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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)



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



For quarterly period ended June 30, 2003



OR



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



For the transition period from  to
.



Commission file number 0-25886



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GARDEN FRESH RESTAURANT CORP.

(Exact name of registrant as specified in its charter)



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|Delaware                                                       |  | 33-0028786                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employee Identification No.)
|                                                              



15822 Bernardo
Center Drive, Suite A, San Diego, CA 92127

(Address of principal executive offices)(Zip Code)



Registrants telephone number, including area code: (858) 675-1600



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



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



The number of shares of Common Stock, $.01 par value, outstanding as of
August 1, 2003 was 5,796,000. There are no other classes of common stock.



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GARDEN FRESH RESTAURANT CORP.

FORM 10-Q



INDEX



|                                         |  |                                                                                              |  | PAGE
|---------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | ----
|PART I:            FINANCIAL
INFORMATION |  |                                                                                             
|                                         |  |                                                                                             
|Item 1:                                  |  | Unaudited Financial Statements                                                               |  |     
|                                         |  |                                                                                             
|                                         |  | Balance Sheets as of September 30, 2002 and June 30, 2003                                    |  | 3   
|                                         |  |                                                                                             
|                                         |  | Statements of Operations for the three and nine months ended June 30, 2002 and June 30, 2003 |  | 4   
|                                         |  |                                                                                             
|                                         |  | Statements of Cash Flows for the nine months ended June 30, 2002 and June 30, 2003           |  | 5   
|                                         |  |                                                                                             
|                                         |  | Notes to Unaudited Financial Statements                                                      |  | 6   
|                                         |  |                                                                                             
|Item 2:                                  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations        |  | 9   
|                                         |  |                                                                                             
|Item 3:                                  |  | Quantitative and Qualitative Disclosures About Market Risk                                   |  | 22  
|                                         |  |                                                                                             
|Item 4:                                  |  | Controls and Procedures                                                                      |  | 23  
|                                         | 
|PART II:            OTHER
INFORMATION    |  |                                                                                             
|                                         |  |                                                                                             
|Item 1:                                  |  | Legal Proceedings                                                                            |  | 24  
|Item 2:                                  |  | Changes in Securities                                                                        |  | 24  
|Item 3:                                  |  | Defaults Upon Senior Securities                                                              |  | 24  
|Item 4:                                  |  | Submission of Matters to a Vote of Security Holders                                          |  | 24  
|Item 5:                                  |  | Other Information                                                                            |  | 24  
|Item 6:                                  |  | Exhibits and Reports on Form 8-K                                                             |  | 24  



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GARDEN FRESH RESTAURANT CORP.



BALANCE SHEETS



(Dollars in thousands, except par value amounts)



|                                                                                                                                                                                                                                                                 |  | September 30, 2002 |         | June 30, 2003
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | -------------
|                                                                                                                                                                                                                                                                 |  |                    |         | (Unaudited)  
|ASSETS                                                                                                                                                                                                                                                           |  |                    |         |              
|Cash and cash equivalents                                                                                                                                                                                                                                        |  | $                  | 5,294   |              
|Inventories                                                                                                                                                                                                                                                      |  |                    | 9,123   |              
|Other current assets                                                                                                                                                                                                                                             |  |                    | 3,919   |              
|                                                                                                                                                                                                                                                                 |  |                    |         |              
|Total current assets                                                                                                                                                                                                                                             |  |                    | 18,336  |              
|                                                                                                                                                                                                                                                                 |  |                   
|Property and equipment, net                                                                                                                                                                                                                                      |  |                    | 132,638 |              
|                                                                                                                                                                                                                                                                 |  |                   
|Intangible and other assets                                                                                                                                                                                                                                      |  |                    | 2,032   |              
|                                                                                                                                                                                                                                                                 |  |                    |         |              
|TOTAL ASSETS                                                                                                                                                                                                                                                     |  | $                  | 153,006 |              
|                                                                                                                                                                                                                                                                 |  |                    |         |              
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                             |  |                    |         |              
|                                                                                                                                                                                                                                                                 |  |                   
|Accounts payable                                                                                                                                                                                                                                                 |  | $                  | 5,604   |              
|Current portion of long-term debt                                                                                                                                                                                                                                |  |                    | 10,635  |              
|Accrued liabilities                                                                                                                                                                                                                                              |  |                    | 11,743  |              
|                                                                                                                                                                                                                                                                 |  |                    |         |              
|Total current liabilities                                                                                                                                                                                                                                        |  |                    | 27,982  |              
|                                                                                                                                                                                                                                                                 |  |                   
|Deferred income taxes                                                                                                                                                                                                                                            |  |                    | 8,336   |              
|Long-term debt, net of current portion                                                                                                                                                                                                                           |  |                    | 32,970  |              
|Other liabilities                                                                                                                                                                                                                                                |  |                    | 3,485   |              
|                                                                                                                                                                                                                                                                 |  |                   
|Shareholders equity:                                                                                                                                                                                                                                            |  |                    |         |              
|Preferred stock, $.001 par value; 2,500,000 shares authorized at September 30, 2002 and June 30, 2003 of which 120,000 shares
are designated as Series A Preferred Stock; 0 shares issued and outstanding at September 30, 2002 and June 30, 2003, respectively. |  |                    |        |              
|Common stock, $.01 par value; 12,000,000 shares authorized at September 30, 2002 and June 30, 2003, respectively; 5,732,822 and
5,795,954 shares issued and outstanding at September 30, 2002 and June 30, 2003, respectively.                                   |  |                    | 57      |              
|Additional paid-in capital                                                                                                                                                                                                                                       |  |                    | 60,133  |              
|Retained earnings                                                                                                                                                                                                                                                |  |                    | 20,043  |              
|                                                                                                                                                                                                                                                                 |  |                    |         |              
|Total shareholders equity                                                                                                                                                                                                                                       |  |                    | 80,233  |              
|                                                                                                                                                                                                                                                                 |  |                    |         |              
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                       |  | $                  | 153,006 |              
|                                                                                                                                                                                                                                                                 |  |                    |         |              



See notes to
unaudited financial statements.



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GARDEN FRESH RESTAURANT CORP.

STATEMENTS OF OPERATIONS



(In thousands, except per share amounts)

(Unaudited)



|                                                             |  | Three Months Ended June 30, |        |   | Nine months ended June 30, |  
|------------------------------------------------------------ |  | --------------------------- | ------ | - | -------------------------- | -
|                                                             |  | 2002                        |        |   | 2003                       |  
|Net sales                                                    |  | $                           | 55,713 |   |                            | $
|Costs and expenses:                                          |  |                             |        |   |                            |  
|Costs of sales                                               |  |                             | 13,526 |   |                            |  
|Restaurant operating expenses:                               |  |                             |        |   |                            |  
|Labor                                                        |  |                             | 17,465 |   |                            |  
|Occupancy and other expenses                                 |  |                             | 13,115 |   |                            |  
|General and administrative expenses                          |  |                             | 3,237  |   |                            |  
|Restaurant opening costs                                     |  |                             | 25     |   |                            |  
|Depreciation and amortization                                |  |                             | 3,423  |   |                            |  
|                                                             |  |                             |        |   |                            |  
|Total costs and expenses                                     |  |                             | 50,791 |   |                            |  
|Operating income                                             |  |                             | 4,922  |   |                            |  
|Other income (expense):                                      |  |                             |        |   |                            |  
|Interest income                                              |  |                             | 22     |   |                            |  
|Interest expense                                             |  |                             | (1,138 | ) |                            |  
|Other expense, net                                           |  |                             | (19    | ) |                            |  
|                                                             |  |                             |        |   |                            |  
|Income before provision for income taxes                     |  |                             | 3,787  |   |                            |  
|Provision for income taxes                                   |  |                             | (1,544 | ) |                            |  
|                                                             |  |                             |        |   |                            |  
|Net income                                                   |  | $                           | 2,243  |   |                            | $
|                                                             |  |                             |        |   |                            |  
|Basic net income per common share                            |  | $                           | 0.39   |   |                            | $
|                                                             |  |                             |        |   |                            |  
|Shares used in computing basic net income per common share   |  |                             | 5,718  |   |                            |  
|                                                             |  |                             |        |   |                            |  
|Diluted net income per common share                          |  | $                           | 0.38   |   |                            | $
|                                                             |  |                             |        |   |                            |  
|Shares used in computing diluted net income per common share |  |                             | 5,975  |   |                            |  
|                                                             |  |                             |        |   |                            |  



See notes to
unaudited financial statements.



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GARDEN FRESH RESTAURANT CORP.

STATEMENTS OF CASH FLOWS



(Dollars in thousands)

(Unaudited)



|                                                                                   |  | Nine months ended June 30, |       
|---------------------------------------------------------------------------------- |  | -------------------------- | ------
|                                                                                   |  | 2002                       |       
|Cash flows from operating activities:                                              |  |                            |       
|Net income                                                                         |  | $                          | 3,945 
|Adjustments to reconcile net income to net cash provided by operating activities:  |  |                            |       
|Depreciation and amortization                                                      |  |                            | 10,171
|Loss on disposal of property and equipment                                         |  |                            | 353   
|Provision for deferred income taxes                                                |  |                            | 2,398 
|Tax benefit from exercise of common stock options                                  |  |                            |      
|Amortization of deferred gain on sale-leaseback of properties                      |  |                            | (37   
|Changes in operating assets and liabilities:                                       |  |                            |       
|Inventories                                                                        |  |                            | (828  
|Other current assets                                                               |  |                            | 753   
|Intangible and other assets                                                        |  |                            | (305  
|Accounts payable                                                                   |  |                            | (3,109
|Accrued liabilities                                                                |  |                            | 330   
|Other liabilities                                                                  |  |                            | 1     
|                                                                                   |  |                            |       
|Net cash provided by operating activities                                          |  |                            | 13,672
|                                                                                   |  |                            |       
|Cash flows from investing activities:                                              |  |                            |       
|Acquisition of property and equipment:                                             |  |                            |       
|New restaurant development                                                         |  |                            | (2,780
|Existing restaurant additions                                                      |  |                            | (4,287
|Decrease in construction costs included in accounts payable                        |  |                            | (805  
|Proceeds from sale-lease back transactions                                         |  |                            | 9,550 
|                                                                                   |  |                            |       
|Net cash used in investing activities                                              |  |                            | 1,678 
|                                                                                   |  |                            |       
|Cash flows from financing activities:                                              |  |                            |       
|Borrowings under line of credit                                                    |  |                            |      
|Repayments under line of credit                                                    |  |                            | (450  
|Proceeds from long-term debt                                                       |  |                            | 7,719 
|Repayment of short-term debt                                                       |  |                            | (5,700
|Repayment of long-term debt                                                        |  |                            | (8,483
|Net proceeds from issuance of common stock                                         |  |                            | 431   
|                                                                                   |  |                            |       
|Net cash used in financing activities                                              |  |                            | (6,483
|                                                                                   |  |                            |       
|Net increase in cash and cash equivalents                                          |  |                            | 8,867 
|Cash and cash equivalents at beginning of period                                   |  |                            | 165   
|                                                                                   |  |                            |       
|Cash and cash equivalents at end of period                                         |  | $                          | 9,032 
|                                                                                   |  |                            |       
|Supplemental disclosure of noncash investing and financing transactions:           |  |                            |       
|Property and equipment asset purchases in accounts payable and accrued liabilities |  | $                          | 100   
|Replacement of line of credit with short-term debt                                 |  | $                          | 8,700 



See notes to
unaudited financial statements.



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GARDEN FRESH RESTAURANT CORP.

NOTES TO UNAUDITED FINANCIAL STATEMENTS



| | 1. |  | BASIS OF PRESENTATION
| | -- |  | ---------------------



The accompanying financial statements have been prepared by Garden Fresh Restaurant Corp. (the Company) without audit and
reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of financial position and the results of operations for the interim periods. The statements have been
prepared in accordance with the regulations of the Securities and Exchange Commission and do not necessarily include certain information and footnote disclosures necessary to present the statements in accordance with accounting principles generally
accepted in the United States of America. For further information, refer to the financial statements and notes thereto for the fiscal year ended September 30, 2002 included in the Companys Form 10-K as filed with the Securities and Exchange
Commission.



The preparation of financial
statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.



| | 2. |  | STOCK BASED COMPENSATION
| | -- |  | ------------------------



In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of FASB Statement No. 123 (SFAS 148). SFAS 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure provisions of SFAS 148 in the quarter ended March 31, 2003.



At June 30, 2003, the Company had two
stock-based employee compensation plans, which consist of employee stock option grants and the employee stock purchase plan. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees and Related Interpretations. No compensation expense has been recognized for employee stock option grants, which are fixed in nature, as the options have been granted at fair value. No compensation expense has been
recognized for the employee stock purchase plan. Had the Company applied the provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, expense for the Companys stockbased compensation awards and employee stock
purchase plan shares issued during the three and nine months ended June 30, 2002 and 2003 would have been determined based on the fair value of the awards at the grant dates, and the Companys net income and net income per common share would
have been reduced to the pro forma amounts indicated below:



(In thousands, except per share amounts)



|                                                                                                                                    |  | Three months ended June 30, |       |   | Nine months ended June 30, |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | -------------------------- | -
|                                                                                                                                    |  | 2002                        |       |   | 2003                       |  
|Net income, as reported                                                                                                             |  | $                           | 2,243 |   |                            | $
|Less: stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             | (277  | ) |                            |  
|                                                                                                                                    |  |                             |       |   |                            |  
|Pro forma net income                                                                                                                |  | $                           | 1,966 |   |                            | $
|                                                                                                                                    |  |                             |       |   |                            |  



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|Net income per common share: |  |   |      |  |   |      |  |   |      |  |   |     
|---------------------------- |  | - | ---- |  | - | ---- |  | - | ---- |  | - | ----
|Basic:                       |  |   |      |  |   |      |  |   |      |  |   |     
|As reported                  |  | $ | 0.39 |  | $ | 0.23 |  | $ | 0.69 |  | $ | 0.54
|                             |  |   |      |  |   |      |  |   |      |  |   |     
|Pro forma                    |  | $ | 0.34 |  | $ | 0.18 |  | $ | 0.56 |  | $ | 0.41
|                             |  |   |      |  |   |      |  |   |      |  |   |     
|Diluted:                     |  |   |      |  |   |      |  |   |      |  |   |     
|As reported                  |  | $ | 0.38 |  | $ | 0.23 |  | $ | 0.68 |  | $ | 0.53
|                             |  |   |      |  |   |      |  |   |      |  |   |     
|Pro forma                    |  | $ | 0.33 |  | $ | 0.18 |  | $ | 0.55 |  | $ | 0.40
|                             |  |   |      |  |   |      |  |   |      |  |   |     



The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for grants in fiscal 2002 and 2003, respectively: dividend yield of 0.0% for each year,
expected volatility of 109.45% and 115.73%, risk-free interest of 3.85% and 3.07%, and expected lives of 5.0 years for each year. The fair value of the employees purchase rights pursuant to the employee stock option purchase plan is estimated
using the Black-Scholes model with the following assumptions for fiscal 2002 and 2003: dividend yield of 0.0% for each year, expected volatility of 36.57% and 26.62%, risk-free interest of 2.27% and 1.54%, and expected lives of 6 months for each
year.



| | 3. |  | NET INCOME PER COMMON SHARE
| | -- |  | ---------------------------



Basic net income per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted
net income per common share is computed based on the weighted average number of common shares and dilutive potential common shares, which includes options under the Companys stock option plans computed using the treasury stock method and
common shares expected to be issued under the Companys Employee Stock Purchase Plan.



Potential issuances of common stock of 257,000 and 102,000 shares for the three month periods ended June 30, 2002 and 2003, respectively,
and 99,000 and 139,000 shares for the nine month periods ended June 30, 2002 and 2003, respectively, were used to calculate diluted net income per common share. There were no reconciling items in calculating the numerator for basic and diluted net
income per common share for either of the periods presented. Shares related to stock options of 354,000 and 699,000 for the three month periods ended June 30, 2002 and 2003, respectively, and 430,000 and 659,000 shares for the nine month period
ended June 30, 2002 and 2003, respectively, were excluded from the calculation of diluted net income per common share, as the effect of their inclusion would be anti-dilutive.



| | 4. |  | SALE-LEASE BACK TRANSACTIONS
| | -- |  | ----------------------------



During the nine months ended June 30, 2002, the Company entered into four sale-leaseback transactions whereby the Company sold and leased
back the land and building for four separate restaurant sites. The Company received net proceeds of $9.5 million from the four transactions and recorded deferred gains of $285,000. The gains are being amortized over the respective lease terms of 20
years. The related leases are being accounted for as operating leases. Two of the sale-lease back transactions described above occurred during the first quarter and two occurred during the third quarter of fiscal 2002.



During the nine months ended June 30, 2003, the
Company completed a sale-leaseback transaction whereby the Company sold and leased back the land and building for one restaurant site. The Company received net proceeds of $3.1 million from the transaction and recorded a deferred gain of $152,000.
The gain is being amortized over the lease term of 20 years. The related lease is being accounted for as an operating lease. There were no sale lease-back transactions during the quarter ended June 30, 2003. The sale-lease back transaction described
above occurred during the first quarter of fiscal 2003.



| | 5. |  | CREDIT AGREEMENTS
| | -- |  | -----------------



On November 1, 2002, the Company entered into a line of credit agreement (Credit Agreement) with a bank. During the quarter ended June 30,
2003, the Company amended the Credit Agreement to allow the issuance



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GARDEN FRESH RESTAURANT CORP.

NOTES TO UNAUDITED FINANCIAL STATEMENTS



of
letters of credit up to an aggregate $2 million. The agreement provides for borrowings up to $6 million under a revolving credit agreement, which includes the $2 million of potential drawings under the letter of credit. The proceeds shall be used to
finance the establishment of restaurants and to finance the Companys working capital requirements, and the letter of credit shall be used as a guarantee in relation to the Companys insurance agreement with its carrier. Outstanding
borrowings for working capital purposes shall not at any time exceed $2.0 million. Borrowings are secured by certain equipment and fixtures of the Company. The outstanding principal balance on this line of credit will carry interest at either the
prime rate or LIBOR plus 2% with interest payable at the beginning of each month for the line of credit, and a fee of 1.25% will be charged on the face amount of the letter of credit issued. The Companys Credit Agreement contains various
financial covenants and restrictions. The Credit Agreement expires on January 31, 2004 and the letter of credit issued will expire on April 1, 2004. During the three months ended June 30, 2003, a letter of credit in the amount of $1,702,000 was
issued to the Companys insurance carrier. As of June 30, 2003, there were no outstanding balances under this agreement and there have been no amounts drawn on the letter of credit.



During the three months and nine months ended June 30, 2003, the Company entered into various debt
agreements for the purchase and financing of capital equipment in the amount of $2.0 million and $5.7 million, respectively.



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GARDEN FRESH RESTAURANT CORP.



|ITEM 2: |  | MANGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | ------------------------------------------------------------------------------------



|INTRODUCTION |  | 
|------------ |  | 



The statements contained in this Form 10-Q that are not purely historical are forward looking statements, including statements regarding the
Companys expectations, hopes, beliefs, intentions or strategies regarding the future. Statements which use words such as expects, will, may, could, anticipates, believes,
intends, attempts, and seeks are forward looking statements. These forward looking statements, including statements regarding the Companys (i) plans to open new restaurants, (ii) plans to increase
operational efficiency and improve labor utilization, (iii) budgeted capital expenditures for new restaurant openings and improvements at existing sites, (iv) increased efficiencies resulting from its new accounting software program, (v) plans and
needs to obtain additional financing, (vi) future restaurant sales, (vii) ability to compete against other companies, and (viii) strategic marketing programs and effects of such programs are all based on information available to the Company on the
date hereof, and the Company assumes no obligation to update any such forward looking statements.



There is intense competition in the quick casual service restaurant industry with respect to market share, restaurant locations, labor, menu and
product development. The Company competes primarily on the basis of quality and value of the food products offered, quality of service, price, dining experience, restaurant location and the ambiance of the facilities against individually owned
restaurants as well as other national and regional chains, some of which have significantly greater financial resources and market penetration. The Companys results of operations depend upon the effectiveness of its strategies as compared to
its competitors, and can be adversely affected by aggressive competition from numerous and varied competitors in all areas of business, including new product introductions, promotions and discounting. In addition, restaurant sales can be affected by
factors, including but not limited to, economic and political conditions, demographic changes, consumer preferences, tastes and spending patterns, perceptions about the health and safety of food products and severe weather conditions. It is
important to note that the Companys actual results could differ materially from expectations. Among the factors that could cause actual results to differ materially are the factors set forth under the heading Managements Discussion
and Analysis of Financial Condition and Results of OperationsBusiness Risks. The Companys plans to increase operational efficiency could be affected by escalating costs of both utilities and fuel, as well as increased labor costs.
The Companys results of operations can also be adversely affected by increasing occupancy and insurance costs, interest rates, inflation, recession and other factors over which the Company has no control. Other factors that may cause actual
results to differ materially from expectations include changes in accounting standards, policies and practices; new legislation and governmental regulation; potential variances between estimated and actual liabilities, including litigation costs;
and the possibility of unforeseen events affecting the industry in general. There can be no assurance as to when, if ever, these trends can or will be reversed or that earnings will not be materially affected.



This discussion of uncertainties is not exhaustive. Additional risk
factors associated with our business are detailed in our most recent Annual Report on Form 10-K filed with the SEC.



CRITICAL ACCOUNTING POLICIES



In response to the SECs Release Numbers 33-8050 Cautionary Advice Regarding Disclosure About Critical Accounting Policies and 33-8056,
Commission Statement about Managements Discussion and Analysis of Financial Condition and Results of Operations, the Company has identified the following significant judgments and estimates used by management in the preparation of
the Companys unaudited financial statements. The preparation of the Companys financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
judgments that affect the Companys reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those
related to impairment of long-lived assets, accruals for workers compensation and general liability insurance, and contingencies and litigation. These estimates are based on the information that is currently available to management and on various
other assumptions that management believes to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.



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##### Table of Contents

Management believes that the following are more significant judgments and estimates used in the
preparation of the Companys unaudited financial statements:



| |  |  | The Company maintains accruals for workers compensation and general liability insurance, which are recorded in the accrued liabilities section of the balance sheets. The
Company determines the adequacy of these accruals by evaluating (1) information periodically provided by its carrier regarding the Companys historical experience and trends relating to insurance claims and payments, and (2) industry experience
and trends related to insurance claims and payments. The Company also consults with its carrier regarding the carriers expectation of future trends to determine necessary accruals. If such information indicates that the accruals are overstated
or understated, the Company will adjust the assumptions utilized in its methodologies and reduce or provide for additional accruals as appropriate. An increase or decrease to the workers compensation insurance accrual would affect the
Companys results of operations by increasing or decreasing the Companys employee benefits expense. An increase or decrease to the general liability insurance accrual would affect the Companys results of operations by increasing or
decreasing the Companys occupancy and other expense.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company is subject to various claims and legal actions in the ordinary course of business. Some of these matters include landlord disputes, professional liability,
employee-related matters, and investigations by governmental agencies regarding employment practices. The Company is currently in one dispute with a landlord relating to common area maintenance charges and accordingly has recorded a liability for
its estimated losses under these disputes totaling $40,000 based on invoices received from the vendor. The Company is not aware of any additional pending or threatened litigation that it believes is reasonably likely to have a material adverse
effect on its results of operations. Should the Company become aware of such claims or should the amounts it is currently disputing change, it will re-evaluate the probability of an adverse outcome and provide new or additional accruals for such
contingencies as necessary.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company assesses the impairment of long-lived assets to be held for use whenever events or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held for use is based on expectations of future undiscounted cash flows from the related operations, and when circumstances dictate, the Company adjusts the asset to the extent the carrying value exceeds
the fair value of the asset. Judgments made by the Company related to the expected useful lives of long-lived assets and its ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as
the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As the Company assesses the ongoing expected cash flows and carrying amounts of our long-lived assets, these factors could
cause the Company to realize a material impairment charge, which would result in decreased results of operations, and potentially decrease the carrying value of these assets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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QUARTERLY RESULTS



The following table sets forth the percentage of net sales of certain items included in the Companys statement of operations for the
periods indicated.



(Unaudited)



|                                         |  | Three months ended June 30, |     |  |       |     |  |  | Nine months ended June 30, | 
|---------------------------------------- |  | --------------------------- | --- |  | ----- | --- |  |  | -------------------------- | 
|                                         |  | 2002                        |     |  | 2003  |     |  |  |                            | 
|Net sales                                |  | 100.0                       | %   |  | 100.0 | %   |  |  |                            | 
|                                         |  |                             |     |  |       |     |  |  |                            | 
|Costs and expenses:                      |  |                             |     |  |       |     |  |  |                            | 
|Costs of sales                           |  | 24.3                        | %   |  | 24.2  | %   |  |  |                            | 
|Restaurant operating expenses:           |  |                             |     |  |       |     |  |  |                            | 
|Labor                                    |  | 31.3                        | %   |  | 31.4  | %   |  |  |                            | 
|Occupancy and other expenses             |  | 23.5                        | %   |  | 25.7  | %   |  |  |                            | 
|General and administrative expenses      |  | 5.9                         | %   |  | 6.3   | %   |  |  |                            | 
|Restaurant opening costs                 |  |                            |     |  |      |     |  |  |                            | 
|Depreciation and amortization            |  | 6.2                         | %   |  | 6.4   | %   |  |  |                            | 
|                                         |  |                             |     |  |       |     |  |  |                            | 
|Total costs and expenses                 |  | 91.2                        | %   |  | 94.0  | %   |  |  |                            | 
|                                         |  |                             |     |  |       |     |  |  |                            | 
|Operating income                         |  | 8.8                         | %   |  | 6.0   | %   |  |  |                            | 
|Interest income                          |  |                            |     |  |      |     |  |  |                            | 
|Interest expense                         |  | (2.0                        | ) % |  | (1.6  | ) % |  |  |                            | 
|Other expenses, net                      |  |                            |     |  | (0.2  | ) % |  |  |                            | 
|                                         |  |                             |     |  |       |     |  |  |                            | 
|Income before provision for income taxes |  | 6.8                         | %   |  | 4.2   | %   |  |  |                            | 
|Provision for income taxes               |  | (2.8                        | ) % |  | (1.8  | ) % |  |  |                            | 
|                                         |  |                             |     |  |       |     |  |  |                            | 
|Net income                               |  | 4.0                         | %   |  | 2.4   | %   |  |  |                            | 
|                                         |  |                             |     |  |       |     |  |  |                            | 





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RESULTS OF OPERATIONS



Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2003



Net Sales. Net sales for the third quarter of fiscal 2003 increased 1.6% to $56.6 million from $55.7 million for the
comparable 2002 period primarily due to the two additional restaurant openings during the second fiscal quarter ended March 31, 2003 and an increase in comparable restaurant sales of 0.3% which was the result of an increase in average meal price of
2.6% offset by decreased guest counts of 2.3%. See Business Risks - Certain Operating Results and Considerations.



Costs of Sales. Costs of sales for the third quarter of fiscal 2003 increased 1.5% to $13.7 million from $13.5 million for the comparable 2002
period as a result of increased sales. As a percentage of net sales, costs of sales decreased 0.1 percentage points to 24.2% from 24.3% since the comparable 2002 period due to increased vendor rebates and efficiencies achieved through the
Companys integration of its Food Management System (FMS) which includes the Companys purchasing, central kitchens and distribution centers, partially offset by higher food costs associated with our menu development and seasonal
promotions. Should the Company continue to make expenditures towards menu improvement or to support specific programs, costs of sales can be expected to continue to increase. See Business RisksCertain Operating Results and
Considerations.



Labor Expense. Labor expense
for the third quarter of fiscal 2003 increased 1.7% to $17.8 million from $17.5 million for the comparable 2002 period. As a percentage of net sales, labor increased 0.1 percentage points to 31.4% from 31.3% since the comparable 2002 period due to
the addition of two new restaurants and a stand-alone kitchen facility, higher wage rates across markets, increased health and workers compensation insurance premiums for restaurant employees due to escalating rate pressures from the insurance
industry, and increased costs for employee benefits, partially offset by efficiencies achieved by programs put in place to better utilize crew labor hours and reduce the number of managers in each restaurant. The Company expects health and
workers compensation insurance premiums to continue to increase, especially in California, its largest employment base, resulting in increased labor expense. See Business Risks  Minimum Wage.



Occupancy and Other Expenses. Occupancy and other expenses increased
11.5% for the third quarter of fiscal 2003 to $14.6 million from $13.1 million for the comparable 2002 period. Occupancy and other expenses as a percentage of net sales increased 2.2 percentage points to 25.7% from 23.5% for the comparable 2002
period. The increase as a percentage of net sales is the result of an increase in marketing expenses, increases in base rent from Consumer Price Index (CPI) escalations for leased sites as well as increased rent from the sale-leaseback of three
sites since the comparable period in the prior year. In addition, part of the increase can be attributed to higher utility costs and increased liability and property insurance costs as a result of increased rate pressure throughout the insurance
industry. The Company anticipates occupancy and other expenses to increase as it continues to experience rising insurance premiums, increasing rent expense resulting from CPI escalation clauses under operating leases and higher repair and
maintenance expenses relating to its aging restaurant base. Should the Company undertake additional sale-leasebacks of existing sites it would incur increased base rent related to new leases at those sites but experience a decrease in depreciation
expense related to the sale of those assets.See Business Risks  Planned Marketing Expenditures and Business Risks  Other Operating Expenditures.



General and Administrative Expenses.General and administrative
expenses increased 12.5% for the third quarter of fiscal 2003 to $3.6 million from $3.2 million for the comparable period. As a percentage of net sales, general and administrative expenses increased 0.4 percentage points to 6.3% from 5.9% since the
comparable 2002 period as a result of increased fees for audit and tax services and increased staffing in the real estate and marketing departments, which were only partially offset by higher sales.



Restaurant Opening Costs. Restaurant opening costs for the three
months ended June 30, 2003 decreased 92% to $2,000 from $25,000 for the comparable 2002 period due to the timing of restaurant openings. There were no new restaurants opened in the current quarter, and one new restaurant opened in the latter part of
the second quarter of fiscal 2002.



Depreciation and
Amortization. Depreciation and amortization for the three months ended June 30, 2003 increased 5.9% to $3.6 million from $3.4 million for the comparable 2002 period. Depreciation and amortization as a percentage of net sales increased 0.2
percentage points to 6.4% for the quarter ended June 30, 2003 from 6.2% for the comparable 2002 period. These increases are the result of additional expense related to the opening of two new restaurants and the stand-alone kitchen facility, and to
depreciation expense related to the addition of a new corporate office and the amortization of a new accounting software package since the comparable 2002 period. These increases were partially offset by decreased depreciation expense associated
with the sale-leaseback transactions since the comparable 2002 period.



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Interest Income. Interest income for the three months ended June 30, 2003 decreased 59% to $9,000
from $22,000 for the comparable 2002 period as a result of decreased investing activity and lower interest rates compared to the same period in the prior year.



Interest Expense. Interest expense for the three months ended June 30, 2003 decreased 18% to $0.9 million from $1.1 million for the comparable
2002 period as a result of both lower interest rates and a reduction in debt balances since the same period in the prior fiscal year.



Other Expense, net. Other expense, net for the three months ended June 30, 2003 was $148,000 compared to $19,000 for the comparable 2002 period.
The additional expense for the 2003 period is due to increased asset disposals during the three months ended June 30, 2003 compared to the same period in fiscal 2002.



Provision for Income Taxes. Income tax expense for the third quarter of fiscal 2003 decreased 33% to $1.0 million
from $1.5 million for the comparable 2002 period. This decrease is primarily due to decreased taxable earnings during the 2003 period offset by an increase in the Companys effective income tax rate since the same period in the prior fiscal
year. The Companys effective tax rate for the three months ended June 30, 2003 increased 1.8 percentage points to 42.6% from 40.8% for the quarter ended June 30, 2002 as a result of higher apportionment of taxable earnings to states such as
California and Illinois that have greater marginal income tax rates. The Company anticipates that it will continue to experience the effects of apportionment on its taxable earnings should its growth plans result in the expansion of its operations
into states with greater marginal income tax rates.



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##### Table of Contents

Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2003



Net Sales.Net sales for the nine months ended June 30, 2003
increased 2.1% to $162.8 million from $159.5 million for the comparable 2002 period. This increase was due to both the opening of two restaurants since the comparable 2002 period and the increase in comparable restaurant sales of 0.8%. The
comparable restaurant sales increase was driven by an average meal price increase of 3.6% which was partially offset by decreased guest counts of 2.8% versus the comparable 2002 period.See Business Risks - Certain Operating Results and
Considerations.



Costs of Sales.Costs of
sales for the nine months ended June 30, 2003 increased 1.3% to $39.7 million from $39.2 million for the comparable 2002 period due to the addition of two restaurants since the comparable 2002 period combined with increased spending related to menu
development which was partially offset by an increase in the vendor rebates received. As a percentage of net sales, costs of sales decreased 0.1 percentage points to 24.4% from 24.5% since the comparable 2002 period as a result of efficiencies
achieved through the integration of the FMS which includes the Companys purchasing, central kitchens and distribution centers. See Business Risks  Reliance on Key Suppliers and Distributors.



Labor Expense.Labor expense for the nine months ended June 30, 2003
increased 1.4% to $51.6 million from $50.9 million for the comparable 2002 period due primarily to the two new restaurants and a stand-alone kitchen facility opened since the prior period. As a percentage of net sales, the labor expense decreased
0.2 percentage points to 31.7% from 31.9% in the comparable 2002 period as a result of programs put in place to better utilize crew labor hours and reduce the number of managers in each restaurant. See Business Risks  Minimum
Wage.



Occupancy and Other Expenses.Occupancy
and other expenses for the nine months ended June 30, 2003 increased 6.7% to $41.4 million from $38.8 million for the comparable 2002 period. Occupancy and other expenses as a percentage of net sales increased 1.1 percentage points to 25.4% from
24.3% for the comparable 2002 period. This was due primarily to increased marketing spending, increases in base rent associated with sale-leasebacks and escalating rent due to CPI increases from operating leases, higher utility costs predominantly
in California, higher property and liability insurance costs as a result of increased rate pressure throughout the insurance industry, and increased repair and maintenance costs for aging restaurants. See Business Risks  Planned
Operating Expenditures.



General and
Administrative Expenses.General and administrative expenses for the nine months ended June 30, 2003 increased 7.1% to $10.6 million from $9.9 million for the comparable 2002 period. As a percentage of net sales, general and administrative
expenses increased 0.3 percentage points to 6.5% from 6.2% for the comparable 2002 period. The increase as a percentage of net sales is the result of higher rent and related expenses for the new corporate office, increased fees for audit and tax
services, and increased staffing in the real estate and marketing departments, which were only partially offset by higher sales.



Restaurant Opening Costs.Restaurant opening costs for the nine months ended June 30, 2003 decreased 33% to $0.2 million from $0.3 million for the
comparable 2002 period. Restaurant opening costs as a percentage of net sales decreased 0.1 percentage points to 0.1% from 0.2% for the comparable 2002 period. These decreases are the result of the timing and nature of the restaurant opening costs
which are expensed in the period incurred. Two restaurants and a stand-alone kitchen facility were opened during the first nine months of fiscal 2003 compared to two new restaurants and one of the Companys distribution centers opened during
the first nine months of fiscal 2002.



Depreciation and
Amortization.Depreciation and amortization for the nine months ended June 30, 2003 increased 6.9% to $10.9 million from $10.2 million for the same period in fiscal 2002. Depreciation and amortization as a percentage of net sales increased 0.3
percentage points to 6.7% from 6.4% for the comparable period in 2002. These increases were due to additional depreciation for the assets purchased for the two new restaurants and stand-alone kitchen facility opened since the comparable 2002
period, as well as additional assets purchased for existing restaurants and assets related to a new corporate office and accounting software. These increases were partially offset by decreased depreciation expense associated with the sale-leaseback
transactions since the comparable 2002 period.



Interest
Income.Interest income for the nine months ended June 30, 2003 decreased 25% to $41,000 from $55,000 for the comparable 2002 period due primarily to decreased interest rates.



Interest Expense.Interest expense for the nine months ended June 30, 2003 decreased 20% to $2.8 million from $3.5
million for the comparable 2002 period, due primarily to a decrease in the outstanding debt balances and the decrease in interest rates. Interest expense as a percentage of net sales have remained consistent with the comparable period in 2002 at
0.2%.



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Other Expense, net.Other expense, net for the nine months ended June 30, 2003 and 2002 was $0.3
million, which is primarily due to expenses related to asset disposals.



Provision for Income Taxes. Income tax expense for the nine months ended June 30, 2003 decreased 15% to $2.3 million from $2.7 million for the comparable 2002 period. The decrease is primarily due to decreased taxable earnings during
the 2003 period as compared to the same period in the prior year which was partially offset by an increase in the Companys effective income tax rate. The Companys effective income tax rate for the nine months ended June 30, 2003
increased 2.4 percentage points to 42.6% from 40.2% for the nine months ended June 30, 2002 mainly as a result of higher apportionment of taxable earnings to states such as California and Illinois that have greater marginal income tax rates and a
revision to the Companys original fiscal 2003 estimated income before tax.



LIQUIDITY AND CAPITAL RESOURCES



The
Companys principal capital requirement has been both for funding the development of new restaurants and improving existing restaurants. The Company finances its cash requirements principally from cash flows from operating activities, bank
debt, mortgage financing, equipment lease financing, sale-lease back of owned properties and the sale of Company stock. Cash and cash equivalents increased $3.2 million to $8.5 million at June 30, 2003 from $5.3 million at the beginning of the
fiscal year. The higher cash balance at June 30, 2003 resulted from cash generated from operations and the receipt of proceeds related to financing activities during the nine months ended June 30, 2003. These proceeds were used to fund capital
expenditures and to repay borrowings that existed previously.



Capital expenditures totaled $10 million during the first nine months of fiscal 2003 and $7.9 million for the comparable period in fiscal 2002. During the first nine months of fiscal 2003, the Company made capital expenditures of $6.3
million (including the decrease in construction costs included in accounts payable) for construction of two new restaurants and a stand-alone kitchen facility, which opened during the second quarter of fiscal 2003, and $3.7 million for capital
improvements at existing sites. For the first nine months of fiscal 2002, the Company paid $3.6 million (including the decrease in construction costs included in accounts payable) for the opening of two new restaurants, and construction of future
restaurants, and paid $4.3 million for capital improvements at existing restaurants. The cash investment to open a new restaurant excludes restaurant opening costs and typically includes the purchase or installation of furniture, fixtures, equipment
and leasehold improvements, and in the case of an owned site, the purchase of land and a building.



The Companys original capital budget for fiscal 2003 totaled $14.7 million, which included $8.7 million for the completion of the construction of
three new restaurants, one stand-alone kitchen facility and $6.0 million for capital improvements for existing facilities. For the remaining quarter of fiscal 2003 the Company has a remaining budget for capital expenditures in the amount of $2.7
million related to improvements at existing sites. In January 2003, the Company completed its development of the two new restaurants and the stand-alone kitchen facility. The Company currently does not have plans to open any additional restaurants
in fiscal 2003. See Business Risks  Expansion Risks.



During the first nine months of fiscal 2003, the Company generated $13.7 million in cash flows from operating activities, obtained $5.7 million from long-term equipment financing and $1.5 million from the draw on the
line of credit, received proceeds from a sale-lease back transaction of $3.1 million, and received $0.5 million from the sale of the Companys Common Stock pursuant to stock option plans and the Companys Employee Stock Purchase Plan. In
addition, the Company made repayments of $9.8 million towards its long-term debt obligations and $1.5 million of repayments on the line of credit during the nine months ended June 30, 2003.



The Companys working capital deficit decreased $4.1 million to $5.5
million at June 30, 2003 from $9.6 million at September 30, 2002, primarily due to the increases in cash, inventories and other assets as well as a decrease in accounts payable, partially offset by an increase in accrued liabilities. The Company and
the restaurant industry in general maintain insignificant receivables and vendors grant trade credit for purchasing food and supplies. Inventories have increased $24,000 from September 30, 2002 in order to support the addition of two new restaurants
and a stand-alone central kitchen during the nine months ended June 30, 2003. The Company also continues to invest in the business through the addition of new restaurants and refurbishment of existing restaurants, which are reflected as long-term
assets and not as part of working capital. As of June 30, 2003 the current ratio increased to 0.8 to 1.0 compared with 0.66 to 1.0 at the beginning of the fiscal year, primarily due to the increase in cash, inventories and current portion of
long-term debt, offset by a decrease in accounts payable. There can be no assurance that the Company will continue to reduce its working capital deficit in the future.



As of June 30, 2003, the Company operated 97 restaurants. The Company currently owns the land or land and buildings for 24
restaurants, including the land for two sites related to future openings. The Company did not open any restaurants during the three months ended June 30, 2003.



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The Company incurred restaurant opening costs of $2,000 during the three months ended June 30, 2003 for
the opening of two new restaurants and one stand-alone kitchen facility that opened during January 2003. See Business Risks  Expansion Risks.



The Company requires capital principally to grow the business through new restaurant construction, as well as to maintain,
improve and refurbish existing restaurants, and for general operating purposes. In addition to funds generated from operations, the Company may need to obtain external financing in the form of a sale-lease back of owned properties and long-term debt
financing to complete its long-term plans for expansion of new restaurants and improvements to existing restaurants and meet principal payments on its existing loans. There can be no assurance that such funds will be available when needed and should
the Company not be able to obtain such financing it may be forced to severely curtail the development of new restaurants at its desired pace and cease improvements to existing restaurants. Additionally, should the Companys results of
operations decrease it may not have the ability to pay its debt of $39.5 million outstanding at June 30, 2003. Based upon current levels of operations and anticipated growth, the Company expects that cash flows from operations, combined with other
financing alternatives available, will be sufficient to meet debt service, capital expenditures and working capital requirements for the next twelve months. See Business Risks  Capital Requirements.



The Company is subject to a number of covenants under various debt
instruments, including limitations on additional borrowings, acquisitions, capital expenditures, lease commitments and dividend payments, as well as requirements to maintain certain financial ratios, cash flows and net worth. As of June 30, 2003,
the Company was in compliance with all such covenants.



Total
debt outstanding decreased $4.1 million to $39.5 million, including the line of credit balance, at June 30, 2003 from $43.6 million at the beginning of the fiscal year. The Company is also subject to payments under specific contractual obligations
and commitments. A summary of those contractual obligations and commercial commitments as of June 30, 2003 is as follows:



|                                   |  | Payments due by period as of June 30, 2003 (In thousands)                    
|---------------------------------- |  | -----------------------------------------------------------------------------
|Contractual obligations            |  | Less than 1year                                                              
|Long-term debt                     |  | $                                                                            
|Operating leases                   |  |                                                                              
|Minimum purchase obligations(1)    |  |                                                                              
|                                   |  |                                                                              
|Total cash contractual obligations |  | $                                                                            
|                                   |  |                                                                              
|                                   | 
|                                   |  | Amount of commitment expiration per period as of June 30, 2003 (In thousands)
|Commercial commitments             |  | Less than 1year                                                              
|Guarantee(2)                       |  | $                                                                            
|Letter of credit(3)                |  |                                                                              
|                                   |  |                                                                              
|Total commercial commitments       |  | $                                                                            
|                                   |  |                                                                              

---

|(1) |  | Consists of procurement contracts with minimum purchase obligations related to tangible goods.
|--- |  | ----------------------------------------------------------------------------------------------

|(2) |  | Consists solely of guarantee associated with sub-leased property. The Company is not aware of any non-performance under the sub-lease arrangement that would result in our having to
perform in accordance with the terms of the guarantee and accordingly, has not recorded a liability related to this guarantee. In the event of non-performance under the arrangement, the Company would be required to fulfill the lease obligation.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Letter of credit agreement is a security for the performance under the Companys insurance agreement with its carrier. The agreement will remain in effect until the carrier
deems the policy has no remaining liability. The carrier can draw on the letter of credit in the event of non-renewal by the bank or if the Company fails to reimburse the carrier up to an amount equal to the carriers claim for reimbursement.
The letter of credit agreement with the bank is for an amount not to exceed $1,702,000 and expires on April 1, 2004, however is deemed to be automatically extended without amendment for one year after the expiration date. As of June 30, 2003, there
have been no amounts drawn on the letter of credit. As part of establishing the letter of credit, the Company paid a fee of $19,500.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The Company is not aware of any other factors, which are reasonably likely to affect the liquidity, other
than those discussed above and disclosed as business risks and risk factors disclosed in the Companys Form 10-K filed with the SEC. While the Company has noted that certain operating expenses, including insurance and occupancy costs, are
rising and the economy has slowed down, the Company believes that there are sufficient funds available from operations, the existing credit facility and the sale lease-back of restaurant properties to accommodate the Companys future growth.



IMPACT OF INFLATION



The primary inflationary factors affecting the Companys operations
include food and beverage and labor costs. Minimum wage increases have affected earnings during the current fiscal year. Substantial increases in costs and expenses, particularly food, supplies, labor, utilities, operating expenses, and fuel costs
could have a significant impact on the Companys operating results to the extent that such increases cannot be passed along to guests.



OTHER



The Company is not a party to off-balance sheet arrangements, does not engage in trading activities involving non-exchange traded contracts, and is not a party to any transaction with persons or activities that derive
benefits from their non-independent relationships with the Company.



NEW
ACCOUNTING STANDARDS



In June 2002, the FASB issued
Statement of Financial Accounting Standards No. 146 (SFAS No. 146), Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability
for an exit cost was recognized at the date of the companys commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing
of recognizing any future restructuring costs as well as the amounts recognized. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted the provisions of SFAS No. 146 on January 1,
2003 and does not anticipate that the adoption of SFAS No. 146 will have a material effect on its financial statements.



In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS No. 148), Accounting for Stock Based Compensation 
Transition and Disclosure, which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of Statement No. 123
(SFAS No. 123) to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. Under the provisions of SFAS No. 123, companies that adopted the preferable, fair value based method were
required to apply that method prospectively for new stock option awards. This contributed to a ramp-up effect on stock-based compensation expense in the first few years following adoption. SFAS No. 148 provides two additional methods of
transition that reflect an entitys full complement of stock-based compensation expense immediately upon adoption, thereby eliminating the ramp-up effect. SFAS No. 148 also improves the clarity and prominence of disclosures about the pro forma
effects of using the fair value based method of accounting for stock-based compensation for all companiesregardless of the accounting method usedby requiring that the data be presented more prominently and in a more user-friendly format
in the footnotes to the financial statements. In addition, the Statement improves the timeliness of those disclosures by requiring that this information be included in interim as well as annual financial statements. The Company did not adopt the
fair value based method of accounting for stock-based employee compensation. The Company adopted the interim disclosure provisions of SFAS No. 148 in the quarter ended March 31, 2003 which did not have a material effect on its financial statements.



In April 2003, the FASB issued Statement of Financial
Accounting Standards No. 149 (SFAS No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative
contains a financing component that warrants special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003, and is not expected to have a material impact on the
Companys financial statements.



In May 2003, the
Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement establishes
standards for how an issuer classifies and measures certain financial instruments with characteristics of



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both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity. This Statement is effective for the Company for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, and is not expected to have a material impact on the Companys financial statements.



In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45), Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34, or FIN No. 45. FIN No. 45 elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of certain guarantees. The
initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN No. 45 are effective for interim or annual
periods ending after December 15, 2002. The Company has adopted the disclosure provisions of FIN No. 45 as of January 1, 2003.



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46), Consolidation of Variable Interest Entities, an interpretation of ARB No.
51, or FIN No. 46. FIN No. 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities
that effectively disperse risk will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. FIN No. 46 also requires enhanced disclosure requirements
related to variable interest entities. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, or on October 1, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company does not believe that the
adoption of this accounting pronouncement will have a material impact on our financial statements.



In November 2002, the FASBs Emerging Issues Task Force (EITF) discussed Issue 02-16 (EITF 02-16), Accounting by a Customer (including a
Reseller) for Cash Consideration Received from a Vendor. Issue 02-16 provides guidance on how a customer should account for cash consideration received from a vendor. This Issue is effective for new arrangements entered into after December 15,
2002. The Company has adopted the provisions of Issue 02-16 in the second quarter of fiscal year 2003 for all prospective agreements with effective dates after January 1, 2003 and believes that the adoption will not have a material impact on our
results of operations or financial position as these type of agreements were previously accounted for in a similar manner.



BUSINESS RISKS



The Companys business is subject to a number of risks. A comprehensive summary of such risks can be found in the Companys Form 10-K. In
addition to other information in this Form 10-Q, shareholders and prospective investors should consider carefully the following factors in evaluating the Company and its business.



Certain Operating Results and Considerations



The Companys comparable restaurant sales for the third quarter of fiscal year 2003 increased 0.3% from the comparable
period in fiscal 2002 and the Company believes that it may from time to time in the future experience declines in comparable restaurant sales, and that any future increases in comparable restaurant sales may be modest. In fiscal 2001 and 2002 the
Company experienced an increase of 3.3% and 2.1%, respectively, in comparable restaurant sales. In the first nine months of fiscal 2002 and 2003, the Companys comparable restaurant sales increased 2.0% and 0.8% respectively. The Company does
not believe it has significant latitude to achieve comparable restaurant sales growth through price increases, and, as a result, the Company does not believe that recent comparable restaurant sales are indicative of future trends in such sales.



Expansion Risks



The Company opened ten restaurants in fiscal 2001 (opening nine new
restaurants and re-opening one existing restaurant), two in fiscal 2002, and has opened two restaurants and one stand-alone kitchen facility to date in fiscal 2003. Both restaurants and the stand-alone kitchen facility were opened during the second
quarter of fiscal 2003 in an existing region in Southern California. The Company currently does not have plans to open any additional restaurants in fiscal 2003. The Companys ability to achieve its expansion plans in the future will depend on
a variety of factors, many of which may be beyond the Companys control, including the Companys ability to locate suitable restaurant sites, negotiate acceptable lease or



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purchase terms, obtain required governmental approvals, construct new restaurants in a timely manner, attract, train and retain qualified and experienced
personnel and management, operate its restaurants profitably and obtain additional capital, as well as general economic conditions and the degree of competition in the particular region of expansion. The Company has experienced, and expects to
continue to experience, delays in restaurant openings from time to time.



The Company incurs substantial costs in opening a new restaurant and, in the Companys experience, new restaurants experience fluctuating operational levels for some time after opening. In the Companys
experience, operational expenses tend to stabilize over a period of three to fifteen months after a restaurant opens. Additionally, owned restaurants generally require significantly more upfront capital than leased restaurants. As a result, an
increase in the percentage of owned restaurant openings as compared to historical practice would increase the capital required to meet the Companys growth plans.



Since its inception, the Company has closed non-performing buffet restaurants and concept restaurants due to poor operating
performance. Given the number of restaurants in current operation and the Companys projected expansion rate, there can be no assurances that the Company will not close restaurants in the future. Any closure could result in a significant
writeoff of assets, which could adversely affect the Companys business, financial condition and results of operations.



There can be no assurance that the Company will successfully expand into new regions or that new restaurants will be profitable. The Company has
encountered intense competition for restaurant sites, and in many cases has had difficulty buying or leasing desirable sites on terms that are acceptable to the Company. In many cases, the Companys competitors are willing and able to pay more
than the Company for sites. The Company expects these difficulties in obtaining desirable sites to continue for the foreseeable future.



Restaurant Industry and Competition



The restaurant industry is highly competitive. Key competitive factors in the industry include the quality and value of the food products offered, quality
of service, price, dining experience, restaurant location and the ambiance of the facilities. The Companys primary competitors include mid-priced, full-service casual dining restaurants, as well as traditional self-service buffet and other
soup and salad restaurants and healthful and nutrition-oriented restaurants. The Company competes with national and regional chains, as well as individually owned restaurants. The number of buffet and casual restaurants with operations generally
similar to the Companys has grown substantially in the last several years and the Company believes competition among buffet-style and casual restaurants has increased and will continue to increase as the Companys competitors expand
operations in various geographic areas. Such increased competition could increase the Companys operating costs or adversely affect its revenues. The Company believes it competes favorably in the industry, although many of the Companys
competitors have been in existence longer than the Company, have more established market presence and have substantially greater financial, marketing and other resources than the Company, which may give them certain competitive advantages. In
addition, the restaurant industry has few non-economic barriers to entry. Therefore, there can be no assurance that third parties will not be able to successfully imitate and implement the Companys concept. The Company has encountered intense
competition for restaurant sites, and in many cases has had difficulty buying or leasing desirable sites on terms that are acceptable to the Company. In many cases, the Companys competitors are willing and able to pay more than the Company for
sites. The Company expects these difficulties in obtaining desirable sites to continue for the foreseeable future.



Multi-unit food service businesses such as the Companys can also be materially and adversely affected by publicity resulting from poor food quality,
illness, injury or other health concerns with respect to the nutritional value of certain food. To minimize the risk of food-borne illness, the Company has implemented sanitation audits through its Food Management System for managing food safety and
quality. Nevertheless, the risk of food-borne illness cannot be completely eliminated. Any outbreak of such illness attributed to Company restaurants in particular, or within the food service industry in general, could have a material adverse effect
on our financial condition and results of operations.



Capital Requirements



In addition to funds generated from operations, the
Company may need to obtain external financing in the form of sale-lease back of owned properties and long-term debt financing to complete its plans for expansion through new restaurants and improvements to existing restaurants for fiscal year 2003
and beyond and to meet principal payments on its existing loans. There can be no assurance that such funds will be available when needed and should the Company not be able to obtain such financing it may be forced to severely curtail, or entirely
suspend, the development of new restaurants at its desired pace and to make improvements to existing restaurants. Additionally, should the Companys results of operations decrease it may not have the ability to pay its debt of $39.5 million
outstanding at June 30, 2003.



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Cost Sensitivity



The Companys profitability is highly sensitive to increases in food, labor and other operating costs. The Companys dependence on frequent
deliveries of fresh produce and groceries subjects it to the risk that shortages or interruptions in supply caused by adverse weather or other conditions could materially adversely affect the availability, quality and cost of ingredients. In
addition, unfavorable trends or developments concerning factors such as inflation, food, labor, employee benefit costs (including increases in hourly wage and minimum unemployment tax rates  See Business Risks - Minimum
Wage), rent increases resulting from the CPI rent escalation provisions in the Companys leases, escalating insurance costs for health benefits, general liability, property and workers compensation coverage, and the availability
of experienced management and hourly employees may also adversely affect the Company. There can be no assurance to what extent that these conditions will continue or that the Company will have the ability to control costs in the future. See
Business Risks  Reliance on Key Suppliers and Distributors.



Minimum Wage



The Company has experienced
increases in its labor expenses due to increases in the federal minimum wage rate and in the California minimum wage rate. These increases have resulted in a decrease in the Companys profitability. The Company could be impacted by increasing
wage costs in any of its markets where the minimum wage rate is increased. The Company is exploring strategic ideas on how to better manage labor utilization in order to minimize any potential impact from increasing wage costs. There can be no
assurance that the Company will be able to manage and absorb these increases in wage costs in the future.



Planned Marketing Expenditures



The Company has incurred increased marketing expenditures during the first six months of fiscal 2003 as an attempt to increase guest counts. A significant portion of the Companys external marketing effort consists of attracting guests
through the use of freestanding inserts (FSIs), print media, and radio advertising as a means to increase market awareness. In addition, the restaurants often cosponsor fundraising events in the restaurants for local
charitable and other community organizations. There can be no assurance that the marketing and promotion strategies discussed herein will be successful or benefit the Company by increasing guest counts or achieving higher net sales in the future.



Other Operating Expenditures



Since June 30, 2002, the Company has converted three locations to leased
from owned as part of a plan to reduce debt. Such conversions result in an increase in restaurant rent expense (partially offset by a decrease in building depreciation expense) for the converted location. Should the Company continue to convert owned
locations to leased locations, restaurant rent expense will continue to increase as a result.



The Company continues to experience increased insurance costs and higher repair and maintenance expenditures in its existing restaurants. Such increases may affect restaurant profitability. There can be no assurance
that the increases in repair and maintenance expenditures will not continue to impact the Companys ability to control costs in the future.



Importance of Key Employees



The success of the Company and its individual restaurants depends upon the Companys ability to attract and retain highly motivated, well-qualified
restaurant operations and other management personnel. The Company faces significant competition in the recruitment of qualified employees.



Seasonality and Quarterly Fluctuations



The Companys business experiences seasonal fluctuations, as a disproportionate amount of the Companys net income is generally realized in the
second and third fiscal quarters due to higher average sales and lower average costs. Quarterly results have been and are expected to continue to fluctuate as a result of a number of factors, including the timing of new restaurant openings. As a
result of these factors, net sales and net income on a quarterly basis may fluctuate and are not necessarily indicative of the results that may be achieved for a full fiscal year.



Geographic Concentration: Restaurant Base



Forty of the Companys 97 existing restaurants are located in California, and eighteen are located in Florida. Accordingly, the Company is
susceptible to fluctuations in its business caused by adverse economic or other conditions in these regions, including natural disasters or other acts of God. In addition, in California, higher utility costs and insurance



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costs will continue to affect the Companys profitability in this region. As a result of the Companys continued concentration in California and
Florida, adverse economic or other conditions in either state could have a material adverse effect on the Companys business. The Companys significant investment in, and long-term commitment to, each of its restaurant sites limits its
ability to respond quickly or effectively to changes in local competitive conditions or other changes that could affect the Companys operations. In addition, the Company has a small number of restaurants relative to some of its competitors.
Consequently, a decline in the profitability of an existing restaurant or the introduction of an unsuccessful concept could have a more significant effect on the Companys result of operations than would be the case in a company with a larger
number of restaurants.



Reliance on Key Suppliers and Distributors



The Company utilizes sole source suppliers for certain
produce and grocery items. In addition, in order to minimize price fluctuations, the Company enters into fixed price supply contracts that typically have terms of two months to one year and generally do not have minimum purchase requirements.
However, in the event that the Companys suppliers are unable to make the required deliveries due to shortages or interruptions caused by adverse weather or other conditions or are relieved of their contract obligations due to an invocation of
an act of God provision, the Company would need to renegotiate these contracts or purchase such products and groceries elsewhere. There can be no assurance that the Companys produce and grocery costs would not as a result be higher, and such
higher costs could have a material adverse effect on the Companys business, financial conditions and results of operations. The Company has several local produce distributors and also distributes other grocery items through its own
distribution system out of one warehouse on the West Coast and one on the East Coast. All produce and groceries purchased by the Company are channeled from the growers and other suppliers to the Companys warehouses, restaurants and restaurant
central kitchens through these distributors. In the event that any of these distributors were to cease distribution on behalf of the Company, the Company would be required to make alternate arrangements for produce. There can be no assurance that
the Companys distribution expense would not be greater under such alternate arrangements. See Business Risks - Cost Sensitivity.



Volatility of Stock Price



The market price of the Companys common stock has fluctuated since the initial public offering of its common stock in May 1995. Quarterly operating
results of the Company and other restaurant companies, daily transactional volume, changes in general conditions in the economy, the financial markets or the restaurant industry, natural disasters or other developments affecting the Company or its
competitors could cause the market price of the common stock to fluctuate substantially. In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market
price of securities issued by many companies for reasons unrelated to the operating performance of these companies.



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|ITEM 3: |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- |  | ----------------------------------------------------------



On November 1, 2002 the Company entered into a line of credit agreement (Credit Agreement) with Wells Fargo Bank. This credit agreement provides for
borrowings up to $6 million under a revolving credit agreement that will bear interest at either the prime rate or LIBOR plus 2% with interest payable at the beginning of each month. The Credit Agreement terminates on January 31, 2004. At June 30,
2003 there was no outstanding balance under this agreement. Should the Company draw from this line of credit, changes in short-term interest rates could affect the Companys line of credit interest rate, increasing interest expense and likewise
decreasing earnings and cash flow. The Company cannot predict market fluctuations in interest rates and their impact on debt, nor can there be any assurance that long-term fixed rate debt will be available at favorable rates, if at all.
Consequently, future results may differ materially from the estimated results due to adverse changes in interest rates or debt availability.



The majority of the Companys outstanding long-term debt balance at June 30, 2003 of $39.5 million is financed through loans from lending
institutions with fixed interest rates. As such, the Company does not believe that changes in short-term interest rates would have a material impact on interest expense related to these loans or significantly decrease results of operations or cash
flow.



The Company did not have any foreign currency or other
market risk or any derivative financial instruments at June 30, 2003.



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|ITEM 4: |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



Under the supervision and with the participation of management, including the principal executive and principal financial officers we evaluated the
effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal
financial officer concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.



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PART II  OTHER INFORMATION



|                                                            | 
|----------------------------------------------------------- | 
|Item 1. Legal Proceedings                                   | 
|                                                            | 
|Item 2. Changes in Securities                               | 
|                                                            | 
|Item 3. Defaults Upon Senior Securities                     | 
|                                                            | 
|Item 4. Submission of Matters to a Vote of Security Holders | 
|                                                            | 
|Item 5. Other Information                                   | 
|                                                            | 
|Item 6. Exhibits and Reports on Form 8-K                    | 



Exhibits:



The Exhibits required by Item 6(a) of the report are
listed in the Exhibit Index on page 30 herewith.



Reports on Form 8-K:



A report on Form 8-K was filed by the Company on April 2, 2003 relating to
the issuance of a press release entitled Garden Fresh Announces Preliminary Second Fiscal Quarter Results described therein.



A report on Form 8-K was filed by the Company on April 30, 2003 relating to the issuance of a press release entitled Garden Fresh Reports Fiscal 2003 Second Quarter
Results described therein.



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SIGNATURES



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



|DATED:         |  |  |  | GARDEN FRESH RESTAURANT CORP.                                       
|-------------- |  |  |  | --------------------------------------------------------------------
|August 8, 2003 |  |  |  | (Registrant)                                                        
|               |  | 
|               |  |  |  | /s/ Michael P. Mack                                                 
|               |  |  |  | Michael P. Mack                                                     
|               |  |  |  | Chief Executive Officer/President (Principal Executive Officer)     
|               |  | 
|               |  |  |  | /s/ David W. Qualls                                                 
|               |  |  |  | David W. Qualls                                                     
|               |  |  |  | Chief Financial Officer (Principal Accounting and Financial Officer)



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EXHIBIT INDEX



|ExhibitNumber |  | Description                                                                                                                                                           
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1           |  | Restated Certificate of Incorporation of Garden Fresh Restaurant Corp.(1)                                                                                             
|              | 
|3.2           |  | Certificate of Designation, Preferences and Right of the Terms of the Series A Preferred Stock, as filed with the Delaware Secretary of State on February 23, 2001.(2)
|              | 
|3.3           |  | Bylaws of Garden Fresh Restaurant Corp., as amended.(3)                                                                                                               
|              | 
|4.1           |  | Rights Agreement between the Company and Equiserve Trust Company, N.A., dates as of February 15, 2001.(2)                                                             
|              | 
|10.1          |  | Amended Wells Fargo Bank Revolving Line of Credit Note, dated February 1, 2003.                                                                                       
|              | 
|31.1          |  | Certification of Chief Executive Officer                                                                                                                              
|              | 
|31.2          |  | Certification of Chief Financial Officer                                                                                                                              
|              | 
|32.1          |  | Certification of Chief Executive Officer.                                                                                                                             
|              | 
|32.2          |  | Certification of Chief Financial Officer.                                                                                                                             

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|(1) |  | Incorporated by reference from Exhibit 4.1 filed with the Companys Registration Statement on Form S-8 (No. 33-93568) filed June 16, 1995.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Incorporated by reference from the Companys Form 8-K filed with the SEC on February 15, 2001.
|--- |  | ----------------------------------------------------------------------------------------------



|(3) |  | Incorporated by reference from the Companys Registration Statement on Form S-1 (No. 33-90404), as amended by Amendment No. 1 to Form S-1 filed on April 19, 1995, Amendment No.
2 for Form S-1 filed May 8, 1995, and Amendment No. 3 to Form S-1 filed on May 15, 1995.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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