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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2011

OR

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to          

Commission File No. 000-50052

COSÌ, INC.

(Exact name of registrant as specified in its charter)

1751 Lake Cook Road

Deerfield, Illinois 60015

(Address of principal executive offices) (Zip Code)

(847) 597-8800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Number of shares of Common Stock, $.01 par value, outstanding as of August 09, 2011: 51,849,511.

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COSI, INC.

Index to Form 10-Q

For the six-month period ended June 27, 2011

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Cosi, Inc.

Consolidated Balance Sheets

As of June 27, 2011 and December 27, 2010

(dollars in thousands)

The accompanying notes are an intergral part of these consolidated financial statements.

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Cosi, Inc.

Consolidated Statements of Operations

For the Three and Six Month Periods Ended June 27, 2011 and June 28, 2010

(dollars in thousands, except share and per share data)

The accompanying notes are an integral part of these consolidated financial statements.

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Cosi, Inc.

Consolidated Statement of Stockholders’ Equity

For the Six Months Ended June 27, 2011

(unaudited)

(dollars in thousands, except share data)

The accompanying notes are an integral part of these consolidated financial statements.

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Cosi, Inc.

Consolidated Statements of Cash Flows

For the Six-Month Periods Ended June 27, 2011 and June 28, 2010

(dollars in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — Basis of Presentation

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the requirements of Form 10-Q and, therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  In our opinion, the financial statements reflect all adjustments that are necessary for a fair presentation of the results of operations for the periods shown. All such adjustments are of a normal recurring nature. In preparing financial statements in conformity with U.S. GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.

As used in this quarterly report on Form 10-Q, unless the context requires otherwise, the terms “we,” “our,” “Company” or “Cosi” refer to Cosi, Inc. and its consolidated subsidiaries.

The balance sheet at December 27, 2010 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The results for the three and six-month periods ended June 27, 2011 and June 28, 2010 are not indicative of the results for the full fiscal year.

Certain amounts in the June 28, 2010 consolidated statement of cash flows have been reclassified to conform to the June 27, 2011 presentation.

This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 27, 2010, as filed with the Securities and Exchange Commission (“SEC”).

There have been no material changes to our significant accounting policies and estimates from the information provided in Note 1 of our consolidated financial statements included in our Form 10-K for the fiscal year ended December 27, 2010.

Note 2 — Stock-Based Compensation Expense

A summary of non-cash, stock-based compensation expense is as follows:

As of June 27, 2011 and June 28, 2010, all compensation expenses related to stock options granted under the Company’s various incentive plans have been recognized in full. In addition, as of June 27, 2011, there was approximately $0.4 million of total unrecognized compensation expense related to restricted stock shares and units granted under the Cosi, Inc. 2005 Omnibus Long-Term Incentive Plan (the “2005 Plan”). The expense related to these grants is being recognized on a straight-line basis from the date of each grant through fiscal 2015.

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COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

In the six-month period ended June 27, 2011, pursuant to the 2005 Plan and in accordance with the terms and conditions prescribed by the Compensation Committee of our Board of Directors, we granted and issued 98,000 restricted stock shares and 100,000 restricted stock units to key employees. The vesting of these shares and stock units will occur as follows: (i) 20% of the stock shares and stock units vested on the grant date, and (ii) an additional 20% of the stock shares and stock units will vest on each anniversary of the grant date provided that at each such date the employee continues to be employed by the Company. The value of the shares and the stock units for the grants made in the six-month period ended June 27, 2011, based on the closing price of our common stock on the date of the grants, was approximately $0.3 million. In the six-month period ended June 28, 2010, we granted and issued 238,250 restricted stock shares and 200,000 restricted stock units of our authorized but unissued common stock to key employees. The value of the shares for the grants made during that period, based on the closing price of our common stock on the date of the grants, was approximately $0.4 million.

Stock-based compensation expense relating to restricted stock grants of approximately $0.1 million is included in the accompanying consolidated statement of operations for each of the quarters ended June 27, 2011 and June 28, 2010. For the six-month periods ended June 27, 2011 and June 28, 2010, stock-based compensation expense relating to restricted stock grants is $0.3 million and $0.4 million, respectively.

There were no forfeitures of restricted stock during the three-month period ended June 27, 2011. In the three-month period ended June 28, 2010, 20,200 shares of previously issued restricted common stock were forfeited. The value of the forfeited shares, based on the closing price of our common stock on the date of the grants, was approximately $0.02 million. During the six-month periods ended June 27, 2011 and June 28, 2010, 42,000 and 21,400 shares, respectively, of previously issued restricted common stock were forfeited. The value of the forfeited shares, based on the closing price of our common stock on the date of the grants, was approximately $0.1 million and $0.03 million, respectively, in the six-month periods ended June 27, 2011 and June 28, 2010. The accompanying consolidated statement of operations for the six-month periods ended June 27, 2011 and June 28, 2010 reflects the reversal of approximately $0.02 and $0.01 million, respectively, of previously amortized costs related to these forfeited shares.

In the three-month periods ended June 27, 2011 and June 28, 2010, we issued 110,620 and 152,440 shares, respectively, of our restricted common stock to members of the Board of Directors pursuant to the 2005 Plan. These shares had an aggregate value of approximately $0.1 million and vested upon issuance.

Note 3 — Earnings Per Share

Basic earnings per share is calculated by dividing the net income available to common shareholders by the weighted-average common shares outstanding during each period. Diluted earnings per share (“diluted EPS”) is calculated using income available to common shareholders divided by diluted weighted-average shares of common stock

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COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

outstanding during each period. Potentially dilutive securities include unvested stock and common stock related to stock options. Diluted EPS considers the impact of potentially dilutive securities except in periods when there is a loss because the inclusion of these securities would have had an anti-dilutive effect. As of June 27, 2011 and June 28, 2010, there were, respectively, 188,800 and 215,600 unvested restricted shares of common stock outstanding and there were no stock options that were in-the-money. The unvested restricted shares of common stock meet the requirement for dilutive securities and were included in the computation of diluted EPS for the periods of net income but excluded for the periods of net loss. The out-of-the-money stock options to purchase 447,228 and 558,114 shares of common stock that were outstanding at June 27, 2011 and June 28, 2010, respectively, do not meet the requirements for participating securities and were not included in the computation of basic and diluted earnings per share. As of June 27, 2011 and June 28, 2010, there were 255,000 and 270,000, respectively, unvested restricted stock units. The unvested restricted stock units do not meet the requirements for participating securities and were not included in the computation of basic and diluted earnings per share.

In the three and six-month periods ended June 28, 2010, the effect on basic and diluted earnings per share attributable to the approximately $5.1 million gain from the sale of the thirteen restaurants to a franchisee in the District of Columbia was net income of $0.10 per basic and diluted common share in each of the periods. Excluding this gain from our net income, we would have realized a net loss per basic common weighted average share outstanding of $0.03 and $0.09 in the three and six-month periods ended June 28, 2010, respectively.

Note 4 — Asset Impairments

In accordance with FASB Accounting Standards Codification Topic 360 (ASC Topic 360), Property, Plant & Equipment, we evaluate possible impairments at the individual restaurant level periodically and record an impairment loss whenever we determine impairment factors are present. We consider a history of poor financial operating performance to be the primary indicator of potential impairment for individual restaurant locations. We determine whether a restaurant location is impaired based on expected undiscounted cash flows, generally for the remainder of the lease term, and then determine the impairment charge based on discounted cash flows for the same period.

Restaurants are not considered for impairment during the period before they enter the comparable restaurant base, unless specific circumstances warrant otherwise.

In the three and six-month periods ended June 27, 2011, we recorded an asset impairment charge of approximately $0.1 million related to one underperforming restaurant. We recorded an asset impairment charge of approximately $0.2 million related to two underperforming restaurants during the three and six-month periods ended June 28, 2010.

Note 5 — Lease Termination Costs

In the three and six-month periods ended June 27, 2011, we incurred lease termination costs of approximately $0.01 million and $0.03 million, respectively, related to the closing of two restaurant locations. In the three and six-month periods ended June 28, 2010, we recorded lease termination charges of approximately $0.01 million related to a subleased location.

Future store closings, if any, may result in additional lease termination charges. The incurrence of additional lease termination costs will be dependent on our ability to improve operations in those restaurants.  If unsuccessful, lease termination costs will be determined through negotiating acceptable terms with our landlords to terminate the leases for those restaurants or on our ability to locate sub-tenants or assignees for the leases at those locations.

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COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

Note 6 — Contingencies

From time to time, we are a defendant in litigation arising in the ordinary course of our business, including but not limited to claims resulting from “slip and fall” accidents, claims under federal and state laws governing access to public accommodations or other federal and state laws applicable to our business operations, employment-related claims, property damages, claims from guests alleging illness, injury or other food quality, health or operational concerns, and enforcement of intellectual property rights.

As of the date of this report, there are no legal proceedings pending which, at this time, are expected to have a material adverse effect if decided against the Company.

Note 7 — Income Taxes

We have recorded a full valuation allowance to reduce our deferred tax assets related primarily to net operating loss carryforwards. Our determination of the valuation allowance is based on an evaluation of whether it is more likely than not that we will be able to utilize the net operating loss carryforwards, based on the Company’s operating results. A positive adjustment to income will be recorded in future years if we determine that we could realize these deferred tax assets.

As of December 27, 2010, we had net operating loss (“NOL”) carryforwards of approximately $193.9 million for U.S. federal income tax purposes. Under the Internal Revenue Code, an “ownership change” with respect to a corporation can significantly limit the amount of pre-ownership change NOLs and certain other tax assets that the corporation may utilize after the ownership change to offset future taxable income, possibly reducing the amount of cash available to the corporation to satisfy its obligations. An ownership change generally would occur if the aggregate stock ownership of holders of at least 5% of our stock increases by more than 50 percentage points over the preceding three year period. We do not believe that the rights offering that we filed during our first quarter of fiscal 2010 has triggered an ownership change. In addition, a limitation would not have an impact on our consolidated financial statements as we have recorded a valuation allowance for the entire amount of our deferred tax assets.

We adopted ASC 740-10, Income Taxes, which prescribes a comprehensive financial statement model of how a company should recognize, measure, present and disclose uncertain tax positions that the company has taken or expects to take in its income tax returns. The standard requires that only income tax benefits that meet the “more likely than not” recognition threshold be recognized or continue to be recognized on the effective date. Initial recognition amounts would have been reported as a cumulative effect of a change in accounting principle.

No adjustment was made to the beginning retained earnings balance in fiscal 2007, as the ultimate deductibility of all tax positions is highly certain but there is uncertainty about the timing of such deductibility. No interest or penalties have been accrued relative to tax positions due to the Company having either a tax loss or net operating loss carryforwards to offset any taxable income in all subject years. As a result, no liability for uncertain tax positions has been recorded.

Should the Company need to accrue interest or penalties on uncertain tax positions, it would recognize the interest as interest expense and the penalties as a general and administrative expense.

Due to our unexpired NOLs, Cosi could be subject to IRS income tax examination for the tax year 1996 and all subsequent years. We could also be subject to state income tax examinations in certain states where we have unexpired NOLs.

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COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

Note 8 — New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).” This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. This pronouncement is effective for reporting periods beginning on or after December 15, 2011. The adoption of ASU 2011-04 is not expected to have a significant impact to the Company’s consolidated financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-05 is not expected to have a significant impact to the Company’s consolidated financial position or results of operations.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a significant impact on our consolidated financial statements upon adoption.

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Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations for the fiscal quarters ended June 27, 2011 and June 28, 2010 should be read in conjunction with “Selected Consolidated Financial Data” and our audited consolidated financial statements and the notes to those statements that are in our 2010 Annual Report on Form 10-K. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements” below and elsewhere in this Quarterly Report.

OVERVIEW

System wide restaurants:

As of June 27, 2011, there were 81 Company-owned and 59 franchised premium convenience restaurants operating in 18 states, the District of Columbia, and the United Arab Emirates (“UAE”). During the six months ended June 27, 2011, we closed two Company-owned restaurants, one in Illinois and another one in New York. Subsequent to the second quarter of fiscal 2011, we closed one Company-owned restaurant in Michigan.

Our restaurants offer innovative, savory, made-to-order products featuring our authentic hearth-baked crackly crust signature Cosi® flatbread and fresh distinctive ingredients. We maintain a pipeline of new menu offerings that are introduced seasonally through limited time offerings to keep our products relevant to our target customers. Our menu features high-quality sandwiches, freshly-tossed salads, breakfast wraps, Cosi® Squagels®, hot melts, flatbread pizzas, S’mores and other desserts, and a variety of coffees along with other soft drink beverages, bottled beverages including premium still and sparkling water, teas, alcoholic beverages, and other specialty coffees and beverages. Our restaurants offer lunch and afternoon coffee in a counter-service format, with most offering breakfast and/or dinner and dessert menus as well.

We are currently eligible to offer franchises in 47 states and the District of Columbia. We offer franchises to area developers and individual franchise operators. The initial franchise fee, payable to us, for both an area developer and an individual franchise operator, is $40,000 for the first restaurant and $35,000 for each additional restaurant.

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We believe that offering Cosi® franchised restaurants to area developers and individual franchisees offers the prospects of strong financial returns. By franchising, we believe we will be able to increase the presence of our restaurants in various markets throughout the country and generate additional revenue without the large upfront capital commitments and risk associated with opening Company-owned restaurants.

We believe that incorporating a franchising and area developer model into our strategy will position us to maximize the market potential for the Cosi® brand and concept consistent with our available capital, and we expect that Company-owned restaurants (restaurants that we own as opposed to franchised restaurants) will always be an important part of our new restaurant growth.

We also continue to explore strategic opportunities with our Cosi Pronto® (our grab-and-go concept) and full-service concepts in educational establishments, airports, train stations and other public venues that meet our operating and financial criteria.

Critical Accounting Policies

Our discussion and analysis of our consolidated financial condition and results of operations is based upon the consolidated financial statements and notes to the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable and generally accepted for companies in the restaurant industry. We believe that the following addresses the more critical accounting policies used in the preparation of our consolidated financial statements and requires management’s most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. There have been no material changes in the application of our most critical accounting policies and estimates, judgments and assumptions during the second quarter of fiscal 2011.

Long Lived Assets: ASC 360-10-35 Property, Plant, & Equipment requires management judgments regarding the future operating and disposition plans for marginally-performing assets, and estimates of expected realizable values for assets to be sold. The application of this standard has affected the amount and timing of charges to operating results that have been significant in recent years. We evaluate possible impairment at the individual restaurant level periodically and record an impairment loss whenever we determine impairment factors are present. We consider a history of poor financial operating performance to be the primary indicator of potential impairment for individual restaurant locations. We determine whether a restaurant location is impaired based on expected undiscounted cash flows, generally for the remainder of the lease term, and then determine the impairment charge based on discounted cash flows for the same period.  Restaurants are not considered for impairment during the “ramp-up” period before they enter the comparable restaurant base, unless specific circumstances warrant otherwise.

Lease Termination Charges: ASC 420-10-30 Exit or Disposal Cost Obligations requires companies to recognize a liability for the costs associated with an exit or disposal activity when the liability is incurred, rather than at the time of a commitment to an exit or disposal plan. For all exit activities, we estimate our likely liability under contractual leases for restaurants that have been closed. Such estimates have affected the amount and timing of charges to operating results and are impacted by management’s judgments about the time it may take to find a suitable subtenant or assignee, or the terms under which a termination of the lease agreement may be negotiated with the landlord.

Accounting for Lease Obligations: In accordance with ASC 840-10-25 Leases, we recognize rent expense on a straight-line basis over the lease term commencing on the date we take possession. We include any rent escalations, rent abatements during the construction period and any other rent holidays in our straight-line rent expense calculation.

Landlord Allowances: In accordance with ASC 840-10-25 Leases, we record landlord allowances as deferred rent in

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other long-term liabilities on the consolidated balance sheets and amortize them on a straight-line basis over the term of the related leases.

Stock-Based Compensation Expense: In accordance with ASC 718-10-25 Compensation — Stock Compensation we recognize stock-based compensation expense according to the fair value recognition provision, which generally requires, among other things, that all employee share-based compensation be measured using a fair value method and that all the resulting compensation expense be recognized in the financial statements.

We measure the estimated fair value of our granted stock options using a Black-Scholes pricing model and of our restricted stock based on the fair market value of a share of registered stock on the date of grant. The weighted average fair values of the stock options granted through 2005, the last time we issued stock options, were determined using the Black-Scholes option-pricing model.

Income Taxes: We have recorded a full valuation allowance to reduce our deferred tax assets that relate primarily to net operating loss carry-forwards. Our determination of the valuation allowance is based on an evaluation of whether it is more likely than not that we will be able to utilize the net operating loss carry-forwards based on the Company’s operating results. A positive adjustment to income will be recorded in future years if we determine that we could realize these deferred tax assets.

We have adopted the provisions of ASC 740-10-25 Income Taxes beginning in fiscal 2007. No adjustment was made to the beginning retained earnings balance, as the ultimate deductibility of all tax positions is highly certain but there is uncertainty about the timing of such deductibility. No interest or penalties have been accrued relative to tax positions due to the Company having either a tax loss or net operating loss carry-forwards to offset any taxable income in all subject years. As a result, no liability for uncertain tax positions has been recorded.

Revenue

Restaurant Net Sales. Our Company-owned restaurant sales are composed almost entirely of food and beverage sales. We record revenue at the time of the purchase of our products by our customers.

Franchise Fees and Royalties. Franchise fees and royalties includes fees earned from franchise agreements entered into with area developers and franchise operators, as well as royalties received based on sales generated at franchised restaurants. We recognize the franchise fee in the period in which a franchise location opens or when fees are forfeited as a result of a termination of an area developer agreement. We recognize franchise royalties in the period in which sales are made by our franchise operators.

Gift Card Sales. We offer our customers the opportunity to purchase gift cards at our restaurants and through our website. Customers can purchase these cards at varying dollar amounts. At the time of purchase by the customer, we record a gift card liability for the face value of the card purchased. We recognize the revenue and reduce the gift card liability when the gift card is redeemed. We do not reduce our recorded liability for potential non-use of purchased gift cards.

COMPARABLE RESTAURANT SALES

In calculating comparable restaurant sales, we include a restaurant in the comparable restaurant base after it has been in operation for 15 full months. We remove from the comparable restaurant base for the period any restaurant that is temporarily shut down for remodeling during that period. As of June 27, 2011 and June 28, 2010, there were 81 and 85 restaurants in our comparable restaurant base, respectively.

Costs and Expenses

Cost of Food and Beverage. Cost of food and beverage is composed of food and beverage costs. Food and beverage costs are variable and fluctuate with sales volume.

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Restaurant Labor and Related Benefits. The costs of restaurant labor and related benefits include direct hourly and management wages, bonuses, payroll taxes, health insurance and all other fringe benefits.

Occupancy and Other Restaurant Operating Expenses. Occupancy and other restaurant operating expenses include direct restaurant-level operating expenses, including the cost of paper and packaging, supplies, repairs and maintenance, utilities, rent and related occupancy costs.

General and Administrative Expenses. General and administrative expenses include all corporate and administrative functions that support our restaurants and provide an infrastructure to operate our business. Components of these expenses include executive management costs; supervisory and staff salaries; non-field stock-based compensation expense; non-field bonuses and related taxes and employee benefits; travel; information systems; training; support center rent and related occupancy costs; and professional and consulting fees. The salaries, bonuses and employee benefits costs included as general and administrative expenses are generally more fixed in nature and do not vary directly with the number of restaurants we operate. Stock-based compensation expense includes the charges related to recognizing the fair value of stock options and restricted stock as compensation for awards to certain key employees and non-employee directors, except the costs related to stock-based compensation for restaurant employees which are included in restaurant labor and related benefits.

Depreciation and Amortization. Depreciation and amortization principally relates to restaurant assets.

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RESULTS OF OPERATIONS

Our operating results for the three and six-month periods ended June 27, 2011 and June 28, 2010, expressed as a percentage of total revenues (except where otherwise noted), were as follows:

(1)          These are expressed as a percentage of restaurant net sales versus all other items expressed as a percentage of total revenues

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Restaurant Net Sales

Restaurant net sales: Restaurant net sales decreased 8.7%, or approximately $2.5 million, in the three months ended June 27, 2011, as compared to the same period of fiscal 2010, due to an approximately $1.7 million decrease in net restaurant sales from the thirteen Company-owned restaurants sold to a franchisee during the second quarter of fiscal 2010, as well as an approximately $0.9 million decrease in net restaurant sales related to Company-owned restaurants closed during and after the second quarter of fiscal 2010, partially offset by approximately $0.1 million, or 0.5%, increase in net sales in our comparable restaurant base. The 0.5% increase in comparable restaurant net sales in the three months ended June 27, 2011 was comprised of 2.9% increase in average check price, partially offset by a 2.4% decrease in traffic.

In the six months ended June 27, 2011, restaurant net sales decreased 11.8%, or approximately $6.5 million, as compared to the six months ended June 28, 2010, due to a decrease of approximately $4.2 million in net restaurant sales from the thirteen Company-owned restaurants sold to a franchisee in the second quarter of fiscal 2010, a decrease of approximately $3.1 million in net sales related to Company-owned restaurants closed during and after the first quarter of 2010, partially offset by approximately $0.8 million, or 1.7%, increase in net sales in our comparable restaurant base. The 1.7% increase in comparable restaurant net sales in the six months ended June 27, 2011 was comprised of 2.3% increase in average check price, partially offset by 0.6% decrease in traffic.

Franchise Fees and Royalties

Franchise fees and royalties: In the three and six months ended June 27, 2011, franchise fees and royalties decreased by 24.2% and 4.5%, respectively, or approximately $0.3 million and $0.1 million, to approximately $0.8 million and $1.5 million, respectively, as compared to the three and six months ended June 28, 2010. The decrease is due primarily to the $0.3 million in franchise fees recognized during the second quarter of fiscal 2010 resulting from a cancelled area development agreement, partially offset by an increase in franchise royalties of 10.7% and 20.8%, respectively, or approximately $0.1 million and $0.3 million, in the three and six months ended June 27, 2011, as compared to the same periods in fiscal 2010. The increase in franchise royalties during the three and six months ended June 27, 2011 is primarily due to an increase of approximately $0.1 million and $0.2 million, respectively, in royalties

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from the thirteen Company-owned restaurants in the District of Columbia sold to a franchisee during the second quarter of fiscal 2010.

Costs and Expenses

Cost of food and beverage: The decrease in cost of food and beverage, as a percentage of restaurant net sales, during the three and six-month periods ended June 27, 2011, as compared to the three and six-month periods ended June 28, 2010, is due primarily to the favorable impact of the price increase taken at the end of the second quarter of fiscal 2010, as well as the increase in catering sales which carry a more favorable cost of goods as a percentage of net sales relative to the entire menu mix, partially offset by inflation on some food items and the impact on total menu mix of an increase in sales of breakfast items which carry a higher cost of goods as a percentage of net sales when compared to items sold during our lunch and dinner day parts.

Restaurant labor and related benefits: The decrease in restaurant labor and related benefits as a percentage of restaurant net sales in the three months ended June 27, 2011, as compared to the same period of fiscal 2010, is due primarily to savings realized from better deployment of labor hours during peak and non-peak hours of operation, the favorable impact on labor of the price increase taken at the end of the second quarter of fiscal 2010, and savings on certain healthcare related benefits.

The decrease in restaurant labor and related benefits as a percentage of restaurant net sales in the six months ended June 27, 2011, as compared to the same period of fiscal 2010, is due primarily to the favorable impact on labor of the price increase taken at the end of the second quarter of fiscal 2010, savings realized from better deployment of labor hours during peak and non-peak hours of operation, and savings on certain healthcare related benefits.

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Occupancy and other restaurant operating expenses: The increase in occupancy and other restaurant operating expenses, as a percentage of restaurant net sales, in the three months ended June 27, 2011, as compared to the same periods of fiscal 2010, is due primarily to the reversals of tax and restaurant occupancy-related expense accruals during fiscal 2010 as a result of the sale of the thirteen Company-owned restaurants to a franchisee in the District of Columbia, partially offset by the lower costs for repairs and maintenance of the restaurants.

Occupancy and other restaurant operating expenses, as a percentage of restaurant net sales, were comparable for the six-month periods ended June 27, 2011 and June 28, 2010.

General and administrative expenses: The decrease in general and administrative expenses in the three and six months ended June 27, 2011, as compared to the same periods of fiscal 2010, of approximately $0.2 million and $0.5 million, respectively, is due primarily to lower third-party professional fees, lower occupancy costs at our Corporate Headquarters resulting from a reduction of space in late 2010, labor savings resulting from administrative workforce reductions that occurred during fiscal 2010, and lower business travel-related expenses.