##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

FORM 10-Q



---

(Mark One)

|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended September 24, 2006

or



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the Transition Period from 
to .

Commission file number 0-25721.



---

BUCA, Inc.

(Exact name of registrant as specified in its Charter)



---



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Minnesota                                                     |  | 41-1802364                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)

1300 Nicollet Mall, Suite 5003

Minneapolis, Minnesota 55403

(Address of principal executive offices) (Zip
Code)

(612) 225-3400

(Registrants telephone number, including area code)



---

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer ̈Accelerated Filer  x            Non-Accelerated
Filer ̈

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

As of October 30, 2006, the registrant had 20,575,892 shares of
common stock outstanding.



---



---

##### Table of Contents

INDEX

BUCA, INC. AND SUBSIDIARIES



|                              |  |                                                                                                                                             |  |   
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I.
FINANCIAL INFORMATION |  |                                                                                                                                            
|                              |  |                                                                                                                                            
|Item 1.                       |  | Financial Statements                                                                                                                        |  |   
|                              |  |                                                                                                                                            
|                              |  | Condensed Consolidated Balance Sheets  September 24, 2006 and December 25, 2005                                                            |  | 3 
|                              |  |                                                                                                                                            
|                              |  | Condensed Consolidated Statements of Operations - Thirteen and Thirty-Nine Weeks Ended September 24, 2006 and September 25, 2005 (restated) |  | 4 
|                              |  |                                                                                                                                            
|                              |  | Condensed Consolidated Statements of Shareholders Equity  Thirty-Nine Weeks Ended September 24, 2006                                      |  | 5 
|                              |  |                                                                                                                                            
|                              |  | Condensed Consolidated Statements of Cash Flows  Thirty-Nine Weeks Ended September 24, 2006 and September 25, 2005 (restated)              |  | 6 
|                              |  |                                                                                                                                            
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                                        |  | 7 
|                              |  |                                                                                                                                            
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                       |  | 15
|                              |  |                                                                                                                                            
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                  |  | 23
|                              |  |                                                                                                                                            
|Item 4.                       |  | Controls and Procedures                                                                                                                     |  | 24
|                              | 
|PART II.
OTHER INFORMATION    |  |                                                                                                                                            
|                              |  |                                                                                                                                            
|Item 1.                       |  | Legal Proceedings                                                                                                                           |  | 24
|                              |  |                                                                                                                                            
|Item 1A.                      |  | Risk Factors                                                                                                                                |  | 25
|                              |  |                                                                                                                                            
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                 |  | 25
|                              |  |                                                                                                                                            
|Item 3.                       |  | Defaults upon Senior Securities                                                                                                             |  | 25
|                              |  |                                                                                                                                            
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                                         |  | 26
|                              |  |                                                                                                                                            
|Item 5.                       |  | Other Information                                                                                                                           |  | 26
|                              |  |                                                                                                                                            
|Item 6.                       |  | Exhibits                                                                                                                                    |  | 26
|                              | 
|SIGNATURES                    |  | 27                                                                                                                                         
|                              | 
|EXHIBIT INDEX                 |  | 28                                                                                                                                         



2



---

##### Table of Contents

PART 1.  FINANCIAL INFORMATION

Item 1. Financial Statements

BUCA, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share data)

(Unaudited)



|                                                                                                                                            |  |                   |          |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | ------- | -
|                                                                                                                                            |  | September 24,2006 |          |   | December 25,2005 |  
|ASSETS                                                                                                                                      |  |                   |          |   |                  |   |         |  
|CURRENT ASSETS:                                                                                                                             |  |                   |          |   |                  |   |         |  
|Cash                                                                                                                                        |  | $                 | 1,175    |   |                  | $ | 1,421   |  
|Accounts receivable                                                                                                                         |  |                   | 3,266    |   |                  |   | 3,660   |  
|Inventories                                                                                                                                 |  |                   | 6,046    |   |                  |   | 6,382   |  
|Prepaid expenses and other                                                                                                                  |  |                   | 3,485    |   |                  |   | 2,658   |  
|Current assets of discontinued operations and assets held for sale                                                                          |  |                   | 1,210    |   |                  |   | 1,246   |  
|                                                                                                                                            |  |                   |          |   |                  |   |         |  
|Total current assets                                                                                                                        |  | $                 | 15,182   |   |                  |   | 15,367  |  
|                                                                                                                                            |  |                  
|PROPERTY AND EQUIPMENT, net                                                                                                                 |  |                   | 114,728  |   |                  |   | 121,816 |  
|NOTE RECEIVABLE                                                                                                                             |  |                   | 392      |   |                  |   |        |  
|OTHER ASSETS                                                                                                                                |  |                   | 4,221    |   |                  |   | 4,428   |  
|LONG-TERM ASSETS OF DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE                                                                        |  |                   | 8,920    |   |                  |   | 9,255   |  
|                                                                                                                                            |  |                   |          |   |                  |   |         |  
|                                                                                                                                            |  | $                 | 143,443  |   |                  | $ | 150,866 |  
|                                                                                                                                            |  |                   |          |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                        |  |                   |          |   |                  |   |         |  
|CURRENT LIABILITIES:                                                                                                                        |  |                   |          |   |                  |   |         |  
|Accounts payable                                                                                                                            |  | $                 | 9,810    |   |                  | $ | 12,191  |  
|Unredeemed gift card liabilities                                                                                                            |  |                   | 1,857    |   |                  |   | 2,921   |  
|Accrued payroll and benefits                                                                                                                |  |                   | 7,421    |   |                  |   | 8,363   |  
|Accrued sales, property and income tax                                                                                                      |  |                   | 3,239    |   |                  |   | 3,424   |  
|Other accrued expenses                                                                                                                      |  |                   | 4,705    |   |                  |   | 7,232   |  
|Line of credit borrowing                                                                                                                    |  |                   | 6,145    |   |                  |   |        |  
|Current maturities of long-term debt and capital leases                                                                                     |  |                   | 1,414    |   |                  |   | 1,309   |  
|Current liabilities of discontinued operations and assets held for sale                                                                     |  |                   | 2,795    |   |                  |   | 4,145   |  
|                                                                                                                                            |  |                   |          |   |                  |   |         |  
|Total current liabilities                                                                                                                   |  |                   | 37,386   |   |                  |   | 39,585  |  
|                                                                                                                                            |  |                   |          |   |                  |   |         |  
|LONG-TERM DEBT AND CAPITAL LEASES, less current maturities                                                                                  |  |                   | 16,343   |   |                  |   | 17,415  |  
|DEFERRED RENT                                                                                                                               |  |                   | 18,910   |   |                  |   | 19,062  |  
|OTHER LIABILITIES                                                                                                                           |  |                   | 3,471    |   |                  |   | 3,904   |  
|LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE                                                                   |  |                   | 1,687    |   |                  |   | 1,860   |  
|                                                                                                                                            |  |                   |          |   |                  |   |         |  
|Total liabilities                                                                                                                           |  |                   | 77,797   |   |                  |   | 81,826  |  
|                                                                                                                                            |  |                   |          |   |                  |   |         |  
|COMMITMENTS AND CONTINGENCIES (Note 9)                                                                                                      |  |                   |          |   |                  |   |         |  
|SHAREHOLDERS EQUITY:                                                                                                                       |  |                   |          |   |                  |   |         |  
|Undesignated stock, 5,000,000 shares authorized, none issued or outstanding                                                                 |  |                   |         |   |                  |   |        |  
|Common stock, $.01 par value per share, 30,000,000 shares authorized; 20,555,853 and 20,470,075 shares issued and outstanding,
respectively |  |                   | 206      |   |                  |   | 205     |  
|Additional paid-in capital                                                                                                                  |  |                   | 170,425  |   |                  |   | 170,686 |  
|Accumulated deficit                                                                                                                         |  |                   | (104,446 | ) |                  |   | (99,895 | )
|Unearned compensation                                                                                                                       |  |                   |         |   |                  |   | (1,151  | )
|Notes receivable from employee shareholders                                                                                                 |  |                   | (539     | ) |                  |   | (805    | )
|                                                                                                                                            |  |                   |          |   |                  |   |         |  
|Total shareholders equity                                                                                                                  |  |                   | 65,646   |   |                  |   | 69,040  |  
|                                                                                                                                            |  |                   |          |   |                  |   |         |  
|                                                                                                                                            |  | $                 | 143,443  |   |                  | $ | 150,866 |  
|                                                                                                                                            |  |                   |          |   |                  |   |         |  

See notes to Condensed Consolidated Financial Statements.



3



---

##### Table of Contents

BUCA, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(Unaudited)



|                                                                           |  |                      |            |   |                                          |   |            |                   |  |   |                                          |   |  |   |            |  
|-------------------------------------------------------------------------- |  | -------------------- | ---------- | - | ---------------------------------------- | - | ---------- | ----------------- |  | - | ---------------------------------------- | - |  | - | ---------- | -
|                                                                           |  | Thirteen Weeks Ended |            |   | Thirty-Nine Weeks Ended                  |  
|                                                                           |  | September 24,2006    |            |   | September 25,2005 (restated -see Note 2) |   |            | September 24,2006 |  |   | September 25,2005 (restated -see Note 2) |  
|Restaurant sales                                                           |  | $                    | 56,421     |   |                                          | $ | 54,977     |                   |  | $ | 182,282                                  |   |  | $ | 176,015    |  
|Restaurant costs:                                                          |  |                      |            |   |                                          |   |            |                   |  |   |                                          |   |  |   |            |  
|Product                                                                    |  |                      | 14,360     |   |                                          |   | 13,890     |                   |  |   | 45,449                                   |   |  |   | 44,942     |  
|Labor                                                                      |  |                      | 19,476     |   |                                          |   | 18,885     |                   |  |   | 60,387                                   |   |  |   | 58,358     |  
|Direct and occupancy                                                       |  |                      | 18,446     |   |                                          |   | 17,987     |                   |  |   | 54,726                                   |   |  |   | 52,677     |  
|Depreciation and amortization                                              |  |                      | 3,211      |   |                                          |   | 3,162      |                   |  |   | 9,720                                    |   |  |   | 9,850      |  
|                                                                           |  |                      |            |   |                                          |   |            |                   |  |   |                                          |   |  |   |            |  
|Total restaurant costs                                                     |  |                      | 55,493     |   |                                          |   | 53,924     |                   |  |   | 170,282                                  |   |  |   | 165,827    |  
|                                                                           |  |                      |            |  
|General and administrative expenses                                        |  |                      | 5,094      |   |                                          |   | 6,745      |                   |  |   | 14,883                                   |   |  |   | 18,873     |  
|Pre-opening costs                                                          |  |                      |           |   |                                          |   |           |                   |  |   |                                         |   |  |   | 243        |  
|Loss on impairment of long-lived assets                                    |  |                      | 52         |   |                                          |   | 9,365      |                   |  |   | 232                                      |   |  |   | 9,801      |  
|Lease termination charges                                                  |  |                      |           |   |                                          |   | 160        |                   |  |   |                                         |   |  |   | 234        |  
|                                                                           |  |                      |            |   |                                          |   |            |                   |  |   |                                          |   |  |   |            |  
|Operating loss                                                             |  |                      | (4,218     | ) |                                          |   | (15,217    | )                 |  |   | (3,115                                   | ) |  |   | (18,963    | )
|                                                                           |  |                      |            |  
|Interest income                                                            |  |                      | 19         |   |                                          |   | 40         |                   |  |   | 67                                       |   |  |   | 92         |  
|Interest expense                                                           |  |                      | (751       | ) |                                          |   | (786       | )                 |  |   | (2,226                                   | ) |  |   | (2,251     | )
|Loss on early extinguishment of debt                                       |  |                      |           |   |                                          |   | (675       | )                 |  |   |                                         |   |  |   | (675       | )
|                                                                           |  |                      |            |   |                                          |   |            |                   |  |   |                                          |   |  |   |            |  
|Loss before income taxes                                                   |  |                      | (4,950     | ) |                                          |   | (16,638    | )                 |  |   | (5,274                                   | ) |  |   | (21,797    | )
|Income taxes                                                               |  |                      |           |   |                                          |   |           |                   |  |   |                                         |   |  |   |           |  
|                                                                           |  |                      |            |   |                                          |   |            |                   |  |   |                                          |   |  |   |            |  
|Net loss from continuing operations                                        |  |                      | (4,950     | ) |                                          |   | (16,638    | )                 |  |   | (5,274                                   | ) |  |   | (21,797    | )
|Net (loss) income from discontinued operations                             |  |                      | (153       | ) |                                          |   | (4,310     | )                 |  |   | 723                                      |   |  |   | (3,881     | )
|                                                                           |  |                      |            |   |                                          |   |            |                   |  |   |                                          |   |  |   |            |  
|Net loss                                                                   |  | $                    | (5,103     | ) |                                          | $ | (20,948    | )                 |  | $ | (4,551                                   | ) |  | $ | (25,678    | )
|                                                                           |  |                      |            |   |                                          |   |            |                   |  |   |                                          |   |  |   |            |  
|Net loss from continuing operations per sharebasic and diluted            |  | $                    | (0.24      | ) |                                          | $ | (0.82      | )                 |  | $ | (0.26                                    | ) |  | $ | (1.08      | )
|                                                                           |  |                      |            |   |                                          |   |            |                   |  |   |                                          |   |  |   |            |  
|Net loss (income) from discontinued operations per sharebasic and diluted |  | $                    | (0.01      | ) |                                          | $ | (0.22      | )                 |  | $ | 0.04                                     |   |  | $ | (0.19      | )
|                                                                           |  |                      |            |   |                                          |   |            |                   |  |   |                                          |   |  |   |            |  
|Net (loss) per sharebasic and diluted                                     |  | $                    | (0.25      | ) |                                          | $ | (1.04      | )                 |  | $ | (0.22                                    | ) |  | $ | (1.27      | )
|                                                                           |  |                      |            |   |                                          |   |            |                   |  |   |                                          |   |  |   |            |  
|Weighted average common shares outstandingbasic and diluted               |  |                      | 20,534,848 |   |                                          |   | 20,223,749 |                   |  |   | 20,519,310                               |   |  |   | 20,206,579 |  
|                                                                           |  |                      |            |   |                                          |   |            |                   |  |   |                                          |   |  |   |            |  

See notes to Condensed Consolidated Financial Statements.



4



---

##### Table of Contents

BUCA, Inc. and Subsidiaries

Condensed Consolidated Statement of Shareholders Equity

For the Thirty-Nine Weeks Ended September 24, 2006

(in thousands)

(Unaudited)



|                                                       |  |              |   |                            |        |     |                         |   |         |                       |  |   |                                   |   |  |                            |          |   |  |   |      |   |  |   |        |  
|------------------------------------------------------ |  | ------------ | - | -------------------------- | ------ | --- | ----------------------- | - | ------- | --------------------- |  | - | --------------------------------- | - |  | -------------------------- | -------- | - |  | - | ---- | - |  | - | ------ | -
|                                                       |  | Common Stock |   | Additional paid-in capital |        |     | Unearned compen- sation |   |         | Accum- ulated deficit |  |   | Notesreceivable from shareholders |   |  | Total shareholders equity |         
|                                                       |  | Shares       |   |                            | Amount |     |                         |   |         |                      
|Balance at December 25, 2005                           |  | 20,470       |   |                            | $      | 205 |                         | $ | 170,686 |                       |  | $ | (1,151                            | ) |  | $                          | (99,895  | ) |  | $ | (805 | ) |  | $ | 69,040 |  
|Exercise of common stock options                       |  | 5            |   |                            |        |    |                         |   | 21      |                       |  |   |                                  |   |  |                            |         |   |  |   |     |   |  |   | 21     |  
|Issuance of common stock                               |  | 30           |   |                            |        |    |                         |   | 170     |                       |  |   |                                  |   |  |                            |         |   |  |   | (150 | ) |  |   | 20     |  
|Repurchase of common stock from shareholders           |  | (41          | ) |                            |        |    |                         |   | (182    | )                     |  |   |                                  |   |  |                            |         |   |  |   | 194  |   |  |   | 12     |  
|Collections on notes receivable from shareholders      |  |             |   |                            |        |    |                         |   |        |                       |  |   |                                  |   |  |                            |         |   |  |   | 222  |   |  |   | 222    |  
|Common stock issued under employee stock purchase plan |  | 32           |   |                            |        |    |                         |   | 175     |                       |  |   |                                  |   |  |                            |         |   |  |   |     |   |  |   | 175    |  
|Restricted stock forfeitures                           |  | (13          | ) |                            |        |    |                         |   |        |                       |  |   |                                  |   |  |                            |         |   |  |   |     |   |  |   |       |  
|Reclassification due to adoption of SFAS 123(R)        |  |             |   |                            |        |    |                         |   | (1,151  | )                     |  |   | 1,151                             |   |  |                            |         |   |  |   |     |   |  |   |       |  
|Issuance of restricted stock                           |  | 73           |   |                            |        | 1   |                         |   |        |                       |  |   |                                  |   |  |                            |         |   |  |   |     |   |  |   | 1      |  
|Share-based compensation                               |  |             |   |                            |        |    |                         |   | 706     |                       |  |   |                                  |   |  |                            |         |   |  |   |     |   |  |   | 706    |  
|Net loss                                               |  |             |   |                            |        |    |                         |   |        |                       |  |   |                                  |   |  |                            | (4,551   | ) |  |   |     |   |  |   | (4,551 | )
|                                                       |  |              |   |                            |        |     |                         |   |         |                       |  |   |                                   |   |  |                            |          |   |  |   |      |   |  |   |        |  
|Balance at September 24, 2006                          |  | 20,556       |   |                            | $      | 206 |                         | $ | 170,425 |                       |  | $ |                                  |   |  | $                          | (104,446 | ) |  | $ | (539 | ) |  | $ | 65,646 |  
|                                                       |  |              |   |                            |        |     |                         |   |         |                       |  |   |                                   |   |  |                            |          |   |  |   |      |   |  |   |        |  

See notes to Condensed Consolidated Financial Statements.



5



---

##### Table of Contents

BUCA, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)



|                                                                            |  |                         |        |   |                                          |   |         |  
|--------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---------------------------------------- | - | ------- | -
|                                                                            |  | Thirty-Nine Weeks Ended |       
|                                                                            |  | September 24,2006       |        |   | September 25,2005 (restated -see Note 2) |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |  |                         |        |   |                                          |   |         |  
|Net loss                                                                    |  | $                       | (4,551 | ) |                                          | $ | (25,678 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                         |        |   |                                          |   |         |  
|Depreciation and amortization                                               |  |                         | 9,720  |   |                                          |   | 10,859  |  
|Share-based compensation                                                    |  |                         | 706    |   |                                          |   |        |  
|Loss on impairment of long-lived assets                                     |  |                         | 635    |   |                                          |   | 13,738  |  
|Deferred rent                                                               |  |                         | (26    | ) |                                          |   | (100    | )
|Amortization of loan acquisition costs                                      |  |                         | 325    |   |                                          |   | 355     |  
|Loss on early extinguishment of debt                                        |  |                         |       |   |                                          |   | 675     |  
|Tenant allowance proceeds                                                   |  |                         |       |   |                                          |   | 331     |  
|Other non-cash items                                                        |  |                         | (372   | ) |                                          |   |        |  
|Change in assets and liabilities:                                           |  |                         |        |   |                                          |   |         |  
|Accounts receivable                                                         |  |                         | 446    |   |                                          |   | (717    | )
|Inventories                                                                 |  |                         | 382    |   |                                          |   | 530     |  
|Prepaid expenses and other                                                  |  |                         | (888   | ) |                                          |   | 1,347   |  
|Accounts payable                                                            |  |                         | (2,492 | ) |                                          |   | (263    | )
|Accrued expenses                                                            |  |                         | (6,064 | ) |                                          |   | (4,518  | )
|Other                                                                       |  |                         | (675   | ) |                                          |   | (57     | )
|                                                                            |  |                         |        |   |                                          |   |         |  
|Net cash used in operating activities                                       |  |                         | (2,854 | ) |                                          |   | (3,498  | )
|                                                                            |  |                        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |  |                         |        |   |                                          |   |         |  
|Purchase of property and equipment                                          |  |                         | (2,905 | ) |                                          |   | (1,177  | )
|Proceeds from sale of property and equipment                                |  |                         | 7      |   |                                          |   | 349     |  
|Proceeds from sale of other assets                                          |  |                         | 16     |   |                                          |   | 620     |  
|                                                                            |  |                         |        |   |                                          |   |         |  
|Net cash used in investing activities                                       |  |                         | (2,882 | ) |                                          |   | (208    | )
|                                                                            |  |                        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |  |                         |        |   |                                          |   |         |  
|Proceeds from line of credit borrowings                                     |  |                         | 15,595 |   |                                          |   | 7,869   |  
|Payments for line of credit borrowings                                      |  |                         | (9,450 | ) |                                          |   | (3,986  | )
|Principal payments on long-term debt                                        |  |                         | (993   | ) |                                          |   | (18,014 | )
|Proceeds from sale-leaseback                                                |  |                         |       |   |                                          |   | 17,500  |  
|Financing costs                                                             |  |                         | (100   | ) |                                          |   | (781    | )
|Collection on notes receivable from shareholders                            |  |                         | 222    |   |                                          |   | 92      |  
|Net proceeds from issuance of common stock                                  |  |                         | 216    |   |                                          |   | 149     |  
|                                                                            |  |                         |        |   |                                          |   |         |  
|Net cash provided by financing activities                                   |  |                         | 5,490  |   |                                          |   | 2,829   |  
|                                                                            |  |                         |        |   |                                          |   |         |  
|Net change in cash                                                          |  |                         | (246   | ) |                                          |   | (877    | )
|Cash at the beginning of period                                             |  |                         | 1,421  |   |                                          |   | 2,046   |  
|                                                                            |  |                         |        |   |                                          |   |         |  
|Cash at the end of period                                                   |  | $                       | 1,175  |   |                                          | $ | 1,169   |  
|                                                                            |  |                         |        |   |                                          |   |         |  

See notes to Condensed Consolidated Financial Statements.



6



---

##### Table of Contents

BUCA, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. BASIS OF PRESENTATION

BUCA, Inc. and subsidiaries (BUCA, we, our, or us) develop, own and operate Italian
restaurants under the name Buca di Beppo. At September 24, 2006, we owned 93 Buca di Beppo and 11 Vinny Ts of Boston restaurants. We sold the Vinny Ts of Boston restaurants on September 25, 2006 (see Note 11 for further
discussion). Our Buca di Beppo restaurants are located in 23 states and the District of Columbia.

The accompanying condensed consolidated
financial statements have been prepared by us without audit and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of financial position and the results of operations for the interim periods. The
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) and with the regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations relative to interim financial
statements. Operating results for the thirteen and thirty-nine weeks ended September 24, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

The balance sheet at December 25, 2005 has been derived from the audited financial statements at that date, but does not include all of the
information and notes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes for the fiscal year ended December 25, 2005 included
in our 2005 Annual Report on Form 10-K.

As described in Note 4, Discontinued Operations and Assets Held for Sale, we have
reclassified Vinny Ts of Boston and three Buca de Beppo closed restaurants financial results as discontinued operations for all periods presented. These notes to Condensed Consolidated Financial Statements, except where otherwise
indicated, relate to continuing operations only.

The accompanying condensed consolidated financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We had net losses of $4.6 million in the thirty-nine weeks ended September 24, 2006; however, we sustained net
losses of $32.1 million in fiscal 2005, $38.1 million in fiscal 2004 and $24.7 million in fiscal 2003 and we have an accumulated deficit of $104.4 million. We have utilized $2.9 million of cash from operating activities through the thirty-nine weeks
ended September 24, 2006. As of October 31, 2006, we had no outstanding borrowings under the term loan A facility, approximately $5.5 million under our revolving credit facility, and $15.8 million of capitalized leases. Our current
availability under the revolving credit facility is approximately $3.3 million. Our credit agreement contains restrictive covenants which require that we comply with certain financial ratios. These covenants limit our ability to take various actions
without the consent of our lender, including the incurrence of additional debt, the guaranteeing of certain indebtedness and engaging in various types of transactions, including mergers and sales of assets, paying dividends and making distributions
or other restricted payments, including investments. These covenants could have an adverse effect on our business by limiting our ability to take advantage of business opportunities.

In addition, failure to maintain the covenants required by our credit agreement could result in acceleration of the indebtedness under the credit
facility. In fiscal 2005, we were in violation of certain covenants under the credit agreement, which covenants were subsequently amended and the non-compliance waived by the lender. Our inability in the future to comply with the covenant
requirements under the credit agreement or to obtain a waiver of any violations could impair our liquidity and limit our ability to operate. We were in compliance with our bank covenants as of September 24, 2006.

2. RESTATEMENT OF FINANCIAL STATEMENTS

Subsequent to
the issuance of our condensed consolidated financial statements for the thirty-nine weeks ended September 25, 2005, we identified errors in our accounting for leases, which included errors in the accounting for straight-line rent and
depreciation of leasehold assets that affected our historical condensed consolidated financial statements. These errors are discussed in the following paragraphs.

Accounting for Real Estate LeasesWe identified instances where straight-line rent expense was recognized incorrectly because scheduled rent increases were not included in the minimum payments. In
addition, we identified certain leasehold improvements that were being depreciated over lives that were inconsistent with the expected lease term.



7



---

##### Table of Contents

Accounting for CashWe determined that we had incorrectly classified outstanding checks as
accounts payable as of September 25, 2005 rather than as a reduction in our cash balance as of September 25, 2005. We have now determined that outstanding checks should reduce positive balance accounts at the same banking institution that
contain provisions for right of offset.

As a result, the accompanying condensed consolidated financial statements for the thirteen and
thirty-nine weeks ended September 25, 2005 have been restated from the amounts previously reported to correct these errors in accounting.

A summary of the significant effects of the restatement is as follows (in thousands, except share and per share data):



|                                                                |  |                                                |         |   |                                                    |   |         |                        |  |   |          |   |  |   |         |  
|--------------------------------------------------------------- |  | ---------------------------------------------- | ------- | - | -------------------------------------------------- | - | ------- | ---------------------- |  | - | -------- | - |  | - | ------- | -
|                                                                |  | For the Thirteen Weeks EndedSeptember 25, 2005 |         |   | For the Thirty-Nine Weeks Ended September 25, 2005 |  
|                                                                |  | previouslyreported (1)                         |         |   | restated                                           |   |         | previouslyreported (1) |  |   | restated |  
|Statement of Operations                                         |  |                                                |         |   |                                                    |   |         |                        |  |   |          |   |  |   |         |  
|Direct and occupancy                                            |  | $                                              | 17,801  |   |                                                    | $ | 17,987  |                        |  | $ | 52,280   |   |  | $ | 52,677  |  
|Depreciation and amortization                                   |  |                                                | 3,165   |   |                                                    |   | 3,162   |                        |  |   | 9,859    |   |  |   | 9,850   |  
|Total restaurant costs                                          |  |                                                | 53,741  |   |                                                    |   | 53,924  |                        |  |   | 165,439  |   |  |   | 165,827 |  
|Operating loss                                                  |  |                                                | (15,034 | ) |                                                    |   | (15,217 | )                      |  |   | (18,575  | ) |  |   | (18,963 | )
|Net loss from continuing operations                             |  |                                                | (16,455 | ) |                                                    |   | (16,638 | )                      |  |   | (21,409  | ) |  |   | (21,797 | )
|Net loss                                                        |  |                                                | (20,765 | ) |                                                    |   | (20,948 | )                      |  |   | (25,290  | ) |  |   | (25,678 | )
|Net loss from continuing operations per sharebasic and diluted |  |                                                | (0.81   | ) |                                                    |   | (0.82   | )                      |  |   | (1.06    | ) |  |   | (1.08   | )
|Net loss per sharebasic and diluted                            |  |                                                | (1.03   | ) |                                                    |   | (1.04   | )                      |  |   | (1.25    | ) |  |   | (1.27   | )
|                                                                |  |                                                |         |  
|Statement of Cash Flows                                         |  |                                                |         |   |                                                    |   |         |                        |  |   |          |   |  |   |         |  
|Net loss                                                        |  |                                                |         |   |                                                    |   |         |                        |  |   | (25,290  | ) |  |   | (25,678 | )
|Accounts payable                                                |  |                                                |         |   |                                                    |   |         |                        |  |   | (2,146   | ) |  |   | (263    | )
|Net cash used in operating activities                           |  |                                                |         |   |                                                    |   |         |                        |  |   | (5,381   | ) |  |   | (3,498  | )
|Net change in cash                                              |  |                                                |         |   |                                                    |   |         |                        |  |   | (2,760   | ) |  |   | (877    | )

---

|(1) | The amounts labeled Previously Reported have been adjusted to reflect the reclassification for discontinued operations and assets held for sale (see Note 4).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

3. STOCK-BASED COMPENSATION

We have stock-based compensation plans under which we issue stock options, non-vested share awards (restricted stock) and discounted purchase rights. Our 2006 Omnibus Stock Plan (the 2006 Plan) allows our board of directors to grant options
to purchase shares of our stock to eligible employees for both incentive and non-statutory stock options. Options granted under the 2006 Plan vest as determined by the board of directors (generally five years) and are exercisable for a term not to
exceed ten years. The 2006 Plan was approved by our shareholders in June 2006, at which time we ceased granting any future awards under our prior stock option plans. A total of 2,100,000 shares are reserved under the 2006 Plan.

Our employee stock purchase plan (ESPP) permits eligible employees to purchase stock at 85% of the fair market value on either the first or last day of
the purchase period.

It is our policy to issue new shares when options are exercised, upon granting restricted stock and to fulfill
employee purchases through the ESPP.

Prior to fiscal year 2006, we applied Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations in accounting for these plans. No stock-based compensation expense was recognized in our condensed Consolidated Statement of Operations prior to fiscal 2006 for stock option awards, as
the exercise price was equal to the market price of our stock on the date of grant. In addition, we did not recognize any stock-based compensation expense for our ESPP as it is intended to be a plan that qualifies under Section 423 of the
Internal Revenue Code of 1986, as amended. Finally, we recognized stock-based compensation expense for restricted share awards.



8



---

##### Table of Contents

We adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-Based Payment (123(R)) as of the beginning of our fiscal year 2006, requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected the modified
prospective transition method as permitted by SFAS No. 123(R). Under this transition method, stock-based compensation expense for the thirteen and thirty-nine weeks ended September 24, 2006, includes: (a) compensation expense for all
stock-based compensation awards granted prior to, but not yet vested as of December 25, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based
Compensation; (b) compensation expense for all stock-based awards granted subsequent to December 25, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R); and
(c) compensation expense for the discount eligible employees receive as part of the ESPP. We recognized compensation expense for stock options and restricted stock awards on a straight-line basis over the requisite service period of the award.
Total share-based compensation included in general and administrative expense in our Consolidated Statement of Operations for the thirteen and thirty-nine weeks ended September 24, 2006, was $0.2 million and $0.7 million, respectively. In
accordance with the modified prospective transition method of SFAS No. 123(R), financial results for prior periods have not been adjusted.

The following table illustrates the effect on net loss and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123(R) to stock-based employee compensation during the thirteen and thirty-nine weeks
ended September 25, 2005 (in thousands):



|                                                                                         |  |                                        |         |   |                                           |   |         |  
|---------------------------------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ----------------------------------------- | - | ------- | -
|                                                                                         |  | Thirteen weeks endedSeptember 25, 2005 |         |   | Thirty-nine weeks endedSeptember 25, 2005 |  
|Net loss, as reported                                                                    |  | $                                      | (20,948 | ) |                                           | $ | (25,678 | )
|Plus: Stock-based employee compensation expense included in reported net loss            |  |                                        |        |   |                                           |   |        |  
|Less: Stock-based compensation expense determined under fair value method for all awards |  |                                        | (505    | ) |                                           |   | (1,355  | )
|                                                                                         |  |                                        |         |   |                                           |   |         |  
|Pro forma net loss                                                                       |  | $                                      | (21,453 | ) |                                           | $ | (27,033 | )
|                                                                                         |  |                                        |         |   |                                           |   |         |  
|Net loss per common share, basic and diluted:                                            |  |                                        |         |   |                                           |   |         |  
|As reported                                                                              |  | $                                      | (1.04   | ) |                                           | $ | (1.27   | )
|Pro forma                                                                                |  | $                                      | (1.06   | ) |                                           | $ | (1.34   | )

For purposes of this pro forma disclosure, the value of the stock-based compensation was amortized
to expense on a straight-line basis over the period it is vested or earned. Forfeitures were estimated based on historical experience.

The
following table summarizes the stock option transactions for the thirty-nine weeks ended September 24, 2006:



|                                |  |           |  |                                |      |                                           |     
|------------------------------- |  | --------- |  | ------------------------------ | ---- | ----------------------------------------- | ----
|                                |  | Options   |  | Weighted-AverageExercise Price |      | Weighted-AverageRemainingContractual Term
|Outstanding, December 25, 2005  |  | 2,151,495 |  | $                              | 6.64 |                                           | 7.6 
|Granted                         |  | 282,000   |  |                                | 5.46 |                                           |     
|Exercised                       |  | 4,767     |  |                                | 4.50 |                                           |     
|Forfeited or expired            |  | 204,104   |  |                                | 8.37 |                                           |     
|                                |  |           |  |                                |      |                                           |     
|Outstanding, September 24, 2006 |  | 2,224,624 |  | $                              | 6.30 |                                           | 7.39
|                                |  |           |  |                                |      |                                           |     
|Exercisable, September 24, 2006 |  | 1,645,592 |  | $                              | 6.50 |                                           |     
|                                |  |           |  |                                |      |                                           |     



9



---

##### Table of Contents

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing
model and the assumptions noted in the following table. Forfeitures estimates are based on historical company experience and qualitative judgments regarding the employee population.



|                                       |  |      |      |   |      |   |      |  
|-------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|Assumptions                            |  | 2006 |      |   | 2005 |  
|Expected volatility (1)                |  |      | 56.8 | % |      |   | 58.5 | %
|Expected dividends                     |  |      | None |   |      |   | None |  
|Risk-free interest rate (2)            |  |      | 4.6  | % |      |   | 4.2  | %
|Expected term (in years) (3)           |  |      | 7.5  |   |      |   | 7.0  |  
|Weighted Average fair value per option |  | $    | 3.42 |   |      | $ | 3.70 |  

---

|(1) | Expected stock price volatility is based on historical market price data.
|--- | -------------------------------------------------------------------------

|(2) | Based on the U.S. Treasury interest rates whose term is consistent with the expected life of our stock options.
|--- | ---------------------------------------------------------------------------------------------------------------

|(3) | We estimate the expected term of stock options consistent with the simplified method identified in Staff Accounting Bulletin No. 107 which considers the average of the vesting
term and the contractual term to be the expected term.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net cash proceeds from the exercise of stock options were
approximately $21,000 for the thirty-nine weeks ended September 24, 2006.

The fair value of restricted share awards is determined
based on the closing market price of our stock on the date of grant. Upon adoption of SFAS 123(R), we reclassified unearned compensation within shareholders equity to additional paid-in-capital. A summary of the status of our restricted share
awards as of September 24, 2006 is as follows:



|                                |  |         |  |                                        |     
|------------------------------- |  | ------- |  | -------------------------------------- | ----
|Restricted Share Awards         |  | Shares  |  | Weighted-Average Grant-Date Fair Value
|Outstanding, December 25, 2005  |  | 244,000 |  | $                                      | 5.48
|Granted                         |  | 73,407  |  |                                        | 5.61
|Vested                          |  |        |  |                                        |     
|Forfeited or expired            |  | 13,100  |  |                                        | 5.56
|                                |  |         |  |                                        |     
|Outstanding, September 24, 2006 |  | 304,307 |  | $                                      | 5.51
|                                |  |         |  |                                        |     

As of September 24, 2006, there was approximately $2.3 million of total unrecognized
compensation cost related to share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation expense will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost
over a weighted-average period of 3.1 years.

4. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

In December 2005, our board of directors approved the engagement of an investment banker to represent us in the sale of the Vinny Ts of Boston
restaurants. We completed the sale of the Vinny Ts of Boston restaurants on September 25, 2006 (see Note 11 for further discussion). Based on the sale proceeds, less costs to sell, we analyzed the carrying values of the Vinny Ts of
Boston long-lived assets and intangibles and recorded an impairment of approximately $0.4 million as of September 24, 2006. In November 2005, we closed three Buca di Beppo restaurants. The Vinny Ts of Boston brand and associated assets
and the three individual closed restaurants, as aggregated, meet the definition of a component of an entity. Operations and cash flows can be clearly distinguished and measured at the restaurant level and, when aggregated with the Vinny
Ts of Boston events noted above, the financial results of the three closed restaurants were determined to be material to our Condensed Consolidated Financial Statements.

Vinny Ts of Boston has been accounted for as an asset held for sale and, along with the three closed restaurants, have been included in
discontinued operations in the Condensed Consolidated Statements of Operations and assets held for sale in the Condensed Consolidated Balance Sheets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.



10



---

##### Table of Contents

Assets and liabilities classified as held for sale (Vinny Ts of Boston) and discontinued operations
(Buca di Beppo closed restaurants) consisted of (in thousands):



|                        |  |                    |       |                   |   |      
|----------------------- |  | ------------------ | ----- | ----------------- | - | -----
|                        |  | September 24, 2006 |       | December 25, 2005
|Current assets          |  | $                  | 1,210 |                   | $ | 1,246
|Property and equipment  |  |                    | 8,642 |                   |   | 8,943
|Other Assets            |  |                    | 278   |                   |   | 312  
|                        |  |                    |       |                   |   |      
|Total Long-term assets  |  |                    | 8,920 |                   |   | 9,255
|Current liabilities (1) |  |                    | 2,795 |                   |   | 4,145
|Long-term liabilities   |  |                    | 1,687 |                   |   | 1,860

---

|(1) | We closed three Buca di Beppo restaurants in November 2005. We reached an agreement with the landlord of one of the restaurants to terminate the lease and recorded estimated
liabilities for the remaining two restaurants to cover future lease termination costs. The fair value of these liabilities were estimated in accordance with the requirements of SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities.This required us to either negotiate a settlement with the landlord or estimate the present value of the future minimum lease obligations offset by the estimated sublease rentals that could be reasonably obtained for the
properties.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Discontinued operations financial results for the thirteen and thirty-nine weeks ended September 24,
2006 and September 25, 2005 consisted of (in thousands):



|                                               |  |                      |       |   |                         |   |        |                   |  |                   |        |  |   |        |  
|---------------------------------------------- |  | -------------------- | ----- | - | ----------------------- | - | ------ | ----------------- |  | ----------------- | ------ |  | - | ------ | -
|                                               |  | Thirteen Weeks Ended |       |   | Thirty-nine Weeks Ended |  
|                                               |  | September 24,2006    |       |   | September 25,2005       |   |        | September 24,2006 |  | September 25,2005 |       
|Restaurant sales                               |  | $                    | 7,298 |   |                         | $ | 8,702  |                   |  | $                 | 22,950 |  | $ | 27,293 |  
|Restaurant costs                               |  |                      | 7,029 |   |                         |   | 9,098  |                   |  |                   | 21,792 |  |   | 27,253 |  
|Other                                          |  |                      | 422   |   |                         |   | 3,914  |                   |  |                   | 435    |  |   | 3,921  |  
|                                               |  |                      |       |   |                         |   |        |                   |  |                   |        |  |   |        |  
|Net (loss) income from discontinued operations |  | $                    | (153  | ) |                         | $ | (4,310 | )                 |  | $                 | 723    |  | $ | (3,881 | )
|                                               |  |                      |       |   |                         |   |        |                   |  |                   |        |  |   |        |  



|                                     |  |   |          |  
|------------------------------------ |  | - | -------- | -
|Accrued exit costs December 25, 2005 |  | $ | 400,000  |  
|Expenses accrued                     |  |   | 31,000   |  
|Payments                             |  |   | (200,000 | )
|Accretion expense                    |  |   | 93,000   |  
|                                     |  |   |          |  
|Balance at September 24, 2006        |  | $ | 324,000  |  
|                                     |  |   |          |  

5. LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS

We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset or group of assets may
not be recoverable, but at least quarterly. We consider a history of consistent and significant operating losses to be a primary indicator of potential asset impairment. Assets are grouped and evaluated for impairment at the lowest level for which
there are identifiable cash flows, primarily the individual restaurants. A restaurant is deemed to be impaired if a forecast of its future operating cash flows directly related to the restaurant is less than its carrying amount. If a restaurant is
determined to be impaired, the loss is measured as the amount by which the carrying amount of the restaurant exceeds its fair value. Fair value is an estimate based on the best information available including prices for similar assets or the results
of valuation techniques such as discounted estimated future cash flows, as if the decision to continue to use the impaired restaurant was a new investment decision. If these assumptions change in the future, we may be required to take additional
impairment charges for the related assets. Considerable management judgment is necessary to estimate undiscounted future cash flows. Accordingly, actual results could vary significantly from such estimates.



11



---

##### Table of Contents

During the thirteen weeks ended September 24, 2006, we recorded $52,000 of losses related to the
purchase of property and equipment in restaurants that previously have been fully impaired due to amounts not being recoverable by future cash flows of the restaurant.

During the thirty-nine weeks ended September 24, 2006, we recorded $0.2 million of losses related to the purchase of property and equipment in restaurants that previously have been fully impaired due to amounts
not being recoverable by future cash flows of the restaurant. The first three quarters of fiscal 2005 included an approximate $9.8 million loss primarily related to a $6.5 million write-down of six Buca di Beppo restaurants, a $2.9 million loss on a
sale-leaseback transaction and a $0.4 million loss on capitalized costs for one restaurant which was not opened due to a reduction in our development plans.

6. NET LOSS FROM CONTINUING OPERATIONS PER SHARE

Net loss from continuing operations per share is computed in accordance
with SFAS No. 128, Earnings per Share. Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. The following table sets forth the calculation of basic and diluted net loss from
continuing operations per common share (in thousands, except share and per share data):



|                                                                       |  |                      |            |   |                         |   |            |                   |  |   |                   |   |  |   |            |  
|---------------------------------------------------------------------- |  | -------------------- | ---------- | - | ----------------------- | - | ---------- | ----------------- |  | - | ----------------- | - |  | - | ---------- | -
|                                                                       |  | Thirteen Weeks Ended |            |   | Thirty-Nine Weeks Ended |  
|                                                                       |  | September 24,2006    |            |   | September 25,2005       |   |            | September 24,2006 |  |   | September 25,2005 |  
|Numerator:                                                             |  |                      |            |   |                         |   |            |                   |  |   |                   |   |  |   |            |  
|Basic and diluted net loss from continuing operations                  |  | $                    | (4,950     | ) |                         | $ | (16,638    | )                 |  | $ | (5,274            | ) |  | $ | (21,797    | )
|Denominator:                                                           |  |                      |            |   |                         |   |            |                   |  |   |                   |   |  |   |            |  
|Weighted average shares outstanding  basic                            |  |                      | 20,534,848 |   |                         |   | 20,223,749 |                   |  |   | 20,519,310        |   |  |   | 20,206,579 |  
|Effect of dilutive securities:                                         |  |                      |            |   |                         |   |            |                   |  |   |                   |   |  |   |            |  
|Stock options                                                          |  |                      |           |   |                         |   |           |                   |  |   |                  |   |  |   |           |  
|Weighted average shares outstanding  diluted                          |  |                      | 20,534,848 |   |                         |   | 20,223,749 |                   |  |   | 20,519,310        |   |  |   | 20,206,579 |  
|Basic and diluted net loss from continuing operations per common share |  | $                    | (0.24      | ) |                         | $ | (0.82      | )                 |  | $ | (0.26             | ) |  | $ | (1.08      | )

Diluted loss from continuing operations per common share excludes 1.4 million stock options
at a weighted average price of $7.22 in the thirteen weeks ended September 24, 2006 and 2.0 million stock options at a weighted average price of $8.15 in the thirteen weeks ended September 25, 2005, 1.4 million stock options at a
weighted average price of $7.40 in the thirty-nine weeks ended September 24, 2006 and 1.9 million stock options at a weighted average price of $9.04 in the thirty-nine weeks ended September 25, 2005 due to their anti-dilutive effect.

7. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140. This statement is intended to
simplify accounting for certain hybrid financial instruments by permitting fair value re-measurement for such hybrid financial instruments. We are required to adopt SFAS 155 for all financial instruments acquired or issued after the beginning of our
first fiscal year that begins after September 15, 2006. We do not expect that adoption of this statement will have a significant effect on our financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109. FIN 48 prescribes a comprehensive
financial statement model of how a company should recognize, measure, present, and disclose uncertain tax positions that the company has taken or expects to take in its income tax returns. FIN 48 requires that only income tax benefits that meet
the more likely than not recognition threshold be recognized or continue to be recognized on the effective date. Initial derecognition amounts would be reported as a cumulative effect of a change in accounting principle. FIN 48 is
effective for fiscal years beginning after December 15, 2006. We are assessing the impact of the new guidance on all of our open tax positions and it is not expected to have a material impact on earnings.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, which provides interpretive guidance



12



---

##### Table of Contents

on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose
of a materiality assessment. SAB No. 108 is effective for fiscal years ending after November 15, 2006. We are currently assessing the impact, if any, the adoption of SAB No. 108 will have on our financial statements. The cumulative
effect, if any, of applying the provisions of SAB No. 108 will be reported as an adjustment to beginning-of-year retained earnings.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. We are currently evaluating the impact, if any, the
adoption of SFAS No. 157 will have on our financial statements.

In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB Statements No. 87, 88, 106, and 132(R),which requires an employer to recognize the over-funded or under-funded status of defined
benefit and other postretirement plans as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through an adjustment to comprehensive income. This
statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS No. 158 is effective for fiscal years beginning after December 15,
2006. We do not expect that adoption of this statement will have a significant effect on our financial statements.

8. SUPPLEMENTAL CASH FLOW
INFORMATION

The following is supplemental cash flow information for the thirty-nine weeks ended September 24, 2006 and
September 25, 2005 (in thousands):



|                                                            |  |                    |       |   |                    |   |      
|----------------------------------------------------------- |  | ------------------ | ----- | - | ------------------ | - | -----
|                                                            |  | September 24, 2006 |       |   | September 25, 2005
|Cash paid during period for:                                |  |                    |       |   |                    |   |      
|Interest                                                    |  | $                  | 1,959 |   |                    | $ | 2,255
|Income taxes                                                |  |                    |      |   |                    |   | 49   
|Non-cash investing and financing activities:                |  |                    |       |   |                    |   |      
|Shareholder receivable from issuance of stock               |  |                    | (150  | ) |                    |   |     
|Shareholder receivable reduction due to retirement of stock |  |                    | 194   |   |                    |   |     

9. COMMITMENTS AND CONTINGENCIES

Litigation - Three virtually identical civil actions were commenced against our company and three former officers in the United States District
Court for the District of Minnesota between August 7, 2005 and September 7, 2005. The three actions have been consolidated. The four lead plaintiffs filed and served a Consolidated Amended Complaint (the Complaint) on
January 11, 2006. The Complaint was brought on behalf of a class consisting of all persons who purchased our common stock in the market during the time period from February 6, 2001 through March 11, 2005 (the class
period). The lead plaintiffs alleged that in press releases and SEC filings issued during the class period, defendants made materially false and misleading statements about our companys income, revenues, and internal controls, which
allegedly had the result of artificially inflating the market price for our stock. The lead plaintiffs asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and sought compensatory damages in an unspecified amount,
plus an award of attorneys fees and costs of litigation. We filed a motion to dismiss the Complaint, which was granted on October 16, 2006. The Court has allowed plaintiffs 45 days to replead by filing a second amended complaint. We do
not know whether or not plaintiffs will file a second amended complaint. We are not able to predict the ultimate outcome of this litigation, but it may be costly and disruptive. The total costs cannot be reasonably estimated at this time. Federal
securities litigation can result in substantial costs and divert our managements attention and resources, which may have a material adverse effect on our business and results of operations, including cash flows.

In March 2004, two of our former hourly employees filed a purported class action suit against us in the Orange County Superior Court, State of
California. The action was later transferred to the Los Angeles Superior Court, State of California, and subsequently resolved as described below. The complaint alleged causes of action for failure to pay wages/overtime, failure to allow meal
breaks, failure to allow rest breaks, failure to pay reporting time pay, violation of Business & Professions Code Section 17200, and certain statutory damages and penalties. Mediation occurred in February 2005, at which



13



---

##### Table of Contents

time the parties reached a tentative settlement. The settlement was preliminarily approved by the court on
September 21, 2005 and the court entered its order approving the settlement on January 25, 2006. Subsequently, notice and claim forms were mailed to the defined class, and class members have filed claims. Based on estimates received from
external legal counsel, we recorded an estimated settlement expense of $1.8 million in fiscal 2004 associated with this legal action. We accrued an additional $0.5 million in settlement expense in the third quarter of fiscal 2006 in connection with
this matter, as the claims received were higher than we had anticipated. We have paid approximately $0.8 million as of October 31, 2006 and expect to pay the remaining amounts of this settlement before the end of fiscal 2006.

In February 2005, we announced that the SEC had informed us that it has issued a formal order of investigation to determine whether there have been
violations of the federal securities laws. We understand that the order of investigation relates to our internal controls and compliance with rules governing filings and reports, including public disclosures, required to be filed with the SEC, and
the 2002 purchase of an old farmhouse in Italy known as Villa Sermenino. We believe that the SEC largely has completed its investigation of the Company, with which we cooperated and assisted, and we expect to reach a resolution of this
matter with the SEC.

On July 25, 2005, we filed a civil action against two of our former officers, Greg Gadel and John
Motschenbacher, in the Hennepin County District Court, Minneapolis, Minnesota. Gadel was our Chief Financial Officer until February 2005. Motschenbacher was an officer since 1999, and our Senior Vice President and Chief Information Officer from
February 2004 until March 15, 2005. We alleged that Gadel and Motschenbacher breached the fiduciary duties of loyalty, good faith, and due care that they owed to us during their tenure as officers, and unjustly enriched themselves, by
(1) causing us to enter into unfavorable transactions with companies with which Gadel and Motschenbacher had undisclosed, material financial dealings, (2) causing us to overpay for goods and services provided by vendors with which Gadel
and Motschenbacher had undisclosed, material financial dealings, (3) soliciting and receiving undisclosed kickbacks from several vendors, and (4) seeking and receiving improper reimbursement from us for business expenses that were, in
fact, personal in nature, such as family vacations. We sought damages against each of Gadel and Motschenbacher in an amount in excess of $50,000, disgorgement of the compensation that we paid to Gadel and Motschenbacher during the period that they
were faithless fiduciaries, reimbursement of our costs of investigation, and an award of interest, attorneys fees, and costs of litigation. In connection with this action, we submitted an employee dishonesty insurance claim to our insurer
Great American Insurance Company (Great American). Great American paid us approximately $1.9 million for our claim in exchange for a policy release, and we transferred to Great American our rights of recovery in this action. Great
American also assumed the liability for future legal expenses in connection with this action. Since then, this action has been settled and dismissed. The settlement payments made by Gadel and Motschenbacher were paid to Great American.

We are subject to certain other legal actions arising in the normal course of business, none of which is expected to have a material adverse effect on
our results of operations, financial condition or cash flows.

10. NOTE RECEIVABLE

On September 15, 2006, we received a promissory note from Hays Companies, our former insurance broker, in the original principal amount of $460,000.
The note was issued, and an equal amount of cash was paid, to us in connection with the settlement of a dispute primarily regarding the brokers compensation. In connection with such payments, we and Hays Companies also entered into a
confidential settlement agreement and release of all claims. The promissory note is unsecured, bears no interest and is payable on or before March 15, 2008.

11. SUBSEQUENT EVENT

We completed the sale of the Vinny Ts of Boston restaurants to Bertuccis Corporation on
September 25, 2006. The sale price was $6.8 million; of which $3.0 million was paid in cash at the closing and $3.8 million was paid through a promissory note issued at closing. The promissory note matures on June 15, 2008 or earlier upon
the occurrence of certain other events, including a change in control of Bertuccis or the repayment or refinancing of Bertuccis outstanding senior notes. The purchase price is subject to a post-closing working capital adjustment. The net
proceeds of the sale were used to reduce our outstanding indebtedness.



14



---

##### Table of Contents

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

Restatement of Prior
Financial Information

The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and
the notes related to those Condensed Consolidated Financial Statements contained in Part I. Financial Information, Item 1. Financial Statements of this Quarterly Report on Form 10-Q. Any reference to a Note in this
discussion relates to the accompanying notes to the Condensed Consolidated Financial Statements unless otherwise indicated. All applicable disclosures in the following discussion have been modified to reflect the restatement, as described in Note 2
to the Condensed Consolidated Financial Statements (the Restatement).

Overview

At September 24, 2006, we owned and operated 93 Buca di Beppo and 11 Vinny Ts of Boston restaurants. We sold the Vinny Ts of Boston
restaurants on September 25, 2006. Our Buca di Beppo restaurants are full service restaurants that offer high quality, Italian cuisine served family-style in small and large family-sized portions in a fun and energetic atmosphere that parodies
the decor and ambiance of post-War Italian/American restaurants. Our Vinny Ts of Boston restaurants served individual and family-style portions for both lunch and dinner. The Vinny Ts of Boston restaurants were based upon re-creations of
the neighborhood Italian eateries prominent in the neighborhoods of lower Manhattan, Brooklyn, South Philadelphia and North End of Boston in the 1940s.

In January 2005, we opened one new Buca di Beppo restaurant in Carlsbad (San Diego), California. During fiscal 2005, we also closed three Buca di Beppo restaurants. From fiscal 2000 to 2003, we pursued a rapid
expansion strategy, opening 17 restaurants in each of fiscal 2000 and 2001 and 14 in each of fiscal 2002 and 2003. In addition to these new restaurant openings, in January 2002, we purchased the assets of nine Vinny Ts of Boston restaurants,
which we have sold, together with two additional Vinny Ts of Boston we had opened subsequent to that date. In fiscal 2004, we slowed our development, opening three restaurants and closing two. We are currently focused on the development and
implementation of appropriate strategies to improve our operations and improve comparable restaurant sales.

In December 2005, our board of
directors approved the engagement of an investment banker to represent us in the planned sale of the Vinny Ts of Boston restaurants. We completed the sale of Vinny Ts of Boston restaurants on September 25, 2006 (see Note 11 for
further discussion). Based on the sale proceeds, less costs to sell, we analyzed the Vinny Ts of Boston long-lived assets and intangibles carrying values and recorded an impairment of approximately $0.4 million as of September 24, 2006.
Vinny Ts of Boston is accounted for as assets held for sale as of September 24, 2006 and is included in discontinued operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. See Note 4 to our Condensed Consolidated Financial Statements for more information on assets held for sale and discontinued operations.

The three Buca di Beppo restaurants we closed during the fourth quarter of fiscal 2005 were in Cheektowaga, New York, Omaha, Nebraska and West Des
Moines, Iowa. Financial results related to these three restaurants have been classified as discontinued operations in our Consolidated Financial Statements. See Note 4 to our Condensed Consolidated Financial Statements for more information on
discontinued operations. Except where otherwise indicated, the following discussion relates to continuing operations only.

During fiscal
2005, we implemented a price increase of approximately 2.0% at our Buca di Beppo restaurants on our food menu items which resulted in an approximately 1.8% effective price increase on restaurant sales. In the first quarter of 2006, we implemented a
price increase of approximately 1.5% at our Buca di Beppo restaurants on our food menu items which resulted in an approximately 1.2% effective price increase on restaurant sales. The primary reason for the price increases was to offset rising
operational costs, particularly in product, labor, and occupancy expenses.

In February 2005, we announced that the SEC had informed us
that it has issued a formal order of investigation to determine whether there have been violations of the federal securities laws. We understand that the order of investigation relates to our internal controls and compliance with rules governing
filings and reports, including public disclosures, required to be filed with the SEC, and the 2002 purchase of an old farmhouse in Italy known as Villa Sermenino. We believe that the SEC largely has completed its investigation of the
Company, with which we cooperated and assisted, and we expect to reach a resolution of this matter with the SEC.

In March 2005, we
announced that we had terminated the employment of our Vice President, Controller, and Interim Chief Financial Officer and our Senior Vice President and Chief Information Officer. Acting through our audit committee with the assistance of independent
counsel, we then commenced an internal investigation of matters relating to the



15



---

##### Table of Contents

termination of these two executive officers. As part of its investigation, independent counsel to the audit committee,
with the assistance of forensic accountants, examined, among other things, manual journal entries in our accounting records, capitalization of fixed assets in connection with new restaurants being developed in prior years, and potential related
party transactions with certain vendors. Based on our internal investigation, we concluded that there was evidence that one or more of our former officers had breached his fiduciary duties to the company. The officers and employees about whom the
investigation had concerns are no longer with the Company. See Item 1. Legal Proceedings in Part II for a summary of legal proceedings we commenced against certain of our former executive officers.

Results of Operations

Our operating results for the
thirteen and thirty-nine weeks ended September 24, 2006 and September 25, 2005 expressed as a percentage of restaurant sales were as follows:



|                                               |  |                      |        |    |                         |   |        |                    |  |   |                    |    |  |   |         |   
|---------------------------------------------- |  | -------------------- | ------ | -- | ----------------------- | - | ------ | ------------------ |  | - | ------------------ | -- |  | - | ------- | --
|                                               |  | Thirteen Weeks Ended |        |    | Thirty-Nine Weeks Ended |  
|                                               |  | September 24, 2006   |        |    | September 25, 2005      |   |        | September 24, 2006 |  |   | September 25, 2005 |   
|Restaurant sales (in thousands)                |  | $                    | 56,421 |    |                         | $ | 54,977 |                    |  | $ | 182,282            |    |  | $ | 176,015 |   
|Restaurant costs:                              |  |                      |        |    |                         |   |        |                    |  |   |                    |    |  |   |         |   
|Product                                        |  |                      | 25.5   | %  |                         |   | 25.3   | %                  |  |   | 24.9               | %  |  |   | 25.5    | % 
|Labor                                          |  |                      | 34.5   | %  |                         |   | 34.4   | %                  |  |   | 33.1               | %  |  |   | 33.2    | % 
|Direct and occupancy                           |  |                      | 32.7   | %  |                         |   | 32.6   | %                  |  |   | 30.1               | %  |  |   | 29.9    | % 
|Depreciation and amortization                  |  |                      | 5.7    | %  |                         |   | 5.8    | %                  |  |   | 5.3                | %  |  |   | 5.6     | % 
|                                               |  |                      |        |    |                         |   |        |                    |  |   |                    |    |  |   |         |   
|Total restaurant costs                         |  |                      | 98.4   | %  |                         |   | 98.1   | %                  |  |   | 93.4               | %  |  |   | 94.2    | % 
|General and administrative expenses            |  |                      | 9.0    | %  |                         |   | 12.3   | %                  |  |   | 8.2                | %  |  |   | 10.8    | % 
|Pre-opening costs                              |  |                      | 0.0    | %  |                         |   | 0.0    | %                  |  |   | 0.0                | %  |  |   | 0.1     | % 
|Loss on impairment of long-lived assets        |  |                      | 0.1    | %  |                         |   | 17.0   | %                  |  |   | 0.1                | %  |  |   | 5.6     | % 
|Lease termination charges                      |  |                      | 0.0    | %  |                         |   | 0.3    | %                  |  |   | 0.0                | %  |  |   | 0.1     | % 
|                                               |  |                      |        |    |                         |   |        |                    |  |   |                    |    |  |   |         |   
|Operating loss                                 |  |                      | (7.5   | )% |                         |   | (27.7  | )%                 |  |   | (1.7               | )% |  |   | (10.8   | )%
|Interest income                                |  |                      | 0.0    | %  |                         |   | 0.1    | %                  |  |   | 0.0                | %  |  |   | 0.1     | % 
|Interest expense                               |  |                      | (1.3   | %) |                         |   | (1.4   | )%                 |  |   | (1.2               | )% |  |   | (1.3    | )%
|Loss on early extinguishment of debt           |  |                      | (0.0   | %) |                         |   | (1.3   | )%                 |  |   | (0.0               | )% |  |   | (0.4    | )%
|                                               |  |                      |        |    |                         |   |        |                    |  |   |                    |    |  |   |         |   
|Loss before income taxes                       |  |                      | (8.8   | )% |                         |   | (30.3  | )%                 |  |   | (2.9               | )% |  |   | (12.4   | )%
|Income taxes                                   |  |                      | 0.0    | %  |                         |   | 0.0    | %                  |  |   | 0.0                | %  |  |   | 0.0     | % 
|                                               |  |                      |        |    |                         |   |        |                    |  |   |                    |    |  |   |         |   
|Net loss from continuing operations            |  |                      | (8.8   | )% |                         |   | (30.3  | )%                 |  |   | (2.9               | )% |  |   | (12.4   | )%
|Net (loss) income from discontinued operations |  |                      | (0.2   | )% |                         |   | (7.8   | )%                 |  |   | 0.4                | %  |  |   | (2.2    | )%
|                                               |  |                      |        |    |                         |   |        |                    |  |   |                    |    |  |   |         |   
|Net loss                                       |  |                      | (9.0   | )% |                         |   | (38.1  | )%                 |  |   | (2.5               | )% |  |   | (14.6   | )%
|                                               |  |                      |        |    |                         |   |        |                    |  |   |                    |    |  |   |         |   

Thirteen Weeks Ended September 24, 2006 Compared to the Thirteen Weeks Ended September 25, 2005

Restaurant Sales. Our restaurant sales are primarily comprised of food and beverages. Restaurant sales increased by
approximately $1.4 million, or 2.6%, to $56.4 million in the third quarter of fiscal 2006 from $55.0 million in the third quarter of fiscal 2005. Our calculation of comparable restaurant sales includes restaurants open for 18 full months. For the
third quarter of fiscal 2006, comparable restaurant sales increased 2.7% at our Buca di Beppo restaurants. The increase in comparable restaurant sales was driven by increased guest counts, increased to go sales, and additional stores serving lunch.
The Company implemented an approximate 2% price increase on food over the course of fiscal 2005 and an approximate 1.5% price increase on food during the first quarter of fiscal 2006. Coupons and other discounts are accounted for as a direct
reduction in restaurant sales. Third quarter fiscal 2006 restaurant sales reflect total discounts of approximately $2.5 million compared to $2.1 million during the same period in fiscal 2005. We expect that our Buca di Beppo comparable restaurant
sales will be positive for the fourth quarter of fiscal 2006.

Product. Product costs increased by approximately $0.5 million, or
3.4%, to $14.4 million in the third quarter of fiscal 2006 from $13.9 million in the third quarter of fiscal 2005. Product costs as a percentage of sales increased to 25.5% in the third quarter of fiscal 2006 from 25.3% in the third quarter of
fiscal 2005. The increase in product costs in absolute dollars was driven by increased sales and price increases for both produce and staples. The increase in product cost as a percentage of sales was primarily a result of price increases for both
produce and staples. We expect product costs as a percentage of sales to decrease slightly in the fourth quarter of fiscal 2006 as compared to the same quarter in fiscal 2005.



16



---

##### Table of Contents

Labor. Labor costs include direct hourly labor and management wages, bonuses, taxes and benefits
for restaurant employees. Labor costs increased by approximately $0.6 million, or 3.1%, to $19.5 million in the third quarter of fiscal 2006 from $18.9 million in the third quarter of fiscal 2005. Labor cost as a percentage of sales increased 0.1
percentage points to 34.5% in the third quarter of fiscal 2006 from 34.4% in the third quarter of fiscal 2005. The increase in labor dollars was primarily related to staffing additional non-exempt labor to support higher guest counts and increased
hiring of non-exempt employees in the anticipation of adding new lunch restaurants in the fourth quarter of fiscal 2006. The increase in labor costs as a percentage of sales was primarily related to management training and increased hiring related
to the anticipation of serving lunch at additional restaurants in the fourth quarter of fiscal 2006. We expect labor costs as a percentage of sales to remain flat or increase slightly in the fourth quarter of fiscal 2006 as compared to the same
quarter of fiscal 2005.

Direct and Occupancy. Direct and occupancy expenses include supplies, marketing, rent, utilities, real
estate taxes, repairs and maintenance, and other related restaurant costs. Direct and occupancy expenses increased by approximately $0.4 million, or 2.6%, to $18.4 million in the third quarter of fiscal 2006 from $18.0 million in the third quarter
of fiscal 2005. Direct and occupancy costs as a percentage of sales increased to 32.7% in the third quarter of fiscal 2006 from 32.6% from the same period in fiscal 2005. The increase in direct and occupancy expenses as a percentage of sales and in
dollars was primarily related to increases in common area maintenance costs, increased utility usage related to an increased number of restaurants serving lunch, and to-go packaging prices. We expect direct and occupancy expenses as a percentage of
sales to increase slightly in the fourth quarter of fiscal 2006 as compared to the same quarter of fiscal 2005.

Depreciation and
Amortization. Depreciation and amortization includes depreciation on capital expenditures for restaurants and the Paisano Support Center. Depreciation and amortization remained relatively flat at $3.2 million in both the third quarter of fiscal
2006 and the third quarter of fiscal 2005. Depreciation and amortization decreased as a percentage of sales to 5.7% in the third quarter of fiscal 2006 from 5.8% in the third quarter of fiscal 2005. The decrease as a percentage of sales was
primarily due to the increase in sales and the increase in building asset write-offs recorded as a result of impairments taken since the third quarter of fiscal 2005. We expect depreciation and amortization as a percentage of sales to remain flat or
decrease slightly in the fourth quarter of fiscal 2006 as compared to the same quarter of fiscal 2005.

General and Administrative.
General and administrative expenses are comprised of expenses associated with all Paisano Support Center functions that support existing operations, including management and staff salaries, employee benefits, travel, information systems, guest
services, training and market research. General and administrative expenses decreased by approximately $1.6 million, or 24.5%, to $5.1 million in the third quarter of fiscal 2006 from $6.7 million in the third quarter of fiscal 2005. General and
administrative expenses as a percentage of sales decreased to 9.0% in the third quarter of fiscal 2006 from 12.3% in the third quarter of fiscal 2005. The decrease in general and administrative expenses in dollars and as a percentage of sales was
due to reductions in audit fees, Sarbanes-Oxley compliance consulting fees, and legal fees and due to receipt of approximately $0.9 million in insurance-related settlements. As described in Note 3 to our Condensed Consolidated Financial Statements,
our third quarter of fiscal 2006 included approximately $0.2 million of share-based compensation expense as a result of the adoption of SFAS No. 123(R) and an approximately $0.5 million expense related to the California class action settlement.
In accordance with the modified prospective transition method, we have not adjusted the financial results for our prior periods to include a comparable expense. We expect general and administrative expenses as a percentage of sales to decrease in
the fourth quarter of fiscal 2006 as compared to the same quarter of fiscal 2005.

Loss on Impairment of Long-Lived Assets.Loss on
impairment of long-lived assets relates to fixed and other long-term asset impairment charges on both open and unopened restaurants. During the third quarter of fiscal 2006, we recorded fixed asset impairment charges of $0.1 million compared to $9.4
million during the same period in 2005. We recorded approximately $0.1 million of losses related to the purchase of equipment in restaurants that have previously been fully impaired due to amounts not being deemed recoverable by future cash flows of
the restaurant. We will continue to review our restaurants for potential asset impairment.

Interest Expense. Interest expense
includes the financing cost on our credit facilities and capital leases. Interest expense remained relatively flat at $0.8 million in both the third quarter of fiscal 2006 and the third quarter of fiscal 2005. Interest expense on our credit
facilities was approximately $0.4 million while interest expense on our capital leases was approximately $0.3 million in the third quarter of 2006. The decrease primarily resulted from a reduction in long-term debt.

Income Taxes. We did not record a benefit from or provision for income taxes in the third quarter of fiscal 2006 or 2005. We recorded a tax
valuation allowance because we concluded that we remained in a position that may not allow for realization of the asset. We will continue to record a tax valuation allowance until it becomes more likely than not that we will be able to recover the
value of our deferred tax assets.



17



---

##### Table of Contents

Discontinued Operations. In December 2005, our board of directors approved the engagement of
an investment banker to represent us in the sale of the Vinny Ts of Boston restaurants. In November 2005, we also closed three Buca di Beppo restaurants. Vinny Ts of Boston along with the three closed Buca di Beppo restaurants have been
accounted for as discontinued operations under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.During the third quarter of fiscal 2006, net loss from discontinued operations decreased to a $0.2 million loss
from a $4.3 million loss in the same quarter of fiscal 2005. This decrease was primarily related to the operations of Vinny Ts of Boston. Vinny Ts of Boston had a $0.1 million net loss during the third quarter of fiscal 2006 compared to
a $4.1 million loss during the same period in fiscal 2005. The Vinny Ts of Boston third quarter of fiscal 2006 loss included $0.4 million of asset impairment charges. The Vinny Ts of Boston third quarter of fiscal 2005 loss included $3.9
million of asset impairment charges.

Net Loss. Net loss for the third quarter of fiscal 2006 improved over the same period in
fiscal 2005 from a net loss of $20.9 million to a net loss of $5.1 million. As a percentage of sales, net loss for the third quarter of 2006 was 9.0 % compared to a loss of 38.1% in the third quarter of fiscal 2005. The improvement in net loss
in absolute dollars and as a percentage of sales was primarily a result of increases in sales, reductions in general and administrative and a reduction in asset impairment charges.

Thirty-Nine Weeks Ended September 24, 2006 Compared to the Thirty-nine Weeks Ended September 25, 2005

Restaurant Sales. Restaurant sales increased by approximately $6.3 million, or 3.6%, to $182.3 million for the first three quarters of 2006 from $176.0 million in the same period of fiscal 2005. Comparable
restaurant sales increased by approximately 3.7% for Buca di Beppo during the first three quarters of 2006. The increase in total restaurant sales and comparable restaurant sales was due to an increase in guest counts, increased to go sales, the
approximate 2% price increase on food that we took over the course of fiscal 2005, the approximate 1.5% price increase that we took during the first quarter of fiscal 2006, and an increase in the number of stores serving lunch. Coupons and other
discounts are accounted for as a direct reduction in restaurant sales. Restaurant sales for the first three quarters of 2006 reflect total discounts of approximately $8.6 million compared to $7.8 million during the same period in fiscal 2005.

Product. Product costs increased to $45.4 million for the first three quarters of fiscal 2006 from $44.9 million in the same
period of fiscal 2005 but decreased as a percentage of sales to 24.9% from 25.5% during the same period of fiscal 2005. The increase in product costs in absolute dollars was driven by increased sales. Product costs decreased as a percentage of
restaurant sales primarily as a result of a reduction in bar costs for tap beer and wine related to changes in serving sizes, as well as lower pricing resulting from our new distribution contract.

Labor. Labor costs increased by approximately $2.0 million, or 3.5%, to $60.4 million in the first three quarters of fiscal 2006 from $58.4
million in the same period of fiscal 2005 but decreased as a percentage of sales to approximately 33.1% in the first three quarters of fiscal 2006 as compared to 33.2% in the same period of fiscal 2005. The increase in absolute dollars was primarily
a result of increased non-exempt labor due to higher guest counts and increased hiring of non-exempt labor coupled with increased management training to support the offering of lunch in additional restaurants. Labor costs improved as a percentage of
sales primarily due to reductions in exempt labor.

Direct and Occupancy. Direct and occupancy expenses increased by
approximately $2.0 million, or 3.9%, to $54.7 million in the first three quarters of fiscal 2006 from $52.7 million in the first three quarters of fiscal 2005. Direct and occupancy expenses increased as a percentage of sales to 30.1% in the first
three quarters of fiscal 2006 as compared to 29.9% in the same period of fiscal 2005. The increase in direct and occupancy costs as a percentage of sales and in absolute dollars was primarily a result of rising utility prices, common area
maintenance costs and to-go packaging prices. The increase in direct and occupancy costs in absolute dollars was also partially a result of increased credit card expenses resulting from increased sales.

Depreciation and Amortization. Total depreciation and amortization decreased by approximately $0.2 million, or 1.3%, to $9.7 million in the
first three quarters of fiscal 2006 from $9.9 million in the first three quarters of fiscal 2005. Depreciation and amortization decreased as a percentage of sales to 5.3% in the first three quarters of fiscal 2006 as compared to 5.6% in the first
three quarters of fiscal 2005. This decrease was primarily related to a write-down in fiscal 2005 of the restaurant assets of six Buca di Beppo restaurants.

General and Administrative. General and administrative expenses decreased by approximately $4.0 million, or 21.1%, to $14.9 million in the first three quarters of fiscal 2006 from $18.9 million in same
period of fiscal 2005. General and administrative expenses decreased as a percentage of sales to approximately 8.2% in the first three quarters of fiscal 2006 as compared to 10.8% in the same period of fiscal 2005. The decrease in general and
administrative costs as a percentage of sales and in absolute dollars was primarily a result of the receipt of $1.9 million with respect to the employee dishonesty insurance policy settlement and $0.9 million in connection with an insurance-related
settlement in the third quarter of 2006,



18



---

##### Table of Contents

decreased legal and consulting fees related primarily to the internal investigation undertaken in fiscal
2005 and Sarbanes-Oxley compliance partially offset by an approximately $0.5 million expense related to the California class actions settlement. As described in Note 3 to our Condensed Consolidated Financial Statements, our first three quarters of
fiscal 2006 included approximately $0.7 million of share-based compensation expense as a result of the adoption of SFAS No. 123(R). In accordance with the modified prospective transition method, we have not adjusted the financial results for
our prior periods to include a comparable expense.

Loss on Impairment of Long-lived Assets. During the first three quarters of
fiscal 2006 we recorded impairment charges of $0.2 million related to impairments of fixed assets. We recorded approximately $0.2 million of losses related to the purchase of equipment in restaurants that have previously been fully impaired due to
amounts not being deemed recoverable by future cash flows of the restaurant.

Interest Expense. Interest expense remained
relatively flat at approximately $2.2 million in both the first three quarters of fiscal 2006 and the first three quarters of fiscal 2005.

Income Taxes. We did not record a benefit from or provision for income taxes during the first three quarters of fiscal 2006 or 2005.

Discontinued Operations. During the first three quarters of fiscal 2006, net income from discontinued operations increased to $0.7 million from a net loss of $3.9 million in the same period of fiscal 2005. This increase was
related to the operations of Vinny Ts of Boston. Vinny Ts of Boston had $0.9 million of operating income during the first three quarters of fiscal 2006 compared to a $3.6 million loss during the same period in fiscal 2005. During the
first three quarters of fiscal 2006, Vinny Ts of Boston net income included $0.4 million of asset impairment charges. The Vinny Ts of Boston 2005 loss included $3.9 million of asset impairment charges.

Net Loss. During the first three quarters of fiscal 2006 our net loss improved to $4.6 million from $25.7 million in the same period of
fiscal 2005. As a percentage of sales, net loss improved from a negative 14.6% to a negative 2.5%. This increase in dollars and as a percentage of sales was primarily related to an increase in restaurant sales, a decrease in asset impairments and a
decrease in general and administrative expenses.

Liquidity and Capital Resources

As of September 24, 2006, we held cash of approximately $1.2 million, a decrease of approximately $0.2 million from the fiscal 2005 year-end balance
of approximately $1.4 million. The reduction in our cash balance was due primarily to an increased use of cash in our operating and investing activities driven by general and administrative expenses largely related to accounting and legal costs
associated with the investigation of events that transpired under prior management, settlement of various lawsuits, increased medical claims, less favorable payment terms for our new food distributor, net decrease of gift card reserves, capital
spending on a new accounting system, partially offset by proceeds received from insurance and lawsuit settlements.

Net cash used in
operating activities was approximately $2.9 million for the thirty-nine weeks ended September 24, 2006 as compared to net cash used in operating activities of $3.5 million for the same period in fiscal 2005. The decrease of $0.6 million in the
use of cash in operating activities is primarily related to the $2.3 million of proceeds received from insurance and lawsuit settlements and improved restaurant operating performance partially offset by general and administrative expenses related to
accounting and legal costs associated with the investigation of events that transpired under prior management, the settlement of various lawsuits, increased medical claims and less favorable payment terms for our new food distributor. The 2006
activity included break-even cash flow from discontinued operations.

Net cash used in investing activities was $2.9 million for the first
thirty-nine weeks of fiscal 2006 as compared to a $0.2 million use of cash from investing activities for the same period in fiscal 2005. The cash was used primarily for the purchase of a new accounting system and maintaining existing restaurant
assets. The 2006 activity included investing cash uses of less than $50,000 relating to discontinued operations.

We use cash for property
and equipment primarily to fund the development and construction of new restaurants and secondarily to fund capitalized property improvement for our existing restaurants. During fiscal 2005, we opened one new Buca di Beppo restaurant, no Vinny
Ts of Boston restaurants and closed three Buca di Beppo restaurants. We are currently evaluating new prototypes for potential new restaurants to be opened subsequent to fiscal 2006 and we anticipate that total cash investment per Buca di Beppo
restaurant, including pre-opening costs, will be approximately $2.8 million.



19



---

##### Table of Contents

Our board of directors and management reached decisions to close three restaurants during fiscal 2005. In
accordance with the requirements of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, we established lease termination liabilities of approximately $0.4 million in fiscal 2005 based upon our estimate of the
fair value of these obligations by either negotiating a settlement with the landlord or estimating the present value of the future minimum lease obligations offset by the estimated sublease rentals that could be reasonably obtained for the
properties

Net cash provided by financing activities was $5.5 million in the first thirty-nine weeks of fiscal 2006 and $2.9 million for
the same period in fiscal 2005.

In November 2004, we entered into a new credit agreement with Wells Fargo Foothill, Inc. and Ableco
Finance LLC, as lenders, and with Wells Fargo Foothill, Inc., as the arranger and administrative agent for the lenders. The credit agreement provides for (a) a revolving credit facility in an aggregate amount equal to the lesser of a borrowing
base determined in accordance with the terms of the credit agreement and $15 million (including a letter of credit sub-facility of up to an aggregate of $5.7 million); (b) a term loan A facility of up to an aggregate of $5 million; and
(c) a term loan B facility of up to an aggregate of $15 million. We are also required under the loan documents to pay certain of our lenders an annual fee, an unused line of credit fee and a prepayment fee in the event of early termination of
the agreement. Under the term loan A facility, we are required to make a principal payment of $312,500 on the first day of January, April, July and October of each year beginning in 2005 and ending on October 1, 2008.

The credit agreement includes various affirmative and negative covenants, including certain financial covenants such as minimum EBITDA as defined in the
agreement, minimum fixed charge coverage ratio and maximum limits on capital expenditures and the acquisition or construction of new restaurants in any fiscal year. Payments under the credit agreement may be accelerated upon the occurrence of an
event of default, as defined in the credit agreement, that is not otherwise waived or cured. As of March 27, 2005, we were in default of the financial covenants regarding minimum EBITDA and fixed charge coverage ratio. As a result, an amendment
and waiver was negotiated and received in April 2005. In exchange for the amendment and waiver, we paid our lenders fees totaling $0.4 million and the interest rate on the term loan B portion of the credit facility was increased. As of
December 25, 2005, we were in default of the financial covenants regarding minimum EBITDA and fixed charge coverage ratio. As a result, an amendment and waiver was negotiated and received in March 2006. In exchange for the amendment and waiver,
we paid our lender a fee of $0.1 million. The amendment also extended the term of the credit agreement by one year, ending on November 15, 2009. We were in compliance with our bank covenants as of September 24, 2006.

On September 9, 2005, we completed the sale and simultaneous leaseback of eight restaurant locations with affiliates of CRIC Capital at a sale price
of $17.5 million (the Sale Leaseback Transaction). We have and may continue to explore financing opportunities through sale-leaseback transactions involving our land and buildings; however, the current credit facility restricts our
ability to complete certain types of sale-leaseback transactions without the consent of our lenders. We cannot predict whether this financing will be available when needed or on terms acceptable to us.

The net proceeds of the Sale Leaseback Transaction were used to prepay, in its entirety, the outstanding term loan B facility with Ableco and to prepay a
portion of the outstanding term loan A facility with Wells Fargo. A premium equal to four percent of the outstanding principal amount of the term loan B was paid in connection with the prepayment of the term loan B facility. Concurrently with the
closing of the Sale Leaseback Transaction, we entered into an agreement (the Amendment and Consent) with the lenders under the credit agreement. Pursuant to the Amendment and Consent, the lenders consented to the Sale Leaseback
Transaction (subject to the prepayment of the term loan B facility and term loan A facility as provided above), agreed to amend the minimum EBITDA coverage required for relevant testing periods in fiscal year 2007 and agreed to amend the credit
agreement in certain other respects. In consideration for receiving the Amendment and Consent, we agreed to increase the interest rate on each of the remaining term loan A facility and the revolving credit facility by 2.25% per annum.

The interest rate on the term loan A facility is Wells Fargos reference rate plus 2.50 percentage points. Under the credit facility,
our annual capital expenditures are limited to $13 million and the agreement includes covenants that place restrictions on sales of properties, transactions with affiliates, creation of additional debt, limitations on our ability to sign leases for
new restaurants, maintenance of certain financial covenants and other customary covenants.

Amounts borrowed under the credit facility are
secured by substantially all of our tangible and intangible assets. As of October 31, 2006, we had no outstanding borrowings under the term loan A facility, and approximately $5.5 million under our revolving credit facility. As of
October 31, 2006, our current availability under the revolving credit facility was approximately $3.3 million.



20



---

##### Table of Contents

Our capital requirements, including development costs related to the opening of additional restaurants,
have been significant. We have reduced our development plans for fiscal 2005 and 2006 until we have executed proven strategies to consistently improve our comparable restaurant sales and our cash flow from operations. We may need substantial capital
to finance our expansion plans, which require funds for capital expenditures, pre-opening costs and initial operating losses related to new restaurant openings. In addition, we have incurred and expect to incur significant costs related to the
on-going litigation and related matters. The adequacy of available funds and our future capital requirements will depend on many factors, including the pace of expansion, the costs and capital expenditures for new restaurant development and the
nature of contributions, loans and other arrangements negotiated with landlords. Although we can make no assurance, we believe that our available cash, cash flows from operations, and our available borrowings will be sufficient to fund our capital
requirements through at least the next twelve months. Additionally, the proceeds from potential additional sale-leaseback transactions would permit us, if necessary, to repay a portion of indebtedness under the credit agreement. There can be,
however, no assurances regarding these assumptions. If our plans are not achieved, there may be further negative effects on our results of operations and cash flows, which could have a material adverse effect on us. To fund future operations, we may
need to raise additional capital through public or private equity or debt financing to continue our growth. In addition, we have and may continue to consider acquiring the operations of other companies. The sale of additional equity or debt
securities could result in additional dilution to our shareholders. We cannot predict whether additional capital will be available on favorable terms, if at all.

Off-Balance Sheet Arrangements

We do not have off-balance sheet arrangements.

Application of Critical Accounting Policies and Estimates

Critical accounting policies are those we believe are both most important to the portrayal of our financial condition and operating results, and require our most difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different
assumptions. Our critical accounting policies include: property and equipment, leases, impairment of long-lived assets, self-insurance, income taxes, estimated liability for closing restaurants, loss contingencies and share-based compensation. Based
on our adoption of SFAS 123(R) and the impact it had on our financial statements, we added Share-Based Compensation to our Critical Accounting Policies and Estimates, as described below. A more in-depth description of all other policies can be found
in our Annual Report on Form 10-K for the fiscal year ended December 25, 2005.

Share-Based Compensation

Prior to fiscal 2006, we accounted for our share-based employee compensation plans under the measurement and recognition provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by Financial Accounting Standards Board SFAS No. 123, Accounting for Stock-Based Compensation. We
generally recorded no employee compensation expense for options granted prior to fiscal 2006, as options granted generally had exercise prices equal to the fair market value of our common stock on the date of grant. We also recorded no compensation
expense in connection with our ESPP as the purchase price of the stock was not less than 85% of the lower of the fair market value of our common stock at the beginning of each offering period or at the end of each offering period. We had recognized
compensation expense related to non-vested (restricted) stock issued to employees in fiscal 2005. In accordance with SFAS No. 123, we disclosed our net income and earnings per share as if we had applied the fair value-based method in measuring
compensation expense for our share-based incentive awards.

Effective as of fiscal 2006, we adopted the fair value recognition provisions
of SFAS No. 123(R), Share-Based Payment,using the modified prospective transition method. Under that transition method, compensation expense that we recognize beginning in fiscal 2006 includes expense associated with the fair value of
all awards granted on and after December 26, 2005 (the beginning of our 2006 fiscal year), expense for the unvested portion of previously granted awards outstanding on December 26, 2005, and compensation for the discount eligible employees
receive as part of the ESPP. Results for prior periods have not been adjusted.

We estimate the fair value of options granted using the
Black-Scholes option valuation model and the assumptions shown in Note 3 to the accompanying condensed consolidated financial statements. We estimate the volatility of our common stock at the date of grant based on our historical volatility rate,
consistent with SFAS No. 123(R) and Securities and Exchange Commission Staff Accounting Bulletin No. 107 (SAB 107). Our decision to use historical volatility was based upon the lack of actively traded options on our common stock. We
estimate the expected term consistent with the simplified



21



---

##### Table of Contents

method identified in SAB 107 for share-based awards granted during the thirty-nine week period ended September 24,
2006. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of our employee options.
We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. For options granted, we amortize the fair value on a straight-line basis. All options are
amortized over the requisite service periods of the awards, which are generally the vesting periods. If factors change we may decide to use different assumptions under the Black-Scholes option valuation model in the future, which could materially
affect our net income and earnings per share.

Recent Accounting Pronouncements

See Note 7 to our Condensed Consolidated Financial Statements for discussion on new accounting standards.

Inflation

The primary inflationary factors affecting
our operations are food and labor costs. A large number of our restaurant personnel are paid at rates based on the applicable minimum wage, and increases in the minimum wage directly affect our labor costs. To date, inflation has not had a material
impact on our operating results.

Disclosure Regarding Forward-Looking Statements

This Form 10-Q for the thirteen and thirty-nine weeks ended September 24, 2006 contains forward-looking statements within the meaning of the safe
harbor provisions of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on the beliefs of our management as well as on assumptions made by and information currently available to us at the time the
statements were made. When used in this Form 10-Q, the words anticipate, believe, estimate, expect, intend and similar expressions, as they relate to us, are intended to identify the
forward-looking statements. Although we believe that these statements are reasonable, you should be aware that actual results could differ materially from those projected by the forward-looking statements. Because actual results may differ, readers
are cautioned not to place undue reliance on forward-looking statements.



| |  | Our comparable restaurant sales percentage and average weekly sales could fluctuate as a result of the success of our menu initiatives, to go efforts, general economic
conditions, consumer confidence in the economy, changes in consumer preferences, competitive factors, weather conditions, or changes in our historical sales pattern.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Product costs could be adversely affected by increased distribution prices by DMA, our principal food supplier, or a failure to perform by DMA, as well as the availability of food
and supplies from other sources, changes in our menu items, adverse weather conditions, governmental regulation, inflation and general economic conditions.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Labor costs could increase due to increases in the minimum wage as well as competition for qualified employees and the need to pay higher wages to attract a sufficient number of
employees.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Direct and occupancy costs could be adversely affected by an inability to negotiate favorable lease terms, an inability to negotiate favorable lease termination terms, increasing
supply costs or usage, marketing expenses, property taxes, common area maintenance expenses, utility costs or usage, repairs and maintenance expenses, or general economic conditions.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | General and administrative expenses could increase due to competition for qualified employees, the need to pay higher wages to attract sufficient employees, legal and accounting
costs, Sarbanes-Oxley compliance costs as well as general economic conditions.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest expense could be adversely affected by our need for additional borrowings on our credit facilities and an increase in interest rates.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our ability to generate cash from operating activities could be adversely affected by increases in expenses as well as decreases in our average check and guest counts.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our actual cash investment for building each restaurant could be higher or lower based upon the success of locating suitable sites, the restaurant location and construction costs.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22



---

##### Table of Contents

| |  | The covenants and restrictions under our current line of credit and term loan facility could have a significant impact on us based upon our ability to meet and maintain the
covenants, our capital requirements, our financial performance, our business plan and general economic conditions.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The borrowing availability under our current credit facility could be higher or lower due to increases or decreases in our financial performance, ability to maintain debt covenants,
and other debt-related issues.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our capital requirements could be higher or lower due to increases or decreases in the amount of new restaurants we build or acquire and general economic conditions.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The actual impact of our Buca Small initiative could be affected by changes in consumer preferences, the effectiveness of our Buca Small marketing campaigns, competitive factors and
weather conditions.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Additional factors that could cause actual results to differ include: an adverse outcome of the SEC investigation; failure in remediating internal control deficiencies; an adverse
outcome of pending legal proceedings; risks associated with restaurants not generating sufficient cash flows to support the carrying value of the restaurants assets; risks of incurring additional lease termination expenses; risks associated
with terrorism and our countrys war on terrorism; risks associated with actual or alleged food-borne illness; risks associated with future growth; inability to achieve and manage planned expansion; fluctuations in operating results; the need
for additional capital; risks associated with discretionary consumer spending; inability to compete with larger, more established competitors; potential labor shortages; our dependence on governmental licenses; weather and natural disasters; and
legal actions arising in the normal course of business, including complaints or litigation from guests.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our restaurants
feature Italian cuisine served both in individual and family-style portions. Our continued success depends, in part, upon the popularity of this type of Italian cuisine and this style of informal dining. Shifts in consumer preferences away from our
cuisine or dining style could materially adversely affect our future profitability. Also, our success depends to a significant extent on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer
income and consumer confidence. Adverse changes in these factors could reduce guest traffic or impose practical limits on pricing, either of which could materially adversely affect our business, financial condition, operating results or cash flows.

Certain of these risk factors are more fully discussed in our Annual Report on Form 10-K for the period ended December 25, 2005. We
caution you, however, that the list of factors above may not be exhaustive and that those or other factors, many of which are outside of our control, could have a material adverse effect on us and our results of operations. All forward-looking
statements attributable to persons acting on our behalf or us are expressly qualified in their entirety by the cautionary statements set forth here. We assume no obligation to publicly release the results of any revision or updates to these
forward-looking statements to reflect future events or unanticipated occurrences.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from
changes in interest rates on borrowings under our credit agreement. The credit agreement provides for (a) a revolving credit facility in an aggregate amount equal to the lesser of a borrowing base determined in accordance with the terms of the
credit agreement and $15 million (including a letter of credit sub-facility of up to an aggregate of $5.7 million); and (b) a term loan A facility of up to an aggregate of $5 million. The interest rate on the term loan A facility is Wells
Fargos reference rate plus 2.50 percentage points. As of October 31, 2006, we had approximately $5.5 million outstanding in debt borrowings under our credit facility. Thus, a 1% change in interest rates would cause annual interest expense
to increase by $55,000.

We have no derivative financial instruments or derivative commodity instruments.

Many of the food products purchased by us are affected by commodity pricing and are, therefore, subject to price volatility caused by weather, production
problems, delivery difficulties and other factors that are outside our control. To control this risk in part, we have fixed price purchase commitments for some food and supplies from vendors who supply our national food distributor. In addition, we
believe that substantially all of our food and supplies are available from several sources, which helps to control food commodity risks. We believe we have the ability to increase menu prices, or vary the menu items offered, if needed in response to
a food product price increases. To compensate for a hypothetical price increase of 10% for food and supplies, we would need to increase menu prices by an average of 2.5%, which compares to our average price increase of approximately 2.0% in fiscal
2005, 1% in fiscal 2004 and 2% in fiscal 2003. Accordingly, we believe that a hypothetical 10% increase in food product costs would not have a material effect on our operating results.



23



---

##### Table of Contents

Item 4. Controls and Procedures

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of the
principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act)). Based upon this
evaluation, our principal executive officer and principal financial officer concluded that as of September 24, 2006, our disclosure controls and procedures were ineffective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms due to the material weaknesses in internal control over
financial reporting as described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 25, 2005 that have not been remediated. In fiscal 2005 and continuing in fiscal 2006, we have begun to remediate identified
deficiencies and material weaknesses in our internal control over financial reporting. See Item 9A. Controls and Procedures of our Annual Report on Form 10-K for the fiscal year ended December 25, 2005 for more information about the
deficiencies we have identified and the remediation we have taken and expect to take.

Changes in Internal Control Over Financial Reporting

There have been no changes to our internal control over financial reporting during the third quarter of fiscal 2006 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In March 2004, two of our former hourly employees filed a purported class
action suit against us in the Orange County Superior Court, State of California. The action was later transferred to the Los Angeles Superior Court, State of California, and subsequently resolved as described below. The complaint alleged causes of
action for failure to pay wages/overtime, failure to allow meal breaks, failure to allow rest breaks, failure to pay reporting time pay, violation of Business & Professions Code Section 17200, and certain statutory damages and
penalties. Mediation occurred in February 2005, at which time the parties reached a tentative settlement. The settlement was preliminarily approved by the court on September 21, 2005 and the court entered its order approving the settlement on
January 25, 2006. Subsequently, notice and claim forms were mailed to the defined class, and class members have filed claims. Based on estimates received from external legal counsel, we recorded an estimated settlement expense of $1.8 million
in fiscal 2004 associated with this legal action. We accrued an additional $0.5 million in settlement expense in the third quarter of fiscal 2006 in connection with this matter, as the claims received were higher than we had anticipated. We have
paid approximately $0.8 million as of October 31, 2006 and expect to pay the remaining amounts of this settlement before the end of fiscal 2006.

In February 2005, we announced that the SEC had informed us that it has issued a formal order of investigation to determine whether there have been violations of the federal securities laws. We understand that the
order of investigation relates to our internal controls and compliance with rules governing filings and reports, including public disclosures, required to be filed with the SEC, and the 2002 purchase of an old farmhouse in Italy known as Villa
Sermenino. We believe that the SEC largely has completed its investigation of the Company, with which we cooperated and assisted, and we expect to reach a resolution of this matter with the SEC.

Three virtually identical civil actions were commenced against our company and three former officers in the United States District Court for the District
of Minnesota between August 7, 2005 and September 7, 2005. The three actions have been consolidated. The four lead plaintiffs filed and served a Consolidated Amended Complaint (the Complaint) on January 11, 2006. The
Complaint was brought on behalf of a class consisting of all persons who purchased our common stock in the market during the time period from February 6, 2001 through March 11, 2005 (the class period). The lead plaintiffs
alleged that in press releases and SEC filings issued during the class period, defendants made materially false and misleading statements about our companys income, revenues, and internal controls, which allegedly had the result of
artificially inflating the market price for our stock. The lead plaintiffs asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and sought compensatory damages in an unspecified amount, plus an award of
attorneys fees and costs of litigation. We filed a motion to dismiss the Complaint, which was granted on October 16, 2006. The Court has allowed plaintiffs 45 days to replead by filing a second amended complaint. We do not know whether or
not plaintiffs will file a second amended complaint. We are not able to predict the ultimate outcome of this litigation, but it may be costly and disruptive. The total costs cannot be reasonably estimated at this time. Federal securities litigation
can result in substantial costs and divert our managements attention and resources, which may have a material adverse effect on our business and results of operations, including cash flows.



24



---

##### Table of Contents

On July 25, 2005, we filed a civil action against two of our former officers, Greg Gadel and John
Motschenbacher, in the Hennepin County District Court, Minneapolis, Minnesota. Gadel was our Chief Financial Officer until February 2005. Motschenbacher was an officer since 1999, and our Senior Vice President and Chief Information Officer from
February 2004 until March 15, 2005. We alleged that Gadel and Motschenbacher breached the fiduciary duties of loyalty, good faith, and due care that they owed to us during their tenure as officers, and unjustly enriched themselves, by
(1) causing us to enter into unfavorable transactions with companies with which Gadel and Motschenbacher had undisclosed, material financial dealings, (2) causing us to overpay for goods and services provided by vendors with which Gadel
and Motschenbacher had undisclosed, material financial dealings, (3) soliciting and receiving undisclosed kickbacks from several vendors, and (4) seeking and receiving improper reimbursement from us for business expenses that were, in
fact, personal in nature, such as family vacations. We sought damages against each of Gadel and Motschenbacher in an amount in excess of $50,000, disgorgement of the compensation that we paid to Gadel and Motschenbacher during the period that they
were faithless fiduciaries, reimbursement of our costs of investigation, and an award of interest, attorneys fees, and costs of litigation. In connection with this action, we submitted an employee dishonesty insurance claim to our insurer
Great American Insurance Company (Great American). Great American paid us approximately $1.9 million for our claim in exchange for a policy release, and we transferred to Great American our rights of recovery in this action. Great
American also assumed the liability for future legal expenses in connection with this action. Since then, this action has been settled and dismissed. The settlement payments made by Gadel and Motschenbacher were paid to Great American.

From time to time, we are involved in various legal actions arising in the ordinary course of business. In the opinion of our management, the ultimate
dispositions of these matters will not have a material adverse effect on our consolidated financial statements.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in our
Annual Report on Form 10-K for the fiscal year ended December 25, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Our Paisano Partner program requires
our restaurant general managers, known as Paisano Partners, to purchase between $10,000 and $20,000 of our common stock. We provide the Paisano Partners the option to finance the purchase of the common stock with a full recourse loan payable over
five years at a fixed interest rate of 8%. We have the option, but not the obligation, to buy out a Paisano Partners entire equity interest purchased under the Paisano Partner program at the purchase price of the equity interest paid by the
Paisano Partner either (1) upon the initiation of bankruptcy proceedings by or against the Paisano Partner within five years after the purchase date of the equity interest or (2) if the Paisano Partners employment with us is
terminated for any reason within five years after the purchase date of the equity interest. The following table represents the repurchase of Paisano Partner equity shares issued in accordance with this program during the third quarter of fiscal
2006.



|                                          |  |                                                 |  |                                            |      |                                                                                                 |   |                                                                                                                               |   |          
|----------------------------------------- |  | ----------------------------------------------- |  | ------------------------------------------ | ---- | ----------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------------- | - | ---------
|Period                                    |  | (a) Total Number of Shares (or Units)
Purchased |  | (b) Average Price Paid per
Share (or Unit) |      | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |   | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs)*
|Four-week period ended July 23, 2006      |  |                                                |  |                                            |     |                                                                                                 |  |                                                                                                                               | $ | 1,079,944
|Four-week period ended August 20, 2006    |  | 2,954                                           |  | $                                          | 6.03 |                                                                                                 |  |                                                                                                                               |   | 1,059,945
|Five-week period ended September 24, 2006 |  | 4,214                                           |  | $                                          | 5.52 |                                                                                                 |  |                                                                                                                               |   | 1,149,927
|                                          |  |                                                 |  |                                            |      |                                                                                                 |   |                                                                                                                               |   |          
|Total                                     |  | 7,168                                           |  | $                                          | 5.73 |                                                                                                 |  |                                                                                                                               |   |          

---

|* | The dollar figure indicates the total amount of shares that we have the option, but not the obligation, to purchase under the program.
|- | --------------------------------------------------------------------------------------------------------------------------------------

Item 3. Defaults upon Senior Securities

None.



25



---

##### Table of Contents

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits

Exhibits



|            |  |                                                                                                                                                                                                                                                                                        |  |                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                            |  | Method of Filing         
|3.1         |  | Amended and Restated Articles of Incorporation of the Registrant (1)                                                                                                                                                                                                                   |  | Incorporated By Reference
|            |  |                                                                                                                                                                                                                                                                                       
|3.2         |  | Amended and Restated Bylaws of the Registrant (2)                                                                                                                                                                                                                                      |  | Incorporated By Reference
|            |  |                                                                                                                                                                                                                                                                                       
|3.3         |  | Articles of Amendment of Amended and Restated Articles of Incorporation of the Registrant (3)                                                                                                                                                                                          |  | Incorporated By Reference
|            |  |                                                                                                                                                                                                                                                                                       
|4.1         |  | Specimen of Common Stock Certificate (4)                                                                                                                                                                                                                                               |  | Incorporated By Reference
|            |  |                                                                                                                                                                                                                                                                                       
|10.1        |  | Amendment Number Six to Credit Agreement, dated as of August 11, 2006, by and among the Registrant and each of its Subsidiaries that are signatories thereto, the Lenders that are signatories
thereto, and Wells Fargo Foothill, Inc., as the Arranger and the Administrative Agent   |  | Filed Electronically     
|            |  |                                                                                                                                                                                                                                                                                       
|10.2        |  | Amendment Number Seven to Credit Agreement, dated as of October 1, 2006, by and among the Registrant and each of its Subsidiaries that are signatories thereto, the Lenders that are
signatories thereto, and Wells Fargo Foothill, Inc., as the Arranger and the Administrative Agent |  | Filed Electronically     
|            |  |                                                                                                                                                                                                                                                                                       
|31.1        |  | Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                 |  | Filed Electronically     
|            |  |                                                                                                                                                                                                                                                                                       
|31.2        |  | Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                 |  | Filed Electronically     
|            |  |                                                                                                                                                                                                                                                                                       
|32.1        |  | Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                          |  | Filed Electronically     

---

|(1) | Incorporated by reference to Exhibit 3.4 to Amendment No. 1 to the Registrants Registration Statement on Form S-1 (Registration No. 333-72593), filed with the
Commission on March 24, 1999.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Exhibit 3.5 to Amendment No. 1 to the Registrants Registration Statement on Form S-1 (Registration No. 333-72593), filed with the
Commission on March 24, 1999.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to Exhibit 4.3 to the Registrants Registration Statement on Form S-3 (Registration No. 113737), filed with the Commission on March 19,
2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registrants Registration Statement on Form S-1 (Registration No. 333-72593), filed with the
Commission on March 24, 1999.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



---

##### Table of Contents

SIGNATURES

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



|                       |  |              |  |                                     
|---------------------- |  | ------------ |  | ------------------------------------
|                       |  | BUCA, Inc.  
|                       |  | (Registrant)
|                       |  |             
|Date: November 1, 2006 |  | by:          |  | /s/ Wallace B. Doolin               
|                       |  |              |  | Wallace B. Doolin                   
|                       |  |              |  | Chairman and Chief Executive Officer
|                       |  |              |  | (Principal Executive Officer)       
|                       |  |             
|                       |  | by:          |  | /s/ Kaye R. OLeary                 
|                       |  |              |  | Kaye R. OLeary                     
|                       |  |              |  | Chief Financial Officer             
|                       |  |              |  | (Principal Financial Officer)       
|                       |  |             
|                       |  | by:          |  | /s/ Dennis J. Goetz                 
|                       |  |              |  | Dennis J. Goetz                     
|                       |  |              |  | Chief Accounting Officer            
|                       |  |              |  | (Principal Accounting Officer)      



27



---

##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                        |  |                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                            |  | Method of Filing         
|3.1         |  | Amended and Restated Articles of Incorporation of the Registrant (1)                                                                                                                                                                                                                   |  | Incorporated By Reference
|            |  |                                                                                                                                                                                                                                                                                       
|3.2         |  | Amended and Restated Bylaws of the Registrant (2)                                                                                                                                                                                                                                      |  | Incorporated By Reference
|            |  |                                                                                                                                                                                                                                                                                       
|3.3         |  | Articles of Amendment of Amended and Restated Articles of Incorporation of the Registrant (3)                                                                                                                                                                                          |  | Incorporated By Reference
|            |  |                                                                                                                                                                                                                                                                                       
|4.1         |  | Specimen of Common Stock Certificate (4)                                                                                                                                                                                                                                               |  | Incorporated By Reference
|            |  |                                                                                                                                                                                                                                                                                       
|10.1        |  | Amendment Number Six to Credit Agreement, dated as of August 11, 2006, by and among the Registrant and each of its Subsidiaries that are signatories thereto, the Lenders that are signatories
thereto, and Wells Fargo Foothill, Inc., as the Arranger and the Administrative Agent   |  | Filed Electronically     
|            |  |                                                                                                                                                                                                                                                                                       
|10.2        |  | Amendment Number Seven to Credit Agreement, dated as of October 1, 2006, by and among the Registrant and each of its Subsidiaries that are signatories thereto, the Lenders that are
signatories thereto, and Wells Fargo Foothill, Inc., as the Arranger and the Administrative Agent |  | Filed Electronically     
|            |  |                                                                                                                                                                                                                                                                                       
|31.1        |  | Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                 |  | Filed Electronically     
|            |  |                                                                                                                                                                                                                                                                                       
|31.2        |  | Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                 |  | Filed Electronically     
|            |  |                                                                                                                                                                                                                                                                                       
|32.1        |  | Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                          |  | Filed Electronically     

---

|(1) | Incorporated by reference to Exhibit 3.4 to Amendment No. 1 to the Registrants Registration Statement on Form S-1 (Registration No. 333-72593), filed with the
Commission on March 24, 1999.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Exhibit 3.5 to Amendment No. 1 to the Registrants Registration Statement on Form S-1 (Registration No. 333-72593), filed with the
Commission on March 24, 1999.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to Exhibit 4.3 to the Registrants Registration Statement on Form S-3 (Registration No. 113737), filed with the Commission on March 19,
2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registrants Registration Statement on Form S-1 (Registration No. 333-72593), filed with the
Commission on March 24, 1999.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28