**UNITED STATES**

# **SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

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| **x**                                                | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES**     |
|------------------------------------------------------|------------|------------------------------------------------------------------------------------|
|                                                 |       | **EXCHANGE ACT OF 1934**                                                           |
| **For  the fiscal year ended January 28, 2008** |
| **OR**                                               |
| **o**                                                | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES** |
|                                                 |       | **EXCHANGE ACT OF 1934**                                                           |

 

**Commission file number:0-6054**

 

**STARBUFFET, INC.**

(Exact Name of Registrant as Specified in itsCharter)

 

| **Delaware**                              | ** ** | **84-1430786**      |
|-------------------------------------------|------------|---------------------|
| (State or Other Jurisdiction  of          |       | (I.R.S. Employer    |
| Incorporation or Organization)            |       | Identification No.) |
|                                      |       |                |
| **1312 N. Scottsdale Rd.**                | ** ** | ** **          |
| **Scottsdale, Arizona**                   |       | **85257**           |
| (Address of Principal  Executive Offices) | ** ** | (Zip Code)          |

 

**Registrant’s TelephoneNumber, Including Area Code: (480) 425-0397**

 

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**Securities registered pursuant to Section 12(b) ofthe Act: None**

** **

**Securities registered pursuant to Section 12(g) ofthe Act:**

** **
| **(Title of Each Class):** |
|----------------------------|
| **Common Stock**           |
| **$.001 par value**        |

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. Yes o Nox

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act. Yes o Nox

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days. Yes x  No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x.

 

Indicate by check mark whetherregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See the definition of “Large AcceleratedFiler,” “Accelerated Filer” and “Smaller Reporting Company” in Rule 12b-2of the Exchange Act. Large Accelerated Filer o  Accelerated Filer o  Non-Accelerated Filer o (Do not check if smaller reporting company)  Smaller Reporting Company x

 

**     **Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes o Nox

** **

At August 13, 2007, thelast business day of the registrant’s second fiscal quarter, there wereoutstanding 3,170,675 shares of the registrant’s common stock, $.001 parvalue.  The aggregate market value ofcommon stock held by non-affiliates of the registrant based on the lastreported sale price of the common stock as reported on the NASDAQ Small CapMarket on August 13, 2007, ($7.95 per share) was $9,282,110.  For purposes of this computation, allexecutive officers, directors, and 10% beneficial owners of the registrant weredeemed to be affiliates.  Suchdetermination should not be deemed an admission that such executive officers,directors, or 10% beneficial owners are, in fact, affiliates of the registrant.

 

As of April 14, 2008, theregistrant had 3,213,075 shares of common stock outstanding.

 

Documents incorporated byreference: Portions of the registrant’s Proxy Statement for the 2008 AnnualMeeting of Stockholders, to be filed with the Securities and ExchangeCommission within 120 days after January 28, 2008, are incorporated byreference into Part III of this Form 10-K.

 

 

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**STAR BUFFET, INC., ANDSUBSIDIARIES**

 

**Index to Annual Report on Form 10-K**

 

**For the Fiscal Year Ended January 28,2008**

** **
| ** **  | ** **                                                                                                          | **Page**   |
|-------------|---------------------------------------------------------------------------------------------------------------------|------------|
|        | **PART I**                                                                                                     | ** ** |
|        | ** **                                                                                                          | ** ** |
| ITEM 1.     | BUSINESS                                                                                                            | 1          |
|        |                                                                                                                |       |
| ITEM 1A.    | RISK FACTORS                                                                                                        | 6          |
|        |                                                                                                                |       |
| ITEM 1B.    | UNRESOLVED  STAFF COMMENTS                                                                                          | 8          |
|        |                                                                                                                |       |
| ITEM 2.     | PROPERTIES                                                                                                          | 9          |
|        |                                                                                                                |       |
| ITEM 3.     | LEGAL  PROCEEDINGS                                                                                                  | 10         |
|        |                                                                                                                |       |
| ITEM 4.     | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                | 10         |
|        |                                                                                                                |       |
|        | **PART II**                                                                                                    | ** ** |
|        | ** **                                                                                                          | ** ** |
| ITEM 5.     | MARKET  FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES | 11         |
|        |                                                                                                                |       |
| ITEM 6.     | SELECTED  FINANCIAL DATA                                                                                            | 12         |
|        |                                                                                                                |       |
| ITEM 7.     | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                    | 14         |
|        |                                                                                                                |       |
| ITEM 7A.    | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                         | 22         |
|        |                                                                                                                |       |
| ITEM 8.     | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                        | 23         |
|        |                                                                                                                |       |
| ITEM 9.     | CHANGES IN  AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURE                         | 23         |
|        |                                                                                                                |       |
| ITEM 9A(T). | CONTROLS AND PROCEDURES                                                                                             | 23         |
|        |                                                                                                                |       |
| ITEM 9B.    | OTHER INFORMATION                                                                                                   | 25         |
|        |                                                                                                                |       |
|        | **PART III**                                                                                                   | ** ** |
|        | ** **                                                                                                          | ** ** |
| ITEM 10.    | DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                             | 25         |
|        |                                                                                                                |       |
| ITEM 11.    | EXECUTIVE  COMPENSATION                                                                                             | 25         |
|        |                                                                                                                |       |
| ITEM 12.    | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS               | 25         |
|        |                                                                                                                |       |
| ITEM 13.    | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE                                           | 25         |
|        |                                                                                                                |       |
| ITEM 14.    | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                             | 25         |
|        |                                                                                                                |       |
|        | **PART IV**                                                                                                    | ** ** |
|        |                                                                                                                | ** ** |
| ITEM 15.    | EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES                                                                         | 26         |
|        |                                                                                                                |       |
|        | SIGNATURES                                                                                                          | 27         |
|        |                                                                                                                |       |
|        | EXHIBIT INDEX                                                                                                       | E-1        |
|        |                                                                                                                |       |
|        | FINANCIAL STATEMENTS                                                                                                | F-1        |

 

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**Cautionary StatementsRegarding Forward-Looking Statements**

 

This annual report on Form 10-K containsforward-looking statements, within the meaning of the Securities Exchange Actof 1934 and the Securities Act of 1933, which are subject to known and unknownrisks, uncertainties and other factors which may cause the actual results,performance or achievements of the Company to be materially different from anyfuture results, performance or achievements expressed or implied by suchforward-looking statements. In some cases, forward-looking statements areidentified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,”“will,” “may” and similar expressions. You should not place undue reliance onthese forward-looking statements, which speak only as of the date of thisannual report on Form 10-K. All these forward-looking statements are basedon information available to the Company at this time, and the Company assumesno obligation to update any of these statements. Actual results could differfrom those projected in these forward-looking statements as a result of manyfactors, including those identified in the section titled “Risk Factors” underItem 1A and elsewhere. You should review and consider the various disclosuresmade by the Company in this report, and those detailed from time to time in theCompany’s filings with the Securities and Exchange Commission, that attempt toadvise you of the risks and factors that may affect the Company’s futureresults.

 

**PART I**

 

**Item 1. *Business***

 

**Overview**

 

StarBuffet, Inc., a Delaware corporation (“Star” and collectively with itssubsidiaries, the “Company”), is a multi-concept restaurant holding company. Asof January 28, 2008, the Company owned and operated 12 franchised HomeTownBuffets, seven JB’s restaurants, five Whistle Junction restaurants, three 4B’Srestaurants, three Holiday House restaurants, three Western Sizzlinrestaurants, two BuddyFreddys restaurants, two BuddyFreddys Country Buffets,two JJ North’s Grand Buffets, two K-BOB’S Steakhouses, one Pecos DiamondSteakhouse, one Bar-H Steakhouse and one Casa Bonita Mexican theme restaurant.The Company also had five restaurants currently closed for remodeling andrepositioning, three restaurants leased to third-party operators and the netassets of another closed restaurant reported as property held for sale. TheCompany’s restaurants are located in Arkansas, Arizona, Colorado, Florida,Georgia, Idaho, Mississippi, Montana, New Mexico, Oklahoma, Oregon, Texas,Utah, Washington and Wyoming.

 

**Recent Developments**

 

On March 12, 2008, theBoard of Directors approved the Company’s fifth consecutive annualdividend.  This year the dividend is$0.60 per common share and is payable on June 4, 2008 to shareholders ofrecord on May 6, 2008.

 

On February 29, 2008, Starlite Holdings, Inc.(“Starlite”), a newly formed, wholly-owned, independently capitalizedsubsidiary of Star Buffet, Inc. acquired certain assets and facilityleases for four Barnhill’s Buffet restaurants from Barnhill’s Buffet, Inc.(“Barnhill’s”) for a purchase price of approximately $1,075,000.  Barnhill’swas in a Chapter 11 bankruptcy proceeding in the U.S. Bankruptcy Court of theMiddle District of Tennessee and the acquisition was approved by thecourt.  The acquired restaurants are located in Florida (2) andMississippi (2) and as part of the acquisition the Company acquiredperpetual rights to use the Barnhill’s name and related intellectual property.

 

On February 29,2008 the Company amended its Senior Secured Credit Facility (“Credit Facility”)dated January 31, 2008 with Wells Fargo Bank N.A., increasing the term loanprincipal from $7,000,000 to $8,000,000. The Credit Facility was issued on January 31,2008.The increase in the Credit Facility was used to fund the acquisition of thefour Barnhill’s Buffet restaurants as described above.  The CreditFacility is guaranteed by Star Buffet’s subsidiaries and bears interest, at theCompany’s option, at Wells Fargo’s base rate plus 0.25% or at LIBOR plus2.00%.  The Credit Facility is secured by a first priority perfected lienon all of the Company’s assets, except for those assets that are currentlypledged as security for existing obligations, in which case Wells Fargo willhave a second lien.  The term loanmatures on January 31, 2012 and provides for principal to be amortized at$175,000 per quarter for the initial six quarters; $225,000 for the next ninequarters; with any remaining balance due at maturity.  Interest is payablemonthly.  A $2,000,000 revolving line of credit matures on January 31,2012.  Interest on the revolver is payable monthly.  As of April 14,2008, no balance was outstanding on the revolving line of credit.  There is a 0.50% fee for the unused portionof the revolving line of credit.   Inconnection with the Credit Facility, Wells Fargo was granted 42,440 shares ofthe Company’s restricted common stock. The shares were valued at $252,094 and will be amortized over the lifeof the loan.  The Credit Facility can beprepaid in whole or part without penalty.

 

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The CreditFacility contains a number of covenants and restrictions, includingrequirements to meet certain financial ratios and limitations with respect tothe Company’s use of cash.  The Company’squarterly financial covenants associated with this debt start May 19,2008, the end our first quarter in fiscal 2009. The Company is required toobtain interest rate protection through an interest rate swap or caparrangement with respect to not less than 50% of the term loan amount.  Furthermore, certain provisions of the CreditFacility require the Company to remit proceeds from asset dispositions,issuance of debt or equity, insurance proceeds, tax refunds and fifty percent (50%)of excess cashflow (as defined) to reduce the principal amount of the term loanand, thereafter, the revolving line of credit.  Under terms of the CreditFacility, the Company is permitted to pay an annual dividend.  However,restrictions imposed under terms of the Credit Facility may adversely impactthe Company’s ability to pay an annual dividend as the Company has historicallyrelied on multiple sources of cash to fund the dividend.  As of the date of this report, the Companywas in compliance with all of such requirements.

 

On January 31,2008, Star Buffet Management, Inc., a wholly-owned subsidiary of StarBuffet, Inc. acquired the assets and facility leases for sixteen (16)Barnhill’s Buffet restaurants from Barnhill’s for a purchase price ofapproximately $5 million.  The acquisition was approved by thecourt.  The acquired restaurants are located in the following states:Alabama (1), Arkansas (1), Florida (4), Louisiana (3), Mississippi (4), andTennessee (3) and as part of  theacquisition the Company acquired perpetual rights to the use of the Barnhill’sname and related intellectual property.  This acquisition was fundedthrough the Company’s Credit Facility dated January 31, 2008.

 

**Business**

 

The Company’s objective is tooperate a portfolio of well-established, family-oriented restaurant brandsprimarily throughout the southeastern and western United States. The Companybelieves that certain management practices, when applied uniformly across adiversified base of restaurants concepts, will result in consistentlyprofitable financial performance. Key elements of the Company’s managementpractices are:

 

·    *Pay for Performance.*The Company has developed food, labor andcustomer service performance measurements and reporting mechanisms that allowmanagement to effectively monitor restaurant-level operations, benchmarkrestaurant performance and communicate best-practices across its restaurantoperations. Through the use of brand specific bonus programs the Company seeksto motivate its employees, minimize turnover and foster an environment whereemployees are encouraged to maximize restaurant level profitability.

 

·    *Low Overhead.*The Company has been able to maintain a minimalcorporate management structure by expanding the number of restaurantssupervised by field managers, having corporate personnel oversee multipleadministrative functions and by appropriate outsourcing of certain functionswhen cost effective. The Company’s corporate management provides purchasing,information systems, insurance, finance, accounting and payroll servicesdirectly to all restaurants so that managers can focus on restaurant operationsand guest satisfaction.

 

·    *Brand Management/Marketing Economies.*The Company’s strategy is to separately manageeach of its restaurant brands.  And,although each brand is positioned somewhat differently in the market, theCompany seeks to achieve scale by utilizing marketing techniques, such as localstore marketing, radio advertising and promotional mailers, across a spectrumof similar brands.

 

**Segment and RelatedReporting**

 

TheCompany has four reporting segments: HomeTown Buffet, North’s Star, FloridaBuffets Division and Summit Restaurant Division. The Company’s reportablesegments are based on brand similarities and certain contractual requirements.The HomeTown Buffet segment includes the Company’s 12 franchised HomeTownBuffet restaurants.  The HomeTown Buffetsegment also includes one restaurant closed for repositioning.  In addition, another HomeTown Buffetrestaurant was closed during the year. The North’s Star segment includes three Western Sizzlin restaurants andtwo JJ North’s Grand Buffet restaurants. The North’s Star segment also includes two non-operating restaurants, aNorth’s Star Buffet and an Oklahoma Steakhouse restaurant.  The North’s Star Buffet restaurant is leasedto a third party.  The Florida BuffetsDivision includes two BuddyFreddys restaurants, two BuddyFreddys Country Buffetrestaurants, three Holiday House restaurants and five Whistle Junction buffetrestaurants. Results for fiscal 2008 also include 16 weeks of operations forone Whistle Junction restaurant that was closed 

 

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when the management contract was not renewed. In addition, another fourrestaurants in Florida Buffet Division are currently non-operating with twoleased to third parties. The Summit Restaurants Division includes the Company’sseven JB’s Restaurants. The Summit Restaurants Division also includes three 4B’Srestaurants, the Casa Bonita restaurant, two K-BOB’S Steakhouses, one PecosDiamond Steakhouse and one Bar-H Steakhouse. The Summit Restaurant Division also includes two temporarily closedK-BOB’S Steakhouse restaurants.   Withthe acquisition of 20 Barnhill’s Buffet restaurants in fiscal 2009, the Companywill change its reporting segments to the Buffet Division and Non-BuffetDivision.  (See Item 15, FinancialStatements, Note 8.)

 

**Growth Strategy**

 

The Company seeks growthprimarily through the acquisition of existing restaurants which can benefitfrom the Company’s management practices. The Company supplements its program ofacquisitions with the purchase of restaurant properties that can be convertedto the Company’s existing brands and minority investments in, or strategicalliances with, other restaurant chains.

 

·      *Acquisitions.*The Company believes that a number of acquisitionopportunities exist in restaurant segments that include buffets, cafeterias,family dining and steakhouses. The Company believes that many restaurants inthese segments are privately owned and may be available for acquisitionparticularly when the owners decide to retire. Other restaurants may become available for purchase when corporateowners decide to convert from a company store to a franchisor business model orwhen a company is faced with a financial reorganization.

 

·      *Restaurant Conversions.* In recent years, a number of chains in thefamily dining and budget steakhouse segments of the restaurant industry haveexperienced operational difficulties and declining performance. The Companybelieves that these difficulties are the result of increasing competition fromnational casual dining and steakhouse chains which offer superior productquality and service at competitive prices. Many of these restaurants andsteakhouses occupy desirable locations that the Company believes can beacquired and converted to one of its concepts at lower prices or leased atlower rates when compared to the cost of new construction.

 

·      *Minority Investments andStrategic Alliances.*The Companyintends to seek minority investments in, or strategic alliances with, otherrestaurant chains. The Company believes that these investments can provide anattractive, lower risk opportunity for the Company and may facilitate theacquisition of such chains at a later date.

 

**Restaurant Concepts**

 

**HomeTown Buffet Division**

 

*General.*The Company, through its wholly-owned, independentlycapitalized HTB Restaurants, Inc. (“HTB”) subsidiary, has a franchise agreementwith HomeTown Buffet, Inc., a wholly-owned subsidiary of Buffets Holdings, Inc. HTB entered into a franchiseagreement for each location which requires among other items, the payment of acontinuing royalty fee to HomeTown Buffet, Inc. The royalty fee is basedon 2% of the aggregate gross sales of each HomeTown Buffet restaurant.  Each of the franchise agreements has a20-year term (with two five-year renewal options). The franchisor requires HTBto operate each restaurant in conformity with franchise operating manuals,recipe manuals and menus.   The franchiseagreement restricts the Company from operating other buffet restaurant brandswithin a geographic radius of the Company’s or the franchisor’s HomeTown Buffetrestaurants.  The HomeTown franchisor mayterminate a franchise agreement for a number of reasons, including HTB’sfailure to pay royalty fees when due, failure to comply with applicable laws orrepeated failure to comply with one or more requirements of the franchiseagreement.

 

HTB operates 12 HomeTown Buffetrestaurants in Arizona (8), New Mexico (2), Utah (1) and Wyoming (1). Therestaurants are approximately 10,000 square feet and seat approximately 375customers.  HTB also has one restaurantclosed for repositioning in Colorado.

 

###### **North’s Star Division**

###### ** **

*General.* The North’s Star Division consists of threeWestern Sizzlin restaurants in Arkansas, Georgia and Mississippi, two JJ North’sGrand Buffet restaurants and one North’s Star Buffet restaurant. The Company’stwo JJ North’s Grand Buffet restaurants are 

 

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located in Oregon and Washington. The JJ North’sCountry Buffet restaurant located in Boise, Idaho was closed and the leaseexpired March 31, 2008. The North’s Star Buffet restaurant located inArizona is leased to a third party.  TheNorth’s Star Division also has a Oklahoma Steakhouse in Weatherford, Oklahomaclosed for repositioning.  Therestaurants range from 4,000 to 10,000 square feet and seat approximately 125to 325 customers.

 

###### **Florida Buffets Division**

###### ** **

*General.* The Company, through several transactions,acquired 16 properties in Florida which currently operate under the brand namesBuddyFreddys Country Buffet (6), Whistle Junctions (5), BuddyFreddys (2) andHoliday House (3).  The Whistle Junctionrestaurants were acquired by the Company on November 28, 2006. Two of thesix BuddyFreddys Country Buffet restaurants have been closed for repositioning;two of these closed restaurants have been leased to third-party operators andthe net assets of one former BuddyFreddys Country Buffet closed restaurant areclassified as property held for sale. BuddyFreddys restaurants and WhistleJunction restaurants average approximately 10,000 square feet with seating forapproximately 325 guests. Holiday House restaurants average approximately 5,500square feet with seating for approximately 170 guests.

 

###### **Summit Restaurants Division**

###### ** **

*General*.  The Company, through its wholly-owned,independently capitalized Summit Family Restaurants, Inc., (“Summit”)subsidiary, operates six JB’s restaurants in Montana (2), Utah (3) andIdaho (1) and one Casa Bonita restaurant located in Denver, Colorado, fourK-BOB’S restaurants located in Texas (3), New Mexico (1) and a PecosDiamond Steakhouse in Artesia, New Mexico. On May 29, 2007, Summit acquired a Bar-H Steakhouse in Dalhart,Texas.  Summit also acquired three 4B’Srestaurants in Montana, two on July 31, 2007 and one on October 16,2007.  Two of the four K-BOB’S Steakhouserestaurants were temporarily closed at the end of fiscal 2008.  The JB’s and 4B’S restaurants areapproximately 4,000 to 5,500 square feet in size and seat approximately 110 to175 customers.  The Casa Bonita facilityis approximately 52,000 square feet with seating capacity for approximately4,000 customers.  K-BOB’S Steakhouses,Pecos Diamond Steakhouse and Bar-H Steakhouse are approximately 5,000 squarefeet with seating capacity for 150 customers.

 

Subsequent to theacquisition of certain JB’s Family Restaurants in 1998 from JB’s FamilyRestaurants, Inc. (“JB’s”), a wholly-owned subsidiary of CKE Restaurants, Inc.,the Company entered into a License Agreement for each newly acquired JB’sFamily Restaurant.  In November 2002,the Company renewed the JB’s license agreement for $773,000. The licenseagreement is being amortized as an intangible asset.  Amortization expense for fiscal 2008, 2007and 2006 was $78,000 each year.

 

**Licenses, Trademarks andService Marks**

 

The Company owns the trademarksand service marks for BuddyFreddys, Casa Bonita, Holiday House, Pecos DiamondSteakhouse, Bar-H Steakhouse, 4B’S restaurants and Whistle Junction and has alicense agreement with CKE Restaurants, Inc. for use of the “Star” nameand design. The Company has an agreement with North’s Restaurants, Inc.for a perpetual, royalty-free, transferable license to use the intangibleproperty of JJ North’s Grand Buffet. The Company utilizes the HomeTown Buffetand Western Sizzlin’ marks pursuant to various franchise and licenseagreements. The Company has a license agreement and, if exercised, one ten yearoption to use the JB’S trademark through August 31, 2022.  The Company has a perpetual license agreementto utilize, under certain circumstances, the K-BOB’S Steakhouse brand. Thecompany has perpetual rights to the use of the Barnhill’s name and logoas part of its acquisition of 20 Barnhill’s Restaurants in January and February2008.

 

###### **Competition**

###### ** **

The Company competes on thebasis of the quality and value of food products offered, price, service,location, ambiance and overall dining experience.  The Company’s competitors include a large anddiverse group of restaurant chains and individually owned restaurants.  The number of restaurants with operationssimilar to those of the Company has grown considerably in recent years.  As the Company and its principal competitorsexpand operations in various geographic areas, competition can be expected toincrease.

 

**Seasonality**

 

The Company’s business ismoderately seasonal in nature. For the majority of the Company’s restaurants,the highest volume periods are in the first and second fiscal quarters.

 

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**Employees**

 

As of April 14, 2008, theCompany employed approximately 2,800 persons, of whom approximately 2,790 wererestaurant employees. Restaurant employees include salaried management and bothfull-time and part-time workers paid on an hourly basis. No Company employeesare covered by collective bargaining agreements. The Company believes that itsrelations with its employees are generally good.

 

**Directors and Executive Officers**

 

The following table sets forth certain informationregarding the Company’s directors and executive officers:

 
| **Name**                          | ** ** | **Age** | ** ** | **Position**                                     |
|-----------------------------------|------------|---------|------------|--------------------------------------------------|
| Robert E. Wheaton                 |       | 56      |       | Chief Executive Officer,  President and Chairman |
| Ronald E. Dowdy                   |       | 51      |       | Group Controller, Treasurer  and Secretary       |
| Thomas G. Schadt                  |       | 66      |       | Director                                         |
| Phillip “Buddy” Johnson |       | 56      |       | Director                                         |
| Craig B. Wheaton                  |       | 51      |       | Director                                         |
| B. Thomas M. Smith, Jr.      |       | 73      |       | Director                                         |
| Todd S. Brown                     |       | 51      |       | Director                                         |

 

*Robert E. Wheaton* has served as the Chief Executive Officer andPresident and as a director of the Company since its formation in July 1997.Mr. Wheaton has been Chairman of the Board since September 1998. Mr. Wheatonserved as Executive Vice President of CKE Restaurants, Inc. from January 1996through January 1999. From April 1995 to January 1996, he servedas Vice President and Chief Financial Officer of Denny’s Inc., a subsidiary ofFlagstar Corporation. From 1991 to 1995, Mr. Wheaton served as Presidentand Chief Executive Officer, and from 1989 to 1991 as Vice President and ChiefFinancial Officer of The Bekins Company. Mr. Wheaton is the brother ofCraig B. Wheaton, a director of the Company.

 

*Ronald E. Dowdy* has served as the Group Controller since June 1998and as Treasurer and Secretary since February 1999. Mr. Dowdy servedas Controller to Holiday House Corporation for 19 years prior to joining theCompany.

 

*Thomas G. Schadt* has served as a director of the Company sincethe completion of the Company’s initial public offering in September 1997.Mr. Schadt has been the Chief Executive Officer of a privately-heldbeverage distribution company, Bear Creek, L.L.C., since 1995. From 1976 to1994, he held several positions with PepsiCo, Inc., most recently, VicePresident of Food Service.

 

*Phillip “Buddy” Johnson*has served as a director of the Company since February 1999. Mr. Johnsonhas served as the Supervisor of Elections of Hillsborough County since March 2003.From March 2001 until March 2003, he served as the Director of theDivision of Real Estate in the Florida Department of Business and ProfessionalRegulations. Mr. Johnson served as President of the BuddyFreddys Divisionfrom April 1998 until March 2001. From 1980 until 1998, he was thefounding Chairman and CEO of BuddyFreddys Enterprises. From 1991 to 1996, Mr. Johnsonserved as Republican floor leader in the Florida House of Representatives. Mr. Johnsonalso served on the executive committee of The Foundation for Florida’s Future,a non-profit corporation established in 1995 by former governor, Jeb Bush.

 

Craig B. Wheaton hasserved as a director of the Company since February 1999. Mr. Wheatonis a partner in the law firm Kilpatrick Stockton LLP. His main areas ofpractice include employee benefits, executive compensation and generalcorporate law. Mr. Wheaton received his B.A. degree, with honors, from theUniversity of Virginia and his J.D. degree from Wake Forest University. From1993 to 1998, Mr. Wheaton was a member of the Tax Council of the NorthCarolina Bar Association Section on Taxation and chair of its EmployeeBenefits Committee from 1995 to 1997. He is a member and former president ofthe Triangle Benefits Forum. He is a member of the Southern Employee BenefitsConference, the Employee Benefits Committee of the American Bar Association’s Section ofTaxation, the National Pension Assistance Project’s National Lawyers Network,and the National Association of Stock Plan Professionals.

 

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*B. Thomas M. Smith, Jr.*has served as a director of the Company since June 2002.  Mr. Smith was a consultant with ITTCorp. from January 1996 to December 1996 and is now retired.  From 1988 until 1995, he was Vice Presidentand Director of Corporate Purchasing for ITT Corp.  Mr. Smith served as director of RepublicBancorp from June 1999 until April 2005.

 

*Todd S. Brown* has served as adirector of the Company since June 2004. Mr. Brown has served Brown Capital Advisors, Inc. as thePresident since November 1999. From 1994 to November 1999, Mr. Brownserved as Senior Vice President, Chief Financial Officer and Director ofPhoenix Restaurant Group, Inc. (formerly DenAmerica Corp.). Mr. Brownserved as Senior Manager in Audit and Consulting at Deloitte Touche LLP from1980 to 1994. Mr. Brown received an MBA from the University of Missouri in1980 and a BA from Southern Methodist University in 1978.

 

The audit committee is comprised of Todd S. Brown, Thomas G. Schadt andB. Thomas M. Smith, Jr., of which Todd S. Brown is the audit committeefinancial expert and chairman. All three members of the audit committee are “independent”as determined in accordance with the NASDAQ listing standards.

 

**Item 1A.  *Risk Factors***

 

***Our Growth Strategy Depends Upon our Ability to Acquire andSuccessfully Integrate Additional Restaurants.***During fiscal 2008 and subsequent to January 28,2008 the Company acquired a total of 29 restaurants. These acquisitionsrepresent a significant increase in the number of restaurants operated by theCompany and involve risks that could adversely affect the Company’s business,results of operations and financial condition, including the diversion ofmanagement’s attention, the assimilation of the operations and personnel of theacquired restaurants and the potential loss of key employees. In particular,the failure to maintain adequate operating and financial control systems orunexpected difficulties encountered during assimilation of the acquiredrestaurants could materially and adversely affect the Company’s businessfinancial condition and results of operations.**

*** ***

**TheCompany intends continue to pursue a strategy of moderate growth, primarilythrough acquisitions. The success of this strategy will depend in part on theability of the Company to acquire additional restaurants or to convert acquiredsites into restaurants.  The success ofthe Company’s growth strategy is dependent upon numerous factors, including theavailability of suitable acquisition opportunities, the availability ofappropriate financing, and general economic conditions.  The Company must compete with otherrestaurant operators for acquisitions and with other restaurant operators,retail stores, companies and developers for desirable sites.  Many of these entities have substantiallygreater financial and other resources than the Company. Many of its acquiredrestaurants may be located in geographic markets in which the Company haslimited or no operating experience. There can be no assurance that the Companywill be able to identify, negotiate and consummate acquisitions or thatacquired restaurants or converted restaurants can be operated profitably andsuccessfully integrated into the Company’s operations.**

** **

**Acquisitionsinvolve a number of special risks that could adversely affect the Company’sbusiness, results of operations and financial condition, including thediversion of management’s attention, the assimilation of the operations andpersonnel of the acquired restaurants and the potential loss of keyemployees.  In particular, the failure tomaintain adequate operating and financial control systems or unexpecteddifficulties encountered during expansion could materially and adversely affectthe Company’s business, financial condition and results of operations.  There can be no assurance that anyacquisition will not materially and adversely affect the Company or that anysuch acquisition will enhance the Company’s business.  Furthermore, the Company is unable to predictthe likelihood of any additional acquisitions being proposed or completed inthe near future.**

** **

**Astrategy of growth through acquisitions requires access to significant capitalresources. If the Company determines to make a sizeable acquisition, theCompany may be required to obtain approval of creditors, or to sell additionalequity or debt securities, or to obtain additional credit facilities.  The sale of additional equity or convertibledebt securities could result in additional dilution to the Company’sstockholders. At present, the Company has only limited availability under its CreditFacility which expires on January 31, 2012.**

** **

***Loans to third parties involverisk of non-payment.***  Since inception, the Company’s acquisitionstrategy has, in certain circumstances, incorporated loans to sellers tofacilitate certain transactions.  In mostcases, these loans are secured and include, as part of terms and conditions,the Company’s right to convert the loan into ownership of the restaurants.  Also, certain of these loans containfavorable interest rates and repayment terms if the loans are not converted toownership for one or more reasons.  Thisfinancing strategy entails significant risk. Currently, the Company has two loans receivable outstanding and both arein default.  However, because the Companyanticipates full recovery of amounts outstanding through either repayment orconversion to ownership, historically no provision for doubtful accounts hasbeen established.  While estimates todate have been within our expectations, a change in the financial condition ofspecific restaurant companies or in overall industry trends may result infuture adjustments to Company estimates of recoverability of these receivables.

** **

***Operating Results can be Adversely Impacted by the Failure to RenewFacility Leases.*** Themajority of the Company’s facilities are leased. Certain of these leasescontain limited or no renewal options and other leases contain escalating orfair market renewal clauses. There can be no assurance that these facilityleases can renewed or if they are renewed, can be done so at lease rates thatpermit the restaurant to be operated at a profit.

 

6

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***Dependence Upon and Restrictions Resulting from HomeTown FranchiseAgreements.*** The Companyoperates its 12 HomeTown Buffet Restaurants through its wholly-owned,independently capitalized HTB Restaurants, Inc. (“HTB”) subsidiary.  This subsidiary is  party to franchise agreements with thefranchisor, HomeTown Buffet.

** **

**Theperformance of HTB’s HomeTown Buffet restaurants is directly related to thesuccess of the HomeTown Buffet restaurant system and restrictions thefranchiser imposes on the franchisee. The success of HTB’s HomeTown Buffet restaurants depends in part on theeffectiveness of the HomeTown franchisor’s marketing efforts, new productdevelopment initiatives, building retrofit designs, quality assurance and otheroperational programs over which HTB has little or no control.  Futhermore, HTB cannot open new HomeTownBuffets without the permission of the franchisor.**

** **

**Inrecent years HTB’s HomeTown Buffet restaurants have not performed well.  The Company’s management believes this is dueto the franchisor financial difficulties and because the franchisor has notpermitted HTB to develop new restaurants. The lack of investment in the brand on the part of the franchisor andthe franchisor’s unwillingness to permit HTB to develop new locations hascontributed to significant declines in restaurant level revenue andprofitability.  As a result of thesedeclines, HTB has closed a number of HomeTown Buffet restaurants and additionalclosures are possible.  On January 22,2008 Buffets Holdings, Inc., parent of HTB’s franchisor, filed for Chapter11 reorganization.  As a result theCompany determined that it would make no further capital contributions to theHTB subsidiary at this time.  It is uncertainat this time what impact, if any, Buffet Holdings, Inc.’s filing will haveon HTB.**

** **

***The Company’s Quarterly Results are Likely to Fluctuate.*** The Company has in the past experienced, andexpects to continue to experience, significant fluctuations in restaurantrevenues and results of operations from quarter to quarter.  In particular, the Company’s quarterlyresults can vary as a result of acquisitions and costs incurred to integratenewly acquired entities.  Conversely, theCompany’s restaurant revenue and results of operations can vary due torestaurant closures and associated costs connected with these closures.  A number of the Company’s restaurants arelocated in areas which are susceptible to severe winter weather conditions ortropical storm patterns which may have a negative impact on customer trafficand restaurant revenues.  Accordingly,the Company believes that period-to-period comparisons of its operating resultsare not necessarily meaningful and that such comparisons cannot be relied uponas indicators of future performance. Seasonal and quarterly fluctuations can have a material adverse effecton the Company’s business, results of operation and financial condition.

** **

***The Restaurant Industry is Highly Competitive.***  The Companycompetes on the basis of the quality and value of food products offered, price,service, location, ambiance and overall dining experience. As the Company andits principal competitors expand operations in various geographic areas,competition can be expected to intensify. Such intensified competition couldincrease the Company’s operating costs or adversely affect its revenues oroperating margins. A number of competitors have been in existence longer thanthe Company and have substantially greater financial, marketing and otherresources and wider geographical diversity than does the Company.  In addition, the restaurant industry has fewnon-economic barriers to entry and is affected by changes in consumer tastes,national, regional and local economic conditions and market trends.  The Company’s significant investment in, andlong term commitment to, each of its restaurant sites limits its ability torespond quickly or effectively to changes in local competitive conditions orother changes that could affect the Company’s operations.

** **

***The Restaurant Industry is Complex and Volatile.*** Food service businesses are often affected bychanges in consumer tastes, national, regional and local economic conditionsand demographic trends. The performance of individual restaurants may beadversely affected by factors such as traffic patterns, demographic considerationsand the type, number and location of competing restaurants.  Multi-unit food service businesses such asthe Company’s can also be materially and adversely affected by publicityresulting from poor food quality, illness, injury or other health concerns oroperating issues stemming from one restaurant or a limited number ofrestaurants. The Company’s business could be adversely affected by terroristattacks directed toward the food supply chain or public concerns about thesafety of the food supply chain. Dependence on frequent deliveries of freshproduce and groceries subjects food service businesses such as the Company’s tothe risk that shortages or interruptions in supply, caused by adverse weatheror other conditions, could adversely affect the availability, quality and costof ingredients. The Company’s profitability is highly sensitive to increases infood, labor and other operating costs that cannot always be passed on to itsguests in the form of higher prices or otherwise compensated for.  In addition, unfavorable trends ordevelopments concerning factors such as inflation, increased food, labor,employee benefits, including increases in hourly wage and unemployment taxrates utility and  transportation costs,increases in the number and locations of competing buffet-style restaurants,regional weather conditions and the availability of experienced management andhourly employees may also adversely affect the food service industry in generaland the Company’s business, financial condition and results of operations inparticular.  Changes in economicconditions affecting the Company’s guests could reduce traffic in some or allof the Company’s restaurants or impose practical limits on pricing, either ofwhich could have a material adverse effect on the Company’s business, financialcondition and results of operations.

 

7

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***The Company is Dependent on Its Key Personnel.*** The Company believes that its success will dependin part on the services of its key executives, including Robert E. Wheaton,Chairman of the Board, Chief Executive Officer and President.  The Company does not maintain key man lifeinsurance.  The loss of the services of Mr. Wheatoncould have a material adverse effect upon the Company’s business, financialcondition and results of operations, as there can be no assurances that aqualified replacement would be available in a timely manner if at all.

** **

***The Restaurant Industry is Subject to Substantial GovernmentRegulation.*** Therestaurant industry is subject to federal, state and local governmentregulations, including those relating to the preparation and sale of food aswell as building and zoning requirements. In addition, the Company is subject to laws governing its relationshipwith employees, including minimum wage requirements, overtime, working andsafety conditions and citizenship requirements. The failure to obtain or retain food licenses or an increase in theminimum wage rate, employee benefit costs or other costs associated withemployees, could have a material adverse effect on the Company’s business,financial condition and results of operations.

** **

***Effect of Certain Charter and Bylaw Provisions.*** Certain provisions of the Company’s Certificate ofIncorporation and Bylaws may have the effect of making it more difficult for athird party to acquire, or discourage a third party from attempting to acquire,control of the Company.  Such provisionscould limit the price that certain investors might be willing to pay in thefuture for shares of the Company’s Common Stock.  The Company’s Certificate of Incorporationallows the Company to issue up to 1,500,000 shares of currently undesignatedpreferred stock, to determine the powers, preferences, rights, qualificationsand limitations or restrictions granted to or imposed on any un-issued seriesof that preferred stock, and to fix the number of shares constituting any suchseries and the designation of such series, without any vote or future action bythe stockholders.  The preferred stockcould be issued with voting, liquidation, dividend and other rights superior tothe rights of the common stock.  TheCertificate of Incorporation also prohibits the ability of stockholders to callspecial meetings.  The Company’s Bylawsrequire advance notice to nominate a director or take certain otheractions.  Such provisions may make itmore difficult for stockholders to take certain corporate actions and couldhave the effect of delaying or preventing a change in control of theCompany.  In addition, the Company hasnot elected to be excluded from the provisions of Section 203 of theDelaware General Corporation Law, which imposes certain limitations ontransactions between a corporation and “interested” stockholders, as defined insuch provisions.

** **

***Possible Volatility of Stock Price.*** The stock market has from time to time experiencedsignificant price and volume fluctuations that are unrelated to the operatingperformance of particular companies.  Thevolume of trading in the market for the Company’s common stock is limited,which may make it difficult to liquidate an investment and can increase pricevolatility.  Due to changes in thebalance of buy and sell orders and other factors, the price of the Company’scommon stock can change for reasons unrelated to the performance of thebusiness of the Company.  Fluctuations inthe Company’s operating results, failure of such operating results to meet theexpectations of stock market analysts and investors, changes in stock marketanalyst recommendation regarding the Company, the success or perceived successof competitors of the Company, as well as changes in general economic or marketconditions and changes in the restaurant industry may also have a significantadverse affect on the market price of the Common Stock.

** **

***Sale of a Substantial Number of Shares of Our Common Stock Could Causethe Market Price to Decline.*** Sales of a substantial number of shares of our common stock in thepublic market could substantially reduce the prevailing market price of our commonstock. As of April 14, 2008, 3,213,075 shares of common stock wereoutstanding and 40,000 shares were issuable upon exercise of outstandingoptions at exercise prices of $5.00 and $6.70. The Company cannot predict theeffect, if any, that sales of shares of the Company’s common stock or theavailability of such shares for sale will have on prevailing market prices.However, substantial amounts of the Company’s common stock could be sold in thepublic market, which may adversely affect prevailing market prices for thecommon stock.

** **

***Control by One Principal Stockholder.*** Robert E. Wheaton, Chairman of the Board, ChiefExecutive Officer and President, currently beneficially owns approximately 44%of our total equity securities, assuming exercise of vested employee stockoptions, and possesses approximately 44% of the total voting power. Thus Mr. Wheatonhas the ability to control or significantly influence all matters requiring theapproval of our stockholders, including the election of our directors. Sales ofa substantial number of shares of our common stock by Mr. Wheaton or otherprincipal shareholders in the public market could substantially reduce theprevailing market price of our common stock.

** **

**Item 1B.  *Unresolved Staff Comments***

 

**               **The Company is not an accelerated filer, a largeaccelerated filer, or a well known seasoned issuer and consequently is notsubject to the requirements of this item 1B.

 

8

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**Item 2.*Properties***

 

TheCompany’s corporate headquarters is in Scottsdale, Arizona.  A regional administrative office is locatedin Salt Lake City, Utah.

 

TheCompany’s restaurants are primarily freestanding locations. As of January 28,2008, 36 of 53 of the Company’s restaurant facilities were leased. The leasesexpire on dates ranging from 2008 to 2013 with the majority of the leasesproviding for renewal options. All leases provide for specified periodic rentalpayments and many call for additional rent based upon revenue volume. Mostleases provide for periodic rent increases and require the Company to maintainthe property, carry property and general liability insurance and pay associatedtaxes and expenses.

 

The following is a summary ofthe Company’s restaurant properties as of January 28, 2008:

 
| ** ** | ** ** | **HomeTown****Buffet** | ** ** | **North’s****Star** | ** ** | **Florida****Buffets** | ** ** | **Summit** | ** ** | **Total** | ** ** |
|------------|------------|------------------------|------------|--------------------------|------------|------------------------|------------|------------|------------|-----------|------------|
| Owned      |       | 3                      |       | 3                        |       | 5                      |       | 6          |       | 17        |       |
| Leased     |       | 10                     |       | 4                        |       | 11                     |       | 11         |       | 36        |       |
| Total      |       | 13                     |       | 7                        |       | 16                     |       | 17         |       | 53        |       |

 

As of January 28, 2008, theCompany’s restaurants are located in the following states:

 
| ** **  | ** ** | **Number of Restaurants** | ** ** | ** **               | ** ** | ** **             | ** ** |
|-------------|------------|---------------------------|------------|--------------------------|------------|------------------------|------------|
| **State**   | ** ** | **HomeTown****Buffet**    | ** ** | **North’s****Star** | ** ** | **Florida****Buffets** | ** ** | **Summit** | ** ** | **Total** | ** ** |
| Arkansas    |       | —                    |       | 1                        |       | —                 |       | — |   | 1 |   |
| Arizona     |       | 8                         |       | 1                        |       | —                 |       | — |   | 9 |   |
| Colorado    |       | 1                         |       | —                   |       | —                 |       | 1 |   | 2 |   |
| Florida     |       | —                    |       | —                   |       | 16                     |       | — |   | 16 |   |
| Georgia     |       | —                    |       | 1                        |       | —                 |       | — |   | 1 |   |
| Idaho       |       | —                    |       | —                   |       | —                 |       | 1 |   | 1 |   |
| Mississippi |       | —                    |       | 1                        |       | —                 |       | — |   | 1 |   |
| Montana     |       | —                    |       | —                   |       | —                 |       | 5 |   | 5 |   |
| New  Mexico |       | 2                         |       | —                   |       | —                 |       | 2 |   | 4 |   |
| Oklahoma    |       | —                    |       | 1                        |       | —                 |       | — |   | 1 |   |
| Oregon      |       | —                    |       | 1                        |       | —                 |       | — |   | 1 |   |
| Texas       |       | —                    |       | —                   |       | —                 |       | 4 |   | 3 |   |
| Utah        |       | 1                         |       | —                   |       | —                 |       | 4 |   | 5 |   |
| Washington  |       | —                    |       | 1                        |       | —                 |       | — |   | 1 |   |
| Wyoming     |       | 1                         |       | —                   |       | —                 |       | — |   | 1 |   |
| Total       |       | 13                        |       | 7                        |       | 16                     |       | 17 |   | 53 |   |

 

As of January 28, 2008, theCompany’s non-operating restaurants are located in the following states:

 
| ** **  | ** ** | **Number of Non-Operating  Restaurants** | ** ** | ** **               | ** ** | ** **             | ** ** |
|-------------|------------|------------------------------------------|------------|--------------------------|------------|------------------------|------------|
| **State**   | ** ** | **HomeTown****Buffet**                   | ** ** | **North’s****Star** | ** ** | **Florida****Buffets** | ** ** | **Summit** | ** ** | **Total** | ** ** |
| Arizona     |       | —                                   |       | 1                        |       | —                 |       | — |   | 1 |   |
| Colorado    |       | 1                                        |       | —                   |       | —                 |       | — |   | 1 |   |
| Florida     |       | —                                   |       | —                   |       | 4                      |       | — |   | 4 |   |
| New  Mexico |       | —                                   |       | —                   |       | —                 |       | 1 |   | 1 |   |
| Oklahoma    |       | —                                   |       | 1                        |       | —                 |       | — |   | 1 |   |
| Texas       |       | —                                   |       | —                   |       | —                 |       | 1 |   | 1 |   |
| Total       |       | 1                                        |       | 2                        |       | 4                      |       | 2 |   | 9 |   |

 

9

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Three of the ninenon-operating restaurants have been leased to third-party operators; five areclosed for remodeling and/or repositioning; one is closed and classified asproperty held for sale.

 

**Item 3.*LegalProceedings***

 

In conjunctionwith the acquisition of certain JJ North’s restaurants from North’s Restaurants, Inc.(“North’s”) in 1997, the Company provided a credit facility to North’s and whenNorth’s defaulted the Company sued for enforcement. In 1998, the Company’s suitwith North’s resulted in a negotiated settlement in favor of the Companyrepresented by an Amended and Restated Promissory Note (the “Star BuffetPromissory Note).  In a related proceeding, North’s other securedcreditor, Pacific Mezzanine, initiated litigation against North’s seeking amonetary judgment and the appointment of a receiver.  In April, 2006 theCompany noticed all relevant parties of its intent to foreclose to seekexpedited liquidation of North’s assets and repay amounts owed to theCompany.  Subsequent to the notice, the receiver moved to have the Company’sforeclosure of North’s assets set aside so that certain of North’s assets couldbe sold to a third party.  The motion was approved.  On August 7,2006, the receiver paid the Company approximately $1,291,000 from a partialsale of the assets. In August 2007,the receiver notified the Company that he planned to turn control of the JJNorth’s restaurant in Grants Pass, Oregon and associated assets over to theCompany. On September 22, 2007, the Company hired North’s employees,notified North’s creditors of its intent to operate the business and negotiateda facility lease with North’s previous landlord. The transfer of assets fromNorth’s to Star Buffet Management, Inc. was approved by the court. TheCompany’s note, together with the obligation to the other significant creditorof North’s, is secured by the real and personal property, trademarks and allother intellectual property owned by North’s. The Company believes current andfuture cash flows including asset sales are adequate for recovery of theremaining principal amount of the note receivable.  The Company has notprovided an allowance for bad debts for the note as of January 28, 2008.

 

The Company is from time to timethe subject of complaints or litigation from customers alleging injury onproperties operated by the Company, illness or other food quality, health oroperational concerns. Adverse publicity resulting from such allegations maymaterially adversely affect the Company and its restaurants, regardless ofwhether such allegations are valid or whether the Company is liable. TheCompany also is the subject of complaints or allegations from employees fromtime to time. The Company believes that the lawsuits, claims and other legalmatters to which it has become subject in the course of its business are notmaterial to the Company’s business, financial condition or results ofoperations, but an existing or future lawsuit or claim could result in anadverse decision against the Company that could have a material adverse effecton the Company’s business, financial condition and results of operations.

 

**Item 4.*Submissionof Matters to a Vote of Security Holders***

 

Nomatters were submitted to the shareholders of the Company during the fourthquarter of fiscal 2008.

 

10

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**PART II**

 

**Item 5.*  Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities***

 

**Market Information and Holders.** The Company’s Common Stock is listed on the NASDAQCapital Market under the symbol “STRZ”. As of April 14, 2008, there wereapproximately 500 holders of record. The following table sets forth the highand low bid quotations for the Common Stock, as reported by NASDAQ.

 
| ** **       | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| **Fiscal  Year** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First  Quarter   |       | $        | 9.23       |     | $          | 7.80 |   | $ | 9.46 |   | $ | 6.98 |   |
| Second  Quarter  |       | 8.60     |       | 7.56     |       | 8.39 |   | 7.02 |   |
| Third  Quarter   |       | 8.08     |       | 6.50     |       | 8.85 |   | 7.80 |   |
| Fourth  Quarter  |       | 6.96     |       | 5.14     |       | 9.97 |   | 8.01 |   |
|                  |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

**Dividends.** On March 12, 2008, the Board of Directorsapproved the Company’s fifth consecutive annual dividend. The dividend thisyear is $0.60 per common share and is payable on June 4, 2008 toshareholders of record on May 6, 2008.

 

**EquityCompensation Plan Information.**

 

The following table givesinformation about our shares of Common Stock that may be issued under ourequity compensation plans.

 
| ** **                                                  | ** ** | **(a)**                                                                      | ** ** | **(b)**                                                      | ** ** | **(c)**                                                                                                                                               | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Number of securities to  be issued upon exercise  of outstanding options** | ** ** | **Weighted-average  exercise price of  outstanding options** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
| Equity compensation plans  approved by security holders     |       | 40,000                                                                       |       | $                                                            | 6.20       |                                                                                                                                                  | 450,000    |   |
| Equity compensation plans not  approved by security holders |       | —                                                                       |       | —                                                       |       | —                                                                                                                                                |       |
| Total                                                       |       | 40,000                                                                       |       | $                                                            | 6.20       |                                                                                                                                                  | 450,000    |   |

 

The exercise price of theoptions granted and exercisable at January 28, 2008 is $5.00 for 12,000options and $6.70 for 28,000 options.

 

11

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**Item 6.*SelectedFinancial Data***

 

The following paragraphs set forth selected consolidatedfinancial data for the periods indicated. The selected consolidated financialdata for each of the five fiscal years in the period ended January 28,2008, has been derived from our consolidated financial statements for thoseyears.

 

The selected and other data presented below should be readin conjunction with the “Consolidated Financial Statements”, and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included elsewhere in this Form 10-K.

 

The operating results for the 52-week period ended January 28,2008 included 52 weeks of operations for the Company’s 12 franchised HomeTownBuffet restaurants, six JB’s restaurants, five Whistle Junction restaurants, twoBuddyFreddys restaurants, two BuddyFreddys Country Buffet restaurants, twoWestern Sizzlin restaurants, two K-BOB’S Steakhouses, two Holiday Houserestaurants, one JJ North’s Grand Buffet restaurant one Pecos DiamondSteakhouse and one Casa Bonita Mexican theme restaurant.  The results also included the following, oneWestern Sizzlin restaurant for 32 weeks, one Holiday House restaurant for 40weeks, one Bar-H Steakhouse for 35 weeks, one JB’S restaurant for 35 weeks, two4B’S restaurants for 26 weeks, one 4B’S restaurant for 15 weeks and one JJNorth’s Grand Buffet for 18 weeks.  Inaddition, operating results include 39 weeks for one K-BOB’S Steakhouse,36 weeks for one K-BOB’S Steakhouse, 36 weeks for one HomeTown Buffetrestaurant, 27 weeks for one HomeTown Buffet restaurant, 27 weeks for oneOklahoma Steakhouse restaurant and 16 weeks for one Whistle Junction restaurantclosed during the fiscal year 2008.  Nine restaurants were closed at the end of the 2008fiscal year for repositioning. Three of the nine closed restaurants have beenleased to third-property operators, five restaurants remain closed forremodeling and repositioning and another closed restaurant was reported asproperty held for sale.

 

The operating results for the 52-week period ended January 29,2007 included 52 weeks of operations for the Company’s 14 franchised HomeTownBuffet restaurants, six JB’s restaurants, three K-BOB’S Steakhouses, twoBuddyFreddys restaurants, two BuddyFreddys Country Buffet restaurants, twoHoliday House restaurants, one JJ North’s Country Buffet restaurant, and oneCasa Bonita Mexican theme restaurant. The results also included the following, one K-BOB’S Steakhouse for 48weeks, one Pecos Diamond Steakhouse for 29 weeks, one Western Sizzlinrestaurant for 16 weeks and five Whistle Junction restaurants for 9 weeks.  In addition, operating results include19 weeks for one Buddy Freddy’s Country Buffet and 33 weeks for one JJ North’sCountry Buffet restaurant closed during the fiscal year 2007.  Eightrestaurants were closed at the end of the 2007 fiscal year for repositioning.Four of the eight closed restaurants have been leased to third-propertyoperators, three restaurants remain closed for remodeling and repositioning andanother closed restaurant was reported as property held for sale.

 

The operating results for the 52-week period ended January 30,2006 included 52 weeks of operations for the Company’s 14 franchised HomeTownBuffet restaurants, six JB’s restaurants, three BuddyFreddys Country Buffetrestaurants, two BuddyFreddys restaurants, two JJ North’s Country Buffetrestaurants, two Holiday House restaurants and one Casa Bonita Mexican themerestaurant.  In addition, operatingresults included 10 weeks for one JB’s restaurant and one Casa Bonitarestaurant closed during the fiscal year 2006. In addition to the above, theCompany purchased in September 2005 a restaurant facility in Rexburg,Idaho.  The Company leases the restaurantfacility to a JB’s franchisee. Eightrestaurants were closed at the end of the 2006 fiscal year for repositioning.Three of the eight closed restaurants were leased to third-property operators,four restaurants were held for remodeling and repositioning and another closedrestaurant was reported as property held for sale.  One of the four restaurants closed forremodeling and repositioning located in Laramie, Wyoming was sold in March 2006.

 

The operating results for the 53-week period ended January 31,2005 included 53 weeks of operations for the Company’s 14 franchised HomeTownBuffet restaurants, seven JB’s restaurants, three BuddyFreddys Country Buffetrestaurants, two BuddyFreddys restaurants, two JJ North’s Country Buffetrestaurants, two Casa Bonita Mexican theme restaurants, and two Holiday Houserestaurants.  In addition, operatingresults included 30, 34 and 52 weeks for three JJ North’s Country Buffetrestaurants closed during fiscal year 2005 and 35 and 51 weeks for two HomeTownBuffet restaurants. Results for 2005 also included 34 weeks of operations forone North’s Star Buffet restaurant and 39 weeks of operations for one JB’sRestaurant. Eight restaurants wereclosed at the end of the 2005 fiscal year for repositioning. Four of the eightclosed restaurants were leased to third-property operators, three restaurantswere held for remodeling and repositioning and one closed restaurant wasproperty held for sale.

 

The operating results for the 52-week period ended January 26,2004 included 52 weeks of operations for 16 franchised HomeTown Buffetrestaurants, eight JB’s restaurants, five JJ North’s Country Buffet restaurants,three BuddyFreddys Country Buffet restaurants, two BuddyFreddys restaurants,two Casa Bonita Mexican theme restaurants, two Holiday House restaurants andone North’s Star Buffet restaurant.  Inaddition, operating results included 19 and 2 weeks for two BuddyFreddysCountry Buffet restaurants closed during fiscal year 2004 and 12 weeks ofoperations for one JJ North’s Country 

 

12

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Buffet restaurant and 5 weeks of operations for oneJB’s Restaurant. Five restaurants were closed at the end of the 2004 fiscalyear for repositioning. Three of the five closed restaurants were leased tothird-property operators and one closed restaurant was property held for sale.One property was sold during fiscal 2004.

 

**SELECTED FINANCIAL DATA**

 

**(In thousands except per shareamounts and restaurant unit data)**

 
| ** **                                                            | ** ** | **Fifty-Two**          | ** ** | **Fifty-Two**          | ** ** | **Fifty-Two**          | ** ** | **Fifty-Three**        | ** ** | **Fifty-Two**          | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                            | ** ** | **Weeks**              | ** ** | **Weeks**              | ** ** | **Weeks**              | ** ** | **Weeks**              | ** ** | **Weeks**              | ** ** |
| ** **                                                            | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                                            | ** ** | **Jan. 28, 2008** | ** ** | **Jan. 29, 2007** | ** ** | **Jan. 30, 2006** | ** ** | **Jan. 31, 2005** | ** ** | **Jan. 26, 2004** | ** ** |
| **Consolidated  Statements of Operations Data:**                      | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** |
| Total  revenues                                                       |       | $                      | 68,732     |                   | $          | 58,648                 |       | $                      | 56,305     |                   | $          | 64,856 |   | $ | 68,090 |   |
| Costs  and expenses                                                   |       |                   |       |                   |       |                   |       |                   |       |                   |       |
| Food costs                                                            |       | 25,356                 |       | 20,789                 |       | 19,429                 |       | 22,336                 |       | 23,275                 |       |
| Labor costs                                                           |       | 23,913                 |       | 19,674                 |       | 18,260                 |       | 21,712                 |       | 23,015                 |       |
| Occupancy and other expenses                                          |       | 15,187                 |       | 12,772                 |       | 11,763                 |       | 12,963                 |       | 14,042                 |       |
| General and administrative  expenses                                  |       | 3,549                  |       | 2,426                  |       | 2,179                  |       | 2,694                  |       | 2,433                  |       |
| Depreciation and amortization                                         |       | 2,098                  |       | 2,069                  |       | 2,120                  |       | 2,440                  |       | 2,670                  |       |
| Impairment of long-lived  assets                                      |       | 1,401                  |       | —                 |       | 369                    |       | 2,838                  |       | 1,083                  |       |
| Total costs and expenses                                              |       | 71,504                 |       | 57,730                 |       | 54,120                 |       | 64,983                 |       | 66,518                 |       |
| (Loss)  income from operations                                        |       | (2,772                 | )          | 918                    |       | 2,185                  |       | (127                   | )          | 1,572                  |       |
| Interest  expense                                                     |       | (858                   | )          | (616                   | )          | (648                   | )          | (640                   | )          | (569                   | )          |
| Gain  on sale of assets                                               |       | 31                     |       | 230                    |       | —                 |       | —                 |       | —                 |       |
| Reversal  of litigation accrual                                       |       | —                 |       | —                 |       | —                 |       | —                 |       | 400                    |       |
| Other  income, net                                                    |       | 283                    |       | 422                    |       | 680                    |       | 427                    |       | 319                    |       |
| (Loss)  income before income taxes (benefit)                          |       | (3,316                 | )          | 954                    |       | 2,217                  |       | (340                   | )          | 1,722                  |       |
| Income  taxes (benefit)                                               |       | (1,315                 | )          | 238                    |       | 420                    |       | (168                   | )          | 609                    |       |
| Net  income (loss)                                                    |       | $                      | (2,001     | )                      | $          | 716                    |       | $                      | 1797       |                   | $          | (172 | ) | $ | 1,113 |   |
| Net  (loss) income per common share — basic                      |       | $                      | (0.63      | )                      | $          | 0.23                   |       | $                      | 0.60       |                   | $          | (0.06 | ) | $ | 0.38 |   |
| Net  (loss) income per common share — diluted                    |       | $                      | (0.63      | )                      | $          | 0.23                   |       | $                      | 0.56       |                   | $          | (0.06 | ) | $ | 0.38 |   |
| Weighted  average shares outstanding — basic                     |       | 3,171                  |       | 3,147                  |       | 2,990                  |       | 2,950                  |       | 2,950                  |       |
| Weighted  average shares outstanding — diluted                   |       | 3,171                  |       | 3,164                  |       | 3,209                  |       | 2,950                  |       | 2,950                  |       |
| ** **                                                            | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** |
| **Balance  sheet data:**                                              | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** |
| Total  assets                                                         |       | $                      | 35,702     |                   | $          | 34,168                 |       | $                      | 34,824     |                   | $          | 34,880 |   | $ | 35,954 |   |
| Total debt and capital lease  obligations  including current  portion |       | 9,447                  |       | 7,621                  |       | 7,815                  |       | 8,207                  |       | 7,967                  |       |
| Stockholders’  equity                                            |       | $                      | 15,275     |                   | $          | 19,178                 |       | $                      | 20,284     |                   | $          | 19,775 |   | $ | 20,790 |   |
| ** **                                                            | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** |
| **Other  data:**                                                      | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** |
| Operating  units (1)  HomeTown Buffet                                 |       | 12                     |       | 14                     |       | 14                     |       | 14                     |       | 16                     |       |
| North’s Star                                                     |       | 5                      |       | 2                      |       | 2                      |       | 2                      |       | 6                      |       |
| Florida Buffets                                                       |       | 12                     |       | 11                     |       | 7                      |       | 7                      |       | 7                      |       |
| Summit Restaurants                                                    |       | 15                     |       | 12                     |       | 7                      |       | 9                      |       | 10                     |       |
| Non-Operating                                                         |       | 9                      |       | 8                      |       | 8                      |       | 8                      |       | 5                      |       |
| **Total**                                                             |       | 53                     |       | 47                     |       | 38                     |       | 40                     |       | 44                     |       |

 

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(1) At the end of the respective periods.

 

13

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**Item 7.*Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

 

The following Management’sDiscussion and Analysis of Financial Condition and Results of Operations shouldbe read in conjunction with the consolidated financial statements, and thenotes thereto, presented elsewhere in this Form 10-K. The operatingresults for the 52-week period ended January 28, 2008 and for the 52-weekperiod ended January 29, 2007 are based on the composition of restaurantoperations as discussed in Item 6 – Selected Financial Data.

 

TheCompany’s sales were $68.7 million in fiscal 2008, a 17.2 percent increase from$58.6 million in fiscal 2007.  Sales fromthe Company’s nine new store openings in fiscal 2008 and the seven new storeopenings in fiscal 2007 that operated for only part of fiscal 2007 were a netincrease of approximately $12.7 million. Sales lost from closed storesrepresented a net decrease of approximately $1.3 million.  Same store sales decreased approximately 2.5%due primarily to increased competition in some markets.  The net loss for fiscal 2008 was $2,001,000(($0.63) per diluted share) compared with net income for fiscal 2007 of$716,000 ($0.23 per diluted share). Fiscal 2008 was impacted by higher general and administrative expenses,higher interest expense and $1,401,000 in impairment expense.  In addition the Company had a lower gain onsale of assets when compared to fiscal 2007 and lower other income whencompared to fiscal 2007, which is primarily rental income.

 

**Results of Operations**

 

The following table summarizes the Company’s results ofoperations as a percentage of total revenues for the fifty-two weeks ended January 28,2008 (“fiscal 2008”), and for the fifty-two weeks ended January 29, 2007 (“fiscal2007”).

 
| ** **                                   | ** ** | **Fifty-Two  Weeks    Ended   January 28,  2008** | ** ** | **Fifty-Two  Weeks    Ended   January 29,  2007** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Total  revenues                              |       | 100.0                                                  | %          | 100.0                                                  | %          |
| Costs  and expenses:                         |       |                                                   |       |                                                   |       |
| Food costs                                   |       | 36.9                                                   |       | 35.5                                                   |       |
| Labor costs                                  |       | 34.8                                                   |       | 33.6                                                   |       |
| Occupancy and other expenses                 |       | 22.1                                                   |       | 21.8                                                   |       |
| General and administrative  expenses         |       | 5.2                                                    |       | 4.1                                                    |       |
| Depreciation and amortization                |       | 3.0                                                    |       | 3.5                                                    |       |
| Impairment of long-lived  assets             |       | 2.0                                                    |       | 0.0                                                    |       |
| Total  costs and expenses                    |       | 104.0                                                  |       | 98.4                                                   |       |
| Income  (loss) from operations               |       | (4.0                                                   | )          | 1.6                                                    |       |
|                                         |       |                                                   |       |                                                   |       |
| Interest expense                             |       | (1.2                                                   | )          | (1.1                                                   | )          |
| Other income, net                            |       | 0.4                                                    |       | 0.6                                                    |       |
| Net  (loss) income                           |       | (4.8                                                   | )          | 1.6                                                    |       |
| Income  taxes (benefit)                      |       | (1.9                                                   | )          | 0.4                                                    |       |
| (Loss)  income before income taxes (benefit) |       | (2.9                                                   | )%         | 1.2                                                    | %          |

 

     Summarized financial informationconcerning the Company’s reportable segments is shown in the following table.The other assets presented in the consolidated balance sheet and not in thereportable segments relate to the Company as a whole, and not individualsegments. Also certain corporate overhead income and expenses in theconsolidated statements of operations are not included in the reportablesegments. With the acquisition of 20 Barnhill’s Buffet restaurants in fiscal2009, the Company will change its reporting segments to the Buffet Division andNon-Buffet Division.

 

14

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(Dollars in Thousands)

 
| **52 Weeks Ended****January 28, 2008** | ** ** | **HomeTown  Buffet (1)** | ** ** | **North’s  Star (2)** | ** ** | **Florida****Buffets (3)** | ** ** | **Summit (4)** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|----------------------------|------------|----------------------------|------------|----------------|------------|-----------|------------|-----------|------------|
| Revenues                                    |       | $                        | 24,367     |                       | $          | 5,348                      |       | $              | 18,032     |      | $          | 20,985    |       | $ | — |   | $ | 68,732 |   |
| Food  cost                                  |       | 9,276                    |       | 2,248                      |       | 7,161                      |       | 6,671          |       | —    |       | 25,356    |       |
| Labor  cost                                 |       | 8,088                    |       | 1,999                      |       | 6,443                      |       | 7,383          |       | —    |       | 23,913    |       |
| Interest  income                            |       | —                   |       | —                     |       | —                     |       | —         |       | 24        |       | 24        |       |
| Interest  expense                           |       | (151                     | )          | —                     |       | —                     |       | —         |       | (707      | )          | (858      | )          |
| Depreciation &  amortization       |       | 960                      |       | 170                        |       | 341                        |       | 557            |       | 70        |       | 2,098     |       |
| Impairment  of long-lived assets            |       | 275                      |       | —                     |       | 1,034                      |       | 92             |       | —    |       | 1,401     |       |
| Income  (loss) before income taxes          |       | (789                     | )          | (382                       | )          | (1,431                     | )          | 2,443          |       | (3,157    | )          | (3,316    | )          |
|                                             |            |                          |            |                            |            |                            |            |                |            |           |            |           |            |  |  |  |  |  |  |

 
| **52 Weeks  Ended  January 29, 2007** | ** ** | **HomeTown  Buffet (1)** | ** ** | **North’s  Star (2)** | ** ** | **Florida  Buffets (3)** | ** ** | **Summit (4)** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|----------------------------|------------|--------------------------|------------|----------------|------------|-----------|------------|-----------|------------|
| Revenues                                   |       | $                        | 27,258     |                       | $          | 2,301                    |       | $              | 11,642     |      | $          | 17,447    |       | $ | — |   | $ | 58,648 |   |
| Food  cost                                 |       | 10,302                   |       | 970                        |       | 4,312                    |       | 5,205          |       | —    |       | 20,789    |       |
| Labor  cost                                |       | 8,797                    |       | 876                        |       | 3,913                    |       | 6,088          |       | —    |       | 19,674    |       |
| Interest  income                           |       | —                   |       | —                     |       | —                   |       | —         |       | 93        |       | 93        |       |
| Interest  expense                          |       | (167                     | )          | —                     |       | —                   |       | —         |       | (448      | )          | (615      | )          |
| Depreciation &  amortization      |       | 989                      |       | 88                         |       | 419                      |       | 509            |       | 64        |       | 2,069     |       |
| Impairment  of long-lived assets           |       | —                   |       | —                     |       | —                   |       | —         |       | —    |       | —    |       |
| Income  (loss) before income taxes         |       | 117                      |       | (364                       | )          | 510                      |       | 2,627          |       | (1,936    | )          | 954       |       |
|                                            |            |                          |            |                            |            |                          |            |                |            |           |            |           |            |  |  |  |  |  |  |

 

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(1) Thesame store sales declined this year resulting in higher labor costs forHomeTown Buffet as a percentage of sales. Food costs were higher as apercentage of sales this year primarily attributable to higher protein andgrain prices in the current year. Management believes sales decreased because of general economicconditions and increased competition in certain areas.  HomeTown Buffet also had higher labor costsas a percentage of sales compared to the prior year primarily from higherstarting wages and higher minimum wages in certain markets.  The decline in income loss before income taxesin the current year which was primarily the result of higher food, labor and$275,000 in impairment expenses and lower sales.

 

(2) The same store sales increased this year resulting in lowerfood and labor cost for North’s Star as a percentage of sales. The North’s Stardivision had three new Western Sizzlin restaurants, one new Oklahoma Steakhouseand one new JJ North’s restaurant which more than offset the one closed JJNorth’s Country Buffet restaurant and contributed to higher sales.  The Oklahoma Steakhouse closed on December 8,2007.  The losses in the OklahomaSteakhouse increased the loss for the year compared to the prior year.

 

(3) The decline in income (loss) before income taxes in the currentyear in the Florida Buffet segment was primarily impairment expense of$1,034,000 in the current year compared to none in the prior year. In additionthe decline was the result of higher food costs, labor costs and higheroccupancy and other expenses in the five new Whistle Junction restaurants andthe one new Holiday House restaurant as compared to the existing restaurants inthe same segment. The increase in revenues was the result of six newrestaurants.  These new restaurantscontributed approximately $6.4 million more in sales compared to the prior year.

 

(4) The increase in sales from the six new restaurants contributedapproximately $3.2 million in sales including the Pecos Diamond Steakhousecontribution of approximately $684,000 more than last year when Pecos openedduring the second quarter. The decrease in income before income taxes wasprimarily due to the $234,000 gain on selling the restaurant facility inLaramie, Wyoming in the prior year.

 

15

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*Comparisonof Fiscal 2008 to Fiscal 2007*

 

*         *Total revenues increased $10.1 million or 17.2%from $58.6 million in fiscal 2007 to $68.7 million in fiscal 2008.  Sales from the Company’s 16 new storeopenings in fiscal 2008 and fiscal 2007 were a net increase of approximately$12.7 million. Sales lost from closed stores represented a net decrease ofapproximately $1.3 million.  Same storesales decreased approximately 2.5% primarily due to increased competition incertain markets.

 

Food costs as a percentage of total revenues increased from 35.5%during in fiscal 2007 to 36.9% in fiscal 2008. The increase in food costs as a percentage of total revenue wasprimarily attributable to the higher protein and grain prices in the currentyear.

 

Labor costs as a percentage of total revenuesincreased from 33.6% in fiscal 2007 to 34.8% in fiscal 2008 and actual laborcosts increased by $4.2 million.  Theincrease in labor cost and as a percentage of revenue resulted primarily fromhigher starting wages in certain markets in fiscal 2008 as compared to thefiscal year 2007 and higher minimum wages in certain states in the currentyear.  In the fiscal year 2008approximately 700 employees have had minimum wage increases from $0.10 to $0.70per hour.

 

Occupancy and other expenses asa percent of total revenues increased from 21.8% in fiscal 2007 to 22.1% infiscal 2008. The increase as a percentage of revenues for the 52-week periodended January 28, 2008 was primarily attributable to decreased revenues inthe stores opened during both years and increased variable expenses. The fixedportion of occupancy costs is primarily fixed costs for property leases andrelated common area maintenance and property taxes.  Increases in variable costs were attributableto an increase of 0.5% in utility costs as a percentage of revenue in thecurrent year compared to the prior year.

 

General and administrativeexpenses as a percentage of total revenues increased from 4.1% in fiscal 2007to 5.2% in fiscal 2008 and actual costs increased by $1,123,000.  The increase for the 52-week period ended January 28,2008 was primarily attributable to higher contingency expenses and higher fieldcosts associated with acquisitions as compared to the prior fiscal year.

 

Depreciation and amortization asa percent of total revenues decreased from 3.5% in fiscal 2007 to 3.0% infiscal 2008. The decrease as a percentage of revenue is primarily attributableto certain equipment and impaired assets being fully depreciated for the52-week period ended January 28, 2008 as compared to the 52-week periodended January 29, 2007 and our depreciation per revenue for the new storescompared to existing stores.  Theacquisition costs in certain new stores were on the average lower than existingstores resulting in lower depreciation expense in these new stores

 

Impairment of long-lived assetsincreased from 0.0% in fiscal 2007 to 2.0% in fiscal 2008. The impairment infiscal 2008 totaled $238,000 for the impairment of one restaurant’s leaseholdimprovements and $8,000 for franchise costs where projected undiscounted cashflows were less than the net book value of the assets and approximately $29,000of impairment to equipment held for future use and approximately $1,126,000 forthe impairment of goodwill.

 

Interest expense as a percent oftotal revenues increased from 1.1% in fiscal 2007 to 1.3% in fiscal 2008. Theincrease as a percentage of total revenue was primarily attributable to higherdebt balances in fiscal 2008 compared to fiscal 2007.  The higher debt balances resulted from the acquisitionsin fiscal 2008 using real estate mortgages and a higher average revolvingcredit balance.

 

The income tax provision(benefit) totaled $(1,315,000) or (39.7%) of pre-tax income in fiscal 2008 ascompared to $238,000 or 25% of pre-tax income in fiscal 2007.

 

**Liquidity and Capital Resources**

 

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

 

As of January 28, 2008, the Company had$736,000 in cash.  Cash and cash equivalents increased by $318,000 duringthe fiscal year ended January 28, 2008. The net working capital deficitwas $(8,348,000) and $(4,913,000) at January 28, 2008 and January 29,2007, respectively.  The Company spentapproximately $4,400,000 on capital expenditures in fiscal 2008 to, among otherthings, acquire the equipment, building and land for the Western SizzlinRestaurant in Magee, Mississippi, the equipment, building and land for the BarH Steakhouse in Dalhart, Texas and the equipment, building and land for theWestern Sizzlin Restaurant in Magnolia, Arkansas.  In connection withthese acquisitions, the Company incurred a total of approximately $2,300,000 innew restaurant specific debt secured by the acquired assets.  The Companyreceived net proceeds of approximately $746,000 in September 2007 when itsold its equipment, building and land in Spanish Fork, Utah.  The facilityhad been a non-operating unit leased to a third party.

 

16

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Cash provided by operations was $3.0 million forfiscal 2008 and $2.7 million for fiscal 2007.

 

The Company had a$3,000,000 unsecured revolving line of credit with M&I Marshall &Ilsley Bank which provided working capital. The M&I revolving line of credit bore interest at LIBOR plus twopercent per annum.   The Company replacedthe M&I revolving line of credit on January 31, 2008 with a CreditFacility with Wells Fargo Bank, N.A.  The Credit Facility included a $7,000,000 term loanand a $2,000,000 revolving line of credit. The Credit Facility was utilized to retire the Company’s unsecuredrevolving line of credit with M&I Marshall & Ilsley Bank; to fundthe acquisition of assets associated with sixteen (16) Barnhill’s Buffetrestaurants; and to provide additional working capital.  On February 29, 2008 the Companyamended its Credit Facility with Wells Fargo Bank N.A., increasing the termloan principal from $7,000,000 to $8,000,000. The increase in the CreditFacility was used to fund the acquisition of four Barnhill’s Buffet by itsnewly formed, wholly-owned, independently capitalized subsidiary, StarliteHoldings, Inc.  The Credit Facility is guaranteed by Star Buffet’ssubsidiaries and bears interest, at the Company’s option, at Wells Fargo’s baserate plus 0.25% or at LIBOR plus 2.00%.  The Credit Facility is secured bya first priority lien on all of the Company’s assets, except for those assetsthat are currently pledged as security for existing obligations, in which caseWells Fargo will have a second lien.  Theterm loan matures on January 31, 2012 and provides for principal to beamortized at $175,000 per quarter for the initial six quarters; $225,000 forthe next nine quarters; with any remaining balance due at maturity. Interest is payable monthly.  The termloan balance was $6,825,000 on April 14, 2008.  A $2,000,000revolving line of credit matures on January 31, 2012.  Interest onthe revolver is payable monthly.  As of April 14, 2008, no balancewas outstanding on the revolving line of credit.

 

On February 1, 2001, theCompany entered into a $460,000 15 year fixed rate first real estate mortgagewith Victorium Corporation. The mortgage has monthly payments includinginterest of $6,319. The interest rate is 7.5%. The mortgage is secured  the Company’s restaurant in Ocala, Florida.The balance at January 28, 2008 and January 29, 2007 was $311,000 and$325,000, respectively.

 

On May 2, 2002, the Companyentered into a $1,500,000 ten year fixed rate first real estate mortgage withM&I Marshall & Ilsley Bank. The mortgage has monthly payments including interest of $17,894. Theinterest rate is7.5% for the first five years with interest for years six toten calculated at the five year LIBOR rate plus 250 basis points with a floorof 7.5%. The mortgage is secured by the Company’s HomeTown Buffet restaurant inScottsdale, Arizona. The balance at January 28, 2008 and January 29,2007 was $624,000 and $877,000, respectively.

 

On December 19, 2003, theCompany entered into a $1,470,000 six year fixed rate first real estate mortgagewith Platinum Bank.  The mortgage hasmonthly payments including interest of $12,678 with a balloon payment of$475,000 due on December 19, 2009. The interest rate is 7.25%.  The mortgage is secured by the Company’sBuddyFreddys restaurant in Plant City, Florida. The balance at January 28, 2008 and January 29, 2007 was$1,115,000 and $1,237,000, respectively.

 

On February 25, 2004, theCompany entered into a $1,250,000 seven year fixed rate first real estatemortgage with M&I Marshall & Ilsley Bank.  The mortgage has monthly payments includinginterest of $18,396. The interest rate is 6.1%. The mortgage is secured by theCompany’s HomeTown Buffet restaurant in Yuma, Arizona. The balance at January 28,2008 and January 29, 2007 was $404,000 and $721,000, respectively.

 

On July 29, 2004, theCompany entered into a $550,000 ten year fixed rate first real estate mortgagewith Heritage Bank.  The mortgage hasmonthly payments including interest of $6,319. The interest rate is 6.75%. Themortgage is secured by the Company’s JB’s Family Restaurant in Great Falls,Montana. The balance at January 28, 2008 and January 29, 2007 was$391,000 and $430,000, respectively.

 

On October 27, 2004, theCompany entered into a $1,275,000 five year fixed rate first real estatemortgage with Bank of Utah.  The mortgagehas monthly payments including interest of $14,371 with a balloon payment of$752,000 due on October 26, 2009. The interest rate is 6.25%. The mortgagerequires the Company to maintain specified minimum levels of net worth, limitsthe amount of capital expenditures and requires the maintenance of certainfixed charge coverage ratios.  Themortgage is secured by the Company’s HomeTown Buffet restaurant in Layton,Utah. The balance at January 28, 2008 and January 29, 2007 was$840,000 and $1,008,000, respectively.

 

On September 16, 2005, theCompany entered into a $300,000 five year fixed rate real estate mortgage withNaisbitt Investment Company.  Themortgage has monthly payments including interest of $5,870. The interest rateis 6.5%.  The mortgage is secured by theCompany’s JB’s Restaurant in Rexburg, Idaho. The balance at January 28, 2008 and January 29, 2007 was$169,000 and $206,000, respectively.

 

17

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On June 1, 2006, theCompany entered into a $564,000 five year fixed rate first real estate mortgagewith Dalhart Federal Savings and Loans. The mortgage has monthly payments including interest of $6,731. Theinterest rate is 7.63%. The mortgage is secured by the Company’s K-BOB’S Steakhousein Dumas, Texas. The balance at January 28, 2008 and January 29, 2007was $497,000 and $525,000, respectively.

 

On November 8, 2006, theCompany entered into a $595,000 five year fixed rate first real estate mortgagewith Wells Fargo Bank.  The mortgage hasmonthly payments including interest of $8,055. The interest rate is 7.5%. Themortgage is secured by the Company’s Pecos Diamond Steakhouse in Artesia, NewMexico. The balance at January 28, 2008 and January 29, 2007 was $461,000and $560,000, respectively.

 

On January 30, 2007, the Company entered intoa $900,000 five year fixed rate real estate mortgage with Fortenberry’s Beef ofMagee, Inc.  The mortgage has monthly payments including interest of$17,821. The interest rate is 7%.  The mortgage is secured by the Company’sWestern Sizzlin restaurant in Magee, Mississippi. The balance at January 28,2008 was $740,000.

 

On May 29, 2007, the Company entered into a$500,000 five year fixed rate real estate mortgage with Dalhart Federal Savingsand Loan Association.  The mortgage has monthly payments includinginterest of 5,903 with a balloon payment of $301,345 due on June 1,2012.  The interest rate is 7.38%.  The mortgage is secured by the Company’sBar H Steakhouse restaurant in Dalhart, Texas. The balance at January 28, 2008 was $477,000.

 

On June 19, 2007, the Company entered into a$520,000 five year fixed rate real estate mortgage with Farmers Bank andTrust.  The mortgage has monthly payments including interest of $4,676with a balloon payment of $407,313 due on June 19, 2012.  Theinterest rate is 7%.  The mortgage is secured by the Company’s WesternSizzlin restaurant in Magnolia, Arkansas.   Thebalance at January 28, 2008 was $508,000.

 

During fiscal 2008, the Company borrowedapproximately $1,400,000 from Mr. Robert E. Wheaton, a principalshareholder, officer and director of the Company.  This loan dated June 15,2007 is subordinated to the obligation to Wells Fargo Bank, N.A. bears interestat 8.5%. The Company expensed and paid $78,458 to Mr. Wheaton for interestduring the fiscal year. The principal balance and any unpaid interest is dueand payable in full on June 5, 2012. The Company used the funds to acquirerestaurants and provide working capital.

 

The Company believes that available cash,availability under the revolving line of credit and cash flow from operationswill be sufficient to satisfy its working capital and capital expenditurerequirements during the next 12 months. Management does not believe the net working capital deficit will haveany effect on the Company’s ability to operate the business and meetobligations as they come due in the next 12 months.  The Company projects that operating cashflows will exceed planned capital expenditures in the next 12 months and thatfunds will be available to return capital to stockholders in the form ofdividends, share repurchases or both. There can be no assurance, however, that cash and cash flow fromoperations will be sufficient to satisfy its working capital and capitalrequirements for the next 12 months or beyond.

 

It is possible that changes in the Company’soperating results, unavailable loan capacity from the existing credit facility,acceleration of the Company’s capital expenditure plans, potential acquisitionsor other events may cause the Company to seek additional financing.  Additional financing may be raised throughpublic or private equity and/or debt financing or from other sources.

 

###### **Off-balanceSheet Arrangements**

###### ** **

As of January 28, 2008, theCompany did not have any off-balance sheet arrangements as defined in Item 303(a) (4) (ii) ofRegulation S-K.

 

**Commitments and ContractualObligations**

 

The Company’s contractualobligations and commitments principally include obligations associated with ouroutstanding indebtedness and future minimum operating and capital leaseobligations as set forth in the following table:

 

18

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| **Contractual Obligations:**        | ** ** | **Total**                  | ** ** | **Less than****one year** | ** ** | **One to  three years** | ** ** | **Three to  five years** | ** ** | **Greater than  five years** | ** ** |
|-------------------------------------|------------|----------------------------|------------|---------------------------|------------|-------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
| Long-term  debt (1)(2)              |       | $                          | 7,995      |                      | $          | 1,038                   |       | $                        | 3,412      |                         | $          | 2,699 |   | $ | 846 |   |
| Operating  leases (3)               |       | 11,079                     |       | 2,691                     |       | 3,197                   |       | 2,224                    |       | 2,967                        |       |
| Capital  leases (3)                 |       | 110                        |       | 55                        |       | 55                      |       | —                   |       | —                       |       |
| Purchase  commitments               |       | —                     |       | —                    |       | —                  |       | —                   |       | —                       |       |
| Total  contractual cash obligations |       | $                          | 19,184     |                      | $          | 3,784                   |       | $                        | 6,664      |                         | $          | 4,923 |   | $ | 3813 |   |

 

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(1) See Note 5 to theconsolidated financial statements for additional information.

(2) Long-term debt includesnote payable to officer.

(3) See Note 6 to theconsolidated financial statements for additional information.

 

**Impact of Inflation**

 

Management recognizes thatinflation has an impact on food, construction, labor and benefit costs, all ofwhich can significantly affect the Company’s operations. Historically, theCompany has been able to pass on certain associated costs due to theseinflationary factors along to its customers because those factors have impactednearly all restaurant companies.

 

###### **CriticalAccounting Policies and Judgments**

###### ** **

The Company prepares its condensed consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America. The Company’s condensed consolidatedfinancial statements are based on the application of certain accounting policies,the most significant of which are described in Note 1—Summary of SignificantAccounting Policies to the audited consolidated financial statements for theyear ended January 28, 2008, included in the Company’s Annual Report filedon Form 10-K. Certain of these policies require numerous estimates andstrategic or economic assumptions that may prove inaccurate or subject tovariations and may significantly affect the Company’s reported results andfinancial position for the current period or future periods. Changes in theunderlying factors, assumptions or estimates in any of these areas could have amaterial impact on the Company’s future financial condition and results ofoperations. The Company considers the following policies to be the most criticalin understanding the judgments that are involved in preparing its consolidatedfinancial statements.

 

Receivables

 

Receivables are stated at an amount management expectsto collect and provides for an adequate reserve for probable uncollectibleamounts.  Amounts deemed to be uncollectible are written off through acharge to earnings and a credit to a valuation allowance based on management’sassessment of the current status of individual balances.  A receivable iswritten off when it is determined that all collection efforts have beenexhausted.  The Company did not have any reserves for the fiscal yearending January 28, 2008 and January 29, 2007.

 

Notes Receivable

 

Notes receivable are stated at an amount managementexpects to collect and provides for an adequate reserve for probableuncollectible amounts.  Amounts deemed to be uncollectible are written offthrough a charge to earnings and a credit to a valuation allowance based onmanagement’s assessment of the current status of individual balances.  A notereceivable is written off when it is determined that all collection effortshave been exhausted.  The Company did not have any reserves for the fiscalyear ending January 28, 2008 and January 29, 2007.

 

Income Taxes

 

Periodically, the Companyrecords (or reduces) the valuation allowance against deferred tax assets to theamount that is more likely than not to be realized based upon recent pastfinancial performance, tax reporting positions, and expectations of futuretaxable income.  The Company expects tocontinue to record a valuation allowance on certain future tax benefits asrequired under SFAS 109.  

 

19

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The assets are evaluated each period under therequirements of SFAS 109. Currently, the Company does not have a valuationallowance against deferred tax assets since the Company expects to utilize alldeferred tax assets.  FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 requires the recognition, in the financialstatements, of the impact of a tax position, if that position is more likelythan not of being sustained on audit, based on the technical merits of theposition. The Company does not have any tax positions that require recognitionunder Fin 48 as of April 14, 2008.

 

Property, Buildings andEquipment

 

Property and equipment and realproperty under capitalized leases are carried at cost less accumulateddepreciation and amortization. Depreciation and amortization are provided usingthe straight-line method over the following useful lives:

 
| ** **                           | ** ** | **Years**    |
|--------------------------------------|------------|--------------|
| Buildings                            |       | 40           |
| Building and leasehold  improvements |       | 15 – 20 |
| Furniture, fixtures and  equipment   |       | 5 – 8   |

 

Building and leaseholdimprovements are amortized over the lesser of the life of the lease orestimated economic life of the assets. The life of the lease includes renewaloptions determined by management at lease inception. If a previously scheduledlease option is not exercised, any remaining unamortized leasehold improvementsmay be required to be recognized immediately which could result in asignificant charge adversely affecting the operating results of that period.

 

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

 

The Company’s accountingpolicies regarding buildings and equipment include certain management judgmentsregarding the estimated useful lives of such assets, the residual values to whichthe assets are depreciated and the determination as to what constitutesincreasing the life of existing assets. These judgments and estimates mayproduce materially different amounts of depreciation and amortization expensethan would be reported if different assumptions were used. As discussed furtherbelow, these judgments may also impact the Company’s need to recognize animpairment charge on the carrying amount of these assets as the cash flowsassociated with the assets are realized.

 

Impairment of Goodwill

 

Goodwill and other intangibleassets primarily represent the excess of the purchase price paid over the fairvalue of the net assets acquired in connection with business acquisitions. Asof January 29, 2002, the Company adopted SFAS No. 142, Goodwill andOther Intangible Assets (“SFAS 142”). In accordance with SFAS 142, the Companyhas ceased amortizing goodwill recorded in past business combinations effectiveas of January 29, 2002. As a result, there is no charge for goodwillamortization expense contained in the Company’s statements of operations forthe year ended January 29, 2007. The Company recorded impairment expense of $1,401,000 for goodwill infiscal year ended January 28, 2008.

 

SFAS 142 requires that goodwillbe tested for impairment by comparing the fair value of each reporting unitthat included goodwill to the carrying amount of the reporting unit.  The Company performed the transitionalimpairment test and determined that the carrying amount of relevant reportingunits was in excess of the fair value of those units.  This resulted in a transitional impairmentloss of $849,000 which was reported as a cumulative effect of a change inaccounting principle, net of a tax benefit of $289,000 in the first quarter offiscal 2003.  Subsequent to the adoptionof SFAS 142, the Company evaluates goodwill for impairment annually or when atriggering event occurs that indicates a potential impairment may have occurredin accordance with SFAS 142.  Future impairmentsof goodwill, if any, will adversely affect the results of operations in theperiods recognized.

 

Impairment of Long-Lived Assets

 

The Company determines that animpairment write-down is necessary for locations whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. As of January 29, 2002, the Company adopted SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). Inaccordance with SFAS 144, recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to futureundiscounted net cash flows expected to be generated by the asset. If suchassets are considered to be impaired, the impairment to be recognized ismeasured by the 

 

20

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amount by which the carrying amount of the assetsexceed the fair value of the assets.  Anyimpairment which would adversely affect operating results in the affectedperiod.

 

Judgments made by the Companyrelated to the expected useful lives of long-lived assets and the ability ofthe Company to realize undiscounted net cash flows in excess of the carryingamounts of such assets are affected by factors such as the ongoing maintenanceand improvements of the assets, changes in economic conditions, and changes inoperating performance. As the Company assesses the ongoing expected net cashflows and carrying amounts of its long-lived assets, these factors could causethe Company to realize a material impairment charge and could adversely affectoperating results in any period.

 

###### **InsurancePrograms**

###### ** **

Historically, the Company wasself-insured for casualty claims, retaining commercial insurance for casualtyclaims in excess of $2 million per claim and $3 million per year as a riskreduction strategy. Effective January 1, 2008 the company purchasedcommercial insurance for casualty claims in excess of $100,000 per claim.  Accruals for self-insured losses includeestimates based on historical information and expected future developments.Differences in estimates and assumptions could result in actual liabilitiesthat are materially different from the calculated accruals.

 

**Recently Adopted AccountingPronouncements**

 

In February 2006, the FASB issued SFAS 155, *Accounting for Certain Hybrid Financial Instruments —an amendment of FASB Statements No. 133 and 140.*SFAS 155allows financial instruments that contain an embedded derivative and thatotherwise would require bifurcation to be accounted for as a whole on a fairvalue basis, at the holders’ election. SFAS 155 also clarifies and amendscertain other provisions of SFAS 133, *Accountingfor Derivative Instruments and Hedging Activities*, and SFAS 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities — a replacement of FASB Statement125.*Our adoption of SFAS 155 at the beginning of fiscal 2008 had noimpact on our consolidated financial position or results of operations.

 

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

 

In June 2006, the FASB issued FIN 48, *Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109*, which clarifies the accounting foruncertainty in income taxes recognized in financial statements. FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 requires the recognition, in the financialstatements, of the impact of a tax position, if that position is more likelythan not of being sustained on audit, based on the technical merits of theposition. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods and disclosure. Weadopted FIN 48 at the beginning of fiscal 2008 and it has had no impact on ourconsolidated financial position or results of operation.

 

In June 2006, the FASB ratified EITF consensus06-3, *How Taxes Collected from Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement (That Is, Gross versus Net Presentation).* This EITFaddresses the presentation of taxes in the income statement. Gross or netpresentation may be elected for each different type of tax, but similar taxesshould be presented consistently. Taxes within the scope of this EITF wouldinclude taxes that are imposed on a revenue transaction between a seller and acustomer, for example, sales taxes, use taxes, value-added taxes, and sometypes of excise taxes. Our accounting policy is to present the taxes within thescope of EITF 06-3 on a net basis. EITF 06-3 is effective for interim andannual periods beginning after December 15, 2006, which for us is thefirst quarter of fiscal 2008. EITF 06-3 has not had an impact on ourconsolidated financial position or results of operations in fiscal 2008.

 

In September 2006, the FASB issued SFAS 158,*Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans — an amendment of FASB Statements No. 87,88, 106 and 132(R).* SFAS 158 requires the balance sheetrecognition of the funded status of defined benefit pension and otherpostretirement plans, along with a corresponding after-tax adjustment tostockholders’ equity. Our adoption of SFAS 158 at the end of fiscal 2007did not have a material impact on our consolidated financial position orresults of operations.

 

21

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In September 2006, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 108, *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements.*SAB 108 provides interpretive guidance on how the effects of the carryoveror reversal of prior year misstatements should be considered in quantifying acurrent year misstatement for the purpose of the materiality assessment. Ouradoption of SAB 108 at the end of fiscal 2007 did not have a materialimpact on our consolidated financial position or results of operations.

 

**New Accounting Pronouncements NotYet Adopted**

 

In December 2007, the FASB issued FAS 141 (revised 2007), *Business Combinations*. This standardrequires the new acquiring entity to recognize all assets acquired andliabilities assumed in the transactions; establishes an acquisition-date fairvalue for said assets and liabilities; and fully discloses to investors thefinancial effect the acquisition will have. FAS 141 (R) is effective forfiscal years beginning after December 15, 2008, which for us is fiscal2010. We are currently evaluating the impact of FAS 141 (R) on ourconsolidated financial position and results of operations.

 

In December 2007, the FASB issued FAS 160, *Noncontrolling Interests in Consolidated FinancialStatements, and amendment of ARB No. 51 (FAS 160)*. Thisstandard requires all entities to report minority interests in subsidiaries asequity in the consolidated financial statements, and requires that transactionsbetween entities and noncontrolling interests be treated as equity. FAS 160 iseffective for fiscal years beginning after December 15, 2008, which for usis fiscal 2010. We are currently evaluating the impact of FAS 160 on ourconsolidated financial position and results of operations.

 

In September 2006, the FASB issued SFAS 157, *Fair Value Measurements.*SFAS 157establishes a framework for measuring fair value under GAAP and expandsdisclosures about fair value measurement. SFAS 157 also creates consistency andcomparability in fair value measurements among the many accountingpronouncements that require fair value measurements but does not require anynew fair value measurements. SFAS 157 is effective for fiscal years (includinginterim periods) beginning after November 15, 2007, which for us is thefirst quarter of fiscal 2009. We are currently evaluating the impact of SFAS157 on our consolidated financial position and results of operations.

 

In February 2007, the FASB issued SFAS 159, *The Fair Value Option for Financial Assets andFinancial Liabilities — Including an amendment of FASB Statement No. 115*.This standard amends SFAS 115, *Accountingfor Certain Investment in Debt and Equity Securities*, with respectto accounting for a transfer to the trading category for all entities withavailable-for-sale and trading securities electing the fair value option. Thisstandard allows companies to elect fair value accounting for many financialinstruments and other items that currently are not required to be accounted assuch, allows different applications for electing the option for a single itemor groups of items, and requires disclosures to facilitate comparisons ofsimilar assets and liabilities that are accounted for differently in relationto the fair value option. SFAS 159 is effective for fiscal years beginningafter November 15, 2007, which for us is fiscal 2009. We are currentlyevaluating the impact of SFAS 159 on our consolidated financial position andresults of operations.

 

**Item 7A.*Quantitative and Qualitative Disclosures about Market Risk***

 

**Interest Rate Risk**

 

The Company’s principal exposure to financial marketrisks relates to interest rate changes on the Revolving Line of Credit, ofwhich $1,349,000 and $0 was outstanding as of January 28, 2008 and April 14,2008, respectively.  The currentRevolving Line of Credit interest rate is LIBOR plus two percent orapproximately 5.3% on January 28, 2008. A hypothetical increase of 100basis points in short-term interest rates would result in a reduction ofpre-tax earnings, the amount of which would depend on the amount outstanding onthe line of credit. All of our business is transacted in U.S. dollars.Accordingly, foreign exchange rate fluctuations have never had a significantimpact on the Company and are not expected to in the foreseeable future.

 

**Commodity Price Risk**

 

TheCompany purchases a number of food items and utilizes utilities, most of whichare influenced by the associated commodity prices. Although many of theproducts and utilities purchased are subject to changes in the associatedcommodity prices, certain purchasing contract arrangements containing riskmanagement techniques designed to minimize price volatility in the short-termare 

 

22

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available to the Company. Typically the Company uses these types ofpurchasing techniques to minimize price volatility.  The Company does not utilize financialinstruments to hedge commodity price. The Company believes it will be able toaddress significant commodity cost increases by adjusting its menu pricing,menu mix or changing our product delivery strategy. However, rapid increases incommodity prices would likely result in lower operating margins for ourrestaurant concepts, particularly in the short-term.

 

**Item 8.*Financial Statements and Supplementary Data******            ***

 

See the Index to Consolidated FinancialStatements included at “Item 15. Exhibits and Financial Statement Schedules”

 

**Item 9. *Changes inand Disagreements with Accountants on Accounting and Financial Disclosure***

 

None.

 

**Item 9A (T). Controls and Procedures**

 

Management is responsible for the preparation,integrity and fair presentation of the consolidated financial statements andNotes to the consolidated financial statements. The financial statements wereprepared in accordance with the accounting principles generally accepted in theU.S. and include certain amounts based on management’s judgment and bestestimates. Other financial information presented is consistent with thefinancial statements. 

 

Management is also responsible for establishing andmaintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. TheCompany’s internal control over financial reporting is designed under thesupervision of the Company’s principal executive and financial officers inorder to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. The Company’sinternal control over financial reporting includes those policies andprocedures that: 

 

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

 

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

 

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

 

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

 

Our principal executive officer and principalfinancial officer assessed the effectiveness of the Company’s internal controlover financial reporting as of January 28, 2008. In making this assessment,management used the criteria established in Internal Control–IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (“COSO”).  Based on thisevaluation, our principal executive officer and principal financial officershave concluded that the internal controls over financial reporting were noteffective as of  January 28, 2008 andthat certain significant deficiencies and material weaknesses existed for theperiod covered by this Annual Report on Form 10-K. The one significantdeficiency and two material weaknesses identified included:

 

·      Inadequatesegregation of duties (significant deficiency);

·      Untimelyaccount reconciliations (material weakness); and an

·      Inadequatedocumentation of cash disbursements (material weakness).  

 

A significant deficiencyis a deficiency, or combination of deficiencies in internal control overfinancial reporting, that adversely affects the entity’s ability to initiate,authorize, record, process, or report financial data reliably in accordancewith generally accepted accounting principles such that there is more than aremote likelihood that a misstatement of the entity’s financial statements thatis more than inconsequential will not be prevented or detected by the entity’sinternal control. A material weakness is a deficiency or a combination ofdeficiencies in internal control over financial reporting such that there is areasonable possibility that a material misstatement of the annual or interimconsolidated financial statements will not be prevented or detected on a timelybasis. 

 

23

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

 

With respect to account reconciliation and cashdisbursements, management has instituted additional internal control proceduresto insure that: a) account reconciliations are completed earlier in theaccounting cycle; and b) disbursements are not made prior to submission andapproval of adequate supporting documentation.

 

The annual report on internal control over financialreporting does not include an attestation report of our independent registeredpublic accounting firm pursuant to temporary rules of the Securities andExchange Commission that permit us to provide only management’s report in ourannual report on Form 10-K for the fiscal year ended January 28, 2008.

 

24

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**Item 9B. *Other Information***

 

None.

 

**PART III**

 

**Item 10. *Director, Executive Officers and Corporate Governance***

 

Certain information concerningthe current directors and executive officers of the Company is contained inItem 1 of Part I of this Annual Report on Form 10-K.

 

The remaining information ishereby incorporated by reference to the Company’s definitive Proxy Statementfor our 2008 Annual Meeting of Stockholders, to be filed with the Commissionwithin 120 days of January 28, 2008.

 

**Item 11. *Executive Compensation***

 

The information pertaining toexecutive compensation is hereby incorporated by reference to the Company’sdefinitive Proxy Statement for our 2008 Annual Meeting of Stockholders, to befiled with the Commission within 120 days of January 28, 2008.

 

**Item 12.*SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters***

 

The information pertaining tosecurity ownership of certain beneficial owners and management and equitycompensation plan information is hereby incorporated by reference to theCompany’s definitive Proxy Statement for our 2008 Annual Meeting ofStockholders, to be filed with the Commission within 120 days of January 28,2008.

 

**Item 13.*CertainRelationships and Related Transaction, and Director Independence***

 

The information pertaining tocertain relationships and related transactions is hereby incorporated byreference to the Company’s definitive Proxy Statement to for our 2008 AnnualMeeting of Stockholders, to be filed with the Commission within 120 days of January 28,2008.

 

**Item 14.*PrincipalAccountant Fees and Services***

 

Theinformation with respect to principal accountant fees and services is herebyincorporated by reference to the Company’s definitive Proxy Statement for our2008 Annual Meeting of Stockholders, to be filed with the Commission within 120days of January 28, 2008.

 

25

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**PART IV**

 

**Item 15.*Exhibitsand Financial Statement Schedules***

 

**(a)(1) Index toConsolidated Financial Statements:**

** **
| ** **                                                                                                                          | ** ** | **Page Number** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| Report of Management  Responsibilities                                                                                              |       | F-1                  |       |
| Report  of Independent Registered Public Accounting Firm                                                                            |       | F-2                  |       |
| Consolidated  Balance Sheets — as of January 28, 2008 and January 29, 2007                                           |       | F-3                  |       |
|                                                                                                                                |       |                 |       |
| Consolidated  Statements of Operations — for the 52-weeks ended January 28, 2008 and  January 29, 2007               |       | F-5                  |       |
| Consolidated  Statements of Stockholders’ Equity — for the 52-weeks ended January 28,  2008 andJanuary 29, 2007 |       | F-6                  |       |
|                                                                                                                                |       |                 |       |
| Consolidated  Statements of Cash Flows — for the 52-weeks ended January 28, 2008 and  January 29, 2007               |       | F-7                  |       |
| Notes to  Consolidated Financial Statements                                                                                         |       | F-8                  |       |

 

**(a)(2)    Index to Financial Statement Schedules:**

 

All schedules are omitted sincethe required information is not present in amounts sufficient to requiresubmission of the schedule, or because the information required is included inthe consolidated financial statements or the notes thereto.

 

**(a)(3)    Exhibits:**

 

An “Exhibit Index” has beenfiled as a part of this Form 10-K beginning on Page E-1 hereof and isincorporated herein by reference.

 

26

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**SIGNATURES**

 

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

 
|                |   | STAR BUFFET, INC. |
|---------------------|--------|-------------------|
|                |   | (Registrant)      |
|                |   |              |
| April 24, 2008 |   | By:               | /s/ | ROBERT E. WHEATON |
|                |   |              |   | Robert E. Wheaton |
| * *            |   |              |   | *Chief  Executive Officer and President* |
| * *            |   |              |   | *(principal  executive officer)* |
|                |   |              |   |   |
| April 24, 2008 |   | By:               | /s/ | RONALD E. DOWDY |
|                |   |              |   | Ronald E. Dowdy |
| * *            |   |              |   | *Group  Controller, Treasurer and Secretary* |
| * *            |   |              |   | *(principal financial  officer)* |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated.

 
| **Signature** | ** ** | **Title**                         | ** ** | **Date**                    |
|---------------|------------|-----------------------------------|------------|-----------------------------|
| ** **    | ** ** | ** **                        | ** ** | ** **                  |
|          | /s/        | ROBERT E. WHEATON                 |       | Chief Executive Officer,    |   | April 24, 2008 |
|          |       | Robert E. Wheaton                 |       | President and Director      |   |   |
|          |       |                              |       |                        |   |   |
|          | /s/        | RONALD E. DOWDY                   |       | Group Controller, Treasurer |   | April 24, 2008 |
|          |       | Ronald E. Dowdy                   |       | and Secretary               |   |   |
|          |       |                              |       |                        |   |   |
|          | /s/        | THOMAS G. SCHADT                  |       | Director                    |   | April 14, 2008 |
|          |       | Thomas G. Schadt                  |       |                        |   |   |
|          |       |                              |       |                        |   |   |
|          | /s/        | PHILLIP “BUDDY” JOHNSON |       | Director                    |   | April 14, 2008 |
|          |       | Phillip “Buddy” Johnson |       |                        |   |   |
|          |       |                              |       |                        |   |   |
|          | /s/        | CRAIG B. WHEATON                  |       | Director                    |   | April 14, 2008 |
|          |       | Craig B. Wheaton                  |       |                        |   |   |
|          |       |                              |       |                        |   |   |
|          | /s/        | B. THOMAS M. SMITH, JR.           |       | Director                    |   | April 14, 2008 |
|          |       | B. Thomas M. Smith, Jr.      |       |                        |   |   |
|          |       |                              |       |                        |   |   |
|          | /s/        | TODD S. BROWN                     |       | Director                    |   | April 14, 2008 |
|          |       | Todd S. Brown                     |       |                        |   |   |

 

27

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**REPORT OF MANAGEMENT RESPONSIBILITIES**

** **

The management of Star Buffet, Inc. is responsible for thefairness and accuracy of the consolidated financial statements. Theconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America, usingmanagement’s best estimates and judgments where appropriate. The financialinformation throughout this report is consistent with our consolidated financialstatements.

 

Management hasestablished a system of internal controls that provides reasonable assurancethat assets are adequately safeguarded, and transactions are recordedaccurately, in all material respects, in accordance with management’s authorization.We maintain a strong audit program that independently evaluates the adequacyand effectiveness of internal controls. Our internal controls provide forappropriate separation of duties and responsibilities, and there are documentedpolicies regarding utilization of Company assets and proper financialreporting. These formally stated and regularly communicated policies set highstandards of ethical conduct for all employees.

 

This annual report does not include an attestation report of theCompany’s registered public accounting firm regarding internal control overfinancial reporting.  Management’s reportwas not subject to attestation by the Company’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit the Company to provide only management’s report in this annualreport.

 

The Audit Committee of the Board of Directors meets regularly todetermine that management and independent auditors are properly dischargingtheir duties regarding internal control and financial reporting. Theindependent auditors and employees have full and free access to the AuditCommittee at any time.

 

Mayer Hoffman McCann P.C., independentregistered public accountants, are retained to audit the Company’s consolidatedfinancial statements.

 
| /s/ Robert E.  Wheaton                                                |   |
|-----------------------------------------------------------------------|--------|
| Robert E. Wheaton, Chairman of the Board and Chief  Executive Officer |

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To theStockholders

 

STAR BUFFET, INC.AND SUBSIDIARIES

 

We have auditedthe accompanying consolidated balance sheets of Star Buffet, Inc. andSubsidiaries (a Delaware Corporation) as of January 28, 2008 and January 29,2007, and the related consolidated statements of operations, stockholders’equity and cash flows for each of the three fiscal years in the period ended January 28,2008. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

We conducted ouraudits in accordance with auditing standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audits to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement. TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting. Our audit included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Star Buffet, Inc. andSubsidiaries as of January 28, 2008 and January 29, 2007, and theresults of their operations and their cash flows for each of the three fiscalyears in the period ended January 28, 2008, in conformity with U.S.generally accepted accounting principles.

 

 
| /s/ Mayer  Hoffman McCann P.C. |   |
|--------------------------------|--------|
| MAYER HOFFMAN  MCCANN P.C.     |
|                           |
| Phoenix, Arizona               |
| April 24,  2008           |

 

F-2

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**STAR BUFFET,INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

** **
| ** **                                             | ** ** | **January 28,****2008** | ** ** | **January 29,  2007** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| **ASSETS**                                             |       |                         |       |                       |       |
|                                                   |       |                         |       |                       |       |
| Current assets:                                        |       |                         |       |                       |       |
| Cash and cash equivalents                              |       | $                            | 736,000    |                       | $          | 418,000 |   |
| Current portion of notes  receivable                   |       | —                       |       | 58,000                     |       |
| Receivables, net                                       |       | 431,000                      |       | 435,000                    |       |
| Income tax receivables                                 |       | 665,000                      |       | —                     |       |
| Inventories                                            |       | 412,000                      |       | 548,000                    |       |
| Deferred income taxes                                  |       | 319,000                      |       | 310,000                    |       |
| Prepaid expenses                                       |       | 166,000                      |       | 320,000                    |       |
| Total current assets                                   |       | 2,729,000                    |       | 2,089,000                  |       |
|                                                   |       |                         |       |                       |       |
| Property, buildings and  equipment:                    |       |                         |       |                       |       |
| Property, buildings and  equipment, net                |       | 20,816,000                   |       | 17,479,000                 |       |
| Property and equipment under  capitalized leases, net  |       | 71,000                       |       | 751,000                    |       |
| Property and equipment leased  to third parties, net   |       | 3,126,000                    |       | 4,291,000                  |       |
| Property, buildings and  equipment held for future use |       | 2,547,000                    |       | 1,892,000                  |       |
| Property held for sale                                 |       | 931,000                      |       | 931,000                    |       |
| Total property, buildings and  equipment               |       | 27,491,000                   |       | 25,344,000                 |       |
|                                                   |       |                         |       |                       |       |
| Other Assets:                                          |       |                         |       |                       |       |
| Notes receivable, net of  current portion              |       | 704,000                      |       | 1,873,000                  |       |
| Deposits and other                                     |       | 623,000                      |       | 245,000                    |       |
| Total other assets                                     |       | 1,327,000                    |       | 2,118,000                  |       |
|                                                   |       |                         |       |                       |       |
| Deferred income taxes                                  |       | 2,765,000                    |       | 2,097,000                  |       |
|                                                   |       |                         |       |                       |       |
| Intangible assets:                                     |       |                         |       |                       |       |
| Goodwill                                               |       | 551,000                      |       | 1,677,000                  |       |
| Other intangible assets, net                           |       | 839,000                      |       | 843,000                    |       |
| Total intangible assets                                |       | 1,390,000                    |       | 2,520,000                  |       |
|                                                   |       |                         |       |                       |       |
| Total assets                                           |       | $                            | 35,702,000 |                       | $          | 34,168,000 |   |

 

The accompanying notes are anintegral part of the consolidated financial statements.

 

F-3

----

** **
| ** **                                                                                                         | ** ** | **January 28,  2008** | ** ** | **January 29,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                     |       |                       |       |                       |       |
| Current liabilities:                                                                                               |       |                       |       |                       |       |
| Accounts payable-trade                                                                                             |       | $                          | 4,959,000  |                       | $          | 2,657,000 |   |
| Payroll and related taxes                                                                                          |       | 1,401,000                  |       | 1,281,000                  |       |
| Sales and property taxes                                                                                           |       | 1,297,000                  |       | 901,000                    |       |
| Rent, licenses and other                                                                                           |       | 808,000                    |       | 608,000                    |       |
| Income taxes payable                                                                                               |       | 176,000                    |       | 628,000                    |       |
| Revolving line of credit                                                                                           |       | 1,349,000                  |       | 336,000                    |       |
| Current maturities of  obligations under long-term debt                                                            |       | 1,038,000                  |       | 434,000                    |       |
| Current maturities of  obligations under capital leases                                                            |       | 49,000                     |       | 157,000                    |       |
| Total current liabilities                                                                                          |       | 11,077,000                 |       | 7,002,000                  |       |
|                                                                                                               |       |                       |       |                       |       |
| Deferred rent payable                                                                                              |       | 1,846,000                  |       | 1,294,000                  |       |
| Other long-term liability                                                                                          |       | 493,000                    |       | —                     |       |
| Note payable to officer                                                                                            |       | 1,400,000                  |       | —                     |       |
| Capitalized lease obligations,  net of current maturities                                                          |       | 54,000                     |       | 1,239,000                  |       |
| Long-term debt, net of current  maturities                                                                         |       | 5,557,000                  |       | 5,455,000                  |       |
| Total liabilities                                                                                                  |       | 20,427,000                 |       | 14,990,000                 |       |
|                                                                                                               |       |                       |       |                       |       |
| Stockholders’ equity:                                                                                         |       |                       |       |                       |       |
| Preferred stock, $.001 par  value; authorized 1,500,000 shares;  none issued or outstanding                        |       | —                     |       | —                     |       |
| Common stock, $.001 par value; authorized 8,000,000  shares; issued and outstanding 3,170,675 and 3,170,675 shares |       | 3,000                      |       | 3,000                      |       |
| Additional paid-in capital                                                                                         |       | 17,491,000                 |       | 17,491,000                 |       |
| (Accumulated deficit) Retained  earnings                                                                           |       | (2,219,000                 | )          | 1,684,000                  |       |
| Total stockholders’ equity                                                                                    |       | 15,275,000                 |       | 19,178,000                 |       |
|                                                                                                               |       |                       |       |                       |       |
| Total liabilities and  stockholders’ equity                                                                   |       | $                          | 35,702,000 |                       | $          | 34,168,000 |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-4

----

 

**STAR BUFFET, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

 
| ** **                                          | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Two**                  | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **Weeks**                      | ** ** | **Weeks**                      | ** ** | **Weeks**                      | ** ** |
| ** **                                          | ** ** | **Ended**                      | ** ** | **Ended**                      | ** ** | **Ended**                      | ** ** |
| ** **                                          | ** ** | **January 28, 2008** | ** ** | **January 29, 2007** | ** ** | **January 30, 2006** | ** ** |
|                                                |       |                           |       |                           |       |                           |       |
| Total revenues                                      |       | $                              | 68,732,000 |                           | $          | 58,648,000                     |       | $ | 56,305,000 |   |
| Costs and expenses                                  |       |                           |       |                           |       |                           |       |
| Food costs                                          |       | 25,356,000                     |       | 20,789,000                     |       | 19,429,000                     |       |
| Labor costs                                         |       | 23,913,000                     |       | 19,674,000                     |       | 18,260,000                     |       |
| Occupancy and other expenses                        |       | 15,187,000                     |       | 12,772,000                     |       | 11,763,000                     |       |
| General and administrative  expenses                |       | 3,549,000                      |       | 2,426,000                      |       | 2,179,000                      |       |
| Depreciation and amortization                       |       | 2,098,000                      |       | 2,069,000                      |       | 2,120,000                      |       |
| Impairment of long-lived  assets                    |       | 1,401,000                      |       | —                         |       | 369,000                        |       |
| Total costs and expenses                            |       | 71,504,000                     |       | 57,730,000                     |       | 54,120,000                     |       |
| (Loss) income from operations                       |       | (2,772,000                     | )          | 918,000                        |       | 2,185,000                      |       |
|                                                |       |                           |       |                           |       |                           |       |
| Interest expense                                    |       | (858,000                       | )          | (616,000                       | )          | (648,000                       | )          |
| Interest income                                     |       | 24,000                         |       | 93,000                         |       | 361,000                        |       |
| Gain on sale of assets                              |       | 31,000                         |       | 230,000                        |       | —                         |       |
| Other income                                        |       | 259,000                        |       | 329,000                        |       | 319,000                        |       |
| (Loss) income before income  taxes (benefit)        |       | (3,316,000                     | )          | 954,000                        |       | 2,217,000                      |       |
|                                                |       |                           |       |                           |       |                           |       |
| Income tax provision (benefit)                      |       | (1,315,000                     | )          | 238,000                        |       | 420,000                        |       |
|                                                |       |                           |       |                           |       |                           |       |
| Net (loss) income                                   |       | $                              | (2,001,000 | )                              | $          | 716,000                        |       | $ | 1,797,000 |   |
|                                                |       |                           |       |                           |       |                           |       |
| Net (loss) income per common  share— basic     |       | $                              | (0.63      | )                              | $          | 0.23                           |       | $ | 0.60 |   |
| Net (loss) income per common  share— diluted   |       | $                              | (0.63      | )                              | $          | 0.23                           |       | $ | 0.56 |   |
| Weighted average shares  outstanding — basic   |       | 3,171,000                      |       | 3,147,000                      |       | 2,990,000                      |       |
| Weighted average shares  outstanding — diluted |       | 3,171,000                      |       | 3,164,000                      |       | 3,209,000                      |       |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-5

----

 

**STAR BUFFET, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

** **
| ** **                        | ** ** | ** **       | ** ** | ** **  | ** ** | ** **     | ** ** | ** **         | ** ** | **Retained** | ** ** | ** **             | ** ** | ** **      | ** ** |
|-----------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|--------------------|------------|--------------|------------|------------------------|------------|-----------------|------------|
| ** **                        | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | **Officer’s** | ** ** | **Earnings** | ** ** | ** **             | ** ** | **Total**       | ** ** |
| ** **                        | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Notes**      | ** ** | **(Accumulated)**  | ** ** | **Treasury** | ** ** | **Stockholders’** | ** ** |
| ** **                        | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Receivable**     | ** ** | **Deficit)** | ** ** | **Stock**              | ** ** | **Equity**      | ** ** |
|                              |       |             |       |        |       |           |       |               |       |         |       |                   |       |            |       |
| Balance at January 31,  2005 |       | 2,950,000        |       | 3,000       |       | 16,351,000     |       | (698,000           | )          | 4,119,000    |       | —                 |       | 19,775,000      |       |
| Exercised stock options           |       | 53,000           |       | —      |       | 267,000        |       | —             |       | —       |       | —                 |       | 267,000         |       |
| Dividend                          |       | —           |       | —      |       | —         |       | —             |       | (2,253,000   | )          | —                 |       | (2,253,000      | )          |
| Payment by officer                |       | —           |       | —      |       | —         |       | 698,000            |       | —       |       | —                 |       | 698,000         |       |
|                              |       |             |       |        |       |           |       |               |       |         |       |                   |       |            |       |
| Net income                        |       | —           |       | —      |       | —         |       | —             |       | 1,797,000    |       | —                 |       | 1,797,000       |       |
|                              |       |             |       |        |       |           |       |               |       |         |       |                   |       |            |       |
| Balance at January 30,  2006 |       | 3,003,000        |       | 3,000       |       | 16,618,000     |       | —             |       | 3,663,000    |       | —                 |       | 20,284,000      |       |
|                              |       |             |       |        |       |           |       |               |       |         |       |                   |       |            |       |
| Exercised stock options           |       | 168,000          |       | —      |       | 873,000        |       | —             |       | —       |       | —                 |       | 873,000         |       |
| Dividend                          |       | —           |       | —      |       | —         |       | —             |       | (2,695,000   | )          | —                 |       | (2,695,000      | )          |
|                              |       |             |       |        |       |           |       |               |       |         |       |                   |       |            |       |
| Net income                        |       | —           |       | —      |       | —         |       | —             |       | 716,000      |       | —                 |       | 716,000         |       |
|                              |       |             |       |        |       |           |       |               |       |         |       |                   |       |            |       |
| Balance at January 29,  2007 |       | 3,171,000        |       | $           | 3,000      |           | $          | 17,491,000         |       | $            | —     |                   | $          |  1,684,000 |       | $ | — |   | $ | 19,178,000 |   |
|                              |       |             |       |        |       |           |       |               |       |         |       |                   |       |            |       |
| Dividend                          |       | —           |       | —      |       | —         |       | —             |       | (1,902,000   | )          | —                 |       | (1,902,000      | )          |
|                              |       |             |       |        |       |           |       |               |       |         |       |                   |       |            |       |
| Net income                        |       | —           |       | —      |       | —         |       | —             |       | (2,001,000   | )          | —                 |       | (1,302,000      | )          |
|                              |       |             |       |        |       |           |       |               |       |         |       |                   |       |            |       |
| Balance at January 28,  2008 |       | 3,171,000        |       | $           | 3,000      |           | $          | 17,491,000         |       | $            | —     |                   | $          | (2,219,000      | )          | $ | — |   | $ | 15,275,000 |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F-6

----

 

**STAR BUFFET, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

** **
| ** **                                                                                | ** ** | **Fifty-Two  Weeks Ended  January 28,  2008** | ** ** | **Fifty-Two  Weeks Ended  January 29,  2007** | ** ** | **Fifty-Two  Weeks Ended  January 30,  2006** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Cash flows from operating  activities:                                                    |       |                                                    |       |                                                    |       |                                                    |       |
| Net (loss) income                                                                         |       | $                                                       | (2,001,000 | )                                                       | $          | 716,000                                                 |       | $ | 1,797,000 |   |
| Adjustments to reconcile net  income (loss) to net cash provided by operating activities: |       |                                                    |       |                                                    |       |                                                    |       |
| Depreciation                                                                              |       | 1,980,000                                               |       | 1,956,000                                               |       | 2,003,000                                               |       |
| Amortization of franchise and  licenses                                                   |       | 95,000                                                  |       | 91,000                                                  |       | 94,000                                                  |       |
| Amortization of loan costs                                                                |       | 23,000                                                  |       | 22,000                                                  |       | 23,000                                                  |       |
| Gain on sale of assets                                                                    |       | (31,000                                                 | )          | (230,000                                                | )          | —                                                  |       |
| Impairment of long-lived  assets                                                          |       | 1,401,000                                               |       | —                                                  |       | 369,000                                                 |       |
| Deferred income taxes, net                                                                |       | (677,000                                                | )          | 41,000                                                  |       | (439,000                                                | )          |
| Change in operating assets and  liabilities:                                              |       |                                                    |       |                                                    |       |                                                    |       |
| Receivables                                                                               |       | (51,000                                                 | )          | (138,000                                                | )          | 123,000                                                 |       |
| Inventories                                                                               |       | 136,000                                                 |       | (119,000                                                | )          | 36,000                                                  |       |
| Prepaid expenses                                                                          |       | 154,000                                                 |       | (188,000                                                | )          | (58,000                                                 | )          |
| Deposits and other                                                                        |       | (378,000                                                | )          | (112,000                                                | )          | 91  ,000                                                |       |
| Deferred rent payable                                                                     |       | (38,000                                                 | )          | (23,000                                                 | )          | (3,000                                                  | )          |
| Accounts payable-trade                                                                    |       | 2,302,000                                               |       | 479,000                                                 |       | 441,000                                                 |       |
| Income taxes receivable                                                                   |       | (665,000                                                | )          | —                                                  |       | —                                                  |       |
| Income taxes payable                                                                      |       | (452,000                                                | )          | (263,000                                                | )          | 170,000                                                 |       |
| Other accrued liabilities                                                                 |       | 1,210,000                                               |       | 451,000                                                 |       | (781,000                                                | )          |
| Total adjustments                                                                         |       | 5,009,000                                               |       | 1,967,000                                               |       | 2,069,000                                               |       |
| Net cash provided by operating  activities                                                |       | 3,008,000                                               |       | 2,683,000                                               |       | 3,866,000                                               |       |
| Cash flows from investing  activities:                                                    |       |                                                    |       |                                                    |       |                                                    |       |
| Payments on notes receivable                                                              |       | 20,000                                                  |       | 1,323,000                                               |       | 82,000                                                  |       |
| Acquisition of property,  buildings and equipment                                         |       | (4,392,000                                              | )          | (2,505,000                                              | )          | (493,000                                                | )          |
| Interest income                                                                           |       | (1,000                                                  | )          | (2,000                                                  | )          | (1,000                                                  | )          |
| Issuance of note receivable                                                               |       | —                                                  |       | (100,000                                                | )          | (1,640,000                                              | )          |
| Proceeds from the sale of  assets                                                         |       | 746,000                                                 |       | 171,000                                                 |       | —                                                  |       |
| Purchase of license and  trademarks                                                       |       | (35,000                                                 | )          | (230,000                                                | )          | (25,000                                                 | )          |
| Payments by officer                                                                       |       | —                                                  |       | —                                                  |       | 698,000                                                 |       |
| Net cash used in investing  activities                                                    |       | (3,662,000                                              | )          | (1,343,000                                              | )          | (1,379,000                                              | )          |
| Cash flows from financing  activities:                                                    |       |                                                    |       |                                                    |       |                                                    |       |
| Proceeds from issuance of long-term  debt                                                 |       | 1,988,000                                               |       | 1,159,000                                               |       | —                                                  |       |
| Payments on long-term debt                                                                |       | (1,282,000                                              | )          | (929,000                                                | )          | (577,000                                                | )          |
| Proceeds from stock options  exercised                                                    |       | —                                                  |       | 873,000                                                 |       | 267,000                                                 |       |
| Loan from officer                                                                         |       | 1,400,000                                               |       | —                                                  |       | 698,000                                                 |       |
| Proceeds from line of credit,  net                                                        |       | 1,013,000                                               |       | 336,000                                                 |       | —                                                  |       |
| Capitalized loan costs                                                                    |       | (87,000                                                 | )          | (14,000                                                 | )          | (10,000                                                 | )          |
| Principal payments on capital  leases                                                     |       | (158,000                                                | )          | (143,000                                                | )          | (115,000                                                | )          |
| Dividends paid                                                                            |       | (1,902,000                                              | )          | (2,695,000                                              | )          | (2,253,000                                              | )          |
| Net cash provided by (used) in  financing activities                                      |       | 972,000                                                 |       | (1,413,000                                              | )          | (2,688,000                                              | )          |
|                                                                                      |       |                                                    |       |                                                    |       |                                                    |       |
| Net increase (decrease) in  cash and cash equivalents                                     |       | 318,000                                                 |       | (73,000                                                 | )          | (201,000                                                | )          |
| Cash and cash equivalents at  beginning of period                                         |       | 418,000                                                 |       | 491,000                                                 |       | 692,000                                                 |       |
| Cash and cash equivalents at  end of period                                               |       | $                                                       | 736,000    |                                                    | $          | 418,000                                                 |       | $ | 491,000 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

F-7

----

 

**STAR BUFFET, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

**NOTE 1 — SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

A summary of certain significantaccounting policies not disclosed elsewhere in the footnotes to theconsolidated financial statements is set forth below.

 

**Basis of Presentation**

 

The accompanying consolidatedfinancial statements include the accounts for Star Buffet, Inc., togetherwith its direct and indirect wholly owned subsidiaries Summit FamilyRestaurants Inc. (“Summit”), HTB Restaurants, Inc. (“HTB”), NorthstarBuffet, Inc. (“NSBI”) and Star Buffet Management, Inc. (“SBMI”)(collectively the “Company”). The accompanying consolidated financialstatements include the results of operations and assets and liabilities of theCompany’s operations. Certain estimates, assumptions and allocations were madein preparing such financial statements. Significant intercompany transactionsand balances have been eliminated in consolidation.

 

**Organization and Nature ofOperations**

 

The Company was formed by CKERestaurants, Inc. (“CKE”) in July 1997 in connection with thereorganization of CKE’s buffet-style restaurant business. Pursuant to acontribution agreement among the Company and CKE and certain respectivesubsidiaries, CKE transferred to Summit the net assets of its two Casa BonitaMexican theme restaurants, and Summit transferred substantially all of itsassets and liabilities (primarily those relating to the JB’s Restaurant systemand Galaxy Diner restaurants, but excluding 16 HomeTown Buffet restaurantsoperated by HTB) to a newly formed subsidiary of CKE. All of the parties to theforegoing transactions (the “Formation Transactions”) were, upon completionthereof, direct or indirect wholly owned subsidiaries of CKE, and suchFormation Transactions were accounted for as reorganization among companiesunder common control.

 

The operating results for the 52-week period ended January 28,2008 included 52 weeks of operations for the Company’s 12 franchised HomeTown Buffets, seven JB’srestaurants, five Whistle Junction restaurants, three 4B’S restaurants, threeHoliday House restaurants, three Western Sizzlin restaurants, two JJ North’sGrand Buffets, two BuddyFreddys restaurants, two BuddyFreddys Country Buffets,two K-BOB’S Steakhouses, one Pecos Diamond Steakhouse, one Bar-HSteakhouse and one Casa Bonita Mexican theme restaurant. The Company also hadfive restaurants currently closed for remodeling and repositioning, threerestaurants leased to third-party operators and the net assets of anotherclosed restaurant reported as property held for sale. The Company’s restaurantsare located in Arkansas, Arizona, Colorado, Florida, Georgia, Idaho,Mississippi, Montana, New Mexico, Oklahoma, Oregon, Texas, Utah, Washington andWyoming.

 

The operating results for the 52-week period ended January 29,2007 included 52 weeks of operations for the Company’s 14 franchised HomeTownBuffet restaurants, six JB’s restaurants, three K-BOB’S Steakhouses, twoBuddyFreddys restaurants, two BuddyFreddys Country Buffets, two Holiday Houserestaurants, one JJ North’s Grand Buffet restaurant, and one Casa BonitaMexican theme restaurant.  The Companyalso opened the following during the year, one K-BOB’S Steakhouse for 48 weeks,one Pecos Diamond Steakhouse for 29 weeks, one Western Sizzlin restaurant for16 weeks and five Whistle Junction restaurants for 9 weeks.  In addition, operating results include 19 weeks for one Buddy Freddy’sCountry Buffet closed during the fiscal year 2007. Results also include33 weeks for one JJ North’s Country Buffet restaurant closed during the fiscalyear 2007.  Eight restaurants were closed atthe end of the 2007 fiscal year for repositioning. Four of the eight closedrestaurants have been leased to third-property operators, three restaurantsremain closed for remodeling and repositioning and another closed restaurantwas reported as property held for sale.

 

**Fiscal Year**

 

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

 

F-8

----

 

**Cash Equivalents**

 

Highly liquid investments withoriginal maturities of three months or less when purchased are considered cashequivalents. The carrying amounts reported in the consolidated balance sheetsfor these instruments approximate their fair value.

 

**Revenue Recognition**

 

The Company’s principal source of revenue is fromcustomer dining transactions.  Revenue isrecognized at the time the meal is purchased, primarily by cash or credit card.

 

###### **Receivables**

###### ** **

Receivables are stated at anamount management expects to collect and provides for an adequate reserve forprobable uncollectible amounts.  Amountsdeemed to be uncollectible are written off through a charge to earnings and acredit to a valuation allowance based on management’s assessment of the currentstatus of individual balances.  Areceivable is written off when it is determined that all collection effortshave been exhausted.  The Company did nothave any valuation allowance for the years ending January 28, 2008 and January 29,2007.

 

###### **Consideration Received from Vendors**

###### ** **

The Company records vendorrebates on products purchased as a reduction of cost of sales. The allowancesare recognized as earned in accordance with the written agreements with vendors.

 

**Inventories**

 

Inventoriesconsist of food, beverage, gift shop items and restaurant supplies and arevalued at the lower of cost or market, determined by the first-in, first-outmethod.

 

**Property, Buildings andEquipment**

 

Property and equipment and realproperty under capitalized leases are carried at cost less accumulateddepreciation and amortization. Depreciation and amortization are provided usingthe straight-line method over the following useful lives:

 
| ** **                           | ** ** | **Years**     | ** ** |
|--------------------------------------|------------|---------------|------------|
| Buildings                            |       | 40            |       |
| Building and leasehold  improvements |       | 15  – 20 |       |
| Furniture, fixtures and  equipment   |       | 5  – 8   |       |

 

Building and leaseholdimprovements are amortized over the lesser of the life of the lease orestimated economic life of the assets. The life of the lease includes renewaloptions determined by management at lease inception as reasonably likely to beexercised. If a previously scheduled lease option is not exercised, anyremaining unamortized leasehold improvements may be required to be recognizedimmediately which could result in a significant charge adversely affecting theoperating results of that period.

 

Property and equipment placed onthe market for sale is not depreciated and is reclassed on the balance sheet asproperty held for sale. Property and equipment in non-operating units held forremodeling or repositioning is not depreciated.

 

Repairsand maintenance are charged to operations as incurred. Remodeling costs aregenerally capitalized.

 

###### **Goodwill**

###### ** **

Goodwilland other intangible assets primarily represent the excess of the purchaseprice paid over the fair value of the net assets acquired in connection withbusiness acquisitions.

 

TheCompany reviews goodwill for possible impairment on an annual basis or whentriggering events occur in accordance with 

 

F-9

----

 

SFAS 142. Goodwill is tested forimpairment at the reporting unit level. Because SFAS 142 defines a reportingunit as an operating segment or one level below an operating segment, theCompany reviews goodwill for possible impairment at the individual restaurantlevel. Six reporting units (restaurants) had recorded goodwill associated withthem for fiscal 2008 and fiscal 2007.

 

TheCompany utilizes a two-part impairment test. First, the fair value of the reporting unit is compared to the carryingvalue (including goodwill).  If thecarrying value is greater than the fair value, the second step isperformed.  In the second step, the impliedfair value of the reporting unit goodwill is compared to the carrying amount ofgoodwill.  If the carrying value isgreater, a loss is recognized. The goodwill impairment test considers theimpact of current conditions and the economic outlook for the restaurantindustry, the general overall economic outlook including market data,governmental and environmental factors, in establishing the assumptions used tocompute the fair value of each reporting unit. We also take into account the historical, current and future (based onprobability) operating results of the six reporting units and any other factsand data pertinent to valuing the reporting units in our impairment test. Infiscal 2007 the Company determined that there was no goodwill impairment.  In fiscal 2008, the impairment expense forgoodwill was $1,126,000.

 

TheCompany has an independent evaluation of goodwill conducted every threeyears.  The most recent independentvaluation was conducted as of February 1, 2008.

 

**Other Intangible Assets**

 

Other intangible assets arecomprised of franchise fees, loan acquisition costs, and the JB’s licenseagreement. Franchise fees are amortized using the straight-line method over theterms of the franchise agreements, which typically range from 8 to20 years.  Loan costs are amortizedusing the straight-line method over the lesser of the life of the loan or fiveyears (which approximates the effective interest method). The JB’s licenseagreement is being amortized using the straight-line method over 11 years.  The Company has the trademarks and intangibleassets of Whistle Junction, Holiday House and 4B’s for $230,000, $25,000 and$25,000, respectively.  These assets havean indefinite asset life and are subject to possible impairment on an annualbasis or when triggering events occur in accordance with SFAS 142.

 
| ** **                 | ** ** | **Gross**             | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|----------------------------|------------|-----------------------|------------|------------------|------------|------------|------------|
| ** **                 | ** ** | **Carrying Amt** | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| **Fiscal 2008**       |       |                  |       |             |       |       |       |   |   |   |
| Franchise and license fees |       | $                     | 1,363,000  |             | $          | (631,000   | )          | $ | 732,000 |   |
| Loan acquisition costs     |       | 200,000               |       | (93,000          | )          | 107,000    |       |
| Total                      |       | $                     | 1,563,000  |             | $          | (716,000   | )          | $ | 839,000 |   |
| **Fiscal 2007**            |       |                  |       |             |       |       |       |
| Franchise and license fees |       | $                     | 1,378,000  |             | $          | (578,000   | )          | $ | 800,000 |   |
| Loan acquisition costs     |       | 113,000               |       | (70,000          | )          | 43,000     |       |
| Total                      |       | $                     | 1,491,000  |             | $          | (648,000   | )          | $ | 843,000 |   |

 

The table below shows expectedamortization for purchased finite intangibles as of January 28, 2008 forthe next five years:

 
| **Fiscal Year** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| 2009                 |       | 130,000    |       |
| 2010                 |       | 122,000    |       |
| 2011                 |       | 117,000    |       |
| 2012                 |       | 114,000    |       |
| 2013                 |       | 64,000     |       |
| Thereafter           |       | 12,000     |       |
| Total                |       | $          | 559,000    |   |
|                      |            |            |            |  |

 

TheCompany acquired the JB’s license agreement in November 2002 for$773,000.  Amortization expense for theJB’s license agreement was $78,000 in fiscal 2008 and 2007.  Amortization of franchise and license feeswere $95,000 and $91,000 for the fiscal years ending January 28, 2008 and January 29,2007, respectively.  Amortization of loancosts were $23,000 and $22,000 for the fiscal years ending January 28,2008 and January 29, 2007, respectively.

 

F-10

----

 

**Impairment of Long-LivedAssets**

 

TheCompany determines that an impairment write down is necessary for long-livedassets whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. Recoverability of assets to be heldand used is measured by a comparison of the carrying amount of an asset tofuture undiscounted net cash flows expected to be generated by the asset. Ifsuch assets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the assets exceeds thefair value of the assets.   Theimpairment expense in fiscal 2008 was for goodwill, leasehold improvement,equipment and franchise fees of $1,126,000, $238,000, $29,000 and $8,000,respectively.  Impairment expense chargedto operations was $1,401,000 and $0 for the years ended January 28, 2008and January 29, 2007, respectively.

 

###### **Fair Value of FinancialInstruments**

###### ** **

The carrying amounts of the Company’s cash and cashequivalents, receivables, accounts payable and accrued expenses approximatesfair value because of the short maturity of these instruments.

 

The carrying amounts ofthe Company’s notes receivable, long-term debt and capital lease obligationsapproximate fair value and are based on discounted cash flows using marketrates at the balance sheet date. The use of discounted cash flows can besignificantly affected by the assumptions used, including the discount rate andestimates of future cash flows. The derived fair value estimates cannot besubstantiated by comparison to independent markets and, in many cases, couldnot be realized in immediate settlement of the instrument.

 

**Pre-Opening Costs**

 

Pre-opening costs are expensed when incurred. TheCompany incurred and charged to operations approximately $0 of pre-openingcosts during fiscal 2008 and 2007.

 

**Income Taxes**

 

The Company utilizes theliability method of accounting for income taxes. Under the liability method,deferred tax assets and liabilities are determined based on the differencebetween the financial statement and tax basis of assets and liabilities usingenacted tax rates in effect during the years in which the differences areexpected to reverse. An allowance against deferred tax assets is recorded inwhole or in part when it is more likely than not that such tax benefits willnot be realized.

 

**Advertising Expenses**

 

Advertisingcosts are charged to operations as incurred. Amounts charged to operationstotaled $916,000 and $670,000, for the years ended January 28, 2008 and January 29,2007, respectively.

 

**Insurance Programs**

 

Historically, the Company wasself-insured for most casualty claims, with commercial insurance for casualtyclaims in excess of $2 million per claim and $3 million per year as a riskreduction strategy. Effective January 1, 2008 the Company purchasedcommercial insurance for casualty claims in excess of $100,000 per claim.  Accruals for self-insured losses includeestimates based on historical information and expected future developments.  Differences in estimates and assumptionscould result in actual liabilities that are materially different from thecalculated accruals.  Valuation reserves for the years ended January 28,2008 and January 29, 2007, consisted of the following:

 
| **Insurance and claims reserves** | ** ** | **Balance at Beginning  of Period** | ** ** | **Expense Recorded** | ** ** | **Payments Made** | ** ** | **Balance at End of  Period** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------|------------|------------------------|------------|----------------------------------------------|------------|
| Year ended  January 28, 2008                |       | $                                                  | 66,500     |                      | $          | 2,080                  |       | $                                            | (14,580    | ) | $ | 54,000 |   |
| Year ended  January 29, 2007                |       | $                                                  | 50,000     |                      | $          | 27,500                 |       | $                                            | (11,000    | ) | $ | 66,500 |   |

 

F-11

----

 

**Leases**

 

The Company has various leasecommitments on store locations. Expenses of operating leases with escalatingpayment terms are recognized on a straight-line basis over the lives thatconform to the related term used to depreciate leasehold improvements on theleased property.  Contingent rentalpayments are triggered by surpassing annual base revenue levels set forth incertain of our lease agreements. Contingent rental expense is recorded in each month that our revenueexceeds the monthly base revenue levels as set forth in the relevant leaseagreement.  In situations where thecontingent rent is based on annual sales or cumulative sales to date,contingent rental expense is recorded when it is determined probable that wewill exceed the established threshold.

 

**Use of Estimates**

 

In preparing the consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America, management is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and revenue and expenses during the reportingperiod. Actual results could differ from those estimates.

 

**Earnings (Loss) per Share**

 

The Company applies Statement ofFinancial Accounting Standards No. 128 (SFAS No. 128), which requiresthe calculation of basic and diluted income (loss) per share.  Basic income (loss) per share is computed bydividing net income (loss) by the weighted average number of common sharesoutstanding during the fiscal year. Diluted income (loss) per share is computed on the basis of the averagenumber of common shares outstanding plus the dilutive effect of outstandingstock options and warrants using the “treasury stock” method. The following isa reconciliation of the denominators used to calculate diluted earnings (loss)per share on net income (loss) for the respective fiscal years:

 
| ** **                                                 | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Two**                  | ** ** |
|------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **Weeks**                      | ** ** | **Weeks**                      | ** ** |
| ** **                                                 | ** ** | **Ended**                      | ** ** | **Ended**                      | ** ** |
| ** **                                                 | ** ** | **January 28, 2008** | ** ** | **January 29, 2007** | ** ** |
| ** **                                                 | ** ** | ** **                     | ** ** | ** **                     | ** ** |
| Weighted average common shares  outstanding – basic   |       | 3,170,675                      |       | 3,146,974                      |       |
| Dilutive effect of stock  options                          |       | —                         |       | 17,361                         |       |
| Anti-dilutive stock options                                |       | —                         |       | —                         |       |
| Weighted average common shares  outstanding – diluted |       | 3,170,675                      |       | 3,164,335                      |       |

 

Weighted average common sharesused in the year ended January 28, 2008 to calculate diluted loss pershare exclude stock options to purchase 40,000 shares of common stock as theireffect was anti-dilutive.  Weightedaverage common shares used in the year ended January 29, 2007 to calculatediluted earnings per share exclude stock options to purchase 488,000 shares ofcommon stock due to the market price of the underlying stock being less thanthe exercise price.

 

###### **Segment Reporting**

###### ** **

TheCompany’s reportable segments are based on brand similarities. Business resultsare based on the Company’s management accounting practices.

 

###### **Comprehensive Income**

###### ** **

TheCompany does not have any components of comprehensive income other than netincome (loss) and, therefore, comprehensive income equaled net income (loss)for all periods presented.

 

F-12

----

 

**Stock-Based Compensation**

** **

***Periods prior to the adoption of SFAS123(R)***

 

Priorto January 1, 2006, the Company accounted for stock-based awards under theintrinsic value method, which followed the recognition and measurementprinciples of APB Opinion No. 25, *Accountingfor Stock Issued to Employee,* and related interpretations. Theintrinsic value method of accounting resulted in compensation expense for stockoptions to the extent option exercise prices were set below market prices onthe date of grant. Also, to the extent stock awards were forfeited prior tovesting, any previously recognized expense was reversed as an offset tooperating expenses in the period of forfeiture.

 

Thefollowing table illustrates the effects on net loss and net loss per share asif the Company had applied the fair value recognition provisions of SFAS 123, *Accounting for Stock Based Compensation*,as amended by SFAS No. 148, *Accountingfor Stock-Based Compensation—Transition and Disclosure*to optionsgranted under the Company’s stock-based compensation plans prior to theadoption. For purposes of this pro forma disclosure, the value of the optionswas estimated using the Black-Scholes-Merton (“BSM”) option-pricing formula andamortized on a straight-line basis over the respective vesting periods of theawards. Disclosure for the year ended December 31, 2006 is not presentedbecause stock-based payments were accounted for under SFAS 123 (R)’s fair valuemethod during this period.

 
| ** **                                                                       | ** ** | **Fifty-Two**                                                                     | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Weeks Ended**                                                              | ** ** |
| ** **                                                                       | ** ** | **January 30, 2006**                                                    | ** ** |
| ** **                                                                       | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| Net income (loss) attributable to common stockholders                            |       |                                                                              |       |
| As reported                                                                      |       | $                                                                                 | 1,797      |   |
| Employee stock compensation  expense included  in net income  (loss) as reported |       | —                                                                            |       |
| Pro forma compensation expense                                                   |       | (61                                                                               | )          |
| Pro forma net income (loss)                                                      |       | $                                                                                 | 1,736      |   |
| Per share – basic                                                           |       |                                                                              |       |
| As reported                                                                      |       | $                                                                                 | .60        |   |
| Pro forma compensation expense                                                   |       | (.02                                                                              | )          |
| Pro forma net income (loss)                                                      |       | $                                                                                 | .58        |   |
| Per share – diluted                                                         |       |                                                                              |       |
| As reported                                                                      |       | $                                                                                 | .56        |   |
| Pro forma compensation expense                                                   |       | (.02                                                                              | )          |
| Pro forma net income (loss)                                                      |       | $                                                                                 | .54        |   |

 

***Adoption of SFAS 123(R)***

 

As of January 1,2006, the Company adopted SFAS No. 123(R) using the modifiedprospective method, which requires measurement of compensation cost for allstock-based awards at fair value on date of grant and recognition ofcompensation over the service period for awards expected to vest. The fairvalue of stock options is determined using the Black-Scholes-Merton (“BSM”)valuation model, which is consistent with our valuation techniques previouslyutilized for options in footnote disclosures required under SFAS No. 123*.  *Suchvalue is recognized as an expense over the service period, net of estimatedforfeitures, using the straight-line method under SFAS 123(R).

 

The adoption of SFAS 123(R) did not result in acumulative benefit from accounting change, which reflects the net cumulativeimpact of estimating future forfeitures in the determination of period expense,rather than recording forfeitures when they occur as previously permitted, aswe did not have unvested employee stock awards for which compensation expensewas recognized prior to adoption of SFAS No. 123(R).

 

**New AccountingPronouncements**

 

In February 2006, the FASB issued SFAS 155, *Accounting for Certain Hybrid Financial Instruments —an amendment of FASB Statements No. 133 and 140.*SFAS 155allows financial instruments that contain an embedded derivative and thatotherwise would require bifurcation to be accounted for as a whole on a fairvalue basis, at the holders’ election. SFAS 155 also clarifies and amendscertain other provisions of SFAS 133, *Accountingfor Derivative Instruments and Hedging Activities*, and SFAS 140, *Accounting for*

 

F-13

----

 

*Transfersand Servicing of Financial Assets and Extinguishments of Liabilities — areplacement of FASB Statement 125.*Our adoption of SFAS 155at the beginning of fiscal 2008 had no impact on our consolidated financialposition or results of operations.

 

In March 2006, the FASB issued SFAS 156, *Accounting for Servicing of Financial Assets — anamendment of FASB Statement No. 140.*SFAS 156 provides guidanceon the accounting for servicing assets and liabilities when an entityundertakes an obligation to service a financial asset by entering into a servicingcontract. Our adoption of SFAS 156 at the beginning of fiscal 2008 had noimpact on our consolidated financial position or results of operations.

 

In June 2006, the FASB issued FIN 48, *Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109*, which clarifies the accounting foruncertainty in income taxes recognized in financial statements. FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 requires the recognition, in the financialstatements, of the impact of a tax position, if that position is more likelythan not of being sustained on audit, based on the technical merits of theposition. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods and disclosure. Weadopted FIN 48 at the beginning of fiscal 2008 and it has had no impact on ourconsolidated financial position or results of operation.

 

In June 2006, the FASB ratified EITF consensus06-3, *How Taxes Collected from Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement (That Is, Gross versus Net Presentation).* This EITF addressesthe presentation of taxes in the income statement. Gross or net presentationmay be elected for each different type of tax, but similar taxes should bepresented consistently. Taxes within the scope of this EITF would include taxesthat are imposed on a revenue transaction between a seller and a customer, forexample, sales taxes, use taxes, value-added taxes, and some types of excisetaxes. Our accounting policy is to present the taxes within the scope of EITF06-3 on a net basis. EITF 06-3 is effective for interim and annual periodsbeginning after December 15, 2006, which for us is the first quarter offiscal 2008. EITF 06-3 has not had an impact on our consolidated financialposition or results of operations in fiscal 2008.

 

In September 2006, the FASB issued SFAS 158,*Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans — an amendment of FASB Statements No. 87,88, 106 and 132(R).* SFAS 158 requires the balance sheetrecognition of the funded status of defined benefit pension and otherpostretirement plans, along with a corresponding after-tax adjustment tostockholders’ equity. Our adoption of SFAS 158 at the end of fiscal 2007did not have a material impact on our consolidated financial position orresults of operations.

 

In September 2006, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 108, *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements.*SAB 108 provides interpretive guidance on how the effects of the carryoveror reversal of prior year misstatements should be considered in quantifying acurrent year misstatement for the purpose of the materiality assessment. Ouradoption of SAB 108 at the end of fiscal 2007 did not have a materialimpact on our consolidated financial position or results of operations.

 

**Reclassifications**

 

None.

 

**NOTE 2 — ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED**

 

In December 2007, the FASB issued FAS 141 (revised 2007), *Business Combinations*. This standardrequires the new acquiring entity to recognize all assets acquired andliabilities assumed in the transactions; establishes an acquisition-date fairvalue for said assets and liabilities; and fully discloses to investors thefinancial effect the acquisition will have. FAS 141 (R) is effective forfiscal years beginning after December 15, 2008, which for us is fiscal2010. We are currently evaluating the impact of FAS 141 (R) on ourconsolidated financial position and results of operations.

 

In December 2007, the FASB issued FAS 160, *Noncontrolling Interests in Consolidated FinancialStatements, and amendment of ARB No. 51 (FAS 160)*. Thisstandard requires all entities to report minority interests in subsidiaries asequity in the consolidated financial statements, and requires that transactionsbetween entities and noncontrolling interests be treated as equity. FAS 160 iseffective for fiscal years beginning after December 15, 2008, which for usis fiscal 2010. We are currently evaluating the impact of FAS 160 on ourconsolidated financial position and results of operations.

 

F-14

----

 

In September 2006, the FASB issued SFAS 157,*Fair Value Measurements.*SFAS 157 establishes a framework for measuring fair value under GAAP andexpands disclosures about fair value measurement. SFAS 157 also createsconsistency and comparability in fair value measurements among the manyaccounting pronouncements that require fair value measurements but does notrequire any new fair value measurements. SFAS 157 is effective for fiscalyears (including interim periods) beginning after November 15, 2007, whichfor us is the first quarter of fiscal 2009. We are currently evaluating theimpact of SFAS 157 on our consolidated financial position and results ofoperations.

 

In February 2007, the FASB issued SFAS 159, *The Fair Value Option for Financial Assets andFinancial Liabilities — Including an amendment of FASB Statement No. 115*.This standard amends SFAS 115, *Accountingfor Certain Investment in Debt and Equity Securities*, with respectto accounting for a transfer to the trading category for all entities withavailable-for-sale and trading securities electing the fair value option. Thisstandard allows companies to elect fair value accounting for many financialinstruments and other items that currently are not required to be accounted assuch, allows different applications for electing the option for a single itemor groups of items, and requires disclosures to facilitate comparisons ofsimilar assets and liabilities that are accounted for differently in relationto the fair value option. SFAS 159 is effective for fiscal years beginningafter November 15, 2007, which for us is fiscal 2009. We are currentlyevaluating the impact of SFAS 159 on our consolidated financial positionand results of operations.

 

**NOTE 3 — NOTES RECEIVABLE**

 

Notesreceivable consist of the following:

** **
| ** **                                                 | ** ** | **January 28, 2008** | ** ** | **January 29, 2007** | ** ** |
|------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Notes receivable from North’s  Restaurants, Inc. |       | $                              | 490,000    |                           | $          | 1,475,000 |   |
| Notes receivable from  strategic partners                  |       | 214,000                        |       | 436,000                        |       |
| Notes receivable from landlord                             |       | —                         |       | 20,000                         |       |
| Total notes receivable                                     |       | 704,000                        |       | 1,931,000                      |       |
| Less current portion                                       |       | —                         |       | 58,000                         |       |
| Notes receivable, net of  current portion                  |       | $                              | 704,000    |                           | $          | 1,873,000 |   |

 

**Sinceinception, the Company’s acquisition strategy has incorporated the utilizationof loans to sellers to facilitate certain proposed transactions.  In most cases, these loans are secured andinclude, as part of terms and conditions, the Company’s right to convert theloan into ownership of the restaurants. Also, certain of these loans contain favorable interest rates andrepayment terms if the loans are not converted to ownership for one or morereasons.  This financing strategy entailssignificant risk.  Currently, the Companyhas two loans outstanding and both are in default.  However, because the Company anticipates fullrecovery of amounts outstanding through either repayment or conversion toownership, historically no provision for doubtful accounts has beenestablished.  Management is continuallyevaluating the collectibility on an ongoing basis. While estimates to date havebeen within our expectations, a change in the financial condition of specificrestaurant companies or in overall industry trends may result in futureadjustments to Company estimates of recoverability of receivables.**

** **

On February 1, 2005, the Company announcedin a press release that it had entered into a strategic alliance with K-BOB’SUSA Inc. and related affiliates (“K-BOB’S”). In accordance with the terms ofthe strategic alliance, Star Buffet agreed to lend K-BOB’S up to $1.5 millionon a long-term basis.  The Company loanedK-BOB’S $1.5 million and the current balance is $214,500.  In exchange, K-BOB’S granted Star Buffet anoption to purchase as many as five corporate owned and operated K-BOB’Srestaurants located in New Mexico and Texas, as well as rights to develop K-BOB’Sin other areas in the United States.  On January 31,2006, the Company exercised its option under the terms of the strategicalliance and purchased three K-BOB’S restaurants.  In addition, the Company acquired anotherK-BOB’S location in Texas for cash of $700,000 in February 2006.

 

In conjunction with the acquisition of certain JJNorth’s restaurants from North’s Restaurants, Inc. (“North’s”) in 1997,the Company provided a credit facility to North’s and when North’s defaultedthe Company sued for enforcement. In 1998, the Company’s suit with North’sresulted in a negotiated settlement in favor of the Company represented by anAmended and Restated 

 

F-15

----

 

Promissory Note (the “Star Buffet PromissoryNote).  In a related proceeding, North’sother secured creditor, Pacific Mezzanine, initiated litigation against North’sseeking a monetary judgment and the appointment of a receiver.  In April, 2006 the Company noticed allrelevant parties of its intent to foreclose to seek expedited liquidation ofNorth’s assets and repay amounts owed to the Company.  Subsequent to the notice, the receiver movedto have the Company’s foreclosure of North’s assets set aside so that certainof North’s assets could be sold to a third party.  The motion was approved.  On August 7, 2006, the receiver paid theCompany approximately $1,291,000 from a partial sale of the assets. In August 2007, the receiver notified theCompany that he planned to turn control of the JJ North’s restaurant in GrantsPass, Oregon and associated assets over to the Company. On September 22,2007, the Company hired North’s employees, notified North’s creditors of itsintent to operate the business and negotiated a facility lease with North’sprevious landlord.  The transfer ofassets from North’s to Star Buffet Management, Inc. was approved by the court.  The Company’s note, together with theobligation to the other significant creditor of North’s, is secured by the realand personal property, trademarks and all other intellectual property owned byNorth’s. The Company believes current and future cash flows including assetsales are adequate for recovery of the remaining principal amount of the notereceivable.  The Company has not providedan allowance for bad debts for the note as of January 28, 2008.

 

**NOTE 4 — PROPERTY, BUILDINGSAND EQUIPMENT AND REAL PROPERTY UNDER CAPITALIZED LEASES**

 

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

 
| ** **                            | ** ** | **January 28,****2008** | ** ** | **January 29,****2007** | ** ** |
|---------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Property, buildings and equipment:    |       |                         |       |                         |       |
| Furniture, fixtures and  equipment    |       | $                            | 13,708,000 |                         | $          | 13,372,000 |   |
| Land                                  |       | 4,185,000                    |       | 3,410,000                    |       |
| Buildings and leasehold  improvements |       | 23,478,000                   |       | 21,501,000                   |       |
|                                  |       | 41,371,000                   |       | 38,283,000                   |       |
|                                  |       |                         |       |                         |       |
| Less accumulated depreciation         |       | (20,555,000                  | )          | (20,804,000                  | )          |
|                                  |       | $                            | 20,816,000 |                         | $          | 17,479,000 |   |

 

The components of property undercapitalized leases are as follows:

 
| Property and equipment under  capitalized leases |   | $        | 706,000 |       | $ | 3,193,000 |   |
|--------------------------------------------------|--------|----------|---------|------------|---|-----------|--------|
| Less accumulated amortization                    |   | (635,000 | )       | (2,442,000 | ) |
|                                             |   | $        | 71,000  |       | $ | 751,000   |   |

 

In January 2008, theCompany modified two existing capital leases. The lease modifications resulted in property and equipment undercapitalized leases being reduced approximately $2,500,000 since these leasesare now treated as operating leases. Total property, buildings and equipment includes the following land,equipment and buildings and leaseholds currently in nine non-operating units. Threeof the nine non-operating restaurants have been leased to third-partyoperators; five are closed for remodeling and/or repositioning; one is closedand classified as property held for sale atJanuary 28, 2008. The components are as follows:

 
| ** **                                                  | ** ** | **January 28,****2008** | ** ** | **January 29,****2007** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Property, buildings and  equipment leased to third parties: |       |                         |       |                         |       |   |   |
| Equipment                                                   |       | $                            | 974,000    |                         | $          | 1,111,000 |   |
| Land                                                        |       | 1,266,000                    |       | 1,594,000                    |       |
| Buildings and leaseholds                                    |       | 2,631,000                    |       | 3,752,000                    |       |
|                                                        |       | 4,871,000                    |       | 6,457,000                    |       |
|                                                        |       |                         |       |                         |       |
| Less accumulated depreciation                               |       | (1,745,000                   | )          | (2,166,000                   | )          |
|                                                        |       | $                            | 3,126,000  |                         | $          | 4,291,000 |   |

 

F-16

----

 
| ** **                                              | ** ** | **January 28,****2008** | ** ** | **January 29,****2007** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Property, buildings and  equipment held for future use: |       |                         |       |                         |       |
| Equipment                                               |       | $                            | 8,033,000  |                         | $          | 6,398,000 |   |
| Land                                                    |       | 517,000                      |       | 517,000                      |       |
| Buildings and leaseholds                                |       | 2,066,000                    |       | 852,000                      |       |
|                                                    |       | 10,616,000                   |       | 7,767,000                    |       |
|                                                    |       |                         |       |                         |       |
| Less accumulated depreciation                           |       | (8,069,000                   | )          | (5,875,000                   | )          |
|                                                    |       | $                            | 2,547,000  |                         | $          | 1,892,000 |   |

 
| ** **                             | ** ** | **January 28,****2008** | ** ** | **January 29,****2007** | ** ** |
|----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Property and buildings held  for sale: |       |                         |       |                         |       |   |   |
| Land                                   |       | $                            | 567,000    |                         | $          | 567,000 |   |
| Buildings                              |       | 364,000                      |       | 364,000                      |       |
|                                   |       | $                            | 931,000    |                         | $          | 931,000 |   |

 

Depreciation expense for fiscal2008 and 2007 totaled $1,980,000 and $1,956,000, respectively.  Impairment expense for fiscal 2008 and 2007totaled $267,000 and $0, respectively.

 

**NOTE 5 — LONG-TERM DEBT**

 

The Company had a$3,000,000 unsecured revolving line of credit with M&I Marshall &Ilsley Bank which provided working capital for the Company. The M&Irevolving line of credit bore interest at LIBOR plus two percent perannum.   The Company replaced the M&Irevolving line of credit on January 31, 2008 with a Credit Facility withWells Fargo Bank, N.A.  The Credit Facility included a $7,000,000term loan and a $2,000,000 revolving line of credit.  The credit facility was utilized to retirethe Company’s unsecured revolving line of credit with M&I Marshall &Ilsley Bank; to fund the acquisition of assets associated with sixteen (16)Barnhill’s Buffet restaurants; and to provide additional working capital to theCompany.  On February 29,2008 the Company amended the Credit Facility, increasing the term loanprincipal from $7,000,000 to $8,000,000. The increase in the Credit Facilitywas used to fund the acquisition of four additional Barnhill’s Buffetrestaurants by a newly formed, wholly-owned, independently capitalizedsubsidiary, Starlite Holdings, Inc.  The Credit Facility isguaranteed by Star Buffet’s subsidiaries and bears interest, at the Company’soption, at Wells Fargo’s base rate plus 0.25% or at LIBOR plus 2.00%.  TheCredit Facility is secured by a first priority perfected lien on all of theCompany’s assets, except for those assets that are currently pledged assecurity for existing obligations, in which case Wells Fargo will have a secondpriority lien.  The term loan matures on January 31,2012 and provides for principal to be amortized at $175,000 per quarter for theinitial six quarters; $225,000 for the next nine quarters; with anyremaining balance due at maturity.  Interest is payable monthly.  The term loan balance was $6,825,000 on April 14,2008.  A $2,000,000 revolving line of credit matures on January 31,2012.  Interest on the revolver is payable monthly.  As of April 14,2008, no balance was outstanding on the revolving line of credit.  The Credit Facility contains a number ofcovenants and restrictions, including requirements to meet certain financialratios and limitations with respect to the Company’s ability to make capitalexpenditures or to pay dividends.  The Companny’s quarterly financialcovenants associated with this debt start May 19, 2008  The Companyis required to obtain interest rate protection through an interest rate swap orcap arrangement with respect to not less than 50% of the term loanamount.  There is a 0.50% fee for the unused portion of the revolving lineof credit and the Company has agreed to maintain its principal cash managementservices with Wells Fargo.  In connection with the Credit Facility, WellsFargo was granted 42,440 shares of the Company’s restricted common stock.  The shares were valued at $252,094 and willbe amortized over the life of the loan. The credit facility can be prepaid in whole or part withoutpenalty.  Furthermore, certain provisions of the Credit Facility requirethe Company to remit proceeds from asset dispositions, issuance of debt orequity, insurance proceeds, tax refunds and fifty percent (50%) of excess cashflow (as defined) to reduce the principal amount of the term loan and,thereafter, the revolving line of 

 

F-17

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credit.  Under termsof the Credit Facility, the Company is permitted to pay an annualdividend.  However, restrictions imposed under terms of the CreditFacility may adversely impact the Company’s ability to pay an annual dividendas the Company has historically relied on multiple sources of cash to fund thedividend.

 

The Company intends to modestlyexpand operations through the acquisition of restaurants. During fiscal 2008,the Company acquired three 4B’S restaurants, two Western Sizzlin restaurantsand one Bar-H Steakhouse. In addition, the Company opened one JB’S restaurant,one Holiday House restaurant and one one JJ North’s Country Buffet restaurantduring the year.  The Company has some ofthis equipment available from stores closed in previous periods. There can beno assurance that the Company will be able to acquire additional restaurants orlocations or, if acquired, that these restaurants will have a positivecontribution to the Company’s results of operations.

 

    The Company believes that available cash,availability under the revolving line of credit and cash flow from operationswill be sufficient to satisfy its working capital and capital expenditurerequirements during the next 12 months. Management does not believe the networking capital deficit will have any effect on the Company’s ability tooperate the business and meet obligations as they come due in the next 12months. The Company projects that operating cash flows will exceed plannedcapital expenditures in the next 12 months and that funds will be available toreturn capital to stockholders in the form of dividends, share repurchases orboth. There can be no assurance, however, that cash and cashflow fromoperations will be sufficient to satisfy its working capital and capitalrequirements for the next 12 months or beyond.

 

It is possible that changes in the Company’s operating results,unavailable loan capacity from the existing credit facility, acceleration ofthe Company’s capital expenditure plans, potential acquisitions or other eventsmay cause the Company to seek additional financing. Additional financing may beraised through public or private equity and/or debt financing or from othersources.

 

On February 1, 2001, theCompany entered into a $460,000 15 year fixed rate first real estate mortgage withVictorium Corporation. The mortgage has monthly payments including interest of$6,319. The interest rate is 7.5%. The mortgage is secured the Company’srestaurant in Ocala, Florida. The balance at January 28, 2008 and January 29,2007 was $311,000 and $325,000, respectively.

 

On May 2, 2002, the Companyentered into a $1,500,000 ten year fixed rate first real estate mortgage withM&I Marshall & Ilsley Bank. The mortgage has monthly payments including interest of $17,894. Theinterest rate is7.5% for the first five years with interest for years six toten calculated at the five year LIBOR rate plus 250 basis points with a floorof 7.5%. The mortgage is secured by the Company’s HomeTown Buffet restaurant inScottsdale, Arizona. The balance at January 28, 2008 and January 29,2007 was $624,000 and $877,000, respectively.

 

On December 19, 2003, theCompany entered into a $1,470,000 six year fixed rate first real estatemortgage with Platinum Bank.  Themortgage has monthly payments including interest of $12,678 with a balloonpayment of $475,000 due on December 19, 2009. The interest rate is 7.25%..  The mortgage is secured by the Company’sBuddyFreddys restaurant in Plant City, Florida. The balance at January 28, 2008 and January 29, 2007 was$1,115,000 and $1,237,000, respectively.

 

On February 25, 2004, theCompany entered into a $1,250,000 seven year fixed rate first real estatemortgage with M&I Marshall & Ilsley Bank.  The mortgage has monthly payments includinginterest of $18,396. The interest rate is 6.1%. The mortgage is secured by theCompany’s HomeTown Buffet restaurant in Yuma, Arizona. The balance at January 28,2008 and January 29, 2007 was $404,000 and $721,000, respectively.

 

On July 29, 2004, theCompany entered into a $550,000 ten year fixed rate first real estate mortgagewith Heritage Bank.  The mortgage hasmonthly payments including interest of $6,319. The interest rate is 6.75%. Themortgage is secured by the Company’s JB’s Restaurant in Great Falls, Montana.The balance at January 28, 2008 and January 29, 2007 was $391,000 and$430,000, respectively.

 

On October 27, 2004, theCompany entered into a $1,275,000 five year fixed rate first real estatemortgage with Bank of Utah.  The mortgagehas monthly payments including interest of $14,371 with a balloon payment of$752,000 due on October 26, 2009. The interest rate is 6.25%. The mortgagerequires the Company to maintain specified minimum levels of net worth, limitsthe amount of capital expenditures and requires the maintenance of certainfixed charge coverage ratios.  Themortgage is secured by the Company’s HomeTown Buffet restaurant in Layton,Utah. The balance at January 28, 2008 and January 29, 2007 was$840,000 and $1,008,000, respectively.

 

F-18

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On September 16, 2005, theCompany entered into a $300,000 five year fixed rate real estate mortgage withNaisbitt Investment Company.  Themortgage has monthly payments including interest of $5,870. The interest rateis 6.5%.  The mortgage is secured by theCompany’s JB’s Restaurant in Rexburg Idaho.  The balance at January 28,2008 and January 29, 2007 was $169,000 and $206,000, respectively.

 

On June 1, 2006, theCompany entered into a $564,000 five year fixed rate first real estate mortgagewith Dalhart Federal Savings and Loans. The mortgage has monthly payments including interest of $6,731. Theinterest rate is 7.63%. The mortgage is secured by the Company’s K-BOB’S Steakhousein Dumas, Texas. The balance at January 28, 2008 and January 29, 2007was $497,000 and $525,000, respectively.

 

On November 8, 2006, theCompany entered into a $595,000 five year fixed rate first real estate mortgagewith Wells Fargo Bank.  The mortgage hasmonthly payments including interest of $8,055. The interest rate is 7.5%. Themortgage is secured by the Company’s Pecos Diamond Steakhouse in Artesia, NewMexico. The balance at January 28, 2008 and January 29, 2007 was$461,000 and $560,000, respectively.

 

On January 30, 2007, the Company entered intoa $900,000 five year fixed rate real estate mortgage with Fortenberry’s Beef ofMagee, Inc.  The mortgage has monthly payments including interest of$17,821. The interest rate is 7%.  The mortgage is secured by the Company’sWestern Sizzlin restaurant in Magee, Mississippi. The balance at January 28,2008 was $740,000.

 

On May 29, 2007, the Company entered into a$500,000 five year fixed rate real estate mortgage with Dalhart Federal Savingsand Loan Association.  The mortgage has monthly payments includinginterest of 5,903 with a balloon payment of $301,345 due on June 1,2012.  The interest rate is 7.38%.  The mortgage is secured by the Company’sBar H Steakhouse restaurant in Dalhart, Texas. The balance at January 28, 2008 was $477,000.

 

On June 19, 2007, the Company entered into a$520,000 five year fixed rate real estate mortgage with Farmers Bank andTrust.  The mortgage has monthly payments including interest of $4,676with a balloon payment of $407,313 due on June 19, 2012.  Theinterest rate is 7%.  The mortgage is secured by the Company’s WesternSizzlin restaurant in Magnolia, Arkansas.   Thebalance at January 28, 2008 was $508,000.

 

During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. RobertE. Wheaton, a principal shareholder, officer and director of the Company. The loan dated June 15, 2007 was subordinated to the obligation to M&IMarshall & Ilsley Bank and is now subordinated to Wells Fargo Bank,N.A. and bears interest at 8.5%. The Company expensed and paid $78,458 forinterest during the fiscal year. The principal balance and any unpaid interestis due and payable in full on June 5, 2012. The Company used the funds toacquire restaurants and provide working capital.

 

Long term debt and note payable to officermatures in fiscal years ending after January 28, 2008 as follows:

** **
| **Fiscal Year** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| 2009                 |       | 1,038,000  |       |
| 2010                 |       | 2,682,000  |       |
| 2011                 |       | 730,000    |       |
| 2012                 |       | 572,000    |       |
| 2013                 |       | 2,127,000  |       |
| Thereafter           |       | 846,000    |       |
| Total                |       | $          | 7,995,000  |   |
|                      |            |            |            |  |

 

**NOTE 6 — LEASES**

 

The Company occupies certain restaurants under long-termcapital and operating leases expiring at various dates through 2013. Mostrestaurant leases have renewal options for terms of 5 to 20 years, andsubstantially all require payment of real estate taxes and insurance. Certainleases require the rent to be the greater of a stipulated minimum rent or aspecified percentage of sales. Certain operating lease agreements containscheduled rent escalation clauses which are being amortized over the terms ofthe lease, ranging from 5 to 11 years using the straight line method.

 

F-19

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Minimum lease payments for all leases and the presentvalue of net minimum lease payments for capital leases as of January 28,2008 are as follows:

 
| **Fiscal year**                                 | ** ** | **Capital** | ** ** | **Operating** | ** **       |
|------------------------------------------------------|------------|-------------|------------|---------------|------------------|
| 2009                                                 |       | 55,000      |       | 2,691,000     |             |
| 2010                                                 |       | 55,000      |       | 1,904,000     |             |
| 2011                                                 |       | —      |       | 1,293,000     |             |
| 2012                                                 |       | —      |       | 1,201,000     |             |
| 2013                                                 |       | —      |       | 1,024,000     |             |
| Thereafter                                           |       | —      |       | 2,967,000     |             |
| Total minimum lease payments:                        |       | 110,000     |       | $             |  11,079,000 |   |
| Less amount representing  interest:                  |       | 7,000       |       |          |             |
| Present value of minimum lease  payments:            |       | 103,000     |       |          |             |
| Less current portion                                 |       | 49,000      |       |          |             |
| Capital lease obligations  excluding current portion |       | $           | 54,000     |          |             |   |
|                                                      |            |             |            |               |                  |  |  |

 

Aggregate rent expense under non-cancelableoperating leases during fiscal 2008 and 2007 are as follows:

 
| ** **            | ** ** | **Fifty-Two****Weeks Ended  January 28,  2008** | ** ** | **Fifty-Two****Weeks Ended  January 29,  2007** | ** ** |
|-----------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Minimum rentals       |       | $                                                         | 3,213,000  |                                                      | $          | 2,778,000 |   |
| Straight-line rentals |       | (38,000                                                   | )          | (23,000                                                   | )          |
| Contingent rentals    |       | 102,000                                                   |       | 104,000                                                   |       |
|                  |       | $                                                         | 3,277,000  |                                                      | $          | 2,859,000 |   |

 

The Company reduces the deferredrent payable for stores in the year that were purchased or closed.  The $0 and $0 decrease in rent expense forstores purchased or closed in 2008 and 2007, respectively, is recognized in thestraight-line rentals disclosed above.

 

The Company currently leasesthree non-operating units to tenants. The rental income for fiscal 2008 and2007 was $261,000 and $279,000, respectively. Rental income is recognized on astraight-line basis over the term of the lease and is included in other incomein the accompanying statements of operations.

 

Future minimum lease paymentsreceivable in fiscal years ending after January 28, 2008 is as follows:

 
| **Fiscal Year** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| 2009                 |       | 208,000    |       |
| 2010                 |       | 110,000    |       |
| 2011                 |       | 60,000     |       |
| 2012                 |       | 60,000     |       |
| 2013                 |       | 60,000     |       |
| Thereafter           |       | 55,000     |       |
| Total                |       | $          | 553,000    |   |
|                      |            |            |            |  |

 

**NOTE 7 — INCOME TAXES**

 

Income tax provision (benefit) is comprised of thefollowing:

 

F-20

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| ** ** | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Two**                  | ** ** |
|------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** ** | ** ** | **Weeks Ended**           | ** ** | **Weeks Ended**           | ** ** |
| ** ** | ** ** | **January 28, 2008** | ** ** | **January 29, 2007** | ** ** |
| Current:   |       |                           |       |                           |       |
| Federal    |       | $                              | (563,000   | )                              | $          | 144,000 |   |
| State      |       | (75,000                        | )          | 54,000                         |       |
|       |       | (638,000                       | )          | 198,000                        |       |
| Deferred:  |       |                           |       |                           |       |
| Federal    |       | (609,000                       | )          | 36,000                         |       |
| State      |       | (68,000                        | )          | 4,000                          |       |
|       |       | (677,000                       | )          | 40,000                         |       |
|       |       | $                              | (1,315,000 | )                              | $          | 238,000 |   |

 

Areconciliation of income tax provision (benefit) at the federal statutory rateof 34% to the Company’s provision (benefit) for taxes on income is as follows:

 
| ** **                                        | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Two**                  | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **Weeks Ended**           | ** ** | **Weeks Ended**           | ** ** |
| ** **                                        | ** ** | **January 28, 2008** | ** ** | **January 29, 2007** | ** ** |
| Income tax provision (benefit)  at statutory rate |       | $                              | (1,127,000 | )                              | $          | 324,000 |   |
| State income taxes                                |       | (115,000                       | )          | 41,000                         |       |
| Nondeductible expenses                            |       | 60,000                         |       | 60,000                         |       |
| Federal income tax credits                        |       | (176,000                       | )          | (175,000                       | )          |
| Adjustment of estimated income  tax accruals      |       | 43,000                         |       | (12,000                        | )          |
|                                              |       | $                              | (1,315,000 | )                              | $          | 238,000 |   |

 

Theadjustment of estimated income tax accruals in fiscal 2007 included adjustmentsfrom an IRS exam which lowered the income tax expense for the year.

 

Temporarydifferences give rise to a significant amount of deferred tax assets andliabilities as set forth below:

 
| **.**

** **                           | ** ** | **January 28, 2008** | ** ** | **January 29, 2007** | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Current deferred tax assets:                |       |                           |       |                           |       |
| Accrued vacation                            |       | $                              | 96,000     |                           | $          | 83,000 |   |
| Accrued expenses and reserves               |       | 223,000                        |       | 227,000                        |       |
| Total deferred tax assets                   |       | 319,000                        |       | 310,000                        |       |
| Long-term deferred tax assets:              |       |                           |       |                           |       |
| Leases                                      |       | 734,000                        |       | 1,000,000                      |       |
| Depreciation, amortization and  impairments |       | 1,678,000                      |       | 1,084,000                      |       |
| Other                                       |       | 353,000                        |       | 13,000                         |       |
| Total deferred tax assets, net              |       | 2,765,000                      |       | 2,097,000                      |       |
| Valuation allowance                         |       | —                         |       | —                         |       |
| Net long term asset                         |       | 2,765,000                      |       | 2,097,000                      |       |
| Deferred tax assets                         |       | $                              | 3,084,000  |                           | $          | 2,407,000 |   |

 

While there can be no assurancethat the Company will generate any earnings or any specific level of earningsin the future years, 

 

F-21

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management believes it is more likely than notthat the Company will be able to realize the benefit of the deferred tax assetsexisting at January 28, 2008 based on the Company’s expected futurepre-tax earnings. The determination of deferred tax assets is subject toestimates and assumptions. We periodically evaluate our deferred tax assets todetermine if our assumptions and estimates should change.

 

**NOTE 8 — SEGMENT AND RELATEDREPORTING**

 

TheCompany has four reporting segments: HomeTown Buffet, North’s Star, FloridaBuffets Division and Summit Restaurant Division. The Company’s reportablesegments are aggregated based on brand similarities of operating segments. Withthe acquisition of 20 Barnhill’s Buffet restaurants in fiscal 2009, the Companywill change its reporting segments to the Buffet Division and Non-BuffetDivision.

 

As of January 28,2008, the Company owned and operated 12 franchised HomeTown Buffets, seven JB’sFamily restaurants, five Whistle Junction restaurants, four BuddyFreddysrestaurants, three 4B’S restaurants, three Holiday House Family restaurants,three Western Sizzlin restaurants,  twoJJ North’s Grand Buffet,  two K-BOB’SSteakhouses, one Pecos Diamond Steakhouse, one Bar-H Steakhouse and one CasaBonita Mexican restaurant. The Company also had six restaurants currentlyclosed for remodeling and repositioning, three restaurants leased tothird-party operators and the net assets of another closed restaurant reportedas property held for sale. The Company’s restaurants are located in Arkansas,Arizona, Colorado, Florida, Georgia, Idaho, Mississippi, Montana, New Mexico,Oklahoma, Oregon, Texas, Utah, Washington and Wyoming.

 

The accounting policies of thereportable segments are the same as those described in Note 1. The Companyevaluates the performance of its operating segments based on income beforeincome taxes.

 

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

 

(Dollars in Thousands)

 
| **52 Weeks Ended****January 28, 2008** | ** ** | **HomeTown  Buffet** | ** ** | **North’s  Star** | ** ** | **Florida****Buffets** | ** ** | **Summit** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------------------------|------------|----------------------|------------|------------------------|------------|------------------------|------------|------------|------------|-----------|------------|-----------|------------|
| Revenues                                                   |       | $                    | 24,367     |                   | $          | 5,348                  |       | $          | 18,032     |      | $          | 20,985    |       | $ | — |   | $ | 68,732 |   |
| Interest income                                            |       | —               |       | —                 |       | —                 |       | —     |       | 24        |       | 24        |       |
| Interest expense                                           |       | (151                 | )          | —                 |       | —                 |       | —     |       | (707      | )          | (858      | )          |
| Depreciation &  amortization                      |       | 960                  |       | 170                    |       | 341                    |       | 557        |       | 70        |       | 2,098     |       |
| Impairment of long-lived  assets                           |       | 275                  |       | —                 |       | 1,034                  |       | 92         |       | —    |       | 1,401     |       |
| Income (loss) before income  taxes                         |       | (789                 | )          | (382                   | )          | (1,431                 | )          | 2,443      |       | (3,157    | )          | (3,316    | )          |
| Total assets                                               |       | 9,727                |       | 5,139                  |       | 6,884                  |       | 9,291      |       | 4,661     |       | 35,702    |       |
|                                                       |       |                 |       |                   |       |                   |       |       |       |      |       |      |       |
| **52 Weeks Ended****January 29, 2007** | ** ** | **HomeTown  Buffet** | ** ** | **North’s  Star** | ** ** | **Florida****Buffets** | ** ** | **Summit** | ** ** | **Other** | ** ** | **Total** | ** ** |
| Revenues                                                   |       | $                    | 27,258     |                   | $          | 2,301                  |       | $          | 11,642     |      | $          | 17,447    |       | $ | — |   | $ | 58,648 |   |
| Interest income                                            |       | —               |       | —                 |       | —                 |       | —     |       | 93        |       | 93        |       |
| Interest expense                                           |       | (167                 | )          | —                 |       | —                 |       | —     |       | (449      | )          | (616      | )          |
| Depreciation &  amortization                      |       | 989                  |       | 88                     |       | 419                    |       | 509        |       | 64        |       | 2,069     |       |
| Impairment of long-lived  assets                           |       | —               |       | —                 |       | —                 |       | —     |       | —    |       | —    |       |
| Income (loss) before income  taxes                         |       | 117                  |       | (364                   | )          | 510                    |       | 2,627      |       | (1,936    | )          | 954       |       |
| Total assets                                               |       | 11,173               |       | 2,965                  |       | 8,201                  |       | 8,611      |       | 3,218     |       | 34,168    |       |

 

F-22

----

 

**NOTE 9 — STOCKHOLDERS’EQUITY**

 

**Common Stock**

 

Holders of Common Stock areentitled to one vote per share on all matters to be voted upon by thestockholders and do not have cumulative voting rights. Subject to preferencesthat may be applicable to the holders of outstanding shares of Preferred Stock,if any, at the time, holders of Common Stock are entitled to receive ratablysuch dividends, if any, as may be declared from time to time by the Board ofDirectors out of funds legally available therefore. In the event ofliquidation, dissolution or winding up of the Company, the holders of CommonStock shall be entitled to assets of the Company remaining after payment of theCompany’s liabilities and the liquidation preference, if any, of anyoutstanding Preferred Stock. All outstanding shares of Common Stock, are fullypaid and non-assessable. Holders of Common Stock have no preemptive,subscription, redemption or conversion rights. The rights, preferences andprivileges of holders of Common Stock are subject to, and may be adverselyaffected by, the rights of the holders of shares of any series of PreferredStock, which the Company may designate and issue in the future. The Companypaid an annual cash dividend of $0.60 for both fiscal 2008 and fiscal 2007,respectively. The Company also paid a special dividend of $0.25 in fiscal 2007.

 

**Preferred Stock**

 

The Board of Directors has the authority, without furthervote or action by the stockholders, to provide for the issuance of up to1,500,000 shares of Preferred Stock from time to time in one or more serieswith such designations, rights, preferences and privileges and limitations asthe Board of Directors may determine, including the consideration receivedtherefore. The Board of Directors also has authority to determine the number ofshares comprising each series, dividend rates, redemption provisions,liquidation preferences, sinking fund provisions, conversion rights and votingrights without approval by the holders of Common Stock. Although it is notpossible to state the effect that any issuance of Preferred Stock might have onthe rights of holders of Common Stock, the issuance of Preferred Stock may haveone or more of the following effects: (i) to restrict the payment ofdividends on the Common Stock, (ii) to dilute the voting power and equityinterests of holders of Common Stock, (iii) to prevent holders of CommonStock from participating in any distribution of the Company’s assets uponliquidation until any liquidation preferences granted to holders of PreferredStock are satisfied, or (iv) to require approval by the holders ofPreferred Stock for certain matters such as amendments to the Company’sCertificate of Incorporation or any reorganization, consolidation, merger orother similar transaction involving the Company. As a result, the issuance ofPreferred Stock may, under certain circumstances, have the effect of delaying,discouraging or preventing bids for the Common Stock at a premium over themarket price thereof, or a change in control of the Company, and could have amaterial adverse effect on the market price for the Common Stock.

 

**Officer’s Notes Receivable**

 

In connection with the Company’s employment contract with Mr. RobertE. Wheaton, the Company’s President and Chief Executive Officer, the Companyagreed to provide Mr. Wheaton with certain loans solely for the purchaseof the Company’s common stock prior to the enactment of Sarbanes-Oxley Act of2002.  Mr. Wheaton ownsapproximately 44% of the Company’s outstanding common shares and may have theeffective power to elect members of the board of directors and to control thevote on substantially all other matters, without the approval of the otherstockholders.  The loans were secured bythe common stock and bore interest at the prevailing rate set forth in the Company’scredit facility with M&I Marshall & Ilsley Bank.  Repayment terms stipulate that the presidentwould repay principal and interest on or before the later of the fifthanniversary date of the initial advance under the loan agreement, or the datehe received a lump sum payment per a termination clause or six month’s afterthe termination of his employment. Management has elected not to record any interest income on the loansuntil the interest income was paid.  Mr. Wheatonpaid $698,000 in principal and $250,000 in interest in June 2005.  Mr. Wheaton paid the last interestpayment of $43,713 on May 22, 2006.

 

**Common Stock Repurchase**

 

On January 4, 2006, the Company announced that ithad received necessary approval from its lender to commence with a buybackprogram to purchase up to 250,000 common shares.  As of January 28, 2008, the Company hadrepurchased 0 shares.  The timing and 

 

F-23

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amount of sharespurchased will be based on prevailing market conditions and other factors.  As of April 14, 2008, the Company had3,213,075 common shares outstanding.

 

**NOTE 10 —EMPLOYEE BENEFIT PLANS**

 

**401(k) Plan**

 

In May 1998, the Companyestablished a 401(k) plan available to certain employees who have attainedage 21, work 30 hours or more per week, and have met certain minimum servicerequirements. The plan allows participants to allocate up to 15% of theirannual compensation before taxes for investment in several investmentalternatives. Employer contributions are at the discretion of the Company. TheCompany’s contributions to the plan were approximately $5,000 and $9,000, inadministration costs for fiscal 2008 and 2007, respectively.  The plan had fewer than 50 participants as ofApril 18, 2006 and the Board of Directors authorized the termination of theplan.  As of April 17, 2007, theplan had 0 participants and had been terminated.

 

**1997 Stock Incentive Plan**

 

In fiscal year 1998, the Companyadopted the 1997 Stock Incentive Plan (the “1997 Plan”), which authorizes thegrant of options to purchase up to 750,000 shares of Common Stock. The 1997Plan provides for the award of “incentive stock options,” within the meaning ofsection 422 of the Internal Revenue Code of 1986, as amended (the “Code”) andnon-statutory options to directors, officers, employees and consultants of theCompany, except that incentive stock options may not be granted to non-employeedirectors or consultants. The 1997 Plan provides participants with incentiveswhich will encourage them to acquire a proprietary interest in, and continue toprovide services to, the Company.  Aspecial committee appointed by the Board of Directors, has sole discretion andauthority, consistent with the provisions of the 1997 Plan, to determine whicheligible participants will receive options, the time when options will begranted, the terms of options granted and the number of shares which will besubject to options granted under the 1997 Plan.

 

On January 31,2006 we adopted Statement of Financial Accounting Standards No. 123(R), “ShareBased Payment” (SFAS 123(R)).  SFAS 123(R) requires the recognitionof compensation costs relating to share based payment transactions in thefinancial statements.  We have elected the modified prospectiveapplication method of reporting.  Prior to the adoption of SFAS 123(R) weelected to account for stock-based compensation plans using the intrinsic valuemethod under Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” under which no compensation cost is recognizedand the pro forma effects on earnings and earnings per share are disclosed asif the fair value approach had been adopted.  Our stock-based compensationplans are summarized in the table below:

 
| ** **                 | ** ** | **Shares**     | ** ** | **Shares**    | ** ** | **Plan**           | ** ** |
|----------------------------|------------|----------------|------------|---------------|------------|--------------------|------------|
| **Name of Plan** | ** ** | **Authorized** | ** ** | **Available** | ** ** | **Expiration**     | ** ** |
|                       |       |           |       |          |       |               |       |
| 1997 Stock Incentive Plan  |       | 750,000        |       | 488,000       |       | February 2015 |       |

 

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

 

The stock optiontransactions and the options outstanding are summarized as follows:

 

F-24

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| ** **                         | ** ** | **52 Weeks Ended**   | ** ** |
|------------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **January 28, 2008** | ** ** | **January 29, 2007** | ** ** |
| ** **                         | ** ** | **Options**                    | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding at beginning of period |       | 528,000                        |       | $ | 11.56 |   | 696,000 |   | $ | 8.90 |   |
| Granted                            |       | —                         |       | — |   | — |   | — |   |
| Exercised                          |       | —                         |       | — |   | 168,000 |   | $ | 5.22 |   |
| Forfeited                          |       | 488,000                        |       | $ | 12.00 |   | — |   | — |   |
| Outstanding at end of period       |       | 40,000                         |       | $ | 6.20 |   | 528,000 |   | $ | 11.56 |   |
|                               |       |                           |       |   |   |   |   |   |   |
| Exercisable at end of period       |       | 40,000                         |       | $ | 6.20 |   | 528,000 |   | $ | 11.56 |   |

 

There were nooptions granted during the 52 weeks ended January 28, 2008 and January 29,2007.

 

The followingsummarizes information about stock options outstanding at January 28,2008:

 
| ** **                          | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**     | ** ** |
|-------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| **Range of  Exercise  Prices** | ** ** | **Number  Outstanding**      | ** ** | **Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average Exercise  Price** | ** ** |
| $                                   | 5.00       |                         | 12,000     |                             | 1.7        |   | $ | 5.00 |   | 12,000 |   | $ | 5.00 |   |
| $                                   | 6.70       |                         | 28,000     |                             | 7.0        |   | $ | 6.70 |   | 28,000 |   | $ | 6.70 |   |
|                                |       | 40,000                       |       |                             |       |   |   | 40,000 |   |   |   |

 

###### **NOTE11 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**

** **
| ** **                                                              | ** ** | **Fifty-Two**                | ** ** | **Fifty-Two**                | ** ** | **Fifty-Two**                | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                              | ** ** | **Weeks**                    | ** ** | **Weeks**                    | ** ** | **Weeks**                    | ** ** |
| ** **                                                              | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** | **Ended**                    | ** ** |
| ** **                                                              | ** ** | **January 28,****2008** | ** ** | **January 29,****2007** | ** ** | **January 30,****2006** | ** ** |
| Cash paid for income taxes                                              |       | $                            | 479,000    |                         | $          | 460,000                      |       | $ | 688,000 |   |
| Cash paid for interest                                                  |       | 687,000                      |       | 772,000                      |       | 631,000                      |       |
| Non-cash investing and  financing activities are as follows:            |       |                         |       |                         |       |                         |       |
| Exchange of other receivable  for equipment and leaseholds              |       | $                            | 55,000     |                         | $          | —                       |       | $ | — |   |
| Acquisition of property with  debt financing                            |       | —                       |       | —                       |       | 300,000                      |       |
| Exchange of note receivable  for equipment and leaseholds               |       | 1,207,000                    |       | 1,285,000                    |       | —                       |       |
| Transfer of debt as a part of  the sale of assets                       |       | —                       |       | 616,000                      |       | —                       |       |
| Adjustment relating to lease  modification for capital lease obligation |       | 1,136,000                    |       | —                       |       | —                       |       |
| Adjustment relating to lease  modification for deferred taxes           |       | 590,000                      |       | —                       |       | —                       |       |
| Adjustment relating to lease  modification for fixed assets             |       | 546,000                      |       | —                       |       | —                       |       |

 

F-25

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**NOTE 12 — RELATED PARTYTRANSACTIONS**

 

Inconnection with the Company’s employment contract with Mr. Robert E.Wheaton, the Company’s President and Chief Executive Officer, the Companyagreed to provide Mr. Wheaton with certain loans solely for the purchaseof the Company’s common stock prior to the enactment of Sarbanes-Oxley Act of2002. Mr. Wheaton owns approximately 44% of the Company’s outstandingcommon shares including exercisable options which have vested and may have theeffective power to elect members of the board of directors and to control thevote on substantially all other matters, without the approval of the otherstockholders. The loans were secured by the common stock and bore interest atthe prevailing rate set forth in the Company’s credit facility with M&IMarshall & Ilsley Bank. Repayment terms stipulate that the presidentwould repay principal and interest on or before the later of the fifthanniversary date of the initial advance under the loan agreement, the date hereceived a lump sum payment per a termination clause or six month’s after thetermination of his employment. Management elected not to record any interestincome on the loans until the interest income was paid.  Mr. Wheaton paid $698,000 in principaland $250,000 in interest in June 2005.  There was no remaining principal balance due at January 30,2006.  Mr. Wheaton paid the finalinterest payment of $43,713 on May 22, 2006.

 

During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. RobertE. Wheaton, a principal shareholder, officer and director of the Company. The loan dated June 15, 2007 was subordinated to the obligation to M&IMarshall & Ilsley Bank and is now subordinated to Wells Fargo Bank,N.A. and bears interest at 8.5%. The Company expensed and paid $78,458 forinterest during the fiscal year. The principal balance and any unpaid interestis due and payable in full on June 5, 2012. The Company used the funds toacquire restaurants and provide working capital.

 

**NOTE 13 — COMMITMENTS ANDCONTINGENCIES**

 

HTB entered into a franchise agreement for eachHomeTown Buffet location which requires among other items, the payment of acontinuing royalty fee to HomeTown Buffet, Inc. The royalty fee is basedon 2% of the aggregate gross sales of all the Company’s HomeTown Buffetrestaurants. Each of the franchise agreements has a 20-year term (with twofive-year renewal options). HTB provides weekly sales reports to the HomeTownfranchisor as well as periodic and annual financial statements. HTB isobligated to operate its Hometown Buffet restaurants in compliance with thefranchisor’s requirements. The franchisor requires HTB to operate eachrestaurant in conformity with Franchise Operating Manuals and Recipe Manualsand Menus and restricts operating restaurants within a geographic radius of thefranchisor’s restaurants.  Theseagreements also require HTB is to use it best efforts to achieve the highestpracticable level of sales, and requires HTB to promptly make royalty payments.The HomeTown franchisor may terminate a franchise agreement for a number ofreasons, including HTB’s failure to pay royalty fees when due, failure tocomply with applicable laws or repeated failure to comply with one or morerequirements of the franchise agreement. Many state franchise laws limit theability of a franchisor to terminate or refuse to renew a franchise. Generally,a franchisor may terminate a franchise agreement only if the franchiseeviolates a material and substantial provision of the agreement and fails toremedy the violation within a specified period.

 

On February 1,2005, the Company announced in a press release that it had entered into astrategic alliance with K-BOB’S USA Inc. and related affiliates. In accordancewith the terms of the strategic alliance, the Company agreed to lend K-BOB’S upto $1.5 million on a long-term basis. In exchange, K-BOB’S granted the Companyan option to purchase as many as five corporate owned and operated K-BOB’Srestaurants located in New Mexico and Texas. On January 30, 2006, the Company exercised its option under theterms of the strategic alliance and purchased three K-BOB’S restaurants. Inconnection with the purchase, the Company entered into license agreements whichrequire the payment of certain fees to K-BOB’S based on the restaurantgross sales.

 

On April 21,2006, the Company announced in a press release that it had entered into astrategic alliance with Western Sizzlin Corporation. In connection with thestrategic alliance, the Company acquired three Western Sizzlin franchisedrestaurants and entered into license agreements with Western SizzlinCorporation for each. The license agreements require the payment of certainfees to Western Sizzlin Corporation based on the restaurant gross sales.

 

Inconnection with the Company’s employment contract with Robert E. Wheaton, theCompany’s Chief Executive Officer and President, the Company has agreed to pay Mr. Wheatonsix years salary and bonus if he resigns related to a change of control of theCompany or is terminated, unless the termination is for cause.

 

In addition to the foregoing, the Company is engagedin ordinary and routine litigation incidental to its business. Management doesnot anticipate that the resolution of any of these routine proceedings willrequire payments that will have a material effect on the Company’s consolidatedstatements of operations or financial position or liquidity.

 

F-26

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**NOTE 14 — SUBSEQUENT EVENTS**

 

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

 

On February 29, 2008, Starlite Holdings, Inc.(“Starlite”), a newly formed, wholly-owned, independently capitalizedsubsidiary of Star Buffet, Inc. acquired certain assets and facilityleases for four Barnhill’s Buffet restaurants from Barnhill’s Buffet, Inc.(“Barnhill’s”) for a purchase price of approximately $1,075,000.  Barnhill’swas in a Chapter 11 bankruptcy proceeding in the U.S. Bankruptcy Court of theMiddle District of Tennessee and the acquisition was approved by thecourt.  The acquired restaurants are located in Florida (2) andMississippi (2) and as part of the acquisition the Company acquiredperpetual rights to use the Barnhill’s name and related intellectual property.

 

On February 29,2008 the Company amended its Senior Secured Credit Facility (“Credit Facility”)with Wells Fargo Bank N.A., increasing the term loan principal from $7,000,000to $8,000,000. The Credit Facility was issued on January 31, 2008.The increase in the Credit Facilitywas used to fund the acquisition of the four Barnhill’s Buffet restaurants asdescribed above.  The Credit Facility is guaranteed by Star Buffet’ssubsidiaries and bears interest, at the Company’s option, at Wells Fargo’s baserate plus 0.25% or at LIBOR plus 2.00%.  The Credit Facility is secured bya first priority perfected lien on all of the Company’s assets, except forthose assets that are currently pledged as security for existing obligations,in which case Wells Fargo will have a second lien.  The term loan matures on January 31,2012 and provides for principal to be amortized at $175,000 per quarter for theinitial six quarters; $225,000 for the next nine quarters; with any remainingbalance due at maturity.  Interest is payable monthly.  A $2,000,000revolving line of credit matures on January 31, 2012.  Interest onthe revolver is payable monthly.  As of April 11, 2008, no balancewas outstanding on the revolving line of credit.  There is a 0.50% fee for the unused portionof the revolving line of credit.   Inconnection with the Credit Facility, Wells Fargo was granted 42,440 shares ofthe Company’s restricted common stock. The shares were valued at $252,094 and will be amortized over the lifeof the loan.  The Credit Facility can beprepaid in whole or part without penalty.

 

The CreditFacility contains a number of covenants and restrictions, includingrequirements to meet certain financial ratios and limitations with respect tothe Company’s use of cash.  The Company’squarterly financial covenants associated with this debt start May 19,2008, the end our first quarter in fiscal 2009. The Company is required toobtain interest rate protection through an interest rate swap or caparrangement with respect to not less than 50% of the term loan amount.  The Company has elected to not perform thenecessary procedures in order to apply hedge accounting. Therefore, changes inthe fair market value of the interest rate swap will be reflected as anadjustment to interest expense within the consolidated statement of operations.Furthermore, certain provisions of the Credit Facility require the Company toremit proceeds from asset dispositions, issuance of debt or equity, insurance proceeds,tax refunds and fifty percent (50%) of excess cash  flow (as defined) to reduce the principalamount of the term loan and, thereafter, the revolving line of credit. Under terms of the Credit Facility, the Company is permitted to pay an annualdividend.  However, restrictions imposed under terms of the CreditFacility may adversely impact the Company’s ability to pay an annual dividendas the Company has historically relied on multiple sources of cash to fund thedividend.  As of the date of this report,the Company was in compliance with all of such requirements.

 

On January 31,2008, Star Buffet Management, Inc., a wholly-owned subsidiary of StarBuffet, Inc. (collectively, the “Company”) acquired the assets andfacility leases for sixteen (16) Barnhill’s Buffet restaurants from Barnhill’sBuffet, Inc. (“Barnhill’s”) for a purchase price of approximately $5million.  The acquisition was approved by the court.  The acquiredrestaurants are located in the following states: Alabama (1), Arkansas (1), Florida(4), Louisiana (3), Mississippi (4), and Tennessee (3) and as part of theacquisition, the Company acquired perpetual rights to the use of the Barnhill’sname and related intellectual property.  This acquisition was fundedthrough the Company’s Credit Facility dated January 31, 2008.

 

F-27

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**EXHIBIT INDEX**

** **
| **Exhibit****No.** | ** ** | **Description**                                                                                                                                                                                                                            |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                |       | Certificate of Incorporation*                                                                                                                                                                                                              |
| 3.2                |       | Bylaws, as amended on September 22, 1997*                                                                                                                                                                                             |
| 4.1                |       | Form of Common Stock Certificate**                                                                                                                                                                                                    |
| 10.1               |       | Star Buffet, Inc. 1997 Stock Incentive Plan (the “1997 Plan”)**                                                                                                                                                             |
| 10.2               |       | Form of Stock Option Agreement for the 1997 Plan**                                                                                                                                                                                    |
| 10.3               |       | Form of Indemnification Agreement**                                                                                                                                                                                                   |
| 10.4               |       | Management Services Agreement with CKE Restaurants, Inc.**                                                                                                                                                                            |
| 10.5               |       | Form of Franchise Agreement with HomeTown Buffet, Inc.**                                                                                                                                                                         |
| 10.6               |       | Asset Purchase Agreement with North’s Restaurants, Inc. dated  July 24, 1997**                                                                                                                                              |
| 10.6.1             |       | Amendment No. 1 to Asset Purchase Agreement dated as of  September 30, 1997 (incorporated by reference to the Company’s filing on  Form 8-K on October 17, 1997)                                                  |
| 10.6.2             |       | Amended and Restated Credit Agreement dated as of September 30,  1997 between the Company and North’s Restaurants, Inc. (incorporated by  reference to the Company’s filing on Form 8-K on October 17, 1997) |
| 10.7               |       | Form of Contribution Agreement among CKE Restaurants, Inc.,  Summit Family Restaurants Inc. and the Company*                                                                                                                     |
| 10.8               |       | Form of Bill of Sale and Assumption Agreement between Summit  Family Restaurants Inc. and Taco Bueno Restaurants, Inc. (formerly known  as Casa Bonita Incorporated)*                                                            |
| 10.9               |       | Form of Bill of Sale and Assumption  Agreement between Summit Family Restaurants Inc. and JB’s  Restaurants, Inc.*                                                                                                          |
| 10.10              |       | License Agreement with CKE Restaurants, Inc. (incorporated by  reference to the Company’s filing on Form 10-K on April 24, 1998)                                                                                       |
| 10.11              |       | Settlement Agreement with HomeTown  Buffet, Inc. (incorporated by reference to the Company’s filing on Form  10-K on April 24, 1998)                                                                                        |
| 10.12              |       | Asset Purchase Agreement among Summit Family Restaurants Inc. and JB’s  Family Restaurants, Inc., dated February 10, 1998 (incorporated by  reference to the Company’s filing on Form 8-K on March 9, 1998)  |
| 10.13              |       | Stock Repurchase Agreement between Star Buffet, Inc. and CKE  Restaurants, Inc., dated September 10, 1998 (incorporated by reference  to the Company’s filing on Form 10-K on September 28, 1998)            |
| 10.14              |       | Credit Agreement dated as of January 31, 2008 with Wells Fargo  Bank N. A. including First Amendment                                                                                                                                  |
| 10.15              |       | Loan Agreement dated June 15, 2007 with Robert E. Wheaton and  Suzanne H. Wheaton                                                                                                                                                     |
| 10.16              |       | Asset Purchase Agreement dated December 2, 2007 with Barnhill’s  Buffet, Inc. and Star Buffet Management, Inc. including First Amendment                                                                                    |
| 14.1               |       | Code of Ethics (incorporated by reference to the Company’s filing on  Form 10-K on January 31, 2005)                                                                                                                        |
| 21.1               |       | List of Subsidiaries*                                                                                                                                                                                                                      |
| 23.1               |       | Consent of Mayer Hoffman McCann P.C.                                                                                                                                                                                                       |
| 31.1               |       | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act Of 2002                                                                                                                                   |
| 31.2               |       | Certification of Principal Accounting Officer pursuant to Section 302  of the Sarbanes-Oxley Act Of 2002                                                                                                                              |
| 32.1               |       | Certification of Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002                                                                                                                                   |
| 32.2               |       | Certification of Principal Accounting  Officer pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002                                                                                                                              |
| 99.1               |       | Press Release dated April 25, 2008  reporting earnings for fiscal 2008                                                                                                                                                                |

 

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

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

 

E-1

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