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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 April 2, 2006

OR



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

Commission File Number: 0-25629



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CARROLS CORPORATION

(Exact name of
registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 16-0958146                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|968 James Street Syracuse, New York                            |  | 13203                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             

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



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

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

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

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

The number of shares of the registrants common stock (par value $1 per share) outstanding as of June 23, 2006 is 10.



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED MARCH 31, 2006



|        |  |                                                                                          |  |     
|------- |  | ---------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                          |  | Page
|PART I  |  | FINANCIAL INFORMATION                                                                    |  |     
|        |  |                                                                                         
|Item 1  |  | Consolidated Financial Statements (unaudited):                                           |  |     
|        |  |                                                                                         
|        |  | Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005                   |  | 2   
|        |  |                                                                                         
|        |  | Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005 |  | 3   
|        |  |                                                                                         
|        |  | Consolidated Statements of Cash Flows for the Three Months ended March 31, 2006 and 2005 |  | 4   
|        |  |                                                                                         
|        |  | Notes to Consolidated Financial Statements                                               |  | 5   
|        |  |                                                                                         
|Item 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations    |  | 18  
|        |  |                                                                                         
|Item 3  |  | Quantitative and Qualitative Disclosures About Market Risk                               |  | 28  
|        |  |                                                                                         
|Item 4  |  | Controls and Procedures                                                                  |  | 28  
|        |  |                                                                                         
|PART II |  | OTHER INFORMATION                                                                        |  |     
|        |  |                                                                                         
|Item 1  |  | Legal Proceedings                                                                        |  | 31  
|        |  |                                                                                         
|Item 1A |  | Risk Factors                                                                             |  | 31  
|        |  |                                                                                         
|Item 6  |  | Exhibits                                                                                 |  | 31  



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##### Table of Contents

PART IFINANCIAL INFORMATION

ITEM 1INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)



|                                                                                                      |  |               |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                      |  | March 31,2006 |          |   | December 31,2005 |  
|ASSETS                                                                                                |  |               |          |   |                  |   |          |  
|Current assets:                                                                                       |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                             |  | $             | 5,085    |   |                  | $ | 9,331    |  
|Trade and other receivables                                                                           |  |               | 3,584    |   |                  |   | 3,017    |  
|Inventories                                                                                           |  |               | 5,191    |   |                  |   | 5,333    |  
|Prepaid rent                                                                                          |  |               | 4,810    |   |                  |   | 4,476    |  
|Prepaid expenses and other current assets                                                             |  |               | 5,915    |   |                  |   | 4,635    |  
|Refundable income taxes                                                                               |  |               |         |   |                  |   | 593      |  
|Deferred income taxes                                                                                 |  |               | 4,867    |   |                  |   | 4,867    |  
|                                                                                                      |  |               |          |   |                  |   |          |  
|Total current assets                                                                                  |  |               | 29,452   |   |                  |   | 32,252   |  
|Property and equipment, net (Note 3)                                                                  |  |               | 213,945  |   |                  |   | 217,506  |  
|Franchise rights, at cost less accumulated amortization of $53,384 and $52,649, respectively (Note 4) |  |               | 85,754   |   |                  |   | 86,490   |  
|Goodwill (Note 4)                                                                                     |  |               | 124,934  |   |                  |   | 124,934  |  
|Intangible assets, net (Note 4)                                                                       |  |               | 1,393    |   |                  |   | 1,465    |  
|Franchise agreements, at cost less accumulated amortization of $5,308 and $5,208, respectively        |  |               | 5,811    |   |                  |   | 5,869    |  
|Deferred income taxes                                                                                 |  |               | 13,615   |   |                  |   | 13,279   |  
|Other assets                                                                                          |  |               | 14,729   |   |                  |   | 15,150   |  
|                                                                                                      |  |               |          |   |                  |   |          |  
|Total assets                                                                                          |  | $             | 489,633  |   |                  | $ | 496,945  |  
|                                                                                                      |  |               |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                 |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                  |  |               |          |   |                  |   |          |  
|Current portion of long-term debt (Note 5)                                                            |  | $             | 2,565    |   |                  | $ | 2,588    |  
|Accounts payable                                                                                      |  |               | 18,817   |   |                  |   | 19,022   |  
|Accrued interest                                                                                      |  |               | 4,746    |   |                  |   | 7,615    |  
|Accrued payroll, related taxes and benefits                                                           |  |               | 14,706   |   |                  |   | 15,703   |  
|Accrued income taxes payable                                                                          |  |               | 1,311    |   |                  |   |         |  
|Other liabilities                                                                                     |  |               | 13,611   |   |                  |   | 12,765   |  
|                                                                                                      |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                             |  |               | 55,756   |   |                  |   | 57,693   |  
|Long-term debt, net of current portion (Note 5)                                                       |  |               | 381,978  |   |                  |   | 391,108  |  
|Lease financing obligations                                                                           |  |               | 110,974  |   |                  |   | 110,898  |  
|Deferred incomesale-leaseback of real estate                                                         |  |               | 12,398   |   |                  |   | 10,660   |  
|Accrued postretirement benefits                                                                       |  |               | 4,241    |   |                  |   | 4,068    |  
|Other liabilities (Note 7)                                                                            |  |               | 26,270   |   |                  |   | 26,029   |  
|                                                                                                      |  |               |          |   |                  |   |          |  
|Total liabilities                                                                                     |  |               | 591,617  |   |                  |   | 600,456  |  
|Commitments and contingencies (Note 10)                                                               |  |               |          |   |                  |   |          |  
|Stockholders deficit:                                                                                |  |               |          |   |                  |   |          |  
|Common stock, par value $1; authorized 1,000 shares, issued and outstanding10 shares                 |  |               |         |   |                  |   |         |  
|Additional paid-in capital                                                                            |  |               | (75,948  | ) |                  |   | (75,948  | )
|Accumulated deficit                                                                                   |  |               | (26,036  | ) |                  |   | (27,563  | )
|                                                                                                      |  |               |          |   |                  |   |          |  
|Total stockholders deficit                                                                           |  |               | (101,984 | ) |                  |   | (103,511 | )
|                                                                                                      |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders deficit                                                           |  | $             | 489,633  |   |                  | $ | 496,945  |  
|                                                                                                      |  |               |          |   |                  |   |          |  

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



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2006 AND 2005

(In thousands)

(Unaudited)



|                                                                                       |  |      |         |      |   |        
|-------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                       |  | 2006 |         | 2005
|Revenues:                                                                              |  |      |         |      |   |        
|Restaurant sales                                                                       |  | $    | 182,213 |      | $ | 169,138
|Franchise royalty revenues and fees                                                    |  |      | 330     |      |   | 378    
|                                                                                       |  |      |         |      |   |        
|Total revenues                                                                         |  |      | 182,543 |      |   | 169,516
|                                                                                       |  |      |         |      |   |        
|Costs and expenses:                                                                    |  |      |         |      |   |        
|Cost of sales                                                                          |  |      | 51,913  |      |   | 48,838 
|Restaurant wages and related expenses                                                  |  |      | 53,742  |      |   | 50,075 
|Restaurant rent expense                                                                |  |      | 9,020   |      |   | 8,893  
|Other restaurant operating expenses                                                    |  |      | 26,448  |      |   | 24,196 
|Advertising expense                                                                    |  |      | 6,912   |      |   | 6,563  
|General and administrative (including stock-based compensation expense of $75 in 2005) |  |      | 12,292  |      |   | 10,562 
|Depreciation and amortization                                                          |  |      | 8,317   |      |   | 8,365  
|Impairment losses (Note 3)                                                             |  |      | 224     |      |   | 446    
|                                                                                       |  |      |         |      |   |        
|Total operating expenses                                                               |  |      | 168,868 |      |   | 157,938
|                                                                                       |  |      |         |      |   |        
|Income from operations                                                                 |  |      | 13,675  |      |   | 11,578 
|Interest expense                                                                       |  |      | 11,389  |      |   | 10,273 
|                                                                                       |  |      |         |      |   |        
|Income before income taxes                                                             |  |      | 2,286   |      |   | 1,305  
|Provision for income taxes (Note 6)                                                    |  |      | 759     |      |   | 432    
|                                                                                       |  |      |         |      |   |        
|Net income                                                                             |  | $    | 1,527   |      | $ | 873    
|                                                                                       |  |      |         |      |   |        

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



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2006 AND 2005

(In thousands)

(Unaudited)



|                                                                                               |  |      |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                               |  | 2006 |         |   | 2005 |  
|Cash flows provided from (used for) operating activities:                                      |  |      |         |   |      |   |         |  
|Net income                                                                                     |  | $    | 1,527   |   |      | $ | 873     |  
|Adjustments to reconcile net income to net cash provided from (used for) operating activities: |  |      |         |   |      |   |         |  
|Gain on disposal of property and equipment                                                     |  |      | (35     | ) |      |   |        |  
|Stock-based compensation                                                                       |  |      |        |   |      |   | 75      |  
|Depreciation and amortization                                                                  |  |      | 8,317   |   |      |   | 8,365   |  
|Amortization of deferred financing costs                                                       |  |      | 385     |   |      |   | 377     |  
|Amortization of unearned purchase discounts                                                    |  |      | (540    | ) |      |   | (539    | )
|Amortization of deferred gains from sale-leaseback transactions                                |  |      | (147    | ) |      |   | (120    | )
|Impairment losses                                                                              |  |      | 224     |   |      |   | 446     |  
|Accretion of interest on lease financing obligations                                           |  |      | 78      |   |      |   | 84      |  
|Deferred income taxes                                                                          |  |      | (336    | ) |      |   | (329    | )
|Decrease in accrued bonus to employees and director                                            |  |      |        |   |      |   | (20,860 | )
|Decrease in accrued payroll, related taxes and benefits                                        |  |      | (997    | ) |      |   | (10,781 | )
|Changes in other operating assets and liabilities                                              |  |      | (1,205  | ) |      |   | 1,946   |  
|                                                                                               |  |      |         |   |      |   |         |  
|Net cash provided from (used for) operating activities                                         |  |      | 7,271   |   |      |   | (20,463 | )
|                                                                                               |  |      |         |   |      |   |         |  
|Cash flows used for investing activities:                                                      |  |      |         |   |      |   |         |  
|Capital expenditures:                                                                          |  |      |         |   |      |   |         |  
|New restaurant development                                                                     |  |      | (6,518  | ) |      |   | (3,346  | )
|Restaurant remodeling                                                                          |  |      | (1,678  | ) |      |   | (176    | )
|Other restaurant expenditures                                                                  |  |      | (1,445  | ) |      |   | (1,265  | )
|Corporate and restaurant information systems                                                   |  |      | (477    | ) |      |   | (287    | )
|                                                                                               |  |      |         |   |      |   |         |  
|Total capital expenditures                                                                     |  |      | (10,118 | ) |      |   | (5,074  | )
|Properties purchased for sale-leaseback                                                        |  |      | (1,655  | ) |      |   | (275    | )
|Proceeds from sale-leaseback transactions                                                      |  |      | 9,413   |   |      |   |        |  
|                                                                                               |  |      |         |   |      |   |         |  
|Net cash used for investing activities                                                         |  |      | (2,360  | ) |      |   | (5,349  | )
|                                                                                               |  |      |         |   |      |   |         |  
|Cash flows used for financing activities:                                                      |  |      |         |   |      |   |         |  
|Scheduled principal payments on term loans                                                     |  |      | (550    | ) |      |   | (550    | )
|Principal pre-payments on term loans                                                           |  |      | (8,500  | ) |      |   |        |  
|Principal payments on capital leases                                                           |  |      | (103    | ) |      |   | (102    | )
|Financing costs associated with issuance of debt                                               |  |      | (4      | ) |      |   | (177    | )
|                                                                                               |  |      |         |   |      |   |         |  
|Net cash used for financing activities                                                         |  |      | (9,157  | ) |      |   | (829    | )
|                                                                                               |  |      |         |   |      |   |         |  
|Decrease in cash and cash equivalents                                                          |  |      | (4,246  | ) |      |   | (26,641 | )
|Cash and cash equivalents, beginning of period                                                 |  |      | 9,331   |   |      |   | 31,466  |  
|                                                                                               |  |      |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                       |  | $    | 5,085   |   |      | $ | 4,825   |  
|                                                                                               |  |      |         |   |      |   |         |  
|Supplemental disclosures:                                                                      |  |      |         |   |      |   |         |  
|Interest paid on long-term debt                                                                |  | $    | 11,062  |   |      | $ | 3,136   |  
|Interest paid on lease financing obligations                                                   |  | $    | 2,667   |   |      | $ | 2,683   |  
|Decrease in accruals for capital expenditures                                                  |  | $    | (151    | ) |      | $ | (764    | )
|Income taxes refunded, net                                                                     |  | $    | (810    | ) |      | $ | (1,101  | )

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



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars, except share amounts)

1.
Basis of Presentation

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

Business Description.At March 31, 2006 the Company operated, as franchisee, 334 quick-service restaurants under the trade
name Burger King in thirteen Northeastern, Midwestern and Southeastern states. At March 31, 2006, the Company also owned and operated 70 Pollo Tropical restaurants located in Florida and franchised a total of 26 Pollo Tropical
restaurants; 22 in Puerto Rico, two in Ecuador and two in Florida. At March 31, 2006, the Company owned and operated 136 Taco Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico and one in
Georgia.

Fiscal Year.The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. All references
herein to the fiscal years ended January 1, 2006 and January 2, 2005 will be referred to as the fiscal years ended December 31, 2005 and 2004, respectively. Similarly, all references herein to the three months ended April 2, 2006
and April 3, 2005 will be referred to as the three months ended March 31, 2006 and March 31, 2005, respectively.

Basis
of Presentation.The accompanying unaudited consolidated financial statements for the three months ended March 31, 2006 and 2005 have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange
Commission and do not include 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 considered necessary for a fair presentation of such financial statements have been included. The results of operations for the three months ended March 31, 2006 and 2005 are not necessarily indicative of the results to be expected
for the full year.

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

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

2. Stock-Based Compensation

Effective May 3, 2005, Holdings issued an aggregate of 260,600 shares of Holdings common stock in exchange for the cancellation
and termination of an identical number of outstanding options to purchase shares of Holdings common stock. During the second quarter of 2005, Holdings also issued an additional 5,440 shares of Holdings common stock in separate awards. As a
consequence of the exchange, all outstanding stock options were cancelled and terminated. All shares were issued pursuant to stock award agreements, which provide that such shares are fully vested and non-forfeitable upon issuance, but may not be
sold or otherwise disposed of for a period of two years from the date of issuance. Such agreements also provide that up to an aggregate of 16% of each recipients shares (for those recipients that were issued 100 or more shares) are subject to
repurchase by Holdings (at its option) after December 31, 2006 under certain circumstances described in the award agreements. In addition, such shares may be subject to repurchase by Holdings (at its option) in the event of a termination of
employment before the occurrence of certain events.

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

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment (SFAS
123R) which requires companies to measure and recognize compensation expense for all share-based payments at fair value. In addition, the FASB has issued a number of supplements to SFAS 123R to guide the implementation of this new accounting
pronouncement. Share-based payments include stock option grants and other equity-based awards granted under the Companys long-term incentive and stock option plans. SFAS 123R was effective for the Company



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



beginning January 1, 2006. The Company used the modified prospective transition method, which requires that compensation cost be recognized in the
financial statements for all awards granted after the date of adoption as well as for existing awards for which the requisite service has not been rendered as of the date of adoption (the Existing Awards) and requires that prior periods
not be restated. However, as all shares of stock issued in the stock award in the second quarter of 2005 were fully vested and the Company did not have any stock options outstanding at December 31, 2005 and March 31, 2006, the Company has
not recorded any stock-based compensation expense related to the adoption of SFAS 123R. The Company is currently evaluating valuation models to be utilized for any future grants.

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

The following table presents the Companys pro forma net income for the three months ended March 31, 2005 had compensation cost been determined
based upon the fair value of the stock options at the grant date consistent with the fair-value based method of SFAS 123:



|                                                                                                                                 |  |   |     |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | - | --- | -
|Net income as reported                                                                                                           |  | $ | 873 |  
|Add: Stock-based compensation expense included in reported net income, net of related tax effects                                |  |   | 49  |  
|Deduct: Stock-based compensation expense determined under the fair-value based method for all awards, net of related tax
effects |  |   | (58 | )
|                                                                                                                                 |  |   |     |  
|Pro forma net income                                                                                                             |  | $ | 864 |  
|                                                                                                                                 |  |   |     |  

3. Impairment of Long-Lived Assets

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

For the three months ended March 31, 2006 and 2005, the Company recorded impairment
losses on long-lived assets for its segments as follows:



|            |  |      |     |      |   |    
|----------- |  | ---- | --- | ---- | - | ---
|            |  | 2006 |     | 2005
|Burger King |  | $    | 224 |      | $ | 446

4. Goodwill, Franchise Rights and Intangible Assets

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



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



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



Franchise Rights.Amounts allocated to franchise rights for each acquisition are amortized
using the straight-line method over the average remaining term of the acquired franchise agreements at January 1, 2002 plus one twenty-year renewal period. The Company assesses the potential impairment of franchise rights whenever events or
changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists for any of its assets, an estimate of the aggregate undiscounted future cash flows from the acquired restaurants is compared to
the respective carrying value of franchise rights for each Burger King acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. The Company recorded no
impairment charges against franchise rights for the three months ended March 31, 2006 and 2005.

Amortization expense related to
franchise rights for the three months ended March 31, 2006 and 2005 was $735 and $804, respectively.

Intangible Assets. In the
third quarter of 2005, the Company acquired four Taco Cabana restaurants from a franchisee. Under Emerging Issues Task Force Issue No. 04 -1, Accounting for Preexisting Relationships between the Parties to a Business Combination
(EITF 04-1), certain reacquired rights, including the right to the acquirers trade name, are required to be recognized as intangible assets apart from goodwill. The Company allocated $1.6 million of the purchase price to this
intangible asset.

5. Long-term Debt

The Companys senior credit facility provides for a revolving credit facility under which it may borrow up to $50.0 million (including a sub limit of up to $20.0 million for letters of credit and up to $5.0 million for swingline
loans), a $220.0 million term loan B facility and incremental facilities (as defined in the new senior credit facility), at its option, of up to $100.0 million, subject to the satisfaction of certain conditions. At March 31, 2006, $202.8
million was outstanding under the term B facility and no amounts were outstanding under the revolving credit facility. After reserving $15.2 million for letters of credit guaranteed by the facility, $34.8 million was available for borrowings under
the revolving credit facility at March 31, 2006. The Company was in compliance with the covenants under its senior credit facility as of March 31, 2006.

As a result of the restatement of the Companys financial statements as previously reported in Amendment No. 1 to the Companys 2004 Annual Report on Form 10-K/A, the Company was in default under its
senior credit facility by failing to timely furnish its interim consolidated financial statements for the third quarter of 2005 to its lenders. On December 6, 2005, the Company obtained a Consent and Waiver from its lenders under the senior
credit facility that permitted the Company to extend the time to deliver its consolidated financial statements for the third quarter of 2005 to February 15, 2006. On February 15, 2006, the Company obtained a Consent and Waiver from its
lenders under the senior credit facility that permitted the Company to extend the time period to deliver its consolidated financial statements for the third quarter of 2005 to June 30, 2006. This waiver also permitted the Company to extend the
time period to deliver its annual audited consolidated financial statements for 2005 and its consolidated financial statements for the first fiscal quarter of 2006 to June 30, 2006. The Company subsequently delivered these financial statements
on June 30, 2006.

On December 15, 2004, the Company issued $180 million of 9% Senior Subordinated Notes due 2013. Restrictive
covenants under the senior subordinated notes include limitations with respect to the Companys ability to issue additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. Restrictive
covenants under the 9% senior subordinated notes include limitations with respect to the Companys ability to incur additional debt, incur liens, sell or acquire assets or businesses, pay dividends and make certain investments. Except for the
Companys obligation to timely furnish and file its Quarterly Report on Form 10-Q for the third quarter of 2005 and its 2005 Annual Report on Form 10-K, the Company was in compliance at March 31, 2006, with the restrictive covenants in the
indenture governing the senior subordinated notes. The Company subsequently has furnished and filed these two filings.

6. Income Taxes

The income tax provision for the three months ended March 31, 2006 and 2005 was comprised of the following:



|         |  |      |       |   |      |   |      |  
|-------- |  | ---- | ----- | - | ---- | - | ---- | -
|         |  | 2006 |       |   | 2005 |  
|Current  |  | $    | 1,095 |   |      | $ | 761  |  
|Deferred |  |      | (336  | ) |      |   | (329 | )
|         |  |      |       |   |      |   |      |  
|         |  | $    | 759   |   |      | $ | 432  |  
|         |  |      |       |   |      |   |      |  



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



The provision for income taxes for the first quarter of 2006 was derived using an estimated effective
annual income tax rate for 2006 of 33.2%. The provision for income taxes in the first quarter of 2005 is based on an effective rate of 33%.

7. Other
Liabilities

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



|                                    |  |                |        |                   |   |       
|----------------------------------- |  | -------------- | ------ | ----------------- | - | ------
|                                    |  | March 31, 2006 |        | December 31, 2005
|Unearned purchase discounts         |  | $              | 6,133  |                   | $ | 6,686 
|Accrued occupancy costs             |  |                | 10,573 |                   |   | 10,674
|Accrued workers compensation costs |  |                | 4,825  |                   |   | 4,615 
|Other                               |  |                | 4,739  |                   |   | 4,054 
|                                    |  |                |        |                   |   |       
|                                    |  | $              | 26,270 |                   | $ | 26,029
|                                    |  |                |        |                   |   |       

In 2001, management made the decision to close seven Taco Cabana restaurants in the Phoenix,
Arizona market and discontinue restaurant development underway in that market. At each of the periods ended March 31, 2006 and December 31, 2005, the Company had $1.1 million in lease liability reserves that are included in accrued
occupancy costs.

The following table presents the activity in the exit cost reserve:



|                             |  |                             |       |   |      |   |     |  
|---------------------------- |  | --------------------------- | ----- | - | ---- | - | --- | -
|                             |  | Three Months EndedMarch 31, |      
|                             |  | 2006                        |       |   | 2005 |  
|Balance, beginning of period |  | $                           | 1,083 |   |      | $ | 756 |  
|Additions                    |  |                             |      |   |      |   |    |  
|Payments                     |  |                             | (31   | ) |      |   | (32 | )
|                             |  |                             |       |   |      |   |     |  
|Balance, end of period       |  | $                           | 1,052 |   |      | $ | 724 |  
|                             |  |                             |       |   |      |   |     |  

8. Postretirement Benefits

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

The following summarizes the components of net periodic benefit cost:



|                                                |  |                             |     |   |      |   |    |  
|----------------------------------------------- |  | --------------------------- | --- | - | ---- | - | -- | -
|                                                |  | Three Months EndedMarch 31, |    
|                                                |  | 2006                        |     |   | 2005 |  
|Components of net periodic benefit cost:        |  |                             |     |   |      |   |    |  
|Service cost                                    |  | $                           | 118 |   |      | $ | 62 |  
|Interest cost                                   |  |                             | 83  |   |      |   | 49 |  
|Amortization of gains and losses                |  |                             | 21  |   |      |   | (5 | )
|Amortization of unrecognized prior service cost |  |                             | (7  | ) |      |   | (7 | )
|                                                |  |                             |     |   |      |   |    |  
|Net periodic postretirement benefit cost        |  | $                           | 215 |   |      | $ | 99 |  
|                                                |  |                             |     |   |      |   |    |  

As disclosed in the Companys 2005 Annual Report on Form 10-K, the Company expected to
contribute approximately $91 to its postretirement plan in 2006. During the three months ended March 31, 2006, the Company made contributions of $35 to its postretirement plan. The Company expects to make additional contributions during 2006.

9. Business Segment Information

The
Company is engaged in the quick-service and quick-casual restaurant industry, with three restaurant concepts: Burger King operating as a franchisee, 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



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



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 Mexican 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. Segment EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, impairment losses and stock-based compensation expense.

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



|                                             |  |            |        |               |   |            |  |       |         |              |   |         |  |   |        
|-------------------------------------------- |  | ---------- | ------ | ------------- | - | ---------- |  | ----- | ------- | ------------ | - | ------- |  | - | -------
|Three Months Ended:                          |  | TacoCabana |        | PolloTropical |   | BurgerKing |  | Other |         | Consolidated
|March 31, 2006:                              |  |            |        |               |   |            |  |       |         |              |   |         |  |   |        
|Total revenues                               |  | $          | 55,240 |               | $ | 38,586     |  | $     | 88,717  |              | $ |        |  | $ | 182,543
|Cost of sales                                |  |            | 16,010 |               |   | 12,606     |  |       | 23,297  |              |   |        |  |   | 51,913 
|Restaurant wages and related expenses        |  |            | 15,729 |               |   | 9,523      |  |       | 28,490  |              |   |        |  |   | 53,742 
|Depreciation and amortization                |  |            | 2,030  |               |   | 1,364      |  |       | 4,600   |              |   | 323     |  |   | 8,317  
|Segment EBITDA                               |  |            | 7,694  |               |   | 7,636      |  |       | 6,886   |              |   |         |  |   |        
|Capital expenditures, including acquisitions |  |            | 3,244  |               |   | 4,283      |  |       | 2,114   |              |   | 477     |  |   | 10,118 
|                                             |  |            |        |               |  
|March 31 2005:                               |  |            |        |               |   |            |  |       |         |              |   |         |  |   |        
|Total revenues                               |  | $          | 50,183 |               | $ | 34,447     |  | $     | 84,886  |              | $ |        |  | $ | 169,516
|Cost of sales                                |  |            | 14,537 |               |   | 11,381     |  |       | 22,920  |              |   |        |  |   | 48,838 
|Restaurant wages and related expenses        |  |            | 14,139 |               |   | 7,937      |  |       | 27,999  |              |   |        |  |   | 50,075 
|Depreciation and amortization                |  |            | 1,891  |               |   | 1,150      |  |       | 4,980   |              |   | 344     |  |   | 8,365  
|Segment EBITDA                               |  |            | 7,324  |               |   | 7,350      |  |       | 5,790   |              |   |         |  |   |        
|Capital expenditures                         |  |            | 1,623  |               |   | 2,625      |  |       | 539     |              |   | 287     |  |   | 5,074  
|                                             |  |            |        |               |  
|Identifiable Assets:                         |  |            |        |               |   |            |  |       |         |              |   |         |  |   |        
|At March 31, 2006                            |  | $          | 69,959 |               | $ | 58,827     |  | $     | 180,037 |              | $ | 180,810 |  | $ | 489,633
|At December 31, 2005                         |  |            | 70,883 |               |   | 59,761     |  |       | 182,902 |              |   | 183,399 |  |   | 496,945

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



|                                 |  |                              |        |      |   |       
|-------------------------------- |  | ---------------------------- | ------ | ---- | - | ------
|                                 |  | Three Months Ended March 31,
|                                 |  | 2006                         |        | 2005
|Segment EBITDA:                  |  |                              |        |      |   |       
|Taco Cabana                      |  | $                            | 7,694  |      | $ | 7,324 
|Pollo Tropical                   |  |                              | 7,636  |      |   | 7,350 
|Burger King                      |  |                              | 6,886  |      |   | 5,790 
|                                 |  |                              |        |      |   |       
|Subtotal                         |  |                              | 22,216 |      |   | 20,464
|                                 |  |                             
|Less:                            |  |                              |        |      |   |       
|Depreciation and amortization    |  |                              | 8,317  |      |   | 8,365 
|Impairment losses                |  |                              | 224    |      |   | 446   
|Interest expense                 |  |                              | 11,389 |      |   | 10,273
|Provision for income taxes       |  |                              | 759    |      |   | 432   
|Stock-based compensation expense |  |                              |       |      |   | 75    
|                                 |  |                              |        |      |   |       
|Net income                       |  | $                            | 1,527  |      | $ | 873   
|                                 |  |                              |        |      |   |       



9



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



10. Commitments and Contingencies

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

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

On November 30, 2002, four former hourly employees commenced a lawsuit against the Company in the United States District Court for the Western District of New York entitled Dawn Seever, et al. v. Carrols Corporation. The lawsuit
alleges, in substance, that the Company violated certain minimum wage laws under the Federal Fair Labor Standards Act and related state laws by requiring employees to work without recording their time and by retaliating against those who complained.
The plaintiffs seek damages, costs and injunctive relief. They also seek to notify, and eventually certify, a class consisting of current and former employees who, since 1998, have worked, or are working, for the Company. As a result of the
July 21, 2005 Status Conference, the parties agreed to withdraw Plaintiffs Motions to Certify and for National Discovery, and Defendants Motion to Disqualify Counsel and related motions, to allow both sides limited additional
discovery. The Company has since filed a Motion for Summary Judgment that it believes should be scheduled for oral argument in early 2006. It is too early to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of
potential loss. Consequently, it is not possible to predict what adverse impact, if any, this case could have on the Companys consolidated financial condition or consolidated results of operations and cash flows. The Company intends to
continue to contest this case vigorously.

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

11. Recent Accounting Developments

In October 2005,
the FASB issued Staff Position FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period, which requires rental costs associated with ground or building operating leases that are incurred during a construction period to
be recognized as rental expense. This Staff Position is effective for reporting periods beginning after December 15, 2005, and retrospective application is permitted but not required. The Company has not historically capitalized rent incurred
during the construction period. Accordingly, Staff Position FAS 13-1 did not have any impact on the Companys consolidated financial statements.

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



10



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(in
thousands of dollars, except share amounts)



12. Guarantor Financial Statements

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

Cabana Beverages, Inc.

Cabana Bevco LLC

Carrols Realty Holdings Corp.

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Quanta Advertising Corp.

Taco Cabana, Inc.

TP Acquisition Corp.

TC Bevco LLC

TC Lease Holdings III, V and VI, Inc.

T.C. Management, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.

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

For certain of the Companys
sale/leaseback transactions, the Parent Company 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.

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

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



11



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##### Table of Contents

CONSOLIDATING BALANCE SHEET

March 31, 2006

(In thousands of dollars)

(Unaudited)



|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|---------------------------------------------------- |  | ------------------- | -------- | - | --------------------- | - | -------- | ------------ |  | - | ----------------- | - |  | - | -------- | -
|                                                     |  | Parent Company Only |          |   | GuarantorSubsidiaries |   |          | Eliminations |  |   | ConsolidatedTotal |  
|ASSETS                                               |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Current assets:                                      |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Cash and cash equivalents                            |  | $                   | 3,397    |   |                       | $ | 1,688    |              |  | $ |                  |   |  | $ | 5,085    |  
|Trade and other receivables, net                     |  |                     | 740      |   |                       |   | 2,844    |              |  |   |                  |   |  |   | 3,584    |  
|Inventories                                          |  |                     | 3,496    |   |                       |   | 1,695    |              |  |   |                  |   |  |   | 5,191    |  
|Prepaid rent                                         |  |                     | 2,883    |   |                       |   | 1,927    |              |  |   |                  |   |  |   | 4,810    |  
|Prepaid expenses and other current assets            |  |                     | 1,836    |   |                       |   | 4,079    |              |  |   |                  |   |  |   | 5,915    |  
|Deferred income taxes                                |  |                     | 3,081    |   |                       |   | 1,786    |              |  |   |                  |   |  |   | 4,867    |  
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total current assets                                 |  |                     | 15,433   |   |                       |   | 14,019   |              |  |   |                  |   |  |   | 29,452   |  
|Property and equipment, net                          |  |                     | 84,442   |   |                       |   | 159,245  |              |  |   | (29,742           | ) |  |   | 213,945  |  
|Franchise rights, net                                |  |                     | 85,754   |   |                       |   |         |              |  |   |                  |   |  |   | 85,754   |  
|Goodwill                                             |  |                     | 1,450    |   |                       |   | 123,484  |              |  |   |                  |   |  |   | 124,934  |  
|Intangible assets, net                               |  |                     |         |   |                       |   | 1,393    |              |  |   |                  |   |  |   | 1,393    |  
|Franchise agreements, net                            |  |                     | 5,811    |   |                       |   |         |              |  |   |                  |   |  |   | 5,811    |  
|Intercompany receivable (payable)                    |  |                     | 155,465  |   |                       |   | (156,004 | )            |  |   | 539               |   |  |   |         |  
|Investment in subsidiaries                           |  |                     | 24,523   |   |                       |   |         |              |  |   | (24,523           | ) |  |   |         |  
|Deferred income taxes                                |  |                     | 5,780    |   |                       |   | 8,345    |              |  |   | (510              | ) |  |   | 13,615   |  
|Other assets                                         |  |                     | 9,934    |   |                       |   | 6,171    |              |  |   | (1,376            | ) |  |   | 14,729   |  
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total assets                                         |  | $                   | 388,592  |   |                       | $ | 156,653  |              |  | $ | (55,612           | ) |  | $ | 489,633  |  
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)       |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Current liabilities:                                 |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Current portion of long-term debt                    |  | $                   | 2,321    |   |                       | $ | 244      |              |  | $ |                  |   |  | $ | 2,565    |  
|Accounts payable                                     |  |                     | 8,322    |   |                       |   | 10,495   |              |  |   |                  |   |  |   | 18,817   |  
|Accrued interest                                     |  |                     | 4,746    |   |                       |   |         |              |  |   |                  |   |  |   | 4,746    |  
|Accrued payroll, related taxes and benefits          |  |                     | 8,077    |   |                       |   | 6,629    |              |  |   |                  |   |  |   | 14,706   |  
|Accrued income taxes payable                         |  |                     | 1,311    |   |                       |   |         |              |  |   |                  |   |  |   | 1,311    |  
|Other liabilities                                    |  |                     | 9,254    |   |                       |   | 4,357    |              |  |   |                  |   |  |   | 13,611   |  
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total current liabilities                            |  |                     | 34,031   |   |                       |   | 21,725   |              |  |   |                  |   |  |   | 55,756   |  
|Long-term debt, net of current portion               |  |                     | 380,823  |   |                       |   | 1,155    |              |  |   |                  |   |  |   | 381,978  |  
|Lease financing obligations                          |  |                     | 48,784   |   |                       |   | 97,064   |              |  |   | (34,874           | ) |  |   | 110,974  |  
|Deferred incomesale-leaseback of real estate        |  |                     | 5,603    |   |                       |   | 4,502    |              |  |   | 2,293             |   |  |   | 12,398   |  
|Accrued postretirement benefits                      |  |                     | 4,241    |   |                       |   |         |              |  |   |                  |   |  |   | 4,241    |  
|Other liabilities                                    |  |                     | 17,094   |   |                       |   | 8,990    |              |  |   | 186               |   |  |   | 26,270   |  
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total liabilities                                    |  |                     | 490,576  |   |                       |   | 133,436  |              |  |   | (32,395           | ) |  |   | 591,617  |  
|Commitments and contingencies                        |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Stockholders equity (deficit)                       |  |                     | (101,984 | ) |                       |   | 23,217   |              |  |   | (23,217           | ) |  |   | (101,984 | )
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  
|Total liabilities and stockholders equity (deficit) |  | $                   | 388,592  |   |                       | $ | 156,653  |              |  | $ | (55,612           | ) |  | $ | 489,633  |  
|                                                     |  |                     |          |   |                       |   |          |              |  |   |                   |   |  |   |          |  



12



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##### Table of Contents

CONSOLIDATING BALANCE SHEET

December 31, 2005

(In thousands of dollars)

(Unaudited)



|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|---------------------------------------------------- |  | ------------------- | -------- | - | ---------------------- | - | -------- | ------------ |  | - | ------------------ | - |  | - | -------- | -
|                                                     |  | Parent Company Only |          |   | Guarantor Subsidiaries |   |          | Eliminations |  |   | Consolidated Total |  
|ASSETS                                               |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Current assets:                                      |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Cash and cash equivalents                            |  | $                   | 7,493    |   |                        | $ | 1,838    |              |  | $ |                   |   |  | $ | 9,331    |  
|Trade and other receivables, net                     |  |                     | 608      |   |                        |   | 2,409    |              |  |   |                   |   |  |   | 3,017    |  
|Inventories                                          |  |                     | 3,767    |   |                        |   | 1,566    |              |  |   |                   |   |  |   | 5,333    |  
|Prepaid rent                                         |  |                     | 2,600    |   |                        |   | 1,876    |              |  |   |                   |   |  |   | 4,476    |  
|Prepaid expenses and other current assets            |  |                     | 1,292    |   |                        |   | 3,343    |              |  |   |                   |   |  |   | 4,635    |  
|Refundable income taxes                              |  |                     | 593      |   |                        |   |         |              |  |   |                   |   |  |   | 593      |  
|Deferred income taxes                                |  |                     | 3,081    |   |                        |   | 2,225    |              |  |   | (439               | ) |  |   | 4,867    |  
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total current assets                                 |  |                     | 19,434   |   |                        |   | 13,257   |              |  |   | (439               | ) |  |   | 32,252   |  
|Property and equipment, net                          |  |                     | 85,999   |   |                        |   | 155,078  |              |  |   | (23,571            | ) |  |   | 217,506  |  
|Franchise rights, net                                |  |                     | 86,490   |   |                        |   |         |              |  |   |                   |   |  |   | 86,490   |  
|Goodwill                                             |  |                     | 1,450    |   |                        |   | 123,484  |              |  |   |                   |   |  |   | 124,934  |  
|Intangible assets, net                               |  |                     |         |   |                        |   | 1,465    |              |  |   |                   |   |  |   | 1,465    |  
|Franchise agreements, net                            |  |                     | 5,869    |   |                        |   |         |              |  |   |                   |   |  |   | 5,869    |  
|Intercompany receivable (payable)                    |  |                     | 159,161  |   |                        |   | (159,735 | )            |  |   | 574                |   |  |   |         |  
|Investment in subsidiaries                           |  |                     | 21,478   |   |                        |   |         |              |  |   | (21,478            | ) |  |   |         |  
|Deferred income taxes                                |  |                     | 5,611    |   |                        |   | 7,668    |              |  |   |                   |   |  |   | 13,279   |  
|Other assets                                         |  |                     | 10,231   |   |                        |   | 5,968    |              |  |   | (1,049             | ) |  |   | 15,150   |  
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total assets                                         |  | $                   | 395,723  |   |                        | $ | 147,185  |              |  | $ | (45,963            | ) |  | $ | 496,945  |  
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)       |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Current liabilities:                                 |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Current portion of long-term debt                    |  | $                   | 2,340    |   |                        | $ | 248      |              |  | $ |                   |   |  | $ | 2,588    |  
|Accounts payable                                     |  |                     | 7,327    |   |                        |   | 11,695   |              |  |   |                   |   |  |   | 19,022   |  
|Accrued interest                                     |  |                     | 7,615    |   |                        |   |         |              |  |   |                   |   |  |   | 7,615    |  
|Accrued payroll, related taxes and benefits          |  |                     | 8,940    |   |                        |   | 6,763    |              |  |   |                   |   |  |   | 15,703   |  
|Other liabilities                                    |  |                     | 7,933    |   |                        |   | 4,832    |              |  |   |                   |   |  |   | 12,765   |  
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total current liabilities                            |  |                     | 34,155   |   |                        |   | 23,538   |              |  |   |                   |   |  |   | 57,693   |  
|Long-term debt, net of current portion               |  |                     | 389,892  |   |                        |   | 1,216    |              |  |   |                   |   |  |   | 391,108  |  
|Lease financing obligations                          |  |                     | 48,817   |   |                        |   | 90,613   |              |  |   | (28,532            | ) |  |   | 110,898  |  
|Deferred incomesale-leaseback of real estate        |  |                     | 5,664    |   |                        |   | 2,327    |              |  |   | 2,669              |   |  |   | 10,660   |  
|Accrued postretirement benefits                      |  |                     | 4,068    |   |                        |   |         |              |  |   |                   |   |  |   | 4,068    |  
|Other liabilities                                    |  |                     | 16,638   |   |                        |   | 9,222    |              |  |   | 169                |   |  |   | 26,029   |  
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total liabilities                                    |  |                     | 499,234  |   |                        |   | 126,916  |              |  |   | (25,694            | ) |  |   | 600,456  |  
|Commitments and contingencies                        |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Stockholders equity (deficit)                       |  |                     | (103,511 | ) |                        |   | 20,269   |              |  |   | (20,269            | ) |  |   | (103,511 | )
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total liabilities and stockholders equity (deficit) |  | $                   | 395,723  |   |                        | $ | 147,185  |              |  | $ | (45,963            | ) |  | $ | 496,945  |  
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  



13



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CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended March 31, 2006

(In thousands of dollars)

(Unaudited)



|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|------------------------------------- |  | ------------------ | ------ | - | --------------------- | - | ------------ |  | - | ----------------- | - |  | - | -------
|                                      |  | Parent CompanyOnly |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | ConsolidatedTotal
|Revenues:                             |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Restaurant sales                      |  | $                  | 88,717 |   |                       | $ | 93,496       |  | $ |                  |   |  | $ | 182,213
|Franchise royalty revenues and fees   |  |                    |       |   |                       |   | 330          |  |   |                  |   |  |   | 330    
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Total revenues                        |  |                    | 88,717 |   |                       |   | 93,826       |  |   |                  |   |  |   | 182,543
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Costs and expenses:                   |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Cost of sales                         |  |                    | 23,297 |   |                       |   | 28,616       |  |   |                  |   |  |   | 51,913 
|Restaurant wages and related expenses |  |                    | 28,490 |   |                       |   | 25,252       |  |   |                  |   |  |   | 53,742 
|Restaurant rent expense               |  |                    | 5,385  |   |                       |   | 3,029        |  |   | 606               |   |  |   | 9,020  
|Other restaurant operating expenses   |  |                    | 13,747 |   |                       |   | 12,701       |  |   |                  |   |  |   | 26,448 
|Advertising expense                   |  |                    | 3,679  |   |                       |   | 3,233        |  |   |                  |   |  |   | 6,912  
|General and administrative            |  |                    | 6,491  |   |                       |   | 5,801        |  |   |                  |   |  |   | 12,292 
|Depreciation and amortization         |  |                    | 4,761  |   |                       |   | 3,685        |  |   | (129              | ) |  |   | 8,317  
|Impairment losses                     |  |                    | 224    |   |                       |   |             |  |   |                  |   |  |   | 224    
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Total operating expenses              |  |                    | 86,074 |   |                       |   | 82,317       |  |   | 477               |   |  |   | 168,868
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Income from operations                |  |                    | 2,643  |   |                       |   | 11,509       |  |   | (477              | ) |  |   | 13,675 
|Interest expense                      |  |                    | 9,704  |   |                       |   | 2,365        |  |   | (680              | ) |  |   | 11,389 
|Intercompany interest allocations     |  |                    | (4,556 | ) |                       |   | 4,556        |  |   |                  |   |  |   |       
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Income (loss) before income taxes     |  |                    | (2,505 | ) |                       |   | 4,588        |  |   | 203               |   |  |   | 2,286  
|Provision (benefit) for income taxes  |  |                    | (987   | ) |                       |   | 1,639        |  |   | 107               |   |  |   | 759    
|Equity income from subsidiaries       |  |                    | 3,045  |   |                       |   |             |  |   | (3,045            | ) |  |   |       
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        
|Net income                            |  | $                  | 1,527  |   |                       | $ | 2,949        |  | $ | (2,949            | ) |  | $ | 1,527  
|                                      |  |                    |        |   |                       |   |              |  |   |                   |   |  |   |        



14



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##### Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended March 31, 2005

(In thousands of dollars)

(Unaudited)



|                                                                               |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|------------------------------------------------------------------------------ |  | ----------------- | ------ | - | --------------------- | - | ------------ |  | - | ----------------- | - |  | - | -------
|                                                                               |  | ParentCompanyOnly |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | ConsolidatedTotal
|Revenues:                                                                      |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Restaurant sales                                                               |  | $                 | 84,886 |   |                       | $ | 84,252       |  | $ |                  |   |  | $ | 169,138
|Franchise royalty revenues and fees                                            |  |                   |       |   |                       |   | 378          |  |   |                  |   |  |   | 378    
|                                                                               |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Total revenues                                                                 |  |                   | 84,886 |   |                       |   | 84,630       |  |   |                  |   |  |   | 169,516
|                                                                               |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Costs and expenses:                                                            |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Cost of sales                                                                  |  |                   | 22,920 |   |                       |   | 25,918       |  |   |                  |   |  |   | 48,838 
|Restaurant wages and related expenses                                          |  |                   | 27,999 |   |                       |   | 22,076       |  |   |                  |   |  |   | 50,075 
|Restaurant rent expense                                                        |  |                   | 5,439  |   |                       |   | 2,868        |  |   | 586               |   |  |   | 8,893  
|Other restaurant operating expenses                                            |  |                   | 13,342 |   |                       |   | 10,854       |  |   |                  |   |  |   | 24,196 
|Advertising expense                                                            |  |                   | 3,362  |   |                       |   | 3,201        |  |   |                  |   |  |   | 6,563  
|General and administrative (including $75 of stock-based compensation expense) |  |                   | 5,380  |   |                       |   | 5,182        |  |   |                  |   |  |   | 10,562 
|Depreciation and amortization                                                  |  |                   | 5,152  |   |                       |   | 3,333        |  |   | (120              | ) |  |   | 8,365  
|Impairment losses                                                              |  |                   | 446    |   |                       |   |             |  |   |                  |   |  |   | 446    
|                                                                               |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Total operating expenses                                                       |  |                   | 84,040 |   |                       |   | 73,432       |  |   | 466               |   |  |   | 157,938
|                                                                               |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Income from operations                                                         |  |                   | 846    |   |                       |   | 11,198       |  |   | (466              | ) |  |   | 11,578 
|Interest expense                                                               |  |                   | 8,594  |   |                       |   | 2,328        |  |   | (649              | ) |  |   | 10,273 
|Intercompany interest allocations                                              |  |                   | (4,556 | ) |                       |   | 4,556        |  |   |                  |   |  |   |       
|                                                                               |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Income (loss) before income taxes                                              |  |                   | (3,192 | ) |                       |   | 4,314        |  |   | 183               |   |  |   | 1,305  
|Provision (benefit) for income taxes                                           |  |                   | (1,182 | ) |                       |   | 1,528        |  |   | 86                |   |  |   | 432    
|Equity income from subsidiaries                                                |  |                   | 2,883  |   |                       |   |             |  |   | (2,883            | ) |  |   |       
|                                                                               |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        
|Net income                                                                     |  | $                 | 873    |   |                       | $ | 2,786        |  | $ | (2,786            | ) |  | $ | 873    
|                                                                               |  |                   |        |   |                       |   |              |  |   |                   |   |  |   |        



15



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##### Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2006

(In thousands of dollars)

(Unaudited)



|                                                                                               |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|---------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | --------------------- | - | ------ | ------------ |  | - | ----------------- | - |  | - | ------- | -
|                                                                                               |  | ParentCompany Only |        |   | GuarantorSubsidiaries |   |        | Eliminations |  |   | ConsolidatedTotal |  
|Cash flows provided from (used for) operating activities:                                      |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Net income                                                                                     |  | $                  | 1,527  |   |                       | $ | 2,949  |              |  | $ | (2,949            | ) |  | $ | 1,527   |  
|Adjustments to reconcile net income to net cash provided from (used for) operating activities: |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Gain on disposal of property and equipment                                                     |  |                    | (35    | ) |                       |   |       |              |  |   |                  |   |  |   | (35     | )
|Depreciation and amortization                                                                  |  |                    | 4,761  |   |                       |   | 3,685  |              |  |   | (129              | ) |  |   | 8,317   |  
|Amortization of deferred financing costs                                                       |  |                    | 360    |   |                       |   | 59     |              |  |   | (34               | ) |  |   | 385     |  
|Amortization of unearned purchase discounts                                                    |  |                    | (540   | ) |                       |   |       |              |  |   |                  |   |  |   | (540    | )
|Amortization of deferred gains from sale-leaseback transactions                                |  |                    | (70    | ) |                       |   | (31    | )            |  |   | (46               | ) |  |   | (147    | )
|Impairment losses                                                                              |  |                    | 224    |   |                       |   |       |              |  |   |                  |   |  |   | 224     |  
|Accretion of interest on lease financing obligations                                           |  |                    | (32    | ) |                       |   | 122    |              |  |   | (12               | ) |  |   | 78      |  
|Deferred income taxes                                                                          |  |                    | (179   | ) |                       |   | (229   | )            |  |   | 72                |   |  |   | (336    | )
|Decrease in accrued payroll, related taxes and benefits                                        |  |                    | (863   | ) |                       |   | (134   | )            |  |   |                  |   |  |   | (997    | )
|Changes in other operating assets and liabilities                                              |  |                    | 2,313  |   |                       |   | (6,616 | )            |  |   | 3,098             |   |  |   | (1,205  | )
|                                                                                               |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Net cash provided from (used for) operating activities                                         |  |                    | 7,466  |   |                       |   | (195   | )            |  |   |                  |   |  |   | 7,271   |  
|                                                                                               |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Cash flows used for investing activities:                                                      |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Capital expenditures:                                                                          |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|New restaurant development                                                                     |  |                    | (66    | ) |                       |   | (6,452 | )            |  |   |                  |   |  |   | (6,518  | )
|Restaurant remodeling                                                                          |  |                    | (1,580 | ) |                       |   | (98    | )            |  |   |                  |   |  |   | (1,678  | )
|Other restaurant expenditures                                                                  |  |                    | (468   | ) |                       |   | (977   | )            |  |   |                  |   |  |   | (1,445  | )
|Corporate and restaurant information systems                                                   |  |                    | (356   | ) |                       |   | (121   | )            |  |   |                  |   |  |   | (477    | )
|                                                                                               |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Total capital expenditures                                                                     |  |                    | (2,470 | ) |                       |   | (7,648 | )            |  |   |                  |   |  |   | (10,118 | )
|Properties purchased for sale-leaseback                                                        |  |                    |       |   |                       |   | (1,655 | )            |  |   |                  |   |  |   | (1,655  | )
|Proceeds from sales of other properties                                                        |  |                    |       |   |                       |   | 3,443  |              |  |   | 5,970             |   |  |   | 9,413   |  
|                                                                                               |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Net cash used for investing activities                                                         |  |                    | (2,470 | ) |                       |   | (5,860 | )            |  |   | 5,970             |   |  |   | (2,360  | )
|                                                                                               |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Cash flows provided from (used for) financing activities:                                      |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Scheduled principal payments on term loans                                                     |  |                    | (550   | ) |                       |   |       |              |  |   |                  |   |  |   | (550    | )
|Principal payments on capital leases                                                           |  |                    | (38    | ) |                       |   | (65    | )            |  |   |                  |   |  |   | (103    | )
|Principal pre-payments on term loans                                                           |  |                    | (8,500 | ) |                       |   |       |              |  |   |                  |   |  |   | (8,500  | )
|Proceeds from lease financing obligations                                                      |  |                    |       |   |                       |   | 6,330  |              |  |   | (6,330            | ) |  |   |        |  
|Financing costs associated with issuance of debt and lease financing obligations               |  |                    | (4     | ) |                       |   | (360   | )            |  |   | 360               |   |  |   | (4      | )
|                                                                                               |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Net cash provided from (used for) financing activities                                         |  |                    | (9,092 | ) |                       |   | 5,905  |              |  |   | (5,970            | ) |  |   | (9,157  | )
|                                                                                               |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Decrease in cash and cash equivalents                                                          |  |                    | (4,096 | ) |                       |   | (150   | )            |  |   |                  |   |  |   | (4,246  | )
|Cash and cash equivalents, beginning of period                                                 |  |                    | 7,493  |   |                       |   | 1,838  |              |  |   |                  |   |  |   | 9,331   |  
|                                                                                               |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Cash and cash equivalents, end of period                                                       |  | $                  | 3,397  |   |                       | $ | 1,688  |              |  | $ |                  |   |  | $ | 5,085   |  
|                                                                                               |  |                    |        |   |                       |   |        |              |  |   |                   |   |  |   |         |  



16



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##### Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2005

(In thousands of dollars)

(Unaudited)



|                                                                                               |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|---------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | --------------------- | - | ------ | ------------ |  | - | ----------------- | - |  | - | ------- | -
|                                                                                               |  | ParentCompany Only |         |   | GuarantorSubsidiaries |   |        | Eliminations |  |   | ConsolidatedTotal |  
|Cash flows provided from (used for) operating activities:                                      |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Net income                                                                                     |  | $                  | 873     |   |                       | $ | 2,786  |              |  | $ | (2,786            | ) |  | $ | 873     |  
|Adjustments to reconcile net income to net cash provided from (used for) operating activities: |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Stock based compensation                                                                       |  |                    |        |   |                       |   | 75     |              |  |   |                  |   |  |   | 75      |  
|Depreciation and amortization                                                                  |  |                    | 5,152   |   |                       |   | 3,333  |              |  |   | (120              | ) |  |   | 8,365   |  
|Amortization of deferred financing costs                                                       |  |                    | 347     |   |                       |   | 62     |              |  |   | (32               | ) |  |   | 377     |  
|Amortization of unearned purchase discounts                                                    |  |                    | (539    | ) |                       |   |       |              |  |   |                  |   |  |   | (539    | )
|Amortization of deferred gains from sale-leaseback transactions                                |  |                    | (46     | ) |                       |   | (36    | )            |  |   | (38               | ) |  |   | (120    | )
|Impairment losses                                                                              |  |                    | 446     |   |                       |   |       |              |  |   |                  |   |  |   | 446     |  
|Deferred income taxes                                                                          |  |                    | 83      |   |                       |   | (476   | )            |  |   | 64                |   |  |   | (329    | )
|Accretion of interest on lease financing obligations                                           |  |                    | (18     | ) |                       |   | 112    |              |  |   | (10               | ) |  |   | 84      |  
|Decrease in accrued bonus to employees and director                                            |  |                    | (20,860 | ) |                       |   |       |              |  |   |                  |   |  |   | (20,860 | )
|Decrease in accrued payroll, related taxes and benefits                                        |  |                    | (7,977  | ) |                       |   | (2,804 | )            |  |   |                  |   |  |   | (10,781 | )
|Changes in other operating assets and liabilities                                              |  |                    | (2,825  | ) |                       |   | 1,849  |              |  |   | 2,922             |   |  |   | 1,946   |  
|                                                                                               |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Net cash provided from (used for) operating activities                                         |  |                    | (25,364 | ) |                       |   | 4,901  |              |  |   |                  |   |  |   | (20,463 | )
|                                                                                               |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Cash flows used for investing activities:                                                      |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Capital expenditures:                                                                          |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|New restaurant development                                                                     |  |                    | 14      |   |                       |   | (3,360 | )            |  |   |                  |   |  |   | (3,346  | )
|Restaurant remodeling                                                                          |  |                    | (64     | ) |                       |   | (112   | )            |  |   |                  |   |  |   | (176    | )
|Other restaurant expenditures                                                                  |  |                    | (489    | ) |                       |   | (776   | )            |  |   |                  |   |  |   | (1,265  | )
|Corporate and restaurant information systems                                                   |  |                    | (190    | ) |                       |   | (97    | )            |  |   |                  |   |  |   | (287    | )
|                                                                                               |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Total capital expenditures                                                                     |  |                    | (729    | ) |                       |   | (4,345 | )            |  |   |                  |   |  |   | (5,074  | )
|Properties purchased for sale-leaseback                                                        |  |                    | (275    | ) |                       |   |       |              |  |   |                  |   |  |   | (275    | )
|                                                                                               |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Net cash used for investing activities                                                         |  |                    | (1,004  | ) |                       |   | (4,345 | )            |  |   |                  |   |  |   | (5,349  | )
|                                                                                               |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Cash flows used for financing activities:                                                      |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Scheduled principal payments on term loans                                                     |  |                    | (550    | ) |                       |   |       |              |  |   |                  |   |  |   | (550    | )
|Principal payments on capital leases                                                           |  |                    | (36     | ) |                       |   | (66    | )            |  |   |                  |   |  |   | (102    | )
|Financing costs associated with issuance of debt                                               |  |                    | (177    | ) |                       |   |       |              |  |   |                  |   |  |   | (177    | )
|                                                                                               |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Net cash used for financing activities                                                         |  |                    | (763    | ) |                       |   | (66    | )            |  |   |                  |   |  |   | (829    | )
|                                                                                               |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                           |  |                    | (27,131 | ) |                       |   | 490    |              |  |   |                  |   |  |   | (26,641 | )
|Cash and cash equivalents, beginning of period                                                 |  |                    | 29,195  |   |                       |   | 2,271  |              |  |   |                  |   |  |   | 31,466  |  
|                                                                                               |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  
|Cash and cash equivalents, end of period                                                       |  | $                  | 2,064   |   |                       | $ | 2,761  |              |  | $ |                  |   |  | $ | 4,825   |  
|                                                                                               |  |                    |         |   |                       |   |        |              |  |   |                   |   |  |   |         |  



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##### Table of Contents

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

Introduction

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

Executive Summary - an executive review of our performance for the three months ended March 31, 2006.

Company Overview - a general description of our three restaurant concepts and the markets in which they operate.

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

Results
of Operations - an analysis of our results of operations for the three months ended March 31, 2006 and 2005, including a review of the material items and known trends and uncertainties.

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

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

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

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

Segment EBITDA, which is the measure of segment profit or loss used by our chief operating decision maker for purposes of allocating resources to our
restaurant concepts and assessing their performance, is defined as earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, other income and expense and loss on extinguishment of
debt. Segment EBITDA may not be necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation.

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

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 January 1, 2006 and January 2, 2005 will be referred to as the fiscal years ended December 31, 2005 and 2004, respectively. Similarly, all references herein to the three months ended April 2, 2006 and April 3,
2005 will be referred to as the three months ended March 31, 2006 and March 31, 2005, respectively.



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##### Table of Contents

Executive Summary

Total revenues for the first quarter of 2006 increased 7.7% to $182.5 million from $169.5 million in the first quarter of 2005 and Consolidated Adjusted EBITDA increased 8.6% to $22.2 million in the first quarter of
2006 from $20.5 million in the first quarter of 2005. Cash provided from operations was $7.3 million is the first quarter of 2006 compared to cash used for operating activities of $20.5 million in the first quarter of 2005. Revenues from our
Hispanic restaurant brands increased 10.9% to $93.8 million in the first quarter of 2006 compared to $84.6 million in the first quarter of 2005.

We have continued to expand our Hispanic restaurant brands, and at the end of the first quarter of 2006, we were operating a total of 206 restaurants under the Pollo Tropical and Taco Cabana brand names. Sales have grown from the continued
expansion of both brands, as well as continued sales increases from existing restaurants. Since the end of the first quarter of 2005, we opened six new Pollo Tropical restaurants and added ten Taco Cabana restaurants (including four acquired from a
franchisee). In the first quarter of 2006, we opened one new Taco Cabana restaurant and opened our first Pollo Tropical restaurant in the New York/New Jersey market. Comparable Hispanic brand restaurant sales have continued to increase and were up
4.5% in the first quarter of 2006 for Pollo Tropical and 2.4% for Taco Cabana compared to the first quarter of 2005.

Revenues from our
Burger King restaurants increased 4.5% to $88.7 million in the first quarter of 2006 from $84.9 million in the first quarter of 2005. Comparable Burger King restaurant sales increased 6.9% in the first quarter of 2006, such increase offset in part
by the closing of thirteen restaurants in 2005 and two restaurants in the first quarter of 2006. At the end of the first quarter of 2006, we were operating a total of 334 Burger King restaurants.

Segment EBITDA (earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, other income
and expense and loss on extinguishment of debt) for our Hispanic Brands was $15.3 million in the first quarter of 2006 compared to $14.7 million in the first quarter of 2005, an increase of 4.5%. Segment EBITDA for our Burger King restaurants
increased 18.9% in the first quarter of 2006 and was $6.9 million compared to $5.8 million in the first quarter of 2005.

Operating results
for all three brands improved based on increases in sales. Operating margins were up slightly, although they were impacted by higher utility costs, which as a percentage of revenues increased 0.6% over the first quarter of last year.

During the first quarter of 2006 we continued to reduce our outstanding senior secured borrowings. The total principal amount outstanding under our
senior credit facility decreased from $211.8 million at December 31, 2005 to $202.8 million at March 31, 2006 including a voluntary prepayment in the first quarter of 2006 of $8.5 million principal amount of our term loan borrowings.
Proceeds from sale/leaseback transactions, primarily for new units built over the past year, were $9.4 million in the first quarter of 2006.

Company
Overview

We are one of the largest restaurant companies in the United States operating three restaurant brands in the quick-casual and
quick-service restaurant segments with 540 company-owned and operated restaurants in 17 states as of March 31, 2006. We own, operate and franchise two Hispanic restaurant brands, Taco Cabana®and Pollo Tropical®(together referred to by us as our Hispanic Brands) operating primarily in Texas and Florida, respectively. We are also the largest Burger King®franchisee and have operated Burger King restaurants since 1976. We believe that the diversification of our restaurant concepts and
geographic dispersion of our restaurants provide us with balance and stability.

Hispanic Brands

Our Hispanic Brands combine the convenience of quick-service restaurants with the menu variety, use of fresh ingredients, upscale decor and food quality
of casual dining. As of March 31, 2006, our Hispanic Brands were comprised of 206 company-owned and 29 franchised restaurants and accounted for 51.4% of our total revenues and 69.0% of our total Consolidated Adjusted EBITDA for the first three
months of 2006.

Taco Cabana.Taco Cabana restaurants combine fresh, high-quality Tex-Mex and traditional Mexican style food in a
festive setting with the convenience and value of quick-service restaurants. Menu items include sizzling fajitas, quesadillas, enchiladas, other Tex-Mex dishes, fresh-made flour tortillas, frozen margaritas and beer. Most menu items are made fresh
daily in each of our Taco Cabana restaurants. Taco Cabana pioneered the Mexican patio café concept with its first restaurant in San Antonio, Texas in 1978. As of March 31, 2006, we owned and operated 136 Taco Cabana restaurants located
in Texas,



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Oklahoma and New Mexico and franchised two Taco Cabana restaurants in New Mexico and one in Georgia. For the three months ended March 31, 2006, our
company-owned Taco Cabana restaurants generated total revenues of $55.2 million and segment EBITDA of $7.7 million.

Pollo Tropical.Pollo Tropical restaurants combine high quality distinctive menu items and an inviting tropical setting with the convenience and value of quick-service restaurants. Our Pollo Tropical restaurants feature fresh grilled chicken marinated in a
proprietary blend of tropical fruit juices and spices and authentic made from scratch side dishes. Most menu items are made fresh daily in each of our Pollo Tropical restaurants. Pollo Tropical opened its first company-owned restaurant
in 1988 in Miami. As of March 31, 2006, we owned and operated a total of 70 Pollo Tropical restaurants, with 59 located in south Florida, ten located in central Florida and one in the New York metropolitan area located in northern New Jersey.
We also franchised 26 Pollo Tropical restaurants as of March 31, 2006, 22 of which were located in Puerto Rico, two in Ecuador and two in Florida. Since our acquisition of Pollo Tropical, we have expanded the brand by over 90% by opening 34 new
restaurants. For the three months ended March 31, 2006, our company-owned Pollo Tropical restaurants generated total revenues of $38.3 million and segment EBITDA of $7.6 million.

Burger King.Burger King is one of the largest hamburger restaurant chains in the world and we are the largest Burger King franchisee. Burger King
restaurants feature the popular flame-broiled WHOPPER®sandwich as well as hamburgers and
other sandwiches, fries, salads, breakfast items and other offerings typically found in quick-service hamburger restaurants. As of March 31, 2006, we operated 334 Burger King restaurants located in 13 Northeastern, Midwestern and Southeastern
states. For the three months ended March 31, 2006, our Burger King restaurants generated total revenues of $88.7 million and segment EBITDA of $6.9 million.

Liquidity and Capital Resources

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



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



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



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

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 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 (which represent a major investment of cash for us), planned development and debt service requirements for the next twelve months.

Operating activities. Net cash provided from operating activities for the three months ended March 31, 2006 was $7.3 million. Net cash used
for operating activities for the three months ended March 31, 2005 was $20.5 million. At December 31, 2004 we had $31.5 million in cash due to (i) the timing of redemption of the senior subordinated notes associated with the December
2004 refinancing; (ii) the payment in the first quarter of 2005 of a $20.3 million bonus to employees (including management) and a director, including applicable payroll taxes of $0.6 million; and (iii) the payment of $5.5 million of tax
withholdings in the first quarter of 2005 related to the dividend payment in late December of 2004. These payments reduced net cash provided from operating activities in the aggregate $26.4 million in the first three months of 2005.

Our income tax payments included in operating activities have been historically reduced due to the utilization of net operating loss carryforwards. For
tax years beginning in 2006 we have available Federal alternative minimum tax credit carryforwards of $2.9 million with no expiration date and Federal employment tax credit carryforwards of $2.5 million that begin to expire in 2021.

Investing activities including capital expenditures and sale-leaseback transactions. Net cash used for investing activities in the three months
ended March 31, 2006 and 2005 was $2.4 million and $5.3 million, respectively. Capital expenditures were $10.1 million and $5.1 million in the three months ended March 31, 2006 and 2005, respectively, and



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included expenditures for development of new Taco Cabana and Pollo Tropical restaurants of $6.5 million and $3.3 million, respectively. In the first quarter
of 2006, we sold five restaurant properties in sale-leaseback transactions for net proceeds of $9.4 million. The net proceeds from these sales were used to reduce outstanding borrowings under on our senior credit facility. We also had expenditures
related to the purchase of restaurant properties to be sold in sale-leaseback transactions of $1.7 million and $0.3 million in the three months ended March 31, 2006 and 2005, respectively.

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, including expenditures associated with franchise renewals with respect to our Burger King restaurants. Capital expenditures for new restaurant development include the purchase of
related real estate. The following table sets forth our capital expenditures for the periods presented (in thousands):



|                                        |  |            |       |               |   |            |  |   |       |   |              |   |     |  |   |       
|--------------------------------------- |  | ---------- | ----- | ------------- | - | ---------- |  | - | ----- | - | ------------ | - | --- |  | - | ------
|                                        |  | TacoCabana |       | PolloTropical |   | BurgerKing |  |   | Other |   | Consolidated
|Three months ended March 31, 2006:      |  |            |       |               |   |            |  |   |       |   |              |   |     |  |   |       
|Restaurant maintenance expenditures (1) |  | $          | 623   |               | $ | 354        |  | $ | 468   |   |              | $ |    |  | $ | 1,445 
|Restaurant remodeling expenditures      |  |            | 42    |               |   | 56         |  |   | 1,580 |   |              |   |    |  |   | 1,678 
|New restaurant development expenditures |  |            | 2,579 |               |   | 3,873      |  |   | 66    |   |              |   |    |  |   | 6,518 
|Other capital expenditures              |  |            |      |               |   |           |  |   |      |   |              |   | 477 |  |   | 477   
|                                        |  |            |       |               |   |            |  |   |       |   |              |   |     |  |   |       
|Total capital expenditures              |  | $          | 3,244 |               | $ | 4,283      |  | $ | 2,114 |   |              | $ | 477 |  | $ | 10,118
|                                        |  |            |       |               |   |            |  |   |       |   |              |   |     |  |   |       
|Number of new restaurant openings       |  |            | 1     |               |   | 1          |  |   | 0     |   |              |   |     |  |   | 2     
|                                        |  |            |       |               |  
|Three Months Ended March 31, 2005:      |  |            |       |               |   |            |  |   |       |   |              |   |     |  |   |       
|Restaurant maintenance expenditures (1) |  | $          | 416   |               | $ | 360        |  | $ | 489   |   |              | $ |    |  | $ | 1,265 
|Restaurant remodeling expenditures      |  |            |      |               |   | 112        |  |   | 64    |   |              |   |    |  |   | 176   
|New restaurant development expenditures |  |            | 1,207 |               |   | 2,153      |  |   | (14   | ) |              |   |    |  |   | 3,346 
|Other capital expenditures              |  |            |      |               |   |           |  |   |      |   |              |   | 287 |  |   | 287   
|                                        |  |            |       |               |   |            |  |   |       |   |              |   |     |  |   |       
|Total capital expenditures              |  | $          | 1,623 |               | $ | 2,625      |  | $ | 539   |   |              | $ | 287 |  | $ | 5,074 
|                                        |  |            |       |               |   |            |  |   |       |   |              |   |     |  |   |       
|Number of new restaurant openings       |  |            | 1     |               |   | 1          |  |   | 0     |   |              |   |     |  |   | 2     

---

|1) | Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the three months ended
March 31, 2006 and 2005, restaurant repair and maintenance expenses were approximately $4.1 million and $4.5 million, respectively.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In 2006, we anticipate that total capital expenditures will be approximately $37 million to $44 million. These capital expenditures are expected to include approximately $20 million to $25 million for the development
of new restaurants and purchase of related real estate applicable to our Taco Cabana and Pollo Tropical restaurant concepts. In 2006 we anticipate opening approximately six to eight new Pollo Tropical restaurants and eight to ten new Taco Cabana
restaurants. Capital expenditures in 2006 also are expected to include expenditures of approximately $15 million to $17 million, for the ongoing reinvestment in our three restaurant concepts for remodeling costs and capital maintenance expenditures,
and approximately $2.0 million in other capital expenditures.

Financing activities. Net cash used for financing activities for the
three months ended March 31, 2006 and 2005 was $9.2 million and $0.8 million, respectively. Financing activities in these periods consisted of repayments under our debt arrangements and, in the first quarter of 2006, voluntary principal
repayments on borrowings under our senior credit facility of $8.5 million.

Indebtedness. On December 15, 2004, we completed
the private placement of $180.0 million of our 9% Senior Subordinated Notes due 2013, which we refer to as the notes. We received $400.0 million in total proceeds that included the issuance of the notes and term loan B borrowings of
$220.0 million under our senior credit facility. At March 31, 2006, we had total debt outstanding of $495.5 million comprised of $180.0 million of unsecured senior subordinated notes, borrowings under our term loan B facility of $202.8 million
under the senior credit facility, lease financing obligations of $111.0 million and capital lease obligations of $1.8 million.

Our senior
credit facility provides for a revolving credit facility under which we may borrow up to $50.0 million (including a sub limit of up to $20.0 million for letters of credit and up to $5.0 million for swingline loans), a $220.0 million term loan B
facility and incremental facilities (as defined in the new senior credit facility), at our option, of up to $100.0



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##### Table of Contents

million, subject to the satisfaction of certain conditions. At March 31, 2006, $202.8 million was outstanding under the term loan B facility and no
amounts were outstanding under our revolving credit facility. After reserving $15.2 million for outstanding letters of credit guaranteed by the facility, $34.8 million was available for borrowings under our revolving credit facility at
March 31, 2006. We were in compliance with the covenants under our senior credit facility as of March 31, 2006.

Contractual
Obligations. Our contractual obligations are detailed in our 2005 Annual Report on Form 10-K. As of March 31, 2006 , our contractual obligations have not materially changed since December 31, 2005.

Results of Operations

Three Months Ended March 31, 2006
Compared to Three Months Ended March 31, 2005.

Since March 31, 2005, we have opened six new Pollo Tropical restaurants,
six new Taco Cabana restaurants, one new Burger King restaurant and acquired four Taco Cabana restaurants from an existing franchisee. During the same period we closed fourteen Burger King restaurants and one Taco Cabana restaurant.

The following table sets forth, for the three months ended March 31, 2006 and 2005, selected operating results as a percentage of restaurant sales:



|                                                                                |  |       |   |  |       |  
|------------------------------------------------------------------------------- |  | ----- | - |  | ----- | -
|                                                                                |  | 2006  |   |  | 2005  |  
|Restaurant sales:                                                               |  |       |   |  |       |  
|Taco Cabana                                                                     |  | 30.3  | % |  | 29.6  | %
|Pollo Tropical                                                                  |  | 21.0  | % |  | 20.2  | %
|Burger King                                                                     |  | 48.7  | % |  | 50.2  | %
|                                                                                |  |       |   |  |       |  
|                                                                                |  | 100.0 | % |  | 100.0 | %
|                                                                                |  |      
|Costs and expenses:                                                             |  |       |   |  |       |  
|Cost of sales                                                                   |  | 28.5  | % |  | 28.9  | %
|Restaurant wages and related expenses                                           |  | 29.5  | % |  | 29.6  | %
|Restaurant rent expense                                                         |  | 5.0   | % |  | 5.3   | %
|Other restaurant operating expenses                                             |  | 14.5  | % |  | 14.3  | %
|Advertising expense                                                             |  | 3.8   | % |  | 3.9   | %
|General and administrative (including stock-based compensation expense in 2005) |  | 6.7   | % |  | 6.2   | %
|Income from restaurant operations                                               |  | 7.3   | % |  | 6.6   | %

Restaurant Sales. Total restaurant sales for the first quarter of 2006 increased $13.1
million, or 7.7%, to $182.2 million from $169.1 million in the first quarter of 2005 due to sales increases at each of our restaurant brands. Total sales for our Hispanic brands increased $9.2 million, or 11.0%, to $93.5 million in the first quarter
of 2006.

The changes in comparable restaurant sales noted below are calculated using only those restaurants open since the beginning of
the earliest period being compared (12 months for our Burger King restaurants and 18 months for our Pollo Tropical and Taco Cabana restaurants).

Taco Cabana restaurant sales increased $5.1 million, or 10.2%, to $55.2 million in the first quarter of 2006 due primarily to the addition of six new restaurants since the end of the first quarter of 2005 and the acquisition of four Taco
Cabana restaurants from a franchisee in July 2005. These ten additional restaurants contributed $4.0 million of sales in the first quarter of 2006. In addition, sales at our comparable Taco Cabana restaurants increased 2.4% in the first quarter of
2006.

Pollo Tropical restaurant sales increased $4.1 million, or 12.1%, to $38.3 million in the first quarter of 2006 due to the opening
of six new Pollo Tropical restaurants since the end of the first quarter of 2005, which contributed $2.7 million in sales, and a 4.5% sales increase at our comparable Pollo Tropical restaurants in the first quarter of 2006 which included menu price
increases of approximately 4% near the end of the second quarter of 2005.



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##### Table of Contents

Burger King restaurant sales increased $3.8 million, or 4.5%, to $88.7 million in the first quarter of
2006 due to a 6.9% sales increase at our comparable Burger King restaurants in the first quarter of 2006 which included menu price increase of approximately 4% at the beginning of 2006 and an increase in customer traffic compared to the first
quarter of 2005. These factors were offset in part from the net reduction of thirteen Burger King restaurants since the end of the first quarter of 2005.

Operating Costs and Expenses. Cost of sales (food and paper costs), as a percentage of total restaurant sales, decreased to 28.5% in the first quarter of 2006 from 28.9% in the first quarter of 2005. Taco
Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, were 29.0% in both the first quarter of 2006 and 2005. Higher vendor rebates (0.3% of Taco Cabana sales) were substantially offset by higher produce commodity costs. Pollo
Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, decreased to 32.9% in the first quarter of 2006 from 33.3% in the first quarter of 2005 due primarily to lower whole chicken commodity prices (0.9% of Pollo Tropical sales)
and the effect of 2005 menu price increases, partially offset by higher produce commodity costs. Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased to 26.3% in the first quarter of 2006 from 27.0% in the first
quarter of 2005 due primarily to the effect of menu price increases since the end of the first quarter of 2005 (1.3% of Burger King sales) partially offset by higher produce commodity costs (0.3% of Burger King sales) and increased promotional
discounting in 2006 (0.2% of Burger King sales).

Restaurant wages and related expenses, as a percentage of total restaurant sales,
decreased slightly to 29.5% in the first quarter of 2006 from 29.6% in the first quarter of 2005. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, increased to 28.5% in the first quarter of 2006
from 28.2% in the first quarter of 2005 due primarily to higher medical insurance costs (0.2% of Taco Cabana sales). Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, increased to 24.9% in the
first quarter of 2006 from 23.2% in the first quarter of 2005 due to increases in restaurant hourly labor rates (1.1% of Pollo Tropical sales) and higher medical insurance costs (0.7% of Pollo Tropical sales). Burger King restaurant wages and
related expenses, as a percentage of Burger King restaurant sales, decreased to 32.1% in the first quarter of 2006 from 33.0% in the first quarter of 2005 due to the effect of higher comparable restaurant sales volumes on fixed labor costs.

Restaurant rent expense, as a percentage of total restaurant sales, decreased to 5.0% in the first quarter of 2006 from 5.3% in the first
quarter of 2005 due primarily to the effect of higher comparable restaurant sales volumes at all three of our brands in the first quarter of 2006 on fixed labor costs and, to a lesser extent, reductions in contingent rentals related to our Taco
Cabana restaurants (0.1% of total restaurant sales).

Other restaurant operating expenses, as a percentage of total restaurant sales,
increased to 14.5% in the first quarter of 2006 from 14.3% in the first quarter of 2005. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, increased to slightly to 14.3% in the first quarter of 2006
from 14.2% in the first quarter of 2005 as increased utility costs from higher natural gas and electricity prices (1.0% of Taco Cabana sales), was substantially offset by lower repair and maintenance expenses due to the initiatives to enhance the
appearance of our Taco Cabana restaurants in the first quarter of 2005 (0.8% of Taco Cabana sales). Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 12.6% in the first quarter of
2006 from 11.0% in the first quarter of 2005 due to increased utility costs from higher natural gas and electricity prices (0.8% of Pollo Tropical sales), higher repair and maintenance expenses from non-structural hurricane damage in 2005 (0.3% of
Pollo Tropical sales) and higher fees due to increased levels of credit card sales. Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales decreased to 15.5% in the first quarter of 2006 from 15.7% in the
first quarter of 2005 due to the effect of higher sales volumes on fixed operating costs and lower repair and maintenance expenses (0.6% of Burger King sales), partially offset by increased utility costs from higher natural gas rates (0.2% of Burger
King sales) and higher fees associated with the acceptance of credit cards (0.2% of Burger King sales).

Advertising expense, as a
percentage of total restaurant sales, decreased slightly to 3.8% in the first quarter of 2006 from 3.9% in the first quarter of 2005. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, increased to 4.6% in the first
quarter of 2006 from 4.1% in the first quarter of 2005 due primarily to the timing of promotions. Our Taco Cabana advertising expenditures for all of 2006 are anticipated to be comparable to 2005 as a percentage of Taco Cabana sales. Pollo Tropical
advertising expense, as a percentage of Pollo Tropical restaurant sales, decreased to 1.8% in the first quarter of 2006 from 3.3% in the first quarter of 2005 due to television and radio expenditures in 2005. Our Pollo Tropical advertising
expenditures for all of 2006 are anticipated to be approximately 1.3% to 1.7% of Pollo Tropical restaurant sales. Burger King advertising expense, as a percentage of Burger King restaurant sales, increased slightly to 4.1% in the first quarter of
2006 from 4.0% in the first quarter of 2005 due to increased promotional activities in certain of our Burger King markets.



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General and administrative expenses, which included stock-based compensation expense of $0.1 million in
the first quarter of 2005, as a percentage of total restaurant sales, increased to 6.7% in the first quarter of 2006 from 6.2% in the first quarter of 2005. General and administrative expenses increased $1.7 million in the first quarter of 2006
compared to the first quarter of 2005 due primarily to increased legal and professional fees, including audit fees, of $ 0.5 million and higher administrative salaries, including related payroll taxes and benefits, of $ 0.8 million.

Segment EBITDA. Segment EBITDA, which is the measure of segment profit or loss used by our chief operating decision maker for purposes of
allocating resources to our restaurant concepts and assessing their performance, is defined as earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation expense, other income and expense and
loss on extinguishment of debt. Segment EBITDA for our Taco Cabana restaurants increased 5.1% to $7.7 million in the first quarter of 2006 from $7.3 million in the first quarter of 2005. Segment EBITDA for our Pollo Tropical restaurants increased
3.9% to $7.6 million in the first quarter of 2006 from $7.4 million in the first quarter of 2005. Segment EBITDA for our Burger King restaurants increased 18.9% to $6.9 million in the first quarter of 2006 from $5.8 million in the first quarter of
2005.

Depreciation and Amortization and Impairment Losses. Depreciation and amortization expense decreased slightly to $8.3 million
in the first quarter of 2006 from $8.4 million in the first quarter of 2005. Impairment losses were $0.2 million and $0.4 million in the first quarter of 2006 and 2005, respectively, and related in both quarters to property and equipment of certain
underperforming Burger King restaurants and planned future closures of Burger King restaurants.

Interest Expense. Interest expense
increased $1.1 million to $11.4 million in the first quarter of 2006 from $10.3 million in the first quarter of 2005 due primarily to higher effective interest rates on our floating rate borrowings under our senior credit facility. The weighted
average interest rate on our long-term debt, excluding lease financing obligations, for the three months ended March 31, 2006 increased to 8.1% from 6.8% in the first quarter of 2005. Interest expense on lease financing obligations was $2.8
million in both the first quarter of 2006 and 2005.

Provision for Income Taxes. The provision for income taxes in the first quarter
of 2006 was derived using an estimated effective annual income tax rate for 2006 of 33.2%. The provision for income taxes in the first quarter of 2005 is based on an effective annual income tax rate for 2005 of 33%.

Net Income.As a result of the foregoing, net income was $1.5 million in the first quarter of 2006 compared to $0.9 million in the first quarter
of 2005.

Reconciliation of Non-GAAP Financial Measures

A reconciliation of Consolidated Adjusted EBITDA to net cash provided from operating activities is presented below:



|                                                                                                                 |  |                        |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                 |  | Period Ended March 31, |        
|(Dollars in thousands)                                                                                           |  | 2006                   |         |   | 2005 |  
|Consolidated Adjusted EBITDA, as defined                                                                         |  | $                      | 22,216  |   |      | $ | 20,464  |  
|Adjustments to reconcile Consolidated Adjusted EBITDA to net cash provided from (used for) operating activities: |  |                        |         |   |      |   |         |  
|Gain on sale of assets                                                                                           |  |                        | (35     | ) |      |   |        |  
|Interest expense                                                                                                 |  |                        | (11,389 | ) |      |   | (10,273 | )
|Amortization of deferred financing costs                                                                         |  |                        | 385     |   |      |   | 377     |  
|Amortization of unearned purchase discounts                                                                      |  |                        | (540    | ) |      |   | (539    | )
|Amortization of deferred gains from sale-leaseback transactions                                                  |  |                        | (147    | ) |      |   | (120    | )
|Accretion of interest on lease financing obligations                                                             |  |                        | 78      |   |      |   | 84      |  
|Provision for income taxes                                                                                       |  |                        | (759    | ) |      |   | (432    | )
|Deferred income taxes                                                                                            |  |                        | (336    | ) |      |   | (329    | )
|Decrease in accrued bonus to employees and director                                                              |  |                        |        |   |      |   | (20,860 | )
|Decrease in accrued payroll, related taxes and benefits                                                          |  |                        | (997    | ) |      |   | (10,781 | )
|Change in operating assets and liabilities                                                                       |  |                        | (1,205  | ) |      |   | 1,946   |  
|                                                                                                                 |  |                        |         |   |      |   |         |  
|Net cash provided from (used for) operating activities                                                           |  | $                      | 7,271   |   |      | $ | (20,463 | )
|                                                                                                                 |  |                        |         |   |      |   |         |  



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Off-Balance Arrangements

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

Application of Critical Accounting Policies

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

Sales recognition at 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, critical accounting estimates and judgments, as noted below, are inherent in the assessment and recording of accrued occupancy costs, insurance liabilities, legal obligations, income taxes, the valuation of goodwill and
intangible assets for impairment and assessing impairment of long-lived assets. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that
materially different amounts would be reported using different assumptions.

Accrued occupancy costs. We make estimates of accrued
occupancy costs pertaining to closed restaurant locations on an ongoing basis. These estimates require assessment and continuous evaluation of a number of factors such as the remaining contractual period under our lease obligations, the amount of
sublease income we are able to realize on a particular property and estimates of other costs such as property taxes. Differences between actual future events and prior estimates could result in adjustments to these accrued costs. At March 31,
2006 we had three non-operating restaurant properties.

Insurance liabilities. We are self-insured for most workers
compensation, general liability and medical insurance claims. At March 31, 2006, we had $8.4 million accrued for these insurance claims. We record insurance liabilities based on historical and industry trends, which are continually monitored,
and adjust accruals as warranted by changing circumstances. Since there are many estimates and assumptions involved in recording these insurance liabilities, including the ability to estimate the future development of incurred claims based on
historical trends, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities.

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

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

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



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

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

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

We also must evaluate under SFAS No. 98, Accounting for
Leases, (SFAS 98) sales of our restaurants which occur in sale-leaseback transactions to determine the proper accounting for the proceeds of such sales either as a sale or a financing. This evaluation requires certain
judgments in determining whether or not clauses in the lease or any related agreements constitute continuing involvement under SFAS 98. These judgments must also consider the various interpretations of SFAS 98 since its issuance in 1989. For those
sale-leasebacks that are accounted for as financing transactions, we must estimate our incremental borrowing rate, or another rate in cases where the incremental borrowing rate is not appropriate to utilize, for purposes of determining
interest expense and the resulting amortization of the lease financing obligation. Changes in the determination of the incremental borrowing rates or other rates utilized in connection with the accounting for lease financing transactions could have
a significant effect on the interest expense and underlying balance of the lease financing obligations.

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

Effects of New Accounting Standards

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



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

In October 2005, the FASB issued Staff Position FAS 13-1, Accounting for Rental Costs Incurred during a Construction
Period, which requires rental costs associated with ground or building operating leases that are incurred during a construction period to be recognized as rental expense. This Staff Position is effective for reporting periods beginning after
December 15, 2005, and retrospective application is permitted but not required. We have not historically capitalized rent incurred during the construction period. Accordingly, Staff Position FAS 13-1did not have any impact on our consolidated
financial statements.

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

Forward Looking Statements

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



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



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



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



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



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



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



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



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



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



| |  |  | The outcome of pending or yet-to-be instituted legal proceedings;
| | - |  | -----------------------------------------------------------------



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



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



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



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



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



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



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



| |  |  | Factors that affect the restaurant industry generally, including recalls if products become adulterated or misbranded, liability if product consumption causes injury, ingredient
disclosure and labeling laws and regulations 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | and other risks and uncertainties that are discussed herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------

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 or state minimum hourly wage rates, and accordingly,
changes in those rates directly affect our cost of labor. 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. However, no
assurance can be given that we will be able to offset such inflationary cost increases in the future.

ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

ITEM 4CONTROLS AND PROCEDURES

Restatement. As discussed in Note 2 to
Amendment No. 1 to our 2004 Annual Report on Form 10-K/A, we restated our consolidated financial statements for the 2004, 2003 and 2002 fiscal years. Refer to Note 2 to the consolidated financial statements included in the 2004 Annual Report on Form
10-K/A for a complete discussion of the restatement.

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



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We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, with the participation of the Chief Executive Officer and Chief Financial Officer, as well as other key members of our management. In the evaluation,
we considered the restatement of our financial statements as discussed in the 2004 Annual Report on Form 10-K/A. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were ineffective as of April 2, 2006.

Material Weaknesses inInternal Control Over Financial
ReportingA material weakness is a control deficiency (within the meaning of PCAOB Auditing Standard No. 2), or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected. Management identified the following material weaknesses in its internal control over financial reporting as of April 2, 2006:

Personnel

In conjunction with filing the 2004 Annual Report on Form 10-K/A, which included the restatements discussed in Note 2 to the consolidated financial statements of that filing, management concluded that the Company did not have sufficient
personnel with the appropriate knowledge and expertise to identify and resolve certain complex accounting and tax matters. In addition, the Company did not perform the appropriate level of review commensurate with the Companys financial
reporting requirements to ensure the consistent execution of its responsibility in the areas of monitoring of controls, the application of U.S. generally accepted accounting policies and disclosures to support its accounting, tax and reporting
functions. This material weakness contributed to certain of the material weaknesses discussed below.

Controls over Applying the Lease
Financing Method and SFAS No. 98

(a) Controls over the application of the financing method required under SFAS No. 98, with respect to
the depreciation of assets subject to lease financing obligations and the selection of the appropriate interest rate to apply to such financing obligations, were ineffective resulting in the failure to identify misstatements in property and
equipment, lease financing obligations, deferred income-sale/leaseback transactions, depreciation expense, interest expense and rent expense.

(b) Controls to identify leases that contained provisions which constitute forms of continuing involvement requiring real estate transactions to be accounted for as financing transactions rather than as sale/leaseback transactions were
ineffective. This resulted in the Companys failure to identify misstatements in property and equipment, lease financing obligations, deferred income-sale/leaseback transactions, depreciation expense, interest expense and rent expense.

Controls Related to Acquired Intangibles and Deferred Taxes in Conjunction with Acquisitions

Controls related to the preparation, periodic analysis and recording of deferred taxes resulting from differences in financial reporting and tax bases of
acquired assets and liabilities were not effective resulting in misstatements of deferred income tax assets and liabilities, goodwill and goodwill amortization expense as well as the related footnotes.



29



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##### Table of Contents

Controls Over Certain Financial Statement Disclosures

Controls over the preparation of the statements of cash flows were not effective resulting in (i) the improper classification of the proceeds from
qualifying sale leaseback transactions as financing cash flows versus investing cash flows and (ii) the improper recording of the amount of capital expenditures and changes in accounts payable which did not exclude non-cash expenditures. These
weaknesses resulted in the misstatements of the amount of net cash provided from (used for) operating activities, investing activities, financing activities and the amount of cash capital expenditures and in the changes in accounts payable.

The control deficiencies described above resulted in the restatement of the Companys consolidated financial statements as referred
to above. Additionally, each of these control deficiencies could result in the material misstatement of the aforementioned accounts that would result in material misstatements to annual or interim financial statements that would not be prevented or
detected. Accordingly, management has determined at April 2, 2006 that each of these control deficiencies constituted material weaknesses.

Changes in Internal Control over Financial Reporting.No change occurred in our internal control over financial reporting during the first quarter of 2006 that materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.

Remediation of Material Weaknesses.

We plan to take the following steps to remediate the material weaknesses at April 2, 2006 identified as a result of our evaluation:



| | (a) | establish procedures to properly depreciate assets subject to lease financing obligations and select the appropriate interest rate to apply under financing method required by SFAS
No. 98;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | implement a more formalized review process including the involvement of both legal and accounting personnel to identify forms of continuing involvement in sale/leaseback
transactions;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | further formalize, document and enhance the procedures and analysis around the reconciliation of deferred tax balances to the underlying financial reporting and tax bases; and
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | Through the date of the filing of this Form 10-Q, we have hired two senior-level finance professionals to augment the Companys controls and procedures pertaining to financial
reporting and plan to hire additional accounting personnel with the appropriate expertise to improve our internal controls.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART IIOTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

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

We are a party to various other litigation matters
incidental to the conduct of our business. We do not believe that the outcome of any of these matters will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.



|Item 1A. | Risk Factors
|-------- | ------------

There have been no material changes
to the risk factors previously disclosed in the Companys Annual Report on Form 10-K for the year ended January 1, 2006.



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

None



|Item 3. | Default Upon Senior Securities
|------- | ------------------------------

None



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

None



|Item 5. | Other Information
|------- | -----------------

None

Item 6. Exhibits

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



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



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SIGNATURES

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



|                    |  |  |  |                                                       
|------------------- |  |  |  | ------------------------------------------------------
|                    |  |  |  | CARROLS CORPORATION                                   
|                    |  | 
|Date: June 30, 2006 |  |  |  | /S/    ALAN
VITULI                                    
|                    |  |  |  | (Signature)                                           
|                    |  |  |  | Alan Vituli                                           
|                    |  |  |  | Chairman of the Board and                             
|                    |  |  |  | Chief Executive Officer                               
|                    |  | 
|Date: June 30, 2006 |  |  |  | /S/    PAUL R.
FLANDERS                               
|                    |  |  |  | (Signature)                                           
|                    |  |  |  | Paul R. Flanders                                      
|                    |  |  |  | Vice President  Chief Financial Officer and Treasurer



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