10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q

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

For the Quarterly Period Ended April 22, 2007

Commission file number 0-18629

O’Charley’s Inc.

(Exact name of registrant as specified in its charter)

Tennessee	62-1192475
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

3038 Sidco Drive, Nashville, Tennessee	37204
(Address of principal executive offices)	(Zip Code)

(615) 256-8500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o Accelerated filer x Non-accelerated filer o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of May 25, 2007
Common Stock, no par value	23,903,436 shares

O’Charley’s Inc.
Form10-Q
For the Quarter Ended April 22, 2007
Index
	Page No.
Part I — Financial Information
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of April 22, 2007 and December 31, 2006		3
Consolidated Statements of Earnings for the 16 weeks ended April 22, 2007 and April 16, 2006		4
Consolidated Statements of Cash Flows for the 16 weeks ended April 22, 2007 and April 16, 2006		5
Notes to unaudited consolidated financial statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		24
Item 4. Controls and Procedures		25
Part II — Other Information
Item 1. Legal Proceedings		25
Item 4. Submission of Matters to a Vote of Security Holders		26
Item 6. Exhibits		26
Signatures		27

EX-31.1 SECTION 302 CEO CERTIFICATION

EX-31.2 SECTION 302 CFO CERTIFICATION

EX-32.1 SECTION 906 CEO CERTIFICATION

EX-32.2 SECTION 906 CFO CERTIFICATION

2

PART I — FINANCIAL INFORMATION

Item1. Consolidated Financial Statements (Unaudited)

O’CHARLEY’S INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
	April 22,		December 31,
	2007		2006
ASSETS
Current Assets:
Cash and cash equivalents	$	10,967	$	19,923
Trade accounts receivable		13,699		14,903
Inventories		32,431		30,895
Deferred income taxes		7,385		8,269
Assets held for sale		4,227		1,962
Other current assets		7,284		4,797
Total current assets		75,993		80,749
Property and Equipment, net		460,876		464,107
Goodwill		93,381		93,381
Intangible Assets		25,946		25,921
Other Assets		23,993		22,354
Total Assets	$	680,189	$	686,512
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Trade accounts payable	$	15,102	$	17,548
Accrued payroll and related expenses		19,387		21,267
Accrued expenses		25,334		24,515
Deferred revenue		9,647		19,765
Federal, state and local taxes		11,677		17,436
Current portion of long-term debt and capitalized lease obligations		7,912		9,812
Total current liabilities		89,059		110,343
Other Liabilities		56,716		50,798
Long-Term Debt, less current portion		126,435		126,540
Capitalized Lease Obligations, less current portion		15,731		18,005
Shareholders’ Equity:
Common stock — No par value; authorized, 50,000,000 shares; issued and outstanding, 23,882,658 in 2007 and 23,654,745 in 2006		197,237		193,690
Retained earnings		195,011		187,136
Total shareholders’ equity		392,248		380,826
Total Liabilities and Shareholders’ Equity	$	680,189	$	686,512

See accompanying notes to unaudited consolidated financial statements

3

O’CHARLEY’S INC.
CONSOLIDATED STATEMENTS OF EARNINGS
16 Weeks Ended April 22, 2007 and April 16, 2006
(In thousands, except per share data)
(Unaudited)
	2007			2006
Revenues:
Restaurant sales	$	309,116		$		303,217
Commissary sales		3,729				3,077
Franchise revenue		44				157
		312,889				306,451
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		89,920				90,961
Payroll and benefits		104,533				102,750
Restaurant operating costs		56,840				56,572
Cost of commissary sales		3,386				2,686
Advertising and marketing expenses		10,049				8,451
General and administrative expenses		16,258				15,539
Depreciation and amortization, property and equipment		15,141				13,998
Asset impairment and disposals		1,030				—
Pre-opening costs		1,115				1,174
		298,272				292,131
Income from Operations		14,617				14,320
Other Expense (Income):
Interest expense, net		3,896				4,495
Other, net		(5	)			4
		3,891				4,499
Earnings Before Income Taxes		10,726				9,821
Income Taxes		2,718				2,622
Net Earnings	$	8,008		$		7,199
Basic Earnings per Common Share:
Net earnings	$	0.34		$	0.31
Weighted average common shares outstanding		23,765			23,089
Diluted Earnings per Common Share:
Net earnings	$	0.33		$		0.31
Weighted average common shares outstanding		24,130				23,345

See notes to accompanying unaudited consolidated financial statements

4

O’CHARLEY’S INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
16 Weeks Ended April 22, 2007 and April 16, 2006
(In thousands)
(Unaudited)
	2007			2006
Cash Flows from Operating Activities:
Net earnings	$	8,008		$	7,199
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization, property and equipment		15,141			13,998
Amortization of debt issuance costs		281			440
Share-based compensation		1,270			447
Deferred income taxes		215			199
Loss on the sale of assets		23			—
Asset impairment and disposals		1,109			—
Changes in assets and liabilities:
Trade accounts receivable		1,204			1,036
Inventories		(1,536	)		1,592
Other current assets		(2,487	)		(488	)
Trade accounts payable		(2,446	)		6,001
Deferred revenue		(10,117	)		(11,863	)
Accrued payroll, accrued expenses, and federal, state and local taxes		(2,798	)		8,385
Other long-term assets and liabilities		337			626
Net cash provided by operating activities		8,204			27,572
Cash Flows from Investing Activities:
Additions to property and equipment		(15,352	)		(11,104	)
Proceeds from the sale of assets		49			—
Other, net		85			(303	)
Net cash used in investing activities		(15,218	)		(11,417	)
Cash Flows from Financing Activities:
Payments on long-term debt and capitalized lease obligations		(4,279	)		(16,324	)
Excess tax benefit from share-based payments		224			347
Proceeds from the exercise of stock options and issuances under stock purchase plan		2,113			3,439
Net cash used in financing activities		(1,942	)		(12,538	)
(Decrease) Increase in Cash and Cash Equivalents		(8,956	)		3,627
Cash and Cash Equivalents at Beginning of the Period		19,923			5,699
Cash and Cash Equivalents at End of the Period	$	10,967		$	9,326

See accompanying notes to unaudited consolidated financial statements

5

O’CHARLEY’S INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

16 Weeks Ended April 22, 2007 and April 16, 2006

(Unaudited)

A. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. The Company’s fiscal year ends on the last Sunday in December with its first quarter consisting of sixteen weeks and its second, third and fourth quarters consisting of twelve weeks each in most years; however, in fiscal 2006 the fourth quarter consisted of 13 weeks. Fiscal 2007 consists of fifty two weeks and fiscal 2006 consisted of fifty three weeks.

In the opinion of management, the unaudited interim consolidated financial statements contained in this report reflect all adjustments, consisting primarily of normal recurring accruals, which are necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

These unaudited consolidated financial statements, footnote disclosures and other information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Certain reclassifications have been made to the prior year information to conform to the current year presentation.

B. INCOME TAXES

Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 generally requires the Company to record deferred income taxes for the tax effect of differences between the book and tax bases of its assets and liabilities.

Deferred income taxes reflect the available net operating losses and the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of the future tax benefits related to deferred tax assets is dependent on many factors, including the Company’s past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of its deferred tax assets, and carryback and carryforward periods.

The Company’s effective tax rate was 25.3% during the first quarter of 2007 compared with 26.7% during the same period in the prior year. The Company’s overall effective tax rate is estimated based on the Company’s current projection of taxable income and could change in the future as a result of changes in these estimates, changes in federal or state tax rates, or changes in state apportionment factors, as well as changes in unrecognized tax positions and in the valuation allowance applied to the Company’s deferred tax assets.

Accounting for Uncertainty in Income Taxes

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which is an interpretation of SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance prescribed in FIN 48 establishes a recognition threshold of more likely than not that a tax position will be sustained upon examination by taxing authorities, based on the technical merits of the position. The measurement attribute of FIN 48 requires that a tax position be measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As permitted by FIN 48, the Company has elected to include the applicable interest and penalties in income tax expense. FIN 48 was effective for fiscal years beginning after December 15, 2006.

Upon adoption of FIN 48 on January 1, 2007, the Company had a liability for uncertain tax positions of $6.5 million, including approximately $0.8 million in interest. The net affect of the adoption was an increase of approximately $0.2 million in the liability for uncertain tax positions, which was recorded as an adjustment to retained earnings, and common stock. The Company has a $6.2 million liability recorded for uncertain tax positions as of April 22, 2007, including approximately $0.8 million in interest. The decrease in the liability is due to the closing of the Internal Revenue Service examinations in the first quarter of 2007, partially offset by interest and tax on remaining open items. Upon adoption, the total amount of unrecognized tax positions that, if recognized, would affect the effective tax rate is $1.5 million. As of April 22, 2007, the total amount of unrecognized tax positions that, if recognized, would affect the effective tax rate is $1.5 million. The Company has settled $0.7 million of unrecognized tax positions during the first quarter of 2007 as a result of the settlement of an IRS exam. The Company also believes that an additional $2.1 million liability for uncertain tax positions will be settled within twelve months of the date of adoption as a result of the closing of statutes for certain tax years. The tax years 2004 to 2006 remain open to examination by the Internal Revenue Service and the tax years of 2002 to 2006 remain open by various other state taxing jurisdictions.

C. SHARE-BASED COMPENSATION

Total share-based compensation expense for the first quarter of 2007 was approximately $1.3 million and for the first quarter of 2006 was approximately $0.4 million. The Company’s net share-based compensation expense primarily consisted of expense associated with restricted stock awards and to a lesser extent expense associated with unvested stock options and the Company’s employee share purchase plan.

During 2004, the Company changed its approach to equity-based compensation and discontinued issuing stock options, choosing to only issue restricted stock awards. As a result, during the first quarter of 2007, the Company granted approximately 0.3 million shares of time vested restricted stock awards to certain members of senior management and other employees. The Company recognized share-based compensation expense of approximately $0.2 million related to these restricted stock awards granted during the 16-week period ended April 22, 2007. As of April 22, 2007, there were approximately 1.8 million options outstanding and 0.9 million restricted stock awards outstanding.

6

D. NET EARNINGS PER COMMON SHARE

Basic earnings per common share have been computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per common share have been computed on the basis of the weighted average number of common shares outstanding plus the dilutive effect of stock options and restricted (non-vested) stock awards outstanding.

Following is a reconciliation of the weighted average common shares used in the Company’s basic and diluted earnings per share calculation (in thousands).

	16 Weeks Ended
	April 22,		April 16,
	2007		2006
Net earnings	$	8,008	$		7,199
Weighted average common shares outstanding		23,765		23,089
Incremental options and restricted shares outstanding		365		256
Weighted average diluted common shares outstanding		24,130		23,345
Basic earnings per common share	$0.34		$0.31
Diluted earnings per common share	$0.33		$0.31

Options for approximately 0.5 million and 1.5 million shares were excluded from the 2007 and 2006 16-week diluted weighted average share calculations, respectively, due to the shares being anti-dilutive.

E. DERIVATIVE INSTRUMENTS

As of April 22, 2007, the Company’s derivative financial instruments consisted of interest rate swaps with a combined notional amount of $100.0 million which effectively convert an equal portion of the fixed-rate indebtedness related to the Company’s $125.0 million senior subordinated notes due 2013 into variable-rate obligations (fair value hedges). The terms and conditions of the swaps mirror the terms and conditions of the respective debt. The Company’s purpose for holding such instruments is to hedge its exposure to fair value fluctuations due to changes in market interest rates, as well as to maintain, in the Company’s opinion, an appropriate mix of fixed and floating rate debt.

F. LEGAL PROCEEDINGS

In September 2003, the Company became aware that guests and employees at one of its O’Charley’s restaurants located in Knoxville, Tennessee were exposed to the Hepatitis A virus, which resulted in a number of its employees and guests becoming infected. As of the date of this filing, all of these cases have been settled and dismissed. The Company has insurance that provides coverage, subject to limitations, for lost income at its restaurants whose results of operations were adversely affected by the Hepatitis A incident. The Company submitted a claim pursuant to its insurance policy for this type of loss, but its carrier disagreed with the Company’s claim. On July 11, 2005, certain underwriters at Lloyd’s, the Company’s insurance carrier, filed suit against the Company in the Circuit Court for Knox County, Tennessee seeking declaration by the court regarding certain limits in this policy which would effectively limit its recovery under the policy to $100,000. During the first quarter of fiscal 2007, the Company entered into a release and settlement agreement with Lloyd’s. The amount received by the Company in the settlement was included in its results of operations for the first fiscal quarter of 2007.

The Company has been involved in an arbitration in the matter of Ballantyne Village, LLC v. O’Charley’s Inc. filed in April 2005. Ballantyne Village, LLC alleged that the Company breached a lease for retail space for a proposed Stoney River Legendary Steaks restaurant in Charlotte, North Carolina. During the first quarter of fiscal 2007, the Company entered into a settlement and release agreement with the plaintiff. The amount paid by the Company in connection with the settlement was included in its results of operations for the fiscal year ended December 31, 2006.

On May 19, 2006, Meritage Hospitality Group, Inc. and certain of its affiliated entities (“Meritage”), which franchise five O’Charley’s restaurants in Michigan, filed suit against the Company in the United States District Court for the Western District of Michigan. The suit alleged that the Company engaged in fraud and violations of the Michigan Franchise Investment Law and Michigan Consumer Protection Act in connection with Meritage becoming a franchisee of its O’Charley’s restaurant concept. The suit sought rescission of the development agreement and five franchise agreements with the Company and related damages. During the first quarter of fiscal 2007, the Company entered into a general release with Meritage pursuant to which Meritage agreed to dismiss the litigation filed against the Company and the Company agreed to make certain future financial and other accommodations to Meritage under the terms of its development and franchise agreements.

In addition, the Company is a defendant and plaintiff from time to time in various other legal proceedings arising in the ordinary course of its business, including claims relating to injury or wrongful death under “dram shop” laws that allow a person to sue the Company based on any injury caused by an intoxicated person who was wrongfully served alcoholic beverages at one of its restaurants; claims relating to workplace and employment matters, discrimination and similar matters; claims resulting from “slip and fall” accidents; claims relating to lease obligations; claims with respect to insurance recoveries; and claims from guests or employees alleging illness, injury or other food quality, health or operational concerns.

The Company does not believe that any of the legal proceedings pending against it as of the date of this report will have a material adverse effect on its liquidity or financial condition. The Company may incur liabilities or accrue expenses relating to future legal proceedings in a particular fiscal quarter which may adversely affect its results of operations.

7

G. ASSETS HELD FOR SALE

The amount shown in assets held for sale as of April 22, 2007 on the consolidated balance sheet consists of assets related to four underperforming Company-owned O’Charley’s restaurants that have been closed and are currently being marketed for sale and certain production equipment at its commissary. The net book value related to closed restaurants is approximately $4.1 million and the net book value related to the production equipment was approximately $0.1 million. The impairment charges related to the closed restaurants were recorded in prior quarters. The Company has ceased recognizing depreciation expense for all of these assets while they are being held for sale.

H. FRANCHISE AND JOINT VENTURE ARRANGEMENTS

In connection with the Company’s franchising initiative, the Company may from time to time enter into joint venture and franchise arrangements to develop and operate O’Charley’s restaurants. For any joint venture in which the Company has an ownership interest, the Company may make loans to the joint venture entity and/or guarantee certain of the joint venture’s debt and obligations. As of April 22, 2007 the Company has a 50% interest in two joint ventures to operate O’Charley’s restaurants. Under Financial Accounting Standards Board Interpretation (FIN) No. 46R, the joint ventures (JFC Enterprises, LLC and Wi-Tenn Restaurants, LLC) are considered variable interest entities. Since the Company currently bears a disproportionate share of the financial risk associated with the joint ventures, it has been deemed to be the primary beneficiary of the joint ventures and, in accordance with FIN 46R, the Company consolidates the joint ventures in its consolidated financial statements. The JFC Enterprise, LLC, joint venture partner has neither the obligation nor the ability to contribute their proportionate share of expected future losses. Such losses may require additional financial support from the Company. As of April 22, 2007, JFC Enterprises, LLC, which owns and operates three O’Charley’s restaurants in Louisiana, had loans outstanding due to the Company of approximately $8.7 million. In addition, the Company has provided this joint venture entity a debt service guarantee and as of April 22, 2007 there was $1.2 million outstanding under this arrangement. As of April 22, 2007, Wi-Tenn Restaurants, LLC, which owns and operates one O’Charley’s restaurant in Wisconsin, had loans outstanding due to the Company of approximately $3.9 million. The loans to Wi-Tenn Restaurants, LLC, were primarily used to purchase the property and fund construction of its first restaurant.

I. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, (“SFAS 157”). This Standard defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company has not yet determined the impact SFAS No. 157 will have on its 2008 results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statements No. 115” (“SFAS 159”). SFAS 159 allows the irrevocable election of fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities and other items on an instrument-by-instrument basis. Changes in fair value would be reflected in earnings as they occur. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007. The Company is currently evaluating SFAS No. 159 and has not determined the impact if any it will have on the Company’s 2008 results of operations.

J. SUBSEQUENT EVENT

During the second quarter of 2007, the Company has entered into agreements to outsource its salad dressing manufacturing and poultry processing. Both of these activities are currently performed at the Company’s commissary in Nashville. The Company also announced that it will discontinue all food processing and manufacturing operations at its commissary facility in Woburn, Massachusetts, and will transfer the meat cutting operations to its Nashville commissary and outsource the remaining operations. Results for the first quarter included non-cash impairment charges relating to manufacturing equipment of $0.9 million, or approximately $0.03 per diluted share. A total of approximately 30 employees are expected to be displaced in connection with the changes in the Company’s commissary operations, and the Company expects to record severance and related charges of approximately $0.01 per diluted share in the second quarter of 2007.

K. SUPPLEMENTARY CONSOLIDATING FINANCIAL INFORMATION OF SUBSIDIARY GUARANTORS

In the fourth quarter of 2003, the Company issued $125 million aggregate principal amount of 9 percent senior subordinated notes due 2013. The obligations of the Company under the senior subordinated notes are guaranteed by all of the Company’s subsidiaries, with the exception of certain minor subsidiaries. The guarantees are made on a joint and several basis. The claims of creditors of the non-guarantor subsidiaries have priority over the rights of the Company to receive dividends or distributions from such subsidiaries. Presented below is supplementary consolidating financial information for the Company and the subsidiary guarantors as of April 22, 2007 and December 31, 2006 and for the 16 weeks ended April 22, 2007 and April 16, 2006.

8

Consolidating Balance Sheet

As of April 22, 2007

(Unaudited)

						Minor
						Subsidiaries and
	Parent			Subsidiary		Consolidating
	Company			Guarantors		Adjustments			Consolidated
	(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	2,614		$	8,302	$	51		$	10,967
Trade accounts receivable		5,731			8,208		(240	)		13,699
Intercompany receivable (payable)		(217,580	)		125,137		92,443			—
Inventories		3,955			28,404		72			32,431
Deferred income taxes		7,001			384		—			7,385
Assets held for sale		4,063			164		—			4,227
Other current assets		3,474			1,715		2,095			7,284
Total current assets		(190,742	)		172,314		94,421			75,993
Property and Equipment, net		301,268			149,350		10,258			460,876
Goodwill		—			93,381		—			93,381
Other Intangible Asset		25			25,921		—			25,946
Other Assets		221,116			30,000		(227,123	)		23,993
Total Assets (Liabilities)	$	331,667		$	470,966	$	(122,444	)	$	680,189
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable	$	12,584		$	5,377	$	(2,859	)	$	15,102
Accrued payroll and related expenses		15,388			3,993		6			19,387
Accrued expenses		18,358			7,353		(377	)		25,334
Deferred revenue		—			10,165		(518	)		9,647
Federal, state and local taxes		(13,412	)		24,986		103			11,677
Current portion of long-term debt and capitalized lease obligations		7,389			474		49			7,912
Total current liabilities		40,307			52,348		(3,596	)		89,059
Other Liabilities		32,901			22,902		913			56,716
Long-Term Debt, less current portion		144,106			235		(17,906	)		126,435
Capitalized Lease Obligations, less current portion		14,445			1,286		—			15,731
Shareholders’ Equity (Deficit):
Common stock		154,470			343,431		(300,664	)		197,237
Retained earnings (deficit)		(54,562	)		50,764		198,809			195,011
Total shareholders’ equity (deficit)		99,908			394,195		(101,855	)		392,248
Total Liabilities and Shareholders’ Equity (Deficit)	$	331,667		$	470,966	$	(122,444	)	$	680,189
`

9

Consolidating Balance Sheet

As of December31, 2006

(Unaudited)

						Minor
						Subsidiaries and
	Parent			Subsidiary		Consolidating
	Company			Guarantors		Adjustments			Consolidated
	(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	3,069		$	16,524	$	330		$	19,923
Trade accounts receivable		6,715			8,434		(246	)		14,903
Intercompany receivable (payable)		(217,762	)		188,466		29,296			—
Inventories		3,673			27,135		87			30,895
Deferred income taxes		7,885			384		—			8,269
Assets held for sale		1,912			50		—			1,962
Other current assets		2,216			2,531		50			4,797
Total current assets		(192,292	)		243,524		29,517			80,749
Property and Equipment, net		303,817			149,849		10,441			464,107
Goodwill		—			93,381		—			93,381
Other Intangible Asset		—			25,921		—			25,921
Other Assets		219,395			30,153		(227,194	)		22,354
Total Assets (Liabilities)	$	330,920		$	542,828	$	(187,236	)	$	686,512
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable	$	16,058		$	6,951	$	(5,461	)	$	17,548
Accrued payroll and related expenses		17,019			4,244		4			21,267
Accrued expenses		17,606			7,295		(386	)		24,515
Deferred revenue		—			20,242		(477	)		19,765
Federal, state and local taxes		(8,578	)		25,911		103			17,436
Current portion of long-term debt and capitalized lease obligations		9,296			468		48			9,812
Total current liabilities		51,401			65,111		(6,169	)		110,343
Other Liabilities		27,441			22,445		912			50,798
Long-Term Debt, less current portion		144,115			314		(17,889	)		126,540
Capitalized Lease Obligations, less current portion		16,502			1,503		—			18,005
Shareholders’ Equity (Deficit):
Common stock		150,923			343,430		(300,663	)		193,690
Retained earnings (deficit)		(59,462	)		110,025		136,573			187,136
Total shareholders’ equity (deficit)		91,461			453,455		(164,090	)		380,826
Total Liabilities and Shareholders’ Equity (Deficit)	$	330,920		$	542,828	$	(187,236	)	$	686,512

10

Consolidating Statement of Operations

16 Weeks Ended April 22, 2007

(Unaudited)

							Minor
							Subsidiaries and
		Parent		Subsidiary			Consolidating
	Company			Guarantors			Adjustments			Consolidated
				(In thousands)
Revenues:
Restaurant sales	$	176,022		$	124,365		$	8,729		$	309,116
Commissary sales		—			92,270			(88,541	)		3,729
Franchise revenue		162			—			(118	)		44
		176,184			216,635			(79,930	)		312,889
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		52,409			36,330			1,181			89,920
Payroll and benefits		61,166			44,630			(1,263	)		104,533
Restaurant operating costs		29,007			22,340			5,493			56,840
Cost of commissary sales		—			89,639			(86,253	)		3,386
Advertising expenses		—			9,946			103			10,049
General and administrative expenses		2,718			13,782			(242	)		16,258
Depreciation and amortization, property and equipment		8,586			6,177			378			15,141
Asset impairment and disposals		5			1,025			—			1,030
Pre-opening costs		902			258			(45	)		1,115
		154,793			224,127			(80,648	)		298,272
Income from Operations		21,391			(7,492	)		718			14,617
Other Expense (Income):
Interest expense, net		3,408			226			262			3,896
Other, net		17,597			(17,602	)		—			(5	)
		21,005			(17,376	)		262			3,891
(Loss) Earnings Before Income Taxes		386			9,884			456			10,726
Income Tax (Benefit) Expense		(18	)		2,616			120			2,718
Net (Loss) Earnings	$	404		$	7,268		$	336		$	8,008

11

Consolidating Statement of Operations

16 Weeks Ended April 16, 2006

(Unaudited)

							Minor
							Subsidiaries and
		Parent		Subsidiary			Consolidating
	Company			Guarantors			Adjustments			Consolidated
				(In thousands)
Revenues:
Restaurant sales	$	177,645		$	117,938		$	7,634		$	303,217
Commissary sales		—			92,698			(89,621	)		3,077
Franchise revenue		227			—			(70	)		157
		177,872			210,636			(82,057	)		306,451
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		57,238			35,378			(1,655	)		90,961
Payroll and benefits		62,403			42,683			(2,336	)		102,750
Restaurant operating costs		35,660			24,278			(3,366	)		56,572
Cost of commissary sales		—			87,468			(84,782	)		2,686
Advertising expenses		(5,526	)		5,527			8,450			8,451
General and administrative expenses		1,647			13,836			56			15,539
Depreciation and amortization, property and equipment		8,372			5,539			87			13,998
Asset impairment and disposals		—			—			—			—
Pre-opening costs		406			588			180			1,174
		160,200			215,297			(83,366	)		292,131
Income from Operations		17,672			(4,661	)		1,309			14,320
Other Expense (Income):
Interest expense, net		4,130			285			80			4,495
Other, net		17,770			(17,766	)		—			4
		21,900			(17,481	)		80			4,499
(Loss) Earnings Before Income Taxes		(4,228	)		12,820			1,229			9,821
Income Tax (Benefit) Expense		(1,287	)		3,581			328			2,622
Net (Loss) Earnings	$	(2,941	)	$	9,239		$	901		$	7,199

12

Consolidating Statement of Cash Flows

16 Weeks Ended April 22, 2007

(Unaudited)

							Minor
							Subsidiaries and
	Parent			Subsidiary			Consolidating
	Company			Guarantors			Adjustments			Consolidated
	(In thousands)
Cash flows from Operating Activities:
Net (loss) earnings	$	404		$	7,268		$	336		$	8,008
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization, property and equipment		8,586			6,177			378			15,141
Amortization of debt issuance costs		281			—			—			281
Share–based compensation		1,270			—			—			1,270
Provision for deferred income taxes		215			—			—			215
Loss on the sale of assets		23			—			—			23
Asset impairment and disposals		1,109			—			—			1,109
Changes in assets and liabilities:
Trade accounts receivable		986			225			(7	)		1,204
Inventories		(281	)		(1,269	)		14			(1,536	)
Other current assets		(1,258	)		816			(2,045	)		(2,487	)
Trade accounts payable		(3,473	)		(1,575	)		2,602			(2,446	)
Deferred revenue		—			(10,076	)		(41	)		(10,117	)
Accrued payroll, other accrued expenses and federal, state, and local taxes		(1,690	)		(1,118	)		10			(2,798	)
Other long-term assets and liabilities		(204	)		610			(69	)		337
Net cash provided by operating activities		5,968			1,058			1,178			8,204
Cash flows from Investing Activities:
Additions to property and equipment		(8,987	)		(5,679	)		(686	)		(15,352	)
Proceeds from the sale of assets		49			—			—			49
Other, net		4,457			(3,601	)		(771	)		85
Net cash used in investing activities		(4,481	)		(9,280	)		(1,457	)		(15,218	)
Cash flows from Financing Activities:
Payments on long-term debt and capitalized lease obligations		(4,279	)		—			—			(4,279	)
Excess tax benefit from share-based payments		224			—			—			224
Exercise of stock options and issuances under stock purchase plan		2,113			—			—			2,113
Net cash used in financing activities		(1,942	)		—			—			(1,942	)
(Decrease) Increase in Cash and Cash Equivalents		(455	)		(8,222	)		(279	)		(8,956	)
Cash and Cash Equivalents at Beginning of the Period		3,069			16,524			330			19,923
Cash and Cash Equivalents at End of the Period	$	2,614		$	8,302		$	51		$	10,967

13

Consolidating Statement of Cash Flows

16 Weeks Ended April 16, 2006

(Unaudited)

							Minor
							Subsidiaries and
	Parent			Subsidiary			Consolidating
	Company			Guarantors			Adjustments			Consolidated
	(In thousands)
Cash flows from Operating Activities:
Net (loss) earnings	$	(3,533	)	$	9,831		$	901		$	7,199
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization, property and equipment		8,370			5,539			89			13,998
Amortization of debt issuance costs		440			—			—			440
Share–based compensation		447			—			—			447
Provision for deferred income taxes		199			—			—			199
Changes in assets and liabilities:
Trade accounts receivable		(322	)		684			674			1,036
Inventories		236			861			495			1,592
Other current assets		(281	)		2,778			(2,985	)		(488	)
Trade accounts payable		9,022			(6,342	)		3,321			6,001
Deferred revenue		(5,360	)		(6,544	)		41			(11,863	)
Accrued payroll, other accrued expenses and federal, state, and local taxes		7,711			(137	)		811			8,385
Other long-term assets and liabilities		306			367			(47	)		626
Net cash provided by operating activities		17,235			7,037			3,300			27,572
Cash flows from Investing Activities:
Additions to property and equipment		(1,273	)		(9,313	)		(518	)		(11,104	)
Proceeds from the sale of assets		—			—			—			—
Other, net		(2,436	)		4,804			(2,671	)		(303	)
Net cash used in investing activities		(3,709	)		(4,509	)		(3,189	)		(11,407	)
Cash flows from Financing Activities:
Payments on long-term debt and capitalized lease obligations		(16,188	)		(122	)		(14	)		(16,324	)
Excess tax benefit from share-based payments		347			—			—			347
Exercise of stock options and issuances under stock purchase plan		3,439			—			—			3,439
Net cash used in financing activities		(12,402	)		(122	)		(14	)		(12,538	)
Increase in Cash and Cash Equivalents		1,124			2,406			97			3,627
Cash and Cash Equivalents at Beginning of the Period		2,611			3,072			16			5,699
Cash and Cash Equivalents at End of the Period	$	3,735		$	5,478		$	113		$	9,326

14

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

RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements

This report contains certain forward-looking statements within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our intent, belief and expectations such as statements concerning our estimated results in future periods, operating and growth strategy, and financing plans. These forward-looking statements may be affected by certain risks and uncertainties, including, but not limited to, our ability to increase operating margins and increase same store sales at our restaurants; the effect that increases in food, labor, energy, interest costs and other expenses have on our results of operations; our ability to successfully implement changes to our supply chain; our ability to sell closed restaurants and other surplus assets; the possible adverse effect on our sales of any decrease in consumer spending; the effect of increased competition; the resolution of outstanding legal proceedings; and the other risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 under the caption “Risk Factors” and in our other filings with the Securities and Exchange Commission. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

Overview

We are a leading casual dining restaurant company headquartered in Nashville, Tennessee. We own and operate three restaurant concepts under the “O’Charley’s,” “Ninety Nine” and “Stoney River Legendary Steaks” trade names. As of April 22, 2007, we operated 230 O’Charley’s restaurants in 16 states in the Southeast and Midwest regions, 113 Ninety Nine restaurants in nine Northeastern states, and ten Stoney River restaurants in the Southeast and Midwest. As of April 22, 2007, we had five franchised O’Charley’s restaurants including four franchised O’Charley’s restaurants in Michigan and one franchised O'Charley's restaurant in Ohio. As of April 22, 2007, we had three joint venture O’Charley’s restaurants in Louisiana, and one joint venture O'Charley's restaurant in Wisconsin, in all of which we have an ownership interest. Our fiscal year ends on the last Sunday of the calendar year. We have one reportable segment.

Approximately 18 months ago we began our turnaround and transformation process. Our strategy continues to be anchored by three key elements: building a winning team, improving box economics and achieving high guest satisfaction. We believe that our performance in the first quarter of 2007 provides solid evidence of progress in implementing this strategy.

Strengthening the organization with a new core of talent and building a winning team. We have assembled our core of executive talent as we have hired a Concept President – O'Charley's, Chief Supply Chain Officer, Senior Corporate Counsel, Chief Information Officer, Vice President of Human Resource Development, Vice President of Communications and Vice President of Strategic Sourcing over the past two years. We now believe that we have in place a management team that is substantially complete and that will be able to execute successfully our turnaround and transformation efforts. We have benefited from the new ideas and strategies that our new team members have brought to O’Charley’s which we believe is reflected in the improvement in our first quarter of 2007 consolidated operating margin. We are now working to optimize the performance of every member of our organization in order to achieve our long-term vision to be the Best of Class in food and service in our segments of the restaurant industry.

Improving box economics through the execution of product and labor cost management and increasing same store sales through new product offerings, new marketing, and a more analytical approach to menu pricing. Box economics is the relationship between the investment in our restaurants and the sales and related operating margin that those sales should produce. As a percentage of restaurant sales, cost of food and beverage, payroll and benefits costs, and restaurant operating costs in the first quarter were each lower than in the prior-year quarter. This was the result of a higher average check in all three of our concepts, the impact of our theoretical food cost system and our increased focus on our “limited time menu offerings” which have higher margins and reductions in employee health and welfare costs. We expect further cost savings through additional operational efficiencies and other initiatives we are implementing. We began the phase out of Kids-Eat-Free in the second quarter of 2006 and as of the end of the first quarter of 2007 have reduced its availability by approximately 40 percent. We expect to complete the phase out by the middle of 2008. We believe that our increase in average check demonstrates that the core O’Charley’s guest values great food with unique flavor profiles with a higher level of service.

Our ‘Project RevO’lution’ and ‘Project Dressed to the Nines’ teams continue to focus on box economics by, among other initiatives, developing new team member selection and training tools, introducing new kitchen technology and menu engineering, capitalizing on dining room efficiencies and applying these improvements along with our re-brandings of our O’Charley’s and Ninety Nine restaurants. Another important aspect of our re-branding is the introduction of concept specific elements including new uniforms, plateware, menu designs, Curbside-To-Go service and new service standards. During the first quarter of 2007 we completed five ‘Project RevO’lution’ re-brandings at our O’Charley’s restaurants, and six ‘Dressed to the Nines’ re-brandings at our Ninety Nine restaurants. To date we have completed 16 ‘Project RevO’lution’ re-brandings at our O’Charley’s restaurants, and 20 ‘Dressed to the Nines’ re-brandings at our Ninety Nine restaurants. At this time we plan to complete 30 re-brandings at Ninety Nine and approximately 10 to 20 re-brandings at O’Charley’s in 2007. We have also introduced a new prototype for our O’Charley’s and Ninety Nine restaurants. To date we have opened four new company-operated O’Charley’s restaurants featuring the concept’s new prototype design and one Ninety Nine restaurant featuring the new prototype design.

Achieving high guest satisfaction and intent to return by instilling “A Passion to Serve” ^SM. In 2005, we adopted a vision statement: ‘A Passion to Serve’ ^SM. This statement describes our commitment to our guests, each other, our stakeholders and our communities. Our vision is to be the best of class in food and service in our segments of the restaurant industry. We are holding ourselves to higher standards as measured by our Guest Satisfaction Index or “GSI” as we believe that the best marketing takes place within the four walls. Many of our ‘Project Rev’Olution’ and ‘Project Dressed to the Nines’ initiatives are designed to improve the guest experience. Our senior management teams at Ninety Nine and O’Charley’s have implemented a combination of in-store and market focus groups designed to solicit feedback about how we can continue to improve our delivery of great food and service. We believe that an increase in check average requires sustainable improvement in the guest experience. ‘Project Rev’Olution’ and ‘Project Dressed to the Nines’ are key elements in our effort to achieve higher guest satisfaction. Our product

15

development teams at all three concepts continue to deliver great tasting menu offerings. We believe that we are taking the appropriate steps to generate profitable and sustainable growth while enhancing shareholder value.

Improving the performance of our supply chain. We operate an approximately 200,000 square foot commissary in Nashville, Tennessee through which we manufacture, purchase and distribute a substantial majority of the food products and supplies for our O’Charley’s, Ninety Nine and Stoney River restaurants. To a lesser extent, the commissary sells manufactured items to other customers, including retail grocery chains, mass merchandisers and wholesale clubs. We also operate a 20,000 square foot production facility located in Woburn, Massachusetts where we perform meat cutting and other manufacturing for our Ninety Nine restaurants, and a 79,000 square foot distribution facility in Bellingham, Massachusetts which provides distribution services for our Ninety Nine restaurants. Subsequent to the end of the first quarter of 2007, we entered into agreements to outsource the poultry processing and salad dressing manufacturing activities that we currently perform at our Nashville commissary. We also decided to close our manufacturing operations in Woburn, Massachusetts, moving meat cutting to Nashville and outsourcing the other manufacturing that we perform there. Our results for the first quarter of 2007 include non-cash impairment charges of $0.9 million, or $0.03 per diluted share, for the impairment of manufacturing equipment in connection with the changes in our commissary operations. A total of approximately 30 employees working in both Woburn and Nashville will be displaced. We expect to record related severance charges of approximately $0.3 million, or $0.01 per diluted share in the second quarter of 2007. We expect that these changes to our supply chain will reduce our ongoing cost of food and beverage by between $1.0 million and $1.5 million per year, or between $0.03 and $0.05 per diluted share. We expect to realize less than half of this annual savings in the 2007 fiscal year. We continue to consider alternatives for our meat processing and bakery operations in Nashville, and for our distribution operations in Nashville and Bellingham. Such alternatives may result in additional impairment and other charges in subsequent quarters.

Following is an explanation of certain items in our consolidated statements of earnings:

Revenues consist of Company-operated and joint venture restaurant sales and, to a lesser extent, commissary sales and franchise revenue. Restaurant sales include food and beverage sales and are net of applicable state and local sales taxes and discounts. Commissary sales represent sales to outside parties consisting primarily of sales of O’Charley’s branded food items, primarily salad dressings, to retail grocery chains, mass merchandisers, wholesale clubs and franchisees. Franchise revenue consists of development fees and royalties on sales by franchised units. Our development fees for franchisees in which we do not have an ownership interest are generally $50,000 for the first two restaurants and $25,000 for each additional restaurant opened by the franchisee. The development fees are recognized during the reporting period in which the developed restaurant begins operation. The royalties are recognized in revenue in the period corresponding to the franchisees’ sales.

Cost of Food and Beverage primarily consists of the costs of beef, poultry, seafood, produce and alcoholic and non-alcoholic beverages net of vendor discounts and rebates. The two most significant commodities that may affect our cost of food and beverage are beef and seafood, which account for approximately 24 percent to 25 percent and 10 percent to 11 percent, respectively, of our overall cost of food and beverage. Generally, temporary increases in these costs are not passed on to guests; however, in the past, we have adjusted menu prices to compensate for increased costs of a more permanent nature.

Payroll and Benefits include payroll and related costs and expenses directly relating to restaurant level activities including restaurant management salaries, bonuses, share-based compensation, hourly wages for restaurant level team members, payroll taxes, workers’ compensation, various health, life and dental insurance programs, vacation expense and sick pay. We have various incentive bonus plans that compensate restaurant management for achieving certain restaurant level financial targets and performance goals.

Restaurant Operating Costs include occupancy and other expenses at the restaurant level, except property and equipment depreciation and amortization. In addition to occupancy costs, supplies, straight-line rent, supervisory salaries, bonuses, share-based compensation and related expenses, management training salaries, general liability and property insurance, property taxes, utilities, repairs and maintenance, outside services and credit card fees account for the major expenses in this category.

Advertising and Marketing Expenses include all advertising and marketing-related expenses for the various programs that we utilize to promote traffic and brand recognition for our three restaurant concepts. This category also includes the administrative costs of our marketing departments.

General and Administrative Expenses include the costs of restaurant support center administrative functions that support the existing restaurant base and provide the infrastructure for future growth. Executive management and support staff salaries, bonuses, share-based compensation and related expenses, data processing, legal and accounting expenses, and office expenses account for the major expenses in this category. This category also includes all recruiting, relocation and severance-related expenses.

Depreciation and Amortization Property and Equipment primarily includes depreciation on property and equipment calculated on a straight-line basis over the estimated useful lives of the respective assets or the lease term plus one renewal term for leasehold improvements, if shorter.

Asset Impairment and Disposals includes costs associated with the impairment of land, buildings and equipment and certain other assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. Impairment charges for assets that are held for sale represents the difference between their current book value and the estimated net sales proceeds. Impairment costs also include the disposal of certain assets at existing restaurants for re-brandings related to ‘Project Rev’Olution’ and ‘Dressed to the Nines’. Disposal costs include the costs incurred to prepare the asset or assets for sale including the following: repair and maintenance, clean up costs, broker commissions, independent appraisals, insurance deductibles and proceeds. Gains and/or losses associated with the sale of assets are also included in this category.

Pre-opening Costs represent costs associated with our store opening teams, as well as other costs associated with opening a new restaurant and are expensed as incurred. These costs also include straight-line rent related to leased properties from the period of time between when we have waived any contingencies regarding use of the leased property and the date on which the restaurant opens. The amount of pre-opening costs incurred in any one period includes costs incurred during the period for restaurants opened and under development. Our pre-opening costs may vary significantly from period to period primarily due to the timing of restaurant development and openings. Pre-opening costs also include training, supply, and other costs necessary to prepare for the re-opening of an existing restaurant as part of ‘Project RevO’lution’ and ‘Dressed to the Nines’ re-brandings.

16

The following section should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto included elsewhere herein. The following table highlights the operating results for the 16-week periods ended April 22, 2007 and April 16, 2006 as a percentage of total revenues unless specified otherwise. Certain reclassifications have been made to the prior year information to conform to the current year presentation.

	16 Weeks Ended
	April 22,			April 16,
	2007			2006
Revenues:
Restaurant sales		98.8	%		98.9	%
Commissary sales		1.2			1.0
Franchise revenue		—			0.1
		100.0	%		100.0	%
Costs and Expenses:
Cost of restaurant sales: (1)
Cost of food and beverage		29.1	%		30.0	%
Payroll and benefits		33.8			33.9
Restaurant operating costs		18.4			18.7
Cost of commissary sales (2)		1.1			0.9
Advertising and marketing expenses		3.2			2.8
General and administrative expenses		5.2			5.1
Depreciation and amortization		4.8			4.6
Asset impairment and disposals		0.3			—
Pre-opening costs		0.4			0.4
Income from Operations		4.7			4.7
Other Expense:
Interest expense, net		1.3			1.5
Earnings before Income Taxes		3.4			3.2
Income Taxes		0.9			0.9
Net Earnings		2.5	%		2.3	%

(1)	Shown as a percentage of restaurant sales.
(2)		Cost of commissary sales as a percentage of commissary sales was 90.8 percent and 87.3 percent for the 16-week periods ended April 22, 2007 and April 16, 2006, respectively.

17

The following table reflects margin performance of each of our concepts for the quarters ended April 22, 2007 and April 16, 2006.

	16 Weeks Ended
	April 22,	April 16,
	2007	2006
	($ in millions)
O’Charley’s Concept: (1)
Restaurant Sales	$    200.4	$    202.0
Cost and expenses: (2)
Cost of food and beverage	29.0%	30.0%
Payroll and benefits	33.3%	33.4%
Restaurant operating costs (3)	17.4%	17.9%
Ninety Nine Concept:
Restaurant Sales	$      96.1	$      92.4
Cost and expenses: (2)
Cost of food and beverage	28.2%	29.1%
Payroll and benefits	35.8%	35.8%
Restaurant operating costs (3)	20.7%	20.2%
Stoney River Concept:
Restaurant Sales	$      12.6	$        8.8
Cost and expenses: (2)
Cost of food and beverage	37.3%	39.3%
Payroll and benefits	27.6%	25.7%
Restaurant operating costs (3)	15.9%	19.0%
(1) Includes results from O’Charley’s joint venture operations, but excludes revenue from franchised restaurants. (2) Shown as a percentage of restaurant sales. (3) Includes rent, where 100% of the Ninety Nine restaurant locations are leased (land or land and building) as compared to 57% for O’Charley’s and 60% for Stoney River.

18

The following table sets forth certain financial and other restaurant data for the quarters ended April 22, 2007 and April 16, 2006:

	April 22,			April 16,
	2007			2006
Number of Restaurants:
O’Charley’s Restaurants:
In operation, beginning of quarter		227			225
Restaurants opened		3			—
Restaurant closed		—			—
In operation, end of quarter		230			225
Ninety Nine Restaurants:
In operation, beginning of quarter		114			109
Restaurants opened		—			2
Restaurants closed		(1	)		—
In operation, end of quarter		113			111
Stoney River Restaurants:
In operation, beginning of quarter		10			7
Restaurants opened		—			—
Restaurants closed		—			—
In operation, end of quarter		10			7
Franchised / Joint Venture Restaurants (O’Charley’s)
In operation, beginning of quarter		10			6
Restaurants opened		—			1
Restaurants closed		(1	)		—
In operation, end of quarter		9			7
Average Weekly Sales per Store:
O’Charley’s	$	54,000		$	55,621
Ninety Nine		52,809			52,813
Stoney River		78,907			78,707
Change in Same Store Sales (1):
O’Charley’s		(1.6	%)		0.6	%
Ninety Nine		2.7	%		1.1	%
Stoney River		0.8	%		5.1	%
Change in Same Store Guest Visits (1):
O’Charley’s		(7.0	%)		(0.6	%)
Ninety Nine		(2.3	%)		0.7	%
Stoney River		(4.7	%)		2.9	%
Change in Same Store Average Check per Guest (1):
O’Charley’s		5.8	%		1.2	%
Ninety Nine		5.1	%		0.4	%
Stoney River		5.9	%		2.2	%
Average Check per Guest (2):
O’Charley’s	$	12.52		$	11.80
Ninety Nine		14.44			13.74
Stoney River		43.22			41.54

(1)	When computing same store sales and guest visits, restaurants open for at least 78 weeks are compared from period to period.
(2)	The average check per guest is computed using all restaurants open at the end of the quarter.

19

First Fiscal Quarter of 2007 Versus First Fiscal Quarterof 2006

Revenues

During the 16 weeks ended April 22, 2007, total revenues increased $6.4 million, or 2.1 percent, to $312.9 million from $306.5 million for the 16 weeks ended April 16, 2006.

During the first quarter of 2007, gift card redemptions at our three restaurant concepts totaled $14.8 million, a 9.6 percent decrease over our gift card redemptions in the first quarter of 2006. We believe that this year-over-year reduction in gift card redemptions is due to the calendar shift resulting from the 53^rd week of our 2006 fiscal year.

Restaurant sales for company-operated O’Charley’s decreased 1.4 percent to $197.4 million for the first quarter, reflecting the impact of a same store sales decrease of 1.6 percent partially offset by the addition of six new company-operated restaurants and the closing of one company-operated restaurant since the first quarter of 2006. The same store sales decrease was comprised of a 5.8 percent increase in average check offset by a 7.0 percent decrease in guest counts. The decline in guest counts was not unexpected as we continued to phase out our “kids eat free” program as well as the use of couponing and discounting. Average check for company-operated stores in the first quarter was $12.52. Three company-operated O’Charley’s restaurants opened during the first quarter, bringing the total number of company-operated restaurants to 230 at the end of the quarter.

Restaurant sales for Ninety Nine increased 4.0 percent to $96.1 million in the first quarter, reflecting the addition of three new restaurants and the closing of one restaurant since the first quarter of 2006. The same store sales increase of 2.7 percent was comprised of a 5.1 percent increase in average check partially offset by a 2.3 percent decrease in guest counts. Average check in the first quarter was $14.44. One Ninety Nine restaurant closed in the first quarter, bringing the total number to 113 at the end of the quarter.

Restaurant sales for Stoney River Legendary Steaks increased 43.2 percent to $12.6 million in the first quarter, which reflects sales increases of 0.8 percent at the six restaurants included in the same store sales base, and sales at the new restaurants in Dublin, Ohio, Nashville, Tennessee, Chesterfield, Missouri, and Atlanta, Georgia. The same-store sales increase consisted of a 5.9 percent increase in average check partially offset by a 4.7 percent decline in guest counts. Average check for Stoney River in the first quarter was $43.22.

Cost of Food and Beverage

During the first quarter of 2007, our cost of food and beverage was $89.9 million, or 29.1 percent of restaurant sales, compared with $91.0 million, or 30.0 percent of restaurant sales in the first quarter of 2006. This decrease in food and beverage cost as a percentage of restaurant sales reflects the impact of a higher average check, higher margins on our limited time menu offerings, a narrowing of the gap between our theoretical and actual food costs and lower costs for pork, partially offset by higher costs for most other food commodities.

Payroll and Benefits

During the first quarter of 2007, payroll and benefits were $104.5 million, or 33.8 percent of restaurant sales, compared to $102.8 million, or 33.9 percent of restaurant sales, in the same prior-year period. A 30 basis point reduction in employee health and welfare expense was partially offset by increases in training and bonus expenses.

Restaurant Operating Costs

During the first quarter of 2007, restaurant operating costs were $56.8 million, or 18.4 percent of restaurant sales, compared to $56.6 million, or 18.7 percent of restaurant sales, in the same prior year period. A number of factors contributed to this 30 basis point improvement, including the impact of lower linen and supply costs at the O’Charley’s concept.

Advertising and Marketing Expenses

During the first quarter of 2007, advertising and marketing expenditures increased $1.6 million, or 18.8 percent, to $10.0 million or 3.2 percent of revenue from $8.5 million or 2.8 percent of revenue in the first quarter of 2006. The increase in advertising and marketing expenses is primarily due to the additional advertising of our limited time menu offerings.

General and Administrative Expenses

General and administrative expenses increased to $16.3 million in the first quarter of 2007 from $15.5 million in the first quarter of 2006, and as a percentage of revenues, increased to 5.2 percent from 5.1 percent in the same prior-year period. A 30 basis point increase in share-based compensation expense, or approximately $0.03 per diluted share, was partially offset by reduced expenses as a percent of sales in other areas.

Asset Impairment and Disposals

During the first quarter of 2007, we recorded $0.9 million in non-cash impairment charges related to our decision to close our manufacturing operations in Woburn, Massachusetts and the outsourcing of the poultry processing and salad dressings activities performed at our Nashville commissary. We also recorded approximately $0.1 million relating to losses taken on the disposal of assets. In the first quarter of 2006, we did not take any such impairment or disposal charges.

20

Depreciation and Amortization, Property and Equipment

During the first quarter of 2007, depreciation increased by $1.1 million to $15.1 million as compared to $14.0 million in the same prior year period and increased as a percentage of total revenues to 4.8 percent from 4.6 percent. This increase is due to additional capital expenditures made since the first quarter of 2006 and their related deprecation expense.

Pre-opening Costs

During the first quarter of 2007, pre-opening costs were $1.1 million, reflecting the opening of three new O’Charley’s restaurants and the completion of five ‘Project Rev’Olution’ and six ‘Project Dressed to the Nines’ re-brandings. During the first quarter of 2006, pre-opening costs were $1.2 million.

Interest Expense, Net

Interest expense, net during the first quarter of 2007 decreased to $3.9 million compared to $4.5 million for the same prior-year period as a result of the higher earnings on our $11.0 million of cash and equivalents as of April 22, 2007. In addition, we had no loans outstanding on our revolving line of credit as compared to $9.0 million outstanding at the end of the first quarter of last year.

Income Taxes

During the first quarter of 2007, the company adopted FASB Interpretation No. 48 (FIN48), “Accounting for Uncertainty in Income Taxes” an interpretation of SFAS No. 109 “Accounting for Income Taxes” and we also closed an Internal Revenue Service audit for the tax years 2002 through 2004. We expect our effective tax rate for the balance of fiscal year to be between 25 and 26 percent.

On May 16, 2007, we issued a press release reporting our unaudited financial results for the first quarter of 2007. In that release, we indicated that the effective tax rate applied to pretax earnings in the quarter was 26.5%. We also indicated in the release that the application of FIN 48 and the closing of the audit resulted in additional income tax expense in the quarter of $0.1 million, with a corresponding adverse impact on the effective tax rate of 1.4%. Since issuing that release, we have finalized our first quarter financial and accounting procedures, and have concluded that adoption and application of FIN 48 was not material to our results in the quarter. As a result, the effective tax rate for the quarter was 25.3%, rather than the 26.5% previously reported. This adjustment resulted in an increase in our basic earnings per share by $0.01 to $0.34 per share, but does not impact the previously-reported diluted earnings per share of $0.33.

Liquidity and Capital Resources

Our primary sources of capital have historically been cash provided by operations, borrowings under our credit facilities and capital leases. Our principal capital needs have historically arisen from property and equipment additions, acquisitions, and payments on long-term debt and capitalized lease obligations. In addition, we lease a substantial number of our restaurants under operating leases and have substantial operating lease obligations. Like many restaurant companies, our working capital has historically had current liabilities in excess of current assets due to the fact that most of our sales are received as cash or credit card charges, and we have reinvested our cash in new restaurant development. We do not believe this indicates a lack of liquidity. To the extent operations generate cash in excess of working capital and development needs, we have historically invested this cash in overnight repurchase agreements. As previously announced, we have slowed our restaurant development in order to focus on improving the performance of our existing restaurants and we opened three Company-owned O’Charley’s restaurants but did not open any Ninety Nine or Stoney River restaurants during the first quarter of 2007. We did, however, complete five O’Charley’s restaurant re-brandings and six Ninety Nine restaurant re-brandings during the quarter as part of our continued focus on our existing restaurants.

On October 18, 2006, we entered into a Second Amended and Restated Credit Agreement, (the “Credit Agreement”). The Credit Agreement amended and restated our existing senior secured credit facility entered into on November 4, 2003. The Credit Agreement provides for a five-year, $125.0 million revolving credit facility and permits us to request an increase in the principal amount of the facility of up to $25.0 million. At April 22, 2007, we had no amounts outstanding on the revolving credit facility except for approximately $9.1 million in letters of credit which reduced our available borrowings under the Credit Agreement.

The Credit Agreement includes certain customary representations and warranties, negative covenants and events of default. It requires us to comply with certain financial covenants, including an adjusted debt to EBITDAR ratio, a senior secured leverage ratio, a fixed-charge coverage ratio and capital expenditures ratio. We were in compliance with such covenants at April 22, 2007.

The interest rates per annum applicable to loans outstanding under the Credit Agreement will, at our option, be equal to either a base rate or a LIBOR rate, in each case plus an applicable margin (0.0 percent to 0.5 percent in the case of base rate loans and 0.75 percent to 1.25 percent in the case of LIBOR rate loans), depending on our senior secured leverage ratio. At April 22, 2007, our margin applicable to LIBOR loans was 0.75 percent. In addition to the interest payments required under the Credit Agreement, we are required to pay a commitment fee on the aggregate average daily unused portion of the credit facility equal to 0.25 percent to 0.375 percent per annum, depending on our senior secured leverage ratio.

Our obligations under the Credit Agreement are secured by liens on substantially all of our assets, including a pledge of the capital stock of our material subsidiaries (but excluding real property acquired after November 3, 2003). Except as otherwise provided in the Credit Agreement, the Credit Agreement will mature on October 18, 2011.

From time to time, we have entered into interest rate swap agreements with certain financial institutions. During the first quarter of 2004, we entered into interest rate swap agreements with a financial institution that effectively convert a portion of the fixed-rate indebtedness related to the $125 million aggregate principal amount of senior subordinated notes due 2013 into variable-rate obligations. The total notional amount of these swaps was $100.0 million and is based on the six-month LIBOR rate in arrears plus a specified margin, the average of which is 3.9 percent. The terms and conditions of these swaps mirror the interest terms and conditions on our 9.0 percent senior subordinated notes due 2013 and are accounted for as fair value hedges. These swap agreements expire in November 2013. Our weighted average interest rate for the years ended April 22, 2007 and April 16, 2006 was 8.3 percent and 8.1 percent, respectively.

21

On May 18, 2007, subsequent to the end of our first quarter, we announced the authorization by our board of directors to increase our $25.0 million share repurchase limit to $50.0 million and a quarterly dividend of $0.06 per share. The share repurchase authorization does not have an expiration date and the pace of repurchase activity will depend on factors such as levels of cash generation from operations, cash requirements for strategic initiatives, repayment of debt, current stock price, and other factors. We may repurchase shares from time to time on the open market or in private transactions, including structured transactions. The dividend is payable on June 29, 2007, to shareholders of record on June 15, 2007.

In 2007, net cash flows used by investing activities included capital expenditures incurred principally for building new restaurants, improvements to existing restaurants, and technological improvements at our restaurant support center. The Company did not finance any capital expenditures during the quarters ended April 22, 2007 or April 16, 2006. Capital expenditures for the quarter ended April 22, 2007 and April 16, 2006 were as follows:

	April 22,			April 16,
		2007		2006
		(in thousands)
New restaurant capital expenditures		$	8,206	$	8,097
Other capital expenditures			7,146		3,007
Total capital expenditures		$	15,352	$	11,104

We expect capital expenditures in 2007 to be between $55.0 million and $60.0 million. As part of our focus on improving results in our existing restaurants, we plan to develop and open fewer restaurants in 2007 than we have developed prior to 2006. We expect to open between four and six new company-owned O’Charley’s restaurants, between three and five new Ninety Nine restaurants, and one new Stoney River restaurant in 2007. Our capital expenditure projections for 2007 include between 10 and 20 ‘Project RevO’lution’ re-brandings for our O’Charley’s concept and approximately 30 ‘Dressed to the Nines’ re-brandings for our Ninety Nine concept.

The following tables set forth our capital structure and certain financial ratios and financial data as of and for the quarter ended 16 weeks ended April 22, 2007 and as of and for the year ended December 31, 2006:

	April 22,					December 31,
	2007					2006
	$		%			$		%
	(Dollars in thousands)
Revolving credit facility	$	—		0.0	%	$	—		0.0	%
Secured mortgage note payable		94		0.0			102		0.0
GE Capital Financing arrangement		1,182		0.2			1,197		0.2
Note payable to Stoney River managing partners		314		0.1			393		0.0
Capitalized lease obligations		23,488		4.4			27,665		5.2
Total senior debt		25,078		4.7			29,357		5.4
Senior subordinated notes		125,000		23.0			125,000		23.4
Total debt(1)(2)		150,078		27.7			154,357		28.8
Shareholders’ equity		392,248		72.3			380,826		71.2
Total capitalization	$	542,326		100.0	%	$	535,183		100.0	%
Adjusted total debt(1)(3)	$	416,934				$	419,109
Adjusted total capitalization(1)(3)	$	809,182				$	799,935
EBITDA(1)(4)	$	30,660				$	91,613

(1) We believe EBITDA, total debt, adjusted total debt and adjusted total capitalization are useful measurements to investors because they are commonly used as analytical indicators to evaluate performance, measure leverage capacity and debt service ability. These measures should not be considered as measures of financial performance or liquidity under U.S. generally accepted accounting principles (GAAP). EBITDA, total debt, adjusted total debt and adjusted total capitalization should not be considered in isolation or as alternatives to financial statement data presented in our consolidated financial statements as an indicator of financial performance or liquidity. EBITDA, total debt, adjusted total debt and adjusted total capitalization, as presented, may not be comparable to similarly titled measures of other companies.

(2) Total debt represents the long-term debt and capitalized lease obligations, in each case including current portion. The following table reconciles total debt, as described above, to the long-term debt and capitalized lease obligations, in each case including current portion as reflected in our consolidated balance sheets:

	April, 22	December 31,
	2007	2006
	(inthousands)
Current portion of long-term debt and capitalized lease obligations	$ 7,912	$ 9,812
Add:
Long-term debt, less current portion	126,435	126,540
Capitalized lease obligations, less current portion	15,731	18,005
Total debt	$150,078	$ 154,357

22

(3) Adjusted total debt represents the sum of long-term debt and capitalized lease obligations, in each case including current portion, plus the product of (a) rent expense for the 52 and 53 weeks ended April 22, 2007 and December 31, 2006, respectively, multiplied by (b) eight. Adjusted total capitalization represents the sum of long-term debt and capitalized lease obligations, in each case including current portion, shareholders’ equity, plus the product of (a) rent expense for the 52 and 53 weeks ended April 22, 2007 and December 31, 2006, respectively, multiplied by (b) eight. The following table reconciles adjusted total debt and adjusted total capitalization, as described above, to the long-term debt and capitalized lease obligations, in each case including current portion, shareholders’ equity and rent expense as reflected in our consolidated financial statements and the notes to the consolidated financial statements:

	April 22,		December 31,
	2007		2006
	(in thousands)
Current portion of long-term debt and capitalized leases	$	7,912	$	9,812
Add:
Long-term debt, less current portion		126,435		126,540
Capitalized lease obligations, less current portion		15,731		18,005
Total debt		150,078		154,357
Add eight times rent expense		266,856		264,752
Adjusted total debt		416,934		419,109
Add:
Shareholders’ equity		392,248		380,826
Adjusted total capitalization	$	809,182	$	799,935

(4) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization and asset impairments, as defined in our credit agreement. The following tables reconcile EBITDA, as described above, to net earnings, and to cash flows provided by operating activities as reflected in our consolidated statements of earnings and cash flows:

	16 weeks ended April 22,		Year ended December 31,
	_2007_		_2006_
	(in thousands)
Net earnings	$	8,008	$	18,890
Add:
Income taxes		2,718		7,200
Interest expense, net		3,896		14,401
Asset impairments		897		4,508
Depreciation and amortization		15,141		46,614
EBITDA	$	30,660	$	91,613

	16 weeks ended		Year ended
	April 22,		December 31,
	2007		2006
	(inthousands)
Net cash provided by operating activities	$ 8,204		$ 83,260
Adjustment for items included in cash provided by operating activities but excluded from the calculation of EBITDA:
Deferred income taxes	(215	)	7,495
Share-based compensation	(1,270	)	(2,655	)
Amortization of deferred gain on sale-leasebacks	325		1,077
(Loss) gain on the sale of assets held for sale and other assets dispositions	(156	)	1,835
Changes in operating assets and liabilities	18,101		(17,425	)
Changes in long-term assets and liabilities	(662	)	(2,233	)
Income taxes	2,718		7,200
Interest expense, net	3,615		13,059
EBITDA	$ 30,660		$ 91,613

Based upon the current level of operations and anticipated growth for our restaurant concepts, we believe that cash flow from operations and borrowings under our Credit Agreement are sufficient to fund our working capital needs over at least the next 12 months. There can be no assurances that such sources of financing will be available to us or that any such financing would not negatively impact our earnings.

23

Critical Accounting Policies

In our Annual Report on Form 10-K for the year ended December 31, 2006, we identified our critical accounting policies related to property and equipment, lease accounting, share-based compensation, goodwill and trademarks, impairment of long-lived assets, and income taxes and related financial statement items. We consider an accounting policy to be critical if it is most important to the portrayal of our financial condition and results, and it requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. During the first 16 weeks of 2007, there have been no changes in our critical accounting policies.

Contractual Obligations and Commercial Commitments

There were no material changes in our contractual obligations and commercial commitments as of April 22, 2007 as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.

Outlook

We expect to report net earnings per diluted share of between $0.20 and $0.24 for the 12-week period ending July 15, 2007. We expect to report net earnings per diluted share of between $1.00 and $1.10 for the fiscal year ending December 30, 2007. The second quarter and full-year guidance includes the first quarter impairment charges, anticipated second quarter severance and related charges of $0.01 per diluted share, and the anticipated reduction in food cost of approximately $0.02 per diluted share from the changes announced related to our supply chain arrangements. We have locked in our pricing for the remaining three quarters of 2007 for approximately 95 percent of our estimated requirements for poultry, and approximately 90 percent of our estimated requirements for pork. We also have an arrangement with another party which we believe provides price protection for 95 percent of our estimated requirements for beef. Compared to the average prices paid in the corresponding three quarters of 2006, these arrangements provide for pricing for the remaining three quarters of 2007 that is more than 15 percent lower for pork, and between 5 percent and 6 percent higher for beef and poultry. With respect to poultry pricing, this is a correction to the number that we previously disclosed.

Projected results for the second quarter and the year are based upon anticipated same store sales increases of less than two percent for O’Charley’s, and between one percent and three percent at Ninety Nine, and continued year-over-year improvement in restaurant-level margins. In 2007, we expect to open between four and six new O’Charley’s company-operated restaurants, between three and five new Ninety Nine restaurants and one new Stoney River restaurant. Our guidance for 2007 anticipates the completion of 30 ‘Dressed to the Nines’ remodels in Ninety Nine. Although we have not yet decided to proceed with a full roll-out of ‘Project RevO’lution’ remodels in the O’Charley’s concept, the guidance for 2007 anticipates the completion of between 10 and 20. Including the training expenses and asset disposals associated with these remodels, they are expected to have a negative impact on net earnings in 2007. Our guidance for the second quarter and full year 2007 does not reflect any impact for charges or expenses arising from decisions we may make as part of our transition efforts, or as a result of additional changes to our supply chain.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, (“SFAS 157”). This Standard defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We have not yet determined the impact SFAS 157 will have on our 2008 results of operations or financial position.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statements No. 115” (“SFAS 159”). SFAS 159 allows the irrevocable election of fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities and other items on an instrument-by-instrument basis. Changes in fair value would be reflected in earnings as they occur. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of the first fiscal year beginning after November 15, 2007. We are currently evaluating this SFAS and have not determined the impact if any it will have on our 2008 results of operations.

Impact of Inflation

The impact of inflation on the cost of food, labor, equipment, land construction costs, and fuel/energy costs could adversely affect our operations. A majority of our employees are paid hourly rates related to federal and state minimum wage laws. The federal government and several states have instituted or are considering changes to their minimum wage and/or benefit related laws which, if enacted, could have an adverse impact on the Company’s payroll and benefit costs. As a result of increased competition and the low unemployment rates in the markets in which our restaurants are located, we have continued to increase wages and benefits in order to attract and retain management personnel and hourly employees. In addition, most of our leases require us to pay taxes, insurance, maintenance, repairs and utility costs, and these costs are subject to inflationary pressures. Commodity inflation has had a significant impact on our operating costs. We also believe that increased fuel costs over the past 18 months have had a negative impact on consumer behavior and have increased the cost of operating our Commissary. We attempt to offset the effect of inflation through periodic menu price increases, economies of scale in purchasing and cost controls and efficiencies at our restaurants.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing, and cash management activities. We utilize a balanced mix of debt maturities along with both fixed-rate and variable-rate debt to manage our exposures to changes in interest rates. Our fixed-rate debt consists primarily of capitalized lease obligations and senior subordinated notes and our variable-rate debt consists primarily of our revolving credit facility.

As an additional method of managing our interest rate exposure on our Credit Facility, at certain times we enter into interest rate swap agreements whereby we agree to pay over the life of the swaps a fixed interest rate payment on a notional amount and in exchange we receive a floating rate payment calculated on the same amount over the same time period. The fixed interest rates are dependent upon market levels at the time the swaps are consummated. The floating interest rates are

24

generally based on the monthly LIBOR rate and rates are typically reset on a monthly basis, which is intended to coincide with the pricing adjustments on our revolving credit facility. There were no swaps outstanding at April 22, 2007 associated with our Credit Facility.

At April 22, 2007, we had interest rate swap agreements with a financial institution that effectively converted a portion of the fixed-rate indebtedness related to our $125.0 million senior subordinated notes due 2013 into variable-rate obligations. The total notional amount of these swaps is $100.0 million and is based on six-month LIBOR rates in arrears plus a specified margin, the average of which is 3.9 percent. The terms and conditions of these swaps mirror the interest terms and conditions on the notes and are accounted for as fair value hedges. These swap agreements expire in November 2013.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, we performed an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In performing this evaluation, management determined that we had insufficient personnel with appropriate qualifications and training in accounting for income taxes to allow for the timely preparation of an accurate income tax provision and related disclosures. In addition, management’s oversight and review related to certain income tax accounts and analyses was not effective. These deficiencies in internal control over financial reporting resulted in more than a remote likelihood that a material misstatement of our income tax accounts would not be detected or prevented. Therefore, we concluded that our disclosures controls were not effective. During the quarter ended April 22, 2007, we initiated steps to remediate these deficiencies in our disclosure controls and procedures by instituting additional internal review procedures along with outside technical expertise in regards to accounting for income taxes. While we believe that these steps have resulted in improvements in our disclosure controls, based upon our experience in the first quarter in connection with the adoption of Financial Interpretation No. 48 (FIN 48) “Accounting for Uncertainty in Income Taxes” – an Interpretation of SFAS No. 109, “Accounting for Income Taxes”, we concluded that our disclosure controls and procedures were not effective as of April 22. 2007.

Changes in Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). During the assessment of internal control over financial reporting performed in connection with the preparation of management’s annual report on internal control over financial reporting contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, management determined we had insufficient personnel with appropriate qualifications and training in accounting for income taxes to allow for the timely preparation of an accurate income tax provision. In addition, management’s oversight and review related to certain income tax accounts and analyses was not effective. These deficiencies in internal control over financial reporting resulted in more than a remote likelihood that a material misstatement of our income tax accounts would not be detected or prevented. During the quarter ended April 22, 2007, we initiated steps to remediate these deficiencies in our disclosure controls and procedures by instituting additional review procedures along with outside technical expertise in regards to accounting for income taxes. Except as described above, there have been no other changes in the Company’s internal control over financial reporting during the first fiscal quarter of 2007 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In September 2003, we became aware that guests and employees at one of our O’Charley’s restaurants located in Knoxville, Tennessee were exposed to the Hepatitis A virus, which resulted in a number of our employees and guests becoming infected. As of the date of this filing, all of these cases have been settled and dismissed. We have insurance that provides coverage, subject to limitations, for lost income at our restaurants whose results of operations were adversely affected by the Hepatitis A incident. We submitted a claim pursuant to our insurance policy for this type of loss, but our carrier disagreed with our claim. On July 11, 2005, certain underwriters at Lloyd’s, our insurance carrier, filed suit against us in the Circuit Court for Knox County, Tennessee seeking declaration by the court regarding certain limits in this policy which would effectively limit our recovery under the policy to $100,000. During the first quarter of fiscal 2007, we entered into a release and settlement agreement with Lloyd’s. The amount received by us in the settlement was included in our results of operations for the first fiscal quarter of 2007.

We have been involved in an arbitration in the matter of Ballantyne Village, LLC v. O’Charley’s Inc. filed in April 2005. Ballantyne Village, LLC has alleged that we breached a lease for retail space for a proposed Stoney River Legendary Steaks restaurant in Charlotte, North Carolina. During the first quarter of fiscal 2007, we entered into a settlement and release agreement with the plaintiff. The amount paid by us in the settlement was included in our results of operations for the fiscal year ended December 31, 2006.

On May 19, 2006, Meritage Hospitality Group, Inc. and certain of its affiliated entities (“Meritage”), which franchise five O’Charley’s restaurants in Michigan, filed suit against us in the United States District Court for the Western District of Michigan. The suit alleged that we engaged in fraud and violations of the Michigan Franchise Investment Law and Michigan Consumer Protection Act in connection with Meritage becoming a franchisee of our O’Charley’s restaurant concept. The suit sought rescission of the development agreement and five franchise agreements with us and related damages. During the first quarter of fiscal 2007, we entered into a general release with Meritage pursuant to which Meritage agreed to dismiss the litigation filed against us and we agreed to make certain future financial and other accommodations to Meritage under the terms of their development and franchise agreements.

In addition, we are defendants and plaintiffs from time to time in various other legal proceedings arising in the ordinary course of our business, including claims relating to injury or wrongful death under “dram shop” laws that allow a person to sue us based on any injury caused by an intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants; claims relating to workplace and employment matters, discrimination and similar matters; claims resulting from “slip and fall” accidents; claims with respect to insurance recoveries; claims relating to lease obligations; and claims from our guests or employees alleging illness, injury or other food quality, health or operational concerns.

We do not believe that any of the legal proceedings pending against us as of the date of this report will have a material adverse effect on our liquidity or financial condition. We may incur liabilities or accrue expenses relating to future legal proceedings in a particular fiscal quarter which may adversely affect our results of operations.

25

Item 4. Submission of Matters to a Vote of Security Holders

We held our annual meeting of shareholders on May 17, 2007. The number of shares of Common Stock, no par value share, of the Company issued, outstanding, and entitled to vote at March 30, 2007, the record date of the meeting, was approximately 23.7 million. Approximately 92.4 percent of the outstanding shares was present in person or by proxy at the meeting. At the annual meeting, the following proposals were voted upon:

(a) Nominations to elect the following directors as Class II directors to a three-year term expiring at the Annual meeting in 2010 and until their successors are elected and qualified:

Director	For	Withheld
William F. Andrews	19,897,007	2,040,450
John E. Stokely	19,897,836	2,039,621
H. Steve Tidwell	19,743,789	2,193,668

The following table sets forth the other members of our board of directors whose term of office continued after the meeting and the year in which his or her term expires:

Name	Term Expires
Gregory L. Burns	2009
Robert J. Walker	2009
Richard Reiss, Jr.	2008
G. Nicholas Spiva	2008
Shirley A. Zeitlin	2008
Dale W. Polley	2008

(b) Adoption of the O’Charley’s Inc. Executive Incentive Plan:

For	Against	Abstain
16,894,312	2,572,326	25,609

(c) Ratification of the appointment of KPMG LLP as the Company’s independent registered public accounting firm for 2007:

For	Against	Abstain
21,141,268	785,695	10,492

(d) Adoption of a shareholder proposal requesting the Board to take the necessary steps to declassify the Board and establish annual election of directors:

For	Against	Abstain
17,588,760	1,878,065	25,422

Item 6. Exhibits

No.	Description
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Gregory L. Burns, Chief Executive Officer of O’Charley’s Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Lawrence E. Hyatt, Chief Financial Officer of O’Charley’s Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

26

SIGNATURES

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.

O’Charley’s Inc.

(Registrant)

Date: May 30, 2007 By: /s/ Gregory L. Burns  

Gregory L. Burns

Chairman and Chief Executive Officer

Date: May 30, 2007 By: /s/ Lawrence E. Hyatt  

Lawrence E. Hyatt

Chief Financial Officer, Secretary andTreasurer

27

EX-31

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Gregory L. Burns, certify that:

1. I have reviewed this quarterly report on Form 10-Q of O'Charley's Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 30, 2007

/s/ Gregory L. Burns

Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Lawrence E. Hyatt, certify that:

1. I have reviewed this quarterly report on Form 10-Q of O'Charley's Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;

and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 30, 2007

/s/ Lawrence E. Hyatt

Chief Financial Officer

EX-32

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of O'Charley's Inc. (the "Company") on Form 10-Q for the period ending April 22, 2007, as filed with the Securities and Exchange Commission on May 30, 2007 (the "Report"), I, Gregory L. Burns, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Gregory L. Burns

Gregory L. Burns

Chief Executive Officer

May 30, 2007

EX-32

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of O'Charley's Inc. (the "Company") on Form 10-Q for the period ending April 22, 2007 as filed with the Securities and Exchange Commission on May 30, 2007 (the "Report"), I, Lawrence E. Hyatt, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Lawrence E. Hyatt

Lawrence E. Hyatt

Chief Financial Officer

May 30, 2007