# UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 10-Q

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

For the quarterly period ended April 5, 2006

Commission file number: 333-116897

# BUFFETS HOLDINGS, INC.

---





|                                |  |                    
|------------------------------- |  | -------------------
|
|
|
|(State or other jurisdiction of |  | (IRS Employer      
|incorporation or organization)  |  | Identification No.)





|                                         |           
|---------------------------------------- | ----------
|
|
|
|
|                                        
|
|(Address of principal executive offices) | (Zip Code)

Registrants telephone number, including area code: (651) 994-8608

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 checkmark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.LARGE ACCELERATED FILER [  ]
ACCELERATED FILER [  ]
NON-ACCELERATED FILER [X]

Indicate by checkmark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).YES [   ] NO [X]

The number of shares of Buffets Holdings, Inc.s common stock outstanding as of May 18, 2006 was 3,104,510.

---



# BUFFETS HOLDINGS, INC.TABLE OF CONTENTS

|                                 |  | 
|-------------------------------- |  | 
|Part I.    Financial Information |  | 
|                                 |  | 
|Item 1.                          |  | 
|                                 |  | 
|                                 |  | 
|                                 |  | 
|                                 |  | 
|                                 |  | 
|                                 |  | 
|                                 |  | 
|                                 |  | 
|                                 |  | 
|Item 2.                          |  | 
|                                 |  | 
|                                 |  | 
|Item 3.                          |  | 
|                                 |  | 
|Item 4.                          |  | 
|                                 |  | 
|Part II.  Other Information      |  | 
|                                 |  | 
|Item 1.                          |  | 
|                                 |  | 
|Item 5.                          |  | 
|                                 |  | 
|Item 6.                          |  | 

2



# PART I. FINANCIAL
INFORMATION

# ITEM 1. FINANCIAL STATEMENTS

# BUFFETS HOLDINGS, INC.
AND SUBSIDIARIES

# CONDENSED CONSOLIDATED BALANCE
SHEETS

|                                                                     | June 29, | April 5,
|-------------------------------------------------------------------- | -------- | --------
|
|
|
|ASSETS                                                               |          |         
|CURRENT ASSETS:                                                      |          |         
|Cash and cash equivalents                                            |          |         
|Receivables                                                          |          |         
|Inventories                                                          |          |         
|Prepaid expenses and other current assets                            |          |         
|Deferred income taxes                                                |          |         
|                                                                     |          |         
|Total current assets                                                 |          |         
|PROPERTY AND EQUIPMENT, net                                          |          |         
|GOODWILL                                                             |          |         
|DEFERRED INCOME TAXES                                                |          |         
|OTHER ASSETS, net                                                    |          |         
|                                                                     |          |         
|Total assets                                                         |          |         
|                                                                     |          |         
|LIABILITIES AND SHAREHOLDERS' DEFICIT                                |          |         
|CURRENT LIABILITIES:                                                 |          |         
|Accounts payable                                                     |          |         
|Accrued liabilities                                                  |          |         
|Income taxes payable                                                 |          |         
|Current maturities of long-term debt                                 |          |         
|                                                                     |          |         
|Total current liabilities                                            |          |         
|LONG-TERM DEBT, net of current maturities                            |          |         
|DEFERRED LEASE OBLIGATIONS                                           |          |         
|OTHER LONG-TERM LIABILITIES                                          |          |         
|                                                                     |          |         
|Total liabilities                                                    |          |         
|SHAREHOLDERS' DEFICIT:                                               |          |         
|Preferred stock; $.01 par value, 1,100,000 shares authorized; none   |          |         
|issued and outstanding as of June 29, 2005 and April 5, 2006         |          |         
|Common stock; $.01 par value, 3,600,000 shares authorized; 3,175,135 |          |         
|shares issued and outstanding as of June 29, 2005 and 3,104,510 as   |          |         
|of April 5, 2006                                                     |          |         
|Additional paid in capital                                           |          |         
|Accumulated deficit                                                  |          |         
|                                                                     |          |         
|Total shareholders' deficit                                          |          |         
|                                                                     |          |         
|Total liabilities and shareholders' deficit                          |          |         
|                                                                     |          |         

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

3



# BUFFETS HOLDINGS, INC.
AND SUBSIDIARIES

# CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS

|                                     | Sixteen Weeks Ended | Forty Weeks Ended
|------------------------------------ | ------------------- | -----------------
|
|
|
|
|RESTAURANT SALES                     |                     |                  
|RESTAURANT COSTS:                    |                     |                  
|Food                                 |                     |                  
|Labor                                |                     |                  
|Direct and occupancy                 |                     |                  
|                                     |                     |                  
|Total restaurant costs               |                     |                  
|ADVERTISING EXPENSES                 |                     |                  
|GENERAL AND ADMINISTRATIVE EXPENSES  |                     |                  
|SHAREHOLDERS' RIGHTS REPURCHASE      |                     |                  
|CLOSED RESTAURANT COSTS              |                     |                  
|IMPAIRMENT OF ASSETS                 |                     |                  
|                                     |                     |                  
|OPERATING INCOME                     |                     |                  
|INTEREST EXPENSE                     |                     |                  
|INTEREST INCOME                      |                     |                  
|LOSS RELATED TO REFINANCING          |                     |                  
|LOSS RELATED TO EARLY EXTINGUISHMENT |                     |                  
|OF DEBT                              |                     |                  
|OTHER INCOME                         |                     |                  
|                                     |                     |                  
|LOSS BEFORE INCOME TAXES             |                     |                  
|INCOME TAX BENEFIT                   |                     |                  
|                                     |                     |                  
|Net loss                             |                     |                  
|                                     |                     |                  

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

4



# BUFFETS HOLDINGS, INC.
AND SUBSIDIARIES

# CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS

|                                                                | Forty Weeks Ended
|--------------------------------------------------------------- | -----------------
|
|
|
|
|OPERATING ACTIVITIES:                                           |                  
|Net loss                                                        |                  
|Adjustments to reconcile net loss to net cash provided by       |                  
|operating activities:                                           |                  
|Depreciation and amortization                                   |                  
|Amortization of debt issuance cost                              |                  
|Accretion of original issue discount                            |                  
|Loss related to early extinguishment of debt                    |                  
|Deferred income taxes                                           |                  
|Loss on disposal of assets                                      |                  
|Impairment of assets                                            |                  
|Changes in assets and liabilities:                              |                  
|Receivables                                                     |                  
|Inventories                                                     |                  
|Prepaid expenses and other current assets                       |                  
|Accounts payable                                                |                  
|Accrued and other liabilities                                   |                  
|Income taxes payable                                            |                  
|                                                                |                  
|Net cash provided by operating activities                       |                  
|                                                                |                  
|INVESTING ACTIVITIES:                                           |                  
|Purchase of property and equipment                              |                  
|(Purchase) sale of other assets                                 |                  
|                                                                |                  
|Net cash used in investing activities                           |                  
|                                                                |                  
|FINANCING ACTIVITIES:                                           |                  
|Repayment of debt                                               |                  
|Issuance of stock                                               |                  
|Repurchase of stock                                             |                  
|Reduction of restricted cash available for early extinguishment |                  
|of debt                                                         |                  
|Use of restricted cash for early extinguishment of debt         |                  
|Debt issuance costs                                             |                  
|                                                                |                  
|Net cash used in financing activities                           |                  
|                                                                |                  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                         |                  
|CASH AND CASH EQUIVALENTS, beginning of period                  |                  
|                                                                |                  
|CASH AND CASH EQUIVALENTS, end of period                        |                  
|                                                                |                  
|SUPPLEMENTAL CASH FLOW INFORMATION:                             |                  
|Cash paid during the period for--                               |                  
|Interest (net of capitalized interest of $371 and $243)         |                  
|                                                                |                  
|Income taxes                                                    |                  
|                                                                |                  

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

5



# BUFFETS HOLDINGS, INC.
AND SUBSIDIARIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

# 1. Nature of Organization

Description of Business

Buffets
Holdings, Inc., a Delaware corporation, acquired 100 percent of the common stock of
Buffets, Inc. and its subsidiaries in a buyout from public shareholders on October 2, 2000
(the Acquisition). Buffets Holdings, Inc. and subsidiaries (Buffets
Holdings) and Buffets, Inc. and subsidiaries are collectively referred to as the
Company. Buffets, Inc., a Minnesota corporation, is the principal operating subsidiary of
Buffets Holdings.

The
Company owns and operates a chain of restaurants in the United States under the names of
Old Country Buffet(R), Country Buffet(R), HomeTown Buffet(R), Grannys Buffet(SM),
and Tahoe Joes Famous Steakhouse(R). The Company, operating principally in the
buffet/grill segment, owned and operated 338 restaurants (329 family buffet restaurants)
and franchised 18 restaurants operating as of April 5, 2006.

Interim Financial
Information

In
the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain all necessary adjustments, which are of a normal recurring nature, to
present fairly the Companys financial position and the results of its operations and
cash flows for the periods presented, in conformity with accounting principles generally
accepted in the United States of America and with the regulations of the Securities and
Exchange Commission (SEC). Certain information and footnote disclosures,
normally included in accordance with accounting principles generally accepted in the
United States of America, have been condensed or omitted pursuant to SEC rules and
regulations. Operating results for the forty weeks ended April 5, 2006 are not necessarily
indicative of results that may be achieved for the fiscal year ending June 28, 2006.

The
balance sheet as of June 29, 2005 has been derived from the audited consolidated financial
statements at that date but does not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for complete
financial statements.

These
unaudited condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the related notes contained in the
Companys Form 10-K filed with the Securities and Exchange Commission on September
23, 2005 and with Managements Discussion and Analysis of Financial Condition and
Results of Operations appearing on pages 22 through 31 of this report.

Principles of
Consolidation

The
condensed consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany transactions have been eliminated in the
consolidation.

Fiscal Year

The
Companys fiscal year is comprised of fifty-two or fifty-three weeks divided into
four fiscal quarters of twelve, twelve, sixteen, and twelve or thirteen weeks.

Reclassifications

Certain
amounts shown in the prior-period consolidated financial statements have been reclassified
to conform with the current period condensed consolidated financial statement
presentation. These reclassifications had no effect on net loss or shareholders
deficit as previously presented.

6



# 2. Summary of Significant
Accounting Policies

Long-Lived Assets

The
Company tests property and equipment for impairment annually or whenever events or
circumstances indicate that the carrying amount of a restaurants assets may not be
recoverable. The Company tests for impairment using historical cash flows and other
relevant facts and circumstances as the primary basis for its estimates of future cash
flows. Assets are grouped and evaluated for impairment at the lowest level for which there
are identifiable cash flows, namely individual restaurants. A restaurant is deemed to be
impaired if a forecast of undiscounted future operating cash flows, including disposal
value, if any, is less than its carrying amount.

If
a restaurant is determined to be impaired, the loss is measured as the amount by which the
carrying amount of the restaurant exceeds its fair value. Fair value is based on quoted
market prices in active markets, if available. If quoted market prices are not available,
the Company generally measures fair value by discounting estimated future cash flows. This
process requires the use of estimates and assumptions, which are subject to a high degree
of judgment. Accordingly, actual results could vary significantly from such estimates.

During
the first forty weeks of fiscal 2006, the Company recognized a loss of approximately $1.4
million related to impairments of the carrying value of its long-lived assets for 16 under
performing restaurants, as the carrying value of these long-lived assets exceeded their
fair value. Fourteen of these restaurants were subsequently closed. There were no
impairment charges recognized during the first forty weeks of fiscal 2005.

# 3. Recent Accounting
Pronouncements

In
June 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections.
SFAS No. 154 replaces APB (Accounting Principles Board) Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of a
change in accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting pronouncement
in the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those provisions
should be followed. This Statement shall be effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. The Company
does not believe that the adoption of SFAS No. 154 will have a material impact on its
results of operations or financial position.

In
December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. This
statement requires all entities to recognize compensation expense in an amount equal to
the fair value of share-based payments granted to employees. SFAS No. 123(R) is effective
as of the beginning of the first annual reporting period after December 15, 2005. The
Company is in the process of evaluating the impact that the adoption of SFAS No. 123(R)
will have on its consolidated financial statements.

# 4. Stock-Based
Compensation

The
Company accounts for activity under its stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees. Accordingly, the Company does not recognize compensation
expense in connection with employee stock option grants because stock options are granted
at exercise prices not less than the fair value of the common stock on the date of grant.

There
would have been no effect on net income had the Company applied the fair value expense
recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation for the sixteen and forty weeks
ended April 6, 2005 and April 5, 2006, respectively.

7



# 5. Other Assets

Other
assets consist principally of debt issuance costs, notes receivable and other intangibles
net of accumulated amortization of $2.5 million and $3.7 million as of June 29, 2005 and
April 5, 2006, respectively. Debt issuance costs are the capitalized costs incurred in
conjunction with amending Buffets, Inc.s senior credit agreement, issuing Buffets,
Inc.s senior subordinated notes and issuing Buffets Holdings senior discount
notes. Debt issuance costs are being amortized over the terms of the financing
arrangements using the effective interest method. Other intangibles include trademarks,
franchise fees and liquor licenses. Trademarks and franchise fees are fully amortized as
of April 5, 2006. Liquor licenses are not amortized, as they have indefinite lives. Notes
receivable principally arose from the sale of certain restaurant facilities. Long-term and
short-term notes receivable collectively totaled $1.9 million as of June 29, 2005 and $0.8
million as of April 5, 2006. The notes receivable have due dates between 2006 and 2008.

The
gross carrying amount and accumulated amortization of each major intangible asset class
was as follows (in thousands):

|                       | Franchise fees | Trademarks | Liquor licenses | Total |  |   |     |  
|---------------------- | -------------- | ---------- | --------------- | ----- |  | - | --- | -
|
|
|
|BALANCE, June 29, 2005 |                |            | $               | 69    |  | $ | (65 | )
|FY 2006 Activity:      |                |           
|Amortization           |                |            |                 |      |  |   | (4  | )
|                       |                |            |                 |       |  |   |     |  
|BALANCE, April 5, 2006 |                |            | $               | 69    |  | $ | (69 | )
|                       |                |            |                 |       |  |   |     |  

# 6. Accrued Liabilities

Accrued
liabilities consisted of the following (in thousands):

|                                      | June 29, | April 5,
|------------------------------------- | -------- | --------
|
|Accrued compensation                  |          |         
|Accrued workers' compensation         |          |         
|Accrued interest                      |          |         
|Accrued insurance                     |          |         
|Accrued sales, use and property taxes |          |         
|Unearned revenue                      |          |         
|Closed restaurant reserve             |          |         
|Accrued other                         |          |         
|                                      |          |         
|                                      |          |         
|                                      |          |         

Activity
recorded in the closed restaurant reserve related to store closings identified and
recognized prior to December 31, 2002 has been recorded in accordance with Emerging
Issues Task Force (EITF) 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring), and EITF 95-3, Recognition of Liabilities in Connection
with a Purchase Business Combination. Closed restaurant costs incurred subsequent to
December 31, 2002 have been reserved in accordance with SFAS No. 146 (SFAS 146),
Accounting for Costs Associated with Exit or Disposal Activities.

The
store closing costs are principally comprised of lease termination costs and obligations,
net of sublease and other cash receipts. Employee termination costs are recognized in the
period that the closure is communicated.

8



The
following table summarizes closed restaurant reserve activity by type of cost (in
thousands):

|                                               | June 29, | April 5,
|---------------------------------------------- | -------- | --------
|
|BALANCE, beginning of period                   |          |         
|Additions:                                     |          |         
|Lease obligations charged to earnings          |          |         
|Employee termination costs charged to earnings |          |         
|Reductions:                                    |          |         
|Cash payments:                                 |          |         
|Lease termination costs and obligations        |          |         
|Employee severance costs                       |          |         
|                                               |          |         
|BALANCE, end of period                         |          |         
|                                               |          |         

In
addition to lease obligation and employee termination costs the Company incurred closed
restaurant costs of $0.8 million for the 40 weeks ended April 5, 2006 related to
incremental cash and non-cash charges that were directly expensed.

The
following table summarizes planned and actual store closing activity:

|                                                            | June 29, | April 5,
|----------------------------------------------------------- | -------- | --------
|
|Number of stores:                                           |          |         
|Expected to close as of the beginning of the period         |          |         
|Closed during the period                                    |          |         
|Identified for closure during the period                    |          |         
|                                                            |          |         
|Expected to close as of the end of the period               |          |         
|                                                            |          |         
|Number of employees:                                        |          |         
|Expected to be terminated as of the beginning of the period |          |         
|Terminated during the period                                |          |         
|Identified for termination during the period                |          |         
|                                                            |          |         
|Expected to be terminated as of the end of the period       |          |         
|                                                            |          |         

The remaining
closed restaurant reserves are expected to be paid, or incurred, by year as follows (in
thousands):

|           | 
|---------- | 
|2006       | 
|2007       | 
|2008       | 
|2009       | 
|2010       | 
|Thereafter | 
|           | 
|           | 
|           | 

The
Company closed 16 under performing restaurants in the third quarter of fiscal 2006. We
incurred cash charges related to these store closures in the third quarter of fiscal 2006
of approximately $3.8 million. These charges included approximately $3.2 million related
to lease termination costs and obligations, $0.4 million related to employee termination

9



costs and $0.2 million related to other associated costs. Non-cash charges related to
these closures in the third quarter of fiscal 2006 were approximately $0.1 million. These
charges were expensed as incurred pursuant to SFAS 146 and are recorded in closed
restaurant costs in the condensed consolidated statements of operations.

The
Company closed 18 under performing restaurants in the first forty weeks of fiscal 2006. We
incurred cash charges related to these store closures in the first forty weeks of fiscal
2006 of approximately $3.9 million. These charges included approximately $3.2 million
related to lease termination costs and obligations, $0.4 million related to employee
termination costs and $0.3 million related to other associated costs. Non-cash charges
related to these closures for the first forty weeks of fiscal 2006 were approximately $0.2
million. These charges were expensed as incurred pursuant to SFAS 146 and are recorded in
closed restaurant costs in the condensed consolidated statements of
operations.

# 7. Long-Term Debt

As
of April 5, 2006, long-term debt outstanding was as follows (in thousands):

|Buffets, Inc.                                                     | 
|----------------------------------------------------------------- | 
|Credit Facility:                                                  | 
|Revolving credit facility                                         | 
|Term loan, interest at LIBOR plus 3.50%, due quarterly through    | 
|June 28, 2009 (interest rate at 8.19% as of April 5, 2006)        | 
|                                                                  | 
|Total Credit Facility                                             | 
|Senior subordinated notes, interest at 11.25%, due July 15, 2010, | 
|net of discount of $4,378                                         | 
|                                                                  | 
|Total long-term debt at Buffets, Inc.                             | 





|Buffets Holdings, Inc.                                             | 
|------------------------------------------------------------------ | 
|Senior discount notes, interest at 13.875%, due December 15, 2010, | 
|net of discount of $34,905                                         | 
|                                                                   | 
|Grand total long-term debt                                         | 
|Less - Current maturities                                          | 
|                                                                   | 
|                                                                   | 
|                                                                   | 

Credit Facility

Effective
as of July 28, 2005, Buffets Holdings, Inc. entered into Amendment No. 1, dated as of
April 6, 2005 (the Amendment), to Buffets, Inc.s Amended and Restated
Credit Agreement, dated as of February 20, 2004 (the Credit Facility). The
Amendment relaxed the interest coverage and maximum leverage ratios of the Credit Facility
with which Buffets, Inc. is required to comply.

The
Credit Facility provides for total borrowings of up to $310.0 million, including (i) a
$230.0 million term loan, (ii) a $30.0 million revolving credit facility, (iii) a $20.0
million letter of credit facility, and (iv) a $30.0 million synthetic letter of credit
facility. The terms of the Credit Facility permit Buffets, Inc. to borrow, subject to
availability and certain conditions, incremental term loans or to issue additional notes
in an aggregate amount up to $25.0 million. The borrowings under the term loan facility
bear interest, at Buffets, Inc.s option, at either adjusted LIBOR plus 3.50% or at
an alternate base rate plus 2.50%, subject to a leverage-based pricing grid. The term loan
and the synthetic letter of credit facility mature on June 28, 2009, while the revolving
facility and the letter of credit facilities mature on June 28, 2007. The borrowings due
under the term loan are payable in equal quarterly installments in an annual amount equal
to 1% of the term loan during each of the first four and a half years of the loan, with
the remaining balance payable due in equal quarterly installments during the last

10



year of
the loan. The Credit Facility is fully and unconditionally guaranteed by Buffets Holdings,
which has no independent assets or operations, and is secured by substantially all of the
Companys assets. Borrowing availability under the Credit Facility depends upon our
continued compliance with certain covenants and financial ratios including leverage,
interest coverage and fixed charge coverage as specifically defined in the Credit Facility
and its amendments. Buffets, Inc. was in compliance with all financial ratio covenants of
the Credit Facility as of April 5, 2006. The financial ratio covenant requirements
increase over time, however, as set forth in the Amendment.

As
of April 5, 2006, Buffets, Inc. had $38.7 million in outstanding letters of credit, which
expire through November 15, 2007. As of April 5, 2006, total borrowing availability was
$41.3 million, which is comprised of a revolving credit facility of $30.0 million and
letter of credit facilities of $11.3 million.

Buffets,
Inc. has the option of tying its borrowings to LIBOR or a base rate when calculating the
interest rate for the term loan. The base rate is the greater of Credit Suisse First
Bostons prime rate, or the federal funds effective rate plus 1⁄2%

111⁄4% Senior
Subordinated Notes

On
June 28, 2002, Buffets, Inc. issued 111⁄4% senior subordinated notes in the principal
amount of $230 million due July 15, 2010. These notes were issued at a 96.181% discount,
resulting in an effective yield of 12% to the initial principal amount. Interest is
payable semi-annually on January 15 and July 15 of each year through July 15, 2010.
Accretion of the original issue discount was approximately $0.2 million for the sixteen
weeks ended April 6, 2005 and April 5, 2006, respectively, and $0.6 million for the forty
weeks ended April 6, 2005 and April 5, 2006, respectively, and is included in interest
expense in the accompanying condensed consolidated statements of operations. Except in the
event of an initial public offering, Buffets, Inc. is not entitled to redeem the notes at
its option prior to July 15, 2006. The redemption price during the first twelve-month
period following July 15, 2006 is 105.625%. The redemption price declines by 1871⁄2
basis points per year until July 15, 2009, at which point there is no redemption price
premium. In the event of an initial public offering prior to July 15, 2006, Buffets, Inc.
may redeem up to 35% of the aggregate principal amount of the notes at a redemption price
of 111.25%. Furthermore, in the event of a change in control, as defined in the indenture
governing those notes, the holders of the notes may require the Company to repurchase the
notes at a purchase price of 101% of the outstanding principal amount plus accrued and
unpaid interest.

13 7/8% Senior Discount
Notes

On
May 18, 2004, Buffets Holdings issued $132 million aggregate principal amount at maturity
of 13 7/8% senior discount notes due December 15, 2010. These notes were issued at a
discount to their aggregate principal amount at maturity. Prior to July 31, 2008, interest
will accrue on the 13 7/8% senior discount notes in the form of an increase in the
accreted value of the notes. The accreted value of each note will increase until July 31,
2008 at a rate of 13.875% per annum. After this date, cash interest on the notes will
accrue and be payable on January 31 and July 31 of each year at a rate of 13.875% per
annum. Accretion of the discount was approximately $3.4 million and $3.9 million for the
sixteen weeks ended April 6, 2005 and April 5, 2006, respectively, and $8.6 million and
$9.7 million for the forty weeks ended April 6, 2005 and April 5, 2006, respectively.
Accretion of the discount is included in interest expense in the accompanying condensed
consolidated statements of operations. If the Company fails to meet certain leverage ratio
tests on or about July 31, 2006 or July 31, 2008, additional interest will accrue on the
notes from that date at a rate of 1% per annum, up to a maximum of 2% per annum.

# 8. Significant Events

New Holding Company

On
December 29, 2005, Buffets Holdings, Inc., announced that its stockholders formed Buffets
Restaurants Holdings, Inc. (Buffets Restaurants Holdings) and entered into a
contribution agreement with Caxton-Iseman Investments, L.P., Sentinel Capital Partners II,
L.P., members of Buffets Holdings senior management and Buffets Restaurants Holdings (the
Contribution Agreement). Pursuant to the terms of the Contribution Agreement
holders of in excess of 99% of Buffets Holdings outstanding common stock contributed
their shares of common stock of Buffets Holdings to Buffets Restaurants Holdings in
exchange for proportional amounts of Buffets Restaurants Holdings common stock. As a
result of the share exchange, Buffets Holdings is majority-owned by Buffets Restaurant
Holdings.

11



Concurrently
with its formation, Buffets Restaurants Holdings entered into separate negotiated option
agreements with two of the largest groups of holders of Buffets Holdings senior discount
notes. Together, these two groups of holders own an aggregate principal amount at maturity
of the Buffets Holdings senior discount notes representing in excess of 80% of the outstanding Buffets
Holdings senior discount notes. In exchange for 13.875% senior discount notes
due 2010 of Buffet Restaurants Holdings with an initial accreted value equal to 10% of the
accreted value of the Buffets Holdings senior discount notes subject to the options, the
options permit Buffets Restaurants Holdings to purchase the Buffets Holdings senior
discount notes for a period of one year. The cash exercise price for each option is the
difference between (i) the sum of the accreted value of the Buffets Holdings senior
discount notes subject to the option and one-half of the make-whole premium for such notes
(calculated based on a treasury rate plus 50 basis points and the first redemption price
for the Buffets Holdings senior discount notes) and (ii) the initial accreted value of the
Buffets Restaurants Holdings senior discount notes issued as consideration for the option.
Each option is immediately exercisable and expires on December 29, 2006.

Strategic Alternatives

On
January 13, 2006, Buffets Holdings issued a press release announcing that it planned to
engage financial advisors to assist in exploring various strategic alternatives to
maximize shareholder value. Credit Suisse Securities (USA) LLC and Piper Jaffray & Co.
were subsequently engaged as the Companys advisors to assist in this effort.

Store Closures

In
February 2006, the Company closed fourteen under performing restaurants. The Company
incurred cash charges related to these store closures in the third quarter of fiscal 2006
of approximately $3.8 million. These charges included approximately $3.2 million related
to lease termination costs and obligations, $0.4 million related to employee termination
costs and $0.2 related to other associated costs. Non-cash charges related to these
closures were approximately $0.1 million. These charges were expensed as incurred pursuant
SFAS 146 and are recorded in closed restaurant costs in the condensed
consolidated statements of operations.

Appointment of Chief
Executive Officer

Effective
as of November 7, 2005, R. Michael Andrews, Jr. was appointed Chief Executive Officer of
Buffets Holdings and the Company and each of its direct and indirect subsidiaries, and was
elected a Director of Buffets Holdings and the Company. Roe H. Hatlen resigned as Chief
Executive Officer of Buffets Holdings and the Company and each of its direct and indirect
subsidiaries, effective as of November 7, 2005. It is presently anticipated that Mr.
Hatlen will continue to serve as a director of Buffets Holdings and the Company.

Appointment of Chief
Financial Officer

On January 24,  2006,  the Boards of  Directors  of Buffets,  Inc.  and Buffets  Holdings,  Inc.  appointed  A. Keith Wall as Chief
Financial Officer of the Company and each of its direct and indirect subsidiaries, effective
January 31, 2006.

Shareholders Rights
Repurchase

During
the third quarter of fiscal 2006, the Company repurchased shares of common stock held by
former management shareholders who separated from the Company. Pursuant to section 4.8(b)
of the Companys Stockholders Agreement, if a definitive agreement respecting a
sale of the Company is executed within six months following the separation of management
shareholders and the purchase price is higher than that determined for the shares, the
management shareholders are to receive an additional payment from the Company equal to the
difference (such rights referred to herein as clawback rights). The former
management shareholders waived these clawback rights for the related
shares repurchased in the third quarter of fiscal 2006 in return for a higher price per
repurchased share. In conjunction with the share repurchase, the Company paid
approximately $0.8 million to these former shareholders as consideration paid for waiving
their clawback rights. The total payment of $0.8 million was expensed to the
condensed consolidated statement of operations.

12



# 9. Related-Party
Transactions

Roe
H. Hatlen, a founder of our Company and a current member on the Boards of Directors,
entered into an advisory agreement with Buffets Holdings on September 28, 2000 (the
Advisory Agreement), that was scheduled to expire in December 2005. On
December 13, 2005, the Company entered into Amendment no. 1 (the Advisory Agreement
Amendment) to the Advisory Agreement. The Advisory Agreement Amendment extends the
term of the Advisory Agreement through June 30, 2006. Pursuant to the Advisory Agreement
Amendment, Mr. Hatlen is to be compensated for services provided in connection with the
Advisory Agreement at an annualized rate of $200,000 per year and is eligible to receive
an incentive compensation payment at the end of our fiscal year 2006. The amount of the
incentive compensation payment is dependent upon our financial performance. All costs are
recognized as incurred in general and administrative expenses in the condensed
consolidated statements of operations.

# 10. Litigation

On
November 12, 2004, two former restaurant managers of the Company's wholly-owned subsidiary, HomeTown
Buffet, Inc. (HomeTown Buffet), individually and on behalf of all others
similarly situated, filed a class action lawsuit against HomeTown Buffet in California
Superior Court in San Francisco County. The lawsuit alleges that the defendants violated
California wage and hour laws by failing to pay all of its California managers and
assistant managers overtime, and for making deductions from bonus compensation based on
the companys workers compensation costs. In March 2006, the plaintiffs amended
the complaint in the lawsuit to add OCB Restaurant Company, LLC as a defendant, and to
limit the claims to those managers below the level of restaurant general manager. In April
2006, the defendants removed the lawsuit to the United States District Court for the Northern
District of California. The plaintiffs seek compensatory damages, penalties, restitution
of unpaid overtime and deductions, pre-judgment interest, costs of suit and reasonable
attorneys fees. The complaint does not make a specific monetary demand. This action
is in a preliminary stage, and the Company is currently not able to predict the outcome of this
action or reasonably estimate a range of possible loss. The Company is vigorously defending this
action.

The
Company is also involved in various legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Companys consolidated financial position or
the results of operations.

# 11. Condensed
Consolidating Financial Statements

The
following unaudited condensed consolidating financial statements are presented pursuant to
Rule 3-10 of Regulation S-X. Buffets, Inc. is an issuer (the Subsidiary
Issuer) of 111⁄4% senior subordinated notes that are fully and unconditionally
guaranteed by its parent, Buffets Holdings (the Parent), as well as each of
its subsidiaries including HomeTown Buffets, Inc., OCB Restaurant Co., OCB Purchasing Co.,
Restaurant Innovations, Inc., Distinctive Dining, Inc., Tahoe Joes, Inc., Buffets
Leasing Company, LLC, HomeTown Leasing Company, LLC, OCB Leasing Company, LLC, and Tahoe
Joes Leasing Company, LLC (collectively, the Subsidiary Guarantors). All
guarantees are joint and several and the subsidiary issuer and the subsidiary guarantors
are 100% owned by the parent company.

There
are certain restrictions on the ability of the Company to obtain funds from its
subsidiaries. Pursuant to the terms of the Companys debt agreements, the Company and
its subsidiaries have restrictions on their ability to make certain payments. The types of
payments that are restricted include dividends or other equity distributions to equity
holders, payments to repurchase the Companys capital stock, repayment of
subordinated debt prior to scheduled repayment or maturity and certain investments
(collectively referred to as Restricted Payments). The restrictions do not
allow the Company and its subsidiaries, directly or indirectly, to make a Restricted
Payment if at the time the Company or a subsidiary makes such Restricted Payment: (1) a
default has occurred and is continuing, (2) certain debt covenant ratios of the Company
exceed a specified threshold or Buffets, Inc. is restricted from incurring additional
indebtedness, or (3) the aggregate amount of such Restricted Payment and all other
Restricted Payments exceeds certain thresholds.

13



# Condensed
Consolidating Balance Sheet  As of June 29, 2005

|                                          |  | Subsidiary | Subsidiary |         |  
|----------------------------------------- |  | ---------- | ---------- | ------- | -
|
|
|
|ASSETS                                    |  |            |            |         |  
|CURRENT ASSETS:                           |  |           
|Cash and cash equivalents                 |  |            | $          | 49      |  
|Receivables                               |  |            |            | --      |  
|Inventories                               |  |            |            | --      |  
|Prepaid expenses and other current assets |  |            |            | 4       |  
|Deferred income taxes                     |  |            |            | 187     |  
|                                          |  |            |            |         |  
|Total current assets                      |  |            |            | 240     |  
|PROPERTY AND EQUIPMENT, net               |  |            |            | --      |  
|GOODWILL, net                             |  |            |            | --      |  
|DEFERRED INCOME TAXES                     |  |            |            | 2,792   |  
|OTHER ASSETS, net                         |  |            |            | 2,556   |  
|                                          |  |            |            |         |  
|Total assets                              |  |            | $          | 5,588   |  
|                                          |  |            |            |         |  
|LIABILITIES AND SHAREHOLDERS'             |  |           
|EQUITY (DEFICIT)                          |  |           
|CURRENT LIABILITIES:                      |  |           
|Accounts payable                          |  |            |            | --      |  
|Accrued liabilities                       |  |            |            | --      |  
|Income taxes payable                      |  |            |            | (1,877  | )
|Current maturities of long-term debt      |  |            |            | --      |  
|                                          |  |            |            |         |  
|Total current liabilities                 |  |            |            | (1,877  | )
|LONG-TERM DEBT, net of current maturities |  |            |            | 87,439  |  
|DEFERRED LEASE OBLIGATIONS                |  |            |            | --      |  
|OTHER LONG-TERM LIABILITIES               |  |            |            | --      |  
|                                          |  |            |            |         |  
|Total liabilities                         |  |            |            | 85,562  |  
|                                          |  |            |            |         |  
|COMMITMENTS AND CONTINGENCIES             |  |           
|SHAREHOLDERS' EQUITY (DEFICIT)            |  |           
|Common stock                              |  |            |            | 32      |  
|Additional paid in capital                |  |            |            | 14      |  
|Retained earnings (accumulated deficit)   |  |            |            | (80,020 | )
|                                          |  |            |            |         |  
|Total shareholders' equity (deficit)      |  |            |            | (79,974 | )
|                                          |  |            |            |         |  
|Total liabilities and shareholders'       |  |           
|equity (deficit)                          |  |            | $          | 5,588   |  
|                                          |  |            |            |         |  

14



# Condensed Consolidating
Balance Sheet As of April 5, 2006

|                                          |  | Subsidiary | Subsidiary |         |  
|----------------------------------------- |  | ---------- | ---------- | ------- | -
|
|
|
|ASSETS                                    |  |            |            |         |  
|CURRENT ASSETS:                           |  |           
|Cash and cash equivalents                 |  |            | $          | 37      |  
|Receivables                               |  |            |            | 8       |  
|Inventories                               |  |            |            | --      |  
|Prepaid expenses and other current assets |  |            |            | 4       |  
|Deferred income taxes                     |  |            |            | 187     |  
|                                          |  |            |            |         |  
|Total current assets                      |  |            |            | 236     |  
|PROPERTY AND EQUIPMENT, net               |  |            |            | --      |  
|GOODWILL, net                             |  |            |            | --      |  
|DEFERRED INCOME TAXES                     |  |            |            | 2,792   |  
|OTHER ASSETS, net                         |  |            |            | 2,286   |  
|                                          |  |            |            |         |  
|Total assets                              |  |            | $          | 5,314   |  
|                                          |  |            |            |         |  
|LIABILITIES AND SHAREHOLDERS'             |  |           
|EQUITY (DEFICIT)                          |  |           
|CURRENT LIABILITIES:                      |  |           
|Accounts payable                          |  |            |            | --      |  
|Accrued liabilities                       |  |            |            | --      |  
|Income taxes payable                      |  |            |            | (7,233  | )
|Current maturities of long-term debt      |  |            |            | --      |  
|                                          |  |            |            |         |  
|Total current liabilities                 |  |            |            | (7,233  | )
|LONG-TERM DEBT, net of current maturities |  |            |            | 97,095  |  
|DEFERRED LEASE OBLIGATIONS                |  |            |            | --      |  
|OTHER LONG-TERM LIABILITIES               |  |            |            | --      |  
|                                          |  |            |            |         |  
|Total liabilities                         |  |            |            | 89,862  |  
|                                          |  |            |            |         |  
|COMMITMENTS AND CONTINGENCIES             |  |           
|SHAREHOLDERS' EQUITY (DEFICIT)            |  |           
|Common stock                              |  |            |            | 31      |  
|Additional paid in capital                |  |            |            | 5       |  
|Retained earnings (accumulated deficit)   |  |            |            | (84,584 | )
|                                          |  |            |            |         |  
|Total shareholders' equity (deficit)      |  |            |            | (84,548 | )
|                                          |  |            |            |         |  
|Total liabilities and shareholders'       |  |           
|equity (deficit)                          |  |            | $          | 5,314   |  
|                                          |  |            |            |         |  

15



# Condensed
Consolidating Statement of Operations For the Sixteen Weeks
Ended April 6, 2005

|                             |  | Subsidiary | Subsidiary |        |  
|---------------------------- |  | ---------- | ---------- | ------ | -
|
|
|
|RESTAURANT SALES             |  |            | $          | --     |  
|RESTAURANT COSTS:            |  |           
|Food                         |  |            |            | --     |  
|Labor                        |  |            |            | --     |  
|Direct and occupancy         |  |            |            | --     |  
|                             |  |            |            |        |  
|Total restaurant costs       |  |            |            | --     |  
|ADVERTISING EXPENSES         |  |            |            | --     |  
|GENERAL AND ADMINISTRATIVE   |  |           
|EXPENSES                     |  |            |            | 1      |  
|CLOSED RESTAURANT COSTS      |  |            |            | --     |  
|                             |  |            |            |        |  
|OPERATING INCOME (LOSS)      |  |            |            | (1     | )
|INTEREST EXPENSE             |  |            |            | 3,518  |  
|INTEREST INCOME              |  |            |            | --     |  
|LOSS RELATED TO REFINANCING  |  |            |            | 24     |  
|OTHER INCOME                 |  |            |            | --     |  
|                             |  |            |            |        |  
|INCOME (LOSS) BEFORE INCOME  |  |           
|TAXES                        |  |            |            | (3,543 | )
|INCOME TAX EXPENSE (BENEFIT) |  |            |            | (1,171 | )
|                             |  |            |            |        |  
|Net income (loss)            |  |            | $          | (2,372 | )
|                             |  |            |            |        |  

16



# Condensed
Consolidating Statement of Operations For the Forty Weeks
Ended April 6, 2005

|                             |  | Subsidiary | Subsidiary |        |  
|---------------------------- |  | ---------- | ---------- | ------ | -
|
|
|
|RESTAURANT SALES             |  |            | $          | --     |  
|RESTAURANT COSTS:            |  |           
|Food                         |  |            |            | --     |  
|Labor                        |  |            |            | --     |  
|Direct and occupancy         |  |            |            | --     |  
|                             |  |            |            |        |  
|Total restaurant costs       |  |            |            | --     |  
|ADVERTISING EXPENSES         |  |            |            | --     |  
|GENERAL AND ADMINISTRATIVE   |  |           
|EXPENSES                     |  |            |            | 4      |  
|CLOSED RESTAURANT COSTS      |  |            |            | --     |  
|                             |  |            |            |        |  
|OPERATING INCOME (LOSS)      |  |            |            | (4     | )
|INTEREST EXPENSE             |  |            |            | 8,810  |  
|INTEREST INCOME              |  |            |            | --     |  
|LOSS RELATED TO REFINANCING  |  |            |            | 859    |  
|LOSS RELATED TO EARLY        |  |           
|EXTINGUISHMENT OF DEBT       |  |            |            | --     |  
|OTHER INCOME                 |  |            |            | --     |  
|                             |  |            |            |        |  
|INCOME (LOSS) BEFORE INCOME  |  |           
|TAXES                        |  |            |            | (9,673 | )
|INCOME TAX EXPENSE (BENEFIT) |  |            |            | (3,386 | )
|                             |  |            |            |        |  
|Net income (loss)            |  |            | $          | (6,287 | )
|                             |  |            |            |        |  

17



# Condensed
Consolidating Statement of Operations For the Sixteen Weeks
Ended April 5, 2006

|                             |  | Subsidiary | Subsidiary |        |  
|---------------------------- |  | ---------- | ---------- | ------ | -
|
|
|
|RESTAURANT SALES             |  |            | $          | --     |  
|RESTAURANT COSTS:            |  |           
|Food                         |  |            |            | --     |  
|Labor                        |  |            |            | --     |  
|Direct and occupancy         |  |            |            | --     |  
|                             |  |            |            |        |  
|Total restaurant costs       |  |            |            | --     |  
|ADVERTISING EXPENSES         |  |            |            | --     |  
|GENERAL AND ADMINISTRATIVE   |  |           
|EXPENSES                     |  |            |            | 2      |  
|SHAREHOLDERS' RIGHTS         |  |           
|REPURCHASE                   |  |            |            | 757    |  
|CLOSED RESTAURANT COSTS      |  |            |            | --     |  
|                             |  |            |            |        |  
|OPERATING INCOME (LOSS)      |  |            |            | (759   | )
|INTEREST EXPENSE             |  |            |            | 3,971  |  
|INTEREST INCOME              |  |            |            | --     |  
|LOSS RELATED TO REFINANCING  |  |            |            | --     |  
|OTHER INCOME                 |  |            |            | --     |  
|                             |  |            |            |        |  
|INCOME (LOSS) BEFORE INCOME  |  |           
|TAXES                        |  |            |            | (4,730 | )
|INCOME TAX EXPENSE (BENEFIT) |  |            |            | (3,303 | )
|                             |  |            |            |        |  
|Net income (loss)            |  |            | $          | (1,427 | )
|                             |  |            |            |        |  

18



# Condensed
Consolidating Statement of Operations For the Forty Weeks
Ended April 5, 2006

|                             |  | Subsidiary | Subsidiary |         |  
|---------------------------- |  | ---------- | ---------- | ------- | -
|
|
|
|RESTAURANT SALES             |  |            | $          | --      |  
|RESTAURANT COSTS:            |  |           
|Food                         |  |            |            | --      |  
|Labor                        |  |            |            | --      |  
|Direct and occupancy         |  |            |            | --      |  
|                             |  |            |            |         |  
|Total restaurant costs       |  |            |            | --      |  
|ADVERTISING EXPENSES         |  |            |            | --      |  
|GENERAL AND ADMINISTRATIVE   |  |           
|EXPENSES                     |  |            |            | 5       |  
|SHAREHOLDERS' RIGHTS         |  |           
|REPURCHASE                   |  |            |            | 757     |  
|CLOSED RESTAURANT COSTS      |  |            |            | --      |  
|IMPAIRMENT OF ASSETS         |  |            |            | --      |  
|                             |  |            |            |         |  
|OPERATING INCOME (LOSS)      |  |            |            | (762    | )
|INTEREST EXPENSE             |  |            |            | 9,928   |  
|INTEREST INCOME              |  |            |            | --      |  
|LOSS RELATED TO REFINANCING  |  |            |            | --      |  
|OTHER INCOME                 |  |            |            | --      |  
|                             |  |            |            |         |  
|INCOME (LOSS) BEFORE INCOME  |  |           
|TAXES                        |  |            |            | (10,690 | )
|INCOME TAX EXPENSE (BENEFIT) |  |            |            | (5,356  | )
|                             |  |            |            |         |  
|Net income (loss)            |  |            | $          | (5,334  | )
|                             |  |            |            |         |  

19



# Condensed
Consolidating Statement of Cash Flows For the Forty Weeks
Ended April 6, 2005

|                                                  |  | Subsidiary | Subsidiary |        |  
|------------------------------------------------- |  | ---------- | ---------- | ------ | -
|
|
|
|OPERATING ACTIVITIES:                             |  |            |            |        |  
|Net income (loss)                                 |  |            | $          | (6,287 | )
|Adjustments to reconcile net income (loss) to net |  |           
|cash provided by (used in) operating activities:  |  |           
|Depreciation and amortization                     |  |            |            | --     |  
|Amortization of debt issuance costs               |  |            |            | 242    |  
|Accretion of original issue discount              |  |            |            | 8,568  |  
|Loss related to early extinguishment of debt      |  |            |            | --     |  
|Deferred income taxes                             |  |            |            | (1,024 | )
|Loss on disposal of assets                        |  |            |            | --     |  
|Changes in assets and liabilities:                |  |           
|Receivables                                       |  |            |            | --     |  
|Inventories                                       |  |            |            | --     |  
|Prepaid expenses and other assets                 |  |            |            | (5     | )
|Accounts payable                                  |  |            |            | (177   | )
|Accrued and other liabilities                     |  |            |            | --     |  
|Income taxes payable/refundable                   |  |            |            | (2,362 | )
|                                                  |  |            |            |        |  
|Net cash provided by (used in) operating          |  |           
|activities                                        |  |            |            | (1,045 | )
|                                                  |  |            |            |        |  
|INVESTING ACTIVITIES:                             |  |           
|Purchase of property and equipment                |  |            |            | --     |  
|Corporate cash advances (payments)                |  |            |            | --     |  
|Proceeds from sale (purchase) of other assets     |  |            |            | 33     |  
|                                                  |  |            |            |        |  
|Net cash provided by (used in) investing          |  |           
|activities                                        |  |            |            | 33     |  
|                                                  |  |            |            |        |  
|FINANCING ACTIVITIES:                             |  |           
|Repayment of debt                                 |  |            |            | --     |  
|Repurchase of common stock                        |  |            |            | (284   | )
|Proceeds from issuance of common stock            |  |            |            | 15     |  
|Reduction of restricted cash available for early  |  |           
|extinguishment of debt                            |  |            |            | --     |  
|Use of restricted cash for early extinguishment   |  |           
|of debt                                           |  |            |            | --     |  
|Dividends                                         |  |            |            | 1,290  |  
|Debt issuance costs                               |  |            |            | (56    | )
|                                                  |  |            |            |        |  
|Net cash provided by (used in) financing          |  |           
|activities                                        |  |            |            | 965    |  
|                                                  |  |            |            |        |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS           |  |            |            | (47    | )
|CASH AND CASH EQUIVALENTS, beginning of           |  |           
|period                                            |  |            |            | 96     |  
|                                                  |  |            |            |        |  
|CASH AND CASH EQUIVALENTS, end of period          |  |            | $          | 49     |  
|                                                  |  |            |            |        |  

20



# Condensed
Consolidating Statement of Cash Flows For the Forty Weeks
Ended April 5, 2006

|                                                  |  | Subsidiary | Subsidiary |        |  
|------------------------------------------------- |  | ---------- | ---------- | ------ | -
|
|
|
|OPERATING ACTIVITIES:                             |  |            |            |        |  
|Net income (loss)                                 |  |            | $          | (5,334 | )
|Adjustments to reconcile net income (loss) to net |  |           
|cash provided by (used in) operating activities:  |  |           
|Depreciation and amortization                     |  |            |            | --     |  
|Amortization of debt issuance costs               |  |            |            | 272    |  
|Accretion of original issue discount              |  |            |            | 9,656  |  
|Loss on disposal of assets                        |  |            |            | --     |  
|Impairment of assets                              |  |            |            | --     |  
|Changes in assets and liabilities:                |  |           
|Receivables                                       |  |            |            | (8     | )
|Inventories                                       |  |            |            | --     |  
|Prepaid expenses and other assets                 |  |            |            | --     |  
|Accounts payable                                  |  |            |            | --     |  
|Accrued and other liabilities                     |  |            |            | --     |  
|Income taxes payable/refundable                   |  |            |            | (5,356 | )
|                                                  |  |            |            |        |  
|Net cash provided by (used in) operating          |  |           
|activities                                        |  |            |            | (770   | )
|                                                  |  |            |            |        |  
|INVESTING ACTIVITIES:                             |  |           
|Purchase of property and equipment                |  |            |            | --     |  
|Corporate cash advances (payments)                |  |            |            | --     |  
|Proceeds from sale (purchase) of other assets     |  |            |            | (2     | )
|                                                  |  |            |            |        |  
|Net cash provided by (used in) investing          |  |           
|activities                                        |  |            |            | (2     | )
|                                                  |  |            |            |        |  
|FINANCING ACTIVITIES:                             |  |           
|Repayment of debt                                 |  |            |            | --     |  
|Repurchase of common stock                        |  |            |            | (10    | )
|Dividends                                         |  |            |            | 770    |  
|                                                  |  |            |            |        |  
|Net cash provided by (used in) financing          |  |           
|activities                                        |  |            |            | 760    |  
|                                                  |  |            |            |        |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS           |  |            |            | (12    | )
|CASH AND CASH EQUIVALENTS, beginning of           |  |           
|period                                            |  |            |            | 49     |  
|                                                  |  |            |            |        |  
|CASH AND CASH EQUIVALENTS, end of period          |  |            | $          | 37     |  
|                                                  |  |            |            |        |  

21



# ITEM 2.  MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You
should read the following discussion in conjunction with our condensed consolidated
financial statements and related notes included elsewhere in this report. Unless the
context indicates or requires otherwise, (i) the term Buffets Holdings refers
to Buffets Holdings, Inc.; (ii) the term Buffets refers to Buffets, Inc., our
principal operating subsidiary; (iii) the terms we, our,
ours, and the Company refer to Buffets Holdings, Inc. and its
subsidiaries. Some of the statements in the following discussion are forward-looking
statements. See Forward-Looking Statements and Risk Factors.

# Overview

We
are the largest operator of company-owned stores in the buffet/grill sector (through
Buffets and its subsidiaries), as measured in both sales and number of restaurants. Our
restaurants are principally operated under the names Old Country Buffet(R) and HomeTown
Buffet(R). As of April 5, 2006, we had 338 company-owned restaurants and 18 franchised
locations in 35 states.

Buffets
was founded in 1983 to develop buffet-style restaurants under the name Old Country Buffet.
In October 1985, Buffets completed its initial public offering and was listed on The
NASDAQ National Market. In September 1996, Buffets merged with HomeTown Buffet, Inc.,
which was developed by one of Buffets co-founders and had 80 company-owned HomeTown
Buffet restaurants in 11 states and 19 franchised restaurants in eight states. In October
2000, Buffets was acquired by Buffets Holdings, a company organized by Caxton-Iseman
Capital, Inc., in a buyout from public shareholders.

Our
financial results are significantly impacted by changes in sales at our company-owned
restaurants. Changes in sales are largely driven by changes in average weekly guest counts
and average guest check. Average weekly guest counts are affected by changes in consumer
confidence, competition, economic conditions and unusual weather patterns. We monitor
average weekly guest counts very closely, as they directly impact our revenues and
profits, and focus substantial efforts on growing these numbers on a same-store basis.
Same-store average weekly sales and guest counts are affected by several factors including, our ability to
consistently deliver a high-quality, value-priced selection of home-style cooked meals in
a clean and pleasant self-service buffet format and the success of our marketing promotions
and other business strategies.

Our
business model is characterized by a relatively fixed cost structure, particularly in the
short term. Accordingly, changes in marginal average weekly sales volume can have a more
significant impact on our profitability than for a business possessing a more variable
cost structure. Over a longer time horizon, by virtue of our diversified food offerings,
we are able to address the semi-fixed element of food cost by modifying our offerings or
by highlighting other foods on the menu in order to reduce consumption on the higher cost
items. In addition, we monitor our labor costs and hourly employee productivity, as
measured by the number of guests served per labor hour, on a weekly basis to ensure that
restaurants are responsive in scheduling and managing our labor to varying levels of guest
traffic.

Since
we acquired Buffets in a buyout from its public shareholders in October 2000, we have
focused on improving asset management and optimizing our capital structure. As a result,
we have had net closures of 66 restaurants in less attractive locations either through
early termination, or non-renewal at lease end, since October 2000.

Our
fiscal year comprises 52 or 53 weeks divided into four fiscal quarters of 12, 12, 16 and
12 or 13 weeks.

The
following is a description of the line items from our condensed consolidated statements of
operations:

| |  |  | We recognize as restaurant  sales the proceeds from the sale of food and  beverages at our company  owned  restaurants  at the
     time of such sale.  We recognize  the  proceeds  from the sale of gift  certificates/cards  when the gift  certificates/cards  are
     redeemed at our  restaurants.  Until  redemption,  the unearned  revenue from the sale of gift  certificates/cards  is included in
     accrued  liabilities on our consolidated  balance sheets.  Our franchise  income includes royalty fees and initial  franchise fees
     received from our  franchisees  and is recognized  in other  income.  Royalty fees are based on gross sales and are  recognized in
     income as sales are generated.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22



| |  |  | Restaurant costs reflect only direct restaurant  operating costs,  including food, labor and direct and occupancy costs. Labor
     costs include compensation and benefits for both hourly and restaurant  management  employees.  Direct and occupancy costs consist
     primarily of costs of supplies, maintenance, utilities, rent, real estate taxes, insurance, depreciation and amortization.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Advertising expenses reflect all advertising and promotional costs.
| | - |  | -------------------------------------------------------------------

| |  |  | General  and  administrative  expenses  reflect  all costs,  other than  advertising  expenses,  not  directly  related to the
     operation of restaurants.  These expenses consist primarily of corporate  administrative  compensation and overhead,  district and
     regional management compensation and related management expenses and the costs of recruiting,  training and supervising restaurant
     management personnel.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Shareholders'  rights  repurchase  reflects the costs associated with the repurchase of certain rights  associated with shares
     of common stock previously held by former management shareholders who separated from the company.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Closed  restaurant costs represents costs associated with store closure of under performing  restaurants,  including,  but not
     limited to lease termination costs and obligations and employee termination costs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Impairment of assets  reflects fair market  adjustments to the carrying  value of long-lived  assets,  primarily  comprised of
     leasehold improvements and equipment.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Interest  expense  reflects  interest  costs  associated  with our debt,  amortization  of debt issuance cost and accretion of
     original issuance discount on our subordinated notes and bonds.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Interest income reflects interest earned on our short-term investments.
| | - |  | -----------------------------------------------------------------------

| |  |  | Effective as of July 28, 2005, we entered into  Amendment  No. 1, dated as of April 6, 2005, to Buffets'  Amended and Restated
     Credit  Agreement,  dated as of February 20, 2004.  Loss related to refinancing  in fiscal 2006 is comprised of  transaction  fees
     incurred in  conjunction  with this  amendment.  Loss related to  refinancing  in fiscal 2005 reflects  costs  associated  with an
     initial public offering of Income Deposit Securities that was withdrawn due to unfavorable market conditions.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Loss related to the early  extinguishment  of debt  reflects the costs  associated  with  redeeming a portion of Buffets' 11 1/4%
     senior subordinated notes prior to their maturity during fiscal year 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Other income primarily reflects franchise fees earned.
| | - |  | ------------------------------------------------------

| |  |  | Income tax expense reflects the current and deferred tax provision  (benefit)  determined
in accordance with the provisions of Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes."
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Critical Accounting
Policies

Our
condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation
of our condensed consolidated financial statements requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. On an ongoing
basis, management evaluates its estimates and assumptions, including those related to
recoverability of long-lived assets, goodwill, self-insurance reserves and income taxes.
Management bases its estimates and assumptions on historical experience and on various
other factors made. Actual results may differ from these estimates and assumptions under
different circumstances or conditions.

We
believe the following critical accounting policies affect managements significant
estimates and assumptions used in the preparation of our condensed consolidated financial
statements.

23



Long-Lived Assets

We
test property and equipment for impairment annually or whenever events or circumstances
indicate that the carrying amount of a restaurants assets may not be recoverable. We
test for impairment using historical cash flows and other relevant facts and circumstances
as the primary basis for our estimates of future cash flows. Assets are grouped and
evaluated for impairment at the lowest level for which there are identifiable cash flows,
namely as individual restaurants. A restaurant is deemed to be impaired if a forecast of
undiscounted future operating cash flows, including disposal value, if any, is less than
its carrying amount.

If
a restaurant is determined to be impaired, the loss is measured as the amount by which the
carrying amount of the restaurant exceeds its fair value. Fair value is based on quoted
market prices in active markets, if available. If quoted market prices are not available,
we generally measure fair value by discounting estimated future cash flows. This process
requires the use of estimates and assumptions, which are subject to a high degree of
judgment. Accordingly, actual results could vary significantly from such estimates.

During
the first forty weeks of fiscal 2006, we recognized a loss of approximately $1.4 million
related to the impairment of long-lived assets for 16 restaurants. There were no
impairment charges recognized during the third quarter of fiscal 2006 or the first forty
weeks of fiscal 2005.

Goodwill

We
test the recoverability of goodwill annually or whenever events or circumstances indicate
that the carrying amount may not be recoverable. Goodwill is deemed to be impaired if the
fair value of a reporting unit is less than its carrying value. If goodwill is determined
to be impaired, the loss is measured as the amount by which the carrying amount of a
reporting units goodwill exceeds its implied fair value. The fair value of a
reporting unit is an estimate based on assumptions regarding its future cash flows. In the
event that these assumptions change in the future, we may be required to record impairment
charges related to our goodwill. There were no impairment charges during the first forty
weeks of fiscal 2006 or fiscal 2005.

Insurance Reserves

We
carry insurance reserves for exposure related to our workers compensation, general
liability, medical and dental programs. We effectively self-insure a significant portion
of certain risks through the use of large self-insured retentions combined with stop-loss
coverage, or by maintaining large deductibles on traditional policies of insurance. The
liability represents an estimate of the ultimate cost of claims incurred and unpaid as of
the balance sheet date, including both reported claims and claims that have been incurred
but not reported. The estimated liability is established based upon historical claims data
and third-party actuarial estimates of settlement costs for incurred claims. Our estimates
include our judgments and independent actuarial assumptions regarding economic conditions,
the frequency and severity of claims and claim development patterns and settlement
practices. These estimates and assumptions are monitored and adjusted when warranted by
changing circumstances. Changes in these factors may produce materially different amounts
of expense and liabilities that would be reported under these insurance programs.

Closed Restaurant Reserve

We
maintain a closed restaurant reserve for restaurants that are no longer being utilized in
current operations. The closed restaurant costs are principally comprised of our estimates
of lease termination costs and obligations, net of sublease and other cash receipts, and
employee termination costs. Many factors including the local business environment, other
available lease sites, the ability to secure subleases, the creditworthiness of
subtenants, and our success at negotiating early termination agreements with lessors are
considered in establishing the accruals. Adjustments to the reserve primarily relate to
changes in subtenant income or actual exit costs differing from original estimates.
Adjustments are made for changes in estimates in the period in which the changes become
known. The store closing reserve was $1.5 million and $3.0 million as of June 29, 2005 and
April 5, 2006, respectively.

We
closed sixteen under performing restaurants in the third quarter of fiscal 2006. We
incurred cash charges related to these store closures in the third quarter of fiscal 2006
of approximately $3.8 million. These charges included approximately $3.2 million related
to lease termination costs and obligations, $0.4 million related to employee termination
costs

24



and $0.2 million related to other associated costs. These charges were expensed as
incurred pursuant to SFAS 146 and are recorded in closed restaurant costs in
the condensed consolidated statements of operations.

Income Taxes

We
estimate certain components of our provision for income taxes. These estimates include,
among other items, depreciation and amortization expense allowable for tax purposes,
allowable tax credits for items such as the Working Opportunity Tax Credit and taxes paid
on reported employee tip income, effective rates for state and local taxes, and the tax
deductibility of certain other items. Our estimates are based on current tax laws, the
best available information at the time of the provision and historical experience. Income
tax returns are subject to audit by federal, state, and local governments, generally years
after the returns are filed. These returns could be subject to material adjustments or
differing interpretations of the tax laws.

Deferred
tax assets and liabilities are recognized for the expected future tax consequences of
temporary differences between financial reporting amounts and the tax basis of existing
assets and liabilities based on currently enacted tax laws and tax rates in effect for the
periods in which the differences are expected to reverse. Income tax expense is the tax
payable for the quarter, plus the change during the quarter in deferred income taxes.
Valuation allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.

Gift Cards

Historically,
Buffets has sold gift certificates to its guests. Beginning in November 2002, Buffets
stopped selling paper gift certificates and began selling gift cards. Proceeds from the
sale of gift cards are initially recorded as a liability when received. Revenues from the
sale of gift cards at our restaurants are recognized upon redemption. In estimating the
related gift card liability, we analyze historical trends to derive our estimates of
future gift card redemption patterns. The assumptions and activity are closely monitored
for changes in escheatment laws and redemption patterns. We adjust our gift card liability
based on historical and expected non-redemption trends. These adjustments are classified
within direct and occupancy costs in our condensed consolidated income statements. The
gift card/certificate liability was $4.1 million and $4.5 million as of June 29, 2005 and
April 5, 2006, respectively.

Results of Operations

The
following discussion reflects our historical results for the 16-week periods ended April
6, 2005 and April 5, 2006. Our future results may not be consistent with our historical
results. The following discussion should be read in conjunction with our condensed
consolidated financial statements and related notes included elsewhere in this report.

|                                                       | Sixteen Weeks Ended
|------------------------------------------------------ | -------------------
|
|Significant items that impacted results of operations: |                    
|Shareholders' rights repurchase (1)                    |                    
|Closed restaurant costs (2)                            |                    
|                                                       |                    

|(1) | Shareholders'  rights  repurchase  reflects the costs of the repurchase of certain rights  associated  with shares of common stock
    previously held by former management shareholders who separated from the Company.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Closed  restaurant  costs were $4.4 million  during the third quarter of fiscal 2006 as compared to $0.5 million for the comparable
    prior year period.  The increase was due in large part due to the closure of 16 under  performing  restaurants in the third quarter
    of fiscal 2006  compared with zero store  closures in the  comparable  prior year period.  The prior year costs  represent  charges
    related to stores that had  previously  closed.  We incurred cash charges  related to these store  closures in the third quarter of
    fiscal 2006 of approximately  $3.8 million.  These charges included  approximately  $3.2 million related to lease termination costs
    and obligations,  $0.4 million related to employee  termination costs and $0.2 million related to other associated costs.  Non-cash
    charges related to these closures were approximately $0.1 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25



The
following table sets forth our results of operations based on the percentage relationship
of the items listed to our restaurant sales during the periods shown:

|                                    | Sixteen Weeks Ended
|----------------------------------- | -------------------
|
|
|Restaurant sales                    |                    
|Restaurant costs                    |                    
|Advertising expenses                |                    
|General and administrative expenses |                    
|Shareholders' rights repurchase     |                    
|Closed restaurant costs             |                    
|                                    |                    
|Operating income                    |                    
|Interest expense                    |                    
|Interest income                     |                    
|Loss related to refinancing         |                    
|Other income                        |                    
|                                    |                    
|Loss before income taxes            |                    
|Income tax benefit                  |                    
|                                    |                    
|Net loss                            |                    
|                                    |                    

Certain percentage
amounts do not sum to total due to rounding.

Restaurant
Sales. Restaurant sales increased $15.0 million, or 5.4%, during the sixteen weeks ended
April 5, 2006 over the comparable prior year period. Average weekly sales for the third
quarter of fiscal 2006 increased 8.0% over the comparable prior year period to $53,139.
This improvement was primarily due to an increased check average. Same-store sales for the
sixteen weeks ended April 5, 2006 increased by 6.0% compared to the comparable prior year
period. The increase was comprised of a 6.5% increase in average check, partially offset
by a 0.5% decline in guest traffic. We currently expect same-store sales for the fourth
quarter of fiscal 2006 (the 12-week period ending June 28, 2006) to range between a two
and a four percent improvement versus the comparable period in fiscal 2005.

Restaurant
Costs.Restaurant costs for the third quarter of fiscal 2006 decreased by 0.5% as a
percentage of sales compared with the comparable prior year period. Food costs increased
1.2% as a percentage of sales during the third quarter of fiscal 2006 as compared to the
prior year period primarily due to our steak and shrimp promotions, which commenced early
in fiscal 2006. Our steak offerings were introduced in the first quarter of fiscal 2006
and were expanded system-wide during the second quarter and further expanded in frequency
to six-to-seven days per week during the third quarter. Labor costs decreased 1.4% as a
percentage of sales in large part due to improved sales leverage, as well as a reduction
in workers compensation costs as compared to the prior year period. Direct and occupancy
costs decreased by 0.3% as a percentage of sales primarily due to improved sales leverage
attributable to reasonably fixed costs on an improving sales base. We currently expect
that restaurant costs will range between 84.5% and 86.5% as a percentage of sales during
the fourth quarter of fiscal 2006.

Advertising
Expenses. Advertising costs were flat as a percentage of sales during the third quarter of
fiscal 2006 versus the comparable quarter in the prior year as the increased promotional
advertising in conjunction with the expansion of our system-wide steak promotion was
offset in large part by improved sales leverage. There was an emphasis placed on media
placements to capitalize on the traditional summer surge in consumer traffic. We expect
that advertising costs will range between 2.9% and 3.3% as a percentage of sales during
the fourth quarter of fiscal 2006.

26



General
and Administrative Expenses. General and administrative expenses increased 0.1% as a
percentage of sales during the third quarter of fiscal 2006 as compared to the 16 weeks
ended April 6, 2005. This increase was largely due to higher severance expense and
professional fees, partially offset by reasonably fixed costs on an improving sales base.
We currently expect that general and administrative expenses will range between 4.3% and
4.7% as a percentage of sales for the fourth quarter of fiscal 2006.

Interest
Expense. Interest expense increased 0.2% as a percentage of sales during the third quarter
of fiscal 2006 versus the comparable prior year period primarily due to rising interest
rates on our term loans and the impact of higher accretion of non-cash interest expense on
our 13 7/8% senior discount notes. We currently expect that interest expense will range
between 5.1% and 5.5% as a percentage of sales for the fourth quarter of fiscal 2006.

Income
Taxes. Income tax benefit increased 1.1% as a percentage of sales for the sixteen weeks
ended April 5, 2006 compared to the sixteen weeks ended April 6, 2005 principally due to
an increase in loss before income taxes as well as an increase in the effective tax rate.
The increase in the effective tax rate was largely attributable to the non-deductibility
of a portion of the interest on our 13 7/8% senior discount notes. The increase in
accreted interest related to these notes caused the non-deductible portion of this
interest to have a greater impact on the effective rate. In addition, the
non-deductibility of the costs related to the repurchase of certain rights associated with
management incentive shares previously held by former management shareholders who
separated from the Company during the third quarter of fiscal 2006 increased tax expense
for the third quarter by approximately $286,000.

For the 40 Weeks Ended April 6, 2005
Compared to the 40 Weeks Ended April 5, 2006. Our future results may not be consistent
with our historical results. The following discussion should be read in conjunction with
our condensed consolidated financial statements and related notes included elsewhere in
this report.

|                                                       | Forty Weeks Ended
|------------------------------------------------------ | -----------------
|
|
|Significant items that impacted results of operations: |                  
|Shareholders' rights repurchase (1)                    |                  
|Closed restaurant costs (2)                            |                  
|Impairment of assets (3)                               |                  
|Loss related to refinancing (4)                        |                  
|Loss related to early extinguishment of debt (5)       |                  
|                                                       |                  

|(1) | Shareholders'  rights  repurchase  reflects the costs of the repurchase of certain rights  associated  with shares of common stock
    previously held by former management shareholders who separated from the Company.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Closed  restaurant  costs were $5.5 million  during the first forty weeks of fiscal 2006 as compared to $2.3 million for the comparable
    prior year period.  The increase was due in large part due to the closure of 18 under  performing  restaurants in the first forty weeks
    of fiscal 2006 compared  with nine store  closures in the  comparable  prior year period.  We incurred  cash charges  related to these
    store  closures of  approximately  $3.9  million.  These charges  included  approximately  $3.2
    million related to lease  termination  costs and obligations,  $0.4 million related to employee  termination costs and $0.3 million
    related to other associated costs.  Non-cash charges related to these closures were approximately $0.2 million.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | We test property and equipment for impairment  annually or whenever events or circumstances  indicate that the carrying amount of a
    restaurant's  assets may not be  recoverable.  Assets are grouped and evaluated for  impairment at the lowest level for which there
    are  identifiable  cash  flows,  namely as  individual  restaurants.  During the first  forty  weeks of fiscal  2006,  the  Company
    recognized a loss of approximately  $1.4 million related to impairments of the carrying value of its long-lived assets for 16 under
    performing  restaurants,  as the carrying value of these long-lived assets exceeded their fair value. Fourteen of these restaurants
    were subsequently closed.  There were no impairment charges recognized during the first forty weeks of fiscal 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27



|(4) | We incurred  approximately  $0.8 million in costs of an initial public  offering of Income Deposit  Securities  that was withdrawn
    due to  unfavorable  market  conditions  during the second  quarter of fiscal 2005.  Effective as of July 28, 2005, we entered into
    amendment No. 1, dated as of April 6, 2005, to Buffets,  Inc.'s  Amended and Restated  Credit  Agreement,  dated as of February 20,
    2004.  In conjunction with this amendment, we incurred $0.6 million in transaction fees in the first quarter of fiscal 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | During the first quarter of fiscal 2005, we paid  approximately  $15.7  million to redeem  approximately  $14.3 million of Buffets'
    11 1/4% senior  subordinated notes at an average price of 106.7%. The difference between the premium purchase price and the discounted
    carrying value of the senior  subordinated  notes, as well as the associated  write-off of debt issuance costs, was recognized as a
    loss related to the early extinguishment of debt.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
following table sets forth our results of operations based on the percentage relationship
of the items listed to our restaurant sales during the periods shown:

|                                             | Forty Weeks Ended
|-------------------------------------------- | -----------------
|
|
|Restaurant sales                             |                  
|Restaurant costs                             |                  
|Advertising expenses                         |                  
|General and administrative expenses          |                  
|Shareholders' rights repurchase              |                  
|Closed restaurant costs                      |                  
|Impairment of assets                         |                  
|                                             |                  
|Operating income                             |                  
|Interest expense                             |                  
|Interest income                              |                  
|Loss related to refinancing                  |                  
|Loss related to early extinguishment of debt |                  
|Other income                                 |                  
|                                             |                  
|Loss before income taxes                     |                  
|Income tax benefit                           |                  
|                                             |                  
|Net loss                                     |                  
|                                             |                  

Certain percentage
amounts do not sum to total due to rounding.

Restaurant
Sales.Restaurant sales for the forty weeks ended April 5, 2006 increased $37.6 million,
or 5.4%, compared with the forty weeks ended April 6, 2005. Average weekly sales for the
first forty weeks of fiscal 2006 of $52,731 were 6.9% higher than the comparable prior
year periods average weekly sales of $49,313. Same-store sales for the first forty
weeks of fiscal 2006 increased by 5.5% compared to the comparable prior year period,
reflecting a 6.2% increase in average check, partially offset by a 0.7% decline in guest
traffic.

Restaurant
Costs. Restaurant costs for the first forty weeks of fiscal 2006 decreased 0.6% as a
percentage of sales compared with the comparable prior year period. Food costs increased
1.0% as a percentage of sales primarily due to our steak and shrimp promotions, which
commenced early in fiscal 2006. Our steak offerings were introduced in the first quarter
of fiscal 2006 and were expanded system-wide in the second quarter and further expanded in
frequency to six-to-seven days per week during the third quarter. Labor costs were 1.3%
lower as a percentage of sales in large part due to improved sales leverage, as well as a
reduction in workers compensation costs as compared to the prior year period. Direct and
occupancy costs decreased by 0.1% measured as a percentage of sales versus the comparable
period in the prior year primarily due to improved sales leverage attributable to
reasonably fixed costs on an improving sales base.

28



Advertising
Expenses.Advertising costs increased 0.8% as a percentage of sales during the first forty
weeks of fiscal 2006 versus the comparable period in the prior year as we significantly
increased promotional advertising in conjunction with the expansion of our system-wide
steak promotion during the second quarter. This heightened marketing commitment, resulting
in media coverage for the majority of the Companys owned buffet units, served to
announce the system-wide introduction of steak offerings. Television advertising was
expanded into areas that had previously not received advertising. The scope of advertising
was reduced in the third quarter to a level more consistent with prior years.

General
and Administrative Expenses. General and administrative expenses decreased 0.2% as a
percentage of sales during the first forty weeks of fiscal 2006 as compared to the
comparable period in the prior year. This decrease was largely due to reasonably fixed
costs on an improving sales base.

Interest
Expense. Interest expense increased 0.1% as a percentage of sales during the first forty
weeks of fiscal 2006 versus the comparable prior year period primarily due to rising
interest rates on our term loans and the impact of higher accretion of non-cash interest
expense on our 13 7/8% senior discount notes.

Income
Taxes. Income tax benefit increased 0.4% as a percentage of sales for the forty weeks
ended April 5, 2006 compared to the forty weeks ended April 6, 2005 principally due to an
increase in loss before income taxes as well as an increase in the effective tax rate. The
increase in effective tax rate was largely attributable to the non-deductibility of a
portion of the interest on our 13 7/8% senior discount notes. The increase in the accreted
interest related to these notes caused the non-deductible portion of this interest to have
a greater impact on the effective rate. In addition, the cumulative impacts of the
conversion of one of our subsidiaries to a limited liability company (LLC) in the second
quarter and the non-deductibility of the costs related to the repurchase of certain rights
associated with shares of common stock previously held by former management shareholders
who separated from the Company during the third quarter of fiscal 2006 increased tax expense.
Effective September 22, 2005, OCB Restaurant Co. was converted to OCB
Restaurant Company, LLC. In conjunction with this LLC conversion, we recognized a
cumulative charge of $368,000 to restate the carrying value of our deferred tax assets, to
reflect a lower expected future tax rate. In conjunction with the shareholder rights
repurchases, we recognized an income tax charge of $268,000.

Liquidity and Capital
Resources

We
are a holding company with no operations or assets of our own other than the capital stock
of our subsidiaries. Operations are conducted through our subsidiaries and our ability to
make payments on the senior discount notes is dependent on the earnings and the
distribution of funds from our subsidiaries through loans, dividends or otherwise.
However, none of our subsidiaries is obligated to make funds available to us for payment
on the senior discount notes. The terms of our credit facility place restrictions on
Buffets ability to pay dividends and otherwise transfer assets to us. Further, the
terms of the indenture governing Buffets senior subordinated notes place
restrictions on the ability of Buffets and our other subsidiaries to pay dividends and
otherwise transfer assets to us.

Cash
flows generated from our operating activities provide us with a significant source of
liquidity. Our sales are primarily for cash or credit and settlement occurs within a few
days. Our cash from operations is used for debt service payments, capital expenditures,
including remodeling initiatives, payments to vendors and general corporate purposes. Vendors
are paid on terms ranging from 14 to 35 days. In addition to cash flows from operations,
revolving credit loans and swingline loans are available to us under our credit facility.
Letters of credit issued under the letter of credit facility are also available to us to
support payment obligations incurred for our general corporate purposes. Our favorable
vendor terms relative to the timing of our cash receipts allow us to voluntarily
accelerate our debt repayments, resulting in significant working capital deficit.

Historically,
our capital requirements have been for the development and construction of new
restaurants, restaurant refurbishment and the installation of new information systems. We
expect these requirements to continue in the foreseeable future.

Operating
Activities. Net cash provided by operating activities was $24.6 million for the forty
weeks ended April 5, 2006 and $28.2 million for the forty weeks ended April 6, 2005. Net
cash provided by operating activities exceeded the net loss for the first forty weeks of
fiscal 2006 principally due to the effect of depreciation and amortization, accretion of
original issue discount, an increase in the loss related to the impairment of assets and a
decrease in receivables, partially offset by an increase in prepaid expenses and other
assets, a decrease in accrued and other liabilities and a decrease in income taxes

29



payable. Net cash provided by operating activities exceeded the net loss for the first
forty weeks of fiscal 2005 principally due to the effect of depreciation and amortization,
accretion of original issue discount, the loss related to the early extinguishment of debt
and the loss on disposal of assets, partially offset by an increase in prepaid expenses
and other assets, a decrease in accrued and other liabilities and a decrease in income
taxes payable.

Investing
Activities. Net cash used in investment activities was $22.8 million for the forty weeks
ended April 5, 2006 and $20.8 million for the forty weeks ended April 6, 2005. Investment
activities were largely comprised of capital expenditures for both periods. During the
first forty weeks of fiscal 2006, remodeling and improvement costs on our existing
restaurants accounted for approximately $19.8 million of our capital expenditures. The
bulk of the remainder of our capital expenditures during the first forty weeks of fiscal
2006 were comprised of new construction expenditures. During the first forty weeks of
fiscal 2005, new restaurant construction accounted for approximately $10.1 million of our
capital expenditures. The remainder of our capital expenditures during the first forty
weeks of fiscal 2005 were primarily comprised of remodeling and improvement costs on our
existing restaurants.

Financing
Activities. Net cash used in financing activities totaled $17.0 million for the first
forty weeks of fiscal 2006 and $21.6 million for the first forty weeks of fiscal 2005.
Financing activities consisted primarily of accelerated repayments of debt in both
periods. Buffets, Inc. completed its partial bond repurchase program in August 2004,
cumulatively expending $49.5 million to redeem $43.9 million of senior subordinated notes
at an average price of 109.2% over a period of approximately six months. During the first
quarter of fiscal 2005, Buffets, Inc. spent $15.7 million to redeem $14.3 million of
senior subordinated notes at an average price of 106.7%.

Future
Capital Expenditures. During the remainder of fiscal 2006, we plan to:

| |  |  | Spend approximately $1 million on a new restaurant to be opened this fiscal year.
| | - |  | ---------------------------------------------------------------------------------

| |  |  | Spend  approximately  $7 million on remodeling and improvement  costs that will be capitalized.  Remodeling  incorporates  design
        elements to update the decor of our existing  facilities  including a lighter,  more contemporary  interior design and expanded
        dessert  displays.  Other  improvement  costs include a variety of outlays such as display  grills,  new carpet,  equipment and
        minor leasehold improvements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, we plan to spend approximately $5 million on the repair and maintenance of our
existing restaurant locations, which amounts will be expensed. This will encompass
expenditures to keep equipment in good working order and leasehold improvements in good
condition, without substantially extending the economic lives of the underlying assets.

Store
Closures. We closed 18 under performing restaurants in the first forty weeks of fiscal
2006. We incurred cash charges related to these store closures of approximately $3.9
million. These charges included approximately $3.2 million related to lease termination
costs and obligations, $0.4 million related to employee termination costs and $0.3 million
related to other associated costs. As of April 5, 2006, $1.8 million of these cash charges
have been paid.

We
are not aware of any other material event or trend that would potentially affect our
capital requirements or liquidity. For the next twelve months, we believe that cash flow
from operations, landlord contributions, credits received from trade suppliers and
available borrowing capacity will be adequate to finance our development plans, on-going
operations and debt service obligations.

Credit Facilities and
Other Long Term Debt

On
February 20, 2004, Buffets entered into an amended and restated senior credit facility
(Credit Facility). The Credit Facility provides for total borrowings of up to
$310.0 million including (i) a $230.0 million term loan, (ii) a $30.0 million revolving
credit facility, (iii) a $20.0 million letter of credit facility, and (iv) a $30.0 million
synthetic letter of credit facility. The terms of the Credit Facility permit us to borrow,
subject to availability and certain conditions, incremental term loans or to issue
additional notes in an aggregate amount up to $25.0 million.

Effective
as of July 28, 2005, Buffets Holdings, Inc. entered into Amendment No. 1, dated as of
April 6, 2005 (the Amendment), to Buffets, Inc.s Amended and Restated
Credit Agreement, dated as of February 20, 2004. The Amendment relaxed the interest
coverage and maximum leverage ratios of the Amended and Restated Credit Agreement with
which Buffets, Inc. is required to comply.

As
of April 5, 2006, we had $38.7 million in outstanding letters of credit, which expire
through November 15, 2007. As of April 5, 2006, total borrowing availability was $41.3
million, which is comprised of a revolving credit facility of $30.0 million and letter of
credit facilities of $11.3 million.

On
June 28, 2002, Buffets issued $230.0 million aggregate principal amount of its 111⁄4%
senior subordinated notes due July 15, 2010 at 96.181%. Interest on Buffets senior
subordinated notes is payable semi-annually on January 15 and July 15 of each year. Except
in the event of an initial public offering, we are not entitled to redeem Buffets
senior subordinated notes prior to July 15, 2006, after which we can choose to redeem some
or all of Buffets senior subordinated notes at specified redemption prices.

On
May 18, 2004, we issued $132.0 million aggregate principal amount at maturity of our 13
7/8% senior discount notes due December 15, 2010. Our senior discount notes were issued at
a discount to their aggregate principal amount at maturity. Prior to July 31, 2008,
interest will accrue on our senior discount notes in the form of an increase in the
accreted value of those notes. The accreted value of each senior discount note will
increase until July 31, 2008 at a rate of 13.875% per annum. After this date, cash
interest on the senior discount notes will accrue and be payable on January 31 and July 31
of each year at a rate of 13.875% per annum. If we fail to meet certain leverage ratio
tests on or about July 31, 2006 or July 31, 2008, additional interest will accrue on our
senior discount notes from that date at a rate of 1% per annum, up to a maximum of 2% per
annum.

30



Seasonality and Quarterly
Fluctuations

Our
sales are seasonal, with a lower percentage of annual sales occurring in most of our
current market areas during the winter months. Generally, restaurant sales per unit are
lower in the winter months, our third fiscal quarter ending in April of each year. The
impact of these reduced average weekly sales are mitigated in our quarterly data
presentations through the inclusion of 16 weeks in the quarter ending in early April of
each year, compared to only 12 or 13 weeks in each of the other fiscal quarters. Our
restaurant sales may also be affected by unusual weather patterns, particularly during the
winter months, major world events or matters of public interest that compete for
customers attention.

Forward-Looking
Statements and Risk Factors

Certain
statements contained in this Managements Discussion and Analysis of Financial
Condition and Results of Operations which are not historical facts are forward-looking
statements that are subject to risks and uncertainties that could cause actual results to
differ materially from those set forth in, or implied by, forward-looking statements. We
have tried, whenever possible, to identify these forward-looking statements using words
such as projects, anticipates, believes,
estimates, expects, plans, intends, and
similar expressions. Similarly, statements herein that describe our business strategy,
outlook, objectives, plans, intentions or goals are also forward-looking statements. The
risks and uncertainties involving forward-looking statements include, but are not limited
to, general business and economic conditions, negative publicity, the impact of
competition, the seasonality of our business, adverse weather conditions, future commodity
prices, fuel and utility costs, labor costs, employment and environmental laws, public
health developments including avian flu, governmental regulations, and inflation. For a
detailed discussion of risks and uncertainties that may cause our future performance to
differ from that projected in the forward-looking statements, please refer to the
Risk Factors/Forward-Looking Statements section contained in our Form 10-K
filed with the Securities and Exchange Commission on September 23, 2005. All
forward-looking statements speak only as of the date of this report. All subsequent
written and oral forward-looking statements attributable to us or any person acting on our
behalf are qualified by the cautionary statements in this section. We undertake no
obligation to update or publicly release any revisions to forward-looking statements to
reflect events, circumstances or changes in expectations after the date of this report.

# ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest
Rate Risks. We have interest rate exposure relating to the variable portion of our
long-term obligations. Buffets 111⁄4% senior subordinated notes and our 13 7/8%
senior discount notes are fixed rate instruments, while the interest rates on the term
loans under the Credit Facility are variable. A 1% change in interest rates on our
variable rate debt would have resulted in our interest rate expense fluctuating by
approximately $1.5 million for the forty weeks ended April 5, 2006.

Food
Commodity Risks.Many of the food products purchased by us are affected by commodity
pricing and are, therefore, subject to price volatility caused by weather, production
problems, delivery difficulties and other factors that are outside our control. To control
this risk in part, we have fixed price purchase commitments with terms of one year or less
for some key food and supplies from vendors who supply our national food distributor. In
addition, we believe that substantially all of our food and supplies are available from
several sources, which helps to control food commodity risks. We believe we have the
ability to increase menu prices, or vary the menu items offered, if needed, in response to
food product price increases within the range that has been experienced historically. To
compensate for a hypothetical price increase of 10% for food and beverages, we would need
to increase menu prices by an average of approximately 3%. Our average menu price
increases were approximately 6% for the forty weeks ended April 5, 2006. Accordingly, we
believe that a hypothetical 10% increase in food product costs would not have a material
effect on our operating results.

# ITEM 4. CONTROLS AND
PROCEDURES

Disclosure
Controls and Procedures.We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and regulations, and that the information
is accumulated and communicated to our management, including our principal executive
officer and our principal financial and accounting officer, as appropriate, to allow
timely decisions regarding required disclosures based closely on the definition of
disclosure controls and procedures in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934.

As
of April 5, 2006, we carried out an evaluation, under the supervision and with the
participation of our management, including our principal executive officer and our
principal financial and accounting officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation, we
concluded that our disclosure controls and procedures were effective.

31



Changes
in Internal Control. During the forty weeks ended April 5, 2006, there were no significant
changes in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) of the Securities and Exchange Act of 1934) that have materially affected,
or are reasonably likely to materially affect, our internal control over financial
reporting.

It
should be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the system
will be met. In addition, the design of any control system is based in part upon certain
assumptions about the likelihood of future events. Because of these and other inherent
limitations of control systems, there is only reasonable assurance that our controls will
succeed in achieving the stated goals under all potential future conditions.

# PART II. OTHER
INFORMATION

# ITEM 1. LEGAL PROCEEDINGS

Litigation.
          On November 12, 2004, two former restaurant managers of our wholly-owned
          subsidiary, HomeTown Buffet, Inc. (HomeTown Buffet), individually
          and on behalf of all others similarly situated, filed a class action lawsuit
          against HomeTown Buffet in California Superior Court in San Francisco County.
          The lawsuit alleges that the defendants violated California wage and hour laws
          by failing to pay all of its California managers and assistant managers
          overtime, and for making deductions from bonus compensation based on the
          companys workers compensation costs. In March 2006, the plaintiffs
          amended the complaint in the lawsuit to add OCB Restaurant Company, LLC as a
          defendant, and to limit the claims to those managers below the level of
          restaurant general manager. In April 2006, the defendants removed the lawsuit to the
          United States District Court for the Northern District of California. The
          plaintiffs seek compensatory damages, penalties, restitution of unpaid overtime
          and deductions, pre-judgment interest, costs of suit and reasonable
          attorneys fees. The complaint does not make a specific monetary demand.
          This action is in a preliminary stage, and we are currently not able to predict
          the outcome of this action or reasonably estimate a range of possible loss. We
          are vigorously defending this action.

We
are also involved in various legal actions arising in the ordinary course of business. In
the opinion of management, the ultimate disposition of these matters will not have a
material adverse effect on our consolidated financial position or the results of
operations.

# ITEM 5. OTHER INFORMATION

Strategic
Alternatives.On January 13, 2006, Buffets Holdings issued a press release announcing that
we plan to engage financial advisors to assist in exploring various strategic alternatives
to maximize shareholder value. Credit Suisse Securities (USA) LLC and Piper Jaffray & Co.
were subsequently engaged as our advisors to assist in this effort.

Store
Closures. In February 2006, the Company closed fourteen under performing restaurants. The
Company incurred cash charges related to these store closures in the third quarter of
fiscal 2006 of approximately $3.8 million. These charges included approximately $3.2
million related to lease termination costs and obligations, $0.4 million related to
employee termination costs and $0.2 related to other associated costs. Non-cash charges
related to these closures were approximately $0.1 million. These charges were expensed as
incurred pursuant SFAS 146 and are recorded in closed restaurant costs in the
condensed consolidated statements of operations.

Shareholders
Rights Repurchase. During the third quarter of fiscal 2006, we repurchased shares of
common stock held by former management shareholders who separated from the Company.
Pursuant to section 4.8(b) of our Stockholders Agreement, if a definitive agreement
respecting the sale of our Company is executed within six months following the separation
of management shareholders and the purchase price is higher than that determined for the
shares, the management shareholders are to receive an additional payment from us for their
respective shares equal to the difference (such rights referred to herein as
clawback rights). The former management shareholders waived these
clawback rights for the related shares repurchased in the third quarter of
fiscal 2006 in return for a higher price per repurchased share. In conjunction with the
share repurchase, the Company paid approximately $0.8 million to these former shareholders
as consideration paid for waiving their clawback rights. The total payment of
$0.8 million was expensed to the condensed consolidated statement of operations.

32



Voluntary
Filer. We are a voluntary filer and file annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, amendments to those reports and other information
with the Securities and Exchange Commission (SEC). The public can obtain
copies of these materials by contacting the SEC at 1-800-SEC-0330, or by accessing the
SECs website at www.sec.gov. In addition, a link to our SEC filings is provided on
our website at www.buffet.com.

# ITEM 6. EXHIBITS

See
Index to Exhibits on page 35 of this report.

33



# 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.

|                     |    
|-------------------- | ---
|
|
|
|
|
|                     |    
|
|
|Date:   May 18, 2006 | By:
|                    
|                     |    
|                     |    
|                     |    
|                     |    
|                     | By:
|                    
|                     |    
|                     |    
|                     |    

34



# INDEX TO EXHIBITS

|      | 
|----- | 
|
|
|10.1* | 
|      | 
|10.2* | 
|      | 
|10.3* | 
|      | 
|10.4* | 
|      | 
|10.5* | 
|      | 
|31.1  | 
|      | 
|31.2  | 
|      | 

---

*     Previously provided or incorporated
by reference.

35