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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 September 30,
2004



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 an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).    Yes ̈No  x



The number of shares of the registrants common stock outstanding as of
November 9, 2004 is 10.



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PART I - FINANCIAL INFORMATION



ITEM 1 - FINANCIAL STATEMENTS



CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands of dollars)



|                                                                                                      |  |                   |         |                  |   |        
|----------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                                                                                      |  | September 30,2004 |         | December 31,2003
|                                                                                                      |  | (unaudited)       |         |                 
|ASSETS                                                                                                |  |                   |         |                  |   |        
|Current assets:                                                                                       |  |                   |         |                  |   |        
|Cash and cash equivalents                                                                             |  | $                 | 2,989   |                  | $ | 2,414  
|Trade and other receivables, net                                                                      |  |                   | 1,975   |                  |   | 1,280  
|Inventories                                                                                           |  |                   | 4,595   |                  |   | 4,936  
|Prepaid rent                                                                                          |  |                   | 191     |                  |   | 2,534  
|Prepaid expenses and other current assets                                                             |  |                   | 4,497   |                  |   | 4,043  
|Refundable income taxes                                                                               |  |                   | 200     |                  |   |       
|Deferred income taxes                                                                                 |  |                   | 6,286   |                  |   | 6,286  
|                                                                                                      |  |                   |         |                  |   |        
|Total current assets                                                                                  |  |                   | 20,733  |                  |   | 21,493 
|                                                                                                      |  |                   |         |                  |   |        
|Property and equipment, at cost less accumulated depreciation of $221,384 and $194,652, respectively  |  |                   | 210,981 |                  |   | 236,353
|                                                                                                      |  |                  
|Franchise rights, at cost less accumulated amortization of $54,012 and $50,732, respectively (Note 9) |  |                   | 82,992  |                  |   | 86,148 
|                                                                                                      |  |                  
|Goodwill, at cost less accumulated amortization of $10,053 at both dates (Note 9)                     |  |                   | 123,861 |                  |   | 123,861
|                                                                                                      |  |                  
|Deferred income taxes                                                                                 |  |                   | 7,188   |                  |   | 8,619  
|                                                                                                      |  |                  
|Other assets                                                                                          |  |                   | 9,434   |                  |   | 10,400 
|                                                                                                      |  |                   |         |                  |   |        
|Total assets                                                                                          |  | $                 | 455,189 |                  | $ | 486,874
|                                                                                                      |  |                   |         |                  |   |        



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



2



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(in thousands of dollars)



|                                                                                        |  |                   |         |                  |   |         |  
|--------------------------------------------------------------------------------------- |  | ----------------- | ------- | ---------------- | - | ------- | -
|                                                                                        |  | September 30,2004 |         | December 31,2003 |  
|                                                                                        |  | (unaudited)       |         |                  |  
|LIABILITIES and STOCKHOLDERS EQUITY                                                    |  |                   |         |                  |   |         |  
|Current liabilities:                                                                    |  |                   |         |                  |   |         |  
|Accounts payable                                                                        |  | $                 | 19,676  |                  | $ | 17,230  |  
|Accrued interest                                                                        |  |                   | 5,470   |                  |   | 1,549   |  
|Accrued payroll, related taxes and benefits                                             |  |                   | 16,513  |                  |   | 11,545  |  
|Accrued income taxes                                                                    |  |                   |        |                  |   | 836     |  
|Other liabilities                                                                       |  |                   | 15,027  |                  |   | 14,897  |  
|Current portion of long-term debt                                                       |  |                   | 12,215  |                  |   | 14,005  |  
|Current portion of lease financing obligations                                          |  |                   | 2,535   |                  |   | 2,288   |  
|                                                                                        |  |                   |         |                  |   |         |  
|Total current liabilities                                                               |  |                   | 71,436  |                  |   | 62,350  |  
|                                                                                        |  |                  
|Long-term debt, net of current portion                                                  |  |                   | 233,581 |                  |   | 281,827 |  
|Lease financing obligations, net of current portion                                     |  |                   | 80,472  |                  |   | 82,397  |  
|Deferred income  sale/leaseback of real estate                                         |  |                   | 11,004  |                  |   | 8,841   |  
|Accrued postretirement benefits                                                         |  |                   | 3,367   |                  |   | 2,962   |  
|Other liabilities (Note 7)                                                              |  |                   | 27,343  |                  |   | 27,527  |  
|                                                                                        |  |                   |         |                  |   |         |  
|Total liabilities                                                                       |  |                   | 427,203 |                  |   | 465,904 |  
|                                                                                        |  |                  
|Commitments and contingencies (Note 11)                                                 |  |                   |         |                  |   |         |  
|                                                                                        |  |                  
|Stockholders equity:                                                                   |  |                   |         |                  |   |         |  
|Common stock, par value $1; authorized 1,000 shares, issued and outstanding  10 shares |  |                   |        |                  |   |        |  
|Additional paid-in capital                                                              |  |                   | 24,485  |                  |   | 24,485  |  
|Accumulated earnings (deficit)                                                          |  |                   | 3,501   |                  |   | (3,515  | )
|                                                                                        |  |                   |         |                  |   |         |  
|Total stockholders equity                                                              |  |                   | 27,986  |                  |   | 20,970  |  
|                                                                                        |  |                   |         |                  |   |         |  
|Total liabilities and stockholders equity                                              |  | $                 | 455,189 |                  | $ | 486,874 |  
|                                                                                        |  |                   |         |                  |   |         |  



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



3



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2004
AND 2003

(unaudited)

(in thousands of dollars)



|                                      |  |      |         |                        |   |        
|------------------------------------- |  | ---- | ------- | ---------------------- | - | -------
|                                      |  | 2004 |         | Restated (Note 2) 2003
|Revenues:                             |  |      |         |                        |   |        
|Restaurant sales                      |  | $    | 177,796 |                        | $ | 165,836
|Franchise royalty revenues and fees   |  |      | 366     |                        |   | 359    
|                                      |  |      |         |                        |   |        
|Total revenues                        |  |      | 178,162 |                        |   | 166,195
|                                      |  |     
|Costs and expenses:                   |  |      |         |                        |   |        
|Cost of sales                         |  |      | 51,853  |                        |   | 47,304 
|Restaurant wages and related expenses |  |      | 52,245  |                        |   | 49,400 
|Restaurant rent expense               |  |      | 8,966   |                        |   | 7,670  
|Other restaurant operating expenses   |  |      | 24,405  |                        |   | 23,352 
|Advertising expense                   |  |      | 6,186   |                        |   | 6,261  
|General and administrative            |  |      | 10,503  |                        |   | 10,236 
|Depreciation and amortization         |  |      | 10,357  |                        |   | 10,729 
|Impairment losses (Note 5)            |  |      | 60      |                        |   | 1,687  
|Other expense (Note 4)                |  |      | 2,352   |                        |   |       
|                                      |  |      |         |                        |   |        
|Total operating expenses              |  |      | 166,927 |                        |   | 156,639
|                                      |  |      |         |                        |   |        
|Income from operations                |  |      | 11,235  |                        |   | 9,556  
|                                      |  |     
|Interest expense                      |  |      | 7,145   |                        |   | 8,067  
|                                      |  |      |         |                        |   |        
|Income before income taxes            |  |      | 4,090   |                        |   | 1,489  
|                                      |  |     
|Provision for income taxes (Note 6)   |  |      | 1,506   |                        |   | 695    
|                                      |  |      |         |                        |   |        
|Net income                            |  | $    | 2,584   |                        | $ | 794    
|                                      |  |      |         |                        |   |        



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



4



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2004
AND 2003

(unaudited)

(in thousands of dollars)



|                                      |  |      |         |                        |   |        
|------------------------------------- |  | ---- | ------- | ---------------------- | - | -------
|                                      |  | 2004 |         | Restated (Note 2) 2003
|Revenues:                             |  |      |         |                        |   |        
|Restaurant sales                      |  | $    | 511,863 |                        | $ | 483,001
|Franchise royalty revenues and fees   |  |      | 1,122   |                        |   | 1,055  
|                                      |  |      |         |                        |   |        
|Total revenues                        |  |      | 512,985 |                        |   | 484,056
|                                      |  |     
|Costs and expenses:                   |  |      |         |                        |   |        
|Cost of sales                         |  |      | 147,854 |                        |   | 135,123
|Restaurant wages and related expenses |  |      | 151,767 |                        |   | 146,224
|Restaurant rent expense               |  |      | 26,253  |                        |   | 23,020 
|Other restaurant operating expenses   |  |      | 69,154  |                        |   | 67,164 
|Advertising expense                   |  |      | 19,059  |                        |   | 21,266 
|General and administrative            |  |      | 30,749  |                        |   | 28,448 
|Depreciation and amortization         |  |      | 32,043  |                        |   | 32,553 
|Impairment losses (Note 5)            |  |      | 629     |                        |   | 2,332  
|Other expense (Note 4)                |  |      | 2,352   |                        |   |       
|                                      |  |      |         |                        |   |        
|Total operating expenses              |  |      | 479,860 |                        |   | 456,130
|                                      |  |      |         |                        |   |        
|Income from operations                |  |      | 33,125  |                        |   | 27,926 
|                                      |  |     
|Interest expense                      |  |      | 22,046  |                        |   | 24,710 
|                                      |  |      |         |                        |   |        
|Income before income taxes            |  |      | 11,079  |                        |   | 3,216  
|                                      |  |     
|Provision for income taxes (Note 6)   |  |      | 4,063   |                        |   | 1,439  
|                                      |  |      |         |                        |   |        
|Net income                            |  | $    | 7,016   |                        | $ | 1,777  
|                                      |  |      |         |                        |   |        



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



5



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2004
AND 2003

(unaudited)

(in thousands of dollars)



|                                                                                    |  |      |         |   |                        |   |         |  
|----------------------------------------------------------------------------------- |  | ---- | ------- | - | ---------------------- | - | ------- | -
|                                                                                    |  | 2004 |         |   | Restated (Note 2) 2003 |  
|Cash flows provided from operating activities:                                      |  |      |         |   |                        |   |         |  
|Net income                                                                          |  | $    | 7,016   |   |                        | $ | 1,777   |  
|Adjustments to reconcile net income to net cash provided from operating activities: |  |      |         |   |                        |   |         |  
|Loss (gain) on sales of properties                                                  |  |      | (314    | ) |                        |   | 388     |  
|Depreciation and amortization                                                       |  |      | 32,043  |   |                        |   | 32,553  |  
|Impairment losses                                                                   |  |      | 629     |   |                        |   | 2,332   |  
|Deferred income taxes                                                               |  |      | 1,431   |   |                        |   | 674     |  
|Change in operating assets and liabilities                                          |  |      | 10,781  |   |                        |   | (1,008  | )
|                                                                                    |  |      |         |   |                        |   |         |  
|Net cash provided from operating activities                                         |  |      | 51,586  |   |                        |   | 36,716  |  
|                                                                                    |  |      |         |   |                        |   |         |  
|Cash flows used for investing activities:                                           |  |      |         |   |                        |   |         |  
|Capital expenditures:                                                               |  |      |         |   |                        |   |         |  
|New restaurant development                                                          |  |      | (7,422  | ) |                        |   | (16,833 | )
|Restaurant remodeling                                                               |  |      | (818    | ) |                        |   | (3,133  | )
|Other restaurant expenditures                                                       |  |      | (4,565  | ) |                        |   | (5,468  | )
|Corporate and restaurant information systems                                        |  |      | (724    | ) |                        |   | (1,187  | )
|                                                                                    |  |      |         |   |                        |   |         |  
|Total capital expenditures                                                          |  |      | (13,529 | ) |                        |   | (26,621 | )
|Properties purchased for sale-leaseback                                             |  |      | (924    | ) |                        |   | (3,149  | )
|Proceeds from dispositions of property and equipment                                |  |      | 1,174   |   |                        |   | 2,670   |  
|                                                                                    |  |      |         |   |                        |   |         |  
|Net cash used for investing activities                                              |  |      | (13,279 | ) |                        |   | (27,100 | )
|                                                                                    |  |      |         |   |                        |   |         |  
|Cash flows used for financing activities:                                           |  |      |         |   |                        |   |         |  
|Payments on revolving credit facility, net                                          |  |      | (500    | ) |                        |   | (36,100 | )
|Principal payments on term loans                                                    |  |      | (10,125 | ) |                        |   | (5,500  | )
|Principal pre-payments on term loans                                                |  |      | (39,000 | ) |                        |   |        |  
|Principal payments on lease financing obligations                                   |  |      | (1,678  | ) |                        |   | (1,496  | )
|Payments on other notes payable                                                     |  |      | (117    | ) |                        |   | (716    | )
|Principal payments on capital leases                                                |  |      | (294    | ) |                        |   | (370    | )
|Proceeds from sale-leaseback transactions                                           |  |      | 13,982  |   |                        |   | 35,278  |  
|                                                                                    |  |      |         |   |                        |   |         |  
|Net cash used for financing activities                                              |  |      | (37,732 | ) |                        |   | (8,904  | )
|                                                                                    |  |      |         |   |                        |   |         |  
|Increase in cash and cash equivalents                                               |  |      | 575     |   |                        |   | 712     |  
|Cash and cash equivalents, beginning of period                                      |  |      | 2,414   |   |                        |   | 2,538   |  
|                                                                                    |  |      |         |   |                        |   |         |  
|Cash and cash equivalents, end of period                                            |  | $    | 2,989   |   |                        | $ | 3,250   |  
|                                                                                    |  |      |         |   |                        |   |         |  



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



6



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of
dollars)



|1. | Statement of Management
|-- | -----------------------



The accompanying unaudited consolidated financial statements for the three and nine months ended September 30, 2004 and 2003 have been prepared without
audit, pursuant to the rules and regulations of the Securities and Exchange Commission and do not include all 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 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, 2004 and 2003 are not necessarily indicative of
the results to be expected for the full year.



The preparation
of 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. Actual results could differ from those estimates.



The consolidated financial statements include the accounts of Carrols
Corporation and its majority owned subsidiaries (Carrols or the Company). All material intercompany balances, transactions and profits have been eliminated.



We use a 52-53 week fiscal year ending on the Sunday closest to December 31. For convenience, all references herein to the
fiscal years ended December 29, 2002 and December 28, 2003 will be referred to as the fiscal years ended December 31, 2002 and 2003, respectively. Similarly, all references herein to the three and nine months ended September 28, 2003 and September
26, 2004 will be referred to as the three and nine months ended September 30, 2003 and September 30, 2004, respectively. Our fiscal years ended December 31, 2001, 2002 and 2003 each contained 52 weeks. Our fiscal year ended December 31, 2004 will
contain 53 weeks. The additional week in fiscal 2004 will be included in the fourth quarter.



These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2003 contained in the Companys 2003 Annual
Report on Form 10-K. The December 31, 2003 balance sheet data is derived from those audited financial statements. As further discussed in Note 3, the Company restated its financial statements including applicable footnotes in its 2003 Annual Report
on Form 10-K for periods ended prior to December 31, 2003. All previously reported amounts affected by the restatement that appear elsewhere in these footnotes to the consolidated financial statements have also been restated.



Certain amounts for prior periods have been reclassified to conform to the
current year presentation.



7



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars)



|2. | Stock-Based Compensation Disclosures Required by SFAS No. 123 and No. 148
|-- | -------------------------------------------------------------------------



Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based Compensation,
(SFAS 123), as amended by FAS 148, permits 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 allows entities to continue to apply the provisions of 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 has elected to continue applying the provisions of APB 25 and provide the pro forma
disclosure provisions of SFAS 123.



The following table
presents the Companys proforma net income 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 FAS 123:



|                                    |  |                                 |       |                                |   |      |  |                  |       |  |   |      
|----------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ---- |  | ---------------- | ----- |  | - | -----
|                                    |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                                    |  | 2004                            |       | 2003                           |   | 2004 |  | 2003            
|                                    |  |                                 |       | Restated(Note 2)               |   |      |  | Restated(Note 2)
|Net income as reported              |  | $                               | 2,584 |                                | $ | 794  |  | $                | 7,016 |  | $ | 1,777
|Less: Compensation cost, net of tax |  |                                 | 72    |                                |   | 65   |  |                  | 224   |  |   | 208  
|                                    |  |                                 |       |                                |   |      |  |                  |       |  |   |      
|Proforma net income                 |  | $                               | 2,512 |                                | $ | 729  |  | $                | 6,792 |  | $ | 1,569
|                                    |  |                                 |       |                                |   |      |  |                  |       |  |   |      



|3. | Restatement of Previously Issued Financial Statements
|-- | -----------------------------------------------------



As previously reported in the Companys Annual Report on Form 10-K for the year ended December 31, 2003, the Company restated its financial
statements including applicable footnotes for periods ended prior to December 31, 2003 to report real estate transactions for 86 restaurants consummated during 1991 to 2000 as financing transactions under SFAS No. 98 Accounting for
Leases rather than as sale/leaseback transactions as previously reported. The impact of the restatement was to record on the Companys balance sheets the property and equipment of the restaurants subject to these transactions and record
the proceeds from these transactions (including the gains previously deferred), as a form of debt financing. The restatement also impacted our operating results by increasing the depreciation expense for the property and equipment subject to these
transactions and recharacterizing the lease payments previously reported as rent expense for these restaurants as principal repayments and interest expense. There was no impact on sale/leaseback transactions that were consummated in 2002 and 2003.



8



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars)



The following table sets forth the
previously reported amounts and the restated amounts reflected in the accompanying consolidated financial statements:



|                                                   |  |                                      |         |                                     |   |                                     |  |   |            |   |  |   |         |  
|-------------------------------------------------- |  | ------------------------------------ | ------- | ----------------------------------- | - | ----------------------------------- |  | - | ---------- | - |  | - | ------- | -
|                                                   |  | Three Months EndedSeptember 30, 2003 |         | Nine Months EndedSeptember 30, 2003 |  
|                                                   |  | AsPreviously Reported                |         | AsRestated                          |   | AsPreviouslyReported                |  |   | AsRestated |  
|Consolidated Statements of Operations:             |  |                                      |         |                                     |   |                                     |  |   |            |   |  |   |         |  
|Restaurant rent expense                            |  | $                                    | 9,924   |                                     | $ | 7,670                               |  | $ | 29,781     |   |  | $ | 23,020  |  
|Depreciation and amortization                      |  |                                      | 9,611   |                                     |   | 10,729                              |  |   | 29,199     |   |  |   | 32,553  |  
|Total operating expenses                           |  |                                      | 157,775 |                                     |   | 156,639                             |  |   | 459,537    |   |  |   | 456,130 |  
|Income from operations                             |  |                                      | 8,420   |                                     |   | 9,556                               |  |   | 24,519     |   |  |   | 27,926  |  
|Interest expense                                   |  |                                      | 6,257   |                                     |   | 8,067                               |  |   | 19,249     |   |  |   | 24,710  |  
|Income before income taxes                         |  |                                      | 2,163   |                                     |   | 1,489                               |  |   | 5,270      |   |  |   | 3,216   |  
|Provision for income taxes                         |  |                                      | 976     |                                     |   | 695                                 |  |   | 2,297      |   |  |   | 1,439   |  
|Net income                                         |  |                                      | 1,187   |                                     |   | 794                                 |  |   | 2,973      |   |  |   | 1,777   |  
|                                                   |  |                                      |        
|                                                   |  |                                      |         |                                     |   | Nine Months EndedSeptember 30, 2003 | 
|                                                   |  |                                      |         |                                     |   | AsPreviouslyReported                |  |   | AsRestated |  
|Consolidated Statements of Cash Flows:             |  |                                      |         |                                     |   |                                     |  |   |            |   |  |   |         |  
|Net income                                         |  |                                      |         |                                     |   |                                     |  | $ | 2,973      |   |  | $ | 1,777   |  
|Depreciation and amortization                      |  |                                      |         |                                     |   |                                     |  |   | 29,199     |   |  |   | 32,553  |  
|Deferred income taxes                              |  |                                      |         |                                     |   |                                     |  |   | 1,532      |   |  |   | 674     |  
|Other changes in operating assets and liabilities  |  |                                      |         |                                     |   |                                     |  |   | (1,204     | ) |  |   | (1,008  | )
|Net cash provided from operating activities        |  |                                      |         |                                     |   |                                     |  |   | 35,220     |   |  |   | 36,716  |  
|Principal payments on lease financing obligations. |  |                                      |         |                                     |   |                                     |  |   |           |   |  |   | (1,496  | )
|Net cash used for financing activities             |  |                                      |         |                                     |   |                                     |  |   | (7,408     | ) |  |   | (8,904  | )



|4. | Public Offering of Securities
|-- | -----------------------------



On June 22, 2004 our parent company, Carrols Holdings Corporation (Holdings), filed a registration statement on Form S-1 to register an initial public
offering of Enhanced Yield Securities (EYSs) and senior subordinated notes to be sold separately. This registration statement was subsequently amended on August 25, 2004. On October 25, 2004 Holdings withdrew its S-1 registration statement with
respect to the aforementioned securities. The Company has recorded in other expense in the third quarter of 2004 the incurred costs related to this offering of $2.35 million.



9



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

(in
thousands of dollars)



|5. | Impairment of Long-Lived Assets
|-- | -------------------------------



The Company reviews its long-lived assets for impairment at the restaurant level on an ongoing basis. If an indicator of impairment exists for any of its
restaurants, an estimate of undiscounted future cash flows produced by each restaurant is compared to that restaurants carrying value. If an asset is determined to be impaired, an impairment charge is measured by the excess of the carrying
amount of the asset over its fair value. The Company recorded impairment charges for its segments as follows:



|            |  |                                 |    |                                |   |       |  |      |     |  |   |      
|----------- |  | ------------------------------- | -- | ------------------------------ | - | ----- |  | ---- | --- |  | - | -----
|            |  | Three Months EndedSeptember 30, |    | Nine Months EndedSeptember 30,
|            |  | 2004                            |    | 2003                           |   | 2004  |  | 2003
|Burger King |  | $                               | 60 |                                | $ | 38    |  | $    | 629 |  | $ | 463  
|Taco Cabana |  |                                 |   |                                |   | 1,649 |  |      |    |  |   | 1,869
|            |  |                                 |    |                                |   |       |  |      |     |  |   |      
|            |  | $                               | 60 |                                | $ | 1,687 |  | $    | 629 |  | $ | 2,332
|            |  |                                 |    |                                |   |       |  |      |     |  |   |      



|6. | Income Taxes
|-- | ------------



The income tax provision for the nine months ended September 30, 2004 and 2003 was comprised of the following:



|         |  |      |       |                           |   |      
|-------- |  | ---- | ----- | ------------------------- | - | -----
|         |  | 2004 |       | 2003 As Restated (Note 2)
|Current  |  | $    | 2,632 |                           | $ | 765  
|Deferred |  |      | 1,431 |                           |   | 674  
|         |  |      |       |                           |   |      
|         |  | $    | 4,063 |                           | $ | 1,439
|         |  |      |       |                           |   |      



The difference
between the expected tax benefit, resulting from application of the federal statutory income tax rate to pretax income, and the reported income tax provision results principally from state taxes and non-deductible amortization of certain franchise
rights.



|7. | Other Liabilities
|-- | -----------------



Other long-term liabilities at September 30, 2004 and December 31, 2003 consisted of the following:



|                                   |  |                    |        |                   |   |       
|---------------------------------- |  | ------------------ | ------ | ----------------- | - | ------
|                                   |  | September 30, 2004 |        | December 31, 2003
|Unearned purchase discounts        |  | $                  | 9,182  |                   | $ | 10,888
|Accrued occupancy costs            |  |                    | 8,505  |                   |   | 8,012 
|Accrued workers compensation costs |  |                    | 4,450  |                   |   | 3,848 
|Other                              |  |                    | 5,206  |                   |   | 4,779 
|                                   |  |                    |        |                   |   |       
|                                   |  | $                  | 27,343 |                   | $ | 27,527
|                                   |  |                    |        |                   |   |       



10



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars)



|8. | Postretirement Benefits
|-- | -----------------------



The Company provides postretirement medical and life insurance benefits covering substantially all Burger King administrative and restaurant management
salaried employees. On May 19, 2004, FASB Staff Position No. FAS 106-2 Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FAS 106-2) was issued. FAS 106-2 provides
guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) for employers that sponsor postretirement health care plans that provide prescription drug benefits. FAS 106-2 also
requires those employers to provide certain disclosures in their financial statements regarding the effect of the federal subsidy provided by the Act (the Subsidy) beginning in the third quarter of 2004. The subsidy will not impact the
Companys cash flows until 2006.



The Company has
reviewed the methods prescribed in the Act to calculate the impact of the Subsidy and has included the impact in its third quarter disclosures. Due to the Subsidy, for the year ending December 31, 2004 it is expected that postretirement benefit
expense will be reduced by $62,000 and the accumulated benefit obligation will be reduced by $646,000 at July 1, 2004.



The Companys assumptions used to determine its postretirement benefit obligations at December 31, 2003 are as follows:



|                                                                                  |  |      |  
|--------------------------------------------------------------------------------- |  | ---- | -
|Discount rate                                                                     |  | 6.15 | %
|                                                                                  | 
|Assumed health care trend rates:                                                  |  |      |  
|                                                                                  | 
|Medical benefits cost rent rate assumed for the following year                    |  | 8.5  | %
|Prescription drug benefit cost trend rate assumed for the following year          |  | 12.0 | %
|Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |  | 5.0  | %
|Year that the rate reaches the ultimate trend rate                                |  | 2010 |  



The following
summarizes the components of net periodic benefit cost for the nine months ended September 30, 2004 and 2003.



|                                                |  |      |     |   |      |   |     |  
|----------------------------------------------- |  | ---- | --- | - | ---- | - | --- | -
|                                                |  | 2004 |     |   | 2003 |  
|Components of net periodic benefit cost:        |  |      |     |   |      |   |     |  
|Service cost                                    |  | $    | 246 |   |      | $ | 216 |  
|Interest cost                                   |  |      | 193 |   |      |   | 174 |  
|Amortization of gains and losses                |  |      | 38  |   |      |   | 27  |  
|Amortization of unrecognized prior service cost |  |      | (22 | ) |      |   | (22 | )
|                                                |  |      |     |   |      |   |     |  
|Net periodic postretirement benefit cost        |  | $    | 455 |   |      | $ | 395 |  
|                                                |  |      |     |   |      |   |     |  



11



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars)



|9. | Goodwill and Franchise Rights
|-- | -----------------------------



Fees for initial franchises and renewals are amortized using the straight-line method over the term of the agreement, generally 20 years. Acquisition
costs allocated to franchise rights are amortized using the straight-line method, principally over the remaining lives of the acquired leases, including renewal options, but not in excess of 40 years.



Amortization expense for the quarter ended September 30, 2004 and 2003,
amounted to $1,132 and $1,161, respectively. Amortization expense for the nine months ended September 30, 2004 and 2003 amounted to $3,403 and $3,536, respectively. Estimated annual amortization expense is as follows:



|     |  |       
|---- |  | ------
|2004 |  | $4,617
|2005 |  | 4,532 
|2006 |  | 4,433 
|2007 |  | 4,267 
|2008 |  | 4,129 



Goodwill is not being
amortized but 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 each year.
Accordingly, there were no changes to the carrying amount of goodwill during the nine months ended September 30, 2004.



|10. | Business Segment Information
|--- | ----------------------------



The Company is engaged in the restaurant industry, with three restaurant concepts: Burger King operating as a franchisee, 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 regional quick-casual restaurant chain featuring grilled marinated
chicken and authentic made from scratch side dishes. Pollo Tropicals core markets are located in south and central Florida. Taco Cabana is a regional quick-casual restaurant chain featuring Tex-Mex style food, including
flame-grilled beef and chicken fajitas, quesadillas and other Tex-Mex dishes. Taco Cabanas core markets are primarily in Texas.



The following table includes measures of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to the
segments and assessing their performance. EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, impairment losses and other expense.



The Other column includes corporate related items not allocated to reportable segments and for income from
operations, principally corporate depreciation and amortization. Other identifiable assets consist primarily of franchise rights and intangible assets. Non-operating expenses, comprised of interest expense and interest income, are corporate related
items and therefore have not been allocated to the reportable segments.



12



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars)



|                                      |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|------------------------------------- |  | ---------- | ------- | ------------- | - | ---------- |  | ----- | ------- | ------------ | - | ------- |  | - | -------
|                                      |  | TacoCabana |         | PolloTropical |   | BurgerKing |  | Other |         | Consolidated
|Three Months Ended:                   |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|                                      |  |            |         |               |  
|September 30, 2004:                   |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|Revenues                              |  | $          | 51,852  |               | $ | 30,287     |  | $     | 96,023  |              | $ |        |  | $ | 178,162
|Cost of sales                         |  |            | 15,440  |               |   | 9,458      |  |       | 26,955  |              |   |        |  |   | 51,853 
|Restaurant wages and related expenses |  |            | 14,703  |               |   | 7,656      |  |       | 29,886  |              |   |        |  |   | 52,245 
|Depreciation and amortization         |  |            | 2,339   |               |   | 1,330      |  |       | 5,866   |              |   | 822     |  |   | 10,357 
|EBITDA                                |  |            | 7,784   |               |   | 6,269      |  |       | 9,951   |              |   |         |  |   |        
|Capital expenditures                  |  |            | 1,984   |               |   | 2,939      |  |       | 1,193   |              |   | 362     |  |   | 6,478  
|                                      |  |            |         |               |  
|September 30, 2003 (as restated):     |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|Revenues                              |  | $          | 47,172  |               | $ | 27,870     |  | $     | 91,153  |              | $ |        |  | $ | 166,195
|Cost of sales                         |  |            | 14,167  |               |   | 8,381      |  |       | 24,756  |              |   |        |  |   | 47,304 
|Restaurant wages and related expenses |  |            | 13,412  |               |   | 7,070      |  |       | 28,918  |              |   |        |  |   | 49,400 
|Depreciation and amortization         |  |            | 2,134   |               |   | 1,052      |  |       | 6,496   |              |   | 1,047   |  |   | 10,729 
|EBITDA                                |  |            | 6,426   |               |   | 5,451      |  |       | 10,095  |              |   |         |  |   |        
|Capital expenditures                  |  |            | 5,107   |               |   | 441        |  |       | 1,345   |              |   | 211     |  |   | 7,104  
|                                      |  |            |         |               |  
|Nine Months Ended:                    |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|                                      |  |            |         |               |  
|September 30, 2004:                   |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|Revenues                              |  | $          | 149,611 |               | $ | 90,925     |  | $     | 272,449 |              | $ |        |  | $ | 512,985
|Cost of sales                         |  |            | 44,661  |               |   | 27,986     |  |       | 75,207  |              |   |        |  |   | 147,854
|Restaurant wages and related expenses |  |            | 42,550  |               |   | 22,541     |  |       | 86,676  |              |   |        |  |   | 151,767
|Depreciation and amortization         |  |            | 7,769   |               |   | 3,634      |  |       | 17,925  |              |   | 2,715   |  |   | 32,043 
|EBITDA                                |  |            | 20,783  |               |   | 21,017     |  |       | 26,349  |              |   |         |  |   |        
|Capital expenditures                  |  |            | 5,561   |               |   | 3,522      |  |       | 3,722   |              |   | 724     |  |   | 13,529 
|                                      |  |            |         |               |  
|September 30, 2003 (as restated):     |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|Revenues                              |  | $          | 135,534 |               | $ | 81,644     |  | $     | 266,878 |              | $ |        |  | $ | 484,056
|Cost of sales                         |  |            | 39,931  |               |   | 24,786     |  |       | 70,406  |              |   |        |  |   | 135,123
|Restaurant wages and related expenses |  |            | 38,971  |               |   | 21,086     |  |       | 86,167  |              |   |        |  |   | 146,224
|Depreciation and amortization         |  |            | 6,535   |               |   | 3,733      |  |       | 19,147  |              |   | 3,138   |  |   | 32,553 
|EBITDA                                |  |            | 18,627  |               |   | 16,392     |  |       | 27,792  |              |   |         |  |   |        
|Capital expenditures                  |  |            | 14,755  |               |   | 4,160      |  |       | 6,519   |              |   | 1,187   |  |   | 26,621 
|                                      |  |            |         |               |  
|Identifiable Assets:                  |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|At September 30, 2004                 |  | $          | 61,910  |               | $ | 43,691     |  | $     | 190,892 |              | $ | 158,696 |  | $ | 455,189
|At December 31, 2003                  |  |            | 72,885  |               |   | 43,612     |  |       | 208,008 |              |   | 162,369 |  |   | 486,874
|                                      |  |            |         |               |  
|Year ended December 31, 2003:         |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|EBITDA                                |  | $          | 24,411  |               | $ | 22,553     |  | $     | 36,787  |              |   |         |  |   |        
|Year ended December 31, 2002:         |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|EBITDA                                |  | $          | 28,278  |               | $ | 22,384     |  | $     | 43,651  |              |   |         |  |   |        
|Year ended December 31, 2001:         |  |            |         |               |   |            |  |       |         |              |   |         |  |   |        
|EBITDA                                |  | $          | 24,467  |               | $ | 22,085     |  | $     | 43,219  |              |   |         |  |   |        



13



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars)



A reconciliation of our
segments EBITDA to consolidated net income is as follows:



|                              |  |                                 |        |                                |   |        |  |      |        |  |   |       
|----------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                              |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                              |  | 2004                            |        | 2003                           |   | 2004   |  | 2003
|Segment EBITDA:               |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Taco Cabana                   |  | $                               | 7,784  |                                | $ | 6,426  |  | $    | 20,783 |  | $ | 18,627
|Pollo Tropical                |  |                                 | 6,269  |                                |   | 5,451  |  |      | 21,017 |  |   | 16,392
|Burger King                   |  |                                 | 9,951  |                                |   | 10,095 |  |      | 26,349 |  |   | 27,792
|                              |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Subtotal                      |  |                                 | 24,004 |                                |   | 21,972 |  |      | 68,149 |  |   | 62,811
|                              |  |                                 |        |                               
|Less:                         |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Depreciation and amortization |  |                                 | 10,357 |                                |   | 10,729 |  |      | 32,043 |  |   | 32,553
|Impairment losses             |  |                                 | 60     |                                |   | 1,687  |  |      | 629    |  |   | 2,332 
|Interest expense              |  |                                 | 7,145  |                                |   | 8,067  |  |      | 22,046 |  |   | 24,710
|Provision for income taxes    |  |                                 | 1,506  |                                |   | 695    |  |      | 4,063  |  |   | 1,439 
|Other expense                 |  |                                 | 2,352  |                                |   |       |  |      | 2,352  |  |   |      
|                              |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Net income                    |  | $                               | 2,584  |                                | $ | 794    |  | $    | 7,016  |  | $ | 1,777 
|                              |  |                                 |        |                                |   |        |  |      |        |  |   |       



|                              |  |                         |        |      |   |        |  |   |        |  
|----------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------ | -
|                              |  | Year Ended December 31, |       
|                              |  | 2003                    |        | 2002 |   | 2001   | 
|Segment EBITDA:               |  |                         |        |      |   |        |  |   |        |  
|Taco Cabana                   |  | $                       | 24,411 |      | $ | 28,278 |  | $ | 24,467 |  
|Pollo Tropical                |  |                         | 22,553 |      |   | 22,384 |  |   | 22,085 |  
|Burger King                   |  |                         | 36,787 |      |   | 43,651 |  |   | 43,219 |  
|                              |  |                         |        |      |   |        |  |   |        |  
|Subtotal                      |  |                         | 83,751 |      |   | 94,313 |  |   | 89,771 |  
|                              |  |                         |       
|Less:                         |  |                         |        |      |   |        |  |   |        |  
|Depreciation and amortization |  |                         | 43,102 |      |   | 42,766 |  |   | 47,388 |  
|Impairment losses             |  |                         | 4,151  |      |   | 1,285  |  |   | 7,631  |  
|Interest expense              |  |                         | 32,363 |      |   | 34,955 |  |   | 40,552 |  
|Provision for income taxes    |  |                         | 1,767  |      |   | 5,593  |  |   | 274    |  
|                              |  |                         |        |      |   |        |  |   |        |  
|Net income (loss)             |  | $                       | 2,368  |      | $ | 9,714  |  | $ | (6,074 | )
|                              |  |                         |        |      |   |        |  |   |        |  



|11. | 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 alleges that Carrols has engaged in a pattern and practice of unlawful discrimination, harassment and
retaliation against former and current female employees of Carrols. At present, the EEOC has identified approximately 450 individuals it believes represent the class of claimants. The EEOC is seeking monetary and injunctive relief from Carrols.



On January 15, 2004, Carrols filed a renewed Motion for
Summary Judgment (the Motion). The Court held oral argument on the Motion on March 12, 2004 and has taken the Motion under submission. It is not possible to predict whether Carrols will prevail on the Motion which, subject to possible
appeals by the EEOC, would effectively end the case. If Carrols does not prevail on the Motion, the case will proceed to trial. It is too early to make an evaluation of the likelihood of an unfavorable outcome or estimate of 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 financial condition or results of operations and cash flows. The Company intends to continue to contest the case
vigorously and believes it is without merit.



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



14



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars)



|12. | Subsequent Event
|--- | ----------------



On October 27, 2004 (the conversion date), Carrols Holdings Corporation (Carrols Holdings), which owns 100% of the outstanding
capital stock of Carrols Corporation, eliminated its tracking stock capital structure by combining all of its series of authorized common stock into one series of common stock. In this regard, on the conversion date the authorized series
of common stock known as Pollo Tropical Stock and Taco Cabana Stock were each converted into the series of common stock known as Carrols Stock. From and after the conversion date, the Carrols Stock has been renamed and is now referred to as Common
Stock. We refer to the above-described transaction as the combination. In contemplation of the combination, on October 6, 2004, the Restated Certificate of Incorporation of Carrols Holdings was amended to amend and clarify certain
general provisions relating to a combination of its three authorized series of common stock. In addition, effective October 27, 2004, the Restated Certificate of Incorporation of Carrols Holdings was further amended to give effect to the
combination.



Prior to the conversion date, no shares of Pollo
Tropical Stock or Taco Cabana Stock were outstanding. However, as a result of the combination, each outstanding option to purchase a share of Pollo Tropical Stock pursuant to the 1998 Pollo Tropical Long-Term Incentive Plan was converted on the
conversion date into an option to purchase .4144 shares of Common Stock. Similarly, each outstanding option to purchase a share of Taco Cabana Stock pursuant to the 2001 Taco Cabana Long-Term Incentive Plan was converted on the conversion date into
an option to purchase .0522 shares of Common Stock. As a result of the combination, options to purchase a total of 97,000 shares of Pollo Tropical Stock and 409,400 shares of Taco Cabana Stock outstanding immediately prior to the conversion date
were converted, effective as of the conversion date, into options to purchase a total of 61,656 shares of Common Stock. These options, which were previously granted under the 1998 Pollo Tropical Long-Term Incentive Plan and the 2001 Taco Cabana
Long-Term Incentive Plan, will continue to be governed by such applicable plan, each of which has been amended as of the conversion date to reflect the combination.



The Company expects to record a compensation charge in the fourth quarter of 2004 relative to the above conversion.



|13. | Guarantor Financial Statements
|--- | ------------------------------



The $170 million 91/2% Senior Subordinated Notes due 2008 of the Company are guaranteed by certain of the Companys subsidiaries (Guarantor Subsidiaries), all of which are wholly-owned by the Company. These subsidiaries are:



Carrols Realty Holdings

Carrols Realty I Corp.

Carrols Realty II
Corp.

Carrols J.G. Corp.

Quanta Advertising Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Taco Cabana, Inc.

TP Acquisition Corp.

T.C. Management, Inc.

Taco Cabana Management, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.



The following supplemental financial information includes consolidating balance sheets and statements of operations for the
Parent Company only, Guarantor Subsidiaries and for the Company as of September 30, 2004 and December 31, 2003 and for the three and nine months ended September 30, 2004 and 2003, and the statements of cash flows as of September 30, 2004 and 2003.
Debt and goodwill allocated to subsidiaries are presented on an accounting push-down basis.



During 2003, the Parent Company entered into an agreement, retroactive to January 1, 2002, to charge interest to the Guarantor Subsidiaries. The
retroactive interest recorded in the second quarter of 2003 was $14,097.



For certain of the Companys sale/leaseback transactions, Carrols Corporation has guaranteed on an unsecured basis the rental payments of its subsidiaries. In accordance with Emerging Issues Task Force 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.



15



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING BALANCE SHEET

September 30, 2004

(unaudited)

(in thousands of dollars)



|                                                    |  |                   |         |                       |   |          |              |  |   |                |   |  |   |        
|--------------------------------------------------- |  | ----------------- | ------- | --------------------- | - | -------- | ------------ |  | - | -------------- | - |  | - | -------
|                                                    |  | ParentCompanyOnly |         | GuarantorSubsidiaries |   |          | Eliminations |  |   | Combined Total
|ASSETS                                              |  |                   |         |                       |   |          |              |  |   |                |   |  |   |        
|Current Assets:                                     |  |                   |         |                       |   |          |              |  |   |                |   |  |   |        
|Cash and cash equivalents                           |  | $                 | 811     |                       | $ | 2,178    |              |  | $ |               |   |  | $ | 2,989  
|Trade and other receivables, net                    |  |                   | 498     |                       |   | 1,477    |              |  |   |               |   |  |   | 1,975  
|Inventories                                         |  |                   | 3,210   |                       |   | 1,385    |              |  |   |               |   |  |   | 4,595  
|Prepaid rent                                        |  |                   | 195     |                       |   | (4       | )            |  |   |               |   |  |   | 191    
|Prepaid expenses and other current assets           |  |                   | 1,188   |                       |   | 3,309    |              |  |   |               |   |  |   | 4,497  
|Refundable income taxes                             |  |                   | 200     |                       |   |         |              |  |   |               |   |  |   | 200    
|Deferred income taxes                               |  |                   | 6,286   |                       |   |         |              |  |   |               |   |  |   | 6,286  
|                                                    |  |                   |         |                       |   |          |              |  |   |                |   |  |   |        
|Total current assets                                |  |                   | 12,388  |                       |   | 8,345    |              |  |   |               |   |  |   | 20,733 
|                                                    |  |                   |         |                      
|Property and equipment, net                         |  |                   | 103,637 |                       |   | 133,547  |              |  |   | (26,203        | ) |  |   | 210,981
|Franchise rights, net                               |  |                   | 82,992  |                       |   |         |              |  |   |               |   |  |   | 82,992 
|Goodwill, net                                       |  |                   | 1,449   |                       |   | 122,412  |              |  |   |               |   |  |   | 123,861
|Intercompany receivable (payable)                   |  |                   | 126,985 |                       |   | (126,985 | )            |  |   |               |   |  |   |       
|Investment in subsidiaries                          |  |                   | 21,824  |                       |   |         |              |  |   | (21,824        | ) |  |   |       
|Deferred income taxes                               |  |                   | 7,188   |                       |   |         |              |  |   |               |   |  |   | 7,188  
|Other assets                                        |  |                   | 8,098   |                       |   | 2,726    |              |  |   | (1,390         | ) |  |   | 9,434  
|                                                    |  |                   |         |                       |   |          |              |  |   |                |   |  |   |        
|Total assets                                        |  | $                 | 364,561 |                       | $ | 140,045  |              |  | $ | (49,417        | ) |  | $ | 455,189
|                                                    |  |                   |         |                       |   |          |              |  |   |                |   |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                |  |                   |         |                       |   |          |              |  |   |                |   |  |   |        
|Current Liabilities:                                |  |                   |         |                       |   |          |              |  |   |                |   |  |   |        
|Accounts payable                                    |  | $                 | 9,387   |                       | $ | 10,289   |              |  | $ |               |   |  | $ | 19,676 
|Accrued interest                                    |  |                   | 5,470   |                       |   |         |              |  |   |               |   |  |   | 5,470  
|Accrued payroll, related taxes and benefits         |  |                   | 8,776   |                       |   | 7,737    |              |  |   |               |   |  |   | 16,513 
|Other liabilities                                   |  |                   | 8,763   |                       |   | 6,264    |              |  |   |               |   |  |   | 15,027 
|Current portion of long-term debt                   |  |                   | 11,949  |                       |   | 266      |              |  |   |               |   |  |   | 12,215 
|Current portion of lease financing obligations      |  |                   | 1,420   |                       |   | 1,961    |              |  |   | (846           | ) |  |   | 2,535  
|                                                    |  |                   |         |                       |   |          |              |  |   |                |   |  |   |        
|Total current liabilities                           |  |                   | 45,765  |                       |   | 26,517   |              |  |   | (846           | ) |  |   | 71,436 
|                                                    |  |                   |         |                      
|Long-term debt, net of current portion              |  |                   | 233,134 |                       |   | 447      |              |  |   |               |   |  |   | 233,581
|Lease financing obligations, net of current portion |  |                   | 28,337  |                       |   | 81,979   |              |  |   | (29,844        | ) |  |   | 80,472 
|Deferred income - sale/leaseback of real estate     |  |                   | 6,803   |                       |   | 1,167    |              |  |   | 3,034          |   |  |   | 11,004 
|Accrued postretirement benefits                     |  |                   | 3,367   |                       |   |         |              |  |   |               |   |  |   | 3,367  
|Other liabilities                                   |  |                   | 19,169  |                       |   | 8,077    |              |  |   | 97             |   |  |   | 27,343 
|                                                    |  |                   |         |                       |   |          |              |  |   |                |   |  |   |        
|Total liabilities                                   |  |                   | 336,575 |                       |   | 118,187  |              |  |   | (27,559        | ) |  |   | 427,203
|                                                    |  |                   |         |                      
|Commitments and contingencies                       |  |                   |         |                       |   |          |              |  |   |                |   |  |   |        
|                                                    |  |                   |         |                      
|Stockholders equity                                |  |                   | 27,986  |                       |   | 21,858   |              |  |   | (21,858        | ) |  |   | 27,986 
|                                                    |  |                   |         |                       |   |          |              |  |   |                |   |  |   |        
|Total liabilities and stockholders equity          |  | $                 | 364,561 |                       | $ | 140,045  |              |  | $ | (49,417        | ) |  | $ | 455,189
|                                                    |  |                   |         |                       |   |          |              |  |   |                |   |  |   |        



16



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING BALANCE SHEET

December 31, 2003

(unaudited)

(in thousands of dollars)



|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|--------------------------------------------------- |  | ------------------ | ------- | --------------------- | - | -------- | ------------ |  | - | ------------- | - |  | - | -------
|                                                    |  | ParentCompany Only |         | GuarantorSubsidiaries |   |          | Eliminations |  |   | CombinedTotal
|ASSETS                                              |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Current Assets:                                     |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Cash and cash equivalents                           |  | $                  | 708     |                       | $ | 1,706    |              |  | $ |              |   |  | $ | 2,414  
|Trade and other receivables, net                    |  |                    | 372     |                       |   | 908      |              |  |   |              |   |  |   | 1,280  
|Inventories                                         |  |                    | 3,413   |                       |   | 1,523    |              |  |   |              |   |  |   | 4,936  
|Prepaid rent                                        |  |                    | 1,309   |                       |   | 1,225    |              |  |   |              |   |  |   | 2,534  
|Prepaid expenses and other current assets           |  |                    | 1,150   |                       |   | 2,893    |              |  |   |              |   |  |   | 4,043  
|Deferred income taxes                               |  |                    | 6,286   |                       |   |         |              |  |   |              |   |  |   | 6,286  
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Total current assets                                |  |                    | 13,238  |                       |   | 8,255    |              |  |   |              |   |  |   | 21,493 
|                                                    |  |                    |         |                      
|Property and equipment, net                         |  |                    | 118,489 |                       |   | 142,060  |              |  |   | (24,196       | ) |  |   | 236,353
|Franchise rights, net                               |  |                    | 86,148  |                       |   |         |              |  |   |              |   |  |   | 86,148 
|Goodwill, net                                       |  |                    | 1,473   |                       |   | 122,388  |              |  |   |              |   |  |   | 123,861
|Intercompany receivable (payable)                   |  |                    | 147,675 |                       |   | (147,675 | )            |  |   |              |   |  |   |       
|Investment in subsidiaries                          |  |                    | 14,206  |                       |   |         |              |  |   | (14,206       | ) |  |   |       
|Deferred income taxes                               |  |                    | 8,619   |                       |   |         |              |  |   |              |   |  |   | 8,619  
|Other assets                                        |  |                    | 6,163   |                       |   | 5,584    |              |  |   | (1,347        | ) |  |   | 10,400 
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Total assets                                        |  | $                  | 396,011 |                       | $ | 130,612  |              |  | $ | (39,749       | ) |  | $ | 486,874
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Current Liabilities:                                |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Accounts payable                                    |  | $                  | 10,918  |                       | $ | 6,312    |              |  | $ |              |   |  | $ | 17,230 
|Accrued interest                                    |  |                    | 1,549   |                       |   |         |              |  |   |              |   |  |   | 1,549  
|Accrued payroll, related taxes and benefits         |  |                    | 6,826   |                       |   | 4,719    |              |  |   |              |   |  |   | 11,545 
|Other liabilities                                   |  |                    | 6,757   |                       |   | 8,140    |              |  |   |              |   |  |   | 14,897 
|Accrued income taxes                                |  |                    | 836     |                       |   |         |              |  |   |              |   |  |   | 836    
|Current portion of long-term debt                   |  |                    | 13,758  |                       |   | 247      |              |  |   |              |   |  |   | 14,005 
|Current portion of lease financing obligations      |  |                    | 1,292   |                       |   | 1,723    |              |  |   | (727          | ) |  |   | 2,288  
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Total current liabilities                           |  |                    | 41,936  |                       |   | 21,141   |              |  |   | (727          | ) |  |   | 62,350 
|                                                    |  |                    |         |                      
|Long-term debt, net of current portion              |  |                    | 281,176 |                       |   | 651      |              |  |   |              |   |  |   | 281,827
|Lease financing obligations, net of current portion |  |                    | 29,418  |                       |   | 80,290   |              |  |   | (27,311       | ) |  |   | 82,397 
|Deferred income - sale/leaseback of real estate     |  |                    | 3,673   |                       |   | 2,192    |              |  |   | 2,976         |   |  |   | 8,841  
|Accrued postretirement benefits                     |  |                    | 2,962   |                       |   |         |              |  |   |              |   |  |   | 2,962  
|Other liabilities                                   |  |                    | 15,876  |                       |   | 11,621   |              |  |   | 30            |   |  |   | 27,527 
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Total liabilities                                   |  |                    | 375,041 |                       |   | 115,895  |              |  |   | (25,032       | ) |  |   | 465,904
|                                                    |  |                    |         |                      
|Commitments and contingencies                       |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|                                                    |  |                    |         |                      
|Stockholders equity                                |  |                    | 20,970  |                       |   | 14,717   |              |  |   | (14,717       | ) |  |   | 20,970 
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        
|Total liabilities and stockholders equity          |  | $                  | 396,011 |                       | $ | 130,612  |              |  | $ | (39,749       | ) |  | $ | 486,874
|                                                    |  |                    |         |                       |   |          |              |  |   |               |   |  |   |        



17



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2004

(unaudited)

(in thousands of
dollars)



|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|------------------------------------- |  | ------------------ | ------ | - | --------------------- | - | ------------ |  | - | ------------- | - |  | - | -------
|                                      |  | ParentCompany Only |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | CombinedTotal
|Revenues:                             |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Restaurant sales                      |  | $                  | 96,023 |   |                       | $ | 81,773       |  | $ |              |   |  | $ | 177,796
|Franchise royalty revenues and fees   |  |                    |       |   |                       |   | 366          |  |   |              |   |  |   | 366    
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Total revenues                        |  |                    | 96,023 |   |                       |   | 82,139       |  |   |              |   |  |   | 178,162
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Costs and expenses:                   |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Cost of sales                         |  |                    | 26,955 |   |                       |   | 24,898       |  |   |              |   |  |   | 51,853 
|Restaurant wages and related expenses |  |                    | 29,886 |   |                       |   | 22,359       |  |   |              |   |  |   | 52,245 
|Restaurant rent expense               |  |                    | 5,713  |   |                       |   | 2,598        |  |   | 655           |   |  |   | 8,966  
|Other restaurant operating expenses   |  |                    | 13,708 |   |                       |   | 10,697       |  |   |              |   |  |   | 24,405 
|Advertising expense                   |  |                    | 4,057  |   |                       |   | 2,129        |  |   |              |   |  |   | 6,186  
|General and administrative            |  |                    | 5,753  |   |                       |   | 4,750        |  |   |              |   |  |   | 10,503 
|Depreciation and amortization         |  |                    | 6,471  |   |                       |   | 4,235        |  |   | (349          | ) |  |   | 10,357 
|Impairment losses                     |  |                    | 60     |   |                       |   |             |  |   |              |   |  |   | 60     
|Other expense                         |  |                    | 2,352  |   |                       |   |             |  |   |              |   |  |   | 2,352  
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Total operating expenses              |  |                    | 94,955 |   |                       |   | 71,666       |  |   | 306           |   |  |   | 166,927
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Income from operations                |  |                    | 1,068  |   |                       |   | 10,473       |  |   | (306          | ) |  |   | 11,235 
|Interest expense                      |  |                    | 5,994  |   |                       |   | 1,623        |  |   | (472          | ) |  |   | 7,145  
|Intercompany allocations              |  |                    | (4,556 | ) |                       |   | 4,556        |  |   |              |   |  |   |       
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Income (loss) before income taxes     |  |                    | (370   | ) |                       |   | 4,294        |  |   | 166           |   |  |   | 4,090  
|Provision (benefit) for income taxes  |  |                    | (28    | ) |                       |   | 1,534        |  |   |              |   |  |   | 1,506  
|Equity income from subsidiaries       |  |                    | 2,926  |   |                       |   |             |  |   | (2,926        | ) |  |   |       
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        
|Net income                            |  | $                  | 2,584  |   |                       | $ | 2,760        |  | $ | (2,760        | ) |  | $ | 2,584  
|                                      |  |                    |        |   |                       |   |              |  |   |               |   |  |   |        



18



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2003

(unaudited)

(in thousands of
dollars)



|                                      |  |                    |        |   |                       |   |              |  |   |                                  |   |  |   |        
|------------------------------------- |  | ------------------ | ------ | - | --------------------- | - | ------------ |  | - | -------------------------------- | - |  | - | -------
|                                      |  | ParentCompany Only |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | As Restated(Note 2)CombinedTotal
|Revenues:                             |  |                    |        |   |                       |   |              |  |   |                                  |   |  |   |        
|Restaurant sales                      |  | $                  | 91,153 |   |                       | $ | 74,683       |  | $ |                                 |   |  | $ | 165,836
|Franchise royalty revenues and fees   |  |                    |       |   |                       |   | 359          |  |   |                                 |   |  |   | 359    
|                                      |  |                    |        |   |                       |   |              |  |   |                                  |   |  |   |        
|Total revenues                        |  |                    | 91,153 |   |                       |   | 75,042       |  |   |                                 |   |  |   | 166,195
|                                      |  |                    |        |   |                       |   |              |  |   |                                  |   |  |   |        
|Costs and expenses:                   |  |                    |        |   |                       |   |              |  |   |                                  |   |  |   |        
|Cost of sales                         |  |                    | 24,756 |   |                       |   | 22,548       |  |   |                                 |   |  |   | 47,304 
|Restaurant wages and related expenses |  |                    | 28,918 |   |                       |   | 20,482       |  |   |                                 |   |  |   | 49,400 
|Restaurant rent expense               |  |                    | 5,007  |   |                       |   | 2,276        |  |   | 387                              |   |  |   | 7,670  
|Other restaurant operating expenses   |  |                    | 13,567 |   |                       |   | 9,785        |  |   |                                 |   |  |   | 23,352 
|Advertising expense                   |  |                    | 3,580  |   |                       |   | 2,681        |  |   |                                 |   |  |   | 6,261  
|General and administrative            |  |                    | 5,230  |   |                       |   | 4,503        |  |   | 503                              |   |  |   | 10,236 
|Depreciation and amortization         |  |                    | 7,336  |   |                       |   | 3,580        |  |   | (187                             | ) |  |   | 10,729 
|Impairment losses                     |  |                    | 38     |   |                       |   | 1,649        |  |   |                                 |   |  |   | 1,687  
|                                      |  |                    |        |   |                       |   |              |  |   |                                  |   |  |   |        
|Total operating expenses              |  |                    | 88,432 |   |                       |   | 67,504       |  |   | 703                              |   |  |   | 156,639
|                                      |  |                    |        |   |                       |   |              |  |   |                                  |   |  |   |        
|Income from operations                |  |                    | 2,721  |   |                       |   | 7,538        |  |   | (703                             | ) |  |   | 9,556  
|Interest expense                      |  |                    | 6,884  |   |                       |   | 1,476        |  |   | (293                             | ) |  |   | 8,067  
|Intercompany allocations              |  |                    | (2,819 | ) |                       |   | 2,819        |  |   |                                 |   |  |   |       
|                                      |  |                    |        |   |                       |   |              |  |   |                                  |   |  |   |        
|Income (loss) before income taxes     |  |                    | (1,344 | ) |                       |   | 3,243        |  |   | (410                             | ) |  |   | 1,489  
|Provision for income taxes            |  |                    | 94     |   |                       |   | 601          |  |   |                                 |   |  |   | 695    
|Equity income from subsidiaries       |  |                    | 2,232  |   |                       |   |             |  |   | (2,232                           | ) |  |   |       
|                                      |  |                    |        |   |                       |   |              |  |   |                                  |   |  |   |        
|Net income                            |  | $                  | 794    |   |                       | $ | 2,642        |  | $ | (2,642                           | ) |  | $ | 794    
|                                      |  |                    |        |   |                       |   |              |  |   |                                  |   |  |   |        



19



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2004

(unaudited)

(in thousands of
dollars)



|                                      |  |                    |         |   |                       |   |              |  |   |               |   |  |   |        
|------------------------------------- |  | ------------------ | ------- | - | --------------------- | - | ------------ |  | - | ------------- | - |  | - | -------
|                                      |  | ParentCompany Only |         |   | GuarantorSubsidiaries |   | Eliminations |  |   | CombinedTotal
|Revenues:                             |  |                    |         |   |                       |   |              |  |   |               |   |  |   |        
|Restaurant sales                      |  | $                  | 272,449 |   |                       | $ | 239,414      |  | $ |              |   |  | $ | 511,863
|Franchise royalty revenues and fees   |  |                    |        |   |                       |   | 1,122        |  |   |              |   |  |   | 1,122  
|                                      |  |                    |         |   |                       |   |              |  |   |               |   |  |   |        
|Total revenues                        |  |                    | 272,449 |   |                       |   | 240,536      |  |   |              |   |  |   | 512,985
|                                      |  |                    |         |   |                       |   |              |  |   |               |   |  |   |        
|Costs and expenses:                   |  |                    |         |   |                       |   |              |  |   |               |   |  |   |        
|Cost of sales                         |  |                    | 75,207  |   |                       |   | 72,647       |  |   |              |   |  |   | 147,854
|Restaurant wages and related expenses |  |                    | 86,676  |   |                       |   | 65,091       |  |   |              |   |  |   | 151,767
|Restaurant rent expense               |  |                    | 16,779  |   |                       |   | 7,509        |  |   | 1,965         |   |  |   | 26,253 
|Other restaurant operating expenses   |  |                    | 39,414  |   |                       |   | 29,740       |  |   |              |   |  |   | 69,154 
|Advertising expense                   |  |                    | 11,006  |   |                       |   | 8,053        |  |   |              |   |  |   | 19,059 
|General and administrative            |  |                    | 17,018  |   |                       |   | 13,731       |  |   |              |   |  |   | 30,749 
|Depreciation and amortization         |  |                    | 19,953  |   |                       |   | 13,113       |  |   | (1,023        | ) |  |   | 32,043 
|Impairment losses                     |  |                    | 629     |   |                       |   |             |  |   |              |   |  |   | 629    
|Other expense                         |  |                    | 2,352   |   |                       |   |             |  |   |              |   |  |   | 2,352  
|                                      |  |                    |         |   |                       |   |              |  |   |               |   |  |   |        
|Total operating expenses              |  |                    | 269,034 |   |                       |   | 209,884      |  |   | 942           |   |  |   | 479,860
|                                      |  |                    |         |   |                       |   |              |  |   |               |   |  |   |        
|Income from operations                |  |                    | 3,415   |   |                       |   | 30,652       |  |   | (942          | ) |  |   | 33,125 
|Interest expense                      |  |                    | 18,572  |   |                       |   | 4,892        |  |   | (1,418        | ) |  |   | 22,046 
|Intercompany allocations              |  |                    | (13,669 | ) |                       |   | 13,669       |  |   |              |   |  |   |       
|                                      |  |                    |         |   |                       |   |              |  |   |               |   |  |   |        
|Income (loss) before income taxes     |  |                    | (1,488  | ) |                       |   | 12,091       |  |   | 476           |   |  |   | 11,079 
|Provision (benefit) for income taxes  |  |                    | (886    | ) |                       |   | 4,949        |  |   |              |   |  |   | 4,063  
|Equity income from subsidiaries       |  |                    | 7,618   |   |                       |   |             |  |   | (7,618        | ) |  |   |       
|                                      |  |                    |         |   |                       |   |              |  |   |               |   |  |   |        
|Net income                            |  | $                  | 7,016   |   |                       | $ | 7,142        |  | $ | (7,142        | ) |  | $ | 7,016  
|                                      |  |                    |         |   |                       |   |              |  |   |               |   |  |   |        



20



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2003

(unaudited)

(in thousands of
dollars)



|                                       |  |                    |         |   |                       |   |         |              |  |   |                                  |   |  |   |        
|-------------------------------------- |  | ------------------ | ------- | - | --------------------- | - | ------- | ------------ |  | - | -------------------------------- | - |  | - | -------
|                                       |  | ParentCompany Only |         |   | GuarantorSubsidiaries |   |         | Eliminations |  |   | As Restated(Note 2)CombinedTotal
|Revenues:                              |  |                    |         |   |                       |   |         |              |  |   |                                  |   |  |   |        
|Restaurant sales                       |  | $                  | 266,878 |   |                       | $ | 216,123 |              |  | $ |                                 |   |  | $ | 483,001
|Franchise royalty revenues and fees    |  |                    |        |   |                       |   | 1,055   |              |  |   |                                 |   |  |   | 1,055  
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                  |   |  |   |        
|Total revenues                         |  |                    | 266,878 |   |                       |   | 217,178 |              |  |   |                                 |   |  |   | 484,056
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                  |   |  |   |        
|Costs and expenses:                    |  |                    |         |   |                       |   |         |              |  |   |                                  |   |  |   |        
|Cost of sales                          |  |                    | 70,406  |   |                       |   | 64,717  |              |  |   |                                 |   |  |   | 135,123
|Restaurant wages and related expenses  |  |                    | 86,167  |   |                       |   | 60,057  |              |  |   |                                 |   |  |   | 146,224
|Restaurant rent expense                |  |                    | 15,570  |   |                       |   | 6,674   |              |  |   | 776                              |   |  |   | 23,020 
|Other restaurant operating expenses    |  |                    | 39,638  |   |                       |   | 27,526  |              |  |   |                                 |   |  |   | 67,164 
|Advertising expense                    |  |                    | 11,592  |   |                       |   | 9,674   |              |  |   |                                 |   |  |   | 21,266 
|General and administrative             |  |                    | 15,713  |   |                       |   | 12,054  |              |  |   | 681                              |   |  |   | 28,448 
|Depreciation and amortization          |  |                    | 21,653  |   |                       |   | 11,254  |              |  |   | (354                             | ) |  |   | 32,553 
|Impairment losses                      |  |                    | 463     |   |                       |   | 1,869   |              |  |   |                                 |   |  |   | 2,332  
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                  |   |  |   |        
|Total operating expenses               |  |                    | 261,202 |   |                       |   | 193,825 |              |  |   | 1,103                            |   |  |   | 456,130
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                  |   |  |   |        
|Income from operations                 |  |                    | 5,676   |   |                       |   | 23,353  |              |  |   | (1,103                           | ) |  |   | 27,926 
|Interest expense                       |  |                    | 21,107  |   |                       |   | 4,188   |              |  |   | (585                             | ) |  |   | 24,710 
|Intercompany allocations               |  |                    | (24,946 | ) |                       |   | 24,946  |              |  |   |                                 |   |  |   |       
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                  |   |  |   |        
|Income (loss) before income taxes      |  |                    | 9,515   |   |                       |   | (5,781  | )            |  |   | (518                             | ) |  |   | 3,216  
|Provision (benefit) for income taxes   |  |                    | 2,705   |   |                       |   | (1,266  | )            |  |   |                                 |   |  |   | 1,439  
|Equity income (loss) from subsidiaries |  |                    | (5,033  | ) |                       |   |        |              |  |   | 5,033                            |   |  |   |       
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                  |   |  |   |        
|Net income (loss)                      |  | $                  | 1,777   |   |                       | $ | (4,515  | )            |  | $ | 4,515                            |   |  | $ | 1,777  
|                                       |  |                    |         |   |                       |   |         |              |  |   |                                  |   |  |   |        



21



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2004

(in thousands of dollars)

(unaudited)



|                                                                                           |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | --------------------- | - | ------- | ------------ |  | - | -------------- | - |  | - | ------- | -
|                                                                                           |  | ParentCompany Only |         |   | GuarantorSubsidiaries |   |         | Eliminations |  |   | Combined Total |  
|Cash flows provided from operating activities:                                             |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Net income (loss)                                                                          |  | $                  | 7,016   |   |                       | $ | 7,142   |              |  | $ | (7,142         | ) |  | $ | 7,016   |  
|Adjustments to reconcile net income (loss) to net cash provided from operating activities: |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Gain on sales of properties                                                                |  |                    | (288    | ) |                       |   | (26     | )            |  |   |               |   |  |   | (314    | )
|Depreciation and amortization                                                              |  |                    | 19,952  |   |                       |   | 13,114  |              |  |   | (1,023         | ) |  |   | 32,043  |  
|Impairment losses                                                                          |  |                    | 629     |   |                       |   |        |              |  |   |               |   |  |   | 629     |  
|Deferred income taxes                                                                      |  |                    | 1,431   |   |                       |   |        |              |  |   |               |   |  |   | 1,431   |  
|Changes in operating assets and liabilities                                                |  |                    | 20,745  |   |                       |   | (17,531 | )            |  |   | 7,567          |   |  |   | 10,781  |  
|                                                                                           |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Net cash provided from operating activities                                                |  |                    | 49,485  |   |                       |   | 2,699   |              |  |   | (598           | ) |  |   | 51,586  |  
|                                                                                           |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Cash flows used for investing activities:                                                  |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Capital expenditures:                                                                      |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|New restaurant development                                                                 |  |                    | (1,005  | ) |                       |   | (6,417  | )            |  |   |               |   |  |   | (7,422  | )
|Restaurant remodeling                                                                      |  |                    | (818    | ) |                       |   |        |              |  |   |               |   |  |   | (818    | )
|Other restaurant expenditures                                                              |  |                    | (1,899  | ) |                       |   | (2,666  | )            |  |   |               |   |  |   | (4,565  | )
|Corporate and restaurant information systems                                               |  |                    | (590    | ) |                       |   | (134    | )            |  |   |               |   |  |   | (724    | )
|                                                                                           |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Total capital expenditures                                                                 |  |                    | (4,312  | ) |                       |   | (9,217  | )            |  |   |               |   |  |   | (13,529 | )
|Properties purchased for sale-leaseback                                                    |  |                    | (924    | ) |                       |   |        |              |  |   |               |   |  |   | (924    | )
|Proceeds from sales of other properties                                                    |  |                    | 488     |   |                       |   | 686     |              |  |   |               |   |  |   | 1,174   |  
|                                                                                           |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Net cash used for investing activities                                                     |  |                    | (4,748  | ) |                       |   | (8,531  | )            |  |   |               |   |  |   | (13,279 | )
|                                                                                           |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Cash flows provided from (used for) financing activities:                                  |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Payments on revolving credit facility, net                                                 |  |                    | (500    | ) |                       |   |        |              |  |   |               |   |  |   | (500    | )
|Principal payments on term loans                                                           |  |                    | (10,125 | ) |                       |   |        |              |  |   |               |   |  |   | (10,125 | )
|Principal pre-payments on term loans                                                       |  |                    | (39,000 | ) |                       |   |         |              |  |   |                |   |  |   | (39,000 | )
|Principal payments on lease financing obligations                                          |  |                    | (953    | ) |                       |   | (1,323  | )            |  |   | 598            |   |  |   | (1,678  | )
|Payments on other notes payable, net                                                       |  |                    | (117    | ) |                       |   |        |              |  |   |               |   |  |   | (117    | )
|Principal payments on capital leases                                                       |  |                    | (110    | ) |                       |   | (184    | )            |  |   |               |   |  |   | (294    | )
|Proceeds from lease financing obligations, net                                             |  |                    |        |   |                       |   | 3,250   |              |  |   | (3,250         | ) |  |   |        |  
|Financing costs associated with lease financing obligations                                |  |                    |        |   |                       |   | (98     | )            |  |   | 98             |   |  |   |        |  
|Proceeds from sale/leaseback transactions                                                  |  |                    | 6,171   |   |                       |   | 4,659   |              |  |   | 3,152          |   |  |   | 13,982  |  
|                                                                                           |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Net cash provided from (used for) financing activities                                     |  |                    | (44,634 | ) |                       |   | 6,304   |              |  |   | 598            |   |  |   | (37,732 | )
|                                                                                           |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Net increase in cash and cash equivalents                                                  |  |                    | 103     |   |                       |   | 472     |              |  |   |               |   |  |   | 575     |  
|Cash and cash equivalents, beginning of year                                               |  |                    | 708     |   |                       |   | 1,706   |              |  |   |               |   |  |   | 2,414   |  
|                                                                                           |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  
|Cash and cash equivalents, end of year                                                     |  | $                  | 811     |   |                       | $ | 2,178   |              |  | $ |               |   |  | $ | 2,989   |  
|                                                                                           |  |                    |         |   |                       |   |         |              |  |   |                |   |  |   |         |  



22



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2003

(unaudited)

(in thousands of
dollars)



|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | --------------------- | - | ------- | ------------ |  | - | ----------------------------------- | - |  | - | ------- | -
|                                                                                                      |  | ParentCompany Only |         |   | GuarantorSubsidiaries |   |         | Eliminations |  |   | As Restated (Note 2) Combined Total |  
|Cash flows provided from operating activities:                                                        |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Net income (loss)                                                                                     |  | $                  | 1,777   |   |                       | $ | (4,515  | )            |  | $ | 4,515                               |   |  | $ | 1,777   |  
|Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities: |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|(Gain)/Loss on disposal of property and equipment                                                     |  |                    |        |   |                       |   | (293    | )            |  |   | 681                                 |   |  |   | 388     |  
|Depreciation and amortization                                                                         |  |                    | 21,654  |   |                       |   | 11,253  |              |  |   | (354                                | ) |  |   | 32,553  |  
|Impairment losses                                                                                     |  |                    | 462     |   |                       |   | 1,870   |              |  |   |                                    |   |  |   | 2,332   |  
|Deferred income taxes                                                                                 |  |                    | 674     |   |                       |   |        |              |  |   |                                    |   |  |   | 674     |  
|Changes in operating assets and liabilities                                                           |  |                    | 16,751  |   |                       |   | (12,690 | )            |  |   | (5,069                              | ) |  |   | (1,008  | )
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Net cash provided from (used for) operating activities                                                |  |                    | 41,318  |   |                       |   | (4,375  | )            |  |   | (227                                | ) |  |   | 36,716  |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Cash flows used for investing activities:                                                             |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Capital expenditures:                                                                                 |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|New restaurant development                                                                            |  |                    | (1,901  | ) |                       |   | (14,932 | )            |  |   |                                    |   |  |   | (16,833 | )
|Restaurant remodeling                                                                                 |  |                    | (2,986  | ) |                       |   | (147    | )            |  |   |                                    |   |  |   | (3,133  | )
|Other restaurant expenditures                                                                         |  |                    | (1,632  | ) |                       |   | (3,836  | )            |  |   |                                    |   |  |   | (5,468  | )
|Corporate and restaurant information systems                                                          |  |                    | (931    | ) |                       |   | (256    | )            |  |   |                                    |   |  |   | (1,187  | )
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Total capital expenditures                                                                            |  |                    | (7,450  | ) |                       |   | (19,171 | )            |  |   |                                    |   |  |   | (26,621 | )
|Purchased properties for sale/leaseback                                                               |  |                    |        |   |                       |   | (3,149  | )            |  |   |                                    |   |  |   | (3,149  | )
|Proceeds from sales of non operating properties                                                       |  |                    |        |   |                       |   | 2,670   |              |  |   |                                    |   |  |   | 2,670   |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Net cash used for investing activities                                                                |  |                    | (7,450  | ) |                       |   | (19,650 | )            |  |   |                                    |   |  |   | (27,100 | )
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Cash flows provided from (used for) financing activities:                                             |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Payments on revolving credit facility, net                                                            |  |                    | (36,100 | ) |                       |   |        |              |  |   |                                    |   |  |   | (36,100 | )
|Principal payments on term loans                                                                      |  |                    | (5,500  | ) |                       |   |        |              |  |   |                                    |   |  |   | (5,500  | )
|Principal payments on lease financing obligations                                                     |  |                    | (829    | ) |                       |   | (894    | )            |  |   | 227                                 |   |  |   | (1,496  | )
|Principal pre-payments on term loans                                                                  |  |                    |        |   |                       |   |        |              |  |   |                                    |   |  |   |        |  
|Payments on other notes payable, net                                                                  |  |                    | (716    | ) |                       |   |        |              |  |   |                                    |   |  |   | (716    | )
|Principal payments on capital leases                                                                  |  |                    | (138    | ) |                       |   | (232    | )            |  |   |                                    |   |  |   | (370    | )
|Proceeds from financing obligations, net                                                              |  |                    |        |   |                       |   | 16,180  |              |  |   | (16,180                             | ) |  |   |        |  
|Financing costs associated with financing obligations                                                 |  |                    |        |   |                       |   | (863    | )            |  |   | 863                                 |   |  |   |        |  
|Proceeds from sale/leaseback transactions                                                             |  |                    | 9,631   |   |                       |   | 10,330  |              |  |   | 15,317                              |   |  |   | 35,278  |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Net cash provided from (used for) financing activities                                                |  |                    | (33,652 | ) |                       |   | 24,521  |              |  |   | 227                                 |   |  |   | (8,904  | )
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Net increase in cash and cash equivalents                                                             |  |                    | 216     |   |                       |   | 496     |              |  |   |                                    |   |  |   | 712     |  
|Cash and cash equivalents, beginning of year                                                          |  |                    | 715     |   |                       |   | 1,823   |              |  |   |                                    |   |  |   | 2,538   |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  
|Cash and cash equivalents, end of year                                                                |  | $                  | 931     |   |                       | $ | 2,319   |              |  | $ |                                    |   |  | $ | 3,250   |  
|                                                                                                      |  |                    |         |   |                       |   |         |              |  |   |                                     |   |  |   |         |  



23



---

ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS



Certain statements included in this Managements Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this Quarterly Report on Form 10-Q which are not statements of historical fact are intended to be, and are hereby identified as, 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. Those statements include statements regarding the intent, belief or current expectations of the Company and its management team. 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 in the forward-looking statements. Such risks and uncertainties include,
among other things, competitive conditions, economic and regulatory factors, general economic conditions particularly at the retail level, fluctuations in commodity prices, availability of restaurant supply and distribution of product, liquidity of
major distributors, labor and employee benefit costs, the outcome of pending or yet-to-be instituted legal proceedings, the ability of the Company to manage its growth and successfully implement its business strategy, environmental conditions and
regulations, weather conditions, significant disruptions in service or supply by any of our suppliers, risks associated with the expansion of our business, general risks associated with the food industry, our inability to integrate any businesses we
acquire, our borrowing costs and credit ratings, which may be influenced by credit ratings of our competitors, 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, factors that affect the food industry generally, including recalls if products became adulterated or misbranded, liability if product consumption causes injury, ingredient disclosure and
labeling laws and regulations 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, the
availability and terms of necessary or desirable financing or refinancing and other risks and uncertainties that are discussed herein and in our Annual Report on Form 10-K for the year ended December 31, 2003.



We use a 52-53 week fiscal year ending on the Sunday closest to December 31.
For convenience, all references herein to the fiscal years ended December 29, 2002 and December 28, 2003 will be referred to as the fiscal years ended December 31, 2002 and 2003, respectively. Similarly, all references herein to the three and nine
months ended September 28, 2003 and September 26, 2004 will be referred to as the three and nine months ended September 30, 2003 and September 30, 2004, respectively. Our fiscal years ended December 31, 2001, 2002 and 2003 each contained 52 weeks.
Our fiscal year ended December 31, 2004 will contain 53 weeks. The additional week in fiscal 2004 will be included in the fourth quarter.



Overview



We are one of the largest restaurant companies in the United States operating 536 restaurants in 17 states as of September 30, 2004. We operate three
restaurant brands that provide balance through diversification of our restaurant concepts and geographic dispersion. We own and operate two regional Hispanic Brand restaurant companies: Taco Cabana and Pollo Tropical. We are also the largest Burger
King franchisee in the world and have operated Burger King restaurants since 1976.



24



---

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)



Restatement



We restated our financial statements, including applicable footnotes, for periods ended prior to December 31, 2003 to report real estate transactions for
86 restaurants consummated during 1991 to 2000 as financing transactions under SFAS No. 98, Accounting for Leases, rather than as sale/leaseback transactions.



The restatement was due to lease provisions in certain of our sale/leaseback transactions, which we believe have minimal
commercial impact upon the relevant terms of the leases. Had we been aware of the potential impact of the provisions upon our financial statements, we believe that both the respective lessors and we would have agreed to exclude those provisions from
each lease without affecting any of the material terms of such leases. We may amend these leases in the future to address these provisions and to qualify them for treatment as operating leases as originally intended. However, we cannot assure you as
to when or whether any or all of such leases will be amended.



The impact of the restatement was to record on our balance sheets the property and equipment of the restaurants subject to these transactions and record the proceeds from these transactions (including the gains previously deferred) as a
form of debt financing. The restatement also impacted our financial results by increasing the depreciation expense for the property and equipment subject to these transactions and recharacterizing the lease payments previously accounted for as rent
expense for these restaurants as principal repayments and interest expense. In addition, the restatement had no impact on our liquidity and net cash flow. There was no impact on sale/leaseback transactions that were consummated in 2002 and 2003.



As a result of the restatement of our previously issued
financial statements discussed above, we were in default related to certain required financial leverage ratios and other covenants under our senior secured credit facility. We obtained a waiver from our senior secured lenders of any prior
non-compliance and defaults resulting from the restatement. In addition, our senior secured credit facility was amended to exclude all adjustments resulting from this restatement on our financial covenant requirements and to treat, on a prospective
basis, the specified leases as if no restatement or recharacterization has occurred.



See Note 2 to the consolidated financial statements included elsewhere in this Form 10Q for a complete discussion of the restatement. Amounts affected by the restatement that appear in our Managements Discussion
and Analysis of Financial Condition and Results of Operations below have also been restated.



25



---

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)



Public Offering of Securities



On June 22, 2004 our parent company, Carrols Holdings Corporation (Holdings), filed a registration statement on Form S-1 to register an
initial public offering of Enhanced Yield Securities (EYSs) and senior subordinated notes. This registration statement was subsequently amended on August 25, 2004. On October 25, 2004 Holdings withdrew its S-1 registration statement with respect to
the aforementioned securities. The Company has recorded the incurred costs related to this offering of $2.35 million in other expense in the third quarter of 2004.



Significant Accounting Policies



Financial Reporting Release No. 72 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief discussion of the more significant accounting policies and methods used by us.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make assumptions
and estimates that can have a material impact on our results of operations. Sales recognition at company-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,
estimates and judgments, as noted below, are inherent in the assessment and recording of accrued occupancy costs, insurance liabilities, legal obligations, income taxes and the valuation of goodwill for impairment. 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, if any; 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, 2004 we had three non-operating properties.



Insurance liabilities. We are self-insured for most workers compensation, general liability and medical insurance claims. At September 30, 2004 we had $9.2 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.



26



---

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)



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 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 different from
that recorded, the asset balance and income statement would reflect the change in the period such determination is made.



Goodwill valuation. We must evaluate our recorded intangible assets for impairment under Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets, on an ongoing basis. We have elected to conduct our annual impairment review of goodwill and other intangible assets at December 31. Our review at December 31, 2003 indicated there
has been no impairment as of that date. This annual evaluation requires us to make estimates and assumptions regarding the fair value of our reporting units. These estimates may differ from actual future events.



27



---

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)



Results of Operations



Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003.



Since September 30, 2003 we have opened two new Burger King restaurants, closed two Burger King restaurants, opened five
Taco Cabana restaurants and closed one Taco Cabana restaurant.



The following table sets forth, for the three months ended September 30, 2004 and 2003, selected operating results as a percentage of total restaurant sales:



|                                      |  |       |   |  |       |  
|------------------------------------- |  | ----- | - |  | ----- | -
|                                      |  | 2004  |   |  | 2003  |  
|Restaurant sales:                     |  |       |   |  |       |  
|Taco Cabana                           |  | 29.1  | % |  | 28.4  | %
|Pollo Tropical                        |  | 16.9  | % |  | 16.6  | %
|Burger King                           |  | 54.0  | % |  | 55.0  | %
|                                      |  |       |   |  |       |  
|                                      |  | 100.0 | % |  | 100.0 | %
|Costs and expenses:                   |  |       |   |  |       |  
|Cost of sales                         |  | 29.2  | % |  | 28.5  | %
|Restaurant wages and related expenses |  | 29.4  | % |  | 29.8  | %
|Restaurant rent expense               |  | 5.0   | % |  | 4.6   | %
|Other restaurant operating expenses   |  | 13.7  | % |  | 14.1  | %
|Advertising expense                   |  | 3.5   | % |  | 3.8   | %
|General and administrative            |  | 5.9   | % |  | 6.2   | %
|                                      |  |      
|Income from restaurant operations     |  | 7.4   | % |  | 5.5   | %
|                                      |  |       |   |  |       |  



Restaurant
Sales. Total restaurant sales for the third quarter of 2004 increased $12.0 million to $177.8 million from $165.8 million in the third quarter of 2003 due to increases at all three of our restaurant concepts. Taco Cabana restaurant sales
increased $4.7 million, or 9.9%, to $51.7 million in the third quarter of 2004 due to a 5.2% sales increase at our comparable Taco Cabana restaurants and the net addition of four restaurants since the third quarter of 2003. Taco Cabana comparable
restaurant sales increased from higher customer traffic, an increase in the average sales transaction compared to the third quarter of 2003 and, to a lesser extent, menu price increases of approximately 1% which occurred early in 2004. Pollo
Tropical restaurant sales increased $2.4 million, or 8.7%, in the third quarter of 2004 to $30.0 million due to a 9.6% sales increase at our comparable Pollo Tropical restaurants due primarily to increases in customer traffic and to a lesser extent
an increase in the average sales transaction. Pollo Tropical sales were negatively impacted in the third quarter due to hurricanes in Florida that caused many of our restaurants to close for 2.4% of all available restaurant sales days in the third
quarter. There were no significant menu price increases in the first nine months of 2004 for our Pollo Tropical restaurants. Burger King restaurant sales increased $4.9 million, or 5.3%, to $96.0 million in the third quarter



28



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)



of 2004 due primarily to an increase in comparable restaurant sales of 4.6%. The sales increase for our Burger King restaurants in the third quarter of 2004 was driven
by an increase in the average sales transaction of 5.9% due to the introductory promotions of premium sandwiches and to a lesser extent menu price increases of approximately 1.5% in August of 2004.



Operating Costs and Expenses.Cost of sales (food and paper
costs), as a percentage of total restaurant sales, increased to 29.2% in the third quarter of 2004 from 28.5% in the third quarter of 2003. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, decreased to 29.8% in the third
quarter of 2004 from 30.1% in the third quarter of 2003 due to improvements in restaurant food controls and higher vendor rebates (.2% of Taco Cabana sales), partially offset by higher beef commodity prices in 2004. Pollo Tropical cost of sales, as
a percentage of Pollo Tropical restaurant sales, increase in to 31.5% in the third quarter of 2004 from 30.3% in the third quarter of 2003 due to an increase in chicken commodity prices of approximately 4% and lower vendor rebates. Burger King cost
of sales, as a percentage of Burger King restaurant sales, increased to 28.1% in the third quarter of 2004 from 27.2% in the third quarter of 2003 due primarily to sales of new menu items which have higher selling prices but lower margins as a
percentage of their selling prices and an increase in beef commodity prices of approximately 15%.



Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased to 29.4% in the third quarter of 2004 from 29.8% in the third
quarter of 2003. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased slightly to 28.4% in the third quarter of 2004 from 28.5% in the third quarter of 2003. Pollo Tropical restaurant wages
and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased slightly to 25.5% in the third quarter of 2004 from 25.6% in the third quarter of 2003 due to restaurant productive labor efficiencies and the effect on fixed labor
costs of higher comparable restaurant sales volumes, substantially offset by higher restaurant incentive bonuses in 2004. Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, decreased to 31.1% in the
third quarter of 2004 from 31.7% in the third quarter of 2003 due to the effects of higher comparable restaurant sales volumes on fixed labor costs.



Other restaurant operating expenses, as a percentage of total restaurant sales, decreased to 13.7% in the third quarter of 2004 from 14.1% in the third
quarter of 2003. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, decreased to 13.6% in the third quarter of 2004 from 14.0% in the third quarter of 2003 due primarily to lower electricity costs (.4%
of Taco Cabana sales) and the effect of higher sales volumes on fixed operating costs. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 12.2% in the third quarter of 2004 from 11.7%
in the third quarter of 2003 due primarily to repairs and other costs related to the hurricanes experienced in Florida in the third quarter of 2004. Burger King other restaurant operating expenses, as



29



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS, (Continued)



a percentage of Burger King restaurant sales, decreased to 14.3% in the third quarter of 2004 from 14.9% in the third quarter of 2003 repair and maintenance expenses
(0.2% of Burger King sales) and the effect of higher sales volumes on fixed operating costs and lower repair and maintenance expenses (0.2% of Burger King sales).



Advertising expense, as a percentage of total restaurant sales, decreased to 3.5% in the third quarter of 2004 from 3.8% in
the third quarter of 2003. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales was 3.5% in the third quarter of 2004 and 2003. Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales,
decreased significantly to 1.0% in the third quarter of 2004 from 3.7% in the third quarter of 2003 due to lower television and radio advertising expenditures. We anticipate our Pollo Tropical advertising expense for all of 2004, as a percentage of
Pollo Tropical restaurant sales, to be significantly lower than historical levels. Burger King advertising expense, as a percentage of Burger King restaurant sales, increased to 4.2% in the third quarter of 2004 from 3.9% in the third quarter of
2003 due to costs associated with a specific Burger King system-wide promotion early in the third quarter of 2004.



Restaurant rent expense, as a percentage of total restaurant sales, increased to 5.0% in the third quarter of 2004 from 4.6% in the third quarter of 2003
due to sale/leaseback transactions completed in 2003 and in the first six months of 2004.



General and administrative expenses, as a percentage of total restaurant sales, decreased to 5.9% in the third quarter of 2004 from 6.2% in the third quarter of 2003 due to effects of comparable restaurant sales
increases on fixed administrative costs. General and administrative expenses increased $0.3 million to $10.5 million due primarily to increased administrative bonus levels in 2004 of $1.2 million offset in part by reductions in administrative staff
in 2004 and employee termination costs in 2003.



Segment
EBITDA. Earnings before interest, income taxes, depreciation and amortization, impairment losses and other expense (EBITDA) for our Taco Cabana restaurant segment increased 21.1% to $7.8 million in the third quarter of 2004 from
$6.4 million in the third quarter of 2003. EBITDA for our Pollo Tropical restaurant segment increased 15.0% to $6.3 million in the third quarter of 2004 from $5.5 million in the third quarter of 2003. EBITDA for our Burger King restaurant segment
decreased slightly to $10.0 million in the third quarter of 2004 from $10.1 million in the third quarter of 2003.



Depreciation and Amortization and Impairment Losses. Depreciation and amortization expense decreased to $10.4 million in the third quarter
of 2004 from $10.7 million in the third quarter of 2003 due primarily to lower equipment depreciation at our Burger King restaurants. Impairment losses were $0.1 million in the third quarter of 2004 and were related to certain underperforming Burger
King restaurants. Impairment losses were $1.7 million in the third quarter of 2003 and were related to certain underperforming Taco Cabana restaurants.



30



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS, (Continued)



Interest Expense. Interest expense decreased $0.9 million to $7.1 million in the third quarter of 2004 due primarily to lower average
debt balances in the third quarter of 2003 offset slightly by higher effective interest rates on our floating rate debt. The average effective interest rate on all debt increased to 8.0% for the third quarter of 2004 from 7.2% in the third quarter
of 2003. This increase is primarily from our senior subordinated notes comprising a greater percentage of our total outstanding debt, as a result of our voluntary principal prepayments on borrowings under our senior credit facility.



Income Taxes. The provision for income taxes for the third
quarter of 2004 was derived using an estimated annual effective income tax rate for 2004 of 36.7%. This rate is higher than the Federal statutory tax rate of 35% due to state franchise taxes and non-deductible amortization of certain franchise
rights.



Net Income. As a result of the
foregoing, net income for the third quarter of 2004 increased to $2.6 million from $0.8 million in the third quarter of 2003.



Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003.



The following table sets forth, for the nine months ended September 30, 2004 and 2003, selected operating results as a
percentage of total restaurant sales:



|                                      |  |       |   |  |       |  
|------------------------------------- |  | ----- | - |  | ----- | -
|                                      |  | 2004  |   |  | 2003  |  
|Restaurant sales:                     |  |       |   |  |       |  
|Taco Cabana                           |  | 29.2  | % |  | 28.0  | %
|Pollo Tropical                        |  | 17.6  | % |  | 16.7  | %
|Burger King                           |  | 53.2  | % |  | 55.3  | %
|                                      |  |       |   |  |       |  
|                                      |  | 100.0 | % |  | 100.0 | %
|Costs and expenses:                   |  |       |   |  |       |  
|Cost of sales                         |  | 28.9  | % |  | 28.0  | %
|Restaurant wages and related expenses |  | 29.6  | % |  | 30.3  | %
|Restaurant rent expense               |  | 5.1   | % |  | 4.8   | %
|Other restaurant operating expenses   |  | 13.5  | % |  | 13.9  | %
|Advertising expense                   |  | 3.7   | % |  | 4.4   | %
|General and administrative            |  | 6.0   | % |  | 5.9   | %
|                                      |  |      
|Income from restaurant operations     |  | 6.7   | % |  | 5.6   | %
|                                      |  |       |   |  |       |  



Restaurant
Sales. Total restaurant sales for the first nine months of 2004 increased $28.9 million, or 6.0%, to $511.9 million from $483.0 million in the first nine months of 2003 due to sales increases at all three of our restaurant concepts. Taco
Cabana restaurant sales increased $14.1 million, or 10.4%, to $149.3 million in the first nine months of 2004 due in part to a 5.0% sales increase at our comparable Taco Cabana restaurants and the net addition of nine restaurants since the beginning
of



31



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)



2003. Taco Cabana comparable restaurant sales in the first nine months of 2004 increased from higher customer traffic, an increase in the average sales transaction
compared to the first nine months of 2003 and, to a lesser extent, menu price increases of approximately 1% which occurred early in the first quarter of 2004. Pollo Tropical restaurant sales increased $9.2 million, or 11.4%, in the first nine months
of 2004 to $90.1 million due primarily to an 10.6% sales increase at our comparable Pollo Tropical restaurants that resulted from increases in customer traffic. There were no significant menu price increases in the first nine months of 2004 for our
Pollo Tropical restaurants. Burger King restaurant sales increased by $5.6 million, or 2.1%, to $272.4 million in the first nine months of 2004 based on an increase in comparable restaurant sales of 2.1% due to increases in the average sales
transaction at our Burger King restaurants from premium sandwiches introduced in 2004. These increases were partially offset by reduced customer traffic, most notably in the first quarter of 2004. Our Burger King restaurants had menu price increases
of approximately 1.5% in August of 2004.



Operating Costs
and Expenses. Cost of sales (food and paper costs), as a percentage of total restaurant sales, increased to 28.9% in the first nine months of 2004 from 28.0% in the first nine months of 2003. Taco Cabana cost of sales, as a percentage of
Taco Cabana restaurant sales, increased to 29.9% in the first nine months of 2004 from 29.5% in the first nine months of 2003 due to higher beef commodity prices in 2004, offset partially by a modest price increase of 1.0% early in the first quarter
of 2004 and improvements in restaurant food controls. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, increased to 31.1% in the first nine months of 2004 from 30.6% in the first nine months of 2003 due to increases
in chicken commodity costs of approximately 4% and lower vendor rebates, offset in part by improvements in restaurant food controls. Burger King cost of sales, as a percentage of Burger King restaurant sales, increased significantly to 27.6% in the
first nine months of 2004 from 26.4% in the first nine months of 2003 due to an increase in beef commodity prices of approximately 15% (0.7% of Burger King sales), an increase in other commodity costs, including cheese, (0.5% of Burger King sales)
and sales of new menu items which have higher selling prices but lower margins as a percentage of their selling prices (0.7%). These increases were offset in part by the effect of menu price increases (0.4% of Burger King sales) and lower
promotional sales discounts in 2004 (0.3% of Burger King sales).



Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased to 29.6% in the first nine months of 2004 from 30.3% in the first nine months of 2003. Taco Cabana restaurant wages and related expenses, as a
percentage of Taco Cabana restaurant sales, decreased to 28.5% in the first nine months of 2004 from 28.8% in the first nine months of 2003 due to the effect on fixed labor costs of higher comparable restaurant sales volumes and to the price
increase in the first quarter of 2004, offset in part by higher medical insurance costs (.3% of Taco Cabana sales). Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased significantly to
25.0% in the first nine months of 2004 from 26.1% in the first nine months of 2003 due to the effect on fixed labor costs of higher comparable restaurant sales volumes and restaurant productive labor efficiencies. Burger King restaurant wages and
related expenses, as a percentage of Burger King restaurant sales, decreased to 31.8% in the first nine months of 2004 from



32



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)



32.3% in the first nine months of 2003 due primarily to restaurant labor efficiencies (0.4% of Burger King sales) and lower restaurant incentive bonuses (0.2% of
Burger King sales), offset in part by higher medical insurance costs (0.2% of Burger King sales).



Other restaurant operating expenses, as a percentage of total restaurant sales, decreased to 13.5% in the first nine months of 2004 from 13.9% in the
first nine months of 2003. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, decreased slightly to 13.3% in the first nine months of 2004 from 13.4% in the first nine months of 2003 due to lower
electric utility costs and the effect on fixed operating costs of higher comparable restaurant sales volumes. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 11.0% in the first
nine months of 2004 from 11.7% in the first nine months of 2003 due to lower liability insurance costs (0.4% of Pollo Tropical sales), lower utility costs (.1% of Pollo Tropical sales) and the effect on fixed operating costs of higher comparable
restaurant sales volumes. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales, decreased to 14.5% in the first nine months of 2004 from 14.9% in the first nine months of 2003 due primarily to lower repair
and maintenance expenses (0.2% of Burger King sales) and lower discretionary restaurant operating expenses (0.2% of Burger King sales).



Advertising expense, as a percentage of total restaurant sales, decreased to 3.7% in the first nine months of 2004 from 4.4% in the first nine months of
2003. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, decreased slightly to 4.7% in the first nine months of 2004 from 4.8% in the first nine months of 2003 due to the timing of promotions in 2004 compared to the
prior year. Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales, decreased significantly to 1.2% in the first nine months of 2004 from 3.9% in the first nine months of 2003 due to lower television and radio
advertising expenditures. Burger King advertising expense, as a percentage of Burger King restaurant sales, decreased to 4.0% in the first nine months of 2004 from 4.3% in the first nine months of 2003 due to lower local advertising expenditures in
the first half of 2004.



Restaurant rent expense, as a
percentage of total restaurant sales, increased to 5.1% in the first nine months of 2004 from 4.8% in the first nine months of 2003 due to sale/leaseback transactions completed in 2003 and 2004.



General and administrative expenses, as a percentage of total restaurant
sales, increased slightly to 6.0% in the first nine months of 2004 from 5.9% in the first nine months of 2003. General and administrative expenses increased $2.3 million to $30.7 million due to increased administrative bonus levels in 2004 of $3.1
million offset in part by a litigation settlement received in 2003 and employee termination costs in 2003.



Segment EBITDA.Earnings before interest, income taxes, depreciation and amortization, impairment losses and other expense
(EBITDA) for our Taco Cabana restaurant segment increased 11.6% to $20.8 million in the first nine months of 2004 from $18.6 million in the first nine months of



33



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)



2003. EBITDA for our Pollo Tropical restaurant segment increased 28.2% to $21.0 million in the first nine months of 2004 from $16.4 million in the first nine months of
2003. EBITDA for our Burger King restaurant segment decreased 5.2% to $26.3 million in the first nine months of 2004 from $27.8 million in the first nine months of 2003.



Depreciation and Amortization and Impairment Losses. Depreciation and amortization expense decreased to $32.0
million in the first nine months of 2004 from $32.6 million in the first nine months of 2003 due primarily to lower equipment depreciation at our Burger King restaurants. Impairment losses were $0.6 million in the first nine months of 2004 and were
related to certain underperforming Burger King restaurants. Impairment losses were $2.3 million in the first nine months of 2003; $1.9 million related to certain underperforming Taco Cabana restaurants and $.4 million related to certain
underperforming Burger King restaurants.



Interest
Expense. Interest expense decreased $2.7 million to $22.0 million in the first nine months of 2004 from $24.7 million in 2003 due primarily to lower average debt balances in 2004, offset slightly by higher effective interest rates on our
floating rate debt. The average effective interest rate on all debt increased to 7.7% for the first nine months of 2004 from 7.1% for the first nine months of 2003. This increase is primarily from our senior subordinated notes comprising a greater
percentage of our total outstanding debt, as a result of our principal prepayments on our senior credit facility.



Income Taxes. - The provision for income taxes for the first nine months of 2004 was derived using an estimated effective income tax rate
for 2004 of 36.7%. This rate is higher than the Federal statutory tax rate of 35% due to state franchise taxes and non-deductible amortization of certain franchise rights.



Net Income. As a result of the foregoing, net income increased to $7.0 million for the first nine months of
2004 from $1.8 million in 2003.



Off-Balance Sheet Arrangements



We have no off-balance sheet arrangements.



34



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)



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 accounts for food, supplies and payroll become due.
| | - | ------------------------------------------------------------------------------------------------------



Historically, our cash requirements have arisen from:



| |  | servicing our debt;
| | - | -------------------



| |  | ongoing capital reinvestment in our existing restaurants; and
| | - | -------------------------------------------------------------



| |  | financing the opening and equipping of new restaurants.
| | - | -------------------------------------------------------



Interest payments under our senior subordinated notes and other existing debt obligations represent significant liquidity requirements for us. We believe
cash generated from our operations and availability under our revolving credit facility will provide sufficient cash availability to cover our working capital needs, capital expenditures, planned development and debt service requirements for the
next twelve months.



Operating activities. Net
cash provided by operating activities for the nine months ended September 30, 2004 and 2003 was $51.6 million and $36.7 million, respectively. Our income tax payments included in operating activities have been historically reduced due to the
utilization of net operating loss carry-forwards. As of December 31, 2003, we had remaining net operating loss carryforwards for federal income tax purposes of $5.3 million, federal alternative minimum tax credit carryforwards of $3.7 million and
federal work opportunity tax credit carryforwards of $2.6 million.



Investing activities including capital expenditures. Net cash used for investing activities for the nine months ended September 30, 2004 and 2003 was $13.3 million and $27.1 million, respectively. Capital expenditures
represent a major investment of cash for us, and for the nine months ended September 30, 2004 and 2003, were $13.5 million and $26.6 million, respectively. We sold one non-operating property and an excess land parcel for total net proceeds of $1.2
million in the first nine months of 2004 and we sold four non-operating properties for net proceeds of $2.7 million in the first nine months of 2003. The net proceeds from these sales were used to reduce outstanding debt under our senior credit
facility.



35



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)



Our capital expenditures primarily include (1) capital restaurant maintenance expenditures, (2) restaurant remodeling and (3) new restaurant
development. Capital restaurant maintenance expenditures include capital expenditures for the ongoing reinvestment and enhancement of our restaurants. Remodeling expenditures include capital expenditures for renovating and in some cases rebuilding
the interior and exterior of our existing restaurants, which in the past have generally been expenditures associated with franchise renewals with respect to our Burger King restaurants. Capital expenditures for new restaurant development are
associated with developing new restaurants including the purchase of related real estate. The following table sets forth our capital expenditures for the periods presented:



|                                      |  |                        |        |               |   |            |  |              |       |  |   |       
|------------------------------------- |  | ---------------------- | ------ | ------------- | - | ---------- |  | ------------ | ----- |  | - | ------
|                                      |  | TacoCabana             |        | PolloTropical |   | BurgerKing |  | Consolidated
|                                      |  | (Dollars in thousands)
|Nine Months Ended September 30, 2004: |  |                        |        |               |   |            |  |              |       |  |   |       
|Restaurant maintenance                |  | $                      | 1,616  |               | $ | 1,050      |  | $            | 1,899 |  | $ | 4,565 
|Restaurant remodeling                 |  |                        |       |               |   |           |  |              | 818   |  |   | 818   
|New restaurant development            |  |                        | 3,945  |               |   | 2,472      |  |              | 1,005 |  |   | 7,422 
|Other capital expenditures            |  |                        | 58     |               |   | 76         |  |              | 590   |  |   | 724   
|                                      |  |                        |        |               |   |            |  |              |       |  |   |       
|Total capital expenditures            |  | $                      | 5,619  |               | $ | 3,598      |  | $            | 4,312 |  | $ | 13,529
|                                      |  |                        |        |               |   |            |  |              |       |  |   |       
|Number of new restaurant openings     |  |                        | 4      |               |   | 0          |  |              | 1     |  |   | 5     
|                                      |  |                        |        |              
|Nine Months Ended September 30, 2003: |  |                        |        |               |   |            |  |              |       |  |   |       
|Restaurant maintenance                |  | $                      | 1,981  |               | $ | 1,855      |  | $            | 1,632 |  | $ | 5,468 
|Restaurant remodeling                 |  |                        | 121    |               |   | 26         |  |              | 2,986 |  |   | 3,133 
|New restaurant development            |  |                        | 12,653 |               |   | 2,279      |  |              | 1,901 |  |   | 16,833
|Other capital expenditures            |  |                        | 121    |               |   | 135        |  |              | 931   |  |   | 1,187 
|                                      |  |                        |        |               |   |            |  |              |       |  |   |       
|Total capital expenditures            |  | $                      | 14,876 |               | $ | 4,295      |  | $            | 7,450 |  | $ | 26,621
|                                      |  |                        |        |               |   |            |  |              |       |  |   |       
|Number of new restaurant openings     |  |                        | 7      |               |   | 2          |  |              | 1     |  |   | 10    



For all of 2004, we
anticipate total capital expenditures of approximately $20 million to $22 million. These capital expenditures include approximately $11 million to $12 million for the development of new restaurants and purchase of related real estate applicable to
our three restaurant concepts. Capital expenditures in 2004 also include expenditures of approximately $8 million to $9 million for the ongoing reinvestment in our three restaurant concepts for remodeling costs and capital maintenance expenditures
and approximately $1.0 million in other capital expenditures.



Financing activities including sale/leaseback transactions. Net cash used for financing activities for the nine months ended September 30, 2004 and 2003 was $37.7 million and $8.9 million, respectively. Financing activities in
these periods consisted primarily of borrowings and repayments under our debt arrangements and sales of restaurant properties in sale/leaseback transactions.



36



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)



In the first nine months of 2004, we sold ten restaurant properties in sale/leaseback transactions for net proceeds of $14.0 million. In the first nine
months of 2003 we sold 26 restaurant properties in sale/leaseback transactions for net proceeds of $35.3 million. The net proceeds from all such sales were used to reduce outstanding debt under our senior credit facility. For all of 2004, we
anticipate that our net proceeds from sale/leaseback transactions will be approximately $15 million.



Existing indebtedness. At September 30, 2004, we had total debt of $328.8 million comprised of $170.0 million of unsecured 9.5% Senior
Subordinated Notes due 2008, borrowings under our senior credit facility of $74.5 million, lease financing obligations of $83.0 million and other debt, primarily capital leases, of $1.3 million. Our senior credit facility provides for a $70 million
term loan A facility, an $80 million term loan B facility and a $50 million revolving credit facility. During the nine months ended September 30, 2004 we made voluntary principal prepayments on our term A and term B debt of $39.0 million in the
aggregate. At September 30, 2004, an aggregate of $74.4 million principal amount was outstanding under the term loan A and B facilities and $0.1 million was outstanding under our revolving credit facility. At September 30, 2004 $39.0 million was
available for borrowings under our revolving credit facility, after reserving $10.9 million for letters of credit guaranteed by the facility, subject to meeting certain financial ratio tests required under the senior credit facility.



As a result of the restatement of our previously issued financial statements
discussed above, we were in default related to certain required financial leverage ratios and other covenants under our senior secured credit facility. We obtained a waiver from our senior secured lenders of any prior non-compliance and defaults
resulting from the restatement. In addition, our senior secured credit facility was amended to exclude all adjustments resulting from this restatement on our financial covenant requirements and to treat, on a prospective basis, the specified leases
as if no restatement or recharacterization had occurred. We were in compliance with the covenants under our senior credit facility, as amended, and the indenture governing our 9.5% Senior Subordinated Notes due 2008 as of September 30, 2004.



Inflation



The inflationary factors that have historically affected our results of
operations include increases in food and paper costs, labor and other operating expenses. 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. The restaurant industry and we typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. We cannot assure you
that we will be able to offset such inflationary cost increases in the future.



37



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MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)



Recent Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin (ARB) No. 51 (FIN 46). FIN 46 is intended to clarify the application of the majority voting interest requirement of ARB No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The controlling financial interest
may be achieved through arrangements that do not involve voting interests. A company that holds variable interests in an entity will need to consolidate the variable interest entity (VIE) if the companys interest in the VIE is such that the
company will absorb a majority of the VIEs expected losses and/or receive a majority of the entitys expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant
variable interest holders. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect
adjustment as of the beginning of the first year restated. FIN 46 is effective immediately for a VIE created or obtained after January 31, 2003. FIN 46, as amended, became effective for variable interests in a VIE created before February 1, 2003 as
of December 31, 2003.



FIN 46 has been subsequently modified,
clarified and replaced by the issuance of FIN 46R on December 23, 2003. Relative to FIN 46, FIN 46R (a) essentially excludes operating businesses from its provisions subject to four conditions, (b) states the provisions of FIN 46R are not required
to be applied if a company is unable, subject to making an exhaustive effort, to obtain the necessary information, (c) includes new definitions and examples of what variable interests are, (d) clarifies and changes the definition of a variable
interest entity and (e) clarifies and changes the definition and treatment of de facto agents, as that term is defined in FIN 46 and FIN 46R. FIN 46R was issued December 23, 2003 and, for us, is effective in 2004. We reviewed the provisions of FIN
46R and determined that it does not have a material effect on our financial statements.



On May 19, 2004, FASB Staff Position No. FAS 106-2 Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FAS 106-2) was issued. FAS
106-2 provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) for employers that sponsor postretirement health care plans that provide prescription drug benefits. FAS
106-2 also requires those employers to provide certain disclosures in their financial statements regarding the effect of the federal subsidy provided by the Act (the Subsidy) beginning in the third quarter of 2004. Any effect of the subsidy will not
impact our cash flows until 2006.



We have reviewed the methods prescribed in
the Act to calculate the impact of the Subsidy and have included the impact in our third quarter financial statements. For the year ending December 31, 2004 it is expected that postretirement benefit expense will be reduced by $62,000 and the
accumulated benefit obligation will be reduced by $646,000 at July 1, 2004.



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ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS



There were no material changes from the information presented in Item 7A of the
Companys Annual Report on Form 10-K for the year ended December 31, 2003 with respect to the Companys market risk sensitive instruments.



ITEM 4  CONTROLS AND PROCEDURES



Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a  15(e)
and 15d  15(e) under the Securities Exchange Act of 1934 (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 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.



In accordance with Exchange Act Rules 13a 15 and 15d  15, we carried out an evaluation, with the participation of the Chief Executive Officer
and Chief Financial Officer, as well as other key members of our management, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, to provide reasonable assurance that information required
to be disclosed in our reports filed or submitted 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.



No change occurred in our internal controls concerning financial reporting
during the third quarter of 2004 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



PART II - OTHER INFORMATION



Item 1. Legal Proceedings



None



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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 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.



40



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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 10, 2004 |  | /s/ Alan Vituli                                       
|                        |  | (Signature)                                           
|                        |  | Alan Vituli                                           
|                        |  | Chairman of the Board and Chief Executive Officer     
|                        | 
|Date: November 10, 2004 |  | /s/ Paul R. Flanders                                  
|                        |  | (Signature)                                           
|                        |  | Paul R. Flanders                                      
|                        |  | Vice President  Chief Financial Officer and Treasurer



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