Forward-Looking Statements

Statements in this Form 10-Q quarterly report may be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These risks and uncertainties, many of which are not within our control, include but are not limited to: the adverse effect that increasing commodity costs have on our profitability and operating results; the pending litigation with the primary supplier of hot dogs to our Branded Product Program may result in a disruption in that supply or increased costs, either of which including the prolonged midwest drought which has resulted in record high corn prices would adversely affect our operating results; the outcome of any appeal of the court's ruling in such litigation; the timing of any such cash payment under the court ruling in such litigation and the tax impact of the ruling; the status of our licensing and supply agreements, including our ability to enter into a new supply agreement for hot dogs and the terms thereof; current economic conditions could result in decreased consumer spending on discretionary products, such as fast food; as well as those risks discussed in the Company's Form 10-K annual report for the year ended March 25, 2012, and in other documents which we file with the Securities and Exchange Commission. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. We generally identify forward-looking statements with the words "believe," "intend," "plan," "expect," "anticipate," "estimate," "will," "should" and similar expressions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q.

Introduction

As used in this Report, the terms "we", "us", "our", "Nathan's" or the "Company" mean Nathan's Famous, Inc. and its subsidiaries (unless the context indicates a different meaning).

We are engaged primarily in the marketing of the "Nathan's Famous" brand and the sale of products bearing the "Nathan's Famous" trademarks through several different channels of distribution. Historically, our business has been the operation and franchising of quick-service restaurants featuring Nathan's World Famous Beef Hot Dogs, crinkle-cut French-fried potatoes, and a variety of other menu offerings. Our Company-owned and franchised units operate under the name "Nathan's Famous," the name first used at our original Coney Island restaurant opened in 1916. Nathan's product licensing program began in 1978 by selling packaged hot dogs and other meat products to retail customers through supermarkets or grocery-type retailers for off-site consumption. During fiscal 1998, we introduced our Branded Product Program, which currently enables foodservice retailers and others to sell some of Nathan's proprietary products outside of the realm of a traditional franchise relationship. In conjunction with this program, purchasers of Nathan's products are granted a limited use of the Nathan's Famous trademark with respect to the sale of the purchased products, including Nathan's World Famous Beef Hot Dogs, certain other proprietary food items and paper goods. During fiscal 2008, we launched our Branded Menu Program, which is a limited franchise program, under which foodservice operators may sell a greater variety of Nathan's Famous menu items than under the Branded Product Program.

Our revenues are generated primarily from selling products under Nathan's Branded Product Program, operating Company-owned restaurants, franchising the Nathan's restaurant concept (including the Branded Menu Program) and licensing agreements for the sale of Nathan's products within supermarkets and club stores, the sale of Nathan's products directly to other foodservice operators and the manufacture of certain proprietary spices by third parties.

In addition to plans for expansion through our Branded Product Program, franchising and licensing, Nathan's continues to seek to co-brand within its restaurant system. Nathan's is also the owner of the Arthur Treacher's brand. At June 24, 2012, the Arthur Treacher's brand was being sold within 55 Nathan's restaurants.

At June 24, 2012, our restaurant system consisted of 307 Nathan's franchised units, including 127 Branded Menu units, and five Company-owned units (including one seasonal unit), located in 27 states, the Cayman Islands and seven foreign countries. At June 26, 2011, our restaurant system consisted of 269 Nathan's franchised units, including 93 Branded Menu units, and five Company-owned units (including one seasonal unit), located in 26 states, the Cayman Islands and seven foreign countries.

As described in our Annual Report on Form 10-K for the year ended March 25, 2012, our future results could be impacted by many developments including that the terms of our next primary license agreement for hot dogs may be more favorable, although there can be no assurance thereof, than our agreement with SMG which is scheduled to expire on February 28, 2014. In addition, our future operating results could be impacted by the record high corn prices, as a result of the drought in the midwest, which could significantly increase the cost of beef.

Critical Accounting Policies and Estimates

As discussed in our Form 10-K for the fiscal year ended March 25, 2012, the discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently, actual results could differ from those estimates. Our most critical accounting policies and estimates relate to revenue recognition; impairment of goodwill and other intangible assets; impairment of long-lived assets; share-based compensation and income taxes (including uncertain tax positions). Since March 25, 2012, there have been no changes in our critical accounting policies or significant changes to the assumptions and estimates related to them.

Recently Issued Accounting Pronouncements Not Yet Adopted

There are no recently issued accounting pronouncements that have not yet been adopted that are expected, when adopted, to have a material impact on the consolidated financial statements or notes thereto.

Results of Operations

Thirteen weeks ended June 24, 2012 compared to thirteen weeks ended June 26, 2011

Revenues

Total sales increased by 14.6% to $16,405,000 for the thirteen weeks ended June 24, 2012 ("fiscal 2013 period") as compared to $14,316,000 for the thirteen weeks ended June 26, 2011 ("fiscal 2012 period"). Foodservice sales from the Branded Product and Branded Menu Programs increased by 16.4% to $11,806,000 for the fiscal 2013 period as compared to sales of $10,140,000 in the fiscal 2012 period. This increase was primarily attributable to a 10.5% increase in the volume of products ordered and the impact of price increases that took effect during the fiscal 2013 period and fiscal 2012 periods. Total Company-owned restaurant sales, comprised of five Nathan's restaurants in both periods (including one seasonal restaurant), increased by $576,000 to $4,588,000 during the fiscal 2013 period compared to $4,012,000 during the fiscal 2012 period. This increase was primarily attributed to the increased sales at our relocated and expanded seasonal Boardwalk restaurant in Coney Island that opened in April 2012. During the fiscal 2013 period, other sales were approximately $153,000 lower than the fiscal 2012 period primarily because Nathan's terminated our agreement with the QVC television network in March 2012.

Franchise fees and royalties were $1,430,000 in the fiscal 2013 period as compared to $1,435,000 in the fiscal 2012 period. Total royalties were $1,281,000 in the fiscal 2013 period as compared to $1,189,000 in the fiscal 2012 period. Royalties earned under the Branded Menu program were $241,000 in the fiscal 2013 period as compared to $119,000 in the fiscal 2012 period due principally to the additional units in operation. Royalties earned under the Branded Menu Program are not based upon a percentage of restaurant sales but are based upon product purchases. Traditional franchise royalties were $1,040,000 in the fiscal 2013 period as compared to $1,070,000 in the fiscal 2012 period. Franchise restaurant sales decreased to $23,377,000 in the fiscal 2013 period as compared to $24,074,000 in the fiscal 2012 period primarily due to the decline in our comparable restaurants. Comparable domestic franchise sales (consisting of 118 Nathan's outlets, excluding sales under the Branded Menu Program) were $18,626,000 in the fiscal 2013 period as compared to $19,473,000 in the fiscal 2012 period, a decrease of 4.3%. Franchise sales within retail environments declined by approximately 4.7% compared to the prior period and sales at our travel and entertainment venues declined by approximately 3.8% compared to the fiscal 2012 period. Comparable international franchise sales, principally the Middle East, declined by approximately $65,000 or 5.3% during the fiscal 2013 period as compared to the fiscal 2012 period.

At June 24, 2012, 307 domestic and international franchised or Branded Menu Program franchise outlets were operating as compared to 269 domestic and international franchised or Branded Menu Program franchise outlets at June 26, 2011. Total franchise fee income was $149,000 in the fiscal 2013 period, including a $30,000 cancellation fee, compared to $246,000 in the fiscal 2012 period, including a $10,000 cancellation fee. Domestic franchise fee income was $133,000 in the fiscal 2013 period compared to $148,000 in the fiscal 2012 period. International franchise fee income was $16,000 in the fiscal 2013 period, compared to $98,000 during the fiscal 2012 period. During the fiscal 2013 period, 13 new franchised outlets opened, including eight Branded Menu Program outlets. During the fiscal 2012 period, 14 new franchised outlets opened, including a location in each of Canada, China, Kuwait and the Dominican Republic and six Branded Menu Program outlets.

License royalties were $2,229,000 in the fiscal 2013 period as compared to $1,967,000 in the fiscal 2012 period. Total royalties earned on sales of hot dogs from our retail and foodservice license agreements increased 11.8% to $1,803,000 from $1,613,000 primarily due to higher sales by SMG in the fiscal 2013 period. Royalties earned from SMG, primarily from the retail sale of hot dogs, were $1,465,000 during the fiscal 2013 period as compared to $1,125,000 during the fiscal 2012 period. Royalties earned from our foodservice licensee, substantially from sales of hot dogs to Sam's Club and Kroger's, were $338,000 during the fiscal 2013 period as compared to $488,000 during the fiscal 2012 period. This decrease is due primarily to a royalty concession on sales to Sam's Club and lower sales volume to Kroger's. During the fiscal 2013 period, we earned royalties of $57,000 from a new agreement for the sale of salty snacks. Royalties earned from all other licensing agreements for the manufacture and sale of Nathan's products increased by $15,000, during the fiscal 2013 period, as compared to the fiscal 2012 period.

Interest income was $100,000 in the fiscal 2013 period as compared to $178,000 in the fiscal 2012 period, primarily due to lower interest income of approximately $48,000 earned on marketable securities and lower interest earned on the Miami Subs note of approximately $30,000. As additional marketable securities mature or are called by the issuer and we are unable to earn similar returns upon reinvestment, we would anticipate lower investment income in the future. On June 29, 2011, we completed the sale of the Miami Subs note receivable and no longer earned interest income of 8.5%.

Other income was $18,000 in the fiscal 2013 period as compared to $1,000 in the fiscal 2012 period. This increase is due primarily to a renegotiated sublease of a non-franchised restaurant.

Costs and Expenses

Overall, our cost of sales increased by $1,349,000 to $12,985,000 in the fiscal 2013 period as compared to $11,636,000 in the fiscal 2012 period. Our gross profit (representing the difference between sales and cost of sales) was $3,420,000 or 20.8% of sales during the fiscal 2013 period as compared to $2,680,000 or 18.7% of sales during the fiscal 2012 period. The margin improvement was primarily due to the impact of sales price increases that have been implemented in order to offset the higher cost of hot dogs for our Branded Product Program.

Cost of sales in the Branded Product Program increased by approximately $1,164,000 during the fiscal 2013 period as compared to the fiscal 2012 period, primarily as a result of the higher sales volume and the approximately 2.7% increased cost of our hot dogs. During the fiscal 2013 period, the market price of hot dogs was approximately 0.3% higher than during the fiscal 2012 period. During the fiscal 2013 period, our purchase commitments increased cost by approximately $141,000. During the fiscal 2012 period, our purchase commitments to acquire hot dogs yielded savings of approximately $72,000. This difference is due to two contributing factors, a) the unexpected decline in the cost of one of the beef components and b) the higher amount of product purchased pursuant to the purchase commitments. During the fiscal 2013 period approximately 59.6% of our product was purchased at prevailing market prices as compared to approximately 91.0% during the fiscal 2012 period. The purchase commitments increased our costs by approximately $0.032 per pound during the fiscal 2013 period and reduced our costs by approximately $0.018 per pound during the fiscal 2012 period. The cost of beef could further increase due to the record high corn prices as a result of the drought in the midwest. If the cost of beef and beef trimmings increases and we are unable to pass on these higher costs through price increases or otherwise reduce any increase in our costs through the use of purchase commitments, our margins will be adversely impacted.

With respect to Company-owned restaurants, our cost of sales during the fiscal 2013 period was $2,575,000 or 56.1% of restaurant sales, as compared to $2,249,000 or 56.1% of restaurant sales in the fiscal 2012 period. Other cost of sales declined by $141,000 in the fiscal 2013 period, primarily because of the termination of our agreement with the QVC television network in March 2012.

Restaurant operating expenses were $875,000 in the fiscal 2013 period as compared to $819,000 in the fiscal 2012 period. The difference in restaurant operating costs was primarily due to higher percentage rent due on the increased sales at the new Boardwalk location. Although utility costs did not increase significantly during the fiscal 2013 period, we continue to be concerned about the volatile market conditions for oil and natural gas.

Depreciation and amortization was $274,000 in the fiscal 2013 period as compared to $227,000 in the fiscal 2012 period. This increase is primarily attributable to the investment made at the new Boardwalk location and higher depreciation on newly-added consigned equipment by our Branded Product Program.

General and administrative expenses increased by $113,000 or 4.5% to $2,625,000 in the fiscal 2013 period as compared to $2,512,000 in the fiscal 2012 period. The increase in general and administrative expenses was primarily due to increased compensation costs of $76,000, marketing activities of $34,000 and a bad debt of $24,000 which were partially offset by lower professional fees of $23,000.

Interest expense of $112,000 in the fiscal 2013 and fiscal 2012 periods represents accrued interest in connection with Nathan's appeal of the SMG damages award calculated at the New York State statutory rate of 9% per annum. In connection with its appeal, on March 31, 2011, Nathan's was required to enter into both a security agreement and a blocked deposit account control agreement and to deposit approximately $4,910,000 into the account and agree to deposit additional amounts monthly in an amount equal to the post-judgment interest. Nathan's expects to continue to accrue these charges during the term of the appeal.

Provision for Income Taxes

In the fiscal 2013 period, the income tax provision was $1,305,000 or 39.4% of earnings before income taxes as compared to $995,000 or 38.4% of income before income taxes in the fiscal 2012 period. Nathan's effective tax rate was reduced by 1.2% during the fiscal 2013 period and reduced by 2.3% during the fiscal 2012 period, due to the differing effects of tax-exempt interest income. Nathan's effective tax rates without these adjustments would have been 40.6% for the fiscal 2013 period and 40.7% for the fiscal 2012 period. Nathan's estimates that its unrecognized tax benefits and the related accrued interest and penalties could be further reduced by up to $134,000 during the remainder of fiscal 2013.

Off-Balance Sheet Arrangements

At March 25, 2012, the Company had an outstanding purchase commitment to acquire hot dogs at a cost of approximately $4,900,000 from its primary hot dog manufacturer. At June 24, 2012, the balance of that purchase commitment was approximately $1,085,000. Nathan's currently expects to complete this purchase commitment by August 2012. Nathan's has not entered into any new purchase commitments during the fiscal 2013 period. However, Nathan's may enter into additional purchase commitments in the future as favorable market conditions become available.

Liquidity and Capital Resources

Cash and cash equivalents at June 24, 2012 aggregated $8,634,000, a $2,605,000 increase during the fiscal 2013 period. At June 24, 2012, marketable securities were $12,629,000 compared to $14,710,000 at March 25, 2012 and net working capital increased to $24,597,000 from $21,989,000 at March 25, 2012.

Cash provided by operations of $585,000 in the fiscal 2013 period is primarily attributable to net income of $2,006,000 and other non-cash items of $551,000. Changes in Nathan's operating assets and liabilities decreased cash by $1,972,000, primarily resulting from increased accounts and other receivables, net of $2,230,000, lower accounts payable and accrued expenses of $336,000 and increased inventories of $286,000 partly offset by reduced prepaid expenses and other current assets of $765,000. The increase in accounts and other receivables is primarily due to the normal seasonal increases of license royalties due from SMG and increased Branded Product Program sales. The decrease in accounts payable and accrued expenses primarily relates to the payments of accrued compensation and unexpended marketing funds partly offset by the higher product purchases in connection with our Branded Product Program. The decrease in prepaid expenses is due primarily to the reduction of prepaid income taxes arising from the fiscal 2013 period's earnings and the application of prepaid insurances and restaurant rent during the fiscal 2013 period.

Cash provided by investing activities was $1,796,000 in the fiscal 2013 period. We received cash proceeds of $2,000,000 from the redemption of maturing available-for-sale securities. We funded $112,000 of interest into the restricted cash account, as required on a monthly basis throughout the appeal of the SMG damages award. We incurred capital expenditures of $92,000 primarily in connection with our Branded Product Program and capital projects at our restaurants.

Cash provided by financing activities of $224,000 in the fiscal 2013 period relates to the expected realization of the tax benefits associated with employee stock option exercises of $247,000 and proceeds from the exercise of employee stock options of $214,000 which were reduced by $237,000 for the payment of withholding tax on the net share settlement exercise of employee stock options. The Company has not purchased any of its stock during the fiscal 2013 period.

During the period from October 2001 through June 24, 2012, Nathan's purchased a total of 4,491,486 shares (which included 663,482 shares purchased through a modified dutch tender offer which closed in January 2012) of its common stock at a cost of approximately $50,313,000 pursuant to its stock repurchase plans previously authorized by the Board of Directors.

On November 3, 2009, Nathan's Board of Directors authorized its sixth stock repurchase plan for the purchase of up to 500,000 shares of its common stock on behalf of the Company. On February 1, 2011, Nathan's Board of Directors authorized a 300,000 share increase in the number of shares that the Company may repurchase. As of June 24, 2012, the Company had repurchased 392,527 shares at a cost of $6,707,000 under the sixth stock repurchase plan.

Currently, an aggregate of 407,473 shares can still be purchased under Nathan's existing stock buy-back program, as of June 24, 2012. Purchases may be made from time to time, depending on market conditions, in open market or privately-negotiated transactions, at prices deemed appropriate by management. There is no set time limit on the repurchases to be made under these stock-repurchase plans.

Management believes that available cash, marketable securities and cash generated from operations should provide sufficient capital to finance our operations and stock repurchases for at least the next 12 months.

As discussed above, we had cash and cash equivalents at June 24, 2012 aggregating $8,634,000, and marketable securities of $12,629,000. Our Board routinely monitors and assesses its cash position and our current and potential capital requirements. We may continue to return capital to our shareholders through stock repurchases, although there is no assurance that the Company will make any repurchases under its existing stock-repurchase plan. Since March 26, 2007, to date, we have repurchased 2,600,386 shares at a total cost of approximately $43,155,000, reducing the number of shares then-outstanding by 43.2%.

We expect that in the future we will make investments in certain existing restaurants, support the growth of the Branded Product and Branded Menu Programs and continue our stock repurchase programs, funding those investments from our operating cash flow. We may also incur capital and other expenditures or engage in investing activities in connection with opportunistic situations that may arise on a case-by-case basis.

At June 24, 2012, there were three properties that we lease from third parties which we sublease to two franchisees and a non-franchisee. We remain contingently liable for all costs associated with these properties including:
rent, property taxes and insurance. We may incur future cash payments with respect to such properties, consisting primarily of future lease payments, including costs and expenses associated with terminating any of such leases.

The following schedule represents Nathan's cash contractual obligations and commitments by maturity (in thousands):

                                                                             Payments Due by Period
                                                    Less than                                      More than 5
Cash Contractual Obligations           Total         1 Year         1-3 Years       3-5 Years         Years
Employment Agreements                $   2,021     $     1,049     $       772     $       200     $         -
Purchase Commitment (a)                  1,085           1,085               -               -               -
Operating Leases                        18,200           1,728           3,430           3,227           9,815
Gross Cash Contractual Obligations      21,306           3,862           4,202           3,427           9,815
Sublease Income                          3,779             405             793             523           2,058
Net Cash Contractual Obligations     $  17,527     $     3,457     $     3,409     $     2,904     $     7,757

a) At June 24, 2012 Nathan's had an outstanding purchase commitment to acquire hot dogs at a total cost of $1,085,000.

At June 24, 2012, the Company had unrecognized tax benefits of $430,000. The Company believes that it is reasonably possible that the unrecognized tax benefits may decrease by $134,000 within the next year. A reasonable estimate of the timing of the remaining liabilities is not possible.

Inflationary Impact

We do not believe that general inflation has materially impacted earnings since 2006. However, we have experienced significant volatility in our costs for our hot dogs and certain food products, distribution costs and utilities. Our commodity costs for beef have been especially volatile since fiscal 2004. In an effort to reduce the impact of increasing market prices, we have entered into purchase commitments for a portion of our hot dogs since January 2008. The market price of hot dogs was approximately 0.3% higher than during the fiscal 2012 period. This modest increase is in addition to last years' increase of approximately 12.0% over the April - June 2011 period and approximately 1.2% less than our fourth quarter fiscal 2012. Despite this quarter's decline, the cost of beef and beef trimmings during the first six months of calendar 2012, have been the highest that they have ever been since the inception of our Branded Product Program in 1997. We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during fiscal 2013. In addition, beef prices could further increase due to the record high corn prices, as a result of the drought in the midwest. We may attempt to enter into similar purchase arrangements for hot dogs and other products in the future. Additionally, we expect to continue experiencing volatility in oil and gas prices on our distribution costs for our food products and utility costs in the Company-owned restaurants.

In March 2010, the Federal government passed new legislation to reform the U.S. health care system. As part of the plan, employers will be expected to provide their employees with minimum levels of healthcare coverage or incur certain financial penalties. As Nathan's workforce includes numerous part-time workers that typically are not offered healthcare coverage, we may be forced to expand healthcare coverage or incur these new penalties which may increase our health care costs.

From time to time, various Federal and New York State legislators have proposed changes to the minimum wage requirements. Although we only operate five Company-owned restaurants, we believe that significant increases in the minimum wage could have a significant financial impact on our financial results and the results of our franchisees.

Continued increases in labor, food and other operating expenses, including health care, could adversely affect our operations and those of the restaurant . . .