** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

### **Washington, D.C. 20549**

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**FORM 10-Q**

 
| **(Mark One)**                                        |
|-------------------------------------------------------|
| **x**                                                 | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                            | ** ** | ** ** |
| **For the quarterly period ended September 29, 2007** |
| ** **                                            |
| **OR**                                                |
| ** **                                            | ** ** | ** ** |
| **o**                                                 | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom              to              **

 

**Commission file number:  333-115046**

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**MRS. FIELDS FAMOUSBRANDS, LLC**

(Exact Nameof Registrant Specified in Its Charter)

 

 

| **Delaware**                     | ** **                         |
|----------------------------------|------------------------------------|
| (State or Other  Jurisdiction of | **80-0096938**                     |
| Incorporation or  Organization)  | (IRS Employer  Identification No.) |

 

| **2855  East Cottonwood Parkway, Suite 400** | ** **     |
|----------------------------------------------|----------------|
| **Salt  Lake City, Utah**                    | **84121-7050** |
| (Address of Principal  Executive Offices)    | (Zip Code)     |

 

Registrant's Telephone Number, Including Area Code:**(801) 736-5600**

** **

----

 

        Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

YES x NO o

 

        Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler or a non-accelerated filer.  Seedefinition of "accelerated filer and large accelerated filer" in Rule12b-2 of the Exchange Act. (Check one):

 
| Large  Accelerated Filer o | Accelerated Filer o | Non-accelerated filer x |
|---------------------------------|--------------------------|------------------------------|

 

        Indicate bycheck mark whether the registrant is a shell company (as defined by Rule 12b-2of the Exchange Act).  YES o    NO x

 

      OnNovember 12, 2007, 100 common interests of the registrant were outstanding, allof which are held by an affiliate of the registrant.  There is no established trading market forthe registrant's common interests.

 

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### **MRS. FIELDS FAMOUS BRANDS, LLC**

** **

**TABLE OF CONTENTS**

 

 
| **PART  I – FINANCIAL INFORMATION**                                                                                                               |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                   |
| Item 1. Financial Statements  (Unaudited)                                                                                                              |
|                                                                                                                                                   |
| Condensed Consolidated Balance Sheets as of  September 29, 2007 and December 30, 2006                                                                  |
|                                                                                                                                                   |
| Condensed Consolidated Statements of  Operations and Comprehensive Loss for the 13 weeks and 39 weeks ended  September 29, 2007 and September 30, 2006 |
|                                                                                                                                                   |
| Condensed Consolidated Statements of Cash Flows for  the 39 weeks ended September 29, 2007 and September 30, 2006                                      |
|                                                                                                                                                   |
| Notes to Condensed Consolidated  Financial Statements                                                                                                  |
|                                                                                                                                                   |
| Item 2.  Management's Discussion and Analysis of Financial Condition and Results of  Operations                                                        |
|                                                                                                                                                   |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                                                    |
|                                                                                                                                                   |
| Item 4.  Controls and Procedures                                                                                                                       |
|                                                                                                                                                   |
| **PART II – OTHER  INFORMATION**                                                                                                                  |
|                                                                                                                                                   |
| Item  1. Legal Proceedings                                                                                                                             |
|                                                                                                                                                   |
| Item 1A.  Risk Factors                                                                                                                                 |
|                                                                                                                                                   |
| Item 6.  Exhibits                                                                                                                                      |
|                                                                                                                                                   |
| SIGNATURES                                                                                                                                             |

 

2

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# **PART I –FINANCIAL INFORMATION**

 

# **Item 1.  Financial Statements**

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

**CondensedConsolidated Balance Sheets**

(in thousands)

(Unaudited)

** **
| ** **                                                                                 | ** ** | **September 29,** | ** ** | **December 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                 | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| ASSETS:                                                                                    |       |              |       |             |       |
| Cash and cash equivalents                                                                  |       | $                 | 24,105     |             | $          | 15,963 |   |
| Receivables, net of allowance for doubtful accounts of $545 and $692,  respectively        |       | 7,738             |       | 10,639           |       |
| Marketable securities available-for-sale                                                   |       | 1,449             |       | —           |       |
| Amounts due from affiliates                                                                |       | 50                |       | —           |       |
| Inventories                                                                                |       | 3,804             |       | 3,977            |       |
| Prepaid expenses and other                                                                 |       | 1,481             |       | 720              |       |
| Deferred tax asset                                                                         |       | 562               |       | 734              |       |
| Total current assets                                                                       |       | 39,189            |       | 32,033           |       |
|                                                                                       |       |              |       |             |       |
| Property and equipment, net                                                                |       | 6,795             |       | 8,169            |       |
| Goodwill                                                                                   |       | 48,843            |       | 64,115           |       |
| Trademarks and other intangible assets, net                                                |       | 9,265             |       | 10,745           |       |
| Deferred loan costs, net of accumulated amortization of $11,698 and  $10,810, respectively |       | 5,230             |       | 6,118            |       |
| Deferred tax asset                                                                         |       | 818               |       | 9                |       |
| Other assets                                                                               |       | 4,686             |       | 531              |       |
| Total assets                                                                               |       | $                 | 114,826    |             | $          | 121,720 |   |
|                                                                                       |       |              |       |             |       |
| LIABILITIES AND MEMBER'S DEFICIT:                                                          |       |              |       |             |       |
| Accounts payable                                                                           |       | $                 | 4,383      |             | $          | 9,621 |   |
| Accrued liabilities                                                                        |       | 8,318             |       | 14,750           |       |
| Amounts due to affiliates                                                                  |       | 6,182             |       | 3,788            |       |
| Current portion of capital lease obligations                                               |       | 103               |       | 119              |       |
| Current portion of deferred revenues                                                       |       | 997               |       | 1,069            |       |
| Total current liabilities                                                                  |       | 19,983            |       | 29,347           |       |
| Long-term debt                                                                             |       | 195,747           |       | 195,747          |       |
| Capital lease obligations, net of current portion                                          |       | 340               |       | 385              |       |
| Deferred revenues, net of current portion                                                  |       | 513               |       | 751              |       |
| Other liabilities                                                                          |       | 1,121             |       | 1,254            |       |
| Total liabilities                                                                          |       | 217,704           |       | 227,484          |       |
| Commitments and Contingencies                                                              |       |              |       |             |       |
| Member's deficit                                                                           |       | (102,882          | )          | (105,614         | )          |
| Accumulated other comprehensive income (loss)                                              |       | 4                 |       | (150             | )          |
| Total member's deficit                                                                     |       | (102,878          | )          | (105,764         | )          |
| Total liabilities and member's deficit                                                     |       | $                 | 114,826    |             | $          | 121,720 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements

 

3

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**MRS.FIELDS FAMOUS BRANDS, LLC**

**Condensed Consolidated Statementsof Operations and ComprehensiveIncome (Loss)**

(inthousands)

(Unaudited)

** **
| ** **                                                                      | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                      | ** ** | **September 29,**  | ** ** | **September 30,**  | ** ** | **September 29,** | ** ** | **September 30,** | ** ** |
| ** **                                                                      | ** ** | **2007**           | ** ** | **2006**           | ** ** | **2007** | ** ** | **2006** | ** ** |
| REVENUES:                                                                       |       |               |       |               |       |   |   |   |   |
| Mrs. Fields                                                                     |       | $                  | 11,138     |               | $          | 13,182 |   | $ | 34,793 |   | $ | 28,482 |   |
| GAC/Pretzels                                                                    |       | 6,728              |       | 7,507              |       | 21,952 |   | 22,435 |   |
| Dairy                                                                           |       | 2,608              |       | 3,829              |       | 8,124 |   | 10,736 |   |
| Other                                                                           |       | 75                 |       | —             |       | 75 |   | — |   |
| Total revenues                                                                  |       | 20,549             |       | 24,518             |       | 64,944 |   | 61,653 |   |
|                                                                            |       |               |       |               |       |   |   |   |   |
| OPERATING COSTS AND EXPENSES:                                                   |       |               |       |               |       |   |   |   |   |
| Mrs. Fields                                                                     |       | 9,601              |       | 13,454             |       | 30,213 |   | 27,733 |   |
| GAC/Pretzels                                                                    |       | 3,682              |       | 3,619              |       | 10,779 |   | 11,023 |   |
| Dairy                                                                           |       | 1,405              |       | 1,738              |       | 4,438 |   | 5,118 |   |
| General and administrative                                                      |       | 2,790              |       | 2,291              |       | 7,816 |   | 7,752 |   |
| Depreciation                                                                    |       | 529                |       | 551                |       | 1,594 |   | 1,910 |   |
| Amortization                                                                    |       | 519                |       | 517                |       | 1,555 |   | 1,593 |   |
| Impairment of goodwill                                                          |       | —             |       | —             |       | — |   | 14,568 |   |
| Gain on sale of intangible assets                                               |       | (11,883            | )          | —             |       | (11,883 | ) | — |   |
| Gain on sale of land held for sale                                              |       | —             |       | —             |       | (128 | ) | — |   |
| Total operating costs and expenses                                              |       | 6,643              |       | 22,170             |       | 44,384 |   | 69,697 |   |
| Income (loss) from operations                                                   |       | 13,906             |       | 2,348              |       | 20,560 |   | (8,044 | ) |
| Interest expense, net                                                           |       | (5,188             | )          | (5,270             | )          | (15,869 | ) | (15,741 | ) |
| Other expense                                                                   |       | —             |       | —             |       | — |   | (28 | ) |
| Income (loss) before income taxes                                               |       | 8,718              |       | (2,922             | )          | 4,691 |   | (23,813 | ) |
| Income taxes                                                                    |       | 4,354              |       | (460               | )          | 4,372 |   | (1,250 | ) |
| Net income (loss)                                                               |       | $                  | 4,364      |               | $          | (2,462 | ) | $ | 319 |   | $ | (22,563 | ) |
|                                                                            |       |               |       |               |       |   |   |   |   |
| COMPREHENSIVE INCOME (LOSS):                                                    |       |               |       |               |       |   |   |   |   |
| Net income (loss)                                                               |       | $                  | 4,364      |               | $          | (2,462 | ) | $ | 319 |   | $ | (22,563 | ) |
| Unrealized gain on marketable securities available-for-sale, net of  income tax |       | 161                |       | —             |       | 161 |   | — |   |
| Foreign currency translation adjustment                                         |       | (2                 | )          | (37                | )          | (7 | ) | (3 | ) |
| Comprehensive income (loss)                                                     |       | $                  | 4,523      |               | $          | (2,499 | ) | $ | 473 |   | $ | (22,566 | ) |
|                                                                                 |            |                    |            |                    |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to unaudited condensedconsolidated financial statements

 

4

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

(in thousands)

(Unaudited)

 
| ** **                                                                            | ** ** | **39 Weeks Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                            | ** ** | **September 29,**  | ** ** | **September 30,** | ** ** |
| ** **                                                                            | ** ** | **2007**           | ** ** | **2006** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |       |               |       |   |   |
| Net income (loss)                                                                     |       | $                  | 319        |   | $ | (22,563 | ) |
| Adjustments to reconcile net income (loss) to net cash used in  operating activities: |       |               |       |   |   |
| Impairment of goodwill                                                                |       | —             |       | 14,568 |   |
| Depreciation and amortization                                                         |       | 3,149              |       | 3,503 |   |
| Amortization of deferred loan costs                                                   |       | 888                |       | 816 |   |
| Loss on sale of non-marketable securities                                             |       | —             |       | 28 |   |
| Gain on sale of land held for sale                                                    |       | (128               | )          | — |   |
| Gain on sale of intangible assets                                                     |       | (11,883            | )          | — |   |
| Deferred income taxes                                                                 |       | (637               | )          | (587 | ) |
| Changes in assets and liabilities:                                                    |       |               |       |   |   |
| Receivables                                                                           |       | 2,901              |       | (1,428 | ) |
| Inventories                                                                           |       | 173                |       | (1,034 | ) |
| Prepaid expenses and other                                                            |       | (761               | )          | (198 | ) |
| Other assets                                                                          |       | (71                | )          | (369 | ) |
| Accounts payable                                                                      |       | (5,238             | )          | 117 |   |
| Accrued liabilities                                                                   |       | (6,432             | )          | (4,593 | ) |
| Amounts due to/from affiliates                                                        |       | 4,657              |       | 253 |   |
| Deferred revenues                                                                     |       | (310               | )          | 8 |   |
| Other liabilities                                                                     |       | (133               | )          | 183 |   |
| Net cash used in operating activities                                                 |       | (13,506            | )          | (11,296 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |       |               |       |   |   |
| Proceeds from sale of intangible assets, net                                          |       | 21,658             |       | — |   |
| Proceeds from sale of land held for sale                                              |       | 278                |       | — |   |
| Proceeds from sale of non-marketable securities                                       |       | —             |       | 122 |   |
| Purchases of property and equipment                                                   |       | (215               | )          | (4,494 | ) |
| Net cash provided by (used in) investing activities                                   |       | 21,721             |       | (4,372 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |       |               |       |   |   |
| Principal payments on capital leases                                                  |       | (66                | )          | (77 | ) |
| Net cash used in financing activities                                                 |       | (66                | )          | (77 | ) |
| Effect of foreign exchange rate changes on cash                                       |       | (7                 | )          | (3 | ) |
| Net increase (decrease) in cash and cash equivalents                                  |       | 8,142              |       | (15,748 | ) |
| Cash and cash equivalents at beginning of period                                      |       | 15,963             |       | 23,664 |   |
| Cash and cash equivalents at end of period                                            |       | $                  | 24,105     |   | $ | 7,916 |   |
|                                                                                  |       |               |       |   |   |
| **Supplemental Disclosures of Cash Flow  Information:**                               | ** ** | ** **         | ** ** | ** ** | ** ** |
| Cash paid for interest                                                                |       | $                  | 20,577     |   | $ | 20,553 |   |
| **Supplemental Disclosure of Noncash Investing and  Financing Activities:**           | ** ** | ** **         | ** ** | ** ** | ** ** |
| Contribution from parent under tax allocation agreement                               |       | $                  | 2,413      |   | $ | — |   |
| Distribution to parent under tax allocation agreement                                 |       | —             |       | 672 |   |
| Securities received from sale of assets                                               |       | 5,497              |       | — |   |
| Assets acquired under capital lease                                                   |       | 5                  |       | — |   |
| Leasehold improvements acquired under lease incentives                                |       | —             |       | 1,250 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements

** **

**5**

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** **

**MRS.FIELDS FAMOUS BRANDS, LLC**

**Notes toCondensed Consolidated Financial Statements**

(Unaudited)

** **

** **

**1.  Description ofBusiness**

** **

Mrs. Fields Famous Brands, LLC andsubsidiaries (the "Company") is a wholly-owned subsidiary ofMrs. Fields' Original Cookies, Inc. ("MFOC").  MFOC is a wholly-owned subsidiary ofMrs. Fields' Holding Company, Inc. ("MFH") and MFH is awholly-owned subsidiary of Mrs. Fields' Companies, Inc.("MFC").

 

On December 31, 2006, the Company restructured andreorganized its resources to focus primarily on the areas management identifiedas vital to the future growth of the Company’s brands.  As part of this reorganization, the Companyformed three business units and appointed presidents for each business unit,which include Mrs. Fields (defined below), TCBY ("Dairy"), and thecombined group of Great American Cookies, Pretzel Time and Pretzelmaker(collectively "GAC/Pretzels"). Each of the presidents is responsible for operations of their respectivebusiness unit.  Operating segments arecomponents of the Company for which separate financial information is availablethat is evaluated regularly by management in deciding how to allocate resourcesand assess performance.  As a result ofthe reorganization, the Company’s reportable segments changed from the fourpreviously reported segments, namely franchising, gifts, branded retail, andlicensing, to six operating segments as follows:

 

 
| • | Mrs. Fields Gifts          |   |                                                     |
|--------|----------------------------|--------|----------------------------------------------------------|
| • | Mrs. Fields Branded Retail |   |                                                     |
| • | Mrs. Fields Franchising    |   |    (collectively "Mrs. Fields") |
| • | Mrs. Fields Licensing      |   |                                                     |
| • | GAC/Pretzels               |   |                                                     |
| • | Dairy                      |   |                                                     |

 

In accordance withStatement of Financial Accounting Standards ("SFAS") No. 131,"Disclosures about Segments of an Enterprise and RelatedInformation," the Company has restated the segment disclosures for the 13and 39 weeks ended September 30, 2006 to conform to the presentation of the newoperating segments.

 

**2.  Sale of PretzelBrands**

On August7, 2007, the Company and its wholly-owned subsidiaries, PTF, LLC and PMC, LLC,formally Pretzel Time Franchising, LLC and Pretzelmaker Franchising, LLC,respectively, (collectively "Pretzels"), completed a sale of certainassets, consisting primarily of identifiable intangible assets of Pretzels, toNexCen Brands, Inc. ("NexCen") for $29.3 million, consisting of $22.0million in cash and 997,671 shares of NexCen common stock valued at $7.35 pershare on the date of the sale.  Under theterms of the asset purchase agreement (the "Agreement"), $2.9 million(397,121 shares) and $1.0 million (136,054 shares) of NexCen common stock,valued at $7.35 per share, is held in escrow for nine and fifteen months,respectively, pending satisfaction of certain standard representations andwarranties.  The carrying amount of theidentifiable intangible assets was $0 on the date of the sale as the intangibleassets were either internally generated or fully amortized; goodwill related toPretzels totaled $15.3 million on the date of sale.

TheCompany is restricted from trading the shares of NexCen common stock untiltwelve months after the closing and then only 25 percent of the total number ofshares every three months thereafter. Due to the restrictions on the sale of the NexCen common stock, theCompany recorded the shares at a 25 percent discount from the fair value on thedate of sale.  The shares that may betraded within 12 months ($1.2 million) have been reported as available-for-salesecurities in accordance with SFAS No. 115, "Accounting for CertainInvestments in Debt and Equity Securities."  The remainder of the stock that is notavailable for sale within 12 months ($4.3 million) is accounted for using thecost method at the discounted basis and is included in other assets.

The netproceeds of the sale, taking into effect the 25 percent discount for therestricted stock, totaled $27.2 million (net of $341,000 of direct costs of thesale); the resulting gain on sale totaled $11.9 million.

 

6

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**3.     Basis ofPresentation**

 

The accompanying unaudited condensed consolidated financial statementsof the Company have been prepared in accordance with U.S. generally acceptedaccounting principles ("GAAP") for interim financial information andArticle 10 of Regulation S-X.   Accordinglythey do not include all of the information and footnotes required by GAAP forcomplete financial statements.  In theopinion of management, all adjustments, consisting only of normal recurringaccruals, considered necessary for a fair presentation have been included.Income per common interest information is not presented because the Company iswholly-owned by MFOC and, therefore, its common interests are not publiclytraded.  These unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and notes thereto for the fiscal yearended December 30, 2006 contained in the Company's 2006 Annual Report on Form10-K filed with the Securities and Exchange Commission on March 21, 2007 (the"Annual Report").

 

The preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.

 

In connection with the Company's reorganization and change in businesssegments, certain prior year amounts in the audited consolidated financialstatements and supporting note disclosures have been reclassified to conform tothe current year presentation.  TheCompany reclassified prior year revenues and expenses as follows:
| • |   | Franchising to the Mrs. Fields, GAC/Pretzels and  Dairy business units; |
|--------|--------|-------------------------------------------------------------------------|
| • |   | Gifts, Branded Retail and Licensing to the Mrs.  Fields business unit.  |

 

   Such reclassification did notimpact previously reported net loss or accumulated deficit.

** **

**4.  Receivables**

** **

Most of the Company's receivables are due from domestic andinternational franchisees, distributors, licensees and corporate customers ofMrs. Fields Gifts and Mrs. Fields Branded Retail.  These receivables are composed of normaltrade accounts receivable and longer-term notes receivable.  Service charges may be assessed on past dueinvoices but any revenue associated with the service charges is only recognizedwhen collected.  The Company maintains anallowance for doubtful accounts to cover potential losses.  This allowance is the Company's best estimateof the amount of probable collection losses in the Company's existing tradeaccounts receivable.  The Companydetermines the allowance based upon historical write-off experience andindividual facts and circumstances associated with individual debtors.  If the assumptions that are used to determinethe allowance for doubtful accounts change, the Company may have to provide fora greater level of expense in future periods or reverse amounts provided for inprior periods.

 

Prior to fiscal 2001, TCBY Systems, LLC ("TCBY"),a wholly-owned subsidiary of the Company, extended credit from time to time inthe form of notes receivable to franchisees and certain of these notesreceivable remain outstanding.  Notesreceivable from franchisees are primarily collateralized by equipment locatedat the franchisees' stores.  These notesbear interest at market rates at the time the notes were issued and mature atvarious dates through April 2009. TCBY regularly reviews the notes for non-performance.  Notes that are considered non-performing areplaced on a non-accrual status when the collectibility of principal or interestbecomes uncertain.  During the 39 weeksended September 29, 2007 and September 30, 2006, TCBY recognized no interestincome pertaining to these notes receivable.

 

7

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Prior to fiscal 2001, TCBY factored various notes receivableaggregating $2.1 million.  Under theterms of the factoring agreement, TCBY is ultimately responsible to thefactoring agent for the realizability of the notes receivable.  In the event of non-performance, thefactoring agent has recourse against TCBY to a maximum level of $195,000 and$269,000 as of September 29, 2007 and December 30, 2006, respectively, whichthe Company has reserved 100 percent for this potential recourse liability.  This reserve is included in accruedliabilities in the accompanying condensed consolidated balance sheets.

** **

Notes receivable are composed of the following (inthousands):

| ** **                      | ** ** | **September 29,** | ** ** | **December 30,** | ** ** |
|---------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                      | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| Performing notes                |       | $                 | 23         |             | $          | 59 |   |
| Allowance for doubtful accounts |       | (13               | )          | (19              | )          |
|                            |       | $                 | 10         |             | $          | 40 |   |

 

The activity in the allowance for doubtful accountsfor notes receivable is as follows (in thousands):

 

| ** **        | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 39 Weeks Ended** | ** ** |
|-------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **        | ** ** | **September 29,**          | ** ** | **September 30,**          | ** ** | **September 29,** | ** ** | **September 30,** | ** ** |
| ** **        | ** ** | **2007**                   | ** ** | **2006**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Beginning balance |       | $                          | 15         |                       | $          | 43 |   | $ | 19 |   | $ | 69 |   |
| Reversals, net    |       | (2                         | )          | (21                        | )          | (6 | ) | (47 | ) |
|              |       | $                          | 13         |                       | $          | 22 |   | $ | 13 |   | $ | 22 |   |

** **

**5. Marketable Securities Available-for-Sale**

** **

**The cost, grossunrealized gain and fair value of available-for-sale securities at September29, 2007 were as follows (in thousands):**

** **

| ** **        | ** ** | ** ** | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **     | ** ** |
|-------------------|------------|------------|------------|----------------|------------|----------------|------------|----------------|------------|
| ** **        | ** ** | ** ** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **     | ** ** |
| ** **        | ** ** | **Cost**   | ** ** | **Gain**       | ** ** | **(Loss)**     | ** ** | **Fair Value** | ** ** |
| Equity securities |       | $          | 1,188      |           | $          | 261            |       | $              | —     |   | $ | 1,449 |   |
|              |       | $          | 1,188      |           | $          | 261            |       | $              | —     |   | $ | 1,449 |   |

** **

**8**

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** **

**6.  Inventories**

** **

Inventories, consisting of finished goods, raw materials,novelties and packaging, are stated at the lower of cost (first-in, first-outmethod) or market value.  Inventories arecomposed of the following (in thousands):

 

| ** **     | ** ** | **September 29,** | ** ** | **December 30,** | ** ** |
|----------------|------------|-------------------|------------|------------------|------------|
| ** **     | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| Finished goods |       | $                 | 1,438      |             | $          | 1,663 |   |
| Raw Materials  |       | 1,009             |       | 1,071            |       |
| Novelties      |       | 910               |       | 803              |       |
| Packaging      |       | 447               |       | 440              |       |
|           |       | $                 | 3,804      |             | $          | 3,977 |   |

** **

** **

**7.  Property andEquipment**

** **

Equipment and fixtures are stated at cost less accumulateddepreciation and are depreciated over three to seven years using thestraight-line method.  Leaseholdimprovements are stated at cost less accumulated depreciation and aredepreciated over the shorter of the term of the lease or the estimated usefullife using the straight-line method. Property and equipment are composed of the following (in thousands):

 

| ** **                    | ** ** | **September 29,** | ** ** | **December 30,** | ** ** |
|-------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                    | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| Equipment and fixtures        |       | $                 | 11,876     |             | $          | 11,682 |   |
| Leasehold improvements        |       | 7,020             |       | 6,997            |       |
| Land                          |       | 240               |       | 240              |       |
|                          |       | 19,136            |       | 18,919           |       |
| Less accumulated depreciation |       | (12,341           | )          | (10,750          | )          |
|                          |       | $                 | 6,795      |             | $          | 8,169 |   |

** **

** **

Property and equipment at September 29, 2007 and December30, 2006 included gross assets acquired under capital leases of $723,000 and$718,000, respectively, and related accumulated depreciation of $352,000 and$259,000, respectively.

 

Expenditures that materially extend useful lives of propertyand equipment are capitalized.  Routinemaintenance, repairs and renewal costs are expensed as incurred.  Gains or losses from the sale or retirementof property and equipment are recorded in income from operations.

 

Included in leasehold improvements at September 29, 2007 andDecember 30, 2006 is $1.3 million, less $177,000 and $83,000, respectively, ofaccumulated depreciation, representing amounts for tenant improvements providedas lease incentives by the lessor related to the lease for the Company'sgifting operations facility.  Deferredrent at September 29, 2007 and December 30, 2006 of $125,000 is included inaccrued liabilities and $1.0 million in other liabilities relating to theselease incentives.  The total amount ofthese leasehold improvements and deferred rent are amortized over the life ofthe lease.

 

During the 39 weeks ended September 29, 2007, the Companysold land held for sale for $278,000, resulting in a gain of $128,000.  Land held for sale at December 30, 2006 wasincluded in other assets.

** **

**9**

----

** **

**8.  Goodwill,Trademarks and Intangible Assets**

** **

The Company accounts for goodwill and other intangibleassets in accordance with SFAS No. 142 ("SFAS 142"),"Goodwill and Other Intangible Assets."  Goodwill and intangible assets acquired in apurchase business combination and determined to have an indefinite useful lifeare not amortized, but are tested for impairment at least annually inaccordance with the provisions of SFAS 142.  SFAS 142 also requires that intangibleassets with estimable useful lives be amortized over their respective estimateduseful lives to their estimated residual values and be reviewed for impairmentin accordance with SFAS No. 144, "Accounting for Impairment orDisposal of Long-Lived Assets."

 

 The following outlines the Company's goodwill by operating segment(in thousands):

 

| ** **              | ** ** | **September 29,** | ** ** | **December 30,** | ** ** |
|-------------------------|------------|-------------------|------------|------------------|------------|
| ** **              | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| GAC/Pretzels            |       | $                 | 39,641     |             | $          | 54,913 |   |
| Mrs. Fields Franchising |       | 5,491             |       | 5,491            |       |
| Mrs. Fields Gifts       |       | 1,859             |       | 1,859            |       |
| Mrs. Fields Licensing   |       | 1,852             |       | 1,852            |       |
|                    |       | $                 | 48,843     |             | $          | 64,115 |   |

 

** **

The Mrs. Fields Branded Retail and Dairy operating segmentshad no goodwill at September 29, 2007 and December 30, 2006.  GAC/Pretzels goodwill decreased $15.3 millionas a result of the sale of Pretzels (see Note 2).

** **

**9.  AccruedLiabilities**

** **

Accrued liabilities are composed of the following (inthousands):

 

| ** **                        | ** ** | **September 29,** | ** ** | **December 30,** | ** ** |
|-----------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                        | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| Accrued liabilities               |       | $                 | 4,916      |             | $          | 5,452 |   |
| Accrued compensation and benefits |       | 2,172             |       | 1,408            |       |
| Accrued severance                 |       | 319               |       | 1,856            |       |
| Accrued interest payable          |       | 911               |       | 6,034            |       |
|                              |       | $                 | 8,318      |             | $          | 14,750 |   |

 

 

The accrued severance at September 29, 2007 and December 30,2006 relates primarily to severance accrued as a result of the Company’sreorganization in January 2007 resulting in a reduction of personnel.  In accordance with SFAS No. 112,"Employers' Accounting for Postemployment Benefits — An Amendment toFinancial Accounting Standards Board ("FASB") Statements No. 5 andNo. 43," the Company accrued approximately $1.7 million of severance costsin fiscal 2006 related to this reorganization as it was probable and estimableat December 30, 2006.

 

10

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The activity inaccrued severance for the 13 weeks and 39 weeks ended September 29, 2007 is asfollows (in thousands):

 

| ** **        | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|-------------------|------------|--------------------|------------|--------------------|------------|
| ** **        | ** ** | **September 29,**  | ** ** | **September 29,**  | ** ** |
| ** **        | ** ** | **2007**           | ** ** | **2007**           | ** ** |
| Beginning balance |       | $                  | 584        |               | $          | 1,856 |   |
| Additions         |       | —             |       | 28                 |       |
| Payments          |       | (265               | )          | (1,565             | )          |
|              |       | $                  | 319        |               | $          | 319 |   |

 

** **

**10.  Related-PartyTransactions**

** **

The amounts dueto/from affiliates are composed of the following (in thousands):

 

| ** **                   | ** ** | **September 29,** | ** ** | **December 30,** | ** ** |
|------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                   | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| Amounts due from affiliates: |       |              |       |             |       |
| MFC                          |       | $                 | 50         |             | $          | — |   |
|                         |       | $                 | 50         |             | $          | — |   |
| ** **                   | ** ** | ** **        | ** ** | ** **       | ** ** |
| Amounts due to affiliates:   |       |              |       |             |       |
| MFC - tax sharing            |       | $                 | 5,834      |             | $          | 3,166 |   |
| MFH                          |       | 273               |       | 273              |       |
| MFOC                         |       | 75                |       | 349              |       |
|                         |       | $                 | 6,182      |             | $          | 3,788 |   |

 

The Company has a taxallocation agreement with MFC pursuant to which the Company agreed to makepayments to MFC, after taking into account payments the Company makes directlyto tax authorities, based on the Company's stand-alone consolidatedfederal income tax liability, determined as if the Company and its subsidiariesconstituted their own consolidated group for federal income tax purposes.  The Company will not be permitted to makethese payments to MFC, unless the MFC federal tax liability exceeds theCompany's stand-alone federal tax liability, until it meets certain financialratios and is otherwise in compliance with the terms of the Company's indenturegoverning the 9 percent senior secured notes and the 111⁄2 percent senior securednotes (together, the "Senior Secured Notes").

 

Additionally, the taxallocation agreement with MFC does not allow for the carry-back of netoperating losses.  Under the tax allocationagreement, the Company's net operating losses must be carried forward whendetermining payment to MFC.  As a resultof the taxable income generated in the 39 weeks ended September 29, 2007, theCompany realized its net operating loss carry forward and recorded acontribution from MFC of $2.4 million for tax carry forwards under the taxallocation agreement.

 

11

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**11.  ReportableSegments**

** **

As disclosed inNote 1, the Company changed its reporting segments as a result of thereorganization of the Company’s business units.

 

The Company has thefollowing six reportable operating segments:

 

 
| • | Mrs. Fields Gifts          |   |                                                      |
|--------|----------------------------|--------|-----------------------------------------------------------|
| • | Mrs. Fields Branded Retail |   |                                                      |
| • | Mrs. Fields Franchising    |   |    (collectively "Mrs.  Fields") |
| • | Mrs. Fields Licensing      |   |                                                      |
| • | GAC/Pretzels               |   |                                                      |
| • | Dairy                      |   |                                                      |

 

The accountingpolicies for the segments are the same as those discussed in the summary ofsignificant accounting policies in Note 2 to the Company's Annual Report.  Sales and transfers between segments areeliminated in consolidation.

 

The Mrs. FieldsGifts operating segment includes sales generated from the Company's giftcatalog and website.

 

The Mrs. FieldsBranded Retail operating segment includes sales generated directly from thesale of Mrs. Fields products through various retail channels.  As discussed in Note 9, "ReportableSegments," in the, Annual Report, the Company commenced selling shelfstable cookies in July 2006 directly through retail channels following thetermination of certain license agreements. Prior to this time, our branded retail activities consisted only ofsales of Mrs. Fields branded cookie dough directly through retail channels.

 

The Mrs. FieldsLicensing operating segment includes licensing activity with third parties forthe sale of products bearing the Company's brand names.

 

The Mrs. FieldsFranchising, GAC/Pretzels and Dairy operating segments include revenuesreceived either directly or indirectly from cookie, yogurt and pretzel stores,which are owned and operated by third parties. These revenues include initial franchise or license fees, monthlyroyalties based on a percentage of a franchisee's gross sales, sales of cookiedough that the Company produces and certain product formulation fees andsupplier allowances which are based upon sales to franchisees.

 

The Companyevaluates performance of each operating segment based on contribution.  Contribution is computed as the differencebetween the revenues generated by a reportable segment and the selling andoccupancy expenses, cost of sales and direct operating expenses related to thatreportable operating segment. Contribution is used as a measure of the operating performance of anoperating segment.  The Company does notallocate any general and administrative expenses, interest expense, ordepreciation and amortization to its reportable operating segments.

 

12

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Segment revenuesand contribution are presented in the following table (in thousands):

 

| ** **                 | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 39 Weeks Ended** | ** ** |
|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **September 29,**          | ** ** | **September 30,**          | ** ** | **September 29,** | ** ** | **September 30,** | ** ** |
| ** **                 | ** ** | **2007**                   | ** ** | **2006**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                  |       |                       |       |                       |       |   |   |   |   |
| Mrs. Fields Gifts          |       | $                          | 3,419      |                       | $          | 3,915 |   | $ | 13,401 |   | $ | 13,980 |   |
| Mrs. Fields Branded Retail |       | 5,633                      |       | 6,906                      |       | 15,292 |   | 6,985 |   |
| Mrs. Fields Franchising    |       | 1,875                      |       | 2,050                      |       | 5,574 |   | 6,139 |   |
| Mrs. Fields Licensing      |       | 211                        |       | 311                        |       | 526 |   | 1,378 |   |
| Total Mrs. Fields          |       | 11,138                     |       | 13,182                     |       | 34,793 |   | 28,482 |   |
| GAC/Pretzels               |       | 6,728                      |       | 7,507                      |       | 21,952 |   | 22,435 |   |
| Dairy                      |       | 2,608                      |       | 3,829                      |       | 8,124 |   | 10,736 |   |
|                       |       | $                          | 20,474     |                       | $          | 24,518 |   | $ | 64,869 |   | $ | 61,653 |   |
| Contribution:              |       |                       |       |                       |       |   |   |   |   |
| Mrs. Fields Gifts          |       | $                          | (247       | )                          | $          | (1,632 | ) | $ | (831 | ) | $ | (3,717 | ) |
| Mrs. Fields Branded Retail |       | 407                        |       | 214                        |       | 1,147 |   | 235 |   |
| Mrs. Fields Franchising    |       | 1,174                      |       | 1,301                      |       | 3,720 |   | 4,228 |   |
| Mrs. Fields Licensing      |       | 203                        |       | (155                       | )          | 544 |   | 3 |   |
| Total Mrs. Fields          |       | 1,537                      |       | (272                       | )          | 4,580 |   | 749 |   |
|                       |       |                       |       |                       |       |   |   |   |   |
| GAC/Pretzels               |       | 3,046                      |       | 3,888                      |       | 11,173 |   | 11,412 |   |
| Dairy                      |       | 1,203                      |       | 2,091                      |       | 3,686 |   | 5,618 |   |
|                       |       | $                          | 5,786      |                       | $          | 5,707 |   | $ | 19,439 |   | $ | 17,779 |   |

 

The reconciliationof contribution to income (loss) before income taxes is as follows (inthousands):

 

| ** **                          | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 39 Weeks Ended** | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **September 29,**          | ** ** | **September 30,**          | ** ** | **September 29,** | ** ** | **September 30,** | ** ** |
| ** **                          | ** ** | **2007**                   | ** ** | **2006**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Contribution                        |       | $                          | 5,786      |                       | $          | 5,707 |   | $ | 19,439 |   | $ | 17,779 |   |
| Other revenues                      |       | 75                         |       | —                     |       | 75 |   | — |   |
| General and administrative expenses |       | (2,790                     | )          | (2,291                     | )          | (7,816 | ) | (7,752 | ) |
| Depreciation and amortization       |       | (1,048                     | )          | (1,068                     | )          | (3,149 | ) | (3,503 | ) |
| Impairment of goodwill              |       | —                     |       | —                     |       | — |   | (14,568 | ) |
| Gain on sale of land held for sale  |       | —                     |       | —                     |       | 128 |   | — |   |
| Gain on sale of intangible assets   |       | 11,883                     |       | —                     |       | 11,883 |   | — |   |
| Interest expense, net               |       | (5,188                     | )          | (5,270                     | )          | (15,869 | ) | (15,741 | ) |
| Other expense                       |       | —                     |       | —                     |       | — |   | (28 | ) |
| Income (loss) before income taxes   |       | $                          | 8,718      |                       | $          | (2,922 | ) | $ | 4,691 |   | $ | (23,813 | ) |

 

 Included in revenues for GAC/Pretzels isapproximately $600,000 and $1.5 million for the 13 weeks ended September 29,2007 and September 30, 2006, respectively, and $3.5 million and $4.3 million forthe 39 weeks ended September 29, 2007 and September 30, 2006, respectively,related to the Pretzel brands sold in August 2007.

 

13

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Segment assets arepresented in the following table (in thousands):

 

| ** **                      | ** ** | **September 29,** | ** ** | **December 30,** | ** ** |
|---------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                      | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| Mrs. Fields Gifts               |       | $                 | 9,593      |             | $          | 11,703 |   |
| Mrs. Fields Branded Retail      |       | 3,618             |       | 3,157            |       |
| Mrs. Fields Franchising         |       | 10,095            |       | 10,538           |       |
| Mrs. Fields Licensing           |       | 2,527             |       | 3,476            |       |
| Total Mrs. Fields               |       | 25,833            |       | 28,874           |       |
| GAC/Pretzels                    |       | 43,747            |       | 59,829           |       |
| Dairy                           |       | 6,449             |       | 7,359            |       |
| Total Segment Identified Assets |       | 76,029            |       | 96,062           |       |
| Non-Segment Identified Assets   |       | 38,797            |       | 25,658           |       |
| Total Assets                    |       | $                 | 114,826    |             | $          | 121,720 |   |

 

The fixed assets and inventory ofthe Company primarily relate to the Company's GAC manufacturing facility, Mrs.Fields Branded Retail operating segment, Mrs. Fields Gifts operating segmentand related activities.  Assets relatingto the Mrs. Fields Franchising operating segment, the Dairy operating segmentand the Mrs. Fields Licensing operating segment are primarily amounts due fromfranchisees and licensees and goodwill relating to franchising concepts.

 

Revenues from franchisees,customers and licensees within the United States of America were $19.3 millionand $61.5 million or 94.0 percent and 94.8 percent of total revenues for the 13and 39 weeks ended September 29, 2007, respectively, and $23.2 million and$59.7 million or 94.7 percent and 96.8 percent of total revenues for the 13 and39 weeks ended September 30, 2006, respectively.  Revenues from international franchisees,customers and licensees were $­­­1.2 million and $3.4 million or 6.0 percentand 5.2 percent of total revenues for the 13 and 39 weeks ended September 29,2007, respectively, and $1.3 million and $2.0 million or 5.3 percent and 3.2percent of total revenues for the 13 and 39 weeks ended September 30, 2006,respectively.  Revenues from any singleforeign country were not material. Providing geographical information regarding long-lived assets isimpracticable.

 

The Mrs. Fields, GAC/Pretzels andDairy business units are not dependent upon any single franchisee.

 

The Mrs. Fields Gifts operatingsegment has one customer that accounted for approximately $800,000 and $3.2million, or 24.3 percent and 23.8 percent of revenues for the 13 and 39weeks ended September 29, 2007, respectively, and $1.4 million and $2.3million, or 34.5 percent and 16.5 percent of revenues for the 13 and 39 weeksended September 30, 2006, respectively. No other customers accounted for more than five percent of Mrs. FieldsGifts operating segment revenues.

*** ***

The Mrs. Fields Branded Retail operatingsegment is not dependent upon any single customer.

 

14

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The Mrs. Fields Licensing operating segment has one licensee thataccounted for approximately $108,000 and $223,000 or 51.0 percent and 42.3percent of the revenues of the Licensing operating segment for the 13 and 39weeks ended September 29, 2007, and approximately $88,000 and $207,000 or 28.4percent and 15.0 percent of the revenues of the Licensing operating segment forthe 13 and 39 weeks ended September 30, 2006, respectively; one licensee thataccounted for approximately $32,000 and $95,000 or 15.0 percent and 18.1percent of the revenues of the Licensing operating segment for the 13 and 39weeks ended September 29, 2007, respectively, and had no revenues for the 13and 39 weeks ended September 30, 2006, respectively; one licensee thataccounted for approximately $30,000 and $58,000 or 14.2 percent and 11.0percent of the revenues of the Licensing operating segment for the 13 and 39weeks ended September 29, 2007, respectively, and approximately $19,000 and$394,000 or 6.2 percent and 28.6 percent of the revenues of the Licensingoperating segment for the 13 and 39 weeks ended September 30, 2006,respectively; and one licensee that accounted for approximately $30,000 and$90,000 or 14.2 percent and 17.1 percent of the revenues of the Licensingoperating segment for the 13 and 39 weeks ended September 29, 2007,respectively, and approximately $30,000 and $90,000 or 9.6 percent and 6.5percent of the revenues of the Licensing operating segment for the 13 and 39weeks ended September 30, 2006, respectively.

** **

**12.  Share-Based Compensation**

 

***PhantomStock Plan***

Effective May 23,2004, the Board of Directors of MFC (the "Board of Directors")adopted the Phantom Stock Plan of Mrs. Fields' Companies, Inc. (the"Phantom Plan").  The purposeof the Phantom Plan is to provide long-term incentives to key employees of MFCor its subsidiaries (the "Participants") as determined by theCompensation Committee of the Board of Directors (the"Committee").  The Phantom Planis unfunded and Participants do not receive any payment under the Phantom Planuntil the completion of the first to occur of: (i) a sale of substantially allof the assets of MFC; (ii) a public offering of MFC's common stock where MFCreceives proceeds, net of any underwriter's discounts and expenses, of not lessthan $50 million; or (iii) any stock sale, merger or other transaction wherethe owners of common stock immediately before the transaction do not own inexcess of 50 percent of the common stock of the entity surviving such sale,merger or other transaction (a "Triggering Event").

 

Participantsreceive performance units in amounts recommended by MFC's Chief ExecutiveOfficer and determined by the Committee. Once issued, performance units may only be forfeited upon certainevents, such as a participant’s voluntary termination or termination forcause.  Additionally, the Phantom Planmay be terminated by the Board of Directors at any time at its solediscretion.  Upon the completion of aTriggering Event, Participants receive payments reflecting the number and valueof their performance units at the time of the completion of the TriggeringEvent.  Payments to Participants may bemade in cash or through issuance of equity securities of MFC, as determined bythe Committee, at which time MFC will recognize compensation expense.  The value of a performance unit at thecompletion of a Triggering Event is the value of one share of common stock ofMFC as determined in good faith by the Board of Directors.  If the Board of Directors determines theneed, it may seek the advice of an independent advisor.

 

The maximum numberof performance units that may be granted under the Phantom Plan is one millionunits. Subdivisions, splits or combinations involving MFC's common stock willproportionately affect the number of performance units that have been awardedunder the Phantom Plan.  In May 2004, theCommittee approved the grant of up to 392,418 performance units allocated amongParticipants as determined by the Committee. In March 2006, the Committee approved the grant of up to 182,274additional units to Participants identified by the Committee, resulting intotal authorized grants of up to 574,692 performance units.  During the 39 weeks ended September 29, 2007,no performance units were granted to Participants. Future grants, if any, shallalso be determined by the Committee.  Asof September 29, 2007 and December 30, 2006, a total of 460,130 performanceunits are issued and outstanding.

 

15

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SFAS No. 123(R),"Share-Based Payment," applies to all of the Company’s outstandinggrants under the Phantom Plan.  There areno other employee share-based payment awards outstanding.  Compensation costs for the grants under thePhantom Plan will be recognized upon the completion of a Triggering Event.Accordingly, no compensation costs have been recognized in the statement ofoperations for the 13 weeks and 39 weeks ended September 29, 2007 or September30, 2006.

 

***Employee Stock Option Plan***

Effective September 1, 2004, MFCterminated its Employee Stock Option Plan pursuant to the provisions of theplan.  No further options will be grantedunder the plan.  Valid and outstandingoptions granted to plan participants prior to termination were unaffected bythe termination.  The remaining 10,000outstanding options expired without exercise in March 2007.  As of September 29, 2007, there were noissued or outstanding options under the Employee Stock Option Plan.

** **

***Director Stock Option Plan***

Members of the Company's Board of Managers, other than officers of theCompany, are qualified to participate in MFC's Director Stock Option Plan (the"Director Stock Option Plan"). Under MFC's Director Stock Option Plan, a committee of the Board ofDirectors of MFC is authorized to administer the Plan and has the power, amongother things, to grant awards of options for common stock of MFC to outsidedirectors of MFC and its subsidiaries, including the Company.  MFC's Director Stock Option Plan provides forthe issuance of time vested options, which vest 25 percent per year on theanniversaries of the dates on which they are granted and vest in full upon achange of control of MFC or the Company. A total of 100,000 shares of common stock of MFC are reserved for issuanceunder MFC's Director Stock Option Plan and as of September 29, 2007 there wereoutstanding options providing for the issuance of up to 60,672 of thoseshares.  During the quarter endedSeptember 29, 2007, there were no additional stock option grants awarded to thenon-executive Managers.  Common stock ofMFC issued under the Director Stock Option Plan is subject to customaryrestrictions on transfer.  Compensationcosts for the grants under the Director Stock Option Plan are recognized overthe vesting period of the grant.  Thecompensation costs for the 13 weeks and 39 weeks ended September 29, 2007 andSeptember 30, 2006 were insignificant.

 

**13.  Commitments andContingencies**

 

The Companyand its products are subject to regulation by numerous governmentalauthorities, including, without limitation, federal, state and local laws andregulations governing franchising, health, sanitation, environmentalprotection, safety and hiring and employment practices.

 

In the ordinarycourse of business, the Company is involved in routine litigation, includingfranchise disputes and trademark disputes. The Company is not a party to any legal proceedings that, in the opinionof management, after consultation with legal counsel, is material to itsbusiness, financial condition or consolidated results of operations.

 

**14.  Supplemental CondensedConsolidating Financial Information**

 

Long-term debt includes the SeniorSecured Notes that were issued by the Company and Mrs. Fields FinancingCompany, Inc. as co-issuers.  Mrs. FieldsFinancing Company, Inc. is a wholly-owned finance subsidiary of theCompany.  The Senior Secured Notes arefully and unconditionally guaranteed on a joint and several basis by all of theCompany's domestic subsidiaries other than immaterial subsidiaries.  The Company has no independent assets oroperations.  Therefore, supplementalfinancial information on a condensed consolidating basis of the guarantorsubsidiaries is not required.  There areno restrictions on the Company's ability to obtain cash dividends or otherdistributions of funds from the guarantor subsidiaries, except those imposed byapplicable law.

 

16

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**15. Taxes**

 

On December 31, 2006, the Companyadopted the provisions of FASB No. 48 ("FIN 48"), "Accountingfor Uncertainty in Income Taxes," an interpretation of FASB StatementNo. 109, "Accounting for Income Taxes."  FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.  The interpretation requires that the Companyrecognize the impact of a tax position in the financial statements if thatposition is more likely than not of being sustained on audit, based on thetechnical merits of the position.  FIN 48also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods and disclosure.  In accordance with the provisions of FIN 48,any cumulative effect resulting from the change in accounting principle is tobe recorded as an adjustment to the opening balance of member's deficit.

 

The adoption of FIN 48 did not havean impact on the Company’s consolidated financial statements.  At December 31, 2006 and through September29, 2007, the Company had no unrecognized tax benefits.  As of the date of adoption, there were no taxpositions for which it is reasonably possible that the total amounts ofunrecognized tax benefits will significantly increase or decrease within twelvemonths from the date of adoption of FIN 48 or from September 29, 2007.

 

The Company recognizes interest andpenalties related to unrecognized tax benefits in interest expense.  There have been no interest or penaltiesrecognized in the financial statements of the Company.

 

The Company is included in theconsolidated income tax returns of MFC in the U.S. federal jurisdiction and invarious state jurisdictions.  MFC iscurrently not under examination by any federal or state tax authority, butremains subject to income tax examinations for each of its open tax years,which extend back to 2003 for federal income tax purposes and 2002 for stateincome tax purposes.

 

On December 31, 2006, the Companyadopted Emerging Issues Task Force ("EITF") issued EITF IssueNo. 06-3 ("EITF 06-3"), "How Taxes Collected from Customersand Remitted to Government Authorities Should Be Presented in the IncomeStatement (That Is, Gross Versus Net Presentation)."  EITF 06-3 addresses which taxes assessed by agovernment authority should be considered and how these taxes should bepresented in the income statement (i.e., gross versus net).  The Company records revenues net of state andlocal sales taxes.

** **

**16.  Accounting PronouncementsNot Yet Adopted**

** **

In February 2007, the FASB issuedSFAS No. 159, ("SFAS 159"), "The Fair Value Option forFinancial Assets and Financial Liabilities—Including an Amendment of FASBStatement No. 115."  SFAS 159expands the use of fair value accounting but does not affect existing standardswhich require assets or liabilities to be carried at fair value.  SFAS 159 gives a company the irrevocableoption to carry most financial assets and liabilities at fair value, withchanges in fair value recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15,2007 and is required to be adopted by the Company in the first quarter of 2008. The Company is currently determiningwhether fair value accounting is appropriate for any of its eligible items andcannot currently estimate the impact, if any, which SFAS 159 will have on theCompany's consolidated results of operation and financial condition.

 

In September 2006, the FASB issuedSFAS No. 157 (“SFAS 157”), "Fair Value Measurements," to define fairvalue, establish a framework for measuring fair value in generally acceptedaccounting principles and expand disclosures about fair value measurements, butdoes not change existing guidance as to whether or not an instrument is carriedat fair value.  SFAS 157 is effective forfiscal years beginning after November 15, 2007 and interim periods within thosefiscal years.  The Company is currentlyevaluating the effect, if any, that the adoption of SFAS 157 will have on theCompany's consolidated financial position and results of operations.

 

17

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**17.  Liquidity and CapitalResources**

 

Managementcannot be certain, based on historical results and current projections, thatthe cash currently on hand and expected future cash flows from operations willbe sufficient to meet its September 2008 interest payment.  The Company is pursuing various actions toimprove its liquidity, financial condition and results of operations.  These actions include, but are not limitedto, the following:

 

·                  staff changes andinvestment initiatives to reduce costs and improve revenues;

·                  possiblereinvestment of net proceeds from the sale of the Pretzel businesses intohigher yielding assets;

·                  sale of additionalassets; and

·                  raising ofadditional equity capital.

 

Management and its major shareholder have retainedBlackstone Advisory Services to assist in reviewing the Company’s alternativesas part of its strategic review process.

 

Failure of these actions to improve the Company’s financialcondition and operational performance may result in the company’s inability tomeet its September 2008 interest payment. Failure to make the payment could have a material adverse impact on theCompany's future operations and carrying value of assets.  There can be no assurance that the plannedactions will be successful or that the Company’s financial position willimprove, absent successful execution of some or all of the actions beingconsidered.

 

18

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

 

 

**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

 

         Certain information set forth in this report contains"forward-looking statements" within the meaning of the federalsecurities laws.  Forward-lookingstatements are those that do not relate solely to historical fact.  They include, but are not limited to, anystatement that may predict, forecast, indicate or imply future results,performance, achievements or events. They may contain words such as "believe,""anticipate," "expect," "estimate,""intend," "project," "plan,""continue," "will," "may" or the negative of suchwords or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties, including,but not limited to, economic, competitive and governmental factors outside ofour control, that may cause actual results to differ materially from trends,plans or expectations set forth in the forward-looking statements.  Factors you should consider that could causethese differences include all factors described under Part II, Item 1A."Risk Factors" contained elsewhere in this report.

 

         You arecautioned not to place undue reliance on the forward-looking statementscontained in this report, which reflect management's analysis only as of thedate of this report.  We undertake noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise.  In light of these risks, uncertainties andassumptions, the forward-looking events discussed in this report may not occur.

 

# **Recent Developments**

 

      On August 7, 2007, Mrs. Fields Famous Brands, LLC andsubsidiaries ("we," "us," the "Company" orsimilar terms) completed the sale ofcertain assets, consisting primarily of identifiable intangible assets of ourwholly-owned subsidiaries, PTF, LLC ("Pretzel Time") and PMF,LLC  ("Pretzelmaker"), formallyPretzel Time Franchising, LLC and Pretzelmaker Franchising, LLC, respectively,(collectively "Pretzels"), to NexCen Brands, Inc.("NexCen") for $29.3 million, consisting of $22.1 million in cash and997,671 shares of NexCen common stock valued at $7.35 per share on the date ofthe sale.  Under the terms of the assetpurchase agreement (the "Agreement"), $2.9 million (397,121 shares)and $1.0 million (136,054 shares) of NexCen common stock, valued at $7.35 pershare, is held in escrow for nine and fifteen months, respectively, pendingsatisfaction of certain standard representations and warranties.  The carrying amount of the identifiableintangible assets was $0 on the date of the sale as the intangible assets wereeither internally generated or fully amortized; goodwill related to Pretzelstotaled $15.3 million on the date of sale.

 

        We are restricted fromtrading the shares of NexCen common stock until twelve months after the closingand then only 25 percent of the total number of shares every three monthsthereafter.  Due to the restrictions onthe sale of the NexCen common stock, we recorded the shares at a 25 percentdiscount from the fair value on the date of sale.  The shares that may be traded within 12months ($1.2 million) have been reported as available-for-sale securities inaccordance with SFAS No. 115, "Accounting for Certain Investments in Debtand Equity Securities."  Theremainder of the stock that is not available for sale within 12 months ($4.3million) is accounted for using the cost method at the discounted basis and isincluded in other assets.

 

        The net proceeds of thesale, taking into effect the 25 percent discount for the restricted stock,totaled $27.2 million (net of $341,000 of direct costs of the sale); theresulting gain on sale totaled $11.9 million.

 

# **Executive Summary**

 

        We are one of the largest franchisors inthe premium snack-food industry, featuring Mrs. Fields®, Great AmericanCookies® and TCBY® as our core brands. Through our franchisees' retail stores, we are the largest retailer offreshly baked on-premises specialty cookies and brownies in the United Statesof America (the "United States") and the largest retailer ofsoft-serve frozen yogurt in the United States. In addition, we operate a gifts and a branded retail business and haveentered into licensing arrangements that attempt to leverage awareness of ourcore brands among our retail customer base. We operate through a network of 1,679 retail concept locations, whichare located throughout the United States and in approximately 24 foreigncountries.

 

19

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        On December 31, 2006, we restructuredand reorganized our resources to focus primarily on the areas we identified asvital to the future growth of our brands. As part of this reorganization, we formed three business units andappointed presidents for each business unit, which include Mrs. Fields, TCBY("Dairy"), and the combined group of Great American Cookies, PretzelTime and Pretzelmaker (collectively "GAC/Pretzels").  Each of the presidents is responsible foroperations of their respective business unit. Operating segments are components of our Company for which separatefinancial information is available that is evaluated regularly by management indeciding how to allocate resources and assess performance.  As a result of the reorganization, ourreportable segments have changed from the four previously reported segments,namely franchising, gifts, branded retail, and licensing, to six operatingsegments as follows:

 

 
| • | Mrs. Fields Gifts          |   |                                                      |
|--------|----------------------------|--------|-----------------------------------------------------------|
| • | Mrs. Fields Branded Retail |   |                                                      |
| • | Mrs. Fields Franchising    |   |    (collectively "Mrs.  Fields") |
| • | Mrs. Fields Licensing      |   |                                                      |
| • | GAC/Pretzels               |   |                                                      |
| • | Dairy                      |   |                                                      |

 

      In accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments ofan Enterprise and Related Information,” we have restated the segmentdisclosures for the 13 and 39 weeks ended September 30, 2006 to conform to thepresentation of the new operating segments.

 

        Mrs. Fields, GAC/Pretzels and Dairyrepresented 53.6 percent, 33.8 percent and 12.5 percent of total revenues,respectively, for the 39 weeks ended September 29, 2007 and 46.2 percent, 36.4percent, and 17.4 percent of total revenues, respectively, for the 39 weeksended September 30, 2006.

 

        As of September 29, 2007, our storeportfolio consisted of 1,279 domestic franchised locations, 299 internationalfranchised locations and 101 licensed locations. Our franchisees’ andlicensees’ concept locations by brand are distributed as follows:

 

 

| ** **                    | ** ** | **Domestic**   | ** ** | **International** | ** ** | **Licensed**  | ** ** | ** ** | ** ** |
|-------------------------------|------------|----------------|------------|-------------------|------------|---------------|------------|------------|------------|
| ** **                    | ** ** | **Franchised** | ** ** | **Franchised**    | ** ** | **Locations** | ** ** | **Total**  | ** ** |
| Mrs. Fields                   |       | 320            |       | 96                |       | 29            |       | 445        |       |
| Great American Cookies        |       | 286            |       | 1                 |       | —        |       | 287        |       |
| TCBY - traditional stores     |       | 332            |       | —            |       | —        |       | 332        |       |
| TCBY - non-traditional stores |       | 329            |       | 202               |       | 70            |       | 601        |       |
| Yovana - test stores (1)      |       | 2              |       | —            |       | 2             |       | 4          |       |
| TCBY/Beriyo                   |       | 10             |       | —            |       | —        |       | 10         |       |
| Dairy subtotal                |       | 673            |       | 202               |       | 72            |       | 947        |       |
| Total                         |       | 1,279          |       | 299               |       | 101           |       | 1,679      |       |

----

(1)  Included in the domestic franchised YovanaYogurt Café ("Yovana") test stores is one store currently owned andoperated by us, which may be refranchised, relocated or closed in fiscal2007.  We assumed operations from afranchisee in an effort to more closely monitor the results of the test.

 

        The previoustable counts each concept location individually.  For example, if a physical location had aMrs. Fields store and a TCBY store together, it would be counted as two conceptlocations in the table above.  If actualphysical stores were counted rather than concept locations, total store countswould be reduced by 90 locations to 1,589.

 

20

----

 

        During the 39 weeks ended September 29,2007, our store portfolio declined from 2,313 concept locations to 1,679concept locations, as follows:

 

| ** **                    | ** ** | **Total Company** | ** ** |
|-------------------------------|------------|-------------------|------------|
| ** **                    | ** ** | **Domestic**      | ** ** | **International** | ** ** | **Licensed** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Franchised**    | ** ** | **Franchised** | ** ** | **Locations** | ** ** | **Total** | ** ** |
| Balance at December 30, 2006  |       | 1,804             |       | 356 |   | 153 |   | 2,313 |   |
| New development openings      |       | 41                |       | 24 |   | — |   | 65 |   |
| Permanent closings            |       | (242              | )          | (29 | ) | (45 | ) | (316 | ) |
| Other closings, net           |       | (9                | )          | 1 |   | 1 |   | (7 | ) |
| Sale of Pretzel stores        |       | (315              | )          | (53 | ) | (8 | ) | (376 | ) |
| Balance at September 29, 2007 |       | 1,279             |       | 299 |   | 101 |   | 1,679 |   |

 

 

        The following tables provide additionaldetail of new development openings, permanent closings and other openings andclosings of our concept locations during the 39 weeks ended September 29, 2007:

 

| ** **                    | ** ** | **Domestic Franchised** | ** ** |
|-------------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | ** **              | ** ** | ** ** | ** ** | **Traditional** | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Mrs. Fields**         | ** ** | **GAC/Pretzels** | ** ** | **Dairy** | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance at December 30, 2006  |       | 360                     |       | 622 |   | 376 |   | 446 |   | 1,804 |   |
| New development openings      |       | 6                       |       | 23 |   | 8 |   | 4 |   | 41 |   |
| Permanent closings            |       | (44                     | )          | (38 | ) | (40 | ) | (120 | ) | (242 | ) |
| Other closings, net           |       | (2                      | )          | (6 | ) | — |   | (1 | ) | (9 | ) |
| Sale of Pretzel stores        |       | —                  |       | (315 | ) | — |   | — |   | (315 | ) |
| Balance at September 29, 2007 |       | 320                     |       | 286 |   | 344 |   | 329 |   | 1,279 |   |

 

| ** **                    | ** ** | **International Franchised** | ** ** |
|-------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | ** **                   | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | ** **                   | ** ** | ** ** | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Mrs. Fields**              | ** ** | **GAC/Pretzels** | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance at December 30, 2006  |       | 97                           |       | 55 |   | 204 |   | 356 |   |
| New development openings      |       | 7                            |       | 5 |   | 12 |   | 24 |   |
| Permanent closings            |       | (8                           | )          | (7 | ) | (14 | ) | (29 | ) |
| Other closings, net           |       | —                       |       | 1 |   | — |   | 1 |   |
| Sale of Pretzel stores        |       | —                       |       | (53 | ) | — |   | (53 | ) |
| Balance at September 29, 2007 |       | 96                           |       | 1 |   | 202 |   | 299 |   |

 

 

| ** **                    | ** ** | **Licensed Locations** | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | ** **             | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | ** **             | ** ** | ** ** | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Mrs. Fields**        | ** ** | **GAC/Pretzels** | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance at December 30, 2006  |       | 44                     |       | 10 |   | 99 |   | 153 |   |
| New development openings      |       | —                 |       | — |   | — |   | — |   |
| Permanent closings            |       | (15                    | )          | (2 | ) | (28 | ) | (45 | ) |
| Other openings, net           |       | —                 |       | — |   | 1 |   | 1 |   |
| Sale of Pretzel stores        |       | —                 |       | (8 | ) | — |   | (8 | ) |
| Balance at September 29, 2007 |       | 29                     |       | — |   | 72 |   | 101 |   |

 

21

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        We have implemented a number ofstrategies designed to attempt to reverse our trend of declining store counts,including identifying stores that are at risk of closure for operationalissues, lease or franchise agreement expiration and working with franchisees torelocate, transfer or correct operational deficiencies.  We are also testing programs to refresh,remodel or reconcept some of our concept locations, as more fully discussed inour 2006 Annual Report on Form 10-K filed with the Securities and ExchangeCommission ("SEC") on March 21, 2007 ("AnnualReport").  There can be no assurancethat our strategies will succeed.  Ifstore counts continue to decline, our business operations or financialcondition could be adversely affected.

 

        Throughout this discussion, we refer tothe total weeks that our franchised locations operate in any given period as"franchised unit weeks" and use that term comparatively whendescribing factors that may affect performance.    Fewer franchised locations translatenaturally to fewer total franchised unit weeks that our franchisees operate andcontribute revenues to us.  The Dairyoperating segment is composed of both larger, traditional locations and asignificant number of smaller, non-traditional locations.  We measure franchised unit weeks differentlyfor the Dairy operating segment, based on our calculation that it takesapproximately three average non-traditional locations to equal the revenues ofone average traditional location.  Wetherefore refer to "traditional equivalent unit weeks" to describethe total number of weeks that TCBY franchised locations operate in any givenperiod, adjusted to account for the different impact that non-traditional TCBYstore openings and closings may have when compared to similar events affectingtraditional TCBY stores.

# ** **

# **  Reclassifications**

*** ***

        In connection with our reorganizationand change in business segments, certain prior year amounts have beenreclassified to conform to the current year presentation.  We reclassified prior year revenues andexpenses as follows:

 
|   | • | Franchising to the Mrs. Fields, GAC/Pretzels and  Dairy business units; and |
|--------|--------|-----------------------------------------------------------------------------|
|   | • | Gifts, Branded Retail and Licensing to the Mrs.  Fields business unit.      |

 

Suchreclassification did not impact previously reported net loss or accumulateddeficit.

 

22

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**Results of Operations**

 

        Thefollowing table sets forth, for the periods indicated, certain informationrelating to our operations and percentage changes from period to period (inthousands):

 
| ** **                           | ** ** | **13 Weeks Ended** | ** ** | ** **    | ** ** | **39 Weeks Ended** | ** ** | ** **    | ** ** |
|--------------------------------------|------------|--------------------|------------|---------------|------------|--------------------|------------|---------------|------------|
| ** **                           | ** ** | **September**      | ** ** | **September** | ** ** | **%**              | ** ** | **September** | ** ** | **September** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **29, 2007**       | ** ** | **30, 2006**  | ** ** | **Change**         | ** ** | **29, 2007**  | ** ** | **30, 2006** | ** ** | **Change** | ** ** |
| REVENUES:                            |       |               |       |          |       |               |       |          |       |   |   |   |   |
| Mrs. Fields Gifts                    |       | $                  | 3,419      |          | $          | 3,915              |       | (12.7         | )          | $ | 13,401 |   | $ | 13,980 |   | (4.1 | ) |
| Mrs. Fields Branded Retail           |       | 5,633              |       | 6,906         |       | (18.4              | )          | 15,292        |       | 6,985 |   | 118.9 |   |
| Mrs. Fields Franchising              |       | 1,875              |       | 2,050         |       | (8.5               | )          | 5,574         |       | 6,139 |   | (9.2 | ) |
| Mrs. Fields Licensing                |       | 211                |       | 311           |       | (32.2              | )          | 526           |       | 1,378 |   | (61.8 | ) |
| Total Mrs. Fields                    |       | 11,138             |       | 13,182        |       | (15.5              | )          | 34,793        |       | 28,482 |   | 22.2 |   |
| GAC/Pretzels                         |       | 6,728              |       | 7,507         |       | (10.4              | )          | 21,952        |       | 22,435 |   | (2.2 | ) |
| Dairy                                |       | 2,608              |       | 3,829         |       | (31.9              | )          | 8,124         |       | 10,736 |   | (24.3 | ) |
| Other                                |       | 75                 |       | —        |       | NM                 |       | 75            |       | — |   | NM |   |
| Total revenues                       |       | 20,549             |       | 24,518        |       | (16.2              | )          | 64,944        |       | 61,653 |   | 5.3 |   |
| OPERATING COSTS AND EXPENSES:        |       |               |       |          |       |               |       |          |       |   |   |   |   |
| Mrs. Fields Gifts                    |       | 3,666              |       | 5,547         |       | (33.9              | )          | 14,232        |       | 17,697 |   | (19.6 | ) |
| Mrs. Fields Branded Retail           |       | 5,226              |       | 6,692         |       | (21.9              | )          | 14,145        |       | 6,750 |   | 109.6 |   |
| Mrs. Fields Franchising              |       | 701                |       | 749           |       | (6.4               | )          | 1,854         |       | 1,911 |   | (3.0 | ) |
| Mrs. Fields Licensing                |       | 8                  |       | 466           |       | (98.3              | )          | (18           | )          | 1,375 |   | NM |   |
| Total Mrs. Fields                    |       | 9,601              |       | 13,454        |       | (28.6              | )          | 30,213        |       | 27,733 |   | 8.9 |   |
| GAC/Pretzels                         |       | 3,682              |       | 3,619         |       | 1.7                |       | 10,779        |       | 11,023 |   | (2.2 | ) |
| Dairy                                |       | 1,405              |       | 1,738         |       | (19.2              | )          | 4,438         |       | 5,118 |   | (13.3 | ) |
| General and administrative           |       | 2,790              |       | 2,291         |       | 21.8               |       | 7,816         |       | 7,752 |   | 0.8 |   |
| Depreciation                         |       | 529                |       | 551           |       | (4.0               | )          | 1,594         |       | 1,910 |   | (16.5 | ) |
| Amortization                         |       | 519                |       | 517           |       | 0.4                |       | 1,555         |       | 1,593 |   | (2.4 | ) |
| Impairment of goodwill               |       | —             |       | —        |       | —             |       | —        |       | 14,568 |   | NM |   |
| Gain on sale of intangible assets    |       | (11,883            | )          | —        |       | NM                 |       | (11,883       | )          | — |   | NM |   |
| Gain on sale of land held for sale   |       | —             |       | —        |       | —             |       | (128          | )          | — |   | NM |   |
| Total operating costs and expenses   |       | 6,643              |       | 22,170        |       | (70.0              | )          | 44,384        |       | 69,697 |   | (36.3 | ) |
| Income (loss) from operations        |       | 13,906             |       | 2,348         |       | 492.2              |       | 20,560        |       | (8,044 | ) | NM |   |
| Interest expense, net                |       | (5,188             | )          | (5,270        | )          | (1.6               | )          | (15,869       | )          | (15,741 | ) | 0.8 |   |
| Other expense                        |       | —             |       | —        |       | —             |       | —        |       | (28 | ) | NM |   |
| Income (loss) before income taxes    |       | 8,718              |       | (2,922        | )          | NM                 |       | 4,691         |       | (23,813 | ) | NM |   |
| Income taxes                         |       | 4,354              |       | (460          | )          | NM                 |       | 4,372         |       | (1,250 | ) | NM |   |
| Net income (loss)                    |       | $                  | 4,364      |          | $          | (2,462             | )          | NM            |       | $ | 319 |   | $ | (22,563 | ) | NM |   |
| Cash flows from operating activities |       | $                  | (7,377     | )             | $          | (3,607             | )          | (104.5        | )          | $ | (13,506 | ) | $ | (11,296 | ) | (19.6 | ) |
| Cash flows from investing activities |       | $                  | 21,503     |          | $          | (2,691             | )          | NM            |       | $ | 21,721 |   | $ | (4,372 | ) | NM |   |
| Cash flows from financing activities |       | $                  | (61        | )             | $          | (26                | )          | (134.6        | )          | $ | (66 | ) | $ | (77 | ) | 14.3 |   |

----

NM - Calculation not meaningful.

 

23

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**13 Weeks Ended September 29, 2007**

**Compared to the 13 Weeks EndedSeptember 30, 2006**

** **

*        Income FromOperations—Overview*. Income from operations was $13.9 million for the 13 weeks endedSeptember 29, 2007, an increase of $11.6 million or 492.2 percent from incomeof $2.3 million for the 13 weeks ended September 30, 2006.  The increase in income from operations wasprimarily due to the following:

 
| • | gain on sale of the Pretzel brands of $11.9 million  in 2007;              |
|--------|----------------------------------------------------------------------------|
| • | increased contribution from our business units of  $100,000; and           |
| • | increase in other revenue of $100,000, as described  in more detail below. |

 

        The foregoing increases in income fromoperations were partially offset by an increase in general and administrativeexpenses of $500,000.

 

        The change in contribution from ourbusiness units of $100,000 is composed of the following:

 
| • | Mrs. Fields business unit contribution increase of  $1.8 million; partially offset by |
|--------|---------------------------------------------------------------------------------------|
| • | GAC/Pretzels business unit contribution decrease of  $800,000; and                    |
| • | Dairy business unit contribution decrease of  $900,000.                               |

 

        *BusinessUnit Contribution. *Mrs.Fields business unit contribution is composed of the following:

 
| • | sales of products through our gift catalog and  website, less direct operating expenses in our Mrs. Fields Gifts operating  segment;                                                                                  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | net sales of our branded products through retail  channels by us and through food brokers less related cost of sales and direct  selling and operating expenses in our Mrs. Fields Branded Retail operating  segment; |
| • | sales of new franchises and royalties from existing  franchises less direct operating expenses in our Mrs. Fields Franchising  operating segment; and                                                                 |
| • | licensing fees received from third parties for the  sale of products bearing our brand names less direct operating expenses in  our Mrs. Fields Licensing operating segment.                                          |

 

        Our GAC/Pretzels and Dairy business unitcontribution is composed of sales of new franchises and royalties from existingfranchises less direct operating expenses. Our GAC/Pretzels business unit also includes sales of batter to ourGreat American Cookies ("GAC") franchisees, less cost of product anddirect operating expenses, from our manufacturing facility.

 

        The following table sets forth thecontribution from each of our business units (in thousands):

 

| ** **   | ** ** | **For the 13 Weeks Ended** | ** ** |
|--------------|------------|----------------------------|------------|
| ** **   | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** |
| ** **   | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Mrs. Fields  |       | $                          | 1,537      |   | $ | (272 | ) |
| GAC/Pretzels |       | 3,046                      |       | 3,888 |   |
| Dairy        |       | 1,203                      |       | 2,091 |   |
|         |       | $                          | 5,786      |   | $ | 5,707 |   |

 

24

----

 

**Mrs.Fields**

 

        The following table details the revenuesand operating expenses of the Mrs. Fields business unit (in thousands):

 

| ** **                           | ** ** | **For the 13 Weeks Ended** | ** ** | ** **        | ** ** |
|--------------------------------------|------------|----------------------------|------------|-------------------|------------|
| ** **                           | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **2007**                   | ** ** | **2006**          | ** ** | **Change** | ** ** |
| Mrs. Fields Gifts                    |       | $                          | 3,419      |              | $          | 3,915 |   | (12.7 | ) |
| Mrs. Fields Branded Retail           |       | 5,633                      |       | 6,906             |       | (18.4 | ) |
| Mrs. Fields Franchising              |       | 1,875                      |       | 2,050             |       | (8.5 | ) |
| Mrs. Fields Licensing                |       | 211                        |       | 311               |       | (32.2 | ) |
| Total Mrs. Fields revenues           |       | 11,138                     |       | 13,182            |       | (15.5 | ) |
| Mrs. Fields Gifts                    |       | 3,666                      |       | 5,547             |       | (33.9 | ) |
| Mrs. Fields Branded Retail           |       | 5,226                      |       | 6,692             |       | (21.9 | ) |
| Mrs. Fields Franchising              |       | 701                        |       | 749               |       | (6.4 | ) |
| Mrs. Fields Licensing                |       | 8                          |       | 466               |       | (98.3 | ) |
| Total Mrs. Fields operating expenses |       | 9,601                      |       | 13,454            |       | (28.6 | ) |
| Total Mrs. Fields contribution       |       | $                          | 1,537      |              | $          | (272 | ) | NM |   |

** **

*** ***

***Mrs. Fields Gifts***

 

*        Mrs. Fields GiftsRevenues.*  Mrs. Fields Giftsrevenues were $3.4 million for the 13 weeks ended September 29, 2007, adecrease of $500,000 or 12.7 percent from $3.9 million for the 13 weeks endedSeptember 30, 2006.  These revenuesconsist of sales through our catalog and website as well as affiliations withother websites and sales to large corporate accounts.  This decrease in revenues was primarilyattributable to the following:

 
| • | national accounts revenues of $400,000 related to  the timing of purchases in 2007 by our largest customer; and |
|--------|-----------------------------------------------------------------------------------------------------------------|
| • | affiliates driven sales of $200,000 due to a  reduction in the number of affiliates.                            |

 

        The foregoing decreases in revenues werepartially offset by an increase in revenues of $100,000­­ generated throughInternet search engine advertising.

 

*        Mrs. Fields GiftsExpenses.*  Mrs. Fields Giftsexpenses are composed of cost of sales for products sold, selling andpromotional expenses and direct operating expenses of this segment.  These expenses were $3.7 million for the13 weeks ended September 29, 2007, a decrease of $1.8 million or 33.9 percentfrom $5.5 million for the 13 weeks ended September 30, 2006.  This decrease in expenses was primarily dueto the following:

 
| • | cost of sales of $700,000 primarily due to the  reduction in revenues and decreased freight costs;                                                    |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | rent and occupancy expenses in fiscal year 2006 of  $400,000 related to the old Gifts facility;                                                       |
| • | expenses of $200,000 incurred in fiscal year 2006  related to moving into the new Gifts facility;                                                     |
| • | compensation and related costs of $200,000 due to  the reduced headcount resulting from our management reorganization that  occurred in January 2007; |
| • | catalog and advertising expenses of $100,000; and                                                                                                     |
| • | other operating expenses of $300,000.                                                                                                                 |

 

        The foregoing decreases in expenses werepartially offset by an increase in bonus expense of $100,000 for accruedbonuses for fiscal year 2007.

** **

***Mrs. Fields Branded Retail***

 

*        Mrs. Fields Branded RetailRevenues. *Mrs. Fields Branded Retail revenues were $5.6 million for the 13 weeksended September 29, 2007, a decrease of $1.3 million or 18.4 percent from $6.9million for the 13 weeks ended September 30, 2006.  This decrease in revenues was due primarily tothe increased revenues in 2006 associated with the Mrs. Fields branded shelfstable cookies we commenced selling in July 2006 following a period of timewhen our former licensee was not servicing our commercial customers, resultingin increased revenues in 2006 as we caught up on the demand.

 

25

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        *Mrs. Fields**Branded Retail Expenses.*  Mrs. Fields Branded Retail expenses arecomposed of cost of sales for product sold, selling and promotional expensesand other direct operating expenses of this segment.  These expenses were $5.2 million for the 13weeks ended September 29, 2007, a decrease of $1.5 million or 21.9 percent from$6.7 million for the 13 weeks ended September 30, 2006.  This decrease in expenses was primarily dueto:

 

·                  cost of sales of $1.2 millionprimarily due to the decrease in revenues; and

·                  professional fees of $400,000 forfees paid in 2006 to the former operator of the Mrs. Fields branded shelfstable cookie business to assist us in the transition.

 

        The foregoing decreases in expenses werepartially offset by increases in salaries of $100,000 due to increased headcount.

** **

***Mrs. Fields Franchising***

** **

        The following table details theyear-over-year ("YOY") percentage change in same store sales:

 

| ** **  | ** ** | **For the 13 Weeks Ended** | ** ** |
|-------------|------------|----------------------------|------------|
| ** **  | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** |
| ** **  | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Mrs. Fields |       | 1.2                        |       | (0.8 | ) |

 

 

        Our Mrs. Fields concept's YOY same storesales were up 1.2 percent for the 13 weeks ended September 30, 2007, acontinued improvement compared to the first half of 2007.  This was aresult of an increased average ticket price due to promotional focus on theBreezer smoothie program, a strong summer promotion launch and continuedoperational focus in the field.

 

        *Mrs. Fields**FranchisingRevenues. *Mrs. Fields Franchising revenues were$1.9 million for the 13 weeks ended September 29, 2007, a decrease of$200,000 or 8.5 percent from $2.1 million for the 13 weeks ended September 30,2006.  This decrease in revenues wasprimarily attributable to approximately 500 or 11.2 percent fewer franchisedunit weeks, offset partially by an increase in YOY same store sales.

 

*Mrs. Fields Franchising Expenses.*  Mrs. Fields Franchising expenses are composedof operation and supervision expenses wherein we provide support, direction andsupervision to the franchisees, and development and support expenses includingproduct development costs, expenses relating to new franchise development,marketing and advertising, bad debt expense and other direct franchisingexpenses of this segment.  These expenseswere $700,000 for the 13 weeks ended September 29, 2007 and for the 13 weeksended September 30, 2006.  Thisconsistent level of expenses was primarily due to the following decreases:

 
| • | expenses of $100,000 related to shared resources for  product development, purchasing, training and customer service; and |
|--------|---------------------------------------------------------------------------------------------------------------------------|
| • | expenses of $200,000 associated with brand  initiatives.                                                                  |

 

        The foregoing decreases in expenses wereoffset by increases in:

 
| • | compensation and related costs of $100,000 primarily  due to a newly appointed president as part of the management reorganization  that occurred in January 2007; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | bonus expense of $100,000 for accrued bonuses for  fiscal year 2007; and                                                                                          |
| • | franchise operations and supervision costs of  $100,000.                                                                                                          |

 

***Mrs. Fields Licensing***

*** ***

*        Mrs. Fields LicensingRevenues. *Mrs. Fields Licensing revenues were $200,000 for the 13 weeks endedSeptember 29, 2007, a decrease of $100,000 or 32.2 percent from $300,000for the 13 weeks ended September 30, 2006. This decrease in revenues was primarily due to higher licensingroyalties earned in 2006 of $100,000 under our terminated licensing agreementfor the sale of TCBY frozen food specialty products through retail channels.

 

26

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        *Mrs. Fields Licensing Expenses. *Mrs. Fields Licensing expenses arecomposed of selling and promotional expenses, bad debt and other directoperating expenses of this segment. These expenses were negligible for the 13 weeks ended September 29, 2007,a decrease of $500,000 or 98.3 percent from $500,000 for the 13 weeks endedSeptember 30, 2006.  This decrease inexpenses was primarily due to:

 
| • | bad debt expense of $300,000 in fiscal year 2006  related to a terminated license agreement;                                                              |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | compensation and related costs of $100,000 due to  the reduced headcount resulting from our management reorganization that  occurred in January 2007; and |
| • | other operating costs of $100,000 primarily related  to cost of sales and advertising and promotional expenses.                                           |

 

**GAC/Pretzels**

** **

**       **The followingtable details the YOY percentage change in same store sales:

 

| ** **             | ** ** | **For the 13 Weeks Ended** | ** ** |
|------------------------|------------|----------------------------|------------|
| ** **             | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** |
| ** **             | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Great American Cookies |       | 0.9                        |       | 4.2 |   |

 

 

       Our GreatAmerican Cookies concept continued its positive momentum through the thirdquarter of fiscal year 2007 with a 0.9 percent YOY same store salesincrease.  The launch of a new Cookie Cake program, new summer cookie andBreezer flavor introductions, combined with momentum from stores celebrating 30thanniversary events at malls across the country helped drive sales in spite ofdecreased customer counts and slower retail sales at malls.

 

*        GAC/PretzelsRevenues. *GAC/Pretzels revenues were $6.7 million for the 13 weeks endedSeptember 29, 2007, a decrease of $800,000 or 10.4 percent from $7.5million for the 13 weeks ended September 30, 2006.  Revenues related to the Pretzel brands soldin August 2007 were $600,000 for the 13 weeks ended September 29, 2007, adecrease of $900,000 from $1.5 million for the 13 weeks ended September 30,2006.  The offsetting increase inrevenues of $100,000 was associated with the GAC brand and was primarily due toan increase in sales of product by our GAC manufacturing facility to ourfranchisees primarily due to approximately 100 or 3.2 percent additionalfranchised unit weeks.

 

*GAC/PretzelsExpenses. *GAC/Pretzelsexpenses are composed of operation and supervision expenses wherein we providesupport, direction and supervision to the franchisees; development and supportexpenses including product development costs, expenses relating to newfranchise development, marketing and advertising, bad debt expenses and otherdirect franchising expenses of this segment; and cost of product salesassociated with our Great American Cookies manufacturing facility including rawmaterials, labor and other manufacturing costs. The operation and supervision and franchise development expenses relatedto the Pretzel brands subsequent to the sale in August 2007 have beenre-directed to support and develop our remaining brands.  The GAC/Pretzels expenses were $3.7 millionfor the 13 weeks ended September 29, 2007, an increase of $100,000 or1.7 percent from $3.6 million for the 13 weeks ended September 30, 2006.  This increase in expenses was primarily dueto the following:

 
| • | bonus accrual of $100,000 for accrued bonuses for  fiscal year 2007; |
|--------|----------------------------------------------------------------------|
| • | bad debt expense of $100,000; and                                    |
| • | other franchise development expenses of $100,000.                    |

** **

        The foregoing increases in expenses werepartially offset by the following decreases:

 
| • | cost of product and operating expenses of $100,000  associated with our Great American Cookies manufacturing facility; and |
|--------|----------------------------------------------------------------------------------------------------------------------------|
| • | brand initiatives of $100,000.                                                                                             |

 

27

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**Dairy**

 

        The following table details the YOYpercentage change in same store sales:

 

| ** ** | ** ** | **For the 13 Weeks Ended** | ** ** |
|------------|------------|----------------------------|------------|
| ** ** | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** |
| ** ** | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Dairy      |       | 4.9                        |       | (2.8 | ) |

 

Our Dairy segment's YOY same store salesincreased 4.9 percent for the 13 weeks ended September 30, 2007 primarilyas a result of product improvements, menu enhancements, a remodel program thatwas rolled out initially to over 100 existing TCBY traditional franchisedstores, as well as warmer weather in certain parts of the United States.

* *

*DairyRevenues. *Dairy revenues were $2.6 million for the13 weeks ended September 29, 2007, a decrease of $1.2 million or 31.9 percentfrom $3.8 million for the 13 weeks ended September 30, 2006.  This decrease in revenues was due to:

 
| • | product formulation revenues generated by purchases  of TCBY products by franchisees of $1.0 million due to approximately 1,300 or  18.4 percent fewer traditional equivalent unit weeks and rebates offered to  franchisees as an incentive to remodel their stores; and |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | royalties of $200,000 principally attributable to  fewer traditional equivalent unit weeks.                                                                                                                                                                               |

 

We anticipate that our traditional equivalent unit weeks willcontinue to decline in the near future.

* *

*Dairy Expenses.* Dairy expenses are composed of operation andsupervision expenses wherein we provide support, direction and supervision tothe franchisees, and development and support expenses including productdevelopment costs, expenses relating to new franchise development, marketingand advertising, bad debt expense and other direct franchising expenses of thissegment.  These expenses were $1.4million for the 13 weeks ended September 29, 2007, a decrease of $300,000 or19.2 percent from $1.7 million for the 13 weeks ended September 30, 2006.  This decrease in expenses was primarily attributableto the following:

 
| • | bad debt expense of $400,000 primarily related to  the bankruptcy of Americana in 2006;                                                                                                    |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | distribution costs of $200,000 associated with the  distribution of our products to our dairy franchise system resulting from the  Blue Line Extension Agreement that ended in March 2007; |
| • | costs associated with shared resources related to  product development, purchasing, training and customer service of $100,000;  and                                                        |
| • | travel and related costs of $100,000.                                                                                                                                                      |

 

        The foregoing decreases in expenses werepartially offset by the following increases:

 
| • | brand initiatives of $200,000 for the new store  décor initiative;  |
|--------|--------------------------------------------------------------------------|
| • | bonus expense of $200,000 for accrued bonuses for  fiscal year 2007; and |
| • | compensation and related costs of $100,000.                              |

 

**Other**

 

*        General and AdministrativeExpenses.*  General andadministrative expenses were $2.8 million for the 13 weeks ended September 29,2007, an increase of $500,000 or 21.8 percent from $2.3 million for the 13weeks ended September 30, 2006.  Thisincrease in general and administrative expenses was primarily due to:

 
| • | increase in bonus  expense of $800,000 for accrued bonuses for fiscal year 2007; partially  offset by                                      |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
| • | decrease in  compensation and related costs of $200,000 primarily due to the decrease in  headcount resulting from our reorganization; and |
| • | decrease in legal fees  of $100,000.                                                                                                       |

 

28

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*        Depreciation andAmortization Expense.* Total depreciation and amortization expense was $1.0 million for the 13weeks ended September 29, 2007, a decrease of $100,000 or 1.9 percent from $1.1million for the 13 weeks ended September 30, 2006.  Depreciation expense was $500,000 for the 13weeks ended September 29, 2007, a decrease of $100,000 or 4.0 percent from$600,000 for the 13 weeks ended September 30, 2006.  Amortization expense was $500,000 for the 13weeks ended September 29, 2007 and for the 13 weeks ended September 30, 2006.

 

29

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**39 Weeks Ended September 29, 2007**

**Compared to the 39 Weeks EndedSeptember 30, 2006**

** **

*Income From Operations—Overview*.  Income from operations was $20.6 millionfor the 39 weeks ended September 29, 2007, an increase of $28.6 million from aloss of $8.0 million for the 39 weeks ended September 30, 2006.  This increase in income from operations wasprimarily due to:

 

•             gain on sale of the Pretzel brandsof $11.9 million in fiscal year 2007;

•             impairment of goodwill associatedwith the Dairy reporting unit of $14.6 million in fiscal year 2006;

•             increasedcontribution from our business units of $1.7 million;

•             decreaseddepreciation expense of $300,000; and

•             gainon the sale of land of $100,000 resulting from a sale that occurred in fiscalyear 2007.

 

The increasein contribution from our business units of $1.7 million is composed of thefollowing:

 

•             Mrs.Fields business unit contribution increase of $3.8 million; partially offset by

•             GAC/Pretzelsbusiness unit contribution decrease of $200,000;

•             Dairybusiness unit contribution decrease of $1.9 million.

 

        The following table sets forth thecontribution from each of our business units (in thousands):

 

| ** **   | ** ** | **For the 39 Weeks Ended** | ** ** |
|--------------|------------|----------------------------|------------|
| ** **   | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** |
| ** **   | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Mrs. Fields  |       | $                          | 4,580      |   | $ | 749 |   |
| GAC/Pretzels |       | 11,173                     |       | 11,412 |   |
| Dairy        |       | 3,686                      |       | 5,618 |   |
|         |       | $                          | 19,439     |   | $ | 17,779 |   |

 

**Mrs.Fields**

 

        The following table details the revenuesand operating expenses of the Mrs. Fields business unit (in thousands):

 

| ** **                           | ** ** | **For the 39 Weeks Ended** | ** ** |
|--------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **2007**                   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Mrs. Fields Gifts                    |       | $                          | 13,401     |   | $ | 13,980 |   | (4.1 | ) |
| Mrs. Fields Branded Retail           |       | 15,292                     |       | 6,985 |   | 118.9 |   |
| Mrs. Fields Franchising              |       | 5,574                      |       | 6,139 |   | (9.2 | ) |
| Mrs. Fields Licensing                |       | 526                        |       | 1,378 |   | (61.8 | ) |
| Total Mrs. Fields revenues           |       | 34,793                     |       | 28,482 |   | 22.2 |   |
| Mrs. Fields Gifts                    |       | 14,232                     |       | 17,697 |   | (19.6 | ) |
| Mrs. Fields Branded Retail           |       | 14,145                     |       | 6,750 |   | 109.6 |   |
| Mrs. Fields Franchising              |       | 1,854                      |       | 1,911 |   | (3.0 | ) |
| Mrs. Fields Licensing                |       | (18                        | )          | 1,375 |   | NM |   |
| Total Mrs. Fields operating expenses |       | 30,213                     |       | 27,733 |   | 8.9 |   |
| Total Mrs. Fields contribution       |       | $                          | 4,580      |   | $ | 749 |   | 511.5 |   |

*** ***

***Mrs. Fields Gifts***

 

*        Mrs. Fields GiftsRevenues.*  Mrs. Fields Giftsrevenues were $13.4 million for the 39 weeks ended September 29, 2007, adecrease of $600,000 or 4.1 percent from $14.0 million for the 39 weeks endedSeptember 30, 2006.  This decrease inrevenues was primarily due to:

 

•                     decreasedcatalog driven sales of $1.5 million due to decreased circulation of ourcatalogs; partially offset by

•                   increased sales from advertisingon Internet search engines of $900,000 due to additional providers­­.

 

30

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*        Mrs. Fields GiftsExpenses.*  Mrs. Fields Giftsexpenses were $14.2 million for the 39 weeks ended September 29, 2007, adecrease of $3.5 million or 19.6 percent from $17.7 million for the 39weeks ended September 30, 2006.  Thisdecrease in expenses was primarily due to the following:

 

•                  catalog and advertising expenses of $1.3 million due to decreasedcirculation of our catalogs;

•                  cost of sales of $500,000 primarily due to reduced revenues;

•                  compensation and related costs of $400,000 due to the reduced headcountresulting from our managementreorganization thatoccurred in January 2007;

•                  rent and occupancy expenses of $400,000 in fiscal year 2006 related tothe old Gifts facility;

•                  operating expenses of $400,000;

•                  expense of $200,000 associated with moving to the new Gifts facility;

•                  severance of $200,000 incurred in fiscal year 2006;

•                  recruiting and relocation expenses of $200,000; and

•                  professional fees of $100,000 due to projects completed in fiscal year2006.

 

        The foregoing decreases in expenses werepartially offset by increases in bonus expense of $200,000 for accrued bonusesfor fiscal year 2007.

** **

***Mrs. Fields Branded Retail***

 

*        Mrs. Fields Branded RetailRevenues. *Mrs. Fields Branded Retail revenues were $15.3 million for the 39 weeksended September 29, 2007, an increase of $8.3 million or 118.9 percent from$7.0 million for the 39 weeks ended September 30, 2006.  This increase is due to the revenuesgenerated from the sale of Mrs. Fields branded shelf stable cookies.  As previously discussed, we commenced sellingMrs. Fields branded shelf stable cookies in July 2006 directly through retailchannels following the termination of certain license agreements.

 

*        Mrs. Fields**Branded Retail Expenses.*  Mrs. Fields Branded Retail expenses were$14.1 million for the 39 weeks ended September 29, 2007, an increase of $7.3million or 109.6 percent from $6.8 million for the 39 weeks ended September 30,2006.  This increase is associated withthe branded retail activities which commenced in July 2006.

** **

***Mrs. Fields Franchising***

** **

        The following table details the YOYpercentage change in same store sales:

 

| ** **  | ** ** | **For the 39 Weeks Ended** | ** ** |
|-------------|------------|----------------------------|------------|
| ** **  | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** |
| ** **  | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Mrs. Fields |       | (0.8                       | )          | (1.4 | ) |

 

        Our Mrs. Fields concept's YOY same storesales decrease of 0.8 percent for the 39 weeks ended September 30, 2007was a result of a continued decline in customer counts at the storespartially offset by increases in our average ticket price due to promotionalfocus on the Big Cookie Cake program and our Breezer smoothie program.

 

        *Mrs. Fields**FranchisingRevenues. *Mrs. Fields Franchising revenues were$5.6 million for the 39 weeks ended September 29, 2007, a decrease of$500,000 or 9.2 percent from $6.1 million for the 39 weeks ended September 30,2006.  This decrease in revenues wasprimarily attributable to approximately 1,300 or 9.2 percent fewer franchisedunit weeks and a decrease in same store YOY sales of 0.8 percent.

 

*Mrs. Fields Franchising Expenses.*  Mrs. Fields Franchising expenses were $1.9million for the 39 weeks ended September 29, 2007 and for the 39 weeks endedSeptember 30, 2006.  This consistentlevel of expenses was primarily due to the following decreases:

 

•                  expenses of $300,000 associated with brand initiatives; and

•                  expenses of $300,000 related to shared resources for productdevelopment, purchasing, training and customer service.

 

31

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         The foregoing decreases in expenseswere offset by increases in:

 

•                  compensation and related costs of $300,000 primarily due to a newly appointedpresident as part of the management reorganization that occurred in January2007;

•                  bonus expense of $200,000 for accrued bonuses for fiscal year 2007; and

•                  franchise operations and supervision costs of $100,000.

 

***Mrs. Fields Licensing***

*** ***

*        Mrs. Fields LicensingRevenues. *Mrs. Fields Licensing revenues were $500,000 for the 39 weeks endedSeptember 29, 2007, a decrease of $900,000 or 61.8 percent from $1.4million for the 39 weeks ended September 30, 2006.  This decrease in revenues was primarily dueto:

 

•                  royalties of $600,000 in fiscal year 2006 under ourterminated licensing agreement for the sale of TCBY frozen food specialtyproducts through retail channels that were not repeated in fiscal year 2007;and

•                  licensing royalties earned in fiscal year 2006 of$300,000 under our terminated licensing agreement for the sale of Mrs. Fieldsbranded shelf stable cookies that were not repeated in fiscal year 2007.

 

        *Mrs. Fields Licensing Expenses. *Mrs. Fields Licensing expenseswere negligible for the 39 weeks ended September 29, 2007, a decrease of $1.4million from $1.4 million for the 39 weeks ended September 30, 2006.  This decrease in expenses was primarily dueto the following:

 

•                  bad debt expense of $700,000 in fiscal year 2006 related to aterminated license agreement;

•                  cost of sales, legal, advertising and promotion expenses totalingapproximately $500,000; and

•                  compensation and related costs of $200,000 due to the reduced headcountresulting from our management reorganization that occurred in January 2007.

** **

**GAC/Pretzels**

** **

**       **Thefollowing table details the YOY percentage change in same store sales:

 

| ** **             | ** ** | **For the 39 Weeks Ended** | ** ** |
|------------------------|------------|----------------------------|------------|
| ** **             | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** |
| ** **             | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Great American Cookies |       | 1.3                        |       | 3.9 |   |

 

       Our GreatAmerican Cookies concept's YOY same store sales increase of 1.3 percent for the39 weeks ended September 29, 2007 was primarily a result of new productintroductions and higher YOY average ticket price resulting from increasedfocus and implementation of everyday offers (e.g. Buy 5 for $5.55 and Buy 5 Get1 Free) and an increase in Cookie Cake price and overall sales.

 

*        GAC/PretzelsRevenues. *GAC/Pretzels revenues were $22.0 million for the 39 weeks endedSeptember 29, 2007, a decrease of $400,000 or 2.2 percent from $22.4million for the 39 weeks ended September 30, 2006.  Revenues related to the Pretzel brands soldin August 2007 were $3.5 million for the 39 weeks ended September 29, 2007, adecrease of $800,000 from $4.3 million for the 39 weeks ended September 30,2006.  The offsetting increase inrevenues of $400,000 was associated with the GAC brand was primarily due to:

 

•                   sales of product by our GAC manufacturingfacility to our franchisees of $300,000 primarily due to a price increase toour franchisees of approximately 5.0 percent effective April 2006; and

•                   royalties of $200,000 due to approximately 400or 3.3 percent additional franchised unit weeks.

 

        The foregoing increases inrevenues were partially offset by a decrease in initial franchise fees of$100,000.

 

32

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*GAC/PretzelsExpenses. *GAC/Pretzelsexpenses were $10.8 million for the 39 weeks ended September 29, 2007, adecrease of $200,000 or 2.2 percent from $11.0 million for the 39 weeksended September 30, 2006. This decrease in expenses was primarily due to thefollowing decreases:

 

•                   cost of product and operatingexpenses of $400,000 associated with our Great American Cookies manufacturingfacility;

•                  ****costs of $100,000 due to shared resources related toproduct development, purchasing, training and customer service; and

•                   brand initiatives of $100,000.

** **

        The foregoing decreases in expenses werepartially offset by the following increases:

 

** **

•                  ****bonus accrual of $200,000 for accrued bonuses forfiscal year 2007;

•                  **c**ompensationand related costs of $100,000; and

•                   bad debt expense of $100,000.

 

**Dairy**

 

        The following table details the YOYpercentage change in same store sales:

 

| ** ** | ** ** | **For the 39 Weeks Ended** | ** ** |
|------------|------------|----------------------------|------------|
| ** ** | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** |
| ** ** | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Dairy      |       | 0.0                        |       | (1.4 | ) |

 

Our Dairy segment's YOY same store sales were flat forthe 39 weeks ended September 30, 2007 primarily as a result of increasedrevenues due to product improvements, menu enhancements, a remodel program thatwas rolled out initially to over 100 existing TCBY traditional franchisedstores, as well as warmer weather in certain parts of the United States duringthe third quarter.  These increases wereoffset by YOY softness in the first and second quarters of fiscal year 2007 as a resultof unseasonably cold and wet weather during that part of the year.

 

*DairyRevenues. *Dairy revenues were $8.1 million for the39 weeks ended September 29, 2007, a decrease of $2.6 million or 24.3 percentfrom $10.7 million for the 39 weeks ended September 30, 2006.  This change in revenues was primarily due to:

 

•                    product formulation revenues generated bypurchases of TCBY products by franchisees of $1.9 million due to approximately3,800 or 16.7 percent fewer traditional equivalent unit weeks and rebatesoffered to franchisees as an incentive to remodel their stores;

•                    royalties of $800,000 principally attributableto fewer traditional equivalent unit weeks; partially offset by

•                   revenues of $100,000 from a Yovana test storewe began operating in the fourth quarter of 2006.

 

We anticipate that our traditional equivalent unitweeks will continue to decline in the near future.

 

*        Dairy Expenses.* Dairy expenses were $4.4 million for the 39weeks ended September 29, 2007, a decrease of $700,000 or 13.3 percentfrom $5.1 million for the 39 weeks ended September 30, 2006.  This decrease in expenses was primarilyattributable to the following:

 

•                  distribution costs of $700,000 associated with the distribution of ourproducts to our dairy franchise system resulting from the Blue Line ExtensionAgreement that ended in March 2007;

•                  compensation and related costs of $400,000 due to the decrease inheadcount resulting from our reorganization;

•                  costsof $300,000 related to shared resources related to product development,purchasing, training and customer service;

•                  baddebt of $300,000 primarily associated with the bankruptcy of Americana infiscal year 2006;

•                  travel and related costs of $200,000; and

•                  severance of $100,000 for amounts incurred in fiscal year 2006.

 

33

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        The foregoing decreases in expenses werepartially offset by the following increases:

 

•                  brand initiatives of $900,000 to test the Beriyo and Yovana conceptsand to prepare for the TCBY new store décor initiative;

•                  bonus expense of $300,000 for accrued bonuses for fiscal year 2007; and

•                  operating costs of $100,000 related to a Yovana test store that webegan operating in the fourth quarter of 2006.

 

**Other**

 

*        General and AdministrativeExpenses.*  General andadministrative expenses were $7.8 million for the 39 weeks ended September 29,2007 and for the 39 weeks ended September 30, 2006.  This consistent level of general andadministrative expenses was primarily attributable to the following decreases:

 

•                  compensation and related costs of $800,000 primarily due to the decreasein headcount resulting from our reorganization;

•                  severance costs of $300,000 incurred in fiscal 2006;

•                  legal expenses of $200,000; and

•                  other general and administrative expenses of $100,000.

 

        The foregoing decreases in expenses wereoffset by the following increases:

 

•                  bonus accrual of $1.2 million for accrued bonuses for fiscal year 2007;and

•                  professional fees of $200,000 primarily related to Sarbanes-Oxleyimplementation.

* *

*        Depreciation and Amortization Expense.* Total depreciation and amortization expense was $3.1 million for the 39weeks ended September 29, 2007, a decrease of $400,000 or 10.1 percent from$3.5 million for the 39 weeks ended September 30, 2006.  Depreciation expense was $1.6 million for the39 weeks ended September 29, 2007, a decrease of $300,000 or 16.5 percent from$1.9 million for the 39 weeks ended September 30, 2006.  This decrease was due to the following:

 

•                  $400,000 attributable to leasehold improvements and equipmentassociated with a Yovana test store; and

•                  $300,000 attributable to leasehold improvements in our old giftingfacility.

 

These decreases in depreciationexpense were partially offset by an increase in depreciation expense of$400,000 associated with the new gifting facility.

 

        Amortization expense was $1.6 millionfor the 39 weeks ended September 29, 2007 and for the 39 weeks ending September30, 2006.

** **

**Consolidated Financial Condition**

** **

*       *Total assetsat September 29, 2007 were $114.8 million, a decrease of $6.9 million or5.7 percent from $121.7 million at December 30, 2006.  This decrease in assets was primarilyattributable to the following decreases:

 

•                  goodwill of $15.3 million associated with the Pretzel brands which wesold in August 2007;

•                  accounts receivable, net of $2.9 million;

•                  property and equipment of $1.4 million;

•                  trademarks and other intangible assets, net of $1.5 million;

•                  deferred loan costs of $900,000; and

•                  inventories of $100,000.

 

        The foregoing decreases in assets werepartially offset by the following increases:

 

•                   cash and cash equivalents of $8.1million primarily due to the proceeds on the sale of the Pretzel brands, partiallyoffset by the semi-annual interest payment on our Senior Secured Notes made inSeptember 2007;

•                   investments held for sale andother assets of $5.7 million primarily composed of the stock received as partof the sale of the Pretzel brands;

•                   deferred tax asset of $600,000;and

•                   prepaid expenses of $800,000.

 

34

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      Total liabilities at September 29,2007 were $217.7 million, a decrease of $9.8 million or 4.3 percentfrom $227.5 million at December 30, 2006. This decrease in liabilities was primarily attributable to the followingdecreases:

 

•                  accrued liabilities of $6.4 million;

•                  accounts payable of $5.2 million;

•                  deferred revenues and other liabilities of $500,000; and

•                  capital lease obligations of $100,000.

 

Theforegoing decreases in liabilities were partially offset by an increase inamounts due to affiliates of $2.4 million, primarily a result of amounts dueunder a tax sharing agreement.

 

***Consolidated Cash Flows for the 39 Weeks EndedSeptember 29, 2007 Compared to September 30, 2006***

 

        Net cash used in operating activitieswere $13.5 million for the 39 weeks ended September 29, 2007, an increase incash used of $2.2 million from net cash flows used in operating activities of$11.3 million for the 39 weeks ended September 30, 2006.  This increase in cash used in operatingactivities was principally due to an increase in contribution by our operatingsegments of $1.7 million partially offset by an increase in cash used forworking capital assets and liabilities of $3.9 million.

 

         Net cash provided by investingactivities were $21.7 million for the 39 weeks ended September 29, 2007, anincrease in cash provided of $26.1 million from cash used in investingactivities of $4.4 million for the 39 weeks ended September 30, 2006.  This increase in cash from investingactivities was attributable to the net proceeds on the sale of the Pretzelbrands of $21.7 million, a decrease in the purchase of property and equipmentof $4.3 million, principally associated with our new gifts facility in 2006,and from proceeds from the sale of land of $300,000 that occurred in 2007.  These changes were partially offset by proceedsfrom the sale of non-marketable securities of $100,000 that occurred in 2006.

 

        Netcash used in financing activities were negligible for the 39 weeks endedSeptember 29, 2007 and for the 39 weeks ended September 30, 2006 and relate toprincipal payments on capital leases.

###### *** ***

###### ***Liquidity and CapitalResources***

** **

        Ourprincipal sources of liquidity are cash on hand and cash flows generated from thesale of operating assets and from operations. At September 29, 2007, we had $24.1 million of cash on hand.  We expect that our principal uses of cashwill be for working capital, capital expenditures and semi-annual interestpayments of $10.3 million on our 9 percent senior secured notes and our 111⁄2percent senior secured notes (together, the "Senior Secured Notes"),of which $10.3 million will be due on March 15, 2008 and September 15,2008.  In addition, to the extent we havecash available and it is permitted by the indenture governing the SeniorSecured Notes, we may pay dividends to our parent companies for uses such asacquisitions, debt repayments and dividends. We do not expect to be required, but we may offer, to repurchase aportion of the Senior Secured Notes as described below.

 

         We are highly leveraged. At September 29, 2007, we had $195.7 million of long-term debtrepresented by the Senior Secured Notes. The Senior Secured Notes mature on March 15, 2011, with interestpayable semi-annually on March 15 and September 15.  Due to borrowing restrictions under theindenture governing the Senior Secured Notes, our ability to obtain additionaldebt financing is significantly limited. The Senior Secured Notes require us to offer to repurchase a portion ofthe notes at 100 percent of the principal amount, plus accrued and unpaidinterest thereon to the date of purchase, with 50 percent of our"excess cash flow," as defined in the indenture agreement, when theratio of our net indebtedness to consolidated EBITDA is above 3.75 to 1.0 andthe cumulative unpaid excess cash flow offer amount exceeds $10.0 million.  We do not anticipate that our "excesscash flow" will exceed the levels that would require us to offer torepurchase a portion of the notes described above.

 

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         We cannot becertain, based on historical results and current projections, that the cashcurrently on hand and expected future cash flows from operations will besufficient to meet our September 2008 interest payment.  We are pursuing various actions to improveour liquidity, financial condition, and results of operations.  These actions include, but are not limitedto, the following:

 

•                  staff changes and investment initiativesto reduce costs and improve revenues;

•                  possible reinvestment of net proceedsfrom the sale of the Pretzel businesses into higher yielding assets;

•                  sale of additional assets; and

•                  raising of additional equity capital.

 

          Management and our major shareholderhave retained Blackstone Advisory Services to assist in reviewing ouralternatives as part of our strategic review process.

 

          Failureof these actions to improve our financial condition and operational performancemay result in our inability to meet our September 2008 interest payment.  Failure to make the payment could have amaterial adverse impact on our future operations and carrying value ofassets.  There can be no assurance thatthe planned actions will be successful or that our financial position willimprove, absent successful execution of some or all of the actions beingconsidered.

 

**Inflation**

** **

          The impact of inflation on our business hasnot been significant in recent years. Some of our employees are paid hourly wages at the federal minimum wagelevel.  Minimum wage increases willnegatively impact our payroll costs in the short term, but management believessuch impact can be offset in the long term through lower staffing of operationsand, if necessary, through product price increases.

** **

**Seasonality**

 

Our salesand contribution from franchisees' store operations are highly seasonal, butour various brands experience counteracting seasonal effects.  Our Mrs. Fields and Great American Cookiesstores, primarily located in malls, tend to mirror customer traffic flow trendsin malls, which increase significantly during the fourth quarter, primarilybetween Thanksgiving and the end of the calendar year.  Holiday gift purchases also are a significantfactor in increased sales in the fourth quarter.  However, Dairy stores experience their strongestsales periods during the warmer months from late Spring through early Fall,which helps to balance the impact of seasonality on our operations.  The combined revenues for each quarter of theMrs. Fields Franchising, GAC/Pretzels and Dairy operating segments as apercentage of total combined revenues for the fiscal year ended December 30,2006 were 23.3 percent for the first quarter, 25.6 percent for the secondquarter, 25.2 percent for the third quarter and 25.9 percent for the fourthquarter.

 

Our salesand contribution from our Mrs. Fields Gifts operating segment are highlyseasonal primarily due to holiday gift purchases that increase sales in thefourth quarter.  Sales in the fourthquarter of fiscal 2006 were $16.7 million, which represents 54.5 percent oftotal sales of the gifts segment for the year ended December 30, 2006.

**Critical Accounting Policies**

 

           The preparation of financial statementsrequires us to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosure of contingent assets and liabilities andthe reported amounts of revenues and expenses in our consolidated financialstatements.  Management has reviewed withour Audit Committee the accounting policies that we use to prepare ourconsolidated financial statements and believes that the following policies arethe most important to the portrayal of our financial condition and the resultsof our operations while requiring the use of judgments and estimates about theeffects of matters that are inherently uncertain.

 

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*        Revenue Recognition*.  We recognize revenues from our initialfranchising fees and licensing fees when all material services or conditionsrelating to the franchising or licensing have been substantially performed orsatisfied, which is generally upon the opening of a store by a franchisee orlicensee.  Franchise and licenseroyalties, which are based on a percentage of gross store sales, are recognizedas earned, which is generally upon sale of product by franchisees orlicensees.  Minimum royalty payments undercertain licensing agreements are deferred and recognized on a straight-linebasis over the term of the agreement. Revenues from the sale of cookie dough that we produce and sell tocertain franchisees are recognized at the time of shipment and classified infranchising revenues.  Revenues, net ofsales discounts and allowances, from the sale of branded retail products suchas cookie dough and shelf stable cookies to grocery stores and wholesale clubsare recognized upon delivery and included in branded retail revenues.  Revenues, net of state and local sales tax,from gift sales are recognized at the time of shipment.

 

        Wereceive cash payments for product formulation fees and allowances fromsuppliers based on the amount of product purchased directly by our distributorsand franchisees.  These productformulation fees and allowances include cash payments to us for the right touse our proprietary formulations and recipes to manufacture the frozen dough,dough mixes and TCBY products these suppliers sell to our franchisees.  Formulation fees and allowances are recordedas franchising revenues upon shipment of product to our distributors orfranchisees.  Included in franchising revenuesin each of operating segments for such formulation fees and allowances are asfollows (in thousands):

 

| ** **   | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 39 Weeks Ended** | ** ** |
|--------------|------------|----------------------------|------------|----------------------------|------------|
| ** **   | ** ** | **September 29,**          | ** ** | **September 30,**          | ** ** | **September 29,** | ** ** | **September 30,** | ** ** |
| ** **   | ** ** | **2007**                   | ** ** | **2006**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Mrs. Fields  |       | $                          | 373        |                       | $          | 490 |   | $ | 1,261 |   | $ | 1,449 |   |
| GAC/Pretzels |       | 222                        |       | 313                        |       | 823 |   | 911 |   |
| Dairy        |       | 1,272                      |       | 2,311                      |       | 4,911 |   | 6,880 |   |
|         |       | $                          | 1,867      |                       | $          | 3,114 |   | $ | 6,995 |   | $ | 9,240 |   |

 

*Impairment of Goodwill.*  Goodwill is not amortized, but is subject toan annual assessment for impairment, or more frequently if circumstancesindicate potential impairment, through a comparison of fair value to itscarrying amount.  The two-step approachto assess our goodwill impairment requires that we first compare the estimatedfair value of each reporting unit with goodwill to the carrying amount of thereporting unit's assets and liabilities, including its goodwill.  If the fair value of the reporting unit isbelow its carrying amount, then the second step of the impairment test isperformed, in which the current fair value of the reporting unit's assets andliabilities will determine the current implied fair value of the reportingunit's goodwill.

 

On anannual basis (in the fourth quarter), or more frequently if circumstancesindicate potential impairment, we perform an assessment for impairment of ourgoodwill associated with each of our reporting units, by comparing eachreporting unit's fair value with its carrying value.  The estimated fair value of goodwill isaffected by, among other things, operating results, our business plan for thefuture, estimated results of future operations and the comparable companies andtransactions that are used to estimate the fair value of our goodwill.  To the extent that the carrying value of areporting unit exceeds its fair value, goodwill is written down to its impliedfair value.  Changes in our business planor operating results that are different than the projections used to developthe reporting unit's fair value may have an impact on the valuation ofgoodwill.

 

Inconducting our impairment analyses, we perform analyses and tests of ourgoodwill with respect to our reporting units. The test methods employed involve assumptions concerning useful lives ofintangible assets, interest and discount rates, projections and other assumptionsof future business conditions.  Theassumptions employed are based on management's judgment using internal andexternal data.

 

*Impairmentof Long-lived and Certain Identifiable Intangible Assets.* We review ourlong-lived assets for impairment when circumstances indicate that the carryingvalue of an asset may not be fully recovered by the undiscounted net cash flowgenerated over the remaining life of the related asset or group of assets.  If the cash flows generated by the asset arenot sufficient to recover the remaining carrying value of the asset, we arerequired to write down the value of the asset to its estimated fair value.  In evaluating whether the asset will generatesufficient cash flow to recover its carrying value, we estimate the amount ofcash flow that will be generated by the asset and the remaining life of theasset.  In making our estimate, weconsider the performance trends related to the asset, the likelihood that thetrends will continue or change, at the asset grouping level for which there areidentifiable independent cash flows.

 

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*Allowancefor Doubtful Accounts.*  We sell products to and receive royaltiesfrom our franchisees and sell products to other customers.  Sometimes these franchisees and customers areunable or unwilling to pay for the products that they receive or royalties thatthey owe.  Factors that affect ourability to collect amounts that are due to us include the financial strength ofa franchisee or customer and its operations, the economic strength of the mallwhere the franchisee is located and the overall strength of the retaileconomy.  We are required to establish anestimated allowance for the amounts included in accounts receivable that wewill not be able to collect in the future. To establish this allowance, we evaluate the customer's or franchisee'sfinancial strength, payment history, reported sales and the availability ofcollateral to offset potential losses. If the assumptions that are used to determine the allowance for doubtfulaccounts change, we may have to provide for a greater level of expense infuture periods or reverse amounts provided in prior periods.

 

*Deferred Income TaxAssets. *Deferred income taxassets are assessed for recoverability and valuation allowances are provided asnecessary to reduce deferred income tax assets to amounts expected to berealized.  Should expectations of taxableincome change in future periods, it may become necessary to change thevaluation allowance, which could affect our results of operations in the periodsuch determination is made.  We record anincome tax provision or benefit at a rate that is based on expected results forthe fiscal year.  If future changes in marketconditions cause actual results to be more or less favorable, adjustments tothe effective income tax rate on a quarterly basis could be required.

 

*Inventories.*  In assessing therealizability of inventories, we make judgments as to future demandrequirements and product expiration dates. The inventory requirements change based on projected customer demand,which changes due to fluctuations in market conditions and product life cycles.

* *

*Legaland Regulatory.*  We record liabilities for legal andregulatory matters when the contingency is both probable and reasonablyestimable.  We are involved in severallegal and regulatory matters.  Afterconsultation with legal counsel, we believe that the ultimate dispositions ofthese matters will not have a material negative impact on our financialposition, liquidity or results of operations. However, there can be no assurance that we will be successful in ourefforts to satisfactorily resolve these matters and the ultimate outcome couldresult in a material negative impact on our financial position, liquidity orresults of operations.

**Accounting Pronouncements Not Yet Adopted**

# ** **

        InFebruary 2007, the Financial Accounting Standards Board ("FASB")issued Statement of Financial Accounting Standards ("SFAS") SFASNo. 159, ("SFAS 159"), "The Fair Value Option for FinancialAssets and Financial Liabilities—Including an Amendment of FASB StatementNo. 115."  SFAS 159 expands theuse of fair value accounting but does not affect existing standards whichrequire assets or liabilities to be carried at fair value.  SFAS 159 gives a company the irrevocableoption to carry most financial assets and liabilities at fair value, withchanges in fair value recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15,2007 and is required to be adopted by us in the first quarter of 2008.  We are currently determining whether fairvalue accounting is appropriate for any of our eligible items and cannotcurrently estimate the impact, if any, which SFAS 159 will have on our consolidatedresults of operation and financial condition.

 

        InSeptember 2006, the FASB issued SFAS No. 157 ("SFAS 157"), "FairValue Measurements," to define fair value, establish a framework formeasuring fair value in generally accepted accounting principles and expanddisclosures about fair value measurements, but does not change existingguidance as to whether or not an instrument is carried at fair value.  SFAS 157 is effective for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscal years.  We are currently evaluating the effect, ifany, that the adoption of SFAS 157 will have on our consolidated financialposition and results of operations.

 

# **Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

        Therehave been no significant changes in market risks since the end of our fiscalyear ended December 30, 2006.  For moreinformation, please read Item 7A. and the consolidated financial statements andnotes thereto contained in our Annual Report.

 

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# **Item 4.  Controls and Procedures**

 

        Our management,with the participation of our Chief Executive Officer (the "CEO") andChief Accounting Officer (the "CAO"), evaluated the effectiveness ofour disclosure controls and procedures (as defined in Rule 15d-15(e) under the SecuritiesExchange Act of 1934 (the "Exchange Act") as of the end of the periodcovered by this report.  Based on thatevaluation, the CEO and the CAO concluded that our disclosure controls andprocedures, as of the end of the period covered by this report, are functioningeffectively to provide reasonable assurance that the information required to bedisclosed by us in our reports filed under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSEC's rules and forms and is accumulated and communicated to our management,including the CEO and CAO, as appropriate to allow timely decisions regardingrequired disclosure.  A controls system,no matter how well designed and operated, cannot provide absolute assurancethat the objectives of the controls system are met, and no evaluation ofcontrols can provide absolute assurance that all control issues and instancesof fraud, if any, within a company have been detected.

 

        There has beenno change in our internal control over financial reporting (as defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our fiscalquarter ended September 29, 2007, that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II – OTHER INFORMATION**

 

# **Item 1.  LegalProceedings**

 

        We and our products aresubject to regulation by numerous governmental authorities, including, withoutlimitation, federal, state and local laws and regulations governingfranchising, health, sanitation, environmental protection, safety and hiringand employment practices.

 

        In the ordinarycourse of business, we are involved in routine litigation, including franchisedisputes and trademark disputes.  We arenot a party to any legal proceedings that, in the opinion of management, afterconsultation with legal counsel, is material to its business, financialcondition or results of operations.

 

**Item 1A.  RiskFactors**

 

The following risk factors, amongothers, could cause our financial performance to differ significantly from thegoals, plans, objectives, intentions and expectations expressed in thisreport.  If any of the following risksand uncertainties or other risks and uncertainties not currently known to us ornot currently considered to be material actually occur, our business, financialcondition or operating results could be harmed substantially.

*** ***

***Risks Related to Our Business***

*** ***

*        Theresults of operations of our business in the future will depend upon whether weare able to successfully implement our business strategy, the implementation ofwhich depends on factors that are beyond our control.*

 

We believe that the implementationof our business strategy is key to enabling us to grow our revenues andprofitability and, ultimately, our future success.  Our business strategy is focused on thegrowth of each of our brands by increasing the number of retail units andprofitable sales.

 

        *From time to time,we may be restricted from selling our franchises.*

 

 Thesale of franchisesis regulated by various state laws as well as by the Federal TradeCommission.  The Federal Trade Commissionrequires that franchisors make extensive disclosure in a uniform franchiseprospectus to prospective franchisees but does not require registration.  However, a number of states require annualregistration of the uniform franchise prospectus with state authorities orother disclosure in connection with franchise offers and sales.  In addition, several states have"franchise relationship laws" or "business opportunitylaws" that limit the ability of the franchisors to terminate agreements orto withhold consent to renewal or transfer of these agreements.

 

 Thereare certain events that require us to make certain disclosure to stateauthorities.  Further, renewal of uniformfranchise offeringcircular registrations are required in several states within a certain periodof time following our fiscal year end. From time to time in the future, there will be periods of time aftercertain events or in connection with registration renewal during which we maybe prohibited from selling our franchises in certain states.  Without limiting the foregoing, our financialcondition requires us to defer collection of certain fees in some states untilthe store opens, and in Virginia, prohibits us from offering new franchises forsale.  If we are unable to sell ourfranchises for an extended period of time in certain states, our businessoperations or financial condition could be adversely affected.

* *

*Our ability to attract newfranchisees, retain existing franchisees, and locate andprocure favorable store locations is critical to the success ofour business.*

* *

We compete with a broad segment ofother business opportunities and franchise companies for franchisees. There is also aggressive competition from many sources forfavorable sites for new stores, both within and outside the mallenvironment.  Many of our competitors have greater resources ormore favorable business models than ours with which to attract new investorsand procure sites.  If we are unable to attract new or existingfranchisees to purchase new franchises, or represent a competitiveopportunity for leaseholders, it will limit our ability to develop newfranchised locations.

 

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*A decline in mall traffic couldcause our bakery brand franchise income to decrease materially.*

 

 We believe thatthe amount and proximity of pedestrian traffic near our bakery brand storesstrongly influence sales of our products, which we believe are frequentlyimpulse purchases.  In recent years, webelieve visits to major shopping malls, where at September 29, 2007 themajority of our bakery franchisees' stores are located, have experiencedperiods of decline.  This trend has had anegative impact on our revenues.  Wecannot be sure that this trend will not continue or that this trend can beoffset by increased sales per customer. A prolonged decline in mall traffic could adversely affect our financialcondition and results of operations.

* *

*Wehave experienced a number of franchise store closures since 2004.  If this trend continues, our financialposition and results of operations could be adversely affected.*

 

        Since the end of fiscal2004, excluding the Pretzel brands sold in August 2007, 8 retail conceptlocations were closed by MFOC and 843 retail concept locations were closed byother franchisees.  These closuresrepresent 37.9 percent of the total number of stores open at the beginning offiscal 2005.  In comparison, 282 retailconcept locations have opened since the end of fiscal 2004.  Since the end of fiscal 2004, the number ofGreat American Cookies brand locations has increased by 1.4 percent, the numberof Mrs. Fields brand locations has decreased by 14.6 percent, thenumber of TCBY brand traditional locations has decreased by 29.2 percent,and the number of TCBY brand non-traditional locations has decreased by37.7 percent.  Additional storeclosures could occur in the future and we may be unable to successfully openadditional new stores in the future.  Ifthis trend continues, our financial condition and results of operations may beadversely affected.

* *

*        Webelieve our brand identity is critical**to the success of ourbusiness.  If we are unable to use any ofour trademarks or to protect our trade secrets, our sales and our results ofoperations will be adversely affected.*

* *

 We believe thatour trademarks have significant value and are important to the marketing of ourretail outlets and products and the operations of our franchisees' stores, giftssegment and licensing strategy.  Most ofour trademarks are federally registered before the United States Patent andTrademark Office and registered or pending in many foreign countries.  However, we cannot be sure that ourtrademarks cannot be circumvented or that our trademarks do not or will notviolate the proprietary rights of others. If a challenge to one of our trademarks is successful, we could beprevented from continuing to use that trademark.  A negative ruling concerning our use or thevalidity or enforceability of one of our trademarks would adversely affect oursales of the related products and our operating results.  In addition, we cannot be sure that we willhave the financial resources necessary to police the use of our trademarks by ourfranchisees and licensees or enforce or defend our trademarks, which couldresult in incorrect or unauthorized use of our trademarks.  Moreover, we may not be able to use orregister our existing trademarks abroad due to the application of foreign laws,which would force us to adopt new trademarks for use in those jurisdictionsthat initially will not be as recognizable as our existing marks.  Despite our efforts to protect our tradesecrets, unauthorized parties may attempt to obtain and use informationregarding our proprietary recipes and our means of protecting our trade secretrights may not be adequate.  Theoccurrence of any of these factors could diminish the value of our trademarkportfolio or trade secrets and negatively impact our sales, business operationsand strategies.

* *

*        Wedepend heavily on our suppliers and distributors.*

 

We depend on several primarysuppliers, including Countryside and Oak State, which supply products for ourMrs. Fields franchise system and branded retail business.  We also depend on two main suppliers forproduction of our TCBY branded yogurt products under two Supply Agreements withScott Brothers and Yarnell.

 

 Wealso depend on our primary distributors for distribution of perishable andnon-perishable items to our franchisees. We have supply agreements with eight regional distributors who willprovide service to our TCBY franchisees throughout the United States.  The distribution costs to most of ourfranchisees have not substantially increased under the new regional agreements.

 

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         Our relianceon our suppliers and distributors, particularly newly-established ones,subjects us to a number of risks, including possible delays or interruptions insupplies, diminished control over quality and a potential lack of adequate rawmaterial capacity.  Any disruption in thesupply of or degradation in the quality of the raw materials provided by oursuppliers could have a material adverse effect on our business, operatingresults and financial condition.  Inaddition, such disruptions in supply or degradations in quality could have along-term detrimental impact on our efforts to develop a strong brand identityand a loyal consumer base.  If anysupplier or distributor fails to perform as anticipated, or if there is atermination or any disruption in any of these relationships for any reason, itcould have a material adverse effect on our results of operations.

* *

*        Ourinformation systems are an integral part of our gifts segment.  Systems disruptions and failures could causeour customers to become dissatisfied with us and may impair our business.*

 

 Our ability tomaintain our website, network system and telecommunications equipment inworking order and to reasonably protect them from interruption is critical tothe success of our gifts business segment. Our website must accommodate regular traffic, deliver information andcomplete transactions.  Our customers,advertisers and business alliances may become dissatisfied by any systemsfailure that interrupts our ability to provide our products and services tothem.

 

*        Webelieve that our relationship with our franchisees and retail licensees iscritical to the success of our business. If these franchise and retail license agreements were to be terminatedor if we are unable to maintain these relationships, our sales and our resultsof operations would be adversely affected.*

* *

 Tenof our franchisees or licensees own ten or more retail concept locations.  In total, these franchisees own ­­­180 retailconcept locations and contributed approximately $900,000 or 2.5 percent of ourfranchise revenues for the quarter ended September 29, 2007.  For the same period, franchise revenues madeup 54.9 percent of our total revenues. The termination of these key franchise or retail license agreements orlower than anticipated sales may have an adverse affect on our financialcondition and results of operations.  Wecannot be sure that our relations with franchisees and licensees will notchange or that our licensees will continue to perform as they have in the past,which could result in franchise or license agreements being terminated by us orby our franchisees or licensees.

 

 Generally,we believe our relationship with our franchisees and our licensees is acritical component in the success of our business.  As an example, as required by state andfederal franchise disclosure rules, we must provide all prospective franchiseeswith the name and contact information for each of the concept's existing franchisees.  Prospects often contact existing franchiseesas part of their due diligence before making a franchise purchasedecision.  If our relationship withexisting franchisees is strained, it may slow or suspend franchise developmentwith new franchisees, as well as curtail additional development with existingfranchisees.  Strained relationships withexisting franchisees can also contribute to additional or accelerated closureof existing stores, particularly upon transfer or expiration of franchise agreementsand leases.

 

*        Wemay be harmed by actions taken by our franchisees or licensees that are beyondour control.*

 

 Ourfranchisees and licensees generally are independent contractors and are not ouremployees.  We require our franchiseesand licensees to adhere to strict production, display, storage and marketingspecifications and procedures and we provide training and support tofranchisees, but the quality of franchised store operations or licensedproducts may be diminished by any number of factors beyond our control.  Consequently, franchisees may not operatestores or licensees may not produce or market licensed products in a mannerconsistent with our standards and requirements, or may not hire and train qualifiedmanagers and other store personnel.  Ifthey do not, our image, reputation and brand may suffer and our franchise andlicense revenues as well as our ability to attract prospective franchisees maybe adversely affected.

 

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*         We are vulnerable to fluctuations inthe cost, availability and quality of our ingredients.*

 

 Thecost, availability and quality of the ingredients we use to prepare ourproducts at the Great American Cookies manufacturing facility and in our giftsoperations are subject to a range of factors, many of which are beyond ourcontrol.  Fluctuations in economic andpolitical conditions, weather and demand could adversely affect the costs ofour ingredients.  We have no control overfluctuations in the price of commodities and we may not be able to pass throughany cost increases to our customers.  Weare dependent on frequent deliveries of fresh ingredients, thereby subjectingus to the risk of shortages or interruptions in supply.  All of these factors could cause adverse marketconditions which could adversely affect our financial results.

* *

         *Our branded retail business is in its start-up phaseand we are only beginning to establish relationships with brokers, vendors andcustomers.*

 

 Thesale of snack products to grocery, club stores and similar distributionchannels is highly competitive and subject to ongoing expenses related toslotting fees, advertising credits and discounts*. *Similarly, the business relies onrelationships with vendors, brokers and customers.  Since we commenced this business veryrecently (in July 2006), there can be no certainty that we will successfully maintain the level of business orrelationships established by Shadewell, who operated a similar business under alicense agreement with us.  As with anynew business, we may be unable to predict with any certainty the costsassociated with operating the branded retail group or the revenues we expect togenerate.  We do not believe that theincome for this new business will immediately replace or exceed the royaltiesthat may have been generated by the terminated license agreements.

* *

*        Ifwe lose key management personnel, we may have difficulty in implementing thebusiness strategy that current management has developed and may fail to achieveexpected profits as a result.*

 

 Oursuccess depends on the continued services of our senior management,particularly Stephen Russo, our President and Chief Executive Officer.  In addition, our continued growth depends, inpart, on attracting and retaining skilled managers and employees as well asmanagement's ability to utilize effectively our key personnel.  If Stephen Russo or any other seniormanagement personnel leaves us,we may have difficulty in implementing the business strategy they havedeveloped and may fail to achieve expected profits as a result.  We cannot be sure that management's effortsto integrate, utilize, attract and retain personnel will be successful.

* *

*        Ourfailure to respond to demographic trends, changes**inconsumer preferences and other factors and our failure to implement newmarketing strategies could have a material adverse effect on our results ofoperations.*

 

The specialty and snack foodindustry is affected by changes in consumer preferences, tastes and eatinghabits, local, regional, national and international economic conditions,demographic trends and mall traffic patterns. A number of factors, including increased food, labor and benefits costs,the availability of experienced management and hourly employees anddifficulties or delays in developing and introducing new products to suitconsumer preferences, may adversely affect the specialty retail industry ingeneral and our franchise outlets in particular.  Our failure to anticipate, identify andrespond to changing consumer preferences and economic conditions and thefailure of our customers to respond favorably to our marketing or new productscould have a material adverse effect on our results of operations.

 

 As an example,we believe our TCBY brand has struggled to stay relevant and differentiatedfrom its competitors.  We believe it isimportant to the brand’s growth to reposition it in a way that capitalizes onyogurt’s current popularity and revitalize it through new store design andvenues.  We are in the process ofexploring ways to accomplish this repositioning and revitalization, includingthe testing of our Yovana concept, Beriyo products and new store design.  However, we do not know how successful wewill be in developing or implementing this plan or the extent to which thecapital investment required to implement such a reconcepting plan will beavailable when needed.  If we are unableto successfully implement this or any other aspect of our business strategy,our business operations and our financial condition could be adverselyaffected.

 

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*        There isintense competition in the specialty food retailers industry.*

 

 The specialtyretail food and snack food industry is highly competitive with respect toprice, service, location and food quality and within the industry we compete with cookie,pretzel, frozen yogurt and ice cream retailers, as well as other confectionary,sweet snack and specialty foods retailers, many of which have greater resourcesthan we do.  Consequently, we cannot becertain that we can compete successfully with these other food retailers.

 

 In addition tothe risks we face from current competitors, we cannot be certain that we cansuccessfully compete with any new entrants into the specialty retail food and snack food industrywho may introduce new and successful products or marketing.  Our inability to compete adequately wouldhave a material adverse effect on our results of operations.

 

*        Adversepublicity, particularly about health concerns, could reduce our sales andadversely affect our results of operations.*

 

 Our ability tocompete depends in part on maintaining our reputation with consumers.  We could be adversely affected by publicityresulting from food quality, illness, injury or other health concerns,including food borne illness claims or operating issues stemming from onestore, a limited number of stores or even a competitor's store.  In addition, we use ingredients in several ofour products, such as nuts, to which some people may have allergies, and butterand cream, which are high in fat.  Theremay be adverse publicity about the health risks relating to these or otheringredients.  Adverse publicity aboutthese factors could reduce sales of our products and adversely affect resultsof operations.

 

*         Ourinternational operations are exposed to various risks that could have amaterial adverse effect on our results of operations and financial condition.*

 

 We havefranchised and licensed retail stores in numerous foreign countries.  While most of our operations are in theUnited States, through our franchised retail store locations and our brandedretail activities, we also have operations in numerous other regions, includingoperations in Canada, Mexico, Australia, South America, the Caribbean, theMiddle East and Asia, representing approximately 3.7 percent of our totalrevenue during fiscal 2006.  We expect toexpand into additional regions in the future. Our international operations are subject to many additional risks,including:

 

•                  the burden of complying with multiple andpossibly conflicting laws and any unexpected changes in regulatoryrequirements;

•                   import and export restrictionsand tariffs;

•                   additional expenses relating tothe difficulties and costs of staffing and managing international operations;

•                   litigation in foreignjurisdictions;

•                   potentially adverse taxconsequences;

•                   increased competition as a resultof subsidies to local companies;

•                   political instability or war;

•                   cultural differences;

•                   the impact of business cycles andeconomic instability; and

•                   increased expense as a result ofinflation.

 

*       *Any one of these factors could have amaterial adverse affect on our sales of products or services to ourinternational customers and curtail our expansion strategy.

 

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*Government regulation of our business could adverselyaffect the results of our operations.*

 

 Numerousgovernmental authorities have issued regulations that apply to us and ourfranchisees' stores, including, without limitation, federal, state and locallaws and regulations governing health, sanitation, environmental protection,safety, hiring and employment practices, including laws, such as the Fair LaborStandards Act, governing such matters as minimum wages, overtime and otherworking conditions.  The FDA administersregulations that apply to our products. If we fail to obtain or retain the required food licenses or to complywith applicable governmental regulations or if there is any increase inemployee benefit costs or other costs associated with employees, our costscould increase as we attempt to comply with regulations.  Our revenues could decrease if we or oursuppliers are unable to manufacture or if our franchisees or licensees areunable to sell products in locations in which we do not have requiredlicenses.  Our products, themanufacturers and their manufacturing facilities are also subject to periodicinspection.  Discovery of problems mayreduce our results of operations because of costs of compliance or inability tomanufacture or sell products for failure to comply with regulations.

 

 In addition, thesale of franchises is regulated by various state laws as well as by the FederalTrade Commission.  The Federal TradeCommission requires that franchisors make extensive disclosure in a UniformFranchise prospectus to prospective franchisees but does not requireregistration.  However, a number ofstates require registration of the Uniform Franchise prospectus with stateauthorities or other disclosure in connection with franchise offers andsales.  In addition, several states have"franchise relationship laws" or "business opportunitylaws" that limit the ability of the franchisors to terminate agreements orto withhold consent to renewal or transfer of these agreements.  While we believe that we are in compliancewith existing regulations in the jurisdictions where we currently offerfranchises, we cannot predict the effect of any future legislation or regulationon our business operations or financial condition.  Additionally, bills have occasionally beenintroduced in Congress which would provide for federal regulation of aspects offranchisor-franchisee relationships. We cannot predict what effect those regulations could have on ourbusiness.

 

*Anyinterruption in funding sources used by franchisees to purchase and develop ourfranchises could adversely impact our ability to market franchises.*

 

 Many of ourfranchisees must obtain loans to purchase and develop our franchises.  One significant source of this funding is theU.S. Small Business Administration ("SBA").  Any suspension of funding or delays inapproval of the SBA's funding budget will affect our franchisees' ability toobtain funding from this significant source and adversely impact our ability tomarket franchises.

 

*        Litigation,including product liability litigation, could reduce our results of operationsor increase our losses because of the cost of paying on successful claims andwe may not be able to continue to obtain adequate insurance.*

 

 We are involvedin routine litigation in the ordinary course of business, including franchisedisputes.  Although we have not beensignificantly adversely affected in the past by litigation, there can be noassurance as to the effect of any future disputes.

 

 Although wecurrently are not subject to any product liability litigation, we couldexperience product liability litigation in the future involving ourproducts.  Our quality control program isdesigned to maintain high standards for the food and materials and foodpreparation procedures used by franchised stores.  Products are periodically inspected by ourpersonnel at both the point of sale locations and the manufacturing facilitiesto ensure that they conform to our standards.  In addition to insurance held by oursuppliers, we maintain insurance relating to personal injury and productliability in amounts that we consider adequate for the retail foodindustry.  While we have been able toobtain insurance in the past, there can be no assurance that we will be able tomaintain these insurance policies in the future.  Consequently, any successful claim againstus, in an amount materially exceeding our coverage, could adversely affect ouroperating results.

 

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*         Quarterlyfluctuations and seasonality.*

 

 Our operatingresults are subject to quarterly and seasonal fluctuations.  Our sales and income from franchisees' storeoperations are seasonal given the significant impact of the high number of mallbased locations.  At these locations,sales tend to mirror customer traffic flow trends in malls, which increasesignificantly during the fourth quarter, primarily between Thanksgiving and theend of the calendar year.  Holiday giftpurchases also are a significant factor in increased sales in the fourthquarter.  However, our TCBY franchisedstores tend to have their strongest sales periods during the warmer months fromlate Spring through early Fall, which helps to balance the impact ofseasonality on our operations.  Inaddition, by marketing our cookie brands around holidays that occur in lateWinter and early Spring, such as Valentine's Day and Easter as well as holidaysin the late Fall, such as Halloween, we hope to continue to decrease the impactof seasonality on our cash flow. However, we may not be successful in decreasing the impact ofseasonality on our cash flow.  If we areunable to manage seasonal fluctuations of cash flow, our financial conditionand results of operations may be adversely affected.

*** ***

***Risks Related to Our SubstantialIndebtedness***

*** ***

*        Oursubstantial level of indebtedness could adversely affect our financialcondition and prevent us from fulfilling our obligations under our SeniorSecured Notes.*

 

        We have substantialindebtedness represented by our Senior Secured Notes.  In addition, subject to restrictions in theIndenture governing the Senior Secured Notes, we may incur additionalindebtedness.

 

Our high level ofindebtedness could have important consequences, including the following:

 

•                  our ability to obtain additional financing for working capital, capitalexpenditures, acquisitions or general corporate purposes may be limited;

•                  we must use a substantial portion of our cash flow from operations topay interest and required principal on the Senior Secured Notes and, to theextent incurred, our other indebtedness, which will reduce the funds availableto us for operations and other purposes;

•                  our high level of indebtedness could place us at a competitivedisadvantage compared to our competitors that may have proportionately lessdebt;

•                  our flexibility in planning for, or reacting to, changes in ourbusiness and the industry in which we operate may be limited; and

•                  our high level of indebtedness makes us more vulnerable to economicdownturns and adverse developments in our business.

 

 We expect toobtain the money to pay our expenses and to pay the amounts due under theSenior Secured Notes and our other debt primarily from our operations.  Our ability to meet our expenses and makethese payments thus depends on our future performance, which will be affectedby financial, business, economic and other factors, many of which we cannotcontrol.  Our available cash hasdecreased since 2004 and our business may not generate sufficient cash flowfrom operations in the future and our currently anticipated growth in revenueand cash flow may not be realized, either or both of which could result in ourbeing unable to repay indebtedness, including the Senior Secured Notesor to fund other liquidity needs.  We arenot certain, based on historical results and current projections, that our cashcurrently on hand and expected future cash flows from operations will besufficient to meet our September 2008 interest payment on the Senior SecuredNotes.  If we do not have enough money to make the September 2008 interestpayment, to meet other obligations under the Senior Secured Notes or to fundother liquidity needs, we may be required to attempt to refinance all or partof our then existing debt (including the Senior Secured Notes), sell assets orborrow more money.  However, we may notbe able to accomplish any of these alternatives on terms acceptable to us, orat all.  In addition, the terms ofexisting or future debt agreements, including the Indenture, may restrict usfrom adopting any of these alternatives. The failure to generate sufficient cash flow or to achieve any of thesealternatives could have a material adverse effect on our business and our abilityto pay the September 2008 interest payment and the amounts due under the SeniorSecured Notes.

 

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*         TheIndenture imposes significant operating and financial restrictions, which mayprevent us from pursuing certain business opportunities and taking certainactions.*

 

         The Indenture imposessignificant operating and financial restrictions on us.  These restrictions limit, among other things,our ability to:

 

•                  incur additional indebtedness;

•                  repay subordinated indebtedness prior to stated maturities;

•                  pay dividends on or redeem or repurchase our stock;

•                  issue capital stock;

•                  make investments;

•                  create liens;

•                  sell certain assets or merge with or into other companies;

•                  enter into certain transactions with stockholders and affiliates;

•                  sell stock in our subsidiaries;

•                  restrict dividends, distributions or other payments from oursubsidiaries; and

•                  otherwise conduct necessary corporate activities.

 

 To the extentthat we wish to conduct these restricted activities, we must do so in strictaccordance with the provisions of the Indenture.  These restrictions could adversely affect ourability to finance our future operations or capital needs and pursue availablebusiness opportunities.  A breach of anyof these restrictions could result in a default in respect of the relatedindebtedness.  If a default occurs, therelevant lenders could elect to declare the indebtedness, together with accruedinterest and fees, to be immediately due and payable and proceed against anycollateral securing that indebtedness, which includes substantially all of ourassets.  Acceleration of our otherindebtedness could result in a default under the terms of the Indenture and ourassets may not be sufficient to satisfy our obligations under our indebtedness,including the Senior Secured Notes.

 

        *Our parent companies may takeactions that conflict with bondholder, franchisee and other interests.*

 

 As a result ofits direct control of our ultimate parent company and indirect control of MFHand MFOC, two affiliated private investment firms, Capricorn Investors II, L.P.and Capricorn Investors III, L.P. together control the power to elect ourmanagers, to appoint members of management and to approve all actions requiringthe approval of the holders of our common interests, including adoptingamendments to our certificate of formation and limited liability companyagreement as well as approving mergers, acquisitions or sales of all orsubstantially all of our assets.  Theactions may conflict with the interests of bondholders, franchisees andothers.  Similarly, the interests of ourparent companies could conflict with other stakeholder interests.  For example, if we encounter financialdifficulties or are unable to pay our debts as they mature, the interests ofMFOC as a holder of equity might conflict with holders of the Senior SecuredNotes.  Our parent companies also mayhave an interest in pursuing acquisitions, divestitures, financings or othertransactions that, in their judgment, could enhance their equity investment, eventhough such transactions might materially adversely affect our financialcondition and results of operations.

 

# **Item6.  Exhibits**

 

The list of exhibits in the Exhibit Index to thisquarterly report is incorporated herein by reference.

 

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# **SIGNATURES**

** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

** **

 

 
| /s/ Stephen Russo                        |     | November 13, 2007 |
|------------------------------------------|----------|-------------------|
| *Stephen Russo*                          | * * | *Date*            |
| *President and Chief Executive Officer*  | * * | * *          |
| (*Principal Executive  Officer*)         |     |              |
|                                     |     |              |
| /s/ Steven K. Passey                     |     | November 13, 2007 |
| *Steven K. Passey*                       | * * | *Date*            |
| *Chief Accounting Officer and Treasurer* | * * | * *          |
| *(Principal Financial Officer)*          | * * | * *          |

 

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**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                           |   |   |
|            |       |                                                                                                                                                                           |   |   |
|            |       |                                                                                                                                                                           |   |   |
| 31.1            |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.  |
|            |       |                                                                                                                                                                           |
| 31.2            |       | Certification of Chief Accounting Officer pursuant  to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|            |       |                                                                                                                                                                           |
| 32.1            |       | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                           |
|            |       |                                                                                                                                                                           |
| 32.2            |       | Certification of Chief Accounting Officer pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                          |
|            |       |                                                                                                                                                                           |

 

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