UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended October 3, 2004

OR

For the transition period from _________________ to _______________.

Commission file number 333-57925

The Restaurant Company

(901) 766-6400

Indicate by ü 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 ü        No

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

Number of shares of common stock outstanding: 10,820.

1

Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE RESTAURANT COMPANY AND SUBSIDIARIES

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

2

THE RESTAURANT COMPANY AND SUBSIDIARIES

The accompanying notes are an integral part of these consolidated balance sheets.

3

THE RESTAURANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par and Share Amounts)
(Unaudited)

The accompanying notes are an integral part of these consolidated balance sheets.

4

THE RESTAURANT COMPANY AND SUBSIDIARIES

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

5

THE RESTAURANT COMPANY AND SUBSIDIARIES

Organization

The Restaurant Company (the “Company,” “Perkins,” or “TRC”) is a wholly-owned subsidiary of The Restaurant Holding Corporation (“RHC”). TRC conducts business under the name “Perkins Restaurant and Bakery”. TRC is also the sole stockholder of TRC Realty LLC, The Restaurant Company of Minnesota and Perkins Finance Corp. RHC’s principal stockholders are Donald N. Smith (“Mr. Smith”), TRC’s Chairman and Chief Executive Officer, and BancBoston Ventures, Inc. (“BBV”). Mr. Smith is also the Chairman of Friendly Ice Cream Corporation (“FICC”), which operates and franchises approximately 544 restaurants, located primarily in the northeastern United States.

Basis of Presentation

The accompanying unaudited consolidated financial statements of TRC have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and notes necessary for complete financial statements in conformity with generally accepted accounting principles. The results for the periods indicated are unaudited but reflect all adjustments (consisting only of normal recurring adjustments) which management considers necessary for a fair presentation of the operating results. Results of operations for the interim periods are not necessarily indicative of a full year of operations. The notes to the financial statements contained in the 2003 Annual Report on Form 10-K should be read in conjunction with these statements.

Accounting Reporting Period

The Company’s fiscal calendar year consists of thirteen four-week periods ending on the last Sunday in December. The first quarter each year will include four four-week periods. The first, second and third quarters ended on April 18, July 11 and October 3, respectively. The fourth quarter of 2004 will end on December 26.

Contingencies

The Company is a party to various legal proceedings in the ordinary course of business. Management does not believe it is likely that these proceedings, either individually or in the aggregate, will have a material adverse effect on the Company’s financial position or results of operations.

On June 9, 2000, the Company entered into an agreement to guarantee fifty percent of borrowings up to a total guarantee of $1,500,000 for use by a franchisee to remodel and upgrade existing restaurants. As of October 3, 2004, there was $3,000,000 in borrowings outstanding under this agreement of which the Company guaranteed $1,500,000. Under the provisions of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, this guarantee has been determined by the Company not to be a variable interest in the franchisee.

6

Provision for Disposition of Assets and Asset Write-Down

During the quarter ended October 3, 2004, four separate hurricanes struck Florida where the Company has a significant concentration of stores. The Company recorded a provision for the disposition of assets of $38,000, which represents the net book value of specifically identifiable assets destroyed during the hurricanes. All other costs associated with the hurricanes, including repairs and capital replacements, are estimated to be approximately $300,000. Of this amount, the Company estimates that approximately $160,000 consists of capital items that will be included in 2004 capital spending. The remaining costs were expensed to the income statement during the third quarter.

Also, during the quarter, the Company entered into a contract to sell one restaurant property. This sale closed on October 15, 2004. The Company will record a net gain of approximately $400,000 on the sale during the fourth quarter.

During the second quarter, the Company sold one property and recorded a net gain of $81,000. The Company also completed the sale of one property that was under contract on April 18, 2004. A loss of $356,000 on this property was recognized in the first quarter.

During the first quarter of 2004, the Company sold one property and recorded a net loss on the sale of approximately $7,000. Also, the Company determined that impairment existed with respect to two Company-operated restaurants. This determination was made based on the Company’s projections that the future cash flows of these restaurants would not exceed the present carrying value of the assets. Accordingly, the Company recorded an impairment charge of $446,000 to adjust the assets of these restaurants to net realizable value.

Supplemental Cash Flow Information

The increase or decrease in cash and cash equivalents due to changes in operating assets and liabilities for the twelve and forty weeks ended October 3 and October 5, consists of the following (in thousands):

7

Other supplemental cash flow information is as follows (in thousands):

Year-to-date, the Company has converted approximately $283,000 of accounts receivable to long-term notes receivable.

8

Segment Reporting

The following presents revenue and other financial information by business segment for the twelve and forty weeks ended October 3 and October 5 (in thousands):

9

A reconciliation of other segment loss is as follows (in thousands):

Revolving Credit Agreement

As of October 3, 2004, the Company has a secured $25,000,000 revolving line of credit facility (the “Credit Facility”) with a sub-limit for up to $7,500,000 of letters of credit. All amounts under the Credit Facility bear interest at floating rates based on the agent’s base rate or Eurodollar rates as defined in the agreement. All indebtedness under the Credit Facility is collateralized by a first priority lien on substantially all of the assets of the Company. The maturity date of the Credit Facility is January 1, 2005. Currently, the Company is negotiating with the Lender to extend the term of the Credit Facility, which the Company anticipates completing before expiration of the Credit Facility. As of October 3, 2004, there were no borrowings and approximately $5,968,000 of letters of credit outstanding under the Credit Facility.

At April 20, 2003, the Company failed to meet the criteria of one of the financial covenants of the Credit Facility. On May 14, 2003, the Company executed an amendment to the Credit Facility that waived the April 20, 2003 covenant violation, reduced the requirements of the financial covenants and lowered the total amount available under the Credit Facility from $40,000,000 to $25,000,000. The Company executed an amendment to the Credit Facility on March 25, 2004 that reduced the requirements of the financial covenants at the end of the first quarter 2004 and thereafter. Effective June 16, 2004, the Company executed an amendment to the Credit Facility that increased the sub-limit of letters of credit from $5,000,000 to $7,500,000. As of October 3, 2004, the Company was in compliance with the requirements of the financial covenants.

10

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED OCTOBER 3, 2004

RESULTS OF OPERATIONS

Overview:

The Company is a leading operator and franchisor of mid-scale restaurants located in 34 states and five Canadian provinces. As of October 3, 2004, the Company owned and operated 154 and franchised 333 Perkins Restaurants. Both the Company-operated and franchised Perkins Restaurants operate under the names “Perkins Restaurant and Bakery,” “Perkins Family Restaurant,” “Perkins Family Restaurant and Bakery,” or “Perkins Restaurant” and the mark “Perkins”. The Company also offers cookie doughs, muffin batters, pancake mixes, pies and other food products for sale to our Company-operated and franchised restaurants and bakery and food service distributors through Foxtail Foods (“Foxtail”), our manufacturing division. The business of Perkins was founded in 1958, and since then Perkins has continued to adapt its menus, product offerings, building designs and decor to meet changing consumer preferences. Perkins is a highly recognized brand in the geographic areas it serves.

The Company’s revenues are derived primarily from the operation of Company-owned restaurants, the sale of bakery products produced by Foxtail and franchise royalties. In order to ensure consistency and availability of Perkins’ proprietary products to each unit in the system, Foxtail offers cookie doughs, muffin batters, pancake mixes, pies and other food products to Company-operated and franchised restaurants through food service distributors. Sales to Company-operated restaurants are eliminated in the accompanying statements of operations. For the quarter ended October 3, 2004, revenues from Company-operated restaurants, Foxtail, and franchise and other accounted for 81.2%, 12.1% and 6.7% of total revenue, respectively.

11

A summary of the Company’s results for the twelve and forty weeks ended October 3, 2004 and October 5, 2003 are presented in the following table. All revenues, costs and expenses are expressed as a percentage of total revenues.

Net Income for the third quarter of 2004 was $1,741,000 versus net income of $1,176,000 for the third quarter of 2003. For the year-to-date period ended October 3, 2004, net income was $4,539,000 compared to $2,557,000 for the year-to-date period ended October 5, 2003.

12

Revenues:

Total revenues for the third quarter of 2004 increased 1.7% from the prior year third quarter. Year-to-date total revenues increased 2.6% over the prior year-to-date period. This increase is primarily due to increased restaurant sales.

Same store comparable sales in Company-operated restaurants increased approximately 0.4% for the third quarter and increased approximately 1.4% year-to-date. The increase for the quarter is attributable to an increase in the average guest check of 4.3% offset by a decrease of 3.9% in comparable guest visits . The year-to-date increase is attributable to a 4.1% increase in the average guest check offset by a decrease of 2.7% in comparable guest visits. The calculation of same store comparable sales excludes days that stores were closed due to the series of hurricanes in Florida.

Revenues from Foxtail increased approximately 18.9% from the prior year quarter and increased 7.8% over the prior year-to-date period and constituted approximately 12.1% and 10.2%, respectively, of the Company’s total revenues.

Franchise revenue, composed primarily of franchise royalties, decreased 0.2% over the third quarter of 2003 and increased 1.0% year-to-date. Royalty revenues increased for the year-to-date period primarily due to an estimated 1.7% increase in franchise restaurant comparable sales partially offset by a decrease in the average number of franchise restaurants. Since the third quarter of 2003, the Company’s franchisees have opened 8 restaurants and have closed 13 restaurants.

Costs and Expenses:

Food cost:

In terms of total revenues, food cost increased 1.2 percentage points from the third quarter of 2003 and increased 0.5 percentage points over the previous year-to-date period. Restaurant food cost, as a percentage of restaurant sales, decreased 0.9 and 0.6 percentage points for the quarter and year-to-date periods, respectively, primarily due to selective menu price increases and decreased discounting. These efficiencies were partially offset by increases in commodity costs, primarily beef, pork, dairy and eggs. As a percentage of Foxtail sales, Foxtail food cost increased 9.9 and 5.0 percentage points for the quarter and year-to-date periods, respectively, primarily due to production inefficiencies related to the plant expansion completed earlier this year as well as increases in the costs of raw materials, particularly eggs, milk and other dairy products.

Labor and benefits:

Labor and benefits expense, as a percentage of total revenues, decreased 1.2 percentage points from the third quarter of 2003 and decreased 0.8 percentage points for the year-to-date period ended October 3, 2004. The decrease is primarily due to increased labor productivity at Company-operated restaurants partially offset by an increase in employee insurance, average wage rates and Foxtail labor costs, which increased 2.1% for the quarter as a percentage of Foxtail sales.

Federal and state minimum wage laws impact the wage rates of the Company’s hourly employees. Certain states do not allow tip credits for servers which results in higher payroll costs as well as greater exposure to increases in minimum wage rates. In the past, the Company has been able to offset increases in labor costs through selective menu price increases and improvements in labor productivity. However, there is no assurance that future increases can be mitigated through raising menu prices or improvements in labor productivity.

13

Operating expenses:

Expressed as a percentage of total revenues, operating expenses were flat compared to the third quarter of 2003 and decreased 0.3 percentage points for the year-to-date period. The decrease for the year-to-date period is primarily due to decreases in the usage of restaurant supplies and in administrative expenses at Company-operated restaurants.

General and administrative:

General and administrative expenses, as a percentage of total revenues, increased 0.1 percentage points compared to the third quarter of 2003 and increased 0.3 percentage points over the year-to-date period. The increase is primarily due to increased incentive costs, partially offset by reduced home office expenses.

Depreciation and amortization:

Depreciation and amortization expense decreased from 5.2 percent of sales in the third quarter of 2003 to 4.9 percent of sales in 2004 and decreased from 5.5 percent of sales to 4.9 percent of sales for the year-to-date period ended October 3, 2004 as compared to the same period in 2003. This decrease is primarily due to the Company’s reduction in capital spending since 2001.

Interest, net:

Interest expense, as a percentage of total revenue, was flat compared to the third quarter of 2003 and decreased 0.3 percentage points compared to the year-to-date period primarily due to a reduction in the overall borrowings by the Company.

Provision for Disposition of Assets and Asset Write-Down:

During the quarter ended October 3, 2004, four separate hurricanes struck Florida where the Company has a significant concentration of stores. The Company recorded a provision for the disposition of assets of $38,000, which represents the net book value of specifically identifiable assets destroyed during the hurricanes. All other costs associated with the hurricanes, including repairs and capital replacements, are estimated to be approximately $300,000. Of this amount, the Company estimates that approximately $160,000 consists of capital items that will be included in 2004 capital spending. The remaining costs were expensed to the income statement during the third quarter.

Also, during the quarter, the Company entered into a contract to sell one restaurant property. This sale closed on October 15, 2004. The Company will record a net gain of approximately $400,000 on the sale during the fourth quarter.

During the second quarter, the Company sold one property and recorded a net gain of $81,000. The Company also completed the sale of one property that was under contract on April 18, 2004. A loss of $356,000 on this property was recognized in the first quarter.

During the first quarter of 2004, the Company sold one property and recorded a net loss on the sale of approximately $7,000. Also, the Company determined that impairment existed with respect to two Company-operated restaurants. This determination was made based on the Company’s projections that the future cash flows of these restaurants would not exceed the present carrying value of the assets. Accordingly, the Company recorded an impairment charge of $446,000 to adjust the assets of these restaurants to net realizable value.

Other, net:

Other income, as a percentage of total revenue, increased slightly compared to the third quarter of 2003.

Provision for Income Taxes:

The effective tax rate for the third quarter and year-to-date periods was 32.4% and 32.5%, respectively. The effective tax rate increased significantly over the comparable prior year periods due to the fact that the impact of certain tax credits, which primarily result from excess FICA taxes paid on server tip income that exceeds minimum wage, was reduced as a result of the increase in current year pretax income.

14

CAPITAL RESOURCES AND LIQUIDITY

The Company’s primary sources of funding during the quarter were cash flows from operating activities. The principal uses of cash during the quarter were capital lease payments and capital expenditures. Capital expenditures for the third quarter of 2004 were $2,343,000 compared to $1,768,000 for the third quarter of 2003. Capital expenditures in 2004 consisted primarily of capital required to remodel and upgrade existing restaurants and expand operations at our manufacturing facility. The Company’s capital budget for 2004 is $15.0 million and includes plans to open no new Company-operated restaurants.

As of October 3, 2004, the Company has a secured $25,000,000 revolving line of credit facility (the “Credit Facility”) with a sub-limit for up to $7,500,000 of letters of credit. All amounts under the Credit Facility bear interest at floating rates based on the agent’s base rate or Eurodollar rates as defined in the agreement. All indebtedness under the Credit Facility is collateralized by a first priority lien on substantially all of the assets of the Company. The maturity date of the Credit Facility is January 1, 2005. Currently, the Company is negotiating with the Lender to extend the term of the Credit Facility, which the Company anticipates completing before expiration of the Credit Facility. As of October 3, 2004, there were no borrowings and approximately $5,968,000 of letters of credit outstanding under the Credit Facility.

At April 20, 2003, we failed to meet the criteria of one of the financial covenants of the Credit Facility. On May 14, 2003, the Company executed an amendment to the Credit Facility that waived the April 20, 2003 covenant violation, reduced the requirements of the financial covenants and lowered the total amount available under the Credit Facility from $40,000,000 to $25,000,000. The Company executed an amendment to the Credit Facility on March 25, 2004 that reduced the requirements of the financial covenants at the end of the first quarter 2004 and thereafter. Effective June 16, 2004, the Company executed an amendment to the Credit Facility that increased the sub-limit of letters of credit from $5,000,000 to $7,500,000. As of October 3, 2004, the Company was in compliance with the requirements of the financial covenants.

On November 15, 2001, the Company elected to begin accruing cash interest on its 11.25% Senior Discount Notes (the “Notes”). Cash interest is payable semi-annually on May 15 and November 15. On May 15, 2003 the Company paid $8,383,000 in principal of the Notes at a redemption price of 105.625% of the face amount of the Notes. The principal balance of the Notes on October 3, 2004 was $18,009,000.

TRC is a wholly-owned subsidiary of RHC. The common shares of RHC not owned by Mr. Smith are subject to an option requiring RHC to redeem the shares at any time after December 22, 2004 at fair market value (the “Put”). As of October 3, 2004, these shares represented 30% of the outstanding common stock of RHC. As of December 28, 2003, the estimated fair market value of the Put was $4,650,000. RHC has a management fee agreement dated as of December 22, 1999, with BBV whereby BBV provides certain consulting services to RHC. In consideration for these services, a fee of $250,000 accrues annually and is payable by RHC on December 22, 2004.

Additionally, RHC issued 50,000 shares of non-voting preferred stock on December 22, 1999. The preferred stock is mandatorily redeemable for $1,000 per share (the “Liquidation Value”) plus all accrued but unpaid dividends, if any, on December 22, 2006. Preferred dividends of 8% per annum of the Liquidation Value of each share are payable quarterly. As of October 3, 2004, approximately $23,017,000 of in-kind dividends had been paid through the issuance of additional shares of preferred stock. Assuming a continuation of in-kind dividends, the redemption price on December 22, 2006 is estimated to be $87,044,000. The holders of preferred stock are entitled to be paid in cash the Liquidation Value of each share of preferred stock before any payments are made to any holders of common stock. The preferred stock is redeemable at the option of the Company at any time prior to the mandatory redemption date at the Liquidation Value.

15

RHC has no material assets other than its investment in TRC. The ability of TRC to pay dividends to or make distributions to RHC in order to redeem common or preferred shares or pay the management fee to BBV is restricted under its senior notes indenture and the Credit Facility Agreement.

The Company’s ability to make scheduled payments of principal of, or to pay the interest or liquidated damages, if any, on, or to refinance, its indebtedness, or to fund planned capital expenditures, or to meet its or RHC’s other liquidity needs will depend on the Company’s future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond control of the Company. Based upon the current level of operations, management believes that cash flow from operating activities and available cash, together with available borrowings under the Credit Facility, will be adequate to meet the Company’s liquidity needs in the normal course of its operations. There can be no assurance that the Company will generate sufficient cash flow from operations, have access to capital markets or that future borrowings will be available in an amount sufficient to enable the Company to service its indebtedness or to fund its other liquidity needs. In addition, there can be no assurance that the Company will be able to effect any necessary recapitalization or refinancing on commercially reasonable terms or at all.

SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the estimates that are required to prepare the financial statements of a corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

Revenue Recognition:

Revenue at Company-operated restaurants is recognized as customers pay for products at the time of sale. The earnings reporting process is covered by our system of internal controls and generally does not require significant management judgments and estimates. However, estimates are inherent in the calculation of franchisee royalty revenue. We calculate an estimate of royalty income each period and adjust royalty income when actual amounts are reported by franchisees. Historically, these adjustments have not been material.

Concentration of Credit Risk:

Financial instruments, which potentially expose the Company to concentrations of credit risk, consist principally of franchisee and Foxtail accounts receivable. We perform ongoing credit evaluations of our customers and generally require no collateral to secure accounts receivable. The credit review is based on both financial and non-financial factors. Based on this review, we provide for estimated losses for accounts receivable that are not likely to be collected. Although we maintain good relationships with our franchisees, if average sales or the financial health of significant franchisees were to deteriorate, we may have to increase our reserves against collection of franchise revenues.

16

Insurance Reserves:

We are self-insured up to certain limits for costs associated with workers’ compensation claims, property claims and benefits paid under employee health care programs. At October 3, 2004 and December 28, 2003, we had total self-insurance accruals reflected in our balance sheet of approximately $4.7 million.

The measurement of these costs required the consideration of historical loss experience and judgments about the present and expected levels of cost per claim. We account for these costs primarily through actuarial methods, which develop estimates of the undiscounted liability for claims incurred, including those claims incurred but not reported. These methods provide estimates of future ultimate claim costs based on claims incurred as of the balance sheet date. Other acceptable methods of accounting for these accruals include measurement of claims outstanding and projected payments.

We believe the use of actuarial methods to account for these liabilities provides a consistent and effective way to measure these highly judgmental accruals. However, the use of any estimation technique in this area is inherently sensitive given the magnitude of claims involved and the length of time until the ultimate cost is known. We believe that our recorded obligations for these expenses are consistently measured on a conservative basis. Nevertheless, changes in health care costs, accident frequency and severity and other factors can materially affect the estimate for these liabilities.

Long-Lived Assets:

The restaurant industry is capital intensive. We have approximately 60% of our total assets invested in property and equipment. We capitalize only those costs that meet the definition of capital assets under generally accepted accounting principles. Accordingly, repairs and maintenance costs that do not extend the useful life of the asset are expensed as incurred.

The depreciation of our capital assets over their estimated useful lives, and the determination of any salvage values, requires management to make judgments about future events. Because we utilize many of our capital assets over relatively long periods (20 – 30 years for our restaurant buildings), we periodically evaluate whether adjustments to our estimated lives or salvage values are necessary. The accuracy of these estimates affects the amount of depreciation expense recognized in a period and, ultimately, the gain or loss on the disposal of the asset. Historically, gains and losses on the disposition of assets have not been significant. However, such amounts may differ materially in the future based on restaurant performance, technological obsolescence, regulatory requirements and other factors beyond our control.

Due to the fact that we have invested a significant amount in the construction or acquisition of new restaurants, we have risks that these assets will not provide an acceptable return on our investment and an impairment of these assets may occur. The accounting test for whether an asset held for use is impaired involves first comparing the carrying value of the asset with its estimated future undiscounted cash flows. If these cash flows do not exceed the carrying value, the asset must be adjusted to its current fair value. We periodically perform this test on each of our restaurants to evaluate whether impairment exists. Factors influencing our judgment include the age of the restaurant (new restaurants have significant start up costs which impede a reliable measure of cash flow), estimation of future restaurant performance and estimation of restaurant fair value. Due to the fact that we can specifically evaluate impairment on a restaurant-by-restaurant basis, we have historically been able to identify impaired restaurants and record the appropriate adjustment.

We utilize operating leases to finance a significant number of our restaurant properties. Over the years, we have found these leasing arrangements to be favorable from a cash flow and risk management standpoint. Such arrangements typically shift the risk of loss on the residual value of the assets at the end of the lease period to the lessor.

17

The future commitments for operating leases are not reflected as a liability in our balance sheet because the leases do not meet the accounting definition of capital leases. The determination of whether a lease is accounted for as a capital lease or an operating lease requires management to make estimates primarily about the fair value of the asset and its estimated economic useful life. We believe that we have a well-defined and controlled process for making this evaluation.

We have approximately $31 million of intangible assets on our balance sheet resulting from the acquisition of businesses. New accounting standards adopted in 2002 require that we review these intangible assets for impairment on an annual basis and cease all goodwill amortization. The adoption of these new rules did not result in an impairment of our recorded intangible assets. The annual evaluation of intangible asset impairment requires the use of estimates about the future cash flows of each of our reporting units to determine their estimated fair values. Changes in forecasted operations and changes in discount rates can materially affect these estimates. However, once an impairment of intangible assets has been recorded, it cannot be reversed.

Deferred Income Taxes:

We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. We record a valuation allowance to reduce deferred tax assets to the balance that is more likely than not to be realized. In evaluating the need for a valuation allowance, we must make judgments and estimates on future taxable income, feasible tax planning strategies and existing facts and circumstances. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflect the change in the period such determination is made. We believe that the valuation allowance recorded is adequate for the circumstances. However, changes in facts and circumstances that affect our judgments or estimates in determining the proper deferred tax assets or liabilities could materially affect the recorded amounts.

SEASONALITY

Company revenues are subject to seasonal fluctuations. Customer counts (and consequently revenues) are highest in the summer months and lowest during the winter months because of the high proportion of restaurants located in states where inclement weather adversely affects guest visits.

FORWARD-LOOKING STATEMENTS

This discussion contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations that are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated by the forward-looking statements. Such factors include, but are not limited to, the following: general economic conditions, competitive factors, consumer taste and preferences and adverse weather conditions. The Company does not undertake to publicly update or revise the forward-looking statements even if experience or future changes make it clear that the projected results expressed or implied therein will not be realized.

18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative market risks of the Company since the prior reporting period.

ITEM 4. CONTROLS AND PROCEDURES

     As of October 3, 2004, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a – 15(e) under the Exchange Act). Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of October 3, 2004. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

19

PART II — OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits -

20

Signature

Pursuant to the requirements 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.

	THE RESTAURANT COMPANY
DATE: November 15, 2004	BY: /s/ Michael P. Donahoe
	Michael P. Donahoe
	Executive Vice President, Chief Financial Officer and Director

21