Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

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

 

**For the quarterly period ended July 1, 2008**

 

**OR**

** **

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

 

**Commission File Number 0-27148**

 

**EinsteinNoah 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)                        | ** ** | (Zip Code)                            |

** **

**(303) 568-8000**

(Registrant’s telephone number, including area code)

** **

 

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

 

 

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

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

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

 

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

 

As of August 1, 2008, there were 15,932,856shares of the registrant’s Common Stock, par value of $0.001 per shareoutstanding.

 

 

 

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**EINSTEIN NOAH RESTAURANT GROUP, INC.**

 

TABLE OF CONTENTS

** **
| **Part I. Financial Information** |
|----------------------------------------|
|                                   |   |   |
| Item 1.                                | Financial Statements (Unaudited): |   |
|                                   |   |   |
|                                   | Consolidated Balance Sheets | 3 |
|                                   |   |   |
|                                   | Consolidated Statements of  Operations | 4 |
|                                   |   |   |
|                                   | Consolidated Statements of  Cash Flows | 5 |
|                                   |   |   |
|                                   | Consolidated Statement of  Changes in Stockholders’ Deficit | 6 |
|                                   |   |   |
|                                   | Notes to the Consolidated  Financial Statements | 7 |
|                                   |   |   |
| Item 2.                                | Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 15 |
|                                   |   |   |
| Item 3.                                | Quantitative  and Qualitative Disclosures about Market Risk | 32 |
|                                   |   |   |
| Item 4.                                | Controls and  Procedures | 33 |
|                                   |   |   |
| **Part II. Other  Information**   |
|                                   |   |   |
| Item 1.                                | Legal Proceedings | 34 |
|                                   |   |   |
| Item 1A.                               | Risk Factors | 34 |
|                                   |   |   |
| Item 4.                                | Submission  of Matters to a Vote of Security Holders | 43 |
|                                   |   |   |
| Item 6.                                | Exhibits | 44 |

 

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PART I. FINANCIAL INFORMATION

Item 1.  FinancialStatements

 

**EINSTEIN NOAH RESTAURANTGROUP, INC.**

**CONSOLIDATED BALANCESHEETS**

**(in thousands, exceptshare information)**

**(Unaudited)**

 
| ** **                                                                                                                                                                    | ** ** | **January 1,** | ** ** | **July 1,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **2008**            | ** ** | **2008**         | ** ** |
| **ASSETS**                                                                                                                                                                    | ** ** | ** **          | ** ** | ** **       | ** ** |
| Current  assets:                                                                                                                                                              |       |                |       |             |       |
| Cash and  cash equivalents                                                                                                                                                    |       | $                   | 9,436      |             | $          | 18,416 |   |
| Restricted  cash                                                                                                                                                              |       | 1,203               |       | 876              |       |
| Franchise  and other receivables, net ofallowance of $606 and $278, respectively                                                                                              |       | 7,807               |       | 6,498            |       |
| Inventories                                                                                                                                                                   |       | 5,313               |       | 4,917            |       |
| Prepaid  expenses and other current assets                                                                                                                                    |       | 5,281               |       | 5,036            |       |
| Total  current assets                                                                                                                                                         |       | 29,040              |       | 35,743           |       |
|                                                                                                                                                                          |       |                |       |             |       |
| Property,  plant and equipment, net                                                                                                                                           |       | 47,714              |       | 52,532           |       |
| Trademarks  and other intangibles, net                                                                                                                                        |       | 63,831              |       | 63,831           |       |
| Goodwill                                                                                                                                                                      |       | 4,981               |       | 4,981            |       |
| Debt  issuance costs and other assets, net                                                                                                                                    |       | 2,996               |       | 2,881            |       |
|                                                                                                                                                                          |       |                |       |             |       |
| Total  assets                                                                                                                                                                 |       | $                   | 148,562    |             | $          | 159,968 |   |
|                                                                                                                                                                          |       |                |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                                                | ** ** | ** **          | ** ** | ** **       | ** ** |
| Current  liabilities:                                                                                                                                                         |       |                |       |             |       |
| Accounts  payable                                                                                                                                                             |       | $                   | 5,072      |             | $          | 5,472 |   |
| Accrued  expenses and other current liabilities                                                                                                                               |       | 19,279              |       | 19,795           |       |
| Short-term  debt and current portion of long-term debt                                                                                                                        |       | 955                 |       | 1,180            |       |
| Current  portion of obligations under capital leases                                                                                                                          |       | 80                  |       | 79               |       |
| Mandatorily  redeemable, Series Z Preferred Stock, $.001 par value, $1,000 per share  liquidation value; 57,000 shares authorized; 57,000 shares issued and  outstanding |       | —              |       | 57,000           |       |
|                                                                                                                                                                          |       |                |       |             |       |
| Total  current liabilities                                                                                                                                                    |       | 25,386              |       | 83,526           |       |
|                                                                                                                                                                          |       |                |       |             |       |
| Senior  notes and other long-term debt                                                                                                                                        |       | 88,875              |       | 87,200           |       |
| Long-term  obligations under capital leases                                                                                                                                   |       | 67                  |       | 29               |       |
| Other  liabilities                                                                                                                                                            |       | 10,841              |       | 11,034           |       |
| Mandatorily  redeemable, Series Z Preferred Stock, $.001 par value, $1,000 per share  liquidation value; 57,000 shares authorized; 57,000 shares issued and  outstanding |       | 57,000              |       | —           |       |
|                                                                                                                                                                          |       |                |       |             |       |
| Total  liabilities                                                                                                                                                            |       | 182,169             |       | 181,789          |       |
|                                                                                                                                                                          |       |                |       |             |       |
| Commitments  and contingencies                                                                                                                                                |       |                |       |             |       |
|                                                                                                                                                                          |       |                |       |             |       |
| Stockholders’  deficit:                                                                                                                                                  |       |                |       |             |       |
| Series A  junior participating preferred stock, 700,000 shares authorized; no shares  issued and outstanding                                                             |       |                |       |             |       |
| Common  stock, $.001 par value; 25,000,000 shares authorized; 15,878,811 and  15,932,856 shares issued and outstanding                                                        |       | 16                  |       | 16               |       |
| Additional  paid-in capital                                                                                                                                                   |       | 262,830             |       | 263,860          |       |
| Accumulated  deficit                                                                                                                                                          |       | (296,453            | )          | (285,697         | )          |
|                                                                                                                                                                          |       |                |       |             |       |
| Total  stockholders’ deficit                                                                                                                                             |       | (33,607             | )          | (21,821          | )          |
|                                                                                                                                                                          |       |                |       |             |       |
| Total  liabilities and stockholders’ deficit                                                                                                                             |       | $                   | 148,562    |             | $          | 159,968 |   |

 

The accompanying notes are an integral part of these consolidated financialstatements.

 

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**EINSTEINNOAH RESTAURANT GROUP, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands, except earnings per share and related share information)**

**(unaudited)**

 
| ** **                                                       | ** ** | **13 weeks ended** | ** ** | **26 weeks ended** | ** ** |
|------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                       | ** ** | **July 3,**   | ** ** | **July 1,**   | ** ** | **July 3,** | ** ** | **July 1,** | ** ** |
| ** **                                                       | ** ** | **2007**           | ** ** | **2008**           | ** ** | **2007** | ** ** | **2008** | ** ** |
| Revenues:                                                        |       |               |       |               |       |   |   |   |   |
| Company-owned  restaurant sales                                  |       | $                  | 94,141     |               | $          | 96,321 |   | $ | 183,256 |   | $ | 189,931 |   |
| Manufacturing  and commissary revenues                           |       | 5,682              |       | 7,640              |       | 11,500 |   | 15,728 |   |
| Franchise  and license related revenues                          |       | 1,232              |       | 1,453              |       | 2,554 |   | 3,019 |   |
|                                                             |       |               |       |               |       |   |   |   |   |
| Total  revenues                                                  |       | 101,055            |       | 105,414            |       | 197,310 |   | 208,678 |   |
|                                                             |       |               |       |               |       |   |   |   |   |
| Cost of  sales:                                                  |       |               |       |               |       |   |   |   |   |
| Company-owned  restaurant costs                                  |       | 75,257             |       | 76,648             |       | 146,589 |   | 152,473 |   |
| Manufacturing  and commissary costs                              |       | 5,380              |       | 7,224              |       | 10,802 |   | 15,084 |   |
|                                                             |       |               |       |               |       |   |   |   |   |
| Total  cost of sales                                             |       | 80,637             |       | 83,872             |       | 157,391 |   | 167,557 |   |
|                                                             |       |               |       |               |       |   |   |   |   |
| Gross  profit                                                    |       | 20,418             |       | 21,542             |       | 39,919 |   | 41,121 |   |
|                                                             |       |               |       |               |       |   |   |   |   |
| Operating  expenses:                                             |       |               |       |               |       |   |   |   |   |
| General  and administrative expenses                             |       | 10,855             |       | 9,540              |       | 21,587 |   | 20,283 |   |
| Depreciation  and amortization                                   |       | 2,623              |       | 3,345              |       | 5,042 |   | 6,549 |   |
| Loss on  sale, disposal or abandonmentof assets, net             |       | 31                 |       | 63                 |       | 405 |   | 132 |   |
| Impairment  charges and other related costs                      |       | 166                |       | 54                 |       | 185 |   | 54 |   |
|                                                             |       |               |       |               |       |   |   |   |   |
| Income  from operations                                          |       | 6,743              |       | 8,540              |       | 12,700 |   | 14,103 |   |
| Other  expense:                                                  |       |               |       |               |       |   |   |   |   |
| Interest  expense, net                                           |       | 4,144              |       | 1,328              |       | 8,933 |   | 2,907 |   |
| Write-off  of debt discount upon redemption ofsenior notes       |       | 528                |       | —             |       | 528 |   | — |   |
| Prepayment  penalty upon redemption of senior notes              |       | 240                |       | —             |       | 240 |   | — |   |
| Write-off  of debt issuance costs upon redemptionof senior notes |       | 2,071              |       | —             |       | 2,071 |   | — |   |
|                                                             |       |               |       |               |       |   |   |   |   |
| Income  (loss) before income taxes                               |       | (240               | )          | 7,212              |       | 928 |   | 11,196 |   |
|                                                             |       |               |       |               |       |   |   |   |   |
| Provision  for income taxes                                      |       | 10                 |       | 298                |       | 47 |   | 440 |   |
|                                                             |       |               |       |               |       |   |   |   |   |
| Net  income (loss)                                               |       | $                  | (250       | )                  | $          | 6,914 |   | $ | 881 |   | $ | 10,756 |   |
|                                                             |       |               |       |               |       |   |   |   |   |
| Net  income (loss) per common share — Basic                 |       | $                  | (0.02      | )                  | $          | 0.43 |   | $ | 0.08 |   | $ | 0.68 |   |
| Net  income (loss) per common share — Diluted               |       | $                  | (0.02      | )                  | $          | 0.42 |   | $ | 0.07 |   | $ | 0.65 |   |
|                                                             |       |               |       |               |       |   |   |   |   |
| Weighted  average number of common shares outstanding:           |       |               |       |               |       |   |   |   |   |
| Basic                                                            |       | 11,775,597         |       | 15,925,876         |       | 11,190,612 |   | 15,908,377 |   |
| Diluted                                                          |       | 11,775,597         |       | 16,398,822         |       | 11,874,874 |   | 16,431,921 |   |

 

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

 

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**EINSTEINNOAH RESTAURANT GROUP, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **26 weeks ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                         | ** ** | **July 3,**   | ** ** | **July 1,** | ** ** |
| ** **                                                                         | ** ** | **2007**           | ** ** | **2008** | ** ** |
| OPERATING  ACTIVITIES:                                                             |       |               |       |   |   |
| Net  income                                                                        |       | $                  | 881        |   | $ | 10,756 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |               |       |   |   |
| Depreciation  and amortization                                                     |       | 5,042              |       | 6,549 |   |
| Stock  based compensation expense                                                  |       | 1,250              |       | 810 |   |
| Loss, net  of gains, on disposal of assets                                         |       | 405                |       | 132 |   |
| Impairment  charges and other related costs                                        |       | 185                |       | 54 |   |
| Provision  for losses on accounts receivable                                       |       | 25                 |       | 81 |   |
| Amortization  of debt issuance and debt discount costs                             |       | 392                |       | 241 |   |
| Write-off  of debt issuance costs                                                  |       | 2,071              |       | — |   |
| Write-off  of debt discount                                                        |       | 528                |       | — |   |
| Paid-in-kind  interest                                                             |       | 904                |       | — |   |
| Changes  in operating assets and liabilities:                                      |       |               |       |   |   |
| Restricted  cash                                                                   |       | 694                |       | 327 |   |
| Franchise  and other receivables                                                   |       | 358                |       | 1,228 |   |
| Accounts  payable and accrued expenses                                             |       | (1,225             | )          | 2,027 |   |
| Other  assets and liabilities                                                      |       | (3,194             | )          | 522 |   |
|                                                                               |       |               |       |   |   |
| Net cash  provided by operating activities                                         |       | 8,316              |       | 22,727 |   |
|                                                                               |       |               |       |   |   |
| INVESTING  ACTIVITIES:                                                             |       |               |       |   |   |
| Purchase  of property and equipment                                                |       | (12,404            | )          | (12,475 | ) |
| Proceeds  from the sale of equipment                                               |       | 1,164              |       | 4 |   |
| Acquisition  of restaurant assets                                                  |       | —             |       | (7 | ) |
|                                                                               |       |               |       |   |   |
| Net cash  used in investing activities                                             |       | (11,240            | )          | (12,478 | ) |
|                                                                               |       |               |       |   |   |
| FINANCING  ACTIVITIES:                                                             |       |               |       |   |   |
| Proceeds  from secondary common stock offering                                     |       | 90,000             |       | — |   |
| Costs  incurred with offering of our common stock                                  |       | (6,417             | )          | — |   |
| Payments  under capital lease obligations                                          |       | (39                | )          | (39 | ) |
| Borrowings  under First Lien Term Loan                                             |       | 11,900             |       | — |   |
| Repayments  under First Lien Term Loan                                             |       | (475               | )          | (1,450 | ) |
| Repayments  under Second Lien Term Loan                                            |       | (65,000            | )          | — |   |
| Repayments  under Subordinated Note                                                |       | (25,000            | )          | — |   |
| Debt  issuance costs                                                               |       | (842               | )          | — |   |
| Proceeds  upon stock option exercises                                              |       | 430                |       | 220 |   |
|                                                                               |       |               |       |   |   |
| Net cash  provided by (used in) financing activities                               |       | 4,557              |       | (1,269 | ) |
|                                                                               |       |               |       |   |   |
| Net  increase in cash and cash equivalents                                         |       | 1,633              |       | 8,980 |   |
| Cash and  cash equivalents, beginning of period                                    |       | 5,477              |       | 9,436 |   |
| Cash and  cash equivalents, end of period                                          |       | $                  | 7,110      |   | $ | 18,416 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**EINSTEINNOAH RESTAURANT GROUP, INC.**

**CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT**

(in thousands,except share information)

(Unaudited)

 
| ** **                                                 | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|-----------------|------------|------------|------------|
| ** **                                                 | ** ** | **Common Stock** | ** ** | **Paid In** | ** ** | **Deficit**    | ** ** | ** **      | ** ** |
| ** **                                                 | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Amount**      | ** ** | **Total**  | ** ** |
|                                                       |       |             |       |        |       |           |       |            |       |       |       |
| Balance,  January 1, 2008                             |       | 15,878,811       |       | $           | 16         |           | $          | 262,830         |       | $          | (296,453   | ) | $ | (33,607 | ) |
| Net  income                                                |       | —           |       | —      |       | —         |       | 10,756          |       | 10,756     |       |
| Common  stock issued uponstock option exercise             |       | 54,020           |       | —      |       | 220            |       | —          |       | 220        |       |
| Common  stock issued uponstock appreciation right exercise |       | 25               |       | —      |       | —         |       | —          |       | —     |       |
| Stock  based compensationexpense                           |       | —           |       | —      |       | 810            |       | —          |       | 810        |       |
|                                                       |       |             |       |        |       |           |       |            |       |       |       |
| Balance,  July 1, 2008                                |       | 15,932,856       |       | $           | 16         |           | $          | 263,860         |       | $          | (285,697   | ) | $ | (21,821 | ) |

 

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

 

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**EINSTEIN NOAH RESTAURANT GROUP,INC.**

Notesto the Consolidated Financial Statements (Unaudited)

 

**1.****             ****Basisof Presentation**

 

The consolidated financial statements ofEinstein Noah Restaurant Group, Inc. and its wholly-owned subsidiaries(collectively, the “Company”) have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”). As of July 1,2008, the Company owned, franchised or licensed various restaurant conceptsunder the brand names of Einstein Bros. Bagels (“Einstein Bros.”), Noah’s NewYork Bagels (“Noah’s”), Manhattan Bagel Company (“Manhattan Bagel”), and NewWorld Coffee (“New World”). Our business is subject to seasonal trends.Generally, our revenues and results of operations in the fourth fiscal quartertend to be the most significant.

 

Theconsolidated financial statements asof July 1, 2008 and for the thirteen and twenty-six weeks ended July 3,2007 and July 1, 2008 have been prepared without audit. The balancesheet information as of January 1, 2008 has been derived from our auditedconsolidated financial statements. The information furnished herein reflectsall adjustments (consisting only of normal recurring accruals and adjustments),which are, in our opinion, necessary to fairly state the interim operatingresults for the respective periods.  However, these operating results arenot necessarily indicative of the results expected for the full fiscal year.

 

Certaininformation and footnote disclosures normally included in annual financialstatements prepared in accordance with generally accepted accounting principlesin the United States have been omitted pursuant to Security Exchange Commission(“SEC”) rules and regulations. The notes to the consolidated financialstatements (unaudited) should be read in conjunction with the notes to theconsolidated financial statements contained in our annual report on Form 10-Kfor the fiscal year ended January 1, 2008. We believe that the disclosuresare sufficient for interim financial reporting purposes.

 

**2.****             ****Recent Accounting Pronouncements**

 

Effective January 1, 2008, theCompany adopted Financial Accounting Standards Board (“FASB”) Statement ofFinancial Accounting Standards (“SFAS”) No. 157, *Fair Value Measurements,* (“SFAS 157”).SFAS 157 defines fair value, establishes a framework for using fair value tomeasure assets and liabilities, and expands disclosure about fair valuemeasurements. SFAS 157 applies whenever other statements require or permitassets or liabilities to be measured at fair value. The adoption of SFAS 157did not have an impact on the Company’s consolidated financial statements.

 

We adopted SFAS No. 159, *The Fair Value Option for Financial Assets and FinancialLiabilities-Including an Amendment of FASB Statement No. 115* (“SFASNo. 159”) on January 2, 2008, which became effective for fiscalperiods beginning after November 15, 2007. This standard permits entitiesto choose to measure many financial instruments and certain other items at fairvalue. While SFAS No. 159 became effective for our 2008 fiscal year, wedid not elect the fair value measurement option for any of our financial assetsor liabilities.

 

In December 2007, the FASBissued SFAS 141 (revised 2007), *Business Combinations*,(“SFAS 141R”). SFAS 141R establishes principles and requirements forhow an acquirer recognizes and measures in its financial statements theidentifiable assets acquired, including goodwill, the liabilities assumed andany non-controlling interest in the acquiree. The Statement also establishesdisclosure requirements to enable users of the financial statements to evaluatethe nature and financial effects of the business combination. SFAS 141R iseffective for business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008. The impact of adopting SFAS 141R will be dependent on the futurebusiness combinations that the Company may pursue after its effective date.

 

In December 2007, the SECissued Staff Accounting Bulletin (“SAB”) 110 *Share-BasedPayment*(“SAB 110”)*.* SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14, *Share-Based Payment,* of the StaffAccounting Bulletin series. Question 6 of Section D.2 of Topic 14expresses the views of the staff regarding the use of the “simplified” methodin developing an estimate of the expected term of “plain vanilla” share optionsand allows usage of the “simplified” method for share option grants prior to December 31,2007. SAB 110 allows public companies which do not have historically sufficientexperience to provide a reasonable estimate to continue

 

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use ofthe “simplified” method for estimating the expected term of “plain vanilla”share option grants after December 31, 2007. SAB 110 is effective January 1,2008. We currently use the “simplified” method to estimate the expected termfor share option grants as we do not have enough historical experience toprovide a reasonable estimate. We will continue to use the “simplified” methoduntil we have enough historical experience to provide a reasonable estimate ofexpected term in accordance with SAB 110.

 

In March 2008,the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASBStatement No. 133*(“SFAS 161”).  This statement changesthe disclosure requirements for derivative instruments and hedgingactivities.  SFAS 161 requires enhanced disclosures about (a) howand why an entity uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for under SFAS 133 andits related interpretations, and (c) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance, and cash flows.  SFAS 161 is effective as of thebeginning of our 2009 fiscal year. We are currently evaluating the potentialimpact, if any, of the adoption of SFAS 161 on our consolidated financialstatements.

 

In April 2008,the FASB issued FASB Staff Position No. FAS 142-3, *Determination of the Useful Life of Intangible Assets*(“FSP 142-3”).  FSP 142-3 amends the factors that should be considered indeveloping renewal or extension assumptions that are used to determine theuseful life of a recognized intangible asset under FASB Statement No. 142,Goodwill and Other Intangible Assets and requires enhanced related disclosures. FSP 142-3 must be applied prospectively to all intangible assets acquired as ofand subsequent to fiscal years beginning after December 15, 2008.  Weare currently evaluating the impact that FSP 142-3 will have on ourconsolidated financial statements.

 

We have considered all otherrecently issued accounting pronouncements and do not believe the adoption ofsuch pronouncements would have a material impact on our consolidated financialstatements.

 

**3.****             ****Stock Based Compensation**

 

Ourstock-based compensation cost for the thirteen weeks ended July 3, 2007and July 1, 2008 was $919,000 and $303,000, respectively, and for thetwenty-six weeks ended July 3, 2007 and July 1, 2008 was $1,250,000and $810,000, respectively.  These costsare included in general and administrative expenses in our statements ofoperations. The fair value of stock options and stock appreciation rights (“SARs”)are estimated using the Black-Scholes option-pricing model with the followingweighted average assumptions:

 
| ** **                                            | ** ** | **13 weeks ended** | ** ** | **26 weeks ended** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                            | ** ** | **July 3,**   | ** ** | **July 1,**   | ** ** | **July 3,** | ** ** | **July 1,** | ** ** |
| ** **                                            | ** ** | **2007**           | ** ** | **2008**           | ** ** | **2007** | ** ** | **2008** | ** ** |
| Expected  life of options and SARs from date of grant |       | 4.0 years          |       | 3.25 - 6.0 years   |       | 4.0 years |   | 3.25 - 6.0 years |   |
| Risk-free  interest rate                              |       | 4.60 - 5.02%       |       | 2.92%              |       | 4.60 - 5.02% |   | 2.49 - 2.92% |   |
| Volatility                                            |       | 28% - 97%          |       | 31.0%              |       | 28% - 97% |   | 31.0% |   |
| Assumed  dividend yield                               |       | 0.0%               |       | 0.0%               |       | 0.0% |   | 0.0% |   |

 

Theexpected term of options is based upon evaluations of historical and expectedfuture exercise behavior. The risk-free interest rate is based on the U.S.Treasury rates at the date of grant with maturity dates approximately equal tothe expected life at the grant date. Implied volatility is based on the meanreverting average of our stock’s historical volatility and that of an industrypeer group. The use of mean reversion is supported by evidence of a correlationbetween stock price volatility and a company’s leverage combined with theeffects mandatory principal payments will have on our capital structure, asdefined under our debt facility. We have not historically paid any dividendsand are currently precluded from doing so under our debt covenants.

 

Asof July 1, 2008, we had approximately $1.5 million of total unrecognizedcompensation cost related to non-vested awards granted under our stock optionand stock appreciation rights plans, which we expect to recognize over aweighted average period of 1.95 years. Total compensation costs related to thenon-vested awards outstanding as of July 1, 2008 will be fully recognizedby the first quarter of fiscal 2011, which represents the end of the requisiteservice period.

 

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**Stock Option Plan Activity**

 

Transactionsduring the twenty-six weeks ended July 1, 2008 were as follows:

 
| ** **                                 | ** ** | ** **  | ** ** | **Weighted** | ** ** | **Weighted** | ** ** | ** **    | ** ** | **Weighted**     | ** ** |
|--------------------------------------------|------------|-------------|------------|--------------|------------|--------------|------------|---------------|------------|------------------|------------|
| ** **                                 | ** ** | **Number**  | ** ** | **Average**  | ** ** | **Average**  | ** ** | **Aggregate** | ** ** | **Average**      | ** ** |
| ** **                                 | ** ** | **of**      | ** ** | **Exercise** | ** ** | **Fair**     | ** ** | **Intrinsic** | ** ** | **Remaining**    | ** ** |
| ** **                                 | ** ** | **Options** | ** ** | **Price**    | ** ** | **Value**    | ** ** | **Value**     | ** ** | **Life (Years)** | ** ** |
| Outstanding,  January 1, 2008         |       | 1,108,361   |       | $            | 8.06       |         |       |          |       |             |       |   |
| Granted                                    |       | 116,738     |       | 15.61        |       |         |       |          |       |             |       |
| Exercised                                  |       | (54,020     | )          | 4.09         |       |         |       |          |       |             |       |
| Forfeited                                  |       | —      |       | —       |       |         |       |          |       |             |       |
| Outstanding,  July 1, 2008            |       | 1,171,079   |       | $            | 9.00       |         | $          | 4.09          |       | $                | 4,552,983  |   | 7.13 |   |
| Exercisable  and vested, July 1, 2008 |       | 718,972     |       | $            | 5.85       |         | $          | 3.41          |       | $                | 4,007,300  |   | 5.98 |   |

 

 
|                                     |   | ** **  |   | **Weighted**   |   |   |   |   |   |   |   |
|------------------------------------------|--------|-------------|--------|----------------|--------|--------|--------|--------|--------|--------|--------|
|                                     |   | **Number**  |   | **Average**    |   |   |   |   |   |   |   |
|                                     |   | **of**      |   | **Grant Date** |   |   |   |   |   |   |   |
|                                     |   | **Options** |   | **Fair Value** |   |   |   |   |   |   |   |
| Non-vested  shares, January 1, 2008 |   | 470,368     |   | $              | 4.80   |   |   |   |   |   |   |   |
| Granted                                  |   | 116,738     |   | 5.46           |   |   |   |   |   |   |   |
| Vested                                   |   | (134,999    | )      | 4.16           |   |   |   |   |   |   |   |
| Forfeited                                |   | —      |   | —         |   |   |   |   |   |   |   |
| Non-vested  shares, July 1, 2008    |   | 452,107     |   | $              | 5.16   |   |   |   |   |   |   |   |

 

 

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**Stock Appreciation Rights Plan Activity**

 

Transactions during thetwenty-six weeks ended July 1, 2008 were as follows:

 
| ** **                                 | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Weighted** | ** ** | ** **    | ** ** | **Weighted**     | ** ** |
|--------------------------------------------|------------|------------|------------|--------------|------------|--------------|------------|---------------|------------|------------------|------------|
| ** **                                 | ** ** | **Number** | ** ** | **Average**  | ** ** | **Average**  | ** ** | **Aggregate** | ** ** | **Average**      | ** ** |
| ** **                                 | ** ** | **of**     | ** ** | **Exercise** | ** ** | **Fair**     | ** ** | **Intrinsic** | ** ** | **Remaining**    | ** ** |
| ** **                                 | ** ** | **SARs**   | ** ** | **Price**    | ** ** | **Value**    | ** ** | **Value**     | ** ** | **Life (Years)** | ** ** |
| Outstanding,  January 1, 2008         |       | 76,913     |       | $            | 11.69      |         |       |          |       |             |       |   |
| Granted                                    |       | 5,002      |       | 14.32        |       |         |       |          |       |             |       |
| Exercised                                  |       | (75        | )          | 8.00         |       |         |       |          |       |             |       |
| Forfeited                                  |       | (11,487    | )          | 11.46        |       |         |       |          |       |             |       |
| Outstanding,  July 1, 2008            |       | 70,353     |       | $            | 11.92      |         | $          | 5.45          |       | $                | 113,685    |   | 3.83 |   |
| Exercisable  and vested, July 1, 2008 |       | 21,200     |       | $            | 11.42      |         | $          | 5.55          |       | $                | 37,763     |   | 3.75 |   |

 

 
|                                     |   | ** ** |   | **Weighted**   |   |   |   |   |   |   |   |
|------------------------------------------|--------|------------|--------|----------------|--------|--------|--------|--------|--------|--------|--------|
|                                     |   | **Number** |   | **Average**    |   |   |   |   |   |   |   |
|                                     |   | **of**     |   | **Grant Date** |   |   |   |   |   |   |   |
|                                     |   | **SARs**   |   | **Fair Value** |   |   |   |   |   |   |   |
| Non-vested  shares, January 1, 2008 |   | 76,913     |   | $              | 5.60   |   |   |   |   |   |   |   |
| Granted                                  |   | 5,002      |   | 3.59           |   |   |   |   |   |   |   |
| Vested                                   |   | (24,212    | )      | 5.55           |   |   |   |   |   |   |   |
| Forfeited                                |   | (8,550     | )      | 5.54           |   |   |   |   |   |   |   |
| Non-vested  shares, July 1, 2008    |   | 49,153     |   | $              | 5.40   |   |   |   |   |   |   |   |

 

**4.****             ****Supplemental Cash Flow Information**

 
| ** **                                                          | ** ** | **26 weeks ended** | ** ** |
|---------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                          | ** ** | **July 3,**   | ** ** | **July 1,** | ** ** |
| ** **                                                          | ** ** | **2007**           | ** ** | **2008** | ** ** |
| ** **                                                          | ** ** | **(in thousands)** | ** ** |
| Cash paid  during the year to date period ended:                    |       |               |       |   |   |
| Interest  related to:                                               |       |               |       |   |   |
| Term  Loans                                                         |       | $                  | 8,185      |   | $ | 2,858 |   |
| $25  Million Subordinated Note                                      |       | 825                |       | — |   |
| Other                                                               |       | 172                |       | 140 |   |
|                                                                |       |               |       |   |   |
| Prepayment  penalty upon redemption of debt                         |       | $                  | 240        |   | $ | — |   |
|                                                                |       |               |       |   |   |
| Income  taxes                                                       |       | $                  | 222        |   | $ | 575 |   |
|                                                                |       |               |       |   |   |
| Non-cash  investing activities:                                     |       |               |       |   |   |
| Change in  accrued expenses for purchases of property and equipment |       | $                  | 2,076      |   | $ | (918 | ) |

 

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**5.****             ****Inventories**

 

Inventories, which consist of food, beverage, paper supplies and bagelingredients, are stated at the lower of cost or market, with cost beingdetermined by the first-in, first-out method. Inventories consist of thefollowing:

 
| ** **         | ** ** | **January 1,**           | ** ** | **July 1,** | ** ** |
|--------------------|------------|-------------------------------|------------|------------------|------------|
| ** **         | ** ** | **2008**                      | ** ** | **2008**         | ** ** |
| ** **         | ** ** | **(in thousands of dollars)** | ** ** |
| Finished  goods    |       | $                             | 4,056      |             | $          | 3,825 |   |
| Raw  materials     |       | 1,257                         |       | 1,092            |       |
| Total  inventories |       | $                             | 5,313      |             | $          | 4,917 |   |

 

**6.****             ****Goodwill, Trademarks and Other Intangibles**

 

Intangible assets include both goodwilland identifiable intangibles arising from the allocation of the purchase pricesof assets acquired. Goodwill represents the excess of cost over fair value ofnet assets acquired in the acquisition of Manhattan Bagel. As of July 1,2008, intangible assets of $63.8 million were not subject to amortization andconsisted primarily of the Einstein Bros., Noah’s and Manhattan Bageltrademarks.

 

Weperformed an impairment analysis of the goodwill and indefinite-livedintangible assets related to our Einstein Bros., Noah’s and Manhattan Bagelbrands as of January 1, 2008 as to which there was no indication ofimpairment.  Duringthe thirteen and twenty-six weeks ended July 3, 2007 and July 1,2008, respectively there were no events or changes in circumstances thatindicated that our goodwill or intangible assets might be impaired or may notbe recoverable.

 

**7.****             ****Senior Notes and Other Long-Term Debt**

 

Senior notes and other long-term debtconsist of the following:

 
| ** **                                                  | ** ** | **January 1,**           | ** ** | **July 1,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------|------------|------------------|------------|
| ** **                                                  | ** ** | **2008**                      | ** ** | **2008**         | ** ** |
| ** **                                                  | ** ** | **(in thousands of dollars)** | ** ** |
| $90  Million First Lien Term Loan                           |       | $                             | 89,550     |             | $          | 88,100 |   |
| New  Jersey Economic Development Authority Note Payable     |       | 280                           |       | 280              |       |
| Total  senior notes and other debt                          |       | $                             | 89,830     |             | $          | 88,380 |   |
| Less  short-term debt and current portion of long-term debt |       | 955                           |       | 1,180            |       |
| Senior  notes and other long-term debt                      |       | $                             | 88,875     |             | $          | 87,200 |   |

 

*FirstLien Term Loan and Revolving Facility*

 

Our debt is composed of a modified termloan with a principal amount of $90 million and a $20 million revolving creditfacility. We may prepay amounts outstanding under the senior secured creditfacility and may terminate commitments in whole at any time without penalty orpremium upon prior written notice. Borrowings under this senior secured credit facility bear interest at arate equal to an applicable margin plus, at our option, either a variable baserate or a Eurodollar rate. As of July 1, 2008 the weighted averageinterest rate under the $90 million First Lien Term Loan (“First Lien Term Loan”)was 5.07%. The revolving facility and the First Lien Term Loan contain usualand customary covenants including consolidated leverage ratios, fixed chargecoverage ratios, limitations on capital expenditures, etc. As of January 1,2008 and July 1, 2008 we were in compliance with all our financial andoperating covenants.

 

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The revolving credit facility remainsavailable, subject to certain conditions, to finance our ongoing workingcapital, capital expenditure and general corporate needs.  In addition, all of the revolving creditfacility is available for letters of credit. As of July 1, 2008, we had$7.0 million in letters of credit outstanding under this facility. The lettersof credit expire on various dates during 2008 and 2009, are automaticallyrenewable for one additional year and are payable upon demand in the event thatwe fail to pay the underlying obligation. Our availability under the revolving facilitywas $13.0 million at July 1, 2008.

 

For the revolving facility, thecapitalized debt issuance costs are being amortized on a straight-line basiswhile the capitalized debt issuance costs for the First Lien Term Loan arebeing amortized on the effective interest rate method. As of July 1, 2008,approximately $0.4 million and $1.9 million in debt issuance costs have beencapitalized for the revolving facility and the First Lien Term Loan,respectively, net of amortization.

 

OnMay 7, 2008, we entered into an interest rate swap agreement relating toour $90 million First Lien Term Loan for the next two years, effective startingin August 2008.  The Company is required to make payments basedon a fixed interest rate of 3.52% calculated on an initial notional amount of$60 million. In exchange the Company will receive interest on a $60 million ofnotional amount at a variable rate. The variable rate interest the Company willreceive is based on the 1-month London InterBank Offered Rate (“LIBOR”).  The net effect of the swap is to fix theinterest rate on $60 million of our First Lien Term Loan at 3.52% plus anapplicable margin.

 

TheCompany’s interest rate swap agreement qualifies as a cash flow hedge, as defined by SFAS133, *Accounting for Derivative Instruments and HedgingActivities*.  The fair value of the interest rate swap agreement, which will be adjustedregularly, will be recorded in the Company’s balance sheet as an asset orliability, as necessary, with a corresponding adjustment to other comprehensiveincome within equity.

 

**8.****             ****Net Income Per Common Share**

 

Inaccordance with SFAS No. 128, *Earnings per Share*,we compute basic net income per common share by dividing the net income for theperiod by the weighted average number of shares of common stock outstandingduring the period. Diluted net income per share is computed by dividing the netincome for the period by the weighted average number of shares of common stockand potential common stock equivalents outstanding during the period using thetreasury stock method. Potential common stock equivalents include incrementalshares of common stock issuable upon the exercise of stock options andwarrants. Potential common stock equivalents are excluded from the computationof diluted net income per share when their effect is anti-dilutive.

 

Thefollowing table sets forth the computation of basic and diluted earnings pershare:

 
| ** **                                       | ** ** | **13 weeks ended**                                                           | ** ** | **26 weeks ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                       | ** ** | **July 3,**                                                             | ** ** | **July 1,**   | ** ** | **July 3,** | ** ** | **July 1,** | ** ** |
| ** **                                       | ** ** | **2007**                                                                     | ** ** | **2008**           | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **(in thousands, except earnings per share and related share  information)** | ** ** |
| Net  income (loss) (a)                           |       | $                                                                            | (250       | )                  | $          | 6,914 |   | $ | 881 |   | $ | 10,756 |   |
|                                             |       |                                                                         |       |               |       |   |   |   |   |
| Basic  weighted average shares outstanding (b)   |       | 11,775,597                                                                   |       | 15,925,876         |       | 11,190,612 |   | 15,908,377 |   |
| Dilutive  effect of stock options and SARs       |       | —                                                                       |       | 472,946            |       | 684,262 |   | 523,544 |   |
| Diluted  weighted average shares outstanding (c) |       | 11,775,597                                                                   |       | 16,398,822         |       | 11,874,874 |   | 16,431,921 |   |
| Basic  earnings per share (a)/(b)                |       | $                                                                            | (0.02      | )                  | $          | 0.43 |   | $ | 0.08 |   | $ | 0.68 |   |
| Diluted  earnings per share (a)/(c)              |       | $                                                                            | (0.02      | )                  | $          | 0.42 |   | $ | 0.07 |   | $ | 0.65 |   |
|                                             |       |                                                                         |       |               |       |   |   |   |   |
| Antidilutive  stock options, SARs and warrants   |       | 1,380,509                                                                    |       | 410,224            |       | 188,364 |   | 410,224 |   |

 

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**9.****             ****Income Taxes**

 

Utilizationof our fully reserved net operating loss (“NOL”) carryforwards reduced ourfederal and state income tax liability incurred in 2008. We have recorded aprovision for income taxes related to our estimate of income taxes due on taxableearnings for the thirteen weeks ended July 3, 2007 and July 1, 2008of $10,000 and $298,000, respectively, and for the twenty-six weeks ended July 3,2007 and July 1, 2008 of $47,000 and $440,000, respectively.

 

Asof July 1, 2008, NOL carryforwards of $138.3 million were available to beutilized against future taxable income for years through fiscal 2026, subjectin part to annual limitations. As a result of prior ownership changes,approximately $91.7 million of our NOL carryforwards are subject to an annualusage limitation of $4.7 million.  Ourability to utilize our NOL carryforwards, including those that are notcurrently subject to limitation, could be limited or further limited in theevent that we undergo an “ownership change” as that term is defined forpurposes of Section 382 of the Internal Revenue Code.  We are in the process of filing a requestwith the Internal Revenue Service to review our methodology for determiningownership changes in accordance with Internal Revenue Code Section 382.Upon acceptance of our request, we believe that our NOL carryforwards will beavailable for utilization. In the event that our request is not accepted,approximately $17.9 million of NOL carryforwards will be at risk to expireprior to utilization.

 

OurNOL carryforwards are included in our deferred income tax assets and have beenfully reserved.  Additionally, wemaintain a full valuation allowance against our total net deferred tax assets.  In accordance with SFAS No. 109, *Accounting for Income Taxes*, (“SFAS No. 109”)we assess the continuing need for a valuation allowance that results fromuncertainty regarding our ability to realize the benefits of our deferred taxassets.

 

Ifwe conclude that our prospects for the realization of our deferred tax assetsare more likely than not, we will then reduce our valuation allowance asappropriate and credit income tax expense after considering the followingfactors:

 

·                  The level of historical taxable income andprojections for future taxable income over periods in which the deferred taxassets would be deductible, and

 

·                  Accumulation of income (loss) before taxesutilizing a look-back period of three years.

 

Wewill continue to review various qualitative and quantitative data in regards tothe realization of our deferred tax assets, including:

 

·                  Events within the restaurant industry,

·                  The cyclical nature of our business,

·                  The health of the economy,

·                  Our future forecasts of taxable income and

·                  Historical trending.

 

Weare subject to income taxes in the U.S. federal jurisdiction, and variousstates and local jurisdictions. Tax regulations within each jurisdiction aresubject to the interpretation of the related tax laws and regulations andrequire significant judgment to apply. We remain subject to examination by U.S.federal, state and local tax authorities for tax years 2004 through 2007. Witha few exceptions, we are no longer subject to U.S. federal, state or localexaminations by tax authorities for the tax year 2003 and prior.

 

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**10.****      ****Commitments and Contingencies**

 

*Letters of Credit and Line of Credit*

 

As of July 1, 2008, we had$7.3 million in letters of credit outstanding. The letters of credit expire onvarious dates during 2008 and 2009, are automatically renewable for oneadditional year and are payable upon demand in the event that we fail to paythe underlying obligation. Of the total letters of credit outstanding, $7.0million reduce our availability under the Revolving Facility. Our availabilityunder the Revolving Facility was $13.0 million at July 1, 2008.

 

*Litigation*

 

Weare subject to claims and legal actions in the ordinary course of our business,including claims by or against our franchisees, licensees and employees orformer employees and/or contract disputes. We do not believe any currentlypending or threatened matter, other than as described below, would have amaterial adverse effect on our business, results of operations or financialcondition.

 

OnAugust 31, 2007, the Company was served in an action brought by FieraFoods Company in the Superior Court of Justice of Ontario, Canada.  Fiera claims that the Company failed tonegotiate in good faith for a frozen bagel dough supply agreement, which wasnot concluded, and made misrepresentations in the negotiations.  Fiera is seeking damages of $17.0 million(Canadian) as well as interest and costs. The Company believes that theseclaims are not valid, is defending this action and has not recorded aliability.

 

OnSeptember 18, 2007, Eric Mathistad, a former store manager, filed aputative class action against the Company in the Superior Court of Californiafor the State of California, County of San Diego.  The plaintiff alleges that we failed to payovertime wages to “salaried restaurant employees” of our Californiastores who were improperly designated as exempt employees, and that theseemployees were deprived of mandated meal periods and rest breaks.  Plaintiff alleges that these actions were inviolation of the California Labor Code Sections 1194, et seq., 500, et seq., CaliforniaBusiness and Professions Code Section 17200, et seq., and applicable wageorder(s) issued by the Industrial Welfare Commission.  Plaintiff seeks injunctive relief,declaratory relief, attorney’s fees, restitution and an unspecified amount ofdamages for unpaid overtime and for missed meal and/or rest periods. On November 14,2007, Bernadette Mejia, another former store manager, filed a similarcase.    On April 10, 2008, theMathistad and Meija cases were consolidated into one case and, on May 6,2008, Plaintiffs filed an Amended Consolidated Complaint.   The Company filed a Demurrer on June  20, 2008,  claiming that, among other things,plaintiff fails to state a claim against the Company; plaintiff does not statea claim for a joint venture, partnership, common enterprise, or aiding andabetting; plaintiff’s definition of the class is deficient and plaintiff’sclaims for declaratory judgment regarding Labor Code violations should bedismissed.   Because limited discovery has been conducted and noclass certification proceeding has occurred, we cannot predict the outcomeof this matter.

 

OnFebruary 8, 2008, Gloria Webber and Hakan Mikado, non-exemptemployees, brought a putative class action against the Company in theSuperior Court of California for the State of California, County of San Diego,claiming failure to pay minimum wages, failure to pay overtimeand failure to provide rest periods and meal breaks, among othercharges.  The parties have agreed to stay formal discovery and aformal response to the complaint pending exchange of information andpending settlement discussions.   We cannot predict the outcomeof this matter.

 

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

### ***Cautionary Note RegardingForward-Looking Statements***

### * *

*We wishto caution our readers that the following important factors, among others,could cause the actual results to differ materially from those indicated byforward-looking statements made in this report and from time to time in newsreleases, reports, proxy statements, registration statements and other writtencommunications, as well as verbal forward-looking statements made from time totime by representatives of the company. Such forward-looking statements involverisks and uncertainties that may cause our actual results, performance orachievements to be materially different from any future performance orachievements expressed or implied by these forward-looking statements. Factorsthat might cause actual events or results to differ materially from thoseindicated by these forward-looking statements may include matters such asfuture economic performance, restaurant openings or closings, operatingmargins, the availability of acceptable real estate locations, the sufficiencyof our cash balances and cash generated from operating and financing activitiesfor our future liquidity and capital resource needs, and other matters, and aregenerally accompanied by words such as: “believes”, “anticipates”, “plans”, “intends”,“estimates”, “predicts”, “targets”, “expects”, “contemplates” and similarexpressions that convey the uncertainty of future events or outcomes. Anexpanded discussion of some of these risk factors follows. **Theserisks and uncertainties include, but are not limited to, the risk factorsdescribed in our annual report on Form 10-K for the year ended January 1,2008 as updated in subsequent quarterly reports on Form 10-Q, includingItem 1A of Part II of this report*

 

**General**

 

Thisinformation should be read in conjunction with the consolidated financialstatements and the notes included in Item 1 of Part I of thisQuarterly Report and the audited consolidated financial statements and notes,and Management’s Discussion and Analysis of Financial Condition and Results ofOperations, contained in the Form 10-K for the fiscal year ended January 1,2008.  The following discussion and analysis includes historical and certainforward-looking information that should be read together with the accompanyingconsolidated financial statements, related footnotes and the discussion belowof certain risks and uncertainties that could cause future operating results todiffer materially from historical results or from the expected resultsindicated by forward-looking statements.

 

**Company Overview**

 

Weare a leading fast-casual restaurant chain, specializing in high-quality foodsfor breakfast and lunch in a café atmosphere with a neighborhood emphasis.  As of July 1, 2008, we owned andoperated, franchised or licensed 623 restaurants in 35 states and in theDistrict of Columbia, primarily under the Einstein Bros., Noah’s and ManhattanBagel brands.  Einstein Bros. is anational fast-casual restaurant chain. Noah’s is a regional fast-casual restaurant chain operated exclusivelyon the West Coast and Manhattan Bagel is a regional fast-casual restaurantchain operated predominantly in the Northeast. Our product offerings include fresh bagels and other goods bakedon-site, made-to-order sandwiches on a variety of bagels and breads, gourmetsoups and salads, decadent desserts, premium coffees and other cafébeverages.  Our manufacturing andcommissary operations prepare and assemble consistent, high-quality ingredientsand we deliver them to our restaurants quickly and efficiently through ournetwork of independent distributors.  Ourmanufacturing and commissary operations support our main business focus,restaurant operations, by exposing our brands to new product channels as wellas enabling sales of our products to third parties.

 

**Current Restaurant Base**

 

Asof July 1, 2008, we owned and operated, franchised or licensed 623restaurants. Our current base of company-owned restaurants under our corebrands includes 339 Einstein Bros. restaurants, 77 Noah’s restaurants and oneManhattan Bagel restaurant. Also, we franchise one Einstein Bros. restaurantand 69 Manhattan Bagel restaurants, and license 132 Einstein Bros. restaurantsand three Noah’s restaurants. In addition, we have one restaurant which weoperate under New World Coffee, our non-core brand.

 

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Thefollowing tables detail our restaurant openings and closings for eachrespective period:

 
| ** **               | ** ** | **13 weeks ended July 3, 2007** | ** ** | **13 weeks ended July 1, 2008** | ** ** |
|--------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **               | ** ** | **Company**                          | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Company** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Owned**                            | ** ** | **Franchised**                       | ** ** | **Licensed** | ** ** | **Total** | ** ** | **Owned** | ** ** | **Franchised** | ** ** | **Licensed** | ** ** | **Total** | ** ** |
| **Einstein Bros.**       | ** ** | ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance       |       | 336                                  |       | —                               |       | 97 |   | 433 |   | 338 |   | 1 |   | 125 |   | 464 |   |
| Opened  restaurants      |       | 1                                    |       | —                               |       | 6 |   | 7 |   | 2 |   | — |   | 8 |   | 10 |   |
| Closed  restaurants      |       | (1                                   | )          | —                               |       | — |   | (1 | ) | (1 | ) | — |   | (1 | ) | (2 | ) |
| Ending  balance          |       | 336                                  |       | —                               |       | 103 |   | 439 |   | 339 |   | 1 |   | 132 |   | 472 |   |
|                     |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Noah’s**          | ** ** | ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance       |       | 74                                   |       | —                               |       | 3 |   | 77 |   | 76 |   | — |   | 3 |   | 79 |   |
| Opened  restaurants      |       | —                               |       | —                               |       | — |   | — |   | 1 |   | — |   | — |   | 1 |   |
| Closed  restaurants      |       | —                               |       | —                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Ending  balance          |       | 74                                   |       | —                               |       | 3 |   | 77 |   | 77 |   | — |   | 3 |   | 80 |   |
|                     |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Manhattan Bagel**      | ** ** | ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance       |       | —                               |       | 79                                   |       | — |   | 79 |   | 1 |   | 69 |   | — |   | 70 |   |
| Opened  restaurants      |       | —                               |       | —                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Closed  restaurants      |       | —                               |       | (3                                   | )          | — |   | (3 | ) | — |   | — |   | — |   | — |   |
| Ending  balance          |       | —                               |       | 76                                   |       | — |   | 76 |   | 1 |   | 69 |   | — |   | 70 |   |
|                     |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Non-Core Brands**      | ** ** | ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance       |       | 2                                    |       | 6                                    |       | — |   | 8 |   | 1 |   | 3 |   | — |   | 4 |   |
| Opened  restaurants      |       | —                               |       | —                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Closed  restaurants      |       | (1                                   | )          | (2                                   | )          | — |   | (3 | ) | — |   | (3 | ) | — |   | (3 | ) |
| Ending  balance          |       | 1                                    |       | 4                                    |       | — |   | 5 |   | 1 |   | — |   | — |   | 1 |   |
|                     |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Consolidated Total**   | ** ** | ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total  beginning balance |       | 412                                  |       | 85                                   |       | 100 |   | 597 |   | 416 |   | 73 |   | 128 |   | 617 |   |
| Opened  restaurants      |       | 1                                    |       | —                               |       | 6 |   | 7 |   | 3 |   | — |   | 8 |   | 11 |   |
| Closed  restaurants      |       | (2                                   | )          | (5                                   | )          | — |   | (7 | ) | (1 | ) | (3 | ) | (1 | ) | (5 | ) |
| Total ending  balance    |       | 411                                  |       | 80                                   |       | 106 |   | 597 |   | 418 |   | 70 |   | 135 |   | 623 |   |

 
| ** **               | ** ** | **26 weeks ended July 3,  2007** | ** ** | **26 weeks ended July 1,  2008** | ** ** |
|--------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **               | ** ** | **Company**                           | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | **Company** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Owned**                             | ** ** | **Franchised**                        | ** ** | **Licensed** | ** ** | **Total** | ** ** | **Owned** | ** ** | **Franchised** | ** ** | **Licensed** | ** ** | **Total** | ** ** |
| **Einstein Bros.**       | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance       |       | 341                                   |       | —                                |       | 93 |   | 434 |   | 337 |   | — |   | 121 |   | 458 |   |
| Opened  restaurants      |       | 1                                     |       | —                                |       | 10 |   | 11 |   | 5 |   | 1 |   | 12 |   | 18 |   |
| Closed  restaurants      |       | (6                                    | )          | —                                |       | — |   | (6 | ) | (3 | ) | — |   | (1 | ) | (4 | ) |
| Ending  balance          |       | 336                                   |       | —                                |       | 103 |   | 439 |   | 339 |   | 1 |   | 132 |   | 472 |   |
|                     |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Noah’s**          | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance       |       | 73                                    |       | —                                |       | 3 |   | 76 |   | 77 |   | — |   | 3 |   | 80 |   |
| Opened  restaurants      |       | 1                                     |       | —                                |       | — |   | 1 |   | 1 |   | — |   | — |   | 1 |   |
| Closed  restaurants      |       | —                                |       | —                                |       | — |   | — |   | (1 | ) | — |   | — |   | (1 | ) |
| Ending  balance          |       | 74                                    |       | —                                |       | 3 |   | 77 |   | 77 |   | — |   | 3 |   | 80 |   |
|                     |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Manhattan Bagel**      | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance       |       | —                                |       | 80                                    |       | — |   | 80 |   | 1 |   | 69 |   | — |   | 70 |   |
| Opened  restaurants      |       | —                                |       | —                                |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Closed  restaurants      |       | —                                |       | (4                                    | )          | — |   | (4 | ) | — |   | — |   | — |   | — |   |
| Ending  balance          |       | —                                |       | 76                                    |       | — |   | 76 |   | 1 |   | 69 |   | — |   | 70 |   |
|                     |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Non-Core Brands**      | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance       |       | 2                                     |       | 6                                     |       | — |   | 8 |   | 1 |   | 3 |   | — |   | 4 |   |
| Opened  restaurants      |       | —                                |       | —                                |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Closed  restaurants      |       | (1                                    | )          | (2                                    | )          | — |   | (3 | ) | — |   | (3 | ) | — |   | (3 | ) |
| Ending  balance          |       | 1                                     |       | 4                                     |       | — |   | 5 |   | 1 |   | — |   | — |   | 1 |   |
|                     |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Consolidated Total**   | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total  beginning balance |       | 416                                   |       | 86                                    |       | 96 |   | 598 |   | 416 |   | 72 |   | 124 |   | 612 |   |
| Opened  restaurants      |       | 2                                     |       | —                                |       | 10 |   | 12 |   | 6 |   | 1 |   | 12 |   | 19 |   |
| Closed  restaurants      |       | (7                                    | )          | (6                                    | )          | — |   | (13 | ) | (4 | ) | (3 | ) | (1 | ) | (8 | ) |
| Total  ending balance    |       | 411                                   |       | 80                                    |       | 106 |   | 597 |   | 418 |   | 70 |   | 135 |   | 623 |   |

 

16

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Thefollowing table details our restaurant openings and closings over the lasttwelve months:

 
| ** **                           | ** ** | **Trailing 12 Months Activity** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Company**                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Owned**                       | ** ** | **Franchised** | ** ** | **Licensed** | ** ** | **Total** | ** ** |
| **Einstein Bros.**                   | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance July 3, 2007 |       | 336                             |       | — |   | 103 |   | 439 |   |
| Opened  restaurants                  |       | 12                              |       | 1 |   | 33 |   | 46 |   |
| Closed  restaurants                  |       | (9                              | )          | — |   | (4 | ) | (13 | ) |
| Ending  balance July 1, 2008    |       | 339                             |       | 1 |   | 132 |   | 472 |   |
|                                 |       |                            |       |   |   |   |   |   |   |
| **Noah’s**                      | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance July 3, 2007 |       | 74                              |       | — |   | 3 |   | 77 |   |
| Opened  restaurants                  |       | 4                               |       | — |   | — |   | 4 |   |
| Closed  restaurants                  |       | (1                              | )          | — |   | — |   | (1 | ) |
| Ending  balance July 1, 2008    |       | 77                              |       | — |   | 3 |   | 80 |   |
|                                 |       |                            |       |   |   |   |   |   |   |
| **Manhattan Bagel**                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance July 3, 2007 |       | —                          |       | 76 |   | — |   | 76 |   |
| Opened  restaurants                  |       | 1                               |       | 2 |   | — |   | 3 |   |
| Closed  restaurants                  |       | —                          |       | (9 | ) | — |   | (9 | ) |
| Ending  balance July 1, 2008    |       | 1                               |       | 69 |   | — |   | 70 |   |
|                                 |       |                            |       |   |   |   |   |   |   |
| **Non-Core Brands**                  | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance July 3, 2007 |       | 1                               |       | 4 |   | — |   | 5 |   |
| Opened  restaurants                  |       | —                          |       | — |   | — |   | — |   |
| Closed  restaurants                  |       | —                          |       | (4 | ) | — |   | (4 | ) |
| Ending  balance July 1, 2008    |       | 1                               |       | — |   | — |   | 1 |   |
|                                 |       |                            |       |   |   |   |   |   |   |
| **Consolidated Total**               | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance July 3, 2007 |       | 411                             |       | 80 |   | 106 |   | 597 |   |
| Opened  restaurants                  |       | 17                              |       | 3 |   | 33 |   | 53 |   |
| Closed  restaurants                  |       | (10                             | )          | (13 | ) | (4 | ) | (27 | ) |
| Ending  balance July 1, 2008    |       | 418                             |       | 70 |   | 135 |   | 623 |   |

 

**New Restaurant Openings**

 

In2008, we plan to open at least 18 new company-owned restaurants.  Through the twenty-six weeks ended July 1,2008 we opened 5 company-owned Einstein Bros. restaurants.  Through the twenty-six weeks ended July 1,2008 we opened one company-owned Noah’s restaurant.

 

Weplan to open at least 5 franchise restaurants and at least 35 licenserestaurants in 2008.  The licenserestaurants will be located primarily in airports, colleges and universities,office buildings, hospitals and military bases and on turnpikes.  Through the twenty-six weeks ended July 1,2008 we opened one Einstein Bros. franchise restaurant and twelve licenserestaurants.

 

17

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**Results of Operations**

 

**We have a52/53-week fiscal year ending on the Tuesday closest to December 31. Thesecond quarters in fiscal years 2007 and 2008 ended on July 3, 2007 and July 1,2008, respectively, and each contained thirteen weeks, and the year to dateperiods each contained twenty-six weeks.**

** **

Thistable sets forth, for the periods indicated, certain amounts included in ourconsolidated statements of operations, the relative percentage that thoseamounts represent to total revenue (unless otherwise indicated), and thepercentage change in those amounts from period to period. All percentages arecalculated using actual amounts rounded to the nearest thousand.

 

18

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| ** **                                                       | ** ** | **13 weeks ended**         | ** ** | **Increase/**    | ** ** | **13 weeks ended**             | ** ** |
|------------------------------------------------------------------|------------|----------------------------|------------|------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **(dollars in thousands)** | ** ** | **(Decrease)**   | ** ** | **(percent of total revenue)** | ** ** |
| ** **                                                       | ** ** | **July 3,**           | ** ** | **July 1,** | ** ** | **2008**                       | ** ** | **July 3,** | ** ** | **July 1,** | ** ** |
| ** **                                                       | ** ** | **2007**                   | ** ** | **2008**         | ** ** | **vs. 2007**                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Revenues:                                                        |       |                       |       |             |       |                           |       |   |   |   |   |
| Company-owned  restaurant sales                                  |       | $                          | 94,141     |             | $          | 96,321                         |       | 2.3 | % | 93.2 | % | 91.4 | % |
| Manufacturing  and commissary revenues                           |       | 5,682                      |       | 7,640            |       | 34.5                           | %          | 5.6 | % | 7.2 | % |
| Franchise  and license related revenues                          |       | 1,232                      |       | 1,453            |       | 17.9                           | %          | 1.2 | % | 1.4 | % |
| Total  revenues                                                  |       | 101,055                    |       | 105,414          |       | 4.3                            | %          | 100.0 | % | 100.0 | % |
|                                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| Cost of  sales:                                                  |       |                       |       |             |       |                           |       |   |   |   |   |
| Company-owned  restaurant costs                                  |       |                       |       |             |       |                           |       |   |   |   |   |
| Cost of  goods sold                                              |       | 27,876                     |       | 28,933           |       | 3.8                            | %          | 27.6 | % | 27.4 | % |
| Labor  costs                                                     |       | 28,566                     |       | 28,201           |       | (1.3                           | )%         | 28.3 | % | 26.8 | % |
| Other  operating costs                                           |       | 8,728                      |       | 9,300            |       | 6.6                            | %          | 8.6 | % | 8.8 | % |
| Rent and  related, and marketing costs                           |       | 10,087                     |       | 10,214           |       | 1.3                            | %          | 10.0 | % | 9.7 | % |
| Total  company-owned restaurant costs                            |       | 75,257                     |       | 76,648           |       | 1.8                            | %          | 74.5 | % | 72.7 | % |
|                                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| Manufacturing  and commissary costs                              |       | 5,380                      |       | 7,224            |       | 34.3                           | %          | 5.3 | % | 6.9 | % |
| Total  cost of sales                                             |       | 80,637                     |       | 83,872           |       | 4.0                            | %          | 79.8 | % | 79.6 | % |
|                                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| Gross  profit:                                                   |       |                       |       |             |       |                           |       |   |   |   |   |
| Company-owned  restaurant                                        |       | 18,884                     |       | 19,673           |       | 4.2                            | %          | 18.7 | % | 18.7 | % |
| Manufacturing  and commissary                                    |       | 302                        |       | 416              |       | 37.7                           | %          | 0.3 | % | 0.4 | % |
| Franchise  and license                                           |       | 1,232                      |       | 1,453            |       | 17.9                           | %          | 1.2 | % | 1.4 | % |
| Total  gross profit                                              |       | 20,418                     |       | 21,542           |       | 5.5                            | %          | 20.2 | % | 20.5 | % |
|                                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| Gross  profit percentages:                                       |       |                       |       |             |       |                           |       |   |   |   |   |
| Company-owned  restaurant                                        |       | 20.1                       | %          | 20.4             | %          | 1.5                            | %          |   | * |   | * |
| Manufacturing  and commissary                                    |       | 5.3                        | %          | 5.4              | %          | 1.9                            | %          |   | * |   | * |
| Franchise  and license                                           |       | 100.0                      | %          | 100.0            | %          | 0.0                            | %          |   | * |   | * |
|                                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| Operating  expenses:                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| General  and administrative expenses                             |       | 10,855                     |       | 9,540            |       | (12.1                          | )%         | 10.7 | % | 9.1 | % |
| Depreciation  and amortization                                   |       | 2,623                      |       | 3,345            |       | 27.5                           | %          | 2.6 | % | 3.2 | % |
| Loss on  sale, disposal or abandonmentof assets, net             |       | 31                         |       | 63               |       | 103.2                          | %          | 0.0 | % | 0.1 | % |
| Impairment  charges and other relatedcosts                       |       | 166                        |       | 54               |       | (67.5                          | )%         | 0.2 | % | 0.1 | % |
| Income  from operations                                          |       | 6,743                      |       | 8,540            |       | 26.6                           | %          | 6.7 | % | 8.1 | % |
| Other  expense:                                                  |       |                       |       |             |       |                           |       |   |   |   |   |
| Interest  expense, net                                           |       | 4,144                      |       | 1,328            |       | (68.0                          | )%         | 4.1 | % | 1.3 | % |
| Write-off  of debt discount uponredemption of senior notes       |       | 528                        |       | —           |       | (100.0                         | )%         | 0.5 | % | 0.0 | % |
| Prepayment  penalty upon redemptionof senior notes               |       | 240                        |       | —           |       | (100.0                         | )%         | 0.2 | % | 0.0 | % |
| Write-off  of debt issuance costs uponredemption of senior notes |       | 2,071                      |       | —           |       | (100.0                         | )%         | 2.0 | % | 0.0 | % |
|                                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| Income  (loss) before income taxes                               |       | (240                       | )          | 7,212            |       |                           | **         | (0.2 | )% | 6.8 | % |
| Provision  for income taxes                                      |       | 10                         |       | 298              |       | 2880.0                         | %          | 0.0 | % | 0.3 | % |
| Net  income (loss)                                               |       | $                          | (250       | )                | $          | 6,914                          |       |   | ** | (0.2 | )% | 6.6 | % |
|                                                                  |            |                            |            |                  |            |                                |            |  |  |  |  |  |  |  |

 

----

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

 

19

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Table ofContents

 

 
| ** **                                                       | ** ** | **26 weeks ended**         | ** ** | **Increase/**    | ** ** | **26 weeks ended**             | ** ** |
|------------------------------------------------------------------|------------|----------------------------|------------|------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **(dollars in thousands)** | ** ** | **(Decrease)**   | ** ** | **(percent of total revenue)** | ** ** |
| ** **                                                       | ** ** | **July 3,**           | ** ** | **July 1,** | ** ** | **2008**                       | ** ** | **July 3,** | ** ** | **July 1,** | ** ** |
| ** **                                                       | ** ** | **2007**                   | ** ** | **2008**         | ** ** | **vs. 2007**                   | ** ** | **2007** | ** ** | **2008** | ** ** |
| Revenues:                                                        |       |                       |       |             |       |                           |       |   |   |   |   |
| Company-owned  restaurant sales                                  |       | $                          | 183,256    |             | $          | 189,931                        |       | 3.6 | % | 92.9 | % | 91.0 | % |
| Manufacturing  and commissary revenues                           |       | 11,500                     |       | 15,728           |       | 36.8                           | %          | 5.8 | % | 7.6 | % |
| Franchise  and license related revenues                          |       | 2,554                      |       | 3,019            |       | 18.2                           | %          | 1.3 | % | 1.4 | % |
| Total  revenues                                                  |       | 197,310                    |       | 208,678          |       | 5.8                            | %          | 100.0 | % | 100.0 | % |
|                                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| Cost of  sales:                                                  |       |                       |       |             |       |                           |       |   |   |   |   |
| Company-owned  restaurant costs                                  |       |                       |       |             |       |                           |       |   |   |   |   |
| Cost of  goods sold                                              |       | 54,149                     |       | 56,918           |       | 5.1                            | %          | 27.4 | % | 27.3 | % |
| Labor  costs                                                     |       | 55,173                     |       | 57,151           |       | 3.6                            | %          | 28.0 | % | 27.4 | % |
| Other  operating costs                                           |       | 17,499                     |       | 18,178           |       | 3.9                            | %          | 8.9 | % | 8.7 | % |
| Rent and  related, and marketing costs                           |       | 19,768                     |       | 20,226           |       | 2.3                            | %          | 10.0 | % | 9.7 | % |
| Total  company-owned restaurant costs                            |       | 146,589                    |       | 152,473          |       | 4.0                            | %          | 74.3 | % | 73.1 | % |
|                                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| Manufacturing  and commissary costs                              |       | 10,802                     |       | 15,084           |       | 39.6                           | %          | 5.5 | % | 7.2 | % |
| Total  cost of sales                                             |       | 157,391                    |       | 167,557          |       | 6.5                            | %          | 79.8 | % | 80.3 | % |
|                                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| Gross  profit:                                                   |       |                       |       |             |       |                           |       |   |   |   |   |
| Company-owned  restaurant                                        |       | 36,667                     |       | 37,458           |       | 2.2                            | %          | 18.6 | % | 18.0 | % |
| Manufacturing  and commissary                                    |       | 698                        |       | 644              |       | (7.7                           | )%         | 0.4 | % | 0.3 | % |
| Franchise  and license                                           |       | 2,554                      |       | 3,019            |       | 18.2                           | %          | 1.3 | % | 1.4 | % |
| Total  gross profit                                              |       | 39,919                     |       | 41,121           |       | 3.0                            | %          | 20.2 | % | 19.7 | % |
|                                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| Gross  profit percentages:                                       |       |                       |       |             |       |                           |       |   |   |   |   |
| Company-owned  restaurant                                        |       | 20.0                       | %          | 19.7             | %          | (1.5                           | )%         |   | * |   | * |
| Manufacturing  and commissary                                    |       | 6.1                        | %          | 4.1              | %          | (32.8                          | )%         |   | * |   | * |
| Franchise  and license                                           |       | 100.0                      | %          | 100.0            | %          | 0.0                            | %          |   | * |   | * |
|                                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| Operating  expenses:                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| General  and administrative expenses                             |       | 21,587                     |       | 20,283           |       | (6.0                           | )%         | 10.9 | % | 9.7 | % |
| Depreciation  and amortization                                   |       | 5,042                      |       | 6,549            |       | 29.9                           | %          | 2.6 | % | 3.1 | % |
| Loss on  sale, disposal or abandonmentof assets, net             |       | 405                        |       | 132              |       | (67.4                          | )%         | 0.2 | % | 0.1 | % |
| Impairment  charges and other relatedcosts                       |       | 185                        |       | 54               |       | (70.8                          | )%         | 0.1 | % | 0.0 | % |
| Income  from operations                                          |       | 12,700                     |       | 14,103           |       | 11.0                           | %          | 6.4 | % | 6.8 | % |
| Other  expense:                                                  |       |                       |       |             |       |                           |       |   |   |   |   |
| Interest  expense, net                                           |       | 8,933                      |       | 2,907            |       | (67.5                          | )%         | 4.5 | % | 1.4 | % |
| Write-off  of debt discount uponredemption of senior notes       |       | 528                        |       | —           |       | (100.0                         | )%         | 0.3 | % | 0.0 | % |
| Prepayment  penalty upon redemptionof senior notes               |       | 240                        |       | —           |       | (100.0                         | )%         | 0.1 | % | 0.0 | % |
| Write-off  of debt issuance costs uponredemption of senior notes |       | 2,071                      |       | —           |       | (100.0                         | )%         | 1.0 | % | 0.0 | % |
|                                                             |       |                       |       |             |       |                           |       |   |   |   |   |
| Income  before income taxes                                      |       | 928                        |       | 11,196           |       | 1106.5                         | %          | 0.5 | % | 5.4 | % |
| Provision  for income taxes                                      |       | 47                         |       | 440              |       | 836.2                          | %          | 0.0 | % | 0.2 | % |
| Net  income                                                      |       | $                          | 881        |             | $          | 10,756                         |       | 1120.9 | % | 0.4 | % | 5.2 | % |
|                                                                  |            |                            |            |                  |            |                                |            |  |  |  |  |  |  |  |  |

 

----

| * |   | not applicable |
|---|--------|----------------|

 

***Consolidated Results***

 

**For thethirteen weeks ended July 1, 2008 compared to the same period in 2007,total revenue increased $4.4 million, or 4.3%, gross profit increased $1.1million or 5.5%, income from operations improved $1.8 million or 26.6%, and ourincome before income taxes increased $7.5 million. This growth was a result ofhaving more locations, increased comparable store sales and price increases atour company-owned restaurants, an increase in sales volume and price increasesfrom our manufacturing and commissary operations and an increase of comparablestore sales from our franchisees and licensees, partially offset by increasedcost of sales which was**

** **

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** **

**primarilydriven by rising commodity costs and labor costs for both the company-ownedrestaurants and our manufacturing and commissary operations.  Adding to the increase in gross profit was adecrease in our general and administrative expenses related to decreased stock-basedcompensation expense and other cost savings, an increase in depreciationexpense from the new restaurants that have been opened, decreased interestexpense related to the debt redemption in 2007 as well as the $2.8 million inrelated one-time charges that occurred in 2007.**

** **

Forthe twenty-six weeks ended July 1, 2008 compared to the same period in2007, total revenue increased $11.4 million, or 5.8%, gross profit increased$1.2 million or 3.0%, income from operations improved $1.4 million or 11.0%,and our income before income taxes increased $10.3 million. This growth isprimarily due to having seven additional company-owned restaurants and 19additional franchise and license locations, which increased our sales and costof sales.  Additionally, revenues haveincreased as a result of higher comparable store sales, partially offset byincreased cost of sales which was primarily driven by rising commodity costsand labor costs for both the company-owned restaurants and our manufacturingand commissary operations.  Adding tothis was a decrease in our general and administrative expenses related todecreased stock-based compensation expense and other cost savings, an increasein depreciation expense from the new restaurants that have been opened,decreased interest expense related to the debt redemption in 2007 as well asthe $2.8 million in related one-time charges that occurred in 2007.

 

***Company-Owned Restaurant Operations***

 

***Revenues***

** **

**Comparablestore sales represent sales at restaurants open for one full year that have notbeen relocated or closed during the current year.  Comparable store sales include company-ownedrestaurants only and represent the change in period-over-period sales for thecomparable restaurant base.  A restaurantbecomes comparable in its thirteenth full month of operation.**

** **

**For thethirteen weeks ended July 1, 2008, our comparable store sales increased1.0% over the same periods in 2007.  Thisincrease was primarily due to system-wide price increases of 6.8% since July 3,2007 and a 3.5% shift in product mix to higher priced items, partially offsetby an 8.5% decrease in the volume of units sold which we believe was mostly dueto the economic climate and its negative impact on consumer discretionaryspending, and from a decrease in our hours of operation.**

** **

**For thetwenty-six weeks ended July 1, 2008, our comparable store sales increased2.3% over the same periods in 2007.  Thisincrease was primarily due to system-wide price increases of 6.3% since July 3,2007 and a 3.1% shift in product mix to higher priced items, partially offsetby a 6.5% decrease in the volume of units sold which we believe was mostly dueto the economic climate and its negative impact on consumer discretionaryspending and from a decrease in our hours of operation.**

** **

Company-ownedrestaurant sales for the thirteen weeks ended July 1, 2008 increased $2.2million, or 2.3%, when compared to the same period in 2007.  This increase was primarily due to theaforementioned price increases coupled with a net increase in restaurantsopened over the last twelve months.  Onaverage, the restaurants opened since July 3, 2007 are higher volumerestaurants relative to those that were closed over the same period, which alsopositively contributed to the increase in sales.

 

Company-ownedrestaurant sales for the twenty-six weeks ended July 1, 2008 increased$6.7 million, or 3.6%, when compared to the same period in 2007.  This increase was primarily due to theaforementioned price increases coupled with a net increase of two restaurantsopened in 2008 compared to a net decrease of five restaurants closed in 2007.

 

*Cost of Sales*

 

Costof sales consists of cost of goods sold, labor expenses, other operating costsand rent and related and marketing costs.

 

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*                                               **Cost ofGoods Sold*

 

Food,beverage and packaging costs are three elements that make up cost of goods soldand constitute a large portion of the cost of sales at our company-owned restaurants.  These costs increased $1.0 million to $28.9million for the thirteen weeks ended July 1, 2008 from $27.9 million forthe same period in 2007, predominantly due to an increase in commoditycosts, an increase in distribution costs that were driven by higher fuel costs,and increased costs associated with a net opening of seven stores over the lasttwelve months, partially offset by a reduction in the volume of products sold.

 

Forthe twenty-six weeks ended July 1, 2008, these costs increased $2.8 millionto $56.9 million from $54.1 million for the same period in 2007,predominantly due to an increase in commodity costs, an increase indistribution costs that were driven by higher fuel costs, and increased costsassociated with a net opening of seven stores over the last twelve months,partially offset by a reduction in the volume of products sold.

 

Comparedto 2007, most of our commodity-based food costs increased in 2008.  Flour represents the most significant rawingredient we purchase. The cost of wheat and the cost of flour increasedsubstantially in the last half of 2007 but stabilized by the end of the secondquarter and are expected to stay at these levels through the remainder of 2008.To mitigate this risk of increasing prices, we have utilized a subsidiary ofCargill, Incorporated to manage our wheat purchases for our company-ownedproduction facility.  We will continue towork with Cargill, Incorporated to strategically source our key ingredient.  However, there can be no assurance that we willbenefit from a decline in the cost of any of the commodity-based products thatwe purchase.

 

*                                               **LaborExpenses*

 

Laborexpenses, which includes our general managers and restaurant-level labor costs,including taxes and associated employee benefits, decreased $0.4 million to$28.2 million for the thirteen weeks ended July 1, 2008 compared to$28.6 million for the same period in 2007. The decrease was primarily related to a decrease in incentivecompensation of $0.5 million and a decrease in our self-insurance costs of $0.3million, partially offset by a $0.4 million increase in labor costs from acombination of the growth of new restaurant openings that occurred throughout2007 and the first twenty-six weeks of 2008, and an increase in base payyear-over-year from a combination of merit and an overall inflationary shift inour compensation structure caused by a January 2008increase in minimum wage rates at the federal level and in several statesin which we operate.

 

Laborexpenses increased $2.0 million to $57.2 million for the twenty-six weeks endedJuly 1, 2008 compared to $55.2 million for the same period in 2007. Thisincrease was predominantly due to a $2.6 million increase in labor costs from acombination of the growth of new restaurant openings that occurred throughout2007 and the first twenty-six weeks of 2008 which increased the number ofemployees, and an increase in base pay year-over-year from a combination ofmerit and an overall inflationary shift in our compensationstructure caused by a January 2008 increase in minimum wagerates at the federal level and in several states in which we operate, alongwith an increase in workers’ compensation costs of $0.5 million, partiallyoffset by a decrease in incentive compensation of $0.8 million and a decreasein our self-insurance costs of $0.3 million.

 

*                                               **OtherOperating Costs*

 

Otheroperating costs consist of other restaurant-level occupancy expenses such asutilities, repairs and maintenance costs, credit card fees and supplies. Other operating costs increased $0.6 million to $9.3 million for the thirteenweeks ended July 1, 2008 compared to $8.7 million for the same periodin 2007.  This increase was attributable to an increase in credit cardfees of $0.3 million from a shift in consumer payment practices, an increase inutilities of $0.1 million, and an increase in other overhead costs of $0.2million.

 

Otheroperating costs increased $0.7 million to $18.2 million for the twenty-sixweeks ended July 1, 2008 compared to $17.5 million for the same periodin 2007.  This increase was attributable to an increase in credit cardfees of $0.5 million from a shift in consumer payment practices, and anincrease in utilities of $0.2 million.

 

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*Rent and related, and marketing costs*

 

Rentand related, and marketing costs consist of restaurant-level rent expense,common area maintenance expense, property taxes and marketing expense. Rent and related and marketing costs increased $0.1 million to $10.2 millionfor the thirteen weeks ended July 1, 2008 compared to $10.1 millionfor the same period in 2007.  This increase was principally attributableto an increase in rent and related expense of $0.6 million, partially offset bya decrease in marketing expense of $0.5 million.

 

Rentand related and marketing costs increased $0.4 million to $20.2 million for thetwenty-six weeks ended July 1, 2008 compared to $19.8 million for thesame period in 2007.  This increase was principally attributable to anincrease in rent and related expense of $0.9 million, an increase in othercosts of $0.1 million, partially offset by a decrease in marketing expense of$0.6 million.

 

***Manufacturing andCommissary Operations***

 

Our manufacturingoperations, which include our United States Department of Agriculture inspectedcommissaries, predominantly support our company-owned restaurants and generaterevenue from the sale of food products to franchisees, licensees, third-partydistributors and other third parties. All inter-company transactions have beeneliminated during consolidation.

 

*Revenues*

 

Manufacturing and commissaryrevenues for the thirteen weeks ended July 1, 2008 increased $1.9 millionor 34.5% to $7.6 million from $5.7 million in the same period in 2007.  $0.6 million of this increase was attributedto a rise in the volume of units sold to our more significant customers and$0.9 million was related to price increases. An additional $0.4 million of the increase was attributed to ourexpanded role within the distribution chain for sales to our franchise andlicense locations, slightly off-set by a drop in the volume of units sold tothese customers.

 

Manufacturing and commissaryrevenues for the twenty-six weeks ended July 1, 2008 increased $4.2million or 36.8% to $15.7 million from $11.5 million in the same period in2007.  $1.4 million of this increase wasattributed to a rise in the volume of units sold to our more significant customersand $1.6 million was related to price increases.  An additional $1.2 million of the increasewas attributed to our expanded role within the distribution chain for sales toour franchise and license locations, slightly off-set by a drop in the volumeof units sold to these customers.

 

*Cost of Sales*

 

Costof sales consists of cost of goods sold, labor expenses and other operatingcosts and expenses.

 

*Cost ofGoods Sold*

 

Manufacturing costs arecomposed of raw materials such as flour, dairy products and meats.  These costs increased $1.7 million to $4.3million for the thirteen weeks ended July 1, 2008 from $2.6 million in thesame period in 2007, predominantly due to an increase in commodity costs and,to a lesser extent, an increase in volume of units sold.  Some of the raw materials used arecommodity-based products and are subject to the same market fluctuationspreviously mentioned. We purchase certain raw materials under volume-basedpricing agreements and, as manufacturing production increases we experience morefavorable pricing arrangements.

 

Manufacturing costs arecomposed of raw materials such as flour, dairy products and meats.  Forthe twenty-six weeks ended July 1, 2008, these costs increased $3.9million to $9.2 million from $5.3 million for the same period in 2007,predominantly due to an increase in commodity costs and to a lesser extent, anincrease in volume of units sold.  Some of the raw materials used arecommodity-based products and are subject to the same market fluctuationspreviously mentioned. We purchase certain raw materials under volume-basedpricing agreements and, as manufacturing production increases, we experiencemore favorable pricing arrangements.

 

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*Labor Expenses*

 

Labor expenses, whichinclude manufacturing-level labor costs, including taxes and associatedemployee benefits, increased $0.1 million to $1.7 million for the thirteenweeks ended July 1, 2008 compared to $1.6 million for the same period in2007. This increase was due to an increase in units produced as well as anincrease in merit pay year-over-year, and increased minimum wage rate increasesat the federal level and in some states in which we operate that went intoeffect starting January 2008.

 

Labor expenses increased$0.4 million to $3.5 million for the twenty-six weeks ended July 1,2008 compared to $3.1 million for the same period in 2007. The increase was dueto an increase in units produced as well as an increase in merit payyear-over-year, and increased minimum wage rate increases at the federal leveland in some states in which we operate that went into effect starting January 2008,and to a lesser extent an increase in the cost of employee benefits.

 

*OtherOperating Costs and Expenses*

 

Other operating costs andexpenses consist of occupancy expenses (rent, insurance, licenses, taxes andutilities) and other operating expenses (excluding food costs and laborexpenses reported separately). The changes for the thirteen and twenty-sixweeks ended July 1, 2008 compared to the same periods in 2007 werenegligible.  These expenses totaled $1.2million for both the thirteen weeks ended July 1, 2008 and the same periodin 2007, and $2.4 million for both the twenty-six weeks ended July 1, 2008and the same period in 2007.

 

***Franchise and LicenseOperations***

 

Franchiseand license revenue consists of ongoing royalty payments to us based on apercentage of the restaurant’s gross sales, and a license or franchise fee thatis recorded in deferred revenue and recognized as income upon the fulfillmentof certain start up support obligations, such as training. Overall,licensee and franchisee revenue improved $0.2 million, or 17.9%, for thethirteen weeks ended July 1, 2008 as compared to the same period in 2007.The percentage increase was predominantly due to improved comparable sales byfranchisees and licensees of the Manhattan Bagel and Einstein Bros. brands anda net increase of 29 licensed restaurants, partially offset by a netdecrease of 9 franchised restaurants since July 3, 2007.

 

Overall,licensee and franchisee revenue improved $0.5 million, or 18.2%, for thetwenty-six weeks ended July 1 2008 as compared to the same period in 2007.The year-to-date percentage increase was predominantly due to improvedcomparable sales by franchisees and licensees of the Manhattan Bagel andEinstein Bros. brands and a net increase of 29 licensed restaurants, partiallyoffset by a net decrease of 9 franchised restaurants since July 3, 2007.

 

***General and Administrative Expenses***

 

General and administrativeexpenses include corporate and administrative functions that support ourcompany-owned restaurants as well as our manufacturing and commissary, and franchiseand license operations.  These costsinclude employee wages, taxes and related benefits, travel costs, informationsystems, recruiting and training costs, corporate rent, general insurance costsand other corporate expenses.

 

Our general and administrativeexpenses decreased $1.4 million to $9.5 million for the thirteen weeks ended July 1,2008 compared to $10.9 million for the same period in 2007. As a percentage oftotal revenues, our general and administrative expenses were 9.1% for thethirteen weeks ended July 1, 2008 compared to 10.7% for the same period in2007.  The overall decrease waspredominately related to a $0.6 million decrease in stock-based compensationexpense that was primarily due to the additional options that were granted andvested in the second quarter of 2007 related to the secondary public offering,which did not occur again in 2008. Additionally, there were decreases of $0.2 million related to legalcosts incurred in 2007 to amend our debt facility, net decreases of $0.1 millionin compensation expense related to lower bonus expenses partially offset byincreased manager training costs, a decrease of $0.2 million related to therelocation of our corporate offices, and other decreases of $0.3 million in ourgeneral and administrative expenses.

 

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Our general andadministrative expenses decreased $1.3 million to $20.3 million for the twenty-sixweeks ended July 1, 2008 compared to $21.6 million for the same period in2007. As a percentage of total revenues, our general and administrativeexpenses were 9.7% for the twenty-six weeks ended July 1, 2008 compared to10.9% for the same period in 2007. The overall decrease was predominatelyrelated to a $0.4 million decrease in stock based compensation that wasprimarily due to the additional options that were granted and vested in thesecond quarter of 2007 related to the secondary public offering, which did notoccur again in 2008.  Additionally, therewere decreases of $0.5 million in management development expenses, $0.3 millionin costs of transitioning to a new distributor, $0.2 million related to the relocationof our corporate offices, $0.4 million in recruiting, and referral fees relatedto senior level management positions and $0.2 million in other expenses,partially offset by increases of $0.7 million related to increased managertraining costs and increased salary expenses.

 

***Depreciation and Amortization***

 

Depreciationand amortization are periodic non-cash charges that represent the reduction inusefulness and value of our tangible and intangible assets.  The majority of our depreciation andamortization relates to equipment and leasehold improvements located in ourcompany-owned restaurants. Based on our current purchases of capital assets,our existing base of assets, and our projections for new purchases of fixedassets, we believe depreciation expense for 2008 will be approximately $14.0million.

 

Depreciationand amortization expenses increased $0.7 million for the thirteen weeks ended July 1,2008 when compared to the same period in 2007. The increase is due to theadditional depreciation expense on our new corporate headquarters that weoccupied in May 2007 and the additional assets invested in thecompany-owned restaurants that were added or upgraded since the second quarterof 2007.

 

Depreciationand amortization expenses increased $1.5 million for the twenty-six weeks endedJuly 1, 2008 when compared to the same period in 2007. The increase is dueto the additional depreciation expense on our new corporate headquarters thatwe occupied in May 2007 and the additional assets invested in thecompany-owned restaurants that were added or upgraded since the second quarterof 2007.

 

***Loss on Sale, Disposal orAbandonment of Assets***

 

Gains and losses on thesale, disposal or abandonment of assets represent the difference of proceedsreceived, if any, and the net book value of an asset. We establish estimateduseful lives for our assets, which range from three to ten years, anddepreciate using the straight-line method. Leasehold improvements are limitedto the lesser of the useful life or the non-cancelable lease term. The usefullives of the assets are based upon our expectations of the period of time thatthe asset will be used to generate revenue. We periodically review the assetsfor changes in circumstances, which may impact their useful lives.  During the thirteen weeks ended July 1,2008, we recorded $63,000 in losses on the disposal, sales or abandonment ofassets, compared to $31,000 for the same period in 2007.  During the twenty-six weeks ended July 1,2008, we recorded $132,000 in losses on the disposal, sales or abandonment ofassets, compared to $405,000 for the same period in 2007.

 

***Impairment Charges andOther Related***

 

Impairment losses arenon-cash charges recorded on long-lived assets, goodwill, trademarks and ourother intangible assets. Impairment losses are recorded on long-lived assets ona restaurant-by-restaurant basis whenever impairment indicators are determinedto be present. Other related expenses are those costs incurred to closecompany-owned restaurants.  During thethirteen weeks ended July 1, 2008, we recorded $54,000 in impairmentcharges and other related expenses, compared to $166,000 for the same period in2007.  During the twenty-six weeks ended July 1,2008, we recorded $54,000 in impairment charges and other related expenses,compared to $185,000 for the same period in 2007.

 

***Interest Expense, Net***

 

In June 2007, weamended our debt facility and reduced our debt outstanding to $90 million,substantially decreasing our interest expense. The outstanding senior notes and other long-term debt as of July 1,2008 was $88.4 million compared to $90.6 million as of July 3, 2007.   Net interest expense for the thirteen weeksended July

 

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1, 2008 was $1.3 million,compared to $4.1 million for the same period in 2007 and net interest expensefor the twenty-six weeks ended July 1, 2008 was $2.9 million, compared to$8.9 million for the same period in 2007.

 

***Other Expense***

 

During the second quarter,we wrote off $2.1 million of debt issuance costs and paid a $0.2 millionredemption premium related to the repayment of the $65 Million Second Lien TermLoan, and wrote off a $0.5 million discount related to the repayment of the $25Million Subordinated Note.

 

***Income Taxes***

 

Wereported net income for the twenty-six weeks ended July 1, 2008 of $10.8million as compared to net income of $0.9 million for the same period in 2007.For tax purposes, utilization of our fully reserved net operating loss (“NOL”)carryforwards reduced our effective tax rate and our federal and state incometax liability incurred for the first twenty-six weeks of 2008. We have recordeda provision for income taxes in the amount of $298,000 and $440,000 related toour estimate of income taxes due on taxable earnings for the thirteen andtwenty-six weeks ended July 1, 2008, respectively.

 

Asof July 1, 2008, our NOL carryforwards for U.S. federal income taxpurposes were $138.3 million, $91.7 million of which are subject to an annualusage limitation of $4.7 million, and were subject to the following expirationschedule:

 

 

| **Net Operating Loss Carryforwards** | ** ** |
|--------------------------------------|------------|
| **Expiration Date**                  | ** ** | **Amount** | ** ** |
| ** **                           | ** ** | **(in thousands of dollars)** | ** ** |
| December 31,  2018              |       | 10,086 |   |
| December 31,  2019              |       | 6,862 |   |
| December 31,  2020              |       | 10,424 |   |
| December 31,  2021              |       | 10,515 |   |
| December 31,  2022              |       | 35,688 |   |
| December 31,  2023              |       | 42,362 |   |
| December 31,  2024              |       | 12,003 |   |
| December 31,  2025              |       | 5,413 |   |
| December 31,  2026              |       | 4,900 |   |
|                                 |       | $ | 138,253 |   |
|                                      |            |  |  |  |

 

Our NOL carryforwards areincluded in our deferred income tax assets and have been fully reserved.  Additionally, we maintain a full valuationallowance against our total net deferred tax assets.  In accordance with SFAS No. 109, *Accounting for Income Taxes*, (“SFAS No. 109”)we assess the continuing need for a valuation allowance that results fromuncertainty regarding our ability to realize the benefits of our deferred taxassets.

 

If we conclude that ourprospects for the realization of our deferred tax assets are more likely thannot, we will then reduce our valuation allowance as appropriate and creditincome tax expense after considering the following factors:

 

·                  The level of historical taxable incomeand projections for future taxable income over periods in which the deferredtax assets would be deductible, and

 

·                  Accumulation of income (loss) beforetaxes utilizing a look-back period of three years.

 

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We will continue to review variousqualitative and quantitative data in regards to the realization of our deferredtax assets, including:

 

·                  Events within the restaurant industry,

·                  The cyclical nature of our business,

·                  The health of the economy,

·                  Our future forecasts of taxable income and

·                  Historical trending.

 

**Financial Condition, Liquidityand Capital Resources**

 

The restaurant industry ispredominantly a cash business where cash is received at the time of thetransaction. We believe we will generate sufficient cash flow and havesufficient availability under our Revolving Facility to fund operations,capital expenditures and required debt and interest payments. Our inventoryturns frequently because our products are perishable. Accordingly, ourinvestment in inventory is minimal. Our accounts payable are on terms that webelieve are consistent with those of other companies within the industry.

 

Theprimary driver of our operating cash flow is our restaurant operations,specifically the gross margin from our company-owned restaurants. Therefore, wefocus on the elements of those operations including comparable store sales andcash flows to ensure a steady stream of operating profits that enable us tomeet our cash obligations. On a weekly basis, we review our company-ownedrestaurant performance compared with the same period in the prior year and ouroperating plan.

 

Basedupon our projections for 2008 and 2009, we believe our various sources ofcapital, including availability under existing debt facilities, and cash flowfrom operating activities of continuing operations, are adequate to financeoperations as well as the repayment of current debt obligations.

 

OurMandatorily Redeemable Series Z Preferred Stock has been reclassified to acurrent liability as of July 1, 2008 as the redemption is now within one year.As part of the amended First Lien Term Loan in June of 2007, we obtained acommitment for an incremental term loan in an aggregate principal amount of upto $57 million to be used by us, if needed, solely for the purpose of redeemingthe zero coupon Series Z preferred stock due on June 30, 2009.Availability of the incremental term loan is subject to customary borrowingconditions, including absence of any default or material adverse change, and toa requirement of successful syndication of such incremental term loan. It isour intention to continue to focus on generating cash through June 30, 2009 topay down a substantial portion of the Series Z obligation. Due to the currentstate of the credit market, we also plan to discuss our financing options withother institutions.

 

*WorkingCapital Deficit*

 

OnJuly 1, 2008, we had unrestricted cash of $18.4 million and restrictedcash of $0.9 million. Under the Revolving Facility, there were no outstandingborrowings, $7.0 million in letters of credit outstanding and borrowingavailability of $13.0 million. On June 30, 2008 we reclassified the $57million mandatorily redeemable series Z preferred stock as a short termliability which resulted in our working capital decreasing $51.4 million to adeficit of $47.8 million on July 1, 2008 compared to a surplus of $3.6million on January 1, 2008.  Thereclassification was partially offset by $5.6 million that was primarily due tothe increased cash flow stemming from an increase in profitability at ourcompany-owned restaurants, and a decrease in our accounts receivable along withdecreases in our other current assets and current liabilities.  Short-term debt and the current portion of long-termdebt increased by $0.2 million related to the timing of when the payments aredue compared to our fiscal year-end.

 

*CashProvided by Operations*

 

This$14.4 million increase was due primarily to a $9.9 million increase in netincome and $7.5 million of changes to our operating assets and liabilities suchas accounts receivable, inventories, prepaid expenses, accounts payable andaccrued expenses. Net cash generated by operating activities was $22.7 millionfor the twenty-six weeks ended July 1, 2008 compared to $8.3 million forthe same period in 2007.

 

*CashUsed in Investing Activities*

 

Duringthe twenty-six weeks ended July 1, 2008, we used approximately $12.5million of cash to purchase additional property and equipment that included$3.7 million to open six new restaurants in 2008, $0.7 million in payments forrestaurants that opened in 2007, and $0.3 million towards 12 restaurants thatare currently under construction and are scheduled to open in 2008; $3.7million for upgrading existing restaurants in 2008, $0.1 million for restaurantsthat were upgraded in 2007 and $0.2 million of upgrades that are in process andare scheduled to be completed in 2008; $2.5 million for replacement ofequipment at our existing company-owned

 

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restaurants,$0.3 million for equipment at our manufacturing operations, and $1.0 millionfor general corporate purposes.

 

Duringthe twenty-six weeks ended July 3, 2007, we used approximately $12.4million of cash to purchase additional property and equipment that included$1.0 million to open two new restaurants in 2007, $0.6 million in payments forrestaurants that opened in 2006, and $1.0 million towards 10 restaurants thatare currently under construction and were opened in 2007 and 2008; $1.1 millionfor upgrading existing restaurants, $4.5 million for replacement of oldequipment with new equipment at our existing company-owned restaurants, $1.1million for our manufacturing operations, $1.3 million for general corporatepurposes, and $1.8 for leasehold improvements and build-out related to our newcorporate headquarters.

 

Weanticipate that the majority of our capital expenditures for the remainder offiscal 2008 will be focused on the addition of at least 18 new company-ownedrestaurants during 2008 at an average investment of approximately $600,000 perrestaurant, which varies depending upon square footage, layout and location. Wealso upgraded 27 of our current restaurants during the twenty-six weeks ended July 1,2008 and intend to upgrade at least 18 more during the remainder of 2008.

 

*Cash Provided by (Used in) Financing Activities*

 

Forthe twenty-six weeks ended July 1, 2008, $1.3 million in cash was used infinancing activities compared to $4.6 million of cash provided by financingactivities in the same period in 2007. The primary use of funds in 2008 wasfrom principal payments on our debt.

 

Forthe twenty-six weeks ended July 3, 2007, we received $90.0 million incash, and incurred $6.4 million in stock issuance costs as a result of oursecondary public offering of common stock. Concurrent with our June 28,2007 amendment to our First Lien Term Loan, we drew down an additional $11.9million in debt and incurred an additional $0.8 million in debt issuancecosts.  The funds from these two transactions were used to pay off the$65.0 million Second Lien Term Loan and the $25.0 Million Subordinated Note and$2.5 million of related paid-in-kind interest on the Subordinated Note.

 

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*Contractual Obligations*

 

Thefollowing table summarizes the amounts of payments due under specifiedcontractual obligations as of July 1, 2008:

 
| ** **                                           | ** ** | **Payments Due by Fiscal Period** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2008**                          | ** ** | **2009 to 2011** | ** ** | **2012 to  2013** | ** ** | **2014 and  thereafter** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **(in thousands of dollars)**     | ** ** |
| Accounts  payable and accrued expenses               |       | $                                 | 25,267     |   | $ | — |   | $ | — |   | $ | — |   | $ | 25,267 |   |
| Debt                                                 |       | 505                               |       | 2,925 |   | 84,950 |   | — |   | 88,380 |   |
| Estimated  interest expense on our debt facility (a) |       | 2,352                             |       | 14,120 |   | 2,622 |   | — |   | 19,094 |   |
| Manditorily  redeemable series Z                     |       | —                            |       | 57,000 |   | — |   | — |   | 57,000 |   |
| Minimum  lease payments under capital leases         |       | 45                                |       | 73 |   | — |   | — |   | 118 |   |
| Minimum  lease payments under operating leases       |       | 14,169                            |       | 66,440 |   | 13,214 |   | 12,261 |   | 106,084 |   |
| Purchase  obligations (b)                            |       | 15,799                            |       | 10,786 |   | — |   | — |   | 26,585 |   |
| Other  long-term obligations (c)                     |       | —                            |       | 750 |   | 500 |   | 5,524 |   | 6,774 |   |
| Total                                                |       | $                                 | 58,137     |   | $ | 152,094 |   | $ | 101,286 |   | $ | 17,785 |   | $ | 329,302 |   |

 

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| (a)    |   | Calculated  as of July 1, 2008, using the LIBOR and U.S. Prime rates, plus the  applicable margin in effect. Because the interest rates on the first lien  term loan facility and the revolving credit facility are variable, actual  payments could differ materially. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                         |
| (b)    |   | Purchase  obligations consist of non-cancelable minimum purchases of frozen dough and  certain other raw ingredients that are used in our products.                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                         |
| (c)    |   | Other  long-term obligations primarily consist of the remaining liability related to  minimum future purchase commitments with a supplier that advanced us $10.0  million in 1996.                                                                                           |

 

*Insurance*

 

Weare insured for losses related to health, general liability and workers’compensation under large deductible policies. The insurance liability representsan estimate of the ultimate cost of claims incurred and unpaid as of thebalance sheet date. The estimated workers’ compensation liability isestablished based on actuarial estimates, is discounted at 10% based upon adiscrete analysis of actual claims and historical data and is reviewed on aquarterly basis to ensure that the liability is appropriate. If actual trends,including the severity or frequency of claims, differ from our estimates ourfinancial results could be favorably or unfavorably impacted.  The estimated workers’ compensation liabilityis included in accrued expenses in our consolidated balance sheets.

 

**Consumer Spending Habits and Impact of Inflation**

 

Ourresults depend on consumer spending, which is influenced by consumer confidence,disposable income and general economic conditions. In particular, the effectsof higher energy, food costs, increases in the rate of foreclosures, marketuncertainty, and a reduction in the availability of credit, among other things,may impact discretionary consumer spending in restaurants. Accordingly, webelieve we experience declines in comparable store sales during economicdownturns or during periods of economic uncertainty. Any material decline inthe amount of discretionary spending could have a material adverse effect onour sales and income.

 

**Impact of Agricultural Commodities**

 

Ourcost of sales consist of cost of goods sold, which is made up of food andproduct costs, compensation costs, and operating costs.  Wheat, butter, and cheese are our primaryagricultural commodities and represent 10.9%,

 

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3.7%and 2.4% of our cost of goods sold, respectively. In addition, coffee, chickenand turkey are the other major agricultural commodities and represent 4.6% ofour cost of goods sold.   For the lastfew years, cost increases in one or more of our agricultural commodities weregenerally modest in relation to our total cost of sales. In 2007, however, theprice for a bushel of wheat began to rise at a rapid rate and reached new pricelevels that were unprecedented. The increase is related to substantially lowerending stock of wheat as well as fears related to lower harvests which is aresult of lower plantings, unfavorable weather conditions, and lost acreage toother competing crops.

 

Towardsthe end of 2007, we utilized a subsidiary of Cargill, Incorporated to assist usin managing the price of our purchases of wheat. Through this relationship wehave secured our wheat requirements as well as established the price for wheatfor virtually all of our needs in fiscal 2008 and have begun to take positionsfor 2009. To offset the impact of higher wheat prices, we implemented a priceincrease in early 2008 at our Einstein Bros. restaurants and in June 2008at our Noah’s restaurants.

 

**Impact of Inflation on Labor**

 

Wepay many of our employees hourly rates above the applicable federal, state ormunicipal “living wage” rates. Ongoing changes in minimum wage laws havecreated pressure to increase the pay scale for our associates, which wouldincrease our labor costs.

 

**Impact of Inflation on Other Elements of Cost**

 

Wehave experienced only a modest impact from inflation.  However, the impact of inflation ondistribution and occupancy costs could, in the future, significantly affect ouroperations. Costs for construction, taxes, repairs, maintenance and insuranceall impact our occupancy costs. We believe our current strategy, which is toseek to maintain operating margins through a combination of menu priceincreases, menu mix, cost controls, hours of operations, efficient purchasingpractices and careful evaluation of property and equipment needs, has been aneffective tool for dealing with inflation.

 

**Seasonality and Quarterly Results**

 

Ourbusiness is subject to seasonal fluctuations. Significant portions of our netrevenues and results of operations are realized during the fourth quarter ofthe fiscal year, which includes the December holiday season. Because ofthe seasonality of the business and the industry, results for any quarter arenot necessarily indicative of the results that may be achieved for any otherquarter or the full fiscal year.

 

### ***Critical Accounting Policies and Estimates***

### * *

Inthe first quarter of 2008, we reviewed the depreciable lives of our assets anddetermined that the economic useful life for leasehold improvements on newrestaurants should be the shorter of 10 years or the life of the lease, whichis typically 10 years.  We alsodetermined that the economic useful lives of our restaurant upgrades should bethe shorter of 5 years or the life of the lease. However, as we approve ourrestaurants to be upgraded, we simultaneously review the lease, and typicallyonly upgrade those locations that have a renewal option and we are reasonablyassured that the lease will be renewed.

 

Inthe first quarter of 2008, we reviewed the expected term of our options andSARs using the guidance under SFAS 123(R) and SAB 110.  Previously, all options had an expected termof 4 years, but subsequent to our secondary offering and listing back onto theNASDAQ Global Market exchange, we determined that each plan should be evaluatedseparately and we revised the expected term for newly issued options.  We estimated that the expected term for the2003 Executive Employee Incentive Plan, the 2004 Stock Option Plan forIndependent Directors, and the Stock Appreciation Rights Plan should be 6 years,2.75 years and 3.25 years, respectively.

 

Theeffect of these two changes in estimates are recorded prospectively inaccordance with SFAS 154 *AccountingChanges and Error Corrections*. These changes, individually and in the aggregate, do not materiallychange the income from operations, net income or the net income per commonshare.

 

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Therewere no other material changes in our critical accounting policies since thefiling of our 2007 Form 10-K. As discussed in that filing, the preparationof the consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makecertain estimates and assumptions that affect the amount of reported assets andliabilities and disclosure of contingent assets and liabilities at the date of theconsolidated financial statements and revenues and expenses during the periodsreported. Actual results may differ from those estimates.

 

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**Item3.  Quantitative and Qualitative Disclosures about Market Risk**

 

During the thirteen andtwenty-six weeks ended July 1, 2008 and July 3, 2007, our results of operations,financial position and cash flows have not been materially affected by changesin the relative values of non-U.S. currencies to the U.S. dollar. We do not usederivative financial instruments to limit our foreign currency risk exposuresince virtually all of our business is conducted in the United States.

 

Our manufacturing operationssell bagels to a wholesaler and a distributor who take possession in the UnitedStates and sell outside of the United States. As the product is shipped FOBdomestic dock, there are no international risks of loss or foreign exchangecurrency issues. Sales shipped internationally are included in manufacturingand commissary revenue. We recognized revenue for these international shipmentswithin manufacturing and commissary revenues of approximately $0.9 million and$1.5 million the thirteen weeks ended July 3, 2007 and July 1, 2008,respectively and $1.6 million and $2.6 million for the twenty-six weeks ended July 3,2007 and July 1, 2008, respectively. We continue to look for other international opportunities.

 

Our debt as of July 1,2008 was principally composed of the amended Revolving Facility and First LienTerm Loan.  For fixed rate debt, interestrate changes affect the fair market value of such debt but do not impactearnings or cash flows. Conversely for variable rate debt, including borrowingsunder our revolving facility and first lien term loan, interest rate changesgenerally do not affect the fair market value of such debt, but do impactfuture earnings and cash flows, assuming other factors are held constant. A 100basis point increase in short-term effective interest rates would increase ourinterest expense by approximately $0.9 million annually, assuming no change inthe size or composition of debt as of July 1, 2008, and presuming theutilization of our accumulated net operating losses would minimize the taximplications for the next several years. Currently, the interest rates on our revolving facility and first lien termloan are predominantly at LIBOR rates plus an applicable margin throughshort-term fixed rate financing. The estimated increase in interest expenseincorporates the fixed interest financing into its assumptions.  On May 7, 2008, we entered into aninterest rate swap agreement, to fix our rate on $60 million of our debt to3.52% plus an applicable margin for the next two years, effective August 2008.

 

On an annual basis, wepurchase a substantial amount of agricultural products that are subject tofluctuations in price based upon market conditions. Our purchase arrangementsmay contain contractual features that limit the price paid by establishingcertain price floors or caps. We do not use financial instruments to hedgecommodity prices.  We have utilized asubsidiary of Cargill, Incorporated to manage our wheat purchases for ourcompany-owned production facility.  Inaddition to wheat, we have established contracts and entered into commitmentswith our vendors for butter, cheese, coffee and turkey.

 

Thismarket risk discussion contains forward-looking statements. Actual results maydiffer materially from this discussion based upon general market conditions andchanges in domestic and global financial markets.

 

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**Item4.  Controls and Procedures**

 

*Evaluation of Disclosure Controls and Procedures*

 

Anevaluation was carried out under the supervision and with the participation ofcompany management, including our chief executive officer and chief financialofficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934, as amended) as of July 1, 2008. Basedupon that evaluation, our chief executive officer and our chief financialofficer have concluded that the design and operation of our disclosure controlsand procedures were effective in timely making known to them materialinformation relating to the Company required to be disclosed in reports that wefile or submit under the Exchange Act rules.

 

Itshould be noted that any system of controls, however well designed andoperated, can provide only reasonable assurance regarding management’s controlobjectives. In addition, the design of any control system is based in part uponcertain assumptions about the likelihood of future events. Because of these andother inherent limitations of control systems, there can be no assurance thatany design will succeed in achieving its stated goals under all potentialfuture conditions, regardless of how remote.

 

*Changes in Internal Control over Financial Reporting*

 

Duringthe twenty-six weeks ended July 1, 2008, there were no changes to ourinternal controls over financial reporting that were identified in connectionwith the evaluation of our disclosure controls and procedures required by theExchange Act rules and that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

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**PART II- OTHER INFORMATION**

 

**Item 1.   Legal Proceedings**

 

Informationregarding legal proceedings is incorporated by reference from Note 10 to ourConsolidated Financial Statements set forth in Part I of this report.

 

### ***Item 1A. Risk Factors***

### * *

Part I,Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 1,2008 describes important factors that could cause our actual operating resultsto differ materially from those indicated or suggested by forward-lookingstatements made in this Form 10-Q or presented elsewhere by managementfrom time-to-time. These factors include but are not limited to the following:

 

**Risk Factors Relating to Our Business and Our Industry**

 

*General economic conditions haveaffected, and could continue to affect, discretionary consumer spending,particularly spending for meals prepared away from home.*

 

International, national and local economic conditions, including creditand mortgage markets, energy costs, lay-offs, foreclosure rates, and similaradverse economic news and factors affect discretionary consumer spending. Thesefactors could reduce consumers’ discretionary spending with in turn couldreduce our guest traffic or average check. In 2006 and 2007, restaurants industry-wide were adversely affected as aresult of reduced consumer spending due to rising fuel and energy costs.  The conditions experienced recently alsoinclude reduced consumer confidence, on-going concerns about the housingmarket, concerns over the stability of financial institutions, and increasedhealth care and energy costs.  Adversechanges in consumer discretionary spending, which could be affected by manydifferent factors which are out of our control, including those listedabove, could harm our business prospects, financial condition, operatingresults and cash flows.  Our success willdepend in part upon our ability to anticipate, identify and respond to changingeconomic and other conditions.

 

*Failure to protect food suppliesand adhere to food safety standards could result in food-borne illnesses and/orinjuries to our guests. Damage to our reputation for serving high quality, safefood could adversely affect our results.*

 

Food safety and reputation for quality is the most significant risk toany company that operates in the restaurant industry. Food safety is the focusof increased government regulatory initiatives at the local, state and federallevels.

 

Failure to protect our food supply or enforce food safety policies,such as proper food temperatures and adherence to shelf life dates, couldresult in food-borne illnesses and/or injuries to our guests. Also, our reputationof providing high quality food is an important factor in choosing ourrestaurants. Instances of food borne illness, including listeriosis, salmonellaand e-coli, whether or not traced to our restaurants, could reduce demand forour menu offerings. If any of our guests become ill from consuming ourproducts, the affected restaurants may be forced to close. An instance of foodcontamination originating from one of our restaurants, our commissaries orsuppliers, or our manufacturing plant could have far-reaching effects, as thecontamination, or the perception of contamination could affect substantiallyall of our restaurants. In addition, publicity related to either productcontamination or recalls may cause our guests to cease frequenting our restaurantsbased on fear of such illnesses*.* For example,the recent outbreak of salmonella may affect the public’s perception of foodsafety at restaurants and,

 

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in particular, in restaurants that serve suspected products and this inturn, could cause consumers to cease frequenting our restaurants.

 

*Changesin consumer preferences could harm our financial results.*

 

Numerous factors including changes in consumer tastes and preferencesoften affect restaurants.  Shifts inconsumer preferences away from our type of cuisine and/or the fast-casual stylecould have a material effect on our results of operations.  Dietary trends, such as the consumption offood low in carbohydrate content have, in the past, and may, in the future,negatively impact our sales. Changes in our guests’ spending habits andpreferences could have a material adverse effect on our sales.  Our results will depend on our ability torespond to changing consumer preferences and tastes.

 

*Increasingcommodity prices would adversely affect our gross profit.*

 

Recent global demand for commodities such as wheat has resulted inhigher prices for flour and has increased our costs.  The prices of our main ingredients aredirectly associated with the changing weather conditions as well as economicfactors such as supply and demand of certain commodities within the UnitedStates and other countries.  Our abilityto forecast and manage our commodities could significantly affect our grossmargins.

 

Due to increased demand for ethanol, the cost of corn has increasedsubstantially, which has increased the cost of corn-sourced ingredients as wellas other commodities such as wheat, the primary ingredient in most of ourproducts.  We expect that this demand andthese commodity pressures to continue for 2008 and into 2009 as well. Anyincrease in the prices of the ingredients most critical to our products, suchas wheat, could adversely affect our operating results.

 

Additionally, in the event of destruction of products such as tomatoesor peppers or massive culling of specific animals such as chickens or turkeysto prevent the spread of disease, the supply and availability of ingredientsmay become limited. This could dramatically increase the price of certain menuitems which could decrease sales of those items or could force us to eliminatethose items from our menus entirely. All of these factors could adverselyaffect our business, reputation and financial results.

 

*We maynot be successful in implementing any or all of the initiatives of our businessstrategy.*

 

Our success depends in part on our ability to understand and satisfythe needs of our guests, franchisees and licensees. Our business strategyconsists of several initiatives:

 

· expand sales at our existing company-owned restaurants;

· open new company-owned restaurants; and

· open new franchised and licensed restaurants.

 

Our ability to achieve any or all of these initiatives is uncertain.Our success in expanding sales at company-owned restaurants through varioussub-initiatives including: developing new menu offerings and broadening ourofferings across multiple dayparts, improving our ordering and production systems,expanding our catering program and upgrading our restaurants is dependent inpart on our ability to predict and satisfy consumer preferences and asmentioned above, consumers ability to respond positively in a troublesomeeconomic environment. Our success in growing our business through opening newcompany-owned restaurants is dependent on a number of factors, including ourability to: find suitable locations, reach acceptable lease terms, haveadequate capital, find available contractors, obtain licenses and permits,locate and train appropriate staff and properly manage the new restaurant. Oursuccess in opening new franchised and licensed restaurants is dependent upon,among other factors, our ability to: attract quality businesses to invest inour core brands, maintain the effectiveness of our franchise disclosuredocuments in target states, offer restaurant solutions for a variety oflocation types and the ability of our franchisees and licensees to: findsuitable locations, reach acceptable lease terms, have adequate capital, securereasonable

 

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financing, find available contractors, obtain licenses and permits,locate and train staff appropriately and properly manage the new restaurants.Accordingly, we may not be able to open or upgrade as many restaurants or grantas many franchises or licenses as we project or otherwise execute on ourstrategy. If we are not successful in implementing any or all of theinitiatives of our business strategy, it could have a material adverse effecton our business, results of operations, and financial condition.

 

*Oursales and profit growth could be adversely affected if comparable store salesare less than we expect.*

 

The level of growth in comparable store sales significantly affects ouroverall sales growth and will be a critical factor affecting profit growth. Ourability to increase comparable store sales depends in part on our ability tooffer hospitality and attractive menu items, and successfully implement ourinitiatives to increase throughput, such as increasing the speed at which ouremployees serve each guest. Factors such as traffic patterns, localdemographics, the type, number and location of competing restaurants andeconomic climate may adversely affect the performance of individualrestaurants. It is possible that we will not achieve our targeted comparablestore sales growth or that the change in comparable store sales could benegative and could adversely impact our sales and profit growth.

 

*Competition in the restaurantindustry is intense, and we may fall short of our revenue and profitabilitytargets if we are unable to compete successfully.*

 

Our industry is highly competitive and there are many well-establishedcompetitors with substantially greater financial and other resources than wehave. Although we operate in the fast-casual segment of the restaurantindustry, we also consider restaurants in the fast-food and full-servicesegments to be our competitors. Several fast-casual and fast-food chains arefocusing more on breakfast offerings and expanding their coffee offerings. Thiscould further increase competition in the breakfast daypart. In addition to currentcompetitors, one or more new major competitors with substantially greaterfinancial, marketing and operating resources could enter the market at any timeand compete directly against us. Also, in virtually every major metropolitanarea in which we operate or expect to enter, local or regional competitorsalready exist. This may make it more difficult to obtain real estate andadvertising space, and to attract and retain guests and personnel.

 

*We occupy our company-ownedrestaurants under long-term non-cancelable leases, and we may be unable torenew leases at the end of their lease periods or obtain new leases onacceptable terms.*

 

We do not own any real property, and all of our company-ownedrestaurants are located in leased premises. Many of our current leases arenon-cancelable and typically have terms ranging from five to ten years with twothree- to five-year renewal options. We believe leases that we enter into inthe future likely will also be long-term and non-cancelable and have similarrenewal options. Most of our leases provide that the landlord may increase therent over the term of the lease, and require us to pay our proportionate shareof the cost of insurance, taxes, maintenance and utilities. If we close arestaurant, we generally remain committed to perform our obligations under theapplicable lease, which would include, among other things, payment of the baserent for the balance of the lease term. In some instances, we may be unable toclose an underperforming restaurant due to continuous operation clauses in ourlease agreements. Our obligation to continue making rental payments in respectof leases for closed or underperforming restaurants could have a materialadverse effect on our business and results of operations.

 

Alternatively, at the end of the lease term and any renewal period fora restaurant, we may be unable to renew the lease without substantialadditional cost, if at all. If we are unable to renew our restaurant leases, wemay be forced to close or relocate a restaurant, which could subject us toconstruction and other costs and risks, and could have a material adverseeffect on our business and results of operations. For example, closing arestaurant, even during the time of relocation, will reduce the sales that therestaurant would have contributed to our revenues. Additionally, the revenueand profit, if any, generated at a relocated restaurant may not equal therevenue and profit generated at the existing restaurant. We also facecompetition from both restaurants and other retailers for suitable sites fornew restaurants. As a result, we may not be able to secure or renew leases foradequate sites at acceptable rent levels.

 

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*The cost of natural resources,such as energy, together with the cost, availability and quality of our rawingredients affect our results of operations.*

 

The cost, availability and quality of the ingredients that we use toprepare our food are subject to a range of factors, many of which are beyondour control. Fluctuations in economic and political conditions, product demand,weather, crops planted, and natural resources such as electricity, water, andfuel could adversely affect the cost of our ingredients. We have limitedcontrol over changes in the price and quality of these natural resources, sincewe typically do not enter into long-term pricing agreements for our ingredientsand production costs, such as energy and fuel. We may not be able to passthrough any future cost increases by increasing menu prices, as we have done inthe past. We and our franchisees and licensees are dependent on a constantsupply of energy, frequent deliveries of fresh ingredients, and regularconsumption of fuel, thereby subjecting us to the risk of shortages orinterruptions in supply of any of these items.

 

The cost of energy impacts our results of operations in severalways.  We have seen our cost ofelectricity gradually increase over time. Distribution costs related to fuelhave impacted our operations negatively. Additionally, travel costs, includinggas prices and airline fares, have been increasing significantly nationwide.These costs impact our results of operation currently and could impact usnegatively in the future.

 

*Ouroperations may be negatively impacted by adverse weather conditions and naturaldisasters.*

 

Adverse weather conditions and natural disasters could seriously affectregions in which our company-owned, franchised and licensed restaurants arelocated, regions that produce raw ingredients for our restaurants, or locationsof our distribution network. If adverse weather conditions or natural disasterssuch as fires and hurricanes affect our restaurants, we could experienceclosures, repair and restoration costs, food spoilage, and other significantreopening costs as well as increased food costs and delayed supply shipments,any of which would adversely affect our business.  In addition, if adverse weather or naturaldisasters affect our distribution network, we could experience shortages ordelayed shipments at our restaurants, which could adversely affect them.  Additionally, during periods of extremetemperatures (either hot or cold) or precipitation, many individuals choose tostay inside. This negatively impacts transaction counts in our restaurants andover extended periods of time could adversely affect our business and resultsof operations.

 

The effects of hurricanes, fires, freezes and other adverse weatherconditions are likely to affect supply of and costs for raw ingredients andnatural resources, near-term construction costs for our new restaurants as wellas sales in our restaurants going forward. If we are not able to anticipate orreact to changing costs of food and other raw materials by adjusting ourpurchasing practices or menu prices, our operating margins would likelydeteriorate.

 

*We have single suppliers for mostof our key ingredients, and the failure of any of these suppliers to perform couldharm our business.*

 

We currently purchase our raw materials from various suppliers;however, we have only one supplier for each of our key ingredients. We purchasea majority of our frozen bagel dough from a single supplier, who utilizes ourproprietary processes and on whom we are dependent in the short-term. All ofour remaining frozen bagel dough is produced at our dough manufacturingfacility in Whittier, California. Additionally, we purchase all of our creamcheese from a single source. Although to date we have not experiencedsignificant difficulties with our suppliers, our reliance on a single supplierfor each of our key ingredients subjects us to a number of risks, includingpossible delays or interruption in supplies, diminished control over qualityand a potential lack of adequate raw material capacity. Any disruption in thesupply or degradation in the quality of the materials provided by our supplierscould have a material adverse effect on our business, operating results andfinancial condition. In addition, any such disruptions in supply ordegradations in quality could have a long-term detrimental impact on ourefforts to maintain a strong brand identity and a loyal consumer base.

 

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*Failure of our distributors toperform adequately or any disruption in our distributor relationships couldadversely affect our business and reputation.*

 

Wedepend on our network of independent regional distributors to distribute frozenbagel dough and other products and materials to our company-owned, franchisedand licensed restaurants. Any failure by one or more of our distributors toperform as anticipated, or any disruption in any of our distributionrelationships for any reason, would subject us to a number of risks, includinginadequate products delivered to our restaurants, diminished control overquality of products delivered, and increased operating costs to prevent delaysin deliveries. Any of these events could harm our relationships with ourfranchisees or licensees, or diminish the reputation of our menu offerings orour brands in the marketplace. In addition, a negative change in the volume ofproducts ordered from our distributors by our company-owned, franchised and/orlicensed restaurants could increase our distribution costs. These risks couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

*Increasinglabor costs could adversely affect our results of operations and cash flows.*

 

We are dependent upon an available labor pool of associates, many ofwhom are hourly employees whose wages may be affected by increases in thefederal, state or municipal “living wage” rates. Numerous increases have beenmade on federal, state and local levels to increase minimum wage levels.Increases in state minimum hourly wage rates in some of the states in which weoperate became effective January 2008, and the federal minimum wageincreased on July 24, 2008 and the minimum wage will be raised again in2009. Increases in the minimum wage may create pressure to increase the payscale for our associates, which would increase our labor costs and those of ourfranchisees and licensees.

 

A shortage in the labor pool or other general inflationary pressures orchanges could also increase labor costs. In addition, changes in labor laws orreclassifications of associates from management to hourly employees couldaffect our labor cost. An increase in labor costs could have a material adverseeffect on our income from operations and decrease our profitability and cashflows if we are unable to recover these increases by raising the prices wecharge our guests.

 

*We may not be able to generatesufficient cash flow to make payments on our substantial amount of debt andmandatorily redeemable preferred stock.*

 

We have a considerable amount debt and are substantially leveraged. Asof July 1, 2008, we had $88.4 million in term loans and notes outstanding.  In addition, we may, subject to certainrestrictions, incur substantial additional indebtedness in the future. Our highlevel of debt, among other things, could:

 

· make it difficult for us to satisfy our obligations under ourindebtedness;

· limit our ability to obtainadditional financing for working capital, capital expenditures, acquisitionsand general corporate purposes;

· increase our vulnerability to downturns in our business or the economygenerally;

· increase our vulnerability to volatility in interest rates; and

· limit our ability to withstand competitive pressures from our lessleveraged competitors.

 

Economic, financial, competitive, legislative and other factors beyondour control may affect our ability to generate cash flow from operations tomake payments on our indebtedness and to fund necessary working capital. Asignificant reduction in operating cash flow would likely increase the need foralternative sources of liquidity. If were unable to generate sufficient cashflow to make payments on our debt, we will have to pursue one or morealternatives, such as reducing or delaying capital expenditures, refinancingour debt on terms that are not favorable to us, selling assets or issuingadditional equity securities. We may not be able to accomplish any of thesealternatives on satisfactory terms, if at all, and even if accomplished, theymay not yield sufficient funds to service our debt.

 

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We also have $57.0 million of mandatorily redeemable preferred stockdue June 30, 2009.  Given thecurrent credit climate we may not be able to successfully syndicate thecommitment we have for an incremental loan, or find additional financing at allthat would be used to pay the series Z obligation.

 

*We must comply with certaincovenants inherent in our debt agreements to avoid defaulting under thoseagreements.*

 

Our current debt agreements contain certain covenants, which, amongothers, include certain financial covenants such as limitations on capitalexpenditures, maintenance of the business, use of proceeds from sales of assetsand consolidated leverage and fixed charge coverage ratios as defined in theagreements. The covenants also preclude the declaration and payment ofdividends or other distributions to holders of our common stock. We are subjectto multiple economic, financial, competitive, legal and other risks that arebeyond our control and could harm our future financial results. Any adverseeffect on our business or financial results could affect our ability tomaintain compliance with our debt covenants, and any failure by us to complywith these covenants could result in an event of default. If we were to defaultunder our covenants and such default were not cured or waived, our indebtednesscould become immediately due and payable, which could render us insolvent.

 

*We facethe risk of adverse publicity and litigation in connection with our operations.*

 

We are from time to time the subject of complaints or litigation fromour consumers alleging illness, injury or other food quality, health oroperational concerns. Adverse publicity resulting from these allegations maymaterially adversely affect us, regardless of whether the allegations are validor whether we are liable. In addition, employee claims against us based on,among other things, discrimination, harassment or wrongful termination,improper classification of management employees as exempt employees or otherlabor code violations may divert financial and management resources that wouldotherwise be used to benefit our future performance. There is also a risk oflitigation from our franchisees with regard to the terms of our franchisearrangements. We have been subject to a variety of these and other claims fromtime to time, and although these claims have not historically had a materialimpact on our operations, a significant increase in the number of these claimsor the number that are successful, including the claims described in Note 10 toour Consolidated Financial Statements set forth in Part I of this report,could materially adversely affect our business, prospects, financial condition,operating results or cash flows.

 

*Aregional or global health pandemic could severely affect our business.*

 

A health pandemic is a disease that spreads rapidly and widely byinfection and affects many individuals in an area or population at the sametime. In 2004, 2005 and 2006, Asian and European countries experiencedoutbreaks of avian flu and it is possible that it will continue to migrate tothe United States where our restaurants are located. If a regional or globalhealth pandemic were to occur, depending upon its duration and severity, ourbusiness could be severely affected. We have positioned ourselves as a “neighborhoodatmosphere” between home and work where people can gather for human connectionand high quality food. Customers might avoid public gathering places in theevent of a health pandemic, and local, regional or national governments mightlimit or ban public gatherings to halt or delay the spread of disease. Aregional or global pandemic might also adversely impact our business bydisrupting or delaying production and delivery of products and materials in oursupply chain and causing staff shortages in our restaurants. The impact of ahealth pandemic might be disproportionately greater on us than on othercompanies that depend less on the gathering of people in a neighborhoodatmosphere.

 

*Our franchisees and licensees maynot help us develop our business as we expect, or could actually harm ourbusiness.*

 

We rely in part on our franchisees and licensees and the manner inwhich they operate their restaurants to develop and promote our business.Although we have developed criteria to evaluate and screen prospectivecandidates, the candidates may not have the business acumen or financialresources necessary to operate successful restaurants in their respectiveareas. In addition, franchisees and licensees are subject to business riskssimilar to what we face

 

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such as competition, consumer acceptance, fluctuations in the cost,availability and quality of raw ingredients, and increasing labor costs. Thefailure of franchisees and licensees to operate successfully could have amaterial adverse effect on us, our reputation, our ability to collectroyalties, our brands and our ability to attract prospective candidates.  Potential franchisees and licensees may havedifficulty obtaining proper financing as a result of the downturn in the creditmarkets.  As we offer and grantfranchises for our Einstein Bros. brand, our reliance on our franchisees isexpected to increase in proportion to growth of the franchisee base. Withrespect to franchising our Einstein Bros. brand, we may not be able to identifyfranchisees that meet our criteria, or to enter into franchise area developmentagreements with prospective franchisee candidates that we identify. As aresult, our franchise program for the Einstein Bros. brand may not grow at therate we currently expect, or at all.

 

*Our restaurants and products aresubject to numerous and changing government regulations. Failure to complycould negatively affect our sales, increase our costs or result in fines orother penalties against us.*

 

Each of our restaurants is subject to licensing and regulation by thehealth, sanitation, safety, labor, building and fire agencies of the respectivestates, counties, cities and municipalities in which it is located. A failureto comply with one or more regulations could result in the imposition ofsanctions, including the closing of facilities for an indeterminate period oftime, or third party litigation, any of which could have a material adverseeffect on us and our results of operations.

 

Many recent government bodies have begun to legislate or regulatehigh-fat and high sodium foods as a way of combating concerns about obesity andhealth. Several municipalities are requiring restaurants and other food serviceestablishments to phase-out artificial trans-fat by certain dates in 2008,including New York City, New York, Philadelphia, Pennsylvania, and King County(Seattle), Washington. Many other states are considering laws banning trans-fatin restaurant food. Because we do use trans-fat in a few of our products,federal, state or local regulations in the future may limit sales of certain ofour foods or ingredients. Public interest groups have also focused attention onthe marketing of high-fat and high-sodium foods to children in a stated effortto combat childhood obesity. San Francisco and New York City have recentlyadopted regulations requiring disclosure of nutritional, including calorieinformation on menus and/or menu boards. Additional cities or states maypropose or adopt similar regulations. The cost of complying with theseregulations could increase our expenses and the possible negative publicityarising from such legislative initiatives could reduce our future sales.

 

Our franchising operations are subject to regulation by the FederalTrade Commission. We must also comply with state franchising laws and a widerange of other state and local rules and regulations applicable to ourbusiness. The failure to comply with federal, state and local rules andregulations would have an adverse effect on us.

 

Under various federal, state and local laws, an owner or operator ofreal estate may be liable for the costs of removal or remediation of certainhazardous or toxic substances on or in such property. Such liability may beimposed without regard to whether the owner or operator knew of, or wasresponsible for, the presence of such hazardous or toxic substances. Althoughwe are not aware of any environmental conditions that require remediation by usunder federal, state or local law at our properties, we have not conducted acomprehensive environmental review of our properties or operations. We may nothave identified all of the potential environmental liabilities at ourproperties, and any such liabilities that are identified in the future may havea material adverse effect on our financial condition.

 

*We maynot be able to protect our trademarks, service marks and other proprietaryrights.*

 

We believe our trademarks, service marks and other proprietary rightsare important to our success and our competitive position. Accordingly, wedevote substantial resources to the establishment and protection of ourtrademarks, service marks and proprietary rights. However, the actions we takemay be inadequate to prevent imitation of our products and concepts by others, to prevent various challenges to ourregistrations or applications or denials of applications for the registrationof trademarks, service marks and proprietary rights in the U.S. or other 

 

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countries, or to prevent othersfrom claiming violations of their trademarks and proprietary marks. Inaddition, others may assert rights in our trademarks, service marks and otherproprietary rights.

 

*Our ability to use net operatingloss carryforwards to offset future taxable income for U.S. federal income taxpurposes is subject to limitation.*

 

In general, under Section 382 of the Internal Revenue Code, acorporation that undergoes an “ownership change” is subject to limitations onits ability to utilize its pre-change net operating loss (“NOL”) carryforwardsto offset future taxable income. A corporation generally undergoes an “ownershipchange” when the stock ownership percentage (by value) of its “5 percentstockholders” increases by more than 50 percentage points over any three-yeartesting period.

 

As of July 1, 2008, our NOL carryforwards for U.S. federal incometax purposes were approximately $138.3 million. As a result of prior ownershipchanges, approximately $97.1 million of our NOL carryforwards are subject to anannual usage limitation of $4.7 million. Due to transactions involving the saleor other transfer of our stock from the date of our last ownership changethrough the date of the secondary public offering of our common stock, andchanges in the value of our stock during that period, such offering may resultin an additional ownership change for purposes of Section 382 or willsignificantly increase the likelihood that we will undergo an additionalownership change in the future (which could occur as a result of transactionsinvolving our stock that are outside of our control).   In either event, the occurrence of anadditional ownership change would limit our ability to utilize theapproximately $46.6 million of our NOL carryforwards that are not currentlysubject to limitation, and could further limit our ability to utilize ourremaining NOL carryforwards and possibly other tax attributes. Limitationsimposed on our ability to use NOL carryforwards and other tax attributes tooffset future taxable income could cause us to pay U.S. federal income taxesearlier than we otherwise would if such limitations were not in effect, andcould cause such NOL carryforwards and other tax attributes to expire unused,in each case reducing or eliminating the benefit of such NOL carryforwards andother tax attributes to us and adversely affecting our future cash flow. We arein the process of filing a request with the Internal Revenue Service to reviewour methodology for determining ownership changes in accordance with InternalRevenue Code Section 382.  Weanticipate this filing will be completed no later than September 15, 2008.Upon acceptance of our request, we believe that our NOL carryforwards will beavailable for utilization.  In the eventthat our request is not accepted, approximately $17.9 million of NOLcarryforwards will be at risk to expire prior to utilization.  Similar rules and limitations may applyfor state income tax purposes as well.

 

**Risk Factors Relating to Our Common Stock**

 

                                                *We havea majority stockholder.*

 

Greenlight Capital, L.L.C. and its affiliates beneficially ownapproximately 67.4% of our common stock. As a result, Greenlight has sufficientvoting power, without the vote of any other stockholders, to determine whatmatters will be submitted for approval by our stockholders to elect all of themembers of our board of directors, and to determine whether a change in controlof our company occurs. Greenlight’s interests on matters submitted tostockholders may be different from those of other stockholders. Greenlight hasvoted its shares to elect our current board of directors, and the chairman ofour board of directors is a current employee of Greenlight.

 

We have listed our common stock on the NASDAQ Global Market. NASDAQ rules willrequire us to have an audit committee consisting entirely of independentdirectors. However, under NASDAQ rules, if a single stockholder holds more that50% of the voting power of a listed company, that company is considered acontrolled company, and is exempt from several other corporate governancerules, including the requirement that companies have a majority of independentdirectors and independent director involvement in the selection of directornominees and in the determination of executive compensation. As a result, ourstockholders will not have, and may never have, the protections that these rules areintended to provide. The Company currently has a majority of independentdirectors on the board of directors.

 

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*Futuresales of shares of our common stock by our stockholders could cause our stockprice to fall.*

 

Ifa substantial number of shares of our common stock are sold in the publicmarket, the market price of our common stock could fall. The perception amonginvestors that these sales will occur could also produce this effect. Ourmajority stockholder, Greenlight, beneficially owns approximately 67.4% of ourcommon stock and sales by Greenlight or a perception that Greenlight will sellcould cause a decrease in the market price of our common stock.

 

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**Item 4.  ****Submissionof Matters to a Vote of Security Holders**

 

(a)                                   The Annual Meeting of Shareholders of theCompany was held on May 6, 2008   in connection with whichit filed a Proxy Statement with the SEC on April 2, 2008.

 

(c)                                   The following matters were voted upon atthe meeting and approved by the Shareholders:

 

                                                 (1)             Eachof the nominees, as described in the Proxy Statement referenced above, wasre-elected as a director to hold office until the next Annual Meeting ofShareholders or until his successor is elected and qualified.

 
| **Nominee  Name**                | ** ** | **Votes For** | ** ** | **Votes Against or  Withheld** |
|----------------------------------|------------|---------------|------------|--------------------------------|
| Michael  W. Arthur               |       | 15,174,885    |       | 366,592                        |
|                             |       |          |       |                           |
| E.  Nelson Heumann               |       | 13,496,690    |       | 2,044,787                      |
|                             |       |          |       |                           |
| Frank  C. Meyer                  |       | 15,173,669    |       | 367,808                        |
|                             |       |          |       |                           |
| Thomas  J. Mueller               |       | 15,305,286    |       | 236,191                        |
|                             |       |          |       |                           |
| Paul  J.B. Murphy III            |       | 13,496,714    |       | 2,044,763                      |
|                             |       |          |       |                           |
| S.  Garrett Stonehouse, Jr. |       | 15,174,886    |       | 366,591                        |

 

(2)             Proposal to ratify the appointment ofGrant Thornton LLP, an independent registered public accounting firm,  as independent auditors for the fiscal yearending December 30, 2008.

 
| **Votes  For** | ** ** | **Votes Against** | ** ** | **Abstentions** |
|----------------|------------|-------------------|------------|-----------------|
| 15,539,918     |       | 1,110             |       | 449             |

 

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**Item 6.  Exhibits**

 
| 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   |   | Certification by Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002      |
|   |   |                                                                                                                                                               |
| 32.2   |   | Certification by Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002      |
|   |   |                                                                                                                                                               |
| 32.3   |   | Certification by Chief  Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     |

 

**Signatures**

 

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

 
|   |                | EINSTEIN NOAH RESTAURANT  GROUP, INC. |
|--------|---------------------|---------------------------------------|
|   |                |                                  |
|   |                |                                  |
| Date:  | August 6, 2008 | By: /s/ PAUL J. B.  MURPHY, III  |
|   |                | Paul J.B. Murphy, III            |
|   |                | Chief Executive Officer               |
|   |                |                                  |
| Date:  | August 6, 2008 | By: /s/ RICHARD P. DUTKIEWICZ         |
|   |                | Richard P. Dutkiewicz                 |
|   |                | Chief Financial Officer               |
|   |                |                                  |

 

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