**UNITED STATESSECURITIES 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 July 1, 2006**                                                                                                                                                  |
|                                                                                                                                                                                              |
| **OR**                                                                                                                                                                                            |
|                                                                                                                                                                                              |                                                                                          |
| **o**                                                                                                                                                                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                              |
| **For the  transition period from             to             ** |

 

**Commission file number: 333-115046**

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**MRS.FIELDS FAMOUS BRANDS, LLC**(Exact Name of Registrant Specified in Its Charter)

| **Delaware**                                | **80-0096938**                     |
|---------------------------------------------|------------------------------------|
| (State or Other Jurisdiction of             | (IRS Employer  Identification No.) |
| Incorporation or Organization)              |                               |
| ** **                                  | ** **                         |
| **2855 East Cottonwood Parkway, Suite 400** |                               |
| **Salt Lake City, Utah**                    | **84121-7050**                     |
| (Address of Principal Executive Offices)    | (Zip Code)                         |

 

Registrant’sTelephone Number, Including Area Code:**(801)736-5600**

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Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

YES x      NO o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated fileror a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (check one):

Large AcceleratedFiler o            Accelerated Filer o            Non-accelerated filer x

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

OnAugust 9, 2006, 100 common interests of registrant were outstanding, all ofwhich are held by an affiliate.  There isno established trading market for registrant’s common interests.

 

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

**TABLE OFCONTENTS**
|                                                                                                                                                     | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART I — FINANCIAL INFORMATION**                                                                                                             |       |       |
|                                                                                                                                                |       |       |
| Item 1. Financial Statements  (Unaudited)                                                                                                           |       |       |
|                                                                                                                                                |       |       |
| Condensed  Consolidated Balance Sheets as of July 1, 2006 and December 31, 2005                                                                     |       |       |
|                                                                                                                                                |       |       |
| Condensed  Consolidated Statements of Operations and Comprehensive Income (Loss) for the  13 weeks and 26 weeks ended July 1, 2006 and July 2, 2005 |       |       |
|                                                                                                                                                |       |       |
| Condensed  Consolidated Statements of Cash Flows for the 26 weeks ended July 1, 2006 and  July 2, 2005                                    |       |       |
|                                                                                                                                                |       |       |
| 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                                                                                                                                          |       |       |

 

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# **PART I —FINANCIAL INFORMATION**

# **Item 1. Financial Statements**

**MRS. FIELDS FAMOUS BRANDS, LLCCondensed Consolidated Balance Sheets(Unaudited)(Dollars in thousands)**
| ** **                                                                                | ** ** | **July 1,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ASSETS:                                                                                   |       |                   |       |                        |       |
| Cash and cash equivalents                                                                 |       | $                      | 14,277     |                        | $          | 23,664 |   |
| Receivables, net of allowance for doubtful accounts  of $873 and $612, respectively       |       | 7,245                  |       | 8,061                       |       |
| Inventories                                                                               |       | 2,645                  |       | 2,869                       |       |
| Prepaid expenses and other                                                                |       | 1,158                  |       | 932                         |       |
| Deferred tax asset                                                                        |       | 835                    |       | 780                         |       |
| Total current assets                                                                      |       | 26,160                 |       | 36,306                      |       |
| Property and equipment, net                                                               |       | 4,992                  |       | 4,360                       |       |
| Goodwill                                                                                  |       | 64,115                 |       | 78,683                      |       |
| Trademarks and other intangible assets, net                                               |       | 11,729                 |       | 12,755                      |       |
| Deferred loan costs, net of accumulated amortization  of $10,517 and $9,964, respectively |       | 6,410                  |       | 6,964                       |       |
| Deferred tax asset                                                                        |       | 548                    |       | 151                         |       |
| Other assets                                                                              |       | 556                    |       | 678                         |       |
|                                                                                      |       | $                      | 114,510    |                        | $          | 139,897 |   |
| LIABILITIES AND MEMBER’S DEFICIT:                                                    |       |                   |       |                        |       |
| Accounts payable                                                                          |       | $                      | 2,384      |                        | $          | 6,496 |   |
| Accrued liabilities                                                                       |       | 11,662                 |       | 12,289                      |       |
| Amounts due to affiliates                                                                 |       | 3,618                  |       | 3,949                       |       |
| Current portion of capital lease obligations                                              |       | 108                    |       | 104                         |       |
| Current portion of deferred revenues                                                      |       | 1,404                  |       | 1,074                       |       |
| Total current liabilities                                                                 |       | 19,176                 |       | 23,912                      |       |
| Long-term debt                                                                            |       | 195,747                |       | 195,747                     |       |
| Capital lease obligations, net of current portion                                         |       | 430                    |       | 485                         |       |
| Deferred revenues, net of current portion                                                 |       | 985                    |       | 1,175                       |       |
| Total liabilities                                                                         |       | 216,338                |       | 221,319                     |       |
| Member’s deficit                                                                     |       | (101,713               | )          | (81,273                     | )          |
| Accumulated other comprehensive loss                                                      |       | (115                   | )          | (149                        | )          |
| Total member’s deficit                                                               |       | (101,828               | )          | (81,422                     | )          |
| COMMITMENTS AND  CONTINGENCIES                                                            |       | $                      | 114,510    |                        | $          | 139,897 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

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**MRS. FIELDS FAMOUS BRANDS, LLCCondensed Consolidated Statements of Operations and Comprehensive Income (Loss)(Unaudited)(Dollars in thousands)**
| ** **                                                 | ** ** | **13 Weeks Ended** | ** ** | **26 Weeks Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                 | ** ** | **July 1,  2006**       | ** ** | **July 2,  2005**       | ** ** | **July 1,  2006** | ** ** | **July 2,  2005** | ** ** |
| REVENUES:                                                  |       |                         |       |                         |       |   |   |   |   |
| Franchising                                                |       | $                            | 13,561     |                         | $          | 13,969 |   | $ | 25,924 |   | $ | 26,323 |   |
| Gifts                                                      |       | 4,887                        |       | 5,389                        |       | 10,065 |   | 10,349 |   |
| Licensing                                                  |       | 427                          |       | 839                          |       | 1,067 |   | 1,977 |   |
| Other                                                      |       | 45                           |       | 67                           |       | 79 |   | 119 |   |
| Total revenues                                             |       | 18,920                       |       | 20,264                       |       | 37,135 |   | 38,768 |   |
| OPERATING COSTS  AND EXPENSES:                             |       |                         |       |                         |       |   |   |   |   |
| Franchising                                                |       | 6,023                        |       | 5,726                        |       | 11,967 |   | 10,814 |   |
| Gifts                                                      |       | 5,518                        |       | 5,330                        |       | 12,150 |   | 10,578 |   |
| Licensing                                                  |       | 680                          |       | 213                          |       | 909 |   | 355 |   |
| General and administrative                                 |       | 2,581                        |       | 2,297                        |       | 5,440 |   | 4,302 |   |
| Depreciation                                               |       | 943                          |       | 274                          |       | 1,359 |   | 553 |   |
| Amortization                                               |       | 538                          |       | 705                          |       | 1,076 |   | 1,410 |   |
| Impairment of goodwill                                     |       | 14,568                       |       | —                       |       | 14,568 |   | — |   |
| Other operating expenses, net                              |       | 23                           |       | 44                           |       | 58 |   | 81 |   |
| Total operating costs and expenses                         |       | 30,874                       |       | 14,589                       |       | 47,527 |   | 28,093 |   |
| Income (loss) from operations                              |       | (11,954                      | )          | 5,675                        |       | (10,392 | ) | 10,675 |   |
| Interest  expense, net                                     |       | (5,241                       | )          | (5,344                       | )          | (10,471 | ) | (10,699 | ) |
| Other loss                                                 |       | (150                         | )          | —                       |       | (28 | ) | — |   |
| Income (loss) before provision (benefit) for income  taxes |       | (17,345                      | )          | 331                          |       | (20,891 | ) | (24 | ) |
| Provision  (benefit) for income taxes                      |       | 651                          |       | 110                          |       | (790 | ) | (10 | ) |
| Net income (loss)                                          |       | $                            | (17,996    | )                            | $          | 221 |   | $ | (20,101 | ) | $ | (14 | ) |
| COMPREHENSIVE INCOME (LOSS):                               |       |                         |       |                         |       |   |   |   |   |
| Net income (loss)                                          |       | $                            | (17,996    | )                            | $          | 221 |   | $ | (20,101 | ) | $ | (14 | ) |
| Foreign currency translation adjustment                    |       | 36                           |       | (1                           | )          | 34 |   | (6 | ) |
| Comprehensive  income (loss)                               |       | $                            | (17,960    | )                            | $          | 220 |   | $ | (20,067 | ) | $ | (20 | ) |

 

See accompanying notes to condensed consolidated financial statements.

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**MRS. FIELDS FAMOUS BRANDS, LLC**

**CondensedConsolidated Statements of Cash Flows**

**(Unaudited)**

**(Dollars in thousands)**
| ** **                                                                                 | ** ** | **26 Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                 | ** ** | **July 1,**             | ** ** | **July 2** | ** ** |
| ** **                                                                                 | ** ** | **2006**                     | ** ** | **2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                     |       |                         |       |   |   |
| Net loss                                                                                   |       | $                            | (20,101    | ) | $ | (14 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |       |                         |       |   |   |
| Impairment of goodwill                                                                     |       | 14,568                       |       | — |   |
| Depreciation and amortization                                                              |       | 2,435                        |       | 1,963 |   |
| Amortization of deferred loan costs                                                        |       | 554                          |       | 631 |   |
| Loss on non-marketable securities                                                          |       | 28                           |       | — |   |
| Deferred income taxes                                                                      |       | (452                         | )          | 260 |   |
| Changes in assets and liabilities:                                                         |       |                         |       |   |   |
| Receivables                                                                                |       | 816                          |       | 1,361 |   |
| Amounts due to affiliates, net                                                             |       | (670                         | )          | (246 | ) |
| Inventories                                                                                |       | 224                          |       | 125 |   |
| Prepaid expenses and other                                                                 |       | (226                         | )          | 424 |   |
| Other assets                                                                               |       | (78                          | )          | (39 | ) |
| Accounts payable                                                                           |       | (4,112                       | )          | (1,850 | ) |
| Accrued liabilities                                                                        |       | (815                         | )          | (1,398 | ) |
| Deferred revenue                                                                           |       | 140                          |       | (489 | ) |
| Net cash (used in) provided by operating activities                                        |       | (7,689                       | )          | 728 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                     |       |                         |       |   |   |
| Proceeds from sale of equity warrants                                                      |       | 122                          |       | — |   |
| Purchases of property and equipment                                                        |       | (1,803                       | )          | (569 | ) |
| Net cash used in investing activities                                                      |       | (1,681                       | )          | (569 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                     |       |                         |       |   |   |
| Principal payments on capital lease                                                        |       | (51                          | )          | (17 | ) |
| Net cash used in financing activities                                                      |       | (51                          | )          | (17 | ) |
| Effect of  foreign exchange rate changes on cash                                           |       | 34                           |       | (6 | ) |
| Net (decrease)  increase in cash and cash equivalents                                      |       | (9,387                       | )          | 136 |   |
| Cash and cash  equivalents at beginning of period                                          |       | 23,664                       |       | 19,859 |   |
| Cash and cash  equivalents at end of period                                                |       | $                            | 14,277     |   | $ | 19,995 |   |
|                                                                                       |       |                         |       |   |   |
| **Supplemental  Disclosures of Cash Flow Information:**                                    | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Cash paid for interest                                                                     |       | $                            | 10,274     |   | $ | 10,286 |   |
| Cash paid for income taxes                                                                 |       | 60                           |       | 74 |   |
| **Supplemental  Disclosure of Noncash Investing and Financing Activities:**                | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Assets acquired under capital lease                                                        |       | $                            | —     |   | $ | 198 |   |
| Distribution to parent under tax allocation  agreement                                     |       | 339                          |       | — |   |
| Leasehold  improvements acquired under lease incentives                                    |       | 188                          |       | — |   |

 

See accompanying notes tocondensed consolidated financial statements.

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**MRS.FIELDS FAMOUS BRANDS, LLC****Notes toCondensed Consolidated Financial Statements(Unaudited)**

**1.  Basis of Presentation**

The accompanying condensed consolidated financialstatements have been prepared by Mrs. Fields Famous Brands, LLC andsubsidiaries (the “Company” or “Mrs. Fields”) in accordance with the rules andregulations of the Securities and Exchange Commission (“SEC”) for interimfinancial information and, accordingly, do not include all of the informationand footnotes required by U.S. generally accepted accounting principles for acomplete presentation of the financial statements.  In the opinion of management, these condensedconsolidated financial statements reflect all adjustments, which consist onlyof normal recurring adjustments, necessary to present fairly the financialposition of Mrs. Fields as of July 1, 2006 and December 31, 2005, and the resultsof their operations and their cash flows for the periods presented.  The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.  These condensed consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto for the fiscal year ended December 31,2005 contained in Mrs. Fields’ Annual Report on Form 10-K filed with the SEC onMarch 21, 2006.

The Company is a wholly-ownedsubsidiary of Mrs. Fields’ Original Cookies, Inc. (“MFOC”).  MFOC is a wholly-owned subsidiary ofMrs. Fields’ Holding Company, Inc. (“MFH”) and MFH is a wholly-ownedsubsidiary of Mrs. Fields’ Companies, Inc. (“MFC”).

The results of operationsfor the 13 and 26 weeks ended July 1, 2006 are not necessarily indicative ofthe results that may be expected for the remainder of the fiscal year endingDecember 30, 2006.  Income per commoninterest information is not presented because Mrs. Fields is wholly-owned byMFOC and, therefore, its common interests are not publicly traded.

**2. Receivables**

Most of the Company’sreceivables are due from domestic and international franchisees, distributors,licensees and corporate customers of our gifts segment.  These receivables consist of normal tradeaccounts receivable and longer-term notes receivable.  Service charges may be assessed on past dueinvoices but any revenue associated with these charges is only recognized whencollected.  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, extendedcredit from time to time in the form of notes receivable to franchisees andcertain of these notes receivable remain outstanding.  Notes receivable from franchisees areprimarily collateralized by equipment located at the franchisees’ stores.  These notes bear interest at market rates andmature at various dates through April 2009.  TCBY regularly reviews the notes fornon-performance.  Notes that areconsidered non-performing are placed on a non-accrual status when thecollectibility of principal or interest becomes uncertain.  During the 26 weeks ended July 1, 2006 andJuly 2, 2005, TCBY recognized no interest income pertaining to these notesreceivable.

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Prior to fiscal 2001, TCBY factored various notesreceivable aggregating $2.1 million. Under the terms of the factoring agreement, TCBY is ultimatelyresponsible to the factoring agent for the realizability of the notesreceivable.  In the event ofnon-performance, the factoring agent has recourse against TCBY to a maximumlevel of $375,000 and $478,000 as of July 1, 2006 and December 31, 2005,respectively.  The Company has reservesof $375,000 and $478,000 as of July 1, 2006 and December 31, 2005,respectively, for this potential recourse liability.  This reserve is included in accruedliabilities in the accompanying condensed consolidated balance sheets.

Notes receivable at July 1, 2006 and December 31, 2005are comprised of the following (in thousands):
|                                  | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| Performing notes                 |       | $                | 169        |                  | $          | 195 |   |
| Allowance for  doubtful accounts |       | (43              | )          | (69                   | )          |
|                             |       | $                | 126        |                  | $          | 126 |   |

 

The activity in the allowance for doubtful accountsfor notes receivable for the 13 and 26 weeks ended July 1, 2006 and July 2,2005 is as follows (in thousands):

|                        | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 26 Weeks Ended** | ** ** |
|------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **             | ** ** | **July 1,**                               | ** ** | **July 2,**                               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
|                   |       | **2006**                                       | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** |   |
| Beginning  balance     |       | $                                              | 58         |                                           | $          | 88 |   | $ | 69 |   | $ | 597 |   |
| Additions  (reversals) |       | (15                                            | )          | (4                                             | )          | (26 | ) | (1 | ) |
| Write-offs             |       | —                                         |       | (1                                             | )          | — |   | (513 | ) |
|                   |       | $                                              | 43         |                                           | $          | 83 |   | $ | 43 |   | $ | 83 |   |

 

**3. Inventories**

Inventories,consisting of raw materials, finished goods, packaging and novelties, arestated at the lower of cost (first-in, first-out method) or market value.  Inventories at July 1, 2006 and December 31,2005 are comprised of the following (in thousands):

|                | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
|----------------|------------|------------------|------------|-----------------------|------------|
| ** **     | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| Raw materials  |       | $                | 1,149      |                  | $          | 1,283 |   |
| Finished goods |       | 443              |       | 770                   |       |
| Packaging      |       | 654              |       | 548                   |       |
| Novelties      |       | 399              |       | 268                   |       |
|           |       | $                | 2,645      |                  | $          | 2,869 |   |

 

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**4. Property and Equipment**

Equipment and fixturesare stated at cost less accumulated depreciation and are depreciated over threeto seven years using the straight-line method. Leasehold improvements are stated at cost less accumulated depreciationand are depreciated over the shorter of the term of the lease or the estimateduseful life using the straight-line method. Property and equipment at July 1, 2006 and December 31, 2005 arecomprised of the following (in thousands):

|                                | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| Leasehold  improvements        |       | $                | 4,947      |                  | $          | 4,241 |   |
| Equipment and  fixtures        |       | 9,455            |       | 7,927                 |       |
| Land                           |       | 240              |       | 240                   |       |
|                           |       | 14,642           |       | 12,408                |       |
| Less accumulated  depreciation |       | (9,650           | )          | (8,048                | )          |
|                           |       | $                | 4,992      |                  | $          | 4,360 |   |

 

Property andequipment at July 1, 2006 and December 31, 2005 includes gross assets acquiredunder capital leases of $698,000 and related accumulated depreciation of$199,000 and $139,000, respectively.

Expenditures thatmaterially extend useful lives of property and equipment are capitalized.  Routine maintenance, repairs and renewalcosts are expensed as incurred.  Gains orlosses from the sale or retirement of property and equipment are recorded incurrent operations.

Included inleasehold improvements and accrued liabilities at July 1, 2006 is $188,000representing amounts incurred to date for tenant improvements provided as leaseincentives by the lessor related to the lease for the Company’s new giftingoperations facility.  The total amount ofthe leasehold improvements and deferred rent will be amortized over the life ofthe lease.

Due to continuedoperating losses at a test concept store that resulted in part from itslocation in a low-traffic site, the Company reviewed the long-lived assetsassociated with this test store and determined that the carrying value of theseassets was not recoverable.  As a result,the Company recorded an impairment for these assets, consisting of leaseholdimprovements and equipment, of approximately $350,000.  This amount is included in depreciationexpense in the condensed consolidated statement of operations and comprehensiveincome (loss).

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

The Companyaccounts for goodwill and other intangible assets in accordance with Statementof Financial Accounting Standards (“SFAS”) No. 142 (“SFAS 142”), “Goodwilland Other Intangible Assets.”  Goodwilland intangible assets acquired in a purchase business combination anddetermined to have an indefinite useful life are not amortized, but are testedfor impairment at least annually in accordance with the provisions ofSFAS 142.  SFAS 142 alsorequires that intangible assets with estimable useful lives be amortized overtheir respective estimated useful lives to their estimated residual values andbe reviewed for impairment in accordance with SFAS No. 144 (“SFAS 144”), “Accountingfor Impairment or Disposal of Long-Lived Assets.”

The Companydetermined that a triggering event had occurred under SFAS 144 as a result ofan eroding dairy franchise system due to fewer locations, consistent negativeyear-over-year same store sales by our dairy franchisees and the Company’sinability to locate and open a significant number of new or additionalfranchise locations.   These factors haveresulted in continued decreases in franchise royalties and yogurt formulationrevenues from the Company’s dairy franchise system.  The Company performed the impairment test asrequired by SFAS 144 for the long-lived assets of the dairy reporting unit anddetermined these assets were not impaired as of July 1, 2006.  Therefore, no adjustment to the carryingvalue of these long-lived assets was required.

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As a result of theimpairment test performed on the long-lived assets of the dairy reporting unit,the Company determined a triggering event had occurred under SFAS 142 and assuch, tested the goodwill related to the dairy franchise reporting unit, bycomparing its fair value with its carrying value.  The estimated fair value of goodwill isaffected by, among other things, operating results, the Company’s business planfor the future, estimated results of future operations and the comparablecompanies that are used to estimate the fair value of the goodwill.  To the extent that the carrying value of areporting unit exceeds it fair value, goodwill is written down to its impliedfair value. Changes in the business plan or operating results that aredifferent than the projections used to develop the reporting unit’s fair valuemay have an impact on the valuation of the goodwill.

The Companycompared the implied fair value of the dairy franchising reporting unit’sgoodwill with the carrying amount of the goodwill and determined an impairmentof dairy franchising goodwill of $14.6 million for the 26 weeks ended July 1,2006.  The implied fair value of thegoodwill is determined by allocating the fair value of the reporting unit toall of the assets (recognized and unrecognized) and liabilities of thereporting unit in a manner similar to a purchase price allocation, inaccordance with SFAS No. 141, “Business Combinations.”

Thefollowing outlines the Company’s goodwill by reporting unit as of July 1, 2006and December 31, 2005 (in thousands):

|                     | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
|---------------------|------------|------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| Bakery  Franchising |       | $                | 60,404     |                  | $          | 60,404 |   |
| Dairy  Franchising  |       | —           |       | 14,568                |       |
| Gifts               |       | 1,859            |       | 1,859                 |       |
| Licensing           |       | 1,852            |       | 1,852                 |       |
| Total               |       | $                | 64,115     |                  | $          | 78,683 |   |

 

**6. Accrued Liabilities**

Accrued liabilities arecomprised of the following at July 1, 2006 and December 31, 2005 (inthousands):

|                                    | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| Accrued  compensation and benefits |       | $                | 1,546      |                  | $          | 1,534 |   |
| Other accrued  liabilities         |       | 4,139            |       | 4,778                 |       |
| Accrued interest  payable          |       | 5,977            |       | 5,977                 |       |
|                               |       | $                | 11,662     |                  | $          | 12,289 |   |

 

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**7. Related-Party Transactions**

The amounts due to affiliates are comprised of amountsdue to MFC, MFH and MFOC at July 1, 2006 and December 31, 2005 (in thousands):

|                    | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| MFC - tax  sharing |       | $                | 3,049      |                  | $          | 3,138 |   |
| MFH                |       | 273              |       | 273                   |       |
| MFOC               |       | 296              |       | 538                   |       |
|               |       | $                | 3,618      |                  | $          | 3,949 |   |

 

The Company has a tax allocation agreement with MFCpursuant to which the Company agreed to make payments to MFC, after taking intoaccount payments the Company makes directly to tax authorities, based on theCompany’s stand-alone consolidated federal income tax liability,determined as if the Company and its subsidiaries constituted their own consolidatedgroup for federal income tax purposes. The Company will not be permitted to make these payments to MFC, unlessthe MFC federal tax liability exceeds the Company’s stand-alone federal taxliability, until it meets certain financial ratios and is otherwise incompliance with the terms of the indenture governing the 9 percent seniorsecured notes and the 111⁄2 percent senior secured notes (the “Senior SecuredNotes”).

During the 26 weeks ended July 1, 2006, the Companyrecognized a benefit for income taxes of $790,000 related to losses fromoperations.  Under the tax allocationagreement with MFC, the Company is unable to carry-back tax benefits related tothe net operating losses and, as a result, the current portion of the benefitof $339,000 was recorded as a distribution to parent.

**8. Reportable Segments**

Operating segments are components of the Company forwhich separate financial information is available that is evaluated regularlyby management in deciding how to allocate resources and assess performance.  This information is reported on the basisthat it is used internally for evaluating segment performance.  The Company has three reportable operatingsegments; namely, franchising, gifts and licensing.  The franchising segment consists of 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 gifts segment consists of sales generatedfrom the Company’s mail order gift catalog and website.  The licensing segment consists of otherlicensing activity from third parties for the sale of products bearing theCompany’s brand names.  The accountingpolicies for the segments are the same as those discussed in the summary ofsignificant accounting policies in Note 2 to our consolidated financialstatements contained in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission (“SEC”) on March 21, 2006.  Sales and transfers between segments areeliminated in consolidation.

The Company evaluates performance of each segmentbased on contribution.  Contribution iscomputed as the difference between the revenues generated by a reportablesegment and the selling and occupancy expenses, cost of sales and directgeneral and administrative expenses related to that reportable segment.  Contribution is used as a measure of theoperating performance of an operating segment. The Company does not allocate any indirect general and administrativeexpense, other operating income (expense), interest expense, depreciation andamortization or assets to its reportable operating segments.

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Segment revenues and contribution for the 13 and 26weeks ended July 1, 2006 and July 2, 2005 are presented in the following table(in thousands):

|                        | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 26 Weeks Ended** | ** ** |
|------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **             | ** ** | **July 1,**                               | ** ** | **July 2,**                               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| **Total Company** | ** ** | **2006**                                       | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:              |       |                                           |       |                                           |       |   |   |   |   |
| Franchising            |       | $                                              | 13,561     |                                           | $          | 13,969 |   | $ | 25,924 |   | $ | 26,323 |   |
| Gifts                  |       | 4,887                                          |       | 5,389                                          |       | 10,065 |   | 10,349 |   |
| Licensing              |       | 427                                            |       | 839                                            |       | 1,067 |   | 1,977 |   |
|                   |       | $                                              | 18,875     |                                           | $          | 20,197 |   | $ | 37,056 |   | $ | 38,649 |   |
| Contribution:          |       |                                           |       |                                           |       |   |   |   |   |
| Franchising            |       | $                                              | 7,538      |                                           | $          | 8,243 |   | $ | 13,957 |   | $ | 15,509 |   |
| Gifts                  |       | (631                                           | )          | 59                                             |       | (2,085 | ) | (229 | ) |
| Licensing              |       | (253                                           | )          | 626                                            |       | 158 |   | 1,622 |   |
|                   |       | $                                              | 6,654      |                                           | $          | 8,928 |   | $ | 12,030 |   | $ | 16,902 |   |

 

The reconciliation of contribution to net income(loss) for the 13 and 26 weeks ended July 1, 2006 and July 2, 2005 is asfollows (in thousands):
| ** **                            | ** ** | **For the 13 Weeks Ended** | ** ** | **For the 26 Weeks Ended** | ** ** |
|---------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                            | ** ** | **July 1,**                               | ** ** | **July 2,**                               | ** ** | **July 1,** | ** ** | **July 2,** | ** ** |
| ** **                            | ** ** | **2006**                                       | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Contribution                          |       | $                                              | 6,654      |                                           | $          | 8,928 |   | $ | 12,030 |   | $ | 16,902 |   |
| Other operating  revenue              |       | 45                                             |       | 67                                             |       | 79 |   | 119 |   |
| General and  administrative expenses  |       | (2,581                                         | )          | (2,297                                         | )          | (5,440 | ) | (4,302 | ) |
| Other operating  expenses, net        |       | (23                                            | )          | (44                                            | )          | (58 | ) | (81 | ) |
| Interest expense,  net                |       | (5,241                                         | )          | (5,344                                         | )          | (10,471 | ) | (10,699 | ) |
| Other loss                            |       | (150                                           | )          | —                                         |       | (28 | ) | — |   |
| Depreciation and  amortization        |       | (1,481                                         | )          | (979                                           | )          | (2,435 | ) | (1,963 | ) |
| Impairment of  goodwill               |       | (14,568                                        | )          | —                                         |       | (14,568 | ) | — |   |
| Benefit  (provision) for income taxes |       | (651                                           | )          | (110                                           | )          | 790 |   | 10 |   |
| Net income  (loss)                    |       | $                                              | (17,996    | )                                              | $          | 221 |   | $ | (20,101 | ) | $ | (14 | ) |

 

The fixed assets and inventory of the Companyprimarily relate to the Company’s Great American Cookies manufacturing facilityand gifts business segment and related activities.  Assets relating to franchising and licensingactivities are primarily amounts due from franchisees and licensees andgoodwill relating to franchising concepts.

Revenues from franchisees, customers and licenseeswithin the United States of America (“United States”) were $18.5 million and$36.4 million or 97.9 percent and 98.1 percent of total revenues for the 13 and26 weeks ended July 1, 2006, respectively, and $19.9 million and $37.9 millionor 98.0 percent and 97.7 percent of total revenues for the 13 and 26 weeks endedJuly 2, 2005, respectively.  Revenuesfrom international franchisees, customers and licensees were $400,000 and$700,000 or 2.1 percent and 1.9 percent of total revenues for the 13 and 26weeks ended July 1, 2006, respectively, and $400,000 and $900,000 or 2.0percent and 2.3 percent of total revenues for the 13 and 26 weeks ended July 2,2005, respectively.  Revenues from anysingle foreign country were not material. Providing geographical information regarding long-lived assets isimpracticable.

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The Company has one licensee that accounted for$10,000 and $375,000 or 2.3 percent and 35.2 percent of the revenuesof the licensing segment for the 13 and 26 weeks ended July 1, 2006,respectively, and $534,000 and $1.3 million or 63.6 percent and 65.8 percent ofthe revenues of the licensing segment for the 13 and 26 weeks ended July 2,2005, respectively.  The Company has onecustomer in its gifts business segment that accounted for $962,000 and $1.9million or 19.7 percent and 18.7 percent of revenues of the giftsbusiness segment for the 13 and 26 weeks ended July 1, 2006, respectively, and$828,000 and $1.5 million or 15.4 percent and 14.4 percent of the revenues ofthe gifts business segment for the 13 and 26 weeks ended July 2, 2005,respectively.  There were no othercustomers or licensees that accounted for more than ten percent ofMrs. Fields’ total revenues or any individual segment’s revenues.

**9.  Share-Based Compensation**

On January 1, 2006 the Company adopted the provisionsof Financial Accounting Standards Board Statement No. 123R, Share-BasedPayment (“SFAS 123R”).  SFAS 123R setsaccounting requirements for “share-based” compensation to employees andrequires companies to recognize in the statement of operations the grant-datefair value of stock options and other equity-based compensation.

Effective as of May 23, 2004, the Board of Directorsof MFC approved adoption of 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 the CompensationCommittee of the Board of Directors (the “Committee”).  The Phantom Plan is unfunded and Participantsdo not receive any payment under the Phantom Plan until the completion of thefirst to occur of: (i) a sale of substantially all of the assets of MFC; (ii) apublic offering of MFC’s Common Stock where MFC receives proceeds, net of anyunderwriter’s discounts and expenses, of not less than $50 million; or (iii)any stock sale, merger or other transaction where the owners of Common Stockimmediately before the transaction do not own in excess of 50 percent of thecommon stock of the entity surviving such sale, merger or other transaction (a “TriggeringEvent”).  Additionally, the Phantom Planmay be terminated by the Board of Directors at any time at its solediscretion.  Participants receiveperformance units in amounts recommended by the CEO and determined by theCommittee.  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 compensation expense will be recognized.  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 number of performance units that may begranted under the Phantom Plan is one million units. Subdivisions, splits orcombinations involving MFC’s Common Stock will proportionately affect thenumber of performance units that have been awarded under the Phantom Plan.  In May 2004, the Committee approved the grantof up to 392,418 performance units allocated among Participants as determinedby the Committee.  In March 2006, theCommittee approved the grant of up to 182,274 additional units to Participantsidentified by the Committee, resulting in total authorized grants of up to574,692 performance units.  During the 26weeks ended July 1, 2006, the Committee granted 218,730 performance units toParticipants.  Future grants, if any,shall also be determined by the Committee. As of July 1, 2006, a total of 560,130 performance units have beengranted to Participants.

The Company’s Phantom Plan is accounted for under SFAS123R.  Compensation cost for the grantsunder the Phantom Plan will be recognized upon the completion of a TriggeringEvent.  Accordingly, no compensation costhas been recognized in the statement of operations for the 13 and 26 weeksended July 1, 2006.

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**10. Commitments and Contingencies**

TheCompany and 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.

Inthe ordinary course of business, the Company is involved in routine litigation,including franchise disputes and trademark disputes.  The Company is not a party to any legalproceedings that, in the opinion of management, after consultation with legalcounsel, is material to its business, financial condition or results ofoperations.

Asreported in the Company’s Form 8-K filed with the SEC on May 12, 2006, on May8, 2006, the Court of Chancery of the State of Delaware ruled in the Company’sfavor on all issues in the litigation filed against Mrs. Fields Franchising,LLC (“MFF”), a subsidiary of the Company, by Shadewell Grove IP, LLC (“Shadewell”),related to MFF’s termination of certain license agreements between MFF andShadewell.  Until June 27, 2006,Shadewell continued to operate under the terminated license agreements.  On June 27, 2006, MFF and Shadewell entered intoa consulting agreement (the “Shadewell Consulting Agreement”) whereby Shadewellemployees would provide consulting and training services to MFF employeesthrough August 28, 2006 to assist MFF in establishing its own business sellingproducts through designated retail distribution channels.  Shadewell received for its services a fee of$325,000 paid in four weekly installments of $81,250 beginning June 28, 2006.

OnJuly 5, 2006, MFF began running its new retail business, including sellingproducts to retail customers directly or through brokers, purchasing inventoryfrom contract manufacturers and providing distribution of product to thecustomer.  As a result, the Companyanticipates the use of cash to operate the business while it identifies a newlicensee or develops another strategy for the operation of the type of businessformerly operated by Shadewell.

OnJune 1, 2006, Shadewell’s first quarter royalty payment under the terminatedlicense agreements became past due.  Atthat time, Shadewell notified the Company that its bank had called its note dueand exercised its right to sweep Shadewell’s cash deposits to recover theamount of its note.  As a result,management determined that the collectibility of Shadewell’s first quarterroyalty was doubtful and established a bad debt reserve of approximately$345,000.  In addition, the Companyearned $268,000 in royalty revenues from Shadewell during the 13 weeks endedJuly 1, 2006; however, due to the uncertainty of its collectibility, theCompany has not recognized any royalty revenues for the terminated licenseagreements in the second quarter.

**11. Supplemental Condensed Consolidating Financial Information**

Long-term debt includes the Senior Secured Notes thatwere issued by the Company and Mrs. Fields Financing Company, Inc. asco-issuers.  Mrs. Fields FinancingCompany, Inc. is a wholly-owned finance subsidiary of Mrs. Fields FamousBrands, LLC.  The Senior Secured Notesare fully and unconditionally guaranteed on a joint and several basis by all ofthe Company’s domestic subsidiaries other than minor subsidiaries.  Mrs. Fields Famous Brands, LLC has noindependent assets or operations. Therefore, supplemental financial information on a condensedconsolidating basis of the guarantor subsidiaries is not required.  There are no restrictions on the Company’sability to obtain cash dividends or other distributions of funds from theguarantor subsidiaries, except those imposed by applicable law.

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**12. Distribution Agreements**

TCBY and Blue Line Distributing (“Blue Line”), TCBY’sprincipal distributor of TCBY products to its franchisees, entered into anExtension to Distribution Agreement (the “Extension Agreement”) effectiveFebruary 2, 2006.  Under the ExtensionAgreement, Blue Line agreed to continue to perform under the Food and PackagingDistribution Agreement (the “Distribution Agreement”) dated November 14, 2002,until the earlier to occur of (a) 30 days following the date when TCBY notifiesBlue Line in writing that it has obtained a new distributor and (b) 30 daysfollowing the date, if any, when Blue Line notifies TCBY in writing that BlueLine reasonably determines that TCBY is no longer making best efforts andprogress to obtain a new distributor. Under the terms of the Extension Agreement, TCBY agreed to make certainpayments directly to Blue Line in order to delay distribution cost increases tofranchisees and agreed to guarantee certain amounts during the extensionperiod.  TCBY has entered into supplyagreements with two regional distributors who will provide service to certainregions of the United States, namely Southwest Traders, Inc. for portions ofCalifornia, Arizona, New Mexico, Nevada, Oregon, Washington and Idaho, andYancey’s Foodservice Company, Inc. for portions of Idaho, Utah, Colorado,Wyoming and Nebraska.  TCBY is finalizingnegotiations with a number of other distributors who will eventually replaceBlue Line, including Kaleel Brothers in the northeastern United States.  TCBY believes it will be able to identifydistributors for the remaining regions of the United States before Blue Lineceases its services under the Extension Agreement.  The Company anticipates the distributioncosts to many of our franchisees will not substantially increase under the newregional agreements.

**13. Recent Accounting Pronouncements**

 

In July2006, the Financial Accounting Standards Board ("FASB") issued FASBInterpretation ("FIN") No. 48 ("FIN 48") "Accountingfor Income Tax Uncertainties."  FIN48 defines the threshold for recognizing the benefits of tax return positionsin the financial statements as "more-likely-than-not" to be sustainedby the taxing authority.  FIN 48 providesguidance on the derecognition, measurement and classification of income taxuncertainties, along with any related interest and penalties.  FIN 48 also includes guidance concerningaccounting for income tax uncertainties in interim periods and increases thelevel of disclosures associated with any recorded income taxuncertainties.  FIN 48 is effective forfiscal years beginning after December 15, 2006. The Company has not yet determined the impact, if any, of adopting theprovisions of FIN 48 on its consolidated financial position or results ofoperations.

 

In June2006, the Emerging Issues Task Force ("EITF") reached a consensus onEITF Issue No. 06-03 ("EITF 06-03"), "How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross versus Net Presentation)."  EITF 06-03 provides that the presentation oftaxes assessed by a governmental authority that is directly imposed on arevenue-producing transaction between a seller and a customer on either a grossbasis (included in revenues and costs) or on a net basis (excluded fromrevenues) is an accounting policy decision that should be disclosed.  The provisions of EITF 06-03 become effectiveas of December 31, 2006. The adoption of EITF 06-03 is not expected to have amaterial impact on the Company's consolidated financial position or results ofoperations.

 

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# **Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

**DISCLOSURE REGARDING FORWARD-LOOKINGSTATEMENTS**

This report includes “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  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 words or phrases ofsimilar meaning.  Forward-lookingstatements involve risks and uncertainties, including, but not limited to,economic, competitive and governmental factors outside of our control, that maycause actual results to differ materially from trends, plans or expectationsset forth in the forward-looking statements. Factors you should consider that could cause these differences include:

·                  the availabilityand adequacy of our cash flow to satisfy our obligations, including debtservice on our long-term debt and additional funds required for workingcapital;

·                  the impact ofour current negative member’s deficit on our franchising activities;

·                  our ability tosolicit new franchisees;

·                  economic,competitive, demographic, business and other pressures, trends and conditionsin various markets;

·                  the seasonalnature of our operations;

·                  actions taken orfailed to be taken by third parties, including by our customers, suppliers,distributors, competitors and shareholders, as well as legislative, regulatory,judicial and other governmental authorities;

·                  changes in ourbusiness strategy or development plans;

·                  performance byour franchisees and licensees or changes in relationships with our franchiseesand licensees;

·                  difficulties ordelays in our developing and introducing anticipated new products or failure ofour customers to accept new product offerings;

·                  adoption of newaccounting pronouncements;

·                  changes inconsumer preferences and our ability to adequately anticipate such changes;

·                  changes inprices of our raw materials;

·                  changes inpersonnel or increased labor costs;

·                  the terminationof, or inability to renew on favorable terms, our material agreements;

·                  changes incustomer traffic;

·                  legal proceedingsand regulatory matters;

·                  naturaldisasters, acts of war or terrorist incidents; and

·                  all otherfactors described under Item 1A. Risk Factors contained elsewhere in thisreport.

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You are cautionednot to place undue reliance on the forward-looking statements contained in thisreport, which reflect management’s analysis only as of the date of thisreport.  We undertake no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise. In light of these risks, uncertainties and assumptions, theforward-looking events discussed in this report may not occur.

# **Executive Summary**

Mrs.Fields Famous Brands, LLC (“we”, “us”, the “Company” or similar terms) is oneof the largest franchisors in the premium snack-food industry, featuring Mrs.Fields®, Great American Cookies®, TCBY®, Pretzel Time® and Pretzelmaker® as ourcore brands.  Through our franchisees’retail stores, we are the largest retailer of freshly baked on-premisesspecialty cookies and brownies in the United States of America (the “UnitedStates”); the largest retailer of soft-serve frozen yogurt in the UnitedStates; and the second largest retailer of baked on-premises pretzels in theUnited States.  In addition, we operate agifts business and have entered into licensing arrangements that attempt toleverage awareness of our core brands among our retail customer base.  We operate through a network of 2,384 retailconcept locations, which are located throughout the United States and inapproximately 25 foreign countries.

Ourbusiness is divided into three primary business segments for financialreporting purposes: franchising, gifts and licensing, which represented 69.8percent, 27.1 percent and 2.9 percent of total revenues, respectively, for the26 weeks ended July 1, 2006. 

Webelieve our business strategy aligns the interests of the Company with theinterests of our retail franchisees and focuses our joint efforts onstrengthening and broadening the appeal of our brands through satisfying thewants and needs of consumers.  Thatstrategy is based upon three continuing objectives:

·                  build profitableyear-over-year franchise sales;

·                  accelerategrowth of new franchised store development; and

·                  grow licensingand gifts operations.

 

Weuse the following key performance indicators to measure our success andprogress:

·                  year-over-yearsame store franchise sales;

·                  net change innumber of retail concept locations; and

·                  year-over-yeargifts and licensing revenues.

 

Our performance against these key performanceindicators is presented and discussed throughout the management’s discussionand analysis.  For further disclosure ofreportable segments, see Note 8 to our condensed consolidated financialstatements contained elsewhere in this report.

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As of July 1, 2006, our store portfolio consisted of1,882 domestic franchised locations, 343 international franchised locations and159 licensed locations.  Our franchisees’and licensees’ concept locations by brand are distributed as follows:

|                                | ** ** | **Domestic**   | ** ** | **International** | ** ** | **Licensed**  | ** ** | ** ** | ** ** |
|--------------------------------|------------|----------------|------------|-------------------|------------|---------------|------------|------------|------------|
| ** **                     | ** ** | **Franchised** | ** ** | **Franchised**    | ** ** | **Locations** | ** ** | **Total**  | ** ** |
| Mrs. Fields                    |       | 364            |       | 94                |       | 45            |       | 503        |       |
| Great American                 |       | 276            |       | 1                 |       | —        |       | 277        |       |
| Original Cookie                |       | —         |       | —            |       | 1             |       | 1          |       |
| Cookie subtotal                |       | 640            |       | 95                |       | 46            |       | 781        |       |
| Pretzel Time                   |       | 192            |       | 5                 |       | 6             |       | 203        |       |
| Pretzelmaker                   |       | 147            |       | 46                |       | 1             |       | 194        |       |
| Hot Sam                        |       | —         |       | —            |       | 3             |       | 3          |       |
| Pretzel subtotal               |       | 339            |       | 51                |       | 10            |       | 400        |       |
| Bakery brands subtotal         |       | 979            |       | 146               |       | 56            |       | 1,181      |       |
| TCBY -  traditional stores     |       | 406            |       | —            |       | —        |       | 406        |       |
| TCBY -  non-traditional stores |       | 489            |       | 197               |       | 103           |       | 789        |       |
| Yovana - test  stores          |       | 2              |       | —            |       | —        |       | 2          |       |
| Beriyo by TCBY -  test stores  |       | 6              |       | —            |       | —        |       | 6          |       |
| Dairy brands subtotal          |       | 903            |       | 197               |       | 103           |       | 1,203      |       |
| Total                          |       | 1,882          |       | 343               |       | 159           |       | 2,384      |       |

 

Theprevious table counts each concept location individually.  For example, if a physical location had a Mrs.Fields store and a Pretzel Time store together, it would be counted as twoconcept locations in the table above.  Ifactual physical stores were counted rather than concept locations, total storecounts would be reduced by 255 locations to 2,129.

Mrs.Fields’ Original Cookies, Inc. (“MFOC”) and certain of its subsidiaries ownedseven franchised and licensed retail concept locations as of July 1, 2006,representing 0.3 percent of the total retail concept locations.  During the 13 and 26 weeks ended July 1,2006, we recognized $34,000 and $86,000, respectively, of franchise royaltiesand $59,000 and $133,000, respectively, of product sales relating to the retailconcept locations owned by MFOC.  MFOCexpects that most of these remaining retail concept locations will be sold toother franchisees or will be closed during fiscal 2006.

Duringthe 26 weeks from December 31, 2005 to July 1, 2006, our store portfoliodeclined from 2,479 concept locations to 2,384 concept locations, as follows:

|                            | ** ** | **Total Company** | ** ** |
|----------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **Domestic**           | ** ** | **International** | ** ** | **Licensed** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Franchised**         | ** ** | **Franchised** | ** ** | **Locations** | ** ** | **Total** | ** ** |
| Balance December  31, 2005 |       | 1,978                  |       | 328 |   | 173 |   | 2,479 |   |
| New development  openings  |       | 35                     |       | 33 |   | — |   | 68 |   |
| Permanent  closings        |       | (132                   | )          | (18 | ) | (14 | ) | (164 | ) |
| Other openings,  net       |       | 1                      |       | — |   | — |   | 1 |   |
| Balance July 1, 2006       |       | 1,882                  |       | 343 |   | 159 |   | 2,384 |   |

 

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The followingtables provide additional detail of new development openings and permanentclosings of our concept locations during the 26 weeks from December 31, 2005 toJuly 1, 2006:

|                            | ** ** | **Domestic Franchised** | ** ** |
|----------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | ** **                   | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** **                   | ** ** | **Traditional** | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Bakery**                   | ** ** | **Dairy** | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance December  31, 2005 |       | 1,006                        |       | 424 |   | 548 |   | 1,978 |   |
| New development  openings  |       | 26                           |       | 7 |   | 2 |   | 35 |   |
| Permanent  closings        |       | (53                          | )          | (22 | ) | (57 | ) | (132 | ) |
| Other openings,  net       |       | —                       |       | 5 |   | (4 | ) | 1 |   |
| Balance July 1, 2006       |       | 979                          |       | 414 |   | 489 |   | 1,882 |   |

 

|                            | ** ** | **International Franchised** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | ** **                        | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** **                        | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Bakery**                        | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance December  31, 2005 |       | 142                               |       | 186 |   | 328 |   |
| New development  openings  |       | 16                                |       | 17 |   | 33 |   |
| Permanent  closings        |       | (12                               | )          | (6 | ) | (18 | ) |
| Balance July 1,  2006      |       | 146                               |       | 197 |   | 343 |   |

 

|                            | ** ** | **Licensed Locations** | ** ** |
|----------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | ** **                  | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** **                  | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Bakery**                  | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance December  31, 2005 |       | 64                          |       | 109 |   | 173 |   |
| Permanent  closings        |       | (8                          | )          | (6 | ) | (14 | ) |
| Balance July 1,  2006      |       | 56                          |       | 103 |   | 159 |   |

 

Wehave implemented a number of strategies designed to attempt to reverse ourtrend of declining store counts, including identifying stores that are at riskof closure for operational issues, lease or franchise agreement expiration andworking with franchisees to relocate, transfer or correct operationaldeficiencies.  We are also testingprograms to refresh, remodel or reconcept some of our concept locations, asmore fully discussed in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission (“SEC”) on March 21, 2006.  There can be no assurance that our strategieswill succeed.  If store counts continueto decline, our business operations or financial condition could be adverselyaffected.

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# **Recent Developments**

# **Blue Line Distributing**

TCBY Systems, LLC (“TCBY”) and Blue Line Distributing(“Blue Line”), TCBY’s principal distributor of TCBY products to itsfranchisees, entered into an Extension to Distribution Agreement (the “ExtensionAgreement”) effective February 2, 2006. Under the Extension Agreement, Blue Line agreed to continue to performunder the Food and Packaging Distribution Agreement (the “DistributionAgreement”) dated November 14, 2002, until the earlier to occur of (a) 30 daysfollowing the date when TCBY notifies Blue Line in writing that it has obtaineda new distributor and (b) 30 days following the date, if any, when Blue Linenotifies TCBY in writing that Blue Line reasonably determines that TCBY is nolonger making best efforts and progress to obtain a new distributor.  Under the terms of the Extension Agreement,TCBY agreed to make certain payments directly to Blue Line in order to delaydistribution cost increases to franchisees and agreed to guarantee certainamounts during the extension period. TCBY has entered into supply agreements with two regional distributorswho will provide service to certain regions of the United States, namelySouthwest Traders, Inc. for portions of California, Arizona, New Mexico,Nevada, Oregon, Washington and Idaho, and Yancey’s Foodservice Company, Inc.for portions of Idaho, Utah, Colorado, Wyoming and Nebraska.  TCBY is finalizing negotiations with a numberof other distributors who will eventually replace Blue Line, including KaleelBrothers in the northeastern United States. TCBY believes it will be able to identify distributors for the remainingregions of the United States before Blue Line ceases its services under theExtension Agreement.  We anticipate thedistribution costs to many of our franchisees will not substantially increaseunder the new regional agreements.

**Status of theShadewell Business**

As reported in our Form 8-K filed with the SEC on May12, 2006, on May 8, 2006, the Court of Chancery of the State of Delaware ruledin our favor on all issues in the litigation filed against Mrs. FieldsFranchising, LLC (“MFF”), a subsidiary of the Company, by Shadewell Grove IP,LLC (“Shadewell”), related to MFF’s termination of certain license agreementsbetween MFF and Shadewell.  Until June27, 2006, Shadewell continued to operate under the terminated licenseagreements.  On June 27, 2006, MFF andShadewell entered into a consulting agreement (the “Shadewell ConsultingAgreement”) whereby Shadewell employees would provide consulting and trainingservices to MFF employees through August 28, 2006 to assist MFF in establishingits own business selling products through designated retail distributionchannels.  Shadewell received for itsservices a fee of $325,000 paid in four weekly installments of $81,250beginning June 28, 2006.

On July 5, 2006, MFF began running its new retailbusiness, including selling products to retail customers directly or throughbrokers, purchasing inventory from contract manufacturers and providingdistribution of product to the customer. As a result, management anticipates the use of significant cash tooperate the business while it identifies a new licensee or develops anotherstrategy for the operation of the type of business formerly operated byShadewell.

On June 1, 2006, Shadewell’s first quarter royaltypayment under the terminated license agreements became past due.  At that time, Shadewell notified the Companythat its bank had called its note due and exercised its right to sweepShadewell’s cash deposits to recover the amount of its note.  As a result, management determined that thecollectibility of Shadewell’s first quarter royalty was doubtful andestablished a bad debt reserve of approximately $345,000.  In addition, the Company earned $268,000 inroyalty revenues from Shadewell during the 13 weeks ended July 1, 2006;however, due to the uncertainty of its collectibility, we have not recognizedany royalty revenues for the terminated license agreements in the second quarter.

We anticipate that the income realized by us fromthese new retail business activities will not immediately replace or exceed theroyalties that may have been generated by the terminated license agreements.

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**Resultsof Operations**

The following table sets forth, for the periodsindicated, certain information relating to our operations and percentagechanges from period to period (in thousands):
|                                                            | ** ** | **13 Weeks Ended** | ** ** | ** **       | ** ** | **26 Weeks Ended** | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|------------------|------------|------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **July 1,**             | ** ** | **July 2,** | ** ** | **%**                        | ** ** | **July 1,** | ** ** | **July 2,** | ** ** | **%** | ** ** |
| ** **                                                 | ** ** | **2006**                     | ** ** | **2005**         | ** ** | **Change**                   | ** ** | **2006**         | ** ** | **2005** | ** ** | **Change** | ** ** |
| REVENUES:                                                  |       |                         |       |             |       |                         |       |             |       |   |   |   |   |
| Franchising                                                |       | $                            | 13,561     |             | $          | 13,969                       |       | (2.9             | )          | $ | 25,924 |   | $ | 26,323 |   | (1.5 | ) |
| Gifts                                                      |       | 4,887                        |       | 5,389            |       | (9.3                         | )          | 10,065           |       | 10,349 |   | (2.7 | ) |
| Licensing                                                  |       | 427                          |       | 839              |       | (49.1                        | )          | 1,067            |       | 1,977 |   | (46.0 | ) |
| Other                                                      |       | 45                           |       | 67               |       | (32.8                        | )          | 79               |       | 119 |   | (33.6 | ) |
| Total revenues                                             |       | 18,920                       |       | 20,264           |       | (6.6                         | )          | 37,135           |       | 38,768 |   | (4.2 | ) |
| OPERATING COSTS  AND EXPENSES:                             |       |                         |       |             |       |                         |       |             |       |   |   |   |   |
| Franchising                                                |       | 6,023                        |       | 5,726            |       | 5.2                          |       | 11,967           |       | 10,814 |   | 10.7 |   |
| Gifts                                                      |       | 5,518                        |       | 5,330            |       | 3.5                          |       | 12,150           |       | 10,578 |   | 14.9 |   |
| Licensing                                                  |       | 680                          |       | 213              |       | 219.2                        |       | 909              |       | 355 |   | 156.1 |   |
| General and administrative                                 |       | 2,581                        |       | 2,297            |       | 12.4                         |       | 5,440            |       | 4,302 |   | 26.5 |   |
| Depreciation                                               |       | 943                          |       | 274              |       | 244.2                        |       | 1,359            |       | 553 |   | 145.8 |   |
| Amortization                                               |       | 538                          |       | 705              |       | (23.7                        | )          | 1,076            |       | 1,410 |   | (23.7 | ) |
| Impairment of goodwill                                     |       | 14,568                       |       | —           |       | NM                           |       | 14,568           |       | — |   | NM |   |
| Other operating expenses, net                              |       | 23                           |       | 44               |       | (47.7                        | )          | 58               |       | 81 |   | (28.4 | ) |
| Total operating costs and expenses                         |       | 30,874                       |       | 14,589           |       | 111.6                        |       | 47,527           |       | 28,093 |   | 69.2 |   |
| Income (loss) from operations                              |       | (11,954                      | )          | 5,675            |       | (310.6                       | )          | (10,392          | )          | 10,675 |   | (197.3 | ) |
| Interest expense, net                                      |       | (5,241                       | )          | (5,344           | )          | (1.9                         | )          | (10,471          | )          | (10,699 | ) | (2.1 | ) |
| Other loss                                                 |       | (150                         | )          | —           |       | NM                           |       | (28              | )          | — |   | NM |   |
| Income (loss) before provision (benefit) for income  taxes |       | (17,345                      | )          | 331              |       | NM                           |       | (20,891          | )          | (24 | ) | NM |   |
| Provision (benefit) for income taxes                       |       | 651                          |       | 110              |       | NM                           |       | (790             | )          | (10 | ) | NM |   |
| Net income (loss)                                          |       | $                            | (17,996    | )                | $          | 221                          |       | NM               |       | $ | (20,101 | ) | $ | (14 | ) | NM |   |
|                                                       |       |                         |       |             |       |                         |       |             |       |   |   |   |   |
| Cash flows from  operating activities                      |       | $                            | 3,532      |             | $          | 6,915                        |       | (48.9            | )          | $ | (7,689 | ) | $ | 728 |   | NM |   |
| Cash flows from  investing activities                      |       | $                            | (1,281     | )                | $          | (393                         | )          | (226.0           | )          | $ | (1,681 | ) | $ | (569 | ) | (195.4 | ) |
| Cash flows from  financing activities                      |       | $                            | (25        | )                | $          | (9                           | )          | (177.8           | )          | $ | (51 | ) | $ | (17 | ) | (200.0 | ) |

 

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**13Weeks Ended July 1, 2006Compared to the 13 Weeks Ended July 2, 2005**

*Income(Loss) From Operations—Overview*.  Loss from operations was $11.9 millionfor the 13 weeks ended July 1, 2006, a decrease of $17.6 million from income of$5.7 million for the 13 weeks ended July 2, 2005.  This decrease was primarily attributable tothe impairment of goodwill associated with the dairy franchise reporting unitof $14.6 million, a decrease in contribution from our business segments of $2.3million, an increase in depreciation and amortization expense of $500,000 andan increase in general and administrative expenses of $300,000.  Decreases in contribution from our businesssegments of $2.3 million were comprised of decreases in our licensing segmentcontribution of $900,000, our franchising segment contribution of $700,000 andour gifting segment contribution of $700,000.

*SegmentContribution.*  Thefollowing table sets forth the contribution from each of our reporting segments(in thousands).  Franchising contributionis comprised of sales of new franchises and royalties from existing franchisesless direct operating expenses.  Giftscontribution is comprised of sales of products through our catalog and Internetbusiness less direct operating expenses. Licensing contribution is comprised of licensing fees received fromthird parties for the sale of products bearing our brand names less directoperating expenses.

|                            | ** ** | **For the 13 Weeks Ended** | ** ** | ** **       | ** ** |
|----------------------------|------------|------------------------------------------------|------------|------------------|------------|
| ** **                 | ** ** | **July 1,**                               | ** ** | **July 2,** | ** ** | **%** | ** ** |
| **Reporting Segment** | ** ** | **2006**                                       | ** ** | **2005**         | ** ** | **Change** | ** ** |
| Franchising                |       | $                                              | 7,538      |             | $          | 8,243 |   | (8.6 | ) |
| Gifts                      |       | (631                                           | )          | 59               |       | NM |   |
| Licensing                  |       | (253                                           | )          | 626              |       | NM |   |
| Total segment contribution |       | $                                              | 6,654      |             | $          | 8,928 |   | (25.5 | ) |

 

**Franchising**

The following tabledetails the revenues and operating expenses of the franchising segment for the13 weeks ended July 1, 2006 and July 2, 2005 (in thousands):

|                                       | ** ** | **For the 13 Weeks Ended** | ** ** | ** **       | ** ** |
|---------------------------------------|------------|------------------------------------------------|------------|------------------|------------|
| ** **                            | ** ** | **July 1,**                               | ** ** | **July 2,** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **2006**                                       | ** ** | **2005**         | ** ** | **Change** | ** ** |
| Bakery revenues                       |       | $                                              | 9,421      |             | $          | 9,471 |   | (0.5 | ) |
| Dairy revenues                        |       | 4,140                                          |       | 4,498            |       | (8.0 | ) |
| Total  franchising revenues           |       | 13,561                                         |       | 13,969           |       | (2.9 | ) |
| Bakery operating  expenses            |       | 4,338                                          |       | 4,288            |       | 1.2 |   |
| Dairy operating  expenses             |       | 1,685                                          |       | 1,438            |       | 17.2 |   |
| Total franchising  operating expenses |       | 6,023                                          |       | 5,726            |       | 5.2 |   |
| Total franchising  contribution       |       | $                                              | 7,538      |             | $          | 8,243 |   | (8.6 | ) |

 

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The following tabledetails the year-over-year (“YOY”) percentage increase (decrease) in same storesales for the 13 weeks ended July 1, 2006 and July 2, 2005:

|                                                 | ** ** | **For the 13 Weeks Ended** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                      | ** ** | **July 1,**                               | ** ** | **July 2,** | ** ** |
| **YOY % Change by Concept** | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| Mrs. Fields                                     |       | (2.1                                           | )          | 0.4 |   |
| Great American  Cookies                         |       | 2.7                                            |       | 5.6 |   |
| Pretzel Time                                    |       | 7.0                                            |       | 2.5 |   |
| Pretzelmaker                                    |       | 11.9                                           |       | 9.4 |   |
| Total Bakery                                    |       | 2.7                                            |       | 3.6 |   |
| TCBY                                            |       | (3.5                                           | )          | (0.3 | ) |
| Total Company                                   |       | 0.8                                            |       | 2.3 |   |

 

*Year-Over-YearSame Store Sales.* Year-over-year same store sales increased forall of our concepts excluding our Mrs. Fields and TCBY concepts during the 13weeks ended July 1, 2006.

Our bakery concepts’year-over-year same store sales increased 2.7 percent for the 13 weeks endedJuly 1, 2006.  The increase inyear-over-year same store sales was due to continued improvement in executionby our franchisees, new merchandising and increased focus on decorating andGrab & Go tables.  Our Great AmericanCookies concept increased year-over-year sales primarily due to Cookie ExpressGrab & Go Decorating Tables for Mother’s Day and Father’s Day as well astargeted in-store and direct mail promotions for graduation occasions.  Our Pretzel Time and Pretzelmaker conceptsincreased year-over-year sales due to continued focus on BreezerTM smoothies andthe “Great Tastes Collide” campaign pairing pretzel bites and BreezersTMtogether.  Our Mrs. Fields conceptexperienced a year-over-year sales decline due to decreased customer counts atthe counter and lower performance for the holidays such as Mother’s Day andFather’s Day.

Our TCBY concept’syear-over-year same store sales decreased 3.5 percent for the 13 weeks endedJuly 1, 2006.  The decrease inyear-over-year same store sales was partially a result of Easter falling in thesecond quarter last year compared to the first quarter of this year.  Since most of our TCBY stores are closedEaster Day, there was one less sales day in the second quarter of this yearthan in the prior year.  Sales were alsonegatively impacted by wetter than normal weather in our key markets,reducing store traffic.  New productintroductions included replacement of all ice cream with hand scooped frozenyogurt in May of 2006, supporting our core yogurt point of difference. The premium hand scooped yogurt has been well received by franchisees andconsumers.

*FranchisingRevenues. *Franchisingrevenues were $13.6 million for the 13 weeks ended July 1, 2006, adecrease of $400,000 or 2.9 percent, from $14.0 million for the 13 weeksended July 2, 2005.  This decrease wasdue to decreased revenues from the dairy franchise system of $400,000 or 8.0percent.

Our revenues from ourbakery franchise system for the 13 weeks ended July 1, 2006 were comparable tothat for the 13 weeks ended July 2, 2005. This was due to decreases in initial franchise fees of $200,000, whichresulted from initial franchise fees from a territorial franchise agreement inCanada for our Mrs Fields and Pretzelmaker concepts in 2005 that did not occurin 2006 and product formulation revenues of $200,000 offset by an increase insales of products by our Great American Cookies manufacturing facility to ourfranchisees of $400,000.  The reductionin product formulation revenues was the result of lower product formulationrevenues earned through our Mrs. Fields bakery franchise system of $100,000 andlower allowances earned from our beverage vendors of $100,000.  Royalties for the 13 weeks ended July 1, 2006were comparable to that of the 13 weeks ended July 2, 2005.

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The decrease in revenuesfrom our dairy franchise system was due to decreases in initial fees of$200,000, royalties of $100,000 or 6.9 percent and product formulation revenuesgenerated by purchases of TCBY products by franchisees of $100,000 or 4.3 percent.  The decrease in royalties and productformulation is principally attributable to approximately 1,000 or 11.7 percentfewer unit weeks and the decrease in year-over-year same store sales.  We anticipate that our dairy unit weeks willcontinue to decline in the near future, at least until our reconcepting testsfor Beriyo by TCBY and Yovana are completed and we have developed a plan toimplement the reconcepting in qualified TCBY traditional stores.  We anticipate our reconcepting tests forBeriyo by TCBY will be completed in the fourth quarter of fiscal 2006, althoughreconcepting tests and activities may continue into 2007.  We continue to be encouraged by consumer datawe have collected.  However, there can beno assurances that our reconcepting tests or implementation will be successful,or that a reconcepting will slow or reverse the declining TCBY store count orcontribution, which may adversely affect our results of operations.

*FranchisingExpenses.*  Franchisingexpenses are comprised 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 expense and otherdirect franchising expenses; and cost of product sales associated with ourGreat American Cookies manufacturing facility, including raw ingredients, laborand other manufacturing costs. Franchising expenses were $6.0 million for the 13 weeks ended July1, 2006, an increase of $300,000 or 5.2 percent, from $5.7 million for the 13weeks ended July 2, 2005.  This increasewas attributable to increases in distribution costs of $200,000 associated withthe distribution of our dairy products to our dairy franchise system resultingfrom the Blue Line Extension Agreement, product cost of sales associated withour Great American Cookies manufacturing facility of $200,000, franchisedevelopment and support expenses of $400,000 partially offset by reductions inexpenses associated with our brand initiatives of $400,000 and franchiseoperations and supervision of $100,000.

Theincrease in franchise development and support expenses was due to increases insalaries and related employee costs of $300,000 and severance costs of $200,000partially offset by a decrease in costs associated with our royalty assuranceprogram of $100,000.  The reduction inoperations and supervision expense of $100,000 was due to reductions incompensation and related benefits.

# **Gifts**

*GiftsRevenues.*  Giftsrevenues were $4.9 million for the 13 weeks ended July 1, 2006, a decrease of$500,000 from $5.4 million for the 13 weeks ended July 2, 2005.  Gifts revenues consist of sales through ourcatalog and website as well as affiliations with other websites and sales tolarge corporate accounts for gifting purposes and commercial airlines.  The decrease in revenues for the 13 weeksended July 1, 2006 was due to decreases in sales through our catalog andwebsite of $200,000 national accounts of $400,000 partially offset by increasesin sales through Internet search engines of $100,000.  The decrease in sales through our catalog andwebsite was primarily due to decreased circulation of our Mother’s Day andFather’s Day catalog.  The decrease insales to national accounts was due to a large initial order shipped in June of2005.

*GiftsExpenses.*  Giftsexpenses were $5.5 million for the 13 weeks ended July 1, 2006, anincrease of $200,000 from $5.3 million for the 13 weeks ended July 2,2005.  This increase in expenses was dueto increases in cost of goods sold of $300,000 and selling expenses of $100,000principally for increased paper and creative costs of our catalogs partiallyoffset by decreased circulation.  Theseincreases were partially offset by a reduction in general and administrativeexpenses of $200,000.  The decrease ingeneral and administrative expenses was due to decreases in professional feesof $400,000 for consultants in 2005 who assisted us in the development of ourgifting business strategy and bad debt expense of $100,000 partially offset byincreases in compensation and related costs of $200,000 and professional ITservices of $100,000.

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**Licensing**

*Licensing Revenues. *Licensing revenues were $400,000 for the 13 weeksended July 1, 2006, a decrease of $400,000 or 49.1 percent, from $800,000for the 13 weeks ended July 2, 2005. This decrease was due to decreases in licensing royalties earned underour licensing agreement for the sale of Mrs. Fields branded shelf stablecookies of $500,000, partially offset by an increase in royalties earned underour licensing agreement for the sale of TCBY frozen food specialty productsthrough retail channels of $100,000.  Asdiscussed in Recent Developments contained elsewhere in this report, due to theuncertainty of the collectibility of royalties earned under our terminatedlicense agreements with Shadewell, we have not recognized any royalty revenuesearned under these agreements during the 13 weeks ended July 1, 2006. Wedo not anticipate earning any royalties under the terminated license agreementsfor the remainder of the year.

*LicensingExpenses.*  Licensingexpenses were $700,000 for the 13 weeks ended July 1, 2006, an increase of$500,000 or 219.2 percent, from $200,000 for the 13 weeks ended July 2,2005.  This increase was due to increasesin bad debt  expense as a result of thetermination of our license agreements for the sale of Mrs. Fields branded shelfstable cookies of $300,000 and costs associated with the sale of TCBY brandedfrozen products of $200,000.

**Other**

*Generaland Administrative Expense.* General and administrative expenses were $2.6 million for the 13 weeksended July 1, 2006, an increase of $300,000 or 12.4 percent, from $2.3 millionfor the 13 weeks ended July 2, 2005. This increase was primarily due to a reduction in the reimbursementamount for management services provided to our parent company, MFOC, of$400,000 as a result of the decrease in the number of stores operated by MFOCand increases in health insurance and other administrative costs of $100,000,partially offset by reductions in recruiting and relocation costs of $100,000and severance costs of $100,000.

*Depreciationand Amortization Expense.* Total depreciation and amortization expense was $1.5 million for the 13weeks ended July 1, 2006, an increase of $500,000 or 51.3 percent from$1.0 million for the 13 weeks ended July 2, 2005.  Depreciation expense was $1.0 million for the13 weeks ended July 1, 2006, an increase of $700,000 or 244.2 percent, from $300,000for the 13 weeks ended July 2, 2005. This increase was principally due to a $400,000 write-down of leaseholdimprovements and equipment associated with a Yovana test store and theacceleration of depreciation expense associated with leasehold improvements inour existing gifting facility in anticipation of relocating from that facilityinto a new facility in August 2006, which shortened the useful lives of theseleasehold improvements.  Amortizationexpense for the 13 weeks ended July 1, 2006 was $500,000, a decrease of$200,000 or 23.7 percent, from $700,000 for the 13 weeks ended July 2,2005.  This decrease was principally dueto the impairment of certain intangible assets of TCBY in 2005 which resultedin a lower carrying value of the intangible assets and lower amortizationexpense in periods subsequent to the impairment.

*Impairmentof Goodwill. *During the 13 weeks ended July 1, 2006, werecorded a charge of $14.6 million to reduce the carrying value of the goodwillassociated with our dairy franchising reporting unit.  This impairment was principally the result ofan eroding dairy franchise system due to fewer locations, consistent negativeyear-over-year same store sales by our dairy franchisees and our inability tolocate and open a significant number of new or additional franchiselocations.   These factors have resultedin continued decreases in franchise royalties and yogurt formulation revenuesfrom our dairy franchise system.  SeeNote 5 to our condensed consolidated financial statements contained elsewherein this report.

*InterestExpense, Net.*  Interestexpense, net was****$5.2 million for the 13 weeks ended July 1, 2006, a decreaseof $100,000 or 1.9 percent,from $5.3 million for the 13 weeks ended July 2, 2005.  The decrease in interest expense, net was theresult of a reduction in amortization of deferred loan costs and an increase ininterest income earned on our cash balances.

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**26 WeeksEnded July 1, 2006****Compared to the 26 Weeks Ended July 2, 2005**

*IncomeFrom Operations—Overview*. Loss from operations was $10.4 million for the 26 weeks ended July1, 2006, a decrease of $21.1 million from $10.7 million for the 26 weeksended July 2, 2005.  This decrease wasprimarily attributable to the impairment of goodwill associated with the dairy franchisereporting unit of $14.6 million, a decrease in contribution from our businesssegments of $4.9 million, an increase in general and administrative expenses of$1.1 million and an increase in depreciation and amortization expense of$500,000.  Decreases in contribution fromour business segments of $4.9 million was comprised of decreases in our giftingsegment contribution of $1.9 million, our franchising segment contribution of$1.6 and our licensing segment contribution of $1.4 million.

*SegmentContribution.*  Thefollowing table sets forth the contribution from each of our reporting segments(in thousands).  Franchising contributionis comprised of sales of new franchises and royalties from existing franchisesless direct operating expenses.  Giftscontribution is comprised of sales of products through our catalog and Internetbusiness less direct operating expenses. Licensing contribution is comprised of licensing fees received fromthird parties for the sale of products bearing our brand names less directoperating expenses.

|                             | ** ** | **For the 26 Weeks Ended** | ** ** | ** **       | ** ** |
|-----------------------------|------------|------------------------------------------------|------------|------------------|------------|
| ** **                  | ** ** | **July 1,**                               | ** ** | **July 2,** | ** ** | **%** | ** ** |
| **Reporting Segment**  | ** ** | **2006**                                       | ** ** | **2005**         | ** ** | **Change** | ** ** |
| Franchising                 |       | $                                              | 13,957     |             | $          | 15,509 |   | (10.0 | ) |
| Gifts                       |       | (2,085                                         | )          | (229             | )          | NM |   |
| Licensing                   |       | 158                                            |       | 1,622            |       | (90.3 | ) |
| Total segment  contribution |       | $                                              | 12,030     |             | $          | 16,902 |   | (28.8 | ) |

 

**Franchising**

The following tabledetails the revenues and operating expenses of the franchising segment for the26 weeks ended July 1, 2006 and July 2, 2005 (in thousands):

|                                      | ** ** | **For the 26 Weeks Ended** | ** ** | ** **       | ** ** |
|--------------------------------------|------------|------------------------------------------------|------------|------------------|------------|
| ** **                           | ** ** | **July 1,**                               | ** ** | **July 2,** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **2006**                                       | ** ** | **2005**         | ** ** | **Change** | ** ** |
| Bakery revenues                      |       | $                                              | 19,017     |             | $          | 18,609 |   | 2.2 |   |
| Dairy revenues                       |       | 6,907                                          |       | 7,714            |       | (10.5 | ) |
| Total franchising revenues           |       | 25,924                                         |       | 26,323           |       | (1.5 | ) |
| Bakery operating  expenses           |       | 8,780                                          |       | 8,173            |       | 7.4 |   |
| Dairy operating  expenses            |       | 3,187                                          |       | 2,641            |       | 20.7 |   |
| Total franchising operating expenses |       | 11,967                                         |       | 10,814           |       | 10.7 |   |
| Total  franchising contribution      |       | $                                              | 13,957     |             | $          | 15,509 |   | (10.0 | ) |

 

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The following tabledetails the YOY percentage increase (decrease) in same store sales for the 26weeks ended July 1, 2006 and July 2, 2005:

|                                                 | ** ** | **For the 26 Weeks Ended** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                      | ** ** | **July 1,**                               | ** ** | **July 2,** | ** ** |
| **YOY % Change by Concept** | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| Mrs. Fields                                     |       | (1.6                                           | )          | 1.0 |   |
| Great American  Cookies                         |       | 3.9                                            |       | 4.5 |   |
| Pretzel Time                                    |       | 5.8                                            |       | 3.7 |   |
| Pretzelmaker                                    |       | 11.5                                           |       | 10.0 |   |
| Total Bakery                                    |       | 3.0                                            |       | 3.6 |   |
| TCBY                                            |       | (0.7                                           | )          | (0.7 | ) |
| Total Company                                   |       | 2.0                                            |       | 2.3 |   |

 

*Year-Over-YearSame Store Sales.* Year-over-year same store sales increased forall of our concepts excluding our Mrs. Fields and TCBY concepts during the 26weeks ended July 1, 2006.

Our bakery concepts’year-over-year same store sales increased 3.0 percent for the 26 weeks endedJuly 1, 2006.  The increase inyear-over-year same store sales was due to new merchandising programs andcontinued improvement in execution by our franchisees.  Our Great American Cookies concept increasedyear-over-year sales primarily due to continued emphasis on cookie cakes,Cookie Express Grab & Go decorating tables and a retail price increase.  Our Pretzel Time and Pretzelmaker conceptsincreased year-over-year sales due to continued focus on BreezerTM smoothies andthe “Great Tastes Collide” campaign pairing pretzel bites and BreezerTMtogether.  Our Mrs. Fields conceptexperienced a year-over-year sales decline due to decreased customer counts atthe counter and lower performance for the holidays such as Mother’s Day andFather’s Day.

Our TCBY concept’syear-over-year same store sales decreased 0.7 percent for the 26 weeks endedJuly 1, 2006.  We continue to focus andemphasize store level operations and standards enforcement to improveoperations and the consumer experience in the store.  This work is beingexecuted in parallel to various reconcepting tests. This reconcepting workis designed to leverage consumer trends, provide a new platform for salesgrowth, build an improved franchisee business model and strengthenour new store development initiatives.

*FranchisingRevenues. *Franchisingrevenues were $25.9 million for the 26 weeks ended July 1, 2006, adecrease of $400,000 or 1.5 percent, from $26.3 million for the 26 weeksended July 2, 2005.  The decreasedrevenues were due to a decrease in revenues from our dairy franchise system of$800,000 or 10.5 percent, partially offset by increased revenues from ourbakery franchise system of $400,000 or 2.2 percent.

The increase in revenuesfrom our bakery franchise system was principally attributable to increases insales of products by our Great American Cookies manufacturing facility to ourfranchisees of $900,000 or 11.3 percent and royalties of $200,000 or 2.9percent, partially offset by reductions of product formulation revenuesgenerated by purchases of certain bakery products by franchisees of $200,000 or19.1 percent, allowances earned from our beverage vendors of $300,000 or 33.8 percentand initial franchise fees of $200,000. The increase in sales by our Great American Cookies manufacturingfacility was primarily due to increases in batter purchases by our GreatAmerican Cookies franchisees as a result of continued positive year-over-yearsame store sales by our franchisees and a price increase to our franchisees of8.3 percent effective April 2005.  Theincrease in royalties was principally due to increases in year-over-year salesby our franchisees.  The reduction inproduct formulation revenues was the result of lower product formulationrevenues earned through our Mrs. Fields bakery franchise system of$200,000.  The decrease in initialfranchise fees of $200,000 was due to initial franchise fees earned in Canadafrom our Mrs. Fields and Pretzelmaker concepts in 2005 that were not repeatedin 2006.

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The decrease in revenuesfrom our dairy franchise system was principally comprised of decreases inproduct formulation revenues generated by purchases of TCBY products byfranchisees of $400,000 or 7.0 percent, royalties of $300,000 or 12.4 percentand initial franchise fees of $100,000 or 44.5 percent.  The decrease in royalties and productformulation revenues is principally attributable to approximately 2,000 or 11.2percent fewer unit weeks.  We anticipatethat our dairy unit weeks will continue to decline in the near future, at leastuntil our reconcepting tests for Beriyo by TCBY and Yovana are completed and wehave developed a plan to implement the reconcepting in qualified TCBYtraditional stores.  We anticipate ourreconcepting tests for Beriyo by TCBY will be completed in the fourth quarterof fiscal 2006, although reconcepting tests and activities may continue into2007.  We continue to be encouraged byconsumer data we have collected. However, there can be no assurances that our reconcepting tests orimplementation will be successful, or that a reconcepting will slow or reversethe declining TCBY store count or contribution, which may adversely affect ourresults of operations.

*FranchisingExpenses.*  Franchisingexpenses were $12.0 million for the 26 weeks ended July 1, 2006, anincrease of $1.2 million or 10.7 percent, from $10.8 million for the 26 weeksended July 2, 2005.  This increase wasattributable to increases in distribution costs of $500,000 associated with thedistribution of our dairy products to our dairy franchise system resulting fromthe Blue Line Extension Agreement, product cost of sales associated with ourGreat American Cookies manufacturing facility of $500,000 and franchisedevelopment and support expenses of $900,000 partially offset by a reduction inexpenses associated with our brand initiatives of $700,000.

Theincrease in franchise development and support expenses of $900,000 was due toincreases in salaries and related employee costs of $700,000, severance costsof $200,000, bad debt expense of $100,000 and other franchise development costsof $100,000, partially offset by a reduction in costs associated with ourroyalty assurance program of $200,000.

**Gifts**

*GiftsRevenues.*  Giftsrevenues were $10.0 million for the 26 weeks ended July 1, 2006, a decrease of$300,000 from $10.3 million for the 26 weeks ended July 2, 2005.  The decrease in revenues for the 26 weeksended July 1, 2006 was due to decreases in sales through our partners such as1-800-Flowers and Walmart of $200,000 national accounts of $100,000 sales toairline and other customers of $400,000, partially offset by increases in salesthrough Internet search engines of $300,000 or 37.3 percent and ouraffiliations with other websites of $100,000.

*GiftsExpenses.*  Giftsexpenses were $12.2 million for the 26 weeks ended July 1, 2006, anincrease of $1.6 million from $10.6 million for the 26 weeks endedJuly 2, 2005.  This increase in expenseswas due to increases in cost of goods sold of $1.0 million and selling expensesof $600,000 principally for increased paper and creative costs of our catalogspartially offset by decreased circulation. General and administrative expenses for gifts were $2.3 million for the26 weeks ended July 1, 2006 and July 2, 2005. This was due to increases in compensation and related costs of $300,000,professional IT services of $200,000 and severance costs of $200,000, partiallyoffset by a decrease in professional fees of $700,000 for consultants in 2005for the assistance and development of our gifting business strategy.

**Licensing**

*Licensing Revenues. *Licensing revenues were $1.1 million for the 26weeks ended July 1, 2006, a decrease of $900,000 or 46.0 percent, from$2.0 million for the 26 weeks ended July 2, 2005.  This decrease was due to decreases inlicensing royalties earned under our licensing agreement for the sale of Mrs.Fields branded shelf stable cookies of $900,000, licensing royalties earnedunder an agreement for the sale of Mrs. Fields branded premium hot cocoa thatwas terminated in early 2005 of $100,000, partially offset by an increase inroyalties earned under our licensing agreement for the sale of TCBY yogurtcovered pretzels and other branded products of $100,000.  As discussed in Recent Developments containedelsewhere in this report, we do not anticipateearning any royalties under the terminated license agreements for the sale ofMrs. Fields branded shelf stable cookies for the remainder of the year.

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*LicensingExpenses. *Licensing expenses were $900,000 for the 26weeks ended July 1, 2006, an increase of $500,000 or 156.1 percent, from$400,000 for the 26 weeks ended July 2, 2005. This increase was due to bad debt expense as a result of the terminationof our license agreements for the sale of Mrs. Fields branded shelf stablecookies of $400,000 and in an increase in costs associated with the sale ofTCBY branded frozen products of $100,000.

**Other**

*Generaland Administrative Expense.* General and administrative expenses were $5.4 million for the 26 weeksended July 1, 2006, an increase of $1.1 million or 26.5 percent, from $4.3million for the 26 weeks ended July 2, 2005. This increase was primarily due to a reduction in the reimbursementamount for management services provided to our parent company, MFOC, of$900,000 as a result of the decrease in the number of stores operated by MFOCand increases in severance costs of $200,000, salaries and related benefits of$200,000 and health insurance expense of $100,000 partially offset byreductions in incentive compensation of $100,000, professional fees of $100,000and recruiting and relocation of $100,000.

*Depreciationand Amortization Expense.* Total depreciation and amortization expense was $2.4 million for the 26weeks ended July 1, 2006, an increase of $400,000 or 24.0 percent from$2.0 million for the 26 weeks ended July 2, 2005.  Depreciation expense was $1.4 million for the26 weeks ended July 1, 2006, an increase of $800,000 or 145.8 percent, from$600,000 for the 26 weeks ended July 2, 2005. This increase was principally due to a $400,000 write-down of leaseholdimprovements and equipment associated with a Yovana test store and theacceleration of depreciation expense associated with leasehold improvements inour existing gifting facility in anticipation of relocating from that facilityinto a new facility in August 2006, which shortened the useful lives of theseleasehold improvements.  Amortization expensefor the 26 weeks ended July 1, 2006 was $1.1 million, a decrease of $300,000 or23.7 percent, from $1.4 million for the 26 weeks ended July 2, 2005.  This decrease was principally due to theimpairment of certain intangible assets of TCBY in 2005 which resulted in alower carrying value of the intangible assets and lower amortization expense infuture periods.

*Impairmentof Goodwill. *During the 26 weeks ended July 1, 2006, werecorded a charge of $14.6 million to reduce the carrying value of the goodwillassociated with our dairy Franchising reporting unit.  This impairment was principally the result ofan eroding dairy franchise system due to fewer locations, consistent negativeyear-over-year same store sales by our dairy franchisees and our inability tolocate and open a significant number of new or additional franchiselocations.   These factors have resultedin continued decreases in franchise royalties and yogurt formulation revenuesfrom our dairy franchise system.  SeeNote 5 to our condensed consolidated financial statements contained elsewherein this report.

*InterestExpense, Net.*  Interestexpense, net was**$**10.5 million for the 26 weeks ended July 1, 2006, a decreaseof $200,000 or 2.1 percent, from $10.7 million for the 26 weeks endedJuly 2, 2005.  The decrease in interestexpense, net was the result of a reduction in amortization of deferred loancosts and an increase in interest income earned on our cash balances.

**ConsolidatedFinancial Condition**

Total assets at July 1,2006 were $114.5 million, a decrease of $25.4 million or 18.1 percent,from $139.9 million at December 31, 2005. This decrease was primarily attributable to decreases in goodwill of$14.6 million, cash and cash equivalents of $9.4 million as a result of oursemi-annual interest payment of $10.2 million, trademarks and intangibles of$1.0 million, accounts receivables of $800,000, deferred loan costs of $500,000and inventory of $200,000 partially offset by increases in property andequipment, net of $600,000, prepaid expenses of $200,000 and deferred taxassets and other assets of $300,000.

Total liabilities at July1, 2006 were $216.3 million, a decrease of $5.0 million or 2.3 percent,from $221.3 million at December 31, 2005. This decrease was primarily due to decreases in accounts payable of $4.1million, accrued liabilities of $600,000, amounts due affiliates of $300,000and capital lease obligations of $100,000 partially offset by an increase indeferred revenues of $100,000.

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**ConsolidatedCash Flows for the 26 Weeks Ended July 1, 2006 Compared to July 2, 2005**

Net cash flows used inoperating activities were $7.7 million for the 26 weeks ended July 1, 2006, adecrease of $8.4 million from net cash flows provided by operating activitiesof $700,000 for the 26 weeks ended July 2, 2005.  This increase in cash used in operations wasprincipally due to a decrease in contribution by our operating segments of $4.9million, an increase in general and administrative expense of $1.2 million anddecreases in cash provided from working capital assets and liabilities of $2.3million.

Net cash flows used ininvesting activities were $1.7 million for the 26 weeks ended July 1, 2006, anincrease of $1.1 million from cash used in investing activities of $600,000 forthe 26 weeks ended July 2, 2005.  Thisincrease was attributable to increases in purchases of property and equipmentof $1.2 million partially offset by proceeds from the sale of equity warrantsin Nonni’s Food Company of $100,000.

Net cash flows used infinancing activities were negligible for the 26 weeks ended July 1, 2006 andfor the 26 weeks ended July 2, 2005.

**Liquidity andCapital Resources**

Our principal sources of liquidity are cash flows fromoperating activities and cash on hand. At July 1, 2006, we had $14.3 million of cash on hand.  During fiscal 2006, we expect that ourprincipal uses of cash will be for working capital, capital expenditures ofapproximately $4.0 million primarily for leasehold improvements and equipmentfor our new gifts facility and interest payments on our 9 percent senior securednotes and the 111⁄2 percent senior secured notes (the “Senior Secured Notes”) of$20.5 million, of which $10.25 million was paid on March 15, 2006.  As discussed in Recent Developments containedelsewhere in this report, management anticipates the use of significant cash tooperate the business previously operated by Shadewell under certain licenseagreements that were terminated by us. During fiscal 2006, we will not be required but we may offer torepurchase a portion of the Senior Secured Notes as described below.  In addition, to the extent we have cashavailable and it is permitted by the indenture agreement, we may pay dividendsto our parent companies for uses such as acquisitions, debt repayments anddividends.  We believe that cash providedby operating activities and cash on hand will be adequate to meet our cashrequirements for the next 12 months*.*

We are highly leveraged.  At July 1, 2006, we had $195.7 million oflong-term debt represented by the Senior Secured Notes.  The Senior Secured Notes mature onMarch 15, 2011, with interest payable semi-annually on March 15 andSeptember 15.  Due to borrowingrestrictions under the indenture governing the Senior Secured Notes, ourability to obtain additional debt financing is significantly limited.  The Senior Secured Notes require us to offerto repurchase a portion of the notes at 100 percent of the principalamount, plus accrued and unpaid interest thereon to the date of purchase, with50 percent of our “excess cash flow”, as defined in the indenture agreement,when the ratio of our net indebtedness to consolidated EBITDA is above 3.75 to1.0 and the cumulative unpaid excess cash flow offer amount exceeds $10.0million.  For a more detailed descriptionof the material terms of the Senior Secured Notes, see Note 3 to ourconsolidated financial statements contained in our Annual Report on Form 10-Kfiled with the SEC on March 21, 2006.

**Inflation**

The impact of inflation on our business has not beensignificant in recent years.  Some of ouremployees are paid hourly wages at the Federal minimum wage level.  Minimum wage increases will negatively impactour payroll costs in the short term, but management believes such impact can beoffset in the long term through lower staffing of operations and, if necessary,through product price increases.

**CriticalAccounting Policies**

The preparation of financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, disclosure of contingent assetsand liabilities and the reported amounts of revenues and expenses in ourconsolidated financial statements. Management has reviewed with our Audit Committee the accounting policiesthat it uses to prepare our consolidated financial statements and believes thatthe following policies are the most important to the portrayal of our financialcondition and the results of our operations while requiring the use ofjudgments and estimates about the effects of matters that are inherentlyuncertain.

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*Impairment ofGoodwill*.  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 reporting unit’sgoodwill.

On an annual basis (in the fourthquarter), or more frequently if circumstances indicate potential impairment, wecomplete an evaluation of goodwill associated with our various reportingunits.  To the extent that the fair valueassociated with goodwill is determined to be less than the recorded value, wewrite down the value of the related goodwill. The estimated fair value of goodwill is affected by, among other things,our business plan for the future, estimated results of future operations andthe comparable companies and transactions that are used to estimate the fairvalue of our goodwill.  Changes in thebusiness plan or operating results that are different than the projections usedto develop the valuation of goodwill may have an impact on the valuation of thegoodwill.

In conducting our impairment analyses, we performanalyses and tests of our goodwill with respect to our reporting units.  The test methods employed involve assumptionsconcerning useful lives of intangible assets, interest and discount rates,projections and other assumptions of future business conditions.  The assumptions employed are based onmanagement’s judgment using internal and external data.

*Impairment ofLong-lived and Certain Identifiable Intangible Assets*.  We reviewour long-lived assets for impairment when circumstances indicate that thecarrying value of an asset may not be fully recovered by the undiscounted netcash flow generated over the remaining life of the related asset or group ofassets.  If the cash flows generated bythe asset are not sufficient to recover the remaining carrying value of theasset, we are required to write down the value of the asset to its estimatedfair value.  In evaluating whether theasset will generate sufficient cash flow to recover its carrying value, we estimatethe amount of cash flow that will be generated by the asset and the remaininglife of the asset.  In making ourestimate, we consider the performance trends related to the asset, thelikelihood that the trends will continue or change, both at the asset level aswell as at the national economic level, and the length of time that we expectto retain the asset.

*Allowance forDoubtful 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.

*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.  We recognize franchise andlicense royalties, which are based on a percentage of gross store sales, asearned, which is generally upon sale of product by franchisees orlicensees.  Minimum royalty paymentsunder certain licensing agreements are deferred and recognized on astraight-line basis over the term of the agreement.  We recognize revenues from the sale of cookiedough that we produce and sell to certain franchisees at the time of shipmentand classify them in franchising revenues. We recognize revenues from the sale of cookie dough to grocery storesand wholesale clubs upon shipment and include them in other revenues.  We recognize revenues from gift sales at thetime of shipment.

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We receive cash payments for product formulation feesand allowances from suppliers based on the amount of product purchased directlyby our distributors and franchisees. These product formulation fees and allowances represent cash payments tous for the right to use our proprietary formulations and recipes to manufacturethe frozen dough, dough mixes and TCBY products these suppliers sell to ourfranchisees.  Formulation fees andallowances are recorded as franchising revenues upon shipment of product to ourdistributors or franchisees.  Included infranchising revenues was $3.4 million and $6.1 million for the 13 and 26 weeksended July 1, 2006, respectively, and $3.8 million and $7.0 million for the 13and 26 weeks ended July 2, 2005, respectively.

**Recent Accounting Pronouncements**

 

        In July 2006, the Financial AccountingStandards Board ("FASB") issued FASB Interpretation ("FIN")No. 48 ("FIN 48") "Accounting for Income TaxUncertainties."  FIN 48 defines thethreshold for recognizing the benefits of tax return positions in the financialstatements as "more-likely-than-not" to be sustained by the taxingauthority.  FIN 48 provides guidance onthe derecognition, measurement and classification of income tax uncertainties,along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income taxuncertainties in interim periods and increases the level of disclosuresassociated with any recorded income tax uncertainties.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.  Wehave not yet determined the impact, if any, of adopting the provisions of FIN48 on our consolidated financial position or results of operations.

 

        In June 2006, the Emerging Issues TaskForce ("EITF") reached a consensus on EITF Issue No. 06-03("EITF 06-03"), "How Taxes Collected from Customers and Remittedto Governmental Authorities Should Be Presented in the Income Statement (ThatIs, Gross versus Net Presentation)." EITF 06-03 provides that the presentation of taxes assessed by agovernmental authority that is directly imposed on a revenue-producingtransaction between a seller and a customer on either a gross basis (includedin revenues and costs) or on a net basis (excluded from revenues) is anaccounting policy decision that should be disclosed.  The provisions of EITF 06-03 become effectiveas of December 31, 2006. The adoption of EITF 06-03 is not expected to have amaterial impact on our consolidated financial position or results ofoperations.

** **

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

There have been no significant changes in market riskssince the end of the Company’s fiscal year ended December 31, 2005.  For more information, please read Item 7A andthe consolidated financial statements and notes thereto contained in our AnnualReport on Form 10-K, filed with the SEC on March 21, 2006.

**Item 4.  Controls and Procedures**

The Company’smanagement, with the participation of the Company’s Chief Executive Officer andChief Accounting Officer, evaluated the effectiveness of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport.  Based on that evaluation, theChief Executive Officer and Chief Accounting Officer concluded that the Company’sdisclosure controls and procedures, as of the end of the period covered by thisreport, are functioning effectively to provide reasonable assurance that theinformation required to be disclosed by the Company in reports filed under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms.  A controls system, no matter how welldesigned and operated, cannot provide absolute assurance that the objectives ofthe controls system are met, and no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within acompany have been detected.

There has been nochange in our internal control over financial reporting (as defined in Rules13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) thatoccurred during our fiscal quarter ended July 1, 2006, that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

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**PARTII — OTHER INFORMATION**

**Item 1.  Legal Proceedings**

The Company andits products are subject to regulation by numerous governmental authorities,including without limitation, federal, state and local laws and regulationsgoverning franchising, health, sanitation, environmental protection, safety andhiring 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 results of operations.

As discussed inthe Company’s Annual Report on Form 10-K filed with the Securities and ExchangeCommission (“SEC”) on March 21, 2006, the Company’s Quarterly Report on Form10-Q for the quarterly period ended April 1, 2006 and filed with the SEC on May12, 2006 and the Company’s Current Report on Form 8-K filed with the SEC on May12, 2006, Shadewell Grove IP, LLC (“Shadewell”) filed a Verified Complaint,Motion for Restraining Order and related documents (the “Action”) in the Courtof Chancery of the State of Delaware against Mrs. Fields Franchising, LLC, awholly-owned subsidiary of the Company (“MFF”), in October 2005.  The action arose from MFF’s termination ofcertain license agreements for Shadewell’s failure to make certain payments toMFF in a timely manner.  In the Action,Shadewell alleged that the license agreements were improperly terminated byMFF.  Among other relief, Shadewellsought a court order that the license agreements would remain in full force andeffect and that MFF must specifically perform its obligations under theagreements.  On May 8, 2006, the courtruled in our favor on all issues.  UntilJune 27, 2006, Shadewell continued to operate under the terminated licenseagreements.  On June 27, 2006, MFF andShadewell entered into a consulting agreement (the “Shadewell ConsultingAgreement”) whereby Shadewell employees would provide consulting and trainingservices to MFF employees through August 28, 2006 to assist in establishment ofMFF’s new business that will operate in distribution channels similar to thosepreviously served by Shadewell for a fee of $325,000 paid in four weeklyinstallments of $81,250 beginning June 28, 2006.  See “Status of the Shadewell Business” inItem 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations contained elsewhere in this report.

**Item 1A.  Risk Factors**

The following riskfactors, among others, could cause our financial performance to differsignificantly from the goals, plans, objectives, intentions and expectationsexpressed in this report.  If any of thefollowing risks and uncertainties or other risks and uncertainties notcurrently known to us or not currently considered to be material actuallyoccur, our business, financial condition or operating results could be harmedsubstantially.

***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 thatthe implementation of our business strategy is key to enabling us to grow ourrevenues and profitability and, ultimately, our future success.  Our business strategy is focused on increasingthe sales of our franchisees, accelerating the development of new franchisedstores, carts and kiosks and growing our licensing and gifts operations, eachof which we believe is critical to our success.

Our businessstrategy is dependent in part on our ability to develop, test and implement areconcepting of our TCBY brand.  If weare unsuccessful, our performance will be adversely affected.

Our initial focuswill include the “repositioning” of our TCBY brand by targeting today’s healthconscious consumers and the “reconcepting” of our TCBY brand by redesigning itstrademarks, décor and updating its menus. We have begun the process ofreviewing how best to develop and implement the reconcepting, including thetesting of our Beriyo by TCBY and Yovana concepts.  However, we do not know how successful wewill be in developing or implementing a reconcepting plan or the extent towhich the capital investment required to implement such a reconcepting planwill be available when needed.  If we areunable to successfully implement this or any other aspect of our businessstrategy, our business operations and our financial condition could beadversely affected.

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

The sale offranchises is 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 or otherdisclosure in connection with franchise offers and sales.  In addition, several states have “franchiserelationship laws” or “business opportunity laws” that limit the ability of thefranchisors to terminate agreements or to withhold consent to renewal ortransfer of these agreements.

There are certainevents that require us to make certain disclosure to state authorities.  Further, renewal of uniform franchiseoffering circular registrations are required in several states within a certainperiod of 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 renewal during which we may be prohibitedfrom selling our franchises in certain states. Without limiting the foregoing, our financial condition requires us todefer collection of certain fees in some states until the store opens, and inVirginia, prohibits us from offering new franchises for sale.  If we are unable to sell our franchises foran extended period of time in certain states, our business operations orfinancial condition could be adversely affected.

*Adecline in mall traffic could cause our bakery brand franchise income todecrease 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 July 1, 2006 the majority ofour bakery franchisees’ stores are located, have experienced periods of decline.  This trend has had a negative impact on ourrevenues.  We cannot be sure that thistrend will not continue or that this trend can be offset by increased sales percustomer.  A prolonged decline in malltraffic could adversely affect our financial condition and results ofoperations.

*Webelieve our brand identity is critical to the success of our business.  If we are unable to use any of our trademarks or to protect our trade secrets, oursales and our results of operations 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,gifts segment and licensing strategy. Most of our trademarks are federally registered before the United StatesPatent and Trademark Office and registered or pending in many foreigncountries.  However, we cannot be surethat our trademarks cannot be circumvented or that our trademarks do not orwill not violate the proprietary rights of others.  If a challenge to one of our trademarks issuccessful, we could be prevented 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 byour franchisees 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.

*Ourinformation systems are an integral part of our gifts segment business.  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.

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*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.*

Seventeen of ourfranchisees or licensees own ten or more retail concept locations.  In total, these franchisees own 344 retailconcept locations and contributed approximately $4.5 million or 8.4percent of our franchise revenues for the year ended December 31, 2005.  For the same period, franchise revenues madeup 60.9 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, webelieve our relationship with our franchisees and our licensees is a criticalcomponent in the success of our business. As an example, as required by state and federal franchise disclosurerules, we must provide all prospective franchisees with the name and contactinformation 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.

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

Our franchiseesand 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 trainqualified managers and other store personnel. If they do not, our image, reputation and brand may suffer, and ourfranchise and license revenues as well as our ability to attract prospectivefranchisees may be adversely affected.

*Weare vulnerable to fluctuations in the cost, availability and quality of ouringredients.*

The cost,availability and quality of the ingredients we use to prepare our products atthe Great American Cookies manufacturing facility and in our gifts operationsare subject to a range of factors, many of which are beyond our control.  Fluctuations in economic and politicalconditions, weather and demand could adversely affect the costs of ouringredients.  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 adversemarket conditions which could adversely affect our financial results.

*Wedepend heavily on our suppliers and distributors.*

We depend on twoprimary suppliers, Countryside and Americana, which supply products for ourMrs. Fields brand and TCBY brand, respectively.  Americana is a related party.  Our agreement with Americana is described in “CertainRelationships and Related Transactions—TCBY Supply Agreement” contained in ourAnnual Report on Form 10-K filed with the SEC on March 21, 2006.  Coolbrands International, Inc., aToronto-based company that owns a majority interest in Americana, recentlyannounced that it had breached a debt covenant in a credit facility that mayinvolve Americana as borrower.  If thedefault adversely affects Americana’s performance of its obligations underthe TCBY Supply Agreement, it could have a material adverse effect on theresults of our dairy operations.

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We also depend onour primary distributors for distribution of perishable and non-perishableitems to our franchisees.  As describedin “Business—Ingredients, Supplies and Distribution,” contained in our AnnualReport on Form 10-K filed with the SEC on March 21, 2006, our primarydistributor to our TCBY system has exercised its right to terminate ourdistribution agreement with them. Although we believe the distributor will continue to serve the systemuntil we are able to identify other distribution solutions, there can be noassurances of the continued extension, or of our ability to replace theirservices with one or more distributors that offer similar pricing.  Our reliance on our suppliers subjects us toa number of risks, including possible delays or interruptions in supplies,diminished control over quality and a potential lack of adequate raw materialcapacity.  Any disruption in the supplyof or degradation in the quality of the raw materials provided by our supplierscould have a material adverse effect on our business, operating results andfinancial condition.  In addition, suchdisruptions in supply or degradations in quality could have a long-termdetrimental impact on our efforts to develop a strong brand identity and aloyal consumer base.  If any supplier ordistributor fails to perform as anticipated, or if there is a termination orany disruption in any of these relationships for any reason, it could have amaterial adverse effect on our results of operations.

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

Our successdepends on the continued services of our senior management, particularlyStephen 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 thebusiness strategy they have developed and may fail to achieve expected profitsas a result.  We cannot be sure thatmanagement’s efforts to integrate, utilize, attract and retain personnel willbe successful.

*Ourfailure to respond to demographic trends, changes in consumer preferences andother factors and our failure to implement new marketing strategies could havea material adverse effect on our results of operations.*

The specialty andsnack food industry is affected by changes in consumer preferences, tastes andeating habits, 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.

*Thereis intense 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 competewith cookie, pretzel, frozen yogurt and ice cream retailers, as well as otherconfectionary, sweet snack and specialty foods retailers, many of which havegreater resources than us.  Consequently,we cannot be certain that we can compete successfully with these other foodretailers.

In addition to therisks we face from current competitors, we cannot be certain that we cansuccessfully compete with any new entrants into the specialty retail food andsnack food industry who may introduce new and successful products ormarketing.  Our inability to competeadequately would have a material adverse effect on our results of operations.

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*Adversepublicity, particularly about health concerns, could reduce our sales andadversely affect 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, weuse ingredients in several of our products, such as nuts, to which some peoplemay have allergies, and butter and cream, which are high in fat.  There may be adverse publicity about thehealth risks relating to these or other ingredients.  Adverse publicity about these factors couldreduce sales of our products and adversely affect results of operations.

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

We have franchisedand licensed retail stores in numerous foreign countries.  While most of our operations are in theUnited States, through our franchised retail store locations, we also haveoperations in numerous other regions, including operations in Canada, SouthAmerica, the Caribbean, the Middle East and Asia, representing approximately1.9 percent of our revenue during the 26 weeks ended July 1, 2006.  We expect to expand into additional regionsin the future.  Our internationaloperations are subject to many additional risks, including:

·                  theburden of complying with multiple and possibly conflicting laws and anyunexpected changes in regulatory requirements;

·                  importand export restrictions and tariffs;

·                  additionalexpenses relating to the difficulties and costs of staffing and managinginternational operations;

·                  litigationin foreign jurisdictions;

·                  potentiallyadverse tax consequences;

·                  increasedcompetition as a result of subsidies to local companies;

·                  politicalinstability or war;

·                  culturaldifferences;

·                  theimpact of business cycles and economic instability; and

·                  increasedexpense as a result of inflation.

Any one of thesefactors could have a material adverse affect our sales of products or servicesto our international customers and curtail our expansion strategy.

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*Governmentregulation of our business could adversely affect the results of ouroperations.*

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 comply withapplicable governmental regulations or if there is any increase in employeebenefit costs or other costs associated with employees, our costs couldincrease 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 “franchiserelationship laws” or “business opportunity laws” that limit the ability of thefranchisors to terminate agreements or to withhold consent to renewal or transferof these agreements.  While we believethat we are in compliance with existing regulations in the jurisdictions wherewe currently offer franchises, we cannot predict the effect of any futurelegislation or regulation on our business operations or financialcondition.  Additionally, bills haveoccasionally been introduced in Congress which would provide for federalregulation of aspects of franchisor-franchisee relationships.  We cannot predict what effect thoseregulations could have on our business.

*Any interruption in funding sourcesused by franchisees to purchase and develop our franchises could adverselyimpact 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 in approval of the SBA’s fundingbudget  will affect our franchisees’ability to obtain funding from this significant source and adversely impact ourability to market 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 involved inroutine 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, there can be noassurance that product liability litigation will not occur in the futureinvolving our products.  Our qualitycontrol program is designed to maintain high standards for the food andmaterials and food preparation procedures used by franchised stores. Productsare periodically inspected by our personnel at both the point of sale locationsand the manufacturing facilities to 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 food industry.  While we have been able to obtain insurancein the past, there can be no assurance that we will be able to maintain theseinsurance policies in the future. Consequently, any successful claim against us, in an amount materiallyexceeding our coverage, could adversely affect our operating results.

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*We experienced a number of franchisestore closures since 2003.  If this trendcontinues, our financial position and results of operations could be adverselyaffected.*

Since the end offiscal 2003, 62 retail concept locations were closed by MFOC and 1,024 retailconcept locations were closed by other franchisees.  These closures represent 35.9 percent of thetotal number of stores open at the beginning of 2004.  In comparison, 413 retail concept locationshave opened since 2003.  Since the end offiscal 2003, the number of Mrs. Fields brand locations has decreased by5.8 percent, the number of Great American Cookies Company brand locationshas decreased by 2.1 percent, the number of TCBY brand traditionallocations has decreased by 19.1 percent, the number of TCBY brand non-traditionallocations has decreased by 35.7 percent, the number of Pretzel Time brandlocations has decreased by 14.0 percent and the number of Pretzelmaker brandlocations has decreased by 8.5 percent. There can be no assurances that store closures will not occur in thefuture or that we will be able to successfully open additional stores in thefuture.  If this trend continues, ourfinancial condition and results of operations could be adversely affected.

*Quarterly fluctuations andseasonality.*

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, with the addition ofTCBY franchised stores, we have hedged against this seasonality impact byintroducing a concept that tends to have its strongest sales periods during thewarmer months from late Spring through early Fall.  In addition, by marketing our cookie brandsaround holidays that occur in late Winter and early Spring, such as Valentine’sDay and Easter as well as holidays in the late Fall, such as Halloween, we hopeto continue to decrease the impact of seasonality on our cash flow.  However, there can be no assurance that wewill be successful in decreasing the impact of seasonality on our cashflow.  If we are unable to manageseasonal fluctuations of cash flow, our financial condition and results of operationsmay 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 havesubstantial indebtedness represented by our Senior Secured Notes.  In addition, subject to restrictions in theindenture governing the Senior Secured Notes (the “Indenture”), we may incuradditional indebtedness.

Our high level of indebtedness could have importantconsequences, including the following:

·                  ourability to obtain additional financing for working capital, capitalexpenditures, acquisitions or general corporate purposes may be impaired;

·                  wemust use a substantial portion of our cash flow from operations to pay interestand required principal on the Senior Secured Notes and, to the extent incurred,our other indebtedness, which will reduce the funds available to us foroperations and other purposes;

·                  ourhigh level of indebtedness could place us at a competitive disadvantagecompared to our competitors that may have proportionately less debt;

·                  ourflexibility in planning for, or reacting to, changes in our business and theindustry in which we operate may be limited; and

·                  ourhigh level of indebtedness makes us more vulnerable to economic downturns andadverse developments in our business.

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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 make thesepayments thus depends on our future performance, which will be affected byfinancial, business, economic and other factors, many of which we cannotcontrol.  Our business may not generatesufficient cash flow from operations in the future and our currentlyanticipated growth in revenue and cash flow may not be realized, either or bothof which could result in our being unable to repay indebtedness, including theSenior Secured Notes, or to fund other liquidity needs.  If we do not have enough money, we may berequired to refinance all or part of our then existing debt (including theSenior Secured Notes), sell assets or borrow more money.  However, there can be no assurance that wewill be able to accomplish any of these alternatives on terms acceptable to us,or at 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 materially adversely affect our business and our ability topay the amounts due under the Senior Secured Notes.

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

The Indentureimposes significant operating and financial restrictions on us.  These restrictions limit or prohibit, amongother things, our ability to:

·                  incuradditional indebtedness;

·                  repaysubordinated indebtedness prior to stated maturities;

·                  paydividends on or redeem or repurchase our stock;

·                  issuecapital stock;

·                  makeinvestments;

·                  createliens;

·                  sellcertain assets or merge with or into other companies;

·                  enterinto certain transactions with stockholders and affiliates;

·                  sellstock in our subsidiaries;

·                  restrictdividends, distributions or other payments from our subsidiaries; and

·                  otherwiseconduct necessary corporate activities.

These restrictionscould adversely affect our ability to finance our future operations or capitalneeds and pursue available business opportunities.  A breach of any of these restrictions couldresult in a default in respect of the related indebtedness.  If a default occurs, the relevant lenderscould elect to declare the indebtedness, together with accrued interest andfees, to be immediately due and payable and proceed against any collateralsecuring that indebtedness.  Accelerationof our other indebtedness could result in a default under the terms of theIndenture and our assets may not be sufficient to satisfy our obligations underour indebtedness, including the Senior Secured Notes.

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

As a result of itsdirect control of our ultimate parent company and indirect control of MFH andMFOC, Capricorn II and Capricorn III 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,even though such transactions might materially adversely affect our financialcondition and results of operations.

**Item 6.  Exhibits**

10.69†               Distribution Services Agreement, datedApril 25, 2006, between TCBY and Southwest Traders, Inc.

10.70†               Distribution Services Agreement, datedMay 8, 2006, between TCBY and Yancey’s Food Service Company, Inc.

31.1                           Certificationof Chief Executive Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of theExchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

31.2                           Certificationof Chief Accounting Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of theExchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

32                                    Certificationof Chief Executive Officer and Chief Accounting Officer Pursuant to 18 U.S.C.Section 1350,        As Adopted Pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

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†                                          Filedherewith.  Confidential treatment will berequested as to certain portions.  Theterm “[CONFIDENTIAL]” as used throughout the indicated exhibit means thatmaterial has been omitted and will be filed separately with the Commission.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

**MRS.FIELDS FAMOUS BRANDS, LLC**
| /s/ Stephen Russo                               |     | August 9, 2006 |
|-------------------------------------------------|----------|----------------|
| Stephen Russo                                   | * * | Date           |
| President and  Chief Executive Officer          |     |           |
| *(Principal  Executive Officer)*                |     |           |
| * *                                        | * * | * *       |
| * *                                        | * * | * *       |
| * *                                        | * * | * *       |
| /s/ Mark C. McBride                             |     | August 9, 2006 |
| Mark C. McBride                                 | * * | Date           |
| Chief Accounting  Officer                       |     |           |
| *(Principal  Financial and Accounting Officer)* |     |           |

 

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