burger King sales).

Advertising
expense, as a percentage of total restaurant sales, was 3.7% in both the first nine months of 2006 and the first nine months of 2005. Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales, decreased to 1.7% in the
first nine months of 2006 from 2.1% in the first nine months of 2005 due to higher television and radio expenditures in 2005. Our Pollo Tropical advertising expenditures for all of 2006 are anticipated to be approximately 1.6% of Pollo Tropical
restaurant sales, although the actual percentage may be different. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, decreased slightly to 4.2% in the first nine months of 2006 from 4.3% in the first nine months of
2005 due primarily to the timing of promotions. Our Taco Cabana advertising expenditures for all of 2006 are anticipated to be approximately 4.2% of Taco Cabana restaurant sales, although the actual percentage may be different. Burger King
advertising expense, as a percentage of Burger King restaurant sales, increased to 4.2% in the first nine months of 2006 from 4.0% in the first nine months of 2005 due to increased promotional activities in certain of our Burger King markets.

General and administrative expenses, including stock-based compensation expense, as a percentage of total restaurant sales, decreased to
6.4% in the first nine months of 2006 from 9.0% in the first nine months of 2005. There was no stock-based compensation expense in the first nine months of 2006. Stock-based compensation expense in the first nine months of 2005 was $16.4 million, or
3.1%, as a percentage of total restaurant sales. Stock-based compensation expense in 2005 was primarily attributable to the issuance by us of our common stock in exchange for all outstanding stock options in the second quarter of 2005. In addition
to the decrease in stock-based compensation expense, general and administrative expenses



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increased 0.5%, as a percentage of total restaurant sales, in the first nine months of 2006 compared to the first nine
months of 2005 due primarily to higher administrative payroll costs, including related payroll taxes and benefits, (0.3% of total restaurant sales) and higher administrative bonus accruals (0.1% of total restaurant sales).

Segment EBITDA. Segment EBITDA for our Pollo Tropical restaurants decreased 2.6% to $21.8 million in the first nine months of 2006 from $22.4
million in the first nine months of 2005. Segment EBITDA for our Taco Cabana restaurants increased 8.8% to $25.7 million in the first nine months of 2006 from $23.6 million in the first nine months of 2005. Segment EBITDA for our Burger King
restaurants increased 3.3% to $26.3 million in the first nine months of 2006 from $25.5 million in the first nine months of 2005.

Depreciation and Amortization and Impairment Losses. Depreciation and amortization expense increased to $25.2 million in the first nine months of 2006 from $24.9 million in the first nine months of 2005. Impairment losses were $0.8
million in the first nine months of 2006 and were related to property and equipment of certain underperforming Taco Cabana restaurants of $0.6 million and property and equipment for planned future closures of Burger King restaurants of $0.2 million.
Impairment losses were $1.4 million in the first nine months of 2005 with $1.3 million related to property and equipment for certain underperforming Burger King restaurants and planned future closures of Burger King restaurants and $0.1 million for
our Taco Cabana restaurants.

Interest Expense. Interest expense increased $2.8 million to $34.6 million in the first nine months of
2006 from $31.8 million in the first nine months of 2005 due primarily to the inclusion in interest expense of $1.7 million of settlement losses on lease financing obligations and higher effective interest rates on our floating rate borrowings under
our senior credit facility. This increase was partially offset by the recharacterization of leases as qualified sale-leasebacks rather than lease financing obligations in the second and third quarters of 2006, as described above under Recent
and Future Events Affecting our Results of Operations - Lease Financing Obligations, which decreased interest expense by $1.3 million for the first nine months of 2006. The weighted average interest rate on our long-term debt, excluding lease
financing obligations, for the nine months ended September 30, 2006 increased to 8.3% from 7.0% in the first nine months of 2005. Interest expense on lease financing obligations, including settlement losses of $1.9 million in the first nine
months of 2006 was $8.9 million in the first nine months of 2006 and $8.5 million in the first nine months of 2005.

Provision for
Income Taxes. The provision for income taxes for the nine months ended September 30, 2006 was derived using an estimated effective annual income tax rate for 2006 of 33.5% as well as the effect of any discrete tax items occurring in the
first nine months of 2006. The provision for income taxes for the nine months ended September 30, 2005 was derived using an estimated effective annual income tax rate for 2005 of 33.2%. The tax provision for the nine months ended
September 30, 2005 also included $3.8 million for the non-deductible portion of stock-based compensation expense related to stock awards in the second quarter of 2005 and $0.5 million of income tax expense associated with Ohio state tax
legislation enacted in the second quarter of 2005. The discrete tax expense for each of these items was recorded in the second quarter of 2005.

On May 18, 2006 the state of Texas enacted House Bill 3, which replaces the states current franchise tax with a margin tax which significantly affects the tax system for most corporate taxpayers. The margin tax,
which is based on revenues less certain allowed deductions, will be accounted for as an income tax, following the provisions of SFAS Statement No. 109, Accounting for Income Taxes. We have reviewed the provisions of this
legislation and have concluded that the impact on our deferred taxes, due to the changes in the Texas tax law, is immaterial.

Net
Income (Loss).As a result of the foregoing, net income was $9.7 million in the first nine months of 2006 compared to a net loss of $5.2 million in the first nine months of 2005.



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A reconciliation of Consolidated Adjusted EBITDA to net cash provided from operating activities for the
nine months ended September 30, 2006 and 2005 is presented below:



|                                                                                                      |  |      |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(Dollars in thousands)                                                                                |  | 2006 |         |   | 2005 |  
|Consolidated Adjusted EBITDA, as defined                                                              |  | $    | 73,811  |   |      | $ | 71,453  |  
|Adjustments to reconcile Consolidated Adjusted EBITDA to net cash provided from operating activities: |  |      |         |   |      |   |         |  
|Gain on sale of assets                                                                                |  |      |        |   |      |   | (585    | )
|Cash portion of stock-based compensation expense                                                      |  |      |        |   |      |   | (122    | )
|Interest expense                                                                                      |  |      | (34,616 | ) |      |   | (31,830 | )
|Amortization of deferred financing costs                                                              |  |      | 1,098   |   |      |   | 1,154   |  
|Amortization of unearned purchase discounts                                                           |  |      | (1,616  | ) |      |   | (1,616  | )
|Amortization of deferred gains from sale-leaseback transactions                                       |  |      | (897    | ) |      |   | (377    | )
|Accretion of interest on lease financing obligations                                                  |  |      | 281     |   |      |   | 257     |  
|Gain on settlement of lease financing obligations                                                     |  |      | (120    | ) |      |   |        |  
|Provision for income taxes                                                                            |  |      | (4,828  | ) |      |   | (2,054  | )
|Deferred income taxes                                                                                 |  |      | 159     |   |      |   | (876    | )
|Decrease in accrued bonus to employees and a director                                                 |  |      |        |   |      |   | (20,860 | )
|Change in other operating assets and liabilities                                                      |  |      | 3,580   |   |      |   | (3,921  | )
|                                                                                                      |  |      |         |   |      |   |         |  
|Net cash provided from operating activities                                                           |  | $    | 36,852  |   |      | $ | 10,623  |  
|                                                                                                      |  |      |         |   |      |   |         |  

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements other than our operating leases, which are primarily for our restaurant properties and not recorded on our
consolidated balance sheet.

Application of Critical Accounting Policies

Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in
the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by
the application of our accounting policies. Our significant accounting policies are described in the Significant Accounting Policies footnote in the notes to our Consolidated Financial Statements included in our Annual Report on Form
10-K for the year ended December 31, 2005. Critical accounting estimates are those that require application of managements most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may
change in subsequent periods.

Sales recognition at our company-owned and operated restaurants is straightforward as customers pay for
products at the time of sale and inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within 30 days. The earnings reporting process is covered by our system of internal controls and
generally does not require significant management estimates and judgments. However, critical accounting estimates and judgments, as noted below, are inherent in the assessment and recording of accrued occupancy costs, insurance liabilities, legal
obligations, income taxes, the valuation of goodwill and intangible assets for impairment, assessing impairment of long-lived assets and lease accounting matters. While we apply our judgment based on assumptions believed to be reasonable under the
circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions.

Accrued occupancy costs. We make estimates of accrued occupancy costs pertaining to closed restaurant locations on an ongoing basis. These estimates require assessment and continuous evaluation of a number of
factors such as the remaining contractual period under our lease obligations, the amount of sublease income we are able to realize on a particular property and estimates of other costs such as property taxes. Differences between actual future events
and prior estimates could result in adjustments to these accrued costs. At September 30, 2006 we had three non-operating restaurant properties.



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Insurance liabilities. We are insured for workers compensation, general liability and
medical insurance claims under policies where we pay all claims, subject to annual stop-loss limitations both for individual claims and claims in the aggregate. At September 30, 2006, we had $7.7 million accrued for these insurance claims. We
record insurance liabilities based on historical and industry trends, which are continually monitored, and adjust accruals as warranted by changing circumstances. Since there are many estimates and assumptions involved in recording these insurance
liabilities, including the ability to estimate the future development of incurred claims based on historical trends, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities.

Legal obligations. In the normal course of business, we must make estimates of potential future legal obligations and liabilities
which require the use of managements judgment. Management may also use outside legal advice to assist in the estimating process. However, the ultimate outcome of various legal issues could be different than management estimates and adjustments
to income could be required.

Income taxes. We record income tax liabilities utilizing known obligations and estimates of potential
obligations. We are required to record a valuation allowance if it is more likely than not that the value of estimated deferred tax assets are different from those recorded. This would include making estimates and judgments on future taxable income,
the consideration of feasible tax planning strategies and existing facts and circumstances. When the amount of deferred tax assets to be realized is expected to be different from that recorded, the asset balance and income statement would reflect
any change in valuation in the period such determination is made.

Evaluation of Goodwill. We must evaluate our recorded goodwill
under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142) on an ongoing basis. We have elected to conduct our annual impairment review of goodwill assets at December 31. Our review at December 31,
2005 indicated there has been no impairment as of that date. This annual evaluation of goodwill requires us to make estimates and assumptions to determine the fair value of our reporting units including projections regarding future operating results
of each restaurant over its remaining lease term and market values. These estimates may differ from actual future events and if these estimates or related projections change in the future, we may be required to record impairment charges for these
assets.

Impairment of Long-lived Assets. We assess the potential impairment of long-lived assets, principally property and
equipment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived
assets with their respective carrying values. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term. If assets are determined to be impaired,
the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, which are subject to a high degree of
judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets.

Impairment of
Burger King Franchise Rights. We assess the potential impairment of Burger King franchise rights whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We determine if there is impairment by
comparing the aggregate undiscounted future cash flows from those acquired restaurants with the respective carrying value of franchise rights for each Burger King acquisition. In determining future cash flows, significant estimates are made by us
with respect to future operating results of each group of acquired restaurants over their remaining franchise life. If acquired franchise rights are determined to be impaired, the impairment charge is measured by calculating the amount by which the
franchise rights carrying amount exceeds its fair value. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment
charges for these assets.

Lease Accounting.Judgments made by management for our lease obligations include the lease term including
the determination of renewal options that are reasonably assured which can affect the classification of a lease as capital or operating for accounting purposes, the term over which related leasehold improvements for each restaurant are
amortized, and any rent holidays and/or changes in rental amounts for recognizing rent expense over the term of the lease. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported
if different assumed lease terms were used.

We also must evaluate under SFAS 98 sales of our restaurants which occur in sale-leaseback
transactions to determine the proper accounting for the proceeds of such sales either as a sale or a financing. This evaluation requires certain judgments in determining whether or not clauses in the lease or any related agreements constitute
continuing involvement under SFAS 98. These judgments must also consider the various interpretations of SFAS 98 since its issuance in 1989. For those sale-leasebacks that are accounted for as financing transactions, we must estimate our
incremental borrowing rate, or another rate in cases where the incremental borrowing rate is not appropriate to utilize, for purposes of determining interest expense and the resulting amortization of the lease financing obligation. Changes in
the determination of the incremental borrowing rates or other rates utilized in connection with the accounting for lease financing transactions could have a significant effect on the interest expense and underlying balance of the lease financing
obligations.



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In addition, if a purchase option exists for any properties subject to a lease financing obligation,
the purchase option is evaluated for its probability of exercise on an ongoing basis. This evaluation considers many factors including, without limitation, our intentions, the fair value of the underlying properties, our ability to acquire the
property, economic circumstances and other available alternatives to us for the continued use of the property. These factors may change and be considered differently in future assessments of probability.

Effects of New Accounting Standards

In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), which requires companies to measure and recognize compensation expense for all share-based payments at fair value. In addition, the FASB has
issued a number of supplements to SFAS 123R to guide the implementation of this new accounting pronouncement. Share-based payments include stock option grants and other equity-based awards granted under any long-term incentive and stock option plans
we may have. SFAS 123R was effective for us beginning January 1, 2006. We used the modified prospective transition method, which requires that compensation cost be recognized in the financial statements for all awards granted after the date of
adoption as well as for existing awards for which the requisite service has not been rendered as of the date of adoption (the Existing Awards) and requires that prior periods not be restated. However, as all shares of stock issued in the
stock award in the second quarter of 2005 were fully vested and we did not have any stock options outstanding at December 31, 2005 and September 30, 2006, we have not recorded any stock-based compensation expense related to the adoption of
SFAS 123R. We are currently evaluating valuation models to be utilized in connection with any future adoption of a stock option or other stock incentive plan.

SFAS 123R also requires an entity to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adopting SFAS 123R (the APIC Pool). In November 2005, the FASB
issued FSP No. FAS 123(R)-3 Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. This FSP provides an elective alternative simplified method for calculating the pool of excess tax benefits
available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R and reported in the consolidated statements of cash flows. Companies may take up to one year from the effective date of the FSP to evaluate the available
transition alternatives and make a one-time election as to which method to adopt. We are currently in the process of evaluating the alternative methods.

In March 2006, the Emerging Issues Task Force (EITF) issued EITF Issue 06-3, How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income
Statement. This Issue discussed how entities are to adopt a policy of presenting sales taxes in the income statement on either a gross or net basis. If taxes are significant, an entity should disclose its policy of presenting taxes and the
amounts of taxes. The guidance is effective for periods beginning after December 15, 2006. We present restaurant sales net of sales taxes and therefore Issue 06-3 will not impact the method for recording these sales taxes in our consolidated
financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income
Taxes, (FIN 48) which clarifies the accounting for uncertainty in income tax recognized in an entitys financial statements in accordance with FASB No. 109 Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. We are currently evaluating the impact on our consolidated financial statements of adopting FIN 48.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Benefits, an amendment of FAS 87, 88, 106 and 132(R) (SFAS
158) which is effective for fiscal years ending after December 15, 2006. SFAS No. 158 requires an employer that sponsors postretirement plans to recognize an asset or liability on its balance sheet for the overfunded or underfunded
status of the plan and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 does not change the amount of actuarially determined expense that is recorded in our consolidated
statement of operations. SFAS 158 also requires an employer to measure plan assets and benefit obligations as of the date of the employers balance sheet, which is consistent with our historical measurement date. The impact of the adoption of
SFAS 158 will be to record a liability and a charge to accumulated other comprehensive income, a component of stockholders deficit, at December 31, 2006 equal to the difference between our accrued benefit cost and our projected benefit
obligation, which was $2.0 million at December 31, 2005.



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In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS
157). This statement defines fair value, establishes a framework for using fair value to measure assets and liabilities and expands disclosures about fair value measurements. The statement applies whenever other pronouncements require or
permit assets or liabilities to be measured at fair value. SFAS 157 is effective for our fiscal year beginning January 1, 2008. We are evaluating the impact the adoption of SFAS 157 will have on our consolidated financial statements.

In September 2006, 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) to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that we quantify
misstatements based on their impact on each of our financial statements (both the statement of operations and statement of financial position) and related disclosures. The application of SAB 108 in the fourth quarter of 2006 is not expected to have
any impact on our consolidated financial statements.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains statements which constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are predictive in nature or that depend upon or refer to future events or conditions are forward-looking statements. These
statements are often identified by the words may, might, will, should, anticipate, believe, expect, intend, estimate, hope or
similar expressions. In addition, expressions of our strategies, intentions or plans are also forward looking statements. These statements reflect managements current views with respect to future events and are subject to risks and
uncertainties, both known and unknown. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their date. There are important factors that could cause actual results to differ materially from those
in forward-looking statements, many of which are beyond our control. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ
materially from those projected or implied in the forward-looking statements. We believe important factors that could cause actual results to differ materially from our expectations include the following, in addition to other risks and uncertainties
discussed herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and uncertainties discussed in Part II - Item1A Risk Factors :



| |  |  | Competitive conditions;
| | - |  | -----------------------



| |  |  | Regulatory factors;
| | - |  | -------------------



| |  |  | Environmental conditions and regulations;
| | - |  | -----------------------------------------



| |  |  | General economic conditions, particularly at the retail level;
| | - |  | --------------------------------------------------------------



| |  |  | Weather conditions;
| | - |  | -------------------



| |  |  | Fuel prices;
| | - |  | ------------



| |  |  | Significant disruptions in service or supply by any of our suppliers or distributors;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Changes in consumer perception of dietary health and food safety;
| | - |  | -----------------------------------------------------------------



| |  |  | Labor and employment benefit costs;
| | - |  | -----------------------------------



| |  |  | The outcome of pending or future legal proceedings;
| | - |  | ---------------------------------------------------



| |  |  | Our ability to manage our growth and successfully implement our business strategy;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | The risks associated with the expansion of our business;
| | - |  | --------------------------------------------------------



| |  |  | General risks associated with the restaurant industry;
| | - |  | ------------------------------------------------------



| |  |  | Our inability to integrate any businesses we acquire;
| | - |  | -----------------------------------------------------



| |  |  | Our borrowing costs and credit ratings, which may be influenced by the credit ratings of our competitors;
| | - |  | ---------------------------------------------------------------------------------------------------------



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| |  |  | The availability and terms of necessary or desirable financing or refinancing and other related risks and uncertainties;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | The risk of events similar to those of September 11, 2001 or an outbreak or escalation of any insurrection or armed conflict involving the United States or any other
national or international calamity; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Factors that affect the restaurant industry generally, including recalls if products become adulterated or misbranded, liability if product consumption causes injury, ingredient
disclosure and labeling laws and regulations, reports of cases of mad cow disease and avian flu, and the possibility that consumers could lose confidence in the safety and quality of certain food products, as well as recent publicity
concerning the health implications of obesity and transfatty acids.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Inflation

The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating
expenses, and most recently, energy costs. Wages paid in our restaurants are impacted by changes in the Federal and state hourly minimum wage rates. Accordingly, changes in the Federal and state hourly minimum wage rates directly affect our labor
costs. We typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that we will be able to offset such inflationary cost
increases in the future.

ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

There were no material changes
from the information presented in Item 7A included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005 with respect to the Companys market risk sensitive instruments.

ITEM 4CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Our senior
management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d  15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), designed to
ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions
rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuers management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.

We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 2, 2006.

Changes in Internal Control over Financial Reporting.As reported in Item 4 of our quarterly report on Form 10-Q for the six months ended July 2, 2006, management identified the following
material weaknesses in our internal control over financial reporting as of July 2, 2006:



| | (a) | We did not have sufficient personnel with the appropriate knowledge and expertise to identify and resolve certain complex accounting and tax matters. In addition, we did not perform
the appropriate level of review commensurate with our financial reporting requirements to ensure the consistent execution of our responsibility in the areas of monitoring of controls; the application of U.S. generally accepted accounting policies
and disclosures to support our accounting, tax and reporting functions.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Controls to identify leases that contained provisions which constituted forms of continuing involvement and required real estate transactions to be accounted for as financing
transactions rather than as sale-leaseback transactions were ineffective. This resulted in our failure to identify misstatements in property and equipment, lease financing obligations, deferred income-sale-leaseback transactions, depreciation
expense, interest expense and rent expense related to sale-leaseback transactions consummated in periods prior to the second quarter of 2004. The restatement of our prior period financial statements as a result of this material weakness was
finalized in the second quarter of 2006.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Actions taken to remediate these material weaknesses have been ongoing since the identification of these
in the fourth quarter of 2005, were enhanced in 2006 and fully implemented as of October 2, 2006. Accordingly, these actions are considered to be control enhancements materially improving our internal controls over financial
reporting. Consequently, based on evaluation described above, our Chief Executive Officer and Chief Financial officer concluded that our disclosure controls and procedures were effective as of October 2, 2006. The actions taken to remediate
these material weaknesses included the following:



| |  |  | We hired five senior accounting professionals that possess a strong understanding of U.S. generally accepted accounting principles, strong technical accounting skills and relevant
experience to augment our staff, to help us improve our controls and procedures pertaining to financial reporting and to assist in making other improvements to our internal controls. Several of these professionals are Certified Public Accountants
with relevant public company experience and with backgrounds in large public accounting firms. We have also re-assigned or replaced certain other personnel within our financial organization in conjunction with these changes.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We reorganized our corporate accounting staff to delineate distinct roles and responsibilities for external financial reporting including the application of generally accepted
accounting principles. We believe that the accounting professionals that we have hired or reassigned have provided us with additional technical accounting expertise as necessary to ensure the timely preparation of our interim and annual financial
statements in accordance with GAAP.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have also re-organized responsibilities within our accounting organization to provide an increased focus on lease accounting matters and, in general, to increase the total
internal resources dedicated to complex accounting and tax matters. Additionally, we have implemented a more structured analysis and review process of the application of generally accepted accounting principles and complex accounting matters. In the
area of income taxes we have formalized our review process regarding our quarterly tax disclosures and accounting as well as the ongoing assessment of new tax laws or other events that could affect our effective tax rate or the recognition of tax
benefits.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have had controls in place for sale-leaseback transactions that were consummated since the first quarter of 2004 and through the date of the filing of this Form 10-Q to properly
assess provisions which constitute forms of continuing involvement, including amendments to lease agreements for certain properties previously accounted for as lease financing obligations to eliminate or otherwise cure the provisions that precluded
the original sale-leaseback accounting under SFAS 98. These controls include a review process conducted by legal and accounting personnel, including management, prior to the lease being executed. We believe that a sufficient passage of time has
occurred since the implementation of these controls to correct this material weakness and that such controls have been applied to a sufficient number of leasing transactions to evaluate the effectiveness of these controls.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have continued to emphasize the importance of an effective environment in relation to accounting and internal control matters over financial reporting, including identifying
opportunities for improvement.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

No other changes occurred in our internal control over financial reporting during the third
quarter of 2006 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We will continue to assess our controls and procedures and will take any further actions that we deem necessary.



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PART IIOTHER INFORMATION

Item 1. Legal Proceedings

On November 16, 1998, the EEOC filed suit in the United States District
Court for the Northern District of New York (the Court), under Title VII of the Civil Rights Act of 1964, as amended, against us. The complaint alleged that we engaged in a pattern and practice of unlawful discrimination, harassment and
retaliation against former and current female employees. The EEOC identified approximately 450 individuals (which were subsequently increased to 511 individuals) that it believed represented the class of claimants and was seeking monetary and
injunctive relief from us.

On April 20, 2005, the Court issued a decision and order granting our Motion for Summary Judgment that we
filed in January 2004. Subject to possible appeal by the EEOC, the case is dismissed; however the Court noted that it was not ruling on the claims, if any, that individual employees might have against us. We do not believe that any individual claim,
if any, would have a material adverse impact on our consolidated financial condition or consolidated results of operations and cash flows.

On February 27, 2006, we filed a motion for summary judgment to dismiss all but between four and 17 of the individual claims. On July 10, 2006, in its response to that motion, the EEOC has asserted that, notwithstanding the
Courts dismissal of the case as a class action, the EEOC may still maintain some kind of collective action on behalf of these claimants. Oral argument before the Court was held on October 4, 2006 and we are awaiting the Courts
decision on our summary judgment motion. Although we believe that the EEOCs continued class litigation argument is without merit, it is not possible to predict the outcome of the pending motion.

Item 1A. RISK FACTORS

You should carefully consider the risks described below, as well as other
information and data included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2005. Any of the following risks could materially adversely affect our business, financial condition or
results of operations.

Risks Related to the Restaurant Industry and Our Business

Intense competition in the restaurant industry could make it more difficult to expand our business and could also have a negative impact on our operating results if
customers favor our competitors or we are forced to change our pricing and other marketing strategies.

The restaurant industry is
highly competitive. In each of our markets, our restaurants compete with a large number of national and regional restaurant chains, as well as locally owned restaurants, offering low and medium-priced fare. We also compete with convenience stores,
delicatessens and prepared food counters in grocery stores, supermarkets, cafeterias and other purveyors of moderately priced and quickly prepared food.

Pollo Tropicals competitors include national chicken-based concepts, such as Boston Market and Kentucky Fried Chicken (KFC), and regional chicken-based concepts as well as quick-service hamburger restaurant
chains and other types of quick-casual restaurants. Our Taco Cabana restaurants, although part of the quick-casual segment of the restaurant industry, compete with quick-service restaurants, including those in the quick-service Mexican segment such
as Taco Bell, other quick-casual restaurants and traditional casual dining Mexican restaurants. With respect to our Burger King restaurants, our largest competitors are McDonalds and Wendys restaurants.

To remain competitive, we, as well as certain other major quick-casual and quick-service restaurant chains, have increasingly offered selected food items
and combination meals at discounted prices. These changes in pricing and other marketing strategies have had, and in the future may continue to have, a negative impact on our sales and earnings.

Factors specific to the quick-casual and quick-service restaurant segments may adversely affect our results of operations, which may cause a decrease in earnings and
revenues.

The quick-casual and quick-service restaurant segments are highly competitive and can be materially adversely affected by
many factors, including:



| |  |  | changes in local, regional or national economic conditions;
| | - |  | -----------------------------------------------------------



| |  |  | changes in demographic trends;
| | - |  | ------------------------------



| |  |  | changes in consumer tastes;
| | - |  | ---------------------------



| |  |  | changes in traffic patterns;
| | - |  | ----------------------------



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| |  |  | increases in fuel prices, including a continuation of the current relatively higher levels of gasoline prices;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | consumer concerns about health and nutrition;
| | - |  | ---------------------------------------------



| |  |  | increases in the number of, and particular locations of, competing restaurants;
| | - |  | -------------------------------------------------------------------------------



| |  |  | inflation;
| | - |  | ----------



| |  |  | increases in utility costs;
| | - |  | ---------------------------



| |  |  | increases in the cost of food, such as beef and chicken, and packaging;
| | - |  | -----------------------------------------------------------------------



| |  |  | consumer dietary considerations;
| | - |  | --------------------------------



| |  |  | increased labor costs, including healthcare and minimum wage requirements;
| | - |  | --------------------------------------------------------------------------



| |  |  | regional weather conditions; and
| | - |  | --------------------------------



| |  |  | the availability of experienced management and hourly-paid employees.
| | - |  | ---------------------------------------------------------------------

Our continued growth depends on our ability to open and operate new restaurants profitably, which in turn depends on our continued access to capital, and newly acquired or developed restaurants may not perform as we expect and we cannot
assure you that our growth and development plans will be achieved.

Our continued growth depends on our ability to develop additional
Pollo Tropical and Taco Cabana restaurants and to selectively acquire and develop additional Burger King restaurants. Development involves substantial risks, including the following:



| |  |  | the inability to fund development;
| | - |  | ----------------------------------



| |  |  | development costs that exceed budgeted amounts;
| | - |  | -----------------------------------------------



| |  |  | delays in completion of construction;
| | - |  | -------------------------------------



| |  |  | the inability to obtain all necessary zoning and construction permits;
| | - |  | ----------------------------------------------------------------------



| |  |  | the inability to identify, or the unavailability of, suitable sites on acceptable leasing or purchase terms;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | developed restaurants that do not achieve desired revenue or cash flow levels once opened;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | incurring substantial unrecoverable costs in the event a development project is abandoned prior to completion;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | the inability to recruit, train and retain managers and other employees necessary to staff each new restaurant;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | changes in governmental rules, regulations and interpretations; and
| | - |  | -------------------------------------------------------------------



| |  |  | changes in general economic and business conditions.
| | - |  | ----------------------------------------------------

We
cannot assure you that our growth and development plans can be achieved. Our development plans will require additional management, operational and financial resources. For example, we will be required to recruit and train managers and other
personnel for each new restaurant. We cannot assure you that we will be able to manage our expanding operations effectively and our failure to do so could adversely affect our results of operations. In addition, our ability to open new restaurants
and to grow, as well as our ability to meet other anticipated capital needs, will depend on our continued access to external financing, including borrowings under our senior credit facility. We cannot assure you that we will have access to the
capital we need on acceptable terms or at all, which could materially adversely affect our business.

Additionally, we may encounter
difficulties growing beyond our presence in our existing core markets. We cannot assure you that we will be able to successfully grow our market presence beyond the current key regions within our existing markets, as we may encounter
well-established competitors in new areas. In addition, we may be unable to find attractive locations or successfully market our products as we attempt to expand beyond our existing core markets, as the competitive circumstances and consumer
characteristics in these new areas may differ substantially from those in areas in which we currently operate. As a result of the foregoing, we cannot assure you that we will be able to successfully integrate or profitably operate new restaurants
outside our core markets.

Our expansion into new markets may present increased risks due to our unfamiliarity with the area.

Some of our new restaurants are and will be located in areas where we have little or no meaningful experience. Those markets may have different
competitive conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause our new restaurants to be less successful than restaurants in our existing markets or to incur losses. An additional risk of
expanding into new markets is the lack of market awareness of the Pollo Tropical or Taco Cabana brand. Restaurants opened in new markets may open at lower average weekly sales volumes than restaurants opened in



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existing markets, and may have higher restaurant-level operating expense ratios than in existing markets. Sales at
restaurants opened in new markets may take longer to reach, or may never reach, average unit volumes, thereby adversely affecting our operating results. Opening new restaurants in areas in which we have little or no operating experience and in which
potential customers may not be familiar with our restaurants may include costs related to the opening, operation and promotion of those restaurants that are substantially greater than those incurred by our restaurants in other areas. Even though we
may incur substantial additional costs with respect to these new restaurants, they may attract fewer customers than our more established restaurants in existing markets.

We could be adversely affected by additional instances of mad cow disease, avian flu or other food-borne illness, as well as widespread negative publicity regarding food quality, illness,
injury or other health concerns.

Negative publicity about food quality, illness, injury or other health concerns (including health
implications of obesity and transfatty acids) or similar issues stemming from one restaurant or a number of restaurants could materially adversely affect us, regardless of whether they pertain to our own restaurants or to restaurants owned or
operated by other companies. For example, health concerns about the consumption of beef or chicken or specific events such as the outbreak of mad cow disease or avian flu could lead to changes in consumer preferences, reduce
consumption of our products and adversely affect our financial performance. These events could reduce the available supply of beef or chicken or significantly raise the price of beef or chicken.

In addition, we cannot guarantee that our operational controls and employee training will be effective in preventing food-borne illnesses, food tampering
and other food safety issues that may affect our restaurants. Food-borne illness or food tampering incidents could be caused by customers, employees or food suppliers and transporters and, therefore, could be outside of our control. Any publicity
relating to health concerns or the perceived or specific outbreaks of food-borne illnesses, food tampering or other food safety issues attributed to one or more of our restaurants could result in a significant decrease in guest traffic in all of our
restaurants and could have a material adverse effect on our results of operations. In addition, similar publicity or occurrences with respect to other restaurants or restaurant chains could also decrease our guest traffic and have a similar material
adverse effect on us.

Our substantial indebtedness could adversely affect our financial condition and our ability to operate our business.

We have a substantial amount of indebtedness. As of September 30, 2006, we had $427.0 million of outstanding indebtedness,
including $187.0 million of indebtedness under our senior credit facility (excluding $14.6 million of outstanding letters of credit and $35.4 million of unused revolving credit borrowing availability under our senior credit facility), $180.0 million
of Notes, $58.4 million of lease financing obligations and $1.6 million of capital leases. As a result, we are a highly leveraged company. This level of indebtedness could have important consequences to you, including the following:



| |  |  | it will limit our ability to borrow money to fund our working capital, capital expenditures, acquisitions and debt service requirements and other financing needs;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our interest expense would increase if interest rates in general increase because a substantial portion of our indebtedness, including all of our indebtedness under our senior
credit facility, bears interest at floating rates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | it may limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | we are more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | it may make us more vulnerable to a downturn in our business, industry or the economy in general;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | a substantial portion of our Consolidated Adjusted EBITDA will be dedicated to the repayment of our indebtedness and related interest, including indebtedness we may incur in the
future, and will not be available for other purposes; for instance, for the year ended December 31, 2005, interest expense and scheduled principal payments on our indebtedness (including on our lease financing obligations) accounted for 48.9%
of our Consolidated Adjusted EBITDA for such period; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing as needed.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Despite our substantial indebtedness, we may still incur significantly more debt, which could further exacerbate the risks described
above.

Although covenants under our senior credit facility and the Indenture governing the Notes limit our ability and the ability of
our present and future restricted subsidiaries to incur additional indebtedness, the terms of our senior credit facility



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and the Indenture governing the Notes permit us to incur significant additional indebtedness, including unused
availability under our revolving credit facility. As of September 30, 2006, we had $35.4 million available for additional revolving credit borrowings under our senior credit facility (after reserving for $14.6 million of letters of credit
outstanding), subject to compliance with customary borrowing conditions. Also under the terms of the senior credit facility, we may borrow an additional $100.0 million, subject to certain conditions. In addition, neither the senior credit facility
nor the Indenture governing the Notes prevent us from incurring obligations that do not constitute indebtedness as defined in those documents. To the extent that we incur additional indebtedness or other obligations, the risks associated with our
substantial leverage described above, including our possible inability to service our debt would increase.

We may not be able to generate sufficient
cash flows to meet our debt service obligations.

Our ability to make payments on and to refinance our indebtedness and to fund planned
capital expenditures will depend on our ability to generate cash from our future operations and on our continued access to external sources of financing. This, to a certain extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control.

Our business may not generate sufficient cash flow from operations and future
borrowings under the senior credit facility or from other sources may not be available to us in an amount sufficient to enable us to repay our indebtedness or to fund our other liquidity needs, including capital expenditure requirements. If we
complete an acquisition, our debt service requirements could increase. A substantial portion of our indebtedness, including all of our indebtedness under the senior credit facility, bears interest at floating rates, and therefore if interest rates
increase, our debt service requirements will increase. We may need to refinance or restructure all or a portion of our indebtedness on or before maturity. We may not be able to refinance or restructure any of our indebtedness, including the senior
credit facility and the Notes, on commercially reasonable terms, or at all. If we cannot service or refinance or restructure our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying
capital expenditures, strategic acquisitions, investments and alliances, any of which could have a material adverse effect on our operations. Additionally, we may not be able to effect such actions, if necessary, on commercially reasonable terms, or
at all.

In addition, upon the occurrence of specific kinds of change of control events, we must offer to purchase the Notes at 101% of the
principal amount thereof plus accrued and unpaid interest to the purchase date. We may not have sufficient funds available to make any required repurchases of the Notes, and restrictions under our senior credit facility may not allow that
repurchase. If we fail to repurchase the Notes in that circumstance, we will be in default under the Indenture governing the Notes and, under cross-default clauses; we will also be in default under the senior credit facility. In addition, certain
change of control events will constitute an event of default under the senior credit facility. A default under the senior credit facility could result in an event of default under the Indenture if the administrative agent or the lenders accelerate
the debt under the senior credit facility. In the event of a default under our senior credit facility or the Indenture, the holders of the applicable indebtedness generally would be able to declare all of that indebtedness to be due and payable as
described in the following risk factor. Upon the occurrence of a change of control we could seek to refinance the indebtedness under the senior credit facility and the Notes or obtain a waiver from the lenders or the noteholders. We cannot assure
you, however, that we would be able to obtain a waiver or refinance our indebtedness on commercially reasonable terms, if at all, in which case we might be required to sell assets to satisfy our repayment obligations. Any future debt that we incur
may also contain provisions requiring the repayments of that debt upon the occurrence of similar change of control events or restrictions on repayment of the Notes or borrowings under our senior credit facility upon a change of control.

Restrictive covenants in the senior credit facility and the Indenture governing the Notes may restrict our ability to operate our business and to pursue our
business strategies; and defaults under our debt instruments may allow the lenders to declare borrowings due and payable.

The senior
credit facility and the Indenture governing the Notes limit our ability, among other things, to:



| |  |  | incur additional indebtedness or issue preferred stock;
| | - |  | -------------------------------------------------------



| |  |  | pay dividends or make distributions in respect of our capital stock or make certain other restricted payments or investments;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | sell assets, including capital stock of restricted subsidiaries;
| | - |  | ----------------------------------------------------------------



| |  |  | agree to limitations on our ability and the ability of our restricted subsidiaries to make distributions;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | enter into transactions with our subsidiaries and affiliates;
| | - |  | -------------------------------------------------------------



| |  |  | incur liens;
| | - |  | ------------



| |  |  | enter into new lines of business; and
| | - |  | -------------------------------------



| |  |  | engage in consolidations, mergers or sales of substantially all of our assets.
| | - |  | ------------------------------------------------------------------------------



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In addition, the senior credit facility requires us to comply with various operational and other
covenants and restricts our ability to prepay our subordinated indebtedness. The senior credit facility also requires us to maintain compliance with specified financial ratios, including fixed charge coverage, senior leverage and total leverage
ratios (as such terms are defined in the senior credit facility). At September 30, 2006, we were in compliance with such covenants. At September 30, 2006 our fixed charge coverage ratio was 1.41 to 1.00 which was in excess of the required
minimum fixed charge coverage ratio at September 30, 2006 of 1.25 to 1.00, our senior leverage ratio was 2.18 to 1.00 which was lower than the maximum allowable senior leverage ratio at September 30, 2006 of 2.50 to 1.00 and our total
leverage ratio was 4.23 to 1.00 which was lower than the maximum allowable total leverage ratio at September 30, 2006 of 5.00 to 1.00. However, our ability to comply with these ratios may be affected by events beyond our control. Any other debt
instruments we enter into in the future may also have provisions similar to those described above.

The restrictions contained in the
Indenture governing the Notes and the senior credit facility and in any other debt instruments we may enter into in the future could:



| |  |  | limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adversely affect our ability to finance our operations, strategic acquisitions, investments or alliances or other capital needs or to engage in other business activities that would
be in our interest.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As noted above, our ability to remain in compliance with agreements and covenants in our debt
instruments depends upon our results of operations and may be affected by events beyond our control, including economic, financial and industry conditions. Accordingly, there can be no assurance that we will remain in compliance with those
agreements and covenants. As a result of prior restatements of our financial statements, we have in the past been in default under our senior credit facility (which defaults have been waived) and, more recently, we were in default under our senior
credit facility by failing to timely furnish to our lenders our annual audited financial statements for 2005 and our unaudited quarterly financial statements for the third quarter of 2005 and the first quarter of 2006. On December 6, 2005, we
obtained a consent and waiver from our lenders under the senior credit facility that permitted us to extend the time to deliver our consolidated financial statements for the third quarter of 2005 to February 15, 2006.On February 15, 2006,
we obtained a waiver of such default from our lenders that extended the time period to deliver those financial statements to June 30, 2006 and we filed such financial statements prior to the expiration of such extension. Accordingly there can
be no assurance that we will remain in compliance with agreements and covenants in our debt instruments.

In the event of a default under
our senior credit facility or the Indenture and in any other debt instruments we may enter into in the future, the holders of the applicable indebtedness generally would be able to declare all of that indebtedness, together with accrued interest, to
be due and payable. In addition, borrowings under the senior credit facility are secured by a first priority lien on all of our assets and, in the event of a default under that facility, the lenders generally would be entitled to seize the
collateral. In addition, default under one debt instrument could in turn permit lenders under other debt instruments to declare borrowings outstanding under those other instruments to be due and payable pursuant to cross default clauses. Moreover,
upon the occurrence of an event of default under the senior credit facility, the commitment of the lenders to make any further loans to us would be terminated. Any such actions or events could force us into bankruptcy and liquidation and we cannot
provide any assurance that we could repay our obligations under the senior credit facility or the Notes. Moreover, our assets and cash flow may not be sufficient to fully repay borrowings under our debt instruments, either upon maturity or if
accelerated following a default. Accordingly, the occurrence of a default under any debt instrument, unless cured or waived, would likely have a material adverse effect on our business.

We are highly dependent on the Burger King system and our ability to renew our franchise agreements with Burger King Corporation. The failure to renew our franchise agreements or Burger Kings failure to
compete effectively could materially adversely affect our results of operations.

Due to the nature of franchising and our agreements
with Burger King Corporation, which we refer to herein as BKC, our success is, to a large extent, directly related to the success of the nationwide Burger King system. In turn, the ability of the nationwide Burger King system to compete effectively
depends upon the success of the management of the Burger King system and the success of its advertising programs and new products. We cannot assure you that Burger King will be able to compete effectively with other quick-service restaurants. As a
result, any failure of Burger King to compete effectively would likely have a material adverse effect on our operating results.

Under each
of our franchise agreements with BKC, we are required to comply with operational programs established by BKC. For example, our franchise agreements with BKC require that our restaurants comply with specified design criteria.



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In addition, BKC generally has the right to require us during the tenth year of a franchise agreement to remodel our
restaurants to conform to the current image of Burger King, which may require the expenditure of considerable funds. In addition, although not required by the franchise agreements, we may not be able to avoid adopting menu price discount promotions
instituted by BKC that may be unprofitable.

Our franchise agreements typically have a 20 year term after which BKCs consent is
required to receive a successor franchise agreement. Our franchise agreements with BKC that are set to expire over the next three years are as follows:



| |  |  | two of our franchise agreements with BKC are due to expire in the fourth quarter of 2006;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | 17 of our franchise agreements with BKC are due to expire in 2007; and
| | - |  | ----------------------------------------------------------------------



| |  |  | 27 of our franchise agreements with BKC are due to expire in 2008.
| | - |  | ------------------------------------------------------------------

We cannot assure you that BKC will grant each of our future requests for successor franchise agreements, and any failure of BKC to renew our franchise agreements could adversely affect our operating results. In
addition, as a condition of approval of a successor franchise agreement, BKC may require us to make capital improvements to particular restaurants to bring them up to Burger King current image standards, which may require us to incur substantial
costs.

In addition, our franchise agreements with BKC do not give us exclusive rights to operate Burger King restaurants in any defined
territory. Although we believe that BKC generally seeks to ensure that newly granted franchises do not materially adversely affect the operations of existing Burger King restaurants, we cannot assure you that franchises granted by BKC to third
parties will not adversely affect any Burger King restaurants that we operate.

If we fail to maintain an effective system of internal controls, we may
not be able to accurately report our financial results.

Effective internal controls are necessary for us to provide reliable financial
reports and effectively prevent fraud. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In the past, we have identified and reported material weaknesses in our internal control over
financial reporting and concluded that our disclosure controls and procedures were ineffective. In addition, we may in the future discover areas of our internal controls that need improvement or that constitute material weaknesses. A material
weakness is a control deficiency (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 2), or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of
annual or interim financial statements will not be prevented or detected. We are continuing to work to improve our internal controls. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our
financial processes and reporting in the future. Any failure to remediate material weaknesses in our internal control over financial reporting or to implement and maintain effective internal controls, or difficulties encountered in their
implementation, could cause us to fail to timely meet our reporting obligations, result in material misstatements in our financial statements or could result in defaults under our senior credit facility, the Indenture governing the Notes or under
any other debt instruments we may enter into in the future. Deficiencies in our internal controls could also cause investors to lose confidence in our reported financial information.

There can be no assurance that we will not have to restate our financial statements in the future.

We have undergone several restatements of our financial statements. In response to this situation, we have taken what we believe to be the necessary measures to ensure that restatements will not occur in the future. However, there can be no
assurance that future restatements will not be necessary due to evolving policies, revised or new accounting pronouncements or other factors. Any future restatements of our financial statements could cause us to fail to timely meet our reporting
obligations or could result in defaults under our senior credit facility, the Indenture governing the Notes or under any other debt instruments we may enter into in the future. Future restatements of our financial statements could also cause
investors to lose confidence in our reported financial information.

We may incur significant liability or reputational harm if claims are brought
against us or against our franchisees.

We or our franchisees may be subject to complaints, regulatory proceedings or litigation from
guests or other persons alleging food-related illness, injuries suffered in our premises or other food quality, health or operational concerns, including environmental claims. In addition, in recent years a number of restaurant companies have been
subject to lawsuits, including class action lawsuits, alleging, among other things, violations of federal and state law regarding workplace and employment matters, discrimination, harassment, wrongful termination and wage, rest break, meal break and
overtime compensation



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issues and, in the case of quick-service restaurants, alleging that they have failed to disclose the health risks
associated with high-fat foods and that their marketing practices have encouraged obesity. We may also be subject to litigation or other actions initiated by governmental authorities, our employees and our franchisees, among others, based upon these
and other matters. For example, in November 1998, the Equal Employment Opportunity Commission (the EEOC) filed suit in the United States District Court for the Northern District of New York against us, alleging that we engaged in a
pattern and practice of unlawful discrimination, harassment and retaliation against former and current female employees. Although the case was dismissed by the court, subject to possible appeal by the EEOC, the court noted that it was not ruling on
the claims, if any, that individual employees might have against us. A significant judgment against us could have a material adverse effect on our financial performance or liquidity. Adverse publicity resulting from such allegations or occurrences
or alleged discrimination or other operating issues stemming from one of our locations, a number of our locations or our franchisees could adversely affect our business, regardless of whether the allegations are true, or whether we are ultimately
held liable. Any cases filed against us could materially adversely affect us if we lose such cases and have to pay substantial damages or if we settle such cases. In addition, any such cases may materially and adversely affect our operations by
increasing our litigation costs and diverting our attention and resources to address such actions. In addition, if a claim is successful, our insurance coverage may not cover or be adequate to cover all liabilities or losses and we may not be able
to continue to maintain such insurance, or to obtain comparable insurance at a reasonable cost, if at all. If we suffer losses, liabilities or loss of income in excess of our insurance coverage or if our insurance does not cover such loss, liability
or loss of income, there could be a material adverse effect on our results of operations.

Our franchisees could take actions that harm our reputation
and reduce our franchise revenues.

As of September 30, 2006, a total of 29 Pollo Tropical and Taco Cabana restaurants were owned
and operated by our franchisees. We do not exercise control of the day-to-day operations of our franchisees. While we attempt to ensure that franchisee-owned restaurants maintain the same high operating standards as our company-owned restaurants,
one or more of these franchisees may fail to meet these standards. Any shortcomings at our franchisee-owned restaurants are likely to be attributed to our company as a whole and could adversely affect our reputation and damage our brands, as well as
have a direct negative impact on franchise revenues we receive from these franchisees.

If the sale-leaseback market requires significantly higher
yields, we may not enter into sale-leaseback transactions and as a result would not receive the related net proceeds.

From time to
time, we sell our restaurant properties in sale-leaseback transactions. We historically have used, and intend to use, the net proceeds from such transactions to reduce outstanding debt and fund future capital expenditures for new restaurant
development. However, the sale-leaseback market may cease to be a reliable source of additional cash flows for us in the future if capitalization rates become less attractive or other unfavorable market conditions develop. For example, should the
sale-leaseback market require significantly higher yields (which may occur as interest rates rise), we may not enter into sale-leaseback transactions, which could adversely affect our ability to reduce outstanding debt and fund new capital
expenditures for future restaurant development.

Changes in consumer taste could negatively impact our business.

We obtain a significant portion of our revenues from the sale of hamburgers, chicken, various types of sandwiches and Mexican and other ethnic foods. The
quick-casual and quick-service restaurant segments are characterized by the frequent introduction of new products, often accompanied by substantial promotional campaigns and are subject to changing consumer preferences, tastes, and eating and
purchasing habits. Our success depends on our ability to anticipate and respond to changing consumer preferences, tastes and eating and purchasing habits, as well other factors affecting the restaurant industry, including new market entrants and
demographic changes. We may be forced to make changes in our menu items in order to respond to changes in consumer tastes or dining patterns, and we may lose customers who do not prefer the new menu items. In recent years, numerous companies in the
quick-casual and quick-service restaurant segments have introduced products positioned to capitalize on the growing consumer preference for food products that are, or are perceived to be, healthy, nutritious, low in calories and low in fat content.
If we do not or, in the case of our Burger King restaurants, if BKC does not, continually develop and successfully introduce new menu offerings that appeal to changing consumer preferences or if we do not timely capitalize on new products, our
operating results will suffer. In addition, any significant event that adversely affects consumption of our products, such as cost, changing tastes or health concerns, could adversely affect our financial performance.



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If a significant disruption in service or supply by any of our suppliers or distributors were to occur, it could
create disruptions in the operations of our restaurants, which could have a material adverse effect on our business.

Our financial
performance is dependent on our continuing ability to offer fresh quality food at competitive prices. If a significant disruption in service or supply by certain of our suppliers or distributors were to occur, it could create disruptions in the
operations of our restaurants, which could have a material adverse effect on us.

For our Pollo Tropical and Taco Cabana restaurants, we
have negotiated directly with local and national suppliers for the purchase of food and beverage products and supplies. Pollo Tropical and Taco Cabana restaurants food and supplies are ordered from approved suppliers and are shipped via
distributors to the restaurants. For our Pollo Tropical restaurants, Henry Lee, a division of Gordon Food Service, serves as our primary distributor of food and paper products under an agreement that expires on March 16, 2007. For our Taco
Cabana restaurants, SYGMA Network, Inc. serves as our primary distributor of food and beverage products and supplies under a distribution services agreement that expires on June 1, 2009. We also rely on Gold Kist under an agreement that expires
on December 31, 2007 as our supplier and distributor of chicken for our Pollo Tropical restaurants and if Gold Kist is unable to service us, this could lead to a material disruption of service or supply until a new supplier is engaged which
could have a material adverse effect on our business. With respect to our distributors for our Pollo Tropical and Taco Cabana restaurants, if any of our distributors is unable to service us, this could lead to a material disruption of service or
supply until a new distributor is engaged, which could have a material adverse effect on our business. For our Burger King restaurants, we are a member of a national purchasing cooperative, Restaurant Services, Inc., which serves as the purchasing
agent for approved distributors to the Burger King system. We are required to purchase all of our foodstuffs, paper goods and packaging materials from BKC-approved suppliers for our Burger King restaurants. We currently utilize three distributors,
Maines Paper & Food Service, Inc., Reinhart Food Service L.L.C. and MBM Food Service Inc., to supply our Burger King restaurants with the majority of their foodstuffs in various geographical areas and, as of October 15, 2006, such
distributors supplied 63%, 32% and 5%, respectively of our Burger King restaurants. Although we believe that we have alternative sources of supply available to our Burger King restaurants, in the event any distributors or suppliers for our Burger
King restaurants are unable to service us, this could lead to a disruption of service or supply at our Burger King restaurants until a new distributor or supplier is engaged, which could have an adverse effect on our business.

If labor costs increase, we may not be able to make a corresponding increase in our prices and our operating results may be adversely affected.

Wage rates for a substantial number of our employees are at or slightly above the minimum wage. As federal and/or state minimum wage rates increase, we
may need to increase not only the wage rates of our minimum wage employees but also the wages paid to the employees at wage rates which are above the minimum wage, which will increase our costs. To the extent that we are not able to raise our prices
to compensate for increases in wage rates, this could have a material adverse effect on our operating results.

The efficiency and quality of our
competitors advertising and promotional programs and the extent and cost of our advertising programs could have a material adverse effect on our results of operations and financial condition.

Should our competitors increase spending on advertising and promotion, should the cost of television or radio advertising increase, should our advertising
funds materially decrease for any reason, or should our advertising and promotion be less effective than our competitors, there could be a material adverse effect on our results of operations and financial condition. In that regard, the
success of our Burger King restaurants also depends in part upon advertising campaigns and promotions by BKC.

Newly acquired or developed restaurants
may reduce sales at our neighboring restaurants.

We intend to continue to open restaurants in our existing core markets, particularly
the core markets served by our Pollo Tropical and Taco Cabana restaurants. To the extent that we open a new restaurant in the vicinity of one or more of our existing restaurants within the same chain, it is possible that some of the customers who
previously patronized those existing restaurants may choose to patronize the new restaurant instead, reducing sales at those existing restaurants. Accordingly, to the extent we open new restaurants in our existing markets; sales at some of our
existing restaurants in those markets may decline.

Our business is regional and we therefore face risks related to reliance on certain markets.

As of September 30, 2006, excluding our franchised locations, all but one of our Pollo Tropical restaurants were located in
Florida and approximately 96% of our Taco Cabana restaurants were located in Texas. Also, as of September 30, 2006, 64% of our Burger King restaurants were located in New York and Ohio. Therefore, the economic conditions, state and local
government regulations, weather conditions or other conditions affecting Florida, Texas, New York and Ohio and the tourism industry affecting Florida may have a material impact on the success of our restaurants in those locations. For example, the
events of September 11, 2001 had a significant negative impact on tourism in Florida, which adversely impacted the revenues and operating results at our Pollo Tropical restaurants.



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Many of our restaurants are located in regions that may be susceptible to severe weather conditions. As a
result, adverse weather conditions in any of these areas could damage these restaurants, result in fewer guest visits to these restaurants and otherwise have a material adverse impact on our business. For example, our business was adversely impacted
in the fourth quarter of 2005 and in the future may be adversely affected by hurricanes and severe weather in Florida and Texas.

We cannot assure you
that the current locations of our existing restaurants will continue to be economically viable or that additional locations will be acquired at reasonable costs.

The location of our restaurants has significant influence on their success. We cannot assure you that current locations will continue to be economically viable or that additional locations can be acquired at
reasonable costs. In addition, the economic environment where restaurants are located could decline in the future, which could result in reduced sales in those locations. We cannot assure you that new sites will be profitable or as profitable as
existing sites.

The loss of the services of our senior executives could have a material adverse effect on our business, financial condition or results
of operations.

Our success depends to a large extent upon the continued services of our senior management, including Alan Vituli,
Chairman of the Board and Chief Executive Officer, and Daniel T. Accordino, President and Chief Operating Officer, who have substantial experience in the restaurant industry. We believe that it would be extremely difficult to replace Messrs. Vituli
and Accordino with individuals having comparable experience. Consequently, the loss of the services of Mr. Vituli or Mr. Accordino could have a material adverse effect on our business, financial condition or results of operations.

Government regulation could adversely affect our financial condition and results of operations.

We are subject to extensive laws and regulations relating to the development and operation of restaurants, including regulations relating to the
following:



| |  |  | zoning;
| | - |  | -------



| |  |  | the preparation and sale of food;
| | - |  | ---------------------------------



| |  |  | liquor licenses which allow us to serve alcoholic beverages at our Taco Cabana restaurants;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | employer/employee relationships, including minimum wage requirements, overtime, working and safety conditions, and citizenship requirements;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | federal and state laws that prohibit discrimination and laws regulating design and operation of facilities, such as the Americans With Disabilities Act of 1990; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | federal and state regulations governing the operations of franchises, including rules promulgated by the Federal Trade Commission.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

In the event that legislation having a negative impact on our business is adopted, you should be aware that it could have a material adverse impact on
us. For example, substantial increases in the minimum wage could adversely affect our financial condition and results of operations. Local zoning or building codes or regulations and liquor license approvals can cause substantial delays in our
ability to build and open new restaurants. Local authorities may revoke, suspend or deny renewal of our liquor licenses if they determine that our conduct violates applicable regulations. Any failure to obtain and maintain required licenses, permits
and approvals could adversely affect our operating results.

If one of our employees sells alcoholic beverages to an intoxicated or minor patron, we may
be liable to third parties for the acts of the patron.

We serve alcoholic beverages at our Taco Cabana restaurants and are subject to
the dram-shop statutes of the jurisdictions in which we serve alcoholic beverages. Dram-shop statutes generally provide that serving alcohol to an intoxicated or minor patron is a violation of the law.

In most jurisdictions, if one of our employees sells alcoholic beverages to an intoxicated or minor patron we may be liable to third parties for the acts
of the patron. We cannot guarantee that those patrons will not be served or that we will not be subject to liability for their acts. Our liquor liability insurance coverage may not be adequate to cover any potential liability and insurance may not
continue to be available on commercially acceptable terms or at all, or we may face increased deductibles on such insurance. Any increase in the number or size of dram-shop claims could have a material adverse



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effect on us as a result of the costs of defending against such claims; paying deductibles and increased insurance
premium amounts; implementing improved training and heightened control procedures for our employees; and paying any damages or settlements on such claims.

Federal, state and local environmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials could expose us to liabilities, which could adversely affect our results of operations.

We are subject to a variety of federal, state and local environmental regulations relating to the use, storage, discharge, emission and
disposal of hazardous materials. We own and lease numerous parcels of real estate on which our restaurants are located.

Failure to comply
with environmental laws could result in the imposition of severe penalties or restrictions on operations by governmental agencies or courts of law that could adversely affect our operations. Also, if contamination is discovered on properties owned
or operated by us, including properties we owned or operated in the past, we can be held liable for severe penalties and costs of remediation. These penalties could adversely affect our results of operations.

We are subject to all of the risks associated with leasing space subject to long-term non-cancelable leases.

Our leases generally have initial terms of 20 years, and typically provide for renewal options in five year increments as well as for rent escalations.
Generally, our leases are net leases, which require us to pay all of the costs of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases. Additional sites that we lease are likely to be subject to similar
long-term non-cancelable leases. If an existing or future restaurant is not profitable, and we decide to close it, we may nonetheless be committed to perform our monetary obligations under the applicable lease including, among other things, paying
all amounts due for the balance of the lease term. In addition, as each of our leases expire, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close restaurants in desirable locations.

We may, in the future, seek to pursue acquisitions and we may not find restaurant companies that are suitable acquisition candidates or successfully
operate or integrate any restaurant companies we may acquire.

We may in the future seek to acquire other restaurant chains. Although we
believe that opportunities for future acquisitions may be available from time to time, increased competition for acquisition candidates exists and may continue in the future. Consequently, there may be fewer acquisition opportunities available to us
as well as higher acquisition prices. There can be no assurance that we will be able to identify, acquire, manage or successfully integrate acquired restaurant companies without substantial costs, delays or operational or financial problems. In the
event we are able to acquire other restaurant companies, the integration and operation of the acquired restaurants may place significant demands on our management, which could adversely affect our ability to manage our existing restaurants. We also
face the risk that our existing systems, procedures and financial controls will be inadequate to support any restaurant chains we may acquire and that we may be unable to successfully integrate the operations and financial systems of any chains we
may acquire with our own systems. While we may evaluate and discuss potential acquisitions from time to time, we currently have no understandings, commitments or agreements with respect to any acquisitions. We may be required to obtain additional
financing to fund future acquisitions. There can be no assurance that we will be able to obtain additional financing on acceptable terms or at all. Both the senior credit facility and the Indenture governing the Notes contain restrictive covenants
that may prevent us from incurring additional debt or acquiring additional restaurant chains. See Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources.

Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our
brand.

We own certain common law trademark rights and a number of federal and international trademark and service mark registrations,
including the Pollo Tropical name and logo and Taco Cabana name and logo, and proprietary rights relating to certain of our core menu offerings. We believe that our trademarks and other proprietary rights are important to our success and our
competitive position. We, therefore, devote appropriate resources to the protection of our trademarks and proprietary rights. The protective actions that we take, however, may not be enough to prevent unauthorized usage or imitation by others, which
could harm our image, brand or competitive position and, if we commence litigation to enforce our rights, cause us to incur significant legal fees.

We are not aware of any assertions that our trademarks or menu offerings infringe upon the proprietary rights of third parties, but we cannot assure you that third parties will not claim infringement by us in the future. Any such claim,
whether or not it has merit, could be time-consuming, result in costly litigation, cause delays in introducing new menu items in the future or require us to enter into royalty or licensing agreements. As a result, any such claim could have a
material adverse effect on our business, results of operations and financial condition.



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

None

Item 3. Default Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits

(a) The following exhibits are filed as part of this report.



|            |  |                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                
|31.1        |  | Chief Executive Officers Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|            | 
|31.2        |  | Chief Financial Officers Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|            | 
|32.1        |  | Chief Executive Officers Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.2        |  | Chief Financial Officers Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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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.



|                        |  |                                                                        
|----------------------- |  | -----------------------------------------------------------------------
|                        |  | CARROLS CORPORATION                                                    
|                        | 
|Date: November 14, 2006 |  | /s/ ALAN VITULI                                                        
|                        |  | (Signature)                                                            
|                        |  | Alan Vituli Chairman of the Board and Chief Executive Officer          
|                        | 
|Date: November 14, 2006 |  | /s/ PAUL R. FLANDERS                                                   
|                        |  | (Signature)                                                            
|                        |  | Paul R. Flanders Vice President  Chief Financial Officer and Treasurer



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