Throughout this Quarterly Report on Form 10-Q, we refer to Carrols Restaurant Group, Inc. as "Carrols Restaurant Group" and, together with its consolidated subsidiaries, as "we", "our" and "us" unless otherwise indicated or the context otherwise requires. Any reference to "Carrols" refers to our wholly-owned subsidiary, Carrols Corporation, a Delaware corporation, and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires. This combined Quarterly Report on Form 10-Q is filed by both Carrols Restaurant Group and its wholly owned subsidiary, Carrols.

We use a 52-53 week fiscal year ending on the Sunday closest to December 31. All references herein to the fiscal years ended December 30, 2007 and December 31, 2006 will be referred to as the fiscal years ended December 31, 2007 and 2006, respectively. Similarly, all references herein to the three and six months ended June 29, 2008 and July 1, 2007 will be referred to as the three and six months ended June 30, 2008 and June 30, 2007, respectively. The years ended December 31, 2007 and 2006 each contained 52 weeks and the three and six months ended June 30, 2008 and 2007 each contained thirteen and twenty-six weeks, respectively.

Introduction

Carrols Restaurant Group is a holding company and conducts all of its operations through its direct and indirect subsidiaries and has no assets other than the shares of capital stock of Carrols, its direct wholly-owned subsidiary. The following "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") relates to the consolidated financial statements of Carrols Restaurant Group and the consolidated financial statements for Carrols presented in Item 1.

The difference between the consolidated financial statements of Carrols Restaurant Group and Carrols is primarily due to additional rent expense of approximately $6,000 per year for Carrols Restaurant Group and the composition of stockholders' deficit.

The following MD&A is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, the Consolidated Financial Statements and the accompanying financial statement notes of each of Carrols Restaurant Group and Carrols appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2007. The overview provides our perspective on the individual sections of MD&A, which include the following:

Company Overview-a general description of our business and our key financial measures.

Recent and Future Events Affecting Our Results of Operations-a description of recent events that affect, and future events that may affect, our results of operations.

Executive Summary-an executive review of our performance for the three months ended June 30, 2008.

Liquidity and Capital Resources-an analysis of historical information regarding our sources of cash and capital expenditures, the existence and timing of commitments and contingencies, changes in capital resources and a discussion of cash flow items affecting liquidity.

Results of Operations-an analysis of our results of operations for the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007.

Application of Critical Accounting Policies-an overview of accounting policies requiring critical judgments and estimates.

Effects of New Accounting Standards-a discussion of new accounting standards and any implications related to our financial statements.

Forward Looking Statements-cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from our historical results or our current expectations or projections.

Company Overview

We are one of the largest restaurant companies in the United States operating three restaurant brands in the quick-casual and quick-service restaurant segments with 557 restaurants located in 16 states as of June 30, 2008. We have been operating restaurants for more than 45 years. We own and operate two Hispanic restaurant brands, Pollo Tropical and Taco Cabana (together referred to by us as our Hispanic Brands), which we acquired in 1998 and 2000, respectively. We are also the largest Burger King franchisee, based on the number of restaurants, and have operated Burger King restaurants since 1976. As of June 30, 2008, our company-owned restaurants included 88 Pollo Tropical restaurants and 150 Taco Cabana restaurants, and we operated 319 Burger King restaurants under franchise agreements. We also franchise our Hispanic Brand restaurants with 30 franchised restaurants located in Puerto Rico, Ecuador and the United States as of June 30, 2008. We believe that the diversification and strength of our restaurant brands as well as the geographic dispersion of our restaurants provide us with stability and enhanced growth opportunities. Our primary growth strategy is to develop new company-owned Hispanic Brand restaurants. For the six months ended June 30, 2008 and June 30, 2007, we had total revenues of $406.4 million and $388.7 million, respectively, and net income of $4.7 million and $6.7 million, respectively.

The following is an overview of the key financial measures discussed in our results of operations:

• Restaurant sales consist of food and beverage sales, net of discounts, at our company-owned Hispanic Brand restaurants and the Burger King restaurants we operate under franchise agreements. Restaurant sales are influenced by menu price increases, new restaurant openings, closures of underperforming restaurants, and changes in comparable restaurant sales. The changes in comparable restaurant sales noted below are calculated using only those restaurants open since the beginning of the earliest period being compared and for the entirety of both periods being compared. Restaurants are included in comparable restaurant sales after they have been open for 12 months for our Burger King restaurants and 18 months for our Pollo Tropical and Taco Cabana restaurants.

• Cost of sales consists of food, paper and beverage costs, including packaging costs, less purchase discounts. Cost of sales is generally influenced by changes in commodity costs, the sales mix of items sold and the effectiveness of our restaurant-level controls to manage food and paper costs. For our Pollo Tropical and Taco Cabana restaurants, we have negotiated directly with local and national suppliers for the purchase of food, paper and beverage products and related supplies. Our Pollo Tropical and Taco Cabana restaurants' commodities are ordered from approved suppliers and are shipped via distributors directly to our restaurants. Key commodities, including chicken and beef, for our Pollo Tropical and Taco Cabana restaurants are generally purchased under annual contracts. For our Burger King restaurants we are a member of a national purchasing cooperative, Restaurant Services, Inc., a non-profit independent cooperative that serves as the purchasing agent for most of the commodities for the Burger King franchise system and also contracts with various distributors to fulfill orders to our restaurants.

• Restaurant wages and related expenses include all restaurant management and hourly productive labor costs, employer payroll taxes, restaurant-level bonuses and related benefits. Payroll and related benefits are subject to inflation, including minimum wage rate increases and any increases in costs for health insurance and workers' compensation insurance. A significant number of our hourly staff is paid at rates consistent with the applicable Federal or state minimum wage and, accordingly, increases in minimum wage rates will increase our labor costs. We are insured for workers' compensation, general liability and medical insurance claims under policies where we pay all claims, subject to annual stop-loss limitations both for individual claims and claims in the aggregate.

• Restaurant rent expense includes base rent, contingent rent and common area maintenance on our leases characterized as operating leases, reduced by the amortization of gains on sale-leaseback transactions.

• Other restaurant operating expenses include all other restaurant-level operating costs, the major components of which are royalty expenses for our Burger King restaurants, utilities, repairs and maintenance, real estate taxes and credit card fees.

• Advertising expense includes all promotional expenses including television, radio, billboards and other media. Pollo Tropical and Taco Cabana utilize an integrated, multi-level marketing approach that includes periodic chain-wide promotions, direct mail, in-store promotions, local store marketing and other strategies, including the use of radio and television advertising in their major markets. For our Burger King restaurants we are generally required to contribute 4% of restaurant sales to an advertising fund utilized by the Burger King franchise system for its advertising, promotional programs and public relations activities. We also supplement from time to time, on a discretionary basis, BKC's advertising and promotional activities with our own local advertising and promotions which may include the purchase of additional media or other forms of advertising.

• General and administrative expenses are comprised primarily of
(1) salaries and expenses associated with corporate and administrative functions that support the development and operations of our restaurants,
(2) legal and professional fees, including external auditing and related costs, (3) costs associated with being a publicly-held company and
(4) stock-based compensation expense.

• Depreciation and amortization primarily includes the depreciation of fixed assets, including equipment, owned buildings and leasehold improvements, depreciation of assets under lease financing obligations and the amortization of Burger King franchise rights and franchise fees.

• Interest expense consists primarily of interest expense associated with our 9% Senior Subordinated Notes due 2013 ("the Notes"), borrowings under our senior credit facility, amortization of deferred financing costs and imputed interest expense on certain leases entered into in connection with sale-leaseback transactions which are accounted for as lease financing obligations. Interest expense also includes any gains and losses from the settlement of lease financing obligations. Interest on borrowings under our senior credit facility is substantially based on LIBOR with a current margin of 1.25%. Consequently, changes in LIBOR rates will impact our interest expense.

Recent and Future Events Affecting our Results of Operations

Initial Public Offering

In December 2006, we and certain selling stockholders, respectively, completed an initial public offering (the "IPO") of 5,666,666 and 5,333,334 shares of our common stock (the latter of which included 1,000,000 shares sold upon the underwriters' exercise of its over-allotment option) at an initial public offering price of $13.00 per share. We received net proceeds of approximately $65.4 million from the sale by us of shares of our common stock in the offering after deducting underwriting discounts and commissions and offering expenses paid by us. We contributed the net proceeds from the IPO to Carrols, which used such funds to repay approximately $68.0 million principal amount of term loan borrowings under our senior credit facility.

New Senior Credit Facility

On March 9, 2007, Carrols terminated its prior senior credit facility and entered into a loan agreement governing our new senior credit facility with a syndicate of lenders. Carrols' new senior credit facility totals approximately $185 million, consisting of $120 million principal amount of term loan A borrowings maturing on March 8, 2013 (or earlier on September 30, 2012 if the Notes are not refinanced by June 30, 2012) and a $65.0 million revolving credit facility maturing on March 8, 2012. The term loan A borrowings and an additional $4.3 million of revolver borrowings from this facility were used to repay all outstanding borrowings and other obligations under the Carrols' prior senior credit facility and to pay certain fees and expenses incurred in connection with the new senior credit facility. In addition, we recorded a pretax charge of $1.5 million in the first quarter of 2007 related to the write off of unamortized deferred financing costs associated with the prior senior credit facility. For a more detailed discussion of the new senior credit facility, see "Liquidity and Capital Resources."

Issuance of Stock Options and Restricted Shares

In connection with the IPO, we granted options to purchase 1,241,750 shares of our common stock and issued 75,800 shares of restricted stock under our 2006 Stock Incentive Plan to certain of our employees and directors in December 2006. Total stock-based compensation expense of approximately $5.4 million will be recognized over the vesting period of these grants. In January 2008 we also granted options to purchase 517,820 shares of our common stock and issued 7,100 shares of restricted stock under our 2006 Stock Incentive Plan to certain of our employees. Total stock-based compensation expense of $1.3 million will be recognized over the vesting period of these grants. For the six months ended June 30, 2008 and 2007, stock-based compensation expense was $1.0 million and $0.7 million, respectively. We currently anticipate we will record total stock-based compensation expense of approximately $2.0 million in 2008. In addition, we will incur additional stock-based compensation expense in future periods for any additional stock option and restricted share grants we make.

Burger King Restaurants

We evaluate the performance of our Burger King restaurants on an ongoing basis. Such evaluation depends on many factors, including our assessment of the anticipated future operating results of the restaurant, the cost of required capital improvements that we would need to commit for such restaurants and the location of the restaurant in its current market. If we determine that a Burger King restaurant is underperforming, we may elect to close such restaurant. Excluding one Burger King Restaurant which was relocated and opened in the same market area in the first quarter of 2008 under a new franchise agreement, we closed five Burger King restaurants in 2007 and four Burger King restaurants in the first six months of 2008. Excluding three Burger King restaurants which we may relocate in the same market area under a new franchise agreement, we currently anticipate that we will likely elect to close an additional five Burger King restaurants in 2008. Based on the current operating results of such closed restaurants, we believe that the future impact on our consolidated results of operations as a result of such restaurant closures will not be material, although there can be no assurance in this regard. Our determination of whether to close such restaurants is subject to further evaluation and may change. We may also elect to close additional Burger King restaurants in the future.

We are also considering other strategic alternatives with respect to our Burger King restaurants, including the possible future sale of some or all of such restaurants. Such determination is subject to ongoing evaluation. To date, we have no current understandings, commitments or agreements with respect to the foregoing and there can be no assurance that we will enter into any such arrangements in the future.

Postretirement Benefits

On November 1, 2007, we amended our postretirement medical and life insurance benefits covering substantially all Burger King administrative and restaurant management personnel. The amendment included an elimination of life insurance benefits for active employees who retire after December 31, 2007 and increases in retiree contributions for both current and future retirees effective January 1, 2008. These amendments reduced our postretirement benefit obligations and will reduce expense in 2008 and subsequent years.

Executive Summary - Operating Performance for the Three Months Ended June 30, 2008

In the first six months of 2008, we have opened four new Pollo Tropical restaurants, four new Taco Cabana restaurants, and one new Burger King restaurant, which was relocated within its market area, and closed four Burger King restaurants and one Taco Cabana restaurant.

Total revenues in the second quarter of 2008 increased 5.1% to $210.7 million from $200.4 million in the second quarter of 2007. Revenues from our Hispanic Brand restaurants increased 5.1% to $108.8 million in the second quarter of 2008 from $103.5 million in the second quarter of 2007 and revenues from our Burger King restaurants also increased 5.1% to $101.8 million in the second quarter of 2008 from $96.9 million in the second quarter of 2007.

Pollo Tropical revenues increased 6.2% to $45.4 million during the second quarter of 2008 compared to $42.7 million in the second quarter of 2007 due primarily to the opening of twelve new Pollo Tropical restaurants since the beginning of the second quarter of 2007, including one new Pollo Tropical restaurants in New Jersey. We also closed one Pollo Tropical restaurant during the same time period. Comparable restaurant sales at Pollo Tropical were essentially flat with an increase of 0.1% in the second quarter of 2008 as effective menu price increases in the second quarter of 5.2% were offset by lower customer traffic.

Taco Cabana revenues increased 4.4% to $63.4 million during the second quarter of 2008 compared to $60.8 million in the second quarter of 2007 due primarily to the opening of eleven new Taco Cabana restaurants since the beginning of the second quarter of 2007. We also closed two Taco Cabana restaurants during the same time period. Comparable restaurant sales at Taco Cabana decreased 0.6% in the second quarter of 2008 as a result of lower customer traffic. Effective menu price increases were 3.0% in the second quarter of 2008.

Comparable restaurant sales at our Burger King restaurants increased 5.9% in the second quarter of 2008 as a result of a 3.4% increase in customer traffic and an average check increase of 2.4%. Effective menu price increases were 3.3% in the second quarter of 2008. These sales increases were partially offset by the closure, excluding relocated restaurants, of eight Burger King restaurants since the beginning of the second quarter of 2007.

Restaurant operating margins in 2008 continue to be negatively impacted from higher commodity costs at all three of our restaurant concepts. As a percentage of total restaurant sales, food and paper costs increased 1.7% to 30.4% in the second quarter of 2008 compared to 28.7% in the second quarter of 2007 as a result of higher prices for chicken, cheese, beef, wheat -based products and fuel surcharges from our distributors.

Advertising expenditures increased to $9.2 million in the second quarter of 2008 from $8.4 million in the second quarter of 2007 and, as a percentage of total restaurant sales, increased to 4.4% in the second quarter of 2008 from 4.2% in the second quarter of 2007 primarily from the timing of expenditures for our Taco Cabana restaurants and higher Burger King restaurant sales.

Higher energy costs continue to adversely impact operating margins as utility costs, as a percentage of total restaurant sales, increased to 4.4% in the second quarter of 2008 from 4.2% in the second quarter of 2007.

General and administrative expenses were $13.7 million in the second quarter of 2008 compared to $13.3 million in the second quarter of 2007. As a percentage of total restaurant sales, general and administrative expenses decreased to 6.5% in the second quarter of 2008 from 6.6% in the second quarter of 2007 due primarily to lower administrative bonus accruals.

Interest expense decreased to $7.1 million in the second quarter of 2008 from $7.6 million in the second quarter of 2007 due to lower effective interest rates on our LIBOR based borrowings under our senior credit facility.

In addition, we recognized a non-recurring pretax gain of $0.1 million in the second quarter of 2008 related to the sale of a Taco Cabana property and a $0.2 million gain on the purchase and retirement in an open market transaction of $2.0 million principal amount of our Notes.

Net income was $3.3 million in the second quarter of 2008 compared to $5.1 million in the second quarter of 2007 as a result of the above.

Liquidity and Capital Resources

We do not have significant receivables or inventory and receive trade credit based upon negotiated terms in purchasing food products and other supplies. We are able to operate with a substantial working capital deficit because:

• restaurant operations are primarily conducted on a cash basis;

• rapid turnover results in a limited investment in inventories; and

• cash from sales is usually received before related liabilities for food, supplies and payroll become due.

Interest payments under our debt obligations, capital expenditures and payments related to our lease obligations represent significant liquidity requirements for us. We believe cash generated from our operations, availability of borrowing under our revolving credit facility and proceeds from anticipated sale-leaseback transactions will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures (which include new restaurant development and represent a major investment of cash for us) and debt service requirements for the next twelve months.

Operating activities. Net cash provide by operating activities for the six months ended June 30, 2008 was $19.4 million due primarily to net income of $4.7 million and depreciation and amortization expense of $16.1 million. Net cash provided from operating activities for the six months ended June 30, 2007 was $29.6 million due primarily to net income of $6.7 million and depreciation and amortization expense of $15.6 million. We also recorded in the first six months of 2007 a $1.5 million non-cash pretax loss on early extinguishment of debt from the write-off of previously deferred financing costs related to our prior senior credit facility.

Investing activities including capital expenditures and qualified sale-leaseback transactions. Net cash used for investing activities in the six months ended June 30, 2008 and 2007 was $24.5 million and $26.7 million, respectively. Capital expenditures for the six months ended June 30, 2008 and 2007 were $29.2 million and $27.7 million, respectively. Our capital expenditures included expenditures for development of new Pollo Tropical and Taco Cabana restaurants for the six months ended June 30, 2008 and 2007 of $15.3 million and $17.8 million, respectively. Expenditures to remodel our existing Pollo Tropical and Burger King restaurants for the six months ended June 30, 2008 and 2007 totaled $5.8 million and $3.2 million, respectively.

In the first six months of 2008 and 2007, we sold four and two restaurant properties, respectively, in sale-leaseback transactions for net proceeds of $4.7 million and $2.5 million, respectively. We also sold one Taco Cabana property in each of the first six months of 2008 and 2007 for net proceeds of $0.1 million and $1.0 million, respectively. The net proceeds from these sales were used to reduce outstanding borrowings under our senior credit facility. We also had expenditures related to the purchase of restaurant properties to be sold in sale-leaseback transactions of $2.5 million in the six months ended June 30, 2007.

Our capital expenditures are primarily for (1) new restaurant development, which includes the purchase of related real estate; (2) restaurant remodeling, which includes the renovation or rebuilding of the interior and exterior of our existing restaurants, including expenditures associated with Burger King franchise renewals; (3) other restaurant capital expenditures, which include capital restaurant maintenance expenditures for the ongoing reinvestment and enhancement of our restaurants; and (4) corporate and restaurant information systems.

The following table sets forth our capital expenditures for the periods presented (in thousands):

                                                 Pollo      Taco     Burger
                                               Tropical    Cabana     King      Other     Consolidated
Six months ended June 30, 2008:
New restaurant development                     $   7,838   $ 7,480   $ 1,067   $    -    $       16,385
Restaurant remodeling                              2,296       340     3,532        -             6,168
Other restaurant capital expenditures (1)          1,274     1,220     1,597        -             4,091
Corporate and restaurant information systems          -         -         -      2,585            2,585

Total capital expenditures                     $  11,408   $ 9,040   $ 6,196   $ 2,585   $       29,229

Number of new restaurant openings                      4         4         1                          9
Six months ended June 30, 2007:
New restaurant development                     $  11,335   $ 6,474   $   911   $    -    $       18,720
Restaurant remodeling                              1,084        -      2,160        -             3,244
Other restaurant capital expenditures (1)            821     1,569     1,880        -             4,270
Corporate and restaurant information systems          -         -         -      1,493            1,493

Total capital expenditures                     $  13,240   $ 8,043   $ 4,951   $ 1,493   $       27,727

Number of new restaurant openings                      4         2        -                           6

1) Excludes restaurant repair and maintenance expenses included in other restaurant operating expenses in our consolidated financial statements. For the six months ended June 30, 2008 and 2007, total restaurant repair and maintenance expenses were approximately $9.8 million and $8.7 million, respectively.

In 2008, we anticipate that total capital expenditures will range from $73 million to $80 million, although the actual amount of capital expenditures may differ from these estimates. These capital expenditures are expected to include approximately $39 million to $43 million for the development of new restaurants and purchase of related real estate. In 2008, we currently anticipate that we will open a total of eight new Pollo Tropical restaurants, ten to twelve new . . .