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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the quarterly period ended February 10, 2010

or



| ̈ | 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
001-08308





Lubys, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 74-1335253                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)



|                                         |  |           
|---------------------------------------- |  | ----------
|13111 Northwest Freeway, Suite 600       |  |           
|Houston, Texas                           |  | 77040     
|(Address of principal executive offices) |  | (Zip Code)

(713) 329-6800

(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   ̈

Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act:



| |  |                            |  |                              |  | 
| |  | -------------------------- |  | ---------------------------- |  | 
| |  | Large accelerated filer   ̈ |  | Accelerated filer  x         |  | 
| |  | Non-accelerated filer   ̈   |  | Smaller reporting company   ̈ |  | 

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

As of March 8, 2010, there were 28,036,835 shares of the registrants common stock outstanding.









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##### Table of Contents

Lubys, Inc.

Form 10-Q

Quarter ended February 10, 2010

Table of Contents



|                               |  |                                                                                       |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                       |  | Page
|Part I - Financial Information |  |                                                                                      
|                               |  |                                                                                      
|Item 1                         |  | Financial Statements                                                                  |  | 3   
|                               |  |                                                                                      
|Item 2                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 17  
|                               |  |                                                                                      
|Item 3                         |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 26  
|                               |  |                                                                                      
|Item 4                         |  | Controls and Procedures                                                               |  | 26  
|                               | 
|Part II - Other Information    |  |                                                                                      
|                               |  |                                                                                      
|Item 1                         |  | Legal Proceedings                                                                     |  | 27  
|                               |  |                                                                                      
|Item 5                         |  | Other Information                                                                     |  | 27  
|                               |  |                                                                                      
|Item 6                         |  | Exhibits                                                                              |  | 27  
|                               | 
|Signatures                     |  | 28                                                                                   

Additional Information

We file reports with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K. The public may read and copy any materials we file with the SEC at its Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet site athttp://www.sec.gov that contains the reports, proxy and information statements, and other information that we
file electronically. Our website address ishttp://www.lubys.com. Please note that our website address is provided as an inactive textual reference only. We make available free of charge through our website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is
not part of this report, and is therefore not incorporated by reference unless such information is specifically referenced elsewhere in this report.



2



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Part I - FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

Lubys, Inc.

Consolidated Balance Sheets

(In thousands, except share data)



|                                                                                                                                                                                          |  |                  |         |   |                |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | -------------- | - | ------- | -
|                                                                                                                                                                                          |  | February 10,2010 |         |   | August 26,2009 |  
|                                                                                                                                                                                          |  | (Unaudited)      |         |   |                |  
|ASSETS                                                                                                                                                                                    |  |                  |         |   |                |   |         |  
|Current Assets:                                                                                                                                                                           |  |                  |         |   |                |   |         |  
|Cash and cash equivalents                                                                                                                                                                 |  | $                | 754     |   |                | $ | 882     |  
|Trade accounts and other receivables, net                                                                                                                                                 |  |                  | 1,958   |   |                |   | 1,463   |  
|Food and supply inventories                                                                                                                                                               |  |                  | 2,729   |   |                |   | 2,801   |  
|Prepaid expenses                                                                                                                                                                          |  |                  | 304     |   |                |   | 655     |  
|Assets related to discontinued operations                                                                                                                                                 |  |                  | 47      |   |                |   | 391     |  
|Deferred income taxes                                                                                                                                                                     |  |                  | 164     |   |                |   | 192     |  
|                                                                                                                                                                                          |  |                  |         |   |                |   |         |  
|Total current assets                                                                                                                                                                      |  |                  | 5,956   |   |                |   | 6,384   |  
|Property and equipment, net                                                                                                                                                               |  |                  | 138,410 |   |                |   | 146,238 |  
|Long-term investments                                                                                                                                                                     |  |                  | 5,155   |   |                |   | 6,903   |  
|Deferred incomes taxes                                                                                                                                                                    |  |                  | 6,210   |   |                |   | 5,082   |  
|Property held for sale                                                                                                                                                                    |  |                  | 3,870   |   |                |   | 3.870   |  
|Assets related to discontinued operations                                                                                                                                                 |  |                  | 24,988  |   |                |   | 25,812  |  
|Other assets                                                                                                                                                                              |  |                  | 227     |   |                |   | 223     |  
|                                                                                                                                                                                          |  |                  |         |   |                |   |         |  
|Total assets                                                                                                                                                                              |  | $                | 184,816 |   |                | $ | 194,512 |  
|                                                                                                                                                                                          |  |                  |         |   |                |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                      |  |                  |         |   |                |   |         |  
|Current Liabilities:                                                                                                                                                                      |  |                  |         |   |                |   |         |  
|Accounts payable                                                                                                                                                                          |  | $                | 8,402   |   |                | $ | 11,541  |  
|Liabilities related to discontinued operations                                                                                                                                            |  |                  | 382     |   |                |   | 1,888   |  
|Accrued expenses and other liabilities                                                                                                                                                    |  |                  | 12,449  |   |                |   | 14,045  |  
|                                                                                                                                                                                          |  |                  |         |   |                |   |         |  
|Total current liabilities                                                                                                                                                                 |  |                  | 21,233  |   |                |   | 27,474  |  
|Credit facility debt                                                                                                                                                                      |  |                  |        |   |                |   |        |  
|Liabilities related to discontinued operations                                                                                                                                            |  |                  | 765     |   |                |   | 382     |  
|Other liabilities                                                                                                                                                                         |  |                  | 3,163   |   |                |   | 3,524   |  
|                                                                                                                                                                                          |  |                  |         |   |                |   |         |  
|Total liabilities                                                                                                                                                                         |  |                  | 25,161  |   |                |   | 31,380  |  
|                                                                                                                                                                                          |  |                  |         |   |                |   |         |  
|Commitments and Contingencies                                                                                                                                                             |  |                  |         |   |                |   |         |  
|SHAREHOLDERS EQUITY                                                                                                                                                                      |  |                  |         |   |                |   |         |  
|Common stock, $0.32 par value; 100,000,000 shares authorized; shares issued were 28,536,835 and 28,494,511, respectively; shares
outstanding were 28,036,835 and 27,994,511, respectively |  |                  | 9,133   |   |                |   | 9,118   |  
|Paid-in capital                                                                                                                                                                           |  |                  | 22,567  |   |                |   | 21,989  |  
|Retained earnings                                                                                                                                                                         |  |                  | 132,661 |   |                |   | 136,800 |  
|Accumulated other comprehensive income                                                                                                                                                    |  |                  | 69      |   |                |   |        |  
|Less cost of treasury stock, 500,000 shares                                                                                                                                               |  |                  | (4,775  | ) |                |   | (4,775  | )
|                                                                                                                                                                                          |  |                  |         |   |                |   |         |  
|Total shareholders equity                                                                                                                                                                |  |                  | 159,655 |   |                |   | 163,132 |  
|                                                                                                                                                                                          |  |                  |         |   |                |   |         |  
|Total liabilities and shareholders equity                                                                                                                                                |  | $                | 184,816 |   |                | $ | 194,512 |  
|                                                                                                                                                                                          |  |                  |         |   |                |   |         |  

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



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Lubys, Inc.

Consolidated Statements of Operations (unaudited)

(In thousands except per share data)



|                                                                        |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|----------------------------------------------------------------------- |  | ---------------- | ------ | - | ------------------ | - | ------ | ---------------- |  | - | ---------------- | - |  | - | ------- | -
|                                                                        |  | Quarter Ended    |        |   | Two Quarters Ended |  
|                                                                        |  | February 10,2010 |        |   | February 11,2009   |   |        | February 10,2010 |  |   | February 11,2009 |  
|                                                                        |  | (12 weeks)       |        |   | (12 weeks)         |   |        | (24 weeks)       |  |   | (24 weeks)       |  
|SALES:                                                                  |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|Restaurant sales                                                        |  | $                | 50,800 |   |                    | $ | 58,472 |                  |  | $ | 99,226           |   |  | $ | 115,478 |  
|Culinary contract services                                              |  |                  | 2,959  |   |                    |   | 3,031  |                  |  |   | 6,251            |   |  |   | 6,033   |  
|                                                                        |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|TOTAL SALES                                                             |  |                  | 53,759 |   |                    |   | 61,503 |                  |  |   | 105,477          |   |  |   | 121,511 |  
|COSTS AND EXPENSES:                                                     |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|Cost of food                                                            |  |                  | 13,928 |   |                    |   | 16,120 |                  |  |   | 26,911           |   |  |   | 31,734  |  
|Payroll and related costs                                               |  |                  | 18,094 |   |                    |   | 20,143 |                  |  |   | 36,548           |   |  |   | 40,954  |  
|Other operating expenses                                                |  |                  | 10,750 |   |                    |   | 11,556 |                  |  |   | 22,602           |   |  |   | 25,131  |  
|Opening costs                                                           |  |                  | 121    |   |                    |   | 36     |                  |  |   | 152              |   |  |   | 95      |  
|Cost of culinary contract services                                      |  |                  | 2,788  |   |                    |   | 2,681  |                  |  |   | 5,716            |   |  |   | 5,341   |  
|Depreciation and amortization                                           |  |                  | 3,487  |   |                    |   | 3,629  |                  |  |   | 7,009            |   |  |   | 7,276   |  
|General and administrative expenses                                     |  |                  | 5,003  |   |                    |   | 5,638  |                  |  |   | 10,485           |   |  |   | 11,748  |  
|Provision for asset impairments, net                                    |  |                  | 32     |   |                    |   | 233    |                  |  |   | 32               |   |  |   | 233     |  
|Net gain on disposition of property and equipment                       |  |                  | (1,041 | ) |                    |   | (23    | )                |  |   | (730             | ) |  |   | (235    | )
|                                                                        |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|Total costs and expenses                                                |  |                  | 53,162 |   |                    |   | 60,013 |                  |  |   | 108,725          |   |  |   | 122,277 |  
|                                                                        |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|INCOME (LOSS) FROM OPERATIONS                                           |  |                  | 597    |   |                    |   | 1,490  |                  |  |   | (3,248           | ) |  |   | (766    | )
|Interest income                                                         |  |                  | 7      |   |                    |   | 40     |                  |  |   | 16               |   |  |   | 159     |  
|Interest expense                                                        |  |                  | (44    | ) |                    |   | (56    | )                |  |   | (172             | ) |  |   | (142    | )
|Gain on sales and redemptions (impairment in fair value) of investments |  |                  | 20     |   |                    |   | (131   | )                |  |   | (438             | ) |  |   | (131    | )
|Other income, net                                                       |  |                  | 215    |   |                    |   | 233    |                  |  |   | 412              |   |  |   | 491     |  
|                                                                        |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|Income (loss) before income taxes and discontinued operations           |  |                  | 795    |   |                    |   | 1,576  |                  |  |   | (3,430           | ) |  |   | (389    | )
|Provision (benefit) for income taxes                                    |  |                  | 665    |   |                    |   | 571    |                  |  |   | (702             | ) |  |   | (94     | )
|                                                                        |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|Income (loss) from continuing operations                                |  |                  | 130    |   |                    |   | 1,005  |                  |  |   | (2,728           | ) |  |   | (295    | )
|Loss from discontinued operations, net of income taxes                  |  |                  | (552   | ) |                    |   | (859   | )                |  |   | (1,411           | ) |  |   | (1,751  | )
|                                                                        |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|NET INCOME (LOSS)                                                       |  | $                | (422   | ) |                    | $ | 146    |                  |  | $ | (4,139           | ) |  | $ | (2,046  | )
|                                                                        |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|Income (loss) per share from continuing operations:                     |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|Basic                                                                   |  | $                |       |   |                    | $ | 0.04   |                  |  | $ | (0.10            | ) |  | $ | (0.01   | )
|Assuming dilution                                                       |  |                  |       |   |                    |   | 0.04   |                  |  |   | (0.10            | ) |  |   | (0.01   | )
|                                                                        |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|Loss per share from discontinued operations:                            |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|Basic                                                                   |  | $                | (0.02  | ) |                    | $ | (0.03  | )                |  | $ | (0.05            | ) |  | $ | (0.06   | )
|Assuming dilution                                                       |  |                  | (0.02  | ) |                    |   | (0.03  | )                |  |   | (0.05            | ) |  |   | (0.06   | )
|                                                                        |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|Net income (loss) per share:                                            |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|Basic                                                                   |  | $                | (0.02  | ) |                    | $ | 0.01   |                  |  | $ | (0.15            | ) |  | $ | (0.07   | )
|Assuming dilution                                                       |  |                  | (0.02  | ) |                    |   | 0.01   |                  |  |   | (0.15            | ) |  |   | (0.07   | )
|                                                                        |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|Weighted average shares outstanding:                                    |  |                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |         |  
|Basic                                                                   |  |                  | 28,121 |   |                    |   | 28,068 |                  |  |   | 28,117           |   |  |   | 28,073  |  
|Assuming dilution                                                       |  |                  | 28,127 |   |                    |   | 28,075 |                  |  |   | 28,117           |   |  |   | 28,073  |  

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

Note: The Companys Cash Flow Improvement and Capital Redeployment Plan
(the Plan) was approved in the first quarter of fiscal year 2010. As a result, the Company reclassified 24 stores to discontinued operations for current and prior fiscal years.



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Lubys, Inc.

Consolidated Statement of Shareholders Equity and Comprehensive Income (Loss) (unaudited)

(In thousands)



|                                                     |  |              |  |          |                |        |                  |        |   |                                     |   |                          |   |        |  |   |         |   |  |   |    |  |   |         |  
|---------------------------------------------------- |  | ------------ |  | -------- | -------------- | ------ | ---------------- | ------ | - | ----------------------------------- | - | ------------------------ | - | ------ |  | - | ------- | - |  | - | -- |  | - | ------- | -
|                                                     |  | Common Stock |  |          | Paid-InCapital |        | RetainedEarnings |        |   | AccumulatedOtherComprehensiveIncome |   | TotalShareholdersEquity |  
|                                                     |  | Issued       |  | Treasury |                |        |                  |        |  
|                                                     |  | Shares       |  | Amount   |                | Shares |                  | Amount |   |                                     |   |                          |  
|BALANCE AT AUGUST 26, 2009                           |  | 28,495       |  | $        | 9,118          |        | 500              |        | $ | (4,775                              | ) |                          | $ | 21,989 |  | $ | 136,800 |   |  | $ |   |  | $ | 163,132 |  
|Common stock issued under nonemployee director plans |  | 25           |  |          | 8              |        |                 |        |   |                                    |   |                          |   | 118    |  |   |        |   |  |   |   |  |   | 126     |  
|Share based compensation expense                     |  | 17           |  |          | 7              |        |                 |        |   |                                    |   |                          |   | 460    |  |   |        |   |  |   |   |  |   | 467     |  
|Comprehensive income (loss):                         |  |              |  |          |                |        |                  |        |   |                                     |   |                          |   |        |  |   |         |   |  |   |    |  |   |         |  
|Net Loss                                             |  |             |  |          |               |        |                 |        |   |                                    |   |                          |   |       |  |   | (4,139  | ) |  |   |   |  |   | (4,139  | )
|Unrealized gain on investments, net of tax           |  |             |  |          |               |        |                 |        |   |                                    |   |                          |   |       |  |   |        |   |  |   | 69 |  |   | 69      |  
|                                                     |  |              |  |          |                |        |                  |        |   |                                     |   |                          |   |        |  |   |         |   |  |   |    |  |   |         |  
|Total comprehensive loss                             |  |              |  |          |                |        |                  |        |   |                                     |   |                          |   |        |  |   |         |   |  |   |    |  |   | (4,070  | )
|                                                     |  |              |  |          |                |        |                  |        |   |                                     |   |                          |   |        |  |   |         |   |  |   |    |  |   |         |  
|BALANCE AT FEBRUARY 10, 2010                         |  | 28,537       |  | $        | 9,133          |        | 500              |        | $ | (4,775                              | ) |                          | $ | 22,567 |  | $ | 132,661 |   |  | $ | 69 |  | $ | 159,655 |  
|                                                     |  |              |  |          |                |        |                  |        |   |                                     |   |                          |   |        |  |   |         |   |  |   |    |  |   |         |  

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



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Lubys, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)





|                                                                                         |  |                    |         |   |                  |   |        |  
|---------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------ | -
|                                                                                         |  | Two Quarters ended |        
|                                                                                         |  | February 10,2010   |         |   | February 11,2009 |  
|                                                                                         |  | (24 weeks)         |         |   | (24 weeks)       |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                    |         |   |                  |   |        |  
|Net loss                                                                                 |  | $                  | (4,139  | ) |                  | $ | (2,046 | )
|Adjustments to reconcile net loss to net cash provided by operating activities:          |  |                    |         |   |                  |   |        |  
|Provision for asset impairments, net of gains and losses on property sales               |  |                    | (2,267  | ) |                  |   | 88     |  
|Depreciation and amortization                                                            |  |                    | 7,288   |   |                  |   | 8,704  |  
|Impairment charge for decrease in fair value of investments, net of gains                |  |                    | 438     |   |                  |   | 131    |  
|Amortization of debt issuance cost                                                       |  |                    | 85      |   |                  |   | 40     |  
|Non-cash compensation expense                                                            |  |                    | 126     |   |                  |   | 132    |  
|Share-based compensation expense                                                         |  |                    | 466     |   |                  |   | 595    |  
|Deferred tax benefit                                                                     |  |                    | (1,626  | ) |                  |   | (1,267 | )
|                                                                                         |  |                    |         |   |                  |   |        |  
|Cash provided by operating activities before changes in operating assets and liabilities |  |                    | 371     |   |                  |   | 6,377  |  
|Changes in operating assets and liabilities:                                             |  |                    |         |   |                  |   |        |  
|Increase in trade accounts and other receivables, net                                    |  |                    | (478    | ) |                  |   | (771   | )
|Decrease (increase) in food and supply inventories                                       |  |                    | 302     |   |                  |   | (28    | )
|Decrease (increase) in prepaid expenses and other assets                                 |  |                    | 419     |   |                  |   | (29    | )
|Decrease in accounts payable, accrued expenses and other liabilities                     |  |                    | (6,277  | ) |                  |   | (6,596 | )
|                                                                                         |  |                    |         |   |                  |   |        |  
|Net cash used in operating activities                                                    |  |                    | (5,663  | ) |                  |   | (1,047 | )
|                                                                                         |  |                    |         |   |                  |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                    |         |   |                  |   |        |  
|Proceeds from sale and redemption of long-term investments                               |  |                    | 1,414   |   |                  |   | 500    |  
|Proceeds from disposal of assets and property held for sale                              |  |                    | 5,768   |   |                  |   | 1,117  |  
|Purchases of property and equipment                                                      |  |                    | (1,542  | ) |                  |   | (8,775 | )
|                                                                                         |  |                    |         |   |                  |   |        |  
|Net cash provided by (used in) investing activities                                      |  |                    | 5,640   |   |                  |   | (7,158 | )
|                                                                                         |  |                    |         |   |                  |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |                    |         |   |                  |   |        |  
|Credit facility borrowings                                                               |  |                    | 20,100  |   |                  |   | 11,000 |  
|Credit facility repayments                                                               |  |                    | (20,100 | ) |                  |   | (5,000 | )
|Debt issuance costs                                                                      |  |                    | (105    | ) |                  |   |       |  
|                                                                                         |  |                    |         |   |                  |   |        |  
|Net cash provided by (used in) financing activities                                      |  |                    | (105    | ) |                  |   | 6,000  |  
|                                                                                         |  |                    |         |   |                  |   |        |  
|Net decrease in cash and cash equivalents                                                |  |                    | (128    | ) |                  |   | (2,205 | )
|Cash and cash equivalents at beginning of period                                         |  |                    | 882     |   |                  |   | 4,566  |  
|                                                                                         |  |                    |         |   |                  |   |        |  
|Cash and cash equivalents at end of period                                               |  | $                  | 754     |   |                  | $ | 2,361  |  
|                                                                                         |  |                    |         |   |                  |   |        |  
|Cash paid for:                                                                           |  |                    |         |   |                  |   |        |  
|Income taxes                                                                             |  | $                  |        |   |                  | $ |       |  
|Interest                                                                                 |  |                    | 68      |   |                  |   | 102    |  

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



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##### Table of Contents

Lubys, Inc.

Notes to Consolidated Financial Statements (unaudited)

February 10, 2010

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Lubys, Inc. (the Company or Lubys) have been prepared in accordance with U.S. generally accepted
accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for
complete financial statements that are prepared for the Companys Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the period ended February 10, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending August 25, 2010.

The balance sheet dated August 26, 2009, included in this Form 10-Q, has been derived from the audited financial statements at that date. However,
this Form 10-Q does not include all of the information and footnotes required by GAAP for an annual filing of complete financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial
statements and footnotes included in the Companys Annual Report on Form 10-K for the fiscal year ended August 26, 2009.

The
results of operations, assets and liabilities for all units included in the disposal plan discussed in Note 7, have been reclassified to discontinued operations in the statements of operations and balance sheets for all periods presented.

Note 2. Accounting Periods

The Companys fiscal year ends on the last Wednesday in August. As such, each fiscal year normally consists of 13 four-week periods, accounting for 364 days. Each of the first three quarters of each fiscal year consists of three
four-week periods (12 weeks), while the fourth quarter normally consists of four four-week periods (16 weeks). Comparability between accounting periods will be affected by varying lengths of the periods, as well as the seasonality associated with
the restaurant business.

Note 3. Fair Value Measurement

The Financial Accounting Standards Board ( FASB) issued Accounting Standards Codification (ASC) Topic 820,Fair Value Measurements (ASC 820), which defines fair
value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosure about fair value measurements. ASC 820 applies whenever other statements require or permit asset or liabilities to be measured at fair
value. The Company adopted the provisions of ASC 820 at the beginning of the first quarter of fiscal year 2009.

ASC 820 establishes a
three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These tiers include:



| |  | Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities as of the reporting date. Active
markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Level 2: Defined as pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward
prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Level 3: Defined as pricing inputs that are unobservable from objective sources. These inputs may be used with internally developed methodologies that
result in managements best estimate of fair value.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of February 10, 2010, the Company held auction rate
securities, which are classified as available-for-sale investments under long-term investments on the balance sheet and are required to be measured at fair value on a recurring basis. As discussed in Note 4, the continued illiquidity in the auction
rate market has affected the fair market value of the Companys auction rate securities because the auctions continue to fail. Therefore, in the absence of an active market, the Company estimated the fair value of these investments using price
submissions from financial consultants specializing in valuing these types of securities. These valuations considered, among other things, the collateralization underlying the security, the creditworthiness of the counterparty, the timing of the
expected future cash flows, the interest rate of the Companys investments compared to similar investments, the current illiquidity of the investments, and the estimated next successful auction of the security.



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##### Table of Contents

Management believes the Company will more likely than not sell its auction rate securities prior to maturity
or prior to the time when the securities can be sold for par value. The market for the Companys auction rate securities has not been liquid for an extended time and the credit risk of the security issuers and related insurers is uncertain.
Therefore, the Company considers the impairment of its auction rate securities to be other-than-temporary.

As a result of the
other-than-temporary fair value measurement of the Companys auction rate securities investments, the Company did not record any additional realized holding losses during the quarter ended February 10, 2010 though it did record
a realized holding loss of $0.13 million during the quarter ended February 11, 2009. Any recoveries of previous recognized losses will not be recognized until the security is sold or redeemed. Any future decrease in fair value related to these
investments will increase the Companys recognized loss in these securities.

The assets measured at fair value on a recurring basis were
as follows:





|                                                                                             |  |                                                          |   |                                           |   |                                        |  |   |        |  
|-------------------------------------------------------------------------------------------- |  | -------------------------------------------------------- | - | ----------------------------------------- | - | -------------------------------------- |  | - | ------ | -
|                                                                                             |  | Fair ValueMeasurement
Using                              |  
|                                                                                             |  | QuotedPrices inActiveMarkets forIdenticalAssets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level 3) | 
|                                                                                             |  |                                                          |   | (In thousands)                            |   |                                        | 
|Balance at August 27, 2008                                                                   |  | $                                                        |  |                                           | $ |                                       |  | $ | 8,525  |  
|Purchase of long-term investments                                                            |  |                                                          |  |                                           |   |                                       |  |   |       |  
|Sale of long-term investments                                                                |  |                                                          |  |                                           |   |                                       |  |   |       |  
|Calls or redemptions at par value as scheduled by Issuer                                     |  |                                                          |  |                                           |   |                                       |  |   | (625   | )
|Total gains or losses (realized and unrealized)                                              |  |                                                          |   |                                           |   |                                        |  |   |        |  
|included in net income (loss)                                                                |  |                                                          |  |                                           |   |                                       |  |   | (997   | )
|                                                                                             |  |                                                          |   |                                           |   |                                        |  |   |        |  
|Balance at August 26, 2009                                                                   |  |                                                          |  |                                           |   |                                       |  |   | 6,903  |  
|Purchase of long-term investments                                                            |  |                                                          |  |                                           |   |                                       |  |   |       |  
|Sale of long-term investments                                                                |  |                                                          |  |                                           |   |                                       |  |   | (1,364 | )
|Calls or redemptions at par value as scheduled by Issuer                                     |  |                                                          |  |                                           |   |                                       |  |   | (50    | )
|Total unrealized gains or losses recorded in other comprehensive income on the balance sheet |  |                                                          |  |                                           |   |                                       |  |   | 104    |  
|Total gains or losses (realized and unrealized)                                              |  |                                                          |   |                                           |   |                                        |  |   |        |  
|included in net income (loss)                                                                |  |                                                          |  |                                           |   |                                       |  |   | (438   | )
|                                                                                             |  |                                                          |   |                                           |   |                                        |  |   |        |  
|Balance at February 10, 2010                                                                 |  | $                                                        |  |                                           | $ |                                       |  | $ | 5,155  |  
|                                                                                             |  |                                                          |   |                                           |   |                                        |  |   |        |  

The carrying value of cash and cash equivalents, trade accounts and other receivable, accounts payable and accrued expenses
approximate fair value based on the short term nature of these accounts.

Note 4. Investments

Investments include available-for-sale securities which are reported at fair value with unrealized gains and losses excluded from earnings and reported in
shareholders equity unless such losses are considered other-than-temporary. The Company held $7.1 million par value ($5.2 million fair value) and $8.7 million par value ($6.9 million fair value) as of February 10, 2010 and
August 26, 2009, respectively, in auction rate municipal bonds as long-term investments. Adjustments to fair value were recorded in fiscal years 2008 and 2009 and the first quarter ended November 18, 2009 based on the continued illiquidity
of the auction rate securities market and a valuation of the securities. The Company recognized cumulative unrealized losses of $2.1 million and $1.8 million losses as of February 10, 2010 and August 26, 2009, respectively; no additional
losses were recognized in the quarter ended February 10, 2010. The cumulative unrealized losses are considered other-than-temporary and are recorded as a charge to earnings. However, as a result of an increase in fair market value
of the securities at the end of the quarter ended February 10, 2010, the company recorded an unrealized gain of $0.1 million. This unrealized gain was recorded in other comprehensive income on the balance sheet, net of taxes.



8



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##### Table of Contents

The auction rate securities market, which directly affects the Company, continues to be inactive and
auctions continue to fail. Therefore, the Company estimated the fair value of its auction rate securities using pricing valuation models and methodologies from financial consultants specializing in the securities. Based on these valuation models and
methodologies and the possible long-term illiquidity of the markets, the Company has recognized other-than-temporary impairments. See Note 3, Fair Value Measurement.

The auction rate municipal securities are long-term debt obligations that are secured by certain revenue streams (airport, sewer, hospital, etc.). These
auction rate securities have insurance policies guaranteeing, with respect to each bond, the payment of principal and accrued interest, as scheduled, if the issuer is unable to service the debt and have been issued ratings ranging from A1  Aa3
(Moodys) and A  AAA (Standard and Poors). The bonds have experienced this disparity in credit ratings because of the insurance companys revised credit ratings issued by Moodys and Standard and Poors. As these
securities continue to fail at auction, interest income will continue to accrue at a designated benchmark rate plus a premium; otherwise, they will be sold. At each of the resets between February 12, 2008 and February 10, 2010, the Company
received all accrued interest due and all accounts payable upon scheduled principal redemptions.

When normal trading on the auction rate
securities market halted in February 2008, the Company had sell orders on all of its holdings. In fiscal year 2009, the Company received par value of $625,000 plus accrued interest on the bonds upon scheduled principal redemptions. Through the
second quarter ended February 10, 2010, the Company sold one auction rate municipal bond with a par value of $1.6 million ($1.3 million book value) at a 12% discount and received $1.4 million including accrued interest and received par value of
$50,000 plus accrued interest from a scheduled principal redemption.

These municipal bonds have underlying maturity dates ranging from
October 1, 2022 through February 1, 2042 offering rates tied to benchmarks plus a premium. Historically, the auction process allowed investors to obtain immediate liquidity by selling the securities at their face amounts. Liquidity for
these securities was historically provided by entering sell orders through a Dutch-auction process that resets interest rates on these investments every 7, 28 or 35 days. However, the disruptions in the credit markets have continued to adversely
affect the auction market for these types of securities.

Note 5. Income Taxes

For the two quarters ended February 10, 2010, including both continuing and discontinued operations, the Company generated a gross taxable loss of
approximately $5.5 million. No cash payments of estimated income taxes were made during the two quarters ended February 10, 2010.

Deferred tax assets and liabilities are recorded based on differences between the financial reporting basis and the tax basis of assets and liabilities using currently enacted rates and laws that will be in effect when the differences are
expected to reverse. Deferred tax assets are recognized to the extent future taxable income is expected to be sufficient to utilize those assets prior to their expiration. If current available information raises doubt about the realization of the
deferred tax assets, a valuation allowance would be necessary. A valuation allowance for deferred tax assets may be required if recovery of prior taxes by carrying back current losses to prior years is not available if the Company projects lower
levels of future taxable income, or if the Company recently experienced consecutive pretax losses. Such a valuation allowance would be established through a charge to income tax expense which would adversely affect the Companys reported
operating results. Management concluded that for the quarter ended February 10, 2010 an increase in the valuation allowance of approximately $0.4 million was necessary. The valuation allowance partially offsets the Companys operating loss
(NOL) carryovers to future years and its carryover of general business tax credits.

Management believes that adequate provisions
for income taxes have been reflected in the financial statements and is not aware of any significant exposure items that have not been reflected in the financial statements. Amounts considered probable of settlement within one year have been
included in the accrued expenses and other liabilities in the accompanying consolidated balance sheet. The Company does not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next thirteen four-week
periods.



9



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##### Table of Contents

Note 6. Property and Equipment

The cost and accumulated depreciation of property and equipment at February 10, 2010 and August 26, 2009, together with the related estimated useful lives used in computing depreciation and
amortization, were as follows:



|                                               |  |                  |          |   |                |   |          |                       |  |                                             
|---------------------------------------------- |  | ---------------- | -------- | - | -------------- | - | -------- | --------------------- |  | --------------------------------------------
|                                               |  | February 10,2010 |          |   | August 26,2009 |   |          | EstimatedUseful Lives
|                                               |  | (In thousands)   |          |   |               
|Land                                           |  | $                | 38,688   |   |                | $ | 40,540   |                       |  |                                            
|Restaurant equipment and furnishings           |  |                  | 92,383   |   |                |   | 92,141   |                       |  | 3 to 15 years                               
|Buildings                                      |  |                  | 148,112  |   |                |   | 148,003  |                       |  | 20 to 33 years                              
|Leasehold and leasehold improvements           |  |                  | 21,949   |   |                |   | 22,722   |                       |  | Lesser of leaseterm or estimated useful life
|Office furniture and equipment                 |  |                  | 6,254    |   |                |   | 6,280    |                       |  | 3 to 10 years                               
|Construction in progress                       |  |                  | 362      |   |                |   | 544      |                       |  |                                            
|                                               |  |                  |          |   |                |   |          |                       |  |                                             
|                                               |  |                  | 307,748  |   |                |   | 310,230  |                       |  |                                             
|Less accumulated depreciation and amortization |  |                  | (169,338 | ) |                |   | (163,992 | )                     |  |                                             
|                                               |  |                  |          |   |                |   |          |                       |  |                                             
|Property and equipment, net                    |  | $                | 138,410  |   |                | $ | 146,238  |                       |  |                                             
|                                               |  |                  |          |   |                |   |          |                       |  |                                             

Note 7. Impairment of Long-Lived Assets, Discontinued Operations and Property Held for Sale

Impairment of Long-Lived Assets and Store Closings

The Company periodically evaluates long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company estimates future cash
flows expected to result from the use and possible disposition of the asset and will recognize an impairment loss when the sum of the undiscounted estimated future cash flows is less than the carrying amounts of such assets. The estimates of future
cash flows, based on reasonable and supportable assumptions and projections, require managements subjective judgments. The span of time for which future cash flows are estimated is often lengthy, which increases the sensitivity to assumptions
made. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. The Company considers the likelihood of possible outcomes in
determining the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by either discounted cash flows, appraisals or the estimated net proceeds upon sale. With
respect to continuing operations, write-downs associated with these impairment analyses, as well as actual exit costs incurred for store closings are reflected in the Consolidated Statements of Operations in Provision for asset impairments,
net.

Discontinued Operations

As a result of the first quarter fiscal year 2010 adoption of the Companys Cash Flow Improvement and Capital Redeployment Plan (the Plan), the Company reclassified 23 operating stores
and one previously closed location to discontinued operations. The results of operations, assets and liabilities for all units included in the Plan have been reclassified to discontinued operations in the statement of operations and balance sheets
for all periods presented.



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##### Table of Contents

Assets related to discontinued operations include food inventory, prepaid expenses, deferred tax assets,
unimproved land, foreclosed restaurant properties and related equipment for locations classified as discontinued operations. The following table sets forth the assets and liabilities for all discontinued operations:



|                                               |  |                  |        |                  |   |       
|---------------------------------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                                               |  | February 10,2010 |        | February 11,2009
|                                               |  | (in thousands)  
|Trade accounts and other receivable, net       |  | $                |       |                  | $ | 16    
|Food and supply inventories                    |  |                  |       |                  |   | 230   
|Prepaid expenses                               |  |                  | 47     |                  |   | 145   
|                                               |  |                  |        |                  |   |       
|Assets related to discontinued operations      |  | $                | 47     |                  | $ | 391   
|                                               |  |                  |        |                  |   |       
|Property and equipment                         |  | $                | 23,669 |                  | $ | 24,935
|Deferred income taxes                          |  |                  | 1,305  |                  |   | 859   
|Other assets                                   |  |                  | 14     |                  |   | 18    
|                                               |  |                  |        |                  |   |       
|Assets related to discontinued operations      |  | $                | 24,988 |                  | $ | 25,812
|                                               |  |                  |        |                  |   |       
|Accounts payable                               |  | $                |       |                  | $ | 101   
|Accrued expenses and other liabilities         |  |                  | 315    |                  |   | 1,640 
|Deferred income taxes                          |  |                  | 67     |                  |   | 147   
|                                               |  |                  |        |                  |   |       
|Liabilities related to discontinued operations |  | $                | 382    |                  | $ | 1,888 
|                                               |  |                  |        |                  |   |       
|Other liabilities                              |  | $                | 765    |                  | $ | 382   
|                                               |  |                  |        |                  |   |       
|Liabilities related to discontinued operations |  | $                | 765    |                  | $ | 382   
|                                               |  |                  |        |                  |   |       

In conjunction with the Plan adoption, the Company recorded in the
fourth quarter of fiscal year 2009 a non-cash, pre-tax impairment charge of $19.0 million. Of the total impairment charge, $13.1 million related to newly closed locations, $4.4 million related to stores that have not been closed, $0.9 million
related to stores previously closed and $0.6 million related to unimproved properties that will be sold.

No further impairments were
recognized in the first or second quarters of fiscal year 2010. However, in the first quarter of fiscal year 2010, the Company sold two recently closed properties and recognized a gain of $1.2 million. One property was sold in the second quarter of
fiscal year 2010 and recognized a gain of $0.4 million.

As of February 10, 2010, the Company had closed a total of 21 restaurants as
part of the Plan. Of these 21 restaurant properties, 18 are owned properties, one is a building on a ground lease, and two are in-line leases in strip malls. In addition, the Company is marketing for sale three unimproved properties, two of which
are ground leases and one of which is owned. The Company also has two additional ground leases that are discontinued operations that were closed prior to implementation of the Plan.

As of February 10, 2010, the asset carrying value of the owned properties is $23.7 million and is included in assets related to discontinued operations. The asset carrying values of the ground leases
and in-line leases have previously been impaired to zero.

The Company is actively marketing these properties and the Companys results
of discontinued operations will be affected by the disposal of properties related to discontinued operations to the extent proceeds from the sales exceed or are less than net book value.

The following table sets forth the sales and pretax losses reported for all discontinued locations:



|                                                |  |                                               |        |   |                  |   |        |  
|----------------------------------------------- |  | --------------------------------------------- | ------ | - | ---------------- | - | ------ | -
|                                                |  | Two Quarters ended                            |       
|                                                |  | February 10,2010                              |        |   | February 11,2009 |  
|                                                |  | (24 weeks)                                    |        |   | (24 weeks)       |  
|                                                |  | (In thousands, except discontinued locations) |       
|Sales                                           |  | $                                             | 3,747  |   |                  | $ | 18,136 |  
|Pretax losses                                   |  |                                               | (2,173 | ) |                  |   | (2,663 | )
|Income tax benefit on discontinued operations   |  |                                               | 762    |   |                  |   | 912    |  
|Net loss on discontinued operations             |  |                                               | (1,411 | ) |                  |   | (1,751 | )
|Discontinued locations closed during the period |  |                                               | 23     |   |                  |   |       |  



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##### Table of Contents

During the quarter ended February 10, 2010, the Company accrued $0.4 million for lease exit costs and
future rental costs related to closed locations. The Company incurred $0.7 million and zero in employee settlement costs in the two quarters ended February 10, 2010 and February 11, 2009, respectively.

The following table summarizes discontinued operations for the periods presented:



|                                                              |  |                                       |        |   |                  |   |        |  
|------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---------------- | - | ------ | -
|                                                              |  | Two Quarters ended                    |       
|                                                              |  | February 10,2010                      |        |   | February 11,2009 |  
|                                                              |  | (24 weeks)                            |        |   | (24 weeks))      |  
|                                                              |  | (In thousands, except per share data) |       
|Impairments                                                   |  | $                                     |       |   |                  | $ |       |  
|Gains (losses)                                                |  |                                       | 1,568  |   |                  |   | (90    | )
|                                                              |  |                                       |        |   |                  |   |        |  
|Net (impairments) gains                                       |  |                                       | 1,568  |   |                  |   | (90    | )
|Other                                                         |  |                                       | (2,979 | ) |                  |   | (1,661 | )
|                                                              |  |                                       |        |   |                  |   |        |  
|Discontinued operations                                       |  | $                                     | (1,411 | ) |                  | $ | (1,751 | )
|                                                              |  |                                       |        |   |                  |   |        |  
|Effect on EPS from discontinued operations - decrease - basic |  | $                                     | (0.05  | ) |                  | $ | (0.06  | )
|                                                              |  |                                       |        |   |                  |   |        |  

Within discontinued operations, the Company offsets gains from applicable property disposals against total impairments. The
amounts in the table described as Other include employment termination and shut-down costs, as well as operating losses through each restaurants closing date and carrying costs until the locations are finally disposed.

The impairment charges included above relate to properties closed and designated for immediate disposal. The assets of these individual operating units
have been written down to their net realizable values. In turn, the related properties have either been sold or are being actively marketed for sale. All dispositions are expected to be completed within one to three years. Within discontinued
operations, the Company also recorded the related fiscal year-to-date net operating results, employee terminations and basic carrying costs of the closed units.

Property Held for Sale

Property held for sale includes unimproved land, closed
restaurant properties and related equipment for locations not classified as discontinued operations. The specific assets are valued at the lower of net depreciable value or net realizable value.

At August 26, 2009, the Company had a total of four owned properties and two ground leases recorded at approximately $3.9 million in property held for
sale.

As of February 10, 2010, the Company had four owned properties and one ground lease held for sale with a carrying value of
approximately $3.9 million. During the second quarter of fiscal year 2010, the Company was able to negotiate a settlement for one of the ground leases.

The Company is actively marketing the locations currently classified as property held for sale.

The Companys results of continuing operations will be affected by the disposal of properties held for sale to the extent proceeds from the sales exceed or are less than net book value.

Note 8. Commitments and Contingencies

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Pending Claims

Certain current and
former hourly restaurant employees filed a lawsuit against the Company in the U.S. District Court for the Southern District of Texas alleging violations of the Fair Labor Standards Act with respect to the inclusion of certain employees in a tip
pool. The lawsuit seeks penalties and attorneys fees and was conditionally certified as a collective action in October 2008. The Company intends to vigorously defend its position. It is not possible at this time to reasonably
estimate the possible loss or range of loss, if any.



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##### Table of Contents

From time to time, the Company is subject to various other private lawsuits, administrative proceedings and
claims that arise in the ordinary course of its business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to issues common to the
restaurant industry. The Company currently believes that the final disposition of these types of lawsuits, proceedings and claims will not have a material adverse effect on its financial position, results of operations or liquidity. It is possible;
however, that the Companys future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings or claims.

Construction Activity

From time to
time, the Company enters into non-cancelable contracts for the construction of its new restaurants. This construction activity exposes the Company to the risks inherent in new construction including but not limited to rising material prices, labor
shortages, delays in getting required permits and inspections, adverse weather conditions, and injuries sustained by workers. The Company had no non-cancelable contracts as of February 10, 2010.

Note 9. Related Parties

Affiliate
Services

The Companys Chief Executive Officer, Christopher J. Pappas, and Chief Operating Officer, Harris J. Pappas, own two
restaurant entities (the Pappas entities) that may provide services to the Company and its subsidiaries, as detailed in the Master Sales Agreement dated December 9, 2005 among the Company and the Pappas entities.

Under the terms of the Master Sales Agreement, the Pappas entities may provide specialized (customized) equipment fabrication and basic equipment
maintenance, including stainless steel stoves, shelving, rolling carts, and chef tables. The total costs under the Master Sales Agreement of custom-fabricated and refurbished equipment in the two quarters ended February 10, 2010 and
February 11, 2009 were $32,500 and $279,500, respectively. Services provided under this agreement are subject to review and approval by the Finance and Audit Committee.

Operating Leases

The Company previously leased from the Pappas entities property
that was used to accommodate the Companys in-house repair and fabrication center, which was referred to as the Houston Service Center. The Company terminated this lease in August 2008. The Company paid zero dollars pursuant to the terms of
this lease in the two quarters ended February 10, 2010 and February 11, 2009. The Company leases from an unrelated third party a new property that combines both the offices of the Companys Facility Services and Warehouse Operations.
The property is approximately 60,000 square feet.

The Company also previously leased from the Pappas entities approximately 27,000 square
feet of warehouse space to complement the Houston Service Center at a monthly rate of approximately $0.21 per square foot. The Company paid zero dollars pursuant to the terms of this lease in the two quarters ended February 10, 2010 and
February 11, 2009. On February 29, 2008, the Company terminated this lease.

In the third quarter of fiscal year 2004, Messrs.
Pappas became partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas collectively own a 50% limited partnership interest and a 50% general partnership interest in the limited partnership. A third
party company manages the center. One of the Companys restaurants rented space in that center since July 1969 through July 2008.

On
November 22, 2006, the Company executed a new lease agreement in connection with the replacement of the existing restaurant with a new prototype restaurant in the retail strip center described above. The new restaurant opened in July 2008 and
the new lease agreement provides for a primary term of approximately twelve years with two subsequent five-year options. The new lease also gives the landlord an option to buy out the agreement on or after the calendar year 2015 by paying the
unamortized cost of the Companys improvements. The Company is currently obligated to pay rent of $20.00 per square foot ($22.00 per square foot beginning January 2014) plus maintenance, taxes, and insurance during the primary term of the
lease. Thereafter, the lease provides for reasonable increases in rent at set intervals. The Company made payments of $144,000 and $127,000 in the two quarters ended February 10, 2010 and February 11, 2009, respectively. The new lease
agreement was approved by the Finance and Audit Committee.



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##### Table of Contents

Affiliated rents paid for a Houston restaurant property lease represented 6.4% and 5.4% of total rents for
continuing operations for the two quarters ended February 10, 2010 and February 11, 2009, respectively.



|                                                                                   |  |                                    |        |   |                  |   |        |  
|---------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                   |  | Two Quarters ended                 |       
|                                                                                   |  | February 10,2010                   |        |   | February 11,2009 |  
|                                                                                   |  | (24 weeks)                         |        |   | (24 weeks)       |  
|                                                                                   |  | (In thousands, except percentages) |       
|AFFILIATED COSTS INCURRED:                                                         |  |                                    |        |   |                  |   |        |  
|General and administrative expenses  professional and other costs                 |  | $                                  | 33     |   |                  | $ | 64     |  
|Capital expenditures  custom-fabricated and refurbished equipment and furnishings |  |                                    | 33     |   |                  |   | 280    |  
|Other operating expenses and opening costs, including property leases              |  |                                    | 153    |   |                  |   | 144    |  
|                                                                                   |  |                                    |        |   |                  |   |        |  
|Total                                                                              |  | $                                  | 219    |   |                  | $ | 488    |  
|                                                                                   |  |                                    |        |   |                  |   |        |  
|RELATIVE TOTAL COMPANY COSTS:                                                      |  |                                    |        |   |                  |   |        |  
|General and administrative expenses                                                |  | $                                  | 10,485 |   |                  | $ | 11,748 |  
|Capital expenditures                                                               |  |                                    | 1,542  |   |                  |   | 8,775  |  
|Other operating expenses and opening costs                                         |  |                                    | 22,754 |   |                  |   | 25,226 |  
|                                                                                   |  |                                    |        |   |                  |   |        |  
|Total                                                                              |  | $                                  | 34,781 |   |                  | $ | 45,749 |  
|                                                                                   |  |                                    |        |   |                  |   |        |  
|AFFILIATED COSTS INCURRED AS A PERCENTAGE OF RELATIVE TOTAL COMPANY COSTS          |  |                                    | 0.63   | % |                  |   | 1.07   | %
|                                                                                   |  |                                    |        |   |                  |   |        |  

Board of Directors

Pursuant to the terms of a separate Purchase Agreement dated March 9, 2001, entered into by and among the Company, Christopher J. Pappas and Harris J. Pappas, the Company agreed to submit three
persons designated by Christopher J. Pappas and Harris J. Pappas as nominees for election at the 2002 Annual Meeting of Shareholders. Messrs. Pappas designated themselves and Frank Markantonis as their nominees for directors, all of whom were
subsequently elected. Christopher J. Pappas and Harris J. Pappas are brothers. Frank Markantonis is an attorney whose principal client is Pappas Restaurants, Inc., an entity owned by Harris J. Pappas and Christopher J. Pappas.

As amended in June 2004, the Purchase Agreement allows Messrs. Pappas to continue to nominate persons for election to the board, which, if such nominees are
elected, would result in Messrs. Pappas having nominated three of the then-serving directors of the Company. Messrs. Pappas retain their right for so long as they both are executive officers of the Company.

Christopher J. Pappas is a member of the advisory board of Amegy Bank, National Association, which is a lender and syndication agent under the
Companys 2009 revolving credit facility, as amended (New Credit Facility).

Key Management Personnel

In November 2005, Christopher and Harris Pappas entered into new employment agreements that were subsequently amended in November 2008
to extend the termination date thereof to August 2010. In November 2009, Messrs. Pappas fixed annual base salaries were reduced to their current level. Both continue to devote their primary time and business efforts to the Company while
maintaining their roles at Pappas Restaurants, Inc.

On February 1, 2010, the Board of Directors of the Company approved the renewal of a
consultant agreement with Ernest Pekmezaris, the Companys former Chief Financial Officer. Under the agreement, Mr. Pekmezaris will continue to furnish to the Company advisory and consulting services related to finance and accounting
matters and other related consulting services. The agreement expiring on January 31, 2011 was renewed for twelve months at a lower monthly rate. Mr. Pekmezaris is also the Treasurer of Pappas Restaurants, Inc. Compensation for the services
provided by Mr. Pekmezaris to Pappas Restaurants, Inc. is paid entirely by that entity.

Peter Tropoli, Senior Vice President,
Administration, General Counsel and Secretary of the Company, is an attorney who, in the past, has provided litigation services to entities controlled by Christopher J. Pappas and Harris J. Pappas. Mr. Tropoli is the stepson of Frank
Markantonis, who is a director of the Company.

Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of
Harris J. Pappas, the Chief Operating Officer.



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##### Table of Contents

Note 10. Share-Based Compensation

Stock Options

The Company has an Incentive Stock Plan for officers and employees
(Employee Stock Plans) and a Non-employee Director Stock Option Plan for non-employee directors. These plans authorize the granting of stock options, restricted stock and other types of awards consistent with the purpose of the plans.
Approximately 2.8 million shares were authorized for issuance under the Companys plans as of February 10, 2010, of which approximately 1.3 million shares were available for future issuance. Stock options granted under the
Incentive Stock Plan and the Non-employee Director Stock Option Plan have an exercise price equal to the market price of the Companys common stock at the date of grant. Option awards under the Employee Stock Plans generally vest 25% each year
on the anniversary of the grant date and expire six to ten years from the grant date. Option awards under the Non-employee Director Stock Option Plan generally vest 100% on the first anniversary of the grant date and expire ten years from the grant
date.

A summary of the Companys stock option activity for the two quarters ended February 10, 2010 is presented below:



|                                 |  |                           |  |                                |       |                                           |      |                          |   |   
|-------------------------------- |  | ------------------------- |  | ------------------------------ | ----- | ----------------------------------------- | ---- | ------------------------ | - | --
|                                 |  | Shares UnderFixed Options |  | Weighted-AverageExercise
Price |       | Weighted-AverageRemainingContractual Term |      | Aggregate IntrinsicValue
|                                 |  |                           |  |                                |       | (Years)                                   |      | (In thousands)          
|Outstanding at August 26, 2009   |  | 1,025,451                 |  | $                              | 8.77  |                                           | 4.58 |                          | $ | 43
|Granted                          |  | 306,750                   |  |                                | 3.44  |                                           |      |                          |   |   
|Exercised                        |  |                          |  |                                |       |                                           |      |                          |   |   
|Forfeited or Expired             |  | 4,000                     |  |                                | 10.81 |                                           |      |                          |   |   
|                                 |  |                           |  |                                |       |                                           |      |                          |   |   
|Outstanding at February 10, 2010 |  | 1,328,201                 |  |                                | 7.54  |                                           | 5.00 |                          |   | 43
|                                 |  |                           |  |                                |       |                                           |      |                          |   |   
|Exercisable at February 10, 2010 |  | 636,988                   |  | $                              | 9.92  |                                           | 3.13 |                          | $ | 24
|                                 |  |                           |  |                                |       |                                           |      |                          |   |   

Restricted Stock

Restricted stock grants consist of the Companys common stock and generally vest after three years, with the exception of grants under the Nonemployee Director Stock Option Plan, which vest when
granted because they are granted in lieu of a cash payment. All restricted stock grants are cliff-vested. Restricted stock awards are valued at the average market price of the Companys common stock at the date of grant.

A summary of the Companys restricted stock activity during the two quarters ended February 10, 2010 is presented in the following table:



|                              |  |                       |  |                            |      |                                           |     
|----------------------------- |  | --------------------- |  | -------------------------- | ---- | ----------------------------------------- | ----
|                              |  | Restricted StockUnits |  | Weighted-AverageFair Value |      | Weighted-AverageRemainingContractual Term
|                              |  |                       |  | (Per share)                |      | (Years)                                  
|Unvested at August 26, 2009   |  | 80,155                |  | $                          | 9.62 |                                           | 1.06
|Granted                       |  | 16,000                |  |                            | 3.46 |                                           |    
|Vested                        |  | 20,969                |  |                            | 8.50 |                                           |    
|Forfeited                     |  | 10                    |  |                            | 9.61 |                                           |    
|                              |  |                       |  |                            |      |                                           |     
|Unvested at February 10, 2010 |  | 75,176                |  | $                          | 8.15 |                                           | 1.32
|                              |  |                       |  |                            |      |                                           |     



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##### Table of Contents

Note 11. Earnings Per Share

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding and unvested restricted stock for the reporting
period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted net income per share, the
basic weighted average number of shares is increased by the dilutive effect of stock options determined using the treasury stock method. Stock options with exercise prices exceeding current market prices that were excluded from the computation of
net income per share amounted to approximately 1,009,000 shares and 659,000 shares for the two quarters ended February 10, 2010 and February 11, 2009, respectively.

The components of basic and diluted net income per share are as follows:



|                                                                   |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  
|------------------------------------------------------------------ |  | -------------------------------- | ------ | - | ------------------ | - | ------ | ---------------- |  | - | ---------------- | - |  | - | ------ | -
|                                                                   |  | Quarter Ended                    |        |   | Two Quarters Ended |  
|                                                                   |  | February 10,2010                 |        |   | February 11,2009   |   |        | February 10,2010 |  |   | February 11,2009 |  
|                                                                   |  | (12 weeks)                       |        |   | (12 weeks)         |   |        | (24 weeks)       |  |   | (24 weeks)       |  
|                                                                   |  | (In thousands except share data) |       
|Numerator:                                                         |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  
|Income (loss) from continuing operations                           |  | $                                | 130    |   |                    | $ | 1,005  |                  |  | $ | (2,728           | ) |  | $ | (295   | )
|Loss from discontinued operations                                  |  |                                  | (552   | ) |                    |   | (859   | )                |  |   | (1,411           | ) |  |   | (1,751 | )
|                                                                   |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  
|Net income (loss)                                                  |  | $                                | (422   | ) |                    | $ | 146    |                  |  | $ | (4,139           | ) |  | $ | (2,046 | )
|                                                                   |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  
|Denominator:                                                       |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  
|Denominator for basic earnings per share  weighted-average shares |  |                                  | 28,121 |   |                    |   | 28,068 |                  |  |   | 28,117           |   |  |   | 28,073 |  
|Effect of potentially dilutive securities:                         |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  
|Employee and non-employee stock options                            |  |                                  | 6      |   |                    |   | 7      |                  |  |   |                 |   |  |   |       |  
|                                                                   |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  
|Denominator for earnings per share assuming dilution               |  |                                  | 28,127 |   |                    |   | 28,075 |                  |  |   | 28,117           |   |  |   | 28,073 |  
|                                                                   |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  
|Income (loss) per share from continuing operations:                |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  
|Basic                                                              |  | $                                |       |   |                    | $ | 0.04   |                  |  | $ | (0.10            | ) |  | $ | (0.01  | )
|Assuming dilution                                                  |  | $                                |       |   |                    | $ | 0.04   |                  |  | $ | (0.10            | ) |  | $ | (0.01  | )
|                                                                   |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  
|Loss per share from discontinued operations:                       |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  
|Basic                                                              |  | $                                | (0.02  | ) |                    | $ | (0.03  | )                |  | $ | (0.05            | ) |  | $ | (0.06  | )
|Assuming dilution                                                  |  | $                                | (0.02  | ) |                    | $ | (0.03  | )                |  | $ | (0.05            | ) |  | $ | (0.06  | )
|                                                                   |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  
|Net income (loss) per share:                                       |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  
|Basic                                                              |  | $                                | (0.02  | ) |                    | $ | 0.01   |                  |  | $ | (0.15            | ) |  | $ | (0.07  | )
|Assuming dilution                                                  |  | $                                | (0.02  | ) |                    | $ | 0.01   |                  |  | $ | (0.15            | ) |  | $ | (0.07  | )
|                                                                   |  |                                  |        |   |                    |   |        |                  |  |   |                  |   |  |   |        |  

Note 12. New Adopted Accounting Pronouncements

Recent Accounting Pronouncements

In January 2010, the FASB issued guidance
amending certain disclosure requirements regarding fair value measurements. The new guidance requires more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the
activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3. The guidance is effective for our fourth quarter beginning January 31, 2010 and its adoption is not expected to materially impact our consolidated
financial statements.

On August 27, 2009, the Company adopted the FASB Accounting Standards Codification (ASC) Topic 105,
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles  a replacement of FASB Statement No. 162 (ASC 105). ASC 105 provides for the FASB Accounting Standards
Codification (the Codification) to become the single source of authoritative, nongovernmental U.S. GAAP. The Codification did not change or alter GAAP but reorganizes the literature and changes the referencing of financial standards. The
Codification is effective for interim and annual periods ending after September 15, 2009.



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On August 27, 2009, the Company adopted ASC subtopic 260-10, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,which provides that unvested share-based payment awards that contain nonforfietable rights to dividends that are paid or unpaid are participating securities and
shall be included in the computation of earnings per share based on the two-class method. The two-class method is an earnings allocation method for computing earnings per share when an entitys capital structure includes either two or more
classes of common stock or common stock and participating securities. We applied the provision of this accounting guidance for all periods presented. The adoption did not have a material impact on the Companys financial statements.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Managements discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial
statements and footnotes for the period ended February 10, 2010 included in Item 1 of Part I of this Quarterly Report on Form 10-Q, and the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended
August 26, 2009.

The following presents an analysis of the results and financial condition of our continuing operations. Except where
indicated otherwise, the results of discontinued operations are excluded from this discussion.

Overview

As of February 10, 2010, we operated 96 restaurants, of which 95 are traditional cafeterias and one of which primarily serves seafood. These
establishments are located in close proximity to retail centers, business developments and residential areas in four states. Of the 96 restaurants, 68 are located on property that we own and 28 are on leased premises. As of February 10, 2010 we
operated 16 culinary contract service facilities. These facilities are located within healthcare and education settings in Texas and Louisiana. These facilities provide food service options to varied populations including in-hospital-room patient
meal service, retail food-court style restaurant dining, and coffee/snack kiosks.

Accounting Periods

Our fiscal year ends on the last Wednesday in August. As such, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting
for 364 days in the aggregate. Each of the first three quarters of each fiscal year consists of three four-week periods, while the fourth quarter normally consists of four four-week periods. Comparability between quarters may be affected by varying
lengths of the quarters, as well as the seasonality associated with the restaurant business.

Same-Store Sales

The restaurant business is highly competitive with respect to food quality, concept, location, price, and service, all of which may have an effect on
same-store sales. Our same-store sales calculation measures the relative performance of a certain group of restaurants. To qualify for inclusion in this group, a store must have been in operation for 18 consecutive accounting periods. Stores that
close on a permanent basis are removed from the group in the fiscal quarter when operations cease at the restaurant, but remain in the same-store group for previously reported fiscal quarters. Although management believes this approach leads to more
effective year-over-year comparisons, neither the time frame nor the exact practice may be similar to those used by other restaurant companies.

RESULTS OF OPERATIONS

For the Second Quarter and Year-to-Date Fiscal Year 2010 versus the Second Quarter and
Year-to-Date Fiscal Year 2009

Sales

Total sales decreased approximately $7.7 million, or 12.6%, in the quarter ended February 10, 2010 compared to the quarter ended February 11, 2009, consisting of a $7.7 million decrease in
restaurant sales and a less than $0.1 million decrease in culinary contract services. The $7.7 million decline in restaurant sales included the loss of sales from one unit that was in operation during the quarter ended February 11, 2009, but
closed subsequent to that date. We neither closed nor opened any restaurants during the quarter ended February 10, 2010 nor during the quarter ended February 11, 2009. On a same store basis, restaurant sales declined 12.5%.

Total sales decreased approximately $16.0 million, or 13.2% in the two quarters ended February 10, 2010, compared to the two quarters ended
February 11, 2009, consisting of a $16.2 million decrease in restaurant sales offset by a $0.2 million increase in culinary contract services revenue. The $16.2 million decline in restaurant sales included the loss of sales from four units that
were in operation during a portion of the two quarters ended February 11, 2009, but closed subsequent to that date. On a same store sales basis, restaurant sales declined 12.9%. Excluding the sales impact from Hurricane Ike at the beginning of
fiscal year 2009, we estimate same-store sales would have been down 13.0%.



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Cost of Food

Food costs decreased approximately $2.2 million, or 13.6%, in the quarter ended February 10, 2010 compared to the quarter ended February 11, 2009 due to lower sales volumes and lower commodity
costs of beef, seafood, and poultry, as well as lower freight costs on certain items. As a percentage of restaurant sales, food costs decreased 0.2%, to 27.4% in the quarter ended February 10, 2010 compared to 27.6% in the quarter ended
February 11, 2009, primarily due to lower commodity prices and operational improvements in food production and menu management, partially offset by lower menu prices and limited time offers.

Food costs decreased approximately $4.8 million, or 15.2%, in the two quarters ended February 10, 2010 compared to the two quarters ended
February 11, 2009, due to lower sales volumes. As a percentage of restaurant sales, food costs were 27.1% in the two quarters ended February 10, 2010 compared to 27.5% for the two quarters ended February 11, 2009, primarily due to
lower commodity prices and operational improvements in food production and menu management.

Payroll and Related Costs

Payroll and related costs decreased approximately $2.0 million in the quarter ended February 10, 2010 compared to the quarter
ended February 11, 2009. Payroll and related expenses decreased primarily due to increased efficiencies in crew scheduling, lower crew overtime, and lower management costs partially offset by higher average wages paid to our crew employees. As
a percentage of restaurant sales, these costs increased 1.2%, to 35.6%, in the quarter ended February 10, 2010 compared to 34.4% in the quarter ended February 11, 2009, due to reduced restaurant sales, partially offset by lower
workers compensation expenses. The change in workers compensation expense, as a percentage of restaurant sales, increased payroll and related costs by approximately 0.5% in the quarter ended February 11, 2009.

Payroll and related costs decreased approximately $4.4 million in the two quarters ended February 10, 2010 compared to the two quarters ended
February 11, 2009, due primarily to lower use of crew overtime and lower management costs and lower workers compensation costs, offset by higher average wages paid to our crew employees. As a percentage of restaurant sales, payroll and
related costs increased 1.3%, to 36.8%, in the two quarters ended February 10, 2010 compared to 35.5% in the two quarters ended February 11, 2009, primarily due to reduced restaurant sales. The change in the workers compensation
expense, as a percentage of restaurant sales, decreased payroll and related costs by approximately 0.1% in the two quarters ended February 10, 2010 compared to the two quarters ended February 11, 2009.

Other Operating Expenses

Other
operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, services, supplies and occupancy costs. Other operating expenses decreased by approximately $0.8 million, or 7.0%, in
the quarter ended February 10, 2010 compared to the quarter ended February 11, 2009. Other operating expenses decreased primarily due to 1) an approximate $0.8 million reduction in utility expense and 2) an approximate $0.3 million
reduction in supplies, services, and other operating expenses; 3) partially offset by an approximate $0.3 million increase in repairs and maintenance expense and other operating expenses. As a percentage of restaurant sales, other operating expenses
increased 1.3%, to 21.2%, in the quarter ended February 10, 2010 compared to 19.8% in the quarter ended February 11, 2009.

Other
operating expenses decreased by approximately $2.5 million, or 10.1%, in the two quarters ended February 10, 2010 compared to the two quarters ended February 11, 2009. As a percentage of restaurant sales, these costs increased 1.0%, to
22.8%, in the two quarters ended February 10, 2010 compared to 21.8% in the two quarters ended February 11, 2009. Other operating expenses decreased primarily due to 1) an approximate $1.2 million reduction in utility expenses; 2) a $1.0
million reduction due to the non-recurrence of Hurricane Ike-related expenses that were recorded in the two quarters ended February 11, 2009; and 3) an approximate $0.7 million reduction in supplies and other operating expenses; offset by 4) a
$0.4 million increase in marketing and advertising expenses.

Opening Costs

Opening costs include labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were
approximately $121,000 in the quarter ended February 10, 2010 compared to approximately $36,000 in the quarter ended February 11, 2009. The quarter ended February 10, 2010 and the quarter ended February 11, 2009 included carrying
costs of locations to be developed for future restaurant openings. The quarter ended February 10, 2010 also included an impairment charge for assets that will not be fully incorporated into the final design of the unit.

Opening costs were approximately $152,000 in the two quarters ended February 10, 2010 compared to approximately $95,000 in the two quarters ended
February 11, 2009. Opening costs in the two quarters ended February 10, 2010 and the two quarters ended February 11, 2009 included the carrying costs of locations to be developed for future restaurant openings. The two quarters ended
February 10, 2010 also included an impairment charge for assets that will not be fully incorporated into the final design of the unit.



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Cost of Culinary Contract Services

Cost of culinary contract services increased by approximately $0.1 million in the quarter ended February 10, 2010 compared to the quarter ended
February 11, 2009. Cost of culinary contract services includes the food, labor, and other direct operating expenses associated with culinary contract services. During the quarter ended February 10, 2010, culinary services operated sixteen
facilities compared to twelve for the quarter ended February 11, 2009.

Cost of culinary contract services increased by approximately
$0.4 million in the two quarters ended February 10, 2010 compared to the two quarters ended February 11, 2009. Cost of culinary contract services includes the food, labor, and other direct operating expenses associated with culinary
contract services.

Depreciation and Amortization

Depreciation and amortization expense decreased by approximately $0.1 million, or 3.9%, in the quarter ended February 10, 2010 compared to the quarter ended February 11, 2009 due to a slightly
lower depreciable asset base reflecting reduced capital spending, and certain assets reaching the end of their depreciable lives.

Depreciation and amortization expense decreased by approximately $0.3 million, or 3.7%, in the two quarters ended February 10, 2010 compared to the two quarters ended February 11, 2009 due to a slightly lower depreciable asset
base reflecting reduced capital spending, and certain assets reaching the end of their depreciable lives.

General and Administrative
Expenses

General and administrative expenses include corporate salaries and benefits-related costs, including restaurant area leaders,
share-based compensation, professional fees, travel and recruiting expenses and other office expenses. General and administrative expenses decreased by approximately $0.6 million, or 11.3%, in the quarter ended February 10, 2010 compared to the
quarter ended February 11, 2009. The decrease was due to a $0.8 million decrease in corporate salary and benefit expense as a result of reductions in corporate support headcount, partially offset by higher professional fees. As a percentage of
total sales, general and administrative expenses increased to 9.3% in the quarter ended February 10, 2010 compared to 9.2% in the quarter ended February 11, 2009.

General and administrative expenses decreased by approximately $1.3 million, or 10.7%, in the two quarters ended February 10, 2010 compared to the two quarters ended February 11, 2009. As a
percentage of total sales, general and administrative expenses increased to 9.9% in the two quarters ended February 10, 2010 compared to 9.7% in the two quarters ended February 11, 2009. The increase as a percentage of sales was mainly due
to lower sales significantly offset by a $1.3 million reduction in salary and benefit expense as a result of reductions in corporate support headcount.

Net (Gain) Loss on Disposition of Property and Equipment

The net gain on
disposition of property and equipment was approximately $1.0 million in the quarter ended February 10, 2010. The net gain primarily reflects the sale of an easement right. The net gain on disposition of property and equipment was approximately
$23,000 in the quarter ended February 11, 2009.

The net gain on disposition of property and equipment was approximately $0.7 million in
the two quarters ended February 10, 2010. The net gain included a gain on the sales of an easement right offset by normal asset retirement activity in our restaurant units. The net gain on disposition of property and equipment was approximately
$0.2 million in the two quarters ended February 11, 2009.

Interest Income

Interest income decreased by approximately $33,000 in the quarter ended February 10, 2010 compared to the quarter ended February 11, 2009,
primarily related to lower cash and cash equivalents.

Interest income decreased by approximately $143,000 in the two quarters ended
February 10, 2010 compared to the two quarters ended February 11, 2009, primarily related to lower cash and cash equivalents and lower interest rates.

Interest Expense

Interest expense in the quarter ended February 10, 2010
decreased approximately $12,000 compared to the interest expense in the quarter ended February 11, 2009.

Interest expense in the two
quarters ended February 10, 2010 increased approximately $30,000 in the two quarters ended February 11, 2010 compared to the two quarters ended February 11, 2009.

Gain on Sales and Redemptions (Impairment of Fair Market Value) of Investments

The
gain on sale and redemption of investment for the quarter ended February 10, 2010 was $20,000 compared to a provision for impairment of fair market value of investment of $131,000 for the quarter ended February 11, 2009. The impairment was
due to the



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continued illiquidity of the auction rate securities markets. The reduction in fair value of the investments was derived through valuation and is considered other-than-temporary. See
Liquidity and Capital Resources  Status of Long-Term Investments and Liquidity below for additional information regarding these investments.

The net provision for impairment charges for the two quarters ended February 10, 2010 was approximately $0.4 million. The net provision for impairment charges for the two quarters ended
February 11, 2009 was approximately $131,000. The net impairments were due to the continued illiquidity of the auction rate securities markets. The reduction in fair value of the investments was derived through valuation and is considered
other-than-temporary. See Liquidity and Capital Resources  Status of Long-Term Investments and Liquidity below for additional information regarding these investments.

Other Income, Net

Other income, net
consisted primarily of the following components: net rental property income and expenses relating to property for which we are the landlord; prepaid sales tax discounts earned through our participation in state tax prepayment programs; oil and gas
royalty income; and de-recognition of gift certificate liability resulting from the expiration of state statutes of limitation on gift certificate amounts. Other income, net in the quarter ended February 10, 2010 decreased approximately $18,000
compared to the quarter ended February 11, 2009. Other income, net in the two quarters ended February 10, 2010 decreased approximately $79,000 compared to the two quarters ended February 11, 2009.

Taxes

The income tax provision for
the quarter ended February 10, 2010 increased approximately $0.1 million compared to the quarter ended February 11, 2009.

The
income tax benefit for the two quarters ended February 10, 2010 reflects an effective tax rate of 20.5% of the pre-tax loss from continuing operations offset by a valuation allowance. The income tax benefit increased $0.6 million for the two
quarters ended February 10, 2010 compared to the two quarters ended February 11, 2009.

The income tax benefit recorded for the two
quarters ended February 11, 2009 reflects an effective tax rate of 24.2% of the results of continuing operations. There was no valuation allowance at the end of the quarter ended February 11, 2009.

Discontinued Operations

The loss
from discontinued operations was $0.6 million in the quarter ended February 10, 2010 compared to a $0.9 million loss in the quarter ended February 11, 2009. The loss in the quarter ended February 10, 2010 included a $0.4 million gain
related to the sale of closed properties.

The loss from discontinued operations was $1.4 million in the two quarters ended February 10,
2010 compared to a $1.8 million loss in the two quarters ended February 11, 2009. The loss in the two quarters ended February 11, 2010 included a $1.6 million gain related to the sale of closed properties.

LIQUIDITY AND CAPITAL RESOURCES

Cash
and Cash Equivalents

General.Our primary sources of short-term and long-term liquidity are cash flows from operations
and our revolving credit facility. Although the current macroeconomic conditions continue to adversely affect our cash flows from operations, we have made improvements in our controllable costs. We have reduced our discretionary capital expenditures
but plan to continue the level of capital and repair and maintenance expenditures necessary to keep our restaurants attractive and operating efficiently.

Our cash requirements consist principally of:



| |  | capital expenditures for culinary contract services development and construction, restaurant renovations and upgrades and information technology; and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | working capital primarily for our owned restaurants and culinary contract service agreements.
|- |  | ---------------------------------------------------------------------------------------------

Through improved cash flow from operations and proceeds from the sale of assets, as of February 10, 2010 we had no loans outstanding under our New
Credit Facility. Under the current terms of our New Credit Facility, capital expenditures are limited to a maximum amount in fiscal 2010 and to an amount based on our EBITDA, as defined in the credit agreement governing our New Credit Facility, in
subsequent years. The amount of borrowings are also limited based on our EBITDA. However, we do not expect these limits to have a material impact on our operations. Based upon our level of past and projected capital requirements, we expect that
proceeds from the sale of assets and cash flows from operations, combined with other financing alternatives in place or available, will be sufficient to meet our capital expenditures and working capital requirements during the next twelve months.



20



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As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and
inventories, and our vendors grant trade credit for purchases such as food and supplies. However, high levels of accounts receivable are typical for culinary contract services.

Cash and cash equivalents decreased to $0.8 million from $0.9 million at the beginning of the fiscal year. This decrease is primarily due to an increase in cash used in operations activities partially
offset by cash provided by investing activities. We generally reinvest available cash flows from operations to develop new restaurants, enhance existing restaurants and to support culinary contract services.

The following table summarizes our cash flows from operating, investing and financing activities:



|                                                 |  |                    |        |   |                  |   |        |  
|------------------------------------------------ |  | ------------------ | ------ | - | ---------------- | - | ------ | -
|                                                 |  | Two Quarters ended |       
|                                                 |  | February 10,2010   |        |   | February 11,2009 |  
|                                                 |  | (24 weeks)         |        |   | (24 weeks)       |  
|                                                 |  | (In thousands)     |       
|Total cash provided by (used in):                |  |                    |        |   |                  |   |        |  
|Operating activities                             |  | $                  | (5,663 | ) |                  | $ | (1,047 | )
|Investing activities                             |  |                    | 5,640  |   |                  |   | (7,158 | )
|Financing activities                             |  |                    | (105   | ) |                  |   | 6,000  |  
|                                                 |  |                    |        |   |                  |   |        |  
|Increase (decrease) in cash and cash equivalents |  | $                  | (128   | ) |                  | $ | (2,205 | )
|                                                 |  |                    |        |   |                  |   |        |  

Operating Activities. In the two quarters ended February 10, 2010, operating cash flow decreased $4.6
million compared to the two quarters ended February 11, 2009, primarily due to reduced sales generating lower operating income.

Investing Activities. Cash flows provided by investing activities were $5.6 million in the two quarters ended February 10, 2010 compared to $7.2 million in cash used in the two quarters ended February 11, 2009,
primarily due to proceeds received on the sale of properties and long term investments as well as decreased purchases of property and equipment. Our capital expenditure program includes, among other things, restaurant remodeling, information
technology enhancements and Culinary Contract Service locations. We used $1.5 million for purchases of property and equipment in the two quarters ended February 10, 2010 compared to $8.8 million in the two quarters ended February 11, 2009.
We expect to spend approximately $4.5 million to $10.0 million on capital expenditures in fiscal year 2010.

Financing
Activities. Cash provided by (used in) financing activities decreased from a $6.0 million source of cash to a $0.1 million use of cash, compared to the two quarters ended February 11, 2009, due primarily to the pay down of borrowings
under our Amended Facility (as described below under Debt  First Amendment to 2007 Revolving Credit Facility) and our New Credit Facility that replaced the Amended Facility. Net borrowings under our New Credit Facility during the
two quarters ended February 10, 2010 was zero.

Status of Long-Term Investments and Liquidity

At February 10, 2010, we held $7.1 million, par value ($5.2 million, net book value) in auction rate municipal bonds as long-term investments. These
securities are long-term bonds with underlying maturities in years 2022 through 2042 but have historically had short-term features intended for the investors liquidity. Prior to the collapse of the auction rate securities market in February
2008, these bonds were purchased or sold through a Dutch-auction process in short-term intervals of 7, 28 or 35 days, whereby the interest rate on the security is reset. The prevailing market auction failures resulted in the long-term investments
classification and an other-than-temporary impairment net loss of $1.0 million in fiscal year 2009 and $0.4 million in the two quarters ended February 10, 2010. Since, our securities estimate of fair market value increased at the quarter ended
February 10, 2010, we recorded a $0.1 million unrealized gain. The unrealized gain was recorded in other comprehensive income on the balance sheet.

Given our current cash position, expected future cash flow from operations and our available borrowing capacity under our revolving credit facility, we believe the current and near term illiquidity of the
auction rate municipal bonds will not adversely affect managements ability to achieve its operating goals.

Status of Trade
Accounts and Other Receivables, Net

We monitor our receivables aging and record provisions for uncollectability as appropriate. Credit
terms of accounts receivable associated with our culinary contract service business vary from 30 to 60 days based on contract terms.



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Working Capital

We had a working capital deficit of $15.3 million as of February 10, 2010, compared to a working capital deficit of $21.1 million as of August 26, 2009. The reduction of the deficit is primarily
due to a decrease in accounts payable of $3.2 million, a decrease in accrued payroll of $1.0 million, and a decrease in accrued property taxes payable of $2.0 million. We expect to meet our working capital requirements through cash flows from
operations, sales of properties and availability under our New Credit Facility.

Capital Expenditures

Capital expenditures consist of purchases of real estate for future restaurant sites, new units construction, purchases of new and replacement restaurant
furniture and equipment, and ongoing remodeling programs. Capital expenditures for the two quarters ended February 10, 2010 were approximately $1.5 million, and related to maintaining our investment in existing operating units. We expect to be
able to fund all capital expenditures in fiscal year 2010 using cash flows from operations and availability under our New Credit Facility. We expect to spend approximately $4.5 million to $10.0 million on capital expenditures in fiscal year 2010.

DEBT

2009 Revolving
Credit Facility

On November 9, 2009, we entered into a revolving credit facility (the New Credit Facility), which
amends and restates the 2007 Revolving Credit Facility, as amended, and reflects the following changes to the Amended Facility:



| |  | Reduced the aggregate amount of the lenders commitments from $30.0 million to $20.0 million. The amounts available under the New Credit Facility
may still be increased by up to $10.0 million, subject to certain terms and conditions, for a maximum total facility size of $30.0 million.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Changed the maturity date to June 30, 2011.
|- |  | -------------------------------------------



| |  | Required security interest in selected real estate and other Company assets.
|- |  | ----------------------------------------------------------------------------



| |  | Increased interest rate margins from a range of 1.75% to 2.50%, subject to an interest rate floor of 3.50%, to a range of 2.75% to 3.50%, subject to a
4.00% interest rate floor. The applicable spread continues to be dependent upon the ratio of the Companys debt to EBITDA at the most recent determination date, as defined in the credit agreement, as amended.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Modified certain financial covenants for the fiscal year 2010, including the addition of minimum fiscal year 2010 quarterly EBITDA requirements, and
reduced restaurant capital expenditures in fiscal year 2010, as defined.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company incurred approximately $0.4 million in
related fees and expenses to be incurred associated with the closing of the New Credit Facility. Management recognized $54,000 in unamortized pre-paid financing fees outstanding in fiscal year 2010 as a result of the reduction in the facility size
and maturity.

The New Credit Facility contains customary covenants and restrictions on our ability to engage in certain activities, asset
sales, letters of credit, and acquisitions, and contains customary events of default. As of February 10, 2010, we were in compliance with all covenants.

The New Credit Facility was amended on January 31, 2010 to extend the time permitted for us to finalize a portion of our real estate related financing obligations and to clarify covenant language
related to the sale or lease of our assets.

As of February 10, 2010, we had zero outstanding in loans and $1.6 million committed under
letters of credit, which were issued as security for the payment of insurance obligations.

At February 10, 2010 $18.4 million was
available under the New Credit Facility.

First Amendment to 2007 Revolving Credit Facility

On March 18, 2009, we entered into Amendment No. 1 to the 2007 Revolving Credit Facility (the Amended Facility), which amended the 2007
Revolving Credit Facility as follows:



| |  | Reduced the aggregate amount of the lenders commitments from $50.0 million to $30.0 million. The amounts available under the Amended Facility may
still be increased by up to $70.0 million, subject to certain terms and conditions, for a maximum total facility size of $100 million.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Modified the restriction on capital expenditures in fiscal years 2009 through June 30, 2012. In the original 2007 Revolving Credit Facility,
capital expenditures were limited to the extent of our annual four-quarter rolling EBITDA plus 75% of the unused availability for capital expenditures from the immediately preceding fiscal year. We revised the level of spending allowed for capital
expenditures by creating a floor of $20.0 million. The amount of agreed capital expenditures was the greater of (1) $20.0 million in each fiscal year, or (2) the amount of 100% of the preceding fiscal years EBITDA; plus, in
either case, all of the unused availability for capital expenditures from the immediately preceding fiscal year.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Modified the interest rate margins to a range of 1.75% to 2.50% per annum. The applicable spread under each option continues to be dependent upon
the ratio of our debt to EBITDA at the most recent determination date.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Amended the quarterly commitment fee, which is dependent upon the ratio of our debt to EBITDA, to a range of 0.30% to 0.45% per annum. We will
also continue to pay quarterly fees with respect to any letters of credit issued and outstanding. In addition, we were obligated to pay the lenders a one-time fee in connection with the closing of the Amended Facility.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In the original 2007 Revolving Credit Facility, we were permitted to invest in any auction rate securities rated Aaa by Moodys or AAA by S&P.
Because the ratings of our auction rate securities have dropped below these thresholds, the Amended Facility limited these types of investments to a specific list of auction rate securities which we hold.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Modified certain financial covenants, including: (1) the Interest Coverage Ratio from not less than 2.50 to not less than 2.00, (2) the
debt-to-EBITDA ratio from not greater than 3.00 to not greater than 2.75. The Amended Facility also amends the Interest Coverage Ratio calculation to include one-fifth of the principal balance of the loans in the denominator.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2007 Revolving Credit Facility

On July 13, 2007, we entered into a $50.0 million unsecured Revolving Credit Facility (the 2007 Revolving Credit Facility) with Wells Fargo Bank, National Association, as Administrative
Agent, and Amegy Bank, National Association, as Syndication Agent. The 2007 Revolving Credit Facility may, subject to certain terms and conditions, be increased once by an amount up to $50.0 million for a maximum total facility size of $100.0
million. The 2007 Revolving Credit Facility allowed for up to $15.0 million of the available credit to be extended in the form of letters of credit. All amounts owed by us under the 2007 Revolving Credit Facility were guaranteed by our subsidiaries
and must be repaid in full upon the maturity date on June 30, 2012. We amended the 2007 Revolving Credit Facility on March 18, 2009, as described above under First Amendment to 2007 Revolving Credit Facility.

At any time throughout the term of the facility, we had the option to elect one of two bases of interest rates. One interest rate option was the greater of
(a) the Federal Funds Effective Rate plus 0.50%, or (b) prime, plus, in either case, an applicable spread that ranges from zero to 0.50% per annum. The other interest rate option was the London InterBank Offered Rate plus a spread
that ranges from 0.75% to 2.00% per annum. The applicable spread under each option was dependent upon the ratio of our debt to EBITDA at the most recent determination date.

We paid a quarterly commitment fee based on the unused available balance of the 2007 Revolving Credit Facility, which was also dependent upon the ratio of our debt to EBITDA, ranging from 0.20% to
0.30% per annum. We also paid quarterly fees with respect to any letters of credit issued and outstanding. In addition, we paid the lenders a one-time fee in connection with the closing of the 2007 Revolving Credit Facility.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Consolidated Financial Statements included in Item 1 of Part 1 of this report were prepared in conformity with U.S. generally accepted accounting principles. Preparation of the financial statements requires us to make judgments,
estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and expenses during the reporting periods. Due to the significant, subjective and complex judgments and estimates used when
preparing our consolidated financial statements, management regularly reviews these assumptions and estimates with the Finance and Audit Committee of our Board of Directors. Management believes the following are critical accounting policies used in
the preparation of these financial statements.

Income Taxes

We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as
operating loss and tax credit carrybacks and carryforwards. We periodically review the recoverability of tax assets recorded on the balance sheet and provide valuation allowances as management deems necessary.

Management makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates of tax
liability. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions as well as by the Internal Revenue Service. In managements opinion, adequate provisions for income taxes have been made for
all years. We regularly assess the potential outcomes of examinations in determining the adequacy of our provision for income taxes and our income tax liabilities. We believe that we have adequately provided for any reasonable and foreseeable
outcome related to uncertain tax matters.



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Impairment of Long-Lived Assets

We periodically evaluate long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We estimate future cash flows expected to
result from the use and possible disposition of the asset and will recognize an impairment loss when the sum of the undiscounted estimated future cash flows is less than the carrying amounts of such assets. The estimates of future cash flows, based
on reasonable and supportable assumptions and projections, require managements subjective judgments. The span of time for which future cash flows are estimated is often lengthy, which increases the sensitivity to assumptions made. Depending on
the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. We consider the likelihood of possible outcomes in determining the best estimate of future
cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by either discounted cash flows or appraisals.

Investments

Investments include available-for-sale securities, classified as
long-term and reported at fair value. Securities available-for-sale consist of auction rate securities. Declines in fair value of available-for-sale securities are analyzed to determine if the decline is temporary or
other-than-temporary. Temporary unrealized gains and losses on available-for-sale securities are excluded from earnings and reported in shareholders equity. Otherthan-temporary declines reduce earnings. Any increases in
other-than-temporary declines in fair value will not be realized until the securities are sold.

Property Held for Sale

We also periodically review long-lived assets against our plans to retain or ultimately dispose of properties. Property is moved into
property held for sale when the restaurant is closed and the property held for sale is actively marketed. Property held for sale is recorded at amounts not in excess of what management currently expects to receive upon sale, less costs of disposal.
We routinely monitor the estimated value of property held for sale and record adjustments to these values as required. We periodically measure and analyze our estimates against third-party appraisals.

Insurance and Claims

We self-insure
a significant portion of risks and associated liabilities under our employee injury, workers compensation and general liability programs. We maintain insurance coverage with third party carriers to limit our per-occurrence claim exposure. We
have recorded accrued liabilities for self-insurance based upon analysis of historical data and actuarial estimates, and we review these amounts on a quarterly basis to ensure that the liability is appropriate.

The significant assumptions made by the actuary to estimate self-insurance reserves, including incurred but not reported claims, are as follows:
(1) historical patterns of loss development will continue in the future as they have in the past (Loss Development Method), (2) historical trend patterns and loss cost levels will continue in the future as they have in the past
(Bornhuetter-Ferguson Method), and (3) historical claim counts and exposures are used to calculate historical frequency rates and average claim costs are analyzed to get a projected severity (Frequency and Severity Method). The results of these
methods are blended by the actuary to provide the reserves estimates. The third party actuary utilizes methods and assumptions that are in accordance with generally accepted actuarial practices and we believe the conclusions reached are reasonable.

Actual workers compensation, employee injury and general liability claims expense may differ from estimated loss provisions. The
ultimate level of claims under the in-house safety program are not known, and declines in incidence of claims as well as claims costs experiences or reductions in reserve requirements under the program may not continue in future periods.

Share-Based Compensation

Share-based compensation is estimated for equity awards at fair value at the grant date. We determine the fair value of equity awards using the Black Scholes model which requires the use of certain assumptions. The assumptions include the
risk-free interest rate based on the United States Treasury yield curve at the time of the grant, expected dividend yield, expected volatility, expected forfeitures and expected life of the award.

INFLATION

Our policy is to maintain stable
menu prices without regard to seasonal variations in food costs. General increases in cost of food, wages, supplies, transportation and services may require us to increase our menu prices from time to time. To the extent prevailing market conditions
allow, we intend to adjust menu prices to maintain profit margins.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements that are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this Form 10-Q, other than statements of historical facts, are forward-looking statements for
purposes of these provisions, including any statements regarding:



| |  | future operating results;
|- |  | -------------------------



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| |  | future capital expenditures, including expected reductions in capital expenditures;
|- |  | -----------------------------------------------------------------------------------



| |  | future debt, including liquidity and the sources and availability of funds related to debt;
|- |  | -------------------------------------------------------------------------------------------



| |  | projections regarding the financial performance of our new prototype restaurants;
|- |  | ---------------------------------------------------------------------------------



| |  | plans for expansion of our business;
|- |  | ------------------------------------



| |  | plans for expansion of our culinary contract services business;
|- |  | ---------------------------------------------------------------



| |  | scheduled openings of new units;
|- |  | --------------------------------



| |  | closing existing units;
|- |  | -----------------------



| |  | effectiveness of managements Cash Flow Improvement and Capital Redeployment Plan;
|- |  | ----------------------------------------------------------------------------------



| |  | future sales of assets and the gains or losses that may be recognized as a result of any such sale;
|- |  | ---------------------------------------------------------------------------------------------------



| |  | plans relating to our short-term and long-term investments; and
|- |  | ---------------------------------------------------------------



| |  | continued compliance with the terms of our existing revolving credit facility.
|- |  | ------------------------------------------------------------------------------

In some cases, investors can identify these statements by forward-looking words such as anticipate, believe, could,
estimate, expect, intend, outlook, may, should, will, and would or similar words. Forward-looking statements are based on certain assumptions and
analyses made by management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors we believe are relevant. Although management believes that their assumptions are
reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of our control. The following factors, as well as the factors set forth in Item 1A of our
Annual Report on Form 10-K for the fiscal year ended August 26, 2009 and any other cautionary language in this Quarterly Report on Form 10-Q, provide examples of risks, uncertainties, and events that may cause our financial and operational
results to differ materially from the expectations described in our forward-looking statements:



| |  | general business and economic conditions;
|- |  | -----------------------------------------



| |  | the impact of competition;
|- |  | --------------------------



| |  | our operating initiatives, changes in promotional, couponing and advertising strategies and the success of managements business plans;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | fluctuations in the costs of commodities, including beef, poultry, seafood, dairy, cheese, oils and produce;
|- |  | ------------------------------------------------------------------------------------------------------------



| |  | ability to successfully increase sales of existing restaurants to achieve profitability;
|- |  | ----------------------------------------------------------------------------------------



| |  | ability to raise menu prices, and customers acceptance of changes in menu items;
|- |  | --------------------------------------------------------------------------------



| |  | increases in utility costs, including the costs of natural gas and other energy supplies;
|- |  | -----------------------------------------------------------------------------------------



| |  | changes in the availability and cost of labor, including the ability to attract qualified managers and team members;
|- |  | --------------------------------------------------------------------------------------------------------------------



| |  | the effectiveness of our marketing activities;
|- |  | ----------------------------------------------



| |  | the seasonality of the business;
|- |  | --------------------------------



| |  | collectability of accounts receivable;
|- |  | --------------------------------------



| |  | changes in governmental regulations, including changes in minimum wages and health care benefit regulation;
|- |  | -----------------------------------------------------------------------------------------------------------



| |  | the effects of inflation and changes in our customers disposable income, spending trends and habits;
|- |  | -----------------------------------------------------------------------------------------------------



| |  | the ability to realize property values;
|- |  | ---------------------------------------



| |  | the availability and cost of credit;
|- |  | ------------------------------------



| |  | weather conditions in the regions in which our restaurants operate;
|- |  | -------------------------------------------------------------------



| |  | costs relating to legal proceedings;
|- |  | ------------------------------------



| |  | impact of adoption of new accounting standards;
|- |  | -----------------------------------------------



| |  | effects of actual or threatened future terrorist attacks in the United States;
|- |  | ------------------------------------------------------------------------------



| |  | unfavorable publicity relating to operations, including publicity concerning food quality, illness or other health concerns or labor relations; and
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the continued service of key management personnel.
|- |  | --------------------------------------------------



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##### Table of Contents

Each forward-looking statement speaks only as of the date of this Form 10-Q, and we undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should be aware that the occurrence of the events described above and elsewhere in this Form 10-Q could have
material adverse effect on our business, results of operations, cash flows and financial condition.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

We are exposed to market risk from changes in interest rates affecting our variable-rate debt. During the quarter ended February 10, 2010, the total amount of debt subject to interest rate
fluctuations outstanding under our New Credit Facility was zero. Assuming an average debt balance of $5.0 million, a 1.0% increase in prevailing interest rates above our 4.0% interest rate floor per our New Credit Facility, effective
November 9, 2009, would increase our annual interest expense by $50,000.

Although we are not currently using interest rate swaps, we
have previously used and may in the future use these instruments to manage cash flow risk on a portion of our variable-rate debt.

Many
ingredients in the products sold in our restaurants are commodities, subject to unpredictable price fluctuations. We attempt to minimize price volatility by negotiating fixed price contracts for the supply of key ingredients and in some cases by
passing increased commodity costs through to the customer by adjusting menu prices or menu offerings. Our ingredients are available from multiple suppliers so we are not dependent on a single vendor for our ingredients.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation
of Disclosure Controls and Procedures

Management, under the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of
February 10, 2010. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of February 10, 2010, our disclosure controls and procedures were effective in providing reasonable assurance that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended February 10, 2010 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.



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##### Table of Contents

Part II - OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

There have been no
material changes to our legal proceedings as disclosed in Legal Proceedings in Item 3 of Part I of our Annual Report on Form 10-K for the fiscal year ended August 26, 2009.



|Item 5. | Other Information
|------- | -----------------

The Companys
Proxy Statement dated December 3, 2009 for the Annual Meeting of Shareholders held on January 22, 2010, as filed with the Securities and Exchange Commission on December 4, 2009, is incorporated herein by reference.



|(a) | The Annual Meeting of Shareholders of the Company was held on January 22, 2010.
|--- | -------------------------------------------------------------------------------



|(b) | Each of Jill Griffin and Christopher J. Pappas, were elected as a director to hold office until the 2011 Annual Meeting of Shareholders or until his or her successor is
elected and qualified.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, Judith Craven, Arthur Emerson, J.S.B. Jenkins, Frank Markantonis, Joe C.
McKinney, Gasper Mir III and Harris J. Pappas continue to serve as directors.

Mr. Jim Woliver retired from the Board of
Directors as of January 22, 2010.



|(c) | The following matters were voted upon at the Annual Meeting:
|--- | ------------------------------------------------------------

Nominees for election as director to hold office until the 2011 Annual Meeting of Shareholders or until his or her successor is elected and qualified.



|                      |  |            |  |                           
|--------------------- |  | ---------- |  | --------------------------
|                      |  | Votes For  |  | Votes Abstainedor Withheld
|Jill Griffin          |  | 11,018,903 |  | 580,398                   
|Christopher J. Pappas |  | 11,008,314 |  | 590,987                   

Ratification of
appointment of Grant Thornton LLP as independent auditor for the 2010 fiscal year:



|                |  |           
|--------------- |  | ----------
|Votes For       |  | 24,741,255
|Votes Against   |  | 115,378   
|Votes Abstained |  | 110,605   

Broker Non-Votes are not tabulated
on routine proposals.



|Item 6. | Exhibits
|------- | --------



|     |  |                                                                                                                                                                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1  |  | Credit Agreement, as amended through January 31, 2010 among Lubys, Inc., the lenders from time to time party thereto, Wells Fargo Bank, National Association, as
Administrative Agent, and Amegy Bank National Association, as Syndication Agent.
|     | 
|31.1 |  | Rule 13a-14(a)/15d-14(a) certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                              
|     | 
|31.2 |  | Rule 13a-14(a)/15d-14(a) certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                              
|     | 
|32.1 |  | Section 1350 certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                          
|     | 
|32.2 |  | Section 1350 certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                          



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                     |  |                           |  |                                                  
|-------------------- |  | ------------------------- |  | -------------------------------------------------
|                     |  | LUBYS, INC. (Registrant)
|                     |  |                          
|Date: March 19, 2010 |  | By:                       |  | /s/ Christopher J. Pappas                        
|                     |  |                           |  | Christopher J. Pappas                            
|                     |  |                           |  | President and Chief Executive Officer            
|                     |  |                          
|Date: March 19, 2010 |  | By:                       |  | /s/ K. Scott Gray                                
|                     |  |                           |  | K. Scott Gray                                    
|                     |  |                           |  | Senior Vice President and Chief Financial Officer



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##### Table of Contents

EXHIBIT INDEX



|     |  |                                                                                                                                                                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1  |  | Credit Agreement, as amended through January 31, 2010 among Lubys, Inc., the lenders from time to time party thereto, Wells Fargo Bank, National Association, as
Administrative Agent, and Amegy Bank National Association, as Syndication Agent.
|     | 
|31.1 |  | Rule 13a-14(a)/15d-14(a) certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                              
|     | 
|31.2 |  | Rule 13a-14(a)/15d-14(a) certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                              
|     | 
|32.1 |  | Section 1350 certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                          
|     | 
|32.2 |  | Section 1350 certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                          



29