While we seek out less competitive sites, highly successful locations quickly attract competition, which may affect sales. Since late 2004 and continuing through the second quarter of 2008, same-store sales have been negative. Increased competition is a major factor affecting same-store sales. Other factors such as the mid-western economy, gas prices, utility costs and the decline in housing values may also have affected consumer spending at casual dining restaurants. The continuation of same-store sales declines is a major factor in the losses reported over the last three years. We believe that our programs to remodel restaurants to our new prototype look and to improve the consistency of operations can generate positive same-store sales.
Periodically, we experience fluctuations in cost of goods sold, as a percentage of revenues, due to rising commodity prices. Our approach to rising commodity prices has always been to cautiously raise prices periodically at a rate consistent with inflation and not over react to shorter-term price spikes. As a result of this policy, we have generally maintained a gradually declining cost of sales percentage. This approach along with improved purchasing and more favorable commodity prices has allowed us to reduce our cost of sales percentage to the low end of its historical range at 25.1% for 2007. However, rising beef, dairy and produce prices increased costs of goods sold to 25.7% for the first twenty-eight weeks of 2008.
We have experienced sharply rising health insurance costs over the past several years. In 2004, we implemented a new health insurance program and increased our employee contribution rates in an effort to reduce our health insurance costs. By continuing to increase employee contribution levels and as a result of favorable claims experience from the new insurance program, we reduced health insurance costs 18.5% in 2007 and 19.3% through the first twenty-eight weeks of 2008. We believe that the rising cost of healthcare will continue to be a challenge.
We have debt borrowings of approximately $32.3 million at May 11, 2008. Three fourths of the related notes carry variable interest rates. As a result, our Company is exposed to a risk associated with rising interest rates. An increase in interest rates could subject us to even higher interest expense. The remaining debt is a $7.8 million senior subordinated note issued on May 5, 2006 and a $2.0 million 8.5% convertible note issued October 29, 2007. The senior subordinated note carries a fixed interest rate of 14.5% (17.5% from October 1, 2007 through March 31, 2008). The principal balance of the note is due May 5, 2012 or 60 days after completion of the proposed merger with G&R Acquisition, Inc.
As a result of the amendment to our bank agreement dated October 26, 2007, we cannot commit to develop new restaurants until our Company is re-capitalized or sold. Therefore, the only significant uses of our cash in 2008 will be debt service and replacement capital expenditures. We currently expect annual principal payments of $2.4 million and replacement capital expenditures of up to $2.6 million for fiscal 2008. We expect to generate approximately $7.9 million of depreciation expense in 2008. Accordingly, we could report a pre-tax loss in excess of $2.0 million and still generate sufficient cash flow to meet debt payments and fund replacement capital expenditures. We believe that our Company will generate sufficient cash flow to service debt and fund replacement capital expenditures. However, growth plans are curtailed until the completion of the proposed merger with G&R Acquisition, Inc.

On April 28, 2008, we entered into a merger agreement to be acquired by G&R Acquisition, Inc. on or before September 30, 2008. Upon shareholder approval of the merger, at a special meeting of shareholders expected to be held in July 2008, each shareholder will receive $4.00 in cash for all shares owned. In addition to shareholder approval, the completion of the merger is subject to certain other closing conditions, which we believe will be satisfied. Within 60 days of the effective date of the merger, which is expected to occur in July, 2008, the Buyer has agreed to complete the refinancing of approximately $31.0 million of our long-term debt. Our lenders have granted a waiver of certain defaults that would otherwise occur as a result of the merger in return for the agreement to refinance our debt. There is no assurance that proposed merger will be completed. Failure to complete the merger, the refinancing, or comply with the other terms of the related waivers could result in an event of default under our loan agreements. In that case, our lenders could elect to declare all amounts due and payable. There is no assurance that we would be able to negotiate additional waivers under our loan agreements.

YEAR-TO-YEAR COMPARISONS AND ANALYSIS
RESULTS OF OPERATIONS
The following table sets forth our operating results as a percentage of
revenues:

                                                      Twelve                Twelve          Twenty-eight          Twenty-eight
                                                 Weeks Ended           Weeks Ended           Weeks Ended           Weeks Ended
                                                May 11, 2008          May 13, 2007          May 11, 2008          May 13, 2007
Revenues                                               100.0 %               100.0 %               100.0 %               100.0 %
Cost of Goods Sold                                     (25.7 )               (25.1 )               (25.7 )               (25.0 )
Payroll & Benefits                                     (32.4 )               (32.7 )               (32.5 )               (32.0 )
Other Operating Expenses                               (35.9 )               (33.7 )               (34.5 )               (32.9 )
Pre-Opening Expenses                                       -                     -                  (0.2 )                   -
Impairment of Assets                                     0.4                     -                  (0.6 )                   -
Administrative Expenses                                 (6.9 )                (7.8 )                (7.0 )                (7.9 )
Interest Expense                                        (2.5 )                (1.9 )                (2.2 )                (1.9 )
Minority Interest                                       (0.1 )                   -                  (0.1 )                   -
Income Tax Expense Credit                               (0.2 )                 1.0                   0.3                   0.4


Net Income (Loss)                                       (4.1 )%               (0.2 )%               (2.5 )%                0.7 %

REVENUES
Revenues for the second quarter of 2008 decreased $1,108,000 or 2.7% from the second quarter of 2007. The decline was a result of i) the closing of one restaurant at the end of its lease during the second quarter of 2008 ($167,000) and ii) a $2,649,000 or 6.7% decline in sales at restaurants open at least eighteen months, of which $569,000 was the result of a severe blizzard in March, 2008. Exclusive of the weather related sales decline, same-store sales declined approximately 5.2%. These declines were offset by additional sales for two restaurants that opened late in 2007 and an additional restaurant that opened in the first quarter of 2008 ($1,763,000 in total). Franchise fees and royalties increased 10% from $497,000 for the second quarter of 2007 to $546,000 for the second quarter of 2008.

Year-to-date revenues decreased $1,430,000 or 1.5% from 2007 to 2008. The decrease was a result of i) closing one restaurant in the first quarter of 2007 and one in the second quarter of 2008 ($514,000 in total) and ii) a $5.0 million or 5.4% decline in same-store from 2007 to 2008, of which $1.1 million was due to severe winter storms in first half of 2008. These declines were off- set by additional sales at the new restaurants opened in late 2007 and early 2008 ($4,381,000 in total). Year-to-date franchise fees and royalties increased 4% to $1,268,000 for 2008.
Despite an approximately 2.0% ($1.9 million year-to-date) menu price increase from 2007 to 2008, our per person guest check average declined just less than 1%. The decrease in check average may be due to an increased amount of discounting in 2008 which can negatively affect the average guest check calculation. Essentially the decline in same-store sales from 2007 to 2008 was due to an approximately equal decline in customer counts for both the quarter and year-to-date periods.
We believe that same-store sales have been negatively impacted by factors both external and internal to our company. External factors such as a weak mid-western economy, competition and the effect of high gasoline and utility costs on consumer spending have likely impacted same-store sales. The downturn in the housing market and the auto industry have negatively impacted consumer confidence and discretionary spending. In 2007, we reduced the amount of our television advertising, as we believe we are not large enough to be media-efficient in most of our markets. We believe we can better achieve positive same-store sales by a return to community oriented local store marketing, remodeling of existing restaurants to our new prototype look, and consistently operating to our standards.
We opened one restaurant in 2008. No additional company-owned restaurants are planned for fiscal 2008, as we are operating under an agreement with our bank which restricts us from committing to the development of additional restaurants until we re-capitalize or sell our company. Under the agreement, we are permitted to remodel three restaurants to our new prototype look during 2008. We remodeled one restaurant at the end of the second quarter of 2008. We expect to remodel one to two more during the remainder of 2008.
During this period, our growth will shift to the opening of franchised restaurants. We anticipate an increase in franchise fees and royalties in 2008 due to the expected opening of six franchise restaurants in 2008, three of which had opened by the end of the second quarter. At May 11, 2008, 27 franchised restaurants were in operation as compared to 23 at May 13, 2007. Four franchised restaurants opened during 2007 and one closed. At May 11, 2008, two franchised restaurants were under construction and one was in the planning and permitting stage. At May 11, 2008, eight multi-unit franchise agreements were signed, requiring the development of an additional 39 restaurants over the next ten years, plus a single restaurant franchise agreement for a total of 40 additional franchised restaurants.
COSTS AND EXPENSES
Cost of goods sold as a percentage of revenues, increased from 25.1% for the second quarter of 2007 to 25.7% for the second quarter of 2008 due to a 55 basis point ($220,000) increase in dairy costs and a 17 basis point ($68,000) increase in meat costs. Year-to-date cost of goods sold, as a percentage of revenues, increased from 25.0% for 2007 to 25.7% for 2008. The increase was primarily due to a approximately 60 basis point ($560,000) increase in both meat and dairy costs.

The increase in both meat and dairy costs is a result of higher grain prices, which has increased feed prices for both beef and dairy cattle. The increased costs more than offset a 2% menu price increase over last year.
Payroll and benefits, as a percentage of revenues decreased from 32.7% for the second quarter of 2007 to 32.4% for the second quarter of 2008. The decrease was a result of savings in all payroll areas except restaurant management expense. The savings were partially offset by a 75 basis point ($295,000) increase in restaurant management expense, as we seek to hire more experienced managers. Benefits expense was essentially even with the second quarter of 2007. Year-to-date payroll and benefits, as a percentage of revenue increased from 32.0% for 2007 to 32.5% for 2008. The increase was essentially a result of the higher office expenses discussed above. The offsetting savings in other payroll areas did not begin to occur until the second quarter of 2008 when we introduced a labor management software package into our restaurants.
Other operating expenses, as a percentage of revenues, increased from 33.7% for the second quarter of 2007 to 35.9% for the second quarter of 2008. The increase was primarily a result of higher utilities and repair and maintenance expenses, each of which was up approximately 35 basis points or $140,000 and a 130 basis point ($520,000) increase in occupancy expense due to higher real estate taxes and the effect of declining sales on fixed expenses. Year-to-date other operating expenses, as a percentage of revenues, increased from 32.9% for 2007 to 34.5% for essentially the same reasons as the quarterly increase.
Pre-opening expenses, as a percentage of revenues, remained at 0% for both the second quarter of 2008 and 2007. Year-to-date pre-opening expenses, as a percentage of revenues, increased from 0% for 2007 to 0.2% for 2008 due to the opening of one restaurant in early 2008 compared to no openings in 2007.
ASSET IMPAIRMENT
Annually or more frequently if events or circumstances change, a determination is made by management to ascertain whether property and equipment have been impaired based on the sum of expected future undiscounted cash flows from operating activities. If the estimated undiscounted next cash flows are less than the carrying amount of such assets the Company will recognize an impairment loss in amount necessary to write down the assets to fair value. In performing its review, the Company considers the age of the restaurant and any significant economic events, recognizing that certain restaurants may take 24 to 36 months to become profitable or return to profitability.
In evaluating its goodwill, the Company estimates the fair value of the operations at each reporting date to determine if any impairment exists. The Company reviews its other non-amortizing long-lived assets annually and when events or circumstances indicate that the carrying value of the asset may not be recoverable. The recoverability is assessed by calculating estimated fair value. Changes in estimates could result in future impairment changes.
Accordingly, during the first quarter of 2008, we recorded a $424,000 asset impairment charge for the write-down of goodwill and restaurant assets at two under-performing locations. In

the second quarter we recorded an additional $168,000 asset impairment charge for the write-down of restaurant assets at one under-performing location.
ADMINISTRATIVE EXPENSES
Administrative expenses, as a percentage of revenues, declined from 7.8% for the second quarter of 2007 to 6.9% for the second quarter of 2008. Year-to-date administrative expenses, as a percentage of revenues declined from 7.9% for 2007 to 7.0% for 2008. In dollar terms, administrative expenses decreased $473,000 or 15% for the quarterly periods and year-to-date declined $1,057,000 or 14% from 2007 to 2008. The declines were related to the restructuring of our operations department and other overhead reductions implemented late in fiscal 2007. Administrative expenses include stock based compensation totaling approximately $50,000 and $67,000 for the second quarter of 2008 and 2007 respectively, and $96,000 and $132,000 for the year-to-date periods of 2008 and 2007, respectively.
INTEREST EXPENSE
Interest expense increased 28.5% from $772,000 for the second quarter of 2007 to $992,000 for the second quarter of 2008. Year-to-date interest expense increased 16% from $1,841,000 for 2007 to $2,128,000 for 2008.
The interest rate under our revolving credit agreement is based upon the ratio of bank indebtedness plus rent expense multiplied by 8 to earnings before interest, taxes, depreciation, amortization and rent expense. Based upon results for fiscal 2006 and 2007, the interest rate under our credit agreement was LIBOR plus 3.5% or prime plus 3/4 percent for both 2007 and 2008. As a result of decreases in prime and LIBOR, the rate under our revolving credit agreement was 5.75% at May 11, 2008 as compared to 9.0% at May 13, 2007.
The increase in interest expense from the second quarter of 2007 to the second quarter of 2008 was a result of additional interest associated with a financing lease obligation entered into during the first quarter of 2008 ($29,000), a 3 percentage point increase in the interest rate, through March 31, 2008, on our $7.8 million senior subordinated note ($26,000), a $219,000 amendment fee on our senior subordinated note which was added to the outstanding balance of the note on March 31, 2008, and interest on a $2.0 million, 8.5% convertible promissory note issued to a director of our company on October 29, 2007 ($41,000). These factors increasing interest expense were partially offset by the decline in the interest rate under our revolving credit agreement.
The increase in interest expense year-to-date from 2007 to 2008 was a result of additional interest associated with the financing lease obligation entered into during the first quarter of 2008 ($60,000), a 3% percentage point increase in the interest rate, through March 31, 2008, on our $7.8 million senior subordinated note ($94,000), the $219,000 amendment fee referred to above and interest on the $2.0 million, 8.5% convertible note ($93,000). These factors increasing interest expense for the year-to-date period were partially offset by the decline in the interest rate under our revolving credit agreement.
Total interest bearing debt (excluding lease obligations) increased from $28.7 million at May 13, 2007, to $32.2 million at May 11, 2008. The increase was due to an additional $3.2 million

utilization of our revolving credit line, the issuance of the $2.0 million, 8.5% convertible promissory note and an additional $640,000 of amendment fees and interest added to the principal balance of our senior subordinated note less $2.4 million of scheduled principal payments on our term loan. Funds from our revolving credit line and the convertible promissory note were generally used to fund construction and working capital needs.
On October 26, 2007, we entered into agreements with the lender for our revolving credit agreement and the holder of our $7.8 million senior subordinated note. Under the agreements, we are required to re-capitalize or sell our company by June 30, 2008 (amended to September 30, 2008) or establish a new banking relationship by March 31, 2009. Under the agreements, the holder or our senior subordinated note agreed to accept a quarterly cash interest payment on December 31, 2007 and March 31, 2008 based upon a 6% annual interest rate and allow us to add the remaining interest to the note balance. In return, the interest rate from October 1, 2007 through March 31, 2008 was increased by three percentage points to 17.5%.
On October 29, 2007, the first day of fiscal 2008, the Company issued a $2.0 million, 8.5% convertible promissory note to a director of the Company. The proceeds of the note were used to increase working capital. The note provided that one million dollars was due ten days after the Company receives a construction allowance from the landlord of one of the restaurants that opened during the fourth quarter of fiscal 2007. The second million dollars was due on the earlier of April 16, 2009, or upon the recapitalization or sale of the Company and is convertible into shares of common stock at the lesser of $5.00 per share of the equity price per share realized in an equity financing transaction. In connection with the agreement to merge with G&R Acquisition, the Company entered into a waiver and consent agreement with the director. Under this waiver and consent agreement, the director consented to the execution and delivery of the merger agreement by the company and the performance of the Company's obligations thereunder. The director also agreed that the execution, delivery and performance of the merger agreement does not constitute an event of default under the convertible promissory note, all such defaults being waived. In addition, if the director elects to exercise his conversion rights at the closing of the merger, the conversion price shall be $4.00; provided, however, that in the event the closing of the merger does not occur and in all other situations, the rights of the director, including the conversion price and the receipt of principal and interest will be as stated in the convertible promissory note.
We capitalized $7,000 of construction period interest during the first 28 weeks of 2008 versus $15,000 during the first 28 weeks of 2007.
INCOME TAXES AND DEFERRED TAX ASSET
For the first 28 weeks of 2008, we reported a tax credit of $293,000, which reflects the tax benefit of the reported loss before income taxes and $827,000 of FICA tax on tips credit earned during the period, both of which were offset by a $1.1 million increase to the deferred tax asset valuation allowance. For the first 28 weeks of 2007, we reported a tax credit of $400,000 which reflects the tax benefit of $500,000 of FICA tax on tips credit earned during the period. We have determined that it is more likely than not that we will not realize the entire value of our deferred tax asset. We have recorded a valuation allowance totaling $2.4 million at May 11, 2008 related to a portion of the FICA tax on tips credit that may expire before being utilized. Due to changes in facts

and circumstances and the significant management judgments and estimates involved in determining the proper valuation allowance, differences between actual future events and prior judgments and estimates could result in adjustments. Decreases in the expected future taxable income of our company may trigger adjustments in future periods. In the event we were to determine it is more likely than not that we will not fully recognize the remaining net deferred tax assets, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital ratio decreased from 0.4 to 1 at October 28, 2007 to 0.2 to 1 at May 11, 2008 because we classified our long-term debt as current due to the terms of the G&R merger agreement and related agreements with our lenders. Historically, we have been able to operate with a working capital deficiency because i) restaurant operations are primarily conducted on a cash basis, ii) high turnover (about once every 10 days) permits a limited investment in inventory, and iii) trade payables for food purchases usually become due after receipt of cash from the related sales. At May 11, 2008, we had recorded accounts receivable of $1.3 million from landlords for the reimbursement of construction costs of restaurants which opened late in fiscal 2007.
During the first quarter of 2008, we expended approximately $1,879,000 for property additions and $36,949,000 to reduce long-term obligations and increased cash on hand by $137,000. Funds for such expenditures were provided primarily by $37,062,000 from proceeds of long-term obligations and $2,023,130 from operations. We routinely draw down and repay balances under our revolving credit agreement, the gross amounts of which are included in the above numbers.
We expect to remodel one to two restaurants during the remainder of 2008 at an estimated cost of $200,000 each (net of landlord contributions of $200,000 per location), plus make additional capital expenditures of approximately $2.0 million on our existing restaurants. Funding for these capital expenditures is expected to be provided by cash flow from operations, landlord remodeling allowances and our revolving credit line. All of our Company's assets collateralize borrowings under our revolving credit agreement. At May 11, 2008, we had approximately $500,000 available under our $15.0 million revolving credit agreement. . . .