##### ** **

##### **UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

#### **FORM10-Q**

#### ** **

**(Mark one)**

 
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|-----------------------------------------------------------------------------------------------|
|       |       |                                                                                          |
|       |       | **For the quarterly period ended September 30,  2007**                                        |
| ** ** | ** ** | ** **                                                                                    |
| **OR**     |
|       |       |                                                                                          |
| **£** | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**CommissionFile No. 0-23911**

 

**FogCutter Capital Group Inc.**

(Exact name ofregistrant as specified in its charter)

 

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

 

**1410 SWJefferson Street**

**Portland,OR  97201**

(Address ofprincipal executive offices) (Zip Code)

 

**(503)721-6500**

(Registrant’stelephone number, including area code)

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yeso  Nox

 

**APPLICABLEONLY TO CORPORATE ISSUERS:**

 

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

 
| **Class**                                  | ** ** | **Outstanding  at October 31, 2007** |
|--------------------------------------------|------------|--------------------------------------|
| Common Stock,  par value $0.0001 per share |       | 7,957,428 shares                     |

 

 

----

 

FOGCUTTER CAPITAL GROUP INC.

 

FORM 10-Q

 

I N D E X

 
|                                  | **Page No.**                                                                                |
|---------------------------------------|---------------------------------------------------------------------------------------------|
| **PART I—FINANCIAL INFORMATION** | **3**                                                                                       |
| ** **                            | ** **                                                                                  | ** ** |
| Item  1.                              | Interim Consolidated Financial  Statements (Unaudited):                                     | 3 |
|                                  |                                                                                        |   |
|                                  | 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 | 14 |
|                                  |                                                                                        |   |
| Item 3.                               | Quantitative  and Qualitative Disclosures about Market Risk                                 | 24 |
|                                  |                                                                                        |   |
| Item 4.                               | Controls and  Procedures                                                                    | 24 |
|                                  |                                                                                        |   |
| **PART II—OTHER  INFORMATION**   | **26**                                                                                      |
| ** **                            | ** **                                                                                  | ** ** |
| Item 1.                               | Legal Proceedings                                                                           | 26 |
|                                  |                                                                                        |   |
| Item  1A.                             | Risk Factors                                                                                | 26 |
|                                  |                                                                                        |   |
| Item 2.                               | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 26 |
|                                  |                                                                                        |   |
| Item 3.                               | Defaults  Upon Senior Securities                                                            | 26 |
|                                  |                                                                                        |   |
| Item 4.                               | Submission  of Matters to a Vote of Security Holders                                        | 26 |
|                                  |                                                                                        |   |
| Item 5.                               | Other Information                                                                           | 26 |
|                                  |                                                                                        |   |
| Item  6.                              | Exhibits                                                                                    | 26 |
|                                  |                                                                                        |   |
| Signatures                            | 28                                                                                          |

 

Available information

 

Our website iswww.fogcutter.com. We make our annual report on Form 10-K, as well as otherreports filed with the Securities and Exchange Commission, available throughour website as soon as reasonably practicable after they are filed. A copy ofthese reports may also be obtained by writing to us at 1410 SW JeffersonStreet, Portland, Oregon, 97201, Attn: Investor Reporting.

 

2

----

 

**PART I — FINANCIALINFORMATION**

## **ITEM1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

 

FOG CUTTER CAPITAL GROUPINC.

CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION

 *(dollars in thousands,except share data)*

 
| ** **                                                                                                                                                                                                             | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                             | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Assets                                                                                                                                                                                                                 |       |                         |       |                        |       |
| Current Assets:                                                                                                                                                                                                        |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                             |       | $                            | 712        |                        | $          | 1,824 |   |
| Accounts  receivable                                                                                                                                                                                                   |       | 1,743                        |       | 1,586                       |       |
| Notes receivable,  current portion                                                                                                                                                                                     |       | 556                          |       | 464                         |       |
| Loans to senior  executives                                                                                                                                                                                            |       | 1,129                        |       | 1,077                       |       |
| Inventories                                                                                                                                                                                                            |       | 3,435                        |       | 2,442                       |       |
| Investments in  real estate, held for sale, net                                                                                                                                                                        |       | 8,830                        |       | 11,062                      |       |
| Current assets  held for sale                                                                                                                                                                                          |       | —                       |       | 27                          |       |
| Other current  assets                                                                                                                                                                                                  |       | 401                          |       | 525                         |       |
| Total current  assets                                                                                                                                                                                                  |       | 16,806                       |       | 19,007                      |       |
|                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Investments in  real estate, net                                                                                                                                                                                       |       | 11,270                       |       | 11,502                      |       |
| Notes receivable                                                                                                                                                                                                       |       | 50                           |       | 371                         |       |
| Property, plant  and equipment, net                                                                                                                                                                                    |       | 10,475                       |       | 10,576                      |       |
| Intangible  assets, net                                                                                                                                                                                                |       | 5,055                        |       | 5,262                       |       |
| Goodwill                                                                                                                                                                                                               |       | 10,526                       |       | 10,526                      |       |
| Other assets  held for sale                                                                                                                                                                                            |       | —                       |       | 385                         |       |
| Other assets                                                                                                                                                                                                           |       | 1,951                        |       | 2,171                       |       |
| Total assets                                                                                                                                                                                                           |       | $                            | 56,133     |                        | $          | 59,800 |   |
|                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Liabilities and  Stockholders’ Equity                                                                                                                                                                             |       |                         |       |                        |       |
| Liabilities:                                                                                                                                                                                                           |       |                         |       |                        |       |
| Accounts payable  and accrued liabilities                                                                                                                                                                              |       | $                            | 13,068     |                        | $          | 10,658 |   |
| Sales deposits                                                                                                                                                                                                         |       | 1,821                        |       | 1,104                       |       |
| Current  liabilities associated with assets held for sale                                                                                                                                                              |       | —                       |       | 441                         |       |
| Borrowings and  notes payable, current portion                                                                                                                                                                         |       | 11,886                       |       | 13,453                      |       |
| Obligations  under capital leases, current portion                                                                                                                                                                     |       | 584                          |       | 608                         |       |
| Total current  liabilities                                                                                                                                                                                             |       | 27,359                       |       | 26,264                      |       |
|                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Borrowings and  notes payable                                                                                                                                                                                          |       | 6,511                        |       | 2,400                       |       |
| Obligations  under capital leases                                                                                                                                                                                      |       | 11,594                       |       | 11,883                      |       |
| Deferred income                                                                                                                                                                                                        |       | 5,111                        |       | 4,061                       |       |
| Deferred income  taxes                                                                                                                                                                                                 |       | —                       |       | 4,397                       |       |
| Total  liabilities                                                                                                                                                                                                     |       | 50,575                       |       | 49,005                      |       |
|                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Commitments and  contingencies                                                                                                                                                                                         |       |                         |       |                        |       |
|                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Minority  interests in consolidated subsidiaries                                                                                                                                                                       |       | 893                          |       | 441                         |       |
| Minority  interests in consolidated subsidiaries held for sale                                                                                                                                                         |       | —                       |       | 130                         |       |
|                                                                                                                                                                                                                   |       |                         |       |                        |       |
| 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, 2007 and December 31, 2006; 7,957,428 shares outstanding as  of September 30, 2007 and December 31, 2006 |       | 170,397                      |       | 168,965                     |       |
| Accumulated  deficit                                                                                                                                                                                                   |       | (153,723                     | )          | (146,732                    | )          |
| Treasury stock,  3,799,645 common shares as of September 30, 2007 and December 31, 2006, at  cost                                                                                                                      |       | (12,009                      | )          | (12,009                     | )          |
| Total  stockholders’ equity                                                                                                                                                                                       |       | 4,665                        |       | 10,224                      |       |
| Total liabilities  and stockholders’ equity                                                                                                                                                                       |       | $                            | 56,133     |                        | $          | 59,800 |   |

 

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

 

3

----

 

FOG CUTTER CAPITAL GROUPINC.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

*(dollars in thousands, exceptshare data)*

 
| ** **                                                                                                               | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                                                                                               | ** ** | **September 30,** | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                               | ** ** | **2007**               | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue:                                                                                                                 |       |                   |       |                            |       |   |   |   |   |
| Restaurant and  manufacturing sales                                                                                      |       | $                      | 10,212     |                            | $          | 9,810 |   | $ | 29,816 |   | $ | 28,348 |   |
| Restaurant  franchise and royalty fees                                                                                   |       | 599                    |       | 591                             |       | 1,706 |   | 1,826 |   |
| Real estate  rental income                                                                                               |       | 972                    |       | 928                             |       | 2,851 |   | 2,978 |   |
| Total revenue                                                                                                            |       | 11,783                 |       | 11,329                          |       | 34,373 |   | 33,152 |   |
|                                                                                                                     |       |                   |       |                            |       |   |   |   |   |
| Operating costs  and expenses:                                                                                           |       |                   |       |                            |       |   |   |   |   |
| Restaurant and  manufacturing cost of sales                                                                              |       | 5,709                  |       | 5,289                           |       | 17,010 |   | 15,753 |   |
| Real estate  operating expense                                                                                           |       | 313                    |       | 491                             |       | 1,022 |   | 1,163 |   |
| Engineering and  development                                                                                             |       | 360                    |       | 371                             |       | 1,091 |   | 1,167 |   |
| Depreciation and  amortization                                                                                           |       | 548                    |       | 475                             |       | 1,684 |   | 1,375 |   |
| Total operating costs  and expenses                                                                                      |       | 6,930                  |       | 6,626                           |       | 20,807 |   | 19,458 |   |
|                                                                                                                     |       |                   |       |                            |       |   |   |   |   |
| General and  administrative expenses:                                                                                    |       |                   |       |                            |       |   |   |   |   |
| Compensation and  employee benefits                                                                                      |       | 2,254                  |       | 2,616                           |       | 9,366 |   | 8,218 |   |
| Professional  fees                                                                                                       |       | 989                    |       | 1,014                           |       | 2,647 |   | 2,686 |   |
| Fees paid to related  parties                                                                                            |       | —                 |       | 47                              |       | — |   | 279 |   |
| Other                                                                                                                    |       | 4,043                  |       | 4,145                           |       | 12,539 |   | 11,092 |   |
| Total general  and administrative expenses                                                                               |       | 7,286                  |       | 7,822                           |       | 24,552 |   | 22,275 |   |
|                                                                                                                     |       |                   |       |                            |       |   |   |   |   |
| Non-operating  income (expense):                                                                                         |       |                   |       |                            |       |   |   |   |   |
| Gain on sale of  real estate                                                                                             |       | 13                     |       | 1,211                           |       | 13 |   | 2,905 |   |
| Gain on sale of  notes receivable                                                                                        |       | —                 |       | —                          |       | — |   | 496 |   |
| Interest income                                                                                                          |       | 93                     |       | 65                              |       | 197 |   | 242 |   |
| Interest expense                                                                                                         |       | (936                   | )          | (746                            | )          | (2,704 | ) | (1,875 | ) |
| Other income  (loss), net                                                                                                |       | (1,250                 | )          | 467                             |       | (1,086 | ) | 1,076 |   |
| Total  non-operating income (expense)                                                                                    |       | (2,080                 | )          | 997                             |       | (3,580 | ) | 2,844 |   |
|                                                                                                                     |       |                   |       |                            |       |   |   |   |   |
| Loss before  provision for income taxes, minority interests, and equity in income of  equity investees                   |       | (4,513                 | )          | (2,122                          | )          | (14,566 | ) | (5,737 | ) |
|                                                                                                                     |       |                   |       |                            |       |   |   |   |   |
| Minority  interest in losses                                                                                             |       | 193                    |       | 5                               |       | 676 |   | 71 |   |
| Equity in  earnings of equity investees                                                                                  |       | —                 |       | —                          |       | — |   | 748 |   |
| Income tax  benefit                                                                                                      |       | 4,385                  |       | 1,249                           |       | 4,385 |   | 1,249 |   |
|                                                                                                                     |       |                   |       |                            |       |   |   |   |   |
| Income (loss)  from continuing operations                                                                                |       | 65                     |       | (868                            | )          | (9,505 | ) | (3,669 | ) |
|                                                                                                                     |       |                   |       |                            |       |   |   |   |   |
| Income (loss)  from discontinued operations (including gain on sale of $2,492 for nine  months ended September 30, 2007) |       | —                 |       | (7                              | )          | 2,514 |   | 144 |   |
|                                                                                                                     |       |                   |       |                            |       |   |   |   |   |
| Net income  (loss)                                                                                                       |       | $                      | 65         |                            | $          | (875 | ) | $ | (6,991 | ) | $ | (3,525 | ) |
|                                                                                                                     |       |                   |       |                            |       |   |   |   |   |
| Basic earnings  (loss) per share from continuing operations                                                              |       | $                      | 0.01       |                            | $          | (0.11 | ) | $ | (1.19 | ) | $ | (0.46 | ) |
| Basic earnings  per share from discontinued operations                                                                   |       | $                      | —     |                            | $          | — |   | $ | 0.31 |   | $ | 0.02 |   |
| Basic earnings  (loss) per share                                                                                         |       | $                      | 0.01       |                            | $          | (0.11 | ) | $ | (0.88 | ) | $ | (0.44 | ) |
| Basic weighted  average shares outstanding                                                                               |       | 7,957,428              |       | 7,957,428                       |       | 7,957,428 |   | 7,957,428 |   |
| Diluted earnings  (loss) per share from continuing operations                                                            |       | $                      | 0.01       |                            | $          | (0.11 | ) | $ | (1.19 | ) | $ | (0.46 | ) |
| Diluted earnings  per share from discontinued operations                                                                 |       | $                      | —     |                            | $          | — |   | $ | 0.31 |   | $ | 0.02 |   |
| Diluted earnings  (loss) per share                                                                                       |       | $                      | 0.01       |                            | $          | (0.11 | ) | $ | (0.88 | ) | $ | (0.44 | ) |
| Diluted weighted  average shares outstanding                                                                             |       | 7,957,428              |       | 7,957,428                       |       | 7,957,428 |   | 7,957,428 |   |
|                                                                                                                     |       |                   |       |                            |       |   |   |   |   |
| Dividends  declared per share                                                                                            |       | $                      | —     |                            | $          | — |   | $ | — |   | $ | 0.13 |   |

 

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

 

4

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FOG CUTTER CAPITAL GROUP INC.

CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY

(Unaudited)

*(dollarsin thousands, except share data)*

 
| ** **                          | ** ** | **Common Stock**        | ** ** | **Treasury Stock** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-------------------------|------------|--------------------|------------|-----------------|------------|------------|------------|
| ** **                          | ** ** | **Shares ****(1)** | ** ** | **Amount**         | ** ** | **Shares**      | ** ** | **Amount** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance at  January 1, 2007         |       | 7,957,428               |       | $                  | 168,965    |            | 3,799,645  |       | $          | (12,009 | ) | $ | (146,732 | ) | $ | 10,224 |   |
| Comprehensive  income (loss):       |       |                    |       |               |       |            |       |       |       |   |   |   |   |
| Net loss                            |       | —                  |       | —             |       | —          |       | —     |       | (6,991 | ) | (6,991 | ) |
| Stock options  expensed in net loss |       | —                  |       | 1,432              |       | —          |       | —     |       | — |   | 1,432 |   |
| Balance at  September 30, 2007      |       | 7,957,428               |       | $                  | 170,397    |            | 3,799,645  |       | $          | (12,009 | ) | $ | (153,723 | ) | $ | 4,665 |   |

 

----

(1)    Issued and outstanding

 

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

 

5

----

 

FOGCUTTER CAPITAL GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

*(dollarsin thousands)*

 
| ** **                                                               | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                                               | ** ** | **September 30,** | ** ** | **September 30,**          | ** ** |
| ** **                                                               | ** ** | **2007**               | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                   |       |                   |       |                            |       |   |   |   |   |
| Net income  (loss)                                                       |       | $                      | 65         |                            | $          | (875 | ) | $ | (6,991 | ) | $ | (3,525 | ) |
| (Income) loss  from discontinued operations                              |       | —                 |       | 7                               |       | (2,514 | ) | (144 | ) |
| Income (loss)  from continuing operations                                |       | 65                     |       | (868                            | )          | (9,505 | ) | (3,669 | ) |
| Adjustments to  reconcile net income (loss) to net operating cash flows: |       |                   |       |                            |       |   |   |   |   |
| Equity in  earnings of equity investees                                  |       | —                 |       | —                          |       | — |   | (748 | ) |
| Depreciation and  amortization                                           |       | 788                    |       | 663                             |       | 2,413 |   | 1,896 |   |
| Gain on foreign  currency                                                |       | (546                   | )          | (114                            | )          | (799 | ) | (619 | ) |
| Gain on sale of  notes receivable and other assets                       |       | —                 |       | —                          |       | — |   | (496 | ) |
| Gain on sale of  real estate                                             |       | (13                    | )          | (1,211                          | )          | (13 | ) | (2,905 | ) |
| Share based  compensation                                                |       | 526                    |       | 188                             |       | 1,432 |   | 302 |   |
| Market value  impairment reserve                                         |       | 1,800                  |       | 46                              |       | 2,909 |   | 46 |   |
| Other                                                                    |       | (186                   | )          | 25                              |       | (590 | ) | 8 |   |
| Change in:                                                               |       |                   |       |                            |       |   |   |   |   |
| Other assets                                                             |       | (536                   | )          | (1,232                          | )          | (1,199 | ) | (1,453 | ) |
| Deferred income                                                          |       | 320                    |       | (180                            | )          | 1,050 |   | (230 | ) |
| Deferred income  taxes                                                   |       | (4,385                 | )          | (1,279                          | )          | (4,397 | ) | (1,363 | ) |
| Accounts payable  and accrued liabilities                                |       | 1,499                  |       | 1,751                           |       | 3,912 |   | 2,667 |   |
| Net cash used in  operating activities                                   |       | (668                   | )          | (2,211                          | )          | (4,787 | ) | (6,564 | ) |
|                                                                     |       |                   |       |                            |       |   |   |   |   |
| Cash flows from  investing activities:                                   |       |                   |       |                            |       |   |   |   |   |
| Proceeds from  sale of real estate                                       |       | 376                    |       | 6,004                           |       | 376 |   | 12,130 |   |
| Proceeds from  sale of notes receivable and other assets                 |       | —                 |       | —                          |       | — |   | 664 |   |
| Investment in  real estate                                               |       | (71                    | )          | (362                            | )          | (225 | ) | (1,629 | ) |
| Purchase of net  assets of restaurant operations                         |       | —                 |       | (80                             | )          | — |   | (768 | ) |
| Investments in  property, plant, and equipment                           |       | (243                   | )          | (1,594                          | )          | (2,003 | ) | (2,644 | ) |
| Other                                                                    |       | 236                    |       | 1,588                           |       | 211 |   | 1,568 |   |
| Net cash  provided by (used in) investing activities                     |       | 298                    |       | 5,556                           |       | (1,641 | ) | 9,321 |   |
|                                                                     |       |                   |       |                            |       |   |   |   |   |
| Cash flows from  financing activities:                                   |       |                   |       |                            |       |   |   |   |   |
| Proceeds from  borrowings                                                |       | 87                     |       | 3,274                           |       | 2,202 |   | 5,672 |   |
| Repayments on  borrowings                                                |       | (139                   | )          | (8,314                          | )          | (294 | ) | (9,463 | ) |
| Repayments under  capital leases                                         |       | (135                   | )          | (135                            | )          | (312 | ) | (409 | ) |
| Investments by  minority interests, net                                  |       | —                 |       | —                          |       | 1,100 |   | 225 |   |
| Dividend  payments on common stock                                       |       | —                 |       | —                          |       | — |   | (1,034 | ) |
| Net cash  provided by (used in) financing activities                     |       | (187                   | )          | (5,175                          | )          | 2,696 |   | (5,009 | ) |
|                                                                     |       |                   |       |                            |       |   |   |   |   |
| Effect of  exchange rate change on cash                                  |       | —                 |       | (25                             | )          | (1 | ) | (14 | ) |
| Net change in  cash and cash equivalents from continuing operations      |       | (557                   | )          | (1,855                          | )          | (3,733 | ) | (2,266 | ) |
|                                                                     |       |                   |       |                            |       |   |   |   |   |
| Net change in  cash and cash equivalents from discontinued operations:   |       |                   |       |                            |       |   |   |   |   |
| Net cash  provided by (used in) operating activities                     |       | 7                      |       | 183                             |       | (50 | ) | 450 |   |
| Net cash  provided by (used in) investing activities                     |       | —                 |       | (6                              | )          | 2,925 |   | (6 | ) |
| Net cash used in  financing activities                                   |       | —                 |       | (122                            | )          | (254 | ) | (527 | ) |
| Net change in  cash and cash equivalents                                 |       | (550                   | )          | (1,800                          | )          | (1,112 | ) | (2,349 | ) |
| Cash and cash  equivalents at beginning of period                        |       | 1,262                  |       | 3,522                           |       | 1,824 |   | 4,071 |   |
| Cash and cash  equivalents at end of period                              |       | $                      | 712        |                            | $          | 1,722 |   | $ | 712 |   | $ | 1,722 |   |
|                                                                     |       |                   |       |                            |       |   |   |   |   |
| Supplemental  disclosures of cash flow information:                      |       |                   |       |                            |       |   |   |   |   |
| Cash paid for  interest                                                  |       | $                      | 883        |                            | $          | 658 |   | $ | 2,430 |   | $ | 1,688 |   |
| Cash paid for  income taxes                                              |       | $                      | —     |                            | $          | 30 |   | $ | 11 |   | $ | 113 |   |
|                                                                     |       |                   |       |                            |       |   |   |   |   |
| Noncash  investing activities:                                           |       |                   |       |                            |       |   |   |   |   |
| Acquisition of  net assets of franchisee using notes payable             |       | $                      | 500        |                            | $          | — |   | $ | 500 |   | $ | — |   |

 

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

 

6

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

 

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

 

The accompanying interim consolidated financial statements of FogCutter Capital Group Inc. and Subsidiaries (“FCCG” or the “Company”) are unauditedand have been prepared in conformity with the requirements of Regulation S-Xpromulgated under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), particularly Rule 10-01 thereof, which governs the presentation ofinterim 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 accompanyinginterim consolidated financial statements should be read in conjunction withthe Company’s Annual Report as of and for the year ended December 31, 2006 onForm 10-K (“2006 Form 10-K”), as previously filed with the SEC on April 2, 2007.Except as described below, there have been no changes to the Company’ssignificant accounting policies as described in Note 2 to the consolidatedfinancial statements in its 2006 Form 10-K.

 

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 ninemonths ended September 30, 2007 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2007.

 

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

 

At September 30, 2007,certain Company officers and directors had, directly or indirectly, majorityvoting control of the Company.

 

**NOTE 2****-RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS**

 

In the Company’s 2006Form 10-K, the Company restated its consolidated statement of financialcondition as of December 31, 2005 and the related consolidated statements of operations,stockholders’ equity, and cash flows for each of the fiscal years endedDecember 31, 2005 and 2004 as a result of a change in the method of accountingto correct an error in accounting for certain capital leases and the correctionof certain timing errors in the recognition of sales. The restatement is morefully described in *Note 3 – Restatement ofConsolidated Financial Statements* to the Consolidated FinancialStatements and in *Item 7 – Management’s Discussion andAnalysis of Financial Condition and Results of Operations* of the2006 Form 10-K. Financial information included in the reports on Form 10-K,Form 10-Q, and Form 8-K filed by the Company between April 1, 2004 and December31, 2006, and the related opinions of its independent registered publicaccounting firm, and all earnings press releases and similar communicationsissued by the Company during that period, are superseded in their entirety bythe 2006 Form 10-K.

 

**NOTE 3****-SIGNIFICANT EVENTS**

 

The following significantevents affected our operations for the nine months ended September 30, 2007:

 

*Restaurant openings*

 

During the nine monthsended September 30, 2007, Fatburger Holdings Inc. (“Fatburger”), the Company’srestaurant operations subsidiary, opened four additional franchise locationsand one additional company-owned location, and one franchise location wasclosed. Fatburger also purchased the net assets of a franchisee with twolocations and converted them to company-owned locations. In the acquisition,Fatburger issued a note payable to the franchisee for $0.2 million, payable byDecember 31, 2007, and assumed accounts payable and notes payable totaling $0.3million, in exchange for $0.5 million of property, plant and equipment.

 

*Sale of real estate*

 

In July 2007, the Companysold one stand-alone retail location for $0.4 million in cash. The property hada net book value of $0.4 million at the time of disposal, and the Companyrecognized a gain on the sale of less than $0.1 million.

 

*Repayment of notes receivable*

 

In August 2007, theCompany received payment on one note receivable of approximately half of the$0.5 million book value, which was due on August 18, 2007. The remainingprincipal was extended for one year. Upon extension, the Company received anddeferred a loan fee of less than $0.1 million, which will be amortized over theremaining life of the note receivable.

 

7

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*Discontinued operations*

 

On February 28, 2007, FogCap Commercial Lending Inc., a wholly owned subsidiary of the Company, sold its51% interest in George Elkins Mortgage Banking Company (“George Elkins”). TheCompany received $2.9 million for its portion of the proceeds and recorded again on sale of $2.5 million.

 

*Borrowings on notes payable*

 

In January 2007, theCompany borrowed an additional $1.1 million on a note payable that had abalance of $2.1 million at December 31, 2006. The amended note has a balance of$3.2 million and is secured primarily by the Company’s interest in its whollyowned subsidiary, DAC International (“DAC”). The terms of the amended note werenot significantly different from the terms at December 31, 2006.

 

In May 2007, the Companyborrowed an additional $1.0 million on a note payable that had a balance of$2.1 million at December 31, 2006. The amended note has a balance of $3.3million including accrued interest and fees, and is secured primarily by theCompany’s interest in an LLC owned by the Company that holds the Company’s realestate lease portfolio. In August 2007, the Company and the lender agreed toextend the terms of this note payable and amend the interest rate from 13.0%annually to 18.0% annually.

 

*OTC Bulleting Board listing*

 

Effective June 24, 2007,the Company’s common stock began trading on the OTC Bulletin Board (the “OTCBB”)market as FCCG.OB. The OTC Bulletin Board is a regulated quotation service thatdisplays real-time quotes, last-sale prices, and volume information inqualifying over-the-counter equity securities. Prior to being listed on theOTCBB, the Company’s shares were quoted by Pink Sheets LLC.

 

*Change in the Board of Directors*

 

Effective May 21, 2007,Kenneth J. Anderson was elected by the Company’s stockholders as an independentmember of the Board of Directors. Mr. Anderson is a founding partner ofQuintile Wealth Management and has over twenty-five years of financialconsulting and accounting experience. He replaced M. Ray Mathis, who retiredfrom the Company’s Board of Directors effective May 20, 2007.

 

**NOTE 4 –COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK**

 

*Warlick complaints*

 

On October 16, 2006,Fatburger Holdings, Inc., Fatburger Corporation and Fatburger North America,Inc. filed suit against Keith A. Warlick (“Warlick”) the former Chief ExecutiveOfficer of Fatburger Holdings, Inc. and Fatburger Corporation. Warlick’semployment with Fatburger was terminated on September 21, 2006 by resolution ofthe Board of Directors of Fatburger Holdings, Inc. The Fatburger companiesinitiated the lawsuit to recover damages from Warlick arising from wrongful actsand conduct during and after his employment, and are asserting claims for:  breach of contract, breach of duty ofloyalty, breach of fiduciary duty, conversion – embezzlement;fraud/commencement; intentional interference with contractual relations, andequitable indemnity. Warlick filed an answer to the lawsuit denying theallegations and included a cross-complaint against Fatburger Holdings, Inc.,Fatburger Corporation, Fatburger North America, Inc., Fog Cutter Capital Group,Inc., and Andrew Wiederhorn, for breach of contract, employment discriminationbased on race and retaliation, wrongful termination and defamation – slanderwithout any specification of damages. The defendants to the cross-complaintfiled by Warlick dispute the allegations of the cross-complaint and intend tovigorously defend against the cross-complaint.

 

In further response tothe termination of his employment and above lawsuit, on February 6, 2007,Warlick, his wife, and a limited liability company controlled by Warlick, eachof whom is a minority shareholder of Fatburger Holdings, Inc., filed a secondlawsuit against various Fatburger entities, the Company, Andrew Wiederhorn, andmembers of the Fatburger Holdings, Inc. Board of Directors. In an amendedcomplaint the plaintiffs allege claims of: (1) common law fraud and negligentmisrepresentation against the Company and Wiederhorn; (2) fraud pursuant toCalifornia Corporate Code §25401 against the Company, Fatburger Holdings, Inc.and Wiederhorn; (3) rescission, breach of contract, breach of the impliedcovenant of good faith and fair dealing against the Company and FatburgerHoldings, Inc.; and (4) breach of fiduciary duty against all defendants. Theseclaims are based on business transactions which the plaintiffs allege were notin the best interests of Fatburger Holdings, Inc., or the plaintiff minorityshareholders. The plaintiffs claim damages of $20 million. The defendantsdispute the allegations of the lawsuit and intend to vigorously defend againstthe claims.

 

*Liquidity*

 

As of September 30, 2007,borrowings of $1.0 million related to one Barcelona property was reflected as acurrent liability in the accompanying Consolidated Statements of FinancialCondition due to management’s intention to sell the property and repay the relateddebt at the time of sale.

 

As of December 31, 2006,Fatburger was not in compliance with all obligations under the agreementsevidencing its indebtedness, as defined in the applicable agreements. Fatburgerfailed to meet the prescribed fixed charge coverage ratio and the prescribeddebt-coverage ratio for

 

8

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three notes payable. Thelender subsequently issued a waiver of the covenant violations for December 31,2006. As such, in the accompanying Consolidated Statements of FinancialCondition, approximately $3.9 million of long-term debt has been classified ascurrent liabilities as of December 31, 2006, but is classified as long-term asof September 30, 2007.

 

The sale of real estateand other investments is considered to be a normal, recurring part ofoperations and management expects these transactions to generate adequate cashflow to meet the Company’s liquidity needs for the 2007 fiscal year.

 

*Dividends*

 

The Company does not havea fixed dividend policy, and may declare and pay new dividends on common stock,subject to financial condition, results of operations, capital requirements andother factors deemed relevant by the Board of Directors. One factor the Boardof Directors may consider is the impact of dividends on the Company’s liquidity.No dividends have been declared or paid in 2007.

 

*Fatburgeroperations*

 

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. Fatburgerdevelopment involves substantial risks that the Company intends to manage;however, it cannot be assured that present or future development will performin accordance with the Company’s expectations or that any restaurants willgenerate the Company’s expected returns on investment. The Company’s inabilityto expand Fatburger in accordance with planned expansion or to manage thatgrowth could have a material adverse effect on the Company’s operations andfinancial condition. In addition, 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 adverselyaffected.

 

*Centrisoft operations*

 

The Company expects thatCentrisoft Corporation (“Centrisoft”) will require capital resources and havenegative cash flow in the near term. Since Centrisoft is in the early stages ofits marketing, there can be no assurance that it will be successful inattracting a significant customer base. Centrisoft is currently marketing itssoftware to potential customers both directly and through re-sellerrelationships. There can be no assurance that Centrisoft will be successful ingenerating sufficient cash flow to support its own operations in the near term.

 

*Other*

 

In order to facilitatethe development of franchise locations, as of September 30, 2007, Fatburger hadguaranteed the annual minimum lease payments of four restaurant sites owned andoperated by franchisees. The guarantees approximate $1.0 million plus certaincontingent rental payments as defined in the respective leases. These leasesexpire at various times through 2015.

 

The Company may utilize awide variety of off-balance sheet financial techniques to manage risk. Inhedging the interest rate and/or exchange rate exposure of a foreign currencydenominated asset or liability, the Company may enter into hedge transactionsto counter movements in interest rates and foreign currencies. These hedges maybe in the form of currency and interest rate swaps, options, and forwards, orcombinations thereof. As of September 30, 2007, the Company has no outstandingderivative instruments held for trading or hedging purposes.

 

There were no otheroff-balance sheet arrangements in place as of September 30, 2007.

 

**NOTE 5 – STOCK OPTIONS AND RIGHTS**

 

The Company has a stockoption plan (the “Option Plan”) which provides for options to purchase sharesof 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. Newly elected directors automatically receive 5,000 optionson the day they join the Board of Directors. Additionally, 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. Automatic grants vest one third on each of the firstthree anniversaries of the grant date and expire on the tenth anniversary ofthe grant date. The Company granted a total of 18,500 options to itsindependent directors in the nine months ending September 30, 2007. In the sameperiod, the Company granted 615,000 options to certain Company Managers (asdefined by the Option Plan). These grants to purchase the Company’s commonstock at 110% of the fair market value on the grant dates vest one third oneach of the first three anniversaries of the grant dates and expire on thetenth anniversary of the grant dates. The retirement and resignation of certaindirectors and Managers resulted in the forfeiture of 153,667 unvested optionsin the nine months ended September 30, 2007.

 

There were no optionsgranted with exercise prices below the market value of the stock at the grantdate. Fair values for 2007 were estimated using the Black-Scholesoption-pricing model with the following weighted average assumptions used: 0%dividend yield, expected volatility of 76%, risk-free interest rate of 5.0% andexpected lives of five years.

 

9

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A summary of our stockoptions activity for the nine months ended September 30, 2007 is presentedbelow:

 
| ** **                         | ** ** | **Shares** | ** ** | **Weighted Average  Exercise  Price** | ** ** |
|------------------------------------|------------|------------|------------|--------------------------------------------|------------|
| Outstanding at  January 1, 2007    |       | 2,762,000  |       | $                                          | 1.45       |   |
| Granted                            |       | 633,500    |       | $                                          | 2.41       |   |
| Exercised                          |       | —     |       | $                                          | —     |   |
| Cancelled/forfeited                |       | (153,667   | )          | $                                          | 2.80       |   |
| Outstanding at  September 30, 2007 |       | 3,241,833  |       | $                                          | 1.57       |   |

 

A summary of our stockoptions outstanding as of September 30, 2007 is presented below:

 
| **Range of  Exercise Prices** | ** ** | **Shares** | ** ** | **Weighted Average  Remaining  Life** | ** ** | **Weighted Average  Exercise  Price** | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| $1.00 – 2.00                       |       | 2,617,500  |       | 9.2                                        |       | $                                          | 1.32       |   |
| $2.01 – 4.00                       |       | 580,000    |       | 9.7                                        |       | $                                          | 2.46       |   |
| $4.01 – 8.00                       |       | 44,333     |       | 6.7                                        |       | $                                          | 4.55       |   |
| Total                                   |       | 3,241,833  |       | 9.3                                        |       | $                                          | 1.57       |   |

 

**NOTE 6 – VARIABLE INTERESTENTITIES**

 

As of September 30, 2007,the Company has loaned $10.3 million to two related Spanish entities formed topurchase, reposition and sell apartment buildings in Barcelona, Spain. Underthe terms of the loans, the investments meet the definition of a VariableInterest Entity (“VIE”) 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 the VIE have been consolidated intothe accompanying consolidated financial statements as of September 30, 2007. Neitherthe creditors nor the other beneficial interest holders have recourse to theCompany with regard to these investments.

 

The VIE currently ownstwo apartment buildings consisting of 33 residential units with a book value ofapproximately $8.8 million, including capital improvements and carrying costs. Thetwo properties met the criteria to beclassified as “held for sale” and are classified as such on the Statement ofFinancial Condition at September 30, 2007. In December 2006, the VIEentered into an agreement to sell one of the two buildings for approximately$8.6 million. In June 2007, the buyer failed to perform under terms of thecontract, the Company recognized $0.7 million in revenue from a forfeiteddeposit, and the building was re-listed for sale. Based upon management’sestimate of the current fair value, the Company has recorded a market valueimpairment totaling $2.9 million on this building in the nine months endedSeptember 30, 2007. 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                                        |   | $       | 8,830,000 |   |
|---------------------------------------------------------------------------------------|--------|---------|-----------|--------|
| Other assets                                                                          |   | 5,000   |      |
| Borrowings and  notes payable (included in current liabilities at September 30, 2007) |   | 976,000 |      |
| Accrued expenses  and other liabilities                                               |   | 18,000  |      |
| Minority  interest                                                                    |   | 392,000 |      |

 

**NOTE 7 – INCOME TAXES**

 

During the nine monthsended September 30, 2007, the Company determined that it was more likely thannot that certain NOL carryovers would be available to offset prior taxableincome. As a result, the Company recognized an income tax benefit of $4.4million and reduced the deferred tax liability by the same amount. The Companyrecognized a similar benefit in the nine months ended September 30, 2006, inthe amount of $1.2 million.

 

**NOTE 8 – LOANS TO SENIOR EXECUTIVES**

 

Prior to the passage ofthe Sarbanes-Oxley Act of 2002, the Company’s employment agreement with itsChief Executive Officer, Andrew Wiederhorn, allowed him to borrow a specifiedmaximum amount from the Company to purchase shares of common stock. The loansare full

 

10

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recourse to the borrowerand bear interest at the prime rate. The total amount of loans receivable fromMr. Wiederhorn, including compounded interest, was $1.1 million at September30, 2007. The loans matured on February 21, 2007. The Company has not extendedthe maturity date of the loans or amended any other terms. The Company has notdeclared the loans in default and is cooperating with Mr. Wiederhorn incompleting the repayment of the loans in full.

 

**NOTE 9 – INVENTORIES**

 

Inventories relateprimarily to the DAC International subsidiary and consist of the following:

 
| ** **        | ** ** | **September 30,  2007**         | ** ** | **December 31,  2006** | ** ** |
|-------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **(dollars in thousands)** | ** ** |
|              |       |                                 |       |                        |       |
| Raw materials     |       | $                                    | 1,225      |                        | $          | 1,703 |   |
| Work in progress  |       | 1,277                                |       | 138                         |       |
| Finished goods    |       | 933                                  |       | 601                         |       |
| Total inventories |       | $                                    | 3,435      |                        | $          | 2,442 |   |

 

**NOTE 10 – OPERATING SEGMENTS**

 

Operating segmentsconsist of (i) restaurant operations conducted through Fatburger, (ii)manufacturing activities conducted through DAC International, (iii) real estateand financing activities, and (iv) software development and sales conductedthrough Centrisoft Corporation. Each segment operates with its own managementand personnel. Beginning in the fourth quarter of 2006, the Company beganallocating certain corporate expenses to Fatburger through a management fee. Thismanagement fee is reflective of management’s increased involvement in therestaurant operations. The Company began charging this fee to more closelyrepresent the true costs of restaurant operations in the appropriate segment reporting.The management fee is eliminated upon consolidation. The following is a summaryof each of the operating segments:

 

*Restaurant operations*

 

As of September 30, 2007, the Company owned approximately 82% of thevoting control of Fatburger, which operates or franchises 90 hamburgerrestaurants located primarily in California and Nevada, as well as 12 otherstates, Canada, and China. Franchisees currently own and operate 52 of theFatburger locations. Four new franchise restaurants were opened and one franchiserestaurant was closed during the nine months ended September 30, 2007. In thethird quarter of 2007, Fatburger acquired the net assets of two franchiselocations and converted them to company-owned locations.

 
| ** **                                | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                     | ** ** |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Company-owned  restaurant sales           |       | $                                                        | 7,226      |                                                    | $          | 7,426 |   | $ | 21,976 |   | $ | 20,494 |   |
| Royalty revenue                           |       | 528                                                      |       | 551                                                     |       | 1,574 |   | 1,662 |   |
| Franchise fee  revenue                    |       | 71                                                       |       | 40                                                      |       | 131 |   | 164 |   |
| Total revenue                             |       | 7,825                                                    |       | 8,017                                                   |       | 23,681 |   | 22,320 |   |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Cost of sales                             |       | (4,075                                                   | )          | (3,915                                                  | )          | (12,681 | ) | (11,378 | ) |
| Depreciation and  amortization            |       | (497                                                     | )          | (427                                                    | )          | (1,529 | ) | (1,202 | ) |
| Other general  & administrative costs |       | (3,899                                                   | )          | (4,001                                                  | )          | (11,449 | ) | (10,667 | ) |
| Interest expense                          |       | (195                                                     | )          | (187                                                    | )          | (576 | ) | (627 | ) |
| Management  allocation                    |       | (536                                                     | )          | —                                                  |       | (1,608 | ) | — |   |
| Minority  interest in losses              |       | 193                                                      |       | 5                                                       |       | 676 |   | 71 |   |
| Segment loss                              |       | $                                                        | (1,184     | )                                                       | $          | (508 | ) | $ | (3,486 | ) | $ | (1,483 | ) |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                        | 441        |                                                    | $          | 1,465 |   | $ | 948 |   | $ | 2,449 |   |
| Segment assets                            |       |                                                     |       |                                                    |       | $ | 22,165 |   | $ | 21,214 |   |
| Minority  interests                       |       |                                                     |       |                                                    |       | $ | 501 |   | $ | 117 |   |

 

*Manufacturing operations*

 

The Company conductsmanufacturing activities through its wholly-owned subsidiary, DAC International.DAC is a supplier of computer controlled lathes and milling machinery for theproduction of eyeglass, contact, and intraocular lenses.

 

11

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| ** **                                | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                     | ** ** |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Manufacturing  sales                      |       | $                                                        | 2,940      |                                                    | $          | 2,370 |   | $ | 7,781 |   | $ | 7,821 |   |
| Cost of sales                             |       | (1,634                                                   | )          | (1,375                                                  | )          | (4,329 | ) | (4,375 | ) |
| Engineering and  development              |       | (256                                                     | )          | (214                                                    | )          | (724 | ) | (655 | ) |
| Depreciation and  amortization            |       | (20                                                      | )          | (22                                                     | )          | (67 | ) | (42 | ) |
| Other general  & administrative costs |       | (612                                                     | )          | (446                                                    | )          | (1,878 | ) | (1,323 | ) |
| Interest expense                          |       | (13                                                      | )          | —                                                  |       | (28 | ) | (6 | ) |
| Other  non-operating income               |       | 3                                                        |       | 45                                                      |       | 20 |   | 53 |   |
| Segment income                            |       | $                                                        | 408        |                                                    | $          | 358 |   | $ | 775 |   | $ | 1,473 |   |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                        | 3          |                                                    | $          | 145 |   | $ | 71 |   | $ | 205 |   |
| Segment assets                            |       |                                                     |       |                                                    |       | $ | 6,151 |   | $ | 5,582 |   |

 

*Real estate and financingoperations*

 

The Company owns variousinterests in real estate and notes receivable. At September 30, 2007, realestate is comprised of leasehold interests in 72 freestanding retail buildingslocated throughout the United States and two apartment buildings located inBarcelona, Spain. At September 30, 2007, notes receivable have a carrying valueof $0.6 million and are primarily secured by real estate.

 
| ** **                                | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                     | ** ** |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Rental income                             |       | $                                                        | 972        |                                                    | $          | 928 |   | $ | 2,851 |   | $ | 2,978 |   |
| Operating  expenses                       |       | (313                                                     | )          | (491                                                    | )          | (1,022 | ) | (1,163 | ) |
| Depreciation and  amortization            |       | (112                                                     | )          | (111                                                    | )          | (335 | ) | (370 | ) |
| Other general  & administrative costs |       | (243                                                     | )          | (204                                                    | )          | (352 | ) | (608 | ) |
| Interest income                           |       | 91                                                       |       | 66                                                      |       | 194 |   | 242 |   |
| Interest expense                          |       | (725                                                     | )          | (472                                                    | )          | (2,081 | ) | (1,134 | ) |
| Other  non-operating income               |       | 562                                                      |       | 1,678                                                   |       | 1,819 |   | 4,469 |   |
| Market value  impairment reserves         |       | (1,800                                                   | )          | —                                                  |       | (2,909 | ) | — |   |
| Equity in  earnings of equity investees   |       | —                                                   |       | —                                                  |       | — |   | 748 |   |
| Segment income  (loss)                    |       | $                                                        | (1,568     | )                                                       | $          | 1,394 |   | $ | (1,835 | ) | $ | 5,162 |   |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                        | 71         |                                                    | $          | 362 |   | $ | 225 |   | $ | 1,552 |   |
| Segment assets                            |       |                                                     |       |                                                    |       | $ | 24,339 |   | $ | 26,573 |   |
| Minority  interests                       |       |                                                     |       |                                                    |       | $ | 392 |   | $ | 349 |   |

 

Other non-operatingincome for the nine months ended September 30, 2007 is primarily composed offoreign currency gains of $0.8 million, commission and other non-operatingrevenue of $0.3 million, and a forfeited deposit on the sale of one Barcelonaproperty of $0.7 million. This compares to a gain on sale of real estate of$2.9 million, gain on sale of notes receivable of $0.5 million, foreigncurrency gains of $0.6 million, and commission and other non-operating revenueof $0.5 million for the nine months ended September 30, 2006.

 

*Software development and salesoperations*

 

The Company holds a 79%ownership interest in Centrisoft, which conducts software development and salesactivities. Centrisoft develops and sells software that controls and enhancesthe productivity of enterprise networks and provides first level securityagainst unauthorized applications and users.

 
| ** **                                | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                     | ** ** |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Software sales                            |       | $                                                        | 46         |                                                    | $          | 13 |   | $ | 60 |   | $ | 34 |   |
| Engineering and  development              |       | (105                                                     | )          | (156                                                    | )          | (367 | ) | (513 | ) |
| Depreciation and  amortization            |       | (110                                                     | )          | (97                                                     | )          | (334 | ) | (265 | ) |
| Other general  & administrative costs |       | (107                                                     | )          | (340                                                    | )          | (479 | ) | (1,221 | ) |
| Interest expense                          |       | (294                                                     | )          | (232                                                    | )          | (846 | ) | (585 | ) |
| Market value  impairment reserves         |       | —                                                   |       | (46                                                     | )          | — |   | (46 | ) |
| Segment loss                              |       | $                                                        | (570       | )                                                       | $          | (858 | ) | $ | (1,966 | ) | $ | (2,596 | ) |
|                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                        | —     |                                                    | $          | — |   | $ | — |   | $ | 7 |   |
| Segment assets                            |       |                                                     |       |                                                    |       | $ | 3,478 |   | $ | 3,759 |   |

 

12

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*Reconciliation to total net loss*

 
| ** **                                  | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **(dollars in thousands)**                     | ** ** |
|                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Segment income  (loss) from operations      |       | $                                                        | (2,914     | )                                                       | $          | 386 |   | $ | (6,512 | ) | $ | 2,556 |   |
| Corporate  expenses                         |       | (2,234                                                   | )          | (2,648                                                  | )          | (9,812 | ) | (7,953 | ) |
| Elimination of  intercompany charges        |       | 828                                                      |       | 145                                                     |       | 2,434 |   | 479 |   |
| Income tax  benefit                         |       | 4,385                                                    |       | 1,249                                                   |       | 4,385 |   | 1,249 |   |
| Income (loss)  from discontinued operations |       | —                                                   |       | (7                                                      | )          | 2,514 |   | 144 |   |
| Net income  (loss)                          |       | $                                                        | 65         |                                                    | $          | (875 | ) | $ | (6,991 | ) | $ | (3,525 | ) |

 

**NOTE 11 – DISCONTINUED OPERATIONS**

 

Prior to February 2007,the Company held a 51% ownership interest in George Elkins, a Californiacommercial mortgage banking operation. In December 2006, the Company reached anagreement to sell George Elkins to a third party and the sale closed inFebruary 2007. As such, all assets of George Elkins have been classified asheld for sale at December 31, 2006 and results from operations of George Elkinsfor the nine months ended September 30, 2007 and 2006 have been classified asdiscontinued operations. Prior to disposal, George Elkins was a reportablesegment of the Company’s operations.

 
| ** **                                  | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **(dollars in thousands)**                     | ** ** |
|                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Loan brokerage  fees                        |       | $                                                        | —     |                                                    | $          | 1,358 |   | $ | 1,673 |   | $ | 4,755 |   |
| Loan servicing  fees                        |       | —                                                   |       | 217                                                     |       | 134 |   | 708 |   |
| Total revenue                               |       | —                                                   |       | 1,575                                                   |       | 1,807 |   | 5,463 |   |
|                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Depreciation and  amortization              |       | —                                                   |       | (8                                                      | )          | (4 | ) | (22 | ) |
| Other general  & administrative costs   |       | —                                                   |       | (1,498                                                  | )          | (1,811 | ) | (5,181 | ) |
| Interest income                             |       | —                                                   |       | 2                                                       |       | 2 |   | 5 |   |
| Other  non-operating income                 |       | —                                                   |       | 4                                                       |       | 15 |   | 283 |   |
| Minority  interest in earnings              |       | —                                                   |       | (82                                                     | )          | 13 |   | (404 | ) |
| Gain on sale of  discontinued operations    |       | —                                                   |       | —                                                  |       | 2,492 |   | — |   |
| Income (loss)  from discontinued operations |       | $                                                        | —     |                                                    | $          | (7 | ) | $ | 2,514 |   | $ | 144 |   |
|                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Capital  expenditures                       |       | $                                                        | —     |                                                    | $          | 6 |   | $ | — |   | $ | 6 |   |
| Segment assets                              |       |                                                     |       |                                                    |       | $ | — |   | $ | 1,130 |   |
| Minority  interests                         |       |                                                     |       |                                                    |       | $ | — |   | $ | 178 |   |

 

**NOTE 12 – SUBSEQUENT EVENTS**

 

*Restaurant openings*

 

Subsequent to September30, 2007, Fatburger opened one additional company-owned restaurant.

 

*Borrowings on notes payable*

 

Subsequent to September30, 2007, the Company borrowed an additional $0.5 million on a note payablethat had a balance of $3.3 million at September 30, 2007. The amended note hasa balance of $3.8 million and is secured primarily by the Company’s interest inan LLC owned by the Company that holds the Company’s real estate leaseportfolio.

 

13

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**ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF 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, as amended. Forward-LookingStatements are based on various assumptions and events (some of which arebeyond the Company’s control) and may be identified by reference to a futureperiod or periods, or by the use of forward-looking terminology, such as “may,”“will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms orvariations on those terms, or the negative of those terms. Actual results coulddiffer materially from those set forth in Forward-Looking Statements due to avariety of factors, including, but not limited to the Risk Factors identifiedherein and the following:*

* *

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

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

*•*                  competitiveproducts and pricing;

*•*                  the real estatemarket, including the residential real estate market in Barcelona, Spain;

*•*                  the ability tosell assets to maintain liquidity;

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

*•*                  changes inprevailing interest rates;

*•*                  changes incurrency exchange rates;

*•*                  acquisitions andthe integration of acquired businesses;

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

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

*•*                  profitabilityand success of franchisee restaurants;

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

*•*                  the market forCentrisoft’s software products;

*•*                  credit riskmanagement; 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 revisions thatmay be made to any Forward-Looking Statements to reflect the occurrence ofanticipated or unanticipated events or circumstances after the date of suchstatements.*

* *

*Thefollowing discussion and analysis should be read in conjunction with theConsolidated Financial Statements of Fog Cutter Capital Group Inc. and thenotes thereto included elsewhere in this filing. References in this filing to “theCompany,” “we,” “our,” and “us” refer to Fog Cutter Capital Group Inc. and itssubsidiaries unless the context indicates otherwise.*

* *

## **ExecutiveOverview**

## ** **

*Business overview*

 

Fog Cutter Capital GroupInc. is primarily engaged in the operations of its Fatburger Holdings, Inc. (“Fatburger”)restaurant business. Fatburger, “The Last Great Hamburger Stand”®, opened itsfirst restaurant in Los Angeles in 1952. As of September 30, 2007, there were90 Fatburger restaurants located in 14 states and in Canada and China. Therestaurants specialize in fresh, made to order hamburgers and other specialtysandwiches. French fries, homemade onion rings, hand-scooped ice cream shakesand soft drinks round out the menu. We acquired the controlling interest inFatburger in August 2003 and currently own 82% voting control.

 

We plan to open additionalFatburger restaurants throughout the United States and internationally,including Canada and China. We intend to continue to open company-ownedrestaurants in strategic markets and increase the number of franchisedlocations in the U.S. and internationally. Franchisees currently own andoperate 52 of the Fatburger locations and we have agreements for approximately 242new franchise locations. As is typical for our industry, the identification ofqualified franchisees and quality locations has an impact on the rate of growthin the number of our restaurants.

 

In addition to ourrestaurant operation, we also conduct manufacturing activities, softwaredevelopment and sales activities, and make real estate and other realestate-related investments through various controlled subsidiaries.

 

*Operating segments*

 

Our operating segmentsare:

 

14

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

(ii)          Manufacturing operations– conducted through our wholly owned subsidiary, DAC International (“DAC”),

(iii)       Real estate and financeoperations, and

(iv)      Software development andsales operations – conducted through our subsidiary, Centrisoft Corporation (“Centrisoft”).

 

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 insteadfocuses on an investment-by-investment or asset-by-asset analysis within ouroperating segments.

 

*Significant events*

 

The following significantevents affected our operations for the three and nine months ended September30, 2007:

 

•                  Restaurantopenings –During the nine months ended September 30, 2007, we opened fiveadditional Fatburger restaurant locations (four franchise and onecompany-owned), and one franchise location was closed. We also purchased thenet assets of a franchisee with two locations and converted them tocompany-owned locations. In the acquisition, we issued a note payable to thefranchisee for $0.2 million, payable by December 31, 2007, and assumed accountspayable and notes payable totaling $0.3 million, in exchange for $0.5 millionof property, plant and equipment.

 

•                  Saleof real estate – In July 2007, we sold one stand-alone retail location for $0.4million in cash. The property had a net book value of $0.4 million at the timeof disposal, and we recognized a gain on the sale of less than $0.1 million.

 

•                  Repaymentof notes receivable – In August 2007, we received payment on one notereceivable of approximately half of the $0.5 million book value, which was dueon August 18, 2007. The remaining principal was extended for one year. Uponextension, we received and deferred a loan fee of less than $0.1 million, whichwill be amortized over the remaining life of the note receivable.

 

•                  Discontinuedoperations – On February 28, 2007, Fog Cap Commercial Lending Inc., ourwholly-owned subsidiary, sold its 51% interest in George Elkins MortgageBanking Company (“George Elkins”). We received $2.9 million for our portion ofthe proceeds and recorded a gain on sale of $2.5 million.

 

•                  Borrowingson notes payable – In January 2007, we borrowed an additional $1.1 million on anote payable that had a balance of $2.1 million at December 31, 2006. Theamended note has a balance of $3.2 million and is secured primarily by ourinterest in DAC. The terms of the amended note were not significantly differentfrom the terms at December 31, 2006.

 

•                  Borrowingson notes payable – In May 2007, we borrowed an additional $1.0 million on anote payable that had a balance of $2.1 million at December 31, 2006. Theamended note has a balance of $3.1 million and is secured primarily by ourinterest in our real estate lease portfolio. In August 2007, we agreed with thelender to extend the terms of this note and amend the interest rate from 13.0%annually to 18.0% annually.

 

•                  OTCBulleting Board listing – Effective June 24, 2007, our common stock begantrading on the OTC Bulletin Board (the “OTCBB”) market as FCCG.OB. The OTCBulletin Board is a regulated quotation service that displays real-time quotes,last-sale prices, and volume information in qualifying over-the-counter equitysecurities. Prior to being listed on the OTCBB, our shares were quoted by PinkSheets LLC.

 

•                  Changein the Board of Directors – Effective May 21, 2007, Kenneth J. Anderson waselected by our stockholders as an independent member of the Board of Directors.Mr. Anderson is a founding partner of Quintile Wealth Management and has overtwenty-five years of financial consulting and accounting experience. Hereplaced M. Ray Mathis, who retired from our Board of Directors effective May20, 2007.

 

**Results of operations**

** **

We incurred net income(losses) from continuing operations as follows:

 
| ** **                                    | ** ** | **Three months ended September 30,**                        | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                                                        | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Net income  (loss) from continuing operations |       | $                                                                               | 65         |                                                    | $          | (868 | ) | $ | (9,505 | ) | $ | (3,669 | ) |
| Net income  (loss) per share                  |       | $                                                                               | 0.01       |                                                    | $          | (0.11 | ) | $ | (1.19 | ) | $ | (0.46 | ) |

 

15

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Our net loss fromcontinuing operations was $9.5 million (or $1.19 per share) for the nine monthsended September 30, 2007, including net income of $0.1 million (or $0.01 pershare) for the three months then ended. This compares to net losses of $3.7million (or $0.46 per share) for the nine months ended September 30, 2006, and$0.9 million (or $0.11 per share) for the third quarter of 2006. Theyear-to-date net loss is primarily due to operating expenses associated withour management infrastructure, while the net income in the third quarter is duemainly to the recognition of certain income tax benefits. We have put in placea management structure that we believe will enable us to significantly expandour operations, notably our Fatburger subsidiary. However, until the growth isrealized, the cost of our management structure will be borne by our existingoperations.

 

The following sectionsdescribe the results of operations of our operating segments for the three andnine months ended September 30, 2007.

 

*Restaurant segment operations*

 

The following table showsour operating margin for company-owned restaurants for the three and ninemonths ended September 30, 2007 and 2006:

 
| ** **                                     | ** ** | **Three months ended September 30,**      | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                                      | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | **(% 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 |       | (23.7                                                         | )%         | (21.8                                                   | )%         | (24.2 | )% | (24.9 | )% |
| Cost of sales –  wages and benefits       |       | (32.7                                                         | )%         | (30.9                                                   | )%         | (33.5 | )% | (30.6 | )% |
| Restaurant  depreciation and amortization      |       | (6.0                                                          | )%         | (4.9                                                    | )%         | (6.1 | )% | (4.9 | )% |
| Operating margin  (restaurant sales only)      |       | 37.6                                                          | %          | 42.4                                                    | %          | 36.2 | % | 39.6 | % |

 

For the nine months ended September 30, 2007, company-owned restaurantsales increased 7.3% to $22.0 million from $20.5 million for the same period in2006. For the three months ended September 30, 2007, company-owned restaurantsales decreased 2.7% to $7.2 million from $7.4 million for the third quarter of2006. This year-to-date increase was primarily the result of the addition ofnine company-owned restaurants in 2006 and a price increase in June 2006. Samestore sales for company-owned restaurants open during all of 2006 decreased7.1% for the first nine months of 2007 compared to the same period in 2006.

 

The operating margin as a percentage of sales for company-ownedlocations decreased to 36.2% for the first nine months of 2007 from 39.6% forthe same period in 2006. This was due primarily to increases in labor costs of2.9% as a percentage of sales and restaurant depreciation expense of 1.2% (fromthe addition of nine company-owned restaurants in 2006), partially offset byreductions in food costs as a percentage of sales of 0.7%. Since implementing aprice increase in June 2006, our sales prices have remained relatively stable. Thus,our operating margins have been declining as operating costs slowly increaseover time.

 

The following table shows our total operating results from therestaurant segment for the three and nine months ended September 30, 2007 and2006:

 
| ** **                          | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(% to total revenue)**                  | ** ** |
| Total restaurant  operations:       |       |                                                     |       |                                                    |       |   |   |   |   |
| Company-owned  restaurant sales     |       | 92.3                                                     | %          | 92.6                                                    | %          | 92.8 | % | 91.8 | % |
| Royalty revenue                     |       | 6.8                                                      | %          | 6.9                                                     | %          | 6.6 | % | 7.5 | % |
| Franchise fee  revenue              |       | 0.9                                                      | %          | 0.5                                                     | %          | 0.6 | % | 0.7 | % |
| Total revenue                       |       | 100.0                                                    | %          | 100.0                                                   | %          | 100.0 | % | 100.0 | % |
|                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Cost of sales                       |       | (57.7                                                    | )%         | (53.4                                                   | )%         | (59.3 | )% | (55.5 | )% |
| General &  administrative costs |       | (50.6                                                    | )%         | (50.7                                                   | )%         | (49.1 | )% | (48.6 | )% |
| Interest expense                    |       | (2.5                                                     | )%         | (2.3                                                    | )%         | (2.4 | )% | (2.8 | )% |
| Management  allocation              |       | (6.8                                                     | )%         | —                                                  | %          | (6.8 | )% | — | % |
| Minority  interest in losses        |       | 2.5                                                      | %          | 0.1                                                     | %          | 2.9 | % | 0.3 | % |
| Segment loss                        |       | (15.1                                                    | )%         | (6.3                                                    | )%         | (14.7 | )% | (6.6 | )% |

 

Royalty revenue decreased 5.9%, from $1.7 million for the first ninemonths of 2006 to $1.6 million for the nine months ended September 30, 2007,and remained unchanged at $0.5 million for the three month period then ended. Thedecrease was a result of decreased sales in our franchise locations and theconversion of three franchise locations to company-owned stores in the secondhalf of 2006. We added four franchise locations during the nine months endedSeptember 30, 2007, which is partially offset by the closure of one franchiselocation and

 

16

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the conversion of two more locations to company-owned stores. Samestore sales for franchise restaurants open during all of 2006 decreased 10.9%for the first nine months of 2007 compared to the same period in 2006.

 

System-wide same store sales decreased 9.9% for stores open during allof 2006 during the first nine months of 2007 compared to the same period in2006. Our loss from restaurant operations was 14.7% of total revenue for thenine months ended September 30, 2007 (15.1% for the third quarter) compared to6.6% for the same nine months (6.3% for the third quarter) in 2006. The changeis mainly due to the implementation of a management allocation of our corporateexpenses, as well as increased general and administrative expenses as wecontinue to set up our infrastructure to support our expansion.

 

We intend to continue toopen company-owned restaurants in strategic markets and increase the number offranchised locations in the U.S. and internationally. Late in the third quarterof 2007, we opened our first location in China, at the Venetian Macao-Resort-Hotel.Since we acquired our interest in Fatburger in August 2003, Fatburger has added41 new restaurants through September 30, 2007. While we seek to expand thenumber of restaurants, the identification of qualified franchisees and qualitylocations has an effect on the rate of growth in the number of our restaurants.

 

*Manufacturing segment operations*

 
| ** **                   | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                   | ** ** | **(% to total revenue)**                  | ** ** |
| Manufacturing  sales         |       | 100.0                                                    | %          | 100.0                                                   | %          | 100.0 | % | 100.0 | % |
| Manufacturing  cost of sales |       | (55.6                                                    | )%         | (58.0                                                   | )%         | (55.6 | )% | (55.9 | )% |
| Engineering and  development |       | (8.7                                                     | )%         | (9.0                                                    | )%         | (9.3 | )% | (8.4 | )% |
| Operating margin             |       | 35.7                                                     | %          | 33.0                                                    | %          | 35.1 | % | 35.7 | % |
|                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Compensation  expense        |       | (12.6                                                    | )%         | (12.6                                                   | )%         | (14.9 | )% | (12.2 | )% |
| Depreciation  expense        |       | (0.7                                                     | )%         | (0.9                                                    | )%         | (0.9 | )% | (0.5 | )% |
| Other operating  expense     |       | (8.5                                                     | )%         | (4.3                                                    | )%         | (9.3 | )% | (4.2 | )% |
| Segment income               |       | 13.9                                                     | %          | 15.2                                                    | %          | 10.0 | % | 18.8 | % |

 

Total revenue for thissegment was $7.8 million for the nine months ended September 30, 2007 and $2.9million for the three months then ended. This compares to $7.8 million for thenine months ended September 30, 2006 and $2.4 million for the third quarter of2006. Net income for this segment was $0.8 million for the first nine months of2007 ($0.4 million for the third quarter), compared to $1.5 million ($0.4million) for the same periods in 2006. In order to focus our efforts on ourrestaurant segment, we intend to sell our equity position in DAC for an amounthigher than our net investment. If we were to sell this segment, it woulddecrease our net revenue and increase our net loss. There can be no assurancethat we will be able to sell this segment for a profit.

 

*Real estate and finance segmentoperations*

 
| ** **                                 | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(dollars in thousands)**                     | ** ** |
| **Real estate operations:**      |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating  revenue                         |       | $                                                        | 972        |                                                    | $          | 928 |   | $ | 2,851 |   | $ | 2,978 |   |
| Operating  expenses                        |       | (313                                                     | )          | (491                                                    | )          | (1,022 | ) | (1,163 | ) |
| Depreciation and  amortization             |       | (111                                                     | )          | (111                                                    | )          | (335 | ) | (369 | ) |
| Operating margin                           |       | 548                                                      |       | 326                                                     |       | 1,494 |   | 1,446 |   |
|                                       |       |                                                     |       |                                                    |       |   |   |   |   |
| General and  administrative expenses       |       | (243                                                     | )          | (100                                                    | )          | (340 | ) | (483 | ) |
| Interest expense                           |       | (363                                                     | )          | (323                                                    | )          | (1,064 | ) | (985 | ) |
| Gain on sale of  real estate               |       | 13                                                       |       | 1,211                                                   |       | 13 |   | 2,905 |   |
| Other  non-operating income                |       | 2                                                        |       | —                                                  |       | 724 |   | 6 |   |
| Market value  impairment reserve           |       | (1,800                                                   | )          | —                                                  |       | (2,909 | ) | — |   |
| Income (loss)  from real estate operations |       | $                                                        | (1,843     | )                                                       | $          | 1,114 |   | $ | (2,082 | ) | $ | 2,889 |   |

 

During the nine monthsended September 30, 2007, our operating margin on real estate increased lessthan $0.1 million, to $1.5 million, compared to $1.4 million for the sameperiod of 2006. Our operating margin on real estate operations for the thirdquarter of 2007 increased $0.2 million, to $0.5 million, compared to $0.3million in the third quarter of 2006. Although we have continued to sellcertain real estate investments, we have been able to maintain our operatingmargin at relatively stable levels due to our success in reducing vacancies andincreasing lease rates.

 

17

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In July 2007, we sold onestand-alone retail location for $0.4 million in cash. The property had a netbook value of $0.4 million at the time of disposal, and we recognized a gain onthe sale of less than $0.1 million. In the first nine months of 2006, we soldten properties for total proceeds of $12.3 million, resulting in a net gain onsale of approximately $2.9 million. General and administrative expenses havedecreased for the first nine months of 2007 compared to 2006, primarily due tothe VIE investments in Barcelona nearing completion and being marketed for sale.Interest expense for the three and nine months ended September 30, 2007 ($0.4million and $1.1 million, respectively) has increased compared to the same periodsof 2006 ($0.3 million and $1.0 million, respectively) as we borrowed money onvarious notes payable secured by certain real estate investments in the secondhalf of 2006 and first half of 2007.

 

In December 2006, weentered into an agreement to sell one of our two Barcelona properties for asales price of approximately $8.6 million. In June 2007, the buyer failed toperform under terms of the contract. As a result, we recognized $0.7 million inrevenue from a forfeited deposit and re-listed the building for sale. Basedupon our estimate of the current market value, we have recorded market valueimpairments totaling $2.9 million on this property in the nine months endedSeptember 30, 2007.

 

*Interest income*– Our interest income for the nine months ended September 30, 2007 has remainedstable at $0.2 million ($0.1 million for the third quarter) compared with $0.2million for the first nine months of 2006 ($0.1 million for the third quarter).

 

*Interest expense*– Our interest expense not related to real estate investments was $1.0 millionfor the nine months ended September 30, 2007 ($0.4 million for the thirdquarter), compared to $0.2 million for the first nine months of 2006 ($0.2million for the third quarter). This increase is due to various borrowings andnotes payable we have obtained beginning in late 2006.

 

*Foreign exchange gains*– Changes in foreign currency exchange rates resulted in a net gain ofapproximately $0.8 million in this segment for the nine months ended September30, 2007 compared to $0.6 million for the same period in 2006. In the thirdquarter of 2007, we recognized gains of $0.5 million compared to $0.1 millionfor the same period in 2006. At September 30, 2007, approximately 16% of ourtotal assets and 3% of our total liabilities were denominated in euros. See *Item 3 – Quantitative and Qualitative Disclosures about Market Risk*for further analysis.

 

*Other non-operating income*–In the nine months ended September 30, 2007, we had consulting revenue of $0.3million. For the same period in 2006, we had equity in earnings of equityinvestee of $0.7 million and gain on sale of notes receivable of $0.5 millionin this segment.

 

*Software development and salessegment operations*

 
| ** **                        | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(dollars in thousands)**                     | ** ** |
| Software sales                    |       | $                                                        | 46         |                                                    | $          | 13 |   | $ | 60 |   | $ | 34 |   |
| Engineering and  development      |       | (105                                                     | )          | (156                                                    | )          | (367 | ) | (513 | ) |
| Compensation  expense             |       | (38                                                      | )          | (128                                                    | )          | (195 | ) | (646 | ) |
| Depreciation  expense             |       | (110                                                     | )          | (97                                                     | )          | (334 | ) | (265 | ) |
| Other operating  expense          |       | (69                                                      | )          | (212                                                    | )          | (284 | ) | (575 | ) |
| Interest expense                  |       | (294                                                     | )          | (232                                                    | )          | (846 | ) | (585 | ) |
| Market value  impairment reserves |       | —                                                   |       | (46                                                     | )          | — |   | (46 | ) |
| Segment loss                      |       | $                                                        | (570       | )                                                       | $          | (858 | ) | $ | (1,966 | ) | $ | (2,596 | ) |

 

Total revenue for thissegment was less than $0.1 million for each of the nine months ended September30, 2007 and 2006. Segment loss was approximately $2.0 million for the firstnine months of 2007 ($0.6 million for the third quarter) and $2.6 million forthe same period in 2006 ($0.9 million for the third quarter). In order to focusour efforts on our restaurant segment, we intend to sell all, or a portion of,our equity position in Centrisoft. If we were to sell this segment, we believethat it would have a positive effect on our cash flow and decrease our net loss.There can be no assurance that we will be able to sell this segment.

 

*Corporate expenses*

 
| ** **                          | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(dollars in thousands)**                     | ** ** |
| Compensation and  employee benefits |       | $                                                        | 1,253      |                                                    | $          | 1,425 |   | $ | 6,089 |   | $ | 4,435 |   |
| Travel and  entertainment           |       | 341                                                      |       | 323                                                     |       | 1,382 |   | 943 |   |
| Professional  fees                  |       | 256                                                      |       | 499                                                     |       | 982 |   | 1,214 |   |
| Directors fees                      |       | 131                                                      |       | 109                                                     |       | 397 |   | 269 |   |
| Insurance                           |       | 64                                                       |       | 160                                                     |       | 316 |   | 571 |   |
| Occupancy costs                     |       | 29                                                       |       | 50                                                      |       | 106 |   | 140 |   |
| Other expenses                      |       | 160                                                      |       | 82                                                      |       | 540 |   | 381 |   |
| Total operating  expenses           |       | $                                                        | 2,234      |                                                    | $          | 2,648 |   | $ | 9,812 |   | $ | 7,953 |   |

 

18

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For the nine months endedSeptember 30, 2007, we incurred corporate operating expenses of $9.8 million($2.2 million for the third quarter), compared to $8.0 million for the firstnine months of 2006 ($2.6 million for the third quarter). This increase isprimarily due to an increase in compensation expenses. Corporate expenses forthe first nine months of 2007 also include $1.4 million ($0.5 million for thethird quarter) for share based payments accounted for under FAS 123R, comparedto $0.3 million for the same period in 2006 ($0.2 million for the thirdquarter). The increase is due to various stock option grants in August 2006 anda stock option exchange plan adopted in December 2006.

 

*Management allocation and otherintercompany charges*

 

In the fourth quarter of2006, as we focused our efforts on the Fatburger segment we began allocating aportion of our corporate expenses to our restaurant segment to more accuratelyreflect the operating results of that segment. This allocation was $1.6 millionfor the nine months ended September 30, 2007 ($0.5 million for the thirdquarter). This allocation is eliminated upon consolidation on the ConsolidatedStatements of Operations. There was no comparable allocation in the first ninemonths of 2006. Other intercompany charges, including intercompany interestexpense, are eliminated upon consolidation, and totaled $0.8 million for thenine months ended September 30, 2007 ($0.3 million for the third quarter) and$0.5 million for the nine months ended September 30, 2006 ($0.1 million for thethird quarter).

 

*Income taxes*

 

During the nine months endedSeptember 30, 2007, we determined that it was more likely than not that certainNOL carryovers would be available to offset prior taxable income. As a result,we recognized an income tax benefit of $4.4 million and reduced the deferredtax liability by the same amount. We recognized a similar benefit in the ninemonths ended September 30, 2006, in the amount of $1.2 million.

 

*Discontinued operations*

 

In December 2006, we andour 49% partners reached an agreement to sell our ownership interest in GeorgeElkins, a California commercial mortgage banking operation. The sale closed inFebruary 2007. As such, results from operations of George Elkins for the ninemonths ended September 30, 2007 and 2006 have been classified as discontinuedoperations. Prior to the decision to sell George Elkins, it was a reportablesegment of our operations. The following table shows our total operatingresults from George Elkins for the three and nine months ended September 30,2007 and 2006:

 
| ** **                                  | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **(% to total revenue)**                  | ** ** |
| Total revenue                               |       | $                                                        | —     |                                                    | $          | 1,575 |   | $ | 1,807 |   | $ | 5,463 |   |
| Compensation  expense                       |       | —                                                   |       | (1,257                                                  | )          | (1,534 | ) | (4,512 | ) |
| Other operating  expense                    |       | —                                                   |       | (249                                                    | )          | (281 | ) | (691 | ) |
| Non-operating  income                       |       | —                                                   |       | 6                                                       |       | 17 |   | 288 |   |
| Gain on sale of  discontinued operations    |       | —                                                   |       | —                                                  |       | 2,492 |   | — |   |
| Minority  interest in earnings              |       | —                                                   |       | (82                                                     | )          | 13 |   | (404 | ) |
| Income (loss)  from discontinued operations |       | $                                                        | —     |                                                    | $          | (7 | ) | $ | 2,514 |   | $ | 144 |   |

 

**Changes in financial condition**

 

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

 
| ** **                       | ** ** | **September 30, 2007**     | ** ** | **December 31, 2006** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **(dollars in thousands)** | ** ** |
| Total assets                     |       | $                                    | 56,133     |                            | $          | 59,800 |   |
| Total  liabilities               |       | $                                    | 50,575     |                            | $          | 49,005 |   |
| Total minority  interests        |       | $                                    | 893        |                            | $          | 571 |   |
| Total  stockholders’ equity |       | $                                    | 4,665      |                            | $          | 10,224 |   |

 

The decrease in totalassets during the first nine months of 2007 is primarily due to market valueimpairment reserves on real estate investments, as well as the disposal of ourGeorge Elkins subsidiary, which was classified as held for sale at December 31,2006. Total liabilities increased over the first nine months of 2007, primarilydue to additional borrowings of $2.6 million and an increase in accountspayable and accrued liabilities. The cash received from the disposal of GeorgeElkins was used to support our operating activities. Stockholders’ equitydecreased during the first nine months of 2007 by approximately $5.6 million,mainly resulting from our net loss of $7.0 million, partially offset by sharebased compensation of $1.4 million. These changes are described in more detailas follows:

 

19

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*Cash*

 

Our cash decreased $1.1million between December 31, 2006 and September 30, 2007. Significant sourcesand uses of cash during the first nine months of 2007 include:

 

•                  $4.8 million ofcash used in operations – comprised primarily of our net loss from continuingoperations of $9.5 million adjusted for non-cash income and expense items of$4.7 million;

•                  $1.6 million ofcash used in investing activities – comprised mainly of $2.0 million investedin restaurant assets and other property, plant & equipment, partiallyoffset by $0.4 million from the proceeds on the sale of real estate;

•                  $2.7 million ofcash provided by financing activities – includes additional borrowing of $2.2million and $1.1 million invested by minority interests, partially offset by repaymentsof borrowings and capital leases of $0.6 million; and

•                  $2.6 million netcash inflow from discontinued operations.

 

*Net investments in real estate,and related liabilities*

 

Our investments in realestate can be summarized as follows:

 
| ** **                                           | ** ** | **September 30, 2007**     | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **(dollars in thousands)** | ** ** |
| US based  investments – held for sale (1):      |       |                                 |       |                            |       |
| Purchase price /  improvements                       |       | $                                    | —     |                            | $          | 403 |   |
| Accumulated  depreciation and amortization           |       | —                               |       | (35                             | )          |
| Net book value                                       |       | —                               |       | 368                             |       |
| Foreign-based  investments – held for sale (2): |       |                                 |       |                            |       |
| Purchase price /  improvements                       |       | 8,830                                |       | 10,694                          |       |
| Total  investments in real estate, held for sale     |       | $                                    | 8,830      |                            | $          | 11,062 |   |
|                                                 |       |                                 |       |                            |       |
| US based  investments – held for use (3):       |       |                                 |       |                            |       |
| Purchase price /  improvements                       |       | $                                    | 13,298     |                            | $          | 13,200 |   |
| Accumulated  depreciation and amortization           |       | (2,028                               | )          | (1,698                          | )          |
| Total  investments in real estate, held for use      |       | $                                    | 11,270     |                            | $          | 11,502 |   |
|                                                 |       |                                 |       |                            |       |
| Total  investments in real estate, net               |       | $                                    | 20,100     |                            | $          | 22,564 |   |

 

----

(1)     Includes 1 commercial property within theUnited States at December 31, 2006.

(2)     Includes 2 apartment buildings in Barcelona,Spain at September 30, 2007 and December 31, 2006.

(3)     Includes 32 commercial properties undercapital lease throughout the United States at September 30, 2007 and December31, 2006.

 

Borrowings related to ourinvestments in real estate were as follows:

 
| ** **                                      | ** ** | **September 30, 2007**     | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **(dollars in thousands)** | ** ** |
| Obligations on  real estate under capital lease |       | $                                    | 10,111     |                            | $          | 10,471 |   |
| Borrowings on  Barcelona properties             |       | 3,475                                |       | 3,435                           |       |
| Total borrowings  related to real estate        |       | $                                    | 13,586     |                            | $          | 13,906 |   |

 

Investments in propertiesunder capital lease decreased $0.2 million at September 30, 2007 due todepreciation of $0.3 million during the first nine months of 2007, partiallyoffset by capital improvements to those properties. Obligations under capitalleases related to these properties decreased $0.4 million due to scheduledmonthly payments during the same period. Our investment in apartment buildingsin Barcelona, Spain decreased $1.8 million from December 31, 2006 to September30, 2007. This was primarily the result of a market valuation impairment of$2.9 million, partially offset by increases in unrealized foreign currencytranslation of $0.8 million and increased carrying costs of $0.3 million. Investmentsin US-based owned property decreased $0.4 million from December 31, 2006 toSeptember 30, 2007, as we sold our one remaining owned property in July 2007for cash proceeds of $0.4 million.

 

*Net property, plant and equipment*

 

Net property, plant andequipment decreased $0.1 million at September 30, 2007 compared to December 31,2006, primarily due to scheduled monthly depreciation on those assets, offsetby purchases of additional assets, including $0.5 million from the acquisitionof two restaurant locations owned by a franchisee. Obligations on property,plant, and equipment under capital lease decreased to $0.1 million at September30, 2007 compared to $0.2 million at December 31, 2006, due to schedule monthlypayments on these leases.

 

*Goodwill and net intangibleassets*

 
| ** **                               | ** ** | **September 30, 2007**     | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **(dollars in thousands)** | ** ** |
| Goodwill –  Fatburger               |       | $                                    | 7,063      |                            | $          | 7,063 |   |
| Goodwill –  Centrisoft              |       | 1,999                                |       | 1,999                           |       |
| Goodwill – DAC  International       |       | 1,464                                |       | 1,464                           |       |
| Total goodwill                           |       | $                                    | 10,526     |                            | $          | 10,526 |   |
|                                     |       |                                 |       |                            |       |
| Net intangible  assets – Fatburger  |       | $                                    | 4,803      |                            | $          | 4,943 |   |
| Net intangible  assets – Centrisoft |       | 252                                  |       | 319                             |       |
| Total net  intangible assets             |       | $                                    | 5,055      |                            | $          | 5,262 |   |

 

20

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Net intangible assetsdecreased $0.2 million in the nine months ended September 30, 2007 due tomonthly amortization of those assets. Net intangible assets at September 30,2007 consists of trademark rights of approximately $4.0 million, franchiseagreements of approximately $0.5 million, sales contracts for Centrisoft ofapproximately $0.3 million, and other miscellaneous intangible assets ofapproximately $0.2 million. We do not believe that there is any impairment ofgoodwill or net intangible assets at September 30, 2007.

 

*Notes receivable*

 

As of September 30, 2007,our notes receivable portfolio (excluding loans to senior executives) consistsof three individual loans with a combined carrying value of $0.6 million,compared to $0.8 million at December 31, 2006. The decrease was the result ofprincipal repayments received on one of the loans. Two of the loans are securedby real estate consisting of commercial property located in Texas and Arizona,and one loan is secured by stock in a restaurant business. The loans have aweighted average interest rate (excluding fees and points) of 14.1% and aweighted average maturity of 12 months.

 

*Loans to senior executives*

 

We currently have twoloans to our Chairman and Chief Executive Officer, Andrew Wiederhorn, for atotal of $1.1 million. Both loans were made on February 21, 2002 (prior to thepassage of the Sarbanes-Oxley Act of 2002). The loans matured on February 21,2007, and bear interest at the prime rate, as published in the Wall StreetJournal, which interest is added to the principal. We have not extended thematurity date of the loans or amended any other terms. The Company has notdeclared the loans in default and is cooperating with Mr. Wiederhorn incompleting the repayment of the loans in full.

 

*Other assets*

 
| ** **                      | ** ** | **September 30, 2007**     | ** ** | **December 31, 2006** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **(dollars in thousands)** | ** ** |
| Trade  receivables              |       | $                                    | 1,743      |                            | $          | 1,586 |   |
|                            |       |                                 |       |                            |       |
| Inventories                     |       | $                                    | 3,435      |                            | $          | 2,442 |   |
|                            |       |                                 |       |                            |       |
| Other current  assets:          |       |                                 |       |                            |       |
| Prepaid expenses                |       | $                                    | 396        |                            | $          | 429 |   |
| Other VIE-related  assets       |       | 5                                    |       | 96                              |       |
| Total other  current assets     |       | $                                    | 401        |                            | $          | 525 |   |
|                            |       |                                 |       |                            |       |
| Other assets:                   |       |                                 |       |                            |       |
| Software costs                  |       | $                                    | 964        |                            | $          | 1,217 |   |
| Security  deposits              |       | 587                                  |       | 487                             |       |
| Deferred  financing costs       |       | 278                                  |       | 306                             |       |
| Investment in  operating leases |       | 26                                   |       | 54                              |       |
| Other                           |       | 96                                   |       | 107                             |       |
| Total other  assets             |       | $                                    | 1,951      |                            | $          | 2,171 |   |

 

Trade receivables andinventories at September 30, 2007 and December 31, 2006 relate primarily to theoperations of DAC.

 

*Deferred income*

 

Our deferred incomerelating to the collection of unearned Fatburger franchise fees was $5.1million at September 30, 2007, compared with $4.1 million at December 31, 2006.As of September 30, 2007, nearly all of the deferred income was comprised ofthe non-refundable franchise fee received by Fatburger for each futurefranchise location. These initial fees generally represent half of the totalfee per location. The balance of the franchise fee (approximately an additional$5.1 million) will be collected in the future when leases on these specificfranchise locations are signed.

 

*Notes payable*

 

As of September 30, 2007,our notes payable (excluding borrowings on real estate) totaled $14.9 million,including $7.3 million of debt held at Fatburger, $0.7 million at Centrisoft,and $0.5 million at DAC. This compares to $12.4 million at December 31, 2006. Theincrease was primarily due to additional borrowings of $2.2 million and theassumption and issuance of $0.4 million of notes payable in the acquisition oftwo franchisee restaurant locations.

 

21

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*Accounts payable and accruedliabilities*

 

Accounts payable andaccrued liabilities totaled $13.1 million at September 30, 2007, compared with$10.7 million at December 31, 2006, and consisted of the following:

 
| ** **                                     | ** ** | **September 30, 2007**     | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **(dollars in thousands)** | ** ** |
| Accounts payable                               |       | $                                    | 7,913      |                            | $          | 6,999 |   |
| Accrued wages,  bonus and commissions          |       | 2,275                                |       | 669                             |       |
| Leased real  estate portfolio-related accruals |       | 422                                  |       | 597                             |       |
| Other                                          |       | 2,458                                |       | 2,393                           |       |
| Total accrued  expenses and other liabilities  |       | $                                    | 13,068     |                            | $          | 10,658 |   |

 

The increase in accountspayable relates primarily to accrued wages and bonuses due to bonuses approvedby our Compensation Committee, but not yet paid.

 

*Sales deposits*

 

For manufacturing salesat our DAC subsidiary, we normally require a deposit on new orders in theamount of 50% of the expected sale. This deposit is not recognized as revenueuntil the order is complete, invoiced, and the item is shipped to the customer.Sales deposits increased from $1.1 million at December 31, 2006 to $1.8 millionat September 30, 2007.

 

*Deferred income taxes*

 

During the nine monthsended September 30, 2007, we determined that it was more likely than not thatcertain NOL carryovers would be available to offset prior taxable income. As aresult, we recognized an income tax benefit of $4.4 million and reduced thedeferred tax liability by the same amount. We no longer have any deferred taxliability recorded as of September 30, 2007.

 

**Liquidity and Capital Resources**

 

Liquidity is a measurementof our ability to meet potential cash requirements, including ongoingcommitments to repay borrowings, fund business operations, acquisitions, andexpansion (including growth of company-owned and franchised restaurantlocations), engage in loan acquisition and lending activities and for othergeneral business purposes. In addition to our cash on hand, our primary sourcesof funds for liquidity during the first nine months of 2007 consisted of cashprovided by proceeds from the sale of discontinued operations and real estate,new borrowings, and the repayments to us from borrowers. As of September 30,2007, we had cash or cash equivalents of $0.7 million, which, together withprojected borrowings and proceeds from the sales of assets, we believe will besufficient to meet our current liquidity needs.

 

At September 30, 2007, wehad total consolidated secured indebtedness of $30.6 million, as well as $20.0million of other liabilities. Our consolidated secured indebtedness consistedof:

 

•                  notespayable and other debt of Fatburger of $7.5 million secured by the assets ofFatburger;

•                  $12.0million in capital leases maturing between 2010 and 2040 which are securedmainly by real estate;

•                  notespayable of $3.5 million secured by our two Barcelona properties;

•                  $6.4million of notes payable secured by various assets of the Company;

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

•                  $0.7million of notes payable secured by the assets of Centrisoft.

 

We consider the sale ofassets to be a normal, recurring part of our operations and we are currentlygenerating adequate cash flow as a result of these transactions. However,excluding the sale of assets from time to time, we are currently operating withnegative cash flow, since many of our operations do not currently generatesufficient cash to cover operating and overhead 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.

 

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. Specific risks to our liquidity positioninclude the following:

 

*Foreign currency exchange raterisk*

 

Our exposure to foreigncurrency fluctuations arises mainly from our investment in Barcelona realestate. As of September 30, 2007, approximately 16% of our total assets and 3%of our total liabilities were denominated in euros. We may, from time to time,utilize a wide variety of financial techniques to assist in the management ofcurrency risk, including currency swaps, options, and forwards, or

 

22

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combinations thereof. Asof September 30, 2007, we have no outstanding derivative instruments held fortrading or hedging purposes. See *Item 3 – Quantitative andQualitative Disclosures about Market Risk* for further analysis.

 

*Interest rate risk*

 

Our borrowings and theavailability of further borrowings are substantially affected by, among otherthings, changes in interest rates, changes in market spreads or decreases incredit quality of our assets. Material increases in interest expense fromvariable-rate funding sources, or material decreases in monthly cash receiptsfrom operations, generally would negatively impact our liquidity. On the otherhand, material decreases in interest expense from variable-rate funding sourceswould positively affect our liquidity. Fluctuations in interest rates willimpact our net income to the extent our operations and our fixed rate assetsare funded by variable rate debt. We may also be impacted to the extent thatour variable rate assets re-price on a different schedule or in relation to adifferent index than any floating rate debt.

 

*Fatburger debt covenant*

 

At December 31, 2006,Fatburger was not in compliance with all obligations under the agreementsevidencing its indebtedness, as defined in the applicable agreements. Fatburgerfailed to meet the prescribed fixed charge coverage ratio and the prescribeddebt-coverage ratio for three notes payable. The lender subsequently issued a waiverof the covenant violations for December 31, 2006. As such, on our ConsolidatedStatements of Financial Condition, $3.9 million of long-term debt has beenclassified as current at December 31, 2006, but is classified as non-current atSeptember 30, 2007.

 

*Fatburger expansion*

 

Fatburger is involved ina nationwide expansion of franchise and company-owned locations, which requiressignificant liquidity. If real estate locations of sufficient quality cannot belocated, the timing of restaurant openings may be delayed. Additionally, ifFatburger or its franchisees cannot obtain capital sufficient to fund thisexpansion, the timing of restaurant openings may be delayed.

 

*Centrisoft operations*

 

We expect that Centrisoftwill require capital resources and have negative cash flow for the near term. SinceCentrisoft is in the early stages of its marketing, there can be no assurancethat it will be successful in attracting a significant customer base. Centrisoftis currently marketing its software to potential customers both directly andthrough re-seller relationships. There can be no assurance that Centrisoft willbe successful in generating sufficient cash flow to support its own operationsin the near term.

 

*Dividends*

 

While we do not have afixed dividend policy, we may declare and pay new dividends on our commonstock, subject to our financial condition, results of operations, capitalrequirements and other factors deemed relevant by the Board of Directors. Onefactor the Board of Directors may consider is the impact of dividends on ourliquidity. We have not declared or paid any dividends in 2007.

 

*Stock listing*

 

We are currently listedon the OTC Bulletin Board, a regulated quotation service for stocks that arenot listed on one of the major U.S. stock exchanges. Trading of our common stock on the OTCBulletin Board may reduce the liquidity of our common stock compared toquotation on a major US stock exchange. Also, the coverage of the Company bysecurity analysts and media could be reduced, which could result in lowerprices for our common stock than might otherwise prevail and could also resultin increased spreads between the bid and ask prices for our common stock. Additionally,certain investors will not purchase securities that are not quoted on a nationalmarket, which could materially impair our ability to raise funds through theissuance of 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 thatrecommend 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 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 the NASDAQ Stock Market that has a market price of less than $5.00per share), including the delivery of a disclosure schedule explaining thepenny stock market and the associated risks. Such requirements could severelylimit the market liquidity of our common stock. There can be no assurance thatour common stock will not become treated as penny stock.

 

23

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**Off Balance Sheet Arrangements**

 

In order to facilitatethe development of franchise locations, as of September 30, 2007, Fatburger hadguaranteed the annual minimum lease payments of four restaurant sites owned andoperated by franchisees. The guarantees approximate $1.0 million plus certaincontingent rental payments as defined in the respective leases. These leasesexpire at various times through 2015.

 

The lease guarantees byFatburger do not provide us with a material source of liquidity, capitalresources or other benefits. There are no revenues, expenses or cash flowsconnected with the lease guarantees other than the receipt of normal franchiseroyalties. As of September 30, 2007, we were not aware of any event or demandthat was likely to trigger the guarantee by Fatburger.

 

We have various operatingleases for office and retail space which expire through 2015. The leasesprovide for varying minimum annual rental payments including rent increases andfree rent periods. We have future minimum rental payments under non-cancelableoperating leases with initial or remaining terms of one year or more ofapproximately $14.2 million as of September 30, 2007.

 

We did not have any otheroff-balance sheet arrangements in place as of September 30, 2007.

 

## **ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

## ** **

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

 

*Foreign currency exchange raterisk*

 

Our exposure to foreigncurrency fluctuations arises mainly from our investment in Barcelona realestate. As of September 30, 2007, approximately 16% of our total assets and 3%of our total liabilities were denominated in euros. The following tableillustrates the projected effect on our net asset value as a result ofhypothetical changes in foreign currency rates as of September 30, 2007:

 
| **Change in foreign  exchange rates ****(1)** | ** ** | **Projected change in  net asset  fair value** | ** ** | **Projected percentage  change in net asset  fair value** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| Decrease 20%                                                      |       | $                                                                  | (1,850,000 | )                                                                                  | -33.3      | % |
| Decrease 10%                                                      |       | $                                                                  | (925,000   | )                                                                                  | -16.6      | % |
| No Change                                                         |       | $                                                                  | —     |                                                                               | 0.0        | % |
| Increase 10%                                                      |       | $                                                                  | 925,000    |                                                                               | 16.6       | % |
| Increase 20%                                                      |       | $                                                                  | 1,850,000  |                                                                               | 33.3       | % |

 

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(1)                Assumes that uniform percentage changes occurinstantaneously in the euro. A decrease in the foreign exchange rate indicatesa strengthening of the U.S. dollar against the euro. An increase in the foreignexchange rate indicates a weakening of the U.S. dollar against the euro.

 

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. Nosuch currency hedging techniques were in use as of September 30, 2007.

 

*Interestrate risk*

 

Changes in interest ratescan affect net income by increasing the cost associated with operating andexpanding 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 payments on variable-interest rate debt, ourability to acquire loans and general levels of consumer spending.

 

*Other market risks*

 

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

 

**ITEM 4. CONTROLSAND PROCEDURES**

 

*Evaluation of disclosure controls and procedures*

 

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

 

24

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relatingto us and our consolidated subsidiaries is accumulated and communicated to ourmanagement to allow timely decisions regarding required disclosure.

 

*Changesin internal control over financial reporting*

 

There were no significantchanges in our internal control over financial reporting in connection with anevaluation that occurred during our third fiscal quarter of 2007 that havematerially affected or are reasonably likely to materially affect our internalcontrol over financial reporting.

 

25

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## **PARTII — OTHER INFORMATION**

## ** **

**ITEM 1. LEGAL PROCEEDINGS**

** **

*Warlick complaint*

 

**Fatburger Holdings, Inc., et al.v. Keith A. Warlick/ Warlick v. Fatburger, et al, Superior Court of Californiafor the County of Los Angeles, Case No. SC 091436.******On October 16, 2006, Fatburger Holdings, Inc.,Fatburger Corporation and Fatburger North America, Inc. filed suit againstKeith A. Warlick (“Warlick”) the former Chief Executive Officer of FatburgerHoldings, Inc. and Fatburger Corporation. Warlick’s employment with Fatburgerwas terminated on September 21, 2006 by resolution of the Board of Directors ofFatburger Holdings, Inc. The Fatburger companies initiated the lawsuit torecover damages from Warlick arising from wrongful acts and conduct during andafter his employment, and are asserting claims for:  breach of contract, breach of duty ofloyalty, breach of fiduciary duty, conversion – embezzlement;fraud/commencement; intentional interference with contractual relations, andequitable indemnity. Warlick filed an answer to the lawsuit denying theallegations and included a Cross-complaint against Fatburger Holdings, Inc.,Fatburger Corporation, Fatburger North America, Inc., Fog Cutter Capital Group,Inc., and Andrew Wiederhorn, for breach of contract, employment discriminationbased on race and retaliation, wrongful termination and defamation – slanderwithout any specification of damages. The defendants to the Cross-complaintfiled by Warlick dispute the allegations of the cross-complaint and intend tovigorously defend against the cross-complaint.

 

**Keith Warlick, et al. v. FogCutter Capital Group, et al., Superior Court of California for the County ofLos Angeles, Case No. 58365915.**In further response tothe termination of his employment and above lawsuit, on February 6, 2007,Warlick, his wife, and a limited liability company controlled by Warlick, eachof whom is a minority shareholder of Fatburger Holdings, Inc., filed a secondlawsuit against various Fatburger entities, the Company, Andrew Wiederhorn, andmembers of the Fatburger Holdings Inc. Board of Directors. In an amendedcomplaint the plaintiffs allege claims of: (1) common law fraud and negligentmisrepresentation against the Company and Wiederhorn; (2) fraud pursuant toCalifornia Corporate Code §25401 against the Company, Fatburger Holdings, Inc.and Wiederhorn; (3) rescission, breach of contract, breach of the impliedcovenant of good faith and fair dealing against the Company and FatburgerHoldings, Inc.; and (4) breach of fiduciary duty against all defendants. Theseclaims are based business transactions which the plaintiffs allege were not inthe best interests of Fatburger Holdings, Inc. or the plaintiff minorityshareholders. The plaintiffs claim damages of $20 million. The defendantsdispute the allegations of the lawsuit and intend to vigorously defend againstthe claims.

 

**ITEM 1A. RISK FACTORS**

** **

There have been nomaterial changes in the risk factors set forth in *Part I, Item1A – Risk Factors* of our Annual Report as of and for the year endedDecember 31, 2006 on Form 10-K, as previously filed with the SEC on April 2,2007.

 

**ITEM 2. UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

** **

None.

 

**ITEM 3. DEFAULTS UPONSENIOR SECURITIES**

** **

Not applicable.

 

**ITEM 4. SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

** **

**None.**

** **

**ITEM 5. OTHER INFORMATION**

** **

None.

 

**ITEM 6. EXHIBITS**

** **
| 3.1    |   | Amended and Restated  Articles of Incorporation of the Registrant, incorporated by reference to  Exhibit 3.1 to the Form 10-Q for the period ended September 30, 1999, as  previously filed with the SEC on November 22, 1999 (File No. 000-23911). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                |
| 3.2    |   | Bylaws of the Registrant,  incorporated by reference to Exhibit 3.2 to Amendment No. 3 to the  Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                               |

 

26

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

 

27

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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, 2007

 

28

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EXHIBIT INDEX

 
| 3.1    |   | Amended and Restated  Articles of Incorporation of the Registrant, incorporated by reference to  Exhibit 3.1 to the Form 10-Q for the period ended September 30, 1999, as  previously filed with the SEC on November 22, 1999 (File No. 000-23911).                                                                                                        |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 3.2    |   | Bylaws of the  Registrant, incorporated by reference to Exhibit 3.2 to Amendment No. 3 to  the Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.1    |   | Common Stock  Certificate Specimen, incorporated by reference to Exhibit 4.1 to Amendment  No. 3 to the Registration Statement (Registration No. 333-39035) on Form  S-11, as previously filed with the SEC on March 30, 1998.                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.2    |   | Form of Registration  Rights Agreement, incorporated by reference to Exhibit 10.8 to Amendment No.  3 to the Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.3    |   | Form of Stock Option  Plan, incorporated by reference to Exhibit 10.3 to Amendment No. 3 to the  Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.4    |   | Waiver, Release,  Delegation and Amendment to Stock Option and Voting Agreement among Andrew A.  Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, Tiffany Wiederhorn, and  the Registrant, dated July 31, 2002, incorporated by reference to Exhibit 2.1  to the Form 8-K dated August 8, 2002, as previously filed with the SEC on  August 15, 2002. |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.5    |   | Summary of Rights to  Purchase Shares, incorporated by reference to Exhibit 99.1 to the Form 8-K  dated October 18, 2002, as previously filed with the SEC on October 18, 2002.                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.6    |   | Rights Agreement dated  as of October 18, 2002 between the Registrant and The Bank of New York,  incorporated by reference to Exhibit 1 to Form 8-A, as previously filed with  the SEC on October 29, 2002.                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.7    |   | Amendment to the Rights  Agreement, dated as of May 1, 2004, by and between the Registrant and The  Bank of New York, as previously filed with the SEC on March 30, 2005.                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.8    |   | Long Term Vesting Trust  Agreement among the Registrant and Lawrence Mendelsohn, Andrew Wiederhorn and  David Egelhoff, dated October 1, 2000, incorporated by reference to Exhibit  4.4 to the Form 10-K for the year ended December 31, 2002, as previously  filed with the SEC on March 3, 2003.                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.9    |   | Amendment Number 1 to  the Long Term Vesting Trust Agreement dated as of September 19, 2002, by and  between the Registrant and Andrew Wiederhorn, Don Coleman, and David  Dale-Johnson, as previously filed with the SEC on March 30, 2005.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 4.10   |   | Amendment Number 2 to  the Long Term Vesting Trust Agreement, dated as of May 26, 2004, by and  between the Registrant and Andrew Wiederhorn, Don Coleman, and David  Dale-Johnson, as previously filed with the SEC on March 30, 2005.                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 11.1   |   | Computation of Per  Share Earnings.                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 31.1   |   | Certification of Chief  Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 31.2   |   | Certification of Chief  Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 32.1   |   | Certification of the  Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 32.2   |   | Certification of the  Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                  |

 

29

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