##### **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 June 30, 2006**                                              |
| ** ** | ** ** | ** **                                                                                    |
| **OR**     |
| ** ** | ** ** | ** **                                                                                    |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

** **

**CommissionFile No. 0-23911**

 

**Fog Cutter Capital Group Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Maryland**                                                     | ** ** | **52-2081138**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**1410 SWJefferson Street**

**Portland,OR  97201**

(Address ofprincipal executive offices) (Zip Code)

 

**(503)721-6500**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.                                              Yesx  Noo.

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.  (Check one):

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yeso  Nox.

 

**APPLICABLEONLY TO CORPORATE ISSUERS:**

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 
| **Class**                                  | ** ** | **Outstanding at July 31, 2006** |
|--------------------------------------------|------------|------------------------------------------------------|
| Common Stock,  par value $0.0001 per share |       | 7,957,428 shares                                     |

 

 

----

 

FOGCUTTER CAPITAL GROUP INC.

 

FORM 10-Q

 

I N D E X

 
| **PART  I—FINANCIAL INFORMATION** | ** ** | ** **                                                                                  |
|----------------------------------------|------------|---------------------------------------------------------------------------------------------|
| ** **                             | ** ** | ** **                                                                                  | ** ** | ** ** |
| Item  1.                               |       | Interim  Consolidated Financial Statements (Unaudited):                                     |   |   |
|                                   |       |                                                                                        |   |   |
|                                   |       | Consolidated  Statements of Financial Condition                                             |   |   |
|                                   |       |                                                                                        |   |   |
|                                   |       | Consolidated Statements of  Operations                                                      |   |   |
|                                   |       |                                                                                        |   |   |
|                                   |       | Consolidated  Statement of Stockholders’ Equity                                        |   |   |
|                                   |       |                                                                                        |   |   |
|                                   |       | Consolidated  Statements of Cash Flows                                                      |   |   |
|                                   |       |                                                                                        |   |   |
|                                   |       | Notes  to Consolidated Financial Statements                                                 |   |   |
|                                   |       |                                                                                        |   |   |
| Item 2.                                |       | Management’s Discussion and Analysis  of Financial Condition and Results of Operations |   |   |
|                                   |       |                                                                                        |   |   |
| Item 3.                                |       | Quantitative and Qualitative  Disclosures about Market Risk                                 |   |   |
|                                   |       |                                                                                        |   |   |
| Item 4.                                |       | Controls and Procedures                                                                     |   |   |
|                                   |       |                                                                                        |   |   |
| **PART II—OTHER INFORMATION**     | ** ** | ** **                                                                                  |
| ** **                             | ** ** | ** **                                                                                  | ** ** | ** ** |
| Item 1.                                |       | Legal Proceedings                                                                           |   |   |
|                                   |       |                                                                                        |   |   |
| Item  1A.Risk Factors                  |       |                                                                                        |
|                                   |       |                                                                                        |   |   |
| Item 2.                                |       | Unregistered Sales of Equity Securities  and Use of Proceeds                                |   |   |
|                                   |       |                                                                                        |   |   |
| Item 3.                                |       | Defaults Upon Senior Securities                                                             |   |   |
|                                   |       |                                                                                        |   |   |
| Item 4.                                |       | Submission of Matters to a Vote of  Security Holders                                        |   |   |
|                                   |       |                                                                                        |   |   |
| Item 5.                                |       | Other Information                                                                           |   |   |
|                                   |       |                                                                                        |   |   |
| Item  6.                               |       | Exhibits                                                                                    |   |   |
|                                   |       |                                                                                        |   |   |
| Signatures                             |       |                                                                                        |

 

Available information

 

Our website is www.fogcutter.com.  We make our annual report on Form 10-K, aswell as other reports filed with the Securities and Exchange Commission,available through our website as soon as reasonably practicable after they arefiled.  A copy of these reports may alsobe obtained by writing to us at 1410 SW Jefferson Street, Portland, Oregon,97201, Attn:  Investor Reporting.

 

2

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**PART I – FINANCIALINFORMATION**

 

## **ITEM1.  INTERIM CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)**

 

FOG CUTTER CAPITALGROUP INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

*(dollarsin thousands, except share data)*

 
| ** **                                                                                                                                                                                                   | ** ** | ** **                  | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                   | ** ** | **June 30, 2006** | ** ** | **2005**              | ** ** |
|                                                                                                                                                                                                         |       | **(unaudited)**             |       |                  |       |
| Assets                                                                                                                                                                                                       |       |                        |       |                  |       |
| Current Assets:                                                                                                                                                                                              |       |                        |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                   |       | $                           | 3,522      |                  | $          | 4,071 |   |
| Accounts  receivable                                                                                                                                                                                         |       | 1,646                       |       | 1,248                 |       |
| Loans to senior  executives                                                                                                                                                                                  |       | 1,044                       |       | —                |       |
| Inventories                                                                                                                                                                                                  |       | 2,253                       |       | 1,880                 |       |
| Investments in  real estate, held for sale, net                                                                                                                                                              |       | 15,965                      |       | 6,355                 |       |
| Other current  assets                                                                                                                                                                                        |       | 1,459                       |       | 1,678                 |       |
| Total current  assets                                                                                                                                                                                        |       | 25,889                      |       | 15,232                |       |
|                                                                                                                                                                                                         |       |                        |       |                  |       |
| Investments in  real estate, net                                                                                                                                                                             |       | 11,937                      |       | 23,937                |       |
| Notes receivable                                                                                                                                                                                             |       | 820                         |       | 976                   |       |
| Loans to senior  executives                                                                                                                                                                                  |       | —                      |       | 1,015                 |       |
| Investment in  Bourne End                                                                                                                                                                                    |       | 1,600                       |       | 803                   |       |
| Property, plant  and equipment, net                                                                                                                                                                          |       | 6,391                       |       | 5,377                 |       |
| Intangible  assets, net                                                                                                                                                                                      |       | 5,440                       |       | 5,586                 |       |
| Goodwill                                                                                                                                                                                                     |       | 10,079                      |       | 9,979                 |       |
| Other assets                                                                                                                                                                                                 |       | 2,063                       |       | 2,414                 |       |
| Total assets                                                                                                                                                                                                 |       | $                           | 64,219     |                  | $          | 65,319 |   |
|                                                                                                                                                                                                         |       |                        |       |                  |       |
| Liabilities and  Stockholders’ Equity                                                                                                                                                                   |       |                        |       |                  |       |
| Liabilities:                                                                                                                                                                                                 |       |                        |       |                  |       |
| Accounts payable  and accrued liabilities                                                                                                                                                                    |       | $                           | 9,090      |                  | $          | 9,536 |   |
| Borrowings and  notes payable, current portion                                                                                                                                                               |       | 14,021                      |       | 4,642                 |       |
| Obligations under  capital leases, current portion                                                                                                                                                           |       | 1,522                       |       | 1,548                 |       |
| Total current  liabilities                                                                                                                                                                                   |       | 24,633                      |       | 15,726                |       |
|                                                                                                                                                                                                         |       |                        |       |                  |       |
| Borrowings and  notes payable                                                                                                                                                                                |       | 2,296                       |       | 8,294                 |       |
| Obligations  under capital leases                                                                                                                                                                            |       | 8,995                       |       | 9,309                 |       |
| Deferred income                                                                                                                                                                                              |       | 4,060                       |       | 4,330                 |       |
| Deferred income  taxes                                                                                                                                                                                       |       | 5,655                       |       | 5,739                 |       |
| Total  liabilities                                                                                                                                                                                           |       | 45,639                      |       | 43,398                |       |
|                                                                                                                                                                                                         |       |                        |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                               |       | —                      |       | —                |       |
| Minority  interests in consolidated subsidiaries                                                                                                                                                             |       | 846                         |       | 532                   |       |
|                                                                                                                                                                                                         |       |                        |       |                  |       |
| Stockholders’  Equity:                                                                                                                                                                                  |       |                        |       |                  |       |
| Preferred stock,  $.0001 par value; 25,000,000 shares authorized; no shares issued and  outstanding                                                                                                          |       | —                      |       | —                |       |
| Common stock,  $.0001 par value; 200,000,000 shares authorized; 11,757,073 shares issued as  of June 30, 2006 and December 31, 2005; 7,957,428 shares outstanding as of  June 30, 2006 and December 31, 2005 |       | 168,328                     |       | 168,214               |       |
| Accumulated  deficit                                                                                                                                                                                         |       | (138,802                    | )          | (134,977              | )          |
| Accumulated  other comprehensive income                                                                                                                                                                      |       | 217                         |       | 161                   |       |
| Treasury stock,  3,799,645 common shares as of June 30, 2006 and December 31, 2005, at cost                                                                                                                  |       | (12,009                     | )          | (12,009               | )          |
| Total stockholders’  equity                                                                                                                                                                             |       | 17,734                      |       | 21,389                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                             |       | $                           | 64,219     |                  | $          | 65,319 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

3

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FOG CUTTER CAPITALGROUP INC.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

*(dollarsin thousands, except share data*)

 
| ** **                                                                                             | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                                                             | ** ** | **June 30,**      | ** ** | **June 30,**              | ** ** |
| ** **                                                                                             | ** ** | **2006**               | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue:                                                                                               |       |                   |       |                           |       |   |   |   |   |
| Restaurant and  manufacturing sales                                                                    |       | $                      | 8,944      |                           | $          | 6,055 |   | $ | 17,877 |   | $ | 12,037 |   |
| Restaurant  franchise and royalty fees                                                                 |       | 598                    |       | 501                            |       | 1,235 |   | 1,022 |   |
| Real estate  rental income                                                                             |       | 983                    |       | 1,161                          |       | 2,050 |   | 2,163 |   |
| Loan brokerage  and servicing fees                                                                     |       | 1,895                  |       | 1,248                          |       | 3,887 |   | 2,878 |   |
| Total revenue                                                                                          |       | 12,420                 |       | 8,965                          |       | 25,049 |   | 18,100 |   |
|                                                                                                   |       |                   |       |                           |       |   |   |   |   |
| Operating costs  and expenses:                                                                         |       |                   |       |                           |       |   |   |   |   |
| Restaurant and  manufacturing cost of sales                                                            |       | 5,133                  |       | 3,604                          |       | 10,046 |   | 7,063 |   |
| Real estate  operating expense                                                                         |       | 230                    |       | 417                            |       | 672 |   | 840 |   |
| Engineering and  development                                                                           |       | 387                    |       | —                         |       | 797 |   | — |   |
| Depreciation and  amortization                                                                         |       | 453                    |       | 408                            |       | 861 |   | 847 |   |
| Total operating  cost and expenses                                                                     |       | 6,203                  |       | 4,429                          |       | 12,376 |   | 8,750 |   |
|                                                                                                   |       |                   |       |                           |       |   |   |   |   |
| General and  administrative expenses:                                                                  |       |                   |       |                           |       |   |   |   |   |
| Compensation and  employee benefits                                                                    |       | 4,615                  |       | 2,262                          |       | 8,857 |   | 5,029 |   |
| Professional  fees                                                                                     |       | 1,244                  |       | 724                            |       | 1,698 |   | 1,570 |   |
| Fees paid to  related parties                                                                          |       | 72                     |       | —                         |       | 232 |   | — |   |
| Other                                                                                                  |       | 3,819                  |       | 3,053                          |       | 7,337 |   | 6,001 |   |
| Total general  and administrative expenses                                                             |       | 9,750                  |       | 6,039                          |       | 18,124 |   | 12,600 |   |
|                                                                                                   |       |                   |       |                           |       |   |   |   |   |
| Non-operating  income (expense):                                                                       |       |                   |       |                           |       |   |   |   |   |
| Gain on sale of  real estate                                                                           |       | 1,188                  |       | 1,176                          |       | 1,694 |   | 1,589 |   |
| Gain on sale of  notes receivable                                                                      |       | —                 |       | —                         |       | 496 |   | — |   |
| Interest Income                                                                                        |       | 100                    |       | 656                            |       | 180 |   | 980 |   |
| Interest expense                                                                                       |       | (598                   | )          | (467                           | )          | (1,064 | ) | (889 | ) |
| Other income  (loss)                                                                                   |       | 512                    |       | (164                           | )          | 889 |   | (219 | ) |
| Total  non-operating income                                                                            |       | 1,202                  |       | 1,201                          |       | 2,195 |   | 1,461 |   |
|                                                                                                   |       |                   |       |                           |       |   |   |   |   |
| Loss before  provision for income taxes, minority interests, and equity in income of  equity investees |       | (2,331                 | )          | (302                           | )          | (3,256 | ) | (1,789 | ) |
|                                                                                                   |       |                   |       |                           |       |   |   |   |   |
| Provision for  income taxes                                                                            |       | —                 |       | —                         |       | — |   | — |   |
| Minority  interest in earnings                                                                         |       | (104                   | )          | (47                            | )          | (283 | ) | (115 | ) |
| Equity in income  of equity investees                                                                  |       | 823                    |       | 441                            |       | 748 |   | 441 |   |
|                                                                                                   |       |                   |       |                           |       |   |   |   |   |
| Net income  (loss)                                                                                     |       | $                      | (1,612     | )                              | $          | 92 |   | $ | (2,791 | ) | $ | (1,463 | ) |
|                                                                                                   |       |                   |       |                           |       |   |   |   |   |
| Basic income  (loss) per share                                                                         |       | $                      | (0.20      | )                              | $          | 0.01 |   | $ | (0.35 | ) | $ | (0.18 | ) |
| Basic weighted  average shares outstanding                                                             |       | 7,957,428              |       | 7,957,428                      |       | 7,957,428 |   | 8,133,780 |   |
| Diluted net  income (loss) per share                                                                   |       | $                      | (0.20      | )                              | $          | 0.01 |   | $ | (0.35 | ) | $ | (0.18 | ) |
| Diluted weighted  average shares outstanding                                                           |       | 7,957,428              |       | 7,961,915                      |       | 7,957,428 |   | 8,133,780 |   |
| Dividends  declared per share                                                                          |       | $                      | —     |                           | $          | 0.13 |   | $ | 0.13 |   | $ | 0.26 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

4

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FOG CUTTER CAPITAL GROUP INC.

CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY

(Unaudited)

*(dollarsin thousands, except share data)*

 
| ** **                                                                                                         | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** **  | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|---------------------------------------|------------|-------------|------------|
| ** **                                                                                                         | ** ** | **Shares (1)**   | ** ** | **Amount**              | ** ** | **Shares**      | ** ** | **Amount**                            | ** ** | **Deficit** | ** ** | **Income** | ** ** | **Total** | ** ** |
| Balance at  January 1, 2006                                                                                        |       | 7,957,428             |       | $                       | 168,214    |            | 3,799,645  |                                  | $          | (12,009     | )          | $ | (134,977 | ) | $ | 161 |   | $ | 21,389 |   |
| Comprehensive  income (loss):                                                                                      |       |                  |       |                    |       |            |       |                                  |       |        |       |   |   |   |   |
| Net loss                                                                                                           |       | —                |       | —                  |       | —          |       | —                                |       | (2,791      | )          | — |   | (2,791 | ) |
| Other  comprehensive income:                                                                                       |       |                  |       |                    |       |            |       |                                  |       |        |       |   |   |   |   |
| Foreign currency  translation                                                                                      |       | —                |       | —                  |       | —          |       | —                                |       | —      |       | 561 |   | 561 |   |
| Reclassification  adjustment for net losses on securities and foreign currency translation  included in net income |       | —                |       | —                  |       | —          |       | —                                |       | —      |       | (505 | ) | (505 | ) |
| Total  comprehensive loss                                                                                          |       | —                |       | —                  |       | —          |       | —                                |       | —      |       | — |   | (2,735 | ) |
| Stock options  earned                                                                                              |       | —                |       | 114                     |       | —          |       | —                                |       | —      |       | — |   | 114 |   |
| Dividends  declared                                                                                                |       | —                |       | —                  |       | —          |       | —                                |       | (1,034      | )          | — |   | (1,034 | ) |
| Balance at June  30, 2006                                                                                          |       | 7,957,428             |       | $                       | 168,328    |            | 3,799,645  |                                  | $          | (12,009     | )          | $ | (138,802 | ) | $ | 217 |   | $ | 17,734 |   |

 

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(1)                                  Issuedand outstanding

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

5

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FOG CUTTER CAPITALGROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

*(dollarsin thousands)*

 
| ** **                                                               | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                               | ** ** | **June 30,**      | ** ** | **June 30,**              | ** ** |
| ** **                                                               | ** ** | **2006**               | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                   |       |                   |       |                           |       |   |   |   |   |
| Net income  (loss)                                                       |       | $                      | (1,612     | )                              | $          | 92 |   | $ | (2,791 | ) | $ | (1,463 | ) |
| Adjustments to  reconcile net income (loss) to net operating cash flows: |       |                   |       |                           |       |   |   |   |   |
| Equity in income  of equity investees                                    |       | (823                   | )          | (441                           | )          | (748 | ) | (441 | ) |
| Depreciation and  amortization                                           |       | 633                    |       | 532                            |       | 1,208 |   | 1,096 |   |
| Loss (gain) on  foreign currency translation                             |       | (368                   | )          | 249                            |       | (505 | ) | 420 |   |
| Gain on sale of  loans                                                   |       | —                 |       | —                         |       | (496 | ) | — |   |
| Gain on sale of  real estate                                             |       | (1,188                 | )          | (1,176                         | )          | (1,694 | ) | (1,589 | ) |
| Share based  compensation                                                |       | 58                     |       | —                         |       | 114 |   | — |   |
| Other                                                                    |       | (10                    | )          | 20                             |       | (20 | ) | (114 | ) |
| Change in:                                                               |       |                   |       |                           |       |   |   |   |   |
| Deferred income                                                          |       | (30                    | )          | 25                             |       | (50 | ) | (95 | ) |
| Other assets                                                             |       | 211                    |       | (1,250                         | )          | (479 | ) | 136 |   |
| Accounts payable  and accrued liabilities                                |       | 1,472                  |       | (99                            | )          | 960 |   | (837 | ) |
| Net cash used in  operating activities                                   |       | (1,657                 | )          | (2,048                         | )          | (4,501 | ) | (2,887 | ) |
|                                                                     |       |                   |       |                           |       |   |   |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                   |       |                   |       |                           |       |   |   |   |   |
| Proceeds from  sale of real estate                                       |       | 2,641                  |       | 2,128                          |       | 6,126 |   | 3,320 |   |
| Proceeds from  sale of loans                                             |       | —                 |       | —                         |       | 664 |   | — |   |
| Investment in  loans and discounted loans                                |       | —                 |       | (1,345                         | )          | — |   | (1,435 | ) |
| Principal  repayments on loans and discounted loans                      |       | —                 |       | 1,108                          |       | — |   | 1,109 |   |
| Investment in  real estate                                               |       | (362                   | )          | (178                           | )          | (1,190 | ) | (2,126 | ) |
| Purchase of net  assets of restaurant operations                         |       | —                 |       | —                         |       | (688 | ) | — |   |
| Investments in  property, plant, and equipment                           |       | (588                   | )          | (87                            | )          | (894 | ) | (169 | ) |
| Other                                                                    |       | (12                    | )          | 137                            |       | (20 | ) | 133 |   |
| Net cash  provided by investing activities                               |       | 1,679                  |       | 1,763                          |       | 3,998 |   | 832 |   |
|                                                                     |       |                   |       |                           |       |   |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                   |       |                   |       |                           |       |   |   |   |   |
| Proceeds from  borrowings                                                |       | 2,067                  |       | 918                            |       | 2,401 |   | 2,292 |   |
| Repayments on  borrowings                                                |       | (875                   | )          | —                         |       | (1,083 | ) | (82 | ) |
| Repayments under  capital leases                                         |       | (169                   | )          | (135                           | )          | (340 | ) | (245 | ) |
| Purchase of  treasury stock                                              |       | —                 |       | —                         |       | — |   | (1,689 | ) |
| Dividend  payments on common stock                                       |       | —                 |       | (1,061                         | )          | (1,034 | ) | (2,151 | ) |
| Net cash  provided by (used in) financing activities                     |       | 1,023                  |       | (278                           | )          | (56 | ) | (1,875 | ) |
|                                                                     |       |                   |       |                           |       |   |   |   |   |
| EFFECT OF  EXCHANGE RATE CHANGE ON CASH                                  |       | 2                      |       | (86                            | )          | 10 |   | (98 | ) |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                                 |       | 1,047                  |       | (649                           | )          | (549 | ) | (4,028 | ) |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                        |       | 2,475                  |       | 8,569                          |       | 4,071 |   | 11,948 |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                              |       | $                      | 3,522      |                           | $          | 7,920 |   | $ | 3,522 |   | $ | 7,920 |   |
|                                                                     |       |                   |       |                           |       |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                      |       |                   |       |                           |       |   |   |   |   |
| Cash paid for  interest                                                  |       | $                      | 405        |                           | $          | 382 |   | $ | 881 |   | $ | 842 |   |
| Cash paid for  income taxes                                              |       | $                      | 75         |                           | $          | 20 |   | $ | 83 |   | $ | 22 |   |
|                                                                     |       |                   |       |                           |       |   |   |   |   |
| NONCASH  FINANCING AND INVESTING ACTIVITIES:                             |       |                   |       |                           |       |   |   |   |   |
| Treasury stock  acquired through exercise of option                      |       | $                      | —     |                           | $          | — |   | $ | — |   | $ | 593 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

6

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

 

**NOTE 1****-BASIS OF PRESENTATION AND ACCOUNTING POLICIES**

 

The accompanying interim consolidated financial statements of FogCutter Capital Group Inc. and Subsidiaries (“FCCG” or the “Company”) areunaudited and have been prepared in conformity with the requirements ofRegulation S-X promulgated under the Securities Exchange Act of 1934, asamended (the “Exchange Act”), particularly Rule 10-01 thereof, which governsthe presentation of interim financial statements.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  The accompanying interim consolidatedfinancial statements should be read in conjunction with the Company’s 2005Annual Report on Form 10-K.  A summary ofthe Company’s significant accounting policies is set forth in Note 2 to theconsolidated financial statements in its Annual Report on Form 10-K for theyear ended December 31, 2005.

 

In the Company’s opinion,all adjustments, comprised of normal recurring accruals necessary for the fairpresentation of the interim financial statements, have been included in theaccompanying consolidated financial statements. Operating results for the six months ended June 30, 2006 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2006.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires the Company to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.  The Company’soperations and activities are becoming more focused on restaurant and othermore typical commercial businesses, and less focused on finance and realestate.  As a result, certainreclassifications of the balances and modifications to the presentation of thefinancial statements have been made, including the reclassification of certaininvestments in real estate as held for sale. None of these changes in presentation affected previously reportedresults of operations.

 

At June 30, 2006, certainCompany officers and directors had, directly or indirectly, majority votingcontrol of the Company.

 

*Minority interests*

 

The Company appliesAccounting Research Bulletin No. 51, “*Consolidated FinancialStatements*” (“ARB 51”), which requires the elimination of allintercompany profit or loss and balances between consolidated companies.  ARB 51 also requires the recognition ofminority interest in consolidated subsidiaries.  Consistent with ARB 51, wherelosses applicable to a minority interest exceed the minority interest in thecapital of the subsidiary, such excess and any further losses are chargedagainst the Company.  Should thesubsidiary become profitable, the Company will be credited to the extent ofsuch losses previously absorbed.

 

*Long-lived assets, held for sale*

 

The Company classifiesits long-lived assets to be sold as held for sale in the period when thefollowing criteria are met:

 

(i)                   managementcommits to a plan to sell the asset;

(ii)                theasset is available for immediate sale in its present condition subject only toterms that are usual and customary for sales of such assets;

(iii)             an active program to locate a buyer andother actions required to complete the plan to sell the asset have beeninitiated;

(iv)            thesale of the asset is probable, and transfer of the asset is expected to qualifyfor recognition as a completed sale, within one year;

(v)               theasset is being actively marketed for sale at a price that is reasonable inrelation to its current fair value; and

(vi)            actionsrequired to complete the plan indicate that it is unlikely that significantchanges to the plan will be made or that the plan will be withdrawn.

 

*Share-based payments*

 

In 2004, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 123(R), “*Share-Based Payment*”(“FAS 123R”), which requires all share-based awards to employees, includinggrants of employee stock options, to be recognized in results of operationsbased on their fair value.  The Companyadopted FAS 123R on January 1, 2006.

 

*Recently issued accountingstandards*

 

In June, 2006 the FASB issued FASB Interpretation No.48 (“FIN 48”) clarifying the manner in which enterprises’ account foruncertainty in income taxes recognized in an enterprises’ financial statements.  The interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.  TheCompany has not yet determined the effect, if any, of this new standard on itsconsolidated financial position and results of operations.

 

**NOTE 2****-SIGNIFICANT TRANSACTIONS**

 

The following significantevents affected our operations for the six months ended June 30, 2006:

 

7

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*Sale of real estate*

 

During the six monthsended June 30, 2006, the Company sold seven stand-alone retail locations in asingle transaction for a sales price of $3.5 million in cash.  The properties had a net book value of $3.0million at the time of disposal, and the Company recognized gains on the salestotaling $0.5 million.

 

The Company also sold a10 acre parcel of vacant land for $2.6 million in cash.  The property had a net book value of $1.4million at the time of disposal, and the Company recognized a gain on sale of$1.2 million.  Certain contingencies mayresult in additional sale proceeds of $0.3 million.  The Company has not recognized the contingentportion of the sales price due to the uncertainty of ultimate realization.

 

These properties wereclassified as real estate held for sale in the accompanying Statement ofFinancial Condition as of December 31, 2005.

 

*Sale of loan*

 

In March 2006, theCompany sold its interest in one loan for $0.7 million.  This loan had a carrying value of $0.2million and provided a gain on sale of $0.5 million.

 

*Sale of property by equityinvestee*

 

In June 2006, the Company’sequity investee, Bourne End Properties Plc. (“Bourne End”) completed the saleof its last remaining shopping center in Speke, England.  Bourne End recognized a gain under U.S.financial reporting standards of approximately $1.1 million, of which, theCompany’s share was approximately $0.3 million. The Company was also allocated additional income from Bourne End in theapproximate amount of $0.5 million under a revenue sharing agreement with theother investors as a result of exceeding certain profitability measures.  As a result, the Company recognized $0.8million in income from equity investees during the quarter ended June 30, 2006.

 

*Investment in Barcelona, Spainproperties*

 

During the six monthsended June 30, 2006, the Company funded additional loans totaling $1.0 millionto Variable Interest Entities (“VIE”) in Barcelona, Spain.  This brings the Company’s total investment inthese entities to $7.8 million at June 30, 2006.  During the same period, the VIE spentapproximately $1.1 million for improvements and carrying costs on the threeapartment buildings owned.

 

*Fatburger Holdings, Inc. (“Fatburger”)investment*

 

In the six months endedJune 30, 2006, the Company invested an additional $5.0 million in Fatburger andincreased its voting control to approximately 82%.

 

In February 2006,Fatburger acquired a controlling interest in one of its franchisees in Virginiafor $0.2 million.  Approximately $0.4million of property, plant, and equipment and other assets, and $0.2 million ofminority interests were recorded at fair value as a result of thistransaction.  In March 2006, Fatburgeracquired an additional franchise operation located in Florida for $0.5million.  As a result of thistransaction, $0.6 million of assets, including $0.1 million of goodwill, and$0.1 million of liabilities were recorded at fair value.

 

*Centrisoft Corporation (“Centrisoft”)investment*

 

In June 2006, the Companyinvested an additional $0.5 million in Centrisoft and increased its votingcontrol to 79%.

 

*Mortgage note payable*

 

In May 2006, the Companyborrowed $1.5 million secured by an 84,912 sq. ft. warehouse located in Eugene,Oregon.  The proceeds from the note wereused primarily to fund the Company’s investment in Fatburger.

 

*Dividends*

 

On February 28, 2006, theCompany’s Board of Directors declared a $0.13 per share dividend in the firstquarter of 2006.  The dividend was paidon March 14, 2006 to shareholders of record on March 9, 2006.  No dividends were declared or paid in thesecond quarter of 2006.

 

**NOTE 3 – COMMITMENTS,CONTINGENCIES & OFF-BALANCE SHEET RISK**

 

*ShareholderDerivative Complaint*

 

On July 6, 2004, Jeff Allen McCoon, derivatively on behalf ofthe Company, filed a lawsuit in the Circuit Court for the State of Oregon(Multnomah County case number 0407-06900) which named the Company and all ofits directors as defendants.  The lawsuitalleged that members of the Company’s Board of Directors breached their dutiesto the Company in a number of ways, primarily relating to the leave of absenceagreement with Andrew Wiederhorn.  The lawsuit generally sought restitutionof payments made under the leave of absence agreement plus attorney fees andcosts.  On January 6, 2006, the Circuit Court dismissed the entirederivative lawsuit, ruling that Mr. McCoon was unfit to represent the Company’sshareholders.  Mr. McCoon has filed anappeal to this ruling.

 

8

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*Fatburger Debt Covenant*

 

At December 31, 2005,Fatburger was not in compliance with all obligations under the agreementsevidencing its indebtedness, as defined in the applicable agreements.  Fatburger failed to meet the prescribed fixedcharge coverage ratio and the prescribed debt-coverage ratio in two notespayable at December 31, 2005.  Due toFatburger’s non-compliance, the lender has the right to demand repayment of thenotes in 2006.  As such, on the Company’sConsolidated Statements of Financial Condition, $4.1 million and $4.2 millionof long-term debt at June 30, 2006 and December 31, 2005, respectively, havebeen classified as current.  The lenderhas not demanded early repayment of the loans; however, if the lender exercisesits right to demand payment, the Company’s liquidity could be negativelyaffected.

 

*Liquidity*

 

The Company considers thesale of real estate and other investments to be a normal, recurring part ofoperations and expects these transactions to generate adequate cash flow tomeet the Company’s liquidity needs for the 2006 fiscal year.

 

The Company does not havea fixed dividend policy, and may declare and pay new dividends on common stock,subject to financial condition, results of operations, capital requirements andother factors deemed relevant by the Board of Directors.  One factor the Board of Directors mayconsider is the impact of dividends on the Company’s liquidity.  As the Company implements its strategy offocusing efforts on the development of Fatburger, the Board of Directors maydetermine to reduce any future dividend amount to a level that is more typicalof the restaurant industry, or eliminate the dividend in its entirety.

 

*Centrisoft operations*

 

The Company expects thatCentrisoft will require capital resources and have negative cash flow in thenear term.  Since Centrisoft is in theearly stages of its marketing, there can be no assurance that it will besuccessful in attracting a significant customer base.  Centrisoft is currently marketing itssoftware to potential customers both directly and through re-sellerrelationships.  There can be no assurancethat Centrisoft will be successful in generating sufficient cash flow tosupport its own operations in the near term.

 

*Other*

 

The Company may utilize awide variety of off-balance sheet financial techniques to manage its risk.  In hedging the interest rate or foreigncurrency exchange rate exposure, the Company may enter into hedge transactionsto counter movements in interest rates and foreign currencies.  These hedges may be in the form of currencyand interest rate swaps, options, and forwards or combinations thereof.  At June 30, 2006, approximately 50% of theCompany’s equity was invested in net assets located outside of the UnitedStates, primarily denominated in the euro or British pounds.  The Company has no outstanding derivativeinstruments held for trading or hedging purposes.

 

In order to facilitatethe development of franchise locations, Fatburger has guaranteed the annualminimum lease payments of five restaurant sites owned and operated byfranchisees.  As of June 30, 2006, theamount of the guarantees total approximately $1.5 million plus certaincontingent rental payments as defined in the respective leases.  These leases expire at various times through 2015.

 

The Company did not haveany other off balance sheet arrangements in place as of June 30, 2006.

 

**NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS**

 

Primarily as a result of the acquisitions of Fatburger,Centrisoft, and DAC, the Company has goodwill in the amount of $10.1 millionand investments in intangible assets of $5.4 million.  In accordance with FAS No. 142, “*Goodwill and Other Intangible Assets*” (“FAS 142”), goodwillis not amortized, but is subject to an annual impairment test.  Since the acquisitions of Fatburger andCentrisoft by the Company, both operations have experienced operating lossesand have funded their operations with limited liquidity.  The Company believes that these conditionsare temporary in nature, however, should these conditions not be corrected, theCompany may be required to recognize impairment losses on its recordedgoodwill.  As of June 30, 2006, theCompany was not aware of any events or changes in circumstances that wouldrequire the impairment of the recorded goodwill.

 

9

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Net intangible assets included operating manuals,franchise agreements, leasehold interests, and sales contracts.  Summarized information for acquiredintangible assets is as follows (dollars in thousands):

 
| ** **                         | ** ** | **June 30, 2006**          | ** ** |
|------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **(dollars in thousands)** | ** ** |
| Franchise  agreements              |       | $                                    | 1,162      |   |
| Other intangible  assets           |       | 1,023                                |       |
| Total amortized  intangible assets |       | 2,185                                |       |
| Less:  accumulated amortization    |       | (715                                 | )          |
| Net amortized  intangible assets   |       | 1,470                                |       |
|                               |       |                                 |       |
| Trademarks                         |       | 3,970                                |       |
|                               |       |                                 |       |
| Total intangible  assets           |       | $                                    | 5,440      |   |

 

Trademarks, which have indefinite lives, are notsubject to amortization.  All otherintangible assets are amortized using the straight-line method over theestimated useful lives of the assets of five to fifteen years.  Estimated amortization expense for theremainder of 2006 and the five succeeding years is as follows (dollars inthousands):

 
| 2006 |   | $   | 145    |   |
|------|--------|-----|--------|--------|
| 2007 |   | 287 |   |
| 2008 |   | 279 |   |
| 2009 |   | 263 |   |
| 2010 |   | 222 |   |
| 2011 |   | 164 |   |

 

The recorded values of goodwill and other intangibleassets may become impaired in the future. The determination of the value of such intangible assets requiresmanagement to make estimates and assumptions that affect the consolidatedfinancial statements.  Potentialimpairments to intangible assets are assessed when there is evidence thatevents or changes in circumstances indicate that the carrying amount of anasset may not be recovered.  Thisassessment is based on the operational performance of acquired businesses,market conditions and other factors including future events.  Any resulting impairment loss could have anadverse impact on the results of operations of the Company.

 

**NOTE 5 – STOCK OPTIONS AND RIGHTS**

 

The Company has anon-qualified stock option plan (the “Option Plan”) which provides for optionsto purchase shares of the Company’s common stock.  The Company adopted FAS 123R effectiveJanuary 1, 2006, using the modified prospective transition method.  Under that transition method, compensationcost recognized in 2006 includes (a) compensation cost for all share basedawards granted prior to, but not yet vested as of January 1, 2006, based on theattribution method and grant date fair value estimated in accordance with theoriginal provisions of FAS 123, and (b) compensation cost for all share basedawards granted subsequent to January 1, 2006, based on the grant date fairvalue estimated in accordance with the provisions of FAS 123R, all recognizedas the requisite service periods are rendered. Results for prior periods have not been restated.

 

The adoption of FAS 123Rresulted in the Company’s net loss for the six months ended June 30, 2006,being approximately $0.1 million higher than if the Company had continued toaccount for share based compensation under Accounting Principles Board OpinionNo. 25 “*Accounting for Stock Issued to Employees*”(“APB 25”) and had no impact on basic and diluted loss per share as reportedfor the six months ended June 30, 2006.

 

Prior to January 1, 2006,the Company applied APB 25 and related interpretations in accounting for theOption Plan.  Accordingly, nocompensation expense was recognized in the Consolidated Statements ofOperations prior to January 1, 2006 for grants under the Option Plan.  Had compensation expense for the Option Planbeen determined based on the fair value at the grant date consistent with themethods of FAS 123, the Company’s net loss and loss per share for the six monthsended June 30, 2005 would have been as indicated below:

 

10

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| ** **                                                                | ** ** | **Six months ended  June 30, 2005**            | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **(dollars in thousands,  except share data)** | ** ** |
| Net loss:                                                                 |       |                                                               |       |
| As reported                                                               |       | $                                                                  | (1,463     | ) |
| Pro forma  compensation expense from stock based compensation, net of tax |       | (146                                                               | )          |
| Pro forma net  loss                                                       |       | $                                                                  | (1,609     | ) |
| Net loss per  common and common share equivalent:                         |       |                                                               |       |
| Basic loss per  share:                                                    |       |                                                               |       |
| As reported                                                               |       | $                                                                  | (0.18      | ) |
| Pro forma                                                                 |       | $                                                                  | (0.20      | ) |
| Diluted loss per  share:                                                  |       |                                                               |       |
| As reported                                                               |       | $                                                                  | (0.18      | ) |
| Pro forma                                                                 |       | $                                                                  | (0.20      | ) |

 

There were no optionsgranted with exercise prices below the market value of the stock at the grantdate.  Fair values for 2006 wereestimated using the Black-Scholes option-pricing model with the followingweighted average assumptions used: 10% dividend yield, expected volatility of 86%,risk-free interest rate of 2.5% and expected lives of five years.

 

**NOTE 6 – VARIABLE INTERESTENTITIES**

 

As of June 30, 2006, theCompany has funded loans totaling $7.8 million to three related Spanishentities formed to purchase, reposition and sell apartment buildings inBarcelona, Spain.  Under the terms of theloans, the Company receives a preferred 30% return on its investment, and,after a similar return is paid to another minority investor, the Company receivesan 80% share in additional profits generated by the investment.  The investment meets the definition of aVariable Interest Entity (“VIE”) under FASB Interpretation No. 46 (“FIN 46”)and the Company is the primary beneficiary of the VIE.  As a result, the assets, liabilities, andresults of operations of the VIE have been consolidated into the accompanyingconsolidated financial statements as of June 30, 2006.

 

The VIE currently owns threeapartment buildings, consisting of 44 residential units and 5 retail shops, witha book value of approximately $14.0 million, including capital improvements.  These acquisitions, and related operationalexpenditures, were funded with bank loans totaling $6.5 million, the Company’s$7.8 million investment and a $0.5 million contribution from the projectmanagers.  Neither the creditors nor theother beneficial interest holders have recourse to the Company with regard tothese investments and, as a result, the maximum limit of the Company’s exposureto loss on this investment was $7.8 million as of June 30, 2006.

 

A third party hasasserted that it holds a security interest in one of the properties which allowedit, subject to certain legal conditions, to acquire ownership of the propertyon March 24, 2006 unless the VIE formally assumed or repaid a mortgage loansecured by the property in the approximate amount of $4.2 million.  The Company negotiated an extension of time to refinance or repay themortgage, and subsequently the VIE repaid the mortgage in July 2006, thusreleasing the third party’s security interest in the property.

 

Duringthe six months ended June 30, 2006, the Company funded additional loans of $1.0million to the VIE, while the VIE spent approximately $1.1 million forimprovements and carrying costs on the three apartment buildings owned.  At June 30, 2006, these three investments metthe criteria to be classified as “held for sale”, and were classified as suchon the Statement of Financial Condition. Assets and liabilities of the VIE included in the accompanyingconsolidated statements of financial condition are summarized as follows:

 
| Investment in  real estate, held for sale, net                                   |   | $         | 13,988,000 |   |
|----------------------------------------------------------------------------------|--------|-----------|------------|--------|
| Other assets                                                                     |   | 413,000   |       |
| Borrowings and  notes payable (included in current liabilities at June 30, 2006) |   | 6,490,000 |       |
| Accrued expenses  and other liabilities                                          |   | 440,000   |       |
| Minority  interest                                                               |   | 480,000   |       |

 

 

 

11

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**NOTE 7 – OPERATING SEGMENTS**

 

Operating segmentsconsist of (i) restaurant operations conducted through Fatburger, (ii)commercial real estate mortgage brokerage activities conducted through GeorgeElkins Mortgage Banking Company (“George Elkins”), (iii) manufacturingactivities conducted through DAC International, (iv) real estate and financingactivities, and (v) software development and sales conducted through CentrisoftCorporation.  Each segment operates withits own management and personnel, and there are no indirect allocations ofoverhead or other costs.  The followingis a summary of each of the operating segments:

 

*Restaurant Operations*

 

As of June 30, 2006, the Company owned approximately 82% of the votingcontrol of Fatburger, which operates or franchises 83 hamburger restaurantslocated primarily in California and Nevada. Franchisees currently own and operate 54 of the Fatburgerlocations.  Four new restaurants wereopened during the six months ended June 30, 2006, three franchise locations andone company-owned location.  In addition,Fatburger purchased two restaurants from franchisees during the first half of2006.

 
| ** **                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                | ** ** |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Company-owned  restaurant sales           |       | $                                                   | 6,783      |                                              | $          | 6,055 |   | $ | 13,068 |   | $ | 12,037 |   |
| Royalty revenue                           |       | 548                                                 |       | 412                                               |       | 1,111 |   | 793 |   |
| Franchise fee  revenue                    |       | 50                                                  |       | 89                                                |       | 124 |   | 229 |   |
| Total revenue                             |       | 7,381                                               |       | 6,556                                             |       | 14,303 |   | 13,059 |   |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Cost of sales                             |       | (3,804                                              | )          | (3,604                                            | )          | (7,463 | ) | (7,063 | ) |
| Depreciation and  amortization            |       | (419                                                | )          | (343                                              | )          | (775 | ) | (711 | ) |
| Other general  & administrative costs |       | (3,593                                              | )          | (2,943                                            | )          | (6,638 | ) | (5,613 | ) |
| Interest expense                          |       | (185                                                | )          | (156                                              | )          | (396 | ) | (310 | ) |
| Minority  interest in losses              |       | 52                                                  |       | —                                            |       | 39 |   | — |   |
| Segment loss                              |       | $                                                   | (568       | )                                                 | $          | (490 | ) | $ | (930 | ) | $ | (638 | ) |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                   | 566        |                                              | $          | 28 |   | $ | 827 |   | $ | 106 |   |
| Segment assets                            |       |                                                |       |                                              |       | 21,054 |   | 20,319 |   |
| Minority  interests                       |       |                                                |       |                                              |       | 148 |   | — |   |

 

*Commercial Real Estate MortgageBrokerage Operations*

 

The Company holds a 51% ownership interest in George Elkins, aCalifornia mortgage banking operation, which provided brokerage servicesrelated to the production of over $610 million in commercial real estatemortgages in the first six months of 2006, a 64% increase over the same periodin 2005.  George Elkins is headquarteredin Los Angeles, with satellite offices located throughout the southernCalifornia area.  The mortgage brokerage operationalso manages a commercial loan servicing portfolio in excess of $1.0 billionfor various investors.

 
| ** **                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                | ** ** |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Loan brokerage  fees                      |       | $                                                   | 1,703      |                                              | $          | 1,002 |   | $ | 3,396 |   | $ | 2,429 |   |
| Loan servicing  fees                      |       | 192                                                 |       | 246                                               |       | 491 |   | 449 |   |
| Total revenue                             |       | 1,895                                               |       | 1,248                                             |       | 3,887 |   | 2,878 |   |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Depreciation and  amortization            |       | (7                                                  | )          | (15                                               | )          | (14 | ) | (23 | ) |
| Other general  & administrative costs |       | (1,800                                              | )          | (1,291                                            | )          | (3,683 | ) | (2,883 | ) |
| Interest income                           |       | 2                                                   |       | 1                                                 |       | 3 |   | 2 |   |
| Other  non-operating income               |       | 136                                                 |       | 84                                                |       | 280 |   | 95 |   |
| Minority  interest in earnings            |       | (156                                                | )          | (47                                               | )          | (322 | ) | (115 | ) |
| Segment income  (loss)                    |       | $                                                   | 70         |                                              | $          | (20 | ) | $ | 151 |   | $ | (46 | ) |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Capital expenditures                      |       | $                                                   | —     |                                              | $          | 59 |   | $ | — |   | $ | 63 |   |
| Segment assets                            |       |                                                |       |                                              |       | 1,266 |   | 387 |   |
| Minority  interests                       |       |                                                |       |                                              |       | 219 |   | 121 |   |

 

12

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*Manufacturing Operations*

 

The Company conductsmanufacturing activities through its wholly-owned subsidiary, DACInternational.  The Company assumed 100%voting control of DAC in November 2005 and began reporting the operations ofDAC on a consolidated basis as of November 1, 2005.  DAC is a supplier of computer controlledlathes and milling machinery for the production of eyeglass, contact, andintraocular lenses.

 
| ** **                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                | ** ** |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Manufacturing  sales                      |       | $                                                   | 2,158      |                                              | $          | — |   | $ | 4,789 |   | $ | — |   |
| Cost of sales                             |       | (1,329                                              | )          | —                                            |       | (2,583 | ) | — |   |
| Engineering and  development              |       | (211                                                | )          | —                                            |       | (441 | ) | — |   |
| Depreciation and  amortization            |       | (12                                                 | )          | —                                            |       | (21 | ) | — |   |
| Other general  & administrative costs |       | (500                                                | )          | —                                            |       | (876 | ) | — |   |
| Interest expense                          |       | —                                              |       | —                                            |       | (6 | ) | — |   |
| Other  non-operating income               |       | 7                                                   |       | —                                            |       | 7 |   | — |   |
| Segment income                            |       | $                                                   | 113        |                                              | $          | — |   | $ | 869 |   | $ | — |   |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                   | 22         |                                              | $          | — |   | $ | 60 |   | $ | — |   |
| Segment assets                            |       |                                                |       |                                              |       | 4,690 |   | — |   |

 

*Real Estate and FinancingOperations*

 

The Company invests in orfinances real estate and other real estate-related assets.  The financing operations focus on theacquisition of controlling interests in businesses in the process ofrestructuring.  This can take the form ofassisting in a management buy-out, refinancing corporate debt or acquiring the “non-core”assets of a business.

 
| ** **                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                | ** ** |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Rental income                             |       | $                                                   | 983        |                                              | $          | 1,161 |   | $ | 2,050 |   | $ | 2,163 |   |
| Operating  expenses                       |       | (230                                                | )          | (417                                              | )          | (671 | ) | (840 | ) |
| Depreciation and  amortization            |       | (100                                                | )          | (128                                              | )          | (219 | ) | (273 | ) |
| Other general  & administrative costs |       | (163                                                | )          | (134                                              | )          | (404 | ) | (312 | ) |
| Interest income                           |       | 98                                                  |       | 655                                               |       | 177 |   | 979 |   |
| Interest expense                          |       | (376                                                | )          | (311                                              | )          | (596 | ) | (579 | ) |
| Other  non-operating income               |       | 1,557                                               |       | 928                                               |       | 2,791 |   | 1,273 |   |
| Equity in income  of equity investees     |       | 823                                                 |       | 441                                               |       | 748 |   | 441 |   |
| Segment income                            |       | $                                                   | 2,592      |                                              | $          | 2,195 |   | $ | 3,876 |   | $ | 2,852 |   |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                   | 362        |                                              | $          | 178 |   | $ | 1,190 |   | $ | 2,126 |   |
| Segment assets                            |       |                                                |       |                                              |       | 33,364 |   | 47,672 |   |
| Investment in  equity investees           |       |                                                |       |                                              |       | 1,600 |   | 2,192 |   |
| Minority  interests                       |       |                                                |       |                                              |       | 479 |   | 347 |   |

 

13

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*Software Development and Sales*

 

The Company holds a 79%ownership interest in Centrisoft, which conducts software development and salesactivities.  The Company began reportingthe operations of Centrisoft on a consolidated basis as of July 1, 2005, when majorityvoting control was obtained.  Centrisoftdevelops and sells software that controls and enhances the productivity ofenterprise networks and provides first level security against unauthorizedapplications and users.

 
| ** **                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                | ** ** |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Software sales                            |       | $                                                   | 3          |                                              | $          | — |   | $ | 20 |   | $ | — |   |
| Engineering and  development              |       | (176                                                | )          | —                                            |       | (356 | ) | — |   |
| Depreciation and  amortization            |       | (89                                                 | )          | —                                            |       | (167 | ) | — |   |
| Other general  & administrative costs |       | (446                                                | )          | —                                            |       | (882 | ) | — |   |
| Interest expense                          |       | (37                                                 | )          | —                                            |       | (66 | ) | — |   |
| Segment loss                              |       | $                                                   | (745       | )                                                 | $          | — |   | $ | (1,451 | ) | $ | — |   |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                   | —     |                                              | $          | — |   | $ | 7 |   | $ | — |   |
| Segment assets                            |       |                                                |       |                                              |       | 3,845 |   | — |   |

 

*Reconciliation to total netincome (loss)*

 
| ** **                             | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(dollars in thousands)**                | ** ** |
|                                   |       |                                                |       |                                              |       |   |   |   |   |
| Segment income  (loss) from operations |       | $                                                   | 1,462      |                                              | $          | 1,685 |   | $ | 2,515 |   | $ | 2,168 |   |
| Corporate  expenses                    |       | (3,074                                              | )          | (1,593                                            | )          | (5,306 | ) | (3,631 | ) |
| Net income  (loss)                     |       | $                                                   | (1,612     | )                                                 | $          | 92 |   | $ | (2,791 | ) | $ | (1,463 | ) |

 

**NOTE 8 – INCOME TAXES**

 

As of June 30, 2006, theCompany had, for U.S. Federal tax purposes, a net operating loss (“NOL”) carryforward of approximately $88.0 million, including $7.8 million relating toFatburger.  The Company’s NOL begins toexpire in 2018.  Fatburger’s NOL began toexpire in 2004 and is generally subject to an annual limitation under theInternal Revenue Code of 1986, Section 382, *Limitation on NetOperating Loss Carryovers and Certain Built-In Losses Following Change inControl*.  In addition, to theextent the Fatburger NOL is utilized, the recognition of the related taxbenefits would first reduce goodwill related to the Fatburger acquisition, thenother non-current intangible assets related to that acquisition, and thenincome tax expense in accordance with Statement on Financial AccountingStandards No. 109, *Accounting for IncomeTaxes.*

 

United States taxregulations impose limitations on the use of NOL carry forwards followingcertain changes in ownership.  If such achange were to occur with respect to the Company, the limitation couldsignificantly reduce the amount of benefits that would be available to offsetfuture taxable income each year, starting with the year of ownershipchange.  To reduce the likelihood of suchownership changes, the Company established a Shareholder Rights Plan dated asof October 18, 2002, which discourages, under certain circumstances, ownershipchanges which would trigger the NOL limitations.

 

During the six monthsended June 30, 2006 and 2005 a provision for income taxes was not required dueto the net operating loss generated during the period.

 

**NOTE 9 – LOANS TO SENIOR EXECUTIVES**

 

As of June 30, 2006, theCompany had $1.0 million in two outstanding loans to its Chairman and ChiefExecutive Officer, Andrew Wiederhorn. Both loans were made on February 21, 2002 (prior to the passage of theSarbanes-Oxley Act of 2002).  The loansare due on February 21, 2007, and have thus been classified as current on theStatement of Financial Condition as of June 30, 2006.

 

14

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**NOTE 10 – INVENTORIES**

 

Inventories consist ofthe following:

 
| ** **         | ** ** | **June 30,  2006**              | ** ** | **December 31,  2005** | ** ** |
|--------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **         | ** ** | **(dollars in thousands)** | ** ** |
|               |       |                                 |       |                        |       |
| Raw materials      |       | $                                    | 1,286      |                        | $          | 1,326 |   |
| Work in progress   |       | 603                                  |       | 288                         |       |
| Finished goods     |       | 364                                  |       | 266                         |       |
| Total  inventories |       | $                                    | 2,253      |                        | $          | 1,880 |   |

 

**NOTE 11 – SUBSEQUENT EVENTS**

 

*Restaurant openings*

 

Subsequent to June 30,2006, Fatburger opened one company-owned restaurant and purchased onerestaurant location from a franchisee for $250,000.

 

*Sale of Eugene warehouse*

 

The Company has contractedto sell its Eugene warehouse property for a sales price of $2.8 million incash.  The property had a net book valueof $1.6 million at the time of the contract, and is classified as real estate heldfor sale on the accompanying Statements of Financial Condition.  The sale is expected to close in August 2006,and the Company expects to repay a $1.5 million mortgage note payable securedby the property.

 

*Sale of retail property*

 

Subsequent to June 30,2006, the Company contracted to sell one commercial property for a sales priceof $0.5 million in cash.  The propertyhad a net book value of $0.4 million at the time of the contract, and is classifiedas held for sale on the accompanying Statements of Financial Condition.  The sale is expected to close in August 2006.

 

*Distribution from equity investee*

 

Subsequent to June 30,2006, Bourne End distributed the majority of its net assets to its investors,and the Company received $1.6 million for its share.

 

*Sale of one VIE property*

 

Subsequent to June 30,2006, the VIE sold one of its three properties located in Barcelona, Spain fora sales price of approximately $3.6 million. The property had a cost of approximately $3.3 million, including capitalimprovements, at the time of sale.  TheCompany will recognize a gain of approximately $0.3 million from the sale ofthis property.

 

*Payment of VIE mortgage*

 

Subsequent to June 30,2006, the Company borrowed $2.5 million from a lender in the form of anote.  The Company used the funds as partof its $4.4 million additional investment in the VIE.  The VIE then repaid a mortgage loan ofapproximately $4.2 million on one property in Barcelona, Spain, thus releasinga third party’s security interest in the property.

 

15

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Certainstatements contained herein and certain statements contained in future filingsby the Company with the SEC may not be based on historical facts and are “Forward-LookingStatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  Forward-Looking Statementswhich are based on various assumptions (some of which are beyond the Company’scontrol) may be identified by reference to a future period or periods, or bythe use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,”“anticipate,” “continue,” or similar terms or variations on those terms, or thenegative of those terms.  Actual resultscould differ materially from those set forth in Forward-Looking Statements dueto a variety of factors, including, but not limited to the following:*

* *

*•*                  economicfactors, particularly in the market areas in which the Company operates;

*•*                  the financialand securities markets and the availability of and costs associated withsources of liquidity;

*•*                  competitiveproducts and pricing;

*•*                  the real estatemarket;

*•*                  fiscal andmonetary policies of the U.S. Government;

*•*                  changes inprevailing interest rates;

*•*                  changes incurrency exchange rates;

*•*                  acquisitions andthe integration of acquired businesses;

*•*                  performance ofretail/consumer markets, including consumer preferences and concerns about diet;

*•*                  effectiveexpansion of the Company’s restaurants in new and existing markets;

*•*                  profitabilityand success of franchisee restaurants;

*•*                  availability ofquality real estate locations for restaurant expansion;

*•*                  the market forCentrisoft’s software products;

*•*                  credit risk management;and

*•*                  asset/liabilitymanagement.

* *

*Exceptas may be required by law, the Company does not undertake, and specificallydisclaims any obligation, to publicly release the results of any revisionswhich may be made to any Forward-Looking Statements to reflect the occurrenceof anticipated or unanticipated events or circumstances after the date of suchstatements.*

* *

*Thefollowing discussion and analysis should be read in conjunction with theInterim Consolidated Financial Statements of Fog Cutter Capital Group Inc. andthe notes thereto included elsewhere in this filing.  References in this filing to “the Company,” “we,”“our,” and “us” refer to Fog Cutter Capital Group Inc. and its subsidiariesunless the context indicates otherwise.*

* *

## **ExecutiveOverview**

## ** **

*Business Overview*

 

Fog Cutter Capital GroupInc. operates a restaurant business, conducts commercial mortgage brokerageactivities, manufacturing activities, software development and salesactivities, and makes real estate and other real estate-related investments.  We also seek to acquire controlling interestsin underperforming or undervalued operating businesses in which our managementskills and financial structuring can create value.

 

*Operating Segments*

 

Our operating segmentsare:

 

(i)             Restaurant Operations– conducted through our Fatburger subsidiary,

(ii)          CommercialReal Estate Mortgage Brokerage Operations – conducted through our subsidiary,George Elkins Mortgage Banking,

(iii)       Manufacturing Operations –conducted through our wholly owned subsidiary, DAC International,

(iv)      Real Estate and Finance Operations,and

(v)         Software Development andSales Operations – conducted through our subsidiary, Centrisoft Corporation.

 

Due to the varied natureof our operations, we do not utilize a standard array of key performanceindicators in evaluating our results of operations.  Our evaluation instead focuses on aninvestment-by-investment or asset-by-asset analysis within our operatingsegments.

 

16

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*Significant Events*

 

The following significantevents affected our operations for the six months ended June 30, 2006:

 

•                  Saleof real estate – In March 2006, we sold seven stand-alone retail locations in asingle transaction for a sales price of $3.5 million in cash.  The properties had a net book value of $3.0 millionat the time of disposal, and we recognized gains on the sales totaling $0.5million.  In May 2006, we sold a 10 acreparcel of vacant land for $2.6 million in cash. The property had a net book value of $1.4 million at the time ofdisposal, and we recognized a gain on sale of $1.2 million.  Certain contingencies may result inadditional sale proceeds of $0.3 million. However, we have not recognized the contingent portion of the salesprice.

 

•                  Saleof loan – In March 2006, we sold our interest in one loan for $0.7million.  This loan had a carrying valueof $0.2 million and provided a gain on sale of $0.5 million.

 

•                  Saleof property by equity investee – In June 2006, our equity investee, Bourne Endsold its last remaining shopping center in Speke, England.  Bourne End recognized a gain under U.S.financial reporting standards of approximately $1.1 million, of which, ourshare was approximately $0.3 million.  Wewere also allocated additional income from Bourne End in the approximate amountof $0.5 million under a revenue sharing agreement with the other investors as aresult of exceeding certain profitability measures.  As a result, we recognized $0.8 million inincome from Bourne End during the quarter ended June 30, 2006.

 

•                  Investmentin Barcelona, Spain properties – During the six months ended June 30, 2006, wefunded additional loans totaling $1.0 million to our Variable Interest Entitiesin Barcelona, Spain.  During the period,the VIE spent approximately $1.1 million for improvements on the threeapartment buildings owned.

 

•                  Fatburgerinvestment – In March 2006, we invested an additional $2.5 million inFatburger, and increased our voting control to 76%.  In April 2006, we increased our voting controlto 82% through the investment of an additional $2.5 million.

 

•                  Investmentin Boo Yaa Burger – In February 2006, we invested, through our Fatburgersubsidiary, $0.2 million in Boo Yaa Burger, a Fatburger franchisee.  Through this transaction, Fatburger acquired approximately$0.4 million in property, plant, and equipment and other assets, and recognized$0.2 million in minority interest.

 

•                  Purchaseof Fatburger franchisee location – In March 2006, Fatburger paid $0.5 millionto purchase the net assets of one franchisee that owned and operated onelocation in Florida.  Through thistransaction, Fatburger purchased $0.4 million in net assets and recognized $0.1million in goodwill.

 

•                  Centrisoftinvestment – In June 2006, we invested an additional $0.5 million in Centrisoftand increased our voting control to 79%.

 

•                  Mortgagenote payable – In May 2006, we borrowed $1.5 million secured by an 84,912 sq.ft. warehouse located in Eugene, Oregon. The proceeds from the note were used primarily to fund our additionalinvestment in Fatburger.

 

•                  Dividends– On February 28, 2006, the Company’s Board of Directors declared a $0.13 pershare dividend in the first quarter of 2006. The dividend was paid on March 14, 2006 to stockholders of record onMarch 9, 2006.  No dividend has beendeclared or paid in the second quarter of 2006.

 

**Results of operations**

** **

Our operations haveresulted in net income (loss) as follows:

 
| ** **                   | ** ** | **Three months ended June 30,**                             | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                                                        | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Net Income  (Loss)           |       | $                                                                               | (1,612     | )                                                 | $          | 92 |   | $ | (2,791 | ) | $ | (1,463 | ) |
| Net Income  (Loss) Per Share |       | $                                                                               | (0.20      | )                                                 | $          | 0.01 |   | $ | (0.35 | ) | $ | (0.18 | ) |

 

Our net loss was $2.8million (or $0.35 per share) for the six months ended June 30, 2006, and $1.6million (or $0.20 per share) for the three months then ended.  The loss is primarily due to operatingexpenses associated with our management infrastructure.  We have put in place a management structurewhich we believe will enable us to significantly expand our operations, notablyour Fatburger subsidiary.  However, untilthe growth in operations is realized, the cost of our management structure willbe borne by our existing operations.  Ournet loss for the first half of 2005 was also primarily attributable to ouroperating expenses as we transitioned the balance sheet and began focusing onour restaurant operations and other subsidiaries.

 

 

17

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The following sectionsdescribe the results of operations of our operating segments for the three andsix months ended June 30, 2006.

 

*Restaurant Segment Operations*

 

The following table showsour operating margin for company-owned restaurants for the three and six monthsended June 30, 2006 and 2005:

 
|                                           |   | **Three months ended June 30,**           |       | **Six months ended June 30,** |       |
|------------------------------------------------|--------|---------------------------------------------------------------|------------|---------------------------------------------------|------------|
|                                           |   | **2006**                                                      | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** |   |
|                                           |   | **(% to Company-owned restaurant sales)** |       |
| Restaurant  Sales:                             |   |                                                          |       |                                              |       |   |   |   |   |
| Company-owned  restaurant sales                |   | 100.0                                                         | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
| Cost of sales –  food, paper, merchandise |   | (25.2                                                         | )%         | (28.1                                             | )%         | (26.6 | )% | (28.1 | )% |
| Cost of sales –  wages and benefits       |   | (30.9                                                         | )%         | (31.4                                             | )%         | (30.5 | )% | (30.6 | )% |
| Restaurant  depreciation and amortization      |   | (5.2                                                          | )%         | (4.6                                              | )%         | (4.9 | )% | (4.8 | )% |
| Operating margin  (restaurant sales only)      |   | 38.7                                                          | %          | 35.9                                              | %          | 38.0 | % | 36.5 | % |

 

The following table shows our total operating results from therestaurant segment for the three and six months ended June 30, 2006 and 2005:

 
| ** **                              | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(% to total revenue)**             | ** ** |
| Total Restaurant  Operations:           |       |                                                |       |                                              |       |   |   |   |   |
| Company-owned  restaurant sales         |       | 91.9                                                | %          | 92.3                                              | %          | 91.3 | % | 92.2 | % |
| Royalty revenue                         |       | 7.4                                                 | %          | 6.3                                               | %          | 7.8 | % | 6.0 | % |
| Franchise fee  revenue                  |       | 0.7                                                 | %          | 1.4                                               | %          | 0.9 | % | 1.8 | % |
| Total revenue                           |       | 100.0                                               | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
|                                    |       |                                                |       |                                              |       |   |   |   |   |
| Cost of sales                           |       | (56.3                                               | )%         | (59.3                                             | )%         | (56.7 | )% | (58.5 | )% |
| General &  administrative costs     |       | (49.6                                               | )%         | (45.8                                             | )%         | (47.3 | )% | (44.0 | )% |
| Interest expense                        |       | (2.5                                                | )%         | (2.4                                              | )%         | (2.8 | )% | (2.4 | )% |
| Minority  interest in earnings (losses) |       | 0.7                                                 | %          | —                                            | %          | 0.3 | % | — | % |
| Segment loss                            |       | (7.7                                                | )%         | (7.5                                              | )%         | (6.5 | )% | (4.9 | )% |

 

For the six months ended June 30, 2006, company-owned restaurant salesincreased 9.2% to $13.1 million from $12.0 million for the same period in2005.  For the three months ended June 30,2006, company-owned restaurant sales increased 11.5% to $6.8 million from $6.1million for the second quarter of 2005. This increase was primarily the result of increased volume and the additionof three company-owned restaurants in the first half of 2006.  Same store sales for company-owned restaurantsincreased 2.5% for the first half of 2006 compared to the same period in 2005.  Royalty revenue increased 37.5%, from $0.8million for the first half of 2005 to $1.1 million for the six months endedJune 30, 2006, as a result of our franchise restaurant growth strategy.  Same store sales for franchise restaurantsincreased 5.9% for the first half of 2006 compared to the same period in2005.  System-wide same store salesincreased 4.2% for the first half of 2006 compared to the same period in 2005.  Our loss from restaurant operations was 6.5%of total revenue for the six months ended June 30, 2006 and 7.7% for the secondquarter, due to the increased General and Administrative expenses as wecontinue to set up our infrastructure to support expansion.

 

Our primary strategy with respect to Fatburger is to grow bothcompany-owned and franchised locations in the U.S. and internationally, thusincreasing our operating income as well as franchise fees and future royaltyincome.  Since we acquired our interestin Fatburger in August 2003, Fatburger has added 31 new restaurants.  While we seek to expand the number ofexisting restaurants, the identification of qualified franchisees and qualitylocations has an effect on the rate of growth in the number of our restaurants.

 

18

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*Commercial Real Estate MortgageBrokerage Segment Operations*

 
| ** **                        | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **(% to total revenue)**             | ** ** |
| Loan brokerage fees               |       | 83.8                                                | %          | 75.2                                              | %          | 81.4 | % | 81.7 | % |
| Loan servicing  and other revenue |       | 16.2                                                | %          | 24.8                                              | %          | 18.6 | % | 18.3 | % |
| Total revenue                     |       | 100.0                                               | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
|                              |       |                                                |       |                                              |       |   |   |   |   |
| Compensation  expense             |       | (78.7                                               | )%         | (81.6                                             | )%         | (78.1 | )% | (82.4 | )% |
| Other operating  expense          |       | (10.2                                               | )%         | (16.4                                             | )%         | (10.6 | )% | (15.3 | )% |
| Minority  interest in earnings    |       | (7.7                                                | )%         | (3.5                                              | )%         | (7.7 | )% | (3.9 | )% |
| Segment income  (loss)            |       | 3.4                                                 | %          | (1.5                                              | )%         | 3.6 | % | (1.6 | )% |

 

 

For the six months endedJune 30, 2006, total revenue for this business segment increased 40.0% to $4.2million from $3.0 million for the first half of 2005.  For our second fiscal quarter of 2006, segmentrevenue increased 52.5% to $2.0 million from $1.3 million in the second quarterof 2005.  This increase was primarily dueto increased loan brokerage volume in the first half of 2006.  Our income from this business segmentincreased to $0.2 million, or 3.6% of segment revenue for the first half of 2006,$0.1 million (3.4% of revenue) for the second quarter.  This compares to a loss of less than $0.1million, or 1.6% of segment revenue in the first half of 2005, and less than $0.1million (1.5%) in the second quarter of 2005. The improvement came as a result of our ability to maintain segmentoverhead costs while volume increased during the period.

 

During the six monthsended June 30, 2006, George Elkins provided brokerage services resulting in theorigination of over $610 million in commercial real estate loans.  This represents an increase of 64% over thecomparable period in 2005.  Of the loansbrokered in 2006, 61% were funded by conduit lenders, 11% were funded byinsurance companies, 15% were funded by banks or thrifts, with the balancefunded by bridge lenders and other investors. The servicing and loan administration department manages a portfolio of$1.0 billion comprised of 447 loans for approximately 20 clients as of June 30,2006.

 

*Manufacturing Segment Operations*

 
| ** **                   | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(% to total revenue)**             | ** ** |
| Manufacturing  sales         |       | 100.0                                               | %          | —                                            |       | 100.0 | % | — |   |
| Manufacturing  cost of sales |       | (61.6                                               | )%         | —                                            |       | (53.9 | )% | — |   |
| Engineering and  development |       | (9.8                                                | )%         | —                                            |       | (9.2 | )% | — |   |
| Operating margin             |       | 28.6                                                | %          | —                                            |       | 36.9 | % | — |   |
|                         |       |                                                |       |                                              |       |   |   |   |   |
| Compensation  expense        |       | (18.0                                               | )%         | —                                            |       | (13.8 | )% | — |   |
| Depreciation  expense        |       | (0.6                                                | )%         | —                                            |       | (0.4 | )% | — |   |
| Other operating  expense     |       | (4.8                                                | )%         | —                                            |       | (4.5 | )% | — |   |
| Segment income               |       | 5.2                                                 | %          | —                                            |       | 18.2 | % | — |   |

 

Total revenue for thissegment was $4.8 million for the six months ended June 30, 2006, and $2.2million for the three months ended June 30, 2006.  Net income for this segment was $0.9 millionfor the first half of 2006, and $0.1 for the second quarter of 2006.  We began consolidating DAC’s operations inNovember 2005.  Accordingly, no amountsare shown for the comparable periods in 2005.

 

19

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*Real Estate and Finance SegmentOperations*

 

*Real Estate Operations:*

 
| ** **                           | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)**                | ** ** |
|                                 |       |                                                |       |                                              |       |   |   |   |   |
| Operating  revenue                   |       | $                                                   | 983        |                                              | $          | 1,161 |   | $ | 2,050 |   | $ | 2,163 |   |
| Operating  expenses                  |       | (230                                                | )          | (417                                              | )          | (671 | ) | (840 | ) |
| Depreciation and  amortization       |       | (100                                                | )          | (128                                              | )          | (219 | ) | (273 | ) |
| Operating margin                     |       | 653                                                 |       | 616                                               |       | 1,160 |   | 1,050 |   |
|                                 |       |                                                |       |                                              |       |   |   |   |   |
| General and  administrative expenses |       | (155                                                | )          | (127                                              | )          | (383 | ) | (293 | ) |
| Interest expense                     |       | (376                                                | )          | (311                                              | )          | (597 | ) | (578 | ) |
| Gain on sale of  real estate         |       | 1,188                                               |       | 1,176                                             |       | 1,694 |   | 1,589 |   |
| Income from real  estate operations  |       | $                                                   | 1,310      |                                              | $          | 1,354 |   | $ | 1,874 |   | $ | 1,768 |   |

 

During the six monthsended June 30, 2006, our operating margin on real estate increased $0.1million, to $1.2 million, compared to $1.1 million for the first half of2005.  Our operating margin on realestate operations for the second quarter of 2006 remained stable atapproximately $0.6 million compared to the second quarter of 2005.  Although we have continued to sell certainreal estate investments, we have been able to maintain our operating margin dueto our success in reducing vacancies and increasing lease rates.  In the first quarter of 2006, we sold sevenbuildings for total proceeds of $3.5 million, resulting in a gain on sale ofapproximately $0.5 million.  In thesecond quarter of 2006, we sold a parcel of vacant land for total proceeds of $2.6million, resulting in a gain on sale of approximately $1.2 million.

 

*Interest Income:*

 
| ** **                            | ** ** | **Three months ended June 30,**           | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                                      | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(dollars in thousands, except yields)** | ** ** |
| Loan portfolios (1):                  |       |                                                          |       |                                              |       |   |   |   |   |
| Interest income                       |       | $                                                             | 64         |                                              | $          | 550 |   | $ | 101 |   | $ | 773 |   |
| Average asset  balance                |       | $                                                             | 1,870      |                                              | $          | 9,980 |   | $ | 1,931 |   | $ | 9,863 |   |
| Average yield                         |       | 13.7                                                          | %          | 22.0                                              | %          | 10.5 | % | 15.7 | % |
|                                  |       |                                                          |       |                                              |       |   |   |   |   |
| Cash Deposits  and other investments: |       |                                                          |       |                                              |       |   |   |   |   |
| Interest income                       |       | $                                                             | 34         |                                              | $          | 105 |   | $ | 76 |   | $ | 206 |   |
| Average asset  balance                |       | $                                                             | 3,090      |                                              | $          | 7,903 |   | $ | 2,860 |   | $ | 9,338 |   |
| Average yield                         |       | 4.4                                                           | %          | 5.3                                               | %          | 5.3 | % | 4.4 | % |
|                                  |       |                                                          |       |                                              |       |   |   |   |   |
| Total:                                |       |                                                          |       |                                              |       |   |   |   |   |
| Interest income                       |       | $                                                             | 98         |                                              | $          | 655 |   | $ | 177 |   | $ | 979 |   |
| Average asset  balance                |       | $                                                             | 4,960      |                                              | $          | 17,883 |   | $ | 4,791 |   | $ | 19,201 |   |
| Average yield                         |       | 7.9                                                           | %          | 14.7                                              | %          | 7.4 | % | 10.2 | % |

 

----

(1)          Includes loans to senior officers.

 

Our interest income forthe six months ended June 30, 2006 was $0.2 million, compared with $1.0 millionfor the same period in 2005.  For thesecond quarter of 2006, interest income was $0.1 million, compared with $0.7million for the same period in 2005.  Thedecrease is primarily attributable to the sale or repayment of loans in ourloan portfolio since June 30, 2005.

 

*Equity in Earnings of EquityInvestees –* In June 2006, Bourne End sold its last remainingshopping center and recognized a gain under U.S. financial reporting standardsof approximately $1.1 million, of which, our share was approximately $0.3million.  We were also allocatedadditional income from Bourne End in the approximate amount of $0.5 millionunder a revenue sharing agreement with the other investors as a result ofexceeding certain profitability measures. As a result, we recognized $0.8 million in income from Bourne End duringthe quarter ended June 30, 2006.  Duringthe six months ended June 30, 2006, income from Bourne End totaled $0.7 million.

 

*Gain on Sale of Loans*– In March 2006, we sold our interest in one loan for proceeds of $0.7million.  This loan had a carrying valueof $0.2 million and provided a gain on sale of $0.5 million.

* *

*Foreign Exchange Gains*– Changes from foreign currency exchange rates resulted in a net gain ofapproximately $0.5 million in this segment for the six months ended June 30,2006.

 

20

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*Software Development and SalesSegment Operations*

 
| ** **                   | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(dollars in thousands)**                | ** ** |
| Software sales               |       | $                                                   | 3          |                                              | $          | — |   | $ | 20 |   | $ | — |   |
| Engineering and  development |       | (176                                                | )          | —                                            |       | (356 | ) | — |   |
| Compensation  expense        |       | (241                                                | )          | —                                            |       | (518 | ) | — |   |
| Depreciation  expense        |       | (89                                                 | )          | —                                            |       | (167 | ) | — |   |
| Other operating  expense     |       | (242                                                | )          | —                                            |       | (430 | ) | — |   |
| Segment loss                 |       | $                                                   | (745       | )                                                 | $          | — |   | $ | (1,451 | ) | $ | — |   |

 

We did not consolidateCentrisoft’s operations until we acquired voting control of Centrisoft in July2005.  Accordingly, no amounts are shownfor the comparable periods in 2005.

 

*Corporate expenses*

 
| ** **                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(dollars in thousands)**                | ** ** |
| Compensation and  employee benefits |       | $                                                   | 1,663      |                                              | $          | 544 |   | $ | 3,010 |   | $ | 1,247 |   |
| Travel and  entertainment           |       | 312                                                 |       | 113                                               |       | 619 |   | 249 |   |
| Insurance                           |       | 149                                                 |       | 252                                               |       | 410 |   | 420 |   |
| Professional  fees                  |       | 653                                                 |       | 439                                               |       | 715 |   | 1,055 |   |
| Occupancy costs                     |       | 44                                                  |       | 48                                                |       | 91 |   | 107 |   |
| Directors fees                      |       | 83                                                  |       | 79                                                |       | 161 |   | 176 |   |
| Other expenses                      |       | 170                                                 |       | 118                                               |       | 300 |   | 377 |   |
| Total operating  expenses           |       | $                                                   | 3,074      |                                              | $          | 1,593 |   | $ | 5,306 |   | $ | 3,631 |   |

 

For the six months endedJune 30, 2006, we incurred corporate operating expenses of $5.3 million,compared to $3.6 million for the same period in 2005.  For the second quarter of 2006, corporate operatingexpenses were $3.1 million, compared to $1.6 million for the second quarter of2005.  These increases are primarily dueto an increase in compensation expenses recognized.  The majority of compensation costs for ourCEO covering his leave of absence during most of our 2005 fiscal year wereaccrued and expensed in 2004. Accordingly, his compensation costs began to accrue again upon hisreturn in November 2005.  Travel andentertainment expense for the six months ended June 30, 2006 includes less than$0.1 million paid to Peninsula Capital Partners LLC (“Peninsula Capital”), anentity owned by Mr. Wiederhorn, as reimbursement of costs for the Company’sbusiness use of certain private aircraft. The Board of Directors is aware of the relationship and approved thefees for the use of the aircraft.

 

**Changes in financial condition**

 

Our assets, liabilitiesand stockholders’ equity can be summarized as follows:

 
| ** **                       | ** ** | **June 30, 2006**          | ** ** | **December 31, 2005** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **(dollars in thousands)** | ** ** |
| Total assets                     |       | $                                    | 64,219     |                            | $          | 65,319 |   |
| Total  liabilities               |       | $                                    | 45,639     |                            | $          | 43,398 |   |
| Total minority  interests        |       | $                                    | 846        |                            | $          | 532 |   |
| Total  stockholders’ equity |       | $                                    | 17,734     |                            | $          | 21,389 |   |

 

The decrease in totalassets during the first half of 2006 is primarily due to a decrease in investmentin real estate as we sold eight properties during the period.  Total liabilities at June 30, 2006 increasedover the first half of 2006, primarily due to $1.5 million borrowed under amortgage note in April 2006.  The cashreceived from the sale of assets or from operations was used to support ouroperating activities and for the payment of dividends.  We do not have a fixed dividend policy, andmay declare and pay new dividends on common stock, subject to financial condition,results of operations, capital requirements and other factors deemed relevantby our Board of Directors.  One factorthe Board of Directors may consider is the impact of dividends on ourliquidity.  As we implement our strategyof focusing our efforts on the development of Fatburger, the Board of Directorsmay determine to reduce any future dividend amount to a level that is moretypical of the restaurant industry, or eliminate the dividend in its entirety.  Stockholders’ equity decreased during the sixmonths ended June 30, 2006 by approximately $3.7 million, mainly resulting fromour net loss of $2.8 million and dividends paid of $1.0 million.  These changes are described in more detail asfollows:

 

21

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*Cash*

 

Our cash decreased $0.5million from December 31, 2005 to June 30, 2006.  Significant sources and uses of cash during thisperiod include:

 

•                  $4.5 million ofcash used in operations – comprised primarily of our net loss of $2.8 millionadjusted for non-cash income and expense items of $1.5 million;

•                  $4.0 million ofcash provided by investing activities – including $6.1 million from the sale ofreal estate and a net $0.7 million received from our loan portfolio, partiallyoffset by a $1.2 million investment in real estate and a total of $1.6 millioninvested by Fatburger in restaurant assets and investments in a subsidiary; and

•                  Less than $0.1 millionof cash used in financing activities – includes proceeds from borrowings (netof principal repayments and payments on capital leases) of $1.0 million, offsetby approximately $1.0 million in dividends paid during the period.

 

*Net Investments in Real Estate,and related liabilities*

 

Our investments in realestate can be summarized as follows:

 
| ** **                                           | ** ** | **June 30, 2006**          | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **(dollars in thousands)** | ** ** |
| US based  investments – held for sale (1):      |       |                                 |       |                            |       |
| Purchase price /  improvements                       |       | $                                    | 2,514      |                            | $          | 7,032 |   |
| Accumulated  depreciation and amortization           |       | (537                                 | )          | (677                            | )          |
| Net book value                                       |       | 1,977                                |       | 6,355                           |       |
| Foreign-based  investments – held for sale (2): |       |                                 |       |                            |       |
| Purchase price /  improvements                       |       | 13,988                               |       | —                          |       |
| Total  investments in real estate, held for sale     |       | $                                    | 15,965     |                            | $          | 6,355 |   |
|                                                 |       |                                 |       |                            |       |
| US based  investments – held for use (3):       |       |                                 |       |                            |       |
| Purchase price /  improvements                       |       | $                                    | 13,137     |                            | $          | 13,141 |   |
| Accumulated  depreciation and amortization           |       | (1,200                               | )          | (1,032                          | )          |
| Net book value                                       |       | 11,937                               |       | 12,109                          |       |
| Foreign-based  investments – held for use (2):  |       |                                 |       |                            |       |
| Purchase price /  improvements                       |       | —                               |       | 11,828                          |       |
| Total  investments in real estate, held for use      |       | $                                    | 11,937     |                            | $          | 23,937 |   |
|                                                 |       |                                 |       |                            |       |
| Total  investments in real estate, net               |       | $                                    | 27,902     |                            | $          | 30,292 |   |

 

----

(1)     Includes 2 commercial properties within theUnited States at June 30, 2006, 10 properties at December 31, 2005.

(2)     Includes 3 apartment buildings in Barcelona,Spain.  Based on a change incircumstances, all 3 properties were reclassified as held for sale at June 30,2006.

(3)     Includes 32 commercial properties undercapital lease throughout the United States at June 30, 2006 and December 31,2005.

 

Borrowings related to ourinvestments in real estate were as follows:

 
| ** **                                      | ** ** | **June 30, 2006**          | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **(dollars in thousands)** | ** ** |
| Obligations on  real estate under capital lease |       | $                                    | 10,285     |                            | $          | 10,551 |   |
| Obligations on  owned US properties             |       | 1,441                                |       | —                          |       |
| Borrowings on  Barcelona properties             |       | 6,490                                |       | 6,020                           |       |
| Total borrowing  related to real estate         |       | $                                    | 18,216     |                            | $          | 16,571 |   |

 

The decrease in USproperties owned at June 30, 2006 compared to December 31, 2005 is due to thesale of eight properties with a net book value of $4.4 million in two separatetransactions.  There was no debt relatedto these properties.  Investments inproperties under capital lease decreased $0.2 million at June 30, 2006 due todepreciation during the first half of 2006. Obligations under capital leases related to these properties decreased $0.3million primarily due to scheduled monthly payments during the same period.  Our investment in apartment buildings inBarcelona, Spain increased $2.2 million since December 31, 2005.  This was the result of $1.1 million ofadditional investment, and unrealized foreign currency translation changes of $1.1million.  The carrying value ofborrowings related to the Barcelona investments has increased $0.5 million dueto foreign currency translation changes.

 

22

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*Net Property, Plant and Equipment*

 

Net property, plant andequipment increased $1.0 million at June 30, 2006 compared to December 31, 2005,primarily due to the addition of 3 company-owned restaurants in the first half of2006.  Obligations on property, plant,and equipment under capital lease remained substantially unchanged at $0.3million at June 30, 2006.

 

*Goodwill and Net IntangibleAssets*

 
| ** **                                     | ** ** | **June 30, 2006**          | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **(dollars in thousands)** | ** ** |
| Goodwill –  Fatburger                     |       | $                                    | 7,163      |                            | $          | 7,063 |   |
| Goodwill –  Centrisoft acquisition        |       | 1,999                                |       | 1,999                           |       |
| Goodwill – DAC  International acquisition |       | 917                                  |       | 917                             |       |
| Total Goodwill                                 |       | $                                    | 10,079     |                            | $          | 9,979 |   |
|                                           |       |                                 |       |                            |       |
| Net Intangible  Assets – Fatburger        |       | $                                    | 5,038      |                            | $          | 5,134 |   |
| Net Intangible  Assets – Centrisoft       |       | 402                                  |       | 452                             |       |
| Total Net  Intangible Assets                   |       | $                                    | 5,440      |                            | $          | 5,586 |   |

 

As a result of the Fatburger’sacquisition and consolidation of the net assets of one franchisee location,goodwill increased $0.1 million from December 31, 2005 to June 30, 2006.  Net intangible assets decreased $0.1 millionover the same period due to amortization. Net intangible assets at June 30, 2006 consists of trademark rights ofapproximately $4.0 million, franchise agreements of approximately $0.8 million,sales contracts for Centrisoft of approximately $0.4 million, and othermiscellaneous intangible assets of approximately $0.3 million.  We do not believe that there is anyimpairment of goodwill or net intangible assets at June 30, 2006.

 

*Notes Receivable*

 

As of June 30, 2006, our notesreceivable portfolio (excluding loans to senior executives) consists of threeindividual loans with a combined carrying value of $0.8 million.  Two of the loans are secured by real estateconsisting of commercial property located in Texas and Arizona, and one loan issecured by stock in a restaurant business. The loans have a weighted average interest rate (excluding fees andpoints) of 10.8% and a weighted average maturity of 15 months.  In March 2006, we sold our interest in oneloan for proceeds of $0.7 million.  Thisloan had a carrying value of $0.2 million and provided a gain on sale of $0.5million.

 

*Loans to Senior Executives*

 

We currently have twoloans to our Chairman and Chief Executive Officer, Andrew Wiederhorn for atotal of $1.0 million.  Both loans weremade on February 21, 2002 (prior to the passage of the Sarbanes-Oxley Act of2002).  The loans are due on February 21,2007, and bear interest at the prime rate, as published in the Wall StreetJournal, which interest is added to the principal.

 

*Investmentin Bourne End Properties, Ltd.*

 

Ourinvestment in Bourne End increased by $0.8 million from December 31, 2005 to $1.6million at June 30, 2006, due primarily to our share of Bourne End’s net incomefor the six months then ended. Subsequent to June 30, 2006, we received a cash distribution from BourneEnd in the amount of $1.6 million.

 

23

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*Other Assets*

 
| ** **                          | ** ** | **June 30, 2006**          | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **(dollars in thousands)** | ** ** |
| Trade  receivables                  |       | $                                    | 1,646      |                            | $          | 1,248 |   |
|                                |       |                                 |       |                            |       |
| Inventories                         |       | $                                    | 2,253      |                            | $          | 1,880 |   |
|                                |       |                                 |       |                            |       |
| Other current  assets:              |       |                                 |       |                            |       |
| Prepaid expenses                    |       | $                                    | 334        |                            | $          | 389 |   |
| Other restaurant  segment assets    |       | 673                                  |       | 894                             |       |
| Other Barcelona  VIE-related assets |       | 413                                  |       | 266                             |       |
| Other                               |       | 39                                   |       | 129                             |       |
| Total other  current assets         |       | $                                    | 1,459      |                            | $          | 1,678 |   |
|                                |       |                                 |       |                            |       |
| Other assets:                       |       |                                 |       |                            |       |
| Software costs                      |       | $                                    | 1,368      |                            | $          | 1,484 |   |
| Capitalized  deferred compensation  |       | 322                                  |       | 508                             |       |
| Mortgage  servicing rights          |       | 224                                  |       | 234                             |       |
| Investment in  operating leases     |       | 84                                   |       | 126                             |       |
| Other                               |       | 65                                   |       | 62                              |       |
| Total other  assets                 |       | $                                    | 2,063      |                            | $          | 2,414 |   |

 

The increase in tradereceivables and inventories at June 30, 2006 relate primarily to the operationsof DAC.

 

*Deferred Income*

 

Our deferred incomerelating to the collection of unearned Fatburger franchise fees was $4.1million at June 30, 2006, compared with $4.3 million at December 31, 2005.  As of June 30, 2006, nearly all of thedeferred income was comprised of the non-refundable franchise fee received byFatburger for each future franchise location. These initial fees generally represent half of the total fee perlocation.  The balance of the franchisefee (approximately an additional $4.1 million) will be collected in the future ifleases on these specific franchise locations are signed.

 

*Notes Payable*

 

As of June 30, 2006, ournotes payable (excluding borrowings on real estate) totaled $8.3 million,including $6.8 million of debt held at Fatburger and $1.5 million atCentrisoft.  This compares to $6.9million at December 31, 2005.  Theincrease was primarily due to additional borrowings and the purchase of theassets and liabilities of one franchisee location during the first quarter of2006.

 

*Accrued Expenses and OtherLiabilities*

 

Accrued Expenses andOther Liabilities totaled $9.1 million at June 30, 2006, compared with $9.5million at December 31, 2005.

 

*Deferred Income Taxes*

 

Deferred income taxesremained substantially unchanged at $5.7 million at June 30, 2006.  As of June 30, 2006, we had, for U.S. Federaltax purposes, a net operating loss (“NOL”) carryforward of approximately $88.0million, including $7.8 million relating to Fatburger.  Our NOL carryforwards begin to expire in2018, while Fatburger’s NOL carryforwards began to expire in 2004.

 

**Liquidity and Capital Resources**

 

Liquidity is ameasurement of our ability to meet potential cash requirements, includingongoing commitments to repay borrowings, fund business operations,acquisitions, and expansion (including growth of company-owned and franchisedrestaurant locations), engage in loan acquisition and lending activities andfor other general business purposes.  Inaddition to our cash on hand, our primary sources of funds for liquidity duringthe first half of 2006 consisted of cash provided by proceeds from the sale ofreal estate and loans, new borrowings, and the repayments to us fromborrowers.  As of June 30, 2006, we hadcash or cash equivalents of $3.5 million, which, together with projectedborrowings and proceeds from the sales of assets, we believe will be sufficientto meet our current liquidity needs.

 

 

24

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At June 30, 2006, we hadtotal consolidated secured indebtedness of $26.8 million, as well as $18.8million of other liabilities.  Ourconsolidated secured indebtedness consisted of:

•                  $10.5million in capital leases maturing between 2010 and 2040 which are secured byreal estate;

•                  mortgagenotes payable of $6.5 million secured by our Barcelona properties;

•                  mortgagenote payable of $1.5 million secured by our Eugene property;

•                  notespayable and other debt of Fatburger of $6.8 million secured by the assets ofFatburger; and

•                  $1.5million of notes payable secured by the assets of Centrisoft.

 

We consider the sale ofassets to be a normal, recurring part of our operations and we are currentlygenerating adequate cash flow as a result of these transactions.  However, excluding the sale of assets fromtime to time, we are currently operating with negative cash flow, since many ofour assets do not currently generate sufficient cash to cover operatingexpenses.  We believe that our existingsources of funds will be adequate to meet our liquidity needs; however, therecan be no assurance that this will be the case.

 

*Liquidity Risks*

 

If our existing liquidityposition were to prove insufficient, and we were unable to repay, renew orreplace maturing indebtedness on terms reasonably satisfactory to us, we may berequired to sell (potentially on short notice) a portion of our assets, andcould incur losses as a result.  Specificrisks to our liquidity position include the following:

 

*Interest rate risk*

 

Our borrowings and theavailability of further borrowings are substantially affected by, among otherthings, changes in interest rates, changes in market spreads or decreases incredit quality of our assets.  Materialincreases in interest expense from variable-rate funding sources, or materialdecreases in monthly cash receipts from operations, generally would negativelyimpact our liquidity.  On the other hand,material decreases in interest expense from variable-rate funding sources wouldpositively affect our liquidity. Fluctuations in interest rates will impact our net income to the extentour operations and our fixed rate assets are funded by variable rate debt.  We may also be impacted to the extent thatour variable rate assets re-price on a different schedule or in relation to adifferent index than any floating rate debt. See *Item 3 – Quantitative and Qualitative Disclosuresabout Market Risk* for further analysis.

 

*Fatburger debt covenant*

 

At December 31, 2005,Fatburger was not in compliance with all obligations under the agreementsevidencing its indebtedness, as defined in the applicable agreements.  Fatburger failed to meet the prescribed fixedcharge coverage ratio and the prescribed debt-coverage ratio at December 31, 2005.  Due to Fatburger’s non-compliance, the lenderhas the right to demand repayment of the notes in 2006.  As such, on our Consolidated Statements ofFinancial Condition, $4.1 million of long-term debt has been classified ascurrent at June 30, 2006, and $4.2 million at December 31, 2005, that wouldotherwise be classified as non-current.  Thelender has not demanded early repayment of the loans, however, if the lenderexercises its right to demand repayment, our liquidity could be negativelyaffected.

 

*Fatburger expansion*

 

Fatburger is involved ina nationwide expansion of franchise and company-owned locations, which willrequire significant liquidity.  If realestate locations of sufficient quality cannot be located, the timing ofrestaurant openings may be delayed. Additionally, if Fatburger or its franchisees cannot obtain capitalsufficient to fund this expansion, the timing of restaurant openings may bedelayed.

 

*Centrisoft operations*

 

We expect that Centrisoftwill require capital resources and have negative cash flow for the nearterm.  Since Centrisoft is in the earlystages of its marketing, there can be no assurance that it will be successful inattracting a significant customer base. Centrisoft is currently marketing its software to potential customersboth directly and through re-seller relationships.  There can be no assurance that Centrisoftwill be successful in generating sufficient cash flow to support its ownoperations in the near term.

 

*Dividends*

 

In the first quarter of 2006,we declared a cash distribution of $0.13 per share ($1.0 million in total).  No dividends were declared or paid in thesecond quarter of 2006.  While we do nothave a fixed dividend policy, we may declare and pay new dividends on ourcommon stock, subject to our financial condition, results of operations,capital requirements and other factors deemed relevant by the Board ofDirectors.  One factor the Board ofDirectors may consider is the impact of dividends on our liquidity.  As we implement our strategy of focusing ourefforts on the development of Fatburger, we may determine to reduce the futuredividend amount to a level that is more typical of the restaurant industry, oreliminate the dividend in its entirety.

 

25

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*NASDAQ delisting*

 

Effective October 14,2004, due to a NASDAQ staff determination to delist our common stock, our stockbegan trading in the over-the-counter (“OTC”) market.  Prior to that, we were quoted on the NASDAQNational Market.  We appealed thedecision with NASDAQ at various levels, but were informed on April 21, 2005that the NASDAQ decision was final.  Weare continuing to appeal the decision, but there can be no assurance that theappeal will be successful.

 

Trading of our common stock on the OTC market may reduce theliquidity of our common stock compared to quotation on the NASDAQ NationalMarket.  Also, the coverage of theCompany by security analysts and media could be reduced, which could result inlower prices for our common stock than might otherwise prevail and could alsoresult in increased spreads between the bid and ask prices for our commonstock.  Additionally, certain investorswill not purchase securities that are not quoted on the NASDAQ Stock Market,which could materially impair our ability to raise funds through the issuanceof common stock or other securities convertible into common stock.

 

*Commonstock trading price*

 

If the trading price of our common stock is less than $5.00 pershare, trading in our common stock could be subject to Rule 15g-9 of theSecurities Exchange Act of 1934, as amended. Under that Rule, brokers who recommend such securities to persons other thanestablished customers and accredited investors must satisfy special salespractice requirements, including an individualized written suitabilitydetermination for the purchaser and the purchaser’s written consent prior toany transaction.  The SecuritiesEnforcement Remedies and Penny Stock Reform Act of 1990 also requiresadditional disclosure in connection with any trades involving a stock definedas a penny stock (generally, any equity security not traded on an exchange orquoted on NASDAQ that has a market price of less than $5.00 per share),including the delivery of a disclosure schedule explaining the penny stockmarket and the associated risks.  Suchrequirements could severely limit the market liquidity of our common stock.  There can be no assurance that our commonstock will not become treated as penny stock.

 

**Off Balance Sheet Arrangements**

 

In order to facilitatethe development of franchise locations, as of June 30, 2006, Fatburger hadguaranteed the annual minimum lease payments of five restaurant sites owned andoperated by franchisees.  The guaranteesapproximate $1.5 million plus certain contingent rental payments as defined inthe respective leases.  These leasesexpire at various times through 2015.

 

The lease guarantees byFatburger do not provide us with a material source of liquidity, capitalresources or other benefits.  There areno revenues, expenses or cash flows connected with the lease guarantees otherthan the receipt of normal franchise royalties. As of June 30, 2006, we were not aware of any event or demand that waslikely to trigger the guarantee by Fatburger.

 

We have various operatingleases for office and retail space which expire through 2015.  The leases provide for varying minimum annualrental payments including rent increases and free rent periods.  We have future minimum rental payments undernon-cancelable operating leases with initial or remaining terms of one year ormore of approximately $13.5 million as of June 30, 2006.

 

26

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## **ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

## ** **

Our market risk resultsfrom instruments entered into other than for trading purposes and consistsprimarily of exposure to loss resulting from changes in foreign currencyexchange rates, interest rates and commodity prices.

 

*Foreign Currency Exchange RateRisk*

 

Our exposure to foreigncurrency fluctuations arises mainly from our investment in Barcelona realestate and our UK investment in Bourne End. As of June 30, 2006, approximately 50% of our equity is invested in netassets located outside of the United States, primarily denominated in the euroor British pounds.  The following tableillustrates the projected effect on our net asset value as a result ofhypothetical changes in foreign currency rates as of June 30, 2006:

 
| **Change in Foreign  Exchange Rates ****(1)** | ** ** | **Projected Change in  Net Asset  Fair Value** | ** ** | **Projected Percentage  Change in Net Asset  Fair Value** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| Decrease 20%                                                      |       | $                                                                  | (1,852,000 | )                                                                                  | -10.0      | % |
| Decrease 10%                                                      |       | $                                                                  | (926,000   | )                                                                                  | -5.0       | % |
| No Change                                                         |       | $                                                                  | —     |                                                                               | 0.0        | % |
| Increase 10%                                                      |       | $                                                                  | 926,000    |                                                                               | 5.0        | % |
| Increase 20%                                                      |       | $                                                                  | 1,852,000  |                                                                               | 10.0       | % |

 

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(1)                Assumesthat uniform percentage changes occur instantaneously in both the Great Britainpound and the euro.  A decrease in theforeign exchange rate indicates a strengthening of the U.S. dollar against thatcurrency.  An increase in the foreignexchange rate indicates a weakening of the U.S. dollar against that currency.

 

We can utilize a widevariety of financial techniques to assist in the management of currency risk,including currency swaps, options, and forwards, or combinations thereof.  No such currency hedging techniques were inuse as of June 30, 2006.

 

*InterestRate Risk*

 

Changes in interest ratescan affect net income by changing the spread between our interest-earningassets and our interest-bearing liabilities and by increasing the costassociated with operating and expanding our restaurant operation.  Changes in the level of interest rates canalso affect, among other things, the value of our interest-earning assets (andthe associated default rates), our ability to acquire loans and general levelsof consumer spending.

 

The following tablequantifies the potential changes in our net loss and net asset value as of June30, 2006 should interest rates go up or down (shocked) by 100 or 200 basispoints.  Actual results could differsignificantly from those estimated in the table.

 
| ** **                                      | ** ** | **Projected Percent Change In** | ** ** | **Projected Change In**                | ** ** |
|-------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|
| **Interest Rate Change ****(1)** | ** ** | **Net Loss**                              | ** ** | **Net Asset Fair  Value ****(2)** | ** ** | **Annual Net Loss** | ** ** | **Net Asset  Fair Value** | ** ** |
| -200 Basis  Points                              |       | 4.0                                            | %          | -7.4                                             | %          | $ | 62,000 |   | $ | (1,376,000 | ) |
| -100 Basis  Points                              |       | 1.1                                            | %          | -3.6                                             | %          | $ | 18,000 |   | $ | (665,000 | ) |
| 0 Basis Points                                  |       | 0.0                                            | %          | 0.0                                              | %          | $ | — |   | $ | — |   |
| 100 Basis Points                                |       | -0.6                                           | %          | 3.4                                              | %          | $ | (9,000 | ) | $ | 623,000 |   |
| 200 Basis Points                                |       | -1.2                                           | %          | 6.5                                              | %          | $ | (18,000 | ) | $ | 1,207,000 |   |

 

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(1)          Assumesthat uniform changes occur instantaneously in both the yield on 10-year U.S.Treasury notes and the interest rate applicable to U.S. dollar deposits in theLondon interbank market.

(2)          Equalsthe value of off-balance sheet instruments plus the present value of cashinflows generated from interest-earning assets net of cash outflows in respectof interest-bearing liabilities.

 

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The following table provides information as to the type of funding usedto finance our assets as of June 30, 2006.

 
| ** **                          | ** ** | **Basis Amount**                | ** ** | **Coupon Type** | ** ** | **Liability** | ** ** | **Type** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|----------------------|------------|---------------|------------|----------|------------|
| ** **                          | ** ** | **(dollars in thousands)** | ** ** |
| Interest-Bearing  Assets:           |       |                                 |       |                 |       |          |       |     |       |
| Fixed-rate  assets, no financing    |       | $                                    | 836        |                 | Fixed      |          | $          | —   |       | None |   |
| Variable-rate  assets, no financing |       | 1,044                                |       | Prime                |       | —        |       | None     |       |
| Cash and cash  equivalents          |       | 3,522                                |       | N/A                  |       | —        |       | None     |       |
| Subtotal                            |       | 5,402                                |       |                 |       | —        |       |     |       |
|                                |       |                                 |       |                 |       |          |       |     |       |
| Other Assets:                       |       |                                 |       |                 |       |          |       |     |       |
| Investments in  real estate         |       | 27,902                               |       | N/A                  |       | 18,448        |       | Fixed    |       |
| Investment in  BEP                  |       | 1,600                                |       | N/A                  |       | —        |       | None     |       |
| Property, plant  and equipment      |       | 6,391                                |       | N/A                  |       | 8,386         |       | Mixed    |       |
| Intangible  assets, net             |       | 5,440                                |       | N/A                  |       | —        |       | None     |       |
| Goodwill                            |       | 10,079                               |       | N/A                  |       | —        |       | None     |       |
| Other                               |       | 7,405                                |       | N/A                  |       | —        |       | None     |       |
| Subtotal                            |       | 58,817                               |       |                 |       | 26,834        |       |     |       |
|                                |       |                                 |       |                 |       |          |       |     |       |
| Liability Only:                     |       |                                 |       |                 |       |          |       |     |       |
| Deferred income                     |       | —                               |       |                 |       | 4,060         |       | None     |       |
| Deferred income  taxes              |       | —                               |       |                 |       | 5,655         |       | None     |       |
| Other                               |       | —                               |       |                 |       | 9,090         |       | None     |       |
| Total                               |       | $                                    | 64,219     |                 |       |          | $          | 45,639   |       |   |   |

 

*Other Market Risks*

 

Our restaurant operationsare exposed to the impact of commodity and utility price fluctuations relatedto unpredictable factors such as weather and various other market conditionsoutside our control.  Our ability torecover increased costs through higher prices is limited by the competitiveenvironment in which we operate.

 

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**ITEM4.  CONTROLS AND PROCEDURES**

 

*Evaluationof disclosure controls and procedures*

 

OurChief Executive Officer and our Chief Financial Officer, after evaluating theeffectiveness of the Company’s “disclosure controls and procedures” (as definedin the Securities and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as ofthe end of the period covered by this report, have concluded that ourdisclosure controls and procedures were effective and designed to ensure thatmaterial information relating to us and our consolidated subsidiaries isaccumulated and communicated to our management to allow timely decisionsregarding required disclosure.

 

*Changes in internal control overfinancial reporting*

 

There were no significantchanges in our internal control over financial reporting in connection with anevaluation that occurred during our second fiscal quarter of 2006 that havematerially affected or are reasonably likely to materially affect our internalcontrol over financial reporting.

 

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## **PARTII – OTHER INFORMATION**

## ** **

**ITEM 1.  LEGAL PROCEEDINGS**

** **

*NASDAQ Delisting*

 

Effective October 14, 2004, our common stock began trading in theover-the-counter market.  Prior to that,our common stock was quoted on the NASDAQ National Market.  On July 20, 2004, we were notified by NASDAQof a staff determination to delist our common stock effective July 29, 2004.  We were unsuccessful in appealing thedetermination and our common stock was delisted from the NASDAQ National Marketon October 14, 2004.  We subsequentlyrequested a review of the delisting by NASDAQ’s Listing and Hearing ReviewCouncil and by the Securities and Exchange Commission (“SEC”).  Those appeals were also unsuccessful.  On February 17, 2006, we filed a petition forreview of the SEC decision with the United States Court of Appeals, District ofColumbia Circuit.  There can be noassurance that our petition for review will be successful.

 

*ShareholderDerivative Complaint*

 

On July 6, 2004, JeffAllan McCoon, derivatively on behalf of Fog Cutter Capital Group Inc., filed alawsuit in the Circuit Court for the State of Oregon (Multnomah County) whichnamed us and all of our directors as defendants. The lawsuit, as amended,alleged that the Company’s Board of Directors breached their fiduciaryduties to us and our stockholders in a number of ways, primarily relating tothe leave of absence agreement with Mr. Wiederhorn.  On January 6, 2006, the Circuit Court dismissed the entirederivative lawsuit, ruling that Mr. McCoon was unfit to represent ourstockholders.  Mr. McCoon has filed anappeal to this ruling.

 

**ITEM 1A.  RISK FACTORS**

** **

In addition to the otherinformation contained in this quarterly report, you should carefully read andconsider the following risk factors.  Ifany of these risks actually occur, our business, financial condition oroperating results could be materially adversely affected and the trading priceof our common stock could decline.

 

*The delisting of our common stock from the NASDAQ StockMarket could impair our ability to finance our operations through the sale ofcommon stock or securities convertible into common stock.*

 

Effective October 14,2004, due to a NASDAQ staff determination to delist our common stock, our stockbegan trading in the over-the-counter (“OTC”) market.  Prior to the delisting, our common stock wasquoted on the NASDAQ National Market. The liquidity of our common stock is reduced by trading on the OTCmarket as compared to quotation on the NASDAQ National Market.  The coverage of the Company by securityanalysts and media could be reduced, which could result in lower prices for ourcommon stock than might otherwise prevail and could also result in increasedspreads between the bid and ask prices for our common stock.  Additionally, certain investors will notpurchase securities that are not quoted on the NASDAQ Stock Market, which couldmaterially impair our ability to raise funds through the issuance of commonstock or other securities convertible into common stock.

 

*Because the trading price of ourcommon stock is current below $5.00 per share, trading in our common stock issubject to certain restrictions and the market for our common stock coulddiminish.*

 

Because the trading price of our common stock is less than $5.00 pershare, trading in our common stock is subject to Rule 15g-9 of the SecuritiesExchange Act of 1934, as amended.  Underthat Rule, brokers who recommend such securities to persons other than establishedcustomers and accredited investors must satisfy special sales practicerequirements, including an individualized written suitability determination forthe purchaser and the purchaser’s written consent prior to anytransaction.  The Securities EnforcementRemedies and Penny Stock Reform Act of 1990 also requires additional disclosurein connection with any trades involving a stock defined as a penny stock(generally, any equity security not traded on an exchange or quoted on NASDAQthat has a market price of less than $5.00 per share), including the deliveryof a disclosure schedule explaining the penny stock market and the associatedrisks.  Such requirements could severelylimit the market liquidity of our common stock.

 

*Changes in interest rates and currency exchange rates affectour net income.*

 

Our borrowings and the availability of further borrowings aresubstantially affected by, among other things, changes in interest rates.  Fluctuations in interest rates will affectour net income to the extent our operations and our fixed rate assets arefunded by variable rate debt.  We arealso affected by foreign currency exchange rate changes, as a significantportion of our assets are invested in foreign currencies, mainly the euro andGreat British pound.  See *Item 3 - Quantitative and Qualitative Disclosuresabout Market Risk* for further analysis.

 

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*If we do not retain our key employees and management teamour ability to execute our business strategy will be limited.*

 

Our future performance will depend largely on the efforts and abilitiesof our key executive, finance and accounting, and managerial personnel, and onour ability to attract and retain them. The loss of one or more of our senior management personnel may adverselyaffect our business, financial condition or operating results.  When we lose key employees, new employeesmust spend a significant amount of time learning our business model in additionto performing their regular duties and integration of these individuals oftenresults in some disruption to our business. In addition, our ability to execute our business strategy will depend onour ability to recruit and retain key personnel.  Our key employees are not obligated tocontinue their employment with us and could leave at any time.  As part of our strategy to attract and retainpersonnel, we offer stock option grants to certain employees.  However, given the fluctuations of the marketprice of our common stock, potential employees may not perceive our equityincentives such as stock options as attractive, and current employees whoseoptions are no longer priced below market value may choose not to remainemployed by us.  In addition, due to theintense competition for qualified employees, we may be required to increase thelevel of compensation paid to existing and new employees, which couldmaterially increase our operating expenses.

 

*We are the subject of litigation, which may be expensive andmay be time consuming for our management team.*

 

On July 6, 2004, one ofour stockholders, Jeff Allan McCoon, derivatively on behalf of Fog Cutter,filed a lawsuit in the Circuit Court for the State of Oregon (Multnomah County)which named us and all of our directors as defendants.  The lawsuit, asamended, alleged that our Board of Directors breached their fiduciaryduties to us and our stockholders in a number of ways, primarily relating tothe leave of absence agreement with Mr. Wiederhorn.  On January 6, 2006, the Circuit Courtdismissed the entire derivative lawsuit, ruling that Mr. McCoon wasunfit to represent the Company’s stockholders. Mr. McCoon has filed an appeal to this ruling.  We are obligated to indemnify our officersand directors to the extent permitted by applicable law in connection with thisaction, and have insurance for such individuals, to the extent of the limits ofthe applicable insurance policies and subject to potential reservations ofrights.  We are unable, however, topredict the ultimate outcome of matter. We cannot assure you that we will be successful in defending againstthis action and, if we are unsuccessful, we may be subject to significantdamages that could have a material adverse effect on our business, financialcondition and operating results.  Even ifwe are successful, defending against this action has been, and will likelycontinue to be, expensive, time consuming and may divert management’s attentionfrom other business concerns and harm our business.

 

**Risks related to Fatburger**

 

*Fatburger debt covenant*

 

At December 31, 2005,Fatburger was not in compliance with all obligations under the agreementsevidencing its indebtedness, as defined in the applicable agreements.  Fatburger failed to meet the prescribed fixedcharge coverage ratio and the prescribed debt-coverage ratio at December 31,2005.  Due to Fatburger’s non-compliance,the lender has the right to demand repayment of the notes in 2006.  As such, on the Company’s ConsolidatedStatements of Financial Condition, $4.1 million of long-term debt has been classifiedas current at June 30, 2006, and $4.2 million at December 31, 2005, that wouldotherwise be classified as non-current.  Thelender has not demanded early repayment of the loans, however, if the lenderexercises its right to demand repayment, our liquidity could be negativelyaffected.

 

*Fatburger maynot be able to achieve its planned expansion.*

 

We intend to grow Fatburger primarilythrough developing additional new franchisee and Company-ownedrestaurants.  Development involvessubstantial risks, including:

 

•                  the availability of financing to Fatburgerand to franchisees at acceptable rates and upon acceptable terms;

•                  development costs exceeding budgeted orcontracted amounts;

•                  delays in the completion of construction;

•                  the inability to identify, or theunavailability of, suitable sites on acceptable leasing or purchase terms;

•                  developed properties not achieving desiredrevenue or cash flow levels once opened;

•                  incurring substantial unrecoverable costsin the event that a development project is abandoned prior to completion;

•                  the inability to obtain all requiredgovernmental permits;

•                  changes in governmental rules, regulationsand interpretations; and

•                  changes in general economic and businessconditions.

 

Although we intend to manage Fatburger’sdevelopment to reduce such risks, we cannot assure you that present or futuredevelopment will perform in accordance with our expectations.  We cannot assure you that we will completethe development and construction of the restaurants, or that any suchdevelopment will be completed in a timely manner or within budget, or that anyrestaurants will generate our expected returns on investment.  Our inability to expand Fatburger inaccordance with our plans or to manage our growth could have a material adverseeffect on our results of operations and financial condition.

 

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* *

*We may not beable to obtain financing sufficient to fund our planned expansion of Fatburger.*

 

We are implementing a nationwide and internationalexpansion of franchise and company-owned locations of Fatburger, which willrequire significant liquidity.  IfFatburger or its franchisees are unsuccessful in obtaining capital sufficientto fund this expansion, the timing of restaurant openings may be delayed andFatburger’s results may be harmed.

 

*Fatburger’ssuccess depends on its ability to locate a sufficient number of suitable newrestaurant sites.*

 

One of the biggest challenges in meetingour growth objectives for Fatburger will be to secure an adequate supply ofsuitable new restaurant sites.  We haveexperienced delays in opening some Fatburger restaurants and may experiencedelays in the future.  There can be noassurance that sufficient suitable locations will be available for our plannedexpansion in any future period.  Delaysor failures in opening new restaurants could materially adversely affectFatburger’s performance and our business, financial condition, operatingresults and cash flows.  In addition,Fatburger is contemplating expanding into international markets in Asia, whichmay have additional challenges and requirements.

 

*New restaurants, once opened, may not be profitable, if at all, forseveral months.*

 

We anticipate that new Fatburgerrestaurants will generally take several months to reach normalized operatinglevels due to inefficiencies typically associated with new restaurants,including lack of market awareness, the need to hire and train a sufficientnumber of team members, operating costs, which are often materially greaterduring the first several months of operation than thereafter, pre-opening costsand other factors.  Further, some, or allof the new restaurants may not attain anticipated operating results or resultssimilar to those of Fatburger’s existing restaurants.  In addition, restaurants opened in newmarkets may open at lower average weekly sales volumes than restaurants openedin existing markets, and may have higher restaurant-level operating expenseratios than in existing markets.  Salesat restaurants opened in new markets may take longer to reach average annualcompany-owned restaurant sales, if at all, thereby affecting the profitabilityof these restaurants.

 

*Fatburger’s existing systems and procedures may be inadequate tosupport our growth plans.*

 

We face the risk that Fatburger’s existingsystems and procedures, restaurant management systems, financial controls,information and accounting systems, management resources and human resourceswill be inadequate to support our planned expansion of company-owned andfranchised restaurants.  Expansion maystrain Fatburger’s infrastructure and other resources, which could slowrestaurant development or cause other problems. We may not be able to respond on a timely basis to all of the changingdemands that our planned expansion will impose on Fatburger’s infrastructureand other resources.  Any failure by usto continue to improve our infrastructure or to manage other factors necessaryfor us to achieve Fatburger’s expansion objectives could have a material adverseeffect on our operating results.

 

*The quick service restaurant segment is highly competitive,and that competition could lower revenues, margins and market share.*

 

The quick-service restaurant industry ishighly competitive with respect to price, service, location, personnel and thetype and quality of food, and there are many well-established competitors.  Each of Fatburger’s restaurants competesdirectly and indirectly with a large number of national and regional restaurantchains, as well as with locally-owned quick-service restaurants, fast casualrestaurants, and sandwich shops and other similar types of businesses.  The trend toward a convergence in grocery,deli and restaurant services may increase the number of Fatburger’scompetitors.  Such increased competitioncould have a material adverse affect on Fatburger’s financial condition andresults of operations.  Some of Fatburger’scompetitors have substantially greater financial, marketing, operating andother resources than we have, which may give them a competitive advantage.  Certain of Fatburger’s competitors haveintroduced a variety of new products and engaged in substantial pricediscounting in recent years and may continue to do so in the future.  There can be no assurance as to the successof any of Fatburger’s new products, initiatives or overall strategies, orassurance that competitive product offerings, pricings and promotions will nothave an adverse effect upon Fatburger’s financial condition and results ofoperations.

 

*Changes in economic, market and other conditions couldadversely affect Fatburger and its franchisees, and thereby our operatingresults.*

 

The quick-service restaurant industry isaffected by changes in international, national, regional, and local economicconditions, consumer preferences and spending patterns, demographic trends,consumer perceptions of food safety, weather, traffic patterns, the type,number and location of competing restaurants, and the effects of war orterrorist activities and any governmental responses thereto. Factors such asinflation, food costs, labor and benefit costs, legal claims, and theavailability of management and hourly employees also affect restaurantoperations and administrative expenses. The ability of Fatburger and its franchisees to finance new restaurantdevelopment, improvements and additions to existing restaurants, and theacquisition of restaurants from, and sale of restaurants to, franchisees isaffected by economic conditions, including interest rates and other governmentpolicies impacting land and construction costs and the cost and availability ofborrowed funds.

 

*Increases inthe minimum wage may have a material adverse effect on Fatburger’s business andfinancial results.*

 

Fatburger has a substantial number ofemployees who are paid wage rates at or slightly above the minimum wage.  As federal and state minimum wage ratesincrease, Fatburger may need to increase not only the wages of its minimum wageemployees, but also the wages paid to the employees at wage rates which areabove minimum wage.  If competitivepressures or other factors prevent Fatburger from offsetting the increasedcosts by price increases, profitability may decline.  In addition, various other proposals thatwould require employers to provide health insurance for all of their employeesare being considered from time to time in Congress and various states. Theimposition of any requirement that Fatburger provide health insurance to allemployees on terms materially different from its existing programs could have amaterial adverse impact on the results of operations and financial condition ofFatburger.

 

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*Events reported in the media, such as incidents involvingfood-borne illnesses or food tampering, whether or not accurate, can causedamage to Fatburger’s brand’s reputation and swiftly affect sales andprofitability.*

 

Reports, whether true or not, of food-borneillnesses (such as e-coli, avian flu, bovine spongiform encephalopathy,hepatitis A, trichinosis or salmonella) and injuries caused by food tamperinghave in the past severely injured the reputations of participants in the quickservice restaurant segment and could in the future affect Fatburger aswell.  Fatburger’s brand reputation is animportant asset to the business; as a result, anything that damages the brand’sreputation could immediately and severely hurt sales and, accordingly, revenuesand profits.  If customers become illfrom food-borne illnesses, Fatburger could also be forced to temporarily closesome restaurants.  In addition, instancesof food-borne illnesses or food tampering, even those occurring solely at therestaurants of competitors, could, by resulting in negative publicity about therestaurant industry, adversely affect sales on a local, regional or system-widebasis.  A decrease in customer traffic asa result of these health concerns or negative publicity, or as a result of atemporary closure of any Fatburger restaurants, could materially harm Fatburger’sbusiness.

 

*Changing health or dietary preferences may cause consumersto avoid products offered by Fatburger in favor of alternative foods.*

 

The foodservice industry is affected byconsumer preferences and perceptions. Fatburger’s success depends, in part, upon the popularity of burgers andquick-service dining.  Shifts in consumerpreferences away from this cuisine or dining style could have a materialadverse affect on our future profitability. The restaurant industry is characterized by the continual introductionof new concepts and is subject to rapidly changing consumer preferences, tastesand eating and purchasing habits.  Whileburger consumption in the United States has grown over the past 20 years, thedemand may not continue to grow or taste trends may change.  Fatburger’s success will depend in part onour ability to anticipate and respond to changing consumer preferences, tastesand eating and purchasing habits, as well as other factors affecting the foodservice industry, including new market entrants and demographic changes.  If prevailing health or dietary preferencesand perceptions cause consumers to avoid these products offered by Fatburgerrestaurants in favor of alternative or healthier foods, demand for Fatburger’sproducts may be reduced and its business could be harmed.

 

*Fatburger is subject to health, employment, environmentaland other government regulations, and failure to comply with existing or futuregovernment regulations could expose Fatburger to litigation, damage Fatburger’sreputation and lower profits.*

 

Fatburger and its franchisees are subjectto various federal, state and local laws affecting their businesses.  The successful development and operation ofrestaurants depend to a significant extent on the selection and acquisition ofsuitable sites, which are subject to zoning, land use (including the placementof drive-thru windows), environmental (including litter), traffic and otherregulations. Restaurant operations are also subject to licensing and regulationby state and local departments relating to health, food preparation, sanitationand safety standards, federal and state labor laws (including applicableminimum wage requirements, overtime, working and safety conditions andcitizenship requirements), federal and state laws prohibiting discriminationand other laws regulating the design and operation of facilities, such as theAmericans with Disabilities Act of 1990. If Fatburger fails to comply with any of these laws, it may be subjectto governmental action or litigation, and its reputation could be accordinglyharmed.  Injury to Fatburger’s reputationwould, in turn, likely reduce revenues and profits.

 

In recent years, there has been anincreased legislative, regulatory and consumer focus on nutrition andadvertising practices in the food industry, particularly among quick servicerestaurants.  As a result, Fatburger maybecome subject to regulatory initiatives in the area of nutrition disclosure oradvertising, such as requirements to provide information about the nutritionalcontent of its food products, which could increase expenses.  The operation of Fatburger’s franchise systemis also subject to franchise laws and regulations enacted by a number of statesand rules promulgated by the U.S. Federal Trade Commission. Any future legislationregulating franchise relationships may negatively affect Fatburger’soperations, particularly its relationship with its franchisees.  Failure to comply with new or existingfranchise laws and regulations in any jurisdiction or to obtain requiredgovernment approvals could result in a ban or temporary suspension on futurefranchise sales.  Changes in applicableaccounting rules imposed by governmental regulators or private governing bodiescould also affect Fatburger’s reported results of operations, and thus causeour stock price to fluctuate or decline.

 

*Fatburger’s earnings and business growth strategy depends inlarge part on the success of its franchisees, and Fatburger’s reputation may beharmed by actions taken by franchisees that are outside of its control.*

 

A portion of Fatburger’s earnings comesfrom royalties and other amounts paid by Fatburger’s franchisees.  Franchisees are independent contractors, andtheir employees are not employees of Fatburger. Fatburger provides training and support to, and monitors the operationsof, its franchisees, but the quality of their restaurant operations may bediminished by any number of factors beyond Fatburger’s control.  Consequently, franchisees may notsuccessfully operate stores in a manner consistent with Fatburger’s highstandards and requirements and franchisees may not hire and train qualifiedmanagers and other restaurant personnel. Any operational shortcoming of a franchise restaurant is likely to beattributed by consumers to an entire brand, thus damaging Fatburger’sreputation and potentially affecting revenues and profitability.

 

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**Risks related to Centrisoft**

 

*If Centrisoft is unable to compete successfully in thehighly competitive market for network productivity and security products forany reason, its business will fail.*

 

Centrisoft is an early stage company thatcurrently has a limited customer base. The market for enterprise network productivity and security products isintensely competitive and we expect competition to intensify in thefuture.  An increase in competitivepressures in this market or Centrisoft’s failure to compete effectively mayresult in pricing reductions, reduced gross margins and a failure to obtainmarket share.  Other competitors offeringsimilar products have longer operating histories, greater name recognition,larger customer bases and significantly greater financial, technical, marketingand other resources than Centrisoft does. In addition, larger competitors may bundle products competitive withCentrisoft’s with other products that they may sell to our potentialcustomers.  These customers may acceptthese bundled products rather than separately purchasing our products.

 

*Customer demand, competitive pressure and rapid changes intechnology and industry standards could render Centrisoft’s products andservices unmarketable or obsolete, and Centrisoft may be unable to introducenew or improved products and services, or update existing products or services,timely and successfully.*

 

To succeed, Centrisoft must continually change andimprove its products, add new products and services, provide updates toproducts and services and replace existing products and services in response tochanges in customer demand, competitive pressure, rapid technologicaldevelopments and changes in operating systems, Internet access andcommunications, application and networking software, computer andcommunications hardware, programming tools, computer language technology and computerhacker techniques. Centrisoft may be unable to successfully and timely develop andintroduce these new, improved or updated products and services or achieve andmaintain market acceptance for new, improved or updated products and serviceswe develop and introduce.

 

The development and introduction of new,enterprise network and security products or providing updates to existingproducts, is a complex and uncertain process that requires great innovation,the ability to anticipate technological and market trends, the ability todeliver updates in a timely fashion and the ability to obtain required domesticand foreign governmental and regulatory certifications.

 

Releasing new or improved products andservices, or updates to products or services, prematurely may result in qualityproblems, and releasing them late may result in loss of customer confidence andmarket share.  When Centrisoft introducesnew or enhanced products and services, it may be unable to successfully managethe transition from its existing products and services to deliver enough newproducts and services to meet customer demand.

 

*Undetected product errors or defects could result in loss ofrevenues, delayed market acceptance and claims against Centrisoft.*

 

Centrisoft’s products and services maycontain undetected errors or defects, especially when first released.  Despite extensive testing, some errors arediscovered only after a product has been installed and used by customers.  Any errors discovered after commercialrelease could result in loss of revenues or claims against Centrisoft or itsresellers.

 

*Centrisoft may be required to defend lawsuits or pay damagesin connection with the alleged or actual failure of Centrisoft’s products andservices.*

 

Because Centrisoft’s products provide andmonitor network security and may protect valuable information, Centrisoft mayface claims for product liability, tort or breach of warranty relating to itsproducts and services.  Anyone whocircumvents Centrisoft’s security measures could misappropriate theconfidential information or other property of end-users using our products andservices or interrupt their operations. If that happens, affected end-users or channel customers may sueCentrisoft.  In addition, Centrisoft mayface liability for breaches caused by faulty installation and implementation ofits products by end-users or channel customers. Although Centrisoft attempts to reduce the risk of losses from claimsthrough contractual warranty disclaimers and liability limitations, theseprovisions may be unenforceable.  Somecourts, for example, have found contractual limitations of liability instandard software licenses to be unenforceable because the licensee does notsign the license.  Defending a suit,regardless of its merit, could be costly and could divert managementattention.  Although Centrisoft currentlymaintains business liability insurance, this coverage may be inadequate or maybe unavailable in the future on acceptable terms, if at all.

 

*Centrisoft may be unable to adequately protect ourproprietary rights, which may limit its ability to compete effectively.*

 

Despite Centrisoft’s efforts to protect itsproprietary rights, unauthorized parties may misappropriate or infringe on itspatents, trade secrets, copyrights, trademarks, service marks and similarproprietary rights.  Centrisoft may,however, be unsuccessful in protecting its trade secrets or, even ifsuccessful, any required litigation may be costly and time consuming, whichcould harm our business.

 

If Centrisoft fails to obtain and maintainpatent protection for our technology, we may be unable to competeeffectively.  In addition, Centrisoftrelies on unpatented proprietary technology. Because this proprietary technology does not have patent protection,Centrisoft may be unable to meaningfully protect this technology fromunauthorized use or misappropriation by a third party.  Centrisoft’s competitors may independentlydevelop similar or superior technologies or duplicate any unpatentedtechnologies that we have developed which could significantly reduce the valueof its proprietary technology or threaten its market position.

 

 

34

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**Risks related to our real estateholdings and our mortgage brokerage business**

 

*Our performance and value are subject to risks associatedwith our real estate assets and with the real estate industry.*

 

Our economic performance and the value ofour real estate assets, and consequently the value of our stock, are subject tothe risk that if our real estate properties do not generate revenues sufficientto meet our operating expenses, including debt service and capitalexpenditures, our cash flow will be adversely affected.  The following factors, among others, mayadversely affect the income generated by our real estate properties:

 

•                  downturnsin the international, national, regional and local economic conditions(particularly increases in unemployment);

•                  competition from other office andcommercial buildings;

•                  local real estate market conditions, suchas oversupply or reduction in demand for office or other commercial orresidential space;

•                  changes in interest rates and availabilityof attractive financing;

•                  vacancies, changes in market rental ratesand the need to periodically repair, renovate and re-let space;

•                  increased operating costs, includinginsurance expense, utilities, real estate taxes, state and local taxes andheightened security costs;

•                  civil disturbances, natural disasters, orterrorist acts or acts of war which may result in uninsured or underinsuredlosses;

•                  significantexpenditures associated with each investment, such as debt service payments,real estate taxes, insurance and maintenance costs which are generally notreduced when circumstances cause a reduction in revenues from a property;

•                  declinesin the financial condition of our tenants and our ability to collect rents fromour tenants; and

•                  decreasesin the underlying value of our real estate.

 

*Acquired properties may expose us to unknown liability.*

 

We may acquire properties subject toliabilities and without any recourse, or with only limited recourse against theprior owners or other third parties, with respect to unknown liabilities.  As a result, if a liability were assertedagainst us based upon ownership of those properties, we might have to paysubstantial sums to settle or contest it, which could adversely affect ourresults of operations and cash flow. Unknown liabilities with respect to acquired properties might include:

 

•                  liabilitiesfor clean-up of undisclosed environmental contamination;

•                  claims by tenants, vendors or other personsagainst the former owners of the properties;

•                  liabilitiesincurred in the ordinary course of business; and

•                  claimsfor indemnification by general partners, directors, officers and othersindemnified by the former owners of the properties.

 

*Because we rely on our ability tosell assets to generate liquidity, fluctuations in the real estate market couldnegatively affect our cash flow.*

 

We currently generate asubstantial portion of our liquidity from sales of assets, including realestate assets.  If we are unable to sellassets at effective prices, it may affect our liquidity and profitability.

 

*We may have difficulty selling our properties, which maylimit our flexibility.*

 

Properties like the ones that we own couldbe difficult to sell.  This may limit ourability to change our portfolio promptly in response to changes in economic orother conditions.  In addition, tax lawslimit our ability to sell properties and this may affect our ability to sellproperties without adversely affecting our performance or returns.  These restrictions reduce our ability torespond to changes in the performance of our investments and could adverselyaffect our financial condition and results of operations.

 

*Exposure to the SouthernCalifornia commercial real estate market could affect results for GeorgeElkins.*

 

Our mortgage brokeragebusiness, George Elkins, relies on activity in the Southern Californiacommercial real estate market.  If thismarket weakens, we will have fewer sales, resulting in less brokeragecommissions.

 

*Competitive pressures in thecommercial mortgage business could harm our business.*

 

The commercial mortgagebrokerage is highly competitive, and George Elkins competes with larger, betterestablished competitors who often have greater resources than GeorgeElkins.  If George Elkins is unable tosuccessfully compete against its competitors, its business will be harmed andour financial results could suffer.

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

** **

None.

 

35

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**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

** **

Not applicable.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

** **

**Weheld an annual meeting of our stockholders on May 16, 2006.  Of the 7,957,428 shares outstanding as of therecord date for the annual meeting, 7,605,449 shares, or 95.6% of the totalshares eligible to vote at the annual meeting, were represented in person or byproxy.**

** **

**At theannual meeting, Andrew A. Wiederhorn, Donald J. Berchtold, Don H. Coleman, K.Kenneth Kotler, and M. Ray Mathis were each elected to serve as members of ourboard of directors, each to hold office until the 2007 annual meeting ofstockholders or until their successors are elected and qualified.  Each of the directors was elected with thefollowing voting results:**

** **

| ** **            | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|-----------------------|------------|-----------|------------|--------------|------------|
| Andrew A.  Wiederhorn |       | 7,522,620 |       | 82,829       |       |
| Donald J.  Berchtold  |       | 7,518,232 |       | 87,217       |       |
| Don H. Coleman        |       | 7,520,232 |       | 85,217       |       |
| K. Kenneth  Kotler    |       | 7,519,032 |       | 86,417       |       |
| M. Ray Mathis         |       | 7,519,032 |       | 86,417       |       |

** **

**Aproposal to approve the ratification of UHY, LLP as the Company’s independentregistered public accounting firm for the fiscal year ending 2006 passed with 7,560,712shares in favor of the proposal, 39,966 shares against the proposal, and 4,771abstentions.**

** **

**ITEM 5.  OTHER INFORMATION**

** **

None.

 

**ITEM 6.  EXHIBITS**

** **
| 3.1    |   | Amended and Restated  Articles of Incorporation of the Registrant, incorporated by reference to  Exhibit 3.1 to the Form 10-Q for the period ended September 30, 1999, as  previously filed with the SEC on November 22, 1999.                                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 3.2    |   | Bylaws of the  Registrant, incorporated by reference to Exhibit 3.2 to Amendment No. 3 to  the Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.1    |   | Common Stock  Certificate Specimen, incorporated by reference to Exhibit 4.1 to Amendment  No. 3 to the Registration Statement (Registration No. 333-39035) on Form  S-11, as previously filed with the SEC on March 30, 1998.                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.2    |   | Form of Registration  Rights Agreement, incorporated by reference to Exhibit 10.8 to Amendment No.  3 to the Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.3    |   | Form of Stock Option  Plan, incorporated by reference to Exhibit 10.3 to Amendment No. 3 to the  Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.4    |   | Waiver, Release,  Delegation and Amendment to Stock Option and Voting Agreement among Andrew A.  Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, Tiffany Wiederhorn, and  the Registrant, dated July 31, 2002, incorporated by reference to Exhibit 2.1  to the Form 8-K dated August 8, 2002, as previously filed with the SEC on  August 15, 2002. |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.5    |   | Summary of Rights to  Purchase Shares, incorporated by reference to Exhibit 99.1 to the Form 8-K  dated October 18, 2002, as previously filed with the SEC on October 18, 2002.                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.6    |   | Rights Agreement dated  as of October 18, 2002 between the Registrant and The Bank of New York,  incorporated by reference to Exhibit 1 to Form 8-A, as previously filed with  the SEC on October 29, 2002.                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.7    |   | Amendment to the Rights  Agreement, dated as of May 1, 2004, by and between the Registrant and The  Bank of New York as previously filed with the SEC on March 30, 2005.                                                                                                                                                                                   |

 

36

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| 4.8    |   | Long Term Vesting Trust  Agreement among the Registrant and Lawrence Mendelsohn, Andrew Wiederhorn and  David Egelhoff, dated October 1, 2000, incorporated by reference to Exhibit  4.4 to the Form 10-K for the year ended December 31, 2002, as previously  filed with the SEC on March 3, 2003. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                |
| 4.9    |   | Amendment Number 1 to  the Long Term Vesting Trust Agreement dated as of September 19, 2002, by and  between the Registrant and Andrew Wiederhorn, Don Coleman, and David  Dale-Johnson as previously filed with the SEC on March 30, 2005.                                                         |
|   |   |                                                                                                                                                                                                                                                                                                |
| 4.10   |   | Amendment Number 2 to  the Long Term Vesting Trust Agreement, dated as of May 26, 2004, by and  between the Registrant and Andrew Wiederhorn, Don Coleman, and David  Dale-Johnson as previously filed with the SEC on March 30, 2005.                                                              |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.1   |   | Amended and restated  employment agreement between Fog Cutter Capital Group Inc. and Andrew A.  Wiederhorn effective as of June 1, 2006 as previously filed with the SEC on  July 25, 2006.                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.2   |   | Employment agreement  between Fog Cutter Capital Group Inc. and R. Scott Stevenson effective as of  June 1, 2006 as originally filed with the SEC on July 25, 2006.                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                |
| 11.1   |   | Computation of Per  Share Earnings.                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                |
| 31.1   |   | Certification of Chief  Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                |
| 31.2   |   | Certification of Chief  Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                |
| 32.1   |   | Certification of the  Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                |
| 32.2   |   | Certification of the  Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                           |

 

37

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**SIGNATURES**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|                  | FOG  CUTTER CAPITAL GROUP INC. |                                               |
|-----------------------|--------------------------------|----------------------------------------------------|
|                  |                           |                                               |
|                  |                           | By:  /s/ Andrew A. Wiederhorn                      |   |
|                  |                           | Andrew  A. Wiederhorn                              |   |
|                  |                           | Chief  Executive Officer                           |   |
|                  |                           |                                               |   |
|                  |                           |                                               |   |
|                  |                           | By:  /s/ R. Scott Stevenson                        |   |
|                  |                           | R.  Scott Stevenson                                |   |
|                  |                           | Senior  Vice President and Chief Financial Officer |   |
|                  |                           |                                               |
| Date:  August 4, 2006 |                           |

 

38

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EXHIBIT INDEX

 
| 3.1    |   | Amended and Restated  Articles of Incorporation of the Registrant, incorporated by reference to  Exhibit 3.1 to the Form 10-Q for the period ended September 30, 1999, as  previously filed with the SEC on November 22, 1999.                                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 3.2    |   | Bylaws of the  Registrant, incorporated by reference to Exhibit 3.2 to Amendment No. 3 to  the Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.1    |   | Common Stock  Certificate Specimen, incorporated by reference to Exhibit 4.1 to Amendment  No. 3 to the Registration Statement (Registration No. 333-39035) on Form  S-11, as previously filed with the SEC on March 30, 1998.                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.2    |   | Form of Registration  Rights Agreement, incorporated by reference to Exhibit 10.8 to Amendment No.  3 to the Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.3    |   | Form of Stock Option  Plan, incorporated by reference to Exhibit 10.3 to Amendment No. 3 to the  Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.4    |   | Waiver, Release,  Delegation and Amendment to Stock Option and Voting Agreement among Andrew A.  Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, Tiffany Wiederhorn, and  the Registrant, dated July 31, 2002, incorporated by reference to Exhibit 2.1  to the Form 8-K dated August 8, 2002, as previously filed with the SEC on  August 15, 2002. |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.5    |   | Summary of Rights to  Purchase Shares, incorporated by reference to Exhibit 99.1 to the Form 8-K  dated October 18, 2002, as previously filed with the SEC on October 18, 2002.                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.6    |   | Rights Agreement dated  as of October 18, 2002 between the Registrant and The Bank of New York,  incorporated by reference to Exhibit 1 to Form 8-A, as previously filed with  the SEC on October 29, 2002.                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.7    |   | Amendment to the Rights  Agreement, dated as of May 1, 2004, by and between the Registrant and The  Bank of New York as previously filed with the SEC on March 30, 2005.                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.8    |   | Long Term Vesting Trust  Agreement among the Registrant and Lawrence Mendelsohn, Andrew Wiederhorn and  David Egelhoff, dated October 1, 2000, incorporated by reference to Exhibit  4.4 to the Form 10-K for the year ended December 31, 2002, as previously  filed with the SEC on March 3, 2003.                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.9    |   | Amendment Number 1 to  the Long Term Vesting Trust Agreement dated as of September 19, 2002, by and  between the Registrant and Andrew Wiederhorn, Don Coleman, and David  Dale-Johnson as previously filed with the SEC on March 30, 2005.                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.10   |   | Amendment Number 2 to  the Long Term Vesting Trust Agreement, dated as of May 26, 2004, by and  between the Registrant and Andrew Wiederhorn, Don Coleman, and David  Dale-Johnson as previously filed with the SEC on March 30, 2005.                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.1   |   | Amended and restated  employment agreement between Fog Cutter Capital Group Inc. and Andrew A.  Wiederhorn effective as of June 1, 2006 as previously filed with the SEC on  July 25, 2006.                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.2   |   | Employment agreement  between Fog Cutter Capital Group Inc. and R. Scott Stevenson effective as of  June 1, 2006 as originally filed with the SEC on July 25, 2006.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 11.1   |   | Computation of Per  Share Earnings.                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 31.1   |   | Certification of Chief  Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 31.2   |   | Certification of Chief  Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 32.1   |   | Certification of the  Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 32.2   |   | Certification of the  Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                  |

 

39

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