SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.

20549

FORM 10-Q

(Mark One)

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: August 13, 2007

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 x No o

Indicated 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.

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

Indicate by checkmark 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. As of September 13, 2007, there were 3,170,675 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 August 13, 2007 (unaudited) and January 29, 2007

	Unaudited Condensed Consolidated Statements of Operations for the twelve and twenty-eight weeks ended August 13, 2007 and August 14, 2006

	Unaudited Condensed Consolidated Statements of Cash Flows for the twenty-eight weeks ended August 13, 2007 and August 14, 2006

	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 1A.	Risk Factors

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

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

ASSETS	August 13, 2007		January 29, 2007
	(Unaudited)

Current assets:
Cash and cash equivalents	$	941,000	$	418,000
Current portion of notes receivable	—		58,000
Receivables	545,000		435,000
Inventories	660,000		548,000
Deferred income taxes	288,000		310,000
Prepaid expenses	433,000		320,000

Total current assets	2,867,000		2,089,000

Property, buildings and equipment:
Property, buildings and equipment, net	21,038,000		17,479,000
Property and equipment under capitalized leases, net	679,000		751,000
Property and equipment leased to third parties, net	3,938,000		4,291,000
Property, buildings and equipment held for future use	1,892,000		1,892,000
Property held for sale	931,000		931,000
Total property, buildings and equipment	28,478,000		25,344,000

Other assets:
Notes receivable, net of current portion	1,690,000		1,873,000
Deposits and other	247,000		245,000

Total other assets	1,937,000		2,118,000

Deferred income taxes, net	1,902,000		2,097,000

Intangible assets:
Goodwill	1,677,000		1,677,000
Other intangible assets, net	801,000		843,000

Total intangible assets	2,478,000		2,520,000

Total assets	$	37,662,000	$	34,168,000

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

LIABILITIES AND STOCKHOLDERS’ EQUITY	August 13, 2007		January 29, 2007
	(Unaudited)

Current liabilities:
Accounts payable-trade	$	3,319,000	$	2,656,000
Payroll and related taxes	1,427,000		1,281,000
Sales and property taxes	1,218,000		901,000
Rent, licenses and other	554,000		608,000
Income taxes payable	157,000		628,000
Revolving line of credit	2,280,000		336,000
Current maturities of obligations under long-term debt	380,000		434,000
Current maturities of obligations under capital leases	169,000		158,000

Total current liabilities	9,504,000		7,002,000

Deferred rent payable	1,267,000		1,294,000
Note payable to officer	1,320,000		—
Capitalized lease obligations, net of current maturities	1,143,000		1,239,000
Long-term debt, net of current maturities	6,684,000		5,455,000

Total liabilities	19,918,000		14,990,000

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 3,170,675 and 3,170,675 shares	3,000		3,000
Additional paid-in capital	17,491,000		17,491,000
Retained earnings	250,000		1,684,000

Total stockholders’ equity	17,744,000		19,178,000

Total liabilities and stockholders’ equity	37,662,000		34,168,000

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						Twenty-eight Weeks Ended
	August 13, 2007			August 14, 2006			August 13, 2007			August 14, 2006

Total revenues	$	16,308,000		$	13,632,000		$	38,345,000		$	32,395,000

Costs and expenses
Food costs	5,906,000			4,627,000			13,679,000			11,237,000
Labor costs	5,661,000			4,521,000			13,092,000			10,547,000
Occupancy and other expenses	3,622,000			2,924,000			8,190,000			6,797,000
General and administrative expenses	507,000			503,000			1,353,000			1,332,000
Depreciation and amortization	485,000			476,000			1,103,000			1,123,000

Total costs and expenses	16,181,000			13,051,000			37,417,000			31,036,000

Income from operations	127,000			581,000			928,000			1,359,000

Interest expense	(200,000		)	(148,000		)	(418,000		)	(326,000		)
Interest income	4,000			9,000			15,000			66,000
Other income	58,000			61,000			160,000			166,000
Gain on sale of assets	—			—			—			234,000

Income (loss) before income taxes	(11,000		)	503,000			685,000			1,499,000

Income taxes (benefit)	(32,000		)	193,000			217,000			517,000

Net income	$	21,000		$	310,000		$	468,000		$	982,000

Net income per common share – basic	$	0.01		$	0.10		$	0.15		$	0.31
Net income per common share – diluted	$	0.01		$	0.10		$	0.15		$	0.31

Weighted average shares outstanding – basic	3,170,675			3,170,675			3,170,675			3,126,659
Weighted average shares outstanding –diluted	3,180,646			3,179,116			3,180,820			3,150,038

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)

	Twenty-eight Weeks Ended
	August 13, 2007			August 14, 2006
Cash flows from operating activities:
Net income	$	468,000		$	982,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	1,039,000			1,060,000
Amortization of franchise and licenses	51,000			50,000
Amortization of loan cost	13,000			13,000
Gain on sale of assets	—			(234,000		)
Deferred income taxes	217,000			(70,000		)
Change in operating assets and liabilities:
Receivables	(164,000		)	(144,000		)
Inventories	(112,000		)	(27,000		)
Prepaid expenses	(113,000		)	(172,000		)
Deposits and other	(2,000		)	(11,000		)
Deferred rent payable	(27,000		)	(2,000		)
Accounts payable-trade	663,000			108,000
Income taxes payable	(471,000		)	146,000
Other accrued liabilities	409,000			323,000
Total adjustments	1,503,000			1,040,000
Net cash provided by operating activities	1,971,000			2,022,000

Cash flows from investing activities:
Purchase of license and trademarks	(10,000		)	—
Proceeds from sale of assets	—			159,000
Interest income	(2,000		)	(2,000		)
Receipts from payments on notes receivable	20,000			1,323,000
Issuance of note receivable	—			(100,000		)
Acquisition of property, buildings and equipment	(3,896,000		)	(1,983,000		)
Net cash used in investing activities	(3,888,000		)	(603,000		)

Cash flows from financing activities:
Proceeds from stock options exercised	—			872,000
Proceeds received from officer’s note payable	1,320,000			—
Payments on long term debt	(813,000		)	(320,000		)
Proceeds from issuance of long-term debt	1,988,000			564,000
Proceeds on line of credit, net	1,944,000			372,000
Capitalized loan costs	(12,000		)	(4,000		)
Principal payment on capitalized lease obligations	(85,000		)	(77,000		)
Dividends paid	(1,902,000		)	(2,695,000		)
Net cash provided (used) in financing activities	2,440,000			(1,288,000		)

Net increase in cash and cash equivalents	523,000			131,000

Cash and cash equivalents at beginning of period	418,000			491,000

Cash and cash equivalents at end of period	$	941,000		$	622,000

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

	Twenty-eight Weeks Ended
	August 13, 2007		August 14, 2006
Supplemental disclosures of cash flow information:

Cash paid during the period for:
Interest	$	211,000	$	337,000

Income taxes	$	471,000	$	468,000

Non cash investing and financing activities:

Exchange of notes receivable for equipment and leaseholds	$	221,000	$	1,285,500

Transfer of debt as a part of the sale of assets	$	—	$	616,000

Exchange of other receivable for equipment and leaseholds	$	55,000	$	—

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 29, 2007. 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 2007 consolidated financial statements to conform to the fiscal 2008 presentation including the reclassification of $1,110,000 of depreciation and amortization in the Condensed Consolidated Statement of Cash Flows for the quarter ending August 14, 2006 as depreciation of $1,060,000 and amortization of franchise and licenses of $50,000. The accompanying condensed consolidated financial statements include the results of operations and assets and liabilities directly related to the Company’s operations. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The following is a summary of the Company’s restaurant properties as of August 13, 2007. The Company has four reporting segments: HomeTown Buffet, North’s Star, Florida Buffets Division and Summit Restaurants Division. The Company’s reportable segments are based on brand similarities. The HomeTown Buffet segment includes the Company’s 13 franchised HomeTown Buffet restaurants. The HomeTown Buffet in Sandy, Utah was closed on August 5, 2007; the leasehold improvements had been previously impaired. The North’s Star segment includes three Western Sizzlin restaurants, two JJ North’s Country Buffet restaurants, one Oklahoma Steakhouse restaurant and one North’s Star Buffet restaurant, of which one JJ North’s Country Buffet and one North’s Star Buffet are non-operating units. The Oklahoma Steakhouse in Weatherford, Oklahoma is a leased property that opened on June 4, 2007 and the Company purchased the equipment, building and land of the Western Sizzlin in Magnolia, Arkansas on June 19, 2007. The Florida Buffets Division includes five Whistle Junction restaurants, two BuddyFreddys restaurants, two BuddyFreddys Country Buffet restaurants and three Holiday House restaurants. The Florida Buffet Division also includes four non-operating units. The Company closed one Whistle Junction restaurant that it managed on June 12, 2007 without incurring any costs. The Company did not own any assets related to this restaurant. The Summit Restaurants Division included the Company’s eight JB’s Restaurants of which one is a non-operating JB’s Restaurant. The Company opened a JB’s restaurant in Rexburg, Idaho opened on June 1, 2007 and the non-operating unit is leased to a third party. The Summit Restaurants Division also includes four K-BOB’S Steakhouse restaurants, one Pecos Diamond Steakhouse and one Casa Bonita restaurant. In the second quarter of fiscal 2008 the Summit Restaurant Division acquired the equipment, building and land of the Bar H Steakhouse in Dalhart, Texas on May 29, 2007 and leased the 4B’s restaurants in Miles City and Great Falls, Montana on July 31, 2007.

	HomeTown Buffet	North’s Star	Florida Buffets	Summit Restaurants	Total
Owned	3	3	5	7	18
Leased	10	4	11	10	35
Total	13	7	16	17	53

As of August 13, 2007, the Company’s operating and non-operating restaurants are located in the following states:

	Number of Restaurants
State	HomeTown Buffet	North’s Star	Florida Buffets	Summit Restaurants	Total
Arkansas	—	1	—	—	1
Arizona	8	1	—	1	10
Colorado	1	—	—	1	2
Florida	—	—	16	—	16
Georgia	—	1	—	—	1
Idaho	—	1	—	1	2
Mississippi	—	1	—	—	1
Montana	—	—	—	4	4
New Mexico	2	—	—	2	4
Oklahoma	—	1	—	—	1
Texas	—	—	—	4	4
Utah	1	—	—	4	5
Washington	—	1	—	—	1
Wyoming	1	—	—	—	1
Total	13	7	16	17	53

As of August 13, 2007, the Company’s non-operating restaurants are located in the following states:

	Number of Non-Operating Restaurants
State	HomeTown Buffet	North’s Star	Florida Buffets	Summit Restaurants	Total
Arizona	—	1	—	—	1
Florida	—	—	4	—	4
Idaho	—	1	—	—	1
Utah	—	—	—	1	1
Total	—	2	4	1	7

As of August 14, 2006, the Company’s operating and non-operating restaurants were located in the following states:

	Number of Restaurants
State	HomeTown Buffet	North’s Star	Florida Buffets	Summit Restaurants	Total
Arizona	8	1	—	1	10
Colorado	1	—	—	1	2
Florida	—	—	10	—	10
Idaho	—	1	—	—	1
Montana	—	—	—	2	2
New Mexico	2	—	—	2	4
Oregon	—	1	—	—	1
Texas	—	—	—	3	3
Utah	2	—	—	4	6
Washington	—	1	—	—	1
Wyoming	1	—	—	—	1
Total	14	4	10	13	41

As of August 14, 2006, the Company’s non-operating restaurants were located in the following states:

	Number of Non-Operating Restaurants
State	HomeTown Buffet	North’s Star	Florida Buffets	Summit Restaurants	Total
Arizona	—	1	—	—	1
Florida	—	—	4	—	4
Idaho	—	1	—	—	1
Utah	—	—	—	1	1
Total	—	2	4	1	7

The operating results for the 28-week period ended August 13, 2007 included operations shown in the tables above and the lease income and fixed charges for the seven restaurants closed during the entire quarter. The operating results for the 28-week period ended August 14, 2006 included operations shown in the tables above and the lease income and fixed charges for the seven restaurants closed during the entire quarter. Two non-operating stores continue to be closed at the end of the second quarter of fiscal 2008 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 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.

Note (B) 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 prior to the enactment of the Sarbanes-Oxley Act of 2002. Mr. Wheaton owns approximately 48% of the Company’s outstanding common shares including options to purchase stock 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 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. On May 22, 2006, Mr. Wheaton paid the last interest payment of $43,713.

In the 28-week period ended August 13, 2007, the Company borrowed approximately $1,320,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company. The loan is subordinated to the obligation to M&I Marshall & Ilsley Bank and bears interest at 8.5%. The Company expensed and paid $25,936 for interest during the 28-week period ending August 13, 2007. The principal balance and any unpaid interest is due and payable in full on June 5, 2012.

Note (C) Segment and Related Reporting

The Company has four reporting segments: HomeTown Buffet, North’s Star, Florida Buffets Division and Summit Restaurants Division. The Company’s reportable segments are aggregated based on brand similarities of 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 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)

28 Weeks Ended August 13, 2007	HomeTown Buffet			North’s Star(1)			Florida Buffet(2)		Summit(3) Restaurants		Other			Total
Revenues	$	14,043		$	2,587		$	10,325	$	11,390	$	—		$	38,345
Interest income	—			—			—		—		15			15
Interest expense	(82		)	—			—		—		(336		)	(418		)
Depreciation & amortization	512			56			197		300		37			1,103
Income (loss) before income taxes	(100		)	(27		)	96		1,859		(1,143		)	685
Total assets	11,043			5,261			8,150		10,235		2,973			37,662

28 Weeks Ended August 14, 2006	HomeTown Buffet			North’s Star(1)			Florida Buffet(2)		Summit(3) Restaurants		Other			Total
Revenues	$	15,318		$	1,234		$	5,892	$	9,951	$	—		$	32,395
Interest income	—			—			—		—		66			66
Interest expense	(90		)	—			—		—		(236		)	(326		)
Depreciation & amortization	537			47			239		263		37			1,123
Income (loss) before income taxes	471			(213		)	322		1,988		(1,069		)	1,499
Total assets	11,582			2,892			7,880		8,738		3,389			34,481

(1) Included in the reportable segment for the 28 weeks ended August 13, 2007 are two locations that were closed for the entire 28 weeks. These locations incurred $0 of impairment expense in the 28 weeks ended August 13, 2007. These locations have a net book value of equipment of $46,000, buildings and leaseholds of $572,000 and land of $224,000 included in total assets at August 13, 2007.

Included in the reportable segment for the 28 weeks ended August 14, 2006 were two locations that were closed for the entire 28 weeks. These locations had incurred $0 of impairment expense in the 28 weeks ended August 14, 2006. These locations had 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 August 14, 2006.

(2) Included in the reportable segment for the 28 weeks ended August 13, 2007 are four locations that were closed for the entire 28 weeks. These four locations incurred $80,000 of depreciation and amortization and $0 of impairment expense for the 28 weeks ended August 13, 2007. These locations have a net book value of equipment of $397,000, buildings of $1,651,000 and land of $1,559,000 included in total assets at August 13, 2007.

Included in the reportable segment for the 28 weeks ended August 14, 2006 were four locations that were closed for the entire 28 weeks. These four locations incurred $91,000 of depreciation and amortization and $0 of impairment expense for the 28 weeks ended August 14, 2006. These locations had a net book value of equipment of $565,000, buildings of $1,808,000 and land of $1,559,000 included in total assets at August 14, 2006.

(3) Included in the reportable segment for the 28 weeks ended August 13, 2007 is a single location that was closed for the entire 28 weeks. This location incurred $11,000 in depreciation and amortization expense during the 28 weeks ended August 13, 2007. This location has a net book value of equipment of $82,000, buildings of $490,000 and land of $228,000 included in total assets at August 13, 2007.

Included in the reportable segment for the 28 weeks ended August 14, 2006 is a single location that was closed for the entire 28 weeks. The location had $228,000 of land that is included in total assets. The location had $92,000 and $513,000 of net book value of equipment and buildings included in total assets as of August 14, 2006.

Note (D) 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 based on the treasury stock method. The following is a reconciliation of the denominators used to calculate diluted earnings per share on net income for the respective fiscal periods:

	Net Income		Shares	Per Share Amount
12 Weeks Ended August 13, 2007

Weighted average common shares outstanding – basic	$	21,000	3,170,675	$	0.01
Dilutive stock options	—		9,971	—
Weighted average common shares outstanding – diluted	$	21,000	3,180,646	$	0.01

12 Weeks Ended August 14, 2006

Weighted average common shares outstanding – basic	$	310,000	3,170,675	$	0.10
Dilutive stock options	—		8,441	—
Weighted average common shares outstanding – diluted	$	310,000	3,179,116	$	0.10

	Net Income		Shares	Per Share Amount
28 Weeks Ended August 13, 2007

Weighted average common shares outstanding – basic	$	468,000	3,170,675	$	0.15
Dilutive stock options	—		10,145	—
Weighted average common shares outstanding – diluted	$	468,000	3,180,820	$	0.15

28 Weeks Ended August 14, 2006

Weighted average common shares outstanding – basic	$	982,000	3,126,659	$	0.31
Dilutive stock options	—		23,379	—
Weighted average common shares outstanding – diluted	$	982,000	3,150,038	$	0.31

Average shares used in the 12 weeks ended August 13, 2007 and August 14, 2006 diluted earnings per share computations exclude stock options to purchase 488,000 shares of common stock due to the market price of the underlying stock being less than the exercise price. Average shares used in the 28 weeks ended August 13, 2007 and August 14, 2006 diluted earnings per share computations exclude stock options to purchase 488,000 shares of common stock due to the market price of the underlying stock being less than the exercise price.

Note (E) 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. 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. The Company 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 and environmental factors in establishing the assumptions used to compute the fair value of each reporting unit. We also take 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 the reporting units in our 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. There were not any goodwill impairment losses for the 16-week periods ended August 13, 2007 and August 14, 2006.

Note (F) 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 (G) Accounting for Long-Lived Assets

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 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 exceeds the fair value of the assets.

Note (H) Properties, Buildings and Equipment

The components of property, buildings and equipment used in restaurant operations, not including property under capitalized leases held for future use, leased to third parties and held for sale, are as follows:

	August 13, 2007			January 29, 2007
Property, buildings and equipment:
Furniture, fixtures and equipment	$	14,715,000		$	13,372,000
Land	4,185,000			3,410,000
Buildings and leasehold improvements	23,856,000			21,501,000
	42,756,000			38,283,000

Less accumulated depreciation	(21,718,000		)	(20,804,000		)
	$	21,038,000		$	17,479,000

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	(2,514,000		)	(2,442,000		)
	$	679,000		$	751,000

Total property, buildings and equipment includes the following land, equipment and buildings and leaseholds associated with seven non-operating units as of August 13, 2007 and January 29, 2007. As of August 13, 2007 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. The components are as follows:

	August 13, 2007			January 29, 2007
Property and equipment leased to third parties:
Equipment	$	1,111,000		$	1,111,000
Land	1,494,000			1,594,000
Buildings and leaseholds	3,552,000			3,752,000
	6,157,000			6,457,000

Less accumulated depreciation	(2,219,000		)	(2,166,000		)
	$	3,938,000		$	4,291,000

	August 13, 2007			January 29, 2007
Property, buildings and equipment held for future use:
Equipment	$	6,398,000		$	6,398,000
Land	517,000			517,000
Buildings and leaseholds	852,000			852,000
	7,767,000			7,767,000

Less accumulated depreciation	(5,875,000		)	(5,875,000		)
	$	1,892,000		$	1,892,000

	August 13, 2007		January 29, 2007
Property held for sale:
Land	$	567,000	$	567,000
Buildings	364,000		364,000
	$	931,000	$	931,000

The Company did not record an impairment expense in the first or second quarters of fiscal 2008 or fiscal 2007.

Note (I) Stock-Based Compensation

In fiscal year 1998, the Company adopted the 1997 Stock Incentive Plan (the “1997 Plan”), which authorizes the grant of options to purchase up to 750,000 shares of Common Stock. The 1997 Plan provides for the grant of “incentive stock options,” within the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) and non-statutory options to directors, officers, employees and consultants of the Company, except that incentive stock options may not be granted to non-employee directors or consultants. The 1997 Plan provides participants with incentives which will encourage them to acquire a proprietary interest in, and continue to provide services to, the Company. The Compensation Committee has sole discretion and authority, consistent with the provisions of the 1997 Plan, to determine which eligible participants will receive options, the time when options will be granted, terms of options granted and the number of shares which will be subject to options granted under the 1997 Plan.

On January 31, 2006 we adopted Statement of Financial Accounting Standards No. 123(R), “Share Based Payment” (SFAS 123(R)). SFAS 123(R) requires the recognition of compensation costs relating to share based payment transactions in the financial statements. We have elected the modified prospective application method of reporting. Prior to the adoption of SFAS 123(R) we elected to account for stock-based

compensation plans using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensation cost is recognized when the intrinsic value is zero or less and the pro forma effects on earnings and earnings per share are disclosed as if the fair value approach had been adopted. Our stock-based compensation plans are summarized in the table below:

Name of Plan		Shares Authorized		Shares Available		Plan Expiration
1997 Stock Incentive Plan		750,000		1,000		February 2015

Stock options issued under the terms of the plan have, or will have, an exercise price equal to, or greater than, the fair market value of the common stock at the date of the option grant, and expire no later than ten years from the date of grant, with the most recent grant expiring in 2015.

The stock option transactions and the options outstanding are summarized as follows:

	28 Weeks Ended
	August 13, 2007				August 14, 2006
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding at beginning of period	528,000		$	11.56	696,000		$	8.90
Granted	—		—		—		—
Exercised	—		$	—	168,000		$	5.22
Forfeited	—		—		—		—
Outstanding at end of period	528,000		$	11.56	528,000		$	11.56

Exercisable at end of period	528,000		$	11.56	528,000		$	11.56

Weighted average fair value of options granted during the period	$	N/A			$	N/A

The following summarizes information about stock options outstanding at August 13, 2007:

		Options Outstanding				Options Exercisable
Range of Exercise Prices		Number Outstanding	Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$	5.00	12,000	2.2	$	5.00	12,000	$	5.00
$	6.70	28,000	7.5	$	6.70	28,000	$	6.70
$	12.00	488,000	0.1	$	12.00	488,000	$	12.00
		528,000				528,000

The Company did not issue any stock options in fiscal year 2007. The Company has not granted any stock options in fiscal 2008 as of September 13, 2007.

Note (J) Commitments and Contingencies

HTB entered into a franchise agreement for each HomeTown Buffet location which requires among other items, the payment of a continuing royalty fee to HomeTown Buffet, Inc. The royalty fee is based on 2% of the aggregate gross sales of all the Company’s HomeTown Buffet restaurants. Each of the franchise agreements has a 20-year term (with two five-year renewal options). HTB provides weekly sales reports to the HomeTown franchisor as well as periodic and annual financial statements. HTB is obligated to operate its Hometown Buffet restaurants in compliance with the franchisor’s requirements. The franchisor requires HTB to operate each restaurant in conformity with Franchise Operating Manuals, Recipe Manuals and Menus, restricts operating restaurants within a geographic radius of the franchisor’s restaurants, requires HTB is to use it best efforts to achieve the highest practicable level of sales, and requires HTB to promptly make royalty payments. The HomeTown franchisor may terminate a franchise agreement for a number of reasons, including HTB’s failure to pay royalty fees when due, failure to comply with applicable laws or repeated failure to comply with one or more requirements of the franchise agreement. Many state franchise laws limit the ability of a franchisor to terminate or refuse to renew a franchise. Generally, a franchisor may terminate a franchise agreement only if the franchisee violates a material and substantial provision of the agreement and fails to remedy the violation within a specified period.

The Company entered into a license agreement for certain K-BOB’S location which requires among other items, the payment of certain fees to K-BOB’S. The fees, where applicable, are based on the aggregate gross sales. The Company provides sales reports to K-BOB’S as well as periodic and annual financial statements. The Company is obligated to operate its K-BOB’S restaurants in compliance with the K-BOB’S requirements.

The Company entered into an agreement for each Western Sizzlin location which requires among other items, the payment of license fees to Western Sizzlin Corporation. The license fee is based on the aggregate gross. The Company provides weekly sales reports to Western Sizzlin as well as periodic and annual financial statements. The Company is obligated to operate its Western Sizzlin restaurants in compliance with the Western Sizzlin’s requirements.

In 1998, the Company had previously sued North’s Restaurants, Inc. (“North’s”) which resulted in a negotiated settlement in favor of the Company represented by an Amended and Restated Promissory Note (the “Star Buffet Promissory Note). As a result of North’s failing to live up to its obligations under the Star Buffet Promissory Note, on March 2, 2004, the Company filed a second action against North’s in the United States District Court, District of Utah, Central Division, Case No. 2:04CV00211, seeking not less than approximately $2,900,000 plus interest at the default rate as set forth in the Star Buffet Promissory Note. In January 2005, the court granted the Company’s motion for summary judgment, ruling that North’s had failed to pay amounts owed to the Company. The Company obtained a judgment against North’s in the amount of approximately $3,100,000, plus $16,000 in attorney’s fees and costs.

In a related proceeding, North’s other secured creditor, Pacific Mezzanine, initiated litigation against North’s seeking a monetary judgment and the appointment of a receiver. On October 4, 2004, the Circuit Court of the State of Oregon for the County of Jackson approved an order appointing a receiver.

Prior to August 2006, the receiver had remitted only approximately $56,000 in loan repayments. In April, 2006 the Company noticed all relevant parties of its intent to foreclose to seek to expedite the liquidation of North’s assets and repay amounts owed to the Company. Subsequent to the notice, the receiver moved to have the Company’s foreclosure of North’s assets set aside so that certain of North’s assets could be sold to a third party. The motion was approved. On August 7, 2006, the receiver paid the Company approximately $1,291,000 from a partial sale of the assets. The Company’s note, together with the obligation to the other significant creditor of North’s, is secured by the real and personal property, landlord leases, trademarks and all other intellectual property owned by North’s. The Company believes current and future cash flows including asset sales are adequate for recovery of the remaining principal amount of the note receivable. The Company has not recognized any interest income with respect to this note since August 2003. The Company has not provided an allowance for bad debts for the note as of August 13, 2007.

In addition to the foregoing, the Company is engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that the resolution of any of these routine proceedings will require payments that will have a material effect on the Company’s consolidated statements of operations or financial position or liquidity.

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. In accordance with the terms of the strategic alliance, the Company agreed to lend K-BOB’S up to $1.5 million on a long-term basis. 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 in the United States. On January 30, 2006, the Company exercised its option under the terms of the strategic alliance and purchased three K-BOB’S restaurants.

On April 21, 2006, the Company announced in a press release that it had entered into a strategic alliance with Western Sizzlin Corporation. In accordance with the terms of the strategic alliance, the Company plans to convert certain of its existing restaurants to the Western Sizzlin brand; test a newly developed Western Sizzlin buffet prototype; and seek to acquire selected Western Sizzlin franchised restaurants. Additionally, as an important element of the strategic alliance, the Company and Western Sizzlin will explore a number of identified opportunities to reduce operating and administrative expenses.

On April 22, 2007 the principal of Holiday House Corporation (“HHC”) notified the Company that he planned to turn control of the business and associated assets over to the Company. On April 23, 2007 the Company began operating the business. The Company hired HHC’s employees, notified HHC’s creditors of its intent to operate the business and commenced negotiations with HHC’s landlord to craft an acceptable facility lease. In August 2007, the Company signed the facility lease.

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.

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 29.8% and 31.7% for the 28-week periods ended August 13, 2007 and August 14, 2006, respectively.

Note (L) Insurance Programs

The Company is self-insured 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 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 $51,000 and $42,000 for the 28-week periods ended August 13, 2007 and August 14, 2006, respectively.

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 29, 2007. 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 29, 2007, and other filings with the Securities and Exchange Commission.

Overview

Consolidated net income for the 12-week period ended August 13, 2007 decreased $289,000 to $21,000 or $0.01 per share on a diluted basis as compared with net income of $310,000 for the comparable prior year period. Consolidated net income for the 28-week period ended August 13, 2007 decreased $514,000 to $468,000 or $0.15 per share on a diluted basis as compared with consolidated net income of $982,000 for the comparable prior year period. The decrease in consolidated net income for the 12 weeks ended August 13, 2007 is primarily due to an increase in interest expense of $52,000 and an increase in food and labor cost as a percentage of sales compared to same period in the prior year. Total revenues increased $2,676,000 or 19.6% from $13.6 million in the 12 weeks ended August 14, 2006 to $16.3 million in the 12 weeks ended August 13, 2007. The increase in revenues was primarily attributable to 14 new store openings, resulting in sales of approximately $3.1 million, partially offset by declines of approximately $.4 million in comparable same store sales primarily in the HomeTown Buffet division and the closure of one JJ North’s Country Buffet, one BuddyFreddys Country Buffet and one HomeTown Buffet restaurant.

The decrease in consolidated net income for the 28 week period ended August 13, 2007 is primarily due to an increase in interest expense of $92,000, a decrease in interest income of $51,000, a gain on sale of assets of $234,000 in the prior year and increases in food and labor costs as a percentage of sales as compared to the prior year. Total revenues increased $5,950,000 or 18.4% from $32.4 million in the 28 weeks ended August 14, 2006 to $38.3 million in the 28 weeks ended August 13, 2007. The increase in revenues was primarily attributable to 14 new store openings, resulting in sales of approximately $6.6 million, partially offset by declines of approximately $.8 million in comparable same store sales primarily in the HomeTown Buffet division and the closure of one JJ North’s Country Buffet, one BuddyFreddys Country Buffet and one HomeTown Buffet restaurant. The decrease in revenues in comparable same store sales was primarily in the HomeTown Buffet division. The Company believes the decline in same store sales is a result of weaker

economic conditions and due to new restaurant competition in certain markets. The decline in sales on a same store basis significantly impacts consolidated 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.

Recent Developments

The Company acquired the Western Sizzlin restaurant in Magee, Mississippi on January 30, 2007 for $1,400,000. Further, the Company opened a Whistle Junction restaurant on February 20, 2007 in Orlando, Florida and a leased Holiday House restaurant also in Orlando on April 23, 2007. During the second quarter, the Company acquired a Bar H Steakhouse restaurant in Dalhart, Texas on May 29, 2007 and a Western Sizzlin restaurant in Magnolia, Arkansas on June 19, 2007. In addition, the Company opened a JB’ s Family Restaurant in Rexburg, Idaho on June 1, 2007, a leased Oklahoma Steakhouse in Weatherford, Oklahoma on June 4, 2007 and two leased 4B’s restaurants in Miles City and Great Fall, Montana on July 31, 2007. The Company closed one Whistle Junction restaurant in Orlando, FL on June 12, 2007 and one leased Hometown Buffet restaurant on August 5, 2007.

The following states in which the Company does business have had and will have minimum wages increases of $0.70 per hour on July 24, 2007 , 2008, and 2009 as a result of the minimum wage bill passed by Congress and signed by President Bush on May 24, 2007; Georgia, Idaho, Mississippi, New Mexico, Oklahoma, Texas, Utah and Wyoming.

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, 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 28 weeks ended August 13, 2007 and August 14, 2006.

	Twelve Weeks Ended				Twenty-eight Weeks Ended
	August 13, 2007		August 14, 2006		August 13, 2007		August 14, 2006
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%

Costs and expenses
Food costs	36.2		33.9		35.7		34.7
Labor costs	34.7		33.2		34.1		32.6
Occupancy and other expenses	22.2		21.5		21.4		21.0
General and administrative expenses	3.1		3.7		3.5		4.1
Depreciation and amortization	3.0		3.5		2.9		3.5
Total costs and expenses	99.2		95.7		97.6		95.8

Income from operations	0.8		4.3		2.4		4.2

Interest expense	(1.2	)	(1.1	)	(1.1	)	(1.0	)
Interest income	0.0		0.1		0.1		0.2
Other income	0.4		0.1		0.4		0.5
Gain on sale of assets	0.0		0.4		0.0		0.7
Income (loss) before income taxes	(0.0	)	3.7		1.8		4.6

Income taxes (benefit)	(0.2	)	1.4		0.6		1.6

Net income	0.1	%	2.3	%	1.2	%	3.0	%

Effective income tax rate	(290.9	%)	38.4	%	31.7	%	34.4	%

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)

28 Weeks Ended August 13, 2007	HomeTown Buffet(1)			North’s Star(2)			Florida Buffet(3)		Summit Restaurants(4)		Other			Total

Revenues	$	14,043		$	2,587		$	10,325	$	11,390	$	—		$	38,345
Food cost	5,257			1,004			3,960		3,458		—			13,679
Labor cost	4,702			926			3,591		3,873		—			13,092
Interest income	—			—			—		—		15			15
Interest expense	(82		)	—			—		—		(336		)	(418		)
Depreciation & amortization	512			56			197		300		38			1,103
Income (loss) before income taxes	(100		)	(27		)	96		1,859		(1,143		)	685

28 Weeks Ended August 14, 2006	HomeTown Buffet(1)			North’s Star(2)			Florida Buffet(3)		Summit Restaurants(4)			Other			Total
Revenues	$	15,318		$	1,234		$	5,892	$	9,951		$	—		$	32,395
Food cost	5,838			510			2,169		2,571			—			11,088
Labor cost	4,701			439			1,958		3,182			—			10,280
Interest income	—			—			—		—			66			66
Interest expense	(90		)	—			—		—			(236		)	(326		)
Depreciation & amortization	537			47			239		263			38			1,123
Impairment of long-lived assets	—			—			—		(234		)	—			(234		)
Income (loss) before income taxes	471			(213		)	322		1,988			(1,069		)	1,499

(1) The same store sales declined this year resulting in higher labor costs for HomeTown Buffet as a percentage of sales. Management believes sales decreased because of general economic conditions and increased competition in certain areas.

(2) The same store sales increased this year resulting in lower food costs for North’s Star as a percentage of sales. The North’s Star division had three new Western Sizzlin restaurants and one new Oklahoma Steakhouse which more than offset the one closed JJ North’s Country Buffet restaurant and contributed to higher sales and reduced the loss before income taxes.

(3) The decline in income before income taxes in the Florida Buffet segment was primarily the result of higher food and labor costs in the five new Whistle Junction restaurants and the one new Holiday House restaurant as compared to the existing restaurants in the same segment. The increase in revenues was the result of six new restaurants. These new restaurants contributed approximately 4.3 million in sales.

(4) The increase in sales from the four new restaurants contributed approximately $500,000 in sales and the Pecos Diamond Steakhouse contributed approximately $650,000 more than last year when Pecos opened during the quarter. The decrease in income before income taxes was primarily due to the $234,000 gain on selling the restaurant facility in Laramie, Wyoming in the prior year.

Total revenues increased $5,950,000 or 18.4% from $32.4 million in the 28 weeks ended August 14, 2006 to $38.3 million in the 28 weeks ended August 13, 2007. The increase in revenues was primarily attributable to 14 new store openings resulting in sales of approximately $6.6 million partially offset by declines in comparable same store sales primarily in the HomeTown Buffet division and the closure of one JJ North’s Country Buffet, one BuddyFreddys Country Buffet and one Hometown Buffet restaurant.

Food costs as a percentage of total revenues increased from 33.9% during the 12-week period ended August 14, 2006 to 36.2% during the 12 weeks ended August 13, 2007, and from 34.7% during the 28-week period ended August 14, 2006 to 35.7% during the 28 weeks ended August 13, 2007. The increase for the 12 and 28 weeks as a percentage of total revenues was primarily attributable to the higher protein and grain prices in the current year.

Labor costs as a percentage of total revenues increased from 33.2% during the 12-week period ended August 14, 2006 to 34.7% during the 12-week period ended August 13, 2007 and actual costs increased by $1,140,000. Labor costs as a percentage of total revenues increased from 32.6% during the 28-week period ended August 14, 2006 to 34.1% during the 28-week period ended August 13, 2007 and actual labor costs increased by $2,545,000. The increase in labor cost and as a percentage of revenue resulted primarily from higher starting wages in certain

markets in fiscal 2008 as compared to the fiscal year 2007 and higher minimum wages in certain states in the current year.

Occupancy and other expenses as a percentage of total revenues increased from 21.5% during the 12-week period ended August 14, 2006 to 22.2% during the 12-week period ended August 13, 2007 while actual costs increased by $698,000. Occupancy and other expenses as a percentage of total revenues increased from 21.0% during the 28-week period ended August 14, 2006 to 21.4% during the 28-week period ended August 13, 2007 and actual costs increased by $1,393,000. The increase as a percentage of total revenues for both the 12 and 28-week periods was primarily attributable to an increase in utilities as a percentage of revenue in the current year compared to the prior year.

General and administrative costs as a percentage of revenues decreased from 3.7% during the 12-week period ended August 14, 2006 to 3.1% during the 12-week period ended August 13, 2007 and actual costs increased by $4,000. General and administrative costs as a percentage of revenues decreased from 4.1% during the 28-week period ended August 14, 2006 to 3.5% during the 28-week period ended August 13, 2007 and actual costs increased by $21,000. The decrease as a percentage of sales for the 12-week and 28-week periods ended August 13, 2007 was primarily attributable to higher sales from 14 new stores as compared to the same period of the prior year with no significant increase in administrative costs or personnel.

Depreciation and amortization as a percentage of total revenues decreased from 3.5% during the 12-week period ended August 14, 2006 to 3.0% during the 12-week period ended August 13, 2007. Depreciation and amortization as a percentage of total revenues decreased from 4.1% during the 28-week period ended August 14, 2006 to 3.5% during the 28-week period ended August 13, 2007. The decrease is primarily attributable to certain equipment being fully depreciated for the 12-week and 28-week periods ended August 13, 2007 and lower depreciation per revenue for the new stores compared to the existing stores.

Interest expense as a percentage of total revenues increased from 1.1% during the 12-week period ended August 14, 2006 to 1.2% during the 12-week period ended August 13, 2007, and from 1.0% during the 28-week period ended August 14, 2006 to 1.1% during the 28-week period ended August 13, 2007. The increase as a percentage of total revenues was primarily attributable to higher debt balances and higher interest rates for both the 12 and 28 week periods ended August 13, 2007 as compared to the same periods of the prior year.

Interest income decreased from $9,000 for the 12-week period ended August 14, 2006 to $4,000 for the 12-week period ended August 13, 2007. Interest income decreased from $66,000 for the 28-week period ended August 14, 2006 to $15,000 for the 28-week period ended August 13, 2007. The interest income was generated by the Company’s cash and outstanding notes receivable balances. The decrease in interest income for the current year 28 week period is primarily attributable to Mr. Robert E. Wheaton, the Company’s President and Chief Executive Officer, paying $43,700 in interest in the first quarter of fiscal 2007 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. Rental income was $58,000 and $157,000 for four properties leased for the entire 12 and 28-week periods ended August 13, 2007, respectively. Rental income was $55,000 and $146,000 for four properties leased for the entire 12 and 28-week periods ended August 14, 2006, respectively. Other income from management contracts was $0 and $3,000 for the 12 and 28-week periods ended August 13, 2007. Other income from management contracts was $6,000 and $20,000 for the 12 and 28-week periods ended August 14, 2006.

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 August 13, 2007, the Company had $941,000 in cash. Cash and cash equivalents increased by $523,000 during the 28 weeks ended August 13, 2007. The net working capital deficit was $(6,637,000) and $(4,913,000) at August 13, 2007 and January 29, 2007, respectively. The net working capital deficit increased from the prior year primarily because each restaurant operates with a negative working capital balance and there were 12 more restaurants operating on August 13, 2007 as compared to the same quarter ending August 14, 2006 in the prior year. Total cash provided by operations for the 28 weeks ended August 13, 2007 was approximately $1,971,000 as compared to approximately $2,022,000 in the 28 weeks ended August 14, 2006. The Company spent approximately $3,896,000 on capital expenditures in the first two quarters of fiscal 2008 including approximately $1,400,000 to purchase the equipment, building and land in the Western Sizzlin Restaurant in Magee, Mississippi. The acquisition of the Western Sizzlin restaurant was partially financed by a loan from the seller of approximately $900,000, secured by the acquired assets. The Company spent approximately $750,000 to purchase the equipment, building and land in the Bar H Steakhouse in Dalhart, Texas. The acquisition of the Bar H restaurant was partially financed by a bank loan of approximately $500,000, secured by the acquired assets. The Company spent approximately $650,000 to purchase the equipment, building and land in the Western Sizzlin Restaurant in Magnolia, Arkansas. The acquisition of the Western Sizzlin restaurant was partially financed by a bank loan of approximately $520,000 secured by the acquired assets. In addition the Western Sizzlin in Magnolia had a three year loan from the seller of approximately $75,000.

The Company has a $3,000,000 revolving line of credit with M&I Marshall & Ilsley Bank (the “revolving line of credit”) which provides working capital for the Company. The revolving line of credit bears interest at LIBOR plus two percent per annum and is renewable subject to credit review on an annual basis. The revolving line of credit contains covenants which require the Company to maintain certain financial ratios and other covenants that restrict the annual payment for capital expenditures and dividends. As of August 13, 2007, the Company is in compliance with these covenants.

On May 29, 2007, the Company acquired the Bar H Steakhouse in Dalhart, Texas and entered into a $500,000 five year real estate mortgage with Dalhart Federal Savings and Loan Association. The mortgage has monthly payments beginning July 1, 2007 of $5,903 per month with a balloon payment of $301,345 due on June 1, 2012. The mortgage is secured by the acquired Bar H Steakhouse restaurant.

On June 15, 2007, the Company renewed the Revolving Line of Credit to June 15, 2008. The revolving line of credit balance was $2,280,000 on August 13, 2007 and $2,528,000 on September 13, 2007. As of September 13, 2007, $472,000 was available on the revolving line of credit. In addition, the revolving line of credit permits the Company to pay up to $2,700,000 in annual dividends and was amended to allow the

Company to spend up to $4,500,000 in fiscal 2008 and in subsequent years on capital expenditures. The revolving line of credit also permits the Company to repurchase up to 250,000 shares of common stock, although as of September 13, 2007, no shares had been repurchased.

On June 19, 2007, the Company acquired the Western Sizzlin in Magnolia, Arkansas and entered into a $520,000 five year real estate mortgage with Farmers Bank and Trust. The mortgage has monthly payments of $4,676 beginning July 19, 2007 with a balloon payment of $407,313 due on June 19, 2012. The mortgage is secured by the acquired Western Sizzlin restaurant. In addition the Western Sizzlin in Magnolia had a three year loan from the seller of approximately $75,000.

In the 28-week period ended August 13, 2007, the Company borrowed approximately $1,320,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company. The loan is subordinated to the obligation to M&I Marshall & Ilsley Bank and bears interest at 8.5%. The Company expensed and paid $25,936 for interest on this loan during the 28-week period ending August 13, 2007. The principal balance and any unpaid interest is due and payable in full on June 5, 2012. The Company used the funds to acquire restaurants and provide working capital.

The Company believes that available cash, availability under the revolving line of credit, proceeds from the loans from Mr. Wheaton 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 projects that operating cash flows will exceed planned capital expenditures in the next 12 months and that funds will be available to return capital to stockholders in the form of dividends, share repurchases or both. There can be no assurance, however, that cash and cash flow from operations will be sufficient to satisfy its working capital and capital requirements for the next 12 months or beyond.

It is possible that changes in the Company’s operating results, available loan capacity from the existing credit facility, acceleration of the Company’s capital expenditure plans, potential acquisitions or other events may cause the Company to seek additional financing. Additional financing may be raised through public or private equity and/or debt financing or from other sources. Additionally, the Company’s revolving line of credit expires on June 15, 2008. Although it is unlikely at this time, there can be no assurance that required financings at favorable interest rates 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 29, 2007, 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 and equipment and real property 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 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 and environmental factors, in establishing the assumptions used to compute the fair value of each reporting unit. We also take into account the historical, current and future (based on probability) operating results of each reporting units and any other facts and data pertinent to valuing the reporting units in our 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.

Impairment of Long-Lived Assets

The Company evaluates impairment of long-lived assets for impairment 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 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 exceeds the fair value of the assets.

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. 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 is self-insured 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 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.

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	$	7,064	$	415	$	3,858	$	2,216	$	575
Operating leases	10,072		2,505		3,259		1,703		2,605
Capital leases	1,823		315		628		578		302
Purchase commitments	—		—		—		—		—

Total contractual cash obligations	$	18,959	$	3,235	$	7,745	$	4,497	$	3,482

New Accounting Pronouncements

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurement. SFAS 157 also creates consistency and comparability in fair value measurements among the many accounting pronouncements that require fair value measurements but does not require any new fair value measurements. SFAS 157 is effective for fiscal years (including interim periods) beginning after November 15, 2007, which for us is the first quarter of fiscal 2009. We are currently evaluating the impact of SFAS 157 on our consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. This standard amends SFAS 115, Accounting for Certain Investment in Debt and Equity Securities, with respect to accounting for a transfer to the trading category for all entities with available-for-sale and trading securities electing the fair value option. This standard allows companies to elect fair value accounting for many financial instruments and other items that currently are not required to be accounted as such, allows different applications for electing the option for a single item or groups of items, and requires disclosures to facilitate comparisons of similar assets and liabilities that are accounted for differently in relation to the fair value option. SFAS 159 is effective for fiscal years beginning after November 15, 2007, which for us is fiscal 2009. We are currently evaluating the impact of SFAS 159 on our consolidated financial position and results of operations.

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140. SFAS 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be accounted for as a whole on a fair value basis, at the holders’ election. SFAS 155 also clarifies and amends certain other provisions of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement 125. Our adoption of SFAS 155 at the beginning of fiscal 2008 had no impact on our consolidated financial position or results of operations.

In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140. SFAS 156 provides guidance on the accounting for servicing assets and liabilities when an entity undertakes an obligation to service a financial asset by entering into a servicing contract. Our adoption of SFAS 156 at the beginning of fiscal 2008 had no impact on our consolidated financial position or results of operations.

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in financial statements. 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. FIN 48 requires the recognition, in the financial statements, of the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. We adopted FIN 48 at the beginning of fiscal 2008.

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 $3.0 million Revolving Line of Credit, of which $2,280,000 was outstanding as of August 13, 2007 and $2,528,000 on September 13, 2007. The Revolving Line of Credit interest rate is LIBOR plus two percent per annum (averaging approximately 7.3% in fiscal 2008). 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 our 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 4T. Controls and Procedures

The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the required time periods and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow for timely decisions regarding required disclosure.

As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Principal Accounting Officer, of the effectiveness and the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and the Principal Accounting Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There has been no change in our internal control over financial reporting during the quarter ended August 13, 2007, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. In addition, since the most recent evaluation date, there have been no significant changes in our internal control structure, policies, and procedures or in other areas that could significantly affect the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

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. In addition to the foregoing, the Company has ongoing litigation with North’s Restaurants, Inc. as described in more detail in Note J to the condensed consolidated financial statements included herein.

Item 1A. Risk Factors

Risk factors associated with the business and operations of the Company are included in the Company’s report on Form 10-K for the year ended January 29, 2007 and other filings with the Securities and Exchange Commission and should be reviewed by the reader.

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

The annual meeting of stockholders was held on June 25, 2007. Of the 3,170,675 shares of the Company’s common stock issued and outstanding and entitled to vote at the meeting, there were present at the meeting, in person or by proxy, the holders of 3,039,417 common shares, representing 95.86% of the total number of shares entitled to vote at the meeting. This percentage represents a quorum. The following matters were voted upon at the stockholders’ meeting:

1. Each of the six nominees to the Board of Directors was elected to serve a one-year term expiring at the annual meeting of stockholders to be held in 2008 or until their successors are elected and qualified:

Name	Number of Votes Cast
	For	Authority Withheld
Robert E. Wheaton	3,024,457	14,960
Thomas G. Schadt	3,018,060	21,357
Phillip “Buddy” Johnson	3,026,557	12,860
Craig B. Wheaton	3,026,507	12,910
B. Thomas M. Smith, Jr.	3,026,357	13,060
Todd S. Brown	3,025,893	13,524

2. The ratification of the selection of Mayer Hoffman McCann P.C. as independent public accountants of the Company for the current fiscal year was approved by the following vote:

Votes Cast		Number of Shares

For		3,036,737

Against		500

Abstain		2,180

Broker Non-Votes		131,258

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

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

Exhibit Number		Description of Exhibit

3.1		Certificate of Incorporation*
3.2		Bylaws, as amended on September 22, 1997*
4.1		Form of Common Stock Certificate**
10.1		Loan Agreement with Robert E. Wheaton and Suzanne H. Wheaton dated June 15, 2007
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 September 20, 2007.

* 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).

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


September 21, 2007	By:	/s/ Robert E. Wheaton
		Robert E. Wheaton
		Chairman of the Board,
		President, Chief Executive Officer and
		Principal Executive Officer


September 21, 2007	By:	/s/ Ronald E. Dowdy
		Ronald E. Dowdy
		Group Controller,
		Treasurer, Secretary and
		Principal Accounting Officer

STAR BUFFET INC - Quarter Report: 2007 August (Form 10-Q)

SECURITIES EXCHANGE ACT OF 1934

Note (A) Basis of Presentation

Overview

Components of Income from Operations

Results of Operations