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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-Q/A

(Amendment No.1)



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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 3, 2005

OR



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

Commission File Number: 0-25629



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CARROLS CORPORATION

(Exact name of
registrant as specified in its charter)



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

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



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

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 outstanding as of July 20, 2005 is 10.



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EXPLANATORY NOTE

This Quarterly Report on Form 10-Q/A (Form 10-Q/A) is being filed as Amendment No. 1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2005, which was originally filed
with the Securities and Exchange Commission (SEC) on July 29, 2005. We are filing this Form 10-Q/A to restate our consolidated financial statements for the three months ended April 3, 2005 and March 30, 2004 to:
(1) correct our accounting for the depreciation of assets and recording of interest expense associated with sale/leaseback transactions accounted for under the financing method; (2) record twelve real estate transactions as financing
transactions as required under Statement of Financial Accounting Standards (SFAS) No. 98 rather than as sale-leaseback transactions as previously reported; (3) correct deferred taxes associated with certain previously acquired
long-lived assets and liabilities; (4) record proceeds from qualifying sale-leaseback transactions as an investing activity in the statements of cash flows rather than as a financing activity as previously reported; and (5) include in the
statements of cash flows only cash capital expenditures.

Refer to Note 3 to the consolidated financial statements in this Form 10-Q/A for
additional information on these current restatements.

This Form 10-Q/A amends and restates only certain information in the following
sections as a result of the current restatements described above:

Part I  Item 1  Financial Statements

Part I  Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations

Part I  Item 4  Controls and Procedures

In addition, we are also including currently dated Sarbanes Oxley Act Section 302 and Section 906 certifications of the Chief Executive Officer and Chief Financial Officer that are attached to this Form
10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2.

For the convenience of the reader, this Amendment No. 1 on Form 10-Q/A sets forth the
entire Form 10-Q for the quarterly period ended April 3, 2005. However, this Form 10-Q/A only amends and restates the Items described above to reflect the effects of the restatement and no attempt has been made to modify or update other
disclosures presented in our Form 10-Q for the quarterly period ended April 3, 2005. Accordingly, except for the foregoing amended information, this Form 10-Q/A continues to speak as of July 29, 2005 (the original filing date of our Form
10-Q for the quarterly period ended April 3, 2005) and does not reflect events occurring after the filing of our Form 10-Q for the quarterly period ended April 3, 2005 and does not modify or update those disclosures affected by subsequent
events. Forward looking statements made in the Form 10-Q for the quarterly period ended April 3, 2005 have not been revised to reflect events, results or developments that have become known to us after the date of the original filing (other
than the current restatements described above), and such forward looking statements should be read in their historical context. Unless otherwise stated, the information in this Form 10-Q/A not affected by such restatements is unchanged and reflects
the disclosures made at the time of the original filing.



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CARROLS CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED MARCH 31, 2005



|        |  |                                                                                                                  |  |     
|------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                  |  | Page
|PART I  |  | FINANCIAL INFORMATION                                                                                            |  |     
|        |  |                                                                                                                 
|Item 1  |  | Consolidated Financial Statements (Unaudited):                                                                   |  |     
|        |  |                                                                                                                 
|        |  | Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004                                           |  | 4   
|        |  |                                                                                                                 
|        |  | Consolidated Statements of Operations for the three months ended March 31, 2005 and March 31, 2004 (as restated) |  | 5   
|        |  |                                                                                                                 
|        |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and March 31, 2004 (as restated) |  | 6   
|        |  |                                                                                                                 
|        |  | Notes to Consolidated Financial Statements                                                                       |  | 7   
|        |  |                                                                                                                 
|Item 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 25  
|        |  |                                                                                                                 
|Item 3  |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |  | 38  
|        |  |                                                                                                                 
|Item 4  |  | Controls and Procedures                                                                                          |  | 39  
|        |  |                                                                                                                 
|PART II |  | OTHER INFORMATION                                                                                                |  |     
|        |  |                                                                                                                 
|Item 1  |  | Legal Proceedings                                                                                                |  | 42  
|        |  |                                                                                                                 
|Item 6  |  | Exhibits                                                                                                         |  | 42  



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PART IFINANCIAL INFORMATION

ITEM 1FINANCIAL STATEMENTS

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)



|                                                                                               |  |                               |          |   |                  |   |          |  
|---------------------------------------------------------------------------------------------- |  | ----------------------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                               |  | Restated(Note 3)March 31,2005 |          |   | December 31,2004 |  
|ASSETS                                                                                         |  |                               |          |   |                  |   |          |  
|Current assets:                                                                                |  |                               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                      |  | $                             | 4,825    |   |                  | $ | 31,466   |  
|Trade and other receivables, net of reserves of $81 at each date                               |  |                               | 3,093    |   |                  |   | 2,578    |  
|Inventories                                                                                    |  |                               | 4,563    |   |                  |   | 4,831    |  
|Prepaid rent                                                                                   |  |                               | 3,575    |   |                  |   | 3,589    |  
|Prepaid expenses and other current assets                                                      |  |                               | 5,314    |   |                  |   | 4,358    |  
|Refundable income taxes                                                                        |  |                               | 1,462    |   |                  |   | 3,326    |  
|Deferred income taxes                                                                          |  |                               | 6,242    |   |                  |   | 6,242    |  
|                                                                                               |  |                               |          |   |                  |   |          |  
|Total current assets                                                                           |  |                               | 29,074   |   |                  |   | 56,390   |  
|                                                                                               |  |                               |          |   |                  |   |          |  
|Property and equipment, net                                                                    |  |                               | 210,249  |   |                  |   | 213,489  |  
|Franchise rights, net                                                                          |  |                               | 89,252   |   |                  |   | 90,056   |  
|Goodwill                                                                                       |  |                               | 122,241  |   |                  |   | 122,241  |  
|Franchise agreements, at cost less accumulated amortization of $5,043 and $4,954, respectively |  |                               | 6,310    |   |                  |   | 6,480    |  
|Deferred income taxes                                                                          |  |                               | 13,270   |   |                  |   | 12,940   |  
|Other assets                                                                                   |  |                               | 15,200   |   |                  |   | 14,650   |  
|                                                                                               |  |                               |          |   |                  |   |          |  
|Total assets                                                                                   |  | $                             | 485,596  |   |                  | $ | 516,246  |  
|                                                                                               |  |                               |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                          |  |                               |          |   |                  |   |          |  
|Current liabilities:                                                                           |  |                               |          |   |                  |   |          |  
|Current portion of long-term debt                                                              |  | $                             | 2,604    |   |                  | $ | 2,611    |  
|Accounts payable                                                                               |  |                               | 17,021   |   |                  |   | 17,581   |  
|Accrued interest                                                                               |  |                               | 4,946    |   |                  |   | 956      |  
|Accrued payroll, related taxes and benefits                                                    |  |                               | 14,234   |   |                  |   | 24,940   |  
|Accrued bonus to employees and director                                                        |  |                               |         |   |                  |   | 20,860   |  
|Other liabilities                                                                              |  |                               | 11,910   |   |                  |   | 13,957   |  
|                                                                                               |  |                               |          |   |                  |   |          |  
|Total current liabilities                                                                      |  |                               | 50,715   |   |                  |   | 80,905   |  
|                                                                                               |  |                              
|Long-term debt, net of current portion                                                         |  |                               | 397,969  |   |                  |   | 398,614  |  
|Lease financing obligations                                                                    |  |                               | 111,799  |   |                  |   | 111,715  |  
|Deferred incomesale-leaseback of real estate                                                  |  |                               | 8,403    |   |                  |   | 8,585    |  
|Accrued postretirement benefits                                                                |  |                               | 3,567    |   |                  |   | 3,504    |  
|Other liabilities (Note 8)                                                                     |  |                               | 27,799   |   |                  |   | 28,452   |  
|                                                                                               |  |                               |          |   |                  |   |          |  
|Total liabilities                                                                              |  |                               | 600,252  |   |                  |   | 631,775  |  
|                                                                                               |  |                              
|Commitments and contingencies                                                                  |  |                               |          |   |                  |   |          |  
|                                                                                               |  |                              
|Stockholders deficit:                                                                         |  |                               |          |   |                  |   |          |  
|Common stock, par value $1; authorized 1,000 shares, issued and outstanding10 shares          |  |                               |         |   |                  |   |         |  
|Additional paid-in capital                                                                     |  |                               | (92,309  | ) |                  |   | (92,309  | )
|Accumulated deficit                                                                            |  |                               | (22,347  | ) |                  |   | (23,220  | )
|                                                                                               |  |                               |          |   |                  |   |          |  
|Total stockholders deficit                                                                    |  |                               | (114,656 | ) |                  |   | (115,529 | )
|                                                                                               |  |                               |          |   |                  |   |          |  
|Total liabilities and stockholders deficit                                                    |  | $                             | 485,596  |   |                  | $ | 516,246  |  
|                                                                                               |  |                               |          |   |                  |   |          |  

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



4



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(in thousands of dollars)

(Unaudited)



|                                                                                                      |  |                      |         |                      |   |         |  
|----------------------------------------------------------------------------------------------------- |  | -------------------- | ------- | -------------------- | - | ------- | -
|                                                                                                      |  | Restated(Note 3)2005 |         | Restated(Note 3)2004 |  
|Revenues:                                                                                             |  |                      |         |                      |   |         |  
|Restaurant sales                                                                                      |  | $                    | 169,138 |                      | $ | 156,545 |  
|Franchise royalty revenues and fees                                                                   |  |                      | 378     |                      |   | 355     |  
|                                                                                                      |  |                      |         |                      |   |         |  
|Total revenues                                                                                        |  |                      | 169,516 |                      |   | 156,900 |  
|                                                                                                      |  |                      |         |                      |   |         |  
|Costs and expenses:                                                                                   |  |                      |         |                      |   |         |  
|Cost of sales                                                                                         |  |                      | 48,838  |                      |   | 43,681  |  
|Restaurant wages and related expenses                                                                 |  |                      | 50,075  |                      |   | 47,851  |  
|Restaurant rent expense                                                                               |  |                      | 8,893   |                      |   | 8,363   |  
|Other restaurant operating expenses                                                                   |  |                      | 24,196  |                      |   | 21,890  |  
|Advertising expense                                                                                   |  |                      | 6,563   |                      |   | 5,827   |  
|General and administrative (including stock-based compensation expense of $75 and $526, respectively) |  |                      | 10,562  |                      |   | 10,285  |  
|Depreciation and amortization                                                                         |  |                      | 8,365   |                      |   | 10,158  |  
|Impairment losses (Note 4)                                                                            |  |                      | 446     |                      |   | 261     |  
|                                                                                                      |  |                      |         |                      |   |         |  
|Total operating expenses                                                                              |  |                      | 157,938 |                      |   | 148,316 |  
|                                                                                                      |  |                      |         |                      |   |         |  
|Income from operations                                                                                |  |                      | 11,578  |                      |   | 8,584   |  
|Interest expense                                                                                      |  |                      | 10,273  |                      |   | 8,976   |  
|                                                                                                      |  |                      |         |                      |   |         |  
|Income (loss) before income taxes                                                                     |  |                      | 1,305   |                      |   | (392    | )
|Provision (benefit) for income taxes (Note 7)                                                         |  |                      | 432     |                      |   | (175    | )
|                                                                                                      |  |                      |         |                      |   |         |  
|Net income (loss)                                                                                     |  | $                    | 873     |                      | $ | (217    | )
|                                                                                                      |  |                      |         |                      |   |         |  

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



5



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(in thousands of dollars)

(Unaudited)



|                                                                                                      |  |                      |         |   |                      |   |        |  
|----------------------------------------------------------------------------------------------------- |  | -------------------- | ------- | - | -------------------- | - | ------ | -
|                                                                                                      |  | Restated(Note 3)2005 |         |   | Restated(Note 3)2004 |  
|Cash flows provided from (used for) operating activities:                                             |  |                      |         |   |                      |   |        |  
|Net income (loss)                                                                                     |  | $                    | 873     |   |                      | $ | (217   | )
|Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities: |  |                      |         |   |                      |   |        |  
|Stock-based compensation expense                                                                      |  |                      | 75      |   |                      |   | 526    |  
|Depreciation and amortization                                                                         |  |                      | 8,365   |   |                      |   | 10,158 |  
|Amortization of deferred financing costs                                                              |  |                      | 377     |   |                      |   | 390    |  
|Amortization of unearned purchase discounts                                                           |  |                      | (539    | ) |                      |   | (539   | )
|Amortization of deferred gains from sale-leaseback transactions                                       |  |                      | (120    | ) |                      |   | (149   | )
|Impairment losses                                                                                     |  |                      | 446     |   |                      |   | 261    |  
|Accretion of interest on lease financing obligations                                                  |  |                      | 84      |   |                      |   | 108    |  
|Deferred income taxes                                                                                 |  |                      | (329    | ) |                      |   | (536   | )
|Decrease in accrued bonus to employees and director                                                   |  |                      | (20,860 | ) |                      |   |       |  
|Increase (decrease) in accrued payroll, related taxes and benefits                                    |  |                      | (10,781 | ) |                      |   | 873    |  
|Changes in other operating assets and liabilities                                                     |  |                      | 1,946   |   |                      |   | (704   | )
|                                                                                                      |  |                      |         |   |                      |   |        |  
|Net cash provided from (used for) operating activities                                                |  |                      | (20,463 | ) |                      |   | 10,171 |  
|                                                                                                      |  |                      |         |   |                      |   |        |  
|Cash flows used for investing activities:                                                             |  |                      |         |   |                      |   |        |  
|Capital expenditures:                                                                                 |  |                      |         |   |                      |   |        |  
|New restaurant development                                                                            |  |                      | (3,346  | ) |                      |   | (1,754 | )
|Restaurant remodeling                                                                                 |  |                      | (176    | ) |                      |   | (61    | )
|Other restaurant capital expenditures                                                                 |  |                      | (1,265  | ) |                      |   | (1,374 | )
|Corporate and restaurant information systems                                                          |  |                      | (287    | ) |                      |   | (166   | )
|                                                                                                      |  |                      |         |   |                      |   |        |  
|Total capital expenditures                                                                            |  |                      | (5,074  | ) |                      |   | (3,355 | )
|Proceeds from sale-leaseback transactions                                                             |  |                      |        |   |                      |   | 2,818  |  
|Properties purchased for sale-leaseback                                                               |  |                      | (275    | ) |                      |   |       |  
|                                                                                                      |  |                      |         |   |                      |   |        |  
|Net cash used for investing activities                                                                |  |                      | (5,349  | ) |                      |   | (537   | )
|                                                                                                      |  |                      |         |   |                      |   |        |  
|Cash flows used for financing activities:                                                             |  |                      |         |   |                      |   |        |  
|Payments on revolving credit facility, net                                                            |  |                      |        |   |                      |   | (600   | )
|Scheduled principal payments on term loans                                                            |  |                      | (550    | ) |                      |   | (3,375 | )
|Principal pre-payments on term loans                                                                  |  |                      |        |   |                      |   | (9,000 | )
|Payments on other notes payable, net                                                                  |  |                      |        |   |                      |   | (98    | )
|Principal payments on capital leases                                                                  |  |                      | (102    | ) |                      |   | (106   | )
|Financing costs associated with issuance of debt and lease financing obligations                      |  |                      | (177    | ) |                      |   | (221   | )
|Proceeds from lease financing obligations                                                             |  |                      |        |   |                      |   | 4,500  |  
|                                                                                                      |  |                      |         |   |                      |   |        |  
|Net cash used for financing activities                                                                |  |                      | (829    | ) |                      |   | (8,900 | )
|                                                                                                      |  |                      |         |   |                      |   |        |  
|Increase (decrease) in cash and cash equivalents                                                      |  |                      | (26,641 | ) |                      |   | 734    |  
|Cash and cash equivalents, beginning of period                                                        |  |                      | 31,466  |   |                      |   | 2,414  |  
|                                                                                                      |  |                      |         |   |                      |   |        |  
|Cash and cash equivalents, end of period                                                              |  | $                    | 4,825   |   |                      | $ | 3,148  |  
|                                                                                                      |  |                      |         |   |                      |   |        |  
|Supplemental disclosures:                                                                             |  |                      |         |   |                      |   |        |  
|Interest paid on long-term debt                                                                       |  | $                    | 3,136   |   |                      | $ | 1,748  |  
|Interest paid on lease financing obligations                                                          |  | $                    | 2,683   |   |                      | $ | 2,639  |  
|Decrease in accruals for capital expenditures                                                         |  | $                    | (764    | ) |                      | $ | (251   | )
|Income taxes paid (refunded), net                                                                     |  | $                    | (1,101  | ) |                      | $ | 1,268  |  

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



6



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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 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, 2005, the Company operated, as franchisee, 347 quick-service restaurants under the trade name
Burger King in thirteen Northeastern, Midwestern and Southeastern states. At March 31, 2005, the Company also owned and operated 64 Pollo Tropical restaurants located in Florida and franchised 24 Pollo Tropical restaurants in Puerto
Rico, Ecuador and Florida. At March 31, 2005, the Company owned and operated 127 Taco Cabana restaurants located primarily in Texas and franchised seven restaurants in Texas, New Mexico and 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 2, 2005 and December 28, 2003 will be referred to as the fiscal years ended December 31, 2004 and 2003, respectively. Similarly, all references herein to the three months ended April 3, 2005 and March 28, 2004
will be referred to as the three months ended March 31, 2005 and March 31, 2004, respectively.

Basis of Presentation.The
accompanying unaudited consolidated financial statements for the three months ended March 31, 2005 and 2004 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and do not include all
of the information and the footnotes required by accounting principles generally accepted in the United States of America for complete 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, 2005 and 2004 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, 2004 contained in the Companys Amendment No. 1 to its 2004 Annual Report on Form 10-K/A. The December 31, 2004 balance sheet data is derived from those audited financial statements. The Company restated its
financial statements including applicable footnotes in Amendment No. 1 to its 2004 Annual Report on Form 10-K/A as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 as further discussed in Note 3
of the consolidated financial statements contained therein. All previously reported amounts affected by the restatement that appear elsewhere in these footnotes to the consolidated financial statements have also been restated.

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

Subsequent Event. In July 2005 we
acquired four Taco Cabana restaurants in Texas from a franchisee for a cash purchase price of approximately $4.2 million.

2. Stock-Based Compensation

At March 31, 2005, the Company had four stock-based compensation plans. All outstanding stock options were cancelled and
terminated effective May 3, 2005 in exchange for the issuance of an identical number of shares of common stock. See below Subsequent Event. Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based
Compensation, (SFAS 123) permits entities to recognize as an expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123, as amended, allows 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 has elected to continue applying the provisions of APB 25 and provide the pro forma disclosure provisions of SFAS 123.



7



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars, except share amounts)

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



|                                                                                                                                 |  |                              |     |   |                      |   |      |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | --- | - | -------------------- | - | ---- | -
|                                                                                                                                 |  | Three Months Ended March 31, |    
|                                                                                                                                 |  | Restated(Note 3)2005         |     |   | Restated(Note 3)2004 |  
|Net income (loss), as reported                                                                                                   |  | $                            | 873 |   |                      | $ | (217 | )
|Add: Stock-based compensation expense included in reported net income (loss), net of related tax effects (1)                     |  |                              | 49  |   |                      |   | 316  |  
|Deduct: Stock-based compensation expense determined under the fair-value based method for all awards, net of related tax
effects |  |                              | (58 | ) |                      |   | (60  | )
|                                                                                                                                 |  |                              |     |   |                      |   |      |  
|Pro forma net income                                                                                                             |  | $                            | 864 |   |                      | $ | 39   |  
|                                                                                                                                 |  |                              |     |   |                      |   |      |  

---

|(1) | Amount represents stock-based compensation expense for certain stock options requiring variable accounting.
|--- | -----------------------------------------------------------------------------------------------------------

Subsequent Event.Effective May 3, 2005, Holdings issued an aggregate of 260,600 shares of common stock in exchange for the cancellation and
termination of an identical number of outstanding options to purchase shares of Holdings common stock. As a consequence of the exchange, substantially 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 recipients shares (for those recipients that were issued 100 or more shares) are subject to repurchase by Holdings (at its option) after December 31, 2006 under certain circumstances described in the award
agreements. In addition, such shares may be subject to repurchase by Holdings (at its option) in the event of a termination of employment before the occurrence of certain events. The Company recorded a compensation charge in the second quarter of
2005 relative to these stock awards.

3. Restatement of Previously Issued Financial Statements

Current Restatement

As previously reported in
Amendment No. 1 to the Companys 2004 Annual Report on Form 10-K/A for the year ended December 31, 2004, the Company restated its financial statements including applicable footnotes as of December 31, 2004 and 2003 and for the
years ended December 31, 2004, 2003 and 2002 and the unaudited quarterly financial information for the first three quarters of 2004.

Lease
Financing Obligations

The Company reviewed its accounting with respect to the depreciation of assets and recording of interest expense
associated with lease financing obligations related to sale-leaseback transactions required to be accounted for under the financing method. Under the financing method, the assets subject to these obligations remain on the consolidated balance sheet
at their historical costs and continue to be depreciated over their useful lives; the proceeds the Company received from the transaction are recorded as a lease financing obligation and the lease payments are applied as payments of principal and
interest.

The Company previously considered the land and building as a single asset and depreciated this asset (both land and building)
over a depreciable life that was deemed to be the 20-year primary lease term of the underlying obligation. The Company has concluded that its prior accounting was in error and that the portion of the asset representing land should not be
depreciated and the depreciation of the building portion of this asset should continue using its original estimated useful life rather than the term of the underlying obligation. The effect of this restatement resulted in a reduction of depreciation
expense of $0.5 million and an increase to net income of $0.3 million in each of the three months ended March 31, 2005 and 2004, respectively.

Historically, the Company allocated the related lease payments between interest and principal using an interest rate that would fully amortize the lease financing obligation by the end of the primary lease term. Due to the change in
depreciation described above, the assets subject to the lease financing obligations will have a net book value at the end of the primary lease term, primarily for the land portion. To prevent the recognition of a non-cash loss or negative
amortization of



8



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars, except share amounts)

the obligation through the end of the primary lease term, it was necessary to reevaluate the selection of
interest rates which included the Companys incremental borrowing rate, and to adjust the rates used to amortize the lease financing obligations so that a lease obligation equal to or greater that the unamortized asset remained at the end of
the primary lease term. The effect of this restatement resulted in an increase in interest expense related to the lease financing obligations of $0.7 million in each of the three months ended March 31, 2005 and 2004 and a decrease in net income
of $0.4 million and $0.6 million in each of the three months ended March 31, 2005 and 2004, respectively.

These restatements also resulted
in an increase in land and buildings subject to lease financing obligations of $12.0 million and an increase in lease financing obligations of $18.0 million at March 31, 2005.

The Company also has reviewed previously reported sale-leaseback transactions and determined twelve additional real estate transactions were required to
be recorded as financing transactions rather than as sale/leaseback transactions under SFAS No. 98 Accounting for Leases due to certain forms of continuing involvement. The impact of this restatement is to keep the assets subject to
such leases on the Companys balance sheet and to record the proceeds the Company received from these transactions (including the gains previously deferred) as lease financing obligations. This restatement also affects the Companys
operating results by increasing the depreciation expense for buildings subject to these transactions and recharacterizing the lease payments, previously reported as rent expense for these restaurants, as interest expense and principal repayments on
the related financing obligations. The effect of this restatement (a) for the three months ended March 31, 2005 and 2004 was to (i) reduce rent expense by $0.3 million in each period; (ii) increase depreciation expense by $0.1
million in each period; (iii) increase interest expense by $0.3 million in each period; and (iv) reduce net income by $0.1 million in each period; and (b) at March 31, 2005, to increase the net book value of the assets subject to
lease financing obligations by $9.4 million, reduce deferred income-sale/leaseback of real estate by $3.0 million and increase lease financing obligations by $14.7 million.

The net effect of the above current restatements was to decrease net income $0.2 million in each of the three months ended March 31, 2005 and 2004,
respectively.

Deferred Taxes

The
Company also has reviewed deferred taxes recorded for certain long-lived assets and liabilities that were previously acquired in business combinations and the related differences between the income tax bases and the financial reporting bases of
these assets and liabilities and determined that the deferred taxes recorded at the acquisition dates were incorrect. The result of these restatements was to decrease goodwill and deferred tax liabilities by $2.1 million in the aggregate related to
the Companys 2000 acquisition of Taco Cabana and to increase goodwill and deferred tax liabilities by $0.6 million related to the Companys 1998 acquisition of Pollo Tropical. This restatement also cumulatively decreased goodwill
amortization expense by $0.1 million for periods prior to 2002.

Statements of Cash Flows

The Company has corrected its previously issued financial statements to reflect the proceeds from qualifying sale-leaseback transactions within investing
activities rather than as financing activities as previously reported in the statements of cash flows. For the three months ended March 31, 2004 proceeds from qualifying sale-leaseback transactions included in the accompanying consolidated
financial statements were $2.8 million. The Company has also restated its consolidated statements of cash flows for the three months ended March 31, 2005 and 2004 to reflect the impact of changes in accounts payable related to the acquisition
of property and equipment as a non-cash item as required under SFAS No. 95.

Net cash provided from operating activities, capital
expenditures and net cash used for investing activities in the statements of cash flows have been reduced by $0.8 million and increased by $0.3 million for the three months ended March 31, 2005 and 2004, respectively, for such amounts
representing the change in the amount of capital expenditures included in accounts payable at the beginning and end of the periods.

Previous
Restatement

As previously reported in the Companys Annual Report on Form 10-K for the year ended December 31, 2004, the
Company restated its financial statements including applicable footnotes as of December 31, 2003 and for the years ended December 31, 2003 and 2002 and the unaudited quarterly financial information for the first three quarters of 2004.

Lease and Leasehold Improvement Accounting

The Company reviewed its lease accounting policies following a host of announcements by many restaurant and retail companies that they were revising their accounting practices for leases. The Company historically followed the accounting
practice of using the initial lease term when determining operating versus capital lease classification and when calculating



9



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars, except share amounts)

straight-line rent expense. In addition, the Company depreciated its buildings on leased land and
leasehold improvements over a period that included both the initial lease term plus one or more optional extension periods even if the option renewal was not reasonably assured (or the useful life of the asset if shorter).

Upon such review, the Company restated its financial statements for the years ended December 31, 2003 and 2002 and the unaudited quarterly financial
information for 2003 and the first three quarters of 2004 to correct errors in its lease accounting. Specifically, the Company revised its lease term for purposes of lease classification and calculating straight-line rent expense to only include
renewal options that are reasonably assured of exercise because an economic penalty, as defined under SFAS No. 13, Accounting for Leases, (SFAS 13) would be incurred in the event of non-renewal. The Company also revised
its useful lives of leasehold improvements to the shorter of their economic lives or the lease term as defined in SFAS 13. The primary impact of the restatement was to accelerate depreciation of buildings on leased land and leasehold improvements
made subsequent to the lease inception date. The restatement also reduced the lives of intangible assets related to leases. As a result of this restatement, amortization expense for leasehold improvements was increased by $0.4 million in the first
three months of 2004.

In conjunction with the review of its lease accounting, the Company also determined that adjustments were necessary
for lease liabilities for operating leases with non-level rents at the time of its acquisitions of Pollo Tropical in 1998 and Taco Cabana in 2000 as well as liabilities related to acquired leases with above-market rentals for Taco Cabana. The
Company adjusted its purchase price allocations for these acquisitions and restated lease liabilities and goodwill as of the acquisition dates. The Company has also restated rent expense and interest expense for those previously reported periods
subsequent to each acquisition and restated goodwill amortization through December 31, 2001.

As a result of these restatements, rent
expense increased $0.1 million in the first three months of 2004.

Accounting for Franchise Rights

In 2004, the Company also reviewed its accounting policies for the amortization of franchise rights, intangible assets pertaining to the Companys
acquisition of Burger King restaurants, and determined that it made an error in the assessment of their remaining useful lives at January 1, 2002, as part of its adoption of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS
142). Beginning on January 1, 2002, 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. Previously, the Company amortized the amounts allocated to franchise rights over periods ranging from twenty to forty years.

In connection with the review of its accounting for franchise rights, the Company also determined that it understated franchise rights and deferred tax liabilities each by $14.0 million that pertained to an
acquisition of 64 Burger King restaurants in 1997.

The adjustments related to these restatements reduced amortization expense by $0.2
million in the first three months of 2004.

Stock-based Compensation Expense

In 2004, the Company reevaluated the terms of its option plans and grants and concluded that provisions of certain options granted under our plans
required the Company to account for these options using the variable accounting provisions of APB 25. Previously, the Company had accounted for these options under APB 25 using a fixed accounting treatment whereby compensation expense, if any, was
only evaluated at the date of the option grant. The impact of this adjustment was to increase stock-based compensation expense, included in general and administrative expenses, by $0.5 million in the first three months of 2004.

Accounting for Guarantor Financial Statements

In
addition, the Company has restated its financial statements to correct the disclosure related to the Company and its subsidiaries who guarantee certain of the Companys securities for the three months ended March 31, 2004 to reflect the
allocation of corporate costs to conform to the current year presentation. See Note 13.



10



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars, except share amounts)

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



|                                                   |  |                        |          |   |             |   |          |  
|-------------------------------------------------- |  | ---------------------- | -------- | - | ----------- | - | -------- | -
|                                                   |  | March 31, 2005         |         
|                                                   |  | As Previously Reported |          |   | As Restated |  
|Consolidated Balance Sheet:                        |  |                        |          |   |             |   |          |  
|Property and equipment, net                        |  | $                      | 188,870  |   |             | $ | 210,249  |  
|Goodwill                                           |  |                        | 123,724  |   |             |   | 122,241  |  
|Deferred income taxes  long-term                  |  |                        | 9,486    |   |             |   | 13,270   |  
|Other assets                                       |  |                        | 15,160   |   |             |   | 15,200   |  
|Total assets                                       |  |                        | 461,876  |   |             |   | 485,596  |  
|Current portion of lease financing obligations     |  |                        | 2,665    |   |             |   |         |  
|Total current liabilities                          |  |                        | 53,380   |   |             |   | 50,715   |  
|Lease financing obligations                        |  |                        | 79,105   |   |             |   | 111,799  |  
|Deferred income  sale-leaseback of real estate    |  |                        | 11,360   |   |             |   | 8,403    |  
|Total liabilities                                  |  |                        | 573,180  |   |             |   | 600,252  |  
|Accumulated deficit                                |  |                        | (18,995  | ) |             |   | (22,347  | )
|Total stockholders deficit                        |  |                        | (111,304 | ) |             |   | (114,656 | )
|Total liabilities and stockholders equity deficit |  |                        | 461,876  |   |             |   | 485,596  |  



|                                                                |  |                                  |         |   |             |   |         |  
|--------------------------------------------------------------- |  | -------------------------------- | ------- | - | ----------- | - | ------- | -
|                                                                |  | Three Months EndedMarch 31, 2005 |        
|                                                                |  | As Previously Reported           |         |   | As Restated |  
|Consolidated Statements of Operations:                          |  |                                  |         |   |             |   |         |  
|Restaurant rent expense                                         |  | $                                | 9,168   |   |             | $ | 8,893   |  
|Depreciation and amortization                                   |  |                                  | 8,786   |   |             |   | 8,365   |  
|Total operating expenses                                        |  |                                  | 158,634 |   |             |   | 157,938 |  
|Income from operations                                          |  |                                  | 10,882  |   |             |   | 11,578  |  
|Interest expense                                                |  |                                  | 9,219   |   |             |   | 10,273  |  
|Income before income taxes                                      |  |                                  | 1,663   |   |             |   | 1,305   |  
|Provision for income taxes                                      |  |                                  | 583     |   |             |   | 432     |  
|Net income                                                      |  |                                  | 1,080   |   |             |   | 873     |  
|                                                                |  |                                 
|Consolidated Statements of Cash Flows:                          |  |                                  |         |   |             |   |         |  
|Net income                                                      |  | $                                | 1,080   |   |             | $ | 873     |  
|Depreciation and amortization                                   |  |                                  | 8,786   |   |             |   | 8,365   |  
|Amortization of deferred financing costs                        |  |                                  | 355     |   |             |   | 377     |  
|Amortization of deferred gains from sale-leaseback transactions |  |                                  | (165    | ) |             |   | (120    | )
|Accretion of interest on lease financing obligations            |  |                                  |        |   |             |   | 84      |  
|Deferred income taxes                                           |  |                                  | (179    | ) |             |   | (329    | )
|Net cash used for operating activities                          |  |                                  | (20,600 | ) |             |   | (20,463 | )
|Total capital expenditures                                      |  |                                  | (4,310  | ) |             |   | (5,074  | )
|Net cash used for investing activities                          |  |                                  | (4,585  | ) |             |   | (5,349  | )
|Principal payments on lease financing obligations               |  |                                  | (627    | ) |             |   |        |  
|Net cash used for financing activities                          |  |                                  | (1,456  | ) |             |   | (829    | )



11



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars, except share amounts)



|                                                                |  |                                   |         |   |                        |   |         |                       |  |   |         |  
|--------------------------------------------------------------- |  | --------------------------------- | ------- | - | ---------------------- | - | ------- | --------------------- |  | - | ------- | -
|                                                                |  | Three Months Ended March 31, 2004 |        
|                                                                |  | As Previously Reported            |         |   | As Previously Restated |   |         | As Currently Restated | 
|Consolidated Statements of Operations:                          |  |                                   |         |   |                        |   |         |                       |  |   |         |  
|Restaurant rent expense                                         |  | $                                 | 8,564   |   |                        | $ | 8,631   |                       |  | $ | 8,363   |  
|General and administrative expense                              |  |                                   | 9,759   |   |                        |   | 10,285  |                       |  |   | 10,285  |  
|Depreciation and amortization                                   |  |                                   | 10,529  |   |                        |   | 10,575  |                       |  |   | 10,158  |  
|Total operating expenses                                        |  |                                   | 148,362 |   |                        |   | 149,001 |                       |  |   | 148,316 |  
|Income from operations                                          |  |                                   | 8,538   |   |                        |   | 7,899   |                       |  |   | 8,584   |  
|Interest expense                                                |  |                                   | 7,939   |   |                        |   | 7,988   |                       |  |   | 8,976   |  
|Income (loss) before income taxes                               |  |                                   | 599     |   |                        |   | (89     | )                     |  |   | (392    | )
|Provision (benefit) for income taxes                            |  |                                   | 220     |   |                        |   | (42     | )                     |  |   | (175    | )
|Net income (loss)                                               |  |                                   | 379     |   |                        |   | (47     | )                     |  |   | (217    | )
|                                                                |  |                                   |        
|Consolidated Statements of Cash Flows:                          |  |                                   |         |   |                        |   |         |                       |  |   |         |  
|Net income (loss)                                               |  | $                                 | 379     |   |                        | $ | (47     | )                     |  | $ | (217    | )
|Depreciation and amortization                                   |  |                                   | 10,529  |   |                        |   | 10,575  |                       |  |   | 10,158  |  
|Amortization of deferred financing costs                        |  |                                   | 362     |   |                        |   | 362     |                       |  |   | 390     |  
|Amortization of deferred gains from sale-leaseback transactions |  |                                   | (187    | ) |                        |   | (187    | )                     |  |   | (149    | )
|Accretion of interest on lease financing obligations            |  |                                   |        |   |                        |   |        |                       |  |   | 108     |  
|Deferred income taxes                                           |  |                                   | (238    | ) |                        |   | (500    | )                     |  |   | (536    | )
|Changes in other operating assets and liabilities               |  |                                   | (2,054  | ) |                        |   | (1,938  | )                     |  |   | (704    | )
|Net cash provided from operating activities                     |  |                                   | 10,464  |   |                        |   | 10,464  |                       |  |   | 10,171  |  
|Total capital expenditures                                      |  |                                   | (3,104  | ) |                        |   | (3,104  | )                     |  |   | (3,355  | )
|Net cash used for investing activities                          |  |                                   | (3,104  | ) |                        |   | (3,104  | )                     |  |   | (537    | )
|Principal payments on lease financing obligations               |  |                                   | (544    | ) |                        |   | (544    | )                     |  |   |        |  
|Proceeds from lease financing obligations                       |  |                                   |        |   |                        |   |        |                       |  |   | 4,500   |  
|Net cash used for financing activities                          |  |                                   | (6,626  | ) |                        |   | (6,626  | )                     |  |   | (8,900  | )

All previously reported amounts affected by the restatements that appear elsewhere in these
footnotes to the consolidated financial statements have also been restated.

4. 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 asset is compared to their respective carrying values. If an asset is determined to be impaired, the loss is measured by the excess carrying
amount of the asset over its fair value. For the three months ended March 31, 2005 and 2004 the Company recorded impairment losses of $446 and $261, respectively, related to its property and equipment for certain of its Burger King restaurants.

5. Goodwill and Franchise Rights

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
each year. There were no changes to the carrying amount of goodwill during the three months ended March 31, 2005 and 2004.

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 gross carrying amount of franchise rights at March 31, 2005 and December 31, 2004 was $139,225
and $139,527, respectively, and accumulated amortization was $49,973 and $49,471, respectively. Amortization expense was $804 and $808 for the three months ended March 31, 2005 and March 31, 2004, respectively.



12



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars, except share amounts)

6. 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, 2005, $219.5 million principal amount of borrowings were outstanding under the term loan B facility and no amounts were outstanding under the revolving credit facility. After reserving $10.8 million for letters of credit guaranteed by
the facility, $39.2 million was available for borrowings under the revolving credit facility at March 31, 2005.

As a result of the
previous restatement of the Companys financial statements as discussed in Note 3, the Company was in default under its senior credit facility by failing to timely furnish its annual audited financial statements for fiscal year 2004 to its
lenders. On May 19, 2005, the Company obtained a waiver of such default from its lenders that extended the time period to deliver the audited financial statements for the 2004 fiscal year as well as the financial statements for the first
quarter of 2005 to July 31, 2005.

On December 15, 2004, the Company issued $180 million of 9% Senior Subordinated Notes due
2013. In connection with the terms of the senior subordinated notes, because the Company did not complete an exchange offer on or prior to June 13, 2005, the interest rate on the Companys senior subordinated notes was increased by
0.25% per annum for the 90-day period immediately following June 13, 2005 and will be increased by an additional 0.25% per annum for each subsequent 90-day period, with a maximum of 1.00% per annum of additional interest, in each
case until an exchange offer is completed or the senior subordinated notes become freely tradable under the Securities Act of 1933, as amended.

7.
Income Taxes

The income tax provision (benefit) for the three months ended March 31, 2005 and 2004 was comprised of the following:



|         |  |                      |      |   |                      |   |      |  
|-------- |  | -------------------- | ---- | - | -------------------- | - | ---- | -
|         |  | Restated(Note 3)2005 |      |   | Restated(Note 3)2004 |  
|Current  |  | $                    | 761  |   |                      | $ | 361  |  
|Deferred |  |                      | (329 | ) |                      |   | (536 | )
|         |  |                      |      |   |                      |   |      |  
|         |  | $                    | 432  |   |                      | $ | (175 | )
|         |  |                      |      |   |                      |   |      |  

The provision for income taxes for the first quarter of 2005 was derived using an estimated
effective annual income tax rate for 2005 of approximately 33%. The benefit for income taxes in the first quarter of 2004 is based on an effective tax rate of 45.4%. This rate is higher than the statutory Federal tax rate primarily due to state
income taxes and tax credits.

8. Other Liabilities

Other long-term liabilities at March 31, 2005 and December 31, 2004 consisted of the following:



|                                   |  |                |        |                   |   |       
|---------------------------------- |  | -------------- | ------ | ----------------- | - | ------
|                                   |  | March 31, 2005 |        | December 31, 2004
|Unearned purchase discounts        |  | $              | 8,061  |                   | $ | 8,611 
|Accrued occupancy costs            |  |                | 11,219 |                   |   | 11,400
|Accrued workers compensation costs |  |                | 4,911  |                   |   | 4,821 
|Other                              |  |                | 3,608  |                   |   | 3,620 
|                                   |  |                |        |                   |   |       
|                                   |  | $              | 27,799 |                   | $ | 28,452
|                                   |  |                |        |                   |   |       

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 March 31, 2005 and December 31, 2004, the Company has $0.6 million in lease liability reserves at both dates and $0.1 million in other exit cost reserves at
both dates related to these restaurants that are included in accrued occupancy costs.



13



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars, except share amounts)

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



|                             |  |                              |     |   |      |   |     |  
|---------------------------- |  | ---------------------------- | --- | - | ---- | - | --- | -
|                             |  | Three Months Ended March 31, |    
|                             |  | 2005                         |     |   | 2004 |  
|Balance, beginning of period |  | $                            | 756 |   |      | $ | 847 |  
|Additions                    |  |                              |    |   |      |   |    |  
|Payments                     |  |                              | (32 | ) |      |   | (14 | )
|                             |  |                              |     |   |      |   |     |  
|Balance, end of period       |  | $                            | 724 |   |      | $ | 833 |  
|                             |  |                              |     |   |      |   |     |  

9. 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 for the three months ended
March 31, 2005 and 2004:



|                                                |  |      |    |   |      |   |     |  
|----------------------------------------------- |  | ---- | -- | - | ---- | - | --- | -
|                                                |  | 2005 |    |   | 2004 |  
|Components of net periodic benefit cost:        |  |      |    |   |      |   |     |  
|Service cost                                    |  | $    | 62 |   |      | $ | 91  |  
|Interest cost                                   |  |      | 49 |   |      |   | 67  |  
|Amortization of gains and losses                |  |      | (5 | ) |      |   | 15  |  
|Amortization of unrecognized prior service cost |  |      | (7 | ) |      |   | (7  | )
|                                                |  |      |    |   |      |   |     |  
|Net periodic postretirement benefit cost        |  | $    | 99 |   |      | $ | 166 |  
|                                                |  |      |    |   |      |   |     |  

10. Business Segment Information

The Company is engaged in the quick-service and quick-casual restaurant industry, with three restaurant concepts: Burger King operating as a franchisee,
Pollo Tropical and Taco Cabana, both Company owned concepts. The Companys Burger King restaurants are all located in the United States, primarily in the Northeast, Southeast and Midwest. Pollo Tropical is a regional quick-casual restaurant
chain featuring grilled marinated chicken and authentic made from scratch side dishes. Pollo Tropicals core markets are located in south and central Florida. Taco Cabana is a regional quick-casual restaurant chain featuring 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, stock-based compensation expense, other income and expense and loss on extinguishment of debt.



14



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars, except share amounts)

The Other column includes corporate related items not allocated to reportable
segments. Other identifiable assets consist primarily of goodwill.



|                                      |  |             |        |                |   |             |  |       |         |              |   |         |  |   |        
|------------------------------------- |  | ----------- | ------ | -------------- | - | ----------- |  | ----- | ------- | ------------ | - | ------- |  | - | -------
|Three Months Ended:                   |  | Taco Cabana |        | Pollo Tropical |   | Burger King |  | Other |         | Consolidated
|March 31, 2005 (as restated):         |  |             |        |                |   |             |  |       |         |              |   |         |  |   |        
|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  
|                                      |  |             |        |                |  
|March 31, 2004 (as restated):         |  |             |        |                |   |             |  |       |         |              |   |         |  |   |        
|Total revenues                        |  | $           | 46,147 |                | $ | 29,624      |  | $     | 81,129  |              | $ |        |  | $ | 156,900
|Cost of sales                         |  |             | 13,657 |                |   | 9,005       |  |       | 21,019  |              |   |        |  |   | 43,681 
|Restaurant wages and related expenses |  |             | 13,294 |                |   | 7,110       |  |       | 27,447  |              |   |        |  |   | 47,851 
|Depreciation and amortization         |  |             | 2,714  |                |   | 1,047       |  |       | 5,832   |              |   | 565     |  |   | 10,158 
|Segment EBITDA                        |  |             | 6,310  |                |   | 7,246       |  |       | 5,973   |              |   |         |  |   |        
|Capital expenditures                  |  |             | 1,982  |                |   | 482         |  |       | 725     |              |   | 166     |  |   | 3,355  
|                                      |  |             |        |                |  
|Identifiable Assets:                  |  |             |        |                |   |             |  |       |         |              |   |         |  |   |        
|At March 31, 2005 (as restated)       |  | $           | 63,542 |                | $ | 50,693      |  | $     | 193,187 |              | $ | 178,174 |  | $ | 485,596
|At December 31, 2004                  |  |             | 63,655 |                |   | 50,177      |  |       | 198,015 |              |   | 204,399 |  |   | 516,246

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



|                                     |  |                              |        |                      |   |        |  
|------------------------------------ |  | ---------------------------- | ------ | -------------------- | - | ------ | -
|                                     |  | Three Months Ended March 31, |       
|                                     |  | Restated(Note 3)2005         |        | Restated(Note 3)2004 |  
|Segment EBITDA:                      |  |                              |        |                      |   |        |  
|Taco Cabana                          |  | $                            | 7,324  |                      | $ | 6,310  |  
|Pollo Tropical                       |  |                              | 7,350  |                      |   | 7,246  |  
|Burger King                          |  |                              | 5,790  |                      |   | 5,973  |  
|                                     |  |                              |        |                      |   |        |  
|Subtotal                             |  |                              | 20,464 |                      |   | 19,529 |  
|                                     |  |                             
|Less:                                |  |                              |        |                      |   |        |  
|Depreciation and amortization        |  |                              | 8,365  |                      |   | 10,158 |  
|Impairment losses                    |  |                              | 446    |                      |   | 261    |  
|Interest expense                     |  |                              | 10,273 |                      |   | 8,976  |  
|Provision (benefit) for income taxes |  |                              | 432    |                      |   | (175   | )
|Stock-based compensation expense     |  |                              | 75     |                      |   | 526    |  
|                                     |  |                              |        |                      |   |        |  
|Net income (loss)                    |  | $                            | 873    |                      | $ | (217   | )
|                                     |  |                              |        |                      |   |        |  

11. Commitments and Contingencies

On November 16, 1998, the Equal Employment Opportunity Commission (EEOC) filed suit in the United States District Court for the Northern
District of New York (the Court), under Title VII of the Civil Rights Act of 1964, as amended, against 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.



15



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars, except share amounts)

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. On February 25, 2005 the plaintiffs filed motions for judicial notice and to expand discovery class-wide. The Company has opposed plaintiffs motions. 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.

12. Recent Accounting Prouncements

In September 2004, the FASB issued Emerging Issues Task Force (EITF) Topic D-108, Use of the Residual Method to Value Acquired Assets Other than Goodwill, which requires companies that have
applied the residual method to value intangible assets to perform an impairment test on those intangible assets by the end of the first quarter of 2005. The provisions of EITF Topic D-108 did not effect the Companys consolidated financial
statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R)
which replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB No. 25. SFAS 123R requires the measurement of all employee share-based payments, including grants of employee stock options, using a
fair-value-based method and the recording of such expense in the consolidated statements of operations. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. In March 2005,
the SEC issued Staff Accounting Bulletin (SAB) No. 107 Share-Based Payment. SAB 107 expresses views of the SEC staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the
staffs views regarding the valuation of share-based payment arrangements. SFAS 123R is effective for awards that are granted, modified, or settled in cash for the first annual reporting period beginning after June 15, 2005. The Company is
currently evaluating the impact of these pronouncements on its financial statements.

In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets (SFAS 153). This Statement amends the guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions (APB 29). APB 29 provided an exception to the basic
measurement principle (fair value) for exchanges of similar assets, requiring that some nonmonetary exchanges be recorded on a carryover basis. SFAS 153 eliminates the exception to fair value for exchanges of similar productive assets and replaces
it with a general exception for exchange transactions that do not have commercial substance, that is, transactions that are not expected to result in significant changes in the cash flows of the reporting entity. The provisions of SFAS 153 are
effective for exchanges of nonmonetary assets occurring in fiscal periods beginning after June 15, 2005. The Company is currently evaluating the impact of SFAS 153 on its financial statements.

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, (FIN
47). FIN 47 clarifies that the term conditional as used in SFAS No. 143, Accounting for Asset Retirement Obligations, which refers to a legal obligation to perform an asset retirement activity even if the timing
and/or settlement are conditional on a future event that may or may not be within the control of an entity. Accordingly, the entity must record a liability for the conditional asset retirement obligation if the fair value of the obligation can be
reasonably estimated. FIN 47 is effective for periods no later than fiscal years ending after December 15, 2005. The Company is currently evaluating the impact of FIN 47 on its financial statements.



16



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars, except share amounts)

On June 30, 2005, tax legislation in the state of Ohio was enacted that will
significantly restructure the tax system for most corporate taxpayers. Included in the legislation is a multi-year phase-out of the state franchise tax and tangible personal property tax. These taxes will be replaced with a Commercial Activity Tax
that will be phased-in over a five-year period. The Company is evaluating the impact of this legislation and will record any impact therefrom in the second quarter of 2005.

13. Guarantor Financial Statements

The Companys obligations under the $180.0 million 9% senior
subordinated notes are, and the $170.0 million 91/2% senior subordinated notes of the Company were, 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, 2005 and December 31, 2004, 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, 2005 and 2004.

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. Under this approach, to the extent that no
valuation allowance has been provided in the consolidated financial statements, there would typically be no need for a valuation allowance in the separate accounts of the individual entities. 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



17



---

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

(in
thousands of dollars, except share amounts)

number of restaurants for each subsidiary. Management believes that these allocations are reasonable based
on the nature of costs incurred. The Company did not previously allocate these corporate costs to its guarantor subsidiaries for periods ended prior to December 31, 2004.

The Company has restated the guarantor financial statements as of and for the three months ended March 31, 2004 to reflect the allocation of the
corporate costs to conform to the current year presentation. The effect of these restatements resulted in allocations from the Parent Company to the Guarantor Subsidiaries for the three months ended March 31, 2004 of $598 for general and
administrative expenses and $52 for depreciation expense. The income tax benefit related to these allocations included in the Guarantor Subsidiaries statement of operations was $122 for the three months ended March 31, 2004.



18



---

CONSOLIDATING BALANCE SHEET

March 31, 2005 (As Restated)

(unaudited)



|                                                     |  |                   |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|---------------------------------------------------- |  | ----------------- | -------- | - | ---------------------- | - | -------- | ------------ |  | - | ------------------ | - |  | - | -------- | -
|                                                     |  | ParentCompanyOnly |          |   | Guarantor Subsidiaries |   |          | Eliminations |  |   | Consolidated Total |  
|ASSETS                                               |  |                   |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Current assets:                                      |  |                   |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Cash and cash equivalents                            |  | $                 | 2,064    |   |                        | $ | 2,761    |              |  | $ |                   |   |  | $ | 4,825    |  
|Trade and other receivables, net                     |  |                   | 524      |   |                        |   | 2,569    |              |  |   |                   |   |  |   | 3,093    |  
|Inventories                                          |  |                   | 3,247    |   |                        |   | 1,316    |              |  |   |                   |   |  |   | 4,563    |  
|Prepaid rent                                         |  |                   | 1,866    |   |                        |   | 1,709    |              |  |   |                   |   |  |   | 3,575    |  
|Prepaid expenses and other current assets            |  |                   | 1,638    |   |                        |   | 3,676    |              |  |   |                   |   |  |   | 5,314    |  
|Refundable income taxes                              |  |                   | 1,462    |   |                        |   |         |              |  |   |                   |   |  |   | 1,462    |  
|Deferred income taxes                                |  |                   | 3,618    |   |                        |   | 2,876    |              |  |   | (252               | ) |  |   | 6,242    |  
|                                                     |  |                   |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total current assets                                 |  |                   | 14,419   |   |                        |   | 14,907   |              |  |   | (252               | ) |  |   | 29,074   |  
|Property and equipment, net                          |  |                   | 93,266   |   |                        |   | 140,913  |              |  |   | (23,930            | ) |  |   | 210,249  |  
|Franchise rights, net                                |  |                   | 89,252   |   |                        |   |         |              |  |   |                   |   |  |   | 89,252   |  
|Goodwill                                             |  |                   | 1,450    |   |                        |   | 120,791  |              |  |   |                   |   |  |   | 122,241  |  
|Franchise agreements, net                            |  |                   | 6,310    |   |                        |   |          |              |  |   |                    |   |  |   | 6,310    |  
|Intercompany receivable (payable)                    |  |                   | 150,699  |   |                        |   | (151,258 | )            |  |   | 559                |   |  |   |         |  
|Investment in subsidiaries                           |  |                   | 16,984   |   |                        |   |         |              |  |   | (16,984            | ) |  |   |         |  
|Deferred income taxes                                |  |                   | 3,271    |   |                        |   | 9,999    |              |  |   |                   |   |  |   | 13,270   |  
|Other assets                                         |  |                   | 10,865   |   |                        |   | 5,475    |              |  |   | (1,140             | ) |  |   | 15,200   |  
|                                                     |  |                   |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total assets                                         |  | $                 | 386,516  |   |                        | $ | 140,827  |              |  | $ | (41,747            | ) |  | $ | 485,596  |  
|                                                     |  |                   |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)       |  |                   |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Current liabilities:                                 |  |                   |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Current portion of long-term debt                    |  | $                 | 2,343    |   |                        | $ | 261      |              |  | $ |                   |   |  | $ | 2,604    |  
|Accounts payable                                     |  |                   | 6,609    |   |                        |   | 10,412   |              |  |   |                   |   |  |   | 17,021   |  
|Accrued interest                                     |  |                   | 4,946    |   |                        |   |         |              |  |   |                   |   |  |   | 4,946    |  
|Accrued payroll, related taxes and benefits          |  |                   | 8,165    |   |                        |   | 6,069    |              |  |   |                   |   |  |   | 14,234   |  
|Other liabilities                                    |  |                   | 7,527    |   |                        |   | 4,383    |              |  |   |                   |   |  |   | 11,910   |  
|                                                     |  |                   |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total current liabilities                            |  |                   | 29,590   |   |                        |   | 21,125   |              |  |   |                   |   |  |   | 50,715   |  
|Long-term debt, net of current portion               |  |                   | 397,647  |   |                        |   | 322      |              |  |   |                   |   |  |   | 397,969  |  
|Lease financing obligations                          |  |                   | 48,874   |   |                        |   | 91,425   |              |  |   | (28,500            | ) |  |   | 111,799  |  
|Deferred incomesale-leaseback of real estate        |  |                   | 4,035    |   |                        |   | 1,584    |              |  |   | 2,784              |   |  |   | 8,403    |  
|Accrued postretirement benefits                      |  |                   | 3,567    |   |                        |   |         |              |  |   |                   |   |  |   | 3,567    |  
|Other liabilities                                    |  |                   | 17,459   |   |                        |   | 10,221   |              |  |   | 119                |   |  |   | 27,799   |  
|                                                     |  |                   |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total liabilities                                    |  |                   | 501,172  |   |                        |   | 124,677  |              |  |   | (25,597            | ) |  |   | 600,252  |  
|Commitments and contingencies                        |  |                   |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Stockholders equity (deficit)                       |  |                   | (114,656 | ) |                        |   | 16,150   |              |  |   | (16,150            | ) |  |   | (114,656 | )
|                                                     |  |                   |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total liabilities and stockholders equity (deficit) |  | $                 | 386,516  |   |                        | $ | 140,827  |              |  | $ | (41,747            | ) |  | $ | 485,596  |  
|                                                     |  |                   |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  



19



---

CONSOLIDATING BALANCE SHEET

December 31, 2004

(Unaudited)



|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|---------------------------------------------------- |  | ------------------- | -------- | - | ---------------------- | - | -------- | ------------ |  | - | ------------------ | - |  | - | -------- | -
|                                                     |  | Parent Company Only |          |   | Guarantor Subsidiaries |   |          | Eliminations |  |   | Consolidated Total |  
|ASSETS                                               |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Current assets:                                      |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Cash and cash equivalents                            |  | $                   | 29,195   |   |                        | $ | 2,271    |              |  | $ |                   |   |  | $ | 31,466   |  
|Trade and other receivables, net                     |  |                     | 336      |   |                        |   | 2,242    |              |  |   |                   |   |  |   | 2,578    |  
|Inventories                                          |  |                     | 3,376    |   |                        |   | 1,455    |              |  |   |                   |   |  |   | 4,831    |  
|Prepaid rent                                         |  |                     | 1,866    |   |                        |   | 1,723    |              |  |   |                   |   |  |   | 3,589    |  
|Prepaid expenses and other current assets            |  |                     | 1,085    |   |                        |   | 3,273    |              |  |   |                   |   |  |   | 4,358    |  
|Refundable income taxes                              |  |                     | 3,326    |   |                        |   |         |              |  |   |                   |   |  |   | 3,326    |  
|Deferred income taxes                                |  |                     | 3,618    |   |                        |   | 2,624    |              |  |   |                   |   |  |   | 6,242    |  
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total current assets                                 |  |                     | 42,802   |   |                        |   | 13,588   |              |  |   |                   |   |  |   | 56,390   |  
|Property and equipment, net                          |  |                     | 97,006   |   |                        |   | 140,532  |              |  |   | (24,049            | ) |  |   | 213,489  |  
|Franchise rights, net                                |  |                     | 90,056   |   |                        |   |         |              |  |   |                   |   |  |   | 90,056   |  
|Goodwill                                             |  |                     | 1,450    |   |                        |   | 120,791  |              |  |   |                   |   |  |   | 122,241  |  
|Franchise agreements, net                            |  |                     | 6,480    |   |                        |   |         |              |  |   |                   |   |  |   | 6,480    |  
|Intercompany receivable (payable)                    |  |                     | 148,424  |   |                        |   | (149,005 | )            |  |   | 581                |   |  |   |         |  
|Investment in subsidiaries                           |  |                     | 14,100   |   |                        |   |         |              |  |   | (14,100            | ) |  |   |         |  
|Deferred income taxes                                |  |                     | 3,198    |   |                        |   | 9,930    |              |  |   | (188               | ) |  |   | 12,940   |  
|Other assets                                         |  |                     | 10,442   |   |                        |   | 5,380    |              |  |   | (1,172             | ) |  |   | 14,650   |  
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total assets                                         |  | $                   | 413,958  |   |                        | $ | 141,216  |              |  | $ | (38,928            | ) |  | $ | 516,246  |  
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)       |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Current liabilities:                                 |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Current portion of long-term debt                    |  | $                   | 2,343    |   |                        | $ | 268      |              |  | $ |                   |   |  | $ | 2,611    |  
|Accounts payable                                     |  |                     | 7,875    |   |                        |   | 9,706    |              |  |   |                   |   |  |   | 17,581   |  
|Accrued interest                                     |  |                     | 956      |   |                        |   |         |              |  |   |                   |   |  |   | 956      |  
|Accrued payroll, related taxes and benefits          |  |                     | 16,142   |   |                        |   | 8,798    |              |  |   |                   |   |  |   | 24,940   |  
|Accrued bonus to employees and director              |  |                     | 20,860   |   |                        |   |         |              |  |   |                   |   |  |   | 20,860   |  
|Other liabilities                                    |  |                     | 8,586    |   |                        |   | 5,371    |              |  |   |                   |   |  |   | 13,957   |  
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total current liabilities                            |  |                     | 56,762   |   |                        |   | 24,143   |              |  |   |                   |   |  |   | 80,905   |  
|Long-term debt, net of current portion               |  |                     | 398,233  |   |                        |   | 381      |              |  |   |                   |   |  |   | 398,614  |  
|Lease financing obligations                          |  |                     | 48,892   |   |                        |   | 91,313   |              |  |   | (28,490            | ) |  |   | 111,715  |  
|Deferred incomesale-leaseback of real estate        |  |                     | 4,086    |   |                        |   | 1,676    |              |  |   | 2,823              |   |  |   | 8,585    |  
|Accrued postretirement benefits                      |  |                     | 3,504    |   |                        |   |         |              |  |   |                   |   |  |   | 3,504    |  
|Other liabilities                                    |  |                     | 18,010   |   |                        |   | 10,340   |              |  |   | 102                |   |  |   | 28,452   |  
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total liabilities                                    |  |                     | 529,487  |   |                        |   | 127,853  |              |  |   | (25,565            | ) |  |   | 631,775  |  
|Commitments and contingencies                        |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Stockholders equity (deficit)                       |  |                     | (115,529 | ) |                        |   | 13,363   |              |  |   | (13,363            | ) |  |   | (115,529 | )
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  
|Total liabilities and stockholders equity (deficit) |  | $                   | 413,958  |   |                        | $ | 141,216  |              |  | $ | (38,928            | ) |  | $ | 516,246  |  
|                                                     |  |                     |          |   |                        |   |          |              |  |   |                    |   |  |   |          |  



20



---

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended March 31, 2005 (As Restated)

(Unaudited)



|                                                                               |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |        
|------------------------------------------------------------------------------ |  | ------------------- | ------ | - | ---------------------- | - | ------------ |  | - | ------------------ | - |  | - | -------
|                                                                               |  | Parent Company Only |        |   | Guarantor Subsidiaries |   | Eliminations |  |   | Consolidated Total
|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    
|                                                                               |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |        



21



---

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended March 31, 2004 (As Restated)

(Unaudited)



|                                                                                |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |         |  
|------------------------------------------------------------------------------- |  | ------------------- | ------ | - | ---------------------- | - | ------------ |  | - | ------------------ | - |  | - | ------- | -
|                                                                                |  | Parent Company Only |        |   | Guarantor Subsidiaries |   | Eliminations |  |   | Consolidated Total |  
|Revenues:                                                                       |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |         |  
|Restaurant sales                                                                |  | $                   | 81,129 |   |                        | $ | 75,416       |  | $ |                   |   |  | $ | 156,545 |  
|Franchise royalty revenues and fees                                             |  |                     |       |   |                        |   | 355          |  |   |                   |   |  |   | 355     |  
|                                                                                |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |         |  
|Total revenues                                                                  |  |                     | 81,129 |   |                        |   | 75,771       |  |   |                   |   |  |   | 156,900 |  
|                                                                                |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |         |  
|Costs and expenses:                                                             |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |         |  
|Cost of sales                                                                   |  |                     | 21,019 |   |                        |   | 22,662       |  |   |                   |   |  |   | 43,681  |  
|Restaurant wages and related expenses                                           |  |                     | 27,447 |   |                        |   | 20,404       |  |   |                   |   |  |   | 47,851  |  
|Restaurant rent expense                                                         |  |                     | 5,221  |   |                        |   | 2,557        |  |   | 585                |   |  |   | 8,363   |  
|Other restaurant operating expenses                                             |  |                     | 12,683 |   |                        |   | 9,207        |  |   |                   |   |  |   | 21,890  |  
|Advertising expense                                                             |  |                     | 3,261  |   |                        |   | 2,566        |  |   |                   |   |  |   | 5,827   |  
|General and administrative (including $526 of stock-based compensation expense) |  |                     | 4,926  |   |                        |   | 5,359        |  |   |                   |   |  |   | 10,285  |  
|Depreciation and amortization                                                   |  |                     | 6,142  |   |                        |   | 4,135        |  |   | (119               | ) |  |   | 10,158  |  
|Impairment losses                                                               |  |                     | 261    |   |                        |   |             |  |   |                   |   |  |   | 261     |  
|                                                                                |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |         |  
|Total operating expenses                                                        |  |                     | 80,960 |   |                        |   | 66,890       |  |   | 466                |   |  |   | 148,316 |  
|                                                                                |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |         |  
|Income from operations                                                          |  |                     | 169    |   |                        |   | 8,881        |  |   | (466               | ) |  |   | 8,584   |  
|Interest expense                                                                |  |                     | 7,285  |   |                        |   | 2,342        |  |   | (651               | ) |  |   | 8,976   |  
|Intercompany interest allocations                                               |  |                     | (4,556 | ) |                        |   | 4,556        |  |   |                   |   |  |   |        |  
|                                                                                |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |         |  
|Income (loss) before income taxes                                               |  |                     | (2,560 | ) |                        |   | 1,983        |  |   | 185                |   |  |   | (392    | )
|Provision (benefit) for income taxes                                            |  |                     | (1,018 | ) |                        |   | 734          |  |   | 109                |   |  |   | (175    | )
|Equity income from subsidiaries                                                 |  |                     | 1,325  |   |                        |   |             |  |   | (1,325             | ) |  |   |        |  
|                                                                                |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |         |  
|Net income (loss)                                                               |  | $                   | (217   | ) |                        | $ | 1,249        |  | $ | (1,249             | ) |  | $ | (217    | )
|                                                                                |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |         |  



22



---

CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2005 (As Restated)

(Unaudited)



|                                                                                               |  |                     |         |   |                        |   |        |              |  |   |                    |   |  |   |         |  
|---------------------------------------------------------------------------------------------- |  | ------------------- | ------- | - | ---------------------- | - | ------ | ------------ |  | - | ------------------ | - |  | - | ------- | -
|                                                                                               |  | Parent Company Only |         |   | Guarantor Subsidiaries |   |        | Eliminations |  |   | Consolidated Total |  
|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 expense                                                               |  |                     |        |   |                        |   | 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 and lease financing obligations               |  |                     | (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   |  
|                                                                                               |  |                     |         |   |                        |   |        |              |  |   |                    |   |  |   |         |  



23



---

CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2004 (As Restated)

(Unaudited)



|                                                                                               |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ------------------- | ------- | - | ---------------------- | - | ------ | ----------- |  | - | ------------------ | - |  | - | ------ | -
|                                                                                               |  | Parent Company Only |         |   | Guarantor Subsidiaries |   |        | Elimination |  |   | Consolidated Total |  
|Cash flows provided from (used for) operating activities:                                      |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|Net income (loss)                                                                              |  | $                   | (217    | ) |                        | $ | 1,249  |             |  | $ | (1,249             | ) |  | $ | (217   | )
|Adjustments to reconcile net income to net cash provided from (used for) operating activities: |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|Stock based compensation expense                                                               |  |                     |        |   |                        |   | 526    |             |  |   |                   |   |  |   | 526    |  
|Depreciation and amortization                                                                  |  |                     | 6,142   |   |                        |   | 4,135  |             |  |   | (119               | ) |  |   | 10,158 |  
|Amortization of deferred financing costs                                                       |  |                     | 357     |   |                        |   | 68     |             |  |   | (35                | ) |  |   | 390    |  
|Amortization of unearned purchase discounts                                                    |  |                     | (539    | ) |                        |   |       |             |  |   |                   |   |  |   | (539   | )
|Amortization of deferred gains from sale-leaseback transactions                                |  |                     | (86     | ) |                        |   | (25    | )           |  |   | (38                | ) |  |   | (149   | )
|Impairment losses                                                                              |  |                     | 261     |   |                        |   |       |             |  |   |                   |   |  |   | 261    |  
|Accretion of interest on lease financing obligations                                           |  |                     | (2      | ) |                        |   | 119    |             |  |   | (9                 | ) |  |   | 108    |  
|Deferred income taxes                                                                          |  |                     | (52     | ) |                        |   | (527   | )           |  |   | 43                 |   |  |   | (536   | )
|Increase in accrued payroll, related taxes and benefits                                        |  |                     | 933     |   |                        |   | (60    | )           |  |   |                   |   |  |   | 873    |  
|Changes in other operating assets and liabilities                                              |  |                     | 4,884   |   |                        |   | (6,995 | )           |  |   | 1,407              |   |  |   | (704   | )
|                                                                                               |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|Net cash provided from (used for) operating activities                                         |  |                     | 11,681  |   |                        |   | (1,510 | )           |  |   |                   |   |  |   | 10,171 |  
|                                                                                               |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|Cash flows provided from (used for) investing activities:                                      |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|Capital expenditures:                                                                          |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|New restaurant development                                                                     |  |                     | (107    | ) |                        |   | (1,647 | )           |  |   |                   |   |  |   | (1,754 | )
|Restaurant remodeling                                                                          |  |                     | (61     | ) |                        |   |       |             |  |   |                   |   |  |   | (61    | )
|Other restaurant expenditures                                                                  |  |                     | (557    | ) |                        |   | (817   | )           |  |   |                   |   |  |   | (1,374 | )
|Corporate and restaurant information systems                                                   |  |                     | (121    | ) |                        |   | (45    | )           |  |   |                   |   |  |   | (166   | )
|                                                                                               |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|Total capital expenditures                                                                     |  |                     | (846    | ) |                        |   | (2,509 | )           |  |   |                   |   |  |   | (3,355 | )
|Proceeds from sale-leaseback transactions                                                      |  |                     | 1,238   |   |                        |   | 1,580  |             |  |   |                   |   |  |   | 2,818  |  
|                                                                                               |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|Net cash provided from (used for) investing activities                                         |  |                     | 392     |   |                        |   | (929   | )           |  |   |                   |   |  |   | (537   | )
|                                                                                               |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|Cash flows provided from (used for) financing activities:                                      |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|Payments on revolving credit facility, net                                                     |  |                     | (600    | ) |                        |   |       |             |  |   |                   |   |  |   | (600   | )
|Scheduled principal payments on term loans                                                     |  |                     | (3,375  | ) |                        |   |       |             |  |   |                   |   |  |   | (3,375 | )
|Principal pre-payments on term loans                                                           |  |                     | (9,000  | ) |                        |   |       |             |  |   |                   |   |  |   | (9,000 | )
|Payments on other notes payable, net                                                           |  |                     | (98     | ) |                        |   |       |             |  |   |                   |   |  |   | (98    | )
|Principal payments on capital leases                                                           |  |                     | (44     | ) |                        |   | (62    | )           |  |   |                   |   |  |   | (106   | )
|Financing costs associated with issuance of debt and lease financing obligations               |  |                     | (61     | ) |                        |   | (160   | )           |  |   |                   |   |  |   | (221   | )
|Proceeds from lease financing obligations                                                      |  |                     | 1,250   |   |                        |   | 3,250  |             |  |   |                   |   |  |   | 4,500  |  
|                                                                                               |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|Net cash provided from (used for) financing activities                                         |  |                     | (11,928 | ) |                        |   | 3,028  |             |  |   |                   |   |  |   | (8,900 | )
|                                                                                               |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|Net increase in cash and cash equivalents                                                      |  |                     | 145     |   |                        |   | 589    |             |  |   |                   |   |  |   | 734    |  
|Cash and cash equivalents, beginning of period                                                 |  |                     | 708     |   |                        |   | 1,706  |             |  |   |                   |   |  |   | 2,414  |  
|                                                                                               |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  
|Cash and cash equivalents, end of period                                                       |  | $                   | 853     |   |                        | $ | 2,295  |             |  | $ |                   |   |  | $ | 3,148  |  
|                                                                                               |  |                     |         |   |                        |   |        |             |  |   |                    |   |  |   |        |  



24



---

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

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

We use the term Segment EBITDA in Amendment No. 1 to our Quarterly Report on Form 10-Q/A for the quarterly period ended April 3,
2005 because we believe it is a useful financial indicator for measuring segment operating results. Segment EBITDA may not be necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation.

This 2005 Quarterly Report on Form 10-Q/A 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 Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004:



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



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



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



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



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



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



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



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



25



---

| |  |  | 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 Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

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 2, 2005 and December 28, 2003 will be referred to as the fiscal years ended December 31, 2004 and 2003, respectively. Similarly, all references herein to the three months ended April 3, 2005 and
March 28, 2004 will be referred to as the three months ended March 31, 2005 and March 31, 2004, respectively.



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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 538 company owned and operated restaurants in 17 states as of
March 31, 2005. 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. For the three months ended March 31, 2005 we had total revenues of $169.5 million.

Hispanic Brands

We acquired Pollo
Tropical, Inc. in July 1998 and acquired Taco Cabana, Inc. in December 2000. 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, 2005, our Hispanic Brands were comprised of 191 company-owned and 31 franchised restaurants and accounted for 49.9% of our revenues for the three months ended March 31, 2005.

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, 2005, we owned and operated 127 Taco Cabana restaurants located in Texas, Oklahoma and New
Mexico and franchised seven Taco Cabana restaurants in Texas, New Mexico and Georgia. For the three months ended March 31, 2005, our company-owned Taco Cabana restaurants generated total revenues of $50.1 million and segment EBITDA of $7.3
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, 2005, we owned and operated a total of 64 Pollo Tropical restaurants, 55
of which were located in south Florida and nine of which were located in central Florida. We also franchised 24 Pollo Tropical restaurants as of March 31, 2005, 20 of which were located in Puerto Rico, three in Ecuador and one in Miami. Since
our acquisition of Pollo Tropical, we have expanded the brand by over 75% by opening 28 new restaurants. For the three months ended March 31, 2005, our company-owned Pollo Tropical restaurants generated total revenues of $34.4 million and
segment EBITDA of $7.4 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, 2005,
we operated 347 Burger King restaurants located in 13 Northeastern, Midwestern and Southeastern states. For the three months ended March 31, 2005, our Burger King restaurants generated total revenues of $84.9 million and segment EBITDA of $5.8
million.

Recent Developments

Effective May 3, 2005, Holdings issued an aggregate of 260,600 shares of common stock in exchange for the cancellation and termination of an identical number of outstanding options to purchase shares of Holdings common stock. 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. We recorded a compensation charge in the second quarter of 2005 relative to these stock awards.



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Restatements of Previously Issued Financial Statements

Current Restatement

As previously reported in
Amendment No. 1 to our 2004 Annual Report on Form 10-K/A for the year ended December 31, 2004, we restated our financial statements including applicable footnotes as of December 31, 2004 and 2003 and for the years ended
December 31, 2004, 2003 and 2002 and the unaudited quarterly financial information for the first three quarters of 2004.

Lease Financing
Obligations

We reviewed our accounting with respect to the depreciation of assets and recording of interest expense associated with
lease financing obligations related to sale-leaseback transactions required to be accounted for under the financing method. Under the financing method, the assets subject to these obligations remain on the consolidated balance sheet at their
historical costs and continue to be depreciated over their useful lives; the proceeds we received from the transaction are recorded as a lease financing obligation and the lease payments are applied as payments of principal and interest.

We previously considered the land and building as a single asset and depreciated this asset (both land and building) over a depreciable life that was
deemed to be the 20-year primary lease term of the underlying obligation. We have concluded that our prior accounting was in error and that the portion of the asset representing land should not be depreciated and the depreciation of the
building portion of this asset should continue using its original estimated useful life rather than the term of the underlying obligation. The effect of this restatement resulted in a reduction of depreciation expense of $0.5 million and an increase
to net income of $0.3 million in both the three months ended March 31, 2005 and 2004, respectively.

Historically, we allocated the
related lease payments between interest and principal using an interest rate that would fully amortize the lease financing obligation by the end of the primary lease term. Due to the change in depreciation described above, the assets subject to the
lease financing obligations will have a net book value at the end of the primary lease term, primarily for the land portion. To prevent the recognition of a non-cash loss or negative amortization of the obligation through the end of the primary
lease term, it was necessary to reevaluate the selection of interest rates which included our incremental borrowing rate, and to adjust the rates used to amortize the lease financing obligations so that a lease obligation equal to or greater than
the unamortized asset remained at the end of the primary lease term. The effect of this restatement resulted in an increase in interest expense related to the lease financing obligations of $0.7 million in both the three months ended March 31,
2005 and 2004 and a decrease to net income of $0.4 million and $0.6 million in each of the three months ended March 31, 2005 and 2004, respectively.

These restatements also resulted in an increase in land and buildings subject to lease financing obligations of $12.0 million and an increase in lease financing obligations of $18.0 million at March 31, 2005.

We also reviewed previously reported sale-leaseback transactions and determined twelve additional real estate transactions were required
to be recorded as financing transactions rather than as sale/leaseback transactions under SFAS No. 98 Accounting for Leases due to certain forms of continuing involvement. The impact of this restatement is to keep the assets subject
to such leases on our balance sheet and to record the proceeds we received from these transactions (including the gains previously deferred) as lease financing obligations. This restatement also affects our operating results by increasing the
depreciation expense for buildings subject to these transactions and recharacterizing the lease payments, previously reported as rent expense for these restaurants, as interest expense and principal repayments on the related financing obligations.
The effect of this restatement (a) for the three months ended March 31, 2005 and 2004 was to (i) reduce rent expense by $0.3 million in each period; (ii) increase depreciation expense by $0.1 million in each period;
(iii) increase interest expense by $0.3 million in each period; and (iv) reduce net income by $0.1 million in each period; and (b) at March 31, 2005, to increase the net book value of the assets subject to lease financing obligations
by $9.4 million, reduce deferred income-sale/leaseback of real estate by $3.0 million and increase lease financing obligations by $14.7 million.

The net effect of the above current restatements was to decrease net income $0.2 million in each of the three months ended March 31, 2005 and 2004, respectively.

Deferred Taxes

We also have reviewed deferred taxes recorded for certain long-lived assets and
liabilities that were previously acquired in business combinations and the related differences between the income tax bases and the financial reporting bases of these assets and liabilities and determined that the deferred taxes recorded at the
acquisition dates were incorrect. The result of these restatements was to decrease goodwill and deferred tax liabilities by $2.1 million in the aggregate related to



28



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our 2000 acquisition of Taco Cabana and to increase goodwill and deferred tax liabilities by $0.6 million related to our 1998 acquisition of Pollo Tropical.
This restatement also cumulatively decreased goodwill amortization expense by $0.1 million for periods prior to 2002.

Statements of Cash Flows

The Company has corrected its previously issued financial statements to reflect the proceeds from qualifying sale-leaseback
transactions within investing activities rather than as financing activities as previously reported in the statements of cash flows. For the three months ended March 31, 2004 proceeds from qualifying sale-leaseback transactions included in the
accompanying consolidated financial statements were $2.8 million. We have also restated our consolidated statements of cash flows for the three months ended March 31, 2005 and 2004 to reflect the impact of changes in accounts payable related to
the acquisition of property and equipment as a non-cash item as required under SFAS No. 95.

Previous Restatement

As previously reported in the Companys Annual Report on Form 10-K for the year ended December 31, 2004, the Company restated its financial
statements including applicable footnotes as of December 31, 2003 and for the years ended December 31, 2003 and 2002 and the unaudited quarterly financial information for the first three quarters of 2004.

Lease and Leasehold Improvement Accounting

We
reviewed our lease accounting policies following a host of announcements by many restaurant and retail companies that they were revising their accounting practices for leases. We historically followed the accounting practice of using the initial
lease term when determining operating versus capital lease classification and when calculating straight-line rent expense. In addition, we depreciated our buildings on leased land and leasehold improvements over a period that included both the
initial lease term plus one or more optional extension periods even if the option renewal was not reasonably assured (or the useful life of the asset if shorter).

Upon such review, we restated our financial statements for the years ended December 31, 2003 and 2002 and the unaudited quarterly financial information for 2003 and the first three quarters of 2004 to correct
errors in our lease accounting. Specifically, we revised our lease term for purposes of lease classification and calculating straight-line rent expense to only include renewal options that are reasonably assured of exercise because an economic
penalty, as defined under SFAS No. 13, Accounting for Leases, (SFAS 13) would be incurred in the event of non-renewal. We also revised our useful lives of leasehold improvements to the shorter of their economic lives or
the lease term as defined in SFAS No. 13. The primary impact of the restatement was to accelerate depreciation of buildings on leased land and leasehold improvements made subsequent to the lease inception date. The restatement also reduced the
lives of intangible assets related to leases. As a result of this restatement, amortization expense for leasehold improvements was increased by $0.4 million in the first three months of 2004.

In conjunction with the review of our lease accounting, we also determined that adjustments were necessary for lease liabilities for operating leases
with non-level rents at the time of our acquisitions of Pollo Tropical in 1998 and Taco Cabana in 2000 as well as liabilities related to acquired leases with above-market rentals for Taco Cabana. We have adjusted our purchase price allocations for
these acquisitions and restated lease liabilities and goodwill as of the acquisition dates. We have also restated rent expense and interest expense for those previously reported periods subsequent to each acquisition and restated goodwill
amortization through December 31, 2001. As a result of these restatements, rent expense increased $0.1 million in the first three months of 2004.

Accounting for Franchise Rights

In 2004, we also reviewed our accounting policies for the amortization of franchise rights,
intangible assets pertaining to our Burger King acquisitions, and determined that we made an error in the assessment of their remaining useful lives at January 1, 2002, as part of our adoption of SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142). Beginning on January 1, 2002, 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. Previously, we amortized the amounts allocated to franchise rights over periods ranging from twenty to forty years.



29



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In connection with the review of our accounting for franchise rights, we also determined that we
understated the franchise rights and deferred tax liabilities each by $14.0 million that pertained to an acquisition of 64 Burger King restaurants in 1997.

The adjustments related to these restatements reduced amortization expense by $0.2 million in the first three months of 2004.

Stock-based Compensation Expense

In 2004, we reevaluated the terms of our option plans and grants and concluded that
provisions of certain options granted under our plans require us to account for these options using the variable accounting provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
(APB 25). Previously, we had accounted for these options under APB 25 using a fixed accounting treatment whereby compensation expense, if any, was only evaluated at the date of the option grant. The impact of this adjustment was to
increase stock-based compensation expense, included in general and administrative expenses, by $0.5 million in the first three months of 2004.

Accounting for Guarantor Financial Statements

We have restated our financial statements to correct the disclosure related
to the Company and its subsidiaries who guarantee certain of the Companys securities for the three months ended March 31, 2004 to reflect the allocation of corporate costs to conform to the current year presentation. See Note 13 to the
Consolidated Financial Statements.

All previously reported amounts that appear in our Managements Discussion and Analysis of
Financial Condition and Results of Operations below have also been restated to report the revised amounts. See Note 3 to the accompanying Consolidated Financial Statements for a complete discussion of the restatements.

Significant Accounting Policies

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



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The preparation of financial statements in conformity with accounting principles generally accepted in
the United States requires us to make assumptions and estimates that can have a material impact on our results of operations. Sales recognition at company-operated restaurants is straightforward as customers pay for products at the time of sale and
inventory turns over very quickly. Payments to vendors for products sold in the restaurants are generally settled within 30 days. The earnings reporting process is covered by our system of internal controls, and generally does not require
significant management estimates and judgments. However, estimates and judgments, as noted below, are inherent in the assessment and recording of accrued occupancy costs, insurance liabilities, legal obligations, income taxes, the valuation of
goodwill and intangible assets for impairment, and 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, 2005, we had four non-operating restaurant properties.

Insurance liabilities. We are self-insured for most
workers compensation, general liability and medical insurance claims. At March 31, 2005, we had $9.2 million accrued for these insurance claims. We record insurance liabilities based on historical and industry trends, which are
continually monitored, and adjust accruals as warranted by changing circumstances. Since there are many estimates and assumptions involved in recording these insurance liabilities, including the ability to estimate the future development of incurred
claims based on historical trends, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities.

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 the change in the period such
determination is made.

Carrols and its subsidiaries file their tax returns on a consolidated basis with Carrols Holdings. Carrols Holdings
has determined that it should have requested permission from the Internal Revenue Service (the IRS) in order for Carrols Holdings and its subsidiaries to file consolidated federal income tax returns for certain prior taxable years.
Accordingly, Carrols Holdings has filed a ruling request with the IRS requesting such permission. We expect that such request will be granted. Moreover, if such request is denied, we believe that Carrols could still properly have filed a
consolidated return with the subsidiaries comprising the Taco Cabana and Pollo Tropical businesses, but this result is uncertain. If the IRS were to successfully challenge the inclusion of those subsidiaries in our consolidated tax return, we have
estimated that we would owe back taxes in an aggregate amount ranging from approximately $5 million to approximately $8 million plus interest (tax-effected) ranging from approximately $0.7 million to approximately $1.1 million. In such event, we
would have net operating loss carryforwards, for individual subsidiaries, that could be utilized to offset future taxable income of our group, and only any interest charged would negatively impact our earnings.

Evaluation of Goodwill. We must evaluate our recorded intangible assets for impairment under SFAS 142 on an ongoing basis. We have elected to
conduct our annual impairment review of goodwill and other indefinite-lived intangible assets at December 31. Our review at December 31, 2004 indicated there has been no impairment as of that date. This annual evaluation requires us to
make estimates and assumptions regarding the fair value of our reporting units. These estimates may differ from actual future events.



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Impairment of Long-lived Assets. We assess the potential impairment of long-lived assets 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 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 an other 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. At March 31,
2005 there were no purchase options for properties subject to lease financing obligations that we deemed were probable of exercise.

Recent Accounting
Developments

In September 2004, the Financial Accounting Standards Board (FASB) issued Emerging Issues Task Force
(EITF) Topic D-108, Use of the Residual Method to Value Acquired Assets Other than Goodwill, which requires companies, which have applied the residual method to value intangible assets, to perform an impairment test on those
intangible assets by the end of the first quarter of 2005. The provisions of EITF Topic D-108 did not affect our consolidated financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment (SFAS 123R) which replaces SFAS No. 123 (SFAS 123), Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. SFAS 123R requires the measurement of all employee share-based payments, including grants of employee stock options, using a
fair-value-based



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method and the recording of such expense in the consolidated statements of income. The pro forma disclosures previously permitted under SFAS 123 no longer
will be an alternative to financial statement recognition. In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107 Share-Based Payment. SAB 107 expresses views of the SEC staff regarding the interaction
between SFAS 123R and certain SEC rules and regulations and provides the staffs views regarding the valuation of share-based payment arrangements. SFAS 123R is effective for awards that are granted, modified, or settled in cash for the first
annual reporting period beginning after June 15, 2005. We are currently evaluating the impact of these pronouncements on our financial statements.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets (SFAS 153). This Statement amends the guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions (APB 29). APB 29 provided an exception to the basic measurement principle (fair value) for exchanges of similar assets, requiring that some nonmonetary exchanges be recorded on a carryover basis. SFAS 153 eliminates
the exception to fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance, that is, transactions that are not expected to result in significant
changes in the cash flows of the reporting entity. The provisions of SFAS 153 are effective for exchanges of nonmonetary assets occurring in fiscal periods beginning after June 15, 2005.

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, (FIN
47). FIN 47 clarifies that the term conditional as used in SFAS No. 143, Accounting for Asset Retirement Obligations, which refers to a legal obligation to perform an asset retirement activity even if the timing
and/or settlement are conditional on a future event that may or may not be within the control of an entity. Accordingly, the entity must record a liability for the conditional asset retirement obligation if the fair value of the obligation can be
reasonably estimated. FIN 47 becomes effective for us in the fourth quarter of 2005. We are currently evaluating the impact of FIN 47 on our financial statements.

On June 30, 2005, tax legislation in the state of Ohio was enacted that will significantly restructure the tax system for most corporate taxpayers. Included in the legislation is a multi-year phase-out of the
state franchise tax and tangible personal property tax. These taxes will be replaced with a Commercial Activity Tax that will be phased-in over a five-year period. We are evaluating the impact of this legislation and will record any impact therefrom
in the second quarter of 2005.

Results of Operations

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004.

Since March 31, 2004
we have opened one new Burger King restaurant, four new Pollo Tropical restaurants and four new Taco Cabana restaurants. We also closed five Burger King restaurants since March 31, 2004.

The following table sets forth, for the three months ended March 31, 2005 and 2004, selected operating results as a percentage of restaurant sales:



|                                      |  |                           |   |  |                           |  
|------------------------------------- |  | ------------------------- | - |  | ------------------------- | -
|                                      |  | As Restated (Note 3) 2005 |   |  | As Restated (Note 3) 2004 |  
|Restaurant sales:                     |  |                           |   |  |                           |  
|Burger King                           |  | 50.2                      | % |  | 51.8                      | %
|Pollo Tropical                        |  | 20.2                      | % |  | 18.8                      | %
|Taco Cabana                           |  | 29.6                      | % |  | 29.4                      | %
|                                      |  |                           |   |  |                           |  
|                                      |  | 100.0                     | % |  | 100.0                     | %
|Costs and expenses:                   |  |                           |   |  |                           |  
|Cost of sales                         |  | 28.9                      | % |  | 27.9                      | %
|Restaurant wages and related expenses |  | 29.6                      | % |  | 30.6                      | %
|Restaurant rent expense               |  | 5.3                       | % |  | 5.3                       | %
|Other restaurant expenses             |  | 14.3                      | % |  | 14.0                      | %
|Advertising expense                   |  | 3.9                       | % |  | 3.7                       | %
|General and administrative            |  | 6.2                       | % |  | 6.6                       | %
|Income from restaurant operations     |  | 6.6                       | % |  | 5.3                       | %



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Restaurant Sales. Total restaurant sales for the first quarter of 2005 increased $12.6 million, or
8.0%, to $169.1 million from $156.5 million in the first quarter of 2004 due to sales increases at all three of our restaurant concepts.

Taco Cabana restaurant sales increased $4.0 million, or 8.8%, to $50.1 million in the first quarter of 2005 due primarily to a 5.5% sales increase at our comparable Taco Cabana restaurants that resulted from increases in the average sales
transaction and, to a lesser extent, the addition of four restaurants since the end of the first quarter of 2004 and modest menu price increases in 2005 of approximately 1%.

Pollo Tropical restaurant sales increased $4.8 million, or 16.3%, in the first quarter of 2005 to $34.2 million due primarily to a 10.6% sales increase
at our comparable Pollo Tropical restaurants that resulted from an increase in customer traffic, and, to a lesser extent, the opening of four Pollo Tropical restaurants since the end of the first quarter of 2004 and menu price increases of
approximately 2% in 2005.

Burger King restaurant sales increased $3.8 million, or 4.6%, to $84.9 million in the first quarter of 2005 due
to a 5.0% sales increase at our comparable Burger King restaurants that resulted from increases in the average sales transaction due to sales of premium sandwiches and menu price increases of approximately 3.5% since the end of the first quarter of
2004.

Operating Costs and Expenses. Cost of sales (food and paper costs), as a percentage of total restaurant sales, increased to
28.9% in the first quarter of 2005 from 27.9% in the first quarter of 2004. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, decreased to 29.0% in the first quarter of 2005 from 29.7% in 2004 due primarily to improvements
in restaurant-level food controls (1.4% of Taco Cabana sales) and the effect of menu price increases (0.3% of Taco Cabana sales), partially offset by higher commodity prices in 2005 (1.0% of Taco Cabana sales). Pollo Tropical cost of sales, as a
percentage of Pollo Tropical restaurant sales, increased significantly to 33.3% in the first quarter of 2005 from 30.7% in 2004 due in part to a 19% increase in whole chicken commodity prices and increases in other commodity prices (2.7% of Pollo
Tropical sales) and higher menu paper costs (0.4% of Pollo Tropical sales), offset in part by the effect of menu price increases (0.5% of Pollo Tropical sales). Burger King cost of sales, as a percentage of Burger King restaurant sales, increased to
27.0% in the first quarter of 2005 from 25.9% in 2004 due primarily to an increase in beef and other commodity prices (0.8% of Burger King sales), lower rebates in 2005 (0.6% of Burger King sales) and increased sales of menu items introduced in 2004
which have higher selling prices but lower margins as a percentage of their selling prices (0.6% of Burger King sales). These increases were offset in part by the effect of menu price increases since the end of the first quarter of 2004 (1.1% of
Burger King sales).

Restaurant wages and related expenses, as a percentage of total restaurant sales, decreased to 29.6% in the first
quarter of 2005 from 30.6% in 2004. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, decreased to 28.2% in the first quarter of 2005 from 28.9% in 2004 due primarily to the effect on fixed labor
costs of higher comparable restaurant sales volumes, the effect of menu price increases and lower medical insurance costs. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, decreased to 23.2%
in the first quarter of 2005 from 24.2% in 2004 due to the effect on fixed labor costs of higher comparable restaurant sales volumes and the effect of menu price increases. Burger King restaurant wages and related expenses, as a percentage of Burger
King restaurant sales, decreased to 33.0% in the first quarter of 2005 from 33.8% in 2004 due primarily to lower medical and workers compensation insurance costs (0.7%).

Restaurant rent expense, as a percentage of total restaurant sales, was 5.3% for both the first quarters of 2005 and 2004.

Other restaurant operating expenses, as a percentage of total restaurant sales, increased to 14.3% in the first quarter of 2005 from 14.0% in 2004. Taco Cabana other restaurant operating expenses, as a percentage of
Taco Cabana restaurant sales, increased to 14.2% in the first quarter of 2005 from 13.0% in 2004 due primarily to higher repair and maintenance expenses associated with initiatives to enhance the appearance of our Taco Cabana restaurants. Pollo
Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased slightly to 11.0% in the first quarter of 2005 from 10.9% in 2004. Burger King other restaurant operating expenses, as a percentage of Burger
King restaurant sales, increased slightly to 15.7% in the first quarter of 2005 from 15.6% in 2004.



34



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Advertising expense, as a percentage of total restaurant sales, increased to 3.9% in the first quarter of
2005 from 3.7% in the first quarter of 2004. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, decreased to 4.1% in the first quarter of 2005 from 4.5% in 2004 due primarily to the timing of promotions. Our Taco
Cabana advertising expenditures for all of 2005 are anticipated to be comparable to 2004 (approximately 4.0% to 4.2% of Taco Cabana sales). Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales, increased to 3.3% in
the first quarter of 2005 from 1.6% in 2004 due to television and radio advertising expenditures in the first quarter of 2005. There were no television and radio advertising expenditures in the first quarter of 2004. Our Pollo Tropical advertising
expenditures for all of 2005 are anticipated to range from 2.0% to 2.5% of Pollo Tropical restaurant sales. Burger King advertising expense, as a percentage of Burger King restaurant sales, was 4.0% in the first quarter of 2005 and 2004.

General and administrative expenses, as a percentage of total restaurant sales, decreased to 6.2% in the first quarter of 2005 from 6.6% in 2004 due
primarily to a reduction in 2005 of stock-based compensation expense of $0.5 million.

Segment EBITDA. Segment EBITDA is a measure
of segment profit or loss reported to the chief operating decision maker for purposes of allocating resources to our restaurant concepts and assessing their performance. Segment EBITDA 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 restaurant concept increased 16.1% to $7.3 million in the first
quarter of 2005 from $6.3 million in 2004. Segment EBITDA for our Pollo Tropical restaurant concept increased $0.2 million to $7.4 million in the first quarter of 2005 from $7.2 million in 2004. Segment EBITDA for our Burger King restaurant segment
decreased $0.2 million to $5.8 million in the first quarter of 2005 from $6.0 million in 2004.

Depreciation and Amortization and
Impairment Losses. Depreciation and amortization expense decreased to $8.4 million in the first quarter of 2005 from $10.2 million in the first quarter of 2004 due primarily to lower depreciation of equipment and information systems related to
our Burger King restaurants of $0.5 million, lower leasehold improvement amortization of $0.2 million for all of our restaurants and also in general to lower capital expenditures for the year ended December 31, 2004 at our Burger King and Taco
Cabana restaurants compared to historical levels. Impairment losses were $0.4 million and $0.3 million in the first three months of 2005 and 2004, respectively, and were related in both years to certain underperforming Burger King restaurants.

Interest Expense. Interest expense increased $1.3 million to $10.3 million in the first quarter of 2005 from $9.0 million in 2004
due primarily to higher average debt balances in the first quarter 2005 resulting from the December 2004 refinancing and higher effective interest rates on our floating rate debt. The weighted average interest rate on all long-term debt for the
three months ended March 31, 2005 decreased to 6.8% from 7.5% in the first three months of 2004. This decrease was due to our senior subordinated notes, which are at a higher rate than our borrowings under our senior credit facility, comprising
a lower percentage of our total outstanding long-term debt in 2005, as a result of increased borrowings under our senior credit facility from our refinancing in the fourth quarter of 2004.

Provision for Income Taxes. The provision for income taxes for the first quarter of 2005 was derived using an estimated effective annual income
tax rate for 2005 of approximately 33%. The benefit for income taxes in the first quarter of 2004 is based on an effective tax rate for 2004 of 45.4%. This rate is higher than the statutory Federal tax rate primarily due to state income taxes and
tax credits.

Net Income (Loss). As a result of the foregoing, net income in the first quarter of 2005 increased to $0.9 million
from a net loss of $0.2 million in the first quarter of 2004.



35



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Off-Balance Arrangements

We have no off-balance sheet arrangements.

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, planned development and debt service requirements for the next twelve months.

December 2004 Refinancing. 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 senior subordinated notes. Concurrently, we
repaid all outstanding borrowings under our prior senior secured credit facility and amended and restated such senior credit facility with a new syndicate of lenders, which we refer to as the new senior credit facility. We received
$400.0 million in total proceeds that included the issuance of the senior subordinated notes and the term loan B borrowings of $220.0 million under the new senior credit facility. The proceeds were primarily utilized to repay borrowings outstanding
under the prior senior credit facility of $74.4 million, to retire all of our 91/2% senior subordinated notes due 2008 (including redemption premiums) in the amount of $175.9 million, to pay a
dividend to Holdings, our sole stockholder, in the amount of $116.8 million (and Holdings concurrently paid a dividend to its stockholders in the aggregate amount of $116.8 million), to pay fees and expenses related to the refinancing of $8.8
million, and to pay a bonus to employees (including management) and a director, who owned options to purchase common stock of Holdings, totaling $20.9 million, which includes $0.6 million of payroll taxes.

Operating activities. Net cash used for operating activities in the first quarter of 2005 was $20.5 million compared to net cash provided by
operating activities of $10.2 million in the first quarter of 2004. At December 31, 2004 we had $31.5 million in cash due to the timing of payments associated with the December 2004 refinancing. In the first quarter of 2005, we paid the $20.3
million bonus to employees (including management) and a director and the applicable taxes of $0.6 million, as well as $5.5 million of tax withholdings related to the dividend payment in late December of 2004. These payments, totaling $26.4 million,
resulted in a net use of cash for operating activities in the first quarter of 2005. Our income tax payments included in operating activities have been historically reduced due to the utilization of net operating loss carry-forwards. As of
December 31, 2004, we had $1.6 million of remaining net operating loss carryforwards for Federal income tax purposes, Federal alternative minimum tax credit carryforwards of $2.9 million and Federal work opportunity tax credit carryforwards of
$2.9 million.

Investing activities including capital expenditures and sale-leaseback transactions. Net cash used for investing
activities for the three months ended March 31, 2005 was $5.3 million primarily due to capital expenditures (that represent a major investment of cash for us) of $5.1 million. Capital expenditures were $3.4 million in 2004. Net cash used for
investing activities for the three months ended March 31, 2004 was $0.5 million and included the sale of two restaurant properties in sale-leaseback transactions for net proceeds of $2.8 million. There were no sale-leaseback transactions in the
first quarter of 2005. The net proceeds from these sales in 2004 were used to reduce outstanding debt on our prior senior credit facility.



36



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



|                                        |  |             |       |                |   |             |  |   |       |   |              |   |     |  |   |      
|--------------------------------------- |  | ----------- | ----- | -------------- | - | ----------- |  | - | ----- | - | ------------ | - | --- |  | - | -----
|                                        |  | Taco Cabana |       | Pollo Tropical |   | Burger King |  |   | Other |   | Consolidated
|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    
|                                        |  |             |       |                |  
|Three Months Ended March 31, 2004:      |  |             |       |                |   |             |  |   |       |   |              |   |     |  |   |      
|Restaurant maintenance expenditures (1) |  | $           | 444   |                | $ | 373         |  | $ | 557   |   |              | $ |    |  | $ | 1,374
|Restaurant remodeling expenditures      |  |             |      |                |   |            |  |   | 61    |   |              |   |    |  |   | 61   
|New restaurant development expenditures |  |             | 1,538 |                |   | 109         |  |   | 107   |   |              |   |    |  |   | 1,754
|Other capital expenditures              |  |             |      |                |   |            |  |   |      |   |              |   | 166 |  |   | 166  
|                                        |  |             |       |                |   |             |  |   |       |   |              |   |     |  |   |      
|Total capital expenditures              |  | $           | 1,982 |                | $ | 482         |  | $ | 725   |   |              | $ | 166 |  | $ | 3,355
|                                        |  |             |       |                |   |             |  |   |       |   |              |   |     |  |   |      
|Number of new restaurant openings       |  |             | 2     |                |   | 0           |  |   | 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, 2005 and 2004, restaurant repair and maintenance expenses were approximately $4.5 million and $3.7 million, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For all of 2005, we anticipate total capital expenditures, excluding acquisitions, of approximately $30 million to $35 million. These capital expenditures include approximately $14 million to $17 million for the
development of new restaurants and purchase of related real estate applicable to our Taco Cabana and Pollo Tropical restaurant concepts. In 2005 we anticipate opening approximately three to five new Pollo Tropical restaurants (of which two have
opened as of July 29, 2005) and seven to nine new Taco Cabana restaurants (of which three have opened as of July 29, 2005). Capital expenditures in 2005 also include expenditures of approximately $14 million to $16 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. In July 2005 we acquired four Taco Cabana restaurants in Texas from a franchisee
for approximately $4.2 million.

Financing activities. Net cash used for financing activities for the three months ended
March 31, 2005 and 2004 was $0.8 million and $8.9 million, respectively. Financing activities in these periods consisted of repayments under our debt arrangements and in the first quarter of 2004 also included voluntary prepayments under our
term loans then outstanding of $9.0 million. In the first quarter of 2004 we also sold three restaurants for net proceeds of $4.5 million in sale-leaseback transactions accounted for as lease financing obligations. The net proceeds from these sales
were used to reduce outstanding debt under our previous senior credit facility.

Indebtedness. At March 31, 2005, we had total
debt outstanding of $512.4 million comprised of $180.0 million of unsecured senior subordinated notes, borrowings under our term loan B facility of $219.5 million under the senior credit facility, lease financing obligations of $111.8 million and
capital lease obligations of $1.1 million.



37



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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 million, subject to the satisfaction of certain conditions. At March 31, 2005, $219.5 million was outstanding under the term loan B facility and no amounts were outstanding under our revolving credit facility. After reserving
$10.8 million for letters of credit guaranteed by the facility, $39.2 million was available for borrowings under our revolving credit facility at March 31, 2005 and June 30, 2005.

As a result of the previous restatement of the Companys financial statements discussed above, we were in default under our senior credit facility
by failing to timely furnish our annual audited financial statements for fiscal year 2004 to our lenders. On May 19, 2005, we obtained a waiver of such default from our lenders that extended the time period to deliver the audited financial
statements for the 2004 fiscal year as well as the financial statements for the first quarter of 2005 to July 31, 2005.

In connection
with the sale of $180 million of the senior subordinated notes, we and certain of our subsidiaries, which we refer to as the guarantors, entered into a Registration Rights Agreement dated as of December 15, 2004, with J.P. Morgan
Securities Inc., Banc of America Securities LLC, Lehman Brothers Inc., Wachovia Capital Markets, LLC and SunTrust Capital Markets, Inc. In general, the Registration Rights Agreement provided that we and the guarantors agreed to file, and cause to
become effective, a registration statement with the Securities Exchange Commission in which we offer the holders of the senior subordinated notes the opportunity to exchange such senior subordinated notes for newly issued notes that have terms which
are identical to the senior subordinated notes that are registered under the Securities Act of 1933, as amended, which we refer to as the exchange offer.

Pursuant to the Registration Rights Agreement, because we did not complete the exchange offer on or prior to June 13, 2005, the interest rate on our senior subordinated notes was increased by 0.25% per annum
for the 90-day period immediately following June 13, 2005 and will be increased by an additional 0.25% per annum for each subsequent 90-day period, with a maximum of 1.00% per annum of additional interest, in each case until the
exchange offer is completed or the senior subordinated notes become freely tradable under the Securities Act of 1933, as amended.

Contractual Obligations. Our contractual obligations are detailed in Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 31, 2004. As of March 31, 2005, our contractual obligations have not
materially changed from December 31, 2004.

Inflation

The inflationary factors that have historically affected our results of operations include increases in food and paper costs, labor and other operating expenses. Wages paid in our restaurants are impacted by changes
in the Federal 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 of Amendment No. 1 to the Companys Annual Report on Form 10-K/A for the year ended December 31, 2004 with respect to the Companys market risk sensitive instruments.



38



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ITEM 4CONTROLS AND PROCEDURES

Restatement. As discussed in the
Explanatory Note to this Form 10-Q/A, we have amended our Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2005 to restate our consolidated financial statements for the three months ended April 3, 2005 and March 30, 2004. Refer to
Note 3 to the accompanying consolidated financial statements 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.

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 Note 3 to the accompanying consolidated financial statements. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were ineffective as of April 3, 2005.

Material Weaknesses in Internal Control Over Financial
Reporting. A 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 3, 2005:

Personnel

In conjunction with filing
this Form 10-Q/A, which included the restatements as discussed in Note 3 to the accompanying Consolidated Financial Statements, 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, SFAS No. 98 and Lease Accounting Policies

(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.



39



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(c) Controls over the selection and application of lease accounting policies were not effective in
determining lease terms for leasehold amortization periods and recording acquisitions of leases with non-level or above-market rentals which failed to identify misstatements in property and equipment, goodwill, deferred lease liability, depreciation
expense, amortization expense and rent expense.

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

(a) Controls over the application of SFAS No. 142 Accounting for Goodwill and Other Intangible Assets
(SFAS 142) were not effective in the evaluation of the amortization lives of franchise rights and the recording of deferred income tax liabilities related to franchise rights at the acquisition date resulting in misstatements of
franchise rights, deferred income tax liabilities, income tax expense, and amortization expense.

(b) 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.

Controls Over Certain Financial Statement Disclosures

(a) Controls over the preparation of the guarantor footnote disclosures were not effective resulting in the improper allocation of
corporate general and administrative and income tax expenses from the parent company only to the guarantor subsidiaries in accordance with generally accepted accounting principles.

(b) 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.

Controls Over Stock Option Accounting

Controls over the application of variable accounting for stock option agreements that contained several dividend provisions were not effective which failed to identify a misstatement in stock-based compensation
expense.

The control deficiencies described above resulted in the restatement of the Companys consolidated financial statements for
three months ended April 3, 2005 and March 30, 2004. 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 3, 2005 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 2005 that materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.

Remediation of Material Weaknesses

Through the date of the filing of this Form 10-Q/A, we have remediated the following material weaknesses: item (c) under Controls over Applying the Lease Financing Method, SFAS No. 98 and Lease Accounting Policies;
item (a) under Controls Related to Acquired Intangibles and Deferred Taxes in Conjunction with Acquisitions; item (a) under Controls Over Certain Financial Statement Disclosures; and Controls Over Stock Option Accounting, as described above and have
taken the following steps to improve our internal controls.



| | (a) | We have made improvements with respect to the controls over leasing transactions in the application of lease accounting policies in determining lease terms, the
assignment of appropriate lives for leasehold improvements and intangible assets related to leases, and
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



40



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| | recording the acquisitions of leases with non-level rents and, in that regard we have: (i) performed staff training and enhanced our management review over
our procedures in determining the definition of lease term and the assignment of appropriate depreciable lives to leasehold improvements and intangible assets related to leases in accordance with U.S. generally accepted accounting principles, and;
(ii) enhanced documentation procedures to ensure appropriate accounting for straight-line rent expense for any acquired businesses;
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | We implemented procedures to appropriately apply variable accounting with regards to certain stock options. In addition, all stock options were cancelled and terminated during the
quarter ended July 3, 2005;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | We improved our controls over the application of SFAS 142 in evaluating the amortization lives of franchise rights. We will continue to review any factors that would alter the
remaining lives of our franchise rights as circumstances change;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | We developed procedures to ensure that corporate general and administrative expenses and income tax expenses are properly allocated between the parent company only and
guarantor subsidiaries; and
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | We have hired two senior-level finance professionals to augment the Companys controls and procedures pertaining to financial reporting.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------

In addition, we plan to take the following steps to remediate the material weaknesses at April 3, 2005 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) | hire additional accounting personnel with the appropriate expertise.
| | --- | --------------------------------------------------------------------



41



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PART IIOTHER INFORMATION

Item 1. Legal Proceedings

There were no material legal proceedings commenced by or initiated against the
Company during the reported quarter or material developments in any previously reported litigation.

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.



42



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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



43