**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(Markone)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended September 30, 2006**

**OR**

**o**                                 TRANSITIONREPORT 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 of registrantas specified in its charter)

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

 

**1410 SW Jefferson StreetPortland, OR 97201**

(Address of principalexecutive offices) (Zip Code)

**(503) 721-6500**

(Registrant’s telephonenumber, including area code)

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

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
|---------------------------|---------------------|-------------------------|

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the ExchangeAct).                                                                                                                                                                                       Yeso  Nox

**APPLICABLEONLY TO CORPORATE ISSUERS:**

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

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

 

 

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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                                             |       | 3          |       |
|                                  |       |                                                                                        |       |       |       |
|                                  |       | Consolidated Statements of  Operations                                                      |       | 4          |       |
|                                  |       |                                                                                        |       |       |       |
|                                  |       | Consolidated Statement of  Stockholders’ Equity                                        |       | 5          |       |
|                                  |       |                                                                                        |       |       |       |
|                                  |       | Consolidated Statements of  Cash Flows                                                      |       | 6          |       |
|                                  |       |                                                                                        |       |       |       |
|                                  |       | Notes to Consolidated  Financial Statements                                                 |       | 7          |       |
|                                  |       |                                                                                        |       |       |       |
| Item 2.                               |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |       | 17         |       |
|                                  |       |                                                                                        |       |       |       |
| Item 3.                               |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |       | 29         |       |
|                                  |       |                                                                                        |       |       |       |
| Item 4.                               |       | Controls  and Procedures                                                                    |       | 30         |       |
|                                  |       |                                                                                        |       |       |       |
| **PART II—OTHER INFORMATION**    |       |                                                                                        |       |
|                                  |       |                                                                                        |       |       |       |
| Item 1.                               |       | Legal Proceedings                                                                           |       | 31         |       |
|                                  |       |                                                                                        |       |       |       |
| Item 1A.                              |       | Risk Factors                                                                                |       | 31         |       |
|                                  |       |                                                                                        |       |       |       |
| Item 2.                               |       | Unregistered Sales of Equity  Securities and Use of Proceeds                                |       | 37         |       |
|                                  |       |                                                                                        |       |       |       |
| Item 3.                               |       | Defaults Upon Senior  Securities                                                            |       | 37         |       |
|                                  |       |                                                                                        |       |       |       |
| Item 4.                               |       | Submission of Matters to a  Vote of Security Holders                                        |       | 37         |       |
|                                  |       |                                                                                        |       |       |       |
| Item 5.                               |       | Other Information                                                                           |       | 37         |       |
|                                  |       |                                                                                        |       |       |       |
| Item 6.                               |       | Exhibits                                                                                    |       | 37         |       |
|                                  |       |                                                                                        |       |
| Signatures                            |       | 39                                                                                          |       |

 

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 —FINANCIAL INFORMATION**

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

FOG CUTTER CAPITAL GROUPINC.

CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION

*(dollars in thousands, except share data)*
| ** **                                                                                                                                                                                                             | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                             | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
|                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Assets                                                                                                                                                                                                                 |       |                         |       |                        |       |
| Current Assets:                                                                                                                                                                                                        |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                             |       | $                            | 1,722      |                        | $          | 4,071 |   |
| Accounts  receivable                                                                                                                                                                                                   |       | 2,797                        |       | 1,248                       |       |
| Notes  receivable, current portion                                                                                                                                                                                     |       | 462                          |       | 17                          |       |
| Loans to senior  executives                                                                                                                                                                                            |       | 1,060                        |       | —                      |       |
| Inventories                                                                                                                                                                                                            |       | 2,507                        |       | 1,880                       |       |
| Investments in  real estate, held for sale, net                                                                                                                                                                        |       | 11,309                       |       | 6,355                       |       |
| Other current  assets                                                                                                                                                                                                  |       | 1,182                        |       | 1,661                       |       |
| Total current  assets                                                                                                                                                                                                  |       | 21,039                       |       | 15,232                      |       |
|                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Investments in  real estate, net                                                                                                                                                                                       |       | 11,894                       |       | 23,937                      |       |
| Notes receivable                                                                                                                                                                                                       |       | 376                          |       | 976                         |       |
| Loans to senior  executives                                                                                                                                                                                            |       | —                       |       | 1,015                       |       |
| Investment in  Bourne End                                                                                                                                                                                              |       | —                       |       | 803                         |       |
| Property, plant  and equipment, net                                                                                                                                                                                    |       | 7,665                        |       | 5,377                       |       |
| Intangible  assets, net                                                                                                                                                                                                |       | 5,331                        |       | 5,586                       |       |
| Goodwill                                                                                                                                                                                                               |       | 10,079                       |       | 9,979                       |       |
| Other assets                                                                                                                                                                                                           |       | 2,025                        |       | 2,414                       |       |
| Total assets                                                                                                                                                                                                           |       | $                            | 58,409     |                        | $          | 65,319 |   |
|                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Liabilities and  Stockholders’ Equity                                                                                                                                                                             |       |                         |       |                        |       |
| Liabilities:                                                                                                                                                                                                           |       |                         |       |                        |       |
| Accounts payable  and accrued liabilities                                                                                                                                                                              |       | $                            | 10,972     |                        | $          | 9,536 |   |
| Borrowings and  notes payable, current portion                                                                                                                                                                         |       | 9,015                        |       | 4,642                       |       |
| Obligations  under capital leases, current portion                                                                                                                                                                     |       | 1,511                        |       | 1,548                       |       |
| Total current  liabilities                                                                                                                                                                                             |       | 21,498                       |       | 15,726                      |       |
|                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Borrowings and  notes payable                                                                                                                                                                                          |       | 2,290                        |       | 8,294                       |       |
| Obligations  under capital leases                                                                                                                                                                                      |       | 8,839                        |       | 9,309                       |       |
| Deferred income                                                                                                                                                                                                        |       | 3,880                        |       | 4,330                       |       |
| Deferred income  taxes                                                                                                                                                                                                 |       | 4,377                        |       | 5,739                       |       |
| Total  liabilities                                                                                                                                                                                                     |       | 40,884                       |       | 43,398                      |       |
|                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Commitments and  contingencies                                                                                                                                                                                         |       | —                       |       | —                      |       |
| Minority  interests in consolidated subsidiaries                                                                                                                                                                       |       | 643                          |       | 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 September 30, 2006 and December 31, 2005; 7,957,428 shares outstanding as  of September 30, 2006 and December 31, 2005 |       | 168,516                      |       | 168,214                     |       |
| Accumulated  deficit                                                                                                                                                                                                   |       | (139,625                     | )          | (134,977                    | )          |
| Accumulated  other comprehensive income                                                                                                                                                                                |       | —                       |       | 161                         |       |
| Treasury stock,  3,799,645 common shares as of September 30, 2006 and December 31, 2005, at  cost                                                                                                                      |       | (12,009                      | )          | (12,009                     | )          |
| Total  stockholders’ equity                                                                                                                                                                                       |       | 16,882                       |       | 21,389                      |       |
| Total liabilities and stockholders’  equity                                                                                                                                                                       |       | $                            | 58,409     |                        | $          | 65,319 |   |

 

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

3

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FOG CUTTER CAPITAL GROUPINC.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

*(dollars in thousands, except share data)*
| ** **                                                                                             | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                                                                             | ** ** | **September 30,** | ** ** | **September 30,**          | ** ** |
| ** **                                                                                             | ** ** | **2006**               | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue:                                                                                               |       |                   |       |                            |       |   |   |   |   |
| Restaurant and  manufacturing sales                                                                    |       | $                      | 9,810      |                            | $          | 6,011 |   | $ | 27,686 |   | $ | 18,048 |   |
| Restaurant  franchise and royalty fees                                                                 |       | 591                    |       | 721                             |       | 1,826 |   | 1,743 |   |
| Real estate  rental income                                                                             |       | 928                    |       | 1,031                           |       | 2,978 |   | 3,194 |   |
| Loan brokerage  and servicing fees                                                                     |       | 1,575                  |       | 3,114                           |       | 5,463 |   | 5,992 |   |
| Total revenue                                                                                          |       | 12,904                 |       | 10,877                          |       | 37,953 |   | 28,977 |   |
|                                                                                                   |       |                   |       |                            |       |   |   |   |   |
| Operating costs and  expenses:                                                                         |       |                   |       |                            |       |   |   |   |   |
| Restaurant and  manufacturing cost of sales                                                            |       | 5,290                  |       | 3,470                           |       | 15,336 |   | 10,532 |   |
| Real estate  operating expense                                                                         |       | 491                    |       | 391                             |       | 1,163 |   | 1,231 |   |
| Engineering and  development                                                                           |       | 371                    |       | 113                             |       | 1,167 |   | 113 |   |
| Depreciation and  amortization                                                                         |       | 455                    |       | 399                             |       | 1,316 |   | 1,246 |   |
| Total operating  cost and expenses                                                                     |       | 6,607                  |       | 4,373                           |       | 18,982 |   | 13,122 |   |
|                                                                                                   |       |                   |       |                            |       |   |   |   |   |
| General and  administrative expenses:                                                                  |       |                   |       |                            |       |   |   |   |   |
| Compensation and  employee benefits                                                                    |       | 3,873                  |       | 3,960                           |       | 12,730 |   | 8,990 |   |
| Professional  fees                                                                                     |       | 1,031                  |       | 1,044                           |       | 2,729 |   | 2,614 |   |
| Fees paid to  related parties                                                                          |       | 47                     |       | —                          |       | 279 |   | — |   |
| Other                                                                                                  |       | 4,376                  |       | 3,138                           |       | 11,740 |   | 9,138 |   |
| Total general  and administrative expenses                                                             |       | 9,327                  |       | 8,142                           |       | 27,478 |   | 20,742 |   |
|                                                                                                   |       |                   |       |                            |       |   |   |   |   |
| Non-operating income  (expense):                                                                       |       |                   |       |                            |       |   |   |   |   |
| Gain on sale of  real estate                                                                           |       | 1,211                  |       | 195                             |       | 2,905 |   | 1,784 |   |
| Gain on sale of  notes receivable                                                                      |       | —                 |       | —                          |       | 496 |   | — |   |
| Interest Income                                                                                        |       | 67                     |       | 158                             |       | 247 |   | 1,139 |   |
| Interest expense                                                                                       |       | (714                   | )          | (527                            | )          | (1,778 | ) | (1,416 | ) |
| Other income  (loss)                                                                                   |       | 470                    |       | 45                              |       | 1,359 |   | (175 | ) |
| Total  non-operating income (loss)                                                                     |       | 1,034                  |       | (129                            | )          | 3,229 |   | 1,332 |   |
|                                                                                                   |       |                   |       |                            |       |   |   |   |   |
| Loss before provision  for income taxes, minority interests, and equity in income of equity  investees |       | (1,996                 | )          | (1,767                          | )          | (5,278 | ) | (3,555 | ) |
|                                                                                                   |       |                   |       |                            |       |   |   |   |   |
| Minority interest in  earnings                                                                         |       | (76                    | )          | (299                            | )          | (333 | ) | (414 | ) |
| Equity in income (loss)  of equity investees                                                           |       | —                 |       | (415                            | )          | 748 |   | 26 |   |
| Income tax benefit                                                                                     |       | 1,249                  |       | —                          |       | 1,249 |   | — |   |
|                                                                                                   |       |                   |       |                            |       |   |   |   |   |
| Net loss                                                                                               |       | $                      | (823       | )                               | $          | (2,481 | ) | $ | (3,614 | ) | $ | (3,943 | ) |
|                                                                                                   |       |                   |       |                            |       |   |   |   |   |
| Basic loss per share                                                                                   |       | $                      | (0.10      | )                               | $          | (0.31 | ) | $ | (0.45 | ) | $ | (0.49 | ) |
| Basic weighted average  shares outstanding                                                             |       | 7,957,428              |       | 7,957,428                       |       | 7,957,428 |   | 8,089,692 |   |
| Diluted net loss per  share                                                                            |       | $                      | (0.10      | )                               | $          | (0.31 | ) | $ | (0.45 | ) | $ | (0.49 | ) |
| Diluted weighted  average shares outstanding                                                           |       | 7,957,428              |       | 7,957,428                       |       | 7,957,428 |   | 8,089,692 |   |
| Dividends declared per share                                                                           |       | $                      | —     |                            | $          | 0.13 |   | $ | 0.13 |   | $ | 0.39 |   |

 

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

4

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FOGCUTTER CAPITAL GROUP INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ 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                                                                                                                |       | —                |       | —                  |       | —          |       | —                                |       | (3,614      | )          | — |   | (3,614 | ) |
| Other  comprehensive income:                                                                                            |       |                  |       |                    |       |            |       |                                  |       |        |       |   |   |   |   |
| Foreign currency  translation                                                                                           |       | —                |       | —                  |       | —          |       | —                                |       | —      |       | 458 |   | 458 |   |
| Reclassification  adjustment for net losses on securities and foreign currency translation  included in net income |       | —                |       | —                  |       | —          |       | —                                |       | —      |       | (619 | ) | (619 | ) |
| Total  comprehensive loss                                                                                               |       | —                |       | —                  |       | —          |       | —                                |       | —      |       | — |   | (3,775 | ) |
| Stock options  expensed in net loss                                                                                     |       | —                |       | 302                     |       | —          |       | —                                |       | —      |       | — |   | 302 |   |
| Dividends  declared                                                                                                     |       | —                |       | —                  |       | —          |       | —                                |       | (1,034      | )          | — |   | (1,034 | ) |
| Balance at September 30,  2006                                                                                          |       | 7,957,428             |       | $                       | 168,516    |            | 3,799,645  |                                  | $          | (12,009     | )          | $ | (139,625 | ) | $ | — |   | $ | 16,882 |   |

 

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(1)             Issuedand outstanding

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

5

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FOGCUTTER CAPITAL GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

*(dollars in thousands)*
| ** **                                                         | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **September 30,** | ** ** | **September 30,**          | ** ** |
| ** **                                                         | ** ** | **2006**               | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                             |       |                   |       |                            |       |   |   |   |   |
| Net loss                                                           |       | $                      | (823       | )                               | $          | (2,481 | ) | $ | (3,614 | ) | $ | (3,943 | ) |
| Adjustments to reconcile net loss to net operating  cash flows:    |       |                   |       |                            |       |   |   |   |   |
| Equity in (income) loss of equity investees                        |       | —                 |       | 415                             |       | (748 | ) | (26 | ) |
| Depreciation and amortization                                      |       | 651                    |       | 557                             |       | 1,859 |   | 1,592 |   |
| Loss (gain) on foreign currency translation                        |       | (114                   | )          | 34                              |       | (619 | ) | 453 |   |
| Gain on sale of loans                                              |       | —                 |       | —                          |       | (496 | ) | — |   |
| Gain on sale of real estate                                        |       | (1,211                 | )          | (195                            | )          | (2,905 | ) | (1,784 | ) |
| Share based compensation                                           |       | 188                    |       | —                          |       | 302 |   | — |   |
| Other                                                              |       | 152                    |       | 327                             |       | 458 |   | 292 |   |
| Change in:                                                         |       |                   |       |                            |       |   |   |   |   |
| Deferred income                                                    |       | (20                    | )          | (203                            | )          | (70 | ) | (298 | ) |
| Other assets                                                       |       | (1,154                 | )          | 22                              |       | (1,517 | ) | 248 |   |
| Deferred income taxes                                              |       | (1,279                 | )          | (12                             | )          | (1,362 | ) | (38 | ) |
| Accounts payable and accrued liabilities                           |       | 1,791                  |       | (2,527                          | )          | 2,813 |   | (3,273 | ) |
| Net cash used in operating activities                              |       | (1,819                 | )          | (4,063                          | )          | (5,899 | ) | (6,777 | ) |
|                                                               |       |                   |       |                            |       |   |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                             |       |                   |       |                            |       |   |   |   |   |
| Proceeds from sale of real estate                                  |       | 6,004                  |       | 796                             |       | 12,130 |   | 4,115 |   |
| Proceeds from sale of loans                                        |       | —                 |       | —                          |       | 664 |   | — |   |
| Investment in loans and discounted loans                           |       | —                 |       | (989                            | )          | — |   | (2,329 | ) |
| Principal repayments on loans and discounted loans                 |       | —                 |       | 3,145                           |       | — |   | 4,254 |   |
| Investment in real estate                                          |       | (362                   | )          | (132                            | )          | (1,552 | ) | (2,258 | ) |
| Purchase of net assets of restaurant operations                    |       | (240                   | )          | —                          |       | (928 | ) | — |   |
| Investments in property, plant, and equipment                      |       | (1,617                 | )          | (55                             | )          | (2,667 | ) | (205 | ) |
| Distributions from equity investees                                |       | 1,600                  |       | —                          |       | 1,600 |   | — |   |
| Other                                                              |       | (12                    | )          | (12                             | )          | (32 | ) | 106 |   |
| Net cash provided by investing activities                          |       | 5,373                  |       | 2,753                           |       | 9,215 |   | 3,683 |   |
|                                                               |       |                   |       |                            |       |   |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                             |       |                   |       |                            |       |   |   |   |   |
| Proceeds from borrowings                                           |       | 3,274                  |       | 46                              |       | 5,673 |   | 2,289 |   |
| Repayments on borrowings                                           |       | (8,313                 | )          | (99                             | )          | (9,464 | ) | (191 | ) |
| Repayments under capital leases                                    |       | (167                   | )          | (135                            | )          | (507 | ) | (380 | ) |
| Purchase of treasury stock                                         |       | —                 |       | —                          |       | — |   | (1,689 | ) |
| Minority interests distributions paid                              |       | (123                   | )          | (176                            | )          | (319 | ) | (407 | ) |
| Dividend payments on common stock                                  |       | —                 |       | (998                            | )          | (1,034 | ) | (3,149 | ) |
| Net cash used in financing activities                              |       | (5,329                 | )          | (1,362                          | )          | (5,651 | ) | (3,527 | ) |
|                                                               |       |                   |       |                            |       |   |   |   |   |
| EFFECT OF  EXCHANGE RATE CHANGE ON CASH                            |       | (25                    | )          | 14                              |       | (14 | ) | (65 | ) |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                           |       | (1,800                 | )          | (2,658                          | )          | (2,349 | ) | (6,686 | ) |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                  |       | 3,522                  |       | 7,920                           |       | 4,071 |   | 11,948 |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                        |       | $                      | 1,722      |                            | $          | 5,262 |   | $ | 1,722 |   | $ | 5,262 |   |
|                                                               |       |                   |       |                            |       |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                |       |                   |       |                            |       |   |   |   |   |
| Cash paid for interest                                             |       | $                      | 607        |                            | $          | 393 |   | $ | 1,572 |   | $ | 1,176 |   |
| Cash paid for income taxes                                         |       | $                      | 30         |                            | $          | 12 |   | $ | 113 |   | $ | 38 |   |
|                                                               |       |                   |       |                            |       |   |   |   |   |
| NONCASH  FINANCING AND INVESTING ACTIVITIES:                       |       |                   |       |                            |       |   |   |   |   |
| Treasury stock acquired through exercise of option                 |       | $                      | —     |                            | $          | — |   | $ | — |   | $ | 593 |   |
| Capital lease obligations terminated with no penalty               |       | $                      | —     |                            | $          | — |   | $ | — |   | $ | 855 |   |
| Release of assets under capital lease                              |       | $                      | —     |                            | $          | — |   | $ | — |   | $ | 876 |   |
| Noncash business combinations:                                     |       |                   |       |                            |       |   |   |   |   |
| Fair value of assets acquired through business  combinations       |       | $                      | —     |                            | $          | 4,141 |   | $ | — |   | $ | 4,141 |   |
| Liabilities assumed through business combinations                  |       | $                      | —     |                            | $          | (2,130 | ) | $ | — |   | $ | (2,130 | ) |
| Loans converted  to equity interests through business combinations |       | $                      | —     |                            | $          | (2,011 | ) | $ | — |   | $ | (2,011 | ) |

 

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 financialstatements of Fog Cutter Capital Group Inc. and Subsidiaries (“FCCG” or the “Company”)are unaudited 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 nine months ended September 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 generally acceptedin the United States requires the Company to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  The Company’s operations andactivities are becoming more focused on restaurant and other more typicalcommercial businesses, and less focused on finance and real estate.  As a result, certain reclassifications of thebalances and modifications to the presentation of the financial statements havebeen made, including the reclassification of certain investments in real estateas held for sale.  None of these changesin presentation affected previously reported results of operations.

At September 30, 2006,certain Company officers and directors had, directly or indirectly, majorityvoting control of the Company.

*Minority interests*

TheCompany applies Accounting Research Bulletin No. 51, “*ConsolidatedFinancial Statements*” (“ARB 51”), which requires the elimination ofall intercompany profit or loss and balances between consolidatedcompanies.  ARB 51 also requires therecognition of minority interest in consolidated subsidiaries.  Consistent with ARB 51, where lossesapplicable to a minority interest exceed the minority interest in the capitalof the subsidiary, such excess and any further losses are charged against theCompany.  Should the subsidiary becomeprofitable, the Company will be credited to the extent of such lossespreviously absorbed.

*Long-lived assets, held for sale*

TheCompany classifies its long-lived assets to be sold as held for sale in theperiod when the following criteria are met:

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

(ii)                the asset isavailable for immediate sale in its present condition subject only to termsthat are usual and customary for sales of such assets;

(iii)             an active program tolocate a buyer and other actions required to complete the plan to sell theasset have been initiated;

(iv)            the sale of the assetis probable, and transfer of the asset is expected to qualify for recognitionas a completed sale, within one year;

(v)               the asset is beingactively marketed for sale at a price that is reasonable in relation to itscurrent fair value; and

(vi)            actions required tocomplete the plan indicate that it is unlikely that significant changes to theplan will be made or that the plan will be withdrawn.

*Share-based payments*

In2004, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards No. 123(R), “*Share-BasedPayment*” (“FAS 123R”), which requires all share-based awards toemployees, including grants of employee stock options, to be recognized inresults of operations based on their fair value.  The Company adopted FAS 123R onJanuary 1, 2006.

*Recently issued accounting standards*

InJune 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) clarifying themanner in which enterprises account for uncertainty in income taxes recognizedin an enterprise’s financial statements. The interpretation prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition 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 nine months ended September 30, 2006:

7

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

In the nine months endedSeptember 30, 2006, the Company invested an additional $5.0 million inFatburger and increased its voting control to approximately 82%.

In the nine months endedSeptember 30, 2006, Fatburger acquired a controlling interest in one of itsfranchisees in Virginia for $0.2 million. Fatburger has also purchased two franchisee locations in 2006, one inFlorida for $0.5 million, and one in Louisiana for $0.2 million.  As a result of these transactions, $1.2million of assets, including $0.1 million of goodwill, $0.2 million of minorityinterests, and $0.1 million of liabilities were recorded at fair value.

*Sale of real estate*

In March 2006, theCompany sold seven stand-alone retail locations in a single transaction for asales price of $3.5 million in cash.  Theproperties had a net book value of $3.0 million at the time of disposal, andthe Company recognized gains on the sales totaling $0.5 million.

The Company sold a 10acre parcel of vacant land for $2.6 million in cash in May 2006.  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.

The Company sold itsEugene warehouse property for a sales price of $2.8 million in cash in August2006.  The property had a net book valueof $1.6 million at the time of sale, and the Company recognized a gain on saleof $1.2 million.  The Company used partof the proceeds on the sale to repay a $1.5 million mortgage note payablesecured by the property which was obtained in May 2006.

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.  The Company has recognized $0.7 million inincome from equity investees during the nine months ended September 30,2006.  In July 2006, Bourne Enddistributed the majority of its net assets to its investors, and the Companyreceived $1.6 million for its share.

*Investment in Barcelona, Spainproperties*

During the nine monthsended September 30, 2006, the Company invested an additional $5.2 million inits Variable Interest Entities (“VIE”) in Barcelona, Spain.  During the period, the VIE spentapproximately $1.4 million for improvements and carrying costs on its threeapartment buildings, and repaid a $4.2 million mortgage loan on one property,thus releasing a third party’s security interest in the property.  In July 2006, the VIE sold one of threeproperties that it owned for cash proceeds of $3.3 million.  The property had a net book value of $3.3million, including capital improvements and carrying costs, at the time ofdisposal.  At September 30, 2006, theCompany’s total investment in the remaining two entities is $10.3 million.

*Borrowings on note payable*

In July 2006, the Companyborrowed $2.5 million from a lender.  Thepromissory note is secured by the Company’s interest in the VIE, bears interestat a variable rate of prime minus 1.25% plus 10.0% (17.125% at September 30,2006) payable monthly in arrears, and is due January 2007.  The proceeds of the note were used as part ofthe Company’s additional investment in the VIE.

*Centrisoft Corporation (“Centrisoft”)investment*

In June 2006, the Companyincreased its voting control in Centrisoft to 79% and has invested anadditional $2.8 million in Centrisoft during the nine months ended September30, 2006.

*Dividends*

On February 28, 2006, theCompany’s Board of Directors declared a $0.13 per share dividend.  The dividend was paid on March 14, 2006 toshareholders of record on March 9, 2006. No other dividends have been declared or paid in 2006.

8

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

*Shareholder Derivative Complaint*

On July 6, 2004, Jeff Allen McCoon, derivativelyon behalf of the Company, filed a lawsuit in the Circuit Court for the State ofOregon (Multnomah County case number 0407-06900) which named the Company andall of its directors as defendants.  Thelawsuit alleged that members of the Company’s Board of Directors breached theirduties to the Company in a number of ways, primarily relating to the leave ofabsence agreement with Andrew Wiederhorn.  The lawsuit generally soughtrestitution of payments made under the leave of absence agreement plus attorneyfees and costs.  On January 6, 2006, the Circuit Court dismissed theentire derivative lawsuit, ruling that Mr. McCoon was unfit to represent theCompany’s shareholders.  Mr. McCoon hasfiled an appeal to this ruling.

*Delisting*

Effective October 14,2004, due to a NASDAQ staff determination to delist the Company’s common stock,the Company’s stock began trading in the over-the-counter (“OTC”) market.  Prior to the delisting, the Company’s commonstock was quoted on the NASDAQ National Market.

*Liquidity*

The Companyconsiders the sale of real estate and other investments to be a normal,recurring part of operations and expects these transactions to generateadequate cash flow to meet the Company’s liquidity needs for the nextyear.  The Company has experienced lossesfrom operations since its 2004 fiscal year. During this period, the Company’s operations and activities have becomemore focused on restaurant and other more typical commercial businessactivities and have been transitioning away from finance and real estateactivities.  The growth strategies forthe restaurant and other commercial operations, as well as administrative costburdens may threaten the Company’s liquidity position.

If the Company’sexisting liquidity position were to prove insufficient, and it was unable torepay, renew or replace maturing indebtedness on terms reasonably satisfactoryto the Company, it may be required to sell (potentially on short notice) aportion of its assets, and could incur losses as a result.  Specific risks to the Company’s liquidityinclude, but are not limited to, Fatburger’s non-compliance with debtcovenants, Fatburger’s expansion, Centrisoft’s operations, infrastructurecosts, and the declaration and payment of dividends.

*Dividends*

The Company doesnot have a fixed dividend policy, and may declare and pay new dividends oncommon stock, subject to financial condition, results of operations, capitalrequirements and other 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.  On February 28, 2006, the Company’s Board ofDirectors declared a $0.13 per share dividend. The dividend was paid on March 14, 2006 to shareholders of record onMarch 9, 2006.  No other dividends havebeen declared or paid in 2006.

*FatburgerDebt 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 after serving notice.  As such, onthe Company’s Consolidated Statements of Financial Condition, $4.0 million and$4.2 million of long-term debt at September 30, 2006 and December 31, 2005,respectively, have been classified as current. The lender has not demanded early repayment of the loans; however, ifthe lender exercises its right to demand payment, the Company’s liquidity couldbe negatively affected.

*Fatburger operations*

The Company expects that Fatburger will require capital resourcesand have negative cash flow in the near term while it pursues a growth strategythrough developing additional franchisee and Company-owned restaurants.  Fatburger development involves substantialrisks that the Company intends to manage; however, it cannot be assured thatpresent or future development will perform in accordance with the Company’sexpectations or that any restaurants will generate the Company’s expectedreturns on investment.  The Company’sinability to expand Fatburger in accordance with planned expansion or to managethat growth could have a material adverse effect on the Company’s operationsand financial condition.  In addition, 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.

9

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*Centrisoftoperations*

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.

*RelatedParty Transactions*

Duringthe three months ended September 30, 2006, the Company accepted assignment of afractional interest lease, between NetJets Services Inc. and an entitycontrolled by the Company’s chief executive officer, Andrew A. Wiederhorn, forthe lease of a 6.25% undivided interest in an aircraft.  The lease calls for annual payments ofapproximately $420,000 plus specific costs relating to the operation of theaircraft.  The lease expires in December2010, however, the Company has the right to terminate the lease with 90 daysnotice beginning in December 2008. The future minimum lease payments are asfollows (dollars in thousands):
| 2006 |   | $   | 105    |   |
|------|--------|-----|--------|--------|
| 2007 |   | 420 |   |
| 2008 |   | 420 |   |
| 2009 |   | 70  |   |

 

*Other*

The Company mayutilize a wide variety of off-balance sheet financial techniques to manage itsrisk.  In hedging the interest rate orforeign currency exchange rate exposure, the Company may enter into hedgetransactions to counter movements in interest rates and foreigncurrencies.  These hedges may be in theform of currency and interest rate swaps, options, and forwards or combinationsthereof.  At September 30, 2006, approximately59% of the Company’s equity was invested in net assets located outside of theUnited States, primarily denominated in the euro.  The Company has no outstanding derivativeinstruments held for trading or hedging purposes.

In order to facilitatethe development of franchise locations, Fatburger has guaranteed the annual minimumlease payments of five restaurant sites owned and operated by franchisees.  As of September 30, 2006, the amount of theguarantees total approximately $1.5 million plus certain contingent rentalpayments as defined in the respective leases. These leases expire at various times through 2015.

The Company didnot have any other off balance sheet arrangements in place as of September 30,2006.

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

Primarily as a result of the acquisitions ofFatburger, Centrisoft, and DAC, the Company has goodwill in the amount of $10.1million and investments in intangible assets of $5.3 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 conducted 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 September 30, 2006, theCompany was not aware of any events or changes in circumstances that would requirethe impairment of the recorded goodwill.

Net intangible assets included operating manuals,franchise agreements, leasehold interests, and sales contracts.  Summarized information for acquiredintangible assets is as follows (dollars in thousands):
|                                   | ** ** | **September 30, 2006**     | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | **(dollars in thousands)** | ** ** |
| Franchise  agreements             |       | $                                    | 1,162      |   |
| Other intangible  assets          |       | 986                                  |       |
| Total amortized intangible assets |       | 2,148                                |       |
| Less:  accumulated amortization   |       | (787                                 | )          |
| Net amortized intangible assets   |       | 1,361                                |       |
|                              |       |                                 |       |
| Trademarks                        |       | 3,970                                |       |
|                              |       |                                 |       |
| Total intangible  assets          |       | $                                    | 5,331      |   |

 

10

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Trademarks, which haveindefinite lives, are not subject to amortization.  All other intangible assets are amortizedusing the straight-line method over the estimated useful lives of the assets offive to fifteen years.  Estimatedamortization expense for the remainder of 2006 and the five succeeding years isas follows (dollars in thousands):
| 2006 |   | $   | 69     |   |
|------|--------|-----|--------|--------|
| 2007 |   | 274 |   |
| 2008 |   | 274 |   |
| 2009 |   | 252 |   |
| 2010 |   | 217 |   |
| 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 maximum number of shares of common stockthat may be issued pursuant to options granted under the Option Plan is3,500,000 shares.  Each independentdirector receives, on the last day of each quarter, an automatic non-statutoryoption grant to purchase 1,500 shares of common stock at 110% of the fairmarket value on that day.  Automaticgrants will vest one third on each of the first three anniversaries of thegrant date and expire on the tenth anniversary of the grant date.  In addition, on August 8, 2006, the Companygranted to certain officers and directors of the Company options to purchase1,450,000 shares of common stock at 110% of the fair market value on thatday.  These grants will vest one third oneach of the first three anniversaries of the grant date and expire on the tenthanniversary of the grant date.

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: 0% dividend yield, expected volatility of60%, risk-free interest rate of 5.0% and expected lives of five years.

A summary of ourstock options activity for the nine months ended September 30, 2006 ispresented below:
|                                    | ** ** | **Shares** | ** ** | **Weighted Average  Exercise  Price** | ** ** |
|------------------------------------|------------|------------|------------|--------------------------------------------|------------|
| Outstanding at  December 31, 2005  |       | 1,303,000  |       | $                                          | 4.44       |   |
| Granted                            |       | 1,463,500  |       | $                                          | 2.64       |   |
| Exercised                          |       | —     |       | $                                          | —     |   |
| Cancelled/forfeited                |       | (9,000     | )          | $                                          | 5.61       |   |
| Outstanding at  September 30, 2006 |       | 2,757,500  |       | $                                          | 3.48       |   |

 

A summary of ourstock options outstanding as of September 30, 2006 and December 31, 2005 ispresented below:
|                                         | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | ** **                       | ** ** | **Shares**                      | ** ** | **Weighted Average  Remaining  Life** | ** ** | **Weighted Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted Average  Remaining  Life** | ** ** | **Weighted Average  Exercise  Price** | ** ** |
| $2.00 – 4.00                       |       | 1,494,000                        |       | 9.8                             |       | $ | 2.65 |   | 30,500 |   | 7.6 |   | $ | 3.22 |   |
| $4.01 – 6.00                       |       | 1,257,500                        |       | 5.2                             |       | $ | 4.44 |   | 1,265,000 |   | 6.0 |   | $ | 4.45 |   |
| $6.01 – 20.00                      |       | 6,000                            |       | 7.5                             |       | $ | 6.55 |   | 7,500 |   | 8.3 |   | $ | 6.55 |   |
|                                         |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company adopted FAS123R effective January 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.

11

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The adoption of FAS 123Rresulted in the Company’s net loss for the nine months ended September 30, 2006being approximately $0.3 million higher, and caused basic and diluted loss pershare as reported for the same period to be $0.03 higher (higher net loss of$0.2 million and $0.02 per share for the three months then ended) than if theCompany had continued to account for share based compensation under AccountingPrinciples Board Opinion No. 25 “*Accounting for StockIssued to Employees*” (“APB 25”).

Prior to January1, 2006, the Company applied APB 25 and related interpretations in accountingfor the Option 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 ninemonths ended September 30, 2005 would have been as indicated below:

|                                                                           | ** ** | **Nine months ended  September 30, 2005**      | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **(dollars in thousands,  except share data)** | ** ** |
| Net loss:                                                                 |       |                                                               |       |
| As reported                                                               |       | $                                                                  | (3,944     | ) |
| Pro forma compensation expense from stock based  compensation, net of tax |       | (219                                                               | )          |
| Pro forma net loss                                                        |       | $                                                                  | (4,163     | ) |
| Net loss per  common and common share equivalent:                         |       |                                                               |       |
| Basic loss per share:                                                     |       |                                                               |       |
| As reported                                                               |       | $                                                                  | (0.49      | ) |
| Pro forma                                                                 |       | $                                                                  | (0.51      | ) |
| Diluted loss per share:                                                   |       |                                                               |       |
| As reported                                                               |       | $                                                                  | (0.49      | ) |
| Pro forma                                                                 |       | $                                                                  | (0.51      | ) |

 

The effect on the Company’snet loss and loss per share for the three months ended September 30, 2005 wasinsignificant.

**NOTE 6 –VARIABLE INTEREST ENTITIES**

As of September 30, 2006,the Company has funded loans totaling $10.3 million to two 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 Companyreceives an 80% share in additional profits generated by the investment.  The investment meets the definition of aVariable Interest Entity under FASB Interpretation No. 46 (“FIN 46”) and theCompany is the primary beneficiary of the VIE. As a result, the assets, liabilities, and results of operations of theVIE have been consolidated into the accompanying consolidated financialstatements as of September 30, 2006.

The VIE currently ownstwo apartment buildings, consisting of 33 residential units with a book valueof approximately $10.9 million, including capital improvements and carryingcosts.  These acquisitions, and relatedoperational expenditures, were funded with bank loans totaling $0.9 million,the Company’s $10.3 million investment and a $0.3 million contribution from theproject managers.  Neither the creditorsnor the other beneficial interest holders have recourse to the Company withregard to these investments and, as a result, the maximum limit of the Company’sexposure to loss on this investment was $10.3 million as of September 30, 2006.

During the nine monthsended September 30, 2006, the Company funded loans of $5.2 million to the VIE,while the VIE spent approximately $1.4 million for improvements and carryingcosts on its three apartment buildings, and repaid a $4.2 million mortgage loanon one property, thus releasing a third party’s security interest in theproperty.  In July 2006, the VIE sold oneof the three properties that it owned for cash proceeds of $3.3 million.  The property had a net book value of $3.3million, including capital improvements and carrying costs, at the time ofdisposal.  At September 30, 2006, theCompany’s total investment in the remaining two entities is $10.3 million.  The two remaining properties met the criteria to be classified as “held for sale”,and were classified as such on the Statement of Financial Condition atSeptember 30, 2006.  Assets andliabilities of the VIE included in the accompanying consolidated statements offinancial condition are summarized as follows:
| Investment in real estate,  held for sale, net                                        |   | $       | 10,938,000 |   |
|---------------------------------------------------------------------------------------|--------|---------|------------|--------|
| Other assets                                                                          |   | 69,000  |       |
| Borrowings and  notes payable (included in current liabilities at September 30, 2006) |   | 904,000 |       |
| Accrued expenses  and other liabilities                                               |   | 10,000  |       |
| Minority interest                                                                     |   | 349,000 |       |

 

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**NOTE 7 –OPERATING SEGMENTS**

Operating segmentsconsist of (i) restaurant operations conducted through Fatburger, (ii) commercialreal estate mortgage brokerage activities conducted through George ElkinsMortgage Banking Company (“George Elkins”), (iii) manufacturing activitiesconducted through DAC International, (iv) real estate and financing activities,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 September 30, 2006,the Company owned approximately 82% of the voting control of Fatburger, whichoperates or franchises 86 hamburger restaurants located primarily in Californiaand Nevada.  Franchisees currently ownand operate 54 of the Fatburger locations. Seven new restaurants were opened during the nine months ended September30, 2006, four franchise locations and three company-owned locations.  In addition, Fatburger purchased threerestaurants from franchisees during the nine months ended September 30, 2006.
|                                           | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                     | ** ** |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Company-owned  restaurant sales           |       | $                                                        | 7,426      |                                                    | $          | 6,003 |   | $ | 20,494 |   | $ | 18,041 |   |
| Royalty revenue                           |       | 551                                                      |       | 498                                                     |       | 1,662 |   | 1,292 |   |
| Franchise fee  revenue                    |       | 40                                                       |       | 223                                                     |       | 164 |   | 451 |   |
| Total revenue                             |       | 8,017                                                    |       | 6,724                                                   |       | 22,320 |   | 19,784 |   |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Cost of sales                             |       | (3,915                                                   | )          | (3,469                                                  | )          | (11,378 | ) | (10,532 | ) |
| Depreciation and  amortization            |       | (427                                                     | )          | (337                                                    | )          | (1,202 | ) | (1,048 | ) |
| Other general  & administrative costs |       | (4,001                                                   | )          | (3,032                                                  | )          | (10,666 | ) | (8,646 | ) |
| Interest expense                          |       | (187                                                     | )          | (161                                                    | )          | (627 | ) | (471 | ) |
| Minority  interest in losses              |       | 5                                                        |       | —                                                  |       | 70 |   | — |   |
| Segment loss                              |       | $                                                        | (508       | )                                                       | $          | (275 | ) | $ | (1,483 | ) | $ | (913 | ) |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Capital expenditures                      |       | $                                                        | 1,465      |                                                    | $          | 27 |   | $ | 2,449 |   | $ | 114 |   |
| Segment assets                            |       |                                                     |       |                                                    |       | 21,214 |   | 19,120 |   |
| Minority interests                        |       |                                                     |       |                                                    |       | 117 |   | — |   |

 

*Commercial Real Estate Mortgage BrokerageOperations*

The Company holds a 51% ownership interest in GeorgeElkins, a California mortgage banking operation, which provided brokerageservices related to the production of over $806 million in commercial realestate mortgages in the first nine months of 2006, a 3% increase over the sameperiod in 2005.  George Elkins isheadquartered in Los Angeles, with satellite offices located throughout thesouthern California area.  The mortgagebrokerage operation also manages a commercial loan servicing portfolio inexcess of $1.1 billion for various investors.
|                                           | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                     | ** ** |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Loan brokerage  fees                      |       | $                                                        | 1,358      |                                                    | $          | 2,825 |   | $ | 4,755 |   | $ | 5,255 |   |
| Loan servicing  fees                      |       | 217                                                      |       | 289                                                     |       | 708 |   | 737 |   |
| Total revenue                             |       | 1,575                                                    |       | 3,114                                                   |       | 5,463 |   | 5,992 |   |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Depreciation and  amortization            |       | (8                                                       | )          | (26                                                     | )          | (22 | ) | (50 | ) |
| Other general  & administrative costs |       | (1,498                                                   | )          | (2,626                                                  | )          | (5,181 | ) | (5,508 | ) |
| Interest income                           |       | 2                                                        |       | 2                                                       |       | 5 |   | 4 |   |
| Other  non-operating income               |       | 4                                                        |       | 67                                                      |       | 283 |   | 162 |   |
| Minority  interest in earnings            |       | (82                                                      | )          | (299                                                    | )          | (404 | ) | (414 | ) |
| Segment income  (loss)                    |       | $                                                        | (7         | )                                                       | $          | 232 |   | $ | 144 |   | $ | 186 |   |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                        | 6          |                                                    | $          | 28 |   | $ | 6 |   | $ | 91 |   |
| Segment assets                            |       |                                                     |       |                                                    |       | 1,130 |   | 1,732 |   |
| Minority interests                        |       |                                                     |       |                                                    |       | 178 |   | 238 |   |

 

13

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*Manufacturing Operations*

The Company conducts manufacturing activities through its wholly-ownedsubsidiary, DAC International.  TheCompany assumed 100% voting control of DAC in November 2005 and began reportingthe operations of DAC 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 September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                     | ** ** |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Manufacturing  sales                      |       | $                                                        | 2,370      |                                                    | $          | — |   | $ | 7,159 |   | $ | — |   |
| Cost of sales                             |       | (1,375                                                   | )          | —                                                  |       | (3,958 | ) | — |   |
| Engineering and  development              |       | (214                                                     | )          | —                                                  |       | (655 | ) | — |   |
| Depreciation and  amortization            |       | (22                                                      | )          | —                                                  |       | (42 | ) | — |   |
| Other general  & administrative costs |       | (446                                                     | )          | —                                                  |       | (1,322 | ) | — |   |
| Interest expense                          |       | —                                                   |       | —                                                  |       | (6 | ) | — |   |
| Other  non-operating income               |       | 46                                                       |       | —                                                  |       | 53 |   | — |   |
| Segment income                            |       | $                                                        | 359        |                                                    | $          | — |   | $ | 1,229 |   | $ | — |   |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                        | 145        |                                                    | $          | — |   | $ | 205 |   | $ | — |   |
| Segment assets                            |       |                                                     |       |                                                    |       | 5,427 |   | — |   |

 

*Real Estate and FinancingOperations*

The Company owns various interests in real estate and notesreceivable.  At September 30, 2006, realestate is comprised of leasehold interests in 75 freestanding retail buildingslocated throughout the United States and two apartment buildings located inBarcelona, Spain.  At September 30, 2006,notes receivable have a carrying value of $1.9 million and are primarilysecured by real estate.
|                                           | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                     | ** ** |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Rental income                             |       | $                                                        | 928        |                                                    | $          | 1,031 |   | $ | 2,978 |   | $ | 3,194 |   |
| Operating  expenses                       |       | (491                                                     | )          | (391                                                    | )          | (1,163 | ) | (1,231 | ) |
| Depreciation and  amortization            |       | (97                                                      | )          | (135                                                    | )          | (328 | ) | (436 | ) |
| Other general  & administrative costs |       | (205                                                     | )          | (182                                                    | )          | (609 | ) | (494 | ) |
| Interest income                           |       | 66                                                       |       | 156                                                     |       | 242 |   | 1,135 |   |
| Interest expense                          |       | (442                                                     | )          | (283                                                    | )          | (1,038 | ) | (862 | ) |
| Other  non-operating income               |       | 1,678                                                    |       | 173                                                     |       | 4,469 |   | 1,447 |   |
| Equity in income  of equity investees     |       | —                                                   |       | (415                                                    | )          | 748 |   | 26 |   |
| Segment income  (loss)                    |       | $                                                        | 1,437      |                                                    | $          | (46 | ) | $ | 5,299 |   | $ | 2,779 |   |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                        | 362        |                                                    | $          | 132 |   | $ | 1,552 |   | $ | 2,258 |   |
| Segment assets                            |       |                                                     |       |                                                    |       | 26,879 |   | 39,309 |   |
| Investment in  equity investees           |       |                                                     |       |                                                    |       | — |   | 1,753 |   |
| Minority interests                        |       |                                                     |       |                                                    |       | 349 |   | 355 |   |

 

Other non-operating income for the nine months ended September 30, 2006includes gain on sale of real estate ($2.9 million), gain on sale of loans($0.5 million), foreign currency gains ($0.6 million), and commission and othernon-operating revenue ($0.4 million).

*Software Development and Sales*

The Company holds a 79% ownership interest in Centrisoft, whichconducts software development and sales activities.  The Company began reporting the operations ofCentrisoft on a consolidated basis as of July 1, 2005, when majority voting controlwas obtained.  Centrisoft develops andsells software that controls and enhances the productivity of enterprisenetworks and provides first level security against unauthorized applicationsand users.

14

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|                                           | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                     | ** ** |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Software sales                            |       | $                                                        | 13         |                                                    | $          | 8 |   | $ | 34 |   | $ | 8 |   |
| Engineering and  development              |       | (157                                                     | )          | (113                                                    | )          | (513 | ) | (113 | ) |
| Depreciation and  amortization            |       | (98                                                      | )          | (59                                                     | )          | (265 | ) | (59 | ) |
| Other general  & administrative costs |       | (340                                                     | )          | (284                                                    | )          | (1,222 | ) | (284 | ) |
| Interest expense                          |       | (38                                                      | )          | (83                                                     | )          | (104 | ) | (83 | ) |
| Other  non-operating expense              |       | (46                                                      | )          | —                                                  |       | (46 | ) | — |   |
| Segment loss                              |       | $                                                        | (666       | )                                                       | $          | (531 | ) | $ | (2,116 | ) | $ | (531 | ) |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                        | —     |                                                    | $          | — |   | $ | 7 |   | $ | — |   |
| Segment assets                            |       |                                                     |       |                                                    |       | 3,759 |   | 4,101 |   |

 

*Reconciliation to total net income (loss)*
|                                        | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(dollars in thousands)**                     | ** ** |
|                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Segment income  (loss) from operations |       | $                                                        | 615        |                                                    | $          | (620 | ) | $ | 3,073 |   | $ | 1,521 |   |
| Corporate  expenses                    |       | (2,687                                                   | )          | (1,861                                                  | )          | (7,936 | ) | (5,464 | ) |
| Income tax  benefit                    |       | 1,249                                                    |       | —                                                  |       | 1,249 |   | — |   |
| Net loss                               |       | $                                                        | (823       | )                                                       | $          | (2,481 | ) | $ | (3,614 | ) | $ | (3,943 | ) |

 

Corporate expenses for the nine months ended September30, 2006 includes $0.3 million (less than $0.1 million for the three monthsended September 30, 2006) paid to PeninsulaCapital Partners LLC (“Peninsula Capital”), an entity owned by the Company’schief executive officer, as reimbursement of costs for the Company’s businessuse of certain private aircraft.  TheBoard of Directors is aware of the relationship and approved the fees for theuse of the aircraft.

**NOTE 8 –INCOME TAXES**

As of September 30, 2006,the Company had, for U.S. Federal tax purposes, a net operating loss (“NOL”)carry forward of approximately $77.7 million, including $3.4 million relatingto Fatburger and $7.6 million relating to Centrisoft.  The Company’s NOL begins to expire in2018.  Fatburger’s NOL began to expire in2004 and Centrisoft’s will begin to expire in 2020.  The Fatburger NOL carry forward is net ofapproximately $4.1 million disallowed as a result of an examination completedby the Internal Revenue Service in September 2006.  The disallowed NOL carry forward relates toyears in which Fatburger filed a consolidated return with a parent company thatis currently unaffiliated with Fatburger. As a result, documents substantiating the NOL carry forward were notwithin Fatburger’s control.  Fatburgermay appeal the results of this IRS examination. There can be no assurance that such an appeal would be successful.  No tax benefit had been recognized forfinancial reporting purposes relating to the disallowed NOL carry forward.

The Fatburger andCentrisoft NOLs are 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 or Centrisoft NOLs are utilized, the recognition of therelated tax benefits on certain of the NOLs utilized would first reducegoodwill related to those acquisitions, then other non-current intangibleassets related to those acquisitions, and then income tax expense in accordancewith Statement on Financial Accounting Standards No. 109, *Accountingfor Income Taxes.*

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 nine monthsended September 30, 2006, the Company determined that it was more likely than notthat certain NOL carryovers would be available to offset prior taxableincome.  As a result, the Companyrecognized an income tax benefit of $1.2 million and reduced the deferred taxliability by the same amount.

During the nine monthsended September 30, 2005, a provision for income taxes was not required due tothe net operating loss generated during the period.

15

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**NOTE 9 –LOANS TO SENIOR EXECUTIVES**

As of September 30, 2006,the Company had $1.1 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 are classified as current on the Statement ofFinancial Condition as of September 30, 2006.

**NOTE 10 –INVENTORIES**

Inventories consist ofthe following:
|                   | ** ** | **September 30,  2006**         | ** ** | **December 31,  2005** | ** ** |
|-------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **(dollars in thousands)** | ** ** |
|              |       |                                 |       |                        |       |
| Raw materials     |       | $                                    | 1,369      |                        | $          | 1,326 |   |
| Work in progress  |       | 866                                  |       | 288                         |       |
| Finished goods    |       | 272                                  |       | 266                         |       |
| Total inventories |       | $                                    | 2,507      |                        | $          | 1,880 |   |

 

**NOTE 11 –SUBSEQUENT EVENTS**

*Restaurant openings*

Subsequent to September30, 2006, Fatburger opened one additional franchisee location.

*Sale of retail property*

Subsequent to September30, 2006, the Company contracted to sell one commercial property for a salesprice of $0.4 million in cash.  Theproperty had a net book value of $0.4 million at the time of the contract, andis classified as held for sale on the accompanying Statements of FinancialCondition.  The sale is expected to closein November 2006.

*Aircraft lease*

Subsequent to September30, 2006, the Company entered into a capital lease of a private aircraft.  The agreement calls for monthly leasepayments of $6,409 and the Company is responsible for all operating andmaintenance costs of the aircraft.  Thelessor has the option to require the Company to purchase the aircraft for $2.0million between August 1, 2008 and July 31, 2009.  The Company’s chief executive officer, AndrewA. Wiederhorn, owns 25% of the lessor.

*Borrowings*

Subsequent to September30, 2006, the Company borrowed $2.1 million from a lender.  The promissory note is secured by certainassets of the Company, bears interest at a fixed rate of 13.00% payable monthlyin arrears, and is due April 2007.  Theproceeds of the note were used for general business operations, including theCompany’s continued investment in Fatburger.

Also subsequent toSeptember 30, 2006, the Company borrowed $2.0 million from a lender.  The promissory note is secured by certainassets of the Company, bears interest at a fixed rate of 15.00% payable monthlyin arrears, and is due November 2007. The proceeds of the note were used for general business operations,including the Company’s continued investment in Fatburger.

16

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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;

*·*                  thefinancial and securities markets and the availability of and costs associatedwith sources of liquidity;

*·*                  competitiveproducts and pricing;

*·*                  thereal estate market, including the real estate market in Barcelona, Spain andthe commercial real estate market in California;

*·*                  theability to sell assets to maintain liquidity;

*·*                  fiscaland monetary policies of the U.S. Government;

*·*                  changesin prevailing interest rates;

*·*                  changesin currency exchange rates;

*·*                  acquisitionsand the integration of acquired businesses;

*·*                  performanceof retail/consumer markets, including consumer preferences and concerns aboutdiet;

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

*·*                  profitabilityand success of franchisee restaurants;

*·*                  availabilityof quality real estate locations for restaurant expansion;

*·*                  themarket for Centrisoft’s software products;

*·*                  creditrisk 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.*

## **Executive Overview**

*Business Overview*

Fog Cutter Capital GroupInc. is primarily engaged in the operations of its Fatburger restaurantbusiness.  Fatburger, “The Last GreatHamburger Stand”®, opened its first restaurant in Los Angeles in 1952.  There are currently 86 Fatburger restaurantslocated in 14 states and in Canada.  Therestaurants specialize in fresh, made to order hamburgers and other specialtysandwiches.  French fries, homemade onionrings, hand-scooped ice cream shakes and soft drinks round out the menu.

We acquired thecontrolling interest in Fatburger in August 2003.  We plan to open additional Fatburger restaurantsthroughout the United States, Canada, and China.  While we will continue to open company-ownedrestaurants in strategic markets, our primary strategy with respect toFatburger is to increase the number of franchises, thus increasing ourfranchise fee and royalty income. Franchisees currently own and operate 54 of the Fatburger locations andwe have agreements for approximately 230 new franchise locations.  As is typical for our industry, theidentification of qualified franchisees and quality locations has an impact onthe rate of growth in the number of our restaurants.

In addition to ourrestaurant operation, we also conduct commercial mortgage brokerage activities,manufacturing activities, software development and sales activities, and makereal estate and other real estate-related investments through variouscontrolled subsidiaries.

17

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*OperatingSegments*

Our operating segmentsare:

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

(ii)          Commercial Real EstateMortgage Brokerage Operations – conducted through our subsidiary, George ElkinsMortgage Banking,

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

(iv)      Real Estate and FinanceOperations, 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.

*SignificantEvents*

The following significantevents affected our operations for the nine months ended September 30, 2006:

·                  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 votingcontrol to 82% through the investment of an additional $2.5 million.

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

·                  Purchase ofFatburger franchisee locations – In March 2006, Fatburger paid $0.5 million topurchase the net assets of one franchisee that owned and operated one locationin Florida.  Through this transaction,Fatburger purchased $0.4 million in net assets and recognized $0.1 million ingoodwill.  In July 2006, Fatburger paid$0.2 million to purchase the net assets of one franchisee that owned anoperated one location in Louisiana.

·                  Sale of retailproperties – 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 $3.0million at the time of disposal, and we recognized gains on the sales totaling$0.5 million.

·                  Sale of vacantland - In May 2006, we sold a 10 acre parcel of vacant land for $2.6 million incash.  The property had a net book valueof $1.4 million at the time of disposal, and we recognized a gain on sale of$1.2 million.  Certain contingencies mayresult in additional sale proceeds of $0.3 million.  However, we have not recognized thecontingent portion of the sales price.

·                  Sale ofwarehouse – In August 2006, we sold our Eugene warehouse property for $2.8million in cash.  The property had a netbook value of $1.6 million at the time of disposal, and we recognized a gain onsale of $1.2 million.  We used part ofthe proceeds on the sale to repay a $1.5 million mortgage note payable,obtained in May 2006, which was secured by this property.

·                  Sale of loan –In March 2006, we sold our 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 propertyby equity investee – In June 2006, our equity investee, Bourne End sold itslast 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.  We have recognized $0.7 million in incomefrom Bourne End during the nine months ended September 30, 2006.  In July 2006, Bourne End distributed themajority of its net assets to its investors, and we received $1.6 million forour share.

·                  Investment inBarcelona, Spain properties – During the nine months ended September 30, 2006,we invested an additional $5.2 million in our Variable Interest Entities inBarcelona, Spain.  During the period, theVIE spent approximately $1.2 million for improvements and carrying costs on thethree apartment buildings owned, and repaid a $4.2 million mortgage loan on oneproperty, thus releasing a third party’s security interest in theproperty.  In July 2006, the VIE sold oneof three properties that it owned for cash proceeds of $3.3 million.  The property had a net book value of $3.3million, including capital improvements and carrying costs, at the time ofdisposal.

18

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·                  Borrowings onnote payable – In July 2006, we borrowed $2.5 million from a lender in the formof a note, which we then used as part of our additional investment in the VIE.

·                  Centrisoftinvestment – In June 2006, we increased our voting control in Centrisoft to 79%and have invested an additional $2.8 million in Centrisoft during the ninemonths ended September 30, 2006.

·                  Dividends – OnFebruary 28, 2006, the Company’s Board of Directors declared a $0.13 per sharedividend.  The dividend was paid on March14, 2006 to stockholders of record on March 9, 2006.  No other dividends have been declared or paidin 2006.

**Resultsof operations**

Our operations haveresulted in a net loss as follows:
|                    | ** ** | **Three months ended September 30,**                        | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------|------------|---------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **         | ** ** | **2006**                                                                        | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **         | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Net Loss           |       | $                                                                               | (823       | )                                                       | $          | (2,481 | ) | $ | (3,614 | ) | $ | (3,943 | ) |
| Net Loss Per Share |       | $                                                                               | (0.10      | )                                                       | $          | (0.31 | ) | $ | (0.45 | ) | $ | (0.49 | ) |

 

Our net loss was $3.6million (or $0.45 per share) for the nine months ended September 30, 2006, and$0.8 million (or $0.10 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 comparable period in 2005 was also primarily attributable toour operating expenses as we transitioned the balance sheet and began focusingon our restaurant operations and other subsidiaries.

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

*Restaurant Segment Operations*

The following table shows our operating margin for company-ownedrestaurants for the three and nine months ended September 30, 2006 and 2005:
|                                               | ** ** | **Three months ended September 30,**      | ** ** | **Nine months ended September 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 |       | (21.8                                                         | )%         | (27.6                                                   | )%         | (24.9 | )% | (27.9 | )% |
| Cost of sales – wages and benefits       |       | (30.9                                                         | )%         | (30.2                                                   | )%         | (30.7 | )% | (30.4 | )% |
| Restaurant depreciation and amortization      |       | (4.9                                                          | )%         | (4.6                                                    | )%         | (4.9 | )% | (4.7 | )% |
| Operating margin  (restaurant sales only)     |       | 42.4                                                          | %          | 37.6                                                    | %          | 39.5 | % | 37.0 | % |

 

The following table shows our total operating resultsfrom the restaurant segment for the three and nine months ended September 30,2006 and 2005:
|                                    | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **(% to total revenue)**                  | ** ** |
| Total Restaurant  Operations:      |       |                                                     |       |                                                    |       |   |   |   |   |
| Company-owned restaurant sales     |       | 92.6                                                     | %          | 89.3                                                    | %          | 91.8 | % | 91.2 | % |
| Royalty revenue                    |       | 6.9                                                      | %          | 7.4                                                     | %          | 7.5 | % | 6.5 | % |
| Franchise fee revenue              |       | 0.5                                                      | %          | 3.3                                                     | %          | 0.7 | % | 2.3 | % |
| Total revenue                      |       | 100.0                                                    | %          | 100.0                                                   | %          | 100.0 | % | 100.0 | % |
|                               |       |                                                     |       |                                                    |       |   |   |   |   |
| Cost of sales                      |       | (53.4                                                    | )%         | (55.7                                                   | )%         | (55.5 | )% | (57.5 | )% |
| General & administrative costs |       | (50.7                                                    | )%         | (46.0                                                   | )%         | (48.7 | )% | (44.7 | )% |
| Interest expense                   |       | (2.3                                                     | )%         | (3.0                                                    | )%         | (2.8 | )% | (3.0 | )% |
| Minority interest in losses        |       | 0.1                                                      | %          | —                                                  | %          | 0.3 | % | — | % |
| Segment loss                       |       | (6.3                                                     | )%         | (4.7                                                    | )%         | (6.7 | )% | (5.2 | )% |

 

19

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For the nine months ended September 30, 2006,company-owned restaurant sales increased 13.9% to $20.5 million from $18.0million for the same period in 2005.  Forthe three months ended September 30, 2006, company-owned restaurant salesincreased 23.3% to $7.4 million from $6.0 million for the third quarter of2005.  This increase was primarily theresult of the addition of six company-owned restaurants in the first ninemonths of 2006.  Same store sales forcompany-owned restaurants increased 2.0% for the first nine months of 2006compared to the same period in 2005.

Royalty revenue increased 30.8%, from $1.3 million forthe first nine months of 2005 to $1.7 million for the nine months endedSeptember 30, 2006, as a result of our franchise restaurant growthstrategy.  We added 4 franchise locationsduring the nine months ended September 30, 2006.  Same store sales for franchise restaurantsdecreased 3.9% for the first nine months of 2006 compared to the same period in2005.

System-wide same store sales decreased 1.1% for thefirst nine months of 2006 compared to the same period in 2005.  Our loss from restaurant operations was 6.7%of total revenue for the nine months ended September 30, 2006 and 6.3% for thethird quarter, due to the increased General and Administrative expenses as wecontinue to set up our infrastructure to support our planned expansion.

Our primary strategy with respect to Fatburger is to growboth company-owned and franchised locations in the U.S. and internationally,thus increasing our operating income as well as franchise fees and futureroyalty income.  Since we acquired ourinterest in Fatburger in August 2003, Fatburger has added 33 newrestaurants.  While we seek to expand thenumber of existing restaurants, the identification of qualified franchisees andquality locations has an effect on the rate of growth in the number of ourrestaurants.

*Commercial Real Estate Mortgage Brokerage SegmentOperations*
|                                   | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **(% to total revenue)**                  | ** ** |
| Loan brokerage  fees              |       | 86.0                                                     | %          | 88.8                                                    | %          | 82.7 | % | 85.3 | % |
| Loan servicing  and other revenue |       | 14.0                                                     | %          | 11.2                                                    | %          | 17.3 | % | 14.7 | % |
| Total revenue                     |       | 100.0                                                    | %          | 100.0                                                   | %          | 100.0 | % | 100.0 | % |
|                              |       |                                                     |       |                                                    |       |   |   |   |   |
| Compensation  expense             |       | (79.5                                                    | )%         | (75.0                                                   | )%         | (78.5 | )% | (78.6 | )% |
| Other operating  expense          |       | (15.8                                                    | )%         | (8.3                                                    | )%         | (12.0 | )% | (11.7 | )% |
| Minority  interest in earnings    |       | (5.2                                                     | )%         | (9.4                                                    | )%         | (7.0 | )% | (6.7 | )% |
| Segment income (loss)             |       | (0.5                                                     | )%         | 7.3                                                     | %          | 2.5 | % | 3.0 | % |

 

For the nine months endedSeptember 30, 2006, total revenue for this business segment decreased 6.5% to$5.8 million from $6.2 million for the comparable period in 2005.  Over the same period, our income from thissegment decreased to $0.1 million in 2006 (2.5% of segment revenue) from $0.2million (3.0% of segment revenue) in 2005. For our third fiscal quarter of 2006, segment revenue decreased 50.0% to$1.6 million from $3.2 million in the third quarter of 2005.  In the third quarter of 2006, we had a lossin this segment of less than $0.1 million (0.5% of segment revenue), comparedto income of $0.2 million (7.3% of segment revenue) in the third quarter of2005.  While loan production volume hasincreased slightly during 2006, the decrease in earnings has resulted from acompetitive reduction in brokerage fees, due to an overall slowdown of thecommercial real estate market in California.

During the nine monthsended September 30, 2006, George Elkins provided brokerage services resultingin the origination of over $806 million in commercial real estate loans.  This represents an increase of 3% over thecomparable period in 2005.  Of the loansbrokered in 2006, 40% were funded by conduit lenders, 17% were funded by banksor other thrifts, 10% were funded by insurance companies, with the balancefunded by bridge lenders and other investors. The servicing and loan administration department manages a portfolio of$1.1 billion comprised of 454 loans for approximately 16 clients as ofSeptember 30, 2006.

*Manufacturing Segment Operations*
|                              | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(% to total revenue)**                  | ** ** |
| Manufacturing  sales         |       | 100.0                                                    | %          | —                                                  |       | 100.0 | % | — |   |
| Manufacturing  cost of sales |       | (58.0                                                    | )%         | —                                                  |       | (55.3 | )% | — |   |
| Engineering and  development |       | (9.0                                                     | )%         | —                                                  |       | (9.1 | )% | — |   |
| Operating margin             |       | 33.0                                                     | %          | —                                                  |       | 35.6 | % | — |   |
|                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Compensation  expense        |       | (12.6                                                    | )%         | —                                                  |       | (13.4 | )% | — |   |
| Depreciation  expense        |       | (0.9                                                     | )%         | —                                                  |       | (0.6 | )% | — |   |
| Other operating  expense     |       | (4.3                                                     | )%         | —                                                  |       | (4.4 | )% | — |   |
| Segment income               |       | 15.2                                                     | %          | —                                                  |       | 17.2 | % | — |   |

 

20

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Total revenue for thissegment was $7.2 million for the nine months ended September 30, 2006, and $2.4million for the three months then ended. Net income for this segment was $1.2 million for the first nine monthsof 2006, and $0.4 for the third fiscal quarter of 2006.  We began consolidating DAC’s operations inNovember 2005.  Accordingly, no amountsare shown for the comparable periods in 2005.

*Real Estate and Finance SegmentOperations*
|                                       | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Real Estate Operations:** | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(dollars in thousands)**                     | ** ** |
|                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating  revenue                    |       | $                                                        | 928        |                                                    | $          | 1,031 |   | $ | 2,978 |   | $ | 3,194 |   |
| Operating  expenses                   |       | (491                                                     | )          | (391                                                    | )          | (1,163 | ) | (1,231 | ) |
| Depreciation and  amortization        |       | (92                                                      | )          | (124                                                    | )          | (311 | ) | (396 | ) |
| Operating margin                      |       | 345                                                      |       | 516                                                     |       | 1,504 |   | 1,567 |   |
|                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| General and  administrative expenses  |       | (101                                                     | )          | (175                                                    | )          | (484 | ) | (468 | ) |
| Interest expense                      |       | (442                                                     | )          | (283                                                    | )          | (1,038 | ) | (862 | ) |
| Gain on sale of  real estate          |       | 1,211                                                    |       | 195                                                     |       | 2,905 |   | 1,784 |   |
| Income from real estate  operations   |       | $                                                        | 1,013      |                                                    | $          | 253 |   | $ | 2,887 |   | $ | 2,021 |   |

 

During the nine monthsended September 30, 2006, our operating margin on real estate decreased lessthan $0.1 million, to $1.5 million, compared to $1.6 million for the sameperiod of 2005.  Our operating margin onreal estate operations for the third quarter of 2006 decreased $0.2 million, to$0.3 million, compared to $0.5 million in the third quarter of 2005.  Although we have continued to sell certainreal estate investments, we have been able to maintain our operating margin atrelatively stable levels due to our success in reducing vacancies and increasinglease rates.  In the first quarter of2006, we sold seven buildings for total proceeds of $3.5 million, resulting ina net gain on sale of approximately $0.5 million.  In the second quarter of 2006, we sold aparcel of vacant land for total proceeds of $2.6 million, resulting in a gainon sale of approximately $1.2 million. In the third quarter of 2006, we sold our Eugene warehouse property fortotal proceeds of $2.8 million, resulting in a gain on sale of approximately$1.2 million.  Interest expense for thenine months ended September 30, 2006 has increased compared to the same periodof 2005 as we have borrowed money on various notes payable secured by certainreal estate investments in 2006.

Our net interest incomeon interest bearing assets is as follows:
|                                       | ** ** | **Three months ended September 30,**      | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Interest Income:**             | ** ** | **2006**                                                      | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(dollars in thousands, except yields)** | ** ** |
| Loan portfolios (1):                  |       |                                                          |       |                                                    |       |   |   |   |   |
| Interest income                       |       | $                                                             | 32         |                                                    | $          | 47 |   | $ | 133 |   | $ | 820 |   |
| Average asset balance                 |       | $                                                             | 1,890      |                                                    | $          | 6,700 |   | $ | 1,920 |   | $ | 8,575 |   |
| Average yield                         |       | 6.8                                                           | %          | 2.8                                                     | %          | 9.2 | % | 12.8 | % |
|                                  |       |                                                          |       |                                                    |       |   |   |   |   |
| Cash Deposits  and other investments: |       |                                                          |       |                                                    |       |   |   |   |   |
| Interest income                       |       | $                                                             | 33         |                                                    | $          | 109 |   | $ | 109 |   | $ | 314 |   |
| Average asset balance                 |       | $                                                             | 2,640      |                                                    | $          | 7,661 |   | $ | 2,706 |   | $ | 8,809 |   |
| Average yield                         |       | 5.0                                                           | %          | 5.7                                                     | %          | 5.4 | % | 4.8 | % |
|                                  |       |                                                          |       |                                                    |       |   |   |   |   |
| Total:                                |       |                                                          |       |                                                    |       |   |   |   |   |
| Interest income                       |       | $                                                             | 65         |                                                    | $          | 156 |   | $ | 242 |   | $ | 1,134 |   |
| Average asset balance                 |       | $                                                             | 4,530      |                                                    | $          | 14,361 |   | $ | 4,626 |   | $ | 17,384 |   |
| Average yield                         |       | 5.7                                                           | %          | 4.3                                                     | %          | 6.9 | % | 8.7 | % |

----

(1)          Includes loans to senior officers.

21

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Our interest income forthe nine months ended September 30, 2006 was $0.2 million, compared with $1.1million for the same period in 2005.  Forthe third quarter of 2006, interest income was $0.1 million, compared with $0.2million for the same period in 2005.  Thedecrease is primarily attributable to the sale or repayment of loans in ourloan portfolio, mostly since June 30, 2005.

*Equity inEarnings of Equity Investees*– In June 2006, Bourne End soldits last remaining shopping center and recognized a gain under U.S. financialreporting standards of approximately $1.1 million, of which, our share wasapproximately $0.3 million.  We were alsoallocated additional income from Bourne End in the approximate amount of $0.5million under a revenue sharing agreement with the other investors as a resultof exceeding certain profitability measures. As a result, we have recognized $0.7 million in income from Bourne Endduring the nine months ended September 30, 2006.

*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 in foreign currency exchange rates resulted in a net gain ofapproximately $0.6 million in this segment for the nine months ended September30, 2006, compared to losses of $0.5 million for the same period in 2005.  At September 30, 2006, approximately 59% ofour equity was invested in net assets located outside of the United States,primarily denominated in the euro.  See *Item 3 – Quantitative and Qualitative Disclosures about Market Risk*for further analysis.

*Software Development and Sales Segment Operations*
|                              | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                   | ** ** | **(dollars in thousands)**                     | ** ** |
| Software sales               |       | $                                                        | 13         |                                                    | $          | 8 |   | $ | 34 |   | $ | 8 |   |
| Engineering and  development |       | (157                                                     | )          | (113                                                    | )          | (513 | ) | (113 | ) |
| Compensation  expense        |       | (128                                                     | )          | (192                                                    | )          | (646 | ) | (192 | ) |
| Depreciation  expense        |       | (98                                                      | )          | (59                                                     | )          | (265 | ) | (59 | ) |
| Other operating  expense     |       | (212                                                     | )          | (92                                                     | )          | (576 | ) | (92 | ) |
| Interest expense             |       | (38                                                      | )          | (83                                                     | )          | (104 | ) | (83 | ) |
| Other  non-operating expense |       | (46                                                      | )          | —                                                  |       | (46 | ) | — |   |
| Segment loss                 |       | $                                                        | (666       | )                                                       | $          | (531 | ) | $ | (2,116 | ) | $ | (531 | ) |

 

We acquired votingcontrol of Centrisoft in July 2005 and began consolidating Centrisoft’soperations at that time.  Accordingly,the comparable amounts for the nine months ended September 30, 2005 onlyinclude results of Centrisoft’s operations from the date of consolidation.

*Corporate expenses*
|                                     | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(dollars in thousands)**                     | ** ** |
| Compensation and  employee benefits |       | $                                                        | 1,425      |                                                    | $          | 620 |   | $ | 4,435 |   | $ | 1,866 |   |
| Travel and  entertainment           |       | 323                                                      |       | 143                                                     |       | 943 |   | 392 |   |
| Insurance                           |       | 161                                                      |       | 258                                                     |       | 571 |   | 678 |   |
| Professional  fees                  |       | 499                                                      |       | 559                                                     |       | 1,214 |   | 1,614 |   |
| Occupancy costs                     |       | 49                                                       |       | 72                                                      |       | 139 |   | 179 |   |
| Directors fees                      |       | 109                                                      |       | 105                                                     |       | 269 |   | 282 |   |
| Other expenses                      |       | 121                                                      |       | 104                                                     |       | 365 |   | 453 |   |
| Total operating  expenses           |       | $                                                        | 2,687      |                                                    | $          | 1,861 |   | $ | 7,936 |   | $ | 5,464 |   |

 

For the nine months ended September 30, 2006, we incurred corporateoperating expenses of $7.9 million, compared to $5.5 million for the sameperiod in 2005.  For the third quarter of2006, corporate operating expenses were $2.7 million, compared to $1.9 millionfor the third quarter of 2005.  Theseincreases are primarily due to an increase in recognized compensationexpenses.  All compensation costsrelating to our chief executive officer during the nine months ended September30, 2005 were accrued and expensed in 2004 under his leave of absenceagreement.  Accordingly, his compensationcosts began to accrue again upon his return in November 2005.  Travel and entertainment expense for the ninemonths ended September 30, 2006 includes $0.3 million paid to Peninsula Capital Partners LLC (“PeninsulaCapital”), an entity owned by our chief executive officer, as reimbursement ofcosts for the Company’s business use of certain private aircraft.  The Board of Directors is aware of therelationship and approved the fees for the use of the aircraft.

22

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*Income taxes*

During the nine monthsended September 30, 2006, we determined that it was more likely than not thatcertain NOL carryovers would be available to offset prior taxable income.  As a result, we recognized an income taxbenefit of $1.2 million and reduced the deferred tax liability by the sameamount.  During the nine months endedSeptember 30, 2005, a provision for income taxes was not required due to thenet operating loss generated during the period.

**Changes in financial condition**

Our assets, liabilitiesand stockholders’ equity can be summarized as follows:
|                                  | ** ** | **September 30, 2006**     | ** ** | **December 31, 2005** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **(dollars in thousands)** | ** ** |
| Total assets                     |       | $                                    | 58,409     |                            | $          | 65,319 |   |
| Total  liabilities               |       | $                                    | 40,884     |                            | $          | 43,398 |   |
| Total minority  interests        |       | $                                    | 643        |                            | $          | 532 |   |
| Total stockholders’  equity |       | $                                    | 16,882     |                            | $          | 21,389 |   |

 

The decrease in totalassets during the first nine months of 2006 is primarily due to a decrease ininvestment in real estate as we sold ten properties during the period.  Total liabilities decreased over the firstnine months of 2006, primarily due to the repayment of borrowings on propertiesthat have been sold and the recognition of $1.2 million in deferred tax benefitin the third quarter of 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 fixeddividend policy, and may declare and pay new dividends on common stock, subjectto financial condition, results of operations, capital requirements and otherfactors deemed relevant by our Board of Directors.  One factor the Board of Directors mayconsider is the impact of dividends on our liquidity.  As we implement our strategy of focusing ourefforts on the development of Fatburger, the Board of Directors may determineto reduce any future dividend amount to a level that is more typical of therestaurant industry, or eliminate the dividend in its entirety.  On February 28, 2006, the Company’s Board ofDirectors declared a $0.13 per share dividend. The dividend was paid on March 14, 2006 to shareholders of record onMarch 9, 2006.  No other dividends havebeen declared or paid in 2006. Stockholders’ equity decreased during the nine months ended September30, 2006 by approximately $4.5 million, mainly resulting from our net loss of$3.6 million and dividends paid of $1.0 million.  These changes are described in more detail asfollows:

*Cash*

Our cash decreased $2.3million from December 31, 2005 to September 30, 2006.  Significant sources and uses of cash duringthis period include:

·                  $5.9 million ofcash used in operations – comprised primarily of our net loss of $3.6 millionadjusted for non-cash income and expense items of $2.1 million;

·                  $9.2 million ofcash provided by investing activities – including $12.1 million from the saleof real estate, $1.6 million distributed from our equity investee, and a net$0.7 million received from our loan portfolio, partially offset by a $1.6million investment in real estate and a total of $2.7 million invested inrestaurant assets and other property, plant & equipment, and Fatburger’s$0.9 million investment in subsidiaries and franchisee operations; and

·                  $5.6 million of cash used infinancing activities – includes repayments of borrowings and capital leases(net of proceeds on borrowings) of $4.3 million, net distributions to minorityinterests of $0.3 million, and $1.0 million in dividends paid.

*Net Investmentsin Real Estate, and related liabilities*

Our investments inreal estate can be summarized as follows:
|                                                      | ** ** | **September 30, 2006**     | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **(dollars in thousands)** | ** ** |
| US based  investments – held for sale (1):      |       |                                 |       |                            |       |
| Purchase price / improvements                        |       | $                                    | 403        |                            | $          | 7,032 |   |
| Accumulated depreciation and amortization            |       | (32                                  | )          | (677                            | )          |
| Net book value                                       |       | 371                                  |       | 6,355                           |       |
| Foreign-based  investments – held for sale (2): |       |                                 |       |                            |       |
| Purchase price / improvements                        |       | 10,938                               |       | —                          |       |
| Total  investments in real estate, held for sale     |       | $                                    | 11,309     |                            | $          | 6,355 |   |
|                                                 |       |                                 |       |                            |       |
| US based  investments – held for use (3):       |       |                                 |       |                            |       |
| Purchase price / improvements                        |       | $                                    | 13,179     |                            | $          | 13,141 |   |
| Accumulated depreciation and amortization            |       | (1,285                               | )          | (1,032                          | )          |
| Net book value                                       |       | 11,894                               |       | 12,109                          |       |
| Foreign-based  investments – held for use (2):  |       |                                 |       |                            |       |
| Purchase price / improvements                        |       | —                               |       | 11,828                          |       |
| Total  investments in real estate, held for use      |       | $                                    | 11,894     |                            | $          | 23,937 |   |
|                                                 |       |                                 |       |                            |       |
| Total investments in  real estate, net               |       | $                                    | 23,203     |                            | $          | 30,292 |   |

 

23

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----

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

(2)     Includes 2 apartment buildings in Barcelona,Spain at September 30, 2006, 3 properties at December 31, 2005.  Based on a change in circumstances, theremaining 2 properties were reclassified as held for sale at September 30,2006.

(3)     Includes 32 commercial properties under capital lease throughout theUnited States at September 30, 2006 and December 31, 2005.

Borrowings relatedto our investments in real estate were as follows:
|                                                 | ** ** | **September 30, 2006**     | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **(dollars in thousands)** | ** ** |
| Obligations on  real estate under capital lease |       | $                                    | 10,149     |                            | $          | 10,551 |   |
| Borrowings on  Barcelona properties             |       | 3,404                                |       | 6,020                           |       |
| Total borrowings  related to real estate        |       | $                                    | 13,553     |                            | $          | 16,571 |   |

 

The decrease in USproperties owned at September 30, 2006 compared to December 31, 2005 is due tothe sale of nine properties with a net book value of $6.0 million in threeseparate transactions.  There was amortgage note payable obtained in May 2006 on one property which was repaidwhen the property was sold in August 2006. Investments in properties under capital lease decreased $0.2 million atSeptember 30, 2006 due to depreciation during the first nine months of2006.  Obligations under capital leasesrelated to these properties decreased $0.4 million primarily due to scheduledmonthly payments during the same period. Our investment in apartment buildings in Barcelona, Spain decreased $0.9million since December 31, 2005.  Thiswas the result of the sale of one building in July 2006 that had a net bookvalue of $3.3 million, partially offset by $1.4 million of additionalinvestment in the properties and increases in unrealized foreign currency translationof $1.0 million.  The carrying value ofborrowings related to the Barcelona investments has decreased $2.6 million dueto the repayment of a $1.4 million mortgage on one property that was sold inJuly 2006 and the repayment of another $4.2 million mortgage in July 2006 onone property to release a third party’s security interest in the property.  These decreases were partially offset by newborrowings of $2.5 million and an increase of $0.5 million due to unrealizedforeign currency translation.

*NetProperty, Plant and Equipment*

Net property, plant andequipment increased $2.2 million at September 30, 2006 compared to December 31,2005, primarily due to the addition of six company-owned restaurants in thefirst nine months of 2006.  Obligationson property, plant, and equipment under capital lease decreased $0.1 million to$0.2 million at September 30, 2006 primarily due to scheduled monthly payments.

*Goodwilland Net Intangible Assets*
|                                                | ** ** | **September 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        |       | $                                    | 4,990      |                            | $          | 5,134 |   |
| Net Intangible  Assets – Centrisoft       |       | 341                                  |       | 452                             |       |
| Total Net Intangible  Assets                   |       | $                                    | 5,331      |                            | $          | 5,586 |   |

 

As a result of theFatburger’s acquisition and consolidation of the net assets of one franchiseelocation, goodwill increased $0.1 million from December 31, 2005 to September30, 2006.  Net intangible assetsdecreased $0.3 million over the same period due to amortization.  Net intangible assets at September 30, 2006consists of trademark rights of approximately $4.0 million, franchiseagreements of approximately $0.7 million, sales contracts for Centrisoft ofapproximately $0.3 million, and other miscellaneous intangible assets ofapproximately $0.3 million.  We do notbelieve that there is any impairment of goodwill or net intangible assets atSeptember 30, 2006.

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*NotesReceivable*

As of September 30, 2006,our notes receivable portfolio (excluding loans to senior executives) consistsof three individual 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 10.9% and a weighted average maturity of 18 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 toSenior Executives*

We currently have twoloans to our Chairman and Chief Executive Officer, Andrew Wiederhorn for atotal of $1.1 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.*

Bourne End sold its lastremaining shopping center in Speke, England in June 2006, and distributed themajority of its net assets to its investors in July 2006.  We received $1.6 million for our share andadjusted our investment in Bourne End to zero at that time.

*OtherAssets*
|                                    | ** ** | **September 30, 2006**     | ** ** | **December 31, 2005** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **(dollars in thousands)** | ** ** |
| Trade  receivables                 |       | $                                    | 2,797      |                            | $          | 1,248 |   |
|                               |       |                                 |       |                            |       |
| Inventories                        |       | $                                    | 2,507      |                            | $          | 1,880 |   |
|                               |       |                                 |       |                            |       |
| Other current  assets:             |       |                                 |       |                            |       |
| Prepaid expenses                   |       | $                                    | 392        |                            | $          | 389 |   |
| Other restaurant segment assets    |       | 721                                  |       | 894                             |       |
| Other Barcelona VIE-related assets |       | 69                                   |       | 266                             |       |
| Other                              |       | —                               |       | 112                             |       |
| Total other current assets         |       | $                                    | 1,182      |                            | $          | 1,661 |   |
|                               |       |                                 |       |                            |       |
| Other assets:                      |       |                                 |       |                            |       |
| Software costs                     |       | $                                    | 1,301      |                            | $          | 1,484 |   |
| Capitalized deferred compensation  |       | 230                                  |       | 508                             |       |
| Mortgage servicing rights          |       | 219                                  |       | 234                             |       |
| Investment in operating leases     |       | 68                                   |       | 126                             |       |
| Other                              |       | 207                                  |       | 62                              |       |
| Total other  assets                |       | $                                    | 2,025      |                            | $          | 2,414 |   |

 

The increase in tradereceivables and inventories at September 30, 2006 relate primarily to theoperations of DAC.

*Deferred Income*

Our deferred incomerelating to the collection of unearned Fatburger franchise fees was $3.9million at September 30, 2006, compared with $4.3 million at December 31,2005.  The decrease is due to therecognition of deferred fees relating to the opening of three franchiselocations in 2006, as well as the discharge of deferred franchise fees involvedin the purchase of one franchisee’s operations. As of September 30, 2006, nearly all of the deferred income wascomprised of the non-refundable franchise fee received by Fatburger for eachfuture franchise location.  These initialfees generally represent half of the total fee per location.  The balance of the franchise fee(approximately an additional $3.9 million) will be collected in the future whenleases on these specific franchise locations are signed.

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*Notes Payable*

As of September 30, 2006,our notes payable (excluding borrowings on real estate) totaled $7.9 million,including $6.7 million of debt held at Fatburger, $0.7 million at Centrisoft,and $0.5 million at DAC.  This comparesto $6.9 million at December 31, 2005. The increase was primarily due to additional net borrowings of $0.9 millionand the assumption of notes payable in the amount of $0.1 million relating tothe purchase of one franchisee location.

*Accrued Expenses and Other Liabilities*

AccruedExpenses and Other Liabilities totaled $11.0 million at September 30, 2006,compared with $9.5 million at December 31, 2005.
|                                               | ** ** | **September 30, 2006**     | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **(dollars in thousands)** | ** ** |
| Accounts payable                              |       | $                                    | 5,483      |                            | $          | 3,591 |   |
| Sales deposits                                |       | 1,408                                |       | 803                             |       |
| Accrued wages,  bonus and commissions         |       | 1,395                                |       | 581                             |       |
| Other                                         |       | 2,686                                |       | 4,561                           |       |
| Total accrued expenses  and other liabilities |       | $                                    | 10,972     |                            | $          | 9,536 |   |

 

*Deferred Income Taxes*

Deferred income taxesdecreased $1.3 million to $4.4 million at September 30, 2006, compared to $5.7million at December 31, 2005.  During thenine months ended September 30, 2006, we determined that it was more likelythan not that certain NOL carryovers would be available to offset prior taxableincome.  As a result, we recognized anincome tax benefit of $1.2 million and reduced the deferred tax liability bythe same amount.  During the nine monthsended September 30, 2005, a provision for income taxes was not required due tothe net operating loss generated during the period.

**Liquidityand 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 nine months of 2006 consisted of cash provided by proceeds from thesale of real estate and loans, new borrowings, and the repayments to us fromborrowers.  As of September 30, 2006, wehad cash or cash equivalents of $1.7 million, which, together with projectedborrowings and proceeds from the sales of assets, we believe will be sufficientto meet our current liquidity needs.

At September 30,2006, we had total consolidated secured indebtedness of $21.7 million, as wellas $19.2 million of other liabilities. Our consolidated secured indebtedness consisted of:

·                  $10.4million in capital leases maturing between 2010 and 2040 which are secured byreal estate;

·                  mortgagenotes payable of $3.4 million secured by our two Barcelona properties;

·                  notespayable and other debt of Fatburger of $6.7 million secured by the assets ofFatburger;

·                  $0.5million of short-term borrowings secured by the assets of DAC International;and

·                  $0.7 million ofnotes payable secured by the assets of Centrisoft.

We consider thesale of assets to be a normal, recurring part of our operations and we arecurrently generating 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 operations do not currently generate sufficient cash to cover operating andoverhead expenses.  We believe that ourexisting sources of funds will be adequate to meet our liquidity needs;however, there can be no assurance that this will be the case.

*LiquidityRisks*

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:

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*Interestrate risk*

Our borrowings andthe availability of further borrowings are substantially affected by, amongother things, changes in interest rates, changes in market spreads or decreasesin credit quality of our assets. Material increases in interest expense from variable-rate fundingsources, or material decreases in monthly cash receipts from operations,generally would negatively impact our liquidity.  On the other hand, material decreases ininterest expense from variable-rate funding sources would positively affect ourliquidity.  Fluctuations in interestrates will impact our net income to the extent our operations and our fixedrate assets are funded by variable rate debt. We may also be impacted to the extent that our variable rate assetsre-price on a different schedule or in relation to a different index than anyfloating rate debt.  See *Item 3 – Quantitative and Qualitative Disclosures about Market Risk*for further analysis.

*Fatburgerdebt 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 after servingnotice.  As such, on our ConsolidatedStatements of Financial Condition, $4.0 million of long-term debt has beenclassified as current at September 30, 2006, and $4.2 million at December 31,2005, that would otherwise be classified as non-current.  The lender has not demanded early repaymentof the loans, however, if the lender exercises its right to demand repayment,our liquidity could be negatively affected.

*Fatburgerexpansion*

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.

*Centrisoftoperations*

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 own operationsin the near term.

*Dividends*

In the first quarter of2006, we declared a cash distribution of $0.13 per share (approximately $1.0million in total).  No dividends weredeclared or paid in the second or third quarters of 2006.  While we do not have a fixed dividend policy,we may declare and pay new dividends on our common stock, subject to ourfinancial condition, results of operations, capital requirements and otherfactors deemed relevant by the Board of Directors.  One factor the Board of Directors mayconsider 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.

*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 otherthan established 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 commonstock.  There can be no assurance thatour common stock will not become treated as penny stock.

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**Off Balance Sheet Arrangements**

In order tofacilitate the development of franchise locations, as of September 30, 2006,Fatburger had guaranteed the annual minimum lease payments of five restaurantsites owned and operated by franchisees. The guarantees approximate $1.5 million plus certain contingent rentalpayments as defined in the respective leases. These leases expire at various times through 2015.

The lease guarantees by Fatburgerdo not provide us with a material source of liquidity, capital resources orother benefits. There are no revenues, expenses or cash flows connected withthe lease guarantees other than the receipt of normal franchise royalties.

In October 2006, onefranchisee, whose lease is partially guaranteed by Fatburger, failed to makethe monthly lease payment. As a result, Fatburger made the payment under theguarantee. The total amount of our obligation under the guarantee on this leaseis approximately $200,000. We are considering our options to formally assumethe lease and operation of the restaurant location.

As of September 30, 2006,we were not aware of any other event or demand that was likely to trigger theguarantee 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 $12.6 million as of September 30, 2006.

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## **ITEM3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

Our market riskresults from instruments entered into other than for trading purposes andconsists primarily of exposure to loss resulting from changes in foreigncurrency exchange rates, interest rates and commodity prices.

*ForeignCurrency Exchange Rate Risk*

Our exposure to foreigncurrency fluctuations arises mainly from our investment in Barcelona realestate.  As of September 30, 2006,approximately 59% of our equity is invested in net assets located outside ofthe United States, primarily denominated in the euro.  The following table illustrates the projectedeffect on our net asset value as a result of hypothetical changes in foreigncurrency rates as of September 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%                                              |       | $                                                                  | (2,065,000 | )                                                                                  | -11.8      | % |
| Decrease 10%                                              |       | $                                                                  | (1,032,000 | )                                                                                  | -5.9       | % |
| No Change                                                 |       | $                                                                  | —     |                                                                               | 0.0        | % |
| Increase 10%                                              |       | $                                                                  | 1,032,000  |                                                                               | 5.9        | % |
| Increase 20%                                              |       | $                                                                  | 2,065,000  |                                                                               | 11.8       | % |

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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 September 30, 2006.

*InterestRate Risk*

Changes ininterest rates can affect net income by increasing the cost associated withoperating 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.

*Other Market Risks*

Our restaurantoperations are exposed to the impact of commodity and utility pricefluctuations related to unpredictable factors such as weather and various othermarket conditions outside our control. Our ability to recover increased costs through higher prices is limitedby the competitive environment in which we operate.

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**ITEM 4.  CONTROLS ANDPROCEDURES**

*Evaluation of disclosure controlsand procedures*

Our Chief Executive Officer and our ChiefFinancial Officer, after evaluating the effectiveness of the Company’s “disclosurecontrols and procedures” (as defined in the Securities and Exchange Act of 1934Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by thisreport, have concluded that our disclosure controls and procedures wereeffective and designed to ensure that material information relating to us andour consolidated subsidiaries is accumulated and communicated to our managementto allow timely decisions regarding required disclosure.

*Changes in internal control overfinancial reporting*

There were no significant changes in our internalcontrol over financial reporting in connection with an evaluation that occurredduring our third fiscal quarter of 2006 that have materially affected or arereasonably likely to materially affect our internal control over financialreporting.

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## **PART II – OTHER INFORMATION**

**ITEM 1.  LEGALPROCEEDINGS**

*NASDAQ Delisting*

EffectiveOctober 14, 2004, our common stock began trading in the over-the-counter market.  Prior to that, our common stock was quoted onthe NASDAQ National Market.  OnJuly 20, 2004, we were notified by NASDAQ of a staff determination to delistour common stock effective July 29, 2004. We were unsuccessful in appealing the determination and our common stock was delisted from theNASDAQ National Market on October 14, 2004.  We subsequently requested a review of the delistingby NASDAQ’s Listing and Hearing Review Council and by the Securities andExchange Commission (“SEC”).  Thoseappeals were also unsuccessful.  OnFebruary 17, 2006, we filed a petition for review of the SEC decision with theUnited States Court of Appeals, District of Columbia Circuit.  Oral argument is scheduled for November 20,2006.  Therecan be no assurance that our petition for review will be successful.

*Shareholder Derivative 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 Courtdismissed the entire derivative lawsuit, ruling that Mr. McCoon wasunfit to represent our stockholders.  Mr.McCoon has filed an appeal to this ruling.

**ITEM 1A.  RISKFACTORS**

In addition to theother information contained in this quarterly report, you should carefully readand consider the following risk factors. If any of these risks actually occur, our business, financial conditionor operating results could be materially adversely affected and the tradingprice of 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 priceof our common stock is less than $5.00 per share, trading in our common stockis subject to Rule 15g-9 of the Securities Exchange Act of 1934, asamended.  Under that Rule, brokers whorecommend such securities to persons other than established customers andaccredited investors must satisfy special sales practice requirements,including an individualized written suitability determination for the purchaserand the purchaser’s written consent prior to any transaction.  The Securities Enforcement Remedies and PennyStock Reform Act of 1990 also requires additional disclosure in connection withany trades involving a stock defined as a penny stock (generally, any equitysecurity not traded on an exchange or quoted on NASDAQ that has a market priceof less than $5.00 per share), including the delivery of a disclosure scheduleexplaining the penny stock market and the associated risks.  Such requirements could severely limit themarket liquidity of our common stock.

*Changes in interest rates and currencyexchange rates affect our net income.*

Our borrowings and theavailability of further borrowings are substantially affected by, among otherthings, changes in interest rates. Fluctuations in interest rates will affect our net income to the extentour operations and our fixed rate assets are funded by variable rate debt.

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We are also affected byforeign currency exchange rate changes, as a significant portion of our assetsare invested in foreign currencies, mainly the euro.  See *Item 3- Quantitative and Qualitative Disclosures about Market Risk* forfurther analysis.

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

Our future performancewill depend largely on the efforts and abilities of our key executive, financeand accounting, and managerial personnel, and on our ability to attract andretain them.  The loss of one or more ofour senior management personnel may adversely affect our business, financialcondition or operating results.  When welose key employees, new employees must spend a significant amount of timelearning our business model in addition to performing their regular duties andintegration of these individuals often results in some disruption to ourbusiness.  In addition, our ability toexecute our business strategy will depend on our ability to recruit and retainkey personnel.  Our key employees are notobligated to continue 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 and may 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 the 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.

*Changesto our liquidity may affect our net income and future business plans.*

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 next year. The Company hasexperienced losses from operations since its 2004 fiscal year. During thisperiod, the Company’s operations and activities have become more focused onrestaurant and other more typical commercial business activities and have beentransitioning away from finance and real estate activities. The growthstrategies for the restaurant and other commercial operations, as well asadministrative cost burdens may threaten the Company’s liquidity position.

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, but are not limited to, currency andinterest rate risk, Fatburger’s non-compliance with debt covenants, Fatburger’sexpansion, Centrisoft’s operations, and the declaration and payment ofdividends.

**Risks related to Fatburger**

*Fatburgerdebt 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 after servingnotice.  As such, on the Company’sConsolidated Statements of Financial Condition, $4.0 million of long-term debthas been classified as current at September 30, 2006, and $4.2 million atDecember 31, 2005, that would otherwise be classified as non-current.  The lender has not demanded early repaymentof the loans, however, if the lender exercises its right to demand repayment,our liquidity could be negatively affected.

*Fatburgermay not be able to achieve its planned expansion.*

We intend to growFatburger primarily through developing additional new franchisee andCompany-owned restaurants.  Developmentinvolves substantial risks, including:

·                  the availability of financingto Fatburger and to franchisees at acceptable rates and upon acceptable terms;

·                  the availability of sufficientliquidity to fund continued expansion;

·                  development costs exceedingbudgeted or contracted amounts;

·                  delays in the completion of construction;

·                  the inability to identify, orthe unavailability of, suitable sites on acceptable leasing or purchase terms;

·                  developed properties notachieving desired revenue or cash flow levels once opened;

·                  incurring substantialunrecoverable costs in the event that a development project is abandoned priorto completion;

·                  the inability to obtain allrequired governmental permits;

·                  changes in governmental rules,regulations and interpretations; and

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·                  changes in general economic and businessconditions.

Although we intend tomanage Fatburger’s development to reduce such risks, we cannot assure you thatpresent or future development will perform in accordance with ourexpectations.  We cannot assure you thatwe will complete the development and construction of the restaurants, or thatany such development will be completed in a timely manner or within budget, orthat any restaurants 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.

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

We are implementing anationwide and international expansion of franchise and company-owned locationsof Fatburger, which will require significant liquidity.  If Fatburger or its franchisees areunsuccessful in obtaining capital sufficient to fund this expansion, the timingof restaurant openings may be delayed and Fatburger’s results may be harmed.

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

One of the biggestchallenges in meeting our growth objectives for Fatburger will be to secure anadequate supply of suitable new restaurant sites.  We have experienced delays in opening someFatburger restaurants and may experience delays in the future.  There can be no assurance that sufficientsuitable locations will be available for our planned expansion in any futureperiod.  Delays or failures in openingnew restaurants could materially adversely affect Fatburger’s performance andour business, financial condition, operating results and cash flows.  In addition, Fatburger is contemplatingexpanding into international markets in Asia, which may have additionalchallenges and requirements.

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

We anticipate that newFatburger restaurants will generally take several months to reach normalizedoperating levels due to inefficiencies typically associated with newrestaurants, including lack of market awareness, the need to hire and train asufficient number of team members, operating costs, which are often materiallygreater during the first several months of operation than thereafter,pre-opening costs and other factors. Further, some, or all of the new restaurants may not attain anticipatedoperating results or results similar to those of Fatburger’s existingrestaurants.  In addition, restaurantsopened in new markets may open at lower average weekly sales volumes thanrestaurants opened in existing markets, and may have higher restaurant-leveloperating expense ratios than in existing markets.  Sales at restaurants opened in new marketsmay take longer to reach average annual company-owned restaurant sales, if atall, thereby affecting the profitability of these restaurants.

*Fatburger’s existing systems and procedures may beinadequate to support our growth plans.*

We face the risk thatFatburger’s existing systems and procedures, restaurant management systems,financial controls, information and accounting systems, management resourcesand human resources will be inadequate to support our planned expansion ofcompany-owned and franchised restaurants. Expansion may strain Fatburger’s infrastructure and other resources,which could slow restaurant development or cause other problems.  We may not be able to respond on a timelybasis to all of the changing demands that our planned expansion will impose onFatburger’s infrastructure and other resources. Any failure by us to continue to improve our infrastructure or to manageother factors necessary for us to achieve Fatburger’s expansion objectivescould have a material adverse effect on our operating results.

*The quick service restaurant segment is highlycompetitive, and that competition could lower revenues, margins and marketshare.*

The quick-servicerestaurant industry is highly competitive with respect to price, service,location, personnel and the type and quality of food, and there are manywell-established competitors.  Each ofFatburger’s restaurants competes directly and indirectly with a large number ofnational and regional restaurant chains, as well as with locally-owned quick-servicerestaurants, fast casual restaurants, and sandwich shops and other similartypes of businesses.  The trend toward aconvergence in grocery, deli and restaurant services may increase the number ofFatburger’s competitors.  Such increasedcompetition could have a material adverse affect on Fatburger’s financialcondition and results of operations. Some of Fatburger’s competitors have substantially greater financial,marketing, operating and other resources than we have, which may give them acompetitive advantage.  Certain ofFatburger’s competitors have introduced a variety of new products and engagedin substantial price discounting in recent years and may continue to do so inthe future.  There can be no assurance asto the success of any of Fatburger’s new products, initiatives or overallstrategies, or assurance that competitive product offerings, pricings andpromotions will not have an adverse effect upon Fatburger’s financial conditionand results of operations.

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

The quick-servicerestaurant industry is affected by changes in international, national,regional, and local economic conditions, consumer preferences and spendingpatterns, demographic trends, consumer perceptions of food safety, weather,traffic patterns, the type, number and location of competing restaurants, andthe effects of war or terrorist activities and any governmental responsesthereto. Factors such as inflation, food costs, labor and benefit costs, legalclaims, and the availability of management and hourly employees also affectrestaurant operations and administrative expenses.  The ability of Fatburger and its franchiseesto finance new restaurant development, improvements and additions to existingrestaurants, and the acquisition of restaurants from, and sale of restaurantsto, franchisees is affected by economic conditions, including interest ratesand other government policies impacting land and construction costs and thecost and availability of borrowed funds.

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*Increasesin the minimum wage may have a material adverse effect on Fatburger’s businessand financial results.*

Fatburger has asubstantial number of employees who are paid wage rates at or slightly abovethe minimum wage.  As federal and stateminimum wage rates increase, Fatburger may need to increase not only the wagesof its minimum wage employees, but also the wages paid to the employees at wagerates which are above minimum wage.  Ifcompetitive pressures or other factors prevent Fatburger from offsetting theincreased costs 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.

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

Reports, whether true ornot, of food-borne illnesses (such as e-coli, avian flu, bovine spongiformencephalopathy, hepatitis A, trichinosis or salmonella) and injuries caused byfood tampering have in the past severely injured the reputations ofparticipants in the quick service restaurant segment and could in the futureaffect Fatburger as well.  Fatburger’sbrand reputation is an important asset to the business; as a result, anythingthat damages the brand’s reputation could immediately and severely hurt salesand, accordingly, revenues and profits. If customers become ill from food-borne illnesses, Fatburger could alsobe forced to temporarily close some restaurants.  In addition, instances of food-borne illnessesor food tampering, even those occurring solely at the restaurants ofcompetitors, could, by resulting in negative publicity about the restaurantindustry, adversely affect sales on a local, regional or system-wide basis.  A decrease in customer traffic as a result ofthese health concerns or negative publicity, or as a result of a temporaryclosure of any Fatburger restaurants, could materially harm Fatburger’sbusiness.

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

The foodservice industryis affected by consumer preferences and perceptions.  Fatburger’s success depends, in part, uponthe popularity of burgers and quick-service dining.  Shifts in consumer preferences away from thiscuisine or dining style could have a material adverse affect on our futureprofitability.  The restaurant industryis characterized by the continual introduction of new concepts and is subjectto rapidly changing consumer preferences, tastes and eating and purchasinghabits.  While burger consumption in theUnited States has grown over the past 20 years, the demand may not continue togrow or taste trends may change.  Fatburger’ssuccess will depend in part on our ability to anticipate and respond tochanging consumer preferences, tastes and eating and purchasing habits, as wellas other factors affecting the food service industry, including new marketentrants and demographic changes.  Ifprevailing health or dietary preferences and perceptions cause consumers toavoid these products offered by Fatburger restaurants in favor of alternativeor healthier foods, demand for Fatburger’s products may be reduced and itsbusiness could be harmed.

*Fatburger is subject to health, employment,environmental and other government regulations, and failure to comply withexisting or future government regulations could expose Fatburger to litigation,damage Fatburger’s reputation and lower profits.*

Fatburger and itsfranchisees are subject to various federal, state and local laws affectingtheir businesses.  The successfuldevelopment and operation of restaurants depend to a significant extent on theselection and acquisition of suitable sites, which are subject to zoning, landuse (including the placement of drive-thru windows), environmental (includinglitter), traffic and other regulations. Restaurant operations are also subjectto licensing and regulation by state and local departments relating to health,food preparation, sanitation and safety standards, federal and state labor laws(including applicable minimum wage requirements, overtime, working and safetyconditions and citizenship requirements), federal and state laws prohibitingdiscrimination and other laws regulating the design and operation of facilities,such as the Americans with Disabilities Act of 1990.  If Fatburger fails to comply with any ofthese laws, it may be subject to governmental action or litigation, and itsreputation could be accordingly harmed. Injury to Fatburger’s reputation would, in turn, likely reduce revenuesand profits.

In recent years, therehas been an increased legislative, regulatory and consumer focus on nutritionand advertising practices in the food industry, particularly among quickservice restaurants.  As a result,Fatburger may become subject to regulatory initiatives in the area of nutritiondisclosure or advertising, such as requirements to provide information aboutthe nutritional content of its food products, which could increaseexpenses.  The operation of Fatburger’sfranchise system is also subject to franchise laws and regulations enacted by anumber of states and rules promulgated by the U.S. Federal Trade Commission.Any future legislation regulating franchise relationships may negatively affectFatburger’s operations, particularly its relationship with itsfranchisees.  Failure to comply with newor existing franchise laws and regulations in any jurisdiction or to obtainrequired government approvals could result in a ban or temporary suspension onfuture franchise sales.  Changes inapplicable accounting rules imposed by governmental regulators or privategoverning bodies could also affect Fatburger’s reported results of operations,and thus cause our stock price to fluctuate or decline.

*Fatburger’s earnings and business growth strategydepends in large part on the success of its franchisees, and Fatburger’sreputation may be harmed by actions taken by franchisees that are outside ofits control.*

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A portion of Fatburger’searnings comes from royalties and other amounts paid by Fatburger’sfranchisees.  Franchisees are independentcontractors, and their employees are not employees of Fatburger.  Fatburger provides training and support to,and monitors the operations of, its franchisees, but the quality of theirrestaurant operations may be diminished by any number of factors beyondFatburger’s control.  Consequently,franchisees may not successfully operate stores in a manner consistent withFatburger’s high standards and requirements and franchisees may not hire andtrain qualified managers and other restaurant personnel.  Any operational shortcoming of a franchiserestaurant is likely to be attributed by consumers to an entire brand, thusdamaging Fatburger’s reputation and potentially affecting revenues andprofitability.

**Risksrelated to Centrisoft**

*If Centrisoft is unable to competesuccessfully in the highly competitive market for network productivity andsecurity products for any reason, its business will fail.*

Centrisoft is an earlystage company that currently has a limited customer base.  The market for enterprise networkproductivity and security products is intensely competitive and we expectcompetition to intensify in the future. An increase in competitive pressures in this market or Centrisoft’sfailure to compete effectively may result in pricing reductions, reduced grossmargins and a failure to obtain market share. Other competitors offering similar products have longer operating histories,greater name recognition, larger customer bases and significantly greaterfinancial, technical, marketing and other resources than Centrisoft does.  In addition, larger competitors may bundleproducts competitive with Centrisoft’s with other products that they may sellto our potential customers.  Thesecustomers may accept these bundled products rather than separately purchasingour products.

*Customer demand, competitivepressure and rapid changes in technology and industry standards could renderCentrisoft’s products and services unmarketable or obsolete, and Centrisoft maybe unable to introduce new or improved products and services, or updateexisting products or services, timely and successfully.*

To succeed, Centrisoftmust continually change and improve its products, add new products andservices, provide updates to products and services and replace existingproducts and services in response to changes in customer demand, competitivepressure, rapid technological developments and changes in operating systems,Internet access and communications, application and networking software,computer and communications hardware, programming tools, computer languagetechnology and computer hacker techniques. Centrisoft may be unable tosuccessfully and timely develop and introduce these new, improved or updatedproducts and services or achieve and maintain market acceptance for new,improved or updated products and services we develop and introduce.

The development andintroduction of new, enterprise network and security products or providingupdates to existing products, is a complex and uncertain process that requiresgreat innovation, the ability to anticipate technological and market trends,the ability to deliver updates in a timely fashion and the ability to obtainrequired domestic and foreign governmental and regulatory certifications.

Releasing new orimproved products and services, or updates to products or services, prematurelymay result in quality problems, and releasing them late may result in loss ofcustomer confidence and market share. When Centrisoft introduces new or enhanced products and services, it maybe unable to successfully manage the transition from its existing products andservices to deliver enough new products and services to meet customer demand.

*Undetected product errors ordefects could result in loss of revenues, delayed market acceptance and claimsagainst Centrisoft.*

Centrisoft’s productsand services may contain undetected errors or defects, especially when firstreleased.  Despite extensive testing,some errors are discovered only after a product has been installed and used bycustomers.  Any errors discovered aftercommercial release could result in loss of revenues or claims against Centrisoftor its resellers.

*Centrisoft may be required to defend lawsuits or paydamages in connection with the alleged or actual failure of Centrisoft’sproducts and services.*

Because Centrisoft’sproducts provide and monitor network security and may protect valuableinformation, Centrisoft may face claims for product liability, tort or breachof warranty relating to its products and services.  Anyone who circumvents Centrisoft’s securitymeasures could misappropriate the confidential information or other property ofend-users using our products and services or interrupt their operations.  If that happens, affected end-users orchannel customers may sue Centrisoft.  Inaddition, Centrisoft may face liability for breaches caused by faultyinstallation and implementation of its products by end-users or channelcustomers.  Although Centrisoft attemptsto reduce the risk of losses from claims through contractual warrantydisclaimers and liability limitations, these provisions may be unenforceable.  Some courts, for example, have foundcontractual limitations of liability in standard software licenses to beunenforceable because the licensee does not sign the license.  Defending a suit, regardless of its merit,could be costly and could divert management attention.  Although Centrisoft currently maintainsbusiness liability insurance, this coverage may be inadequate or may beunavailable in the future on acceptable terms, if at all.

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*Centrisoft may be unable toadequately protect our proprietary rights, which may limit its ability tocompete effectively.*

Despite Centrisoft’sefforts to protect its proprietary rights, unauthorized parties maymisappropriate or infringe on its patents, trade secrets, copyrights,trademarks, service marks and similar proprietary rights.  Centrisoft may, however, be unsuccessful inprotecting its trade secrets or, even if successful, any required litigationmay be costly and time consuming, which could harm our business.

If Centrisoft fails toobtain and maintain patent protection for our technology, we may be unable tocompete effectively.  In addition,Centrisoft relies on unpatented proprietary technology.  Because this proprietary technology does nothave patent protection, Centrisoft may be unable to meaningfully protect thistechnology from unauthorized 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.

**Risksrelated to our real estate holdings and our mortgage brokerage business**

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

Our economic performance and the value of our real estateassets, and consequently the value of our stock, are subject to the risk thatif our real estate properties do not generate revenues sufficient to meet ouroperating expenses, including debt service and capital expenditures, our cashflow will be adversely affected.  Thefollowing factors, among others, may adversely affect the income generated byour real estate properties:

 

·                  downturns in theinternational, national, regional and local economic conditions (particularlyincreases in unemployment);

·                  competition from other officeand commercial buildings;

·                  local real estate marketconditions, particularly in Barcelona, Spain and southern California, such asoversupply or reduction in demand for office or other commercial or residentialspace;

·                  changes in interest rates andavailability of attractive financing;

·                  vacancies, changes in marketrental rates and the need to periodically repair, renovate and re-let space;

·                  increased operating costs,including insurance expense, utilities, real estate taxes, state and localtaxes and heightened security costs;

·                  civil disturbances, naturaldisasters, or terrorist acts or acts of war which may result in uninsured orunderinsured losses;

·                  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

·                  decreases in theunderlying value of our real estate.

*Acquired properties may expose us to unknown liability.*

We may acquire properties subject to liabilities and withoutany recourse, or with only limited recourse against the prior owners or otherthird 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 orother persons against 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.

 

*Becausewe rely on our ability to sell assets to generate liquidity, fluctuations inthe real estate market could negatively 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, whichmay limit our flexibility.*

Properties like the onesthat we own could be difficult to sell. This may limit our ability to change our portfolio promptly in responseto changes in economic or other conditions. In addition, tax laws limit our ability to sell properties and this mayaffect our ability to sell properties without adversely affecting ourperformance or returns.  Theserestrictions reduce our ability to respond to changes in the performance of ourinvestments and could adversely affect our financial condition and results ofoperations.

*Exposureto the Southern California commercial real estate market could affect resultsfor George Elkins.*

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.

*Competitivepressures in the commercial mortgage business could harm our business.*

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The commercialmortgage brokerage is highly competitive, and George Elkins competes withlarger, better established competitors who often have greater resources thanGeorge Elkins.  If George Elkins isunable to successfully compete against its competitors, its business will beharmed and our financial results could suffer.

**ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

None.

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

Not applicable.

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

**None.**

**ITEM 5.  OTHERINFORMATION**

*RelatedParty Transactions*

Duringthe three months ended September 30, 2006, the Company accepted assignment of afractional interest lease, between NetJets Services Inc. and an entitycontrolled by the Company’s chief executive officer, Andrew A. Wiederhorn, forthe lease of a 6.25% undivided interest in an aircraft.  The lease calls for annual payments ofapproximately $420,000 plus specific costs relating to the operation of theaircraft.  The lease expires in December2010, however, the Company can terminate the lease with 90 days noticebeginning in December 2008.

Subsequentto September 30, 2006, the Company entered into a capital lease of a privateaircraft.  The agreement calls formonthly lease payments of $6,409 and the Company is responsible for alloperating and maintenance costs of the aircraft.  The lessor has the option to require theCompany to purchase the aircraft for $2.0 million between August 1, 2008 andJuly 31, 2009.  The Company’s chiefexecutive officer, Andrew A. Wiederhorn, owns 25% of the lessor.

**ITEM 6. EXHIBITS**

3.1                                 Amendedand Restated Articles of Incorporation of the Registrant, incorporated byreference 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                                 Bylawsof the Registrant, incorporated by reference to Exhibit 3.2 to Amendment No. 3to the Registration Statement (Registration No. 333-39035) on Form S-11, aspreviously filed with the SEC on March 30, 1998.

4.1                                 CommonStock Certificate Specimen, incorporated by reference to Exhibit 4.1 toAmendment No. 3 to the Registration Statement (Registration No. 333-39035) onForm S-11, as previously filed with the SEC on March 30, 1998.

4.2                                 Formof Registration Rights Agreement, incorporated by reference to Exhibit 10.8 toAmendment No. 3 to the Registration Statement (Registration No. 333-39035) onForm S-11, as previously filed with the SEC on March 30, 1998.

4.3                                 Formof Stock Option Plan, incorporated by reference to Exhibit 10.3 to AmendmentNo. 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 amongAndrew A. Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, TiffanyWiederhorn, and the Registrant, dated July 31, 2002, incorporated by referenceto Exhibit 2.1 to the Form 8-K dated August 8, 2002, as previously filed withthe SEC on August 15, 2002.

4.5                                 Summaryof Rights to Purchase Shares, incorporated by reference to Exhibit 99.1 to theForm 8-K dated October 18, 2002, as previously filed with the SEC on October18, 2002.

4.6                                 RightsAgreement dated as of October 18, 2002 between the Registrant and The Bank ofNew York, incorporated by reference to Exhibit 1 to Form 8-A, as previouslyfiled with the SEC on October 29, 2002.

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4.7                                 Amendmentto the Rights Agreement, dated as of May 1, 2004, by and between the Registrantand The Bank of New York, incorporated by reference to Exhibit 4.7 to Form 10-Kfor the year ended December 31, 2004, as previously filed with the SEC on March30, 2005.

4.8                                 LongTerm Vesting Trust Agreement among the Registrant and Lawrence Mendelsohn,Andrew Wiederhorn and David Egelhoff, dated October 1, 2000, incorporated byreference 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                                 AmendmentNumber 1 to the Long Term Vesting Trust Agreement dated as of September 19,2002, by and between the Registrant and Andrew Wiederhorn, Don Coleman, andDavid Dale-Johnson, incorporated by reference to Exhibit 4.9 to Form 10-K forthe year ended December 31, 2004, as previously filed with the SEC on March 30,2005.

4.10                           AmendmentNumber 2 to the Long Term Vesting Trust Agreement, dated as of May 26, 2004, byand between the Registrant and Andrew Wiederhorn, Don Coleman, and DavidDale-Johnson, incorporated by reference to Exhibit 4.10 to Form 10-K for theyear ended December 31, 2004, as previously filed with the SEC on March 30,2005.

10.1                           Amendedand restated employment agreement between Fog Cutter Capital Group Inc. andAndrew A. Wiederhorn effective as of June 1, 2006, incorporated by reference toExhibit 10.1 to Form 8-K dated July 21, 2006, as previously filed with the SECon July 25, 2006.

10.2                           Employmentagreement between Fog Cutter Capital Group Inc. and R. Scott Stevensoneffective as of June 1, 2006, incorporated by reference to Exhibit 10.2 to Form8-K dated July 21, 2006, as previously filed with the SEC on July 25, 2006.

11.1         Computation of Per Share Earnings.

31.1                           Certificationof Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

31.2                           Certificationof Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

32.1                           Certificationof the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2                           Certificationof the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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:  November 13, 2006

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EXHIBIT INDEX

3.1                               Amendedand Restated Articles of Incorporation of the Registrant, incorporated byreference 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                                 Bylawsof the Registrant, incorporated by reference to Exhibit 3.2 to Amendment No. 3to the Registration Statement (Registration No. 333-39035) on Form S-11, aspreviously filed with the SEC on March 30, 1998.

4.1                                 CommonStock Certificate Specimen, incorporated by reference to Exhibit 4.1 toAmendment No. 3 to the Registration Statement (Registration No. 333-39035) onForm S-11, as previously filed with the SEC on March 30, 1998.

4.2                                 Formof Registration Rights Agreement, incorporated by reference to Exhibit 10.8 toAmendment No. 3 to the Registration Statement (Registration No. 333-39035) onForm S-11, as previously filed with the SEC on March 30, 1998.

4.3                                 Formof Stock Option Plan, incorporated by reference to Exhibit 10.3 to AmendmentNo. 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 amongAndrew A. Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, TiffanyWiederhorn, and the Registrant, dated July 31, 2002, incorporated by referenceto Exhibit 2.1 to the Form 8-K dated August 8, 2002, as previously filed withthe SEC on August 15, 2002.

4.5                                 Summaryof Rights to Purchase Shares, incorporated by reference to Exhibit 99.1 to theForm 8-K dated October 18, 2002, as previously filed with the SEC on October18, 2002.

4.6                                 RightsAgreement dated as of October 18, 2002 between the Registrant and The Bank ofNew York, incorporated by reference to Exhibit 1 to Form 8-A, as previouslyfiled with the SEC on October 29, 2002.

4.7                                 Amendmentto the Rights Agreement, dated as of May 1, 2004, by and between the Registrantand The Bank of New York, incorporated by reference to Exhibit 4.7 to Form 10-Kfor the year ended December 31, 2004, as previously filed with the SEC on March30, 2005.

4.8                                 LongTerm Vesting Trust Agreement among the Registrant and Lawrence Mendelsohn,Andrew Wiederhorn and David Egelhoff, dated October 1, 2000, incorporated byreference 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                                 AmendmentNumber 1 to the Long Term Vesting Trust Agreement dated as of September 19,2002, by and between the Registrant and Andrew Wiederhorn, Don Coleman, andDavid Dale-Johnson, incorporated by reference to Exhibit 4.9 to Form 10-K forthe year ended December 31, 2004, as previously filed with the SEC on March 30,2005.

4.10                           AmendmentNumber 2 to the Long Term Vesting Trust Agreement, dated as of May 26, 2004, byand between the Registrant and Andrew Wiederhorn, Don Coleman, and DavidDale-Johnson, incorporated by reference to Exhibit 4.10 to Form 10-K for theyear ended December 31, 2004, as previously filed with the SEC on March 30,2005.

10.1                           Amendedand restated employment agreement between Fog Cutter Capital Group Inc. andAndrew A. Wiederhorn effective as of June 1, 2006, incorporated by reference toExhibit 10.1 to Form 8-K dated July 21, 2006, as previously filed with the SECon July 25, 2006.

10.2                           Employmentagreement between Fog Cutter Capital Group Inc. and R. Scott Stevensoneffective as of June 1, 2006, incorporated by reference to Exhibit 10.2 to Form8-K dated July 21, 2006, as previously filed with the SEC on July 25, 2006.

11.1                           Computationof Per Share Earnings.

31.1                           Certificationof Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

31.2                           Certificationof Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

32.1                           Certificationof the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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32.2                           Certificationof the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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