Many parts of the world including the United States have been in a recession and we believe that these weak general economic conditions could continue through 2009 and possibly beyond. The ongoing impact of the housing crisis, rising unemployment and financial market weakness may further exacerbate current economic conditions. As the economy struggles, our guests may become more apprehensive about the economy and/or related factors, and may reduce their level of discretionary spending. A decrease in spending due to lower consumer discretionary income or consumer confidence in the economy could impact the frequency with which our guests choose to dine out or the amount they spend on meals while dining out, thereby decreasing our revenues and negatively affecting our operating results. Additionally, we believe there is a risk that if the current negative economic conditions persist for a long period of time and/or become more pervasive, consumers might make long-lasting changes to their discretionary spending behavior, including dining out less frequently on a more permanent basis. Our operating performance, as well as our liquidity position, have been and continue to be negatively affected by these economic conditions, many of which are beyond our control. We do not believe that it is likely that these adverse economic conditions, and their effect on the restaurant industry, will improve significantly in the near term.

Results of Operations

Three Month Period Ended October 4, 2009 (13 weeks) compared to Three Month Period Ended September 28, 2008 (13 weeks) and Nine Month Period Ended October 4, 2009 (39 weeks) compared to Nine Month Period Ended September 28, 2008 (39 weeks)

Our revenues and results have been affected by the uncertain macroeconomic environment, particularly in the United States, which has impacted guest traffic throughout the industry. Negative comparable restaurant revenues adversely impacted earnings due to the deleveraging effect on our fixed cost base. We expect these economic conditions to impact our results through fiscal 2009 and possibly beyond. As a result, we could experience reduced revenues and incur a net loss during the remaining quarter of fiscal 2009 and possibly beyond.

Our net loss for the three month period ended October 4, 2009 was $3.3 million compared to net loss of $63.7 million for the three month period ended September 28, 2008. Our net loss for the nine month period ended October 4, 2009 was $11.6 million compared to net loss of $59.6 million for the nine month period ended September 28, 2008. The three and nine month periods ended September 28, 2008 include an estimated non-cash impairment charge of $66.2 million and $3.6 million relating to continuing operations and discontinued operations, respectively. Excluding the effect of these impairment charges, the change to our net loss is primarily due to a decrease in comparable restaurant revenues net of related food and beverage and restaurant operating costs, as well as the charge related to the legal settlements of $11.7 million. For purposes of this discussion, comparable restaurants refer to Morton's steakhouses open for all of fiscal 2008 and the nine month period ended October 4, 2009.

Revenues decreased $8.9 million, or 12.2%, to $64.1 million for the three month period ended October 4, 2009 from $73.0 million for the three month period ended September 28, 2008. Revenues decreased $11.4 million, or 16.8%, due to a decrease in revenues from comparable restaurants. Revenues decreased $0.5 million due to a decrease in revenues from our Trevi restaurant. Revenues increased $2.5 million due to the opening of six new restaurants (two in the nine month period ended October 4, 2009 and four in fiscal 2008). Revenues increased $0.5 million due to an increase in revenues from our Morton's steakhouse in Beverly Hills, California, which was closed from June 1, 2008 to September 10, 2008 for major renovations. Average revenue per restaurant open all of either period being compared decreased 12.9%. Revenues for the three month period ended October 4, 2009 also reflect the impact of aggregate menu price increases of approximately 1.5% in July 2008, 0.8% in October 2008 and 1.0% in June 2009 at our Morton's

Revenues decreased $40.9 million, or 16.8%, to $203.3 million for the nine month period ended October 4, 2009 from $244.2 million for the nine month period ended September 28, 2008. Revenues decreased $51.3 million, or 22.4%, due to a decrease in revenues from comparable restaurants. Revenues decreased $1.3 million due to a decrease in revenues from our Trevi restaurant. Revenues increased $10.4 million due to the opening of six new restaurants (two in the nine month period ended October 4, 2009 and four in fiscal 2008). Revenues increased $0.6 million due to an increase in revenues from our Morton's steakhouse in Beverly Hills, California, which was closed from June 1, 2008 to September 10, 2008 for major renovations. Revenues increased as a result of increased gift card breakage income of $0.7 million. Gift card breakage for the nine months ended October 4, 2009, includes gift card breakage income of $0.7 million relating to a legacy paper gift certificate program; such revenue was recognized after determining the probability of redemption of these paper gift certificates was remote. Average revenue per restaurant open all of either period being compared decreased 18.4%. Revenues for the nine month period ended October 4, 2009 also reflect the impact of aggregate menu price increases of approximately 1.0% in February 2008, 1.5% in July 2008, 0.8% in October 2008 and 1.0% in June 2009 at our Morton's steakhouses and the impact of a menu price increase at our Italian restaurants of approximately 2.0% in August 2008 and 1.0% in October 2008.

Food and beverage costs decreased $4.5 million, or 18.6%, to $19.8 million for the three month period ended October 4, 2009 from $24.3 million for the three month period ended September 28, 2008. These costs decreased $17.4 million, or 21.7%, to $62.8 million for the nine month period ended October 4, 2009 from $80.2 million for the nine month period ended September 28, 2008. These decreases are directly related to the decrease in revenues as compared to the prior period, partially offset by the effects of opening six new restaurants (two in the nine month period ended October 4, 2009 and four in fiscal 2008). Food and beverage costs as a percentage of revenues decreased to 30.9% for the three month period ended October 4, 2009 from 33.3% for the three month period ended September 28, 2008 and decreased to 30.9% for the nine month period ended October 4, 2009 from 32.8% for the nine month period ended September 28, 2008. These decreases were primarily due to the impact of the aggregate menu price increases and lower meat and other food costs when compared to the three and nine month periods ended September 28, 2008.

Restaurant operating expenses, which include labor, occupancy and other operating expenses, decreased $1.5 million, or 3.7%, to $38.5 million for the three month period ended October 4, 2009 from $40.0 million for the three month period ended September 28, 2008. These costs decreased $5.6 million, or 4.6%, to $116.8 million for the nine month period ended October 4, 2009 from $122.4 million for the nine month period ended September 28, 2008. These decreases were primarily due to a decrease in salaries, wages and benefits and a decrease in rent expense, as a result of obtaining rent concessions from landlords, partially offset by the increased costs due to the opening of six new restaurants (two in the nine month period ended October 4, 2009 and four in fiscal 2008). Included in the three month periods ended October 4, 2009 and September 28, 2008 is non-cash rent expense of $1.1 million and $45,000 respectively. Included in the nine month periods ended October 4, 2009 and September 28, 2008 is non-cash rent expense of $2.1 million and $0.1 million respectively. Restaurant operating expenses as a percentage of revenues increased to 60.1% for the three month period ended October 4, 2009 from 54.8% for the three month period ended September 28, 2008 and increased to 57.5% for the nine month period ended October 4, 2009 from 50.1% for the nine month period ended September 28, 2008. These increases were primarily due to the deleveraging effect on the fixed cost base caused by negative comparable restaurant revenues.

Pre-opening costs decreased $0.2 million, or 26.1%, to $0.6 million for the three month period ended October 4, 2009 from $0.8 million for the three month period ended September 28, 2008. These costs decreased $0.7 million, or 27.5%, to $1.8 million for the nine month period ended October 4, 2009 from $2.5 million for the nine month period ended September 28, 2008. We expense all costs incurred during

Depreciation and amortization decreased $0.4 million, or 11.3%, to $2.8 million for the three month period ended October 4, 2009 from $3.2 million for the three month period ended September 28, 2008. Depreciation and amortization decreased $0.7 million, or 7.3%, to $8.9 million for the nine month period ended October 4, 2009 from $9.6 million for the nine month period ended September 28, 2008. These decreases are due to the write-off of certain long-lived assets during fiscal 2008, partially offset by the depreciation and amortization relating to new restaurants and capital expenditures related to renovations to existing restaurants.

General and administrative expenses decreased $2.2 million, or 37.7%, to $3.6 million for the three month period ended October 4, 2009 from $5.8 million for the three month period ended September 28, 2008. These costs decreased $6.9 million, or 36.1%, to $12.2 million for the nine month period ended October 4, 2009 from $19.1 million for the nine month period ended September 28, 2008. General and administrative expenses as a percentage of revenues decreased to 5.7% for the three month period ended October 4, 2009 from 8.0% for the three month period ended September 28, 2008 and decreased to 6.0% for the nine month period ended October 4, 2009 from 7.8% for the nine month period ended September 28, 2008. These decreases are primarily due to a decrease in bonuses, reduced legal expenses and the impact of the implementation of certain cost reduction programs.

Marketing and promotional expenses decreased $0.2 million, or 10.3%, to $1.4 million for the three month period ended October 4, 2009 from $1.6 million for the three month period ended September 28, 2008. These costs decreased $0.7 million, or 12.3%, to $4.8 million for the nine month period ended October 4, 2009 from $5.5 million for the nine month period ended September 28, 2008. Marketing and promotional expenses as a percentage of revenues remained consistent at 2.2% for the three month periods ended October 4, 2009 and September 28, 2008 and increased to 2.4% for the nine month period ended October 4, 2009 from 2.2% for the nine month period ended September 28, 2008.

Non-cash impairment charge of $66.2 million from continuing operations and $3.6 million from discontinued operations for the three and nine month periods ended September 28, 2008 represents an estimated non-cash charge associated with the impairment of goodwill, our intangible asset and other long-lived assets (primarily leasehold improvements and furniture, fixtures and equipment at certain restaurants). The estimated impairment charge was primarily triggered by our continued low market capitalization relative to the book value of our equity, as well as other recent and current market conditions. After performing the interim test for impairment, it was determined that the goodwill, the other intangible asset and long-lived assets were impaired and accordingly we recorded estimated non-cash impairment charges in the amounts of $44.0 million, $6.0 million and $19.8 million, respectively.

Charge related to legal settlements of $1.1 million and $11.7 million for the three and nine month periods ended October 4, 2009, respectively, relates to the settlement of certain wage and hour and similar labor claims against us and certain of our subsidiaries. The settlements involve the payments of cash over up to a four year period as well as the issuance of preferred stock by us. The preferred stock, which will have an aggregate liquidation preference of $6.0 million, will be issued in connection with the settlement of the nationwide class action within thirty days following court approval of such settlement (but not prior to January 1, 2010), and after two years from the date of its issuance may be converted into up to 1,200,000 shares of our common stock (or a lesser number of shares depending on the conversion price computed at the time the court approves the settlement). We will have the right to buy back the preferred stock at a price equal to its liquidation preference at any time prior to its conversion. The cash portion of the settlements was recorded at the present value of the future payments. The preferred stock portion of the settlement was recorded at its estimated fair value as of October 4, 2009. The portion of the settlement accrual relating to

Write-off of deferred financing costs of $0.2 million for the nine month period ended October 4, 2009 represents the partial write-off of previously recorded deferred financing costs in connection the amendment of our senior revolving credit facility that was executed on March 4, 2009, pursuant to which the credit facility was reduced from $115.0 million to $75.0 million, with a further reduction to $70.0 million effective December 31, 2009.

Interest expense, net increased $0.3 million, or 42.6%, to $1.1 million for the three month period ended October 4, 2009 from $0.7 million for the three month period ended September 28, 2008. Interest expense, net increased $0.6 million, or 27.2%, to $2.7 million for the nine month period ended October 4, 2009 from $2.1 million for the nine month period ended September 28, 2008. These increases are primarily due to an increase in borrowings during the three and nine month periods ended October 4, 2009 when compared to the three and nine month periods ended September 28, 2008. Interest income for the three and nine month periods ended October 4, 2009 was insignificant. There was no interest income for the three and nine month periods ended September 28, 2008.

Provision for income taxes consisted of an income tax benefit of $7.5 million for the nine month period ended October 4, 2009 and an income tax benefit of $7.8 million for the nine month period ended September 28, 2008. Our effective tax benefit rate was 40.4% and 12.3% for the nine month periods ended October 4, 2009 and September 28, 2008, respectively. During the nine month period ended October 4, 2009, our tax rate was impacted by certain discrete items, including non-cash charges of approximately $0.7 million, related to the tax impact of the vesting of certain restricted stock awards and other miscellaneous charges and benefits. Excluding the effect of these charges, the Company's effective tax benefit rate for the nine month period ended October 4, 2009 was approximately 44.5%.

During the nine month period ended September 28, 2008, our tax rate was impacted by certain discrete items, including a non-cash charge of approximately $0.3 million, related to the tax impact of the vesting of certain restricted stock awards and other miscellaneous charges and benefits. During the nine month period ended September 28, 2008, we also recorded a non-cash impairment charge for goodwill of approximately $41.6 million, which is not deductible for tax purposes and therefore this charge had no effect on our taxable income; a non-cash impairment charge for the intangible asset of approximately $6.0 million, for which we recorded a deferred tax benefit of approximately $2.2 million to reduce a previously established deferred tax liability related to the intangible asset; and a non-cash impairment charge for long-lived assets of approximately $18.6 million for which the Company recorded a deferred tax benefit of approximately $6.8 million. These benefits were partially offset by an income tax charge of approximately $0.4 million due to the establishment of a valuation allowance against deferred tax assets that were previously recognized by certain of the Company's subsidiaries for state tax benefits, due to the uncertainty of the utilization of these benefits. Excluding the tax effects of these non-cash impairment charges of $66.2 million pre-tax (see Note 14), the valuation allowance established against the deferred tax assets and miscellaneous charges and benefits, which were recognized on a discrete basis in the three and nine month periods ended September 28, 2008, the Company's effective income tax rate was approximately 26.2% for the nine month period ended September 28, 2008. These rates differ from the statutory rates due to the recognition of FICA and other tax credits, and foreign, state and local taxes partially offset by miscellaneous charges and benefits.

Liquidity and Capital Resources

Our principal liquidity requirements are to meet our lease obligations and working capital and capital expenditure needs and to pay principal and interest on our debt. Subject to our operating performance, which, if significantly adversely affected, would adversely affect the availability of funds, we expect to finance our operations, for the next twelve months, through cash provided by operations. We cannot be sure, however, that this will be the case, and to the extent possible, we may seek additional financing in the future. In addition, we rely to a significant degree on landlord development allowances and/or loans as a means of financing the costs of opening new restaurants, and any substantial reduction in the amount of those landlord development allowances could adversely affect our liquidity. As of October 4, 2009, we had cash and cash equivalents of $1.1 million compared to $3.5 million as of January 4, 2009.

The global credit market crisis has created a difficult business environment in our industry, which generally has worsened during fiscal 2009. Our operating performance, as well as our liquidity position, have been and we believe will continue to be negatively affected by these economic conditions, many of which are beyond our control. We do not believe that it is likely that current economic conditions, and their effect on the restaurant industry, will improve significantly in the near term.

We are managing our business during this time through continued development and implementation of operating measures designed to reduce expenditures, conserve cash and generate incremental cash flow. Based on our current projections, we believe that our cash and cash equivalents and cash flow from operations will be sufficient to meet our working capital and investment requirements and our debt service obligations for the next twelve months. If available liquidity is not sufficient to meet these requirements and obligations as they come due, our plans include further reducing expenditures as necessary in order to meet our cash requirements. However, there can be no assurance that any such reductions in expenditures would be sufficient to enable us to meet our cash requirement needs.

Working Capital and Cash Flows

As of October 4, 2009, we had, and in the future we may have, negative working capital balances. Our operations have not required significant working capital and, like many restaurant companies, we have been able to operate with negative working capital since our restaurant guests pay for their food and beverage purchases in cash or by credit card at the time of sale, and we are able to sell many of our food inventory items before payment is due to our suppliers. We do not have significant receivables. Our receivables primarily represent amounts due from credit card processors, which arise when customers pay by credit card, and are included in "Accounts Receivable" in our consolidated balance sheets. We receive trade credit based upon negotiated terms in purchasing food and supplies. Funds available from cash sales not needed immediately to pay for food and supplies or to finance receivables or inventories historically have typically been used for capital expenditures and/or to repay debt.

Operating Activities

Cash flows used in operating activities for the nine month period ended October 4, 2009 were $3.2 million consisting primarily of a decrease in accounts payable and accrued expenses of $12.6 million partially offset by a decrease in inventories of $2.4 million and net income before depreciation, amortization and other non-cash charges, a change in deferred income taxes and the charge related to legal settlements of $5.5 million.

Cash flows used in investing activities for the nine month period ended October 4, 2009 were $13.2 million due to purchases of property and equipment.

Financing Activities

Cash flows provided by financing activities for the nine month period ended October 4, 2009 were $14.0 million, primarily consisting of net borrowings under our senior revolving credit facility of $12.7 million.

Debt and Other Obligations

Senior Revolving Credit Facility

On February 14, 2006, we entered into a $115.0 million senior revolving credit facility with Wachovia Bank, N.A. On March 4, 2009, we entered into the fifth amendment to the senior revolving credit facility reducing the facility from $115.0 million to $75.0 million, with a further reduction to $70.0 million effective December 31, 2009. Our senior revolving credit facility matures on February 14, 2011. As of October 4, 2009, we had outstanding borrowings of approximately $73.5 million under our senior revolving credit facility at a weighted average interest rate of 3.89%, of which approximately $3.5 million is included in "Current portion of borrowings under senior revolving credit facility" in the consolidated balance sheet. As of October 4, 2009, we were in compliance with all of the financial covenants included in the senior revolving credit facility. However, if the weak economic environment deteriorates further, or is prolonged, and our actions to respond to these conditions are not sufficient, we could fail to comply with one or more of the financial covenants in the future.

Non-recourse loan

On April 13, 2009, one of our subsidiaries entered into an agreement with Crown at Miami Beach, LTD, pursuant to which that subsidiary may borrow up to $2.0 million. Loan proceeds are to be used solely for costs incurred in connection with the construction and opening of the restaurant located in Miami Beach, Florida, including for the acquisition and installation of furniture, fixture and equipment. The loan bears interest at 8.0% and matures on October 1, 2014. As of October 4, 2009, the outstanding amount borrowed was $0.7 million.

Mortgages

During 2001, one of our subsidiaries entered into a mortgage loan of $4.0 million with a predecessor of GE Capital Franchise Finance, the proceeds of which were used to fund the purchase of land and construction of a restaurant. The mortgage loan bears interest at 8.98% per annum and is scheduled to mature in March 2021. On October 4, 2009 and January 4, 2009, the aggregate outstanding principal balance due on this mortgage loan was approximately $3.1 million and $3.2 million, respectively, of which approximately $0.2 million and $0.1 million, respectively, of principal is included in "Current portion of obligation to financial institution" in the accompanying consolidated balance sheets. As of October 4, 2009, we were in compliance with all of the financial covenants included in this mortgage loan.

Restaurant Operating Leases

Our obligations for restaurant operating leases include certain restaurant operating leases for which we, or one of our subsidiaries, guarantees, for a portion of the lease term, the performance of the lease by the subsidiary operating company that is a party thereto.

Contractual Commitments

The following table presents our contractual commitments associated with our
debt and other obligations disclosed above as of October 4, 2009:



                                                                        Remainder
                                       2009       2010       2011       2012       2013      Thereafter      Total
                                                                 (amounts in thousands)
Senior revolving credit facility,
including interest (a)               $  4,205   $  2,821   $ 70,353   $     -    $     -    $         -    $  77,379
Non-recourse loan, including
interest                                   15         60         60         60         60            791       1,046
Mortgage loan with GE Capital
Franchise Finance, including
interest                                  109        435        435        435        435          3,156       5,005

Subtotal                                4,329      3,316     70,848        495        495          3,947      83,430
Operating leases                        6,119     28,781     28,940     28,589     28,520        197,968     318,917
Purchase commitments                      690         -          -          -          -              -          690

Total                                $ 11,138   $ 32,097   $ 99,788   $ 29,084   $ 29,015   $    201,915   $ 403,037

(a) Interest is based on borrowings as of October 4, 2009 and current interest rates.

During the first nine months of fiscal 2009, our expenditures for fixed assets and related investment costs, plus pre-opening costs, approximated $15.0 million. During the first nine months of fiscal 2009, capital expenditures were reduced by landlord contributions of approximately $1.9 million. We estimate that we will spend up to approximately $17.0 million in fiscal 2009, including the $15.0 million recorded in the first nine months of fiscal 2009, to finance ordinary refurbishment of existing restaurants, remodel the bar area in selected restaurants to include our Bar 12•21 concept, add additional Boardrooms in selected restaurants and make capital expenditures for new restaurants. Capital expenditures in fiscal 2009 are expected to be reduced by landlord contributions of approximately $2.8 million. We anticipate that funds generated through operations, together with landlord contributions, will be sufficient to fund these currently planned expenditures through the end of fiscal 2009. We cannot be sure, however, that this will be the case.

New Accounting Standards . . .