UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended June 29, 2010

OR



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------

Commission File Number 001-33515





Einstein Noah
Restaurant Group, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 13-3690261                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

555 Zang Street, Suite 300, Lakewood, Colorado 80228

(Address of principal executive offices)

(303) 568-8000

(Registrants telephone number, including area code)



(Former name, former address and former fiscal year, if changed
since last report)





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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  | x  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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

As of August 2, 2010, there were 16,567,848 shares of the registrants Common Stock, par value of $0.001 per share outstanding.









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EINSTEIN NOAH RESTAURANT GROUP, INC.

TABLE OF CONTENTS



|                              |  |                                                                                                                    |  |   
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | --
|Part I. Financial Information
|Item 1.                       |  | Financial Statements (Unaudited):                                                                                  |  |   
|                              |  |                                                                                                                   
|                              |  | Consolidated Balance Sheets, December 29, 2009 and June 29, 2010                                                   |  | 3 
|                              |  |                                                                                                                   
|                              |  | Consolidated Statements of Operations, for the thirteen and twenty-six weeks ended June 30, 2009 and June 29,
2010 |  | 4 
|                              |  |                                                                                                                   
|                              |  | Consolidated Statements of Cash Flows, for the twenty-six weeks ended June 30, 2009 and June 29, 2010              |  | 5 
|                              |  |                                                                                                                   
|                              |  | Notes to the Consolidated Financial Statements                                                                     |  | 6 
|                              |  |                                                                                                                   
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                              |  | 13
|                              |  |                                                                                                                   
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                         |  | 21
|                              |  |                                                                                                                   
|Item 4.                       |  | Controls and Procedures                                                                                            |  | 21
|Part II. Other Information    |  |                                                                                                                   
|                              |  |                                                                                                                   
|Item 1.                       |  | Legal Proceedings                                                                                                  |  | 22
|                              |  |                                                                                                                   
|Item 1A.                      |  | Risk Factors                                                                                                       |  | 22
|                              |  |                                                                                                                   
|Item 4.                       |  | Reserved                                                                                                           |  |   
|                              |  |                                                                                                                   
|Item 6.                       |  | Exhibits                                                                                                           |  | 22



2



---

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

EINSTEIN NOAH RESTAURANT GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

(Unaudited)



|                                                                                                                                                                     |  |              |          |   |          |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | -------- | - | -------- | -
|                                                                                                                                                                     |  | December 29, |          |   | June 29, |  
|                                                                                                                                                                     |  | 2009         |          |   | 2010     |  
|ASSETS                                                                                                                                                               |  |              |          |   |          |   |          |  
|Current assets:                                                                                                                                                      |  |              |          |   |          |   |          |  
|Cash and cash equivalents                                                                                                                                            |  | $            | 9,885    |   |          | $ | 9,363    |  
|Restricted cash                                                                                                                                                      |  |              | 508      |   |          |   | 446      |  
|Accounts receivable                                                                                                                                                  |  |              | 5,629    |   |          |   | 4,422    |  
|Inventories                                                                                                                                                          |  |              | 5,513    |   |          |   | 5,117    |  
|Current deferred income tax assets                                                                                                                                   |  |              | 7,184    |   |          |   | 5,856    |  
|Prepaid expenses                                                                                                                                                     |  |              | 5,682    |   |          |   | 6,331    |  
|Other current assets                                                                                                                                                 |  |              | 73       |   |          |   | 122      |  
|                                                                                                                                                                     |  |              |          |   |          |   |          |  
|Total current assets                                                                                                                                                 |  |              | 34,474   |   |          |   | 31,657   |  
|                                                                                                                                                                     |  |             
|Property, plant and equipment, net                                                                                                                                   |  |              | 58,682   |   |          |   | 58,071   |  
|Trademarks and other intangibles, net                                                                                                                                |  |              | 63,831   |   |          |   | 63,831   |  
|Goodwill                                                                                                                                                             |  |              | 4,981    |   |          |   | 4,981    |  
|Long-term deferred income tax assets                                                                                                                                 |  |              | 46,206   |   |          |   | 43,983   |  
|Debt issuance costs and other assets, net                                                                                                                            |  |              | 3,047    |   |          |   | 2,844    |  
|                                                                                                                                                                     |  |              |          |   |          |   |          |  
|Total assets                                                                                                                                                         |  | $            | 211,221  |   |          | $ | 205,367  |  
|                                                                                                                                                                     |  |              |          |   |          |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                 |  |              |          |   |          |   |          |  
|Current liabilities:                                                                                                                                                 |  |              |          |   |          |   |          |  
|Accounts payable                                                                                                                                                     |  | $            | 4,147    |   |          | $ | 5,994    |  
|Accrued expenses and other current liabilities                                                                                                                       |  |              | 20,633   |   |          |   | 18,207   |  
|Current portion of long-term debt                                                                                                                                    |  |              | 5,234    |   |          |   | 11,900   |  
|Current portion of obligations under capital leases                                                                                                                  |  |              | 22       |   |          |   | 18       |  
|Mandatorily redeemable, Series Z Preferred Stock, $.001 par value, $1,000 per share liquidation value; 57,000 shares authorized;
32,194 and 6,481 shares outstanding |  |              | 32,194   |   |          |   | 6,404    |  
|                                                                                                                                                                     |  |              |          |   |          |   |          |  
|Total current liabilities                                                                                                                                            |  |              | 62,230   |   |          |   | 42,523   |  
|                                                                                                                                                                     |  |             
|Long-term debt                                                                                                                                                       |  |              | 74,553   |   |          |   | 74,103   |  
|Long-term obligations under capital leases                                                                                                                           |  |              | 19       |   |          |   | 12       |  
|Other liabilities                                                                                                                                                    |  |              | 12,133   |   |          |   | 12,565   |  
|                                                                                                                                                                     |  |              |          |   |          |   |          |  
|Total liabilities                                                                                                                                                    |  |              | 148,935  |   |          |   | 129,203  |  
|                                                                                                                                                                     |  |              |          |   |          |   |          |  
|Commitments and contingencies                                                                                                                                        |  |              |          |   |          |   |          |  
|                                                                                                                                                                     |  |             
|Series Z Preferred Stock, $.001 par value, $1,000 per share liquidation value; 6,480 shares outstanding; and accrued additional
redemption                           |  |              |         |   |          |   | 7,571    |  
|                                                                                                                                                                     |  |             
|Stockholders equity:                                                                                                                                                |  |              |          |   |          |   |          |  
|Common stock, $.001 par value; 25,000,000 shares authorized; 16,461,123 and 16,551,221 shares issued and
outstanding                                                 |  |              | 16       |   |          |   | 17       |  
|Additional paid-in capital                                                                                                                                           |  |              | 266,928  |   |          |   | 268,427  |  
|Accumulated other comprehensive loss, net of income tax                                                                                                              |  |              | (1,277   | ) |          |   | (338     | )
|Accumulated deficit                                                                                                                                                  |  |              | (203,381 | ) |          |   | (199,513 | )
|                                                                                                                                                                     |  |              |          |   |          |   |          |  
|Total stockholders equity                                                                                                                                           |  |              | 62,286   |   |          |   | 68,593   |  
|                                                                                                                                                                     |  |              |          |   |          |   |          |  
|Total liabilities and stockholders equity                                                                                                                           |  | $            | 211,221  |   |          | $ | 205,367  |  
|                                                                                                                                                                     |  |              |          |   |          |   |          |  

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



3



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EINSTEIN NOAH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except earnings per share and related share information)

(unaudited)



|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|------------------------------------------------------ |  | -------------- | ---------- | - | -------------- | - | ---------- | -------- |  | - | ---------- | - |  | - | ---------- | -
|                                                       |  | 13 weeks ended |            |   | 26 weeks ended |  
|                                                       |  | June 30,       |            |   | June 29,       |   |            | June 30, |  |   | June 29,   |  
|                                                       |  | 2009           |            |   | 2010           |   |            | 2009     |  |   | 2010       |  
|Revenues:                                              |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Company-owned restaurant sales                         |  | $              | 95,052     |   |                | $ | 94,237     |          |  | $ | 185,506    |   |  | $ | 184,928    |  
|Manufacturing and commissary revenues                  |  |                | 7,613      |   |                |   | 7,256      |          |  |   | 15,740     |   |  |   | 15,227     |  
|Franchise and license related revenues                 |  |                | 1,693      |   |                |   | 1,980      |          |  |   | 3,535      |   |  |   | 4,130      |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Total revenues                                         |  |                | 104,358    |   |                |   | 103,473    |          |  |   | 204,781    |   |  |   | 204,285    |  
|                                                       |  |                |            |  
|Cost of sales:                                         |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Company-owned restaurant costs                         |  |                | 76,844     |   |                |   | 76,760     |          |  |   | 153,841    |   |  |   | 152,127    |  
|Manufacturing and commissary costs                     |  |                | 6,635      |   |                |   | 6,031      |          |  |   | 13,632     |   |  |   | 12,661     |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Total cost of sales                                    |  |                | 83,479     |   |                |   | 82,791     |          |  |   | 167,473    |   |  |   | 164,788    |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Gross profit                                           |  |                | 20,879     |   |                |   | 20,682     |          |  |   | 37,308     |   |  |   | 39,497     |  
|                                                       |  |                |            |  
|Operating expenses (income):                           |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|General and administrative expenses                    |  |                | 8,993      |   |                |   | 8,985      |          |  |   | 18,273     |   |  |   | 19,057     |  
|Depreciation and amortization                          |  |                | 4,106      |   |                |   | 4,480      |          |  |   | 8,139      |   |  |   | 8,746      |  
|Other operating expenses (income)                      |  |                | (235       | ) |                |   | 51         |          |  |   | (236       | ) |  |   | 70         |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Income from operations                                 |  |                | 8,015      |   |                |   | 7,166      |          |  |   | 11,132     |   |  |   | 11,624     |  
|                                                       |  |                |            |  
|Interest expense, net                                  |  |                | 1,156      |   |                |   | 1,435      |          |  |   | 2,346      |   |  |   | 3,186      |  
|Adjustment for Series Z modification                   |  |                |           |   |                |   |           |          |  |   |           |   |  |   | 929        |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Income before income taxes                             |  |                | 6,859      |   |                |   | 5,731      |          |  |   | 8,786      |   |  |   | 7,509      |  
|Provision for income taxes                             |  |                | 393        |   |                |   | 2,483      |          |  |   | 470        |   |  |   | 3,641      |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Net income                                             |  | $              | 6,466      |   |                | $ | 3,248      |          |  | $ | 8,316      |   |  | $ | 3,868      |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Net income                                             |  | $              | 6,466      |   |                | $ | 3,248      |          |  | $ | 8,316      |   |  | $ | 3,868      |  
|Less: Additional redemption on temporary
equity        |  |                |           |   |                |   | (191       | )        |  |   |           |   |  |   | (241       | )
|Add: Accretion of premium on Series Z
preferred stock  |  |                |           |   |                |   | 499        |          |  |   |           |   |  |   | 499        |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Net income available to common stockholders            |  | $              | 6,466      |   |                | $ | 3,556      |          |  | $ | 8,316      |   |  | $ | 4,126      |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Net income available to common stockholders per share: |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Basic                                                  |  | $              | 0.40       |   |                | $ | 0.22       |          |  | $ | 0.52       |   |  | $ | 0.25       |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Diluted                                                |  | $              | 0.39       |   |                | $ | 0.21       |          |  | $ | 0.51       |   |  | $ | 0.25       |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Weighted average number of common shares outstanding:  |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Basic                                                  |  |                | 16,047,305 |   |                |   | 16,496,118 |          |  |   | 16,036,620 |   |  |   | 16,481,595 |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  
|Diluted                                                |  |                | 16,412,363 |   |                |   | 16,813,355 |          |  |   | 16,295,349 |   |  |   | 16,788,850 |  
|                                                       |  |                |            |   |                |   |            |          |  |   |            |   |  |   |            |  

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



4



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EINSTEIN NOAH RESTAURANT GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



|                                                                                  |  |                |         |   |              |   |         |  
|--------------------------------------------------------------------------------- |  | -------------- | ------- | - | ------------ | - | ------- | -
|                                                                                  |  | 26 weeks ended |        
|                                                                                  |  | June 30,2009   |         |   | June 29,2010 |  
|OPERATING ACTIVITIES:                                                             |  |                |         |   |              |   |         |  
|Net income                                                                        |  | $              | 8,316   |   |              | $ | 3,868   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                |         |   |              |   |         |  
|Depreciation and amortization                                                     |  |                | 8,139   |   |              |   | 8,746   |  
|Deferred income tax expense                                                       |  |                |        |   |              |   | 3,551   |  
|Stock-based compensation expense                                                  |  |                | 527     |   |              |   | 842     |  
|Loss on disposal of assets                                                        |  |                | 69      |   |              |   | 71      |  
|Provision for losses on accounts receivable                                       |  |                | 100     |   |              |   | 97      |  
|Amortization of debt issuance and debt discount costs                             |  |                | 285     |   |              |   | 293     |  
|Adjustment for Series Z modification                                              |  |                |        |   |              |   | 929     |  
|Changes in operating assets, liabilities:                                         |  |                |         |   |              |   |         |  
|Restricted cash                                                                   |  |                | 140     |   |              |   | 62      |  
|Accounts receivable                                                               |  |                | 147     |   |              |   | 1,110   |  
|Accounts payable and accrued expenses                                             |  |                | (2,969  | ) |              |   | 1,194   |  
|Other assets and liabilities                                                      |  |                | (757    | ) |              |   | 96      |  
|                                                                                  |  |                |         |   |              |   |         |  
|Net cash provided by operating activities                                         |  |                | 13,997  |   |              |   | 20,859  |  
|INVESTING ACTIVITIES:                                                             |  |                |         |   |              |   |         |  
|Purchase of property and equipment                                                |  |                | (7,173  | ) |              |   | (8,511  | )
|Proceeds from the sale of equipment                                               |  |                |        |   |              |   | 2       |  
|                                                                                  |  |                |         |   |              |   |         |  
|Net cash used in investing activities                                             |  |                | (7,173  | ) |              |   | (8,509  | )
|                                                                                  |  |               
|FINANCING ACTIVITIES:                                                             |  |                |         |   |              |   |         |  
|Payments under capital lease obligations                                          |  |                | (33     | ) |              |   | (11     | )
|Repayments under the term loan                                                    |  |                | (7,863  | ) |              |   | (4,784  | )
|Proceeds from line of credit                                                      |  |                |        |   |              |   | 11,000  |  
|Redemptions under Series Z Preferred Stock                                        |  |                | (20,000 | ) |              |   | (19,234 | )
|Additional redemption payment on Series Z temporary equity                        |  |                |        |   |              |   | (242    | )
|Proceeds upon stock option exercises                                              |  |                | 71      |   |              |   | 399     |  
|                                                                                  |  |                |         |   |              |   |         |  
|Net cash used in financing activities                                             |  |                | (27,825 | ) |              |   | (12,872 | )
|                                                                                  |  |               
|Net decrease in cash and cash equivalents                                         |  |                | (21,001 | ) |              |   | (522    | )
|Cash and cash equivalents, beginning of period                                    |  |                | 24,216  |   |              |   | 9,885   |  
|                                                                                  |  |                |         |   |              |   |         |  
|Cash and cash equivalents, end of period                                          |  | $              | 3,215   |   |              | $ | 9,363   |  
|                                                                                  |  |                |         |   |              |   |         |  

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



5



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EINSTEIN NOAH RESTAURANT GROUP, INC.

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

The
accompanying consolidated balance sheet as of December 29, 2009, which has been derived from audited financial statements, and the unaudited consolidated financial statements of Einstein Noah Restaurant Group, Inc. and its wholly-owned
subsidiaries (collectively, the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished within this Form 10-Q reflects all adjustments
(consisting only of normal recurring accruals and adjustments), which are, in our opinion, necessary to fairly state the interim operating results for the respective periods.

As of June 29, 2010, the Company owned, franchised or licensed various restaurant concepts under the brand names of Einstein Bros. Bagels
(Einstein Bros.), Noahs New York Bagels (Noahs) and Manhattan Bagel Company (Manhattan Bagel).

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting
principles in the United States have been omitted pursuant to SEC rules and regulations. The notes to the consolidated financial statements (unaudited) should be read in conjunction with the notes to the consolidated financial statements contained
in our annual report on Form 10-K for the fiscal year ended December 29, 2009. We believe that the disclosures are sufficient for interim financial reporting purposes. However, these operating results are not necessarily indicative of the
results expected for the full fiscal year. Additionally, our business is subject to seasonal trends. Generally, our revenues and results of operations in the fourth fiscal quarter tend to be the most significant.

2. Recent Accounting Pronouncements

We
have considered recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our consolidated financial statements.

3. Supplemental Cash Flow Information



|                                                                   |  |                |       |   |              |   |       |  
|------------------------------------------------------------------ |  | -------------- | ----- | - | ------------ | - | ----- | -
|                                                                   |  | 26 weeks ended |      
|                                                                   |  | June 30,2009   |       |   | June 29,2010 |  
|                                                                   |  | (in thousands) |      
|Cash paid during the year to date period ended:                    |  |                |       |   |              |   |       |  
|Interest related to:                                               |  |                |       |   |              |   |       |  
|Term loan                                                          |  | $              | 1,998 |   |              | $ | 1,856 |  
|Other                                                              |  |                | 186   |   |              |   | 1,158 |  
|Income taxes                                                       |  | $              | 920   |   |              | $ | 106   |  
|                                                                   |  |               
|Non-cash investing activities:                                     |  |                |       |   |              |   |       |  
|                                                                   |  |               
|Non-cash purchase of equipment through capital leasing             |  | $              | 14    |   |              | $ |      |  
|Change in accrued expenses for purchases of property and equipment |  | $              | (876  | ) |              | $ | (247  | )



6



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EINSTEIN NOAH RESTAURANT GROUP, INC.

Notes to Consolidated Financial Statements (Unaudited)(Continued)



4. Inventories

Inventories, which consist of food, beverage, paper supplies and bagel ingredients, are stated at the lower of cost or market, with cost being determined
by the first-in, first-out method. Inventories consist of the following:



|                  |  |                  |       |              |   |      
|----------------- |  | ---------------- | ----- | ------------ | - | -----
|                  |  | December 29,2009 |       | June 29,2010
|                  |  | (in thousands)  
|Finished goods    |  | $                | 4,100 |              | $ | 3,883
|Raw materials     |  |                  | 1,413 |              |   | 1,234
|                  |  |                  |       |              |   |      
|Total inventories |  | $                | 5,513 |              | $ | 5,117
|                  |  |                  |       |              |   |      

5. Goodwill, Trademarks and Other Intangibles

Intangible assets include both goodwill and identifiable intangibles arising from the allocation of the purchase prices of assets acquired. Goodwill
represents the excess of cost over fair value of net assets acquired in the acquisition of Manhattan Bagel. As of June 29, 2010, intangible assets of $63.8 million were not subject to amortization and consisted primarily of the Einstein Bros.,
Noahs and Manhattan Bagel trademarks.

We performed an impairment analysis of the goodwill and indefinite lived intangible assets
related to our Einstein Bros., Noahs and Manhattan Bagel brands as of December 29, 2009 and there was no indication of impairment. During the thirteen weeks ended June 29, 2010, there were no events or changes in circumstances that
indicated that our goodwill or intangible assets might be impaired or may not be recoverable.

6. Long-Term Debt

Our debt is composed of a credit facility with a modified term loan that has an original principal amount of $90 million and a $20 million revolver. The
term loan had outstanding balances of $79.8 million and $75.0 million as of December 29, 2009 and June 29, 2010, respectively, and the revolver had a balance of $0 and $11.0 million as of December 29, 2009 and June 29, 2010,
respectively. The revolver and credit facility mature in 2012, however we have classified the revolver as a current liability as we intend to pay it off within one year. As of December 29, 2009 and June 29, 2010, our total long-term debt
had a fair value of $64.6 million and $78.2 million, respectively. The fair value of the Companys debt was estimated based on the current rates found in the market place for debt with the same remaining maturities. We may prepay amounts
outstanding under the credit facility and may terminate commitments in whole at any time without penalty or premium upon prior written notice. Borrowings under this credit facility bear interest at a rate equal to an applicable margin plus, at our
option, either a variable base rate or a Eurodollar rate. As of June 29, 2010, the weighted average interest rate under the credit facility, excluding the interest rate swap described in Note 7, was 2.36%. The revolver and the term loan contain
usual and customary covenants including consolidated leverage ratios, fixed charge coverage ratios and limitations on capital expenditures. As of December 29, 2009 and June 29, 2010, we were in compliance with all our financial and
operating covenants.

In addition to our calendar quarterly payments of $225,000 due on our term loan, we are also required to make excess
cash flow payments on our term loan as defined in our credit facility. We made an excess cash flow payment of $4.3 million in the first quarter 2010.

7. Interest Rate Swap and Other Comprehensive Income/Loss

On May 7, 2008, we entered into a two year interest rate swap agreement relating to our term loan, effective August 2008. The Company makes
payments based on a fixed interest rate of 3.52% calculated on an initial notional amount of $60 million. In exchange the Company receives interest on a $60 million of notional amount at a variable rate. The variable rate interest the Company
receives is based on the 1-month London InterBank Offered Rate (LIBOR). The net effect of the swap is to fix the interest rate on $60 million of our term loan at 3.52% plus an applicable margin. As of June 29, 2010 the weighted
average interest rate under the credit facility including this swap was 4.57%.



7



---

EINSTEIN NOAH RESTAURANT GROUP, INC.

Notes to Consolidated Financial Statements (Unaudited)(Continued)



The fair value measurement of the interest rate swap was performed using significant other observable
inputs (level 2) to calculate a liability of $1.3 million and $0.3 million as of December 29, 2009 and June 29, 2010, respectively, which is recorded in accrued expenses and other current liabilities on the Companys consolidated
balance sheet. As of June 29, 2010, the change in fair value associated with this cash flow hedging instrument is recorded in accumulated other comprehensive loss within stockholders deficit.

Comprehensive income consisted of the following:



|                                   |  |                |       |              |   |      
|---------------------------------- |  | -------------- | ----- | ------------ | - | -----
|                                   |  | 26 weeks ended
|                                   |  | June 30,2009   |       | June 29,2010
|                                   |  | (in thousands)
|Net income                         |  | $              | 8,316 |              | $ | 3,868
|Unrealized gain on cash flow hedge |  |                | 544   |              |   | 939  
|                                   |  |                |       |              |   |      
|Total comprehensive income         |  | $              | 8,860 |              | $ | 4,807
|                                   |  |                |       |              |   |      

The Company will reclassify any gain or loss from accumulated other
comprehensive loss, net of tax, on the Companys condensed consolidated balance sheet to other expense/income on the Companys consolidated statements of operations if the Company chooses to terminate the swap before its expiration.

8. Series Z Preferred Stock

On March 17, 2010, the Company and Halpern Denny III, L.P. (Halpern Denny), the holder of the mandatorily redeemable Series Z preferred
stock (Series Z), amended their previous agreement dated May 28, 2009 to extend the redemption date to June 30, 2011, and allow the Company to redeem any amount of Series Z at any time through that date. In addition, beginning
July 1, 2010, Halpern Denny has an option to exchange 50% of the outstanding shares of Series Z and the accrued additional redemption amount on those shares outstanding as of June 30, 2010 into shares of freely tradable common stock at a
price of $11.50 per share. All additional redemption amounts that accrue after June 30, 2010 will be waived with respect to the shares of Series Z exchanged, if any.

We have redeemed $44.0 million of Series Z since June 30, 2009, including a $6.0 million redemption in the second quarter of 2010, leaving
outstanding Series Z shares of $13.0 million plus accrued additional redemption of $1.0 million. As of July 1, 2010, Halpern Denny has a one year option to exchange up to $7.0 million of the outstanding Series Z and accrued additional
redemption amount for up to 608,695 shares of freely tradable common stock.

The Company must first redeem the shares of the Series Z that are
not subject to the exchange option. Then, the Company may redeem the shares that are subject to the exchange option, if Halpern Denny has not exercised its option, which could serve to decrease the number of Series Z shares that are subject to the
exchange option. The remaining provisions of the agreement between Halpern Denny and the Company remain unchanged.

In connection with the
March 17, 2010 agreement, we recorded this instrument on our balance sheet at fair value during the first quarter of 2010. The fair value was recorded at a premium with a non-cash charge to our net income of $0.9 million. The fair value of the
Series Z was estimated to be $31.0 million and $14.2 million, as of December 29, 2009 and June 29, 2010, respectively.

The Series Z
and accrued additional redemption amount subject to the exchange option is recorded within temporary equity with a balance of $7.6 million as of June 29, 2010. The Series Z and the accrued additional redemption not subject to the exchange
option remains in liabilities with a balance of $6.4 million as of June 29, 2010.



8



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EINSTEIN NOAH RESTAURANT GROUP, INC.

Notes to Consolidated Financial Statements (Unaudited)(Continued)



9. Stock-Based Compensation

Our stock-based compensation cost for the thirteen weeks ended June 30, 2009 and June 29, 2010 was $0.3 million and $0.5 million, respectively,
and for the twenty-six weeks ended June 30, 2009 and June 29, 2010 was $0.5 million and $0.8 million, respectively. This expense has been included in general and administrative expenses. The fair value of stock options and stock
appreciation rights (SARs) granted during the quarter are estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:



|                                                     |  |                  |  |                  |  |                  |  |                 
|---------------------------------------------------- |  | ---------------- |  | ---------------- |  | ---------------- |  | ----------------
|                                                     |  | 13 weeks ended   |  | 26 weeks ended  
|                                                     |  | June 30,2009     |  | June 29,2010     |  | June 30,2009     |  | June 29,2010    
|Expected life of options and SARs from date of grant |  | 3.25 - 6.0 years |  | 3.25 - 6.0 years |  | 2.75 - 6.0 years |  | 2.75 - 6.0 years
|Risk-free interest rate                              |  | 1.76 - 2.17%     |  | 1.32 - 2.52%     |  | 1.13 - 2.17%     |  | 1.32 - 2.74%    
|Volatility                                           |  | 42%              |  | 43%              |  | 40 - 42%         |  | 42 - 43%        
|Assumed dividend yield                               |  | 0%               |  | 0%               |  | 0%               |  | 0%              

We evaluate and revise the
assumptions used to calculate the fair value of stock options and SARs granted as necessary, to reflect market conditions and the Companys experience.

As of June 29, 2010, we had approximately $2.1 million of total unrecognized compensation cost related to non-vested awards granted under our stock
option and stock appreciation rights plans, which we expect to recognize over a weighted average period of 1.7 years. As of June 29, 2010, we have approximately $0.1 million of total unrecognized compensation cost related to our restricted
stock plan, which we expect to recognize over a weighted average period of 1.2 years.

Stock Option Plan Activity

Transactions during the thirteen weeks ended June 29, 2010 were as follows:



|                                      |  |                 |   |  |                               |       |                                        |     
|------------------------------------- |  | --------------- | - |  | ----------------------------- | ----- | -------------------------------------- | ----
|                                      |  | NumberofOptions |   |  | WeightedAverageExercise Price |       | Weighted 
AverageRemainingLife (Years)
|Outstanding, December 29, 2009        |  | 910,377         |   |  | $                             | 8.63  |                                        |     
|Granted                               |  | 452,750         |   |  | $                             | 11.60 |                                        |     
|Exercised                             |  | (89,712         | ) |  | $                             | 4.45  |                                        |     
|Cancelled/Forfeited                   |  | (70,328         | ) |  | $                             | 11.61 |                                        |     
|Expired                               |  | (20,833         | ) |  |                               | 18.50 |                                        |     
|                                      |  |                 |   |  |                               |       |                                        |     
|Outstanding, June 29, 2010            |  | 1,182,254       |   |  | $                             | 9.73  |                                        | 7.72
|                                      |  |                 |   |  |                               |       |                                        |     
|Exercisable and vested, June 29, 2010 |  | 415,788         |   |  | $                             | 9.08  |                                        | 5.67
|                                      |  |                 |   |  |                               |       |                                        |     



|                                      |  |                 |   |  |                                      |     
|------------------------------------- |  | --------------- | - |  | ------------------------------------ | ----
|                                      |  | NumberofOptions |   |  | Weighted AverageGrant DateFair
Value
|Non-vested options, December 29, 2009 |  | 463,360         |   |  | $                                    | 2.83
|Granted                               |  | 452,750         |   |  |                                      | 5.01
|Vested                                |  | (100,416        | ) |  |                                      | 3.11
|Forfeited                             |  | (49,228         | ) |  |                                      | 4.15
|                                      |  |                 |   |  |                                      |     
|Non-vested options, June 29, 2010     |  | 766,466         |   |  | $                                    | 4.14
|                                      |  |                 |   |  |                                      |     



9



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EINSTEIN NOAH RESTAURANT GROUP, INC.

Notes to Consolidated Financial Statements (Unaudited)(Continued)



The aggregate intrinsic value of stock options exercised during the twenty-six weeks ended June 29,
2010 was $0.7 million.

Stock Appreciation Rights Plan Activity

Transactions during the thirteen weeks ended June 29, 2010 were as follows:



|                                      |  |              |   |  |                               |       |                                       |     
|------------------------------------- |  | ------------ | - |  | ----------------------------- | ----- | ------------------------------------- | ----
|                                      |  | NumberofSARs |   |  | WeightedAverageExercise Price |       | Weighted AverageRemainingLife (Years)
|Outstanding, December 29, 2009        |  | 67,553       |   |  | $                             | 11.05 |                                       |     
|Granted                               |  | 16,500       |   |  |                               | 12.47 |                                       |     
|Exercised                             |  | (1,100       | ) |  |                               | 8.00  |                                       |     
|Forfeited                             |  | (1,400       | ) |  |                               | 15.00 |                                       |     
|                                      |  |              |   |  |                               |       |                                       |     
|Outstanding, June 29, 2010            |  | 81,553       |   |  | $                             | 11.31 |                                       | 3.94
|                                      |  |              |   |  |                               |       |                                       |     
|Exercisable and vested, June 29, 2010 |  | 38,341       |   |  | $                             | 11.22 |                                       | 2.07
|                                      |  |              |   |  |                               |       |                                       |     



|                                     |  |              |   |  |                                      |     
|------------------------------------ |  | ------------ | - |  | ------------------------------------ | ----
|                                     |  | NumberofSARs |   |  | Weighted AverageGrant DateFair Value
|Non-vested rights, December 29, 2009 |  | 32,812       |   |  | $                                    | 3.25
|Granted                              |  | 16,500       |   |  |                                      | 3.93
|Vested                               |  | (6,050       | ) |  |                                      | 2.89
|Forfeited                            |  | (50          | ) |  |                                      | 6.75
|                                     |  |              |   |  |                                      |     
|Non-vested rights June 29, 2010      |  | 43,212       |   |  | $                                    | 3.57
|                                     |  |              |   |  |                                      |     

The aggregate intrinsic value of SARs exercised during the twenty-six
weeks ended June 29, 2010 was $0.

Restricted Stock

On January 9, 2009, the Companys Compensation Committee had granted 63,776 shares of restricted stock with a value of $375,000 in connection
with Mr. ONeills appointment as President and Chief Executive Officer. The forfeiture restrictions on 21,259 shares lapsed on January 9, 2010 the first anniversary of the grant. The forfeiture restriction on 21,259 shares and
21,258 shares will lapse on the second and third anniversaries of the grant, respectively, provided that Mr. ONeill remains employed by the Company.



10



---

EINSTEIN NOAH RESTAURANT GROUP, INC.

Notes to Consolidated Financial Statements (Unaudited)(Continued)



10. Net Income Per Common Share

The following table sets forth the computation of basic and diluted net income available to common stockholders per share:



|                                                       |  |                                                                         |            |              |                |            |              |  |              |            |  |   |            |  
|------------------------------------------------------ |  | ----------------------------------------------------------------------- | ---------- | ------------ | -------------- | ---------- | ------------ |  | ------------ | ---------- |  | - | ---------- | -
|                                                       |  | 13 weeks ended                                                          |            |              | 26 weeks ended |           
|                                                       |  | June 30,2009                                                            |            | June 29,2010 |                |            | June 30,2009 |  | June 29,2010 |           
|                                                       |  | (in thousands, except earnings per share and related share information) |           
|Net income                                             |  | $                                                                       | 6,466      |              | $              | 3,248      |              |  | $            | 8,316      |  | $ | 3,868      |  
|Less: Additional redemption on temporary equity        |  |                                                                         |           |              |                | (191       | )            |  |              |           |  |   | (241       | )
|Add: Accretion of premium on Series Z
preferred stock  |  |                                                                         |           |              |                | 499        |              |  |              |           |  |   | 499        |  
|                                                       |  |                                                                         |            |              |                |            |              |  |              |            |  |   |            |  
|Net income available to common stockholders (a)        |  | $                                                                       | 6,466      |              | $              | 3,556      |              |  | $            | 8,316      |  | $ | 4,126      |  
|                                                       |  |                                                                         |            |              |                |            |              |  |              |            |  |   |            |  
|Basic weighted average shares outstanding (b)          |  |                                                                         | 16,047,305 |              |                | 16,496,118 |              |  |              | 16,036,620 |  |   | 16,481,595 |  
|Dilutive effect of stock options and SARs              |  |                                                                         | 365,058    |              |                | 317,237    |              |  |              | 258,729    |  |   | 307,255    |  
|                                                       |  |                                                                         |            |              |                |            |              |  |              |            |  |   |            |  
|Diluted weighted average shares outstanding (c)        |  |                                                                         | 16,412,363 |              |                | 16,813,355 |              |  |              | 16,295,349 |  |   | 16,788,850 |  
|                                                       |  |                                                                         |            |              |                |            |              |  |              |            |  |   |            |  
|Net income available to common stockholders per share: |  |                                                                         |            |              |                |            |              |  |              |            |  |   |            |  
|                                                       |  |                                                                         |            |              |                |            |              |  |              |            |  |   |            |  
|Basic (a)/(b)                                          |  | $                                                                       | 0.40       |              | $              | 0.22       |              |  | $            | 0.52       |  | $ | 0.25       |  
|                                                       |  |                                                                         |            |              |                |            |              |  |              |            |  |   |            |  
|Diluted (a)/(c)                                        |  | $                                                                       | 0.39       |              | $              | 0.21       |              |  | $            | 0.51       |  | $ | 0.25       |  
|                                                       |  |                                                                         |            |              |                |            |              |  |              |            |  |   |            |  
|Anti-dilutive stock options and SARs                   |  |                                                                         | 401,906    |              |                | 205,382    |              |  |              | 632,031    |  |   | 198,603    |  
|                                                       |  |                                                                         |            |              |                |            |              |  |              |            |  |   |            |  

Diluted earnings per share is computed by dividing the net income for the period by the weighted average number of shares of
common stock and potential common stock equivalents outstanding during the period using the treasury stock method. Potential common stock equivalents include incremental shares of common stock issuable upon the exercise of stock options. Potential
common stock equivalents are excluded from the computation of diluted net income per share when their effect is anti-dilutive.

11. Income
Taxes

Utilization of our net operating loss (NOL) carryforwards reduced our federal and state income tax liability incurred in
2009 and 2010. We have recorded provisions for income tax expense due on taxable earnings for the thirteen weeks ended June 30, 2009 and June 29, 2010 of $0.4 million and $2.5 million respectively, and for the twenty-six weeks ended
June 30, 2009 and June 29, 2010 of $0.5 million and $3.6 million, respectively. Our 2009 provision for income taxes included a benefit resulting from the reduction of the valuation allowance related to the realization of our deferred tax
assets. This benefit offset the estimated deferred tax expense and significantly lowered our 2009 effective tax rate to 5.7% and 5.3% for the second quarter and year to date 2009, respectively. We reversed our valuation allowance in the third
quarter of 2009.

As of December 29, 2009, NOL carryforwards of $131.9 million were available to be utilized against future taxable
income for years through fiscal 2029, subject in part to annual limitations and excluding approximately $12.2 million of NOL carryforwards that will expire prior to utilization. Accordingly, we have provided a full valuation allowance of $4.9
million related to this portion of our deferred tax assets. Our ability to utilize our NOLs could be further limited if we experience an ownership change as defined by Section 382 of the Internal Revenue Code. The occurrence of an
additional ownership change would limit our ability to utilize approximately $113.4 million of our NOL carryforwards that are not currently subject to limitation, and could further limit our ability to utilize our remaining NOL carryforwards and
possibly other tax attributes. Approximately $18.5 million of our NOLs are currently subject to limitation.



11



---

EINSTEIN NOAH RESTAURANT GROUP, INC.

Notes to Consolidated Financial Statements (Unaudited)(Continued)



We are subject to income taxes in the U.S. federal jurisdiction, and various states and local
jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. We remain subject to examination by U.S. federal, state and local tax
authorities for tax years 2006 through 2008 and with certain state and local authorities for tax years 2005 through 2008. With a few exceptions, we are no longer subject to U.S. federal, state or local examinations by tax authorities for
the tax year 2004 and prior.

12. Commitments and Contingencies

Letters of Credit and Line of Credit

As of June 29, 2010, we had $7.1 million in letters of credit outstanding which reduce our availability under the revolver. The letters of credit
expire on various dates during 2010 through 2012, typically renew annually and are payable upon demand in the event that we fail to pay the underlying obligations.

During the twenty-six weeks ended June 29, 2010, we had a balance of $11.0 million on our revolver. Our availability under the revolver was $1.9
million as of June 29, 2010.

Litigation

We are subject to claims and legal actions in the ordinary course of business, including claims by or against our franchisees, licensees and employees or
former employees and others. We do not believe any currently pending or threatened matter would have a material adverse effect on our business, results of operations or financial condition.

13. Subsequent Events

There were no
material subsequent events have occurred since June 29, 2010 that required recognition or disclosure in these financial statements.



12



---

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Cautionary Note Regarding Forward-Looking Statements

We wish to caution our readers that the following important factors, among others, could cause the actual results to differ materially from those
indicated by forward-looking statements made in this report and periodically in news releases, reports, proxy statements, registration statements and other written communications, as well as verbal forward-looking statements made by Company
representatives. In addition, our definitions of non-GAAP disclosures may differ from how others in our industry may define them. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or
achievements to be materially different from any future performance or achievements expressed or implied by these forward-looking statements. Factors that might cause actual events or results to differ materially from those indicated by these
forward-looking statements may include matters such as future economic performance, general economic conditions, consumer preferences and spending, costs, competition, new product execution, restaurant openings or closings, operating margins, the
availability of acceptable real estate locations, the sufficiency of our cash balances and cash generated from operating and financing activities for our future liquidity and capital resource needs, growth of franchise and licensing, and other
matters, and are generally accompanied by words such as: believes, anticipates, plans, intends, estimates, predicts, targets, expects,
contemplates and similar expressions that convey the uncertainty of future events or outcomes. These risks and uncertainties include, but are not limited to, the risk factors described in our annual report on Form 10-K for the year
ended December 29, 2009 as updated in subsequent quarterly reports on Form 10-Q, including Item 1A of Part II of this report.

General

This
information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Managements
Discussion and Analysis of Financial Condition and Results of Operations, contained in the Form 10-K for the fiscal year ended December 29, 2009. The following discussion and analysis includes historical and certain forward-looking
information that should be read together with the accompanying consolidated financial statements, related footnotes and the discussion below of certain risks and uncertainties that could cause future operating results to differ materially from
historical results or from the expected results indicated by forward-looking statements.

We have a 52/53-week fiscal year ending on the
Tuesday closest to December 31. The second quarters in fiscal years 2009 and 2010 ended on June 30, 2009 and June 29, 2010, respectively, and each contained 13 weeks, and the year to date periods each contained twenty-six weeks.

Use of Non-GAAP Financial Information

In addition to the results reported in accordance with accounting principles generally accepted in the United States of America (GAAP)
included in this filing, the Company has provided certain non-GAAP financial information, including earnings before interest, taxes, depreciation, amortization, and other operating expenses (adjusted EBITDA), net income adjusted for
changes in our tax valuation allowance and all adjustments related to the Series Z modification (adjusted net income), earnings per share adjusted for changes in our tax valuation allowance and loss on debt modification (adjusted
EPS) and free cash flow, or net cash provided by operating activities less net cash used in investing activities. Management believes that the presentation of this non-GAAP financial information provides useful information to investors
because this information may allow investors to better evaluate ongoing business performance and certain components of the Companys results. In addition, the Companys Board of Directors uses this non-GAAP financial information to
evaluate the performance of the Company and the management team. This information should be considered in addition to the results presented in accordance with GAAP, and should not be considered a substitute for the GAAP results. The Company has
reconciled the non-GAAP financial information on page 18 and 19 in this Form 10-Q to the nearest GAAP measure in context.



13



---

Overview

In evaluating and assessing our financial performance for the second quarter of 2010, we considered the following key factors:



| |  |  | Comparable store sales  Despite continued sales challenges from intense competition in the breakfast daypart, persistently high
unemployment rates in our most significant markets and sluggish consumer spending in general, we saw a slight sequential improvement in system-wide and company-owned restaurant comparable transactions during the second quarter of 2010. We did lose
ground in our trend toward improving system-wide and company-owned restaurant comparable store sales.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
remain focused on building consistent comparable store sales and comparable transactions by increasing brand trial and repetitive customer traffic through healthy innovation our core breakfast and lunch dayparts. In the second quarter of 2010 we
launched our bagel thin sandwiches, and seasonal products such as mango-peach muffins, bagels and poppers, and strawberry-mango blenders.

The timing of our promotional calendars between the years adversely impacted our average check resulting in a -1.1% and -2.2% decline
in system-wide and company-owned restaurant comparable store sales, respectively, for the second quarter. Year-to-date our system-wide and company-owned restaurant comparable store sales were -0.5% and -1.2%, respectively.



| |  |  | Unit development  We added 14 net locations in the first half of 2010 compared to 10 net additions in the first half of 2009. As of
June 29, 2010, we owned and operated, franchised, and licensed 697 restaurants. Our current base of company-owned restaurants under our core brands includes 353 Einstein Bros., 76 Noahs, and one Manhattan Bagel. Also, we franchise 72
Manhattan Bagel and 11 Einstein Bros. restaurants, and license 184 Einstein Bros. restaurants.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net cash provided by operating and investing activities  We generated $20.9 million of cash from operations in 2010, an improvement of
$6.9 million, or 49%, from the first half of 2009. We also increased our investments in new restaurants and various upgrades for existing restaurants by $1.3 million from the first half of 2009.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Redemption schedule of our Series Z  On March 17, 2010 we amended our agreement with Halpern Denny to modify the redemption schedule
for our Series Z. The modified schedule of redemption provides us with additional financial flexibility by extending the date for redemption to June 30, 2011 from June 30, 2010. As a result of the March 17, 2010 agreement, we
recognized a non-cash loss of $0.9 million on the modification of Series Z in the first quarter of 2010. Beginning on July 1, 2010, Halpern Denny has an option to exchange 50% of the outstanding shares of Series Z and the accrued additional
redemption price on those shares as of June 30, 2010, to freely tradable common stock. The remaining outstanding shares of Series Z and accrued additional redemption price on those shares as of June 30, 2010 was $14.0 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Outlook for Remainder of 2010

While much of our competition is focusing on value menus, we see that as a short-term solution. We continued with discounting in the second quarter of
2010 as compared to 2009 to protect ourselves against the increased competition primarily in the breakfast daypart. We are committed to healthy innovation, fresh-baked goodness and a strong line of new products that will build customer loyalty for
the long term.

For the remainder of 2010, we plan to emphasize our marketing initiatives, concentrating primarily on the breakfast daypart,
with increased efforts aimed at the lunch daypart. We have a strong line-up of new product offerings and limited time offers that will be introduced throughout the year to drive new traffic and repeat visits.



14



---

We intend to continue to expand our company-owned restaurants in 2010 with the addition of 10 to 12 new
units. These new units will be focused primarily in our more developed markets. During the first half of 2010, we opened four company-owned restaurants. We intend to upgrade 17 of our company-owned restaurants during 2010, of which 13 were completed
in the first half of the year. We also will update approximately 80 of our restaurants with a kitchen display ordering system that improves production accuracy and helps to reduce waste. Finally, we will be renovating certain features at specific
restaurants such as new internal signage and refreshed menu boards, a revitalized coffee program or updated external signage.

We have a
robust pipeline of existing franchise development agreements and new license locations. We plan to open 12 to 17 franchise locations and 35 to 45 license restaurants in 2010. Our license restaurants will open primarily in colleges and universities,
hospitals, and airports. During the first half of 2010 we opened six franchise and nine license restaurants. Two company-owned restaurants and three licensed restaurants were closed during the first half of 2010.

Results of Operations for the Quarter and Year to Date Periods Ended June 30, 2009 and June 29, 2010

Financial Highlights



| |  |  | Adjusted EBITDA decreased 1.6% to $11.7 million in the second quarter of 2010 and increased 7.4% to $20.4 million year to date in 2010 compared to
2009. This was a result of increased investment in key marketing initiatives partially offset by the strong operating controls and effective cost and inventory management at the restaurant level for a year to date increase in gross profit while
expanding the gross margins in our manufacturing and commissaries segment.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adjusted EPS on a dilutive basis was $0.19 in the second quarter of 2010 compared to $0.24 in 2009 and was $0.28 year to date 2010 compared to $0.32 in
2009.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Consolidated Results



|                                                                                        |  |                        |         |   |                        |   |         |                       |  |        |              |  |   |              |   |  |                       |         |   |  |        |   
|--------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------------------- | - | ------- | --------------------- |  | ------ | ------------ |  | - | ------------ | - |  | --------------------- | ------- | - |  | ------ | --
|                                                                                        |  | 13 weeks ended         |         |   | 26 weeks ended         |  
|                                                                                        |  | (dollars in thousands) |         |   | (dollars in thousands) |  
|                                                                                        |  | June 30,2009           |         |   | June 29,2010           |   |         | % Increase/(Decrease) |  |        | June 30,2009 |  |   | June 29,2010 |   |  | % Increase/(Decrease) |        
|Revenues                                                                                |  | $                      | 104,358 |   |                        | $ | 103,473 |                       |  | (0.8   | %)           |  | $ | 204,781      |   |  | $                     | 204,285 |   |  | (0.2   | %)
|                                                                                        |  |                        |         |   |                        |  
|Cost of sales                                                                           |  |                        | 83,479  |   |                        |   | 82,791  |                       |  | (0.8   | %)           |  |   | 167,473      |   |  |                       | 164,788 |   |  | (1.6   | %)
|                                                                                        |  |                        |         |   |                        |   |         |                       |  |        |              |  |   |              |   |  |                       |         |   |  |        |   
|Total gross profit                                                                      |  |                        | 20,879  |   |                        |   | 20,682  |                       |  | (0.9   | %)           |  |   | 37,308       |   |  |                       | 39,497  |   |  | 5.9    | % 
|                                                                                        |  |                        |         |   |                        |  
|Operating expenses                                                                      |  |                        | 12,864  |   |                        |   | 13,516  |                       |  | 5.1    | %            |  |   | 26,176       |   |  |                       | 27,873  |   |  | 6.5    | % 
|                                                                                        |  |                        |         |   |                        |   |         |                       |  |        |              |  |   |              |   |  |                       |         |   |  |        |   
|Income from operations                                                                  |  |                        | 8,015   |   |                        |   | 7,166   |                       |  | (10.6  | %)           |  |   | 11,132       |   |  |                       | 11,624  |   |  | 4.4    | % 
|                                                                                        |  |                        |         |   |                        |  
|Interest expense                                                                        |  |                        | 1,156   |   |                        |   | 1,435   |                       |  | 24.1   | %            |  |   | 2,346        |   |  |                       | 3,186   |   |  | 35.8   | % 
|                                                                                        |  |                        |         |   |                        |  
|Adjustment for Series Z modification                                                    |  |                        |        |   |                        |   |        |                       |  | *      | **           |  |   |             |   |  |                       | 929     |   |  | *      | **
|                                                                                        |  |                        |         |   |                        |   |         |                       |  |        |              |  |   |              |   |  |                       |         |   |  |        |   
|Income before income taxes                                                              |  |                        | 6,859   |   |                        |   | 5,731   |                       |  | (16.4  | %)           |  |   | 8,786        |   |  |                       | 7,509   |   |  | (14.5  | %)
|Provision for income tax                                                                |  |                        | 393     |   |                        |   | 2,483   |                       |  | 531.8  | %            |  |   | 470          |   |  |                       | 3,641   |   |  | 674.7  | % 
|Adjustment for change in tax valuation allowance *                                      |  |                        | 2,500   |   |                        |   |        |                       |  | *      | **           |  |   | 3,159        |   |  |                       |        |   |  | (100.0 | %)
|Adjustment for Series Z modification **                                                 |  |                        |        |   |                        |   | 125     |                       |  | *      | **           |  |   |             |   |  |                       | (754    | ) |  | *      | **
|                                                                                        |  |                        |         |   |                        |   |         |                       |  |        |              |  |   |              |   |  |                       |         |   |  |        |   
|Adjusted net income                                                                     |  | $                      | 3,966   |   |                        | $ | 3,123   |                       |  | (21.3  | %)           |  | $ | 5,157        |   |  | $                     | 4,622   |   |  | (10.4  | %)
|                                                                                        |  |                        |         |   |                        |   |         |                       |  |        |              |  |   |              |   |  |                       |         |   |  |        |   
|Adjustments to adjusted net income:                                                     |  |                        |         |   |                        |   |         |                       |  |        |              |  |   |              |   |  |                       |         |   |  |        |   
|Interest expense, net                                                                   |  |                        | 1,156   |   |                        |   | 1,435   |                       |  | 24.1   | %            |  |   | 2,346        |   |  |                       | 3,186   |   |  | 35.8   | % 
|Additional redemption on temporary equity**                                             |  |                        |        |   |                        |   | 191     |                       |  | *      | **           |  |   |             |   |  |                       | 241     |   |  | *      | **
|Amortization of discount on Series Z preferred stock**                                  |  |                        |        |   |                        |   | (66     | )                     |  |        |              |  |   |             |   |  |                       | (66     | ) |  | *      | **
|Provision for income taxes                                                              |  |                        | 393     |   |                        |   | 2,483   |                       |  | 531.8  | %            |  |   | 470          |   |  |                       | 3,641   |   |  | 674.7  | % 
|Change in tax valuation allowance                                                       |  |                        | 2,500   |   |                        |   |        |                       |  | (100.0 | %)           |  |   | 3,159        |   |  |                       |        |   |  | (100.0 | %)
|Depreciation and amortization                                                           |  |                        | 4,106   |   |                        |   | 4,480   |                       |  | 9.1    | %            |  |   | 8,139        |   |  |                       | 8,746   |   |  | 7.5    | % 
|Other operating expenses                                                                |  |                        | (235    | ) |                        |   | 51      |                       |  | *      | **           |  |   | (236         | ) |  |                       | 70      |   |  | *      | **
|                                                                                        |  |                        |         |   |                        |   |         |                       |  |        |              |  |   |              |   |  |                       |         |   |  |        |   
|Adjusted EBITDA (Earnings before interest, taxes, depreciation, amortization and other) |  | $                      | 11,886  |   |                        | $ | 11,697  |                       |  | (1.6   | %)           |  | $ | 19,035       |   |  | $                     | 20,440  |   |  | 7.4    | % 
|                                                                                        |  |                        |         |   |                        |   |         |                       |  |        |              |  |   |              |   |  |                       |         |   |  |        |   



|* | Our second quarter and year to date 2009 provision for income taxes included a benefit resulting from the reduction of the valuation allowance related to the
realization of our deferred tax assets. This benefit offset the estimated deferred tax expense in 2009.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | As a result of the March 17, 2010 agreement modifying our Series Z, we recognized a non-cash loss of $0.9 million on the extinguishment of debt, recorded
additional redemption within stockholders equity and recorded a discount within interest expense.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*** | not meaningful
|--- | --------------



15



---

During the second quarter of 2009 we introduced bagel poppers, had a nominal price increase and had
continued with our free coupon offers from the first quarter 2009 aimed at increasing transactions and the frequency of guest visits. During 2010 we focused on our new product introductions, continued with the trial-oriented couponing and held
various contests to increase guest frequency. System-wide comparable store sales during the second quarter were -1.1% and year to date 2010 was -0.5%.

Interest expense, net was up 24.1% and 35.8% in the second quarter and year to date 2010, respectively, primarily due to the additional redemption on the
Series Z as we did not start to accrue until July 1, 2009.

Company-Owned Restaurant Operations



|                                             |  |                        |        |   |              |   |        |                                             |  |      |              |  |      |              |  |      |  
|-------------------------------------------- |  | ---------------------- | ------ | - | ------------ | - | ------ | ------------------------------------------- |  | ---- | ------------ |  | ---- | ------------ |  | ---- | -
|                                             |  | 13 weeks ended         |       
|                                             |  | (dollars in thousands) |        |   |              |   |        | Percentage of company-ownedrestaurant sales | 
|                                             |  | June 30,2009           |        |   | June 29,2010 |   |        | % Increase/(Decrease)                       |  |      | June 30,2009 |  |      | June 29,2010 | 
|Company-owned restaurant sales               |  | $                      | 95,052 |   |              | $ | 94,237 |                                             |  | (0.9 | %)           |  |      |              |  |      |  
|Percent of total revenues                    |  |                        | 91.1   | % |              |   | 91.1   | %                                           |  |      |              |  |      |              |  |      |  
|                                             |  |                        |        |   |             
|Cost of sales:                               |  |                        |        |   |              |   |        |                                             |  |      |              |  |      |              |  |      |  
|Cost of goods sold                           |  | $                      | 27,604 |   |              | $ | 26,843 |                                             |  | (2.8 | %)           |  | 29.0 | %            |  | 28.5 | %
|Labor costs                                  |  |                        | 28,930 |   |              |   | 27,423 |                                             |  | (5.2 | %)           |  | 30.4 | %            |  | 29.1 | %
|Other operating costs                        |  |                        | 9,413  |   |              |   | 9,456  |                                             |  | 0.5  | %            |  | 9.9  | %            |  | 10.0 | %
|Rent and related, and marketing costs        |  |                        | 10,897 |   |              |   | 13,038 |                                             |  | 19.6 | %            |  | 11.5 | %            |  | 13.8 | %
|                                             |  |                        |        |   |              |   |        |                                             |  |      |              |  |      |              |  |      |  
|Total company-owned restaurant cost of sales |  | $                      | 76,844 |   |              | $ | 76,760 |                                             |  | (0.1 | %)           |  | 80.8 | %            |  | 81.5 | %
|                                             |  |                        |        |   |              |   |        |                                             |  |      |              |  |      |              |  |      |  
|Total company-owned restaurant gross profit  |  | $                      | 18,208 |   |              | $ | 17,477 |                                             |  | (4.0 | %)           |  | 19.2 | %            |  | 18.5 | %
|                                             |  |                        |        |   |              |   |        |                                             |  |      |              |  |      |              |  |      |  



|                                             |  |                        |         |   |              |   |         |                                             |  |      |              |  |      |              |  |      |  
|-------------------------------------------- |  | ---------------------- | ------- | - | ------------ | - | ------- | ------------------------------------------- |  | ---- | ------------ |  | ---- | ------------ |  | ---- | -
|                                             |  | 26 weeks ended         |        
|                                             |  | (dollars in thousands) |         |   |              |   |         | Percentage of company-ownedrestaurant sales | 
|                                             |  | June 30,2009           |         |   | June 29,2010 |   |         | % Increase/(Decrease)                       |  |      | June 30,2009 |  |      | June 29,2010 | 
|Company-owned restaurant sales               |  | $                      | 185,506 |   |              | $ | 184,928 |                                             |  | (0.3 | %)           |  |      |              |  |      |  
|Percent of total revenues                    |  |                        | 90.6    | % |              |   | 90.5    | %                                           |  |      |              |  |      |              |  |      |  
|Cost of sales:                               |  |                        |         |   |              |   |         |                                             |  |      |              |  |      |              |  |      |  
|Cost of goods sold                           |  | $                      | 55,023  |   |              | $ | 52,549  |                                             |  | (4.5 | %)           |  | 29.7 | %            |  | 28.4 | %
|Labor costs                                  |  |                        | 57,575  |   |              |   | 55,203  |                                             |  | (4.1 | %)           |  | 31.0 | %            |  | 29.9 | %
|Other operating costs                        |  |                        | 18,987  |   |              |   | 18,453  |                                             |  | (2.8 | %)           |  | 10.2 | %            |  | 10.0 | %
|Rent and related, and marketing costs        |  |                        | 22,256  |   |              |   | 25,922  |                                             |  | 16.5 | %            |  | 12.0 | %            |  | 14.0 | %
|                                             |  |                        |         |   |              |   |         |                                             |  |      |              |  |      |              |  |      |  
|Total company-owned restaurant cost of sales |  | $                      | 153,841 |   |              | $ | 152,127 |                                             |  | (1.1 | %)           |  | 82.9 | %            |  | 82.3 | %
|                                             |  |                        |         |   |              |   |         |                                             |  |      |              |  |      |              |  |      |  
|Total company-owned restaurant gross profit  |  | $                      | 31,665  |   |              | $ | 32,801  |                                             |  | 3.6  | %            |  | 17.1 | %            |  | 17.7 | %
|                                             |  |                        |         |   |              |   |         |                                             |  |      |              |  |      |              |  |      |  

Company-owned restaurant sales for the second quarter and year to date 2010 showed a slight decrease of 0.9% and
0.3%, respectively, when compared to 2009. For the second quarter and year to date 2010, our company-owned comparable store sales decreased -2.2% and -1.2%, respectively, with a decline in transactions and a relatively flat average check as
expected from the rollover of our trial-generating initiatives and nominal price increases in 2009. Additionally, a modest price increase was taken in January 2010 at our Einstein Bros. and Noahs company-owned restaurants.

Our gross profit percentage decreased from 19.2% in the second quarter of 2009 to 18.5% in the second quarter of 2010, primarily due to an increase in
our investment in our marketing initiatives, partially offset by reductions in our product costs, improvements in our labor related to the various initiatives that were implemented in 2009 and 2010 and from a decrease in our health care benefit
costs. For the year to date 2010, gross profit was 17.7%, up from 17.1% reported in 2009 primarily due to the aforementioned cost-saving initiatives.



16



---

Compared to 2009, most of our commodity-based food costs have declined in 2010. Wheat represents the most
significant raw ingredient we purchase. We believe our combined commodity costs will continue to decrease for the balance of 2010 similar to the trend we saw in the second quarter 2010. We have locked in approximately 85% of our wheat requirements
for the remainder of fiscal 2010.

Our investment in marketing initiatives rose to $3.1 million, up from $1.0 million in the second quarter of
2009. Total year to date investments in marketing initiatives is up $3.5 million over 2009. While the trend of increased marketing spend will continue, we expect it to be at a lower rate for the balance of the year.

Manufacturing and Commissary Operations



|                                                         |  |                        |       |   |                        |   |       |                       |  |      |              |  |   |              |   |  |                       |        |   |  |      |   
|-------------------------------------------------------- |  | ---------------------- | ----- | - | ---------------------- | - | ----- | --------------------- |  | ---- | ------------ |  | - | ------------ | - |  | --------------------- | ------ | - |  | ---- | --
|                                                         |  | 13 weeks ended         |       |   | 26 weeks ended         |  
|                                                         |  | (dollars in thousands) |       |   | (dollars in thousands) |  
|                                                         |  | June 30,2009           |       |   | June 29,2010           |   |       | % Increase/(Decrease) |  |      | June 30,2009 |  |   | June 29,2010 |   |  | % Increase/(Decrease) |       
|Manufacturing and commissary revenues                    |  | $                      | 7,613 |   |                        | $ | 7,256 |                       |  | (4.7 | %)           |  | $ | 15,740       |   |  | $                     | 15,227 |   |  | (3.3 | %)
|Percent of total revenues                                |  |                        | 7.3   | % |                        |   | 7.0   | %                     |  |      |              |  |   | 7.7          | % |  |                       | 7.5    | % |  |      |   
|Manufacturing and commissary costs                       |  | $                      | 6,635 |   |                        | $ | 6,031 |                       |  | (9.1 | %)           |  | $ | 13,632       |   |  | $                     | 12,661 |   |  | (7.1 | %)
|As a percentage of manufacturing and commissary revenues |  |                        | 87.2  | % |                        |   | 83.1  | %                     |  |      |              |  |   | 86.6         | % |  |                       | 83.1   | % |  |      |   
|                                                         |  |                        |       |   |                        |  
|Total manufacturing and commissary gross profit          |  | $                      | 978   |   |                        | $ | 1,225 |                       |  | 25.3 | %            |  | $ | 2,108        |   |  | $                     | 2,566  |   |  | 21.7 | % 
|                                                         |  |                        |       |   |                        |   |       |                       |  |      |              |  |   |              |   |  |                       |        |   |  |      |   
|As a percentage of manufacturing and commissary revenues |  |                        | 12.8  | % |                        |   | 16.9  | %                     |  |      |              |  |   | 13.4         | % |  |                       | 16.9   | % |  |      |   

During the second quarter and year to date 2010, manufacturing gross profit increased $0.2 million and $0.5
million, respectively, compared to 2009 as a result of lower raw ingredient costs and to a lesser extent improved manufacturing efficiencies, partially offset by a lower volume of units sold.

Franchise and License Operations



|                                            |  |                        |       |   |                        |   |       |                       |  |      |              |  |   |              |   |  |                       |       |   |  |      |  
|------------------------------------------- |  | ---------------------- | ----- | - | ---------------------- | - | ----- | --------------------- |  | ---- | ------------ |  | - | ------------ | - |  | --------------------- | ----- | - |  | ---- | -
|                                            |  | 13 weeks ended         |       |   | 26 weeks ended         |  
|                                            |  | (dollars in thousands) |       |   | (dollars in thousands) |  
|                                            |  | June 30,2009           |       |   | June 29,2010           |   |       | % Increase/(Decrease) |  |      | June 30,2009 |  |   | June 29,2010 |   |  | % Increase/(Decrease) |      
|Franchise and license related revenues      |  | $                      | 1,693 |   |                        | $ | 1,980 |                       |  | 17.0 | %            |  | $ | 3,535        |   |  | $                     | 4,130 |   |  | 16.8 | %
|Percent of total revenues                   |  |                        | 1.6   | % |                        |   | 1.9   | %                     |  |      |              |  |   | 1.7          | % |  |                       | 2.0   | % |  |      |  
|Number of franchise and license restaurants |  |                        | 235   |   |                        |   | 267   |                       |  |      |              |  |   | 235          |   |  |                       | 267   |   |  |      |  

Overall, the franchise and license revenue improvement of $0.3 million, or 17.0%, and $0.6 million, or 16.8%, in
the second quarter and year to date 2010, respectively, was driven by strong royalty streams that were a result of the net opening of 11 franchise locations and 21 license locations over the last twelve months. For the second quarter and year to
date 2010, franchisees and licensees of the Manhattan Bagel and Einstein Bros. brands comparable store sales were up 2.9% and 2.0%, respectively.



17



---

Corporate



|                                     |  |                        |        |    |                        |   |        |                       |  |       |              |  |   |              |    |  |                       |        |   |  |       |  
|------------------------------------ |  | ---------------------- | ------ | -- | ---------------------- | - | ------ | --------------------- |  | ----- | ------------ |  | - | ------------ | -- |  | --------------------- | ------ | - |  | ----- | -
|                                     |  | 13 weeks ended         |        |    | 26 weeks ended         |  
|                                     |  | (dollars in thousands) |        |    | (dollars in thousands) |  
|                                     |  | June 30,2009           |        |    | June 29,2010           |   |        | % Increase/(Decrease) |  |       | June 30,2009 |  |   | June 29,2010 |    |  | % Increase/(Decrease) |       
|General and administrative expenses  |  | $                      | 8,993  |    |                        | $ | 8,985  |                       |  | (0.1  | %)           |  | $ | 18,273       |    |  | $                     | 19,057 |   |  | 4.3   | %
|Percent of total revenues            |  |                        | 8.6%   |    |                        |   | 8.7%   |                       |  |       |              |  |   | 8.9%         |    |  |                       | 9.3%   |   |  |       |  
|Depreciation and amortization        |  | $                      | 4,106  |    |                        | $ | 4,480  |                       |  | 9.1   | %            |  |   | 8,139        |    |  |                       | 8,746  |   |  | 7.5   | %
|Percent of total revenues            |  |                        | 3.9    | %  |                        |   | 4.3    | %                     |  |       |              |  |   | 4.0          | %  |  |                       | 4.3    | % |  |       |  
|Other operating expenses (income)    |  |                        | (235   | )  |                        |   | 51     |                       |  | *     | *            |  |   | (236         | )  |  |                       | 70     |   |  | *     | *
|Percent of total revenues            |  |                        | (0.2   | %) |                        |   | 0.0    | %                     |  |       |              |  |   | (0.1         | %) |  |                       | 0.0    | % |  |       |  
|Total operating expenses             |  | $                      | 12,864 |    |                        | $ | 13,516 |                       |  | 5.1   | %            |  | $ | 26,176       |    |  | $                     | 27,873 |   |  | 6.5   | %
|                                     |  |                        |        |    |                        |   |        |                       |  |       |              |  |   |              |    |  |                       |        |   |  |       |  
|Percent of total revenues            |  |                        | 12.3   | %  |                        |   | 13.1   | %                     |  |       |              |  |   | 12.8         | %  |  |                       | 13.6   | % |  |       |  
|Interest expense, net                |  | $                      | 1,156  |    |                        | $ | 1,435  |                       |  | 24.1  | %            |  |   | 2,346        |    |  |                       | 3,186  |   |  | 35.8  | %
|Percent of total revenues            |  |                        | 1.1    | %  |                        |   | 1.4    | %                     |  |       |              |  |   | 1.1          | %  |  |                       | 1.6    | % |  |       |  
|Adjustment for Series Z modification |  |                        |       |    |                        |   |       |                       |  | *     | *            |  |   |             |    |  |                       | 929    |   |  | *     | *
|Percent of total revenues            |  |                        | 0      | %  |                        |   | 0      | %                     |  |       |              |  |   | 0            | %  |  |                       | 0.5    | % |  |       |  
|Provision for income tax             |  |                        | 393    |    |                        |   | 2,483  |                       |  | 531.8 | %            |  |   | 470          |    |  |                       | 3,641  |   |  | 674.7 | %
|Percent of total revenues            |  |                        | 0.4    | %  |                        |   | 2.4    | %                     |  |       |              |  |   | 0.2          | %  |  |                       | 1.8    | % |  |       |  



|** | not meaningful
|-- | --------------

Our general and administrative
expenses were relatively flat for the second quarter 2010 compared to 2009, and increased $0.8 million year to date 2010 compared to 2009 primarily related to increases in relocation expenses, legal settlements, and incentive compensation.

Depreciation and amortization expenses increased $0.4 million and $0.6 million for the second quarter and year to date 2010, respectively,
when compared to 2009. The increase is due to additional investments in company-owned restaurants that were either added or upgraded since the second quarter of 2009. Based on our current planned purchases of capital assets, our existing base of
assets, and our projections for new purchases of fixed assets, we believe depreciation expense for 2010 will be approximately $18 to $19 million.

Included in other operating expenses (income) for the second quarter of 2009 is a $0.3 million gain from a landlord buyout offer for an early termination
of a lease.

The provision for income taxes increased in 2010 compared to 2009 primarily related to the reversal of our valuation allowance in
the third quarter of 2009.

Reconciliation of Non-GAAP Measures to GAAP Measures



|                                                                                        |  |                |        |                |              |   |              |  |   |              |   |  |   |       
|--------------------------------------------------------------------------------------- |  | -------------- | ------ | -------------- | ------------ | - | ------------ |  | - | ------------ | - |  | - | ------
|                                                                                        |  | 13 weeks ended |        | 26 weeks ended
|                                                                                        |  | June 30,2009   |        |                | June 29,2010 |   | June 30,2009 |  |   | June 29,2010
|                                                                                        |  | (in thousands)
|Net income                                                                              |  | $              | 6,466  |                |              | $ | 3,248        |  | $ | 8,316        |   |  | $ | 3,868 
|Adjustments to net income:                                                              |  |                |        |                |              |   |              |  |   |              |   |  |   |       
|Interest expense, net                                                                   |  |                | 1,156  |                |              |   | 1,435        |  |   | 2,346        |   |  |   | 3,186 
|Provision for income taxes                                                              |  |                | 393    |                |              |   | 2,483        |  |   | 470          |   |  |   | 3,641 
|Depreciation and amortization                                                           |  |                | 4,106  |                |              |   | 4,480        |  |   | 8,139        |   |  |   | 8,746 
|Adjustment for Series Z modification                                                    |  |                |       |                |              |   |             |  |   |             |   |  |   | 929   
|Other operating expenses                                                                |  |                | (235   | )              |              |   | 51           |  |   | (236         | ) |  |   | 70    
|                                                                                        |  |                |        |                |              |   |              |  |   |              |   |  |   |       
|Adjusted EBITDA (Earnings before interest, taxes, depreciation, amortization and other) |  | $              | 11,886 |                |              | $ | 11,697       |  | $ | 19,035       |   |  | $ | 20,440
|                                                                                        |  |                |        |                |              |   |              |  |   |              |   |  |   |       



18



---

EINSTEIN NOAH RESTAURANT GROUP, INC.

NON-GAAP TABLES

(Unaudited)



|                                                                |  |                                                                        |            |   |                |   |            |              |  |   |              |   |  |   |            |  
|--------------------------------------------------------------- |  | ---------------------------------------------------------------------- | ---------- | - | -------------- | - | ---------- | ------------ |  | - | ------------ | - |  | - | ---------- | -
|                                                                |  | 13 weeks ended                                                         |            |   | 26 weeks ended |  
|                                                                |  | June 30,2009                                                           |            |   | June 29,2010   |   |            | June 30,2009 |  |   | June 29,2010 |  
|                                                                |  | (in thousands, except earnings per share and related shareinformation) |           
|Net income available to common stockholders                     |  | $                                                                      | 6,466      |   |                | $ | 3,556      |              |  | $ | 8,316        |   |  | $ | 4,126      |  
|Adjustments for:                                                |  |                                                                        |            |   |                |   |            |              |  |   |              |   |  |   |            |  
|Less: Change in tax valuation allowance                         |  |                                                                        | (2,500     | ) |                |   |           |              |  |   | (3,159       | ) |  |   |           |  
|Add: Adjustment for Series Z modification                       |  |                                                                        |           |   |                |   |           |              |  |   |             |   |  |   | 929        |  
|Add: Amortization of discount on Series Z preferred stock       |  |                                                                        |           |   |                |   | 66         |              |  |   |             |   |  |   | 66         |  
|Less: Accretion of premium on Series Z preferred stock          |  |                                                                        |           |   |                |   | (499       | )            |  |   |             |   |  |   | (499       | )
|                                                                |  |                                                                        |            |   |                |   |            |              |  |   |              |   |  |   |            |  
|Adjusted net income                                             |  | $                                                                      | 3,966      |   |                | $ | 3,123      |              |  | $ | 5,157        |   |  | $ | 4,622      |  
|                                                                |  |                                                                        |            |   |                |   |            |              |  |   |              |   |  |   |            |  
|Weighted average number of common shares outstanding:           |  |                                                                        |            |   |                |   |            |              |  |   |              |   |  |   |            |  
|Basic                                                           |  |                                                                        | 16,047,305 |   |                |   | 16,496,118 |              |  |   | 16,036,620   |   |  |   | 16,481,595 |  
|Diluted                                                         |  |                                                                        | 16,412,363 |   |                |   | 16,813,355 |              |  |   | 16,295,349   |   |  |   | 16,788,850 |  
|                                                                |  |                                                                        |            |  
|Net income per share available to common stockholders  Basic   |  | $                                                                      | 0.40       |   |                | $ | 0.22       |              |  | $ | 0.52         |   |  | $ | 0.25       |  
|Adjustments for:                                                |  |                                                                        |            |   |                |   |            |              |  |   |              |   |  |   |            |  
|Less: Change in tax valuation allowance                         |  | $                                                                      | (0.15      | ) |                | $ |           |              |  | $ | (0.20        | ) |  | $ |           |  
|Add: Adjustment for Series Z modification                       |  | $                                                                      |           |   |                | $ |           |              |  | $ |             |   |  | $ | 0.06       |  
|Add: Amortization of discount on Series Z preferred stock       |  | $                                                                      |           |   |                | $ |           |              |  | $ |             |   |  | $ |           |  
|Less: Accretion of premium on Series Z preferred stock          |  | $                                                                      |           |   |                | $ | (0.03      | )            |  | $ |             |   |  | $ | (0.03      | )
|Adjusted net income per common share  Basic                    |  | $                                                                      | 0.25       |   |                | $ | 0.19       |              |  | $ | 0.32         |   |  | $ | 0.28       |  
|                                                                |  |                                                                        |            |  
|Net income per share available to common stockholders  Diluted |  | $                                                                      | 0.39       |   |                | $ | 0.21       |              |  | $ | 0.51         |   |  | $ | 0.25       |  
|Adjustments for:                                                |  |                                                                        |            |   |                |   |            |              |  |   |              |   |  |   |            |  
|Less: Change in tax valuation allowance                         |  | $                                                                      | (0.15      | ) |                | $ |           |              |  | $ | (0.19        | ) |  | $ |           |  
|Add: Adjustment for Series Z modification                       |  | $                                                                      |           |   |                | $ |           |              |  | $ |             |   |  | $ | 0.06       |  
|Add: Amortization of discount on Series Z preferred stock       |  | $                                                                      |           |   |                | $ |           |              |  | $ |             |   |  | $ |           |  
|Less: Accretion of premium on Series Z preferred stock          |  | $                                                                      |           |   |                | $ | (0.02      | )            |  | $ |             |   |  | $ | (0.03      | )
|Adjusted net income per common share  Diluted                  |  | $                                                                      | 0.24       |   |                | $ | 0.19       |              |  | $ | 0.32         |   |  | $ | 0.28       |  

Financial
Condition, Liquidity and Capital Resources

The restaurant industry is predominantly a cash business where cash is received at the time of
the transaction. We believe we will generate sufficient cash flow and have availability under our revolver to fund operations, capital expenditures, required debt and interest payments and substantial payments to redeem the Series Z. Our investment
in inventory is minimal because our products are perishable. Our accounts payable are on terms that we believe are consistent with those of other companies within the industry.

The primary driver of our operating cash flow is our restaurant operations, specifically the gross margin from our company-owned restaurants. Therefore,
we focus on the elements of those operations including comparable store sales and cash flows to ensure a steady stream of operating profits that enable us to meet our cash obligations.

Our results depend on consumer spending, which is influenced by consumer confidence and disposable income. Accordingly, we believe we experience declines
in comparable store sales during economic downturns or during periods of economic uncertainty. Any material decline in the amount of consumer discretionary spending could have a material adverse effect on our sales and income.



19



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Series Z Preferred Stock

On March 17, 2010, the Company and Halpern Denny amended their previous agreement on the Series Z dated May 28, 2009, to allow the Company to
redeem any amounts at any time through June 30, 2011.

In addition, beginning July 1, 2010, Halpern Denny has an option to exchange
50% of the shares of Series Z and the accrued additional redemption amount on those shares outstanding as of June 30, 2010 into shares of freely tradable common stock at a price of $11.50 per share. The Company must first redeem the shares of
the Series Z that are not subject to the exchange option. To the extent that Halpern Denny has not exercised its exchange option, the Company may redeem the shares that are subject to the exchange option. The remaining provisions of the agreement
between Halpern Denny and the Company remain unchanged.

As of June 30, 2010, the Series Z outstanding shares remaining to be redeemed
was $13.0 million plus accrued additional redemption of $1.0 million. As of July 1, 2010, Halpern Denny has a one year option to exchange up to $7.0 million of the Series Z and accrued additional redemption amount for up to 608,695 shares of
freely tradable common stock.

Working Capital Deficit

Our working capital deficits were $27.8 million and $10.9 million as of December 29, 2009 and June 29, 2010, respectively. Our working
capital deficit position improved in 2010 by $16.9 million due primarily to the reclassification of $10.6 million of Series Z from a liability to temporary equity, and $6.3 million from the generation of $12.4 million in free cash flow, or net cash
provided by operating activities less net cash used in investing activities. We began 2010 with $9.9 million of unrestricted cash and generated $20.6 million in cash from operating activities, received $11.0 million from the draw on our revolver and
another $0.4 million from stock option exercises. We used a portion of this aggregate $41.9 million in cash to invest $8.5 million in property and equipment, to redeem $19.2 million of our Series Z, $9.6 million of which reduced our liability, and
to repay $4.8 million of debt. As of June 29, 2010, we had unrestricted cash of $9.4 million. In addition to changes in unrestricted cash, current maturities of our Series Z and our debt, other elements of working capital fluctuated in the
normal course of business.

Covenants

We are subject to a number of customary covenants under our term loan, including limitations on additional borrowings, acquisitions, and requirements to
maintain certain financial ratios. As of June 29, 2010, we were in compliance with all debt covenants.

Capital
Expenditures

During the year to date period ended June 29, 2010, we used approximately $8.5 million of cash to pay for additional
property and equipment that included the following:



| |  |  | $4.4 million for new restaurants and upgrades of existing restaurants, including the installation of surveillance cameras and kitchen display ordering
systems;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $2.9 million for replacement of equipment at our existing company-owned restaurants and at our manufacturing operations; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | $1.2 million for information technology and corporate infrastructure.
| | - |  | ---------------------------------------------------------------------

The majority of our capital expenditures for fiscal 2010 will be for upgrades in our current restaurants, including the implementation of kitchen display
ordering systems in many of our restaurants, and for the new company-owned restaurants that we intend to open.

Off-Balance Sheet Arrangements

Other than our revolver and letters of credit, we do not have any off-balance sheet arrangements.



20



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Contractual Obligations

For the quarter and year to date 2010, there were no material changes outside the ordinary course of business to our contractual obligations.

Critical Accounting Policies and Estimates

There were no material changes in our critical accounting policies since the filing of our 2009 Form 10-K. As discussed in that filing, the preparation of
the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates.



|Item 3. | Qualitative and Quantitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

There were no material changes in the quantitative and qualitative information about market risk since the end of the most recent fiscal year. For further
information, see Item 7A of our Annual Report on Form 10-K for the year ended December 29, 2009.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of company management, including our chief executive officer and chief
financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of June 29, 2010. Based upon that
evaluation, our chief executive officer and our chief financial officer have concluded that the design and operation of our disclosure controls and procedures were effective in timely making known to them material information relating to the Company
required to be disclosed in reports that we file or submit under the Exchange Act rules.

It should be noted that any system of controls,
however well designed and operated, can provide only reasonable assurance regarding managements control objectives. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Changes in Internal Control over Financial Reporting

During the quarter ended June 29, 2010, there were no changes to our internal control over financial reporting that were identified in connection
with the evaluation of our disclosure controls and procedures required by the Exchange Act rules and that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



21



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PART II - OTHER INFORMATION



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

Information regarding
legal proceedings is incorporated by reference from Note 12 to our Consolidated Financial Statements set forth in Part I of this report.



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

Our business is subject to
a number of risks, including those identified in Item 1A.  Risk Factors of our 2009 Annual Report on Form 10-K, that could have a material effect on our business, results of operations, financial condition and/or liquidity and
that could cause our operating results to vary significantly from period to period. As of June 29, 2010, there have been no material changes to the risks disclosed in our most recent Annual Report on Form 10-K. We may also disclose changes to
such factors or disclose additional factors from time to time in our future filings with the SEC.



|Item 6. | Exhibits
|------- | --------



|     |  |                                                                                                                                                                                                                      
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.1 |  | Emanuel P.N. Hilario Offer of Employment dated May 5, 2010 (1)                                                                                                                                                       
|     | 
|31.1 |  | Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                               
|     | 
|31.2 |  | Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                               
|     | 
|32.1 |  | Certifications by Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002



|(1) | Incorporated by reference from the Companys Current Report on Form 8-K filed on May 10, 2010
|--- | ---------------------------------------------------------------------------------------------



22



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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.



|                     |  |  |  |                                      |  |                            
|-------------------- |  |  |  | ------------------------------------ |  | ---------------------------
|                     |  |  |  | EINSTEIN NOAH RESTAURANT GROUP, INC.
|                     |  |  | 
|Date: August 5, 2010 |  |  |  | By:                                  |  | /S/    JEFFREY J.
ONEILL  
|                     |  |  |  |                                      |  | Jeffrey J. ONeill         
|                     |  |  |  |                                      |  | Chief Executive Officer    
|                     |  |  | 
|Date: August 5, 2010 |  |  |  | By:                                  |  | /S/    EMANUEL P.N.
HILARIO
|                     |  |  |  |                                      |  | Emanuel P.N. Hilario       
|                     |  |  |  |                                      |  | Chief Financial Officer    



23