##### **UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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 June 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 of registrant as specified in its charter)

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

 

**1410 SWJefferson StreetPortland, OR  97201**(Address of principal executive offices) (Zip Code)

**(503)721-6500  **(Registrant’s telephonenumber, including area code)

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.     Yes x  No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.  (Checkone):

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

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

**APPLICABLEONLY TO CORPORATE ISSUERS:**

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

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

 

 

----

 

 

FOGCUTTER CAPITAL GROUP INC.

FORM 10-Q

INDEX
|                                       | ** ** | ** **                                                                                  | ** ** | **Page No.** |
|---------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|--------------|
| **PART I—FINANCIAL INFORMATION** |       |                                                                                        |
|                                  |       |                                                                                        |       |         |
| Item 1.                               |       | Interim Consolidated Financial Statements  (Unaudited):                                     |       |         |
|                                  |       |                                                                                        |       |         |
|                                  |       | Consolidated Statements of Financial Condition                                              |       | 3            |
|                                  |       |                                                                                        |       |         |
|                                  |       | Consolidated Statements of Operations                                                       |       | 4            |
|                                  |       |                                                                                        |       |         |
|                                  |       | Consolidated Statement of Stockholders’ Equity                                         |       | 5            |
|                                  |       |                                                                                        |       |         |
|                                  |       | Consolidated Statements of Cash Flows                                                       |       | 6            |
|                                  |       |                                                                                        |       |         |
|                                  |       | Notes to Consolidated Financial Statements                                                  |       | 7            |
|                                  |       |                                                                                        |       |         |
| Item 2.                               |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |       | 14           |
|                                  |       |                                                                                        |       |         |
| Item 3.                               |       | Quantitative and Qualitative Disclosures about  Market Risk                                 |       | 23           |
|                                  |       |                                                                                        |       |         |
| Item 4.                               |       | Controls and Procedures                                                                     |       | 24           |
|                                  |       |                                                                                        |       |         |
| **PART II—OTHER INFORMATION**    |       |                                                                                        |
|                                  |       |                                                                                        |       |         |
| Item 1.                               |       | Legal Proceedings                                                                           |       | 25           |
|                                  |       |                                                                                        |       |         |
| Item 1A.                              |       | Risk Factors                                                                                |       | 25           |
|                                  |       |                                                                                        |       |         |
| Item 2.                               |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                |       | 25           |
|                                  |       |                                                                                        |       |         |
| Item 3.                               |       | Defaults Upon Senior Securities                                                             |       | 25           |
|                                  |       |                                                                                        |       |         |
| Item 4.                               |       | Submission of Matters to a Vote of Security Holders                                         |       | 25           |
|                                  |       |                                                                                        |       |         |
| Item 5.                               |       | Other Information                                                                           |       | 25           |
|                                  |       |                                                                                        |       |         |
| Item 6.                               |       | Exhibits                                                                                    |       | 25           |
|                                  |       |                                                                                        |       |         |
| Signatures                            |       | 27                                                                                          |
|                                  |       |                                                                                        |       |         |
| Available information                 |       |                                                                                        |

 

Ourwebsite is www.fogcutter.com.  We makeour annual report on Form 10-K, as well as other reports filed with theSecurities and Exchange Commission, available through our website as soon asreasonably practicable after they are filed. A copy of these reports may also be obtained by writing to us at 1410 SWJefferson Street, Portland, Oregon, 97201, Attn:  Investor Reporting.

 

----

 

 

 

**PART I — FINANCIAL INFORMATION**

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

FOG CUTTER CAPITAL GROUPINC.CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(dollars in thousands, except share data)

 

 
| ** **                                                                                                                                                                                                   | ** ** | **June 30, 2007  (unaudited)** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|
| Assets                                                                                                                                                                                                       |       |                                     |       |                        |       |
| Current Assets:                                                                                                                                                                                              |       |                                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                   |       | $                                        | 1,262      |                        | $          | 1,824 |   |
| Accounts  receivable                                                                                                                                                                                         |       | 1,235                                    |       | 1,586                       |       |
| Notes  receivable, current portion                                                                                                                                                                           |       | 464                                      |       | 464                         |       |
| Loans to senior  executives                                                                                                                                                                                  |       | 1,111                                    |       | 1,077                       |       |
| Inventories                                                                                                                                                                                                  |       | 3,247                                    |       | 2,442                       |       |
| Investments in  real estate, held for sale, net                                                                                                                                                              |       | 10,342                                   |       | 11,062                      |       |
| Current assets  held for sale                                                                                                                                                                                |       | —                                   |       | 27                          |       |
| Other current  assets                                                                                                                                                                                        |       | 534                                      |       | 525                         |       |
| Total current  assets                                                                                                                                                                                        |       | 18,195                                   |       | 19,007                      |       |
|                                                                                                                                                                                                         |       |                                     |       |                        |       |
| Investments in real  estate, net                                                                                                                                                                             |       | 11,350                                   |       | 11,502                      |       |
| Notes receivable                                                                                                                                                                                             |       | 360                                      |       | 371                         |       |
| Property, plant and  equipment, net                                                                                                                                                                          |       | 10,054                                   |       | 10,576                      |       |
| Intangible assets, net                                                                                                                                                                                       |       | 5,124                                    |       | 5,262                       |       |
| Goodwill                                                                                                                                                                                                     |       | 10,526                                   |       | 10,526                      |       |
| Other assets held for  sale                                                                                                                                                                                  |       | —                                   |       | 385                         |       |
| Other assets                                                                                                                                                                                                 |       | 2,061                                    |       | 2,171                       |       |
| Total assets                                                                                                                                                                                                 |       | $                                        | 57,670     |                        | $          | 59,800 |   |
|                                                                                                                                                                                                         |       |                                     |       |                        |       |
| Liabilities and  Stockholders’ Equity                                                                                                                                                                   |       |                                     |       |                        |       |
| Liabilities:                                                                                                                                                                                                 |       |                                     |       |                        |       |
| Accounts payable  and accrued liabilities                                                                                                                                                                    |       | $                                        | 11,135     |                        | $          | 10,658 |   |
| Sales deposits                                                                                                                                                                                               |       | 1,987                                    |       | 1,104                       |       |
| Current  liabilities associated with assets held for sale                                                                                                                                                    |       | —                                   |       | 441                         |       |
| Borrowings and  notes payable, current portion                                                                                                                                                               |       | 15,381                                   |       | 13,453                      |       |
| Obligations  under capital leases, current portion                                                                                                                                                           |       | 580                                      |       | 608                         |       |
| Total current  liabilities                                                                                                                                                                                   |       | 29,083                                   |       | 26,264                      |       |
|                                                                                                                                                                                                         |       |                                     |       |                        |       |
| Borrowings and notes  payable                                                                                                                                                                                |       | 2,537                                    |       | 2,400                       |       |
| Obligations under  capital leases                                                                                                                                                                            |       | 11,733                                   |       | 11,883                      |       |
| Deferred income                                                                                                                                                                                              |       | 4.791                                    |       | 4,061                       |       |
| Deferred income taxes                                                                                                                                                                                        |       | 4,386                                    |       | 4,397                       |       |
| Total  liabilities                                                                                                                                                                                           |       | 52,530                                   |       | 49,005                      |       |
|                                                                                                                                                                                                         |       |                                     |       |                        |       |
| Commitments and  contingencies:                                                                                                                                                                              |       |                                     |       |                        |       |
| Minority interests in  consolidated subsidiaries                                                                                                                                                             |       | 1,066                                    |       | 441                         |       |
| Minority interests in  consolidated subsidiaries held for sale                                                                                                                                               |       | —                                   |       | 130                         |       |
| Total  commitments and contingencies                                                                                                                                                                         |       | 1,066                                    |       | 571                         |       |
|                                                                                                                                                                                                         |       |                                     |       |                        |       |
| Stockholders’ Equity:                                                                                                                                                                                   |       |                                     |       |                        |       |
| Preferred stock,  $.0001 par value; 25,000,000 shares authorized; no shares issued and  outstanding                                                                                                          |       | —                                   |       | —                      |       |
| Common stock,  $.0001 par value; 200,000,000 shares authorized; 11,757,073 shares issued as  of June 30, 2007 and December 31, 2006; 7,957,428 shares outstanding as of  June 30, 2007 and December 31, 2006 |       | 169,871                                  |       | 168,965                     |       |
| Accumulated  deficit                                                                                                                                                                                         |       | (153,788                                 | )          | (146,732                    | )          |
| Treasury stock,  3,799,645 common shares as of June 30, 2007 and December 31, 2006, at cost                                                                                                                  |       | (12,009                                  | )          | (12,009                     | )          |
| Total  stockholders’ equity                                                                                                                                                                             |       | 4,074                                    |       | 10,224                      |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                             |       | $                                        | 57,670     |                        | $          | 59,800 |   |

 

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

 

3

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FOG CUTTER CAPITALGROUP INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)*(dollars in thousands, except share data)*

 
| ** **                                                                                                  | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2007**                              | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue:                                                                                                    |       |                                  |       |                                          |       |   |   |   |   |
| Restaurant and  manufacturing sales                                                                         |       | $                                     | 9,685      |                                          | $          | 8,944 |   | $ | 19,604 |   | $ | 18,539 |   |
| Restaurant  franchise and royalty fees                                                                      |       | 568                                   |       | 598                                           |       | 1,107 |   | 1,235 |   |
| Real estate  rental income                                                                                  |       | 944                                   |       | 983                                           |       | 1,879 |   | 2,050 |   |
| Total revenue                                                                                               |       | 11,197                                |       | 10,525                                        |       | 22,590 |   | 21,824 |   |
|                                                                                                        |       |                                  |       |                                          |       |   |   |   |   |
| Operating costs and  expenses:                                                                              |       |                                  |       |                                          |       |   |   |   |   |
| Restaurant and  manufacturing cost of sales                                                                 |       | 5,515                                 |       | 5,134                                         |       | 11,302 |   | 10,463 |   |
| Real estate  operating expense                                                                              |       | 323                                   |       | 230                                           |       | 709 |   | 672 |   |
| Engineering and  development                                                                                |       | 345                                   |       | 387                                           |       | 731 |   | 797 |   |
| Depreciation and  amortization                                                                              |       | 552                                   |       | 472                                           |       | 1,135 |   | 900 |   |
| Total operating  costs and expenses                                                                         |       | 6,735                                 |       | 6,223                                         |       | 13,877 |   | 12,832 |   |
|                                                                                                        |       |                                  |       |                                          |       |   |   |   |   |
| General and  administrative expenses:                                                                       |       |                                  |       |                                          |       |   |   |   |   |
| Compensation and  employee benefits                                                                         |       | 2,265                                 |       | 3,016                                         |       | 7,113 |   | 5,602 |   |
| Professional  fees                                                                                          |       | 984                                   |       | 1,158                                         |       | 1,657 |   | 1,440 |   |
| Fees paid to  related parties                                                                               |       | —                                |       | 72                                            |       | — |   | 232 |   |
| Other                                                                                                       |       | 4,292                                 |       | 3,697                                         |       | 8,497 |   | 7,180 |   |
| Total general  and administrative expenses                                                                  |       | 7,541                                 |       | 7,943                                         |       | 17,267 |   | 14,454 |   |
|                                                                                                        |       |                                  |       |                                          |       |   |   |   |   |
| Non-operating income  (expense):                                                                            |       |                                  |       |                                          |       |   |   |   |   |
| Gain on sale of  real estate                                                                                |       | —                                |       | 1,188                                         |       | — |   | 1,694 |   |
| Gain on sale of  notes receivable                                                                           |       | —                                |       | —                                        |       | — |   | 496 |   |
| Interest income                                                                                             |       | 61                                    |       | 98                                            |       | 104 |   | 176 |   |
| Interest expense                                                                                            |       | (861                                  | )          | (630                                          | )          | (1,768 | ) | (1,129 | ) |
| Other income,  net                                                                                          |       | 25                                    |       | 376                                           |       | 164 |   | 609 |   |
| Total  non-operating income (expense)                                                                       |       | (775                                  | )          | 1,032                                         |       | (1,500 | ) | 1,846 |   |
|                                                                                                        |       |                                  |       |                                          |       |   |   |   |   |
| Loss before provision  for income taxes, minority interests, and equity in income of equity  investees      |       | (3,854                                | )          | (2,609                                        | )          | (10,054 | ) | (3,616 | ) |
|                                                                                                        |       |                                  |       |                                          |       |   |   |   |   |
| Minority interest in losses                                                                                 |       | 449                                   |       | 53                                            |       | 484 |   | 66 |   |
| Equity in earnings of  equity investees                                                                     |       | —                                |       | 824                                           |       | — |   | 748 |   |
|                                                                                                        |       |                                  |       |                                          |       |   |   |   |   |
| Loss from continuing  operations                                                                            |       | (3,405                                | )          | (1,732                                        | )          | (9,570 | ) | (2,802 | ) |
|                                                                                                        |       |                                  |       |                                          |       |   |   |   |   |
| Income from  discontinued operations (including gain on sale of $2,492 for six months  ended June 30, 2007) |       | —                                |       | 69                                            |       | 2,514 |   | 151 |   |
|                                                                                                        |       |                                  |       |                                          |       |   |   |   |   |
| Net loss                                                                                                    |       | $                                     | (3,405     | )                                             | $          | (1,663 | ) | $ | (7,056 | ) | $ | (2,651 | ) |
|                                                                                                        |       |                                  |       |                                          |       |   |   |   |   |
| Basic loss per share  from continuing operations                                                            |       | $                                     | (0.43      | )                                             | $          | (0.22 | ) | $ | (1.20 | ) | $ | (0.35 | ) |
| Basic earnings per  share from discontinued operations                                                      |       | $                                     | —     |                                          | $          | 0.01 |   | $ | 0.31 |   | $ | 0.02 |   |
| Basic loss per share                                                                                        |       | $                                     | (0.43      | )                                             | $          | (0.21 | ) | $ | (0.89 | ) | $ | (0.33 | ) |
| Basic weighted average  shares outstanding                                                                  |       | 7,957,428                             |       | 7,957,428                                     |       | 7,957,428 |   | 7,957,428 |   |
| Diluted loss per share  from continuing operations                                                          |       | $                                     | (0.43      | )                                             | $          | (0.22 | ) | $ | (1.20 | ) | $ | (0.35 | ) |
| Diluted earnings per  share from discontinued operations                                                    |       | $                                     | —     |                                          | $          | 0.01 |   | $ | 0.31 |   | $ | 0.02 |   |
| Diluted loss per share                                                                                      |       | $                                     | (0.43      | )                                             | $          | (0.21 | ) | $ | (0.89 | ) | $ | (0.33 | ) |
| 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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FOGCUTTER CAPITAL GROUP INC.

CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

*(dollars in thousands, exceptshare 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                            |       | —                |       | —                  |       | —          |       | —     |       | (7,056 | ) | (7,056 | ) |
| Stock options expensed  in net loss |       | —                |       | 906                     |       | —          |       | —     |       | — |   | 906 |   |
| Balance at June 30,  2007      |       | 7,957,428             |       | $                       | 169,871    |            | 3,799,645  |       | $          | (12,009 | ) | $ | (153,788 | ) | $ | 4,074 |   |

----

(1)             Issuedand outstanding

 

The accompanying notes are an integral part of theseconsolidated financial statements.

5

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FOG CUTTER CAPITAL GROUPINC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)*****(dollars in thousands)*

** **
|                                                                        | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                             | ** ** | **June 30,**      | ** ** | **June 30,**              | ** ** |
| ** **                                                             | ** ** | **2007**               | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cash flows from operating activities:              |       |                   |       |                           |       |   |   |   |   |
| Net loss                                                               |       | $                      | (3,405     | )                              | $          | (1,663 | ) | $ | (7,056 | ) | $ | (2,651 | ) |
| Income from  discontinued operations                                   |       | —                 |       | (69                            | )          | (2,514 | ) | (151 | ) |
| Loss from  continuing operations                                       |       | (3,405                 | )          | (1,732                         | )          | (9,570 | ) | (2,802 | ) |
| Adjustments to  reconcile net loss to net operating cash flows:        |       |                   |       |                           |       |   |   |   |   |
| Equity in  earnings of equity investees                                |       | —                 |       | (824                           | )          | — |   | (748 | ) |
| Depreciation and  amortization                                         |       | 796                    |       | 646                            |       | 1,625 |   | 1,233 |   |
| Gain on foreign  currency                                              |       | (138                   | )          | (368                           | )          | (253 | ) | (505 | ) |
| Gain on sale of  notes receivable and other assets                     |       | —                 |       | —                         |       | — |   | (496 | ) |
| Gain on sale of  real estate                                           |       | —                 |       | (1,188                         | )          | — |   | (1,694 | ) |
| Share based  compensation                                              |       | 480                    |       | 58                             |       | 906 |   | 114 |   |
| Market value  impairment reserve                                       |       | 1,109                  |       | —                         |       | 1,109 |   | — |   |
| Other                                                                  |       | (409                   | )          | (27                            | )          | (404 | ) | (17 | ) |
| Change in:                                                             |       |                   |       |                           |       |   |   |   |   |
| Other assets                                                           |       | (501                   | )          | 216                            |       | (663 | ) | (220 | ) |
| Deferred income                                                        |       | 255                    |       | (30                            | )          | 730 |   | (50 | ) |
| Deferred income  taxes                                                 |       | (4                     | )          | (75                            | )          | (11 | ) | (83 | ) |
| Accounts payable  and accrued liabilities                              |       | (28                    | )          | 1,451                          |       | 2,412 |   | 916 |   |
| Net cash used in  operating activities                                 |       | (1,845                 | )          | (1,873                         | )          | (4,119 | ) | (4,352 | ) |
|                                                                   |       |                   |       |                           |       |   |   |   |   |
| Cash flows from  investing activities:                                 |       |                   |       |                           |       |   |   |   |   |
| Proceeds from  sale of real estate                                     |       | —                 |       | 2,641                          |       | — |   | 6,126 |   |
| Proceeds from  sale of notes receivable and other assets               |       | —                 |       | —                         |       | — |   | 664 |   |
| Investment in  real estate                                             |       | (36                    | )          | (362                           | )          | (154 | ) | (1,267 | ) |
| Purchase of net  assets of restaurant operations                       |       | —                 |       | —                         |       | — |   | (688 | ) |
| Investments in  property, plant, and equipment                         |       | (424                   | )          | (699                           | )          | (1,760 | ) | (1,050 | ) |
| Other                                                                  |       | (12                    | )          | (12                            | )          | (25 | ) | (20 | ) |
| Net cash  provided by (used in) investing activities                   |       | (472                   | )          | 1,568                          |       | (1,939 | ) | 3,765 |   |
|                                                                   |       |                   |       |                           |       |   |   |   |   |
| Cash flows from  financing activities:                                 |       |                   |       |                           |       |   |   |   |   |
| Proceeds from  borrowings                                              |       | 1,052                  |       | 2,032                          |       | 2,116 |   | 2,399 |   |
| Repayments on  borrowings                                              |       | (33                    | )          | (875                           | )          | (155 | ) | (1,150 | ) |
| Repayments under  capital leases                                       |       | (97                    | )          | (137                           | )          | (177 | ) | (274 | ) |
| Investments by  minority interests, net                                |       | 1,075                  |       | 128                            |       | 1,100 |   | 225 |   |
| Dividend  payments on common stock                                     |       | —                 |       | —                         |       | — |   | (1,034 | ) |
| Net cash  provided by financing activities                             |       | 1,997                  |       | 1,148                          |       | 2,884 |   | 166 |   |
|                                                                   |       |                   |       |                           |       |   |   |   |   |
| Effect of exchange rate  change on cash                                |       | (2                     | )          | 1                              |       | (2 | ) | 10 |   |
| Net change in cash and  cash equivalents from continuing operations    |       | (322                   | )          | 844                            |       | (3,176 | ) | (411 | ) |
|                                                                   |       |                   |       |                           |       |   |   |   |   |
| Net change in cash and  cash equivalents from discontinued operations: |       |                   |       |                           |       |   |   |   |   |
| Net cash provided  by (used in) operating activities                   |       | (35                    | )          | 362                            |       | (57 | ) | 267 |   |
| Net cash  provided by investing activities                             |       | —                 |       | —                         |       | 2,925 |   | — |   |
| Net cash used in  financing activities                                 |       | —                 |       | (159                           | )          | (254 | ) | (405 | ) |
| Net change in cash and  cash equivalents                               |       | (357                   | )          | 1,047                          |       | (562 | ) | (549 | ) |
| Cash and cash  equivalents at beginning of period                      |       | 1,619                  |       | 2,475                          |       | 1,824 |   | 4,071 |   |
| Cash and cash  equivalents at end of period                            |       | $                      | 1,262      |                           | $          | 3,522 |   | $ | 1,262 |   | $ | 3,522 |   |
|                                                                   |       |                   |       |                           |       |   |   |   |   |
| Supplemental  disclosures of cash flow information:                    |       |                   |       |                           |       |   |   |   |   |
| Cash paid for  interest                                                |       | $                      | 758        |                           | $          | 518 |   | $ | 1,547 |   | $ | 1,031 |   |
| Cash paid for  income taxes                                            |       | $                      | 4          |                           | $          | 75 |   | $ | 11 |   | $ | 83 |   |
|                                                                   |       |                   |       |                           |       |   |   |   |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

6

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)**

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

The accompanying interimconsolidated financial statements of Fog Cutter Capital Group Inc. andSubsidiaries (“FCCG” or the “Company”) are unaudited and have been prepared inconformity with the requirements of Regulation S-X promulgated under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), particularlyRule 10-01 thereof, which governs the presentation of interim financial statements.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  The accompanying interim consolidatedfinancial statements should be read in conjunction with the Company’s AnnualReport as of and for the year ended December 31, 2006 on Form 10-K (“2006 Form10-K”), as previously filed with the SEC on April 2, 2007.  Except as described below, there have been nochanges to the Company’s significant accounting policies as described in Note 2to the consolidated financial 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 six months ended June 30, 2007 are notnecessarily indicative of the results that may be expected for the year endingDecember 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 coulddiffer 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, certain reclassifications of the balances and modificationsto the presentation of the financial statements have been made, including thereclassification of certain investments in real estate as held for sale.  None of these changes in presentationaffected previously reported results of operations.

At June 30, 2007, certainCompany officers and directors had, directly or indirectly, majority votingcontrol of the Company.

*Accountingfor income taxes*

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48 (“FIN 48”), clarifying the manner in whichenterprises account for uncertainty in income taxes recognized in an enterprise’sfinancial statements.  The interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  The Companyadopted FIN 48 on January 1, 2007 with no material effect to the Company’sconsolidated financial statements.

**NOTE 2**—**RESTATEMENTOF 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 ofoperations, stockholders’ equity, and cash flows for each of the fiscal yearsended December 31, 2005 and 2004 as a result of a change in the method ofaccounting to correct an error in accounting for certain capital leases and thecorrection of certain timing errors in the recognition of sales.  The restatement is more fully described in *Note 3 — Restatement of Consolidated Financial Statements* tothe Consolidated Financial Statements and in *Item 7 —Management’s Discussion and Analysis of Financial Condition and Results ofOperations* of the 2006 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 December 31, 2006,and the related opinions of its independent registered public accounting firm,and all earnings press releases and similar communications issued by theCompany during that period, are superseded in their entirety by the 2006 Form10-K.

**NOTE 3**—**SIGNIFICANTEVENTS**

The following significantevents affected our operations for the six months ended June 30, 2007:

*Restaurant openings*

During the six monthsended June 30, 2007, Fatburger Holdings Inc. (“Fatburger”), the Company’srestaurant operations subsidiary, opened two additional franchise locations.

*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”).  The Company received $2.9 million for itsportion of the proceeds and recorded a gain on sale of $2.5 million.

7

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*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 $3.2million and is secured primarily by the Company’s interest in its wholly ownedsubsidiary, DAC International (“DAC”). The terms of the amended note were not significantly different from theterms at December 31, 2006.

In May 2007, the Companyborrowed and 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 $3.1 million and is secured primarilyby the Company’s interest in an LLC owned by the Company which holds theCompany’s real estate lease portfolio. The terms of the amended note were not significantly different from theterms at December 31, 2006.

*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 BulletinBoard 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 theOTCBB, the Company’s shares were quoted by Pink Sheets LLC.

*Board of directors’ changes*

Effective May 21, 2007,Kenneth J. Anderson was elected by the Company’s stockholders as an independentdirector.  Mr. Anderson is a foundingpartner of Quintile Wealth Management and has over twenty-five years offinancial consulting and accounting experience. He replaces M. Ray Mathis, who retired from the Company’s board ofdirectors 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’s employment with Fatburger wasterminated on September 21, 2006 by resolution of the board of directors ofFatburger Holdings, Inc.  The Fatburgercompanies initiated the lawsuit to recover damages from Warlick arising fromwrongful acts and conduct during and after his employment, and are assertingclaims for:  breach of contract, breachof duty of loyalty, breach of fiduciary duty, conversion — embezzlement;fraud/commencement; intentional interference with contractual relations, andequitable indemnity.  Warlick filed ananswer to the lawsuit denying the allegations and included a cross-complaintagainst Fatburger Holdings, Inc., Fatburger Corporation, Fatburger NorthAmerica, Inc., Fog Cutter Capital Group, Inc., and Andrew Wiederhorn, forbreach of contract, employment discrimination based on race and retaliation,wrongful termination and defamation — slander without any specification ofdamages. The defendants to the cross-complaint filed by Warlick dispute theallegations of the cross-complaint and intend to vigorously defend against thecross-complaint.

In furtherresponse to the termination of his employment and above lawsuit, on February 6,2007, Warlick, his wife, and a limited liability company controlled by Warlick,each of whom is a minority shareholder of Fatburger Holdings, Inc., filed asecond lawsuit against various Fatburger entities, the Company, AndrewWiederhorn, and members of the Fatburger Holdings, Inc. board ofdirectors.  In an amended complaint theplaintiffs allege claims of: (1) common law fraud and negligentmisrepresentation against the Company and Wiederhorn; (2) fraud pursuant to CaliforniaCorporate Code §25401 against the Company, Fatburger Holdings, Inc. andWiederhorn; (3) rescission, breach of contract, breach of the implied covenantof good faith and fair dealing against the Company and Fatburger Holdings,Inc.; and (4) breach of fiduciary duty against all defendants.  These claims are based on businesstransactions which the plaintiffs allege were not in the best interests ofFatburger Holdings, Inc., or the plaintiff minority shareholders.  The plaintiffs claim damages of $20million.  The defendants dispute the allegationsof the lawsuit and intend to vigorously defend against the claims.

*Liquidity*

As of June 30,2007, borrowings of $0.9 million related to one Barcelona property wasreflected as a current liability in the accompanying Consolidated Statements ofFinancial Condition due to management’s intention to sell the property andrepay the related debt at the time of sale.

As of June 30,2007, Fatburger was not in compliance with all obligations under the agreementsevidencing its indebtedness, as defined in the applicable agreements.  Fatburger failed to meet the prescribed fixedcharge coverage ratio and the prescribed debt-coverage ratio for three notespayable.  As a result, the lender has theright to demand repayment of the notes after serving notice.  As such, in the accompanying ConsolidatedStatements of Financial Condition, approximately $3.9 million of long-term debthas been classified as current liabilities. The lender has not demanded early repayment of the loans; however, ifthe lender exercises its right to demand payment, the Company’s liquidity wouldbe adversely affected in a material manner.

8

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The sale of realestate and 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 doesnot have a fixed dividend policy, and may declare and pay new dividends oncommon stock, subject to financial condition, results of operations, capitalrequirements and other factors deemed relevant by the Board of Directors.  One factor the Board of Directors mayconsider is the impact of dividends on the Company’s liquidity.  No dividends have been declared or paid in2007.

*Fatburger operations*

The Company expects that Fatburger will require capital resourcesand have negative cash flow in the near term while it pursues a growth strategythrough developing additional franchisee and company-owned restaurants.  Fatburger development involves substantialrisks that the Company intends to manage; however, it cannot be assured thatpresent or future development will perform in accordance with the Company’sexpectations or that any restaurants will generate the Company’s expectedreturns on investment.  The Company’sinability to expand Fatburger in accordance with planned expansion or to managethat growth could have a material adverse effect on the Company’s operationsand financial condition.  In addition, ifFatburger or its franchisees are unsuccessful in obtaining capital sufficientto fund this expansion, the timing of restaurant openings may be delayed andFatburger’s results may be adversely affected.

*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 of its marketing, there can beno assurance that it will be successful in attracting a significant customerbase.  Centrisoft is currently marketingits software to potential customers both directly and through re-sellerrelationships.  There can be no assurancethat Centrisoft will be successful in generating sufficient cash flow tosupport its own operations in the near term.

*Other*

In order tofacilitate the development of franchise locations, as of June 30, 2007,Fatburger had guaranteed the annual minimum lease payments of four restaurantsites owned and operated by franchisees. The guarantees approximate $1.1 million plus certain contingent rentalpayments as defined in the respective leases. These leases expire at various times through 2015.

The Company may utilize awide variety of off-balance sheet financial techniques to manage risk.  In hedging the interest rate and/or exchangerate exposure of a foreign currency denominated asset or liability, the Companymay enter into hedge transactions to counter movements in interest rates andforeign currencies.  These hedges may bein the form of currency and interest rate swaps, options, and forwards, orcombinations thereof.  As of June 30,2007, the Company has no outstanding derivative instruments held for trading orhedging purposes.

There were noother off-balance sheet arrangements in place as of June 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.  Themaximum number of shares of common stock that may be issued pursuant to optionsgranted under the Option Plan is 3,500,000 shares.  Newly elected directors automatically receive5,000 options on the day they join the Board. Additionally, each independent director receives, on the last day ofeach quarter, an automatic non-statutory option grant to purchase 1,500 sharesof common stock at 110% of the fair market value on that day.  Automatic grants will vest one third on eachof the first three anniversaries of the grant date and expire on the tenthanniversary of the grant date.  TheCompany granted a total of 14,000 options to its independent directors in thesix months ending June 30, 2007, and the retirement of one board memberresulted in the forfeiture of 128,667 unvested options during that time.  In addition, the Company granted to certainManagers of the Company (as defined by the Option Plan) options to purchase atotal of 310,000 shares of common stock at 110% of the fair market value on thegrant dates.  These grants will vest onethird on each of the first three anniversaries of the grant dates and expire onthe tenth anniversary of the grant dates.

There were no optionsgranted with exercise prices below the market value of the stock at the grantdate.  Fair values for 2007 wereestimated using the Black-Scholes option-pricing model with the followingweighted average assumptions used: 0% dividend yield, expected volatility of76%, risk-free interest rate of 5.0% and expected lives of five years.

9

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A summary of our stockoptions activity for the six months ended June 30, 2007 is presented below:

|                                 | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|---------------------------------|------------|------------|------------|------------------------------------------------|------------|
| Outstanding at  January 1, 2007 |       | 2,762,000  |       | $                                              | 1.45       |   |
| Granted                         |       | 324,000    |       | $                                              | 2.30       |   |
| Exercised                       |       | —     |       | $                                              | —     |   |
| Cancelled/forfeited             |       | (128,667   | )          | $                                              | 2.89       |   |
| Outstanding at  June 30, 2007   |       | 2,957,333  |       | $                                              | 1.48       |   |
|                            |       |       |       |                                           |       |

 

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

| Range of Exercise Prices | ** ** | **Shares** | ** ** | **Weighted Average  Remaining Life** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|-----------------------------------------|------------|------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| $1.00 – 2.00                       |       | 2,613,000  |       | 9.5                                            |       | $                                              | 1.32       |   |
| $2.01 – 4.00                       |       | 300,000    |       | 9.7                                            |       | $                                              | 2.36       |   |
| $4.01 – 8.00                       |       | 44,333     |       | 7.0                                            |       | $                                              | 4.55       |   |
| Total                                   |       | 2,957,333  |       | 9.5                                            |       | $                                              | 1.48       |   |

 

**NOTE 6—VARIABLE INTEREST ENTITIES**

As of June 30, 2007, theCompany has loaned $10.2 million to two related Spanish entities formed topurchase, reposition and sell apartment buildings in Barcelona, Spain.  Under the terms of the loans, the investmentsmeet the definition of a Variable Interest Entity (“VIE”) under FASBInterpretation No. 46 (“FIN 46”) and the Company is the primary beneficiary ofthe VIE.  As a result, the assets,liabilities, and results of operations of the VIE have been consolidated intothe accompanying consolidated financial statements as of June 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 $10.0 million, including capital improvements and carryingcosts.  The two properties met the criteria to be classified as “held for sale” and areclassified as such on the Statement of Financial Condition at June 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 buyerfailed to perform under terms of the contract, the Company recognized $0.7million in revenue from a forfeited deposit, and the building was re-listed forsale.  Based upon management’s estimateof the fair value, the Company recorded a $1.1 million market value impairmenton this building.  Assets and liabilities of the VIE included inthe accompanying consolidated statements of financial condition are summarizedas follows:

| Investment in real estate,  held for sale, net                                   |   | $       | 9,979,000 |   |
|----------------------------------------------------------------------------------|--------|---------|-----------|--------|
| Other assets                                                                     |   | 35,000  |      |
| Borrowings and  notes payable (included in current liabilities at June 30, 2007) |   | 937,000 |      |
| Accrued expenses  and other liabilities                                          |   | 35,000  |      |
| Minority interest                                                                |   | 372,000 |      |

 

**NOTE 7—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 loans are full recourse to the borrowerand bear interest at the prime rate.  Thetotal amount of loans receivable from Mr. Wiederhorn, including compoundedinterest, was $1.1 million at June 30, 2007. The loans matured on February 21, 2007. The Company has not extended the maturity date of the loans or amendedany other terms.  The Company and Mr.Wiederhorn are cooperating in completing the repayment of the loans in full.

**NOTE 8—INVENTORIES**

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

|                    | ** ** | **June 30, 2007**          | ** ** | **December 31, 2006** | ** ** |
|--------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **         | ** ** | **(dollars in thousands)** | ** ** |
|               |       |                                 |       |                            |       |
| Raw materials      |       | $                                    | 1,281      |                            | $          | 1,703 |   |
| Work in progress   |       | 1,016                                |       | 138                             |       |
| Finished goods     |       | 950                                  |       | 601                             |       |
| Total  inventories |       | $                                    | 3,247      |                            | $          | 2,442 |   |

 

10

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**NOTE 9—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.  Eachsegment operates with its own management and personnel.  Beginning in the fourth quarter of 2006, theCompany began allocating certain corporate expenses to Fatburger through amanagement fee.  This management fee isreflective of management’s increased involvement in the restaurantoperations.  The Company began chargingthis fee to more closely represent the true costs of restaurant operations inthe appropriate segment reporting.  Themanagement fee is eliminated upon consolidation.  The following is a summary of each of theoperating segments:

*Restaurant operations*

As of June 30, 2007, theCompany owned approximately 82% of the voting control of Fatburger, whichoperates or franchises 88 hamburger restaurants located primarily in Californiaand Nevada.  Franchisees currently ownand operate 53 of the Fatburger locations. Two new franchise restaurants were opened during the six months endedJune 30, 2007.
| ** **                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                | ** ** |
| ** **                                | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Company-owned  restaurant sales           |       | $                                                   | 7,147      |                                              | $          | 6,782 |   | $ | 14,749 |   | $ | 13,068 |   |
| Royalty revenue                           |       | 528                                                 |       | 548                                               |       | 1,046 |   | 1,111 |   |
| Franchise fee revenue                     |       | 40                                                  |       | 50                                                |       | 61 |   | 124 |   |
| Total revenue                             |       | 7,715                                               |       | 7,380                                             |       | 15,856 |   | 14,303 |   |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Cost of sales                             |       | (4,196                                              | )          | (3,805                                            | )          | (8,607 | ) | (7,463 | ) |
| Depreciation and  amortization            |       | (498                                                | )          | (419                                              | )          | (1,032 | ) | (775 | ) |
| Other general &  administrative costs |       | (3,663                                              | )          | (3,591                                            | )          | (7,550 | ) | (6,666 | ) |
| Interest expense                          |       | (166                                                | )          | (185                                              | )          | (381 | ) | (440 | ) |
| Management allocation                     |       | (536                                                | )          | —                                            |       | (1,072 | ) | — |   |
| Minority interest in  losses              |       | 449                                                 |       | 52                                                |       | 484 |   | 66 |   |
| Segment loss                              |       | $                                                   | (895       | )                                                 | $          | (568 | ) | $ | (2,302 | ) | $ | (975 | ) |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Capital expenditures                      |       | $                                                   | 264        |                                              | $          | 566 |   | $ | 507 |   | $ | 827 |   |
| Segment assets                            |       |                                                |       |                                              |       | $ | 22,065 |   | $ | 21,054 |   |
| Minority interests                        |       |                                                |       |                                              |       | $ | 694 |   | $ | 148 |   |

 

*Manufacturing operations*

The Company conducts manufacturing activities through its wholly-ownedsubsidiary, DAC International.  DAC is asupplier of computer controlled lathes and milling machinery for the productionof eyeglass, contact, and intraocular lenses.
| ** **                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                | ** ** |
| ** **                                | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Manufacturing sales                       |       | $                                                   | 2,528      |                                              | $          | 2,158 |   | $ | 4,841 |   | $ | 5,451 |   |
| Cost of sales                             |       | (1,319                                              | )          | (1,329                                            | )          | (2,695 | ) | (3,000 | ) |
| Engineering and  development              |       | (233                                                | )          | (211                                              | )          | (469 | ) | (441 | ) |
| Depreciation and  amortization            |       | (23                                                 | )          | (13                                               | )          | (47 | ) | (20 | ) |
| Other general &  administrative costs |       | (644                                                | )          | (499                                              | )          | (1,265 | ) | (877 | ) |
| Interest expense                          |       | (12                                                 | )          | —                                            |       | (14 | ) | (6 | ) |
| Other non-operating  income               |       | 3                                                   |       | 7                                                 |       | 17 |   | 7 |   |
| Segment income                            |       | $                                                   | 300        |                                              | $          | 113 |   | $ | 368 |   | $ | 1,114 |   |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Capital expenditures                      |       | $                                                   | 24         |                                              | $          | 22 |   | $ | 69 |   | $ | 60 |   |
| Segment assets                            |       |                                                |       |                                              |       | $ | 5,940 |   | $ | 4,845 |   |

 

11

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*Real estate and financingoperations*

The Company owns various interests in real estate and notesreceivable.  At June 30, 2007, realestate is comprised of ownership or leasehold interests in 72 freestandingretail buildings located throughout the United States and two apartment buildingslocated in Barcelona, Spain.  At June 30,2007, notes receivable have a carrying value of $0.8 million and are primarilysecured by real estate.
| ** **                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                | ** ** |
| ** **                                | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental income                             |       | $                                                   | 944        |                                              | $          | 983 |   | $ | 1,879 |   | $ | 2,050 |   |
| Operating  expenses                       |       | (323                                                | )          | (230                                              | )          | (709 | ) | (671 | ) |
| Depreciation and  amortization            |       | (113                                                | )          | (120                                              | )          | (224 | ) | (258 | ) |
| Other general  & administrative costs |       | (59                                                 | )          | (163                                              | )          | (109 | ) | (404 | ) |
| Interest income                           |       | 61                                                  |       | 98                                                |       | 104 |   | 177 |   |
| Interest expense                          |       | (679                                                | )          | (406                                              | )          | (1,356 | ) | (662 | ) |
| Other  non-operating income               |       | 1,131                                               |       | 1,557                                             |       | 1,256 |   | 2,790 |   |
| Market value  impairment reserves         |       | (1,109                                              | )          | —                                            |       | (1,109 | ) | — |   |
| Equity in  earnings of equity investees   |       | —                                              |       | 824                                               |       | — |   | 748 |   |
| Segment income  (loss)                    |       | $                                                   | (147       | )                                                 | $          | 2,543 |   | $ | (268 | ) | $ | 3,770 |   |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                   | 36         |                                              | $          | 362 |   | $ | 154 |   | $ | 1,190 |   |
| Segment assets                            |       |                                                |       |                                              |       | $ | 26,413 |   | $ | 33,364 |   |
| Investment in  equity investees           |       |                                                |       |                                              |       | $ | — |   | $ | 1,600 |   |
| Minority  interests                       |       |                                                |       |                                              |       | $ | 372 |   | $ | 479 |   |

 

Other non-operatingincome for the six months ended June 30, 2007 is primarily composed of foreigncurrency gains of $0.3 million, commission and other non-operating revenue of$0.3 million, and a forfeited deposit on the sale of one Barcelona property of$0.7 million.  This compares to a gain onsale of real estate ($1.7 million), gain on sale of notes receivable ($0.5million), foreign currency gains ($0.5 million), and commission and othernon-operating revenue ($0.1 million) for the six months ended June 30, 2006.

 

*Software development and salesoperations*

The Company holds a 79% ownership interest inCentrisoft, which conducts software development and sales activities.  Centrisoft develops and sells software thatcontrols and enhances the productivity of enterprise networks and providesfirst level security against unauthorized applications and users.
| ** **                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                | ** ** |
| ** **                                | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Software sales                            |       | $                                                   | 10         |                                              | $          | 3 |   | $ | 14 |   | $ | 20 |   |
| Engineering and  development              |       | (112                                                | )          | (176                                              | )          | (262 | ) | (356 | ) |
| Depreciation and  amortization            |       | (112                                                | )          | (89                                               | )          | (224 | ) | (167 | ) |
| Other general  & administrative costs |       | (151                                                | )          | (446                                              | )          | (372 | ) | (882 | ) |
| Interest expense                          |       | (283                                                | )          | (188                                              | )          | (552 | ) | (353 | ) |
| Segment loss                              |       | $                                                   | (648       | )                                                 | $          | (896 | ) | $ | (1,396 | ) | $ | (1,738 | ) |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                   | —     |                                              | $          | — |   | $ | — |   | $ | 7 |   |
| Segment assets                            |       |                                                |       |                                              |       | $ | 3,399 |   | $ | 3,845 |   |

 

*Reconciliation to total net loss*
| ** **                           | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)**                | ** ** |
|                                 |       |                                                |       |                                              |       |   |   |   |   |
| Segment loss  from operations        |       | $                                                   | (1,390     | )                                                 | $          | 1,192 |   | $ | (3,598 | ) | $ | 2,171 |   |
| Corporate  expenses                  |       | (2,831                                              | )          | (3,075                                            | )          | (7,578 | ) | (5,306 | ) |
| Elimination of  intercompany charges |       | 816                                                 |       | 151                                               |       | 1,606 |   | 333 |   |
| Income from  discontinued operations |       | —                                              |       | 69                                                |       | 2,514 |   | 151 |   |
| Net loss                             |       | $                                                   | (3,405     | )                                                 | $          | (1,663 | ) | $ | (7,056 | ) | $ | (2,651 | ) |

** **

** **

12

----

 

 

**NOTE 10—DISCONTINUEDOPERATIONS**

 

Prior to February, 2007, the Company held a 51% ownership interest inGeorge Elkins, a California commercial 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 ofGeorge Elkins have been classified as held for sale at December 31, 2006 andresults from operations of George Elkins for the six months ended June 30, 2007and 2006 have been classified as discontinued operations.  Prior to disposal, George Elkins was areportable segment of the Company’s operations.
| ** **                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**                | ** ** |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Loan brokerage  fees                      |       | $                                                   | —     |                                              | $          | 1,703 |   | $ | 1,673 |   | $ | 3,396 |   |
| Loan servicing  fees                      |       | —                                              |       | 192                                               |       | 134 |   | 491 |   |
| Total revenue                             |       | —                                              |       | 1,895                                             |       | 1,807 |   | 3,887 |   |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Depreciation and  amortization            |       | —                                              |       | (7                                                | )          | (4 | ) | (14 | ) |
| Other general  & administrative costs |       | —                                              |       | (1,800                                            | )          | (1,811 | ) | (3,683 | ) |
| Interest income                           |       | —                                              |       | 1                                                 |       | 2 |   | 3 |   |
| Other  non-operating income               |       | —                                              |       | 136                                               |       | 15 |   | 280 |   |
| Minority  interest in earnings            |       | —                                              |       | (156                                              | )          | 13 |   | (322 | ) |
| Gain on sale of  discontinued operations  |       | —                                              |       | —                                            |       | 2,492 |   | — |   |
| Income from  discontinued operations      |       | $                                                   | —     |                                              | $          | 69 |   | $ | 2,514 |   | $ | 151 |   |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Capital  expenditures                     |       | $                                                   | —     |                                              | $          | — |   | $ | — |   | $ | — |   |
| Segment assets                            |       |                                                |       |                                              |       | $ | — |   | $ | 1,266 |   |
| Minority interests                        |       |                                                |       |                                              |       | $ | — |   | $ | 219 |   |

 

**NOTE 11—SUBSEQUENT EVENTS**

 

*Restaurant openings*

Subsequent to June 30, 2007, Fatburger opened one additional franchiselocation.

 

*Sale of real estate*

In July 2007, the Company sold one stand-alone retail location for $0.4million in cash.  The property had a netbook value of $0.4 million at the time of disposal, and the Company recognizeda gain on the sale of less than $0.1 million.

13

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| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION 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, asamended.  Forward-Looking Statements arebased on various assumptions and events (some of which are beyond the Company’scontrol) and may be identified by reference to a future period or periods, orby the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,”“anticipate,” “continue,” or similar terms or variations on those terms, or thenegative of those terms.  Actual resultscould differ materially from those set forth in Forward-Looking Statements dueto a variety of factors, including, but not limited to the Risk Factorsidentified herein 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 revisionswhich may be made to any Forward-Looking Statements to reflect the occurrenceof anticipated or unanticipated events or circumstances after the date of suchstatements.*

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

## **Executive Overview**

*Businessoverview*

Fog Cutter Capital GroupInc. is primarily engaged in the operations of its Fatburger Holdings, Inc. (“Fatburger”)restaurant business.  Later in our 2007fiscal year, we intend to change our corporate name to Fatburger RestaurantsInc. in order to better reflect our primary business going forward.

Fatburger, “The LastGreat Hamburger Stand”®, opened its first restaurant in Los Angeles in1952.  As of June 30, 2007, there were 88Fatburger restaurants located in 14 states and in Canada.  The restaurants specialize in fresh, made toorder hamburgers and other specialty sandwiches.  French fries, homemade onion rings,hand-scooped ice cream shakes and soft drinks round out the menu.  We acquired the controlling interest inFatburger in August 2003 and currently own 82% voting control.

We plan to openadditional Fatburger restaurants throughout the United States andinternationally, including Canada and China. We intend to continue to open company-owned restaurants in strategicmarkets and increase the number of franchised locations in the U.S. andinternationally.  Franchisees currentlyown and operate 53 of the Fatburger locations and we have agreements forapproximately 217 new franchise locations. As is typical for our industry, the identification of qualifiedfranchisees and quality locations has an impact on the rate of growth in thenumber 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.

 

14

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*Operating segments*

Our operating segmentsare:

(i)             Restaurant operations — conductedthrough our Fatburger subsidiary,

(ii)          Manufacturing operations — conductedthrough our wholly owned subsidiary, DAC International (“DAC”),

(iii)       Real estate and financeoperations, and

(iv)      Software development andsales operations — conducted through our subsidiary, CentrisoftCorporation (“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 instead focuses on aninvestment-by-investment or asset-by-asset analysis within our operatingsegments.

*Significant events*

The following significantevents affected our operations for the three and six months ended June 30,2007:

·                  Restaurantopenings — During the three and six months ended June 30, 2007,Fatburger opened one and two additional franchise locations, respectively.

·                  Discontinuedoperations — On February 28, 2007, Fog Cap Commercial Lending Inc.,our wholly-owned subsidiary, sold its 51% interest in George Elkins MortgageBanking Company (“George Elkins”).  Wereceived $2.9 million for our portion of the proceeds and recorded a gainon sale of $2.5 million.

·                  Borrowingson notes payable — In January 2007, we borrowed an additional $1.1 millionon a note payable that had a balance of $2.1 million at December 31,2006.  The amended note has a balance of$3.2 million and is secured primarily by our interest in DAC.  The terms of the amended note were notsignificantly different from the terms at December 31, 2006.

·                  Borrowingson notes payable — In May 2007, we borrowed an additional $1.0 millionon a note payable that had a balance of $2.1 million at December 31,2006.  The amended note has a balance of$3.1 million and is secured primarily by our interest in our real estatelease portfolio.  The terms of theamended note were not significantly different from the terms at December 31,2006.

·                  OTCBulleting Board listing — Effective June 24, 2007, our common stockbegan trading on the OTC Bulletin Board (the “OTCBB”) market as FCCG.OB.  The OTC Bulletin Board is a regulatedquotation service that displays real-time quotes, last-sale prices, and volumeinformation in qualifying over-the-counter equity securities.  Prior to being listed on the OTCBB, ourshares were quoted by Pink Sheets LLC.

·                  Boardof directors’ changes — Effective May 21, 2007, Kenneth J. Andersonwas elected by our stockholders as an independent director.  Mr. Anderson is a founding partner ofQuintile Wealth Management and has over twenty-five years of financialconsulting and accounting experience.  Hereplaces M. Ray Mathis, who retired from our board of directors effective May20, 2007.

**Resultsof operations**

We incurred net lossesfrom continuing operations as follows:
| ** **                           | ** ** | **Three months ended June 30,**                             | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                                                        | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Net loss from  continuing operations |       | $                                                                               | (3,405     | )                                                 | $          | (1,732 | ) | $ | (9,570 | ) | $ | (2,802 | ) |
| Net loss per share                   |       | $                                                                               | (0.43      | )                                                 | $          | (0.22 | ) | $ | (1.20 | ) | $ | (0.35 | ) |

 

Our net loss fromcontinuing operations was $9.6 million (or $1.20 per share) for the sixmonths ended June 30, 2007, and $3.4 million (or $0.43 per share) for thethree months then ended.  This comparesto $2.8 million (or $0.35 per share) for the six months ended June 30,2006, and $1.7 million (or $0.22 per share) for the second quarter of2006.  The loss is primarily due tooperating expenses associated with our management infrastructure.  We have put in place a management structurewhich we believe will enable us to significantly expand our operations, notablyour Fatburger subsidiary.  However, untilthe growth is realized, the cost of our management structure will be borne byour existing operations.

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

 

15

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*Restaurant segment operations*

The following table shows our operating margin for company-ownedrestaurants for the three and six months ended June 30, 2007 and 2006:
| ** **                                              | ** ** | **Three months ended June 30,**           | ** ** | **Six months ended June 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 |       | (25.1                                                         | %)         | (25.2                                             | %)         | (24.5 | %) | (26.6 | %) |
| Cost of sales — wages and benefits       |       | (33.6                                                         | %)         | (30.9                                             | %)         | (33.8 | %) | (30.5 | %) |
| Restaurant depreciation and amortization                |       | (6.1                                                          | %)         | (5.2                                              | %)         | (6.2 | %) | (4.9 | %) |
| Operating margin  (restaurant sales only)               |       | 35.2                                                          | %          | 38.7                                              | %          | 35.5 | % | 38.0 | % |

 

For the six months ended June 30, 2007, company-ownedrestaurant sales increased 12.2% to $14.7 million from $13.1 millionfor the same period in 2006.  For thethree months ended June 30, 2007, company-owned restaurant sales increased 4.4%to $7.1 million from $6.8 million for the second quarter of2006.  This increase was primarily theresult of the addition of nine company-owned restaurants in 2006 and a priceincrease in June 2006.  Same store salesfor company-owned restaurants open during all of 2006 decreased 7.3% for thefirst six months of 2007 compared to the same period in 2006.

The operating margin as a percentage of sales forcompany-owned locations decreased to 35.5% for the first six months of 2007from 38.0% for the same period in 2006. This was due primarily to increases in labor costs of 3.3% as apercentage of sales and restaurant depreciation expense of 1.3% (from theaddition of nine company-owned restaurants in 2006), partially offset byreductions in food costs as a percentage of sales of 2.1%.

The following table shows our total operating resultsfrom the restaurant segment for the three and six months ended June 30, 2007and 2006:
| ** **                         | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(% to total revenue)**             | ** ** |
| Total restaurant  operations:      |       |                                                |       |                                              |       |   |   |   |   |
| Company-owned restaurant sales     |       | 92.6                                                | %          | 91.9                                              | %          | 93.0 | % | 91.4 | % |
| Royalty revenue                    |       | 6.9                                                 | %          | 7.4                                               | %          | 6.6 | % | 7.8 | % |
| Franchise fee revenue              |       | 0.5                                                 | %          | 0.7                                               | %          | 0.4 | % | 0.8 | % |
| Total revenue                      |       | 100.0                                               | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
|                               |       |                                                |       |                                              |       |   |   |   |   |
| Cost of sales                      |       | (60.1                                               | %)         | (56.3                                             | %)         | (60.0 | %) | (56.7 | %) |
| General & administrative costs |       | (48.3                                               | %)         | (49.6                                             | %)         | (48.4 | %) | (47.5 | %) |
| Interest expense                   |       | (2.2                                                | %)         | (2.5                                              | %)         | (2.4 | %) | (3.1 | %) |
| Management allocation              |       | (6.8                                                | %)         | —                                            | %          | (6.8 | %) | — | % |
| Minority interest in losses        |       | 5.8                                                 | %          | 0.7                                               | %          | 3.1 | % | 0.5 | % |
| Segment loss                       |       | (11.6                                               | %)         | (7.7                                              | %)         | (14.5 | %) | (6.8 | %) |

 

Royalty revenue decreased 9.1%, from $1.1 millionfor the first six months of 2006 to $1.0 million for the six months endedJune 30, 2007, and remained unchanged at $0.5 million for the three monthperiod then ended. The decrease was a result of decreased sales in ourfranchise locations and the conversion of three franchise locations to company-ownedstores in the second half of 2006.  Weadded two franchise locations during the six months ended June 30, 2007.  Same store sales for franchise restaurantsopen during all of 2006 decreased 11.7% for the first six months of 2007compared to the same period in 2006.

System-wide same store sales decreased 10.2% forstores open during all of 2006 during the first six months of 2007 compared tothe same period in 2006.  Our loss fromrestaurant operations was 14.5% of total revenue for the six months ended June30, 2007 (11.6% for the second quarter) compared to 6.8% for the same sixmonths (7.7% for the second quarter) in 2006. The change is due to the implementation of a management allocation ofour corporate expenses, as well as increased general and administrativeexpenses as we continue to set up our infrastructure to support our expansion.

We intend to continue to open company-owned restaurants in strategicmarkets and increase the number of franchised locations in the U.S. and internationally.  Since we acquired our interest in Fatburgerin August 2003, Fatburger has added 39 new restaurants through June 30,2007.  While we seek to expand the numberof restaurants, the identification of qualified franchisees and qualitylocations has an effect on the rate of growth in the number of our restaurants.

 

16

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*Manufacturing segment operations*
| ** **                   | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                   | ** ** | **(% to total revenue)**             | ** ** |
| Manufacturing  sales         |       | 100.0                                               | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
| Manufacturing  cost of sales |       | (52.2                                               | %)         | (61.6                                             | %)         | (55.7 | %) | (55.0 | %) |
| Engineering and  development |       | (9.2                                                | %)         | (9.8                                              | %)         | (9.7 | %) | (8.1 | %) |
| Operating margin             |       | 38.6                                                | %          | 28.6                                              | %          | 34.6 | % | 36.9 | % |
|                         |       |                                                |       |                                              |       |   |   |   |   |
| Compensation  expense        |       | (14.7                                               | %)         | (18.0                                             | %)         | (16.3 | %) | (12.1 | %) |
| Depreciation  expense        |       | (0.9                                                | %)         | (0.6                                              | %)         | (1.0 | %) | (0.4 | %) |
| Other operating  expense     |       | (11.1                                               | %)         | (4.8                                              | %)         | (9.7 | %) | (4.0 | %) |
| Segment income               |       | 11.9                                                | %          | 5.2                                               | %          | 7.6 | % | 20.4 | % |

 

Total revenue for thissegment was $4.8 million for the six months ended June 30, 2007 and $2.5 millionfor the three months then ended.  Thiscompares to $5.5 million for the six months ended June 30, 2006 and $2.2 millionfor the second quarter of 2006.  Netincome for this segment was $0.4 million for the first six months of 2007($0.3 million for the second quarter), compared to $1.1 million ($0.1 million)for the same periods in 2006.  In orderto focus our efforts on our restaurant segment, we intend to sell our equityposition in DAC for an amount higher 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 assurance that we will beable to sell this segment for a profit.

*Real estate and finance segmentoperations*

*Real estate operations:*
| ** **                                 | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(dollars in thousands)**                | ** ** |
|                                       |       |                                                |       |                                              |       |   |   |   |   |
| Operating  revenue                         |       | $                                                   | 944        |                                              | $          | 983 |   | $ | 1,879 |   | $ | 2,050 |   |
| Operating  expenses                        |       | (323                                                | )          | (230                                              | )          | (709 | ) | (671 | ) |
| Depreciation and  amortization             |       | (113                                                | )          | (120                                              | )          | (224 | ) | (258 | ) |
| Operating margin                           |       | 508                                                 |       | 633                                               |       | 946 |   | 1,121 |   |
|                                       |       |                                                |       |                                              |       |   |   |   |   |
| General and  administrative expenses       |       | (58                                                 | )          | (155                                              | )          | (97 | ) | (383 | ) |
| Interest expense                           |       | (363                                                | )          | (406                                              | )          | (701 | ) | (662 | ) |
| Gain on sale of  real estate               |       | —                                              |       | 1,188                                             |       | — |   | 1,694 |   |
| Other  non-operating income                |       | 711                                                 |       | 1                                                 |       | 716 |   | 6 |   |
| Market value  impairment reserve           |       | (1,109                                              | )          | —                                            |       | (1,109 | ) | — |   |
| Income (loss) from real  estate operations |       | $                                                   | (311       | )                                                 | $          | 1,261 |   | $ | (245 | ) | $ | 1,776 |   |

 

During the six monthsended June 30, 2007, our operating margin on real estate decreased $0.2 million,to $0.9 million, compared to $1.1 million for the same period of2006.  Our operating margin on realestate operations for the second quarter of 2007 decreased $0.1 million,to $0.5 million, compared to $0.6 million in the second quarter of2006.  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.  In the firsthalf of 2006, we sold eight properties for total proceeds of $6.2 million,resulting in a net gain on sale of approximately $1.7 million.  General and administrative expenses havedecreased for the first half of 2007 compared to 2006, primarily due to the VIEinvestments in Barcelona nearing completion and being marketed for sale.  Interest expense for the three and six monthsended June 30, 2007 ($0.4 million and $0.7 million, respectively) hasincreased compared to the same periods of 2006 ($0.4 million and $0.6 million,respectively) as we borrowed money on various notes payable secured by certainreal estate investments in the second half of 2006.

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 to perform under terms of thecontract.  As a result, we recognized$0.7 million in revenue from a forfeited deposit and re-listed thebuilding for sale.  Based upon ourestimate of the current market value, we recorded a $1.1 million marketvalue impairment on this property.

*Interest income* — Ourinterest income for the six months ended June 30, 2007 was $0.1 million,compared with $0.2 million for the first half of 2006.  Interest income for the second quarter of2007 was less than $0.1 million, compared to $0.1 million for thesame period in 2006. The decrease is primarily attributable to a net reductionin average asset balance, reflecting the sale or repayment of notes in ournotes receivable portfolio.

*Foreign exchange gains* — Changesin foreign currency exchange rates resulted in a net gain of approximately $0.3 millionin this segment for the six months ended June 30, 2007 compared to $0.5 millionfor the same period in 2006.  In thesecond quarter of 2007, we recognized gains of $0.1 million compared to$0.4 million for the same period in 2006. At June 30, 2007, approximately17% of our total assets and 3% of our total liabilities were denominated ineuros.  See *Item 3 —Quantitative and Qualitative Disclosures about Market Risk* forfurther analysis.

 

17

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*Other non-operating income*—In the six months ended June 30, 2007, we had consulting revenue of $0.3million.  For the same period in 2006, wehad equity in earnings of equity investee of $0.8 million and gain on sale ofnotes receivable of $0.5 million in this segment.

*Software development and sales segment operations*
| ** **                   | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                   | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                   | ** ** | **(dollars in thousands)**            | ** ** |
| Software sales               |       | $                                               | 10         |                                          | $          | 3 |   | $ | 14 |   | $ | 20 |   |
| Engineering and  development |       | (112                                            | )          | (176                                          | )          | (262 | ) | (356 | ) |
| Compensation expense         |       | (49                                             | )          | (241                                          | )          | (157 | ) | (518 | ) |
| Depreciation expense         |       | (112                                            | )          | (89                                           | )          | (224 | ) | (167 | ) |
| Other operating expense      |       | (102                                            | )          | (205                                          | )          | (215 | ) | (364 | ) |
| Interest expense             |       | (283                                            | )          | (188                                          | )          | (552 | ) | (353 | ) |
| Segment loss                 |       | $                                               | (648       | )                                             | $          | (896 | ) | $ | (1,396 | ) | $ | (1,738 | ) |

 

Total revenue for thissegment was less than $0.1 million for each of the six months ended June 30,2007 and 2006.  Segment loss wasapproximately $1.4 million for the first six months of 2007 ($0.6 millionfor the second quarter) and $1.7 million for the same period in 2006 ($0.9 millionfor the second quarter).  In order tofocus our efforts on our restaurant segment, we intend to sell all, or aportion of, our equity position in Centrisoft. If we were to sell this segment, we believe that it would have apositive effect on our cash flow and decrease our net loss.  There can be no assurance that we will beable to sell this segment.

*Corporate expenses*
| ** **                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(dollars in thousands)**            | ** ** |
| Compensation and  employee benefits |       | $                                               | 1,273      |                                          | $          | 1,663 |   | $ | 4,836 |   | $ | 3,010 |   |
| Travel and  entertainment           |       | 612                                             |       | 312                                           |       | 1,041 |   | 619 |   |
| Insurance                           |       | 116                                             |       | 149                                           |       | 252 |   | 411 |   |
| Professional fees                   |       | 434                                             |       | 653                                           |       | 726 |   | 715 |   |
| Occupancy costs                     |       | 33                                              |       | 44                                            |       | 76 |   | 91 |   |
| Directors fees                      |       | 142                                             |       | 83                                            |       | 267 |   | 161 |   |
| Other expenses                      |       | 221                                             |       | 171                                           |       | 380 |   | 299 |   |
| Total operating expenses            |       | $                                               | 2,831      |                                          | $          | 3,075 |   | $ | 7,578 |   | $ | 5,306 |   |

 

For the six months ended June 30, 2007, we incurred corporate operatingexpenses of $7.6 million ($2.8 million for the second quarter), compared to$5.3 million for the first six months of 2006 ($3.1 million for the secondquarter).  This increase is primarily dueto an increase in compensation expenses. Corporate expenses for the first six months of 2007 also include $0.9million ($0.5 million for the second quarter) for share based paymentsaccounted for under FAS 123R, compared to $0.1 million for the same period in2006 (less than $0.1 million for the second quarter).  The increase is due to various stock optiongrants in August 2006 and a stock option exchange plan adopted in December2006.

*Management allocation and otherintercompany charges*

In the fourth quarter of 2006, as we focused our efforts on theFatburger segment we began allocating a portion of our corporate expenses toour restaurant segment to more accurately reflect the operating results of thatsegment.  This allocation was $1.1million for the six months ended June 30, 2007 ($0.5 million for the secondquarter).  This allocation is eliminatedupon consolidation on the Consolidated Statements of Operations.  There was no comparable allocation in thefirst six months of 2006.  Otherintercompany charges, including intercompany interest expense, are eliminatedupon consolidation, and totaled $0.5 million for the six months ended June 30,2007 ($0.3 million for the second quarter) and $0.3 million for the sixmonths ended June 30, 2006 ($0.2 million for the second quarter).

*Income taxes*

During the three and sixmonths ended June 30, 2007 and 2006, a provision for income taxes was notrequired due to the net operating loss generated during the period.

*Discontinued operations*

In December 2006, we and our 49% partners reached an agreement to sellour ownership interest in George Elkins, a California commercial mortgagebanking operation.  The sale closed inFebruary 2007.  As such, results fromoperations of George Elkins for the six months ended June 30, 2007 and 2006have been classified as discontinued operations.  Prior to the decision to sell George Elkins,it was a reportable segment of our operations. The following table shows our total operating results from George Elkinsfor the three and six months ended June 30, 2007 and 2006:
| ** **                               | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **(% to total revenue)**         | ** ** |
| Total revenue                            |       | $                                               | —     |                                          | $          | 1,895 |   | $ | 1,807 |   | $ | 3,887 |   |
| Compensation  expense                    |       | —                                          |       | (1,599                                        | )          | (1,534 | ) | (3,256 | ) |
| Other operating  expense                 |       | —                                          |       | (208                                          | )          | (281 | ) | (441 | ) |
| Non-operating  income                    |       | —                                          |       | 137                                           |       | 17 |   | 283 |   |
| Gain on sale of  discontinued operations |       | —                                          |       | —                                        |       | 2,492 |   | — |   |
| Minority  interest in earnings           |       | —                                          |       | (156                                          | )          | 13 |   | (322 | ) |
| Income from  discontinued operations     |       | $                                               | —     |                                          | $          | 69 |   | $ | 2,514 |   | $ | 151 |   |

 

18

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**Changes in financial condition**

Our assets, liabilitiesand stockholders’ equity can be summarized as follows:
|                                  | ** ** | **June 30, 2007**          | ** ** | **December 31, 2006** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **(dollars in thousands)** | ** ** |
| Total assets                     |       | $                                    | 57,670     |                            | $          | 59,800 |   |
| Total  liabilities               |       | $                                    | 52,530     |                            | $          | 49,005 |   |
| Total minority  interests        |       | $                                    | 1,066      |                            | $          | 571 |   |
| Total stockholders’  equity |       | $                                    | 4,074      |                            | $          | 10,224 |   |

 

The decrease in totalassets during the first six months of 2007 is primarily due to the disposal ofour George Elkins subsidiary, which was classified as held for sale at December31, 2006.  Total liabilities increasedover the first six months of 2007, primarily due to additional borrowings of$2.1 million and an increase in accounts payable and accrued liabilities.  The cash received from the disposal of GeorgeElkins was used to support our operating activities.  Stockholders’ equity decreased during thefirst half of 2007 by approximately $6.2 million, mainly resulting from our netloss of $7.1 million, partially offset by share based compensation of $0.9million.  These changes are described inmore detail as follows:

*Cash*

Our cash decreased $0.6million between December 31, 2006 and June 30, 2007.  Significant sources and uses of cash duringthe first six months of 2007 include:

·                  $4.1 million ofcash used in operations — comprised primarily of our net loss from continuingoperations of $9.6 million adjusted for non-cash income and expense items of$5.5 million;

·                  $1.9 million ofcash used in investing activities — comprised mainly of $1.8 million investedin restaurant assets and other property, plant & equipment;

·                  $2.9 million of cashprovided by financing activities — includes additional borrowing of $2.1million and $1.1 million invested by minority interests, partially offset byrepayments of borrowings and capital leases of $0.3 million; and

·                  $2.6 million netcash inflow from discontinued operations.

*Net investments in real estate,and related liabilities*

Our investments inreal estate can be summarized as follows:
|                                                      | ** ** | **June 30, 2007**          | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **(dollars in thousands)** | ** ** |
| US based  investments — held for sale (1):      |       |                                 |       |                            |       |
| Purchase price / improvements                        |       | $                                    | 403        |                            | $          | 403 |   |
| Accumulated depreciation and amortization            |       | (40                                  | )          | (35                             | )          |
| Net book value                                       |       | 363                                  |       | 368                             |       |
| Foreign-based  investments — held for sale (2): |       |                                 |       |                            |       |
| Purchase price / improvements                        |       | 9,979                                |       | 10,694                          |       |
| Total  investments in real estate, held for sale     |       | $                                    | 10,342     |                            | $          | 11,062 |   |
|                                                 |       |                                 |       |                            |       |
| US based  investments — held for use (3):       |       |                                 |       |                            |       |
| Purchase price / improvements                        |       | $                                    | 13,266     |                            | $          | 13,200 |   |
| Accumulated depreciation and amortization            |       | (1,916                               | )          | (1,698                          | )          |
| Total  investments in real estate, held for use      |       | $                                    | 11,350     |                            | $          | 11,502 |   |
|                                                 |       |                                 |       |                            |       |
| Total investments in  real estate, net               |       | $                                    | 21,692     |                            | $          | 22,564 |   |

----

(1)     Includes 1 commercial property within the United States at June 30, 2007and December 31, 2006.

(2)     Includes 2 apartment buildings in Barcelona, Spain at June 30, 2007 andDecember 31, 2006.

19

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(3)     Includes 32 commercial properties under capital lease throughout theUnited States at June 30, 2007 and December 31, 2006.

Borrowings relatedto our investments in real estate were as follows:
|                                                 | ** ** | **June 30, 2007**          | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **(dollars in thousands)** | ** ** |
| Obligations on  real estate under capital lease |       | $                                    | 10,225     |                            | $          | 10,471 |   |
| Borrowings on  Barcelona properties             |       | 3,437                                |       | 3,435                           |       |
| Total borrowings  related to real estate        |       | $                                    | 13,662     |                            | $          | 13,906 |   |

 

Investments in propertiesunder capital lease decreased $0.2 million at June 30, 2007 due to depreciationof $0.2 million during the first six months of 2007, partially offset bycapital improvements to those properties. Obligations under capital leases related to these properties decreased$0.2 million due to scheduled monthly payments during the same period.  Our investment in apartment buildings inBarcelona, Spain decreased $0.7 million from December 31, 2006 to June 30,2007.  This was primarily the result of amarket valuation impairment of $1.1 million, partially offset by increases inunrealized foreign currency translation of $0.3 million and increased carryingcosts of $0.1 million.

*Net property, plant and equipment*

Net property, plant andequipment decreased $0.5 million at June 30, 2007 compared to December 31,2006, primarily due to scheduled monthly depreciation on those assets.  Obligations on property, plant, and equipmentunder capital lease remained stable at $0.2 million at June 30, 2007 comparedto December 31, 2006.

*Goodwilland net intangible assets*
|                                          | ** ** | **June 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  |       | $                                    | 4,850      |                            | $          | 4,943 |   |
| Net intangible  assets — Centrisoft |       | 274                                  |       | 319                             |       |
| Total net intangible  assets             |       | $                                    | 5,124      |                            | $          | 5,262 |   |

 

Net intangible assetsdecreased $0.1 million in the six months ended June 30, 2007 due to monthlyamortization of those assets.  Netintangible assets at June 30, 2007 consists of trademark rights ofapproximately $4.0 million, franchise agreements of approximately $0.5 million,sales contracts for Centrisoft of approximately $0.3 million, and othermiscellaneous intangible assets of approximately $0.3 million.  We do not believe that there is anyimpairment of goodwill or net intangible assets at June 30, 2007.

*Notes receivable*

As of June 30, 2007, ournotes receivable portfolio (excluding loans to senior executives) consists ofthree individual loans with a combined carrying value of $0.8 million.  Two of the loans are secured by real estateconsisting of commercial property located in Texas and Arizona, and one loan issecured by stock in a restaurant business. The loans have a weighted average interest rate (excluding fees andpoints) of 10.9% and a weighted average maturity of 8 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 weremade on February 21, 2002 (prior to the passage of the Sarbanes-Oxley Act of2002).  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 the maturity date of theloans or amended any other terms.  TheCompany and Mr. Wiederhorn are cooperating in completing the repayment of theloans in full.

*Otherassets*
|                                | ** ** | **June 30, 2007**          | ** ** | **December 31, 2006** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **(dollars in thousands)** | ** ** |
| Trade  receivables             |       | $                                    | 1,235      |                            | $          | 1,586 |   |
|                           |       |                                 |       |                            |       |
| Inventories                    |       | $                                    | 3,247      |                            | $          | 2,442 |   |
|                           |       |                                 |       |                            |       |
| Other current  assets:         |       |                                 |       |                            |       |
| Prepaid expenses               |       | $                                    | 498        |                            | $          | 429 |   |
| Other VIE-related assets       |       | 36                                   |       | 96                              |       |
| Total other current assets     |       | $                                    | 534        |                            | $          | 525 |   |
|                           |       |                                 |       |                            |       |
| Other assets:                  |       |                                 |       |                            |       |
| Software costs                 |       | $                                    | 1,048      |                            | $          | 1,217 |   |
| Security deposits              |       | 593                                  |       | 487                             |       |
| Deferred financing costs       |       | 287                                  |       | 306                             |       |
| Investment in operating leases |       | 33                                   |       | 54                              |       |
| Other                          |       | 100                                  |       | 107                             |       |
| Total other  assets            |       | $                                    | 2,061      |                            | $          | 2,171 |   |

 

20

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Trade receivables andinventories at June 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 $4.8million at June 30, 2007, compared with $4.1 million at December 31, 2006.  As of June 30, 2007, nearly all of thedeferred income was comprised of the non-refundable franchise fee received byFatburger for each future franchise location. These initial fees generally represent half of the total fee perlocation.  The balance of the franchisefee (approximately an additional $4.8 million) will be collected in the futurewhen leases on these specific franchise locations are signed.

*Notes payable*

As of June 30, 2007, ournotes payable (excluding borrowings on real estate) totaled $14.5 million,including $7.0 million of debt held at Fatburger, $0.7 million at Centrisoft,and $0.5 million at DAC.  This comparesto $12.4 million at December 31, 2006. The increase was primarily due to additional borrowings of $2.1 million.

*Accounts payable and accruedliabilities*

Accountspayable and accrued liabilities totaled $11.1 million at June 30, 2007,compared with $10.7 million at December 31, 2006, and consisted of thefollowing:
|                                                | ** ** | **June 30, 2007**          | ** ** | **December 31, 2006** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **(dollars in thousands)** | ** ** |
| Accounts payable                               |       | $                                    | 6,395      |                            | $          | 6,999 |   |
| Accrued wages,  bonus and commissions          |       | 2,214                                |       | 669                             |       |
| Leased real  estate portfolio-related accruals |       | 646                                  |       | 597                             |       |
| Other                                          |       | 1,880                                |       | 2,393                           |       |
| Total accrued expenses  and other liabilities  |       | $                                    | 11,135     |                            | $          | 10,658 |   |

 

Theincrease in accounts payable relates primarily to accrued wages and bonuses dueto bonuses approved by our Compensation Committee, but not yet paid.

*Sales deposits*

For manufacturing salesat our DAC subsidiary, we usually require a deposit on new orders in the amountof 50% of the expected sale.  Thisdeposit is not recognized as revenue until the order is complete, invoiced, andthe item is shipped to the customer. Sales deposits increased from $1.1 million at December 31, 2006 to $2.0million at June 30, 2007.

*Deferred income taxes*

There was no significantchange to our deferred income taxes at June 30, 2007, compared to December 31,2006.

**Liquidityand Capital Resources**

Liquidity is ameasurement of our ability to meet potential cash requirements, includingongoing commitments to repay borrowings, fund business operations,acquisitions, and expansion (including growth of company-owned and franchisedrestaurant locations), engage in loan acquisition and lending activities andfor other general business purposes.  Inaddition to our cash on hand, our primary sources of funds for liquidity duringthe first six months of 2007 consisted of cash provided by proceeds from thesale of discontinued operations, new borrowings, and the repayments to us fromborrowers.  As of June 30, 2007, we hadcash or cash equivalents of $1.3 million, which, together with projectedborrowings and proceeds from the sales of assets, we believe will be sufficientto meet our current liquidity needs.

At June 30, 2007,we had total consolidated secured indebtedness of $30.2 million, as well as$22.3 million of other liabilities.  Ourconsolidated secured indebtedness consisted of:

 

21

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·                  notespayable and other debt of Fatburger of $7.0 million secured by the assets ofFatburger;

·                  $12.3million in capital leases maturing between 2010 and 2040 which are secured byreal estate;

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

·                  $6.3million 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 thesale of assets to be a normal, recurring part of our operations and we arecurrently generating adequate cash flow as a result of these transactions.  However, excluding the sale of assets fromtime to time, we are currently operating with negative cash flow, since many ofour operations do not currently generate sufficient cash to cover operating andoverhead expenses.  We believe that ourexisting sources of funds will be adequate to meet our liquidity needs; however,there can be no assurance that this will be the case.

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

*Foreigncurrency exchange rate risk*

Our exposure to foreigncurrency fluctuations arises mainly from our investment in Barcelona real estate.  As of June 30, 2007, approximately 17% of ourtotal assets and 3% of our total liabilities were denominated in euros.  We may, from time to time, utilize a widevariety of financial techniques to assist in the management of currency risk,including currency swaps, options, and forwards, or combinations thereof.  As of June 30, 2007, we have no outstandingderivative instruments held for trading or hedging purposes.    See *Item 3 — Quantitative andQualitative Disclosures about Market Risk* for further analysis.

*Interest rate risk*

Our borrowings andthe availability of further borrowings are substantially affected by, amongother things, changes in interest rates, changes in market spreads or decreasesin credit quality of our assets.  Materialincreases in interest expense from variable-rate funding sources, or materialdecreases in monthly cash receipts from operations, generally would negativelyimpact our liquidity.  On the other hand,material decreases in interest expense from variable-rate funding sources wouldpositively affect our liquidity. Fluctuations in interest rates will impact our net income to the extentour operations and our fixed rate assets are funded by variable rate debt.  We may also be impacted to the extent thatour variable rate assets re-price on a different schedule or in relation to adifferent index than any floating rate debt.

*Fatburger debt covenant*

At June 30, 2007,Fatburger was not in compliance with all obligations under the agreementsevidencing its indebtedness, as defined in the applicable agreements.  Fatburger failed to meet the prescribed fixedcharge coverage ratio and the prescribed debt-coverage ratio at December 31,2006.  Due to Fatburger’s non-compliance,the lender has the right to demand repayment of the notes after servingnotice.  As such, on our ConsolidatedStatements of Financial Condition, $3.9 million of long-term debt has beenclassified as current at June 30, 2007, and December 31, 2006, that wouldotherwise be classified as non-current. The lender has not demanded early repayment of the loans, however, ifthe lender exercises its right to demand repayment, our liquidity could benegatively affected.

*Fatburger expansion*

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

*Centrisoft operations*

We expect that Centrisoftwill require capital resources and have negative cash flow for the nearterm.  Since Centrisoft is in the earlystages of its marketing, there can be no assurance that it will be successfulin attracting a significant customer base. Centrisoft is currently marketing its software to potential customersboth directly and through re-seller relationships.  There can be no assurance that 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.  One factor the Board of Directors mayconsider is the impact of dividends on our liquidity.  We have not declared or paid any dividends inthe first quarter of 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 OTC Bulletin Board may reduce theliquidity of our common stock compared to quotation 

22

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on a major US stock exchange. Also, the coverage of the Company by security analysts and media couldbe reduced, which could result in lower prices for our common stock than mightotherwise prevail and could also result in increased spreads between the bidand ask prices for our common stock. Additionally, certain investors will not purchase securities that arenot quoted on a national market, which could materially impair our ability toraise funds through the issuance of common stock or other securitiesconvertible into common stock.

*Common stock tradingprice*

If the trading price of our common stock is less than $5.00 pershare, trading in our common stock could be subject to Rule 15g-9 of theSecurities Exchange Act of 1934, as amended. Under that Rule, brokers who recommend such securities to persons otherthan established customers and accredited investors must satisfy special salespractice requirements, including an individualized written suitability determinationfor the purchaser and the purchaser’s written consent prior to anytransaction.  The Securities EnforcementRemedies and Penny Stock Reform Act of 1990 also requires additional disclosurein connection with any trades involving a stock defined as a penny stock(generally, any equity security not traded on an exchange or quoted on theNASDAQ Stock Market that has a market price of less than $5.00 per share),including the delivery of a disclosure schedule explaining the penny stockmarket and the associated risks.  Suchrequirements could severely limit the market liquidity of our commonstock.  There can be no assurance thatour common stock will not become treated as penny stock.

**Off Balance Sheet Arrangements**

In order tofacilitate the development of franchise locations, as of June 30, 2007,Fatburger had guaranteed the annual minimum lease payments of four restaurantsites owned and operated by franchisees. The guarantees approximate $1.1 million plus certain contingent rentalpayments as defined in the respective leases. These leases expire at various times through 2015.

The lease guarantees byFatburger do not provide us with a material source of liquidity, capitalresources or other benefits.  There areno revenues, expenses or cash flows connected with the lease guarantees otherthan the receipt of normal franchise royalties. As of June 30, 2007, we were not aware of any event or demand that waslikely to trigger the guarantee by Fatburger.

We have various operatingleases for office and retail space which expire through 2015.  The leases provide for varying minimum annualrental payments including rent increases and free rent periods.  We have future minimum rental payments undernon-cancelable operating leases with initial or remaining terms of one year ormore of approximately $15.0 million as of June 30, 2007.

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

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

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

*Foreign currency exchange raterisk*

Our exposure to foreigncurrency fluctuations arises mainly from our investment in Barcelona realestate.  As of June 30, 2007,approximately 17% of our total assets and 3% of our total liabilities weredenominated in euros.  The followingtable illustrates the projected effect on our net asset value as a result ofhypothetical changes in foreign currency rates as of June 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%                                             |       | $                                                                  | (1,737,000 | )                                                                                  | -3.3       | % |
| Decrease 10%                                             |       | $                                                                  | (869,000   | )                                                                                  | -1.6       | % |
| No Change                                                |       | $                                                                  | —     |                                                                               | 0.0        | % |
| Increase 10%                                             |       | $                                                                  | 869,000    |                                                                               | 1.6        | % |
| Increase 20%                                             |       | $                                                                  | 1,737,000  |                                                                               | 3.3        | % |

----

(1)             Assumesthat uniform percentage changes occur instantaneously in the euro.  A decrease in the foreign exchange rateindicates a strengthening of the U.S. dollar against the euro.  An increase in the foreign exchange rateindicates a weakening of the U.S. dollar against the euro.

23

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We can utilize a widevariety of financial techniques to assist in the management of currency risk,including currency swaps, options, and forwards, or combinations thereof.  No such currency hedging techniques were inuse as of June 30, 2007.

*Interestrate risk*

Changes ininterest rates can affect net income by increasing the cost associated withoperating and expanding our restaurant operation.  Changes in the level of interest rates canalso affect, among other things, the value of our interest-earning assets (and theassociated default rates), our payments on variable-interest rate debt, ourability to acquire loans and general levels of consumer spending.

*Other market risks*

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

**ITEM 4.  CONTROLS AND PROCEDURES**

*Evaluation of disclosure controls and procedures*

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

*Changes in internal control over financial reporting*

There were no significant changes in our internalcontrol over financial reporting in connection with an evaluation that occurredduring our second fiscal quarter of 2007 that have materially affected or arereasonably likely to materially affect our internal control over financialreporting.

 

24

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**PART II — OTHERINFORMATION**

**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 suitagainst Keith A. Warlick (“Warlick”) the former Chief Executive Officer ofFatburger Holdings, Inc. and Fatburger Corporation.  Warlick’s employment with Fatburger wasterminated on September 21, 2006 by resolution of the board of directors ofFatburger Holdings, Inc.  The Fatburgercompanies initiated the lawsuit to recover damages from Warlick arising fromwrongful acts and conduct during and after his employment, and are assertingclaims for:  breach of contract, breachof duty of loyalty, breach of fiduciary duty, conversion — embezzlement;fraud/commencement; intentional interference with contractual relations, andequitable indemnity.  Warlick filed ananswer to the lawsuit denying the allegations and included a Cross-complaintagainst Fatburger Holdings, Inc., Fatburger Corporation, Fatburger NorthAmerica, Inc., Fog Cutter Capital Group, Inc., and Andrew Wiederhorn, forbreach of contract, employment discrimination based on race and retaliation,wrongful termination and defamation — slander without any specification ofdamages.   The defendants to theCross-complaint filed by Warlick dispute the allegations of the cross-complaintand intend to vigorously 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 to the termination ofhis employment and above lawsuit, on February 6, 2007, Warlick, his wife, and alimited liability company controlled by Warlick, each of whom is a minorityshareholder of Fatburger Holdings, Inc., filed a second lawsuit against variousFatburger entities, the Company, Andrew Wiederhorn, and members of theFatburger Holdings Inc. board of directors. In an amended complaint the plaintiffs allege claims of: (1) common lawfraud and negligent misrepresentation against the Company and Wiederhorn; (2)fraud pursuant to California Corporate Code §25401 against the Company,Fatburger Holdings, Inc. and Wiederhorn; (3) rescission, breach of contract,breach of the implied covenant of good faith and fair dealing against theCompany and Fatburger Holdings, Inc.; and (4) breach of fiduciary duty againstall defendants.  These claims are basedbusiness transactions which the plaintiffs allege were not in the bestinterests of Fatburger Holdings, Inc. or the plaintiff minorityshareholders.  The plaintiffs claimdamages 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.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

None.

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

Not applicable.

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

**None.**

**ITEM 5.  OTHER INFORMATION**

None.

**ITEM 6.  EXHIBITS**

3.1                                 Amendedand Restated Articles of Incorporation of the Registrant, incorporated byreference to Exhibit 3.1 to the Form 10-Q for the period ended September 30,1999, as previously filed with the SEC on November 22, 1999 (File No.000-23911).

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

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

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

4.3                                 Formof Stock Option Plan, incorporated by reference to Exhibit 10.3 to AmendmentNo. 3 to the Registration Statement (Registration No. 333-39035) on Form S-11,as previously filed with the SEC on March 30, 1998.

4.4                                 Waiver,Release, Delegation and Amendment to Stock Option and Voting Agreement amongAndrew A. Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, TiffanyWiederhorn, and the Registrant, dated July 31, 2002, incorporated by referenceto Exhibit 2.1 to the Form 8-K dated August 8, 2002, as previously filed withthe SEC on August 15, 2002.

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

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

4.7                                 Amendmentto the Rights Agreement, dated as of May 1, 2004, by and between the Registrantand The Bank of New York, as previously filed with the SEC on March 30, 2005.

4.8                                 LongTerm Vesting Trust Agreement among the Registrant and Lawrence Mendelsohn,Andrew Wiederhorn and David Egelhoff, dated October 1, 2000, incorporated byreference to Exhibit 4.4 to the Form 10-K for the year ended December 31, 2002,as previously filed with the SEC on March 3, 2003.

4.9                                 AmendmentNumber 1 to the Long Term Vesting Trust Agreement dated as of September 19,2002, by and between the Registrant and Andrew Wiederhorn, Don Coleman, andDavid Dale-Johnson, as previously filed with the SEC on March 30, 2005.

4.10                           AmendmentNumber 2 to the Long Term Vesting Trust Agreement, dated as of May 26, 2004, byand between the Registrant and Andrew Wiederhorn, Don Coleman, and DavidDale-Johnson, as previously filed with the SEC on March 30, 2005.

11.1         Computation of Per Share Earnings.

31.1         Certification of Chief ExecutiveOfficer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

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

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.
|        | FOG CUTTER CAPITAL GROUP INC. |
|--------|-------------------------------|
|   |                          |
|   |                          |
|   |                          | By: | /s/ Andrew A.  Wiederhorn |   |
|   |                          |   | Andrew A. Wiederhorn |   |
|   |                          |   | Chief Executive Officer |   |
|   |                          |   |   |   |
|   |                          |   |   |   |
|   |                          |   |   |   |
|   |                          | By: | /s/ R. Scott  Stevenson |   |
|   |                          |   | R. Scott Stevenson |   |
|   |                          |   | Senior Vice President and Chief Financial Officer |   |
|   |                          |   |   |

 

Date:  August 10, 2007

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**EXHIBIT INDEX**

3.1                               Amendedand Restated Articles of Incorporation of the Registrant, incorporated byreference to Exhibit 3.1 to the Form 10-Q for the period ended September 30,1999, as previously filed with the SEC on November 22, 1999 (File No. 000-23911).

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

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

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

4.3                                 Formof Stock Option Plan, incorporated by reference to Exhibit 10.3 to AmendmentNo. 3 to the Registration Statement (Registration No. 333-39035) on Form S-11,as previously filed with the SEC on March 30, 1998.

4.4                                 Waiver,Release, Delegation and Amendment to Stock Option and Voting Agreement amongAndrew A. Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, TiffanyWiederhorn, and the Registrant, dated July 31, 2002, incorporated by referenceto Exhibit 2.1 to the Form 8-K dated August 8, 2002, as previously filed withthe SEC on August 15, 2002.

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

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

4.7                                 Amendmentto the Rights Agreement, dated as of May 1, 2004, by and between the Registrantand The Bank of New York, as previously filed with the SEC on March 30, 2005.

4.8                                 LongTerm Vesting Trust Agreement among the Registrant and Lawrence Mendelsohn,Andrew Wiederhorn and David Egelhoff, dated October 1, 2000, incorporated byreference to Exhibit 4.4 to the Form 10-K for the year ended December 31, 2002,as previously filed with the SEC on March 3, 2003.

4.9                                 AmendmentNumber 1 to the Long Term Vesting Trust Agreement dated as of September 19,2002, by and between the Registrant and Andrew Wiederhorn, Don Coleman, andDavid Dale-Johnson, as previously filed with the SEC on March 30, 2005.

4.10                           AmendmentNumber 2 to the Long Term Vesting Trust Agreement, dated as of May 26, 2004, byand between the Registrant and Andrew Wiederhorn, Don Coleman, and DavidDale-Johnson, as previously filed with the SEC on March 30, 2005.

11.1                           Computationof Per Share Earnings.

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

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

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

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

 

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