UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission file number 1-11313

CKE RESTAURANTS, INC.

Registrant’s telephone number, including area code: (805) 745-7500

Former Name, Former Address and Former Fiscal Year, if changed since last report.

     Indicate by checkmark 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 þ No o

     Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

     As of June 15, 2005, 59,471,509 shares of the Registrant’s Common Stock were outstanding.

CKE RESTAURANTS, INC. AND SUBSIDIARIES

INDEX

2

PART 1. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CKE RESTAURANTS, INC. AND SUBSIDIARIES

See Accompanying Notes to Condensed Consolidated Financial Statements

3

CKE RESTAURANTS, INC. AND SUBSIDIARIES

(In thousands, except per share amounts)
(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements

4

CKE RESTAURANTS, INC. AND SUBSIDIARIES

(In thousands)
(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements

5

CKE RESTAURANTS, INC. AND SUBSIDIARIES

See Accompanying Notes to Condensed Consolidated Financial Statements

6

CKE RESTAURANTS, INC. AND SUBSIDIARIES

NOTE (1) BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

     CKE Restaurants, Inc. (“CKE” or the “Company”), through its wholly-owned subsidiaries, owns, operates, franchises and licenses the Carl’s Jr.®, Hardee’s®, La Salsa Fresh Mexican Grill® (“La Salsa”) and The Green Burrito® (“Green Burrito”) concepts. References to CKE or the Company throughout these Notes to Condensed Consolidated Financial Statements are made using the first person notations of “we,” “us” and “our.”

     Carl’s Jr. restaurants are primarily located in the Western United States. Hardee’s restaurants are located throughout the Southeastern and Midwestern United States. La Salsa restaurants are primarily located in California. Green Burrito restaurants are located in California, primarily in dual-brand Carl’s Jr. restaurants. As of May 23, 2005, our system-wide restaurant portfolio consisted of:

     The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of CKE and our wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America, the instructions to Form 10-Q, and Article 10 of Regulation S-X. These statements should be read in conjunction with the audited Consolidated Financial Statements presented in our Annual Report on Form 10-K for the fiscal year ended January 31, 2005. In the opinion of management, all adjustments consisting of normal recurring accruals necessary for a fair presentation of financial position and results of operations for the interim periods presented have been reflected herein. The results of operations for such interim periods are not necessarily indicative of results for the full year or for any future period.

     For clarity of presentation, we generally label all fiscal year ends as fiscal year ended January 31.

     Prior year amounts in the Condensed Consolidated Financial Statements have been reclassified to conform with current year presentation.

Consolidation of Variable Interest Entities

     In accordance with Financial Accounting Standards Board (“FASB”) Interpretation 46, Consolidation of Variable Interest Entities – an interpretation of Accounting Research Bulletin (“ARB”) No. 51 (“FIN 46R”), which we adopted on May 17, 2004, we consolidate certain variable interest entities (“VIEs”) within our Condensed Consolidated Financial Statements as of May 23, 2005, and January 31, 2005, based on our determination that we are the primary beneficiaries of such VIEs.

     We consolidate one franchise entity that operates six Hardee’s restaurants. We sublease to this franchise entity all of its six operating locations and a substantial portion of its operating equipment. Because the principals did not invest a significant amount of equity, the legal entity within which this franchise operates is considered to be inadequately capitalized and, as a result, is a VIE. We determined we are the primary beneficiary of this VIE. The assets and liabilities of this entity are included in the accompanying Condensed Consolidated Balance Sheets as of May 23, 2005, and January 31, 2005, and are not significant. The operating results of this franchise entity are included within the accompanying Condensed Consolidated Statement of Operations for the fiscal quarter ended May 23, 2005, and are not significant. The minority interest in the income of this franchise entity is classified in other income, net, in the accompanying Condensed Consolidated Statement of Operations for the fiscal quarter ended May 23, 2005, and in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheet as of May 23, 2005, and also is not significant. We have no rights to the assets, nor do we have any obligation with respect to the liabilities, of this franchise entity. None of our assets serve as collateral for the creditors of this franchisee or any of our other franchisees.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

     We also consolidate the Hardee’s cooperative advertising funds, which consist of the Hardee’s National Advertising Fund (“HNAF”) and approximately 85 local advertising cooperative funds (“Co-op Funds”) because we have determined we are the primary beneficiaries of these funds. We have included $22,064 of advertising fund assets, restricted, and advertising fund liabilities in the accompanying Condensed Consolidated Balance Sheets as of May 23, 2005 and January 31, 2005.

Stock-Based Compensation

     At January 31, 2005, we had several stock-based employee compensation plans in effect, which are described more fully in Note 22 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended January 31, 2005. We account for those plans under the recognition and measurement principles of Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees (“APB 25”), and related FASB interpretations. No stock-based employee compensation cost is reflected in net income for options granted under these plans, as all such options had an exercise price equal to the market value of the underlying common stock on the date of grant.

     In December 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“SFAS 148”). SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation (“SFAS 123”), to provide alternative methods of transition for a voluntary change to the fair-value method for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Disclosures required by this standard are included below.

     For purposes of the following pro forma disclosures required by SFAS 148 and SFAS 123, the fair value of each option has been estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility, the risk-free rate and the expected term of the option. Because our stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the value of an estimate, in management’s opinion, the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of our employee stock options.

     No options were granted in the sixteen weeks ended May 23, 2005. The assumptions used for grants in the sixteen weeks ended May 17, 2004, are as follows:

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

     The assumptions used to determine the fair value of each option granted are highly subjective. Changes in the assumptions used would affect the fair value of the options granted in the sixteen weeks ended May 17, 2004, as follows:

     The following tables reconcile reported net income to pro forma net income assuming compensation expense for stock-based compensation had been recognized in accordance with SFAS 123:

NOTE (2) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

     In December 2004, the FASB issued SFAS 123 (Revised 2004), Share-Based Payment (“SFAS 123R”), which replaces SFAS 123, supersedes APB 25 and related interpretations and amends SFAS 95, Statement of Cash Flows. The provisions of SFAS 123R are similar to those of SFAS 123; however, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. Fair value of share-based awards will be determined using option-pricing models (e.g. Black-Scholes or binomial models) and assumptions that appropriately reflect the specific circumstances of the awards. Compensation cost will be recognized over the vesting period based on the fair value of awards that actually vest.

     We will be required to choose between the modified-prospective and modified-retrospective transition alternatives in adopting SFAS 123R. Under the modified-prospective-transition method, compensation cost would be recognized in financial statements issued subsequent to the date of adoption for all shared-based payments granted, modified or settled after the date of adoption, as well as for any unvested awards that were granted prior to the date of adoption. As we previously adopted only the pro forma disclosure provisions of SFAS 123, under this method we would recognize compensation cost relating to the unvested portion of awards granted prior to the date of adoption using the same estimate of the grant-date fair value and the same attribution method used to determine the pro forma disclosures under SFAS 123. Under the modified-retrospective-transition method, compensation cost

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

would be recognized in a manner consistent with the modified-prospective-transition method; however, prior period financial statements would also be restated by recognizing compensation cost as previously reported in the pro forma disclosures under SFAS 123. The restatement provisions can be applied to either (i) all periods presented or (ii) to the beginning of the fiscal year in which SFAS 123R is adopted.

     SFAS 123R is effective at the beginning of the first annual period beginning after June 15, 2005 (fiscal 2007 for us) and early adoption is encouraged. We will evaluate the use of certain option-pricing models as well as the assumptions to be used in such models. When such evaluation is complete, we will determine the transition method to use and the timing of adoption. We do not currently anticipate that the impact on net income on a full year basis of the adoption of SFAS 123R will be significantly different from the historical pro forma impacts as disclosed in accordance with SFAS 123.

NOTE (3) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

     In October 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue 04-1, Accounting for Preexisting Relationships between the Parties to a Business Combination (“EITF 04-1”). EITF 04-1 requires that a business combination between two parties that have a preexisting relationship be evaluated to determine if a settlement of a preexisting relationship exists. EITF 04-1 also requires that certain reacquired rights (including the rights to the acquirer’s trade name under a franchise agreement) be recognized as intangible assets apart from goodwill. However, if a contract giving rise to the reacquired rights includes terms that are favorable or unfavorable when compared to pricing for current market transactions for the same or similar items, EITF 04-1 requires that a settlement gain or loss should be measured as the lesser of (i) the amount by which the contract is favorable or unfavorable to market terms from the perspective of the acquirer or (ii) the stated settlement provisions of the contract available to the counterparty to which the contract is unfavorable.

     EITF 04-1 was effective prospectively for business combinations consummated in reporting periods beginning after October 13, 2004 (our fiscal quarter beginning November 2, 2004). EITF 04-1 applies to acquisitions of restaurants we may make from our franchisees or licensees. We currently attempt to have our franchisees or licensees enter into standard franchise or license agreements for the applicable brand and/or market when renewing or entering into a new agreement. However, in certain instances franchisees or licensees have existing agreements that possess terms, including royalty rates, that differ from our current standard agreements for the applicable brand and/or market. If in the future we were to acquire a franchisee or licensee with such an existing agreement, we would be required to record a settlement gain or loss at the date of acquisition. The amount and timing of any such gains or losses we might record is dependent upon which franchisees or licensees we might acquire and when they are acquired. Accordingly, any impact cannot be currently determined.

NOTE (4) INTANGIBLE ASSETS

     The table below presents identifiable, definite-lived intangible assets as of May 23, 2005, and January 31, 2005:

     Amortization expense related to identifiable definite-lived intangible assets was $494 and $733 for the sixteen week periods ended May 23, 2005, and May 17, 2004, respectively. These intangible assets are amortized over

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

periods of six to 20 years and are included in other assets, net in the accompanying Condensed Consolidated Balance Sheets.

NOTE (5) INDEBTEDNESS AND INTEREST EXPENSE

     On June 2, 2004, we amended and restated our senior credit facility (the “Facility”) to provide for a $380,000 senior secured credit facility consisting of a $150,000 revolving credit facility and a $230,000 term loan. The Facility is collateralized by a lien on all of our personal property assets and by certain restaurant property deeds of trust. The revolving credit facility matures on May 1, 2007, and includes an $85,000 letter of credit sub-facility. The principal amount of the term loan is scheduled to be repaid in quarterly installments, with a balloon payment of the remaining principal balance at maturity on July 2, 2008. The Facility also requires term loan prepayments based upon an annual excess cash flow formula, as defined therein. Subject to certain conditions as defined in the Facility, the maturity of the term loan may be extended to May 1, 2010. We used a portion of the proceeds from the $230,000 term loan to repay the $10,137 remaining balance of the prior Facility term loan. On July 2, 2004, we used additional proceeds from the $230,000 term loan to redeem $200,000 of our 9.125% Senior Subordinated Notes due 2009 (“Senior Notes”).

     During the sixteen weeks ended May 23, 2005, we voluntarily prepaid $15,500 of the $230,000 term loan, in addition to the $329 regularly scheduled quarterly payment. As of May 23, 2005, we had (i) borrowings outstanding under the term loan and revolving portions of the Facility of $122,822 and $7,500, respectively, (ii) outstanding letters of credit under the revolving portion of the Facility of $62,728, and (iii) availability under the revolving portion of the Facility of $79,772.

     The terms of the Facility include certain restrictive covenants. Among other things, these covenants restrict our ability to incur debt or liens on our assets, make any significant change in our corporate structure or the nature of our business, dispose of assets in the collateral pool securing the Facility, prepay certain debt, engage in a change of control transaction without the member banks’ consents and make investments or acquisitions. The Facility is collateralized by a lien on all of our personal property assets and liens on certain restaurant properties.

     As of May 23, 2005, the applicable interest rate on the term loan was LIBOR plus 2.00%, or 5.125%, per annum. For the revolving loan portion of the Facility, the applicable interest rate on $2,500 was LIBOR plus 2.25%, or 5.31%, per annum and the applicable rate on the remaining $5,000 was Prime plus 1.00%, or 7.00%, per annum. We also incur fees on outstanding letters of credit under the Facility at a rate of 2.25% per annum.

     The Facility required us to enter into interest rate protection agreements in an aggregate notional amount of at least $70,000 for a term of at least three years. Pursuant to this requirement, on July 26, 2004, we entered into two interest rate cap agreements in an aggregate notional amount of $70,000. Under the terms of each agreement, if LIBOR exceeds 5.375% on the measurement date for any quarterly period, we will receive payments equal to the amount LIBOR exceeds 5.375%, multiplied by (i) the notional amount of the agreement and (ii) the fraction of a year represented by the quarterly period. The agreements expire on July 28, 2007. The agreements were not designated as cash flow hedges under the terms of SFAS 133, Accounting for Derivative Instruments and Hedging Activities. Accordingly, the change in the fair value of the $371 of interest rate cap premiums is recognized quarterly in interest expense in the Condensed Consolidated Statements of Operations. During the quarter ended May 23, 2005, we recorded $47 of interest expense to reduce the carrying value of the interest rate cap premiums to their fair value of $61 at May 23, 2005. As a matter of policy, we do not use derivative instruments unless there is an underlying exposure.

     Subject to the terms of the Facility, we may make annual capital expenditures in the amount of $45,000, plus 80% of the amount of actual EBITDA (as defined) in excess of $110,000. We may also carry forward any unused capital expenditure amounts to the following year. Based on these terms, the Facility permits us to make capital expenditures of at least $63,836 in fiscal 2006, which could increase further based on our performance versus the EBITDA formula described above.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

     The Facility also permits us to repurchase our common stock in an amount up to approximately $68,000 as of May 23, 2005. In addition, the dollar amount of common stock that we may purchase is increased each year by a portion of excess cash flow (as defined) during the term of the Facility. Our Board of Directors has authorized a program to allow us to repurchase up to $20,000 of our common stock. Based on the Board of Directors authorization and the amount of repurchase of our common stock that we have already made thereunder, as of May 23, 2005, we are permitted to make additional repurchases of our common stock up to $14,441.

     Until recently, the Facility prohibited us from paying cash dividends. On April 21, 2005, we amended the Facility to permit us to pay cash dividends on substantially the same terms as we have been and are permitted to repurchase shares of our common stock. This amendment to the Facility also resulted in a 0.50% decrease in the borrowing rate under our term loan, a 0.25% decrease in the borrowing rate on revolving loans and a 0.25% decrease in our letter of credit fee rate. On April 25, 2005, we announced our Board of Directors’ declaration of a cash dividend of $0.04 per share of our common stock, or a total of $2,361, which was paid on June 13, 2005, to our stockholders of record on May 23, 2005, and we further announced our intention to pay a regular quarterly cash dividend.

     The Facility contains financial performance covenants, which include a minimum EBITDA requirement, a minimum fixed charge coverage ratio, and maximum leverage ratios. We were in compliance with these covenants and all other requirements of the Facility as of May 23, 2005.

     The full text of the contractual requirements imposed by the Facility is set forth in the Sixth Amended and Restated Credit Agreement, dated as of June 2, 2004, and the amendments thereto, which we have filed with the Securities and Exchange Commission, and in the ancillary loan documents described therein. Subject to cure periods in certain instances, the lenders under our Facility may demand repayment of borrowings prior to stated maturity upon certain events, including if we breach the terms of the agreement, suffer a material adverse change, engage in a change of control transaction, suffer certain adverse legal judgments, in the event of specified events of insolvency or if we default on other significant obligations. In the event the Facility is declared accelerated by the lenders (which can occur only if we are in default under the Facility), the Company’s 2023 Convertible Notes (described below) may also become accelerated under certain circumstances and after all cure periods have expired.

     On September 29, 2003, we completed an offering of $105,000 of our 4% Convertible Subordinated Notes due 2023 (“2023 Convertible Notes”), and used nearly all of the net proceeds of the offering to repurchase $100,000 of our then-outstanding 4.25% Convertible Subordinated Notes due 2004 (the “2004 Convertible Notes”). The 2023 Convertible Notes bear interest at 4.0% annually, payable in semiannual installments due April 1 and October 1 each year, are unsecured general obligations of ours, and are contractually subordinate in right of payment to certain other of our obligations, including the Facility. On October 1 of 2008, 2013 and 2018, the holders of the 2023 Convertible Notes have the right to require us to repurchase all or a portion of the notes at 100% of the face value plus accrued interest. On October 1, 2008 and thereafter, we have the right to call all or a portion of the notes at 100% of the face value plus accrued interest. Under the terms of the 2023 Convertible Notes, such notes become convertible into our common stock at a conversion price of approximately $8.89 per share at any time after our common stock has a closing sale price of at least $9.78 per share, which is 110% of the conversion price per share, for at least 20 days in a period of 30 consecutive trading days ending on the last trading day of a calendar quarter. As a result of the daily closing sales price levels on our common stock during the second calendar quarter of 2004, the 2023 Convertible Notes became convertible into our common stock effective July 1, 2004, and will remain convertible throughout the remainder of their term.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

     Interest expense consisted of the following:

NOTE (6) FACILITY ACTION CHARGES, NET

     The following transactions have been recorded in the accompanying Condensed Consolidated Statements of Operations as facility action charges, net:

(i)		impairment of long-lived assets for under-performing restaurants;
(ii)		store closure costs;
(iii)		gains (losses) on the sale of restaurants; and
(iv)		amortization of discount related to estimated liability for closing restaurants.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

     The components of facility action charges, net, are as follows:

     The following table summarizes the activity in the estimated liability for closing restaurants:

NOTE (7) INCOME PER SHARE

     We present “basic” and “diluted” income per share. Basic income per share represents net income divided by weighted-average shares outstanding. Diluted income per share represents net income divided by weighted-average shares outstanding, including all potentially dilutive securities and excluding all potentially anti-dilutive securities.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

     The dilutive effect of stock options and warrants is determined using the “treasury stock” method, whereby exercise is assumed at the beginning of the reporting period and proceeds from such exercise, including tax benefits therefrom, are assumed to be used to purchase our common stock at the average market price during the period. The dilutive effect of convertible debt is determined using the “if-converted” method, whereby interest charges and amortization of debt issuance costs, net of taxes, applicable to the convertible debt are added back to income and the convertible debt is assumed to have been converted at the beginning of the reporting period, with the resulting common shares being included in weighted-average shares.

     In conjunction with the acquisition of Santa Barbara Restaurant Group (“SBRG”), we assumed the options outstanding under various SBRG stock plans. We also assumed warrants to purchase approximately 982,000 shares of the Company’s common stock. Approximately 491,000 of the warrants were exercisable at $14.26 per share, the remaining approximately 491,000 of the warrants were exercisable at $15.28 per share. During the sixteen weeks ended May 23, 2005, approximately 86,000 warrants were exercised. The remaining warrants expired on May 1, 2005.

     The table below presents the computation of basic and diluted earnings per share for the sixteen-week periods ended May 23, 2005, and May 17, 2004.

     The following table presents the number of potentially dilutive shares, in thousands, of our common stock excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive:

NOTE (8) SEGMENT INFORMATION

     We are principally engaged in developing, operating and franchising our Carl’s Jr. and Hardee’s quick-service restaurants and La Salsa fast-casual restaurants, each of which is considered an operating segment that is managed and evaluated separately. We evaluate the performance of our segments and allocate resources to them based on several factors, of which the primary financial measure is segment operating income or loss. General and

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

administrative expenses are allocated to each segment based on management’s analysis of the resources applied to each segment. Interest expense related to the Facility, Senior Notes, 2004 Convertible Notes and 2023 Convertible Notes has been allocated to Hardee’s based on the use of funds. Certain amounts that we do not believe would be proper to allocate to the operating segments are included in Other (i.e., gains or losses on sales of long-term investments and the operating results of consolidated variable interest entities). The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended January 31, 2005).

NOTE (9) NET ASSETS HELD FOR SALE

     In conjunction with the acquisition of SBRG in fiscal 2003, we made the decision to divest Timber Lodge as the concept did not fit with our core concepts of quick-service and fast-casual restaurants. The sale of Timber Lodge was completed on September 3, 2004.

     The results of Timber Lodge included in the accompanying Condensed Consolidated Statement of Operations as discontinued operations for the sixteen-week period ended May 17, 2004, are as follows:

     The operating loss for Timber Lodge for the sixteen weeks ended May 17, 2004, includes impairment charges of $617 to reduce the carrying value of Timber Lodge to fair value.

     As of May 23, 2005, assets held for sale consisted of surplus restaurant properties.

NOTE (10) COMMITMENTS AND CONTINGENT LIABILITIES

     In prior years, as part of our refranchising program, we sold existing restaurants to franchisees. In some cases, these restaurants were on leased sites. We entered into sublease agreements with these franchisees but remained principally liable for the lease obligations. We account for the sublease payments received as franchising rental income and the payments on the leases as rental expense in franchising expense. As of May 23, 2005, the present value of our lease obligations under the remaining master leases’ primary terms is $130,020. Franchisees may, from

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

time to time, experience financial hardship and may cease payment on the sublease obligation to us. The present value of our exposure from franchisees characterized as under financial hardship is $21,725, net of $1,165 of accruals within our closed store reserves included in other current liabilities and other long-term liabilities within the accompanying Condensed Consolidated Balance Sheets as of May 23, 2005.

     Pursuant to the Facility, a letter of credit sub-facility in the amount of $85,000 was established (see Note 5). Several standby letters of credit are outstanding under this sub-facility, which secure our potential workers’ compensation obligations and general, auto and health liability obligations. We are required to provide letters of credit each year, or set aside a comparable amount of cash or investment securities in a trust account, based on our existing claims experience. As of May 23, 2005, we had outstanding letters of credit of $62,728 under the revolving portion of the Facility.

     As of May 23, 2005, we had unconditional purchase obligations in the amount of $71,568, which primarily include contracts for goods and services related to restaurant operations and contractual commitments for marketing and sponsorship arrangements.

     We have employment agreements with certain key executives (the “Agreements”). These Agreements include provisions for lump sum payments to the executives that may be triggered by the termination of employment under certain conditions, as defined in each Agreement. If the Agreements were triggered, each affected executive would receive an amount ranging from one to three times his base salary for the remainder of his employment term plus, in some instances, a pro-rata portion of the bonus in effect for the year in which the termination occurs. Additionally, all options granted to the affected executives which have not vested as of the date of termination would vest immediately. The Agreements have terms of three years. If all of these Agreements had been triggered as of May 23, 2005, the Company would have made payments of approximately $6,932.

     We are, from time to time, the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect us and our restaurants, regardless of whether such allegations are valid or whether we are liable. We are also, at times, the subject of complaints or allegations from employees, former employees, franchisees, vendors and landlords.

     As of May 23, 2005, we had recorded an accrued liability for contingencies related to litigation in the amount of $3,700, which relates to certain employment, real estate or other business disputes. Certain of the matters for which we maintain an accrued liability for litigation pose risk of loss significantly above the accrued amounts. In addition, as of January 31, 2005, we estimated the liability for those losses related to other litigation claims that, in accordance with SFAS 5, Accounting for Contingencies, are not accrued, but that we believe are reasonably possible to result in an adverse outcome, to be in the range of $95 to $190.

     For several years, we offered a program whereby we guaranteed the loan obligations of certain franchisees to independent lending institutions. Franchisees have used the proceeds from such loans to acquire certain equipment and pay the costs of remodeling Carl’s Jr. restaurants. In the event a franchisee defaults under the terms of a program loan, we are obligated, within 15 days following written demand by the lending institution, to purchase such loan or assume the franchisee’s obligation thereunder by executing an assumption agreement and seeking a replacement franchisee for the franchisee in default. By purchasing such loan, we may seek recovery against the defaulting franchisee. As of May 23, 2005, the principal outstanding under program loans guaranteed by us totaled approximately $1,380, with maturity dates ranging from 2005 through 2009. As of May 23, 2005, we had no accrued liability for expected losses under this program and were not aware of any outstanding loans being in default.

     We also guarantee an obligation of a former subsidiary to a related party lending institution associated with an equipment leasing transaction. As of May 23, 2005, the remaining amount due to the lender under the equipment lease is approximately $44. We maintain an accrual for the estimated fair value of our guarantee, which is equal to 50% of the remaining obligation.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)

NOTE (11) SUBSEQUENT EVENT

     In June 2003, the Superior Court in Orange County, California (the “Court”) ruled that we were entitled to reimbursement from DeltaKor Investments, Inc. (“DeltaKor”) for legal fees we incurred to defend a claim DeltaKor had brought against us. After subsequent negotiations, DeltaKor’s principal shareholder and an affiliate company and we entered into a binding, verbal settlement on the record before the Court on June 14, 2005, pursuant to which they would reimburse us for $600 of legal fees incurred via three equal installments of $200, plus interest, payable in July, September and December of 2005. We will record the benefits of this contingent gain as offsets to our general and administrative expenses upon collection of each installment.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands)

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

Introduction and Safe Harbor Disclosure

     CKE Restaurants, Inc. and its subsidiaries (collectively referred to as the “Company”) is comprised of the operations of Carl’s Jr., Hardee’s, La Salsa, and Green Burrito, which is primarily operated as a dual-brand concept with Carl’s Jr. quick-service restaurants. The following Management’s Discussion and Analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements contained herein, and our Annual Report on Form 10-K for the fiscal year ended January 31, 2005. All Note references herein refer to the accompanying Notes to Condensed Consolidated Financial Statements.

     Matters discussed in this Form 10-Q contain forward-looking statements relating to future plans and developments, financial goals, and operating performance that are based on our current beliefs and assumptions. Such statements are subject to risks and uncertainties. Factors that could cause our results to differ materially from those described include, but are not limited to, whether or not restaurants will be closed and the number of restaurant closures, consumers’ concerns or adverse publicity regarding our products, the effectiveness of operating initiatives and advertising and promotional efforts (particularly at the Hardee’s brand), changes in economic conditions or prevailing interest rates, changes in the price or availability of commodities, availability and cost of energy, workers’ compensation and general liability premiums and claims experience, changes in our suppliers’ ability to provide quality and timely products, delays in opening new restaurants or completing remodels, severe weather conditions, the operational and financial success of our franchisees, our franchisees’ willingness to participate in our strategy, the availability of financing for us and our franchisees, unfavorable outcomes in litigation, changes in accounting policies and practices, effectiveness of internal controls over financial reporting, new legislation or government regulation (including environmental laws), the availability of suitable locations and terms for the sites designed for development, and other factors as discussed in our filings with the Securities and Exchange Commission.

     Forward-looking statements speak only as of the date they are made. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law or the rules of the New York Stock Exchange.

New Accounting Pronouncements Not Yet Adopted

     See Note 2 of Notes to Condensed Consolidated Financial Statements.

Adoption of New Accounting Pronouncements

     See Note 3 of Notes to Condensed Consolidated Financial Statements.

Critical Accounting Policies

     Our reported results are impacted by the application of certain accounting policies that require us to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our quarterly or annual results of operations and financial condition. Specific risks associated with these critical accounting policies are described in the following paragraphs.

     For all of these policies, we caution that future events rarely develop exactly as expected, and the best estimates routinely require adjustment. Our most significant accounting policies require:

•

estimation of future cash flows used to assess the recoverability of long-lived assets, including goodwill, and to establish the estimated liability for closing restaurants and subsidizing lease payments of franchisees;

•

estimation, using actuarially determined methods, of our self-insured claim losses under our workers’ compensation, general and auto liability insurance programs;

•

determination of appropriate estimated liabilities for loss contingencies;

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

•

determination of lease terms for purposes of evaluating leases for capital versus operating lease treatment, establishing depreciable lives for leasehold improvements and establishing straight-line rent expense periods;

•

estimation of the appropriate allowances associated with franchise and license receivables and liabilities for franchise subleases;

•

determination of the appropriate assumptions to use to estimate the fair value of stock-based compensation for purposes of disclosures of pro forma net income; and

•

estimation of our net deferred income tax asset valuation allowance.

     Descriptions of these critical accounting policies follow.

Impairment of Property and Equipment and Other Amortizable Long-Lived Assets Held and Used, Held for Sale or To Be Disposed of Other Than By Sale

     We evaluate the carrying value of individual restaurants when the operating results have reasonably progressed to a point to adequately evaluate the probability of continuing operating losses or upon expectation that a restaurant will be sold or otherwise disposed of before the end of its previously estimated useful life. We generally estimate the useful life of restaurants on owned property to be 20 to 35 years and estimate the remaining useful life of restaurants subject to leases to range from the end of the lease term then in effect to the end of such lease term including all option periods. We then estimate the future estimated cash flows from operating the restaurant over its estimated useful life. In making these judgments, we consider the period of time since the restaurant was opened or remodeled, and the trend of operations and expectations for future sales growth. We also make judgments about future same-store sales and the operating expenses and estimated useful life that we would expect with such level of same-store sales and related estimated useful life. We employ a probability-weighted approach wherein we estimate the effectiveness of future sales and marketing efforts on same-store sales. If an estimate of the fair value of our assets becomes necessary, we typically base such estimate on forecasted cash flows discounted at the applicable restaurant concept’s weighted average cost of capital.

     During the second and fourth quarter of each fiscal year, we perform an asset recoverability analysis through which we estimate future cash flows for each of our restaurants based upon experience gained, current intentions about refranchising restaurants and closures, expected sales trends, internal plans and other relevant information. As the operations of restaurants opened or remodeled in recent years progress to the point that their profitability and future prospects can adequately be evaluated, additional restaurants will become subject to review and to the possibility that impairments exist.

     Same-store sales are the key indicator used to estimate future cash flow for evaluating recoverability. For each of our restaurant concepts, to evaluate recoverability of restaurant assets we estimate same-store sales will increase at an annual average rate of approximately 3.0% over the remaining useful life of the restaurant. The inflation rate assumed in making this calculation is 2.0%. If our same-store sales do not perform at or above our forecasted level, or cost inflation exceeds our forecast and we are unable to recover such costs through price increases, the carrying value of certain of our restaurants may prove to be unrecoverable and we may incur additional impairment charges in the future.

     Typically, restaurants are operated for three years before we test them for impairment. Also, restaurants typically are not tested for two years following a remodel. We believe this provides the restaurant sufficient time to establish its presence in the market and build a customer base. If we were to test all restaurants for impairment without regard to the amount of time the restaurants were operating, the total asset impairment would increase substantially. In addition, if recently opened or remodeled restaurants do not eventually establish stronger market

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

presence and build a customer base, the carrying value of certain of these restaurants may prove to be unrecoverable and we may incur additional impairment charges in the future.

     As of May 23, 2005, we had a total of 166 restaurants among our three major restaurant concepts that generated negative cash flows on a trailing one-year basis. These restaurants had combined net book values of $32,540. Included within these totals are 28 restaurants with combined net book values of $11,376 that have not been tested for impairment because they had not yet been operated for a sufficient period of time as of our most recent comprehensive semi-annual asset quality review in the fourth quarter of fiscal 2005. If these negative cash flow restaurants were not to begin generating positive cash flows within a reasonable period of time, the carrying value of these restaurants may prove to be unrecoverable and we may recognize additional impairment charges in the future.

Impairment of Goodwill

     At the reporting unit level, goodwill is tested for impairment at least annually during the first quarter of our fiscal year, and on an interim basis if an event or circumstance indicates that it is more likely than not impairment may have occurred. We consider the reporting unit level to be the brand level since the components (e.g., restaurants) within each brand have similar economic characteristics, including products and services, production processes, types or classes of customers and distribution methods. The impairment, if any, is measured based on the estimated fair value of the brand. Fair value can be determined based on discounted cash flows, comparable sales or valuations of other restaurant brands. Impairment occurs when the carrying amount of goodwill exceeds its estimated fair value.

     The most significant assumptions we use in this analysis are those made in estimating future cash flows. In estimating future cash flows, we use the assumptions in our strategic plan for items such as same-store sales, store count growth rates, and the discount rate we consider to be the market discount rate for acquisitions of restaurant companies and brands.

     If our assumptions used in performing the impairment test prove inaccurate, the fair value of the brands may ultimately prove to be significantly lower, thereby causing the carrying value to exceed the fair value and indicating an impairment has occurred. During the first quarter of fiscal year 2006, we evaluated the Carl’s Jr. brand, the only one of our brands for which we currently carry goodwill, through which we concluded that the fair value of the net assets of Carl’s Jr. exceeded the carrying value, and thus no impairment charge was required. As of May 23, 2005, we have $22,649 in goodwill recorded on the Condensed Consolidated Balance Sheet, which relates to Carl’s Jr.

Estimated Liability for Closing Restaurants

     We make decisions to close restaurants based on prospects for estimated future profitability, and sometimes we are forced to close restaurants due to circumstances beyond our control (e.g., a landlord’s refusal to negotiate a new lease). Our restaurant operators evaluate each restaurant’s performance no less frequently than the second and fourth quarter of each fiscal year. When restaurants continue to perform poorly, we consider the demographics of the location, as well as the likelihood of being able to improve an unprofitable restaurant. Based on the operator’s judgment and a financial review, we estimate the future cash flows. If we determine that the restaurant will not, within a reasonable period of time, operate at break-even cash flow or be profitable, and we are not contractually obligated to continue operating the restaurant, we may close the restaurant.

     The estimated liability for closing restaurants on properties vacated is based on the term of the lease and the lease termination fee we expect to pay, as well as estimated maintenance costs until the lease has been abated. The amount of the estimated liability established is the present value of these estimated future payments. The interest rate used to calculate the present value of these liabilities is based on our incremental borrowing rate at the time the liability is established. The related discount is amortized and shown in facility action charges, net, in our Condensed Consolidated Statements of Operations.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

     A significant assumption used in determining the amount of the estimated liability for closing restaurants is the amount of the estimated liability for future lease payments on vacant restaurants, which we determine based on our broker’s assessment of its ability to either successfully negotiate early terminations of our lease agreements with the lessors or sublease the properties. Additionally, we estimate the cost to maintain leased and owned vacant properties until the lease has been abated or the owned property has been sold. If the costs to maintain properties increase, or it takes longer than anticipated to sell properties or sublease or terminate leases, we may need to record additional estimated liabilities. If the leases on the vacant restaurants are not terminated or subleased on the terms we used to estimate the liabilities, we may be required to record losses in future periods. Conversely, if the leases on the vacant restaurants are terminated or subleased on more favorable terms than we used to estimate the liabilities, we reverse previously established estimated liabilities, resulting in an increase in operating income. The present value of our operating lease payment obligations on all closed restaurants is approximately $10,021, which represents the discounted amount we would be required to pay if we are unable to enter into sublease agreements or terminate the leases prior to the terms required in the lease agreements. However, it is our experience that we can often terminate those leases for less than that amount, or sublease the property and, accordingly, we have recorded an estimated liability for operating lease obligations of $6,415 as of May 23, 2005.

Estimated Liability for Self-Insurance

     We are self-insured for a portion of our current and prior years’ losses related to workers’ compensation, general and auto liability insurance programs. We have obtained stop loss insurance for individual workers’ compensation, general and auto liability claims over $500. Insurance accrued liabilities are accounted for based on the present value of actuarial estimates of the amount of incurred and unpaid losses, based approximately on a risk-free interest rate, which we estimate to be 4.5% as of May 23, 2005. These estimates rely on actuarial observations of historical claim loss development. The actuary, in determining the estimated liability, bases the assumptions on the average historical losses on claims we have incurred. The actual loss development may be better or worse than the development we estimated in conjunction with the actuary. In that event, we will modify the reserve. As such, if we experience a higher than expected number of claims or the costs of claims rise more than expected, then we may, in conjunction with the actuary, adjust the expected losses upward and our future self-insurance expenses will rise.

     Within our semi-annual actuary reports, our actuary provides a range of estimated unpaid losses for each insurance category. Using these estimates, we record adjustments to our insurance accrued liabilities, if necessary, to bring each accrual balance within the actuary’s related range. If our accrued liability exceeds the high end of the range, we reduce the insurance accrued liability to the high end of the range. If our accrued liability is below the low end of the range, we record a charge to increase the insurance accrued liability to the low end of the range. Then, based upon projected future self-insurance expenses and adjusted insurance accrual balances relative to the midpoint of the actuary’s range, we adjust our accrual rates for each insurance category prospectively to bring the respective accrued liabilities toward the midpoints of the actuary’s respective ranges.

Loss Contingencies

     We maintain accrued liabilities for contingencies related to litigation. We account for contingent obligations in accordance with SFAS 5, Accounting for Contingencies (“SFAS 5”), which requires that we assess each contingency to determine estimates of the degree of probability and range of possible settlement. Those contingencies that are deemed to be probable and where the amount of such settlement is reasonably estimable are accrued in our Condensed Consolidated Financial Statements. If only a range of loss can be determined, with no amount in the range representing a better estimate than any other amount within the range, we accrue to the low end of the range. In accordance with SFAS 5, as of May 23, 2005, we have recorded an accrued liability for contingencies related to litigation in the amount of $3,700 (see Note 10 of Notes to Condensed Consolidated Financial Statements herein for further information). The assessment of contingencies is highly subjective and requires judgments about future events. Contingencies are reviewed at least quarterly to determine the adequacy of the accruals and related Condensed Consolidated Financial Statement disclosure. The ultimate settlement of contingencies may differ materially from amounts we have accrued in our Condensed Consolidated Financial Statements.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

     In addition, as of May 23, 2005, we estimated the liability for those losses related to other litigation claims that we believe are reasonably possible to result in an adverse outcome, to be in the range of $95 to $190. In accordance with SFAS 5, we have not recorded a liability for those losses.

Accounting for Lease Obligations

     We lease a substantial portion of our restaurant properties. At the inception of the lease, each property is evaluated to determine whether the lease will be accounted for as an operating or capital lease. The lease accounting evaluation may require significant exercise of judgment in estimating the fair value and useful life of the leased property and to establish the appropriate lease term. The lease term used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured because failure to exercise such option would result in an economic penalty. Such economic penalty would typically result from our having to abandon buildings and other non-detachable improvements upon vacating the property. The lease term used for this evaluation also provides the basis for establishing depreciable lives for buildings subject to lease and leasehold improvements, as well as the period over which we recognize straight-line rent expense.

     In addition, the lease term is calculated from the date we take possession of the leased premises through the lease termination date. There is potential for variability in the “rent holiday” period, which begins on the possession date and typically ends upon restaurant opening. Factors that may affect the length of the rent holiday period generally include construction-related delays. Extension of the rent holiday period due to such delays would result in greater rent expense recognized during the rent holiday period.

Franchised and Licensed Operations

     We monitor the financial condition of certain franchisees and record provisions for estimated losses on receivables when we believe that our franchisees are unable to make their required payments to us. Each quarter we perform an analysis to develop estimated bad debts for each franchisee. We then compare the aggregate result of that analysis to the amount recorded in our Condensed Consolidated Financial Statements as the allowance for doubtful accounts and adjust the allowance as appropriate. Additionally, we cease accruing royalties and rental income from franchisees that are materially delinquent in paying or in default for other reasons and reverse any royalties and rent income accrued during the fiscal quarter in which such delinquency or default occurs. Over time our assessment of individual franchisees may change. For instance, we have had some franchisees, who in the past we had determined required an estimated loss equal to the total amount of the receivable, who have paid us in full or established a consistent record of payments (generally one year) such that we determined an allowance was no longer required.

     Depending on the facts and circumstances, there are a number of different actions we and/or our franchisees may take to resolve franchise collections issues. These actions may include the purchase of franchise restaurants by us or by other franchisees, a modification to the franchise agreement, which may include a provision to defer certain royalty payments or reduce royalty rates in the future (if royalty rates are not sufficient to cover our costs of service over the life of the franchise agreement, we record an estimated loss at the time we modify the agreements), a restructuring of the franchisee’s business and/or finances (including the restructuring of leases for which we are the primary obligee — see further discussion below) or, if necessary, the termination of the franchise agreement. The allowance established is based on our assessment of the most probable course of action that will occur.

     Many of the restaurants that we sold to Hardee’s and Carl’s Jr. franchisees as part of our refranchising program were on leased sites. Generally, we remain principally liable for the lease and have entered into a sublease with the franchisee on the same terms as the primary lease. In such cases, we account for the sublease payments received as franchising rental income and the lease payments we make as rental expense in franchised and licensed restaurants and other expense in our Condensed Consolidated Statements of Operations. As of May 23, 2005, the present value of our total obligation on lease arrangements with Hardee’s and Carl’s Jr. franchisees, including subsidized leases discussed further below, was $34,962 and $95,058, respectively. We do not expect Carl’s Jr. franchisees to

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

experience the same level of financial difficulties as Hardee’s franchisees have encountered in the past, however, we can provide no assurance that this will not occur.

     In addition to the sublease arrangements with franchisees described above, we also lease land and buildings to franchisees. As of May 23, 2005, the net book value of property under lease to Hardee’s and Carl’s Jr. franchisees was $19,102 and $5,733, respectively. Financially troubled franchisees are those with whom we have entered into workout agreements and who may have liquidity problems in the future. In the event that a financially troubled franchisee closes a restaurant for which we own the property, our options are to operate the restaurant as a company-operated restaurant, lease the property to another tenant or sell the property. These circumstances would cause us to consider whether the carrying value of the land and building was impaired. If we determined the property value was impaired, we would record a charge to operations for the amount the carrying value of the property exceeds its fair value. As of May 23, 2005, the net book value of property under lease to Hardee’s franchisees that are considered to be financially troubled franchisees was approximately $18,006 and is included in the amount above. During fiscal 2006 or thereafter, some of these franchisees may close restaurants and, accordingly, we may record an impairment loss in connection with some of these closures.

     In accordance with SFAS 146, which we adopted on January 1, 2003, an estimated liability for future lease obligations on restaurants operated by franchisees for which we are the primary obligee is established on the date the franchisee closes the restaurant. Also, we record an estimated liability for subsidized lease payments when we sign a sublease agreement committing us to the subsidy. The liability includes an estimation related to the risk that certain lease payments from the franchisee may ultimately be uncollectible.

     The amount of the estimated liability is established using the methodology described in “Estimated Liability for Closing Restaurants” above. Because losses are typically not probable and/or able to be reasonably estimated, we have not established an additional estimated liability for potential losses not yet incurred under a significant portion of our franchise sublease arrangements. The present value of the lease obligations for which we remain principally liable and have entered into subleases with financially troubled franchisees is approximately $21,725 (five financially troubled franchisees represent approximately 96.4% of this amount). If sales trends/economic conditions worsen for our franchisees, their financial health may worsen, our collection rates may decline and we may be required to assume the responsibility for additional lease payments on franchised restaurants. Entering into restructured franchise agreements may result in reduced franchise royalty rates in the future (see discussion above). The likelihood of needing to increase the estimated liability for future lease obligations is primarily related to the success of our Hardee’s concept (i.e., if our Hardee’s concept results continue to improve from the execution of our comprehensive plan, we would reasonably expect that the financial performance of our franchisees would improve).

Stock-Based Compensation

     As discussed in Note 1 of Notes to Condensed Consolidated Financial Statements, we have various stock-based compensation plans that provide options for certain employees and non-employee directors to purchase shares of our common stock. We have elected to account for stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion 25, Accounting for Stock Issued to Employees, which utilizes the intrinsic value method of accounting for stock-based compensation, as opposed to using the fair-value method prescribed in SFAS 123, Accounting for Stock-Based Compensation (“SFAS 123”). Because of this election, we are required to make certain disclosures of pro forma net income assuming we had adopted SFAS 123. We determine the estimated fair value of stock-based compensation on the date of the grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the historical stock price volatility, expected life of the option and the risk-free interest rate. A change in one or more of the assumptions used in the Black-Scholes option-pricing model may result in a material change to the estimated fair value of the stock-based compensation (see Note 1 of Notes to Condensed Consolidated Financial Statements for analysis of the effect of certain changes in assumptions used to determine the fair value of stock-based compensation).

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

     As discussed in Note 2 of Notes to Condensed Consolidated Financial Statements, we will be required to adopt SFAS 123 (Revised 2004), Share-Based Payment, as of the beginning of fiscal 2007.

Valuation Allowance for Net Deferred Tax Asset

     As disclosed in Note 20 of Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the fiscal year ended January 31, 2005, we have recorded a 100% valuation allowance against our deferred tax assets, net of deferred tax liabilities that may offset our deferred tax assets for income tax accounting purposes. If our business turnaround is successful, we have been profitable for a number of years and our prospects for the realization of our deferred tax assets are more likely than not, we would then reverse our valuation allowance and credit income tax expense. In assessing the prospects for future profitability, many of the assessments of same-store sales and cash flows mentioned above become relevant. When circumstances warrant, we assess the likelihood that our net deferred tax assets will more likely than not be realized from future taxable income. As of May 23, 2005, our net deferred tax assets and related valuation allowance result in a net deferred tax liability of $1,758, of which $228 is included in other current liabilities and $1,530 is included in other long-term liabilities in our Condensed Consolidated Balance Sheet.

Significant Known Events, Trends, or Uncertainties Expected to Impact Fiscal 2006 Comparisons with Fiscal 2005

     The factors discussed below impact comparability of operating performance for the sixteen weeks ended May 23, 2005, and May 17, 2004, or could impact comparisons for the remainder of fiscal 2006.

Divestiture of Timber Lodge

     As discussed in Note 9 of Notes to Condensed Consolidated Financial Statements in this Form 10-Q, Timber Lodge was accounted for as a discontinued operation, and we completed the sale of Timber Lodge on September 3, 2004. The results of Timber Lodge included in our Condensed Consolidated Statement of Operations as discontinued operations for the sixteen-week period ended May 17, 2004, are as follows:

     The operating loss for Timber Lodge for the sixteen weeks ended May 17, 2004, includes impairment charges of $617 to reduce the carrying value of Timber Lodge to fair value.

New Accounting Pronouncements

     See Note 3 of Notes to Condensed Consolidated Financial Statements.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

Seasonality

     We operate on a retail accounting calendar. Our fiscal year has 13 four-week accounting periods and ends the last Monday in January. The first quarter of our fiscal year has four periods, or 16 weeks. All other quarters have three periods, or 12 weeks. Fiscal 2006 will be a 52-week year. Fiscal 2005 was a 53-week fiscal year. The fourth quarter of fiscal 2005 had two accounting periods of four weeks and one accounting period of five weeks.

     Our restaurant sales, and therefore our profitability, are subject to seasonal fluctuations and are traditionally higher during the spring and summer months because of factors such as increased travel upon school vacations and improved weather conditions, which affect the public’s dining habits.

Business Strategy

     We remain focused on vigorously pursuing our comprehensive business strategy. The main components of our strategy are as follows:

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remain focused on restaurant fundamentals — quality, service and cleanliness;

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offer premium products that compete on quality and taste — not price;

•

build on the strength of the Carl’s Jr. brand, including dual-branding opportunities with Green Burrito;

•

continue to execute and refine the Hardee’s turnaround program;

•

control costs while increasing revenues;

•

leverage our infrastructure and marketing presence to build out existing core markets; and

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strengthen our franchise system and pursue further franchising opportunities.

Franchise Operations

     Like others in the quick-service restaurant industry, some of our franchisees experience financial difficulties from time to time with respect to their operations. Our approach to dealing with financial and operational issues that arise from these situations is described under Critical Accounting Policies above, under the heading “Franchised and Licensed Operations.” Some franchisees in the Hardee’s system have experienced significant financial problems and, as discussed above, there are a number of potential resolutions of these financial issues.

     We continue to work with franchisees in an attempt to maximize our future franchising income. Our franchising income is dependent on both the number of restaurants operated by franchisees and their operational and financial success, such that they can make their royalty and lease payments to us. Although we quarterly review the allowance for doubtful accounts and the estimated liability for closed franchise restaurants (see discussion under Critical Accounting Policies — Franchised and Licensed Operations), there can be no assurance that the number of franchisees or franchised restaurants experiencing financial difficulties will not increase from our current assessments, nor can there be any assurance that we will be successful in resolving financial issues relating to any specific franchisee. As of May 23, 2005, our consolidated allowance for doubtful accounts on notes receivable was 61.6% of the gross balance of notes receivable and our consolidated allowance for doubtful accounts on accounts receivable was 3.0% of the gross balance of accounts receivable. During fiscal 2004 and to a lesser extent during fiscal 2005, we established several notes receivable pursuant to completing workout agreements with several troubled franchisees. As of May 23, 2005, we have not recognized $6,571 in accounts receivable and $6,845 in notes receivable, nor the royalty and rent revenue associated with these accounts and notes receivable, due from franchisees that are in default under the terms of their franchise agreements. We still experience specific problems

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

with troubled franchisees (see Critical Accounting Policies — Franchise and Licensed Operations) and may be required to increase the amount of our allowances for doubtful accounts and/or increase the amount of our estimated liability for future lease obligations. The result of increasing the allowance for doubtful accounts is an effective royalty rate lower than our standard contractual royalty rate.

     Effective royalty rate reflects royalties deemed collectible as a percent of franchise-generated revenue for all franchisees for which we are recognizing revenue. For the trailing thirteen periods ended May 23, 2005, the effective royalty rates for domestic Carl’s Jr. and Hardee’s were 3.8% and 3.7%, respectively. For the trailing thirteen periods ended May 17, 2004, the effective royalty rates for domestic Carl’s Jr. and Hardee’s were 3.8% and 3.6%, respectively.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

Operating Review

     The following tables are presented to facilitate Management’s Discussion and Analysis and are presented in the same format in which we present segment information (see Note 8 of Notes to Condensed Consolidated Financial Statements).

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

Presentation of Non-GAAP Measures

EBITDA

     EBITDA is a typical non-GAAP measurement for companies that issue public debt and a measure used by the lenders under our bank credit facility. We believe EBITDA is useful to our investors as an indicator of earnings available to service debt. EBITDA is not a recognized term under GAAP and does not purport to be an alternative to income from operations, an indicator of cash flow from operations or a measure of liquidity. As shown in the table below, we calculate EBITDA as earnings before cumulative effect of accounting changes, discontinued operations,

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

interest expense, income taxes, depreciation and amortization, facility action charges, impairment of goodwill and impairment of assets held for sale. Because not all companies calculate EBITDA identically, this presentation of EBITDA may not be comparable to similarly titled measures of other companies. Additionally, we believe EBITDA is a more meaningful indicator of earnings available to service debt when certain charges, such as impairment of goodwill and facility action charges, are excluded from income (loss) from continuing operations. EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest expense, income taxes, debt service payments and cash costs arising from facility actions.

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CKE RESTAURANTS, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis — (Continued)
(Dollars in thousands)

     The following table reconciles EBITDA (a non-GAAP measure) to cash flow provided by operating activities (a GAAP measure):

Carl’s Jr.

     During the sixteen weeks ended May 23, 2005, we opened two and closed two Carl’s Jr. restaurants. Carl’s Jr. franchisees and licensees opened eight and closed two restaurants. The following tables show the change in the Carl’s Jr. restaurant portfolio, as well as the change in revenue for the current quarter: