STAR BUFFET INC - Quarter Report: 2008 November (Form 10-Q)

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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: November 3, 2008

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, a non-accelerated filer or smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-3 of the Exchange Act. (check one)

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o		Smaller reporting company 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 December 10, 2008, there were 3,213,075 shares of Common Stock, $ .001 par value, outstanding.

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STAR BUFFET, INC. AND SUBSIDIARIES

INDEX

		Page
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements:

	Condensed Consolidated Balance Sheets as of November 3, 2008 (unaudited) and January 28, 2008	3

	Unaudited Condensed Consolidated Statements of Operations for the 12 and 40 weeks ended November 3, 2008 and November 5, 2007	5

	Unaudited Condensed Consolidated Statements of Cash Flows for the 40 weeks ended November 3, 2008 and November 5, 2007	6

	Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3. Quantitative and Qualitative Disclosures about Market Risk		30

Item 4T. Controls and Procedures		30

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		33

Item 1A. Risk Factors		33

Item 5. Other Information		33

Item 6. Exhibits and Reports on Form 8-K		34

Signatures		35

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PART I: FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements

STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	November 3, 2008		January 28, 2008
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,237,000	$	736,000
Receivables, net	700,000		431,000
Income tax receivable	665,000		665,000
Inventories	654,000		412,000
Deferred income taxes	408,000		319,000
Prepaid expenses	458,000		166,000

Total current assets	4,122,000		2,729,000

Property, buildings and equipment:
Property, buildings and equipment, net	26,197,000		20,816,000
Property and equipment under capitalized leases, net	45,000		71,000
Property and equipment leased to third parties, net	797,000		3,126,000
Property, buildings and equipment held for future use, net	4,841,000		2,547,000
Property held for sale	931,000		931,000
Total property, buildings and equipment	32,811,000		27,491,000

Other assets:
Notes receivable, net of current portion	704,000		704,000
Deposits and other	430,000		623,000

Total other assets	1,134,000		1,327,000

Deferred income taxes, net	2,433,000		2,765,000

Intangible assets:
Goodwill	551,000		551,000
Other intangible assets, net	1,206,000		839,000

Total intangible assets	1,757,000		1,390,000

Total assets	$	42,257,000	$	35,702,000

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

(Continued)

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STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

	November 3, 2008			January 28, 2008
	(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable-trade	$	4,622,000		$	4,959,000
Checks written in excess of cash in bank	674,000			—
Payroll and related taxes	1,807,000			1,401,000
Sales and property taxes	2,035,000			1,297,000
Rent, licenses and other	595,000			808,000
Income taxes payable	180,000			176,000
Revolving line of credit	—			1,349,000
Current maturities of obligations under long-term debt	2,585,000			1,038,000
Current maturities of obligations under capital leases	52,000			49,000

Total current liabilities	12,550,000			11,077,000

Deferred rent payable	1,614,000			1,846,000
Other accrued long-term liabilities	493,000			493,000
Note payable to officer	1,992,000			1,400,000
Capitalized lease obligations, net of current maturities	14,000			54,000
Long-term debt, net of current maturities	11,085,000			5,557,000

Total liabilities	27,748,000			20,427,000

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 3,213,075 and 3,170,675 shares	3,000			3,000
Additional paid-in capital	17,742,000			17,491,000
Accumulated deficit	(3,236,000		)	(2,219,000		)

Total stockholders’ equity	14,509,000			15,275,000

Total liabilities and stockholders’ equity	$	42,257,000		$	35,702,000

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

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STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Twelve Weeks Ended						Forty Weeks Ended
	November 3,			November 5,			November 3,			November 5,
	2008			2007			2008			2007
Total revenues	$	20,837,000		$	15,087,000		$	78,226,000		$	53,432,000

Costs and expenses
Food costs	8,215,000			5,771,000			30,386,000			19,450,000
Labor costs	7,067,000			5,441,000			25,554,000			18,533,000
Occupancy and other expenses	4,104,000			3,695,000			15,622,000			11,885,000
General and administrative expenses	640,000			1,156,000			2,284,000			2,509,000
Depreciation and amortization	615,000			507,000			2,074,000			1,611,000
Impairment of long-lived assets	—			—			212,000			—

Total costs and expenses	20,641,000			16,570,000			76,132,000			53,988,000

Income (loss) from operations	196,000			(1,483,000		)	2,094,000			(556,000		)

Interest expense	(265,000		)	(227,000		)	(837,000		)	(645,000		)
Interest income	1,000			4,000			13,000			20,000
Other income	22,000			28,000			76,000			188,000
Gain (loss) on sale of assets	—			31,000			—			31,000

(Loss) income before income taxes	(46,000		)	(1,647,000		)	1,346,000			(962,000		)

Income taxes (benefit)	(28,000		)	(636,000		)	437,000			(419,000		)

Net (loss) income	$	(18,000	)	$	(1,011,000	)	$	909,000		$	(543,000	)

Net (loss) income per common share – basic	$	(0.01	)	$	(0.32	)	$	0.28		$	(0.17	)
Net (loss) income per common share – diluted	$	(0.01	)	$	(0.32	)	$	0.28		$	(0.17	)

Weighted average shares outstanding – basic	3,213,075			3,170,675			3,212,772			3,170,675
Weighted average shares outstanding –diluted	3,213,075			3,170,675			3,212,864			3,170,675

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

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STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	40 weeks Ended
	November 3, 2008			November 5, 2007
Cash flows from operating activities:
Net income (loss)	$	909,000		$	(543,000	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	1,960,000			1,529,000
Amortization of franchise and licenses	60,000			64,000
Amortization of loan costs	139,000			18,000
Gain on sale of assets	—			(31,000		)
Impairment of long-lived assets	212,000			—
Deferred income taxes	243,000			(6,000		)
Change in operating assets and liabilities:
Receivables	(269,000		)	(151,000		)
Income tax receivables	—			(428,000		)
Inventories	(242,000		)	(120,000		)
Prepaid expenses	(292,000		)	(45,000		)
Deposits and other	193,000			—
Deferred rent payable	(232,000		)	(33,000		)
Accounts payable-trade	(337,000		)	500,000
Income taxes payable	4,000			(468,000		)
Other accrued liabilities	930,000			1,145,000
Total adjustments	2,369,000			1,974,000
Net cash provided by operating activities	3,278,000			1,431,000
Cash flows from investing activities:
Acquisition of property, buildings and equipment	(7,479,000		)	(4,310,000		)
Interest income	—			(1,000		)
Proceeds from sale of assets	—			746,000
Receipts from payments on notes receivable	—			20,000
Purchase of license and trademarks	—			(10,000		)
Net cash used in investing activities	(7,479,000		)	(3,555,000		)
Cash flows from financing activities:
Checks written in excess of cash in bank	674,000			475,000
Proceeds received from officer’s note payable	592,000			1,362,000
Payments on long term debt	(4,367,000		)	(1,051,000		)
Proceeds from issuance of long-term debt	11,442,000			1,988,000
(Payments) proceeds on line of credit, net	(1,349,000		)	1,464,000
Capitalized loan costs	(325,000		)	(12,000		)
Principal payment on capitalized lease obligations	(37,000		)	(121,000		)
Dividends paid	(1,928,000		)	(1,902,000		)
Net cash provided by financing activities	4,702,000			2,203,000
Net change in cash and cash equivalents	501,000			79,000

Cash and cash equivalents at beginning of period	736,000			418,000
Cash and cash equivalents at end of period	$	1,237,000		$	497,000

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STAR BUFFET, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

	40 weeks Ended
	November 3, 2008		November 5, 2007

Supplemental disclosures of cash flow information:

Cash paid during the period for:
Interest	$	725,000	$	416,000

Income taxes	$	190,000	$	483,000

Non cash investing and financing activities:

Exchange of notes receivable for equipment and leasehold improvements	$	—	$	1,207,000

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

Exchange of stock for loan costs	$	252,000	$	—

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

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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 independently capitalized subsidiaries Summit Family Restaurants Inc. (“Summit”), HTB Restaurants, Inc. (“HTB”), Northstar Buffet, Inc. (“NSBI”), Star Buffet Management, Inc. (“SBMI”), Starlite Holdings, Inc. (“Starlite”) and StarTexas Restaurants, Inc. (“StarTexas”) (collectively the “Company”) and have been prepared in accordance with U. S. generally accepted accounting principles, 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 28, 2008. 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. 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 November 3, 2008. The Company has two reporting segments, the Buffet Division and the Non-Buffet Division. The Company’s reportable segments are based on brand similarities. The Buffet Division segment includes the Company’s twenty Barnhill’s Buffet restaurants, eleven franchised HomeTown Buffet restaurants, five BuddyFreddys Country Buffet restaurants, two Whistle Junction restaurants, two JJ North’s Grand Buffet restaurants, two BuddyFreddys restaurants and one North Star Buffet restaurant. Five of the Buffet Division restaurants are non-operating units. One Barnhill’s Buffet restaurant lease expired after the quarter ended on November 3, 2008 and the restaurant was closed on November 9, 2008. The Non-Buffet Division includes the Company’s six JB’s Restaurants, four K-BOB’S Steakhouse restaurants, four 4B’s restaurants, two Western Sizzlin restaurants, two Holiday House restaurants, two Casa Bonita restaurants, one Pecos Diamond Steakhouse restaurant and one Bar-H Steakhouse restaurant. Two of the Non-Buffet Division restaurants were non-operating units at November 3, 2008. One of these non-operating restaurants was re-opened on November 8, 2008.

	Buffet Division	Non-Buffet Division	Total
Owned	9	9	18
Leased	34	13	47
Total	43	22	65

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As of November 3, 2008, the Company’s operating and non-operating restaurants are located in the following states:

Number of Restaurants

State	Buffet Division	Non-Buffet Division	Total
Alabama	1	—	1
Arkansas	1	1	2
Arizona	9	—	9
Colorado	—	1	1
Florida	15	2	17
Idaho	—	1	1
Louisiana	3	—	3
Mississippi	6	1	7
Montana	—	6	6
New Mexico	1	2	3
Oklahoma	—	1	1
Oregon	1	—	1
Tennessee	3	—	3
Texas	—	4	4
Utah	1	3	4
Washington	1	—	1
Wyoming	1	—	1
Total	43	22	65

As of November 3, 2008, the Company’s non-operating restaurants are located in the following states:

Number of

Non-Operating Restaurants

State	Buffet Division	Non-Buffet Division	Total
Arizona	1	—	1
Florida	4	—	4
New Mexico	—	1	1
Texas	—	1	1
Total	5	2	7

As of November 5, 2007, the Company’s operating and non-operating restaurants were located in the following states:

Number of Restaurants

State	Buffet Division	Non-Buffet Division	Total
Arkansas	—	1	1
Arizona	9	1	10
Colorado	1	1	2
Florida	13	3	16
Georgia	—	1	1
Idaho	1	1	2
Mississippi	—	1	1
Montana	—	5	5
New Mexico	2	2	4
Oklahoma	—	1	1
Oregon	1	—	1
Texas	—	4	4
Utah	1	3	4
Washington	1	—	1
Wyoming	1	—	1
Total	30	24	54

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As of November 5, 2007, the Company’s non-operating restaurants were located in the following states:

Number of

Non-Operating Restaurants

State	Buffet Division	Non-Buffet Division	Total
Arizona	1	—	1
Colorado	1	—	1
Florida	4	—	4
Idaho	1	—	1
New Mexico	—	1	1
Texas	—	1	1
Total	7	2	9

The operating results for the 40-week period ended November 3, 2008 included operations shown in the tables above and fixed charges for eight non-operating restaurants for the first quarter and seven non-operating restaurants for the second and third quarters in fiscal 2009. Seven restaurants were closed at the end of the third quarter of fiscal 2009 for repositioning. Four of the seven closed restaurants remain closed for remodeling and repositioning, one closed restaurant is held for sale, one closed restaurant is leased to a third party and one of the closed restaurants was opened on November 8, 2008. The operating results for the 40-week period ended November 5, 2007 included operations shown in the tables above and the fixed charges for nine restaurants closed at the end of the third quarter of fiscal 2008.

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) Recent Developments

The Company purchased certain operating assets of twenty (20) Barnhill’s Buffet restaurants in two transactions dated January 31, 2008 and February 29, 2008. The transactions were subject to Bankruptcy Court approval which was granted for the purchase of sixteen (16) units on January 31, 2008 and four (4) units on February 29, 2008. Total consideration paid for the restaurant assets was $6.1 million of which approximately $5.85 million was allocated to restaurant equipment and $250,000 was allocated to for food and related inventories. No value has currently been assigned to any indefinite-lived intangible assets, which would potentially consist of the perpetual right to utilize the Barnhill’s name and related intellectual property. Purchase accounting permits twelve months to complete the purchase allocation and management is in the process of finalizing allocation of the purchase price which will be completed by end of the fourth fiscal quarter of 2009.

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In accordance with the terms of the asset purchase agreements, the Company acquired all the necessary restaurant equipment to operate the restaurants and the intellectual property that permits the perpetual right to utilize the Barnhill’s Buffet name. The Company assumed twenty (20) real estate leases which ranged in length from approximately one (1) year to twelve (12) years. All but one lease contains an option to renew. No other liabilities were assumed in connection with this acquisition. The Company financed the acquisition with the Credit Facility with Wells Fargo Bank, N.A. The Credit Facility included a $7,000,000 term loan and a $2,000,000 revolving line of credit. The term loan was subsequently increased to $8,000,000 when the additional four (4) units were purchased on February 29, 2008. In connection with the Credit Facility, Wells Fargo was granted 42,400 shares of the Company’s restricted common stock. The shares were valued at $251,856 and that amount is being amortized as interest over the life of the loan.

Note (C) Related Party Transactions

Mr. Robert E. Wheaton owns approximately 45.3% of the Company’s outstanding common shares including exercisable options which have vested 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. During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company. The loan dated June 15, 2007 was subordinated to the obligation to M&I Marshall & Ilsley Bank and is now subordinated to the obligation to Wells Fargo Bank, N.A. and bears interest at 8.5%. In June 2008, the Company borrowed approximately $592,000 from Mr. Wheaton under the same terms. This resulted in an increase in the subordinated note balance from $1,400,000 to $1,992,000. The Company expensed and paid $114,231 to Mr. Wheaton for interest during the first three quarters of fiscal 2009. The principal balance and any unpaid interest is due and payable in full on June 5, 2012. The Company used the funds borrowed from Mr. Wheaton for working capital requirements.

Note (D) Segment and Related Reporting

The Company has two reporting segments, the Buffet Division and the Non-Buffet Division. The Company’s reportable segments are aggregated based on brand similarities.

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 for the year ended January 28, 2008. 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. The only interest cost included in the individual segments is interest expense pertaining to capital leases. Also certain corporate overhead income and expenses in the condensed consolidated statements of operations are not included in the reportable segments.

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(Dollars in Thousands)

	Buffet Division			Non-Buffet Division		Other			Total
40 weeks Ended November 3, 2008
Revenues	$	57,773		$	20,453	$	—		$	78,226
Interest income	—			—		13			13
Interest expense	(5		)	—		(832		)	(837		)
Depreciation & amortization	1,543			442		89			2,074
Impairment of long-lived assets	198			14		—			212
Income (loss) before income taxes	2,116			2,019		(2,789		)	1,346
Total assets	24,954			12,757		4,546			42,257
40 weeks Ended November 5, 2007
Revenues	$	33,339		$	20,093	$	—		$	53,432
Interest income	—			—		20			20
Interest expense	(117		)	—		(528		)	(645		)
Depreciation & amortization	1,065			492		54			1,611
Impairment of long-lived assets	—			—		—			—
(Loss) income before income taxes	(938		)	2,250		(2,274		)	(962		)
Total assets	21,593			12,189		3,203			36,985

Note (E) Net Income per Common Share

Net income per common share - basic is computed based on the weighted-average number of common shares outstanding during the period. Net income per common share – diluted is computed based on the weighted-average number of common shares outstanding during the period plus the effect of dilutive common stock equivalents outstanding during the period. Stock options are considered to be common stock equivalents and are included in the diluted calculation using the treasury stock method.

The following table summarizes the calculation of basic and diluted net income per common share for the respective fiscal periods:

	Net (Loss)			Shares	Per Share Amount
12 Weeks Ended November 3, 2008
Weighted average common shares outstanding – basic	$	(18,000	)	3,213,075	$	(0.01	)
Dilutive stock options	—			—	—
Weighted average common shares outstanding – diluted	$	(18,000	)	3,213,075	$	(0.01	)

12 Weeks Ended November 5, 2007
Weighted average common shares outstanding – basic	$	(1,011,000	)	3,170,675	$	(0.32	)
Dilutive stock options	—			—	—
Weighted average common shares outstanding – diluted	$	(1,011,000	)	3,170,675	$	(0.32	)

	Net Income (Loss)			Shares	Per Share Amount
40 weeks Ended November 3, 2008
Weighted average common shares outstanding – basic	$	909,000		3,212,772	$	0.28
Dilutive stock options	—			92	—
Weighted average common shares outstanding – diluted	$	909,000		3,212,864	$	0.28

40 weeks Ended November 5, 2007
Weighted average common shares outstanding – basic	$	(543,000	)	3,170,675	$	(0.17	)
Dilutive stock options	—			—	—
Weighted average common shares outstanding – diluted	$	(543,000	)	3,170,675	$	(0.17	)

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Weighted-average common shares outstanding for the 12 weeks ended November 3, 2008 and November 5, 2007 used to calculate diluted earnings per share exclude stock options to purchase 28,000 and 40,000 shares of common stock, respectively, because these options are antidilutive due to the Company’s net loss for the periods.

Weighted-average common shares outstanding for the 40 weeks ended November 3, 2008 used to calculate diluted earnings per share exclude stock options to purchase 28,000 shares of common stock, because these options are antidilutive due to the market price of the underlying stock being less than the exercise price.

Weighted-average common shares outstanding for the 40 weeks ended November 5, 2007 used to calculate diluted earnings per share exclude stock options to purchase 40,000 shares of common stock, because these options are antidilutive due to the Company’s net loss for the period.

Note (F) Goodwill

Goodwill represents 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 Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS 142 requires goodwill to be tested for impairment at the reporting unit level, which is an operating segment or one level below an operating segment. The Company considers each individual restaurant to be a reporting unit and therefore 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 value 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, 2008. There were no triggering events during the quarter ending November 3, 2008 that would have had an impact on goodwill. There were no goodwill impairment losses recorded for the 40-week periods ended November 3, 2008 and November 5, 2007.

Note (G) Other Intangible Assets

Other intangible assets are comprised of franchise fees, loan acquisition costs, a license agreement and trademarks. Franchise fees are amortized using the straight-line method over the terms of the franchise agreements, which typically range from 8 to 20 years. Loan acquisition costs are amortized using the straight-line method over the lesser of the life of the loan or five years. The license agreement is amortized using the straight-line method over 11 years. Trademarks totaling $280,000 have an indefinite asset life and are subject to possible impairments on a quarterly basis or when triggering events occur in accordance with SFAS 142.

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Note (H) 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 (I) 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 assesses whether an impairment write-down is necessary 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 asset is considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Note (J) Properties, Building and Equipment

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

	November 3, 2008			January 28, 2008
Property, buildings and equipment:
Furniture, fixtures and equipment	$	20,495,000		$	13,708,000
Land	4,285,000			4,185,000
Buildings and leasehold improvements	23,329,000			23,478,000
	48,109,000			41,371,000

Less accumulated depreciation	(21,912,000		)	(20,555,000		)
	$	26,197,000		$	20,816,000

The components of property under capitalized leases are as follows:

Property and equipment under capitalized leases	$	706,000		$	706,000
Less accumulated amortization	(661,000		)	(635,000		)
	$	45,000		$	71,000

Total property, buildings and equipment includes the following land, equipment, buildings and leaseholds associated with seven and nine non-operating units, respectively, as of November 3, 2008 and as of January 28, 2008. As of November 3, 2008 one of the seven units is leased to a third-party operator, five units are closed for remodeling and repositioning and one unit is included in property held for sale. One of the seven non-operating units was opened on November 8, 2008.

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The components are as follows:

	November 3, 2008			January 28, 2008
Property and equipment leased to third parties:
Equipment	$	221,000		$	974,000
Land	224,000			1,266,000
Buildings and leaseholds	685,000			2,631,000
	1,130,000			4,871,000

Less accumulated depreciation	(333,000		)	(1,745,000		)
	$	797,000		$	3,126,000

	November 3, 2008			January 28, 2008
Property, buildings and equipment held for future use:
Equipment	$	8,729,000		$	8,033,000
Land	1,559,000			517,000
Buildings and leaseholds	2,418,000			2,066,000
	12,706,000			10,616,000

Less accumulated depreciation	(7,865,000		)	(8,069,000		)
	$	4,841,000		$	2,547,000

	November 3, 2008		January 28, 2008
Property held for sale:
Land	$	567,000	$	567,000
Buildings	364,000		364,000
	$	931,000	$	931,000

The Company recorded $212,000 of impairment expense related to the closure of six restaurants in the first three quarters of fiscal 2009. The Company did not record an impairment expense in the first three quarters of fiscal 2008.

Note (K) 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. A special committee designated by the board 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.

The Company accounts for stock-based compensation in accordance with SFAS No. 123(R), Share Based Payment. SFAS 123(R) requires the recognition of compensation cost relating to share based payment transactions in the financial statements. Our stock-based compensation plans are summarized in the table below:

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	Shares	Shares	Plan
Name of Plan	Authorized	Available	Expiration

1997 Stock Incentive Plan	750,000	489,000	February 2015

Stock options issued under the terms of the 1997 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:

	40 weeks Ended
	November 3, 2008				November 5, 2007
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding at beginning of period	40,000		$	6.20	528,000		$	11.56
Granted	—		$	—	—		$	—
Exercised	—		$	—	—		$	—
Forfeited	0		$	5.00	488,000		$	12.00
Outstanding at end of period	40,000		$	6.21	40,000		$	6.20

Exercisable at end of period	40,000		$	6.21	40,000		$	6.20

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

The following summarizes information about stock options outstanding at November 3, 2008:

		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	1.0	$	5.00	12,000	$	5.00
$	6.70	28,000	6.3	$	6.70	28,000	$	6.70
		40,000				40,000

The Company did not grant any stock options in the first three quarters of fiscal 2009 or fiscal 2008.

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Note (L) Commitments and Contingencies

HTB entered into a franchise agreement for each HomeTown Buffet location which requires among other items, the payment of a royalty fee to HomeTown Buffet, Inc. The royalty fee is 2% of the gross sales of 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. 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 and Recipe Manuals and Menus and restricts operating restaurants within a geographic radius of the franchisor’s restaurants. These agreements also require HTB to use its 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.

In conjunction with the acquisition of certain JJ North’s restaurants from North’s Restaurants, Inc. (“North’s”) in 1997, the Company provided a credit facility to North’s and when North’s defaulted the Company sued for enforcement. In 1998, the Company’s suit with North’s resulted in a negotiated settlement in favor of the Company represented by an Amended and Restated Promissory Note (the “Star Buffet Promissory Note). 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. In April 2006 the Company noticed all relevant parties of its intent to foreclose to seek expedited 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. In August 2007, the receiver notified the Company that he planned to turn control of the JJ North’s restaurant in Grants Pass, Oregon and associated assets over to the Company. On September 22, 2007, the Company hired North’s employees, notified North’s creditors of its intent to operate the business and negotiated a facility lease with North’s previous landlord. The transfer of assets from North’s to Star Buffet Management, Inc. was approved by the court. The Company’s note, together with the obligation to the other significant creditor of North’s, is secured by the real and personal property, trademarks and all other intellectual property owned by North’s. The Company believes future cash flows from asset sales will be adequate for recovery of the remaining outstanding principal amount of the note receivable. The Company has not provided an allowance for bad debts for the note as of November 3, 2008.

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.

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.

Note (M) 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 32.5% and (43.6)% for the 40-week periods ended November 3, 2008 and November 5, 2007, respectively. The Company has deferred income

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taxes of $2,841,000 and $3,084,000 on November 3, 2008 and January 28, 2008, respectively. The deferred tax assets are primarily the result of timing difference on deferred rent, fixed assets and capital leases.

Note (N) Insurance Programs

Historically, the Company was self-insured for most casualty claims, with commercial insurance for casualty claims in excess of $2 million per claim and $3 million per year. Effective January 1, 2008 the Company purchased commercial insurance for casualty claims in excess of $100,000 per claim. Accruals for self-insured losses include estimates based on historical information and expected future developments. Differences in estimates and assumptions could result in actual liabilities that are materially different from the calculated accruals. The valuation reserves for the quarters ended November 3, 2008 and November 5, 2007 were $29,000 and $59,000, respectively.

Note (O) Subsequent Events

On November 8, 2008, the Company opened one of its non-operating units, a K-BOB’S Steakhouse located in Tucumcari, New Mexico.

On November 9, 2008, the Barnhill’s Buffet restaurant located in Tallahassee, Florida was closed when the lease expired and could not be renewed.

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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 28, 2008. 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 28, 2008, and other filings with the Securities and Exchange Commission.

Overview

The consolidated net loss for the 12-week period ended November 3, 2008 improved approximately $993,000 to a loss of $(18,000) or $(0.01) per diluted share as compared with a net loss of $(1,011,000) or $(0.32) per diluted share for the comparable prior year period. The decrease in the net loss is due to an improvement in income from operations of approximately $1,677,000 primarily from new acquisitions and lower general and administrative expenses partially offset by higher interest expense and a lower income tax benefit. Total revenues increased $5,750,000 or 38.1% from $15.1 million in the 12 weeks ended November 5, 2007 to $20.8 million in the 12 weeks ended November 3, 2008. The increase in revenues was primarily attributable to 24 new store openings that resulted in sales of approximately $8.5 million, partially offset by declines in comparable same store sales of approximately $1.1 million primarily in the HomeTown Buffet restaurants and the closure of 12 restaurants. The decline in sales from the 12 closed stores was approximately $1.7 million.

Consolidated net income for the 40-week period ended November 3, 2008 improved approximately $1,452,000 to net income of $909,000 or $0.28 per diluted share as compared with a net loss of $(543,000) or $(0.17) per diluted share for the comparable prior year period. The improvement in net income is due to an increase in income from operations of approximately $2,650,000 primarily from new acquisitions and partially offset by higher interest expense and an increase in income taxes of approximately $856,000. Total revenues increased approximately $24.8 million or 46.4% from $53.4 million in the 40 weeks ended November 5, 2007 to $78.2 million in the 40 weeks ended November 3, 2008. The increase in revenues was primarily attributable to 30 new store openings that resulted in additional sales of approximately $31.9 million, partially offset by declines in comparable same store sales of approximately $2.4 million primarily in the HomeTown Buffet restaurants and the closure of 14 restaurants. The decline in sales from the 14 closed stores was approximately $4.7 million. 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

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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

On March 12, 2008, the Board of Directors approved the Company’s fifth consecutive annual dividend. This year the dividend is $0.60 per common share and was paid on June 4, 2008 to shareholders of record on May 6, 2008.

On February 29, 2008, Starlite Holdings, Inc. (“Starlite”), a newly formed, wholly-owned, independently capitalized subsidiary of Star Buffet, Inc. acquired certain assets and assumed the facility leases for four Barnhill’s Buffet restaurants from Barnhill’s Buffet, Inc. (“Barnhill’s”) for a purchase price of approximately $1,075,000. Barnhill’s was in a Chapter 11 bankruptcy proceeding in the U.S. Bankruptcy Court of the Middle District of Tennessee and the acquisition was approved by the court. The acquired restaurants are located in Florida (2) and Mississippi (2). As part of the acquisition the Company acquired perpetual rights to use the Barnhill’s name and related intellectual property.

On February 29, 2008 the Company amended its Senior Secured Credit Facility (“Credit Facility”) dated January 31, 2008 with Wells Fargo Bank N.A., increasing the term loan principal from $7,000,000 to $8,000,000 with no change to the $2,000,000 revolving line of credit. The increase in the Credit Facility was used to fund the acquisition of the four Barnhill’s Buffet restaurants as described above. The Credit Facility is guaranteed by Star Buffet, Inc. and its subsidiaries and bears interest, at the Company’s option, at Wells Fargo’s base rate plus 0.25% or at LIBOR plus 2.00%. The Credit Facility is secured by a first priority perfected lien on all of the Company’s assets, except for those assets that were previously pledged as security for existing obligations, in which case Wells Fargo will have a second lien. The term loan matures on January 31, 2012 and provides for principal to be amortized at $175,000 per quarter for the initial six quarters; $225,000 for the next nine quarters; with any remaining balance due at maturity. Interest is payable monthly. The $2,000,000 revolving line of credit also matures on January 31, 2012. Interest on the revolving line of credit is payable monthly. The balance on the revolving line of credit was $900,000 on November 3, 2008 and December 10, 2008. There is a 0.50% fee for the unused portion of the revolving line of credit. In connection with the Credit Facility, Wells Fargo was granted 42,400 shares of the Company’s restricted common stock. The shares were valued at $251,856 and that amount is being amortizied as interest over the life of the loan. The Credit Facility can be prepaid in whole or part without penalty.

The Credit Facility contains a number of covenants and restrictions, including requirements to meet certain financial ratios and limitations with respect to the Company’s use of cash. The Company is also required to obtain interest rate protection through an interest rate swap or cap arrangement with respect to not less than 50% of the term loan amount. With Wells Fargo’s permission, the Company did not enter into any interest rate swap or cap because the Company had plans to substantially reduce the term loan in the current year through cash flow from operations, asset sales and mortgage refinancing. Given the current financial market disruptions, the Company does not believe that the term loan will be substantially reduced in the current fiscal year and plans to meet its requirement for the interest rate swap or cap in December 2008. Furthermore, certain provisions of the Credit Facility require the Company to remit proceeds from asset dispositions, issuance of debt or equity, insurance proceeds, tax refunds and fifty percent (50%) of excess cash flow (as defined) to reduce the principal amount of the term loan and, thereafter, the revolving line of credit. Under terms of the Credit Facility, the Company is permitted to pay an annual dividend. However, restrictions imposed under terms of the Credit Facility may adversely impact the Company’s ability to pay an annual dividend as the Company has historically relied on

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multiple sources of cash to fund the dividend. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which is contingent upon, among other things, the Company’s ability to comply with all debt covenants under its existing senior secured credit facility. As of the end of the third quarter the Company failed one of the covenant calculations. The Company requested and was granted a written waiver by its senior secured lender for the third fiscal quarter only.

On January 31, 2008, Star Buffet Management, Inc., a wholly-owned, independently capitalized subsidiary of Star Buffet, Inc. acquired the assets and facility leases for sixteen (16) Barnhill’s Buffet restaurants from Barnhill’s for a purchase price of approximately $5 million. The acquisition was approved by the bankruptcy court. The acquired restaurants are located in the following states: Alabama (1), Arkansas (1), Florida (4), Louisiana (3), Mississippi (4), and Tennessee (3). As part of the acquisition the Company acquired perpetual rights to the use of the Barnhill’s name and related intellectual property. This acquisition was funded through the Company’s Credit Facility dated January 31, 2008.

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 cost 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 food 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, vacations 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 3, 2008 and November 5, 2007.

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	Twelve Weeks Ended				Forty Weeks Ended
	November 3,		November 5,		November 3,		November 5,
	2008		2007		2008		2007
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%

Costs and expenses
Food costs	39.4		38.2		38.8		36.4
Labor costs	33.9		36.0		32.7		34.7
Occupancy and other expenses	19.7		24.5		20.0		22.2
General and administrative expenses	3.1		7.7		2.9		4.7
Depreciation and amortization	3.0		3.4		2.6		3.0
Impairment of long-lived assets	—		—		0.3		—
Total costs and expenses	99.1		109.8		97.3		101.0

Income from operations	0.9		(9.8	)	2.7		(1.0	)

Interest expense	(1.2	)	(1.5	)	(1.1	)	(1.2	)
Interest income	0.0		0.0		0.0		0.0
Other income	0.1		0.2		0.1		0.3
Gain on sale of assets	0.0		0.2		0.0		0.1
Income (loss) before income taxes	(0.2	)	(10.9	)	1.7		(1.8	)

Income taxes (benefit)	(0.1	)	(4.2	)	0.5		(0.8	)

Net income	(0.1	)%	(6.7	)%	1.2	%	(1.0	)%

Effective income tax rate	(60.9	)%	(38.6	)%	32.5	%	(43.6	)%

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 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)

	Buffet Division (1)			Non-Buffet Division(2)		Other			Total

40 weeks Ended November 3, 2008
Revenues	$	57,773		$	20,453	$	—		$	78,226
Food cost	23,771			6,615		—			30,386
Labor cost	18,056			7,498		—			25,554
Interest income	—			—		13			13
Interest expense	(5		)	—		(832		)	(837		)
Depreciation & amortization	1,543			442		89			2,074
Impairment of long-lived assets	198			14		—			212
Income (loss) before income taxes	2,116			2,019		(2,789		)	1,346

	Buffet Division (1)			Non-Buffet Division(2)		Other			Total

40 weeks Ended November 5, 2007
Revenues	$	33,339		$	20,093	$	—		$	53,432
Food cost	12,982			6,568		—			19,450
Labor cost	11,407			7,126		—			18,533
Interest income	—			—		20			20
Interest expense	(117		)	—		(528		)	(645		)
Depreciation & amortization	1,065			492		54			1,611
Impairment of long-lived assets	—			—		—			—
Income (loss) before income taxes	(938		)	2,250		(2,274		)	(962		)

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(1) The sales increase was primarily from the acquisition of 20 Barnhill’s Buffet restaurants. The food cost as a percentage of revenue increased this year primarily due to increases in wholesale food prices as compared to the prior year. Labor cost decreased as a percentage of revenue this year primarily due to a lower labor cost in the Barnhill’s Buffet restaurants as compared to our existing buffet restaurants. Income (loss) before income taxes increased primarily from the additional income from the Barnhill acquisition.

(2) The sales increased due to the acquisition of nine Non-Buffet restaurants partially offset by the closure of five Non-Buffet restaurants. The food cost as a percentage of revenue decreased this year primarily due to the addition of one Casa Bonita restaurant which has lower food cost than the other Non-Buffet restaurants offset by increases in wholesale food prices as compared to the prior year. Labor cost increased as a percentage of revenue this year primarily due to minimum wage increases in the applicable markets. Income (loss) before income taxes decreased primarily as a result of higher labor costs.

Total revenues increased $5,750,000 or 38.1% from $15.1 million in the 12 weeks ended November 5, 2007 to $20.8 million in the 12 weeks ended November 3, 2008. The increase in revenues was primarily attributable to 24 new store openings that resulted in additional sales of approximately $8.5 million, partially offset by declines in comparable same store sales of approximately $1.1 million primarily in the HomeTown Buffet restaurants and the closure of 12 restaurants. The decline in sales from the 12 closed stores was approximately $1.7 million. Total revenues increased approximately $24,794,000 or 46.4% from $53.4 million in the 40 weeks ended November 5, 2007 to $78.2 million in the 40 weeks ended November 3, 2008. The increase in revenues was primarily attributable to 30 new store openings that resulted in additional sales of approximately $31.9 million, partially offset by declines in comparable same store sales of approximately $2.4 million primarily in the HomeTown Buffet restaurants and the closure of 14 restaurants. The decline in sales from the 14 closed stores was approximately $4.7 million.

Food costs as a percentage of total revenues increased from 38.2% during the 12-week period ended November 5, 2007 to 39.4% during the 12-week period ended November 3, 2008, and from 36.4% during the 40-week period ended November 5, 2007 to 38.8% during the 40-week period ended November 3, 2008. The increase for the 12 and 40 weeks as a percentage of total revenues was primarily attributable to higher wholesale prices for chicken, pork and beef in the current year.

Labor costs as a percentage of total revenues decreased from 36.0% during the 12-week period ended November 5, 2007 to 33.9% during the 12-week period ended November 3, 2008, and from 34.7% during the 40-week period ended November 5, 2007 to 32.7% during the 40-week period ended November 3, 2008. The decrease as a percentage of total revenues was primarily attributable to lower labor costs in the new Barnhill restaurants as compared to the existing restaurants. Labor costs decreased as a percentage of total revenues despite minimum wage increases in every state in which the Company operated in the first three quarters of fiscal 2009 and fiscal 2008. In response to the increased costs, the Company has and will continue toattempt to increase menu pricing in fiscal 2009 with the goal of maintaining a labor cost as a percentage of sales consistent with prior results, although there can be no assurance that expected results will actually occur (see the discussion under “Risk Factors”).

Occupancy and other expenses as a percentage of total revenues decreased from 24.5% during the 12-week period ended November 5, 2007 to 19.7% during the 12-week period ended November 3, 2008, and from 22.2% during the 40-week period ended November 5, 2007 to 20.0% during the 40-week period ended November 3, 2008. The decrease as a percentage of total revenues was primarily attributable to a decrease in facility costs as a percentage of revenues in the current year compared to the prior year.

General and administrative expense as a percentage of total revenues decreased from 7.7% during the 12-week period ended November 5, 2007 to 3.1% during the 12-week period ended November 3, 2008, and from 4.7%

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during the 40-week period ended November 5, 2007 to 2.9% during the 40-week period ended November 3, 2008. The decrease as a percentage of total revenues was primarily attributable to higher revenues for the 12 and 40 weeks ended November 3, 2008 as compared to the same period of the prior year. While the Company has added 30 new stores and closed 14 stores, there has been no significant increase in administrative costs or personnel.

Depreciation and amortization expense increased from $507,000 during the 12-week period ended November 5, 2007 to $615,000 during the 12-week period ended November 3, 2008, and from $1,611,000 during the 40-week period ended November 5, 2007 to $2,074,000 during the 40-week period ended November 3, 2008. The increase was primarily attributable to 30 new store openings since last year partially offset by the closure of 14 stores.

Interest expense increased from $227,000 during the 12-week period ended November 5, 2007 to $265,000 during the 12-week period ended November 3, 2008, and from $645,000 during the 40-week period ended November 5, 2007 to $837,000 during the 40-week period ended November 3, 2008. The increase was primarily attributable to a higher average debt balance in the first two quarters of fiscal 2009 as compared to fiscal 2008 primarily from the debt incurred to acquire the Barnhill’s Buffet restaurants.

Interest income decreased from $4,000 during the 12-week period ended November 5, 2007 to $1,000 during the 12-week period ended November 3, 2008, and from $20,000 during the 40-week period ended November 5, 2007 to $13,000 during the 40-week period ended November 3, 2008. Interest income was primarily generated by the Company’s outstanding notes receivable balances.

Other income is primarily rental income from the Company’s leased properties. Rental income was $19,000 for one property leased for the entire 12-week period ended November 3, 2008. Rental income was $28,000 for four properties leased for the entire 12-week period ended November 5, 2007. Rental income was $61,000 for one property leased for part of the first quarter and one property leased for the entire 40-week period ended November 3, 2008. The Company also had other income in the 40-week period ended November 3, 2008 of approximately $15,000 on the settlement of debt regarding purchase of the Western Sizzlin in Magnolia, Arkansas. Rental income was $185,000 for four properties leased for the entire 40-week period ended November 5, 2007.

The income tax provision totaled $(28,000) or (60.9)% of pre-tax income for the 12-week period ended November 3, 2008 as compared to $(636,000) or (38.6)% of pre-tax income for the 12-week period ended November 5, 2007. The income tax provision totaled $437,000 or 32.5% of pre-tax income for the 40-week period ended November 3, 2008 as compared to $(419,000) or (43.6)% of pre-tax income for the 40-week period ended November 5, 2007.

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 products purchased by the Company are subject to market supply and demand pressures which can have an impact on the Company’s margins. The Company anticipates that modest increases in these costs can be offset through pricing and cost control efforts. However, there is no assurance that the Company would be able to pass more significant costs on to its customers.

Liquidity and Capital Resources

In recent years, the Company has financed operations through a combination of cash on hand, cash provided from operations, available borrowings under bank lines of credit and loans from the principal shareholder.

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As of November 3, 2008, the Company had $1,237,000 in cash. Cash and cash equivalents increased by $501,000 during the 40 weeks ended November 3, 2008. The net working capital deficit was $(8,428,000) and $(8,348,000) at November 3, 2008 and January 28, 2008, respectively. Total cash provided by operations for the 40 weeks ended November 3, 2008 was approximately $3,278,000 as compared to approximately $1,431,000 in the 40 weeks ended November 5, 2007. The Company spent approximately $7.5 million on capital expenditures in the first three quarters of fiscal 2009 including approximately $5.8 million to purchase the 20 Barnhill’s Buffet restaurants.

The Company previously had a $3,000,000 unsecured revolving line of credit with M&I Marshall & Ilsley Bank. The M&I revolving line of credit bore interest at LIBOR plus two percent per annum. The Company replaced the M&I revolving line of credit on January 31, 2008 with a Credit Facility with Wells Fargo Bank, N.A. The Credit Facility included a $7,000,000 term loan and a $2,000,000 revolving line of credit. The Credit Facility was utilized to retire the Company’s unsecured revolving line of credit with M&I Marshall & Ilsley Bank; to fund the acquisition of assets associated with sixteen (16) Barnhill’s Buffet restaurants; and to provide additional working capital. On February 29, 2008 the Company amended its Credit Facility with Wells Fargo Bank N.A., increasing the term loan principal from $7,000,000 to $8,000,000. The increase in the Credit Facility was used to fund the acquisition of four Barnhill’s Buffet restaurants by its newly formed, wholly-owned, independently capitalized subsidiary, Starlite Holdings, Inc.

The Credit Facility is guaranteed by Star Buffet, Inc. and its subsidiaries and bears interest, at the Company’s option, at Wells Fargo’s base rate plus 0.25% or at LIBOR plus 2.00%. The Credit Facility is secured by a first priority lien on all of the Company’s assets, except for those assets that were previously pledged as security for existing obligations, in which case Wells Fargo has a second lien. The term loan matures on January 31, 2012 and provides for principal to be amortized at $175,000 per quarter for the initial six quarters; $225,000 for the next nine quarters; with any remaining balance due at maturity. Interest is payable monthly. The term loan balance was $6,000,000 on November 3, 2008 and December 10, 2008. A $2,000,000 revolving line of credit matures on January 31, 2012. Interest on the revolver is payable monthly. The revolving line of credit balance was $900,000 on November 3, 2008 and December 10, 2008.

During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company. This loan dated June 15, 2007 is subordinated to the obligation to Wells Fargo Bank, N.A. and bears interest at 8.5%. In June, 2008, the Company borrowed approximately $592,000 from Mr. Wheaton under the same terms. This resulted in an increase in the subordinated note balance from $1,400,000 to $1,992,000. The Company expensed and paid $114,231 to Mr. Wheaton for interest during the first two quarters of fiscal 2009. The principal balance and any unpaid interest is due and payable in full on June 5, 2012. The Company used the funds borrowed from Mr. Wheaton for working capital requirements.

On June 27, 2008, the Company entered into an $86,000 five year fixed rate second real estate mortgage with Dalhart Federal Savings and Loans. The mortgage has monthly payments including interest of $1,387. The interest rate is 6.75%. The mortgage is secured by the Company’s K-BOB’S Steakhouse in Dumas, Texas. In addition, the Company entered into a $140,000 five year fixed rate second real estate mortgage with Dalhart Federal Savings and Loan Association. The mortgage has monthly payments including interest of $2,756. The interest rate is 6.75%. The mortgage is secured by the Company’s Bar H Steakhouse restaurant in Dalhart, Texas. The funds from both loans were used to reduce the obligation to Wells Fargo. On July 11, 2008, the Company entered into a $604,000 five year fixed rate real estate mortgage with Farmers Bank and Trust. The mortgage has monthly payments including interest of $5,264. The interest rate is 6.5%. The mortgage is secured by the Company’s Western Sizzlin restaurant in Magnolia, Arkansas. The Company used the funds to payoff the previous loan with Farmers Bank and Trust of $502,000 and the additional $102,000 was used to reduce the obligation to Wells Fargo. The refinancing of these real estate mortgages are part of the Company’s plan to reduce the term loan in the current year through cash flow from operations, asset sales and mortgage refinancing.

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On August 15, 2008, the Company purchased the land and building in our previously leased 4B’s restaurant in Great Falls, Montana for $475,000. The Company entered into a $354,000 15 year fixed rate real estate mortgage with Stockton Bank. The mortgage has monthly payments including interest of $3,134. The interest rate is 6.75%. In addition, the Company refinanced the JB’s restaurant in Great Falls, Montana. The Company entered into a $655,000 15 year fixed rate real estate mortgage with Stockton Bank. The mortgage has monthly payments including interest of $5,805. The interest rate is 6.75%. The Company paid its real estate mortgage with US Bank formerly Heritage Bank in full.

The Company believes that available cash, availability under the revolving line of credit and cash flow from operations will be sufficient to satisfy working capital and capital expenditure requirements during the next 12 months. Additionally, management does not believe that the net working capital deficit will have any material effect on the Company’s ability to operate the business or meet obligations as they come due. However, there can be no assurance that cash on hand and cash flow from operations will be sufficient to satisfy its working capital and capital expenditure requirements. Furthermore, given uncertain financial market conditions, the Company is no longer confident that funds will be available to return capital to stockholders in the form of either dividends or share repurchases until certain financial commitments are met.

It is possible that changes in the Company’s operating results, unavailable 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. 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 U.S. generally accepted accounting principles. 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 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 may be subject to variations, any one of which may significantly affect the Company’s reported results and financial position for the period or in future periods. Changes in 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 provided 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.

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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

Goodwill represents 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. SFAS 142 requires goodwill to be tested for impairment at the reporting unit level, which is and operating segment or one level below an operating segment. The Company considers each individual restaurant to be a reporting unit and therefore 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, 2008.

Impairment of 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 assesses whether 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 asset is considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

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.

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Insurance Programs

Historically, the Company was self-insured for most casualty claims, with commercial insurance for casualty claims in excess of $2 million per claim and $3 million per year as a risk reduction strategy. Effective January 1, 2008 the Company purchased commercial insurance for casualty claims in excess of $100,000 per claim. Accruals for self-insured losses include estimates based on historical information and expected future developments. Differences in estimates and assumptions could result in actual liabilities that are materially different from the calculated accruals.

Commitments and Contractual Obligations

The Company’s contractual obligations and commitments principally include obligations associated with our outstanding indebtedness and future minimum operating and capital lease obligations of its wholly-owned direct and indirect independently capitalized subsidiaries as set forth in the following table:

	Total		Less than one year		One to three years		Three to five years		Greater than five years
	(Dollars in thousands)

Contractual Obligations:
Long-term debt	$	15,662	$	2,585	$	4,201	$	7,573	$	1,303
Operating leases	16,571		2,990		4,501		3,601		5,479
Capital leases	66		52		14		—		—

Total contractual cash obligations	$	32,299	$	5,627	$	8,716	$	11,174	$	6,782

Off Balance Sheet Arrangements

Under the terms of the Credit Facility with Wells Fargo, the Company is required to obtain interest rate protection through an interest rate swap or cap with respect to not less than 50% of the term loan amount. With Wells Fargo’s permission, the Company did not enter into any interest rate swap or cap because the Company had plans to substantially reduce the term loan in the current year through cash flow from operations, asset sales and mortgage refinancing. Given the current financial market disruptions, the Company does not believe that the term loan will be substantially reduced in the current fiscal year and plans to meet its requirement for the interest rate swap or cap in December 2008.

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. Our adoption of SFAS 157 at the beginning of fiscal 2009 did not have a material impact on our consolidated financial position or 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

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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. Our adoption of SFAS 159 at the beginning of fiscal 2009 did not have a material impact on our consolidated financial position or results of operations.

ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In December 2007, the FASB issued SFAS 141 (revised 2007) “FAS 141 (R)”, “Business Combinations.” This standard requires the new acquiring entity to recognize all assets acquired and liabilities assumed in the transaction; establishes an acquisition-date fair value for said assets and liabilities; and fully discloses to investors the financial effect the acquisition will have. FAS 141 (R) is effective for fiscal years beginning after December 15, 2008, which for us is fiscal 2010. We are currently evaluating the impact of FAS 141 (R) on our consolidated financial position and results of operations.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements, and amendment of ARB No. 51” (“FAS 160”). This standard requires all entities to report minority interests in subsidiaries as equity in the consolidated financial statements, and requires that transactions between entities and noncontrolling interests be treated as equity. FAS160 is effective for fiscal years beginning after December 15, 2008, which for us is fiscal 2010. We are currently evaluating the impact of FAS 160 on our consolidated financial position and results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an Amendment of SFAS No. 133” (“FAS 161”). FAS 161 modifies existing requirements to include qualitative disclosures regarding the objectives and strategies for using derivatives, fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. In addition, FAS 161 requires the cross-referencing of derivative disclosures within the financial statements and notes thereto. This statement is effective for the Company at the beginning of the fourth quarter of its 2009 fiscal year. We are currently evaluating the impact of the provisions of FAS 161.

In May 2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion (Including Partial cash Settlement” (“APB 14-1”). APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash (or other assets) upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. APB 14-1 is effective for the Company at the beginning of its 2010 fiscal year and early adoption is not permitted. Retrospective application to all periods presented is required except for instruments that were not outstanding during any of the periods that will be presented in the annual financial statements for the period of adoption but were outstanding during an earlier period. We are currently evaluating the impact adoption of this statement could have on its financial statements.

In June 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-

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based employee stock option valuation instruments on the evaluation. EITF 07-5 is effective for the Company at the beginning of its 2010 fiscal year and cannot be adopted early. We are currently assessing the impact that EITF 07-5 will have on its consolidated financial position and results of operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The Company’s principal exposure to interest rate risk is the impact that interest rate changes could have on its $8.0 million Term Loan and $2.0 million Revolving Line of Credit, of which $6,000,000 and $900,000, respectively was outstanding as of November 3, 2008 and December 10, 2008. The Credit Facility interest rate is LIBOR plus two percent per annum (averaging approximately 5.1% in the first three quarters of fiscal 2009). 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 many products which are affected by commodity prices and therefore, subject to price volatility caused by weather, transportation costs, labor costs, market conditions and other factors which are not considered predictable or within our control. Although many of the products purchased by the Company are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize short-term price volatility. Typically, the Company uses purchasing contracts as an alternative to financial hedges. In many cases, the Company believes it is 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 can result in lower operating margins for our 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 principal 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 principal 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 principal 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.

Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements and Notes to the consolidated financial statements. The financial statements were prepared in accordance with the U.S. generally accepted accounting principles and include certain amounts based on management’s judgment and best estimates.

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Management is also responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed under the supervision of the Company’s principal executive and accounting officers in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

(i)		Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company;

(ii)		Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii)		Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our principal executive officer and principal accounting officer assessed the effectiveness of the Company’s internal control over financial reporting as of January 28, 2008 and identified a significant deficiency and material weaknesses which are noted below. As of November 3, 2008, the principal executive officer and the principal accounting officer concluded that significant deficiency and material weaknesses still exist. In making this assessment, management used the criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, our principal executive and principal accounting officers concluded that the internal controls over financial reporting were not effective as of January 28, 2008 or as of November 3, 2008, and that certain significant deficiencies and material weakness existed for the period covered by the Annual Report on Form 10-K as of January 28, 2008 and as of November 3, 2008 on Form 10-Q. The one significant deficiency and two material weaknesses identified included:

· Inadequate segregation of duties (significant deficiency);

· Untimely account reconciliations (material weakness); and an

· Inadequate documentation of cash disbursements (material weakness).

A significant deficiency is a deficiency, or combination of deficiencies in internal control over financial reporting, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected by the entity’s internal control. A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

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This is a small public company. Effective internal control contemplates segregation of duties so that no one individual handles a transaction from inception to completion. Currently, there are not enough accounting personnel to permit an adequate segregation of duties in all respects and thus a significant deficiency in our internal control exists. Management has commenced and continues an evaluation of staffing levels and responsibilities so as to comply with the segregation of duties requirements.

With respect to account reconciliation and cash disbursements, management has instituted additional internal control procedures to insure that: a) account reconciliations are completed earlier in the accounting cycle; and b) disbursements are not made prior to submission and approval of adequate supporting documentation. Management continues to evaluate the steps taken to eliminate the deficiencies.

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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 related to food quality 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. From time to time, the Company is also the subject of complaints or allegations from employees. The Company believes that generally the lawsuits, claims and other legal matters to which it is subject to in the ordinary 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 a decision against the Company that could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company has ongoing litigation with North’s Restaurants, Inc. as described in more detail in Note L to the condensed consolidated financial statements included herein.

Item 1A. Risk Factors

The Company anticipates increasing its menu prices in response to enacted federal minimum wage increases, which may have unintended consequences on its operations.

The Company’s profitability is sensitive to increases in food, labor and other operating costs that cannot always be passed on to its guests in the form of higher prices. Minimum wage increases in states where the Company’s restaurants are located, in July 2007, January 2008 and July 2008 have and will in the future directly increase our labor costs and may indirectly increase other costs as higher wage costs for service and commodity suppliers are passed on to the Company. In connection with higher energy prices, commodity suppliers have passed on higher wholesale prices and higher transportation costs. In anticipation of these past and future increases, the Company has and will continue to attempt to increase menu prices in fiscal 2009 with the desire to maintain prior profitability. However, the Company cannot predict with any certainty that the menu price increases will be sufficient to maintain its current level of profitability. In addition, the increase in menu prices may adversely affect the volume of our sales reducing future revenues and profitability. Other than what is noted above, there have been no material changes from the risk factors disclosed in Part 1, Item 1A of our Form 10-K for the fiscal year ended January 28, 2008.

Item 5. Other Information

None.

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Item 6. Exhibits

(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 12, 2008.

* 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).

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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 12, 2008	By:	/s/ Robert E. Wheaton
		Robert E. Wheaton
		Chairman of the Board,
		President, Chief Executive Officer and
		Principal Executive Officer


December 12, 2008	By:	/s/ Ronald E. Dowdy
		Ronald E. Dowdy
		Group Controller,
		Treasurer, Secretary and
		Principal Accounting Officer

STAR BUFFET INC - Quarter Report: 2008 November (Form 10-Q)

DELAWARE

84-1430786

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

19

Item 1. Legal Proceedings

33

Item 1A. Risk Factors

33

Item 5. Other Information

33

Item 6. Exhibits and Reports on Form 8-K

34

Signatures

35

Note (A) Basis of Presentation

Overview

Components of Income from Operations

Results of Operations

Treasurer, Secretary and