The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors discussed in "Risk Factors" in our Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 14, 2008 and elsewhere in this report.

Overview

We were incorporated in the State of Nevada on February 8, 2006 as Axxent Media Corp. Prior to December 18, 2007, we were a development stage company as defined by Statement of Financial Accounting Standard (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. As Axxent Media Corp., our business was to obtain reproduction and distribution rights to foreign films within North America and also to obtain the foreign rights to North American films for reproduction and distribution to foreign countries. On August 8, 2007, we changed our name to UFood Franchise Company, Inc., and on September 25, 2007, we changed our name to UFood Restaurant Group, Inc. (UFood or the Company). Following the Merger described below, the Company abandoned its plans both to obtain reproduction and distribution rights to foreign films within North America and to obtain the foreign rights to North American films for reproduction and distribution to foreign countries.

On December 18, 2007, a wholly-owned subsidiary of the Company merged (the Merger) with and into KnowFat Franchise Company, Inc. (KnowFat) with KnowFat surviving the Merger as our wholly-owned subsidiary. Following the Merger, we continued KnowFat's business operations as a franchisor and operator of fast-casual food service restaurants that capitalize on consumer demands for great tasting food with healthy attributes. KnowFat was founded in 2004 to capitalize on the popularity of a chain of fast-casual concept restaurants operating under the tradename "Lo Fat Know Fat" in the greater Boston area, as well as the growing trend in the United States towards healthier living and eating. After operating for three years as KnowFat! Lifestyle Grille, while continuously modifying and improving the concept, management arrived at the conclusion that the KnowFat! name sent the wrong marketing message and alienated some people within the mainstream customer set. As a result, we have decided that future locations will operate under the name UFood Grill. Management believes that the new brand will embrace the mainstream customer better and help extend the concept into a nation-wide chain.

During the three months ended June 29, 2008, we entered into a franchise and development agreement to open three UFood Grill units in airports in Texas. At June 29, 2008, our operations consisted of four company-owned restaurants and four franchisee-owned locations including two franchisee-owned locations operated by the Company pursuant to management services agreements. The franchisee-owned restaurants are located in Boston, Naples and Sacramento. All of our Company-owned restaurants are located in the greater Boston area. Two of our Company-owned restaurants and three of our franchisee-owned locations operate under the name UFood Grill. The conversion of the remaining three KnowFat! Lifestyle Grille units is expected to take place over the next several months. Subsequent to June 29, 2008, a franchisee-owned restaurant opened in downtown Chicago.

We view ourselves primarily as a franchisor and continually review our restaurant ownership mix (that is our mix among Company-owned, franchised, and joint venture) to deliver a great customer experience and drive profitability. In most cases, franchising is the best way to achieve both goals. In our company-owned stores, and in collaboration with our franchisees, we further develop and refine operating standards, marketing concepts and product and pricing strategies, so that we introduce system-wide only those that we believe are most beneficial.

We include in this discussion information on Company, franchisee, and/or system-wide comparable sales and average weekly sales. System-wide sales are a non-GAAP financial measure that includes sales at all Company-owned and franchise-operated stores, as reported by franchisees. Management uses system-wide sales information internally in connection with store development decisions, planning and budgeting analysis. Management believes it is useful in assessing customer acceptance of our brand and facilitating an understanding of financial performance as our franchisees pay royalties and contribute to marketing funds based on a percentage of their sales.

We derive revenues from three sources: (i) store sales include sales of hot and cold prepared food as well as sales of health and nutrition related products;
(ii) franchise royalties and fees represent amounts earned under franchise and area development agreements; and (iii) other revenues derived primarily from the sale of marketing materials to franchisees. Store operating expenses include the cost of goods, food and paper products sold in company-owned stores as well as labor and other operating costs incurred to operate Company-owned stores. General and administrative expenses, advertising, marketing and promotion expenses and depreciation expense relate to all three revenue sources.

Critical Accounting Policies & Estimates

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements for the three and six month periods ended June 29, 2008 and July 1, 2007 which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Variances in the estimates or assumptions used could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances.

We have chosen accounting policies we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. As described in Item 6, "Management's Discussion and Analysis or Plan of Operations" and Item 7, "Financial Statements" of our Annual Report on Form 10-KSB for the fiscal year ended December 30, 2007 filed with the Securities and Exchange Commission on April 14, 2008, we consider our policies on accounting for revenue recognition, valuation of goodwill, income taxes, lease obligations and stock-based compensation to be the most critical in the preparation of the accompanying consolidated financial statements because they involve the most difficult, subjective, or complex judgments about the effect of matters that are inherently uncertain. There have been no material changes to our application of critical accounting policies and significant judgments and estimates since December 30, 2007.

The following table sets forth the percentage relationship to total revenues, except where otherwise indicated, of certain items included in our consolidated statements of operations for the periods indicated. Percentages may not add due to rounding:

                                        Three Months Ended            Six Months Ended
                                      June 29,       July 1,       June 29,       July 1,
                                        2008           2007          2008           2007
Revenues:
Store sales                                 96.4 %        92.2 %         95.5 %        93.4 %
Franchise royalties and fees                 3.6           7.1            4.3           5.8
Other revenue                                  -           0.7            0.2           0.8
                                           100.0 %       100.0 %        100.0 %       100.0 %

Costs and expenses:
Store operating expenses (1):
Food and paper costs                        33.5 %        38.1 %         33.9 %        36.3 %
Cost of nutritional products                10.0          20.7           10.9          20.5
Labor                                       28.5          28.4           29.9          31.0
Occupancy                                   11.6           7.3           11.7           8.2
Other store operating expenses              15.2          16.3           17.5          16.2
General and administrative
expenses                                   172.7          65.7          145.5          60.4
Advertising, marketing and
promotion expenses                          24.8          25.9           19.9          15.3
Depreciation and amortization                6.7           8.0            7.9           8.1
Loss on disposal of assets                     -          36.1            0.1          18.2
Total costs and expenses                   294.4         227.0          267.3         196.6

Operating loss                            (194.4 )      (127.0 )       (167.3 )       (96.6 )

Other income (expense):
Interest income                              2.1           0.5            1.7           0.6
Interest expense                            (1.2 )        (6.7 )         (1.5 )        (6.4 )
Other income                                 4.2             -            2.3             -
Other income (expense), net                  5.1          (6.2 )          2.5          (5.8 )

Loss before income taxes                  (189.3 )      (133.2 )       (164.8 )      (102.4 )
Income taxes                                   -             -              -             -

Net loss                                  (189.3 )%     (133.2 )%      (164.8 )%     (102.4 )%

(1) Food and paper costs are shown as a percentage of food sales. The cost of nutritional products, labor, occupancy and other store operating expenses are shown as a percentage of total store sales.

The following table sets forth certain data relating to the number of Company-owned, franchise-operated and system-wide store locations:

                                       Three Months Ended                Six Months Ended
                                   June 29,          July 1,        June 29,           July1,
                                     2008              2007           2008              2007
Company-owned locations:
Locations at the beginning of
the year                                     4                5               4                5
Locations opened                             -                -               -                -
Locations closed                             -               (1 )             -               (1 )
Locations sold                               -                -               -                -
Locations transferred                        -                -               -                -
Locations at the end of the
period                                       4                4               4                4

Franchise-owned locations:
Locations at the beginning of
the year                                     4                4               4                4
Locations opened                             -                1               -                1
Locations closed                                              -               -                -
Locations sold                               -                -               -                -
Locations transferred                        -                -               -                -
Locations at the end of the
period(1)                                    4                5               4                5

System-wide locations
Locations at the beginning of
the year                                     8                9               8                9
Locations opened                             -                1               -                1
Locations closed                             -               (1 )             -               (1 )
Locations sold                               -                -               -                -
Locations transferred                        -                -               -                -
Locations at the end of the
period                                       8                9               8                9

(1) At June 29, 2008, the Company operated two franchise-owned locations pursuant to the terms of management services agreements.

Three Months Ended June 29, 2008 Compared to Three Months Ended July 1, 2007

General

For the three months ended June 29, 2008, our comparable store sales for Company owned stores decreased by 9.3%. System-wide comparable store sales decreased by 16.2%. For the three months ended June 29, 2008, three of our four Company-owned stores were comparable store locations and two of the four franchisee-owned locations were comparable store locations. All of the comparable store locations are located in the greater Boston area. As of June 29, 2008, the two franchisee-owned comparable store locations are being operated by the Company pursuant to two management services agreements. Comparable store sales of Company-owned and franchisee-owned locations were adversely impacted by record rainfall in the Boston area in May and June and a slowdown in consumer spending. Comparable store sales are based on sales for stores that have been in operation for the entire period of comparison. Franchisee-owned stores which we acquire are included in comparable store sales once they have been open for the entire period of comparison. Comparable store sales exclude closed locations.

During the three months ended June 29, 2008, average weekly sales for Company-owned stores increased by $318, or 1.2%, to $25,746 from $25,428 for the three months ended July 1, 2007. The increase in average weekly sales for Company-owned stores was primarily due to one new Company-owned store that opened in December 2007.

Average weekly sales for franchisee-owned stores decreased by $2,818, or 15.2%, to $15,680 during the three months ended June 29, 2008 from $18,498 for the three months ended July 1, 2007. The decrease in average weekly sales for franchisee-owned stores was primarily due to a decrease in sales at the two franchisee-owned locations in the Boston area. At June 29, 2008, the Company operates the two franchisee-owned locations in the Boston area pursuant to separate management services agreements.

System-wide, average weekly sales decreased by $1,943, or 8.6%, to $20,713 for the three months ended June 29, 2008 from $22,656 for the three months ended July 1, 2007 primarily due to the decrease in average weekly sales of franchisee-owned locations.

Results of Operations

Revenues

Our total revenues for the three months ended June 29, 2008 increased by $279,184, or 20.6%, to $1,635,371 from $1,356,187 for the three months ended July 1, 2007. The increase in total revenues for the three months ended June 29, 2008, as compared to the prior year was primarily due to sales generated by a new Company-owned restaurant that opened at Boston's Logan International Airport in December 2007 partially offset by decreases in sales attributable to a Company-owned restaurant in Woburn, Massachusetts that closed in April 2007, and a Company-owned restaurant in Shrewsbury, Massachusetts that was sold in September 2007 and the decrease in comparable store sales.

The system-wide average weekly sales per store and the related number of operating weeks for the three months ended June 29, 2008 and July 1, 2007 were as follows:

                                            Three Months Ended
                                           June 29,       July 1,    Percentage
                                            2008           2007        Change
System-wide average weekly sales         $     20,713    $  22,656          (8.6 )%
System-wide number of operating weeks             104           65          60.0 %

Average weekly sales is calculated by dividing total net sales by the total number of operating weeks in the period. Accordingly, the year over year change reflects sales for all locations, whereas comparable store sales are based on sales for locations that have been in operation and owned throughout the period of comparison.

Total store sales at Company-owned stores for the three months ended June 29, 2008 increased by $326,496, or 26.1%, to $1,577,040 from $1,250,544 for the three months ended July 1, 2007. As a percentage of total revenues, sales at Company-owned stores increased to 96.4% of total revenues for the three months ended June 29, 2008 from 92.2% of total revenues for the three months ended July 1, 2007. The increase in sales at Company-owned stores for the three months ended June 29, 2008 was primarily due to sales generated by the Logan Airport location, partially offset by a decrease in sales due to the closure of a Company-owned restaurant in April 2007 and the sale of a Company-owned restaurant in September 2007. Average weekly sales for Company-owned stores and the related number of operating weeks for the three months ended June 29, 2008 and July 1, 2007 were as follows:

                                                    Three Months Ended
                                                   June 29,     July 1,    Percentage
                                                     2008         2007       Change
Company-owned stores average weekly sales         $    25,746   $ 25,428           1.2 %
Company-owned stores number of operating weeks             52         39          33.3 %

During the three months ended June 29, 2008, franchise royalties and fees decreased by $37,556, or 39.2% to $58,331 from $95,887 for the three months ended July 1, 2007 primarily due to a decrease in sales at franchisee-owned locations. Sales of franchisee-owned locations decreased primarily due to the closure of two franchisee-owned locations in the second half of 2007. The Company did not recognize any revenue from initial franchise fees during the three months ended June 29, 2008 or the three months ended July 1, 2007.

Average weekly sales for franchisee-owned stores and the related number of operating weeks for the three months ended June 29, 2008 and July 1, 2007 were as follows:

                                           Three Months Ended
                                         June 29,      July 1,      Percentage
                                           2008          2007         Change
Franchisee-owned stores average
weekly sales                            $    15,680   $   18,498          (15.2 )%
Franchisee-owned stores number of
operating weeks                                  52           26          100.0 %

As of June 29, 2008, four franchisee-owned stores were open and operating and franchise and area development agreements covering an additional 71 franchise locations had been signed. Our standard franchise and area development agreements require franchisees and area developers to develop a specified number of stores on or before specific dates. If a franchisee or area developer fails to develop stores on schedule, we have the right to terminate the franchise agreement and develop company-owned locations or develop locations through new area developers in that market. We may exercise one or more alternative remedies to address defaults by area developers and franchisees of the terms of their franchise agreements including the failure to open locations on time and non-compliance with our operating and brand requirements and other covenants under the franchise agreement.

Costs and Expenses

Food and paper costs for the three months ended June 29, 2008 increased by $116,735, or 35.5%, to $445,941 from $329,206 for the three months ended July 1, 2007. The increase was primarily attributable to food and paper costs incurred at a new Company-owned restaurant that opened at Boston's Logan International Airport in December 2007. As a percentage of food sales, food and paper costs decreased to 33.5% of food sales for the three months ended June 29, 2008 from 38.1% of food sales for the three months ended July 1, 2007. The decrease in food and paper costs as a percentage of food sales was primarily attributable to lower meat prices and a change in the sales mix of food items resulting from our newest restaurant at Logan International Airport. Our restaurant at Logan Airport operates under the UFood tradename with a streamlined menu compared with the menus at our three other Company-owned locations which operated under the KnowFat! tradename at June 29, 2008. We plan to convert our three Company-owned KnowFat! locations to the UFood concept in the second half of fiscal 2008.

The cost of nutritional products for the three months ended June 29, 2008 decreased by $101,644, or 39.3%, to $156,968 from $258,612 for the three months ended July 1, 2007. As a percentage of store sales, the cost of nutritional products decreased to 10.0% of store sales for the three months ended June 29, 2008 from 20.7% of store sales for the three months ended July 1, 2007. The decrease in the cost of nutritional products as a percentage of store sales was primarily attributable to a change in our mix of restaurant (i.e., food) sales and retail sales (i.e., nutritional products). Nutritional products represented a smaller proportion of our total store sales in during the three months ended June 29, 2008 compared with the three months ended July 1, 2007.

Store labor expense for the three months ended June 29, 2008 increased by $94,786, or 26.7%, to $449,436 from $354,650 for the three months ended July 1, 2007. The increase in labor expense was primarily attributable to labor costs incurred at our newest restaurant that opened at Logan International Airport in December 2007 and salary increases partially offset by efficiencies associated with the streamlined UFood Grill menu at our Logan Airport location. As a percentage of store sales, labor expense increased slightly to 28.5% of store sales for the three months ended June 29, 2008 from 28.4% of store sales for the three months ended July 1, 2007.

Store occupancy costs for the three months ended June 29, 2008 increased by $92,244, or 100.8%, to $183,711 from $91,467 for the three months ended July 1, 2007. The increase in occupancy costs was primarily attributable to occupancy costs at our Logan Airport store that opened in December 2007 and occupancy costs of a franchise-owned location that the Company began operating pursuant to a management services agreement during the three months ended June 29, 2008. As a percentage of store sales, occupancy costs increased to 11.6% of store sales for the three months ended June 29, 2008 from 7.3% of store sales for the three months ended July 1, 2007 primarily due to higher rent expense at our Logan International Airport location compared with our other restaurant locations.

Other store operating expenses for the three months ended June 29, 2008 increased by $34,866, or 17.1%, to $239,106 from $204,240 for the three months ended July 1, 2007. The increase was primarily due to higher utility costs and other store operating costs at our Logan Airport restaurant partially offset by savings due to improved cost control. As a percentage of store sales, other store operating expenses decreased to 15.2% of store sales for the three months ended June 29, 2008 from 16.3% of store sales during the three months ended July 1, 2007.

General and administrative expenses for the three months ended June 29, 2008 increased by $1,933,473, or 217.1%, to $2,823,870 from $890,397 for the three months ended July 1, 2007. The increase in general and administrative expenses was primarily due to investor relations and public relations expenses incurred in connection with the corporate awareness campaign announced by the Company in May 2008, non-cash, stock-based compensation expense resulting from equity awards to employees, costs of operating as a public company and legal and other costs incurred in connection with the legal matters discussed in Note 7 of the Notes to Consolidated Financial Statements included elsewhere in this Report. During the three months ended June 29, 2008, the Company recognized $729,211 of stock-based compensation expense attributable to equity awards to employees. The Company did not recognize any stock-based compensation expense resulting from equity awards to employees during the three months ended July 1, 2007. As a result of the foregoing, general and administrative expenses increased to 172.7% of total revenues during the three months ended June 29, 2008 from 65.7% of total revenues for the three months ended July 1, 2007.

Advertising, marketing and promotion expenses for the three months ended June 29, 2008 increased by $54,777, or 15.6%, to $406,315 from $351,538 for the three months ended July 1, 2007. The increase in advertising, marketing and promotion expenses was primarily due to an increase in expenses related to the services agreement with George Foreman Ventures, LLC (GFV Services Agreement) that became effective June 12, 2007, and expenses incurred in connection with the conversion of franchise-owned and company-operated stores operating under the KnowFat! tradename to stores operating under the UFood Grill tradename. Advertising, marketing and promotion expenses for the three months ended June 29, 2008 and July 1, 2007 include $383,700 and $315,000, respectively, of non-cash, stock-based compensation expense attributable to the GFV Services Agreement. As a percentage of total revenues, advertising, marketing and promotion expenses decreased to 24.8% of total revenues in the three months ended June 29, 2008 from 25.9% of total revenues in the three months ended July 1, 2007.

Depreciation and amortization expense for the three months ended June 29, 2008 increased by $1,606, or 1.5%, to $110,073 from $108,467 for the three months ended July 1, 2007. As a percentage of total revenues, depreciation and amortization expense decreased to 6.7% of total revenues for the three months ended June 29, 2008 from 8.0% of total revenues for the three months ended July 1, 2007.

Other income and expense improved from $84,078 of other expense for the three months ended July 1, 2007 to $83,931 of other income for the three months ended June 29, 2008. The improvement of $168,009 was primarily attributable to lower interest expense and a gain resulting from the extinguishment of debt. In April 2008, the Company paid $800,000 to extinguish indebtedness incurred in connection with the acquisition of a restaurant location and recognized a gain of $68,575 from the extinguishment of debt.

. . .