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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-Q



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

For the quarterly period ended July 2, 2006

OR



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

Commission File Number: 0-25629



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CARROLS CORPORATION

(Exact name of
registrant as specified in its charter)



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

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



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

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

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

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

The number of shares of the registrants common stock (par value $1 per share) outstanding as of August 6, 2006 is 10.



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED JUNE 30, 2006



|        |  |                                                                                         |  |     
|------- |  | --------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                         |  | Page
|PART I  |  | FINANCIAL INFORMATION                                                                   |  |     
|        |  |                                                                                        
|Item 1  |  | Consolidated Financial Statements (unaudited):                                          |  |     
|        |  |                                                                                        
|        |  | Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005                   |  | 3   
|        |  |                                                                                        
|        |  | Consolidated Statements of Operations for the Three Months Ended June 30, 2006 and 2005 |  | 4   
|        |  |                                                                                        
|        |  | Consolidated Statements of Operations for the Six Months Ended June 30, 2006 and 2005   |  | 5   
|        |  |                                                                                        
|        |  | Consolidated Statements of Cash Flows for the Six Months ended June 30, 2006 and 2005   |  | 6   
|        |  |                                                                                        
|        |  | Notes to Consolidated Financial Statements (unaudited)                                  |  | 7   
|        |  |                                                                                        
|Item 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations   |  | 24  
|        |  |                                                                                        
|Item 3  |  | Quantitative and Qualitative Disclosures About Market Risk                              |  | 39  
|        |  |                                                                                        
|Item 4  |  | Controls and Procedures                                                                 |  | 39  
|        |  |                                                                                        
|PART II |  | OTHER INFORMATION                                                                       |  |     
|        |  |                                                                                        
|Item 1  |  | Legal Proceedings                                                                       |  | 42  
|        |  |                                                                                        
|Item 1A |  | Risk Factors                                                                            |  | 42  
|        |  |                                                                                        
|Item 2  |  | Unregistered Sales of Equity Securities and Use of Proceeds                             |  | 53  
|        |  |                                                                                        
|Item 3  |  | Default Upon Senior Securities                                                          |  | 53  
|        |  |                                                                                        
|Item 4  |  | Submission of Matters to a Vote of Security Holders                                     |  | 53  
|        |  |                                                                                        
|Item 5  |  | Other Information                                                                       |  | 53  
|        |  |                                                                                        
|Item 6  |  | Exhibits                                                                                |  | 53  



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PART IFINANCIAL INFORMATION

ITEM 1INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

(Unaudited)



|                                                                                                      |  |              |         |   |                   |   |          |  
|----------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ----------------- | - | -------- | -
|                                                                                                      |  | June 30,2006 |         |   | December 31, 2005 |  
|ASSETS                                                                                                |  |              |         |   |                   |   |          |  
|Current assets:                                                                                       |  |              |         |   |                   |   |          |  
|Cash and cash equivalents                                                                             |  | $            | 2,053   |   |                   | $ | 9,331    |  
|Trade and other receivables                                                                           |  |              | 5,782   |   |                   |   | 3,017    |  
|Inventories                                                                                           |  |              | 4,818   |   |                   |   | 5,333    |  
|Prepaid rent                                                                                          |  |              | 4,775   |   |                   |   | 4,476    |  
|Prepaid expenses and other current assets                                                             |  |              | 5,791   |   |                   |   | 4,635    |  
|Refundable income taxes                                                                               |  |              |        |   |                   |   | 593      |  
|Deferred income taxes                                                                                 |  |              | 4,867   |   |                   |   | 4,867    |  
|                                                                                                      |  |              |         |   |                   |   |          |  
|Total current assets                                                                                  |  |              | 28,086  |   |                   |   | 32,252   |  
|Property and equipment, net (Note 3)                                                                  |  |              | 192,403 |   |                   |   | 217,506  |  
|Franchise rights, at cost less accumulated amortization of $54,255 and $52,649, respectively (Note 4) |  |              | 84,876  |   |                   |   | 86,490   |  
|Goodwill (Note 4)                                                                                     |  |              | 124,934 |   |                   |   | 124,934  |  
|Intangible assets, net (Note 4)                                                                       |  |              | 1,321   |   |                   |   | 1,465    |  
|Franchise agreements, at cost less accumulated amortization of $5,366 and $5,208, respectively        |  |              | 5,747   |   |                   |   | 5,869    |  
|Deferred income taxes                                                                                 |  |              | 14,628  |   |                   |   | 13,279   |  
|Other assets                                                                                          |  |              | 14,469  |   |                   |   | 15,150   |  
|                                                                                                      |  |              |         |   |                   |   |          |  
|Total assets                                                                                          |  | $            | 466,464 |   |                   | $ | 496,945  |  
|                                                                                                      |  |              |         |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                 |  |              |         |   |                   |   |          |  
|Current liabilities:                                                                                  |  |              |         |   |                   |   |          |  
|Current portion of long-term debt (Note 5)                                                            |  | $            | 2,540   |   |                   | $ | 2,588    |  
|Accounts payable                                                                                      |  |              | 18,670  |   |                   |   | 19,022   |  
|Accrued interest                                                                                      |  |              | 9,010   |   |                   |   | 7,615    |  
|Accrued payroll, related taxes and benefits                                                           |  |              | 15,342  |   |                   |   | 15,703   |  
|Accrued income taxes payable                                                                          |  |              | 1,954   |   |                   |   |         |  
|Other liabilities                                                                                     |  |              | 13,742  |   |                   |   | 12,765   |  
|                                                                                                      |  |              |         |   |                   |   |          |  
|Total current liabilities                                                                             |  |              | 61,258  |   |                   |   | 57,693   |  
|                                                                                                      |  |             
|Long-term debt, net of current portion (Note 5)                                                       |  |              | 372,849 |   |                   |   | 391,108  |  
|Lease financing obligations (Note 9)                                                                  |  |              | 74,082  |   |                   |   | 110,898  |  
|Deferred incomesale-leaseback of real estate                                                         |  |              | 26,557  |   |                   |   | 10,660   |  
|Accrued postretirement benefits (Note 8)                                                              |  |              | 4,405   |   |                   |   | 4,068    |  
|Other liabilities (Note 7)                                                                            |  |              | 26,207  |   |                   |   | 26,029   |  
|                                                                                                      |  |              |         |   |                   |   |          |  
|Total liabilities                                                                                     |  |              | 565,358 |   |                   |   | 600,456  |  
|                                                                                                      |  |             
|Commitments and contingencies (Note 11)                                                               |  |              |         |   |                   |   |          |  
|                                                                                                      |  |             
|Stockholders deficit:                                                                                |  |              |         |   |                   |   |          |  
|Common stock, par value $1; authorized 1,000 shares, issued and outstanding10 shares                 |  |              |        |   |                   |   |         |  
|Additional paid-in capital                                                                            |  |              | (75,948 | ) |                   |   | (75,948  | )
|Accumulated deficit                                                                                   |  |              | (22,946 | ) |                   |   | (27,563  | )
|                                                                                                      |  |              |         |   |                   |   |          |  
|Total stockholders deficit                                                                           |  |              | (98,894 | ) |                   |   | (103,511 | )
|                                                                                                      |  |              |         |   |                   |   |          |  
|Total liabilities and stockholders deficit                                                           |  | $            | 466,464 |   |                   | $ | 496,945  |  
|                                                                                                      |  |              |         |   |                   |   |          |  

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



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2006 AND 2005

(In thousands of dollars)

(Unaudited)



|                                                                                                    |  |      |         |      |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                                                                                                    |  | 2006 |         | 2005 |  
|Revenues:                                                                                           |  |      |         |      |   |         |  
|Restaurant sales                                                                                    |  | $    | 190,252 |      | $ | 181,393 |  
|Franchise royalty revenues and fees                                                                 |  |      | 329     |      |   | 407     |  
|                                                                                                    |  |      |         |      |   |         |  
|Total revenues                                                                                      |  |      | 190,581 |      |   | 181,800 |  
|                                                                                                    |  |      |         |      |   |         |  
|Costs and expenses:                                                                                 |  |      |         |      |   |         |  
|Cost of sales                                                                                       |  |      | 53,386  |      |   | 53,518  |  
|Restaurant wages and related expenses                                                               |  |      | 55,447  |      |   | 52,047  |  
|Restaurant rent expense                                                                             |  |      | 9,159   |      |   | 8,871   |  
|Other restaurant operating expenses                                                                 |  |      | 27,441  |      |   | 25,118  |  
|Advertising expense                                                                                 |  |      | 7,248   |      |   | 6,985   |  
|General and administrative (including stock-based compensation expense of $16,357 in 2005) (Note 2) |  |      | 11,827  |      |   | 27,422  |  
|Depreciation and amortization                                                                       |  |      | 8,463   |      |   | 8,362   |  
|Impairment losses (Note 3)                                                                          |  |      | 20      |      |   | 407     |  
|                                                                                                    |  |      |         |      |   |         |  
|Total operating expenses                                                                            |  |      | 172,991 |      |   | 182,730 |  
|                                                                                                    |  |      |         |      |   |         |  
|Income (loss) from operations                                                                       |  |      | 17,590  |      |   | (930    | )
|Interest expense (Note 9)                                                                           |  |      | 13,011  |      |   | 10,641  |  
|                                                                                                    |  |      |         |      |   |         |  
|Income (loss) before income taxes                                                                   |  |      | 4,579   |      |   | (11,571 | )
|Provision (benefit) for income taxes (Note 6)                                                       |  |      | 1,489   |      |   | (217    | )
|                                                                                                    |  |      |         |      |   |         |  
|Net income (loss)                                                                                   |  | $    | 3,090   |      | $ | (11,354 | )
|                                                                                                    |  |      |         |      |   |         |  

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



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(In thousands of dollars)

(Unaudited)



|                                                                                                    |  |      |         |      |   |         |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                                                                                                    |  | 2006 |         | 2005 |  
|Revenues:                                                                                           |  |      |         |      |   |         |  
|Restaurant sales                                                                                    |  | $    | 372,465 |      | $ | 350,531 |  
|Franchise royalty revenues and fees                                                                 |  |      | 659     |      |   | 785     |  
|                                                                                                    |  |      |         |      |   |         |  
|Total revenues                                                                                      |  |      | 373,124 |      |   | 351,316 |  
|                                                                                                    |  |      |         |      |   |         |  
|Costs and expenses:                                                                                 |  |      |         |      |   |         |  
|Cost of sales                                                                                       |  |      | 105,299 |      |   | 102,356 |  
|Restaurant wages and related expenses                                                               |  |      | 109,189 |      |   | 102,122 |  
|Restaurant rent expense                                                                             |  |      | 18,179  |      |   | 17,764  |  
|Other restaurant operating expenses                                                                 |  |      | 53,889  |      |   | 49,314  |  
|Advertising expense                                                                                 |  |      | 14,160  |      |   | 13,548  |  
|General and administrative (including stock-based compensation expense of $16,432 in 2005) (Note 2) |  |      | 24,119  |      |   | 37,984  |  
|Depreciation and amortization                                                                       |  |      | 16,780  |      |   | 16,727  |  
|Impairment losses (Note 3)                                                                          |  |      | 244     |      |   | 853     |  
|                                                                                                    |  |      |         |      |   |         |  
|Total operating expenses                                                                            |  |      | 341,859 |      |   | 340,668 |  
|                                                                                                    |  |      |         |      |   |         |  
|Income from operations                                                                              |  |      | 31,265  |      |   | 10,648  |  
|Interest expense (Note 9)                                                                           |  |      | 24,400  |      |   | 20,914  |  
|                                                                                                    |  |      |         |      |   |         |  
|Income (loss) before income taxes                                                                   |  |      | 6,865   |      |   | (10,266 | )
|Provision for income taxes (Note 6)                                                                 |  |      | 2,248   |      |   | 215     |  
|                                                                                                    |  |      |         |      |   |         |  
|Net income (loss)                                                                                   |  | $    | 4,617   |      | $ | (10,481 | )
|                                                                                                    |  |      |         |      |   |         |  

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



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CARROLS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(In thousands of dollars)

(Unaudited)



|                                                                                                      |  |      |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                      |  | 2006 |         |   | 2005 |  
|Cash flows provided from (used for) operating activities:                                             |  |      |         |   |      |   |         |  
|Net income (loss)                                                                                     |  | $    | 4,617   |   |      | $ | (10,481 | )
|Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities: |  |      |         |   |      |   |         |  
|Gain on disposal of property and equipment                                                            |  |      |        |   |      |   | (395    | )
|Stock-based compensation                                                                              |  |      |        |   |      |   | 16,361  |  
|Depreciation and amortization                                                                         |  |      | 16,780  |   |      |   | 16,727  |  
|Amortization of deferred financing costs                                                              |  |      | 742     |   |      |   | 759     |  
|Amortization of unearned purchase discounts                                                           |  |      | (1,077  | ) |      |   | (1,077  | )
|Amortization of deferred gains from sale-leaseback transactions                                       |  |      | (338    | ) |      |   | (249    | )
|Impairment losses                                                                                     |  |      | 244     |   |      |   | 853     |  
|Gain on settlements of lease financing obligations                                                    |  |      | (308    | ) |      |   |        |  
|Accretion of interest on lease financing obligations                                                  |  |      | 153     |   |      |   | 173     |  
|Deferred income taxes                                                                                 |  |      | (1,349  | ) |      |   | (240    | )
|Decrease in accrued bonus to employees and director                                                   |  |      |        |   |      |   | (20,860 | )
|Decrease in accrued payroll, related taxes and benefits                                               |  |      | (361    | ) |      |   | (10,393 | )
|Changes in other operating assets and liabilities                                                     |  |      | 3,431   |   |      |   | 7,908   |  
|                                                                                                      |  |      |         |   |      |   |         |  
|Net cash provided from (used for) operating activities                                                |  |      | 22,534  |   |      |   | (914    | )
|                                                                                                      |  |      |         |   |      |   |         |  
|Cash flows provided from (used for) investing activities:                                             |  |      |         |   |      |   |         |  
|Capital expenditures:                                                                                 |  |      |         |   |      |   |         |  
|New restaurant development                                                                            |  |      | (12,066 | ) |      |   | (7,593  | )
|Restaurant remodeling                                                                                 |  |      | (3,345  | ) |      |   | (1,657  | )
|Other restaurant capital expenditures                                                                 |  |      | (3,709  | ) |      |   | (3,046  | )
|Corporate and restaurant information systems                                                          |  |      | (1,002  | ) |      |   | (703    | )
|                                                                                                      |  |      |         |   |      |   |         |  
|Total capital expenditures                                                                            |  |      | (20,122 | ) |      |   | (12,999 | )
|Properties purchased for sale-leaseback                                                               |  |      | (1,655  | ) |      |   | (275    | )
|Deposit on properties purchased for sale-leaseback                                                    |  |      | (1,616  | ) |      |   |        |  
|Proceeds from sale-leaseback transactions                                                             |  |      | 26,118  |   |      |   | 1,137   |  
|Proceeds from dispositions of property and equipment                                                  |  |      |        |   |      |   | 479     |  
|                                                                                                      |  |      |         |   |      |   |         |  
|Net cash provided from (used for) investing activities                                                |  |      | 2,725   |   |      |   | (11,658 | )
|                                                                                                      |  |      |         |   |      |   |         |  
|Cash flows used for financing activities:                                                             |  |      |         |   |      |   |         |  
|                                                                                                      |  |     
|Scheduled principal payments on term loans                                                            |  |      | (1,100  | ) |      |   | (1,100  | )
|Principal pre-payments on term loans                                                                  |  |      | (17,000 | ) |      |   |        |  
|Principal payments on capital leases                                                                  |  |      | (208    | ) |      |   | (205    | )
|Financing costs associated with issuance of debt                                                      |  |      | (4      | ) |      |   | (190    | )
|Settlement of lease financing obligations                                                             |  |      | (14,225 | ) |      |   |        |  
|                                                                                                      |  |      |         |   |      |   |         |  
|Net cash used for financing activities                                                                |  |      | (32,537 | ) |      |   | (1,495  | )
|                                                                                                      |  |      |         |   |      |   |         |  
|Decrease in cash and cash equivalents                                                                 |  |      | (7,278  | ) |      |   | (14,067 | )
|Cash and cash equivalents, beginning of period                                                        |  |      | 9,331   |   |      |   | 31,466  |  
|                                                                                                      |  |      |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                              |  | $    | 2,053   |   |      | $ | 17,399  |  
|                                                                                                      |  |      |         |   |      |   |         |  
|Supplemental disclosures:                                                                             |  |      |         |   |      |   |         |  
|Interest paid on long-term debt                                                                       |  | $    | 15,051  |   |      | $ | 6,751   |  
|Interest paid on lease financing obligations                                                          |  | $    | 7,353   |   |      | $ | 5,363   |  
|Increase (decrease) in accruals for capital expenditures                                              |  | $    | 205     |   |      | $ | (165    | )
|Income taxes paid (refunded), net                                                                     |  | $    | 1,049   |   |      | $ | (2,318  | )
|Non-cash reduction of assets under lease financing obligations due to lease amendments                |  | $    | 13,582  |   |      | $ |        |  
|Non-cash reduction of lease financing obligations due to lease amendments                             |  | $    | 22,744  |   |      | $ |        |  

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



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars, except share amounts)

1.
Basis of Presentation

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

Business Description.At June 30, 2006 the Company operated, as franchisee, 330 quick-service restaurants under the trade name
Burger King in twelve Northeastern, Midwestern and Southeastern states. At June 30, 2006, the Company also owned and operated 70 Pollo Tropical restaurants in Florida and one Pollo Tropical restaurant in the New York City
metropolitan area in northern New Jersey and franchised a total of 26 Pollo Tropical restaurants; consisting of 22 in Puerto Rico, two in Ecuador and two on college campuses in Florida. At June 30, 2006, the Company owned and operated 139 Taco
Cabana restaurants located primarily in Texas and franchised two Taco Cabana restaurants in New Mexico and one in Georgia.

Fiscal Year.The Company uses a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to the fiscal years ended January 1, 2006 and January 2, 2005 will be referred to as the fiscal years ended
December 31, 2005 and 2004, respectively. Similarly, all references herein to the thirteen and 26 weeks ended July 2, 2006 and July 3, 2005 will be referred to as the three and six months ended June 30, 2006 and June 30,
2005, respectively. The years ended December 31, 2005 and 2004 contained 52 weeks and 53 weeks, respectively.

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

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

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

2. Stock-Based Compensation

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

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

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



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

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

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

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



|                                                                                                                                 |  |                                |         |   |                              |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---------------------------- | - | ------- | -
|                                                                                                                                 |  | Three MonthsEndedJune 30, 2005 |         |   | Six MonthsEndedJune 30, 2005 |  
|Net loss, as reported                                                                                                            |  | $                              | (11,354 | ) |                              | $ | (10,481 | )
|Add: Stock-based compensation expense included in reported net loss, net of related tax effects                                  |  |                                | 13,481  |   |                              |   | 13,530  |  
|Deduct: Stock-based compensation expense determined under the fair-value based method for all awards, net of related tax
effects |  |                                | (12,295 | ) |                              |   | (12,353 | )
|                                                                                                                                 |  |                                |         |   |                              |   |         |  
|Pro forma net loss                                                                                                               |  | $                              | (10,168 | ) |                              | $ | (9,304  | )
|                                                                                                                                 |  |                                |         |   |                              |   |         |  

---

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

3. Impairment of Long-Lived Assets

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

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



|            |  |                             |    |                           |   |      |  |      |     |  |   |    
|----------- |  | --------------------------- | -- | ------------------------- | - | ---- |  | ---- | --- |  | - | ---
|            |  | Three Months Ended June 30, |    | Six Months Ended June 30,
|            |  | 2006                        |    | 2005                      |   | 2006 |  | 2005
|Burger King |  | $                           |   |                           | $ | 312  |  | $    | 224 |  | $ | 758
|Taco Cabana |  |                             | 20 |                           |   | 95   |  |      | 20  |  |   | 95 
|            |  |                             |    |                           |   |      |  |      |     |  |   |    
|            |  | $                           | 20 |                           | $ | 407  |  | $    | 244 |  | $ | 853
|            |  |                             |    |                           |   |      |  |      |     |  |   |    



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

4. Goodwill, Franchise Rights and Intangible Assets

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



|                                                |  |             |        |               |   |             |  |       |       |  |   |        
|----------------------------------------------- |  | ----------- | ------ | ------------- | - | ----------- |  | ----- | ----- |  | - | -------
|                                                |  | Taco Cabana |        | PolloTropical |   | Burger King |  | Total
|Goodwill at June 30, 2006 and December 31, 2005 |  | $           | 67,177 |               | $ | 56,307      |  | $     | 1,450 |  | $ | 124,934

Franchise Rights.Amounts allocated to franchise rights for Burger King acquisitions are
amortized using the straight-line method over the average remaining term of the acquired franchise agreements at January 1, 2002 plus one twenty-year renewal period. The Company assesses the potential impairment of franchise rights whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. If an indicator of impairment exists for any of its assets, an estimate of the aggregate undiscounted future cash flows from the acquired restaurants is
compared to the respective carrying value of franchise rights for each Burger King acquisition. If an asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value. There were no
impairment charges against franchise rights for the three and six months ended June 30, 2006. The Company recorded impairment charges related to Burger King franchise rights of $219 for the three and six months ended June 30, 2005,
respectively.

Amortization expense related to Burger King franchise rights was $873 and $803 for the three months ended June 30, 2006
and 2005, respectively. Amortization expense related to Burger King franchise rights for the six months ended June 30, 2006 and 2005 was $1,608 and $1,607, respectively. The estimated amortization expense for the year ending December 31,
2006, including the six month period ended June 30, 2006 and for each of the five succeeding years is $3,215.

Intangible
Assets. In the third quarter of 2005, the Company acquired four Taco Cabana restaurants from a franchisee. Under Emerging Issues Task Force Issue No. 04 -1, Accounting for Preexisting Relationships between the Parties to a Business
Combination (EITF 04-1), certain reacquired rights, including the right to the acquirers trade name, are required to be recognized as intangible assets apart from goodwill. The Company allocated $1.6 million of the purchase price
to this intangible asset. The Company recorded amortization expense relating to the intangible asset of approximately $72 and $144 for the three and six months ended June 30, 2006 and expects the annual expense for the year ending
December 31, 2006, including the six month period ended June 30, 2006, and for each of five years ending 2007 through 2011 to be $289, $289, $211, $133, $125 and $117, respectively.



|                  |  |                       |       |                          |   |                       |  |                          |       |  |   |    
|----------------- |  | --------------------- | ----- | ------------------------ | - | --------------------- |  | ------------------------ | ----- |  | - | ---
|                  |  | June 30, 2006         |       | December 31, 2005       
|                  |  | Gross Carrying Amount |       | Accumulated Amortization |   | Gross Carrying Amount |  | Accumulated Amortization
|Intangible assets |  | $                     | 1,610 |                          | $ | 289                   |  | $                        | 1,610 |  | $ | 145

5. Long-term Debt

The Companys senior credit facility provides for a revolving credit facility under which it may borrow up to $50.0 million (including a sub limit of up to $20.0 million for letters of credit and up to $5.0
million for swingline loans), a $220.0 million term loan B facility and incremental facilities (as defined in the senior credit facility), at its option, of up to $100.0 million, subject to the satisfaction of certain conditions. At June 30,
2006, $193.7 million principal amount of term loan borrowings were outstanding under the term B facility and no amounts were outstanding under the revolving credit facility. After reserving $14.6 million for letters of credit guaranteed by the
facility, $35.4 million was available for borrowings under the revolving credit facility at June 30, 2006. The Company was in compliance with the covenants under its senior credit facility as of June 30, 2006.

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



9



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

6. Income Taxes

The income tax provision (benefit) for the three and six months ended June 30, 2006 and 2005 was comprised of the following:



|         |  |                             |        |   |                           |   |      |      |  |   |        |   |  |   |      |  
|-------- |  | --------------------------- | ------ | - | ------------------------- | - | ---- | ---- |  | - | ------ | - |  | - | ---- | -
|         |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|         |  | 2006                        |        |   | 2005                      |   |      | 2006 |  |   | 2005   |  
|Current  |  | $                           | 2,502  |   |                           | $ | (307 | )    |  | $ | 3,597  |   |  | $ | 455  |  
|Deferred |  |                             | (1,013 | ) |                           |   | 90   |      |  |   | (1,349 | ) |  |   | (240 | )
|         |  |                             |        |   |                           |   |      |      |  |   |        |   |  |   |      |  
|         |  | $                           | 1,489  |   |                           | $ | (217 | )    |  | $ | 2,248  |   |  | $ | 215  |  
|         |  |                             |        |   |                           |   |      |      |  |   |        |   |  |   |      |  

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

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

The provision for income taxes in the three and six months ended June 30, 2005 was derived using an estimated effective annual income tax rate for 2005 of 33.9%. Although the Company had a pretax loss of $11.6 million and $10.3 million
for the three and six months ended June 30, 2005, respectively, the tax benefit related to this loss was reduced by $3.3 million for the non-deductible portion of stock-based compensation expense related to the second quarter stock awards and
was also reduced by the income tax expense associated with the second quarter Ohio state tax legislation of $0.5 million, as discussed below. The amount of the stock-based compensation expense deduction may be adjusted based on the Companys
evaluation of the value of the stock award for tax purposes. To the extent that there is an adjustment to the value of the stock award for tax purposes, the Companys tax provision will be affected in a similar manner in a subsequent period.

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

7. Other Liabilities

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



|                                    |  |               |        |                   |   |       
|----------------------------------- |  | ------------- | ------ | ----------------- | - | ------
|                                    |  | June 30, 2006 |        | December 31, 2005
|Unearned purchase discounts         |  | $             | 5,583  |                   | $ | 6,686 
|Accrued occupancy costs             |  |               | 10,521 |                   |   | 10,674
|Accrued workers compensation costs |  |               | 4,875  |                   |   | 4,615 
|Other                               |  |               | 5,228  |                   |   | 4,054 
|                                    |  |               |        |                   |   |       
|                                    |  | $             | 26,207 |                   | $ | 26,029
|                                    |  |               |        |                   |   |       

In 2001, management made the decision to close seven Taco Cabana restaurants in the Phoenix,
Arizona market and discontinue restaurant development underway in that market. At June 30, 2006, the Company had $1.0 million in lease liability reserves that are included in accrued occupancy costs and $1.1 million of such reserves at
December 31, 2005.



10



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

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



|                             |  |   |       |  
|---------------------------- |  | - | ----- | -
|Balance, beginning of period |  | $ | 1,083 |  
|Additions                    |  |   |      |  
|Payments                     |  |   | (65   | )
|                             |  |   |       |  
|Balance, end of period       |  | $ | 1,018 |  
|                             |  |   |       |  

8. Postretirement Benefits

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

The following summarizes the components of net periodic benefit cost:



|                                                |  |                             |     |   |                           |   |     |      |  |   |      |   |  |   |     |  
|----------------------------------------------- |  | --------------------------- | --- | - | ------------------------- | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                                                |  | Three Months Ended June 30, |     |   | Six Months Ended June 30, |  
|                                                |  | 2006                        |     |   | 2005                      |   |     | 2006 |  |   | 2005 |  
|Components of net periodic benefit cost:        |  |                             |     |   |                           |   |     |      |  |   |      |   |  |   |     |  
|Service cost                                    |  | $                           | 118 |   |                           | $ | 85  |      |  | $ | 236  |   |  | $ | 147 |  
|Interest cost                                   |  |                             | 83  |   |                           |   | 66  |      |  |   | 166  |   |  |   | 115 |  
|Amortization of gains and losses                |  |                             | 21  |   |                           |   | 11  |      |  |   | 42   |   |  |   | 6   |  
|Amortization of unrecognized prior service cost |  |                             | (7  | ) |                           |   | (8  | )    |  |   | (14  | ) |  |   | (15 | )
|                                                |  |                             |     |   |                           |   |     |      |  |   |      |   |  |   |     |  
|Net periodic postretirement benefit cost        |  | $                           | 215 |   |                           | $ | 154 |      |  | $ | 430  |   |  | $ | 253 |  
|                                                |  |                             |     |   |                           |   |     |      |  |   |      |   |  |   |     |  

As disclosed in the Companys 2005 Annual Report on Form 10-K, the Company expected to
contribute approximately $91 to its postretirement plan in 2006. During the three and six months ended June 30, 2006, the Company made contributions of $44 and $79 to its postretirement plan, respectively. The Company expects to make additional
contributions during 2006.

9. Lease Financing Obligations

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

On June 30, 2006, the Company exercised its right of first refusal under the subject leases following the exercise of purchase
options held by the related party and the Company purchased thirteen restaurant properties from the lessor for $16.2 million. The Company recorded a loss of $2.0 million, which is included in interest expense in the second quarter of 2006,
representing the amount by which the purchase price for the restaurant properties exceeded the lease financing obligations of $14.2 million recorded for those leases at the time of the purchase. Concurrently, with the purchase described above, the
properties were sold in a qualified sale-leaseback transaction for net proceeds of $16.7 million. The Company recorded a deferred gain of $5.8 million representing the amount by which the sales price exceeded the net book value of the underlying
assets. The gain will be amortized over the term of the leases, which is generally twenty years. A deposit of $1.6 million associated with this transaction is included in trade and other receivables on the Consolidated Balance Sheet as of
June 30, 2006.

In the second quarter of 2006, the Company also amended lease agreements for twenty-one properties previously
accounted for as lease financing obligations to eliminate or otherwise cure the provisions that precluded the original sale-leaseback accounting under SFAS No. 98. As a result of such amendments, the Company has recorded these sale-leaseback
transactions as sales, removed all property and related liabilities from its consolidated balance sheet and recognized gains



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

from the sales, which were generally deferred and will be amortized as an adjustment to rent expense over
the remaining term of the underlying leases. A gain of $0.3 million was recognized as required by SFAS No. 98 and is included as a reduction of interest expense in the second quarter of 2006. The impact of these transactions was to reduce lease
financing obligations by $22.7 million, reduce assets under lease financing obligations by $13.6 million and record a deferred gain of $8.5 million, all of which have been reflected as non-cash transactions in the consolidated statements of cash
flows.

As a result of the above transactions, in total the Company reduced its lease financing obligations by $37.0 million during the
second quarter of 2006.

In July 2006, the Company amended thirteen additional lease agreements accounted for as lease financing
obligations to eliminate or otherwise cure the provisions that precluded the original sale-leaseback accounting under SFAS No. 98. The effect of these amendments, which will be recorded in the third quarter of 2006, will be to reduce lease
financing obligations by $14.8 million, reduce assets under lease financing obligations by $11.1 million, record a deferred gain of $3.6 million, which will be amortized over the remaining lease term, and record a loss of $0.1 million.

The recharacterization of all of these leases as qualified sale-leasebacks rather than lease financing obligations will reduce interest expense,
reduce depreciation expense and increase rent expense in future periods.

10. Business Segment Information

The Company is engaged in the quick-service and quick-casual restaurant industry, with three restaurant concepts: Burger King operating as a franchisee
and Pollo Tropical and Taco Cabana, both Company-owned concepts. The Companys Burger King restaurants are all located in the United States, primarily in the Northeast, Southeast and Midwest. Pollo Tropical is a 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 accounting policies of each segment are the same as those described in the summary of significant accounting policies. The following table includes Segment EBITDA which is the measure of segment profit or loss
reported to the Companys 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, bonus to employees and a director in connection with the Companys December 2004 refinancing, other income and expense and loss on extinguishment of debt.

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



|                                             |  |             |        |                |   |             |  |       |        |              |   |     |  |   |        
|-------------------------------------------- |  | ----------- | ------ | -------------- | - | ----------- |  | ----- | ------ | ------------ | - | --- |  | - | -------
|Three Months Ended:                          |  | Taco Cabana |        | Pollo Tropical |   | Burger King |  | Other |        | Consolidated
|June 30, 2006:                               |  |             |        |                |   |             |  |       |        |              |   |     |  |   |        
|Total revenues                               |  | $           | 58,681 |                | $ | 38,478      |  | $     | 93,422 |              | $ |    |  | $ | 190,581
|Cost of sales                                |  |             | 17,015 |                |   | 12,367      |  |       | 24,004 |              |   |    |  |   | 53,386 
|Restaurant wages and related expenses        |  |             | 16,506 |                |   | 9,679       |  |       | 29,262 |              |   |    |  |   | 55,447 
|Depreciation and amortization                |  |             | 2,033  |                |   | 1,418       |  |       | 4,676  |              |   | 336 |  |   | 8,463  
|Segment EBITDA                               |  |             | 8,121  |                |   | 7,670       |  |       | 10,282 |              |   |     |  |   |        
|Capital expenditures, including acquisitions |  |             | 3,594  |                |   | 3,720       |  |       | 2,165  |              |   | 525 |  |   | 10,004 
|                                             |  |             |        |                |  
|June 30 2005:                                |  |             |        |                |   |             |  |       |        |              |   |     |  |   |        
|Total revenues                               |  | $           | 52,912 |                | $ | 34,600      |  | $     | 94,288 |              | $ |    |  | $ | 181,800
|Cost of sales                                |  |             | 15,496 |                |   | 11,515      |  |       | 26,507 |              |   |    |  |   | 53,518 
|Restaurant wages and related expenses        |  |             | 14,860 |                |   | 8,062       |  |       | 29,125 |              |   |    |  |   | 52,047 
|Depreciation and amortization                |  |             | 2,054  |                |   | 1,130       |  |       | 4,797  |              |   | 381 |  |   | 8,362  
|Segment EBITDA                               |  |             | 7,894  |                |   | 7,490       |  |       | 8,812  |              |   |     |  |   |        
|Capital expenditures                         |  |             | 2,944  |                |   | 3,332       |  |       | 1,233  |              |   | 416 |  |   | 7,925  



12



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)



|                                             |  |             |         |                |   |             |  |       |         |              |   |         |  |   |        
|-------------------------------------------- |  | ----------- | ------- | -------------- | - | ----------- |  | ----- | ------- | ------------ | - | ------- |  | - | -------
|Six Months Ended:                            |  | Taco Cabana |         | Pollo Tropical |   | Burger King |  | Other |         | Consolidated
|June 30, 2006:                               |  |             |         |                |   |             |  |       |         |              |   |         |  |   |        
|Total revenues                               |  | $           | 113,921 |                | $ | 77,064      |  | $     | 182,139 |              | $ |        |  | $ | 373,124
|Cost of sales                                |  |             | 33,025  |                |   | 24,973      |  |       | 47,301  |              |   |        |  |   | 105,299
|Restaurant wages and related expenses        |  |             | 32,235  |                |   | 19,202      |  |       | 57,752  |              |   |        |  |   | 109,189
|Depreciation and amortization                |  |             | 4,063   |                |   | 2,782       |  |       | 9,276   |              |   | 659     |  |   | 16,780 
|Segment EBITDA                               |  |             | 15,815  |                |   | 15,306      |  |       | 17,168  |              |   |        |  |   |        
|Capital expenditures, including acquisitions |  |             | 6,838   |                |   | 8,003       |  |       | 4,279   |              |   | 1,002   |  |   | 20,122 
|                                             |  |             |         |                |  
|June 30 2005:                                |  |             |         |                |   |             |  |       |         |              |   |         |  |   |        
|Total revenues                               |  | $           | 103,095 |                | $ | 69,047      |  | $     | 179,174 |              | $ |        |  | $ | 351,316
|Cost of sales                                |  |             | 30,033  |                |   | 22,896      |  |       | 49,427  |              |   |        |  |   | 102,356
|Restaurant wages and related expenses        |  |             | 28,999  |                |   | 15,999      |  |       | 57,124  |              |   |        |  |   | 102,122
|Depreciation and amortization                |  |             | 3,945   |                |   | 2,280       |  |       | 9,777   |              |   | 725     |  |   | 16,727 
|Segment EBITDA                               |  |             | 15,218  |                |   | 14,840      |  |       | 14,602  |              |   |         |  |   |        
|Capital expenditures                         |  |             | 4,567   |                |   | 5,957       |  |       | 1,772   |              |   | 703     |  |   | 12,999 
|                                             |  |             |         |                |  
|Identifiable Assets:                         |  |             |         |                |   |             |  |       |         |              |   |         |  |   |        
|At June 30, 2006                             |  | $           | 68,854  |                | $ | 49,423      |  | $     | 166,107 |              | $ | 182,080 |  | $ | 466,464
|At December 31, 2005                         |  | $           | 70,883  |                | $ | 59,761      |  | $     | 182,902 |              | $ | 183,399 |  | $ | 496,945

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



|                                     |  |                             |        |      |                           |         |      |  |      |        |  |   |         |  
|------------------------------------ |  | --------------------------- | ------ | ---- | ------------------------- | ------- | ---- |  | ---- | ------ |  | - | ------- | -
|                                     |  | Three Months Ended June 30, |        |      | Six Months Ended June 30, |        
|                                     |  | 2006                        |        | 2005 |                           |         | 2006 |  | 2005 |       
|Segment EBITDA:                      |  |                             |        |      |                           |         |      |  |      |        |  |   |         |  
|Taco Cabana (1)                      |  | $                           | 8,121  |      | $                         | 7,894   |      |  | $    | 15,815 |  | $ | 15,218  |  
|Pollo Tropical (2)                   |  |                             | 7,670  |      |                           | 7,490   |      |  |      | 15,306 |  |   | 14,840  |  
|Burger King (3)                      |  |                             | 10,282 |      |                           | 8,812   |      |  |      | 17,168 |  |   | 14,602  |  
|                                     |  |                             |        |      |                           |         |      |  |      |        |  |   |         |  
|Subtotal                             |  |                             | 26,073 |      |                           | 24,196  |      |  |      | 48,289 |  |   | 44,660  |  
|                                     |  |                             |        |     
|Less:                                |  |                             |        |      |                           |         |      |  |      |        |  |   |         |  
|Depreciation and amortization        |  |                             | 8,463  |      |                           | 8,362   |      |  |      | 16,780 |  |   | 16,727  |  
|Impairment losses                    |  |                             | 20     |      |                           | 407     |      |  |      | 244    |  |   | 853     |  
|Interest expense                     |  |                             | 13,011 |      |                           | 10,641  |      |  |      | 24,400 |  |   | 20,914  |  
|Provision (benefit) for income taxes |  |                             | 1,489  |      |                           | (217    | )    |  |      | 2,248  |  |   | 215     |  
|Stock-based compensation expense     |  |                             |       |      |                           | 16,357  |      |  |      |       |  |   | 16,432  |  
|                                     |  |                             |        |      |                           |         |      |  |      |        |  |   |         |  
|Net income (loss)                    |  | $                           | 3,090  |      | $                         | (11,354 | )    |  | $    | 4,617  |  | $ | (10,481 | )
|                                     |  |                             |        |      |                           |         |      |  |      |        |  |   |         |  

---

|(1) | Includes general and administrative expenses related directly to the Taco Cabana segment. These expenses were approximately $2.9 million and $5.9 million for the three and six
months ended June 30, 2006, respectively, and $2.5 million and $5.1 million for the three and six months ended June 30, 2005, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)



|(2) | Includes general and administrative expenses related directly to the Pollo Tropical segment. These expenses were approximately $1.9 million and $4.0 million for the three and six
months ended June 30, 2006, respectively, and $1.8 million and $3.7 million for the three and six months ended June 30, 2005, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes general and administrative expenses related directly to the Burger King segment as well as expenses associated with administrative support to all of the Companys
segments including executive management, information systems and certain accounting, legal and other administrative functions. In the aggregate these expenses were approximately $7.0 million and $14.2 million for the three and six months ended
June 30, 2006, respectively, and $6.7 million and $12.8 million for the three and six months ended June 30, 2005, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11. Commitments and Contingencies

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

12. Recent Accounting Developments

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

In March 2006, the Financial Accounting Standards Board (FASB) issued an Exposure Draft, Employers Accounting
for Defined Benefit Pension and Other Postretirement Benefits, an amendment of FAS 87, 88, 106 and 132(R). In its current form, the proposed statement requires an employer that sponsors postretirement plans to recognize an asset or liability
for the overfunded or underfunded status of the plan. Additionally, employers would be required to record all unrecognized prior service costs and credits, unrecognized actual gains and losses and any unrecognized transition obligations or assets in
accumulated other comprehensive income. Such amounts would be reclassified into earnings as components of net period benefit cost/income pursuant to the current recognition and amortization provisions of SFAS No. 106, Employers
Accounting for Postretirement Benefits Other than Pensions (SFAS 106). Finally, the proposed statement requires an employer to measure plan assets and benefit obligations as of the date of the employers statement of financial
position, as is currently used by the Company. The FASB has indicated that it expects to issue a final standard later this year. Except for the measurement date requirement, the proposed statement would be effective for fiscal years ending after
December 15, 2006. At December 31, 2005, the Companys postretirement benefit plan was underfunded by approximately $2.0 million.



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CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(in
thousands of dollars, except share amounts)

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

13. Guarantor Financial Statements

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

Cabana Beverages, Inc.

Cabana Bevco LLC

Carrols Realty Holdings Corp.

Carrols Realty I Corp.

Carrols Realty II Corp.

Carrols J.G. Corp.

Pollo Franchise, Inc.

Pollo Operations, Inc.

Quanta Advertising Corp.

Taco Cabana, Inc.

TP Acquisition Corp.

TC Bevco LLC

TC Lease Holdings III, V and VI, Inc.

T.C. Management, Inc.

Get Real, Inc.

Texas Taco Cabana, L.P.

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

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

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

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



15



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING BALANCE SHEET

June 30, 2006

(In thousands of dollars)

(Unaudited)



|                                                     |  |                     |         |   |                        |   |          |              |  |   |                    |   |  |   |         |  
|---------------------------------------------------- |  | ------------------- | ------- | - | ---------------------- | - | -------- | ------------ |  | - | ------------------ | - |  | - | ------- | -
|                                                     |  | Parent Company Only |         |   | Guarantor Subsidiaries |   |          | Eliminations |  |   | Consolidated Total |  
|ASSETS                                               |  |                     |         |   |                        |   |          |              |  |   |                    |   |  |   |         |  
|Current assets:                                      |  |                     |         |   |                        |   |          |              |  |   |                    |   |  |   |         |  
|Cash and cash equivalents                            |  | $                   | 716     |   |                        | $ | 1,337    |              |  | $ |                   |   |  | $ | 2,053   |  
|Trade and other receivables, net                     |  |                     | 2,613   |   |                        |   | 3,169    |              |  |   |                   |   |  |   | 5,782   |  
|Inventories                                          |  |                     | 3,256   |   |                        |   | 1,562    |              |  |   |                   |   |  |   | 4,818   |  
|Prepaid rent                                         |  |                     | 2,567   |   |                        |   | 2,208    |              |  |   |                   |   |  |   | 4,775   |  
|Prepaid expenses and other current assets            |  |                     | 1,935   |   |                        |   | 3,856    |              |  |   |                   |   |  |   | 5,791   |  
|Deferred income taxes                                |  |                     | 3,081   |   |                        |   | 1,786    |              |  |   |                   |   |  |   | 4,867   |  
|                                                     |  |                     |         |   |                        |   |          |              |  |   |                    |   |  |   |         |  
|Total current assets                                 |  |                     | 14,168  |   |                        |   | 13,918   |              |  |   |                   |   |  |   | 28,086  |  
|                                                     |  |                     |         |  
|Property and equipment, net                          |  |                     | 71,947  |   |                        |   | 163,378  |              |  |   | (42,922            | ) |  |   | 192,403 |  
|Franchise rights, net                                |  |                     | 84,876  |   |                        |   |         |              |  |   |                   |   |  |   | 84,876  |  
|Goodwill                                             |  |                     | 1,450   |   |                        |   | 123,484  |              |  |   |                   |   |  |   | 124,934 |  
|Intangible assets, net In                            |  |                     |        |   |                        |   | 1,321    |              |  |   |                   |   |  |   | 1,321   |  
|Franchise agreements, net                            |  |                     | 5,747   |   |                        |   |         |              |  |   |                   |   |  |   | 5,747   |  
|Intercompany receivable (payable)                    |  |                     | 154,691 |   |                        |   | (155,325 | )            |  |   | 634                |   |  |   |        |  
|Investment in subsidiaries                           |  |                     | 27,596  |   |                        |   |         |              |  |   | (27,596            | ) |  |   |        |  
|Deferred income taxes                                |  |                     | 6,392   |   |                        |   | 8,830    |              |  |   | (594               | ) |  |   | 14,628  |  
|Other assets                                         |  |                     | 9,583   |   |                        |   | 6,388    |              |  |   | (1,502             | ) |  |   | 14,469  |  
|                                                     |  |                     |         |   |                        |   |          |              |  |   |                    |   |  |   |         |  
|Total assets                                         |  | $                   | 376,450 |   |                        | $ | 161,994  |              |  | $ | (71,980            | ) |  | $ | 466,464 |  
|                                                     |  |                     |         |   |                        |   |          |              |  |   |                    |   |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)       |  |                     |         |   |                        |   |          |              |  |   |                    |   |  |   |         |  
|Current liabilities:                                 |  |                     |         |   |                        |   |          |              |  |   |                    |   |  |   |         |  
|Current portion of long-term debt                    |  | $                   | 2,301   |   |                        | $ | 239      |              |  | $ |                   |   |  | $ | 2,540   |  
|Accounts payable                                     |  |                     | 8,021   |   |                        |   | 10,649   |              |  |   |                   |   |  |   | 18,670  |  
|Accrued interest                                     |  |                     | 9,010   |   |                        |   |         |              |  |   |                   |   |  |   | 9,010   |  
|Accrued payroll, related taxes and benefits          |  |                     | 8,506   |   |                        |   | 6,836    |              |  |   |                   |   |  |   | 15,342  |  
|Accrued income taxes payable                         |  |                     | 1,954   |   |                        |   |         |              |  |   |                   |   |  |   | 1,954   |  
|Other liabilities                                    |  |                     | 8,024   |   |                        |   | 5,718    |              |  |   |                   |   |  |   | 13,742  |  
|                                                     |  |                     |         |   |                        |   |          |              |  |   |                    |   |  |   |         |  
|Total current liabilities                            |  |                     | 37,816  |   |                        |   | 23,442   |              |  |   |                   |   |  |   | 61,258  |  
|                                                     |  |                     |         |  
|Long-term debt, net of current portion               |  |                     | 371,753 |   |                        |   | 1,096    |              |  |   |                   |   |  |   | 372,849 |  
|Lease financing obligations                          |  |                     | 28,535  |   |                        |   | 98,036   |              |  |   | (52,489            | ) |  |   | 74,082  |  
|Deferred incomesale-leaseback of real estate        |  |                     | 15,783  |   |                        |   | 4,447    |              |  |   | 6,327              |   |  |   | 26,557  |  
|Accrued postretirement benefits                      |  |                     | 4,405   |   |                        |   |         |              |  |   |                   |   |  |   | 4,405   |  
|Other liabilities                                    |  |                     | 17,052  |   |                        |   | 8,928    |              |  |   | 227                |   |  |   | 26,207  |  
|                                                     |  |                     |         |   |                        |   |          |              |  |   |                    |   |  |   |         |  
|Total liabilities                                    |  |                     | 475,344 |   |                        |   | 135,949  |              |  |   | (45,935            | ) |  |   | 565,358 |  
|                                                     |  |                     |         |  
|Commitments and contingencies                        |  |                     |         |   |                        |   |          |              |  |   |                    |   |  |   |         |  
|                                                     |  |                     |         |  
|Stockholders equity (deficit)                       |  |                     | (98,894 | ) |                        |   | 26,045   |              |  |   | (26,045            | ) |  |   | (98,894 | )
|                                                     |  |                     |         |   |                        |   |          |              |  |   |                    |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                   | 376,450 |   |                        | $ | 161,994  |              |  | $ | (71,980            | ) |  | $ | 466,464 |  
|                                                     |  |                     |         |   |                        |   |          |              |  |   |                    |   |  |   |         |  



16



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING BALANCE SHEET

December 31, 2005

(In thousands of dollars)

(Unaudited)



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



17



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2006

(In thousands of dollars)

(Unaudited)



|                                      |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |        
|------------------------------------- |  | ------------------- | ------ | - | ---------------------- | - | ------------ |  | - | ------------------ | - |  | - | -------
|                                      |  | Parent Company Only |        |   | Guarantor Subsidiaries |   | Eliminations |  |   | Consolidated Total
|Revenues:                             |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |        
|Restaurant sales                      |  | $                   | 93,422 |   |                        | $ | 96,830       |  | $ |                   |   |  | $ | 190,252
|Franchise royalty revenues and fees   |  |                     |       |   |                        |   | 329          |  |   |                   |   |  |   | 329    
|                                      |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |        
|Total revenues                        |  |                     | 93,422 |   |                        |   | 97,159       |  |   |                   |   |  |   | 190,581
|                                      |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |        
|Costs and expenses:                   |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |        
|Cost of sales                         |  |                     | 24,004 |   |                        |   | 29,382       |  |   |                   |   |  |   | 53,386 
|Restaurant wages and related expenses |  |                     | 29,262 |   |                        |   | 26,185       |  |   |                   |   |  |   | 55,447 
|Restaurant rent expense               |  |                     | 5,163  |   |                        |   | 3,270        |  |   | 726                |   |  |   | 9,159  
|Other restaurant operating expenses   |  |                     | 13,736 |   |                        |   | 13,705       |  |   |                   |   |  |   | 27,441 
|Advertising expense                   |  |                     | 3,980  |   |                        |   | 3,268        |  |   |                   |   |  |   | 7,248  
|General and administrative            |  |                     | 6,268  |   |                        |   | 5,559        |  |   |                   |   |  |   | 11,827 
|Depreciation and amortization         |  |                     | 4,844  |   |                        |   | 3,774        |  |   | (155               | ) |  |   | 8,463  
|Impairment losses                     |  |                     |       |   |                        |   | 20           |  |   |                   |   |  |   | 20     
|                                      |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |        
|Total operating expenses              |  |                     | 87,257 |   |                        |   | 85,163       |  |   | 571                |   |  |   | 172,991
|                                      |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |        
|Income from operations                |  |                     | 6,165  |   |                        |   | 11,996       |  |   | (571               | ) |  |   | 17,590 
|Interest expense                      |  |                     | 10,693 |   |                        |   | 3,123        |  |   | (805               | ) |  |   | 13,011 
|Intercompany interest allocations     |  |                     | (4,556 | ) |                        |   | 4,556        |  |   |                   |   |  |   |       
|                                      |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |        
|Income before income taxes            |  |                     | 28     |   |                        |   | 4,317        |  |   | 234                |   |  |   | 4,579  
|Provision for income taxes            |  |                     | 11     |   |                        |   | 1,490        |  |   | (12                | ) |  |   | 1,489  
|Equity income from subsidiaries       |  |                     | 3,073  |   |                        |   |             |  |   | (3,073             | ) |  |   |       
|                                      |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |        
|Net income                            |  | $                   | 3,090  |   |                        | $ | 2,827        |  | $ | (2,827             | ) |  | $ | 3,090  
|                                      |  |                     |        |   |                        |   |              |  |   |                    |   |  |   |        



18



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended June 30, 2005

(In thousands of dollars)

(Unaudited)



|                                                                                   |  |                     |         |   |                        |   |        |              |  |   |                    |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------- | ------- | - | ---------------------- | - | ------ | ------------ |  | - | ------------------ | - |  | - | ------- | -
|                                                                                   |  | Parent Company Only |         |   | Guarantor Subsidiaries |   |        | Eliminations |  |   | Consolidated Total |  
|Revenues:                                                                          |  |                     |         |   |                        |   |        |              |  |   |                    |   |  |   |         |  
|Restaurant sales                                                                   |  | $                   | 94,288  |   |                        | $ | 87,105 |              |  | $ |                   |   |  | $ | 181,393 |  
|Franchise royalty revenues and fees                                                |  |                     |        |   |                        |   | 407    |              |  |   |                   |   |  |   | 407     |  
|                                                                                   |  |                     |         |   |                        |   |        |              |  |   |                    |   |  |   |         |  
|Total revenues                                                                     |  |                     | 94,288  |   |                        |   | 87,512 |              |  |   |                   |   |  |   | 181,800 |  
|                                                                                   |  |                     |         |   |                        |   |        |              |  |   |                    |   |  |   |         |  
|Costs and expenses:                                                                |  |                     |         |   |                        |   |        |              |  |   |                    |   |  |   |         |  
|Cost of sales                                                                      |  |                     | 26,507  |   |                        |   | 27,011 |              |  |   |                   |   |  |   | 53,518  |  
|Restaurant wages and related expenses                                              |  |                     | 29,125  |   |                        |   | 22,922 |              |  |   |                   |   |  |   | 52,047  |  
|Restaurant rent expense                                                            |  |                     | 5,420   |   |                        |   | 2,866  |              |  |   | 585                |   |  |   | 8,871   |  
|Other restaurant operating expenses                                                |  |                     | 13,689  |   |                        |   | 11,429 |              |  |   |                   |   |  |   | 25,118  |  
|Advertising expense                                                                |  |                     | 4,006   |   |                        |   | 2,979  |              |  |   |                   |   |  |   | 6,985   |  
|General and administrative (including $16,357 of stock-based compensation expense) |  |                     | 16,990  |   |                        |   | 10,432 |              |  |   |                   |   |  |   | 27,422  |  
|Depreciation and amortization                                                      |  |                     | 4,968   |   |                        |   | 3,513  |              |  |   | (119               | ) |  |   | 8,362   |  
|Impairment losses                                                                  |  |                     | 312     |   |                        |   | 95     |              |  |   |                   |   |  |   | 407     |  
|                                                                                   |  |                     |         |   |                        |   |        |              |  |   |                    |   |  |   |         |  
|Total operating expenses                                                           |  |                     | 101,017 |   |                        |   | 81,247 |              |  |   | 466                |   |  |   | 182,730 |  
|                                                                                   |  |                     |         |   |                        |   |        |              |  |   |                    |   |  |   |         |  
|Income (loss) from operations                                                      |  |                     | (6,729  | ) |                        |   | 6,265  |              |  |   | (466               | ) |  |   | (930    | )
|Interest expense                                                                   |  |                     | 8,957   |   |                        |   | 2,333  |              |  |   | (649               | ) |  |   | 10,641  |  
|Intercompany interest allocations                                                  |  |                     | (4,556  | ) |                        |   | 4,556  |              |  |   |                   |   |  |   |        |  
|                                                                                   |  |                     |         |   |                        |   |        |              |  |   |                    |   |  |   |         |  
|Loss before income taxes                                                           |  |                     | (11,130 | ) |                        |   | (624   | )            |  |   | 183                |   |  |   | (11,571 | )
|Provision (benefit) for income taxes                                               |  |                     | (1,621  | ) |                        |   | 906    |              |  |   | 498                |   |  |   | (217    | )
|Equity loss from subsidiaries                                                      |  |                     | (1,845  | ) |                        |   |       |              |  |   | 1,845              |   |  |   |        |  
|                                                                                   |  |                     |         |   |                        |   |        |              |  |   |                    |   |  |   |         |  
|Net loss                                                                           |  | $                   | (11,354 | ) |                        | $ | (1,530 | )            |  | $ | 1,530              |   |  | $ | (11,354 | )
|                                                                                   |  |                     |         |   |                        |   |        |              |  |   |                    |   |  |   |         |  



19



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2006

(In thousands of dollars)

(Unaudited)



|                                      |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |        
|------------------------------------- |  | ------------------- | ------- | - | ---------------------- | - | ------------ |  | - | ------------------ | - |  | - | -------
|                                      |  | Parent Company Only |         |   | Guarantor Subsidiaries |   | Eliminations |  |   | Consolidated Total
|Revenues:                             |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |        
|Restaurant sales                      |  | $                   | 182,139 |   |                        | $ | 190,326      |  | $ |                   |   |  | $ | 372,465
|Franchise royalty revenues and fees   |  |                     |        |   |                        |   | 659          |  |   |                   |   |  |   | 659    
|                                      |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |        
|Total revenues                        |  |                     | 182,139 |   |                        |   | 190,985      |  |   |                   |   |  |   | 373,124
|                                      |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |        
|Costs and expenses:                   |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |        
|Cost of sales                         |  |                     | 47,301  |   |                        |   | 57,998       |  |   |                   |   |  |   | 105,299
|Restaurant wages and related expenses |  |                     | 57,752  |   |                        |   | 51,437       |  |   |                   |   |  |   | 109,189
|Restaurant rent expense               |  |                     | 10,548  |   |                        |   | 6,299        |  |   | 1,332              |   |  |   | 18,179 
|Other restaurant operating expenses   |  |                     | 27,483  |   |                        |   | 26,406       |  |   |                   |   |  |   | 53,889 
|Advertising expense                   |  |                     | 7,659   |   |                        |   | 6,501        |  |   |                   |   |  |   | 14,160 
|General and administrative            |  |                     | 12,759  |   |                        |   | 11,360       |  |   |                   |   |  |   | 24,119 
|Depreciation and amortization         |  |                     | 9,605   |   |                        |   | 7,459        |  |   | (284               | ) |  |   | 16,780 
|Impairment losses                     |  |                     | 224     |   |                        |   | 20           |  |   |                   |   |  |   | 244    
|                                      |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |        
|Total operating expenses              |  |                     | 173,331 |   |                        |   | 167,480      |  |   | 1,048              |   |  |   | 341,859
|                                      |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |        
|Income from operations                |  |                     | 8,808   |   |                        |   | 23,505       |  |   | (1,048             | ) |  |   | 31,265 
|Interest expense                      |  |                     | 20,397  |   |                        |   | 5,488        |  |   | (1,485             | ) |  |   | 24,400 
|Intercompany interest allocations     |  |                     | (9,112  | ) |                        |   | 9,112        |  |   |                   |   |  |   |       
|                                      |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |        
|Income (loss) before income taxes     |  |                     | (2,477  | ) |                        |   | 8,905        |  |   | 437                |   |  |   | 6,865  
|Provision (benefit) for income taxes  |  |                     | (976    | ) |                        |   | 3,129        |  |   | 95                 |   |  |   | 2,248  
|Equity income from subsidiaries       |  |                     | 6,118   |   |                        |   |             |  |   | (6,118             | ) |  |   |       
|                                      |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |        
|Net income                            |  | $                   | 4,617   |   |                        | $ | 5,776        |  | $ | (5,776             | ) |  | $ | 4,617  
|                                      |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |        



20



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING STATEMENT OF OPERATIONS

Six Months Ended June 30, 2005

(In thousands of dollars)

(Unaudited)



|                                                                                   |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------- | ------- | - | ---------------------- | - | ------------ |  | - | ------------------ | - |  | - | ------- | -
|                                                                                   |  | Parent Company Only |         |   | Guarantor Subsidiaries |   | Eliminations |  |   | Consolidated Total |  
|Revenues:                                                                          |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |         |  
|Restaurant sales                                                                   |  | $                   | 179,174 |   |                        | $ | 171,357      |  | $ |                   |   |  | $ | 350,531 |  
|Franchise royalty revenues and fees                                                |  |                     |        |   |                        |   | 785          |  |   |                   |   |  |   | 785     |  
|                                                                                   |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |         |  
|Total revenues                                                                     |  |                     | 179,174 |   |                        |   | 172,142      |  |   |                   |   |  |   | 351,316 |  
|                                                                                   |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |         |  
|Costs and expenses:                                                                |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |         |  
|Cost of sales                                                                      |  |                     | 49,427  |   |                        |   | 52,929       |  |   |                   |   |  |   | 102,356 |  
|Restaurant wages and related expenses                                              |  |                     | 57,124  |   |                        |   | 44,998       |  |   |                   |   |  |   | 102,122 |  
|Restaurant rent expense                                                            |  |                     | 10,859  |   |                        |   | 5,734        |  |   | 1,171              |   |  |   | 17,764  |  
|Other restaurant operating expenses                                                |  |                     | 27,031  |   |                        |   | 22,283       |  |   |                   |   |  |   | 49,314  |  
|Advertising expense                                                                |  |                     | 7,368   |   |                        |   | 6,180        |  |   |                   |   |  |   | 13,548  |  
|General and administrative (including $16,432 of stock-based compensation expense) |  |                     | 22,370  |   |                        |   | 15,614       |  |   |                   |   |  |   | 37,984  |  
|Depreciation and amortization                                                      |  |                     | 10,120  |   |                        |   | 6,846        |  |   | (239               | ) |  |   | 16,727  |  
|Impairment losses                                                                  |  |                     | 758     |   |                        |   | 95           |  |   |                   |   |  |   | 853     |  
|                                                                                   |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |         |  
|Total operating expenses                                                           |  |                     | 185,057 |   |                        |   | 154,679      |  |   | 932                |   |  |   | 340,668 |  
|                                                                                   |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |         |  
|Income (loss) from operations                                                      |  |                     | (5,883  | ) |                        |   | 17,463       |  |   | (932               | ) |  |   | 10,648  |  
|Interest expense                                                                   |  |                     | 17,551  |   |                        |   | 4,661        |  |   | (1,298             | ) |  |   | 20,914  |  
|Intercompany interest allocations                                                  |  |                     | (9,112  | ) |                        |   | 9,112        |  |   |                   |   |  |   |        |  
|                                                                                   |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |         |  
|Income (loss) before income taxes                                                  |  |                     | (14,322 | ) |                        |   | 3,690        |  |   | 366                |   |  |   | (10,266 | )
|Provision (benefit) for income taxes                                               |  |                     | (2,803  | ) |                        |   | 2,434        |  |   | 584                |   |  |   | 215     |  
|Equity income from subsidiaries                                                    |  |                     | 1,038   |   |                        |   |             |  |   | (1,038             | ) |  |   |        |  
|                                                                                   |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |         |  
|Net income (loss)                                                                  |  | $                   | (10,481 | ) |                        | $ | 1,256        |  | $ | (1,256             | ) |  | $ | (10,481 | )
|                                                                                   |  |                     |         |   |                        |   |              |  |   |                    |   |  |   |         |  



21



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2006

(In thousands of dollars)

(Unaudited)



|                                                                                    |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------- | ------- | - | ---------------------- | - | ------- | ------------ |  | - | ------------------ | - |  | - | ------- | -
|                                                                                    |  | Parent Company Only |         |   | Guarantor Subsidiaries |   |         | Eliminations |  |   | Consolidated Total |  
|Cash flows provided from operating activities:                                      |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Net income                                                                          |  | $                   | 4,617   |   |                        | $ | 5,776   |              |  | $ | (5,776             | ) |  | $ | 4,617   |  
|Adjustments to reconcile net income to net cash provided from operating activities: |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Depreciation and amortization                                                       |  |                     | 9,605   |   |                        |   | 7,459   |              |  |   | (284               | ) |  |   | 16,780  |  
|Amortization of deferred financing costs                                            |  |                     | 690     |   |                        |   | 122     |              |  |   | (70                | ) |  |   | 742     |  
|Amortization of unearned purchase discounts                                         |  |                     | (1,077  | ) |                        |   |        |              |  |   |                   |   |  |   | (1,077  | )
|Amortization of deferred gains from sale-leaseback transactions                     |  |                     | (156    | ) |                        |   | (86     | )            |  |   | (96                | ) |  |   | (338    | )
|Impairment losses                                                                   |  |                     | 224     |   |                        |   | 20      |              |  |   |                   |   |  |   | 244     |  
|Accretion of interest on lease financing obligations.                               |  |                     | (69     | ) |                        |   | 247     |              |  |   | (25                | ) |  |   | 153     |  
|Deferred income taxes                                                               |  |                     | (791    | ) |                        |   | (713    | )            |  |   | 155                |   |  |   | (1,349  | )
|Gain on settlement of lease financing obligations, net                              |  |                     | (308    | ) |                        |   |        |              |  |   |                   |   |  |   | (308    | )
|Increase (decrease) in accrued payroll, related taxes and benefits                  |  |                     | (434    | ) |                        |   | 73      |              |  |   |                   |   |  |   | (361    | )
|Changes in other operating assets and liabilities                                   |  |                     | 4,083   |   |                        |   | (6,748  | )            |  |   | 6,096              |   |  |   | 3,431   |  
|                                                                                    |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Net cash provided from operating activities                                         |  |                     | 16,384  |   |                        |   | 6,150   |              |  |   |                   |   |  |   | 22,534  |  
|                                                                                    |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Cash flows provided from (used for) investing activities:                           |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Capital expenditures:                                                               |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|New restaurant development                                                          |  |                     | (78     | ) |                        |   | (11,988 | )            |  |   |                   |   |  |   | (12,066 | )
|Restaurant remodeling                                                               |  |                     | (2,818  | ) |                        |   | (527    | )            |  |   |                   |   |  |   | (3,345  | )
|Other restaurant expenditures                                                       |  |                     | (1,383  | ) |                        |   | (2,326  | )            |  |   |                   |   |  |   | (3,709  | )
|Corporate and restaurant information systems                                        |  |                     | (760    | ) |                        |   | (242    | )            |  |   |                   |   |  |   | (1,002  | )
|                                                                                    |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Total capital expenditures                                                          |  |                     | (5,039  | ) |                        |   | (15,083 | )            |  |   |                   |   |  |   | (20,122 | )
|Properties purchased for sale-leaseback                                             |  |                     |        |   |                        |   | (1,655  | )            |  |   |                   |   |  |   | (1,655  | )
|Deposit on properties purchased for sale-leaseback                                  |  |                     | (1,616  | ) |                        |   |        |              |  |   |                   |   |  |   | (1,616  | )
|Proceeds from sales of other properties                                             |  |                     | 9,347   |   |                        |   | 10,801  |              |  |   | 5,970              |   |  |   | 26,118  |  
|                                                                                    |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Net cash provided from (used for) investing activities                              |  |                     | 2,692   |   |                        |   | (5,937  | )            |  |   | 5,970              |   |  |   | 2,725   |  
|                                                                                    |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Cash flows used for financing activities:                                           |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Scheduled principal payments on term loans                                          |  |                     | (1,100  | ) |                        |   |        |              |  |   |                   |   |  |   | (1,100  | )
|Principal payments on capital leases                                                |  |                     | (79     | ) |                        |   | (129    | )            |  |   |                   |   |  |   | (208    | )
|Principal pre-payments on term loans                                                |  |                     | (17,000 | ) |                        |   |        |              |  |   |                   |   |  |   | (17,000 | )
|Settlement of lease financing obligations                                           |  |                     | (7,670  | ) |                        |   | (6,555  | )            |  |   |                   |   |  |   | (14,225 | )
|Proceeds from lease financing obligations                                           |  |                     |        |   |                        |   | 6,330   |              |  |   | (6,330             | ) |  |   |        |  
|Financing costs associated with issuance of debt and lease financing obligations    |  |                     | (4      | ) |                        |   | (360    | )            |  |   | 360                |   |  |   | (4      | )
|                                                                                    |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Net cash used for financing activities                                              |  |                     | (25,853 | ) |                        |   | (714    | )            |  |   | (5,970             | ) |  |   | (32,537 | )
|                                                                                    |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Decrease in cash and cash equivalents                                               |  |                     | (6,777  | ) |                        |   | (501    | )            |  |   |                   |   |  |   | (7,278  | )
|Cash and cash equivalents, beginning of period                                      |  |                     | 7,493   |   |                        |   | 1,838   |              |  |   |                   |   |  |   | 9,331   |  
|                                                                                    |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Cash and cash equivalents, end of period                                            |  | $                   | 716     |   |                        | $ | 1,337   |              |  | $ |                   |   |  | $ | 2,053   |  
|                                                                                    |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  



22



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##### Table of Contents

CARROLS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2005

(In thousands of dollars)

(Unaudited)



|                                                                                                      |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ------------------- | ------- | - | ---------------------- | - | ------- | ------------ |  | - | ------------------ | - |  | - | ------- | -
|                                                                                                      |  | Parent Company Only |         |   | Guarantor Subsidiaries |   |         | Eliminations |  |   | Consolidated Total |  
|Cash flows provided from (used for) operating activities:                                             |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Net income (loss)                                                                                     |  | $                   | (10,481 | ) |                        | $ | 1,256   |              |  | $ | (1,256             | ) |  | $ | (10,481 | )
|Adjustments to reconcile net income (loss) to net cash provided from (used for) operating activities: |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Gain on sales of properties                                                                           |  |                     |        |   |                        |   | (395    | )            |  |   |                   |   |  |   | (395    | )
|Stock based compensation                                                                              |  |                     | 10,859  |   |                        |   | 5,502   |              |  |   |                   |   |  |   | 16,361  |  
|Depreciation and amortization                                                                         |  |                     | 10,120  |   |                        |   | 6,846   |              |  |   | (239               | ) |  |   | 16,727  |  
|Amortization of deferred financing costs                                                              |  |                     | 698     |   |                        |   | 124     |              |  |   | (63                | ) |  |   | 759     |  
|Amortization of unearned purchase discounts                                                           |  |                     | (1,077  | ) |                        |   |        |              |  |   |                   |   |  |   | (1,077  | )
|Amortization of deferred gains from sale-leaseback transactions                                       |  |                     | (98     | ) |                        |   | (74     | )            |  |   | (77                | ) |  |   | (249    | )
|Impairment losses                                                                                     |  |                     | 758     |   |                        |   | 95      |              |  |   |                   |   |  |   | 853     |  
|Deferred income taxes                                                                                 |  |                     | 520     |   |                        |   | (888    | )            |  |   | 128                |   |  |   | (240    | )
|Accretion of interest on lease financing obligations                                                  |  |                     | (35     | ) |                        |   | 229     |              |  |   | (21                | ) |  |   | 173     |  
|Decrease in accrued bonus to employees and director                                                   |  |                     | (20,860 | ) |                        |   |        |              |  |   |                   |   |  |   | (20,860 | )
|Decrease in accrued payroll, related taxes and benefits                                               |  |                     | (8,145  | ) |                        |   | (2,248  | )            |  |   |                   |   |  |   | (10,393 | )
|Changes in other operating assets and liabilities                                                     |  |                     | 6,569   |   |                        |   | (189    | )            |  |   | 1,528              |   |  |   | 7,908   |  
|                                                                                                      |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Net cash provided from (used for) operating activities                                                |  |                     | (11,172 | ) |                        |   | 10,258  |              |  |   |                   |   |  |   | (914    | )
|                                                                                                      |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Cash flows used for investing activities:                                                             |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Capital expenditures:                                                                                 |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|New restaurant development                                                                            |  |                     | 18      |   |                        |   | (7,611  | )            |  |   |                   |   |  |   | (7,593  | )
|Restaurant remodeling                                                                                 |  |                     | (1,032  | ) |                        |   | (625    | )            |  |   |                   |   |  |   | (1,657  | )
|Other restaurant expenditures                                                                         |  |                     | (758    | ) |                        |   | (2,288  | )            |  |   |                   |   |  |   | (3,046  | )
|Corporate and restaurant information systems                                                          |  |                     | (457    | ) |                        |   | (246    | )            |  |   |                   |   |  |   | (703    | )
|                                                                                                      |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Total capital expenditures                                                                            |  |                     | (2,229  | ) |                        |   | (10,770 | )            |  |   |                   |   |  |   | (12,999 | )
|Properties purchased for sale-leaseback                                                               |  |                     | (275    | ) |                        |   |        |              |  |   |                   |   |  |   | (275    | )
|Proceed from sale/leaseback transactions                                                              |  |                     | 1,137   |   |                        |   |        |              |  |   |                   |   |  |   | 1,137   |  
|Proceeds from sales of non-operating properties                                                       |  |                     |        |   |                        |   | 479     |              |  |   |                   |   |  |   | 479     |  
|                                                                                                      |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Net cash used for investing activities                                                                |  |                     | (1,367  | ) |                        |   | (10,291 | )            |  |   |                   |   |  |   | (11,658 | )
|                                                                                                      |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Cash flows used for financing activities:                                                             |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Scheduled principal payments on term loans                                                            |  |                     | (1,100  | ) |                        |   |        |              |  |   |                   |   |  |   | (1,100  | )
|Principal payments on capital leases                                                                  |  |                     | (72     | ) |                        |   | (133    | )            |  |   |                   |   |  |   | (205    | )
|Financing costs associated with issuance of debt                                                      |  |                     | (190    | ) |                        |   |        |              |  |   |                   |   |  |   | (190    | )
|                                                                                                      |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Net cash used for financing activities                                                                |  |                     | (1,362  | ) |                        |   | (133    | )            |  |   |                   |   |  |   | (1,495  | )
|                                                                                                      |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Net decrease in cash and cash equivalents                                                             |  |                     | (13,901 | ) |                        |   | (166    | )            |  |   |                   |   |  |   | (14,067 | )
|Cash and cash equivalents, beginning of period                                                        |  |                     | 29,195  |   |                        |   | 2,271   |              |  |   |                   |   |  |   | 31,466  |  
|                                                                                                      |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  
|Cash and cash equivalents, end of period                                                              |  | $                   | 15,294  |   |                        | $ | 2,105   |              |  | $ |                   |   |  | $ | 17,399  |  
|                                                                                                      |  |                     |         |   |                        |   |         |              |  |   |                    |   |  |   |         |  



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##### Table of Contents

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

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

Introduction

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

Company Overview - a general description of our restaurant concepts and our key financial measures.

Executive Summary - an executive review of our performance for the three and six months ended June 30, 2006.

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

Results
of Operations - an analysis of our results of operations for the three and six months ended June 30, 2006 and 2005.

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

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

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

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



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##### Table of Contents

We use the term Consolidated Adjusted EBITDA because we believe it is a useful financial
indicator for our ability, on a consolidated basis, to service and/or incur indebtedness. Consolidated Adjusted EBITDA (defined as earnings before interest, income taxes, depreciation and amortization, impairment losses, stock-based compensation
expense, bonus to employees and a director in connection with our December 2004 refinancing, other income and expense and loss on extinguishment of debt) should not be considered as an alternative to consolidated cash flows as a measure of liquidity
in accordance with generally accepted accounting principles (GAAP). Consolidated Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation. Management
believes the most directly comparable measure to Consolidated Adjusted EBITDA calculated in accordance with GAAP is net cash provided from operating activities. Our utilization of a non-GAAP financial measure is not meant to be considered in
isolation or as a substitute for net income, income from operations, cash flow, gross margin and other measures of financial performance prepared in accordance with GAAP. See Reconciliation of Non-GAAP Financial Measures on page 35.

We use a 52-53 week fiscal year ending on the Sunday closest to December 31. For convenience, all references herein to the fiscal
years ended January 1, 2006 and January 2, 2005 will be referred to as 2005 and 2004, respectively, or the years ended December 31, 2005 and 2004, respectively. Similarly, all references herein to the thirteen and 26 weeks ended
July 2, 2006 and July 3, 2005 will be referred to as the three and six months ended June 30, 2006 and June 30, 2005, respectively. The years ended December 31, 2005 and 2004 contained 52 weeks and 53 weeks, respectively.

Company Overview

We are one of the
largest restaurant companies in the United States operating three restaurant brands in the quick-casual and quick-service restaurant segments with 540 restaurants in 16 states as of June 30, 2006. We own and operate 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 based on number of restaurants and have operated Burger King restaurants since 1976. As of June 30, 2006, our company-owned and operated restaurants included 71
company-owned Pollo Tropical restaurants and 139 company-owned Taco Cabana restaurants, and we operated 330 Burger King restaurants under franchise agreements. We also franchise our Hispanic Brand restaurants with 29 franchised restaurants located
in Puerto Rico, Ecuador and the United States as of June 30, 2006.

Hispanic Brands

Our Hispanic Brands operate in the quick-casual restaurant segment combining the convenience of quick-service restaurants with the menu variety, use of
fresh ingredients and food quality more typical of casual dining restaurants. As of June 30, 2006, our Hispanic Brands were comprised of 210 company-owned and 29 franchised restaurants and for the three and six months ended June 30, 2006
accounted for 51.0% and 51.2% of our consolidated revenues, respectively.

Taco Cabana.Our Taco Cabana restaurants serve fresh,
high-quality Tex-Mex and traditional Mexican style food, including sizzling fajitas, quesadillas, enchiladas, burritos, tacos, other Tex-Mex dishes, fresh-made flour tortillas, frozen margaritas and beer. Most menu items are made fresh daily in each
of our Taco Cabana restaurants, which feature open display cooking that enables customers to observe the preparation of menu items, including fajitas cooking on a grill and a machine making fresh tortillas. A majority of our Taco Cabana restaurants
are open 24 hours a day, generating customer traffic and restaurant sales across multiple day parts by offering a convenient and quality experience to our customers. Taco Cabana pioneered the Mexican patio café concept with its first
restaurant in San Antonio, Texas in 1978. As of June 30, 2006, we owned and operated 139 Taco Cabana restaurants located in Texas, Oklahoma and New Mexico. For the three and six months ended June 30, 2006, our company-owned Taco Cabana
restaurants generated total restaurant sales of $58.6 million and $113.8 million, respectively, and segment EBITDA of $8.1 million and $15.8 million, respectively.

Pollo Tropical.Our Pollo Tropical restaurants are known for their fresh grilled chicken marinated in a proprietary blend of tropical fruit juices and spices. Our menu also features other items including roast
pork, a line of premium sandwiches, grilled ribs offered with a selection of sauces, authentic made from scratch side dishes and salads. Most menu items are made fresh daily in each of our Pollo Tropical restaurants, which feature open
display cooking that enables customers to observe the preparation of menu items, including chicken grilled on large, open-flame grills. As of June 30, 2006, we owned and operated a total of 71 Pollo Tropical restaurants, with 59 located in
south Florida, eleven located in central Florida and one in the New York City metropolitan area, in northern New Jersey. For the three and six months ended June 30, 2006, our company-owned Pollo Tropical restaurants generated total restaurant
sales of $38.2 million and $76.5 million, respectively, and segment EBITDA of $7.7 million and $15.3 million, respectively.



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##### Table of Contents

Burger King.Burger King is the second largest hamburger restaurant chain in the world (as
measured by the number of restaurants and system-wide sales) and we are the largest franchisee in the Burger King system. Burger King restaurants are part of the quick-service restaurant segment which is the largest of the five major segments of the
U.S. restaurant industry based on 2005 sales. Burger King restaurant feature the popular flame-broiled Whopper® sandwich, as well as a variety of hamburgers and other sandwiches, fries, salads, breakfast items and other offerings typically found in quick-service hamburger restaurants. As of
June 30, 2006, we operated 330 Burger King restaurants located in 12 Northeastern, Midwestern and Southeastern states. For the three and six months ended June 30, 2006, our Burger King restaurants generated total restaurants sales of $93.4
million and $182.1 million, respectively, and segment EBITDA of $10.3 million and $17.2 million, respectively.

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



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



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



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



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



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



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



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##### Table of Contents

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



| |  |  | Segment EBITDAis a financial indicator that is reported to our chief operating decision maker for purposes of allocating resources to our segments and assessing their
performance. Segment EBITDA for our Burger King restaurants includes general and administrative expenses related directly to the Burger King segment as well as the costs associated with administrative support to all of our segments including
executive management, information systems and certain accounting, legal and other administrative functions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Interest expense consists primarily of interest expense associated with $180 million of 9% Senior Subordinated Notes due 2013, which we refer to herein as the
notes, and on borrowings under our senior credit facility, and imputed interest expense on certain leases entered into in connection with sale-leaseback transactions which are accounted for as lease financing obligations. Interest
expense may also include gains and losses from the settlement of lease financing obligations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Executive Summary Operating
Performance for the Three Months Ended June 30, 2006

Total revenues for the second quarter of 2006 increased 4.8% to $190.6
million from $181.8 million in the second quarter of 2005 and Consolidated Adjusted EBITDA increased 7.8% to $26.1 million in the second quarter of 2006 from $24.2 million in the second quarter of 2005. Net cash provided from operations was $15.3
million in the second quarter of 2006 compared to $19.5 million in the second quarter of 2005. Revenues from our Hispanic Brand restaurants increased 11.0% to $97.2 million in the second quarter of 2006 compared to $87.5 million in the second
quarter of 2005.

We have continued to expand our Hispanic Brand restaurants , and at the end of the second quarter of 2006, we owned a
total of 210 restaurants under the Pollo Tropical and Taco Cabana brand names. Sales have grown from the continued expansion of both brands, as well as continued sales increases from existing restaurants. Since the end of the second quarter of 2005,
we opened six new Pollo Tropical restaurants, including one new Pollo Tropical restaurant in the New York City metropolitan area and added eleven Taco Cabana restaurants (which includes four restaurants in Texas acquired from a Taco Cabana
franchisee). In the second quarter of 2006, we opened three new Taco Cabana restaurants and one new Pollo Tropical restaurant. Comparable Hispanic Brand restaurant sales have continued to increase and in the second quarter of 2006 were up 2.4% for
Pollo Tropical and 2.7% for Taco Cabana compared to the second quarter of 2005.

Restaurant sales from our Burger King restaurants
decreased to $93.4 million in the second quarter of 2006 from $94.3 million in the second quarter of 2005 due to the closure of eleven Burger King restaurants since the end of the second quarter of 2005. This decrease was partially offset by an
increase in comparable Burger King restaurant sales of 0.6% in the second quarter of 2006. As of June 30, 2006, we were operating a total of 330 Burger King restaurants.

Segment EBITDA for our Hispanic Brands increased to $15.8 million in the second quarter of 2006 from $15.4 million in the second quarter of 2005, an
increase of 2.6%. Segment EBITDA for our Burger King restaurants increased 16.7% in the second quarter of 2006 to $10.3 million from $8.8 million in the second quarter of 2005.

Operating results in the second quarter of 2006 for all three segments improved based on increases in sales for our Hispanic Brand restaurants and higher
operating margins at our Burger King restaurants, primarily from lower food costs as a percentage of restaurant sales. Pollo Tropical operating margins for the second quarter of 2006 were impacted by higher labor rates due to labor market conditions
in Florida. All three segments were impacted by higher utility costs, which as a percentage of consolidated restaurant sales, increased from 3.7% in the second quarter of 2005 to 4.4% in the second quarter of 2006.

During the second quarter of 2006, we continued to reduce our outstanding term loan borrowings under our senior credit facility by making voluntary
principal prepayments of $8.5 million. The total principal amount outstanding under our senior credit facility has decreased from $211.8 million at December 31, 2005 to $193.7 million at June 30, 2006 due primarily to voluntary principal
prepayments in the first six months of 2006 of $17.0 million on our outstanding term loan borrowings.



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On June 30, 2006, we exercised our right of first refusal under the leases related to thirteen
restaurant properties following the exercise of purchase options held by an entity wholly-owned by the nephew of our chairman and chief executive officer related to the subject properties and we purchased thirteen restaurant properties from the
lessor for $16.2 million. The Company recorded a loss of $2.0 million, which is included in interest expense in the second quarter of 2006, representing the amount by which the purchase price for the restaurant properties exceeded the lease
financing obligations recorded for those leases at the time of the purchase. Concurrently, with the purchase described above, the properties were sold in a qualified sale-leaseback transaction for net proceeds of $16.7 million.

In the second quarter of 2006, we also amended lease agreements for twenty-one restaurant properties previously accounted for as lease financing
obligations to eliminate or otherwise cure the provisions that precluded the original sale-leaseback accounting under SFAS 98. A gain of $0.3 million was recognized as required by SFAS 98 and is included as a reduction of interest expense in the
second quarter of 2006. The impact of these transactions was to reduce lease financing obligations by $22.7 million, reduce assets under lease financing obligations by $13.6 million and record a deferred gain of $8.5 million.

As a result of the above transactions, we reduced our lease financing obligations by $37.0 million in total during the second quarter of 2006. In July
2006, we also amended thirteen additional lease agreements accounted for as lease financing obligations to eliminate or otherwise cure the provisions that precluded the original sale-leaseback accounting under SFAS 98. The effect of these
amendments, which will be recorded in the third quarter of 2006, will be to reduce lease financing obligations by $14.8 million, reduce assets under lease financing obligations by $11.1 million, record a deferred gain of $3.6 million, which will be
amortized over the remaining lease term, and record a loss of $0.1 million.

The recharacterization of all of these leases as qualified
sale-leaseback transactions rather than lease financing obligations will reduce interest expense, reduce depreciation expense and increase rent expense in future periods.

Liquidity and Capital Resources

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



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



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



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

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

Operating activities. Net cash provided from operating activities for the six months ended
June 30, 2006 was $22.5 million due primarily to net income of $4.6 million and depreciation and amortization expense of $16.8 million. Net cash used for operating activities for the six months ended June 30, 2005 was $0.9 million. At
December 31, 2004 we had $31.5 million in cash due to (i) the timing of redemption of the senior subordinated notes associated with the December 2004 refinancing; (ii) the payment in the first quarter of 2005 of a $20.3 million bonus
to employees (including management) and a director in connection with the December 2004 refinancing, including applicable payroll taxes of $0.6 million; and (iii) the payment of $5.5 million of tax withholdings in the first quarter of 2005
related to the dividend payment in late December of 2004. These payments reduced net cash provided from operating activities in the aggregate $26.4 million in the first six months of 2005.

Our income tax payments included in operating activities have been historically reduced due to the utilization of net operating loss carryforwards. For
tax years beginning in 2006 we have available Federal alternative minimum tax credit carryforwards of $2.7 million with no expiration date and Federal employment tax credit carryforwards of $2.5 million that begin to expire in 2021. We had no
Federal net operating loss carryforwards as of December 31, 2005.



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##### Table of Contents

Investing activities including capital expenditures and qualified sale-leaseback transactions. Net
cash provided from investing activities in the six months ended June 30, 2006 was $2.7 million. Net cash used for investing activities in the six months ended June 30, 2005 was $11.7 million. Capital expenditures were $20.1 million and
$13.0 million in the six months ended June 30, 2006 and 2005, respectively, and included expenditures for development of new Taco Cabana and Pollo Tropical restaurants of $12.0 million and $7.6 million, respectively. In the first six months of
2006, we sold 18 restaurant properties in sale-leaseback transactions for net proceeds of $26.1 million. Thirteen of these properties were acquired on June 30, 2006 from the lessor for $16.2 million when we exercised our right of first refusal
under the subject leases following the exercise of purchase options held by an entity wholly-owned by the nephew of our Chairman and Chief Executive Officer. The underlying leases for these thirteen properties were previously treated as lease
financing obligations and the purchases of these properties are shown in our Consolidated Statements of Cash Flows under financing activities as settlements of lease financing obligations. The proceeds from these sales, net of costs of the
properties acquired, other transaction costs and a deposit receivable at June 30, 2006 of $1.6 million related to the purchase of these properties, were used to reduce outstanding borrowings under on our senior credit facility. We also had
expenditures related to the purchase of other restaurant properties to be sold in sale-leaseback transactions of $1.7 million and $0.3 million in the six months ended June 30, 2006 and 2005, respectively.

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



|                                             |  |             |       |                |   |             |  |   |       |   |              |   |       |  |   |       
|-------------------------------------------- |  | ----------- | ----- | -------------- | - | ----------- |  | - | ----- | - | ------------ | - | ----- |  | - | ------
|                                             |  | Taco Cabana |       | Pollo Tropical |   | Burger King |  |   | Other |   | Consolidated
|Six months ended June 30, 2006:              |  |             |       |                |   |             |  |   |       |   |              |   |       |  |   |       
|New restaurant development                   |  | $           | 5,524 |                | $ | 6,464       |  | $ | 78    |   |              | $ |      |  | $ | 12,066
|Restaurant remodeling                        |  |             | 70    |                |   | 457         |  |   | 2,818 |   |              |   |      |  |   | 3,345 
|Other restaurant capital expenditures (1)    |  |             | 1,244 |                |   | 1,082       |  |   | 1,383 |   |              |   |      |  |   | 3,709 
|Corporate and restaurant information systems |  |             |      |                |   |            |  |   |      |   |              |   | 1,002 |  |   | 1,002 
|                                             |  |             |       |                |   |             |  |   |       |   |              |   |       |  |   |       
|Total capital expenditures                   |  | $           | 6,838 |                | $ | 8,003       |  | $ | 4,279 |   |              | $ | 1,002 |  | $ | 20,122
|                                             |  |             |       |                |   |             |  |   |       |   |              |   |       |  |   |       
|Number of new restaurant openings            |  |             | 4     |                |   | 2           |  |   | 0     |   |              |   |       |  |   | 6     
|                                             |  |             |       |                |  
|Six Months Ended June 30, 2005:              |  |             |       |                |   |             |  |   |       |   |              |   |       |  |   |       
|New restaurant development                   |  | $           | 3,065 |                | $ | 4,546       |  | $ | (18   | ) |              | $ |      |  | $ | 7,593 
|Restaurant remodeling                        |  |             |      |                |   | 625         |  |   | 1,032 |   |              |   |      |  |   | 1,657 
|Restaurant maintenance expenditures (1)      |  |             | 1,502 |                |   | 786         |  |   | 758   |   |              |   |      |  |   | 3,046 
|Corporate and restaurant information systems |  |             |      |                |   |            |  |   |      |   |              |   | 703   |  |   | 703   
|                                             |  |             |       |                |   |             |  |   |       |   |              |   |       |  |   |       
|Total capital expenditures                   |  | $           | 4,567 |                | $ | 5,957       |  | $ | 1,772 |   |              | $ | 703   |  | $ | 12,999
|                                             |  |             |       |                |   |             |  |   |       |   |              |   |       |  |   |       
|Number of new restaurant openings            |  |             | 3     |                |   | 2           |  |   | 0     |   |              |   |       |  |   | 5     

---

|1) | Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the six months ended June 30,
2006 and 2005, restaurant repair and maintenance expenses were approximately $8.7 million and $9.0 million, respectively.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
2006, we anticipate that total capital expenditures will be approximately $45 million to $47 million (of which $20.1 million had been expended through June 30, 2006), although the actual amount of capital expenditures my differ from these
estimates. These capital expenditures are expected to include approximately $28 million to $29 million for the development of new restaurants and purchase of related real estate applicable to our Taco Cabana and Pollo Tropical restaurant concepts.
In 2006 we anticipate opening approximately eight new Pollo Tropical restaurants and ten new Taco Cabana restaurants. Capital expenditures in 2006 also are expected to include expenditures of approximately $16 million to $17 million, for the ongoing
reinvestment in our three restaurant concepts for remodeling costs and capital maintenance expenditures, and approximately $1 million in other capital expenditures.

Financing activities. Net cash used for financing activities for the six months ended June 30, 2006 and 2005 was $32.5 million and $1.5 million, respectively. Financing activities in these periods
consisted of repayments under our debt arrangements and, in the first six months of 2006, voluntary principal repayments on borrowings under our senior credit facility of $17.0 million and the payment of $16.2 million, which was comprised of $14.2
million of lease financing obligations and $2.0 million of interest, to acquire thirteen leased properties previously accounted for as lease financing obligations, as discussed above.



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Indebtedness. On December 15, 2004, we completed a refinancing transaction in which we
received $400 million in gross proceeds, including $180.0 million from the sale of our notes in a private placement. We received $400.0 million in total proceeds that included the issuance of the notes and term loan borrowings of $220.0 million
under our senior credit facility. At June 30, 2006, we had total debt outstanding of $449.5 million comprised of $180.0 million of notes, term loan borrowings of $193.7 million under the senior credit facility, lease financing obligations of
$74.1 million and capital lease obligations of $1.7 million.

Our senior credit facility provides for a revolving credit facility under
which we may borrow up to $50.0 million (including a sub limit of up to $20.0 million for letters of credit and up to $5.0 million for swingline loans), a $220.0 million term loan facility and incremental facilities (as defined in the senior credit
facility), at our option, of up to $100.0 million, subject to the satisfaction of certain conditions. At June 30, 2006, $193.7 million was outstanding under the term loan facility and no amounts were outstanding under our revolving credit
facility. After reserving $14.6 million for outstanding letters of credit guaranteed by the facility, $35.4 million was available for borrowings under our revolving credit facility at June 30, 2006. We were in compliance with the covenants
under our senior credit facility as of June 30, 2006.

Contractual Obligations.

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



|                                                    |       |                        |                                |  |             |        |             |   |            |  |   |         |  |   |        
|--------------------------------------------------- | ----- | ---------------------- | ------------------------------ |  | ----------- | ------ | ----------- | - | ---------- |  | - | ------- |  | - | -------
|Contractual Obligations                             |       | Payments due by period
|                                                    | Total |                        | July 2006 throughDecember 2006 |  | 2007  2008 |        | 2009  2010 |   | Thereafter
|Long-term debt obligations, including interest (1)  |       | $                      | 541,059                        |  | $           | 15,901 |             | $ | 63,425     |  | $ | 241,233 |  | $ | 220,500
|Capital lease obligations, including interest (2)   |       |                        | 3,009                          |  |             | 288    |             |   | 644        |  |   | 357     |  |   | 1,720  
|Operating lease obligations (3)                     |       |                        | 418,896                        |  |             | 19,110 |             |   | 70,721     |  |   | 63,056  |  |   | 266,010
|Lease financing obligations, including interest (4) |       |                        | 178,457                        |  |             | 3,484  |             |   | 14,313     |  |   | 14,746  |  |   | 145,914
|                                                    |       |                        |                                |  |             |        |             |   |            |  |   |         |  |   |        
|Total contractual obligations                       |       | $                      | 1,141,421                      |  | $           | 38,783 |             | $ | 149,103    |  | $ | 319,392 |  | $ | 634,144
|                                                    |       |                        |                                |  |             |        |             |   |            |  |   |         |  |   |        

---

|(1) | Our long-term debt obligations include $180 million principal amount of notes and $193.7 million principal amount of term loan borrowings outstanding under the senior credit
facility. Interest payments on our notes of $113.4 million for all periods presented are included at the coupon rate of 9%. Interest payments included above totaling $54.0 million for all periods presented on our term loan facility are variable in
nature and have been calculated using an assumed interest rate of 7.0% for each year.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(4) | Includes interest of $104.4 million in total for all years presented. Since December 31, 2005 we have reduced our lease financing obligations by $37.0 million by i) exercising
our right of first refusal under the subject leases and purchasing thirteen restaurant properties which were concurrently sold in a qualified sale-leaseback transactions and ii) amending lease agreements for twenty-one properties accounted for as
lease financing obligations to eliminate or otherwise cure the provisions that precluded the original sale-leaseback accounting under SFAS 98. See Note 9 to our consolidated financial statements contained elsewhere in this Form 10-Q. These leases
referred to in i) and ii) above are classified as operating lease obligations in the above table.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Results of Operations

From June 30, 2005 through June 30, 2006, we have opened six new Pollo Tropical restaurants, seven new Taco Cabana restaurants, one new
Burger King restaurant and acquired four Taco Cabana restaurants from an existing franchisee. During the same period we closed eleven Burger King restaurants.



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Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005.

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



|                                                                  |  |       |   |  |       |  
|----------------------------------------------------------------- |  | ----- | - |  | ----- | -
|                                                                  |  | 2006  |   |  | 2005  |  
|Restaurant sales:                                                 |  |       |   |  |       |  
|Taco Cabana                                                       |  | 30.8  | % |  | 29.1  | %
|Pollo Tropical                                                    |  | 20.1  | % |  | 18.9  | %
|Burger King                                                       |  | 49.1  | % |  | 52.0  | %
|                                                                  |  |       |   |  |       |  
|                                                                  |  | 100.0 | % |  | 100.0 | %
|                                                                  |  |      
|Costs and expenses:                                               |  |       |   |  |       |  
|Cost of sales                                                     |  | 28.1  | % |  | 29.5  | %
|Restaurant wages and related expenses                             |  | 29.1  | % |  | 28.7  | %
|Restaurant rent expense                                           |  | 4.8   | % |  | 4.9   | %
|Other restaurant operating expenses                               |  | 14.4  | % |  | 13.8  | %
|Advertising expense                                               |  | 3.8   | % |  | 3.9   | %
|General and administrative (including stock compensation expense) |  | 6.2   | % |  | 15.1  | %

Restaurant Sales. Total restaurant sales for the second quarter of 2006 increased $8.9
million, or 4.9%, to $190.3 million from $181.4 million in the second quarter of 2005 due to sales increases at our Hispanic Brand restaurants of $9.7 million, or 11.2%, to $96.8 million in the second quarter of 2006.

Taco Cabana restaurant sales increased $5.8 million, or 11.0%, to $58.6 million in the second quarter of 2006 due primarily to the opening of nine new
restaurants since the beginning of the second quarter of 2005 and the acquisition of four Taco Cabana restaurants from a franchisee in July 2005. These thirteen additional restaurants contributed $4.6 million of additional sales in the second
quarter of 2006 compared to the second quarter of 2005. In addition, comparable restaurant sales at our Taco Cabana restaurants increased 2.7% in the second quarter of 2006.

Pollo Tropical restaurant sales increased $3.9 million, or 11.4%, to $38.2 million in the second quarter of 2006 due to the opening of seven new Pollo
Tropical restaurants since the beginning of the second quarter of 2005, which contributed $3.0 million in additional sales in the second quarter of 2006 compared to the second quarter of 2005. In addition, comparable restaurant sales at our Pollo
Tropical restaurants increased 2.4% in the second quarter of 2006 which included the effect of menu price increases of approximately 4% near the end of the second quarter of 2005.

Burger King restaurant sales decreased $0.9 million, or 0.9%, to $93.4 million in the second quarter of 2006 due to the closure of eighteen Burger King
restaurants since the beginning of the second quarter of 2005. This decrease was partially offset by a comparable restaurant sales increase of 0.6% at our Burger King restaurants in the second quarter of 2006 which included the effect of menu price
increases of approximately 4% at the beginning of 2006.

Operating Costs and Expenses.Cost of sales (food and paper costs), as a
percentage of total restaurant sales, decreased to 28.1% in the second quarter of 2006 from 29.5% in the second quarter of 2005. Taco Cabana cost of sales, as a percentage of Taco Cabana restaurant sales, decreased to 29.0% in the second quarter of
2006 from 29.3% in the second quarter of 2005 due to higher vendor rebates. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, decreased to 32.4% in the second quarter of 2006 from 33.6% in the second quarter of 2005
due primarily to lower whole chicken commodity prices. The effects of 2005 menu price increases for our Pollo Tropical restaurants were substantially offset by higher produce and other commodity costs and the introduction of new menu items in 2006
that have a lower margin as a percentage of sales. Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased significantly to 25.7% in the second quarter of 2006 from 28.1% in the second quarter of 2005 due primarily to
the effect of menu price increases since the end of the first quarter of 2005 (1.2% of Burger King sales in the second quarter of 2006) lower beef commodity costs in the second quarter of 2006 (0.5% of Burger King sales) and lower promotional
discounting in 2006 (0.7% of Burger King sales).

Restaurant wages and related expenses, as a percentage of total restaurant sales,
increased to 29.1% in the second quarter of 2006 from 28.7% in the second quarter of 2005. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, increased slightly to 28.2% in the second quarter of 2006
from 28.1% in the second quarter of 2005. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant



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sales, increased to 25.3% in the second quarter of 2006 from 23.5% in the second quarter of 2005 due primarily to
increases in restaurant hourly labor rates in response to labor market conditions in Florida (1.1% of Pollo Tropical sales), increased manager training to support new restaurant openings (0.3% of Pollo Tropical sales) and higher medical insurance
costs (0.2% of Pollo Tropical sales). Burger King restaurant wages and related expenses, as a percentage of Burger King restaurant sales, increased to 31.3% in the second quarter of 2006 from 30.9% in the second quarter of 2005 due to higher
restaurant incentive bonuses (0.2% of Burger King sales) and increased workers compensation costs (0.2% of Burger King sales).

Restaurant
rent expense, as a percentage of total restaurant sales, decreased to 4.8% in the second quarter of 2006 from 4.9% in the second quarter of 2005 due primarily to the effect of higher comparable restaurant sales volumes at all three of our brands in
the second quarter of 2006 on fixed rent costs.

Other restaurant operating expenses, as a percentage of total restaurant sales, increased
to 14.4% in the second quarter of 2006 from 13.8% in the second quarter of 2005. Taco Cabana other restaurant operating expenses, as a percentage of Taco Cabana restaurant sales, increased to 15.0% in the second quarter of 2006 from 14.1% in the
second quarter of 2005 due primarily to increased utility costs from higher natural gas and electricity prices. Pollo Tropical other restaurant operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 12.8% in the second
quarter of 2006 from 11.7% in the second quarter of 2005 due primarily to increased utility costs from higher natural gas and electricity prices (0.7% of Pollo Tropical sales), higher general liability insurance costs (0.2% of Pollo Tropical sales)
and higher fees due to increased levels of credit card sales (0.1% of Pollo Tropical sales). Burger King other restaurant operating expenses, as a percentage of Burger King restaurant sales increased to 14.7% in the second quarter of 2006 from 14.5%
in the second quarter of 2005 due primarily to increased utility costs from higher natural gas and electricity rates.

Advertising expense,
as a percentage of total restaurant sales, decreased slightly to 3.8% in the second quarter of 2006 from 3.9% in the second quarter of 2005. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, increased to 4.6% in the
second quarter of 2006 from 4.4% in the second quarter of 2005 due primarily to the timing of promotions. Our Taco Cabana advertising expenditures for all of 2006 are anticipated to be comparable to 2005 as a percentage of Taco Cabana sales. Pollo
Tropical advertising expense, as a percentage of Pollo Tropical restaurant sales, decreased to 1.5% in the second quarter of 2006 from 1.9% in the second quarter of 2005 due to television and radio expenditures in the second quarter of 2005. Our
Pollo Tropical advertising expenditures for all of 2006 are anticipated to be approximately 1.6% of Pollo Tropical restaurant sales. Burger King advertising expense, as a percentage of Burger King restaurant sales, increased slightly to 4.3% in the
second quarter of 2006 from 4.2% in the second quarter of 2005 due to increased promotional activities in the second quarter of 2006 in certain of our Burger King markets.

General and administrative expenses, including stock-based compensation expense, as a percentage of total restaurant sales, decreased to 6.2% in the
second quarter of 2006 from 15.1% in the second quarter of 2005. There was no stock-based compensation expense in the second quarter of 2006. Stock-based compensation expense in the second quarter of 2005 was $16.4 million, or as a percentage of
total restaurant sales, 8.6%. Stock-based compensation expense in the second quarter of 2005 was due to the issuance by Holdings of shares of its common stock in exchange for all outstanding stock options in the second quarter of 2005. In addition
to the decrease in stock-based compensation expense, general and administrative expenses increased $0.8 million in the second quarter of 2006 compared to the second quarter of 2005 due primarily to higher administrative payroll and benefit costs of
$ 0.6 million.

Segment EBITDA. Segment EBITDA for our Taco Cabana restaurants increased 2.9% to $8.1 million in the second quarter
of 2006 from $7.9 million in the second quarter of 2005. Segment EBITDA for our Pollo Tropical restaurants increased 2.4% to $7.7 million in the second quarter of 2006 from $7.5 million in the second quarter of 2005. Segment EBITDA for our Burger
King restaurants increased 16.7% to $10.3 million in the second quarter of 2006 from $8.8 million in the second quarter of 2005.

Depreciation and Amortization and Impairment Losses. Depreciation and amortization expense increased slightly to $8.5 million in the second quarter of 2006 from $8.4 million in the second quarter of 2005. Impairment losses were $0.4
million in the second quarter of 2005 and were comprised of $0.3 million of property and equipment writedowns for certain underperforming Burger King restaurants and planned future closures of Burger King restaurants and $0.1 million for our Taco
Cabana restaurants.

Interest Expense. Interest expense increased $2.4 million to $13.0 million in the second quarter of 2006 from
$10.6 million in the second quarter of 2005 due primarily to the inclusion in interest expense of $1.7 million of settlement losses on lease financing obligations and higher effective interest rates on our floating rate borrowings under our senior
credit facility. The weighted average interest rate on our long-term debt, excluding lease financing obligations, for the second quarter of 2006 increased to 8.2% from 7.1% in the second quarter of 2005. Interest expense on lease financing
obligations, including settlement losses of $1.7 million in the second quarter of 2006, was $4.5 million in the second quarter of 2006 and $2.8 million the second quarter of 2005.



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Provision for Income Taxes. The provision for income taxes in the second quarter of 2006 was
derived using an estimated effective annual income tax rate for 2006 of 33.5% as well as the effect of any discrete tax items occurring in the second quarter of 2006. The provision for income taxes in the three and six months ended June 30,
2005 was derived using an estimated effective annual income tax rate for 2005 of 33.9%. Although we had a pretax loss of $11.6 million and $10.3 million for the three and six months ended June 30, 2005, respectively, the tax benefit related to
this loss was reduced by $3.3 million for the non-deductible portion of stock-based compensation expense related to the second quarter stock awards and was also reduced by the income tax expense associated with the second quarter Ohio state tax
legislation of $0.5 million, as discussed below.

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

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

Net Income (Loss).As a result of the foregoing, net income was $3.1 million in the second
quarter of 2006 compared to a net loss of $11.4 million in the second quarter of 2005.

Six Months Ended June 30, 2006 Compared to Six Months
Ended June 30, 2005.

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



|                                                                  |  |       |   |  |       |  
|----------------------------------------------------------------- |  | ----- | - |  | ----- | -
|                                                                  |  | 2006  |   |  | 2005  |  
|Restaurant sales:                                                 |  |       |   |  |       |  
|Taco Cabana                                                       |  | 30.6  | % |  | 29.4  | %
|Pollo Tropical                                                    |  | 20.5  | % |  | 19.5  | %
|Burger King                                                       |  | 48.9  | % |  | 51.1  | %
|                                                                  |  |       |   |  |       |  
|                                                                  |  | 100.0 | % |  | 100.0 | %
|                                                                  |  |      
|Costs and expenses:                                               |  |       |   |  |       |  
|Cost of sales                                                     |  | 28.3  | % |  | 29.2  | %
|Restaurant wages and related expenses                             |  | 29.3  | % |  | 29.1  | %
|Restaurant rent expense                                           |  | 4.9   | % |  | 5.1   | %
|Other restaurant operating expenses                               |  | 14.5  | % |  | 14.1  | %
|Advertising expense                                               |  | 3.8   | % |  | 3.9   | %
|General and administrative (including stock compensation expense) |  | 6.5   | % |  | 10.8  | %

Restaurant Sales. Total restaurant sales for the first six months of 2006 increased $21.9
million, or 6.3%, to $372.5 million from $350.5 million in the first six months of 2005 due primarily to sales increases at our Hispanic Brand restaurants of $19.0 million, or 11.1%, to $190.3 million in the first six months of 2006.



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Taco Cabana restaurant sales increased $10.9 million, or 10.6%, to $113.8 million in the first six months
of 2006 due primarily to the addition of ten new restaurants since the beginning of 2005 and the acquisition of four Taco Cabana restaurants from a franchisee in July 2005. These fourteen additional restaurants contributed $8.6 million of sales in
the first six months of 2006. In addition, comparable restaurant sales at our Taco Cabana restaurants increased 2.6% in the first six months of 2006.

Pollo Tropical restaurant sales increased $8.1 million, or 11.8%, to $76.5 million in the first six months of 2006 due primarily to the opening of eight new Pollo Tropical restaurants since the beginning of 2005,
which contributed $5.8 million in sales in the first six months of 2006, and a 3.5% increase in comparable restaurant sales at our Pollo Tropical restaurants in the first six months of 2006 which included the effect of menu price increases of
approximately 4% near the end of the second quarter of 2005.

Burger King restaurant sales increased $3.0 million, or 1.7%, to $182.1
million in the first six months of 2006 due to a 3.5% increase in comparable restaurant sales at our Burger King restaurants in the first six months of 2006 which included menu price increases of approximately 4% at the beginning of 2006. These
factors were offset in part by the closure of nineteen Burger King restaurants since the beginning of 2005.

Operating Costs and
Expenses. Cost of sales (food and paper costs), as a percentage of total restaurant sales, decreased to 28.3% in the first six months of 2006 from 29.2% in the first six months of 2005. Taco Cabana cost of sales, as a percentage of Taco Cabana
restaurant sales, decreased to 29.0% in the first six months of 2006 from 29.2% in the first six months of 2005 due primarily to higher vendor rebates. Pollo Tropical cost of sales, as a percentage of Pollo Tropical restaurant sales, decreased to
32.6% in the first six months of 2006 from 33.4% in the first six months of 2005 due primarily to lower whole chicken commodity prices. The effects of 2005 menu price increases for our Pollo Tropical restaurants were offset by higher produce
commodity costs and higher paper costs. Burger King cost of sales, as a percentage of Burger King restaurant sales, decreased to 26.0% in the first six months of 2006 from 27.6% in the first six months of 2005 due primarily to the effect of menu
price increases since the end of the first quarter of 2005 (1.2% of Burger King sales in the first six months of 2006) lower beef commodity costs in 2006 (0.4% of Burger King sales) and lower promotional discounting in 2006 (0.3% of Burger King
sales).

Restaurant wages and related expenses, as a percentage of total restaurant sales, increased to 29.3% in the first six months of
2006 from 29.1% in the first six months of 2005. Taco Cabana restaurant wages and related expenses, as a percentage of Taco Cabana restaurant sales, increased slightly to 28.3% in the first six months of 2006 from 28.2% in the first six months of
2005. Pollo Tropical restaurant wages and related expenses, as a percentage of Pollo Tropical restaurant sales, increased to 25.1% in the first six months of 2006 from 23.4% in the first six months of 2005 due primarily to increases in restaurant
hourly labor rates in response to labor market conditions in Florida (1.1% of Pollo Tropical sales) and higher medical insurance costs (0.5% of Pollo Tropical sales). Burger King restaurant wages and related expenses, as a percentage of Burger King
restaurant sales, decreased to 31.7% in the first six months of 2006 from 31.9% in the first six months of 2005 due to the effect of higher comparable restaurant sales volumes on fixed labor costs.

Restaurant rent expense, as a percentage of total restaurant sales, decreased to 4.9% in the first six months of 2006 from 5.1% in the first six months
of 2005 due primarily to the effect of higher comparable restaurant sales volumes at all three of our brands in the first six months of 2006 on fixed rent costs.

Other restaurant operating expenses, as a percentage of total restaurant sales, increased to 14.5% in the first six months of 2006 from 14.1% in the first six months of 2005. Taco Cabana other restaurant operating
expenses, as a percentage of Taco Cabana restaurant sales, increased to 14.6% in the first six months of 2006 from 14.1% in the first six months of 2005 due to increased utility costs from higher natural gas and electricity prices (1.0% of Taco
Cabana sales), offset in part by lower repair and maintenance expenses in the first six months of 2006 due to the initiatives to enhance the appearance of our Taco Cabana restaurants in the first six months of 2005. Pollo Tropical other restaurant
operating expenses, as a percentage of Pollo Tropical restaurant sales, increased to 12.7% in the first six months of 2006 from 11.3% in the first six months of 2005 due primarily to increased utility costs from higher natural gas and electricity
prices (0.7% of Pollo Tropical sales), higher repair and maintenance expenses from non-structural hurricane damage in 2005 (0.2% of Pollo Tropical sales) and higher general liability insurance costs (0.2% of Pollo Tropical sales). Burger King other
restaurant operating expenses, as a percentage of Burger King restaurant sales was 15.1% in both the first six months of 2006 and 2005 as the effect of higher sales volumes on fixed operating costs and lower repair and maintenance expenses (0.3% of
Burger King sales) offset increased utility costs from higher natural gas and electricity rates and higher fees associated with the acceptance of credit cards (0.2% of Burger King sales).



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Advertising expense, as a percentage of total restaurant sales, decreased slightly to 3.8% in the first
six months of 2006 from 3.9% in the first six months of 2005. Taco Cabana advertising expense, as a percentage of Taco Cabana restaurant sales, increased to 4.6% in the first six months of 2006 from 4.3% in the first six months of 2005 due primarily
to the timing of promotions. Our Taco Cabana advertising expenditures for all of 2006 are anticipated to be comparable to 2005 as a percentage of Taco Cabana sales. Pollo Tropical advertising expense, as a percentage of Pollo Tropical restaurant
sales, decreased to 1.6% in the first six months of 2006 from 2.6% in the first six months of 2005 due to television and radio expenditures in 2005. Our Pollo Tropical advertising expenditures for all of 2006 are anticipated to be approximately 1.6%
of Pollo Tropical restaurant sales. Burger King advertising expense, as a percentage of Burger King restaurant sales, increased slightly to 4.2% in the first six months of 2006 from 4.1% in the first six months of 2005 due to increased promotional
activities in certain of our Burger King markets.

General and administrative expenses, including stock-based compensation expense, as a
percentage of total restaurant sales, decreased to 6.5% in the first six months of 2006 from 10.8% in the first six months of 2005. There was no stock-based compensation expense in the first six months of 2006. Stock-based compensation expense in
the first six months of 2005 was $16.4 million, or as a percentage of total restaurant sales, 4.7%. Stock-based compensation expense in 2005 was substantially from the issuance by Holdings of its common stock in exchange for all outstanding stock
options in the second quarter of 2005. In addition to the decrease in stock-based compensation expense, general and administrative expenses increased $2.6 million in the first six months of 2006 compared to the first six months of 2005 due primarily
to higher administrative payroll and benefit costs , including related payroll taxes and benefits, of $1.3 million, higher legal and professional fees, including audit fees, of $0.3 million and higher travel costs of $0.3 million.

Segment EBITDA. Segment EBITDA for our Taco Cabana restaurants increased 3.9% to $15.8 million in the first six months of 2006 from $15.2 million
in the first six months of 2005. Segment EBITDA for our Pollo Tropical restaurants increased 3.1% to $15.3 million in the first six months of 2006 from $14.8 million in the first six months of 2005. Segment EBITDA for our Burger King restaurants
increased 17.6% to $17.2 million in the first six months of 2006 from $14.6 million in the first six months of 2005.

Depreciation and
Amortization and Impairment Losses. Depreciation and amortization expense increased slightly to $16.8 million in the first six months of 2006 from $16.7 million in the first six months of 2005. Impairment losses were $0.2 million in the first
six months of 2006 and were related to property and equipment writedowns for certain underperforming Burger King restaurants and planned future closures of Burger King restaurants. Impairment losses were $0.9 million in the first six months of 2005
with $0.8 million related to property and equipment writedowns for certain underperforming Burger King restaurants and planned future closures of Burger King restaurants and $0.1 million for our Taco Cabana restaurants.

Interest Expense. Interest expense increased $3.5 million to $24.4 million in the first six months of 2006 from $20.9 million in the first six
months of 2005 due primarily to the inclusion in interest expense of $1.7 million of settlement losses on lease financing obligations and higher effective interest rates on our floating rate borrowings under our senior credit facility. The weighted
average interest rate on our long-term debt, excluding lease financing obligations, for the six months ended June 30, 2006 increased to 8.2% from 7.0% in the first six months of 2005. Interest expense on lease financing obligations, including
settlement losses of $1.7 million in the first six months of 2006, was $7.3 million in the first six months of 2006 and $5.6 million in the first six months of 2005.

Provision for Income Taxes. The provision for income taxes in the first six months of 2006 was derived using an estimated effective annual income tax rate for 2006 of 33.5% as well as the effect of any discrete
items occurring in the first six months of 2006. The provision for income taxes in the first six months of 2005 is based on an effective annual income tax rate for 2005 of 33.9%.

Net Income.As a result of the foregoing, net income was $4.6 million in the first six months of 2006 compared to a net loss of $10.5 million in
the first six months of 2005.

Reconciliation of Non-GAAP Financial Measures

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



|                                                                                                                 |  |      |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|(Dollars in thousands)                                                                                           |  | 2006 |         |   | 2005 |  
|Consolidated Adjusted EBITDA, as defined                                                                         |  | $    | 48,289  |   |      | $ | 44,660  |  
|Adjustments to reconcile Consolidated Adjusted EBITDA to net cash provided from (used for) operating activities: |  |      |         |   |      |   |         |  
|Gain on sale of assets                                                                                           |  |      |        |   |      |   | (395    | )
|Cash portion of stock-based compensation expense                                                                 |  |      |        |   |      |   | (71     | )
|Interest expense                                                                                                 |  |      | (24,400 | ) |      |   | (20,914 | )
|Amortization of deferred financing costs                                                                         |  |      | 742     |   |      |   | 759     |  
|Amortization of unearned purchase discounts                                                                      |  |      | (1,077  | ) |      |   | (1,077  | )
|Amortization of deferred gains from sale-leaseback transactions                                                  |  |      | (338    | ) |      |   | (249    | )
|Accretion of interest on lease financing obligations                                                             |  |      | 153     |   |      |   | 173     |  
|Gain on settlement of lease financing obligations                                                                |  |      | (308    | ) |      |   |        |  
|Provision for income taxes                                                                                       |  |      | (2,248  | ) |      |   | (215    | )
|Deferred income taxes                                                                                            |  |      | (1,349  | ) |      |   | (240    | )
|Decrease in accrued bonus to employees and a director                                                            |  |      |        |   |      |   | (20,860 | )
|Decrease in accrued payroll, related taxes and benefits                                                          |  |      | (361    | ) |      |   | (10,393 | )
|Change in operating assets and liabilities                                                                       |  |      | 3,431   |   |      |   | 7,908   |  
|                                                                                                                 |  |      |         |   |      |   |         |  
|Net cash provided from (used for) operating activities                                                           |  | $    | 22,534  |   |      | $ | (914    | )
|                                                                                                                 |  |      |         |   |      |   |         |  



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Off-Balance Arrangements

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

Application of Critical Accounting Policies

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

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

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

Insurance liabilities. We are insured for workers
compensation, general liability and medical insurance claims under policies where we pay all claims, subject to annual stop-loss limitations both for individual claims and claims in the aggregate. At June 30, 2006, we had $7.9 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.



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

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

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

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

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

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

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



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Effects of New Accounting Standards

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

In March 2006, the Financial Accounting Standards Board (FASB) issued an Exposure Draft,
Employers Accounting for Defined Benefit Pension and Other Postretirement Benefits, an amendment of FAS 87, 88, 106 and 132(R). In its current form, the proposed statement requires an employer that sponsors postretirement plans to
recognize an asset or liability for the overfunded or underfunded status of the plan. Additionally, employers would be required to record all unrecognized prior service costs and credits, unrecognized actual gains and losses and any unrecognized
transition obligations or assets in accumulated other comprehensive income. Such amounts would be reclassified into earnings as components of net period benefit cost/income pursuant to the current recognition and amortization provisions of FAS
No. 106, Employers Accounting for Postretirement Benefits Other than Pensions ( FAS 106). Finally, the proposed statement requires an employer to measure plan assets and benefit obligations as of the date of the
employers statement of financial position, as is currently used by us. The FASB has indicated that it expects to issue a final standard later this year. Except for the measurement date requirement, the proposed statement would be effective for
fiscal years ending after December 15, 2006. At December 31, 2005, our postretirement benefit plan, was underfunded by approximately $2.0 million.

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

Forward Looking Statements

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

Inflation

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

ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

ITEM 4CONTROLS AND PROCEDURES

Restatement. As discussed in Note 2 to Amendment
No. 1 to our 2004 Annual Report on Form 10-K/A, we restated our consolidated financial statements for the year ended December 31, 2004, 2003 and 2002 and for the first two quarters of 2005. Refer to Note 2 to the consolidated financial
statements included in the 2004 Annual Report on Form 10-K/A for a complete discussion of the restatement.

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

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



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

Personnel

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

Controls over Applying the Lease Financing Method

In conjunction with the filing of our 2004 Annual Report on Form 10-K/A, which included the restatements discussed in Note 2 to the consolidated financial
statements of that filing, management reported that controls to identify leases that contained provisions which constituted forms of continuing involvement and required real estate transactions to be accounted for as financing transactions rather
than as sale/leaseback transactions were ineffective. This resulted in 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 related to sale/leaseback transactions consummated in periods prior to the second quarter of 2004. The restatement of our prior period financial statements as a result of this material weakness was finalized in the
second quarter of 2006.

We have had controls in place for sale/leaseback transactions that were consummated since the first quarter of
2004 and through the date of this filing in 2006 to properly assess provisions which constitute forms of continuing involvement, including amendments to lease agreements for certain properties previously accounted for as lease financing obligations
to eliminate or otherwise cure the provisions that precluded the original sale-leaseback accounting under SFAS No. 98. These controls included review processes conducted by legal and accounting personnel, including management. While we believe
that we have designed and implemented certain controls to correct this material weakness, there has been an insufficient passage of time to determine if such controls are effective.

Changes in Internal Control over Financial Reporting.As reported in Item 9A of our annual report on Form 10-K for the fiscal year
ended January 2, 2006 and Item 4 of our quarterly report on Form 10-Q for the three months ended April 2, 2006, we reported material weaknesses in our internal control over financial reporting related to (a) applying the lease
financing method and SFAS No. 98, (b) recording deferred taxes in conjunction with acquisitions and (c) preparing the statements of cash flows specific to the classification of proceeds from qualifying sale-leaseback transactions and
exclusion of non-cash capital expenditures from capital expenditures and changes in accounts payable.

In the fiscal quarter ended
July 2, 2006 we have remediated these weaknesses as follows:



| |  |  | We have established procedures (by applying the appropriate interest rates and ensuring the proper depreciation of certain assets) to ensure the appropriate application of the
financing method required by SFAS No. 98.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have enhanced the procedures and analysis around the reconciliation of deferred tax balances to the underlying financial reporting and tax bases, including the preparation of an
updated tax balance sheet.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In connection with the preparation of the statements of cash flows we have established procedures to ensure the proceeds from qualifying sale-leaseback transactions are
appropriately classified and we have implemented an enhanced process to monitor capital expenditures included in accounts payments payable at our reporting dates ensure capital expenditures are properly reflected in the statements of cash flows in
accordance with SFAS No. 95.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the fiscal quarter ended July 2, 2006, and through the date of this filing, we
have also taken the following steps to improve our internal controls:



| |  |  | We have hired five new senior accounting professionals with strong technical accounting skills and relevant experience to augment our staff, to help us improve our controls and
procedures pertaining to financial reporting and to assist in making other improvements to our internal controls. We have also re-assigned or replaced certain other personnel within our financial organization in conjunction with these changes.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have re-organized responsibilities within our accounting organization to provide an increased focus on lease accounting matters and to increase the total internal resources
dedicated to complex accounting matters
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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##### Table of Contents

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



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##### Table of Contents

PART IIOTHER INFORMATION

Item 1. Legal Proceedings

On November 30, 2002, four former hourly employees commenced a lawsuit
against us 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 we 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 us. As a result of the July 21, 2005 Status Conference, the parties agreed to withdraw Plaintiffs Motions to Certify and for
National Discovery, and Defendants Motion to Disqualify Counsel and related motions, to allow both sides limited additional discovery. We have has since filed a Motion for Summary Judgment that the Court has under consideration. The Plaintiffs
have indicated that they will re-file a Motion to Certify and for National Discovery and we intend to oppose such Motion. It is too early to evaluate the likelihood of an unfavorable outcome or estimate the amount or range of potential loss.
Consequently, it is not possible to predict what adverse impact, if any, this case could have on our consolidated financial condition or consolidated results of operations and cash flows. We intend to continue to contest this case vigorously.

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

Item 1A. Risk Factors

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

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

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

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

With respect to our Burger King restaurants, our largest competitors are McDonalds and Wendys restaurants. According to Technomic Information
Services, McDonalds restaurants had aggregate U.S. system-wide sales of $25.6 billion for the year ended December 31, 2005 and operated 13,727 restaurants in the United States at that date, and Wendys restaurants had aggregate
system-wide sales of $7.7 billion for the year ended December 31, 2005 and operated 6,018 restaurants in the United States at that date.

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

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

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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

For the year ended December 31, 2005 and the six months ended June 30,
2006, our Burger King restaurants contributed approximately 51% and 49%, respectively, of our total revenues. Due to the nature of franchising and our agreements with Burger King Corporation, which we refer to herein as BKC, our success is, to a
large extent, directly related to the success of the nationwide Burger King system. In turn, the ability of the nationwide Burger King system to compete effectively depends upon the success of the management of the Burger King system and the success
of its advertising programs and new products. We cannot assure you that Burger King will be able to compete effectively with other quick-service restaurants. As a result, any failure of Burger King to compete effectively would likely have a material
adverse effect on our operating results.

Each of our Burger King restaurants operates under a separate franchise agreement with BKC. Under
our franchise agreements with BKC, we are required to comply with operational programs established by BKC. For example, our franchise agreements with BKC require that our restaurants comply with specified design criteria. In addition, BKC generally
has the right to require us during the tenth year of a franchise agreement to remodel our restaurants to conform to the then-current image of Burger King, which may require the expenditure of considerable funds. In addition, although not required by
the franchise agreements, we may not be able to avoid adopting menu price discount promotions instituted by BKC that may be unprofitable.

BKCs consent is required for us to open new Burger King restaurants and acquire existing Burger King restaurants from other franchisees. BKC has a right of first refusal to acquire existing Burger King restaurants that we may seek to
acquire from other franchisees. We cannot assure you that BKC will continue to consent to our development of new Burger King restaurants or our acquisitions of existing Burger King restaurants in the future or that it would not exercise its right of
first refusal with regard to Burger King restaurants we seek to acquire. To date, BKC has approved all of our acquisitions of Burger King restaurants from other franchisees; however, in two instances, BKC exercised its right of first refusal and
purchased restaurants we sought to acquire.



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Our franchise agreements typically have a 20 year term after which BKCs consent is required to
receive a successor franchise agreement. As of June 30, 2006, we operated 330 Burger King restaurants. Our franchise agreements with BKC that are set to expire over the next three years are as follows:



| |  |  | 7 of our franchise agreements with BKC are due to expire in the last two quarters of 2006;
| | - |  | ------------------------------------------------------------------------------------------



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



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

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

In that regard, the historical costs to
improve our Burger King restaurants in connection with franchise renewals generally ranged from $200,000 to $400,000 per restaurant; however, any future costs for each location may vary significantly and will depend on a number of factors, including
the geographic location and size of those restaurants. In addition, the cost of capital improvements made in connection with future franchise agreement renewals may differ substantially from past franchise renewals.

In addition, of the 24 Burger King franchise agreements expiring in the last two quarters of 2006 and in 2007, we currently anticipate that we will
likely elect not to renew approximately five of those franchise agreements due to the cost of required capital improvements that we would need to make if we were to renew those franchises relative to the profitability of those restaurants. Moreover,
we may elect not to renew certain other Burger King franchise agreements expiring after 2007 for similar reasons. Accordingly, it is possible that the overall number of Burger King restaurants that we operate in the future will decline from current
levels.

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

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

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



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



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



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



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



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



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



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



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



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



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

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

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

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

Some of our new restaurants are and will be located in areas where we have little or no meaningful experience. Those markets may have different
competitive conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause our new restaurants to be less successful than restaurants in our existing markets or to incur losses. An additional risk of
expanding into new markets is the lack of market awareness of the Pollo Tropical or Taco Cabana brand. Restaurants opened in new markets may open at lower average weekly sales volumes than restaurants opened in existing markets, and may have higher
restaurant-level operating expense ratios than in existing markets. Sales at restaurants opened in new markets may take longer to reach or may never reach average unit volumes thereby adversely affecting our operating results. Opening new
restaurants in areas in which we have little or no operating experience and in which potential customers may not be familiar with our restaurants may include costs related to the opening, operation and promotion of those restaurants that are
substantially greater than those incurred by restaurants in other areas. Even though we may incur substantial additional costs with respect to these new restaurants, they may attract fewer customers than our more established restaurants in existing
markets.

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

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

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



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

We have a substantial amount of indebtedness. As of June 30, 2006, we had $449.5 million of outstanding indebtedness, including
$193.7 million of indebtedness under our senior credit facility (excluding $14.6 million of outstanding letters of credit and $35.4 million of unused revolving credit borrowing availability under our senior credit facility), $180.0 million of notes,
$ 74.1 million of lease financing obligations and $1.7 million of capital leases. As a result, we are a highly leveraged company. This level of indebtedness could have important consequences to you, including the following:



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



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



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



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



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



| |  |  | a substantial portion of our cash flow from operations will be dedicated to the repayment of our indebtedness and related interest, including indebtedness we may incur in the
future, and will not be available for other purposes; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

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

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

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

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



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

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

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



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



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



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



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



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



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



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



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

In addition, the senior credit facility restricts our ability to prepay our subordinated indebtedness. The senior credit facility also requires us to maintain compliance with specified financial ratios. Our ability to
comply with these ratios may be affected by events beyond our control. Any other debt instruments we enter into in the future may also have provisions similar to those described above.

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



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



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

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



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compliance with agreements and covenants in our debt instruments. In the event of a default under our senior credit
facility or the indenture and in any other debt instruments we may enter into in the future, the holders of the applicable indebtedness generally would be able to declare all of that indebtedness, together with accrued interest, to be due and
payable. In addition, borrowings under the senior credit facility are secured by a first priority lien on all of our assets and, in the event of a default under that facility, the lenders generally would be entitled to seize the collateral. In
addition, default under one debt instrument could in turn permit lenders under other debt instruments to declare borrowings outstanding under those other instruments to be due and payable pursuant to cross default clauses. Moreover, upon the
occurrence of an event of default under the senior credit facility, the commitment of the lenders to make any further loans to us would be terminated. Accordingly, the occurrence of a default under any debt instrument, unless cured or waived, would
likely have a material adverse effect on our business.

Our failure to comply with the covenants contained in our senior credit facility, the indenture
governing the notes or our other debt agreements, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our operating results and financial condition.

Our senior credit facility requires us to maintain specified financial ratios, including fixed charge coverage, senior leverage and total leverage ratios
(as such terms are defined in the senior credit facility). In addition, our senior credit facility and the indenture governing the notes require us to comply with various operational and other covenants. If there were an event of default under any
of our debt instruments that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to the debt to be due and payable immediately, which in turn would result in cross defaults under our other debt
instruments. Our assets and cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments, either upon maturity or if accelerated upon an event of default.

If, when required, we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, our senior credit
facility, or if a default otherwise occurs, the lenders under our senior credit facility could elect to terminate their commitments thereunder, cease making further loans, declare all borrowings outstanding, together with accrued interest and other
fees, to be immediately due and payable, institute foreclosure proceedings against those assets that secure the borrowings under our senior credit facility and prevent us from making payments on the notes. Any such actions could force us into
bankruptcy or liquidation, and we cannot provide any assurance that we could repay our obligations under the notes in such an event.

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

Effective internal
controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We have identified and
reported material weaknesses in our internal control over financial reporting as of June 30, 2006 and concluded that our disclosure controls and procedures were ineffective as of June 30, 2006. For a discussion of such identified and
reported material weaknesses in our internal controls and our disclosure controls and procedures, see Item 4 - Controls and Procedures. In addition, we may in the future discover areas of our internal controls that need improvement or
that constitute material weaknesses. A material weakness is a control deficiency (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 2), or combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. We are continuing to work to improve our internal controls. We cannot be certain that these measures will ensure that we
implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to remediate the material weaknesses in our internal control over financial reporting or to implement and maintain effective internal
controls, or difficulties encountered in their implementation, could cause us to fail to timely meet our reporting obligations, result in material misstatements in our financial statements or could result in defaults under our senior credit
facility, the indenture governing the notes or under any other debt instruments we may enter into in the future. In addition, deficiencies in our internal controls could also cause investors to lose confidence in our reported financial information.



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

We have undergone several restatements of our previously reported financial results. The details of these restatements and the periods in which they were
reported are detailed in the following filings:



| |  |  | Annual Report on Form 10-K for the year ended December 28, 2003;
| | - |  | ----------------------------------------------------------------



| |  |  | Annual Report on Form 10-K for the year ended January 2, 2005, as amended;
| | - |  | --------------------------------------------------------------------------



| |  |  | Quarterly Report on Form 10-Q for the quarter ended April 2, 2005, as amended; and
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Quarterly Report on Form 10-Q for the quarter ended July 3, 2005, as amended.
| | - |  | -----------------------------------------------------------------------------

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

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

We or our franchisees may be subject to complaints, regulatory proceedings or litigation from
guests or other persons alleging food-related illness, injuries suffered in our premises or other food quality, health or operational concerns, including environmental claims. In addition, in recent years a number of restaurant companies have been
subject to lawsuits, including class action lawsuits, alleging, among other things, violations of federal and state law regarding workplace and employment matters, discrimination, harassment, wrongful termination and wage, rest break, meal break and
overtime compensation issues and, in the case of quick service restaurants, alleging that they have failed to disclose the health risks associated with high-fat foods and that their marketing practices have encouraged obesity. We may also be subject
to litigation or other actions initiated by governmental authorities, our employees and our franchisees, among others, based upon these and other matters. A significant judgment against us could have a material adverse effect on our financial
performance or liquidity. Adverse publicity resulting from such allegations or occurrences or alleged discrimination or other operating issues stemming from one of our locations, a number of our locations or our franchisees could adversely affect
our business, regardless of whether the allegations are true, or whether we are ultimately held liable. Any cases filed against us could materially adversely affect us if we lose such cases and have to pay substantial damages or if we settle such
cases. In addition, any such cases may materially and adversely affect our operations by increasing our litigation costs and diverting our attention and resources to address such actions. In addition, if a claim is successful, our insurance coverage
may not be adequate to cover all liabilities or losses and we may not be able to continue to maintain such insurance, or to obtain comparable insurance at a reasonable cost, if at all. If we suffer losses, liabilities or loss of income in excess of
our insurance coverage or if our insurance does not cover such loss, liability or loss of income, there could be a material adverse effect on our results of operations.

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

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



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

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

Changes in consumer taste could negatively impact our business.

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

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

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

For our Pollo Tropical and Taco Cabana restaurants, we have negotiated directly with local and national suppliers for the purchase of food and beverage
products and supplies. Pollo Tropical and Taco Cabana restaurants food and supplies are ordered from approved suppliers and are shipped via distributors to the restaurants. For our Pollo Tropical restaurants, Henry Lee, a division of Gordon
Food Service, serves as our primary distributor of food and paper products under an agreement that expires on March 16, 2007. For our Taco Cabana restaurants, SYGMA Network, Inc. serves as our primary distributor of food and beverage products
and supplies under a distribution services agreement that expires on June 1, 2009. We also rely on Gold Kist under an agreement which expires on December 31, 2007 as our supplier of chicken for our Pollo Tropical restaurants and if Gold
Kist is unable to service us, this could lead to a material disruption of service or supply until a new supplier is engaged which could have a material adverse effect on our business. With respect to our distributors for our Pollo Tropical and Taco
Cabana restaurants, if any of our distributors is unable to service us, this could lead to a material disruption of service or supply until a new distributor is engaged, which could have a material adverse effect on our business.

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

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



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

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

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

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

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

As of June 30, 2006, excluding our franchised locations, all but one of our company-owned Pollo Tropical restaurants were located in Florida and
approximately 96% of our company-owned Taco Cabana restaurants were located in Texas. Also, as of June 30, 2006, 65% of our Burger King restaurants were located in New York and Ohio. Therefore, the economic conditions, state and local
government regulations, weather conditions or other conditions affecting Florida, Texas, New York and Ohio and the tourism industry affecting Florida may have a material impact on the success of our restaurants in those locations. For example, the
events of September 11, 2001 had a significant negative impact on tourism in Florida, which adversely impacted the revenues and operating results at our Pollo Tropical restaurants.

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

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

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

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

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

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

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



| |  |  | zoning;
| | - |  | -------



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



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



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



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



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

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

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

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

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

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

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

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

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

We may in the future seek to acquire other restaurant chains. Although we believe that opportunities for future acquisitions may be available from time to time, increased competition for acquisition candidates exists and may continue in the
future. Consequently, there may be fewer acquisition opportunities available to us as well as higher acquisition prices. There can be no assurance that we will be able to identify, acquire, manage or successfully integrate acquired restaurant
companies without substantial costs, delays or operational or financial problems. In the event we are able to acquire other restaurant companies, the integration and operation of the acquired restaurants may place significant demands on our
management, which could adversely affect our ability to manage our existing restaurants. We also face the risk that our



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existing systems, procedures and financial controls will be inadequate to support any restaurant chains we may acquire
and that we may be unable to successfully integrate the operations and financial systems of any chains we may acquire with our own systems. While we may evaluate and discuss potential acquisitions from time to time, we currently have no
understandings, commitments or agreements with respect to any acquisitions. We may be required to obtain additional financing to fund future acquisitions. There can be no assurance that we will be able to obtain additional financing on acceptable
terms or at all. Both the senior credit facility and the indenture governing the notes contain restrictive covenants that may prevent us from incurring additional debt or acquiring additional restaurant chains.

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

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

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

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

None

Item 3. Default Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits

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



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



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SIGNATURES

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



|                      |  |                                                                        
|--------------------- |  | -----------------------------------------------------------------------
|                      |  | CARROLS CORPORATION                                                    
|                      | 
|Date: August 16, 2006 |  | /s/ ALAN VITULI                                                        
|                      |  | (Signature)                                                            
|                      |  | Alan Vituli Chairman of the Board and Chief Executive Officer          
|                      | 
|Date: August 16, 2006 |  | /s/ PAUL R. FLANDERS                                                   
|                      |  | (Signature)                                                            
|                      |  | Paul R. Flanders Vice President  Chief Financial Officer and Treasurer



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