UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

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 number: 333-115046

MRS. FIELDS FAMOUS BRANDS, LLC

(Exact Name of Registrant Specified in Its Charter)

Delaware		80-0096938
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

2855 East Cottonwood Parkway, Suite 400 Salt Lake City, Utah		84121-7050
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: (801) 736-5600

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 is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large Accelerated Filer o Accelerated Filer o Non-accelerated filer x

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

On November 10, 2006, 100 common interests of registrant were outstanding, all of which are held by an affiliate. There is no established trading market for registrant’s common interests.

MRS. FIELDS FAMOUS BRANDS, LLC

TABLE OF CONTENTS



PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005

	Condensed Consolidated Statements of Operations and Comprehensive Loss for the 13 weeks and 39 weeks ended September 30, 2006 and October 1, 2005

	Condensed Consolidated Statements of Cash Flows for the 39 weeks ended September 30, 2006 and October 1, 2005

	Notes to Condensed Consolidated Financial Statements

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 6. Exhibits

SIGNATURES

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MRS. FIELDS FAMOUS BRANDS, LLC

Condensed Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands)

	September 30,			December 31,
	2006			2005
ASSETS:
Cash and cash equivalents	$	7,916		$	23,664
Receivables, net of allowance for doubtful accounts of $496 and $612, respectively	9,489			8,061
Inventories	3,903			2,869
Prepaid expenses and other	1,130			932
Deferred tax asset	1,097			780
Total current assets	23,535			36,306

Property and equipment, net	8,194			4,360
Goodwill	64,115			78,683
Trademarks and other intangible assets, net	11,237			12,755
Deferred loan costs, net of accumulated amortization of $10,780 and $9,964, respectively	6,148			6,964
Deferred tax asset	421			151
Other assets	822			678
	$	114,472		$	139,897

LIABILITIES AND MEMBER’S DEFICIT:
Accounts payable	$	6,613		$	6,496
Accrued liabilities	7,822			12,289
Amounts due to affiliates	4,873			3,949
Current portion of capital lease obligations	110			104
Current portion of deferred revenues	1,373			1,074
Total current liabilities	20,791			23,912
Long-term debt	195,747			195,747
Capital lease obligations, net of current portion	402			485
Deferred revenues, net of current portion	884			1,175
Other liabilities	1,308			—
Total liabilities	219,132			221,319
Member’s deficit	(104,508		)	(81,273		)
Accumulated other comprehensive loss	(152		)	(149		)
Total member’s deficit	(104,660		)	(81,422		)
COMMITMENTS AND CONTINGENCIES
	$	114,472		$	139,897

See accompanying notes to condensed consolidated financial statements.

MRS. FIELDS FAMOUS BRANDS, LLC

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(Dollars in thousands)

	13 Weeks Ended						39 Weeks Ended
	September 30,			October 1,			September 30,			October 1,
	2006			2005			2006			2005
REVENUES:
Franchising	$	13,386		$	13,332		$	39,310		$	39,655
Gifts	3,915			3,917			13,980			14,266
Branded retail	6,906			65			6,985			184
Licensing	311			877			1,378			2,854
Total revenues	24,518			18,191			61,653			56,959
OPERATING COSTS AND EXPENSES:
Franchising	6,138			5,214			18,105			16,028
Gifts	5,547			4,372			17,697			14,950
Branded retail	6,692			53			6,750			134
Licensing	466			157			1,375			512
General and administrative	2,259			2,357			7,699			6,659
Depreciation	551			286			1,910			839
Amortization	517			704			1,593			2,114
Impairment of goodwill	—			—			14,568			—
Total operating costs and expenses	22,170			13,143			69,697			41,236
Income (loss) from operations	2,348			5,048			(8,044		)	15,723
Interest expense, net	(5,270		)	(5,289		)	(15,741		)	(15,988		)
Other loss	—			—			(28		)	—
Loss before benefit for income taxes	(2,922		)	(241		)	(23,813		)	(265		)
Benefit for income taxes	460			92			1,250			102

Net loss	$	(2,462	)	$	(149	)	$	(22,563	)	$	(163	)

COMPREHENSIVE LOSS:
Net loss	$	(2,462	)	$	(149	)	$	(22,563	)	$	(163	)
Foreign currency translation adjustment	(37		)	(7		)	(3		)	(13		)
Comprehensive loss	$	(2,499	)	$	(156	)	$	(22,566	)	$	(176	)

See accompanying notes to condensed consolidated financial statements.

MRS. FIELDS FAMOUS BRANDS, LLC
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)

	39 Weeks Ended
	September 30, 2006		October 1, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(22,563)	$	(163)
Adjustments to reconcile net loss to net cash used in operating activities:
Impairment of goodwill	14,568		—
Depreciation and amortization	3,503		2,953
Amortization of deferred loan costs	816		946
Loss on non-marketable securities	28		—
Deferred income taxes	(587)		382
Changes in assets and liabilities:
Receivables	(1,428)		1,635
Amounts due to affiliates, net	252		(315)
Inventories	(1,034)		(1,066)
Prepaid expenses and other	(198)		(336)
Other assets	(369)		(34)
Accounts payable	117		(1,032)
Accrued liabilities	(4,592)		(6,486)
Deferred revenues	8		(598)
Other liabilities	183		—

Net cash used in operating activities	(11,296)		(4,114)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equity warrants	122		—
Purchases of property and equipment	(4,494)		(1,084)

Net cash used in investing activities	(4,372)		(1,084)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease	(77)		(47)
Net cash used in financing activities	(77)		(47)
Effect of foreign exchange rate changes on cash	(3)		(13)
Net decrease in cash and cash equivalents	(15,748)		(5,258)
Cash and cash equivalents at beginning of period	23,664		19,859

Cash and cash equivalents at end of period	$	7,916	$	14,601

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	20,553	$	20,547
Cash paid for income taxes	60		74

Supplemental Disclosure of Noncash Investing and Financing Activities:
Assets acquired under capital lease	$	—	$	198
Distribution to parent under tax allocation agreement	672		—
Leasehold improvements acquired under lease incentives	1,250		—

See accompanying notes to condensed consolidated financial statements.

MRS. FIELDS FAMOUS BRANDS, LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by Mrs. Fields Famous Brands, LLC and subsidiaries (the “Company” or “Mrs. Fields”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information and, accordingly, do not include all of the information and footnotes required by U.S. generally accepted accounting principles for a complete presentation of the financial statements. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, which consist only of normal recurring adjustments, necessary to present fairly the financial position of Mrs. Fields as of September 30, 2006 and December 31, 2005, and the results of their operations and their cash flows for the periods presented. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2005 contained in Mrs. Fields’ Annual Report on Form 10-K filed with the SEC on March 21, 2006.

The Company is a wholly-owned subsidiary of Mrs. Fields’ Original Cookies, Inc. (“MFOC”). MFOC is a wholly-owned subsidiary of Mrs. Fields’ Holding Company, Inc. (“MFH”) and MFH is a wholly-owned subsidiary of Mrs. Fields’ Companies, Inc. (“MFC”).

The results of operations for the 13 and 39 weeks ended September 30, 2006 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending December 30, 2006. Income per common interest information is not presented because Mrs. Fields is wholly-owned by MFOC and, therefore, its common interests are not publicly traded.

2. Receivables

Most of the Company’s receivables are due from domestic and international franchisees, distributors, licensees and corporate customers of our gifts and branded retail segments. These receivables consist of normal trade accounts receivable and longer-term notes receivable. Service charges may be assessed on past due invoices but any revenue associated with these charges is only recognized when collected. The Company maintains an allowance for doubtful accounts to cover potential losses. This allowance is the Company’s best estimate of the amount of probable collection losses in the Company’s existing trade accounts receivable. The Company determines the allowance based upon historical write-off experience and individual facts and circumstances associated with individual debtors. If the assumptions that are used to determine the allowance for doubtful accounts change, the Company may have to provide for a greater level of expense in future periods or reverse amounts provided for in prior periods.

Prior to fiscal 2001, TCBY Systems, LLC (“TCBY”), a wholly-owned subsidiary of the Company, extended credit from time to time in the form of notes receivable to franchisees and certain of these notes receivable remain outstanding. Notes receivable from franchisees are primarily collateralized by equipment located at the franchisees’ stores. These notes bear interest at market rates at the time the notes were issued and mature at various dates through April 2009. TCBY regularly reviews the notes for non-performance. Notes that are considered non-performing are placed on a non-accrual status when the collectibility of principal or interest becomes uncertain. During the 39 weeks ended September 30, 2006 and October 1, 2005, TCBY recognized no interest income pertaining to these notes receivable.

Prior to fiscal 2001, TCBY factored various notes receivable aggregating $2.1 million. Under the terms of the factoring agreement, TCBY is ultimately responsible to the factoring agent for the realizability of the notes receivable. In the event of non-performance, the factoring agent has recourse against TCBY to a maximum level of $314,000 and $478,000 as of September 30, 2006 and December 31, 2005, respectively. The Company has reserves of $314,000 and $478,000 as of September 30, 2006 and December 31, 2005, respectively, for this potential recourse liability. This reserve is included in accrued liabilities in the accompanying condensed consolidated balance sheets.

Notes receivable at September 30, 2006 and December 31, 2005 are comprised of the following (in thousands):

	September 30,			December 31,
	2006			2005
Performing notes	$	72		$	195
Allowance for doubtful accounts	(22		)	(69		)
	$	50		$	126

The activity in the allowance for doubtful accounts for notes receivable for the 13 and 39 weeks ended September 30, 2006 and October 1, 2005 is as follows (in thousands):

	For the 13 Weeks Ended					For the 39 Weeks Ended
	September 30,			October 1,		September 30,			October 1,
	2006			2005		2006			2005
Beginning balance	$	43		$	83	$	69		$	597
Additions (reversals)	(21		)	6		(47		)	5
Write-offs	—			—		—			(513		)
	$	22		$	89	$	22		$	89

3. Inventories

Inventories, consisting of raw materials, finished goods, packaging and novelties, are stated at the lower of cost (first-in, first-out method) or market value. Inventories at September 30, 2006 and December 31, 2005 are comprised of the following (in thousands):

	September 30,		December 31,
	2006		2005
Raw materials	$	1,009	$	1,283
Finished goods	1,557		770
Packaging	430		548
Novelties	907		268
	$	3,903	$	2,869

4. Property and Equipment

Equipment and fixtures are stated at cost less accumulated depreciation and are depreciated over three to seven years using the straight-line method. Leasehold improvements are stated at cost less accumulated depreciation and are depreciated over the shorter of the term of the lease or the estimated useful life using the straight-line method. Property and equipment at September 30, 2006 and December 31, 2005 are comprised of the following (in thousands):

	September 30,			December 31,
	2006			2005
Equipment and fixtures	$	11,025		$	7,927
Leasehold improvements	7,149			4,241
Land	240			240
	18,414			12,408
Less accumulated depreciation	(10,220		)	(8,048		)
	$	8,194		$	4,360

Property and equipment at September 30, 2006 and December 31, 2005 included gross assets acquired under capital leases of $698,000 and related accumulated depreciation of $229,000 and $139,000, respectively.

Expenditures that materially extend useful lives of property and equipment are capitalized. Routine maintenance, repairs and renewal costs are expensed as incurred. Gains or losses from the sale or retirement of property and equipment are recorded in current operations.

Included in leasehold improvements at September 30, 2006 is $1,250,000, less $52,000 of accumulated depreciation representing amounts for tenant improvements provided as lease incentives by the lessor related to the lease for the Company’s new gifting operations facility. Deferred rent of $1,198,000 at September 30, 2006 relating to these lease incentives is included in accrued liabilities and other liabilities. The total amount of these leasehold improvements and deferred rent are amortized over the life of the lease.

5. Goodwill, Trademarks and Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but are tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values and be reviewed for impairment in accordance with SFAS No. 144 (“SFAS 144”), “Accounting for Impairment or Disposal of Long-Lived Assets.”

The Company determined that a triggering event had occurred in the second quarter of 2006 under SFAS 144 as a result of an eroding dairy franchise system due to fewer locations, consistent negative year-over-year same store sales by our dairy franchisees and the Company’s inability to locate and open a significant number of new or additional franchise locations. These factors have resulted in continued decreases in franchise royalties and yogurt formulation revenues from the Company’s dairy franchise system. The Company performed the impairment test as required by SFAS 144 for the long-lived assets of the dairy reporting unit in the second quarter of 2006 and determined these assets were not impaired as of July 1, 2006. Therefore, no adjustment to the carrying value of these long-lived assets was required. The Company did not identify any triggering event in the third quarter of 2006.

As a result of the impairment test performed in the second quarter of 2006 on the long-lived assets of the dairy reporting unit, the Company determined a triggering event had occurred under SFAS 142 and as such, tested the goodwill related to the dairy franchise reporting unit, by comparing its fair value with its carrying value. The estimated fair value of goodwill is affected by, among other things, operating results, the Company’s business plan for the future, estimated results of future operations and the comparable companies that are used to estimate the fair value of the goodwill. To the extent that the carrying value of a reporting unit exceeds it fair value, goodwill is written down to its implied fair value. Changes in the business plan or operating results that are different than the projections used to develop the reporting unit’s fair value may have an impact on the valuation of the goodwill.

At the end of the second quarter of 2006, the Company compared the implied fair value of the dairy franchising reporting unit’s goodwill with the carrying amount of the goodwill and determined an impairment of dairy franchising reporting unit’s goodwill of $14.6 million, which was recorded in the second quarter of 2006. The implied fair value of the goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, “Business Combinations.”

The following outlines the Company’s goodwill by reporting unit at September 30, 2006 and December 31, 2005 (in thousands):

	September 30,		December 31,
	2006		2005
Bakery franchising	$	60,404	$	60,404
Dairy franchising	—		14,568
Gifts	1,859		1,859
Licensing	1,852		1,852
Total	$	64,115	$	78,683

6. Accrued Liabilities

Accrued liabilities are comprised of the following at September 30, 2006 and December 31, 2005 (in thousands):

	September 30,		December 31,
	2006		2005
Other accrued liabilities	$	5,604	$	4,778
Accrued compensation and benefits	1,364		1,534
Accrued interest payable	854		5,977
	$	7,822	$	12,289

7. Related-Party Transactions

The amounts due to affiliates are comprised of amounts due to MFC, MFH and MFOC at September 30, 2006 and December 31, 2005 (in thousands):

	September 30,		December 31,
	2006		2005
MFC - tax sharing	$	3,049	$	3,138
MFH	273		273
MFOC	1,551		538
	$	4,873	$	3,949

The Company has a tax allocation agreement with MFC pursuant to which the Company agreed to make payments to MFC, after taking into account payments the Company makes directly to tax authorities, based on the Company’s stand-alone consolidated federal income tax liability, determined as if the Company and its subsidiaries constituted their own consolidated group for federal income tax purposes. The Company will not be permitted to make these payments to MFC, unless the MFC federal tax liability exceeds the Company’s stand-alone federal tax liability, until it meets certain financial ratios and is otherwise in compliance with the terms of the indenture governing the 9 percent senior secured notes and the 11½ percent senior secured notes (the “Senior Secured Notes”).

During the 39 weeks ended September 30, 2006, the Company recognized a benefit for income taxes of $1.3 million related to losses from operations. Under the tax allocation agreement with MFC, the Company is unable to carry-back tax benefits related to the net operating losses and, as a result, the current portion of the benefit of $672,000 was recorded as a distribution to parent.

8. Reportable Segments

Operating segments are components of the Company for which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and assess performance. This information is reported on the basis that it is used internally for evaluating segment performance. The Company has four reportable operating segments; namely, franchising, gifts, branded retail and licensing. The franchising segment consists of revenues received either directly or indirectly from cookie, yogurt and pretzel stores, which are owned and operated by third parties. These revenues include initial franchise or license fees, monthly royalties based on a percentage of a franchisee’s gross sales, sales of cookie dough that the Company produces and certain product formulation fees and supplier allowances which are based upon sales to franchisees. The gifts segment consists of sales generated from the Company’s mail order gift catalog and website. The branded retail segment consists of sales generated directly from the sale of Mrs. Fields products through various retail channels. As a result of terminating certain licensing agreements, the Company began running a new branded retail business in July 2006, as more fully described in the “Shadewell Grove IP, LLC” section included in Note 10 to these condensed consolidated financial statements. The Company determined that with these new business activities, the branded retail segment constituted a reportable segment under SFAS No. 131 (“SFAS 131”), “Disclosures About Segments of an Enterprise and Related Information” and has restated the corresponding items of segment information for prior periods to conform to the current period presentation. Prior to this quarter, our revenues and operating expenses associated with branded retail activities did not meet the quantitative thresholds of SFAS 131 and were included in other revenues and other operating expenses. The licensing segment consists of other licensing activity from third parties for the sale of products bearing the Company’s brand names.

The accounting policies for the segments are the same as those discussed in the summary of significant accounting policies in Note 2 to our consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC on March 21, 2006. Sales and transfers between segments are eliminated in consolidation.

The Company evaluates performance of each segment based on contribution. Contribution is computed as the difference between the revenues generated by a reportable segment and the selling and occupancy expenses, cost of sales and direct general and administrative expenses related to that reportable segment. Contribution is used as a measure of the operating performance of an operating segment. The Company does not allocate any indirect general and administrative expenses, interest expense, depreciation and amortization or assets to its reportable operating segments.

Segment revenues and contribution for the 13 and 39 weeks ended September 30, 2006 and October 1, 2005 are presented in the following table (in thousands):

	For the 13 Weeks Ended						For the 39 Weeks Ended
	September 30,			October 1,			September 30,			October 1,
Total Company	2006			2005			2006			2005
Revenues:
Franchising	$	13,386		$	13,332		$	39,310		$	39,655
Gifts	3,915			3,917			13,980			14,266
Branded retail	6,906			65			6,985			184
Licensing	311			877			1,378			2,854
	$	24,518		$	18,191		$	61,653		$	56,959
Contribution:
Franchising	$	7,248		$	8,118		$	21,205		$	23,627
Gifts	(1,632		)	(455		)	(3,717		)	(684		)
Branded retail	214			12			235			50
Licensing	(155		)	720			3			2,342
	$	5,675		$	8,395		$	17,726		$	25,335

The reconciliation of contribution to net loss for the 13 and 39 weeks ended September 30, 2006 and October 1, 2005 is as follows (in thousands):

	For the 13 Weeks Ended						For the 39 Weeks Ended
	September 30,			October 1,			September 30,			October 1,
	2006			2005			2006			2005
Contribution	$	5,675		$	8,395		$	17,726		$	25,335
General and administrative expenses	(2,259		)	(2,357		)	(7,699		)	(6,659		)
Interest expense, net	(5,270		)	(5,289		)	(15,741		)	(15,988		)
Other loss	—			—			(28		)	—
Depreciation and amortization	(1,068		)	(990		)	(3,503		)	(2,953		)
Impairment of goodwill	—			—			(14,568		)	—
Benefit for income taxes	460			92			1,250			102
Net loss	$	(2,462	)	$	(149	)	$	(22,563	)	$	(163	)

The fixed assets and inventory of the Company primarily relate to the Company’s Great American Cookies manufacturing facility, branded retail business segment, gifts business segment and related activities. Assets relating to franchising and licensing activities are primarily amounts due from franchisees and licensees and goodwill relating to franchising concepts.

Revenues from franchisees, customers and licensees within the United States of America (“United States”) were $23.2 million and $59.7 million or 94.7 percent and 96.8 percent of total revenues for the 13 and 39 weeks ended September 30, 2006, respectively, and $18.0 million and $55.9 million or 98.9 percent and 98.1 percent of total revenues for the 13 and 39 weeks ended October 1, 2005, respectively. Revenues from international franchisees, customers and licensees were $1.3 million and $2.0 million or 5.3 percent and 3.2 percent of total revenues for the 13 and 39 weeks ended September 30, 2006, respectively, and $200,000 and $1.1 million or 1.1 percent and 1.9 percent of total revenues for the 13 and 39 weeks ended October 1, 2005, respectively. Revenues from any single foreign country were not material. Providing geographical information regarding long-lived assets is impracticable.

The Company has one licensee that accounted for $19,000 and $394,000 or 6.2 percent and 28.6 percent of the revenues of the licensing segment for the 13 and 39 weeks ended September 30, 2006, respectively, and $493,000 and $1.8 million or 56.2 percent and 62.9 percent of the revenues of the licensing segment for the 13 and 39 weeks ended October 1, 2005, respectively.

The Company has one customer in its gifts business segment that accounted for $1.4 million and $2.3 million or 34.5 percent and 16.5 percent of revenues of the gifts business segment for the 13 and 39 weeks ended September 30, 2006, respectively, and $946,000 and $2.4 million or 24.2 percent and 17.1 percent of the revenues of the gifts business segment for the 13 and 39 weeks ended October 1, 2005, respectively. There were no other customers or licensees that accounted for more than ten percent of Mrs. Fields’ total revenues or any individual segment’s revenues.

9. Share-Based Compensation

On January 1, 2006 the Company adopted the provisions of Financial Accounting Standards Board Statement No. 123R (“SFAS 123R”), “Share-Based Payment.” SFAS 123R sets accounting requirements for “share-based” compensation to employees and requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation.

Effective as of May 23, 2004, the Board of Directors of MFC approved adoption of the Phantom Stock Plan of Mrs. Fields’ Companies, Inc. (the “Phantom Plan”). The purpose of the Phantom Plan is to provide long-term incentives to key employees of MFC or its subsidiaries (the “Participants”) as determined by the Compensation Committee of the Board of Directors (the “Committee”). The Phantom Plan is unfunded and Participants do not receive any payment under the Phantom Plan until the completion of the first to occur of: (i) a sale of substantially all of the assets of MFC; (ii) a public offering of MFC’s Common Stock where MFC receives proceeds, net of any underwriter’s discounts and expenses, of not less than $50 million; or (iii) any stock sale, merger or other transaction where the owners of Common Stock immediately before the transaction do not own in excess of 50 percent of the common stock of the entity surviving such sale, merger or other transaction (a “Triggering Event”). Additionally, the Phantom Plan may be terminated by the Board of Directors at any time at its sole discretion. Participants receive performance units in amounts recommended by the CEO and determined by the Committee. Upon the completion of a Triggering Event, Participants receive payments reflecting the number and value of their performance units at the time of the completion of the Triggering Event. Payments to Participants may be made in cash or through issuance of equity securities of MFC, as determined by the Committee, at which time compensation expense will be recognized. The value of a performance unit at the completion of a Triggering Event is the value of one share of common stock of MFC as determined in good faith by the Board of Directors. If the Board of Directors determines the need, it may seek the advice of an independent advisor.

The maximum number of performance units that may be granted under the Phantom Plan is one million units. Subdivisions, splits or combinations involving MFC’s Common Stock will proportionately affect the number of performance units that have been awarded under the Phantom Plan. In May 2004, the Committee approved the grant of up to 392,418 performance units allocated among Participants as determined by the Committee. In March 2006, the Committee approved the grant of up to 182,274 additional units to Participants identified by the Committee, resulting in total authorized grants of up to 574,692 performance units. During the 39 weeks ended September 30, 2006, the Committee granted 218,730 performance units to Participants. Future grants, if any, shall also be determined by the Committee. As of September 30, 2006, a total of 560,130 performance units have been granted to Participants.

The Company’s Phantom Plan is accounted for under SFAS 123R. Compensation costs for the grants under the Phantom Plan will be recognized upon the completion of a Triggering Event. Accordingly, no compensation costs have been recognized in the statement of operations for the 13 and 39 weeks ended September 30, 2006.

10. Commitments and Contingencies

The Company and its products are subject to regulation by numerous governmental authorities, including, without limitation, federal, state and local laws and regulations governing franchising, health, sanitation, environmental protection, safety and hiring and employment practices.

In the ordinary course of business, the Company is involved in routine litigation, including franchise disputes and trademark disputes. The Company is not a party to any legal proceedings that, in the opinion of management, after consultation with legal counsel, is material to its business, financial condition or consolidated results of operations.

Americana Foods Limited Partnership

As reported in the Company’s Form 8-K filed with the SEC on October 17, 2006, TCBY, a wholly-owned subsidiary of the Company, was notified that on October 11, 2006, CB Americana LLC, the general partner of Americana Foods Limited Partnership (“Americana”), filed an involuntary petition with the United States Bankruptcy Court for the Northern District of Texas, naming Americana as a debtor under chapter 7 of the Bankruptcy Code (the “Involuntary Petition”).

Americana is the principal supplier of TCBY’s frozen yogurt products under an Exclusive Supply Agreement between Americana and TCBY dated November 19, 2002 (the “Supply Agreement”). The Supply Agreement is attached as Exhibit 10.50 to Mrs. Fields’ Registration Statement on Form S-4 (File No. 333-115046), as amended, filed with the SEC on April 30, 2004. Production of TCBY products at Americana has ceased in connection with the Involuntary Petition.

TCBY has identified potential replacement suppliers for its proprietary products and is in the process of working with these potential suppliers to accelerate short-term production. TCBY has also purchased most of the inventory that remained at Americana and removed it to an offsite storage facility. TCBY is managing this inventory, as well as inventory at its distributors and its franchisees’ stores. While TCBY believes it can avoid material shortages or immediate interruption in the supply of its principal products to TCBY franchisees, shortages of some products may occur before replacement suppliers can begin full production. Further, there can be no guarantee that TCBY will be able to negotiate long-term supply agreements on terms that are similar to or as favorable as those in the Supply Agreement. Any significant interruption in the supply of TCBY products to franchisees or a material increase in the cost of TCBY products may have a material adverse effect on the TCBY franchise system and Mrs. Fields’ financial performance.

In addition, Americana owed TCBY approximately $585,000 for amounts collected by Americana on behalf of TCBY for product sold and for decreases in the price of commodities that TCBY was entitled to receive from Americana under the Supply Agreement. During the 13 weeks ended September 30, 2006, TCBY recorded bad debt expense of approximately $585,000 and has written off this receivable.

Shadewell Grove IP, LLC

As reported in the Company’s Form 8-K filed with the SEC on May 12, 2006, on May 8, 2006, the Court of Chancery of the State of Delaware ruled in the Company’s favor on all issues in the litigation filed against Mrs. Fields Franchising, LLC (“MFF”), a subsidiary of the Company, by Shadewell Grove IP, LLC (“Shadewell”), related to MFF’s termination of certain license agreements between MFF and Shadewell. Until June 27, 2006, Shadewell continued to operate under the terminated license agreements. On June 27, 2006, MFF and Shadewell entered into a consulting agreement (the “Shadewell Consulting Agreement”) whereby Shadewell employees would provide consulting and training services to MFF employees through August 28, 2006 to assist MFF in establishing its own business selling products through designated retail distribution channels. The Shadewell Consulting Agreement was extended through October 28, 2006. Shadewell received for its services a fee of $395,000 which was paid during the third quarter.

On July 5, 2006, MFF began running its new branded retail business, including selling products to retail customers directly or through brokers, purchasing inventory from contract manufacturers and arranging for distribution of product to these customers. As a result, the Company anticipates the use of cash to operate the business while it identifies a new licensee or develops another strategy for the operation of the type of business formerly operated by Shadewell. The Company recognized no royalty revenues from Shadewell under the terminated license agreements during the 13 weeks ended September 30, 2006.

11. Supplemental Condensed Consolidating Financial Information

Long-term debt includes the Senior Secured Notes that were issued by the Company and Mrs. Fields Financing Company, Inc. as co-issuers. Mrs. Fields Financing Company, Inc. is a wholly-owned finance subsidiary of Mrs. Fields Famous Brands, LLC. The Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s domestic subsidiaries other than immaterial subsidiaries. Mrs. Fields Famous Brands, LLC has no independent assets or operations. Therefore, supplemental financial information on a condensed consolidating basis of the guarantor subsidiaries is not required. There are no restrictions on the Company’s ability to obtain cash dividends or other distributions of funds from the guarantor subsidiaries, except those imposed by applicable law.

12. Distribution Agreements

TCBY and Blue Line Distributing (“Blue Line”), TCBY’s principal distributor of TCBY products to its franchisees, entered into an Extension to Distribution Agreement (the “Extension Agreement”) effective February 2, 2006. Under the Extension Agreement, Blue Line agreed to continue to perform under the Food and Packaging Distribution Agreement (the “Distribution Agreement”) dated November 14, 2002, until the earlier to occur of (a) 30 days following the date when TCBY notifies Blue Line in writing that it has obtained a new distributor and (b) 30 days following the date, if any, when Blue Line notifies TCBY in writing that Blue Line reasonably determines that TCBY is no longer making best efforts and progress to obtain a new distributor. Under the terms of the Extension Agreement, TCBY agreed to make certain payments directly to Blue Line in order to delay distribution cost increases to franchisees and agreed to guarantee certain amounts during the extension period. TCBY has entered into supply agreements with six regional distributors who will provide service to certain regions of the United States. TCBY believes it will be able to identify distributors for the remaining regions of the United States before Blue Line ceases its services under the Extension Agreement. The Company anticipates the distribution costs to most of its franchisees will not substantially increase under the new regional agreements.

13. Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company has not yet determined the impact, if any, of adopting the provisions of SFAS 157 on its consolidated financial position or results of operations.

In September 2006, the SEC issued Staff Accounting Bulleting No. 108 (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, Companies might evaluate the materiality of financial-statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company is currently evaluating the effect, if any, that the adoption of SAB 108 will have on its consolidated financial position and results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Income Tax Uncertainties.” FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. FIN 48 provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has not yet determined the impact, if any, of adopting the provisions of FIN 48 on its consolidated financial position or results of operations.

In June 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 06-03 (“EITF 06-03”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The provisions of EITF 06-03 become effective as of December 31, 2006. The adoption of EITF 06-03 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. They may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “continue,” “will,” “may” or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties, including, but not limited to, economic, competitive and governmental factors outside of our control, that may cause actual results to differ materially from trends, plans or expectations set forth in the forward-looking statements. Factors you should consider that could cause these differences include all factors described under Part II, Item 1A. “Risk Factors” contained elsewhere in this report.

You are cautioned not to place undue reliance on the forward-looking statements contained in this report, which reflect management’s analysis only as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report may not occur.

Executive Summary

Mrs. Fields Famous Brands, LLC and subsidiaries (“we”, “us”, the “Company” or similar terms) is one of the largest franchisors in the premium snack-food industry, featuring Mrs. Fields®, Great American Cookies®, TCBY®, Pretzel Time® and Pretzelmaker® as our core brands. Through our franchisees’ retail stores, we are the largest retailer of freshly baked on-premises specialty cookies and brownies in the United States of America (the “United States”); the largest retailer of soft-serve frozen yogurt in the United States; and the second largest retailer of baked on-premises pretzels in the United States. In addition, we operate a gifts and new branded retail business and have entered into licensing arrangements that attempt to leverage awareness of our core brands among our retail customer base. We operate through a network of 2,351 retail concept locations, which are located throughout the United States and in approximately 24 foreign countries.

Our business is divided into four primary business segments for financial reporting purposes: franchising, gifts, branded retail and licensing, which represented 63.8 percent, 22.7 percent, 11.3 percent and 2.2 percent of total revenues, respectively, for the 39 weeks ended September 30, 2006.

We believe our business strategy aligns the interests of the Company with the interests of our franchisees and focuses our joint efforts on strengthening and broadening the appeal of our brands through satisfying the wants and needs of consumers. That strategy is based upon three continuing objectives:

· build profitable year-over-year franchise sales;

· accelerate growth of new franchised store development; and

· grow licensing and gifts operations.

We use the following key performance indicators to measure our success and progress:

· year-over-year same store franchise sales;

· net change in number of retail concept locations; and

· year-over-year gifts and licensing revenues.

Our performance against these key performance indicators is presented and discussed throughout this management’s discussion and analysis. For further disclosure of reportable segments, see Note 8 to our condensed consolidated financial statements contained elsewhere in this report.

As of September 30, 2006, our store portfolio consisted of 1,848 domestic franchised locations, 347 international franchised locations and 156 licensed locations. Our franchisees’ and licensees’ concept locations by brand are distributed as follows:

	Domestic	International	Licensed
	Franchised	Franchised	Locations	Total
Mrs. Fields	364	93	45	502
Great American	279	1	—	280
Original Cookie	—	—	1	1
Cookie subtotal	643	94	46	783
Pretzel Time	189	5	6	200
Pretzelmaker	145	50	1	196
Hot Sam	—	—	3	3
Pretzel subtotal	334	55	10	399
Bakery brands subtotal	977	149	56	1,182
TCBY - traditional stores	397	—	—	397
TCBY - non-traditional stores	464	198	99	761
Yovana - test stores	2	—	1	3
Beriyo by TCBY - test stores	8	—	—	8
Dairy brands subtotal	871	198	100	1,169
Total	1,848	347	156	2,351

The previous table counts each concept location individually. For example, if a physical location had a Mrs. Fields store and a Pretzel Time store together, it would be counted as two concept locations in the table above. If actual physical stores were counted rather than concept locations, total store counts would be reduced by 246 locations to 2,105.

Mrs. Fields’ Original Cookies, Inc. (“MFOC”) and certain of its subsidiaries owned three franchised and licensed retail concept locations as of September 30, 2006, representing 0.1 percent of the total retail concept locations. During the 13 and 39 weeks ended September 30, 2006, we recognized $24,000 and $110,000, respectively, of franchise royalties and $57,000 and $190,000, respectively, of product sales relating to the retail concept locations owned by MFOC. MFOC expects that these remaining retail concept locations will be sold to other franchisees or will be closed during fiscal 2006.

During the 39 weeks from December 31, 2005 to September 30, 2006, our store portfolio declined from 2,479 concept locations to 2,351 concept locations, as follows:

	Total Company
	Domestic		International		Licensed
	Franchised		Franchised		Locations		Total
Balance December 31, 2005	1,978		328		173		2,479
New development openings	50		47		—		97
Permanent closings	(180	)	(28	)	(17	)	(225	)
Balance September 30, 2006	1,848		347		156		2,351

The following tables provide additional detail of new development openings and permanent closings of our concept locations during the 39 weeks from December 31, 2005 to September 30, 2006:

	Domestic Franchised
					Non-
			Traditional		Traditional
	Bakery		Dairy		Dairy		Total
Balance December 31, 2005	1,006		424		548		1,978
New development openings	39		8		3		50
Permanent closings	(67	)	(29	)	(84	)	(180	)
Other openings, net	(1	)	4		(3	)	—
Balance September 30, 2006	977		407		464		1,848

	International Franchised
			Non-
			Traditional
	Bakery		Dairy		Total
Balance December 31, 2005	142		186		328
New development openings	24		23		47
Permanent closings	(17	)	(11	)	(28	)
Balance September 30, 2006	149		198		347

	Licensed Locations
			Non-
			Traditional
	Bakery		Dairy		Total
Balance December 31, 2005	64		109		173
Permanent closings	(8	)	(9	)	(17	)
Balance September 30, 2006	56		100		156

We have implemented a number of strategies designed to attempt to reverse our trend of declining store counts, including identifying stores that are at risk of closure for operational issues, lease or franchise agreement expiration and working with franchisees to relocate, transfer or correct operational deficiencies. We are also testing programs to refresh, remodel or reconcept some of our concept locations, as more fully discussed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 21, 2006. There can be no assurance that our strategies will succeed. If store counts continue to decline, our business operations or financial condition could be adversely affected.

Recent Developments

Blue Line Distributing

TCBY Systems, LLC (“TCBY”), our wholly-owned subsidiary, and Blue Line Distributing (“Blue Line”), TCBY’s principal distributor of TCBY products to our franchisees, entered into an Extension to Distribution Agreement (the “Extension Agreement”) effective February 2, 2006. Under the Extension Agreement, Blue Line agreed to continue to perform under the Food and Packaging Distribution Agreement (the “Distribution Agreement”) dated November 14, 2002, until the earlier to occur of (a) 30 days following the date when we notify Blue Line in writing that we have obtained a new distributor and (b) 30 days following the date, if any, when Blue Line notifies us in writing that Blue Line reasonably determines that we are no longer making best efforts and progress to obtain a new distributor. Under the terms of the Extension Agreement, we agreed to make certain payments directly to Blue Line in order to delay distribution cost increases to franchisees and agreed to guarantee certain amounts during the extension period. We have entered into supply agreements with six regional distributors who will provide service to certain regions of the United States. We believe we will be able to identify distributors for the remaining regions of the United States before Blue Line ceases its services under the Extension Agreement. We anticipate the distribution costs to most of our franchisees will not substantially increase under the new regional agreements.

Shadewell Grove IP, LLC

As reported in our Form 8-K filed with the SEC on May 12, 2006, on May 8, 2006, the Court of Chancery of the State of Delaware ruled in our favor on all issues in the litigation filed against Mrs. Fields Franchising, LLC (“MFF”), a wholly-owned subsidiary of the Company, by Shadewell Grove IP, LLC (“Shadewell”), related to MFF’s termination of certain license agreements between MFF and Shadewell. Until June 27, 2006, Shadewell continued to operate under the terminated license agreements. On June 27, 2006, MFF and Shadewell entered into a consulting agreement (the “Shadewell Consulting Agreement”) whereby Shadewell employees would provide consulting and training services to our employees through August 28, 2006 to assist us in establishing our own business selling products through designated retail distribution channels. The Shadewell Consulting Agreement was extended through October 28, 2006. Shadewell received for its services a fee of $395,000 which was paid during the third quarter.

On July 5, 2006, MFF began running its new branded retail business, including selling products to retail customers directly or through brokers, purchasing inventory from contract manufacturers and arranging for distribution of product to these customers. As a result, management anticipates the use of significant cash to operate the business while it identifies a new licensee or develops another strategy for the operation of the type of business formerly operated by Shadewell.

On June 1, 2006, Shadewell’s first quarter royalty payment to MFF under the terminated license agreements became past due. At that time, Shadewell notified us that its bank had called its note due and exercised its right to sweep Shadewell’s cash deposits to recover the amount of its note. As a result, management determined that the collectibility of Shadewell’s first quarter royalty was doubtful and established a bad debt reserve of approximately $345,000, which was subsequently written off as of September 30, 2006. In addition, we earned $268,000 in royalty revenues from Shadewell during the 13 weeks ended July 1, 2006; however, due to the uncertainty of its collectibility, we did not recognize any royalty revenues under the terminated license agreements in the second quarter of 2006. There were no royalty revenues earned from Shadewell under the terminated license agreement during the 13 weeks ended September 30, 2006.

We anticipate that the income realized by us from MFF’s new branded retail business activities will not immediately replace or exceed the royalties that may have been generated by the terminated license agreements.

Americana Foods Limited Partnership

As reported in our Form 8-K filed with the SEC on October 17, 2006, TCBY, our wholly-owned subsidiary, was notified that on October 11, 2006, CB Americana LLC, the general partner of Americana Foods Limited Partnership (“Americana”), filed an involuntary petition with the United States Bankruptcy Court for the Northern District of Texas, naming Americana as a debtor under chapter 7 of the Bankruptcy Code (the “Involuntary Petition”).

Americana is the principal supplier of our frozen yogurt products under an Exclusive Supply Agreement between Americana and TCBY dated November 19, 2002 (the “Supply Agreement”). The Supply Agreement is attached as Exhibit 10.50 to Mrs. Fields’ Registration Statement on Form S-4 (File No. 333-115046), as amended, filed with the SEC on April 30, 2004. Production of TCBY products at Americana has ceased in connection with the Involuntary Petition.

We have identified potential replacement suppliers for our proprietary products and are in the process of working with these potential suppliers to accelerate short-term production. We have also purchased most of the inventory that remained at Americana and removed it to an off-site storage facility. We are managing this inventory, as well as inventory at our distributors and our franchisees’ stores. While we believe we can avoid material shortages or immediate interruption in the supply of our principal products to our TCBY franchisees, shortages of some products may occur before replacement suppliers can begin full production. Further, there can be no guarantee that we will be able to negotiate long-term supply agreements on terms that are similar to or as favorable as those in the Supply Agreement. Any significant interruption in the supply of TCBY products to franchisees or a material increase in the cost of TCBY products may have a material adverse effect on our TCBY franchise system and our consolidated financial performance.

In addition, Americana owed us approximately $585,000 for amounts collected by Americana on our behalf for product sold and for decreases in the price of commodities that we were entitled to receive from Americana under the Supply Agreement. During the 13 weeks ended September 30, 2006, we recorded bad debt expense of approximately $585,000 and have written off this receivable.

Results of Operations

The following table sets forth, for the periods indicated, certain information relating to our operations and percentage changes from period to period (in thousands):

	13 Weeks Ended								39 Weeks Ended
	September 30,			October 1,			%		September 30,			October 1,			%
	2006			2005			Change		2006			2005			Change
REVENUES:
Franchising	$	13,386		$	13,332		0.4		$	39,310		$	39,655		(0.9	)
Gifts	3,915			3,917			(0.1	)	13,980			14,266			(2.0	)
Branded retail	6,906			65			NM		6,985			184			NM
Licensing	311			877			(64.5	)	1,378			2,854			(51.7	)
Total revenues	24,518			18,191			34.8		61,653			56,959			8.2
OPERATING COSTS AND EXPENSES:
Franchising	6,138			5,214			17.7		18,105			16,028			13.0
Gifts	5,547			4,372			26.9		17,697			14,950			18.4
Branded retail	6,692			53			NM		6,750			134			NM
Licensing	466			157			196.8		1,375			512			168.6
General and administrative	2,259			2,357			(4.2	)	7,699			6,659			15.6
Depreciation	551			286			92.7		1,910			839			127.7
Amortization	517			704			(26.6	)	1,593			2,114			(24.6	)
Impairment of goodwill	—			—			NM		14,568			—			NM
Total operating costs and expenses	22,170			13,143			68.7		69,697			41,236			69.0
Income (loss) from operations	2,348			5,048			(53.5	)	(8,044		)	15,723			NM
Interest expense, net	(5,270		)	(5,289		)	(0.4	)	(15,741		)	(15,988		)	(1.5	)
Other loss	—			—			NM		(28		)	—			NM
Loss before benefit for income taxes	(2,922		)	(241		)	NM		(23,813		)	(265		)	NM
Benefit for income taxes	460			92			400.0		1,250			102			NM
Net loss	$	(2,462	)	$	(149	)	NM		$	(22,563	)	$	(163	)	NM

Cash flows from operating activities	$	(3,607	)	$	(4,842	)	25.5		$	(11,296	)	$	(4,114	)	(174.6	)
Cash flows from investing activities	$	(2,691	)	$	(515	)	(422.5	)	$	(4,372	)	$	(1,084	)	(303.3	)
Cash flows from financing activities	$	(26	)	$	(30	)	13.3		$	(77	)	$	(47	)	(63.8	)

13 Weeks Ended September 30, 2006
Compared to the 13 Weeks Ended October 1, 2005

Income (Loss) From Operations—Overview. Income from operations was $2.3 million for the 13 weeks ended September 30, 2006, a decrease of $2.7 million or 53.5 percent from $5.0 million for the 13 weeks ended October 1, 2005. This decrease was primarily attributable to a decrease in contribution from our business segments of $2.7 million and an increase in depreciation and amortization expense of $100,000 partially offset by a decrease in general and administrative expenses of $100,000. The decrease in contribution from our business segments of $2.7 million was comprised of decreases in our gifting segment contribution of $1.2 million, our franchising segment contribution of $800,000 and our licensing segment contribution of $900,000 partially offset by an increase in our new branded retail segment of $200,000.

Segment Contribution. Franchising contribution is comprised of sales of new franchises and royalties from existing franchises less direct operating expenses. Gifts contribution is comprised of sales of products through our catalog and website less direct operating expenses. Branded retail contribution is comprised of net sales of our branded products through retail channels by us and through food brokers less related cost of sales and direct selling and operating expenses. Licensing contribution is comprised of licensing fees received from third parties for the sale of products bearing our brand names less direct operating expenses. The following table sets forth the contribution from each of our reporting segments (in thousands).

	For the 13 Weeks Ended
	September 30,			October 1,			%
Reporting Segment	2006			2005			Change
Franchising	$	7,248		$	8,118		(10.7	)
Gifts	(1,632		)	(455		)	(258.7	)
Branded retail	214			12			NM
Licensing	(155		)	720			NM
Total segment contribution	$	5,675		$	8,395		(32.4	)

Franchising

The following table details the revenues and operating expenses of the franchising segment for the 13 weeks ended September 30, 2006 and October 1, 2005 (in thousands):

	For the 13 Weeks Ended
	September 30,		October 1,		%
	2006		2005		Change
Bakery revenues	$	9,557	$	9,152	4.4
Dairy revenues	3,829		4,180		(8.4	)
Total franchising revenues	13,386		13,332		0.4
Bakery operating expenses	4,393		4,109		6.9
Dairy operating expenses	1,745		1,105		57.9
Total franchising operating expenses	6,138		5,214		17.7
Total franchising contribution	$	7,248	$	8,118	(10.7	)

The following table details the year-over-year (“YOY”) percentage increase (decrease) in same store sales for the 13 weeks ended September 30, 2006 and October 1, 2005:

	For the 13 Weeks Ended
	September 30,		October 1,
	2006		2005
Mrs. Fields	(0.8	)	(1.1	)
Great American Cookies	4.2		4.0
Pretzel Time	10.5		(0.1	)
Pretzelmaker	11.9		10.3
Total Bakery	4.5		2.0
TCBY	(2.8	)	(0.6	)
Total Company	2.5		1.2

Year-Over-Year Same Store Sales. Year-over-year same store sales increased for all of our concepts other than our Mrs. Fields and TCBY concepts during the 13 weeks ended September 30, 2006. Our bakery concepts’ year-over-year same store sales increased 4.5 percent for the 13 weeks ended September 30, 2006.

Our Great American Cookies concept increased year-over-year same store sales during this period primarily due to launching its new Disney® program, including cookies and cookie cakes decorated with Disney characters and themes, along with merchandising and gifting items such as Kids Cups and Mini-Buckets, sold in accordance with our licensing agreement with Disney. Additionally, the brand re-launched its Breezer™ smoothie line and introduced a new Peanut Butter Chocolate Brownie.

Our Pretzel Time and Pretzelmaker concepts increased in year-over-year same store sales primarily due to the introduction and promotion of our new pretzel dough. Consumer feedback suggests the new pretzel and pretzel bites products have more flavor, a softer bite and a fresher taste. All of our stores were certified and retrained when we introduced the new pretzel dough in July 2006. Freshly squeezed lemonade and Breezer™ smoothie beverages also continued to provide strong year-over-year growth.

Our Mrs. Fields concept’s year-over-year same store sales decreased 0.8 percent for the 13 weeks ended September 30, 2006. The decrease in year-over-year same store sales was a result of decreased customer counts at the stores. Performance improved for this quarter over last quarter due to the introduction of a summer long kids promotion and a focus on beverages and cookie cakes.

Our TCBY concept’s year-over-year same store sales decreased 2.8 percent for the 13 weeks ended September 30, 2006. We believe that the decrease in year-over-year same store sales may be a result of increases in advertising and market penetration from competitive brands. Our new product introductions, hand scooped frozen yogurt and iced coffee Frappes, have continued to build momentum; however, this was not sufficient to stem the system-wide volume declines due to decreased customer counts at the stores.

Franchising Revenues. Franchising revenues were $13.4 million for the 13 weeks ended September 30, 2006, an increase of $100,000 or 0.4 percent from $13.3 million for the 13 weeks ended October 1, 2005. This increase was due to an increase in revenues from our bakery franchise system of $400,000 partially offset by a decrease in revenues from the dairy franchise system of $300,000.

Revenues from our bakery franchise system for the 13 weeks ended September 30, 2006 were $9.6 million, an increase of $400,000 or 4.4 percent from $9.2 million for the 13 weeks ended October 1, 2005. This increase was due to increases in sales of products by our Great American Cookies manufacturing facility to our franchisees of $400,000 and royalties of $200,000, partially offset by decreases in initial franchise fees of $100,000 and product formulation revenues of $100,000. The increase in sales by our Great American Cookies manufacturing facility was primarily due to increases in batter purchases by our Great American Cookies franchisees as a result of continued positive year-over-year same store sales by our franchisees. The increase in royalties was principally due to increases in year-over-year same store sales by our franchisees. The reduction in product formulation revenues was the result of lower product formulation revenues earned through our Mrs. Fields bakery franchise system.

Revenues from our dairy franchise system were $3.8 million for the 13 weeks ended September 30, 2006, a decrease of $300,000 or 8.4 percent from $4.1 million for the 13 weeks ended October 1, 2005. The decrease in revenues from our dairy franchise system was due to decreases in product formulation revenues generated by purchases of TCBY products by franchisees of $200,000 and initial franchise fees of $100,000. The decrease in product formulation revenues is principally attributable to approximately 900 or 11.7 percent fewer unit weeks and the decrease in year-over-year same store sales. We anticipate that our dairy unit weeks will continue to decline in the near future, at least until our reconcepting tests for Beriyo by TCBY and Yovana and remodeling tests for TCBY traditional stores are completed and we have developed a plan to implement the reconcepting and/or remodeling in qualified TCBY traditional stores. We anticipate our reconcepting and remodeling tests will continue into 2007. We continue to be encouraged by consumer data we have collected. However, there can be no assurances that our reconcepting and remodeling tests or implementation will be successful, or that a reconcepting and remodeling will slow or reverse the declining TCBY store count or contribution, which may adversely affect our consolidated results of operations.

Franchising Expenses. Franchising expenses are comprised of operation and supervision expenses wherein we provide support, direction and supervision to the franchisees; development and support expenses including product development costs, expenses relating to new franchise development, marketing and advertising, bad debt expense and other direct franchising expenses; and cost of product sales associated with our Great American Cookies manufacturing facility, including raw ingredients, labor and other manufacturing costs. Franchising expenses were $6.1 million for the 13 weeks ended September 30, 2006, an increase of $900,000 or 17.7 percent from $5.2 million for the 13 weeks ended October 1, 2005. This increase was attributable to increases in bad debt expense of $300,000 related to Americana, our dairy product manufacturer for our dairy franchise system, distribution costs of $100,000 associated with the distribution of our dairy products to our dairy franchise system resulting from the Blue Line Extension Agreement, product cost of sales associated with our Great American Cookies manufacturing facility of $200,000 and franchise development and support expenses of $400,000 partially offset by reductions in franchise operations and supervision expenses of $100,000.

Gifts

Gifts Revenues. Gifts revenues were $3.9 million for the 13 weeks ended September 30, 2006 and for the 13 weeks ended October 1, 2005. Gifts revenues consist of sales through our catalog and website as well as affiliations with other websites and sales to large corporate accounts for gifting purposes and commercial airlines. This consistency in revenues for the 13 weeks ended September 30, 2006 and October 1, 2005 was due to increases in national accounts of $300,000 and sales through Internet search engines of $100,000 offset by a decrease in sales through our catalog and website of $400,000.

Gifts Expenses. Gifts expenses are comprised of cost of sales for products sold, selling and promotional expenses and direct operating expenses of this segment. Gifts expenses were $5.5 million for the 13 weeks ended September 30, 2006, an increase of $1.1 million or 26.9 percent from $4.4 million for the 13 weeks ended October 1, 2005. This increase in expenses was due to increases in cost of goods sold of $500,000 due to increases in raw materials, production costs and freight expenses, facility expenses of $500,000 primarily due to accrued rents on the former gifting facility and other direct operating expenses of $100,000 due to costs associated with moving to the new gifting facility.

Branded Retail

Branded Retail Revenues. As discussed in “Recent Developments” contained elsewhere in this report, following termination of our license agreements with Shadewell, in July 2006, we commenced selling Mrs. Fields branded shelf stable cookies directly through retail channels. Prior to this time, our branded retail revenues consisted of sales of Mrs. Fields branded cookie dough directly through retail channels. Branded retail net sales were $6.9 million for the 13 weeks ended September 30, 2006, an increase of $6.8 million from $100,000 for the 13 weeks ended October 1, 2005.

Branded Retail Expenses. Branded retail expenses are comprised of cost of sales for product sold, selling and promotional expenses and other direct operating expenses of this segment. Branded retail expenses were $6.7 million for the 13 weeks ended September 30, 2006, an increase of $6.6 million from $100,000 for the 13 weeks ended October 1, 2005. This increase was primarily due to the operating costs associated with the new branded retail activities which commenced in July 2006.

Licensing

Licensing Revenues. Licensing revenues were $300,000 for the 13 weeks ended September 30, 2006, a decrease of $600,000 or 64.5 percent from $900,000 for the 13 weeks ended October 1, 2005. This decrease was due to decreases in licensing royalties earned under our licensing agreement for the sale of Mrs. Fields branded shelf stable cookies of $500,000 and royalties earned under our licensing agreement for the sale of TCBY frozen food specialty products through retail channels of $100,000. As discussed in “Recent Developments” contained elsewhere in this report, we have not recognized any royalty revenues earned under the terminated license agreements during the 13 weeks ended September 30, 2006. We do not anticipate earning any royalties under the terminated license agreements for the remainder of the year.

Licensing Expenses. Licensing expenses are comprised of selling and promotional expenses, bad debt and other direct operating expenses of this segment. Licensing expenses were $500,000 for the 13 weeks ended September 30, 2006, an increase of $300,000 or 196.8 percent from $200,000 for the 13 weeks ended October 1, 2005. This increase was due to increases in bad debt expense of $300,000 related to Americana, our former manufacturer and distributor of TCBY branded frozen products.

Other

General and Administrative Expenses. General and administrative expenses were $2.3 million for the 13 weeks ended September 30, 2006, a decrease of $100,000 or 4.2 percent from $2.4 million for the 13 weeks ended October 1, 2005. This decrease was primarily due to decreases in recruiting and relocation costs of $200,000, incentive compensation of $200,000, salaries and related costs of $100,000, professional fees of $100,000 and other administrative costs of $200,000, partially offset by a reduction in the reimbursement amount we received for management services provided to our parent company, MFOC, of $700,000 as a result of the decrease in the number of stores owned and operated by MFOC.

Depreciation and Amortization Expense. Total depreciation and amortization expense was $1.1 million for the 13 weeks ended September 30, 2006, an increase of $100,000 or 7.9 percent from $1.0 million for the 13 weeks ended October 1, 2005. Depreciation expense was $600,000 for the 13 weeks ended September 30, 2006, an increase of $300,000 or 92.7 percent from $300,000 for the 13 weeks ended October 1, 2005. This increase was principally due to additional depreciation expense of approximately $200,000 associated with leasehold improvements of our former gifting facility as a result of relocating from that facility into a new facility in August 2006, which shortened the useful lives of these leasehold improvements. Amortization expense for the 13 weeks ended September 30, 2006 was $500,000, a decrease of $200,000 or 26.6 percent from $700,000 for the 13 weeks ended October 1, 2005. This decrease was principally due to the impairment of certain intangible assets of TCBY in 2005 which resulted in a lower carrying value of the intangible assets and lower amortization expense in periods subsequent to the impairment.

39 Weeks Ended September 30, 2006

Compared to the 39 Weeks Ended October 1, 2005

Income (Loss) From Operations—Overview. Loss from operations was $8.0 million for the 39 weeks ended September 30, 2006, a decrease of $23.7 million from income from operations of $15.7 million for the 39 weeks ended October 1, 2005. This decrease was primarily attributable to the impairment of goodwill associated with the dairy franchise reporting unit of $14.6 million, a decrease in contribution from our business segments of $7.6 million, an increase in general and administrative expenses of $1.0 million and an increase in depreciation and amortization expense of $500,000. Decreases in contribution from our business segments of $7.6 million was comprised of decreases in our gifting segment contribution of $3.0 million, our franchising segment contribution of $2.4 million and our licensing segment contribution of $2.4 million partially offset by an increase in our new branded retail segment contribution of $200,000.

Segment Contribution. Franchising contribution is comprised of sales of new franchises and royalties from existing franchises less direct operating expenses. Gifts contribution is comprised of sales of products through our catalog and website less direct operating expenses. Branded retail contribution is comprised of net sales of our branded products through retail channels by us and through food brokers, less related cost of sales and direct selling and operating expenses. Licensing contribution is comprised of licensing fees received from third parties for the sale of products bearing our brand names less direct operating expenses. The following table sets forth the contribution from each of our reporting segments (in thousands).

	For the 39 Weeks Ended
	September 30,			October 1,			%
Reporting Segment	2006			2005			Change
Franchising	$	21,205		$	23,627		(10.3	)
Gifts	(3,717		)	(684		)	(443.4	)
Branded retail	235			50			370.0
Licensing	3			2,342			(99.9	)
Total segment contribution	$	17,726		$	25,335		(30.0	)

Franchising

The following table details the revenues and operating expenses of the franchising segment for the 39 weeks ended September 30, 2006 and October 1, 2005 (in thousands):

	For the 39 Weeks Ended
	September 30,		October 1,		%
	2006		2005		Change
Bakery revenues	$	28,574	$	27,761	2.9
Dairy revenues	10,736		11,894		(9.7	)
Total franchising revenues	39,310		39,655		(0.9	)
Bakery operating expenses	13,173		11,852		11.1
Dairy operating expenses	4,932		4,176		18.1
Total franchising operating expenses	18,105		16,028		13.0
Total franchising contribution	$	21,205	$	23,627	(10.3	)

The following table details the YOY percentage increase (decrease) in same store sales for the 39 weeks ended September 30, 2006 and October 1, 2005:

	For the 39 Weeks Ended
	September 30,		October 1,
	2006		2005
Mrs. Fields	(1.4	)	0.2
Great American Cookies	3.9		4.3
Pretzel Time	7.3		2.2
Pretzelmaker	11.6		9.7
Total Bakery	3.5		2.9
TCBY	(1.4	)	(0.8	)
Total Company	2.2		1.8

Year-Over-Year Same Store Sales. Year-over-year same store sales increased for all of our concepts other than our Mrs. Fields and TCBY concepts during the 39 weeks ended September 30, 2006.

Our bakery concepts’ year-over-year same store sales increased 3.5 percent for the 39 weeks ended September 30, 2006. Our Great American Cookies concept increased year-over-year same store sales during this period primarily due to continued emphasis on Cookie Cakes and Cookie Express Grab & Go decorating tables, along with the launching of the new Disney program, the re-launching of the Breezer™ smoothie line and a retail price increase. Our Pretzel Time and Pretzelmaker concepts increased year-over-year same store sales due to the introduction and promotion of our new pretzel dough and the continued focus on Breezer™ smoothies and the “Great Tastes Collide” campaign pairing pretzel bites and Breezer™ smoothies together. Our Mrs. Fields concept’s year-over-year same store sales decreased 1.4 percent for the 39 weeks ended September 30, 2006. The decrease in year-over-year same store sales was a result of lower sales on key holiday weeks this year compared to last year and decreased customer counts at the stores.

Our TCBY concept’s year-over-year same store sales decreased 1.4 percent for the 39 weeks ended September 30, 2006 due to decreased customer counts at the stores. We continue to focus and emphasize store level operations and standards enforcement to improve operations and the consumer experience in the store. This work is being executed in parallel to various reconcepting tests, as more fully discussed in our Annual Report on Form 10-K filed with the SEC on March 21, 2006. This reconcepting work is designed to leverage consumer trends, provide a new platform for sales growth, build an improved franchisee business model and strengthen our new store development initiatives.

Franchising Revenues. Franchising revenues were $39.3 million for the 39 weeks ended September 30, 2006, a decrease of $400,000 or 0.9 percent from $39.7 million for the 39 weeks ended October 1, 2005. The decreased revenues were due to a decrease in revenues from our dairy franchise system of $1.2 million or 9.7 percent, partially offset by increased revenues from our bakery franchise system of $800,000 or 2.9 percent.

The increase in revenues from our bakery franchise system was principally attributable to increases in sales of products by our Great American Cookies manufacturing facility to our franchisees of $1.3 million or 10.7 percent and royalties of $500,000 or 4.3 percent, partially offset by reductions of product formulation revenues generated by purchases of certain bakery products by franchisees of $300,000 or 15.6 percent, allowances earned from our beverage vendors of $400,000 or 29.3 percent and initial franchise fees of $300,000 or 23.2 percent. The increase in sales by our Great American Cookies manufacturing facility was primarily due to increases in batter purchases by our Great American Cookies franchisees as a result of continued positive year-over-year same store sales by our franchisees and a price increase to our franchisees of 8.3 percent effective April 2005. The increase in royalties was principally due to increases in year-over-year same store sales by our franchisees. The reduction in product formulation revenues was the result of lower product formulation revenues earned through our Mrs. Fields bakery franchise system. The decrease in initial franchise fees was due to initial franchise fees earned in Canada from our Mrs. Fields and Pretzelmaker concepts in 2005 that were not repeated in 2006.

The decrease in revenues from our dairy franchise system was principally comprised of decreases in product formulation revenues generated by purchases of TCBY products by franchisees of $600,000 or 8.0 percent, royalties of $400,000 or 8.7 percent and initial franchise fees of $200,000 or 47.7 percent. The decrease in royalties and product formulation revenues is principally attributable to approximately 2,900 or 11.2 percent fewer unit weeks and continued negative year-over-year same store sales. We anticipate that our dairy unit weeks will continue to decline in the near future, at least until our reconcepting tests for Beriyo by TCBY and Yovana and remodeling tests for TCBY traditional stores are completed and we have developed a plan to implement the reconcepting and/or remodeling in qualified TCBY traditional stores. We anticipate our reconcepting and remodeling tests will continue into 2007. We continue to be encouraged by consumer data we have collected. However, there can be no assurances that our reconcepting and remodeling tests or implementation will be successful, or that a reconcepting and remodeling will slow or reverse the declining TCBY store count or contribution, which may adversely affect our consolidated results of operations.

Franchising Expenses. Franchising expenses were $18.1 million for the 39 weeks ended September 30, 2006, an increase of $2.1 million or 13.0 percent from $16.0 million for the 39 weeks ended October 1, 2005. This increase was attributable to increases in product cost of sales associated with our Great American Cookies manufacturing facility of $700,000, distribution costs of $600,000 associated with the distribution of our dairy products to our dairy franchise system resulting from the Blue Line Extension Agreement, bad debt expense of $300,000 related to Americana, our dairy product manufacturer for our dairy franchise system, and franchise development and support expenses of $1.3 million partially offset by a reduction in expenses associated with our brand initiatives of $700,000 and operations and supervision expenses of $100,000.

The increase in franchise development and support expenses of $1.3 million was due to increases in salaries and related employee costs of $800,000, severance costs of $200,000, professional and legal fees of $200,000, bad debt expense of $100,000 and other franchise development costs of $200,000 partially offset by a reduction in costs associated with our royalty assurance program of $200,000.

Gifts

Gifts Revenues. Gifts revenues were $14.0 million for the 39 weeks ended September 30, 2006, a decrease of $300,000 or 2.0 percent from $14.3 million for the 39 weeks ended October 1, 2005. The decrease in revenues for the 39 weeks ended September 30, 2006 was due to decreases in sales through our catalog and website.

Gifts Expenses. Gifts expenses were $17.7 million for the 39 weeks ended September 30, 2006, an increase of $2.7 million or 18.4 percent from $15.0 million for the 39 weeks ended October 1, 2005. This increase in expenses was due to increases in cost of goods sold of $1.3 million due to increases in raw materials, production costs and freight expenses, facility expenses of $700,000 primarily due to accrued rents on the former gifting facility and selling expenses of $600,000 principally for increased paper and creative costs of our catalogs partially offset by decreased circulation. Other direct operating expenses increased $100,000 due to increases in compensation and related costs of $500,000, professional IT services of $200,000, moving costs to our new facility of $200,000 and severance costs of $200,000 partially offset by a decrease in professional fees of $700,000 for consultants in 2005 for the assistance and development of our gifting business strategy, recruiting and relocation costs of $200,000 and bad debt expense of $100,000.

Branded Retail

Branded Retail Revenues. As discussed in “Recent Developments” contained elsewhere in this report, following termination of our license agreements with Shadewell, in July 2006, we commenced selling Mrs. Fields branded shelf stable cookies directly through retail channels. Prior to this time, our branded retail revenues consisted of sales of Mrs. Fields branded cookie dough directly through retail channels. Branded retail net sales were $7.0 million for the 39 weeks ended September 30, 2006, an increase of $6.8 million from $200,000 for the 39 weeks ended October 1, 2005.

Branded Retail Expenses. Branded retail expenses were $6.7 million for the 39 weeks ended September 30, 2006, an increase of $6.6 million from $100,000 for the 39 weeks ended October 1, 2005. This increase was primarily due to the operating costs associated with the new branded retail activities which commenced in July 2006.

Licensing

Licensing Revenues. Licensing revenues were $1.4 million for the 39 weeks ended September 30, 2006, a decrease of $1.5 million or 51.7 percent from $2.9 million for the 39 weeks ended October 1, 2005. This decrease was due to decreases in licensing royalties earned under our licensing agreement for the sale of Mrs. Fields branded shelf stable cookies of $1.4 million and licensing royalties earned under an agreement for the sale of Mrs. Fields branded premium hot cocoa that was terminated in early 2005 of $100,000. As discussed in “Recent Developments” contained elsewhere in this report, we do not anticipate earning any royalties under the terminated license agreements for the sale of Mrs. Fields branded shelf stable cookies for the remainder of the year.

Licensing Expenses. Licensing expenses were $1.4 million for the 39 weeks ended September 30, 2006, an increase of $900,000 or 168.6 percent from $500,000 for the 39 weeks ended October 1, 2005. This increase was due principally to bad debt expense as a result of the termination of our license agreements for the sale of Mrs. Fields branded shelf stable cookies of $400,000, bad debt expense related to Americana, our former manufacturer and distributor of TCBY branded frozen products of $300,000 and an increase in costs associated with the sale of TCBY branded frozen products of $200,000.

Other

General and Administrative Expenses. General and administrative expenses were $7.7 million for the 39 weeks ended September 30, 2006, an increase of $1.0 million or 15.6 percent from $6.7 million for the 39 weeks ended October 1, 2005. This increase was primarily due to a reduction in the reimbursement amount we received for management services provided to our parent company, MFOC, of $1.6 million as a result of the decrease in the number of stores owned and operated by MFOC and increases in severance costs of $200,000, salaries and related benefits of $100,000 and health insurance expense of $100,000 partially offset by reductions in incentive compensation of $300,000, recruiting and relocation of $300,000, professional fees of $200,000 and other general and administrative costs of $200,000.

Depreciation and Amortization Expense. Total depreciation and amortization expense was $3.5 million for the 39 weeks ended September 30, 2006, an increase of $600,000 or 18.6 percent from $2.9 million for the 39 weeks ended October 1, 2005. Depreciation expense was $1.9 million for the 39 weeks ended September 30, 2006, an increase of $1.1 million or 127.7 percent from $800,000 for the 39 weeks ended October 1, 2005. This increase was principally due to a $400,000 write-down of leasehold improvements and equipment associated with a Yovana test store and additional depreciation expense of approximately $500,000 associated with leasehold improvements of our former gifting facility as a result of relocating from that facility into a new facility in August 2006, which shortened the useful lives of these leasehold improvements. Amortization expense for the 39 weeks ended September 30, 2006 was $1.6 million, a decrease of $500,000 or 24.6 percent from $2.1 million for the 39 weeks ended October 1, 2005. This decrease was principally due to the impairment of certain intangible assets of TCBY in 2005, which resulted in a lower carrying value of the intangible assets and lower amortization expense in future periods.

Impairment of Goodwill. During the 39 weeks ended September 30, 2006, we recorded a charge of $14.6 million to reduce the carrying value of the goodwill associated with our dairy franchising reporting unit. This impairment was principally the result of an eroding dairy franchise system due to fewer locations, consistent negative year-over-year same store sales by our dairy franchisees and our inability to locate and open a significant number of new or additional franchise locations. These factors have resulted in continued decreases in franchise royalties and yogurt formulation revenues from our dairy franchise system. See Note 5 to our condensed consolidated financial statements contained elsewhere in this report.

Interest Expense, Net. Interest expense, net was $15.7 million for the 39 weeks ended September 30, 2006, a decrease of $300,000 or 1.5 percent from $16.0 million for the 39 weeks ended October 1, 2005. The decrease in interest expense, net was the result of a reduction in amortization of deferred loan costs and an increase in interest income earned on our cash balances.

Consolidated Financial Condition

Total assets at September 30, 2006 were $114.5 million, a decrease of $25.4 million or 18.2 percent from $139.9 million at December 31, 2005. This decrease was primarily attributable to decreases in goodwill of $14.6 million, cash and cash equivalents of $15.7 million, trademarks and intangibles of $1.5 million and deferred loan costs of $800,000 partially offset by increases in property and equipment, net of $3.8 million, accounts receivables of $1.4 million, inventories of $1.0 million, deferred tax assets of $600,000 and prepaid expenses and other assets of $400,000.

Total liabilities at September 30, 2006 were $219.1 million, a decrease of $2.2 million or 1.0 percent from $221.3 million at December 31, 2005. This decrease was primarily due to decreases in accrued liabilities of $4.4 million and capital lease obligations of $100,000 partially offset by increases in other liabilities of $1.3 million, accounts payable of $100,000 and amounts due to affiliates of $900,000.

Consolidated Cash Flows for the 39 Weeks Ended September 30, 2006 Compared to October 1, 2005

Net cash flows used in operating activities were $11.3 million for the 39 weeks ended September 30, 2006, an increase of $7.2 million from net cash flows used in operating activities of $4.1 million for the 39 weeks ended October 1, 2005. This increase in cash used in operations was principally due to a decrease in contribution by our operating segments of $7.6 million and an increase in general and administrative expenses of $1.0 million partially offset by an increase in cash provided from working capital assets and liabilities of $1.4 million.

Net cash flows used in investing activities were $4.4 million for the 39 weeks ended September 30, 2006, an increase of $3.3 million from cash used in investing activities of $1.1 million for the 39 weeks ended October 1, 2005. This increase was attributable to increases in purchases of property and equipment of $3.4 million principally associated with our new gifts facility partially offset by proceeds from the sale of equity warrants in Nonni’s Food Company of $100,000.

Net cash flows used in financing activities were negligible for the 39 weeks ended September 30, 2006 and for the 39 weeks ended October 1, 2005.

Liquidity and Capital Resources

Our principal sources of liquidity are cash on hand and cash flows from operating activities. At September 30, 2006, we had $7.9 million of cash on hand. During the next 12 months, we expect that our principal uses of cash will be for working capital, capital expenditures and semi-annual interest payments of $20.5 million on our 9 percent senior secured notes and our 11½ percent senior secured notes (the “Senior Secured Notes”), of which $10.25 million will be due on March 15, 2007 and September 15, 2007. In addition, to the extent we have cash available and it is permitted by the indenture governing the Senior Secured Notes, we may pay dividends to our parent companies for uses such as acquisitions, debt repayments and dividends. During the next 12 months, we do not expect to be required, but we may offer, to repurchase a portion of the Senior Secured Notes as described below.

We are highly leveraged. At September 30, 2006, we had $195.7 million of long-term debt represented by the Senior Secured Notes. The Senior Secured Notes mature on March 15, 2011, with interest payable semi-annually on March 15 and September 15. Due to borrowing restrictions under the indenture governing the Senior Secured Notes, our ability to obtain additional debt financing is significantly limited. The Senior Secured Notes require us to offer to repurchase a portion of the notes at 100 percent of the principal amount, plus accrued and unpaid interest thereon to the date of purchase, with 50 percent of our “excess cash flow,” as defined in the indenture agreement, when the ratio of our net indebtedness to consolidated EBITDA is above 3.75 to 1.0 and the cumulative unpaid excess cash flow offer amount exceeds $10.0 million. For a more detailed description of the material terms of the Senior Secured Notes, see Note 3 to our consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC on March 21, 2006.

Due to the seasonal nature of our bakery franchising and gifting businesses, we historically generate a significant amount of cash during the fourth quarter. While we believe, based on historical results and current projections, that the cash currently on hand and expected cash flows from future operations will be sufficient to continue operations for at least the next 12 months, there can be no assurance that actual results will meet or exceed our projections or that our future operating activities will generate sufficient cash to meet our cash requirements for the next 12 months.

Inflation

The impact of inflation on our business has not been significant in recent years. Some of our employees are paid hourly wages at the federal minimum wage level. Minimum wage increases will negatively impact our payroll costs in the short term, but management believes such impact can be offset in the long term through lower staffing of operations and, if necessary, through product price increases.

Critical Accounting Policies

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in our consolidated financial statements. Management has reviewed with our Audit Committee the accounting policies that it uses to prepare our consolidated financial statements and believes that the following policies are the most important to the portrayal of our financial condition and the results of our operations while requiring the use of judgments and estimates about the effects of matters that are inherently uncertain.

Impairment of Goodwill. Goodwill is not amortized, but is subject to an annual assessment for impairment, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. The two-step approach to assess our goodwill impairment requires that we first compare the estimated fair value of each reporting unit with goodwill to the carrying amount of the reporting unit’s assets and liabilities, including its goodwill. If the fair value of the reporting unit is below its carrying amount, then the second step of the impairment test is performed, in which the current fair value of the reporting unit’s assets and liabilities will determine the current implied fair value of the reporting unit’s goodwill.

On an annual basis (in the fourth quarter), or more frequently if circumstances indicate potential impairment, we complete an evaluation of goodwill associated with our various reporting units. To the extent that the fair value associated with goodwill is determined to be less than the recorded value, we write down the value of the related goodwill. The estimated fair value of goodwill is affected by, among other things, our business plan for the future, estimated results of future operations and the comparable companies and transactions that are used to estimate the fair value of our goodwill. Changes in the business plan or operating results that are different than the projections used to develop the valuation of goodwill may have an impact on the valuation of the goodwill.

In conducting our impairment analyses, we perform analyses and tests of our goodwill with respect to our reporting units. The test methods employed involve assumptions concerning useful lives of intangible assets, interest and discount rates, projections and other assumptions of future business conditions. The assumptions employed are based on management’s judgment using internal and external data.

Impairment of Long-lived and Certain Identifiable Intangible Assets. We review our long-lived assets for impairment when circumstances indicate that the carrying value of an asset may not be fully recovered by the undiscounted net cash flow generated over the remaining life of the related asset or group of assets. If the cash flows generated by the asset are not sufficient to recover the remaining carrying value of the asset, we are required to write down the value of the asset to its estimated fair value. In evaluating whether the asset will generate sufficient cash flow to recover its carrying value, we estimate the amount of cash flow that will be generated by the asset and the remaining life of the asset. In making our estimate, we consider the performance trends related to the asset, the likelihood that the trends will continue or change, both at the asset level as well as at the national economic level, and the length of time that we expect to retain the asset.

Allowance for Doubtful Accounts. We sell products to and receive royalties from our franchisees and sell products to other customers. Sometimes these franchisees and customers are unable or unwilling to pay for the products that they receive or royalties that they owe. Factors that affect our ability to collect amounts that are due to us include the financial strength of a franchisee or customer and its operations, the economic strength of the mall where the franchisee is located and the overall strength of the retail economy. We are required to establish an estimated allowance for the amounts included in accounts receivable that we will not be able to collect in the future. To establish this allowance, we evaluate the customer’s or franchisee’s financial strength, payment history, reported sales and the availability of collateral to offset potential losses. If the assumptions that are used to determine the allowance for doubtful accounts change, we may have to provide for a greater level of expense in future periods or reverse amounts provided in prior periods.

Revenue Recognition. We recognize revenues from our initial franchising fees and licensing fees when all material services or conditions relating to the franchising or licensing have been substantially performed or satisfied, which is generally upon the opening of a store by a franchisee or licensee. We recognize franchise and license royalties, which are based on a percentage of gross store sales, as earned, which is generally upon sale of product by franchisees or licensees. Minimum royalty payments under certain licensing agreements are deferred and recognized on a straight-line basis over the term of the agreement. We recognize revenues from the sale of cookie dough that we produce and sell to certain franchisees at the time of shipment and classify them in franchising revenues. We recognize revenues, net of sales discounts and allowances, from the sale of branded retail products such as cookie dough and shelf stable cookies to grocery stores and wholesale clubs upon shipment and include them in branded retail revenues. We recognize revenues from gift sales at the time of shipment.

We receive cash payments for product formulation fees and allowances from suppliers based on the amount of product purchased directly by our distributors and franchisees. These product formulation fees and allowances represent cash payments to us for the right to use our proprietary formulations and recipes to manufacture the frozen dough, dough mixes and TCBY products these suppliers sell to our franchisees. Formulation fees and allowances are recorded as franchising revenues upon shipment of product to our distributors or franchisees. Included in franchising revenues was $3.1 million and $9.2 million for the 13 and 39 weeks ended September 30, 2006, respectively, and $3.5 million and $10.4 million for the 13 and 39 weeks ended October 1, 2005, respectively, for such formulation fees and allowances.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We have not yet determined the impact, if any, of adopting the provisions of SFAS 157 on our consolidated financial position or results of operations.

In September 2006, the SEC issued Staff Accounting Bulleting No. 108 (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, Companies might evaluate the materiality of financial-statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. We are currently evaluating the effect, if any, that the adoption of SAB 108 will have on our consolidated financial position and results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Income Tax Uncertainties.” FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. FIN 48 provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. FIN 48 is effective for fiscal years beginning after December 15, 2006. We have not yet determined the impact, if any, of adopting the provisions of FIN 48 on our consolidated financial position or results of operations.

In June 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 06-03 (“EITF 06-03”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The provisions of EITF 06-03 become effective as of December 31, 2006. The adoption the ETIF 06-03 is not expected to have a material impact on our consolidated financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in market risks since the end of the Company’s fiscal year ended December 31, 2005. For more information, please read Item 7A and the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K filed with the SEC on March 21, 2006.

Item 4. Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Accounting Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during our fiscal quarter ended September 30, 2006, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

The following risk factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in this report. If any of the following risks and uncertainties or other risks and uncertainties not currently known to us or not currently considered to be material actually occur, our business, financial condition or operating results could be harmed substantially.

Risks Related to Our Business

The results of operations of our business in the future will depend upon whether we are able to successfully implement our business strategy, the implementation of which depends on factors that are beyond our control.

We believe that the implementation of our business strategy is key to enabling us to grow our revenues and profitability and, ultimately, our future success. Our business strategy is focused on increasing the sales of our franchisees, accelerating the development of new franchised stores, carts and kiosks and growing our licensing and gifts operations, each of which we believe is critical to our success.

Our business strategy is dependent in part on our ability to develop, test and implement a reconcepting of our TCBY brand. If we are unsuccessful, our performance will be adversely affected.

Our initial focus includes the “repositioning” of our TCBY brand by targeting today’s health conscious consumers and the “reconcepting” of our TCBY brand by redesigning its trademarks, décor and updating its menus. We have begun the process of reviewing how best to develop and implement the reconcepting, including the testing of our Beriyo by TCBY and Yovana concepts. However, we do not know how successful we will be in developing or implementing a reconcepting plan or the extent to which the capital investment required to implement such a reconcepting plan will be available when needed. If we are unable to successfully implement this or any other aspect of our business strategy, our business operations and our financial condition could be adversely affected.

From time to time, we may be restricted from selling our franchises.

The sale of franchises is regulated by various state laws as well as by the Federal Trade Commission. The Federal Trade Commission requires that franchisors make extensive disclosure in a uniform franchise prospectus to prospective franchisees but does not require registration. However, a number of states require annual registration of the uniform franchise prospectus with state authorities or other disclosure in connection with franchise offers and sales. In addition, several states have “franchise relationship laws” or “business opportunity laws” that limit the ability of the franchisors to terminate agreements or to withhold consent to renewal or transfer of these agreements.

There are certain events that require us to make certain disclosure to state authorities. Further, renewal of uniform franchise offering circular registrations are required in several states within a certain period of time following our fiscal year end. From time to time in the future, there will be periods of time after certain events or in connection with renewal during which we may be prohibited from selling our franchises in certain states. Without limiting the foregoing, our financial condition requires us to defer collection of certain fees in some states until the store opens, and in Virginia, prohibits us from offering new franchises for sale. If we are unable to sell our franchises for an extended period of time in certain states, our business operations or financial condition could be adversely affected.

A decline in mall traffic could cause our bakery brand franchise income to decrease materially.

We believe that the amount and proximity of pedestrian traffic near our bakery brand stores strongly influence sales of our products, which we believe are frequently impulse purchases. In recent years, we believe visits to major shopping malls, where at September 30, 2006 the majority of our bakery franchisees’ stores are located, have experienced periods of decline. This trend has had a negative impact on our revenues. We cannot be sure that this trend will not continue or that this trend can be offset by increased sales per customer. A prolonged decline in mall traffic could adversely affect our financial condition and results of operations.

We believe our brand identity is critical to the success of our business. If we are unable to use any of our trademarks or to protect our trade secrets, our sales and our results of operations will be adversely affected.

We believe that our trademarks have significant value and are important to the marketing of our retail outlets and products and the operations of our franchisees’ stores, gifts segment and licensing strategy. Most of our trademarks are federally registered before the United States Patent and Trademark Office and registered or pending in many foreign countries. However, we cannot be sure that our trademarks cannot be circumvented or that our trademarks do not or will not violate the proprietary rights of others. If a challenge to one of our trademarks is successful, we could be prevented from continuing to use that trademark. A negative ruling concerning our use or the validity or enforceability of one of our trademarks would adversely affect our sales of the related products and our operating results. In addition, we cannot be sure that we will have the financial resources necessary to police the use of our trademarks by our franchisees and licensees or enforce or defend our trademarks, which could result in incorrect or unauthorized use of our trademarks. Moreover, we may not be able to use or register our existing trademarks abroad due to the application of foreign laws, which would force us to adopt new trademarks for use in those jurisdictions that initially will not be as recognizable as our existing marks. Despite our efforts to protect our trade secrets, unauthorized parties may attempt to obtain and use information regarding our proprietary recipes and our means of protecting our trade secret rights may not be adequate. The occurrence of any of these factors could diminish the value of our trademark portfolio or trade secrets and negatively impact our sales, business operations and strategies.

Our information systems are an integral part of our gifts segment business. Systems disruptions and failures could cause our customers to become dissatisfied with us and may impair our business.

Our ability to maintain our website, network system and telecommunications equipment in working order and to reasonably protect them from interruption is critical to the success of our gifts business segment. Our website must accommodate regular traffic, deliver information and complete transactions. Our customers, advertisers and business alliances may become dissatisfied by any systems failure that interrupts our ability to provide our products and services to them.

We believe that our relationship with our franchisees and retail licensees is critical to the success of our business. If these franchise and retail license agreements were to be terminated or if we are unable to maintain these relationships, our sales and our results of operations would be adversely affected.

Sixteen of our franchisees or licensees own ten or more retail concept locations. In total, these franchisees own 337 retail concept locations and contributed approximately $4.5 million or 8.4 percent of our franchise revenues for the year ended December 31, 2005. For the same period, franchise revenues made up 60.9 percent of our total revenues. The termination of these key franchise or retail license agreements or lower than anticipated sales may have an adverse affect on our financial condition and results of operations. We cannot be sure that our relations with franchisees and licensees will not change or that our licensees will continue to perform as they have in the past, which could result in franchise or license agreements being terminated by us or by our franchisees or licensees.

Generally, we believe our relationship with our franchisees and our licensees is a critical component in the success of our business. As an example, as required by state and federal franchise disclosure rules, we must provide all prospective franchisees with the name and contact information for each of the concept’s existing franchisees. Prospects often contact existing franchisees as part of their due diligence before making a franchise purchase decision. If our relationship with existing franchisees is strained, it may slow or suspend franchise development with new franchisees, as well as curtail additional development with existing franchisees.

We may be harmed by actions taken by our franchisees or licensees that are beyond our control.

Our franchisees and licensees generally are independent contractors and are not our employees. We require our franchisees and licensees to adhere to strict production, display, storage and marketing specifications and procedures, and we provide training and support to franchisees, but the quality of franchised store operations or licensed products may be diminished by any number of factors beyond our control. Consequently, franchisees may not operate stores or licensees may not produce or market licensed products in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other store personnel. If they do not, our image, reputation and brand may suffer, and our franchise and license revenues as well as our ability to attract prospective franchisees may be adversely affected.

We are vulnerable to fluctuations in the cost, availability and quality of our ingredients.

The cost, availability and quality of the ingredients we use to prepare our products at the Great American Cookies manufacturing facility and in our gifts operations are subject to a range of factors, many of which are beyond our control. Fluctuations in economic and political conditions, weather and demand could adversely affect the costs of our ingredients. We have no control over fluctuations in the price of commodities and we may not be able to pass through any cost increases to our customers. We are dependent on frequent deliveries of fresh ingredients, thereby subjecting us to the risk of shortages or interruptions in supply. All of these factors could cause adverse market conditions which could adversely affect our financial results.

We depend heavily on our suppliers and distributors.

We depend on one primary supplier, Countryside, which supplies products for our Mrs. Fields brand. As discussed in the “Recent Development” section of “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” contained elsewhere in this report, TCBY, our wholly-owned subsidiary, was notified that on October 11, 2006, CB Americana LLC, the general partner of Americana Foods Limited Partnership (“Americana”), filed an involuntary petition with the United States Bankruptcy Court for the Northern District of Texas, naming Americana as a debtor under chapter 7 of the Bankruptcy Code (the “Involuntary Petition”).

Americana was the principal supplier of our frozen yogurt products under an Exclusive Supply Agreement between Americana and TCBY dated November 19, 2002 (the “Supply Agreement”). The Supply Agreement is attached as Exhibit 10.50 to Mrs. Fields’ Registration Statement on Form S-4 (File No. 333-115046), as amended, filed with the Securities and Exchange Commission (“SEC”) on April 30, 2004. Production of TCBY products at Americana has ceased in connection with the Involuntary Petition.

We also depend on our primary distributors for distribution of perishable and non-perishable items to our franchisees. As described in “Business—Ingredients, Supplies and Distribution,” contained in our Annual Report on Form 10-K filed with the SEC on March 21, 2006, our primary distributor to our TCBY system has exercised its right to terminate our distribution agreement with them. We have entered into an Extension to Distribution Agreement (the “Extension Agreement”) effective February 2, 2006. Under the Extension Agreement, Blue Line agreed to continue to perform under the Food and Packaging Distribution Agreement (the “Distribution Agreement”) dated November 14, 2002, until the earlier to occur of (a) 30 days following the date when we notify Blue Line in writing that we have obtained a new distributor and (b) 30 days following the date, if any, when Blue Line notifies us in writing that Blue Line reasonably determines that we are no longer making best efforts and progress to obtain a new distributor. Under the terms of the Extension Agreement, we agreed to make certain payments directly to Blue Line in order to delay distribution cost increases to franchisees and agreed to guarantee certain amounts during the extension period. We have entered into supply agreements with six regional distributors who will provide service to certain regions of the United States. We believe we will be able to identify distributors for the remaining regions of the United States before Blue Line ceases its services under the Extension Agreement. We anticipate the distribution costs to most of our franchisees will not substantially increase under the new regional agreements.

Our reliance on our suppliers subjects us to a number of risks, including possible delays or interruptions in supplies, diminished control over quality and a potential lack of adequate raw material capacity. Any disruption in the supply of or degradation in the quality of the raw materials provided by our suppliers could have a material adverse effect on our business, operating results and financial condition. In addition, such disruptions in supply or degradations in quality could have a long-term detrimental impact on our efforts to develop a strong brand identity and a loyal consumer base. If any supplier or distributor fails to perform as anticipated, or if there is a termination or any disruption in any of these relationships for any reason, it could have a material adverse effect on our results of operations.

Our branded retail business is in its start-up phase and we are only beginning to establish relationships with brokers, vendors and customers.

The sale of snack products to grocery, club stores and similar distribution channels is highly competitive and subject to ongoing expenses related to slotting fees, advertising credits and discounts. Similarly, the business relies on relationships with vendors, brokers and customers. Since we commenced this business in July 2006, there can be no certainty that we will successfully maintain the level of business or relationships established by Shadewell, who operated a similar business under a license agreement with us. We do not believe that the income for this new business will immediately replace or exceed the royalties that may have been generated by the terminated license agreements.

If we lose key management personnel, we may have difficulty in implementing the business strategy that current management has developed, and may fail to achieve expected profits as a result.

Our success depends on the continued services of our senior management, particularly Stephen Russo, our President and Chief Executive Officer. In addition, our continued growth depends, in part, on attracting and retaining skilled managers and employees as well as management’s ability to utilize effectively our key personnel. If Stephen Russo or any other senior management personnel leaves us, we may have difficulty in implementing the business strategy they have developed and may fail to achieve expected profits as a result. We cannot be sure that management’s efforts to integrate, utilize, attract and retain personnel will be successful.

Our failure to respond to demographic trends, changes in consumer preferences and other factors and our failure to implement new marketing strategies could have a material adverse effect on our results of operations.

The specialty and snack food industry is affected by changes in consumer preferences, tastes and eating habits, local, regional, national and international economic conditions, demographic trends and mall traffic patterns. A number of factors, including increased food, labor and benefits costs, the availability of experienced management and hourly employees and difficulties or delays in developing and introducing new products to suit consumer preferences, may adversely affect the specialty retail industry in general and our franchise outlets in particular. Our failure to anticipate, identify and respond to changing consumer preferences and economic conditions and the failure of our customers to respond favorably to our marketing or new products could have a material adverse effect on our results of operations.

There is intense competition in the specialty food retailers industry.

The specialty retail food and snack food industry is highly competitive with respect to price, service, location and food quality and within the industry we compete with cookie, pretzel, frozen yogurt and ice cream retailers, as well as other confectionary, sweet snack and specialty foods retailers, many of which have greater resources than us. Consequently, we cannot be certain that we can compete successfully with these other food retailers.

In addition to the risks we face from current competitors, we cannot be certain that we can successfully compete with any new entrants into the specialty retail food and snack food industry who may introduce new and successful products or marketing. Our inability to compete adequately would have a material adverse effect on our results of operations.

Adverse publicity, particularly about health concerns, could reduce our sales and adversely affect results of operations.

Our ability to compete depends in part on maintaining our reputation with consumers. We could be adversely affected by publicity resulting from food quality, illness, injury or other health concerns, including food borne illness claims or operating issues stemming from one store, a limited number of stores or even a competitor’s store. In addition, we use ingredients in several of our products, such as nuts, to which some people may have allergies, and butter and cream, which are high in fat. There may be adverse publicity about the health risks relating to these or other ingredients. Adverse publicity about these factors could reduce sales of our products and adversely affect results of operations.

Our international operations are exposed to various risks that could have a material adverse effect on our results of operations and financial condition.

We have franchised and licensed retail stores in numerous foreign countries. While most of our operations are in the United States, through our franchised retail store locations and our branded retail activities, we also have operations in numerous other regions, including operations in Canada, Mexico, Australia, South America, the Caribbean, the Middle East and Asia, representing approximately 3.2 percent of our total revenue during the 39 weeks ended September 30, 2006. We expect to expand into additional regions in the future. Our international operations are subject to many additional risks, including:

· the burden of complying with multiple and possibly conflicting laws and any unexpected changes in regulatory requirements;

· import and export restrictions and tariffs;

· additional expenses relating to the difficulties and costs of staffing and managing international operations;

· litigation in foreign jurisdictions;

· potentially adverse tax consequences;

· increased competition as a result of subsidies to local companies;

· political instability or war;

· cultural differences;

· the impact of business cycles and economic instability; and

· increased expense as a result of inflation.

Any one of these factors could have a material adverse affect our sales of products or services to our international customers and curtail our expansion strategy.

Government regulation of our business could adversely affect the results of our operations.

Numerous governmental authorities have issued regulations that apply to us and our franchisees’ stores, including, without limitation, federal, state and local laws and regulations governing health, sanitation, environmental protection, safety, hiring and employment practices, including laws, such as the Fair Labor Standards Act, governing such matters as minimum wages, overtime and other working conditions. The FDA administers regulations that apply to our products. If we fail to obtain or retain the required food licenses or to comply with applicable governmental regulations or if there is any increase in employee benefit costs or other costs associated with employees, our costs could increase as we attempt to comply with regulations. Our revenues could decrease if we or our suppliers are unable to manufacture or if our franchisees or licensees are unable to sell products in locations in which we do not have required licenses. Our products, the manufacturers and their manufacturing facilities are also subject to periodic inspection. Discovery of problems may reduce our results of operations because of costs of compliance or inability to manufacture or sell products for failure to comply with regulations.

In addition, the sale of franchises is regulated by various state laws as well as by the Federal Trade Commission. The Federal Trade Commission requires that franchisors make extensive disclosure in a Uniform Franchise prospectus to prospective franchisees but does not require registration. However, a number of states require registration of the Uniform Franchise prospectus with state authorities or other disclosure in connection with franchise offers and sales. In addition, several states have “franchise relationship laws” or “business opportunity laws” that limit the ability of the franchisors to terminate agreements or to withhold consent to renewal or transfer of these agreements. While we believe that we are in compliance with existing regulations in the jurisdictions where we currently offer franchises, we cannot predict the effect of any future legislation or regulation on our business operations or financial condition. Additionally, bills have occasionally been introduced in Congress which would provide for federal regulation of aspects of franchisor-franchisee relationships. We cannot predict what effect those regulations could have on our business.

Any interruption in funding sources used by franchisees to purchase and develop our franchises could adversely impact our ability to market franchises.

Many of our franchisees must obtain loans to purchase and develop our franchises. One significant source of this funding is the U.S. Small Business Administration (“SBA”). Any suspension of funding or delays in approval of the SBA’s funding budget will affect our franchisees’ ability to obtain funding from this significant source and adversely impact our ability to market franchises.

Litigation, including product liability litigation, could reduce our results of operations or increase our losses because of the cost of paying on successful claims, and we may not be able to continue to obtain adequate insurance.

We are involved in routine litigation in the ordinary course of business, including franchise disputes. Although we have not been significantly adversely affected in the past by litigation, there can be no assurance as to the effect of any future disputes.

Although we currently are not subject to any product liability litigation, there can be no assurance that product liability litigation will not occur in the future involving our products. Our quality control program is designed to maintain high standards for the food and materials and food preparation procedures used by franchised stores. Products are periodically inspected by our personnel at both the point of sale locations and the manufacturing facilities to ensure that they conform to our standards. In addition to insurance held by our suppliers, we maintain insurance relating to personal injury and product liability in amounts that we consider adequate for the retail food industry. While we have been able to obtain insurance in the past, there can be no assurance that we will be able to maintain these insurance policies in the future. Consequently, any successful claim against us, in an amount materially exceeding our coverage, could adversely affect our operating results.

We experienced a number of franchise store closures since 2003. If this trend continues, our financial position and results of operations could be adversely affected.

Since the end of fiscal 2003, 61 retail concept locations were closed by MFOC and 1,086 retail concept locations were closed by other franchisees. These closures represent 37.9 percent of the total number of stores open at the beginning of 2004. In comparison, 442 retail concept locations have opened since the end of fiscal 2003. Since the end of fiscal 2003, the number of Mrs. Fields brand locations has decreased by 6.0 percent, the number of Great American Cookies Company brand locations has decreased by 1.1 percent, the number of TCBY brand traditional locations has decreased by 20.9 percent, the number of TCBY brand non-traditional locations has decreased by 37.9 percent, the number of Pretzel Time brand locations has decreased by 15.3 percent and the number of Pretzelmaker brand locations has decreased by 7.5 percent. There can be no assurances that store closures will not occur in the future or that we will be able to successfully open additional stores in the future. If this trend continues, our financial condition and results of operations could be adversely affected.

Quarterly fluctuations and seasonality.

Our operating results are subject to quarterly and seasonal fluctuations. Our sales and income from franchisees’ store operations are seasonal given the significant impact of the high number of mall based locations. At these locations, sales tend to mirror customer traffic flow trends in malls, which increase significantly during the fourth quarter, primarily between Thanksgiving and the end of the calendar year. Holiday gift purchases also are a significant factor in increased sales in the fourth quarter. However, with the addition of TCBY franchised stores, we have hedged against this seasonality impact by introducing a concept that tends to have its strongest sales periods during the warmer months from late Spring through early Fall. In addition, by marketing our cookie brands around holidays that occur in late Winter and early Spring, such as Valentine’s Day and Easter as well as holidays in the late Fall, such as Halloween, we hope to continue to decrease the impact of seasonality on our cash flow. However, there can be no assurance that we will be successful in decreasing the impact of seasonality on our cash flow. If we are unable to manage seasonal fluctuations of cash flow, our financial condition and results of operations may be adversely affected.

Risks Related to Our Substantial Indebtedness

Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our Senior Secured Notes.

We have substantial indebtedness represented by our Senior Secured Notes. In addition, subject to restrictions in the indenture governing the Senior Secured Notes (the “Indenture”), we may incur additional indebtedness.

Our high level of indebtedness could have important consequences, including the following:

· our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired;

· we must use a substantial portion of our cash flow from operations to pay interest and required principal on the Senior Secured Notes and, to the extent incurred, our other indebtedness, which will reduce the funds available to us for operations and other purposes;

· our high level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt;

· our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; and

· our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business.

We expect to obtain the money to pay our expenses and to pay the amounts due under the Senior Secured Notes and our other debt primarily from our operations. Our ability to meet our expenses and make these payments thus depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future and our currently anticipated growth in revenue and cash flow may not be realized, either or both of which could result in our being unable to repay indebtedness, including the 9 percent senior secured notes and the 11½ percent senior secured notes (“Senior Secured Notes”), or to fund other liquidity needs. If we do not have enough money, we may be required to refinance all or part of our then existing debt (including the Senior Secured Notes), sell assets or borrow more money. However, there can be no assurance that we will be able to accomplish any of these alternatives on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements, including the Indenture, may restrict us from adopting any of these alternatives. The failure to generate sufficient cash flow or to achieve any of these alternatives could have a material adverse effect on our business and our ability to pay the amounts due under the Senior Secured Notes.

The Indenture imposes significant operating and financial restrictions, which may prevent us from pursuing certain business opportunities and taking certain actions.

The Indenture imposes significant operating and financial restrictions on us. These restrictions limit or prohibit, among other things, our ability to:

· incur additional indebtedness;

· repay subordinated indebtedness prior to stated maturities;

· pay dividends on or redeem or repurchase our stock;

· issue capital stock;

· make investments;

· create liens;

· sell certain assets or merge with or into other companies;

· enter into certain transactions with stockholders and affiliates;

· sell stock in our subsidiaries;

· restrict dividends, distributions or other payments from our subsidiaries; and

· otherwise conduct necessary corporate activities.

These restrictions could adversely affect our ability to finance our future operations or capital needs and pursue available business opportunities. A breach of any of these restrictions could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and fees, to be immediately due and payable and proceed against any collateral securing that indebtedness. Acceleration of our other indebtedness could result in a default under the terms of the Indenture and our assets may not be sufficient to satisfy our obligations under our indebtedness, including the Senior Secured Notes.

Our parent companies may take actions that conflict with bondholder, franchisee and other interests.

As a result of its direct control of our ultimate parent company and indirect control of MFH and MFOC, Capricorn II and Capricorn III together control the power to elect our managers, to appoint members of management and to approve all actions requiring the approval of the holders of our common interests, including adopting amendments to our certificate of formation and limited liability company agreement as well as approving mergers, acquisitions or sales of all or substantially all of our assets. The actions may conflict with the interests of bondholders, franchisees and others. Similarly, the interests of our parent companies could conflict with other stakeholder interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of MFOC as a holder of equity might conflict with holders of the Senior Secured Notes. Our parent companies also may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might materially adversely affect our financial condition and results of operations.

Item 6. Exhibits

10.71†		Distribution Services Agreement, dated March 1, 2006, between TCBY Systems, LLC and Kaleel Brothers Inc.

10.72†		Distribution Services Agreement, dated July 17, 2006, between TCBY Systems, LLC and Cheney Brothers, Inc.

10.73†		Distribution Services Agreement, dated August 1, 2006, between TCBY Systems, LLC and Pate Dawson Company.

10.74†		Distribution Services Agreement, dated September 7, 2006, between TCBY Systems, LLC and The Merchants Company.

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Accounting Officer Pursuant to Rule 13a-15(e) or 15d-15(e) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Chief Executive Officer and Chief Accounting Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

† Filed herewith. Confidential treatment will be requested as to certain portions. The term “[CONFIDENTIAL]” as used throughout the indicated exhibit means that material has been omitted and will be filed separately with the Commission.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MRS. FIELDS FAMOUS BRANDS, LLC


/s/ Stephen Russo		November 10, 2006
Stephen Russo		Date
President and Chief Executive Officer
(Principal Executive Officer)


/s/ Mark C. McBride		November 10, 2006
Mark C. McBride		Date
Chief Accounting Officer
(Principal Financial and Accounting Officer)

MRS FIELDS FAMOUS BRANDS LLC 10-Q