SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.

20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: November 7, 2005

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-6054

STAR BUFFET, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		84-1430786
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

1312 N. Scottsdale Road,

Scottsdale, AZ 85257

(Address of principal executive offices) (Zip Code)

(480) 425-0397

(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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of December 13, 2005, there were 3,003,425 shares of Common Stock, $ .001 par value, outstanding.

STAR BUFFET, INC. AND SUBSIDIARIES

INDEX


PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements:

	Condensed Consolidated Balance Sheets as of November 7, 2005 (unaudited) and January 31, 2005

	Unaudited Condensed Consolidated Statements of Operations for the twelve and forty weeks ended November 7, 2005 and November 1, 2004

	Unaudited Condensed Consolidated Statements of Cash Flows for the forty weeks ended November 7, 2005 and November 1, 2004

	Notes to Unaudited Condensed Consolidated Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Item 4.	Controls and Procedures

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings

Item 6.	Exhibits and Reports on Form 8-K

Signatures

PART I: FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	November 7, 2005		January 31, 2005
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	506,000	$	692,000
Current portion of notes receivable	37,000		18,000
Receivables	209,000		420,000
Inventories	487,000		465,000
Deferred income taxes	246,000		204,000
Prepaid expenses	251,000		74,000

Total current assets	1,736,000		1,873,000

Property, buildings and equipment:
Property, buildings and equipment, net	15,811,000		16,759,000
Property and equipment leased to third parties, net	4,520,000		4,361,000
Property, buildings and equipment held for future use	2,327,000		2,574,000
Property and equipment under capitalized leases, net	916,000		1,019,000
Property held for sale	931,000		931,000
Total property, buildings and equipment	24,505,000		25,644,000

Other assets:
Notes receivable, net of current portion	4,264,000		2,860,000
Deposits and other	227,000		224,000

Total other assets	4,491,000		3,084,000

Deferred income taxes, net	1,925,000		1,805,000

Intangible assets:
Goodwill	1,677,000		1,677,000
Other intangible assets, net	741,000		797,000

Total intangible assets	2,418,000		2,474,000

Total assets	$	35,075,000	$	34,880,000

The accompanying notes are an integral part of the condensed consolidated financial statements.

(Continued)

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

	November 7, 2005		January 31, 2005
	(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable-trade	$	1,860,000	$	1,737,000
Payroll and related taxes	1,154,000		1,647,000
Sales and property taxes	908,000		872,000
Rent, licenses and other	417,000		533,000
Income taxes payable	974,000		721,000
Revolving line of credit	452,000		—
Current maturities of obligations under long-term debt	630,000		543,000
Current maturities of obligations under capital leases	139,000		116,000

Total current liabilities	6,534,000		6,169,000

Deferred rent payable	1,318,000		1,320,000
Other long-term liability	34,000		68,000
Capitalized lease obligations, net of current maturities	1,426,000		1,538,000
Long-term debt, net of current maturities	5,794,000		6,010,000

Total liabilities	15,106,000		15,105,000

Stockholders’ equity:
Preferred stock, $.001 par value; authorized 1,500,000 shares; none issued or outstanding	—		—
Common stock, $.001 par value; authorized 8,000,000 shares; issued and outstanding 3,003,425 and 2,950,000 shares	3,000		3,000
Additional paid-in capital	16,618,000		16,351,000
Officer’s note receivable	—		(698,000		)
Retained earnings	3,348,000		4,119,000

Total stockholders’ equity	19,969,000		19,775,000

Total liabilities and stockholders’ equity	$	35,075,000	$	34,880,000

The accompanying notes are an integral part of the condensed consolidated financial statements.

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Twelve Weeks Ended								Forty Weeks Ended
	November 7,				November 1,				November 7,				November 1,
	2005				2004				2005				2004
					(As restated)								(As restated)
Total revenues	$	11,493,000			$	13,269,000			$	44,150,000			$	50,360,000

Costs and expenses
Food costs	3,997,000				4,611,000				15,085,000				17,341,000
Labor costs	3,954,000				4,577,000				14,234,000				16,767,000
Occupancy and other expenses	2,776,000				2,895,000				9,095,000				10,090,000
General and administrative expenses	456,000				540,000				1,645,000				2,070,000
Depreciation and amortization	470,000				531,000				1,651,000				1,828,000
Impairment of long-lived assets	—				262,000				315,000				516,000

Total costs and expenses	11,653,000				13,416,000				42,025,000				48,612,000

(Loss) income from operations	(160,000			)	(147,000			)	2,125,000				1,748,000

Interest expense	(125,000			)	(167,000			)	(503,000			)	(493,000		)
Interest income	28,000				—				330,000				5,000
Other income	101,000				67,000				280,000				213,000

Income (loss) before income taxes	(156,000			)	(247,000			)	2,232,000				1,473,000

Income taxes (benefit)	(54,000			)	(82,000			)	750,000				514,000

Net (loss) income	$		(102,000	)	$		(165,000	)	$		1,482,000		$	959,000

Net (loss) income per common share — basic	$		(0.03	)	$		(0.06	)	$		0.50		$	0.33
Net (loss) income per common share — diluted	$		(0.03	)	$		(0.06	)	$		0.46		$	0.30

Weighted average shares outstanding — basic	3,003,425				2,950,000				2,985,564				2,950,000
Weighted average shares outstanding —diluted	3,003,425				2,950,000				3,208,903				3,184,675

The accompanying notes are an integral part of the condensed consolidated financial statements.

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Forty Weeks Ended
	November 7, 2005			November 1, 2004
				(As restated)
Cash flows from operating activities:
Net income	$	1,482,000		$	959,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,651,000			1,828,000
Impairment of long-lived assets	315,000			516,000
Deferred income taxes	(162,000		)	(27,000		)
Change in operating assets and liabilities:
Receivables	211,000			156,000
Inventories	(22,000		)	(11,000		)
Prepaid expenses	(177,000		)	(227,000		)
Deposits and other	(3,000		)	43,000
Deferred rent payable	(2,000		)	(72,000		)
Accounts payable-trade	123,000			(748,000		)
Income taxes payable	253,000			186,000
Other accrued liabilities	(607,000		)	(26,000		)
Total adjustments	1,580,000			1,618,000
Net cash provided by operating activities	3,062,000			2,577,000

Cash flows from investing activities:
Acquisition of license	(25,000		)	—
Loan repayment by officer	698,000			632,000
Interest income	(2,000		)	(3,000		)
Receipts from payments on notes receivable	79,000			20,000
Issuance of note receivable	(1,500,000		)	—
Acquisition of property, buildings and equipment	(737,000		)	(2,863,000		)
Net cash used in investing activities	(1,487,000		)	(2,214,000		)

Cash flows from financing activities:
Exercise of stock options	267,000			—
Payments on long term debt	(429,000		)	(724,000		)
Proceeds from issuance of long-term debt	300,000			3,075,000
Proceeds (payments) on line of credit, net	452,000			(1,500,000		)
Capitalized loan costs	(9,000		)	(27,000		)
Principal payment on capitalized lease obligations	(89,000		)	(74,000		)
Dividends paid	(2,253,000		)	(1,475,000		)
Net cash used in financing activities	(1,761,000		)	(725,000		)

Net decrease in cash and cash equivalents	(186,000		)	(362,000		)

Cash and cash equivalents at beginning of period	692,000			445,000

Cash and cash equivalents at end of period	$	506,000		$	83,000

(Continued)

The accompanying notes are an integral part of the condensed consolidated financial statements.

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

	Forty Weeks Ended
	November 7, 2005		November 1, 2004
			(As restated)
Supplemental disclosures of cash flow information:

Cash paid during the period for:
Interest	$	486,000	$	491,000

Income taxes	$	659,000	$	354,000

Non cash investing and financing activities:

Exchange of property rental for repair services	$	—	$	2,000

The accompanying notes are an integral part of the condensed consolidated financial statements.

STAR BUFFET, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note (A) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts for Star Buffet, Inc., together with its direct and indirect wholly-owned subsidiaries Summit Family Restaurants Inc. (“Summit”), HTB Restaurants, Inc. (“HTB”), Northstar Buffet, Inc. (“NSBI”) and Star Buffet Management, Inc. (“SBMI”) (collectively the “Company”) and have been prepared in accordance with accounting principles generally accepted in the United States of America, the instructions to Form 10-Q and Article 10 of Regulation S-X. These financial statements should be read in conjunction with the audited consolidated financial statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2005. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the interim periods presented have been reflected herein. Results of operations for such interim periods are not necessarily indicative of results to be expected for the full fiscal year or for any future periods. Certain reclassifications have been made to the fiscal 2005 consolidated financial statements to conform to the fiscal 2006 presentation. The accompanying condensed consolidated financial statements include the results of operations and assets and liabilities directly related to the Company’s operations. Certain estimates, assumptions and allocations were made in preparing such financial statements.

The following is a summary of the Company’s restaurant properties as of November 7, 2005. The HomeTown Buffet segment includes the Company’s 14 franchised HomeTown Buffet restaurants. The Casa Bonita segment includes one Casa Bonita restaurant. The North’s Star segment includes two JJ North’s Country Buffet restaurants. The North’s Star segment also includes two non-operating properties. The Florida Buffets Division includes two BuddyFreddys restaurants, three BuddyFreddys Country Buffet restaurants and two Holiday House restaurants. The Florida Buffets Division also includes four non-operating properties. The JB’s Restaurants segment includes the Company’s six JB’s Restaurants and two non-operating properties.

	HomeTown Buffet	Casa Bonita	North’s Star	Florida Buffets	JB’s	Total
Owned	3	—	1	5	4	13
Leased	11	1	3	6	4	25
Total	14	1	4	11	8	38

In addition to the above summary, the Company purchased in September 2005 a Restaurant facility in Rexburg, Idaho. The Company leases the Restaurant facility to a JB’s Franchisee.

As of November 7, 2005, the Company’s operating and non-operating restaurants are located in the following states:

	Number of Restaurants
State	HomeTown Buffet	Casa Bonita	North’s Star	Florida Buffets	JB’s	Total
Arizona	8	—	1	—	1	10
Colorado	1	1	—	—	—	2
Florida	—	—	—	11	—	11
Idaho	—	—	1	—	—	1
Montana	—	—	—	—	2	2
New Mexico	2	—	—	—	—	2
Oregon	—	—	1	—	—	1
Utah	2	—	—	—	4	6
Washington	—	—	1	—	—	1
Wyoming	1	—	—	—	1	2
Total	14	1	4	11	8	38

As of November 7, 2005, the Company’s non-operating restaurants are located in the following states:

	Number of Non-Operating Restaurants
State	HomeTown Buffet	Casa Bonita	North’s Star	Florida Buffets	JB’s	Total
Arizona	—	—	1	—	—	1
Florida	—	—	—	4	—	4
Idaho	—	—	1	—	—	1
Utah	—	—	—	—	1	1
Wyoming	—	—	—	—	1	1
Total	—	—	2	4	2	8

The operating results for the 12-week period ended November 7, 2005 include operations shown in the tables above and the lease income and fixed charges for the eight restaurants closed during the entire quarter and one restaurant closed during the quarter. Three non-operating stores continue to be closed at the end of the third quarter of fiscal 2006 for repositioning and one non-operating restaurant is for sale and is recorded as property held for sale. The four remaining closed restaurants have been leased to third parties.

The following is a summary of the Company’s restaurant properties as of November 1, 2004. The HomeTown Buffet segment included the Company’s 15 franchised HomeTown Buffet restaurants. The Casa Bonita segment included two Casa Bonita restaurants. The North’s Star segment included three JJ North’s Country Buffet restaurants. This segment also included one non-operating property. The Florida Buffets Division included two BuddyFreddys restaurants, three BuddyFreddys Country Buffet restaurants and two Holiday House restaurants. The Florida Buffets Division also included four non-operating properties. The JB’s Restaurants segment included the Company’s seven JB’s Restaurants. This segment also included two non-operating properties.

	HomeTown Buffet	Casa Bonita	North’s Star	Florida Buffets	JB’s	Total
Owned	3	—	1	5	4	13
Leased	12	2	3	6	5	28
Total	15	2	4	11	9	41

As of November 1, 2004, the Company’s operating and non-operating restaurants were located in the following states:

	Number of Restaurants
State	HomeTown Buffet	Casa Bonita	North’s Star	Florida Buffets	JB’s	Total
Arizona	8	—	1	—	1	10
Colorado	1	1	—	—	—	2
Florida	—	—	—	11	—	11
Idaho	—	—	1	—	—	1
Montana	—	—	—	—	2	2
New Mexico	2	—	—	—	1	3
Oklahoma	—	1	—	—	—	1
Oregon	—	—	1	—	—	1
Utah	3	—	—	—	4	7
Washington	—	—	1	—	—	1
Wyoming	1	—	—	—	1	2
Total	15	2	4	11	9	41

As of November 1, 2004, the Company’s non-operating restaurants were located in the following states:

	Number of Non-Operating Restaurants
State	HomeTown Buffet	Casa Bonita	North’s Star	Florida Buffets	JB’s	Total
Arizona	—	—	1	—	—	1
Florida	—	—	—	4	—	4
Utah	—	—	—	—	1	1
Wyoming	—	—	—	—	1	1
Total	—	—	1	4	2	7

The operating results for the 12-week period ended November 1, 2004 included operations shown in the tables above and the fixed charges for five restaurants operating for two, six, six, seven and 11 weeks, respectively, and for five restaurants closed for the entire quarter. One non-operating restaurant is for sale and is recorded as property held for sale. The four remaining closed restaurants have been leased.

The Company utilizes a 52/53 week fiscal year which ends on the last Monday in January. The first quarter of each year contains 16 weeks while the other three quarters each contain 12 weeks, except the fourth quarter has 13 weeks if the fiscal year has 53 weeks.

Certain prior period amounts have been reclassified to conform to the current year financial statement presentation.

Note (B) Recent Developments

On September 30, 2005, the Casa Bonita in Tulsa closed due to the expiration of the facility lease. The Company recorded an impairment expense of $23,000 for leasehold improvements in the quarter ended August 15, 2005.

Note (C) Related Party Transactions

In connection with the Company’s employment contract with Mr. Robert E. Wheaton, the Company’s President and Chief Executive Officer, the Company agreed to provide Mr. Wheaton with certain loans solely for the purchase of the Company’s common stock on the open market prior to the enactment of the Sarbanes-Oxley Act of 2002. Mr. Wheaton owns, including vested options, approximately 48% of the Company’s outstanding common shares and may have the effective power to elect members of the board of directors and to control the vote on substantially all other matters, without the approval of the other stockholders. The loans were secured by the common stock with recourse and bore interest at the prevailing rate set forth in the Company’s credit facility with M&I Marshall & Ilsley Bank. Repayment terms stipulated that Mr. Wheaton would repay principal and interest on or before the later of the fifth anniversary date of the initial advance under the loan agreement, the date he received a lump sum payment per a termination clause or six month’s after the termination of his employment. Management elected not to record any interest income on the loans until the interest income was paid to the Company. On June 8, 2005, Mr. Wheaton paid the principal balance of $698,000 in full and paid $250,000 in interest. The Company recognized the interest income in the second quarter of fiscal 2006.

Note (D) Segment and Related Reporting

The Company has five reporting segments: HomeTown Buffet, Casa Bonita, North’s Star, Florida Buffets Division and JB’s Restaurants. The Company’s reportable segments are aggregated based on brand similarities of the operating segments.

The accounting policies of the reportable segments are the same as those described in Note 1 of the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K. The Company evaluates the performance of its operating segments based on income before income taxes.

Summarized financial information concerning the Company’s reportable segments is shown in the following table. The other assets presented in the condensed consolidated balance sheets and not in the reportable segments relate to the Company as a whole, and not to the individual segments. Also certain corporate overhead income and expenses in the condensed consolidated statements of operations are not included in the reportable segments.

(Dollars in Thousands)

40 Weeks Ended November 7, 2005	HomeTown Buffet			Casa Bonita(1)		North’s Star(2)			Florida Buffet(3)		JB’s(4)		Other			Total
Revenues	$	21,770		$	7,178	$	1,773		$	8,215	$	5,214	$	—		$	44,150
Interest income	—			—		—			—		—		330			330
Interest expense	(139		)	—		—			—		—		(364		)	(503		)
Depreciation & amortization	767			134		66			465		170		49			1,651
Impairment of long-lived assets	18			23		74			175		25		—			315
Income (loss) before income taxes	1,235			1,500		(245		)	324		555		(1,137		)	2,232
Total assets	12,138			1,271		4,227			8,441		5,122		3,876			35,075

40 Weeks Ended November 1, 2004
(As restated)
Revenues	$	24,677		$	8,050	$	3,578		$	7,987	$	6,068	$	—		$	50,360
Interest income	—			—		—			—		—		5			5
Interest expense	(148		)	—		—			—		—		(345		)	(493		)
Depreciation & amortization	834			184		184			408		169		49			1,828
Impairment of long-lived assets	1			—		231			273		11		—			516
Income (loss) before income taxes	1,441			1,905		(783		)	223		487		(1,800		)	1,473
Total assets	13,703			1,545		5,258			9,668		5,549		463			36,186

(1) Included in the reportable segment for the 40 weeks ended November 7, 2005 is one location that was opened for 35 weeks. This location incurred $23,000 of impairment expense and $43,000 of depreciation expense in the 40 weeks ended November 7, 2005. This location has a net book value of equipment of $80,000 included in total assets at November 7, 2005. This location had revenues of $1,572,000.

(2) Included in the reportable segment for the 40 weeks ended November 7, 2005 are two locations that were closed for the entire 40 weeks. These locations incurred $26,000 of impairment expense in the 40 weeks ended November 7, 2005. These locations have a net book value of equipment of $23,000, buildings and leaseholds of $510,000 and land of $224,000 included in total assets at November 7, 2005.

Included in the reportable segment for the 40 weeks ended November 1, 2004 was one location opened for two weeks during the third quarter and two locations opened for six weeks during the third quarter. These locations represent $184,000, $510,000 and $224,000 of net book value of equipment, buildings and land included in total assets, respectively, and incurred $141,000 in depreciation and amortization expense. These locations contributed revenues of $1,283,000 and incurred $51,000 in impairment of long-lived assets and $85,000 of goodwill impairments.

(3) Included in the reportable segment for the 40 weeks ended November 7, 2005 are four locations that were closed for the entire 40 weeks. These four locations incurred $166,000 of depreciation and amortization and $35,000 of impairment expense for the 40 weeks ended November 7, 2005. These locations have a net book value of equipment of $550,000, buildings of $1,788,000 and land of $1,559,000 included in total assets at November 7, 2005.

Included in the reportable segment for the 40 weeks ended November 1, 2004 were four locations closed for the entire 40 weeks of fiscal 2005. These four locations incurred $319,000 of depreciation and amortization, and represented a net book value of equipment of $1,076,000, buildings of $1,876,000 and land of $1,559,000 included in total assets.

(4) Included in the reportable segment for the 40 weeks ended November 7, 2005 are two locations that were closed for the entire 40 weeks and one location opened for 10 weeks during the first quarter. The locations have $386,000 of land that is included in total assets. These locations have $19,000 and $904,000 of net book value of equipment and buildings included in total assets, respectively, and incurred $23,000 in depreciation and amortization expense and $17,000 of impairment expense during the 40 weeks. The location opened for 10 weeks had revenues of $113,000.

Included in the reportable segment for the 40 weeks ended November 1, 2004 was one location closed for the entire 40-week period and one location operating 11 weeks of the third quarter. These locations represent $45,000, $920,000 and $158,000 of net book value of equipment, buildings and land included in total assets,

respectively, and incurred $37,000 in depreciation and amortization expense. One location contributed $353,000 in revenues and the other location has a land value of $228,000 and was leased to a third party during the quarter.

Note (E) Net Income per Common Share

Net income per common share is computed based on the weighted-average number of common shares and, as appropriate, dilutive common stock equivalents outstanding during the period. Stock options are considered to be common stock equivalents.

Basic net income per common share is the amount of net income for the period available to each share of common stock outstanding during the reporting period. Diluted net income per common share is the amount of net income for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period. The following is a reconciliation of the denominators used to calculate diluted earnings per share on net income for the respective fiscal periods:

12 Weeks Ended November 7, 2005	Net Loss			Shares	Per Share Amount
Weighted average common shares outstanding — basic	$	(102,000	)	3,003,425	$	(0.03	)
Dilutive stock options	—			—	—
Weighted average common shares outstanding — diluted	$	(102,000	)	3,003,425	$	(0.03	)

12 Weeks Ended November 1, 2004 (As restated)
Weighted average common shares outstanding — basic	$	(165,000	)	2,950,000	$	(0.06	)
Dilutive stock options	—			—	—
Weighted average common shares outstanding — diluted	$	(165,000	)	2,950,000	$	(0.06	)

40 Weeks Ended November 7, 2005	Net Income	Shares	Per Share Amount
Weighted average common shares outstanding — basic	$1,482,000	2,985,564	$0.50
Dilutive stock options	—	223,339	—
Weighted average common shares outstanding — diluted	$1,482,000	3,208,903	$0.46

40 Weeks Ended November 1, 2004 (As restated)
Weighted average common shares outstanding — basic	$959,000	2,950,000	$0.33
Dilutive stock options	—	234,675	—
Weighted average common shares outstanding — diluted	$959,000	3,184,675	$0.30

Average shares used in the 12 weeks ended November 7, 2005 and November 1, 2004 diluted earnings per share computations exclude all stock options because these options are antidilutive due to the Company’s net loss for the periods. Average shares used in the 40 weeks ended November 7, 2005 and November 1, 2004 diluted earnings per share computations exclude stock options to purchase 489,000 shares and 496,000 shares, respectively, of common stock due to the market price of the underlying stock being less than the exercise price.

Note (F) Goodwill

Goodwill and other intangible assets primarily represent the excess of the purchase price paid over the fair value of the net assets acquired in connection with business acquisitions. As of January 29, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). In accordance with SFAS 142, the Company has ceased amortizing goodwill recorded in past business combinations effective as of January 29, 2002.

The Company reviews goodwill for possible impairment on an annual basis or when triggering events occur in accordance with SFAS 142. Goodwill is tested for impairment at the reporting unit level. Because SFAS 142 defines a reporting unit as an operating segment or one level below an operating segment, Star Buffet reviews goodwill for possible impairment by restaurant.

The Company utilizes a two-part impairment test. First, the fair value of the reporting unit is compared to carrying value (including goodwill). If the carrying value is greater than the fair value, the second step is performed. In the second step, the implied fair value of the reporting unit goodwill is compared to the carrying amount of goodwill. If the carrying value is greater, a loss is recognized. The goodwill impairment test considers the impact of current conditions and the economic outlook for the restaurant industry, the general overall economic outlook including market data, governmental factors and environmental factors, in establishing the assumptions used to compute the fair value of each reporting unit. The Company also takes into account the historical, current and future (based on probability) operating results of each reporting unit and any other facts and data pertinent to valuing each reporting unit in the impairment test.

The Company has an independent evaluation of goodwill conducted every three years. The most recent independent valuation was conducted as of February 1, 2005. The Company recorded goodwill impairment losses of $0 and $85,000 for the 40-week periods ended November 7, 2005 and November 1, 2004, respectively.

Note (G) Inventories

Inventories consist of food, beverage, gift shop items and restaurant supplies and are valued at the lower of cost or market, determined by the first-in, first-out method.

Note (H) Properties, Buildings and Equipment

The Company evaluates impairment of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company determines that an impairment write-down is necessary for restaurant locations 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 an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

The components of property, buildings and equipment used in restaurant operations, not including property under capitalized leases, are as follows:

	November 7, 2005			January 31, 2005
Property, buildings and equipment:
Furniture, fixtures and equipment	$	11,879,000		$	12,033,000
Land	3,085,000			3,085,000
Buildings and leasehold improvements	20,380,000			20,653,000
	35,344,000			35,771,000
Less accumulated depreciation	(19,533,000		)	(19,012,000		)
	$	15,811,000		$	16,759,000

The components of property under capitalized leases are as follows:

Property and equipment under capitalized leases	$	3,193,000		$	3,193,000
Less accumulated amortization	(2,277,000		)	(2,174,000		)
	$	916,000		$	1,019,000

Total property, buildings and equipment includes the following land, equipment, buildings and leaseholds currently in eight non-operating units. Four of the eight units are leased to third-party operators, three units are closed for remodeling and repositioning and one unit is included in property held for sale at November 7, 2005. In addition, the Company purchased in September 2005 a Restaurant facility in Rexburg, Idaho. The Company leases the Restaurant facility to a third-party operator. The components of property, buildings and equipment are as follows:

	November 7, 2005			January 31, 2005
Property and equipment leased to third parties:
Equipment	$	655,000		$	655,000
Land	1,887,000			1,787,000
Buildings and leaseholds	3,490,000			3,290,000
	6,032,000			5,732,000

Less accumulated depreciation	(1,512,000		)	(1,371,000		)
	$	4,520,000		$	4,361,000

	November 7, 2005			January 31, 2005
Property, buildings and equipment held for future use:
Equipment	$	6,668,000		$	6,153,000
Land	382,000			382,000
Buildings and leaseholds	1,528,000			1,528,000
	8,578,000			8,063,000

Less accumulated depreciation	(6,251,000		)	(5,489,000		)
	$	2,327,000		$	2,574,000

	November 7, 2005		January 31, 2005
Property held for sale:
Land	$	567,000	$	567,000
Buildings	364,000		364,000
	$	931,000	$	931,000

The Company recorded impairment expense for long-lived assets of $0 and $262,000 for the 12 weeks ended November 7, 2005 and November 1, 2004, respectively, primarily as a result of decreasing the carrying value of assets held for future use. The Company recorded impairment expense of $315,000 and $516,000 for the 40 weeks ended November 7, 2005 and November 1, 2004, respectively, primarily as a result of decreasing the carrying value of assets held for future use.

Note (I) Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This statement amends prior statements to provide alternative methods of transition for an entity that voluntarily changes to the fair value-based method of accounting for stock-based employee compensation. The Company did not adopt the fair value recognition method of recording stock-based employee compensation under SFAS No. 123, as amended by SFAS No. 148. In 2004, the FASB issued a revision to SFAS No. 123 (“SFAS 123R”), which requires the measurement of all employee share-based payments to employees, including grants of employee stock options, using a fair value-based method and recording of such expense in the condensed consolidated statements of income. In April 2005, the Securities and Exchange Commission adopted a rule delaying the effective date for recording the compensation expense in the statement of operations under SFAS 123R until the first quarter of the calendar year 2006.

Had compensation expense for stock options awarded under the Company’s plans been determined consistent with SFAS No. 123R, the Company’s net income and earnings per share would have reflected the following pro forma amounts:

	Twelve Weeks Ended						Forty Weeks Ended
	November 7,			November 1,			November 7,		November 1,
	2005			2004			2005		2004
				(As restated)					(As restated)
Net (loss) income:
As reported	$	(102,000	)	$	(165,000	)	$	1,482,000	$	959,000
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards	—			—			61,000		—
Pro forma	$	(102,000	)	$	(165,000	)	$	1,421,000	$	959,000
Basic earnings per share:
As reported	$	(0.03	)	$	(0.06	)	$	0.50	$	0.33
Pro forma	$	(0.03	)	$	(0.06	)	$	0.48	$	0.33
Diluted earnings per share:
As reported	$	(0.03	)	$	(0.06	)	$	0.46	$	0.30
Pro forma	$	(0.03	)	$	(0.06	)	$	0.44	$	0.30
Weighted average shares used in computation:
Basic	3,003,425			2,950,000			2,985,564		2,950,000
Diluted	3,003,425			2,950,000			3,208,903		3,184,675

For options granted during the 40 weeks ended November 7, 2005, the weighted average fair value at the date of grant for options granted was estimated using the Black-Scholes pricing model with the following assumptions:

Assumptions:	Fiscal 2006
Weighted average risk-free interest rate	4.0	%
Weighted average volatility	37.5	%
Expected life	5 years
Dividends	7.5	%

During the first quarter of fiscal 2006, the Company granted 49,200 fully vested stock options at an exercise price equal to the current fair value of the stock.

Note (J) Contingencies

On March 2, 2004, the Company filed an action against North’s Restaurants, Inc. (“North’s”) in the United States District Court, District of Utah, Central Division, Case No. 2:04CV00211, demanding judgment against North’s for failure to repay obligations under a promissory note delivered to the Company in connection with the resolution of prior litigation between the parties in a total amount not less than $2,934,453 plus interest at the default rate as set forth in the promissory note. A motion for summary judgment in favor of the Company was granted in January 2005. In October 2005, the District Court entered a judgment for damages of $3,059,905 plus interest at the default rate and attorney’s fees of $15,980. Since January 26, 2004, the note receivable has been recorded as a long-term receivable. The Company has not recorded interest income due from North’s since August 2003. Since October 2004, the business of North’s has been operated under a receivership. During the first forty weeks of fiscal 2006, North’s made six payments of approximately $9,300 each. The Company’s note, together with the obligation to another significant creditor of North’s, is secured by the real and personal property, landlord leases, trademarks and all other intellectual property associated with seven restaurants. The Company believes current and future cash flows are adequate for recovery of the principal amount of the note receivable. The Company therefore has not provided an allowance for bad debts for the note as of November 7, 2005.

On February 1, 2005, the Company announced in a press release that it had entered into a strategic alliance with K-BOB’S USA Inc. and related affiliates (“K-BOB’S”). In accordance with the terms of the strategic alliance, the Company will lend K-BOB’S $1.5 million at 8.5%. The note provides for repayment at the Company’s option if the Company exercises its rights to purchase the operating assets or the real estate associated with the K-BOB’S business. If the Company does not elect to purchase the K-BOB’S operating assets or real estate, the note receivable will be repaid on a pre-established schedule. In exchange, K-BOB’S granted the Company an option to purchase as many as five corporate owned and operated K-BOB’S restaurants located in New Mexico and Texas, as well as rights to develop K-BOB’S in other areas of the United States. As part of the agreement, the Company loaned K-BOB’S $1.0 million on February 1, 2005 and $300,000 on July 1, 2005.

On October 7, 2005, the Company entered into a strategic alliance with Holiday House Corporation (“HHC”). In accordance with the terms of the strategic alliance, the Company will lend HHC up to $300,000 at an interest rate of 11% for up to four years. In exchange, HHC granted the Company an option to purchase two Holiday House Restaurants located in Florida. As of December 13, 2005, the Company had loaned HHC $200,000.

In connection with the Company’s employment contract with Robert E. Wheaton, the Company’s Chief Executive Officer and President, the Company has agreed to pay Mr. Wheaton six years salary and bonus if he resigns related to a change of control of the Company or is terminated, unless the termination is for cause. Mr. Wheaton’s employment contract also includes an annual bonus of $25,000.

The Company is, from time to time, the subject of complaints or litigation from customers alleging injury on properties operated by the Company, illness or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect the Company and its restaurants, regardless of whether such allegations are valid or whether the Company is liable. The Company also is the subject to complaints or allegations from employees from time to time. The Company believes that the lawsuits, claims and other legal matters to which it has become subject in the course of its business are not material to the Company’s business, financial condition or results of operations, but an existing or future lawsuit or claim could

result in an adverse decision against the Company that could have a material adverse effect on the Company’s business, financial condition and results of operations.

Note (K) Taxes

The Company is able to take advantage of the Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips resulting in a lower effective tax rate of approximately 33.6% and 34.9% as of November 7, 2005 and November 1, 2004, respectively.

Note (L) Insurance Programs

The Company established a self-insured retention in 2003 for general liability claims. The Company has commercial insurance for casualty claims in excess of $2 million per claim and $3 million per year as a risk reduction strategy. Self-insurance retention accruals include estimates based on historical information and expected future developments. If actual claims differ from estimates and assumptions, our actual accrual requirements may be materially different from the calculated accruals. The Company had general liability insurance reserves of $35,000 and $31,000 for the 40-week periods ended November 7, 2005 and November 1, 2004, respectively.

Note (M) Restatement of Financial Statements

This note should be read in conjunction with Note 2, “Restatement of Financial Statements” under Notes to Consolidated Financial Statements included in Form 10-K for the fiscal year ended January 31, 2005.

As a result of a review of its accounting records during the normal course of the fiscal 2005 independent audit, the Company determined rent expense for the fiscal years 1997 through 2004 had been under-recognized. The determination was based on an internal review in consultation with its independent auditors and considering the opinions expressed in the letter of February 7, 2005 from the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) issued to the American Institute of Certified Public Accountants regarding certain operating lease accounting issues and their application under generally accepted accounting principles in the United States of America (“GAAP”). On March 28, 2005, the Audit Committee of the Company determined that it needed to change its calculation and presentation of straight-line rent expense and related deferred rent liability which were not in accordance with GAAP. The Company has restated its previously reported audited financial statements for the fiscal years ended January 26, 2004 and January 27, 2003 and the related unaudited quarterly financial statements for those periods, as well as the unaudited financial statements for the quarters ended May 17, 2004, August 9, 2004 and November 1, 2004. Previously, the Company recorded rent expense on a straight-line basis over the initial non-cancelable lease term. The Company depreciated its leasehold improvements over a period that included both the initial non-cancelable term of the lease and certain option periods. The Company restated its financial statements to recognize rent expense on a straight-line basis which conforms to the term used to depreciate leasehold improvements on the leased property.

STAR BUFFET, INC. AND SUBSIDIARIES

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

The following Management’s Discussion and Analysis should be read in conjunction with the unaudited condensed consolidated financial statements, and the notes thereto, presented elsewhere in this report and the Company’s audited consolidated financial statements and Management’s Discussion and Analysis included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2005. Comparability of periods may be affected by the closure of restaurants or the implementation of the Company’s acquisition and strategic alliance strategies. The costs associated with integrating new restaurants or under performing or unprofitable restaurants, if any, acquired or otherwise operated by the Company may have a material adverse effect on the Company’s results of operations in any individual period.

This Quarterly Report on Form 10-Q contains forward looking statements, which are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; success of integrating newly acquired under performing or unprofitable restaurants; the impact of competitive products and pricing; success of operating initiatives; advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; changes in prevailing interest rates and the availability of financing; food, labor, and employee benefits costs; changes in, or the failure to comply with, government regulations; weather conditions; construction schedules; implementation of the Company’s acquisition and strategic alliance strategy; the effect of the Company’s accounting polices and other risks detailed in the Company’s Form 10-K for the fiscal year ended January 31, 2005, and other filings with the Securities and Exchange Commission.

Overview

Consolidated results for the 12-week period ended November 7, 2005 improved $63,000 to a loss of $102,000 or ($0.03) per share on a diluted basis as compared with a net loss of $165,000 for the comparable prior year period. The increase in net income for the 12-week period ended November 7, 2005 is primarily due to a $262,000 decrease in non-cash impairment expense partially offset by costs associated with closing one restaurant in the third quarter. Total revenues decreased $1.8 million or 13.4% from $13.3 million in the 12 weeks ended November 1, 2004 to $11.5 million for the 12 weeks ended November 7, 2005. The closed stores decrease was $1.2 million and the same store sales decrease was $577,000 or 4.9% for the 12 weeks ended November 7, 2005. The declines in comparable same store sales for the 12 weeks ended November 7, 2005 were primarily attributable to the HomeTown Buffet, Casa Bonita and JB’s divisions. The decrease of revenues was also the result of eight fewer restaurants in operation this year versus the same period of the prior year, one restaurant which closed during the first quarter and another restaurant which closed during the third quarter. Consolidated net income for the 40-week period ended November 7, 2005 increased $523,000 to $1,482,000 or $0.46 per share on a diluted basis as compared with net income of $959,000 for the comparable prior year period. The increase in net income for the 40-week period ended November 7, 2005 is primarily due to a $325,000 increase in interest income including the $250,000 recognized on the loan to the President and Chief Executive Officer, a decrease of approximately $301,000 in workers compensation costs and a decrease in non-cash impairment expense of $201,000 as compared to the same period of the prior year. Total revenues decreased $6.2 million or 12.3% from $50.4 million in the 40 weeks ended November 1, 2004 to $44.2 million in the 40 weeks ended November 7, 2005. The closed stores decrease was approximately $4.5 million and the same store sales decrease was approximately $1.7 million or 3.9% for the 40 weeks ended November 7, 2005. The declines in comparable same store sales for the 40 weeks ended November 7, 2005 were primarily attributable to the HomeTown Buffet, Casa Bonita and JB’s divisions. The decrease of revenues was also the result of eight fewer restaurants in operation this year versus the same period of the prior year, one restaurant which closed during the first quarter and another restaurant which closed during the third quarter. The decline in sales on a same store basis significantly impacts net income because occupancy, salaries, benefits, and other expenses are primarily fixed in nature and generally do not vary significantly with restaurant sales volume. Occupancy and other expense includes major expenditures such as rent, insurance, property taxes, utilities, maintenance and advertising.

Components of Income from Operations

Total revenues include a combination of food, beverage, merchandise and vending sales and are net of applicable state and city sales taxes.

Food costs primarily consist of the costs of food and beverage items. Various factors beyond the Company’s control, including adverse weather and natural disasters, may affect food costs. Accordingly, the Company may incur periodic fluctuations in these costs. Generally, these temporary increases are absorbed by the Company and not passed on to customers; however, management may adjust menu prices to compensate for increased costs of a more permanent nature.

Labor costs include restaurant management salaries, bonuses, hourly wages for unit level employees, various health, life and dental insurance programs, vacation and sick pay and payroll taxes.

Occupancy and other expenses are primarily fixed in nature and generally do not vary with restaurant sales volume. Rent, insurance, property taxes, utilities, maintenance and advertising account for the major expenditures in this category.

General and administrative expenses include all corporate and administrative functions that serve to support the existing restaurant base and provide the infrastructure for future growth. Management, supervisory and staff salaries, employee benefits, data processing, training and office supplies are the major items of expense in this category.

Results of Operations

The following table summarizes the Company’s results of operations as a percentage of total revenues for the 12 and 40 weeks ended November 7, 2005 and November 1, 2004.

	Twelve Weeks Ended				Forty Weeks Ended
	November 7,		November 1,		November 7,		November 1,
	2005		2004		2005		2004
			(As restated)				(As restated)
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%

Costs and expenses
Food costs	34.8		34.7		34.2		34.4
Labor costs	34.4		34.5		32.2		33.3
Occupancy and other expenses	24.1		21.8		20.6		20.0
General and administrative expenses	4.0		4.1		3.7		4.1
Depreciation and amortization	4.1		4.0		3.8		3.7
Impairment of long-lived assets	—		2.0		0.7		1.0
Total costs and expenses	101.4		101.1		95.2		96.5

Income from operations	(1.4	)	(1.1	)	4.8		3.5

Interest expense	(1.1	)	(1.3	)	(1.1	)	(1.0	)
Interest income	0.2		—		0.8		—
Other income	0.9		0.5		0.6		0.4
Income before income taxes	(1.4	)	(1.9	)	5.1		2.9

Income taxes	(0.5	)	(0.6	)	1.7		1.0

Net income	(0.9	)%	(1.3	)%	3.4	%	1.9	%

Effective income tax rate	34.5	%	(33.2	)%	33.6	%	34.9	%

Summarized financial information concerning the Company’s reportable segments is shown in the following table. The other assets presented in the condensed consolidated balance sheet and not in the reportable segments relate to the Company as a whole, and not to the individual segments. Also certain corporate overhead income and expenses in the condensed consolidated statements of operations are not included in the reportable segments.

(Dollars in Thousands)

40 Weeks Ended November 7, 2005	HomeTown Buffet(1)			Casa Bonita(2)		North’s Star(3)			Florida Buffet(4)		JB’s(5)		Other			Total
Revenues	$	21,770		$	7,178	$	1,773		$	8,215	$	5,214	$	—		$	44,150
Food cost	8,058			1,692		716			2,950		1,669		—			15,085
Labor cost	6,567			2,348		620			2,747		1,952		—			14,234
Interest income	—			—		—			—		—		330			330
Interest expense	(139		)	—		—			—		—		(364		)	(503		)
Depreciation & amortization	767			134		66			465		170		49			1,651
Impairment of long-lived assets	18			23		74			175		25		—			315
Income (loss) before income taxes	1,235			1,500		(245		)	324		555		(1,137		)	2,232

40 Weeks Ended November 1, 2004
(As restated)
Revenues	$	24,677		$	8,050	$	3,578		$	7,987	$	6,068	$	—		$	50,360
Food cost	9,015			1,877		1,529			2,909		2,011		—			17,341
Labor cost	7,724			2,561		1,416			2,730		2,336		—			16,767
Interest income	—			—		—			—		—		5			5
Interest expense	(148		)	—		—			—		—		(345		)	(493		)
Depreciation & amortization	834			184		184			408		169		49			1,828
Impairment of long-lived assets	1			—		231			273		11		—			516
Income (loss) before income taxes	1,441			1,905		(783		)	223		487		(1,800		)	1,473

(1) The same store sales declined this year, which, together with certain higher wholesale food costs, resulted in higher food costs for HomeTown Buffet as a percentage of sales. Despite lower same store sales, labor cost was lower as a percentage of sales. Closing two non-performing restaurants resulted in a $1,264,000 decrease in sales, but helped income before income taxes as a percent of sales.

(2) Significant sales decreases in the Tulsa restaurant and costs related to closing the Tulsa restaurant in the third quarter of fiscal 2006 were not offset by sales increases in the Denver restaurant resulting in a decrease in operating margins.

(3) The same store sales declined slightly and with fewer stores operating the sales were significantly lower. With the closing of four non-performing stores this year, the food and labor costs decreased as a percentage of sales in North’s Star which resulted in lower losses in the current year compared to the prior year.

(4) Same store sales increased and the Florida Division had lower food and labor costs as a percentage of sales this year.

(5) Same store sales decreased in the JB’s Division, however, food and labor costs as a percentage of sales were lower than the prior year.

Total revenues decreased $1.8 million or 13.4% from $13.3 million for the 12 weeks ended November 1, 2004 to $11.5 million for the 12 weeks ended November 7, 2005. Total revenues decreased $6.2 million or 12.3% from $50.4 million for the 40 weeks ended November 1, 2004 to $44.2 million for the 40 weeks ended November 7, 2005. The decrease in revenues for the 12 weeks ended November 7, 2005 was attributable to declines in comparable same store sales primarily in the HomeTown Buffet, Casa Bonita and JB’s divisions and the result of eight fewer restaurants in operation this year versus the same period of the prior year and one restaurant that was closed during the first quarter of this year and one during the third quarter of this year. The closed stores decrease was $1.2 million and the same store sales decrease was $577,000 or 4.9% for the 12 weeks ended November 7, 2005. The closed stores decrease was $4.5 million and the same store sales decrease was $1.7 million or 3.9% for the 40 weeks ended November 7, 2005. The decrease in revenues for the 40 weeks ended November 7, 2005 was attributable to declines in comparable same store sales primarily in the HomeTown Buffet, Casa Bonita and JB’s divisions and the result of eight fewer restaurants in operation this year versus the same period of the prior year and one restaurant that was closed during the first quarter of this year and one during the third quarter of this year.

Food costs as a percentage of total revenues increased from 34.7% during the 12-week period ended November 1, 2004 to 34.8% during the 12 weeks ended November 7, 2005, and decreased from 34.4% during the 40-week period ended November 1, 2004 to 34.2% during the 40 weeks ended November 7, 2005. The increase for the 12 weeks as a percentage of total revenues was primarily attributable to decreased revenues in the stores opened both years. Actual food costs decreased by $614,000. The decrease for the 40 weeks as a percentage of total revenues was primarily attributable to the elimination of food cost inefficiencies in seven restaurants closed for the entire 40 week period and one closed during the first quarter of fiscal 2006.

Labor costs as a percentage of total revenues decreased from 34.5% during the 12-week period ended November 1, 2004 to 34.4% during the 12-week period ended November 7, 2005 and actual costs decreased by $623,000. Labor costs as a percentage of total revenues decreased from 33.3% during the 40-week period ended November 1, 2004 to 32.2% during the 40-week period ended November 7, 2005 and actual labor costs declined by $2,533,000. The decrease in labor cost and as a percentage of revenue resulted from the elimination of labor inefficiencies in seven restaurants closed for the entire 40 week period and one closed during the first quarter of fiscal 2006.

Occupancy and other expenses as a percentage of total revenues increased from 21.8% during the 12-week period ended November 1, 2004 to 24.1% during the 12-week period ended November 7, 2005 and actual costs decreased by $119,000. Occupancy and other expenses as a percentage of total revenues increased from 20.0% during the 40-week period ended November 1, 2004 to 20.6% during the 40-week period ended November 7, 2005 and actual costs decreased by $995,000. The increase as a percentage of total revenues for the 12- and 40-week periods ended November 7, 2005 was primarily attributable decreased revenues in the stores opened during both years and expenses incurred in closing one restaurant in the third quarter of fiscal 2006.

General and administrative costs as a percentage of revenues decreased from 4.1% during the 12-week period ended November 1, 2004 to 4.0% during the 12-week period ended November 7, 2005 and actual costs decreased by $84,000. General and administrative costs as a percentage of revenues decreased from 4.1% during the 40-week period ended November 1, 2004 to 3.7% during the 40-week period ended November 7, 2005 and actual costs decreased by $425,000. The decrease for the 12- and 40-week periods ended November 7, 2005 was primarily attributable to lower corporate insurance costs of $332,000. The Company had a $170,000 workers compensation payroll audit adjustment in the prior year and fewer stores in the current year.

Depreciation and amortization as a percentage of total revenues increased from 4.0% during the 12-week period ended November 1, 2004 to 4.1% during the 12-week period ended November 7, 2005. The increase as a percentage of revenues is due to decreased revenues in the stores opened during both years. The actual costs decreased by $61,000 for the 12-week period ended November 7, 2005. Depreciation and amortization as a percentage of total revenues increased from 3.7% during the 40-week period ended November 1, 2004 to 3.8% during the 40-week period ended November 7, 2005. The increase as a percentage of revenues is due to decreased revenues in the stores opened during both years. The actual costs decreased by $177,000 for the 40-week period ended November 7, 2005.

Impairment of long-lived assets as a percentage of total revenues decreased from 2.0% during the 12-week period ended November 1, 2004 to 0.0% during the 12-week period ended November 7, 2005. Impairment of long-lived assets as a percentage of total revenues decreased from 1.0% during the 40-week period ended November 1, 2004 to 0.7% during the 40-week period ended November 7, 2005. The impairment in fiscal 2006 and fiscal 2005 was primarily a result of decreasing the carrying value of assets held for future use.

Interest expense as a percentage of total revenues decreased from 1.3% during the 12-week period ended November 1, 2004 to 1.1% during the 12-week period ended November 7, 2005. The increase for the 12 weeks as a percentage of total revenues was primarily attributable to decreased revenues in the stores opened both years. Interest expense as a percentage of total revenues increased from 1.0% during the 40-week period ended November 1, 2004 to 1.1% during the 40-week period ended November 7, 2005. The increase as a percentage of total revenues was primarily attributable to higher average interest rates along with lower total revenues despite slightly lower debt balances for both the 12 and 40 week periods ended November 7, 2005 as compared to the same periods of the prior year.

Interest income increased from $0 for the 12-week period ended November 1, 2004 to $28,000 for the 12-week period ended November 7, 2005. Interest income increased from $5,000 for the 40-week period ended November 1, 2004 to $330,000 for the 40-week period ended November 7, 2005. The interest income was generated by the

Company’s cash and outstanding notes receivable balances. The increase in the 12-week period ending November 7, 2005 is primarily from the note receivable from K-BOB’S. The average balance outstanding was $1.3 million for the quarter with an interest rate of 8.5%. The increase in interest income for the 40-week period is primarily attributable to Mr. Robert E. Wheaton, the Company’s President and Chief Executive Officer, paying $250,000 in interest in the second quarter of fiscal 2006 on certain loans used solely for the purchase of the Company’s outstanding common stock on the open market issued prior to the enactment of the Sarbanes-Oxley Act of 2002, which had accrued over the life of the loans but was not recognized by the Company until paid.

Other income is rental income from the Company’s leased properties and certain management contracts for the 12 weeks ended November 7, 2005. Rental income was $79,000 and $239,000 for four properties leased for the entire 12 and 40-week periods ended November 7, 2005, respectively. Rental income was $57,000 and $203,000 for three properties leased for the entire 12 and 40-week periods ended November 1, 2004, respectively. Other income from management contracts was $23,000 and $41,000 for the 12 and 40-week periods ended November 7, 2005, respectively.

Impact of Inflation

The impact of inflation on the cost of food, labor, equipment and construction and remodeling of stores could affect the Company’s operations. Many of the Company’s employees are paid hourly rates related to the federal and state minimum wage laws so that changes in these laws can result in higher labor costs to the Company. In addition, the cost of food commodities utilized by the Company are subject to market supply and demand pressures. Shifts in these costs may have an impact on the Company’s food costs. The Company anticipates that modest increases in these costs can be offset through pricing and other cost control efforts; however, there is no assurance that the Company would be able to pass more significant costs on to its customers or if it were able to do so, that it could do so in a short period of time.

Liquidity and Capital Resources

The Company has historically financed operations through a combination of cash on hand, cash provided from operations and available borrowings under bank lines of credit.

As of November 7, 2005, the Company had $506,000 in cash. Cash and cash equivalents decreased by $186,000 during the 40 weeks ended November 7, 2005. The net working capital deficit was $(4,798,000) and $(4,296,000) at November 7, 2005 and January 31, 2005, respectively. The increase in the net working capital deficit is primarily due to the dividend paid in the second quarter ended August 15, 2005. Total cash provided by operations was approximately $3.1 million as compared to approximately $2.6 million in the 40 weeks ended November 1, 2004. The Company used approximately $737,000 on capital expenditures, approximately $1,500,000 in loans to third parties and approximately $2,253,000 to pay dividends. Long-term debt decreased by approximately $429,000 during the 40 weeks ended November 7, 2005 and net proceeds from the Revolving Line of Credit with M&I Marshall & Ilsley Bank increased by approximately $452,000 during the 40 weeks ended November 7, 2005. The Company received approximately $267,000 from the exercise of stock options and approximately $698,000 in principal and $250,000 in interest from the repayment of a debt obligation by Mr. Wheaton, the Company’s President and Chief Executive Officer.

The Company intends to modestly expand operations through the acquisition of regional buffet chains or through the purchase of existing restaurants which would be converted to one of the Company’s existing restaurant concepts. In February 2005, the Company entered into a strategic alliance with an option to purchase as many as five corporate owned and operated K-BOB’s Restaurants and development rights in the United States. In September 2005, the Company bought a restaurant facility in Rexburg, Idaho for $300,000 seller financed at 6.5% interest rate for five years and is currently leasing it to an existing JB’s franchisee. In many instances, management believes that existing restaurant locations can be acquired and converted to the Company’s prototype at a lower

cost than the cost associated with the start of a new restaurant. Management estimates the cost of acquiring and converting a leased property to one of the existing concepts to be approximately $150,000 to $450,000. These costs consist primarily of exterior and interior appearance modifications, new tables, chairs and food bars and the addition of certain kitchen and food service equipment. There can be no assurance that the Company will be able to acquire additional restaurant chains or locations or, if acquired, that these restaurants will have a positive contribution to the Company’s results of operations.

On October 31, 2004, the Company continued a $1.0 million Revolving Line of Credit with M&I Marshall & Ilsley Bank (the “Revolving Line of Credit”). The Revolving Line of Credit provides working capital for the Company. The Revolving Line of Credit bears interest at LIBOR plus two percent per annum. The Revolving Line of Credit requires the Company to maintain specified minimum level of net worth, to limit the amount of capital expenditures, maintain certain fixed charge coverage ratios, and to meet other financial covenants. As of November 7, 2005, the Company is in compliance with these covenants. The Company increased the Revolving Line of Credit on February 1, 2005 to $2.0 million and increased the limit on annual dividends to $2.5 million with no other changes in terms or covenants. On December 13, 2005, the Company’s Board of Directors authorized the continuance of the stock repurchase program, originally approved by the board and announced in 1999, which provided for the repurchase of up to 500,000 shares of common stock. As of December 13, 2005, the Company had not repurchased any shares under the 1999 authorization. In addition, the Board of Directors authorized management to request modifications in the bank covenants to allow for the repurchase of up to 250,000 shares of common stock. Management believes the bank will agree to modify the covenants. On July 1, 2005, the Company extended the Revolving Line of Credit due date from October 31, 2005 to May 31, 2006. The Company will seek to renew or replace the Revolving Line of Credit by May 2006. There can be no assurance the Revolving Line of Credit can be refinanced on acceptable terms or at all. The Revolving Line of Credit balance was $452,000 on November 7, 2005 and $0 on December 13, 2005. As of December 13, 2005, $2,000,000 was available on the Revolving Line of Credit.

The Company believes that available cash and cash flow from operations will be sufficient to satisfy its working capital and capital expenditure requirements during the next 12 months. Management does not believe the net working capital deficit will have any effect on the Company’s ability to operate the business and meet obligations as they come due in the next 12 months. The Company believes that it will spend less than $3 million a year on capital expenditures for the next few years. The Company believes that the combination of capital spending and an acquisition strategy that is not projected to require significant amounts of capital suggests that the Company may generate operating cash flow in excess of expected needs. In such event, the Company plans to consider the return of some capital to its stockholders through a stock repurchase program or a cash dividend or both. There can be no assurance that cash and cash flow from operations will be sufficient to satisfy the Company’s working capital and capital requirements for the next 12 months or beyond. There can be no assurance, however, that changes in the Company’s operating plans, the unavailability of a credit facility, the acceleration of the Company’s expansion plans, lower than anticipated revenues, increased expenses, potential acquisitions or other events will not cause the Company to seek additional financing sooner than anticipated.

If the Company requires additional funds to support its working capital requirements or for other purposes, it may seek to raise such additional funds through public or private equity and/or debt financing or from other sources. There can be no assurance that additional financing will be available on acceptable terms or at all.

Critical Accounting Policies and Judgments

The Company prepares its condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The Company’s condensed consolidated financial statements are based on the application of certain accounting policies, the most significant of which are described in Note 1—Summary of Significant Accounting Policies to the audited consolidated financial statements for the year ended January 31, 2005, included in the Company’s Annual Report filed on Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect the Company’s reported results and financial position for the current period or future periods. Changes in the underlying factors, assumptions or estimates in any of these areas could have a material impact on the Company’s future financial condition and results of

operations. The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing its consolidated financial statements.

Property, Buildings and Equipment

Property, equipment and real property owned and under capitalized leases are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded using the straight-line method over the following useful lives:

		Years
Buildings		40
Building improvements		15 - 20
Furniture, fixtures and equipment		5 - 8

Leasehold improvements are amortized over the lesser of the life of the lease or estimated economic life of the assets. The life of the lease includes renewal options determined by management at lease inception for which failure to renew options would result in a substantial economic penalty.

Repairs and maintenance are charged to operations as incurred. Remodeling costs are generally capitalized.

The Company’s accounting policies regarding buildings and equipment include certain management judgments regarding the estimated useful lives of such assets, the residual values to which the assets are depreciated and the determination as to what constitutes increasing the life of existing assets. These judgments and estimates may produce materially different amounts of depreciation and amortization expense than would be reported if different assumptions were used. As discussed further below, these judgments may also impact the Company’s need to recognize an impairment charge on the carrying amount of these assets as the cash flows associated with the assets are realized.

Impairment of Goodwill

The Company reviews goodwill for possible impairment on an annual basis or when triggering events occur in accordance with SFAS 142. Goodwill is tested for impairment at the reporting unit level. Because SFAS 142 defines reporting unit as an operating segment or one level below an operating segment, Star Buffet reviews goodwill for possible impairment by restaurant. Six and eleven reporting units (restaurants) had recorded goodwill for 2005 and 2004, respectively.

The Company utilizes a two-part impairment test. First, the fair value of the reporting unit is compared to its carrying value (including goodwill). If the carrying value is greater than the fair value, the second step is performed in which the implied fair value of the reporting unit goodwill is compared to the carrying amount of goodwill. If the carrying value is greater, a loss is recognized. The goodwill impairment test considers the impact of current conditions and the economic outlook for the restaurant industry, the general overall economic outlook including market data, and governmental and environmental factors, in establishing the assumptions used to compute the fair value of each reporting unit. The Company also takes into account the historical, current and future (based on probability) operating results of each reporting unit and any other facts

and data pertinent to valuing a reporting unit in the Company’s impairment test. The Company recorded an impairment expense of $1,230,000 during the fiscal year ended January 31, 2005.

The Company has an independent evaluation of goodwill conducted every three years. The most recent independent valuation was conducted as of February 1, 2005.

Impairment of Long-Lived Assets

The Company determines that an impairment write-down is necessary for locations 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 an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Any impairment reduces the profitability of the Company by the amount of the impairment in the period in which it is recognized.

Judgments made by the Company related to the expected useful lives of long-lived assets and the ability of the Company to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. If these factors are different than the estimates of the Company, the carrying value of the long-lived assets could be adversely affected. As the Company assesses the ongoing expected cash flows and carrying amounts of its long-lived assets, these factors could cause the Company to realize a material impairment charge.

Insurance Programs

The Company established a self-insured retention in 2003 for general liability claims. The Company has commercial insurance for casualty claims in excess of $2 million per claim and $3 million per year as a risk reduction strategy. Self-insurance retention accruals include estimates based on historical information and expected future development factors. If actual claims differ from estimates and assumptions, our actual accrual requirements may be materially different from the calculated accruals. The Company had general liability insurance reserves of $35,000 and $31,000 for the 40-week periods ended November 7, 2005 and November 1, 2004, respectively.

Commitments and Contractual Obligations

The Company’s contractual obligations and commitments principally include obligations associated with its outstanding indebtedness and future minimum operating and capital lease obligations as set forth in the following table:

Contractual Obligations:	Total		Less than one year		One to three years		Three to five years		Greater than five years
	(Dollars in thousands)
Long-term debt	$	6,424	$	630	$	1,400	$	2,203	$	2,191
Operating leases	11,065		2,514		4,139		3,749		663
Capital leases	2,367		306		626		1,197		238
Purchase commitments	—		—		—		—		—
Total contractual cash obligations	$	19,856	$	3,450	$	6,165	$	7,149	$	3,092

New Accounting Pronouncements

The Company uses the method of accounting for employee stock options allowed under APB Opinion 25 and has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 (“SFAS No.123”), which require pro forma disclosure of the impact of using the fair value at date of grant method of recording stock-based employee compensation. In 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 123-revised 2004 (“SFAS 123R”) “Share-Based Payment” which replaces SFAS 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. The accounting provisions of SFAS 123R are effective for reporting periods beginning after December 15, 2005. Although the Company has not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R and expect the adoption to potentially have a significant adverse impact on our consolidated statements of operations and net income per share starting in fiscal 2007.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The Company’s principal exposure to financial market risks is the impact that interest rate changes could have on its $2.0 million Revolving Line of Credit, of which $452,000 was outstanding as of November 7, 2005 and $0 on December 13, 2005, respectively. The Revolving Line of Credit interest rate is LIBOR plus two percent per annum (averaging approximately 4.7% in fiscal 2006). A hypothetical increase of 100 basis points in short-term interest rates would result in a reduction of pre-tax earnings, the amount of which would depend on the amount outstanding on the line of credit. All of the Company’s business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations have never had a significant impact on the Company and are not expected to in the foreseeable future.

Commodity Price Risk

The Company purchases certain products which are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within the Company’s control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize price volatility. Typically the Company uses these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, the Company believes it will be able to address commodity cost increases which are significant and appear to be long-term in nature by adjusting its menu pricing, menu mix or changing its product delivery strategy. However, increases in commodity prices could result in lower operating margins for the Company’s restaurant concepts.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s chief executive officer and its principal accounting officer, based on their evaluation of the Company’s disclosure controls and procedures (as defined in the rules under the Securities Exchange Act of 1934) as of the end of the quarterly period covered by this report on Form 10-Q, have concluded that the Company’s disclosure controls and procedures are effective and sufficient to ensure that the Company records, processes, summarizes and reports information required to be disclosed by the Company in its periodic reports filed under the Securities and Exchange Act within the time period specified by the Securities and Exchange Commission’s rules and forms. Even an effective internal control system, no matter how well developed has inherent limitations, including the possibility of the circumvention or overriding of controls. Therefore, our internal control over financial reporting can provide only reasonable assurance with respect to the reliability of our financial reporting and financial statement preparation.

Changes in Internal Control Over Financial Reporting

The Company’s chief executive officer and its principal accounting officer, in the course of evaluating the Company’s disclosure controls and procedures, did not identify any change in the Company’s internal control over financial reporting (as defined in the rules under the Securities Exchange Act of 1934) that occurred during the most recent fiscal quarter covered by this report on Form 10-Q or since that date that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits and Reports on Form 8-K

(a) The following exhibits are attached to this report:

Exhibit		Description
Number		of Exhibit

3.1		Certificate of Incorporation*
3.2		Bylaws, as amended on September 22, 1997*
4.1		Form of Common Stock Certificate**
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1		Press release dated December 16, 2005.

* Previously filed as an exhibit to the Registration Statement on Form S-1, Amendment No. 1 (Registration No. 333- 32249).

** Previously filed as an exhibit to the Registration Statement on Form S-1, Amendment No. 2 (Registration No. 333- 32249).

(b) Current Reports on Form 8-K:

There were no reports on Form 8-K filed during the quarter ended November 7, 2005.

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 hereunto duly authorized.

	STAR BUFFET, INC. AND SUBSIDIARIES


December 16, 2005	By:	/s/ Robert E. Wheaton
		Robert E. Wheaton
		Chairman of the Board,
		President, Chief Executive Officer and
		Principal Executive Officer

December 16, 2005	By:	/s/ Ronald E. Dowdy
		Ronald E. Dowdy
		Group Controller,
		Treasurer, Secretary and
		Principal Accounting Officer

STAR BUFFET INC - Quarter Report: 2005 November (Form 10-Q)

SECURITIES EXCHANGE ACT OF 1934

DELAWARE

84-1430786

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 1.

Legal Proceedings

Item 6.

Exhibits and Reports on Form 8-K

Signatures

Note (A) Basis of Presentation

Overview

Components of Income from Operations

Results of Operations

Treasurer, Secretary and