UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-K
 _______________
 
 [X]
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
  For
the fiscal year ended January 26, 2009
  OR
  [  ]
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
  Commission
file number: 0-6054
  STAR
BUFFET, INC.
 (Exact
Name of Registrant as Specified in its Charter)
 _______________
 Delaware
                84-1430786(State
      or Other Jurisdiction of
                (I.R.S.
      EmployerIncorporation
      or Organization)
                Identification
      No.)1312
      N. Scottsdale Road
                85257Scottsdale,
      Arizona
                (Zip
      Code)(Address
      of Principal Executive Offices)
 
 Registrant's
Telephone Number, Including Area Code: (480) 425-0397
 _______________
  Securities
registered pursuant to Section 12(b) of the Act: None
 Securities
registered pursuant to Section 12(g) of the Act:
 
 (Title of Each
Class):
 Common
Stock
 $.001
par value
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes
[  ] No[X]
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes
[  ] No[X]
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes [X]  No [  ]
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X].
  Indicated
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or smaller reporting
company.  See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check
one)
 Large accelerated filer [ 
]                                          Accelerated
filer [  ]
 Non-accelerated
filer [ 
]                                                           Smaller
reporting company [X]
 
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act.)Yes [  ] No [X]
 
 
  At August
11, 2008, the last business day of the registrant’s second fiscal quarter, there
were outstanding 3,213,075 shares of the registrant’s common stock, $.001 par
value.  The aggregate market value of common stock held by
non-affiliates of the registrant based on the last reported sale price of the
common stock as reported on the NASDAQ Small Cap Market on August 11, 2008,
($4.10 per share) was $4,556,000.  For purposes of this computation,
all executive officers, directors, and 10% beneficial owners of the registrant
were deemed to be affiliates.  Such determination 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 22, 2009, the registrant had 3,213,075 shares of common stock
outstanding.
  Documents
incorporated by reference: Portions of the registrant's Proxy Statement for the
2009 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission within 120 days after January 26, 2009, are incorporated by
reference into Part III of this Form 10-K.
  
 STAR
BUFFET, INC., AND SUBSIDIARIES
 
 Index
to Annual Report on Form 10-K
 
 For
the Fiscal Year Ended January 26, 2009
 
 PagePART
      IITEM
      1.
                                                                            BUSINESS
                                                                            1ITEM
      1A.
                                                                            RISK
      FACTORS
                                                                            4ITEM
      2.
                                                                            PROPERTIES
                                                                            7ITEM
      3.
                                                                            LEGAL
      PROCEEDINGS
                                                                            9ITEM
      4.
                                                                            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                                                            9PART
      IIITEM
      5.
                                                                            MARKET
      FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                                                                            10ITEM
      7.
                                                                            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTSOF
      OPERATIONS
                                                                            11ITEM
      8.
                                                                            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                                                                            20ITEM
      9.
                                                                            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL
      DISCLOSURE
                                                                            20ITEM
      9A(T).
                                                                            CONTROLS
      AND PROCEDURES
                                                                            20ITEM
      9B.
                                                                            OTHER
      INFORMATION
                                                                            21PART
      IIIITEM
      10.
                                                                            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                                                                            22ITEM
      11.
                                                                            EXECUTIVE
      COMPENSATION
                                                                            22ITEM
      12.
                                                                            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      ANDRELATED
      STOCKHOLDER MATTERS
                                                                            22ITEM
      13.
                                                                            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE
                                                                            22ITEM
      14.
                                                                            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                                                                            22PART
      IVITEM
      15.
                                                                            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                                                                            22SIGNATURES
                                                                            23EXHIBIT
      INDEX
                                                                            E-1FINANCIAL
      STATEMENTS
                                                                            F-1
 
 i
 Cautionary
Statements Regarding Forward-Looking Statements
 
 This
annual report on Form 10-K contains forward-looking statements, within the
meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933,
which are subject to known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. In some cases,
forward-looking statements are identified by words such as “believe,”
“anticipate,” “expect,” “intend,” “plan,” “will,” “may” and similar expressions.
You should not place undue reliance on these forward-looking statements, which
speak only as of the date of this annual report on Form 10-K. All these
forward-looking statements are based on information available to the Company at
this time, and the Company assumes no obligation to update any of these
statements. Actual results could differ from those projected in these
forward-looking statements as a result of many factors, including those
identified in the section titled “Risk Factors” under Item 1A and elsewhere. You
should review and consider the various disclosures made by the Company in this
report, and those detailed from time to time in the Company’s filings with the
Securities and Exchange Commission, that attempt to advise you of the risks and
factors that may affect the Company’s future results.
 
 PART
I
 
 Item
1. Business
 
 Overview
 
 Star
Buffet, Inc., a Delaware corporation (“Star” and collectively with its
subsidiaries, the “Company”), is a multi-concept restaurant holding company. As
of January 26, 2009, the Company, through five independently capitalized
subsidiaries operated 19 Barnhill’s Buffet restaurants, 11 franchised HomeTown
Buffets, six JB’s restaurants, four 4B’s restaurants, three K-BOB’S Steakhouses,
three BuddyFreddys restaurants, two Whistle Junction restaurants, two Western
Sizzlin restaurants, two Holiday House restaurants, two JJ North’s Grand
Buffets, two Casa Bonita Mexican theme restaurants, one Pecos Diamond Steakhouse
and one Bar-H Steakhouse. The Company also had four restaurants closed for
remodeling and repositioning, one restaurant leased to a third-party operator
and one restaurant closed and reported as property held for sale. The Company's
restaurants are located in Alabama, Arkansas, Arizona, Colorado, Florida, Idaho,
Louisiana, Mississippi, Montana, New Mexico, Oklahoma, Oregon, Tennessee, Texas,
Utah, Washington and Wyoming.
 
 Recent
Developments
 
 On
February 20, 2009, the Board of Directors voted to indefinitely suspend the
annual dividend on the outstanding common stock of the Company.
 
 Business
 
 The
Company’s business strategy is to operate a broadly diversified portfolio of
well-established, family-oriented restaurants throughout the southeastern and
western United States.  The Company believes that a broad, diversified
business base combined with a low field and corporate overhead cost structure
will result in consistently profitable financial performance.
 
 Segment
and Related Reporting
 
 The
Company has two reporting segments, the Buffet Division and the Non-Buffet
Division. The Company’s reportable segments are aggregated based on operating
similarities.  The Buffet Division includes 19 Barnhill’s Buffets, 11
HomeTown Buffets, three BuddyFreddys, two JJ North’s Grand Buffets and two
Whistle Junction restaurants.  The Buffet Division also has three
restaurants closed for remodeling and repositioning, one restaurant leased to a
third-party operator and one restaurant closed and reported as property held for
sale.  The Non-Buffet Division includes six JB’s restaurants, four
4B’s restaurants, three K-BOB’S Steakhouses, two Western Sizzlin restaurants,
two Casa Bonita restaurants, two Holiday House restaurants, a Bar-H Steakhouse
and a Pecos Diamond Steakhouse.  Additionally, a K-BOB’S Steakhouse
restaurant was closed for remodeling at the end of fiscal 2009.
 
 Growth
Strategy
 
 The
Company seeks modest long-term growth primarily through the acquisition of
existing restaurants. The Company supplements its program of acquisitions with
the purchase of restaurant properties that can be converted to the Company’s
existing brands and minority investments in, or strategic alliances with, other
restaurant chains.
 
 1
 ·
              Acquisitions.The
      Company believes that a number of acquisition opportunities exist in
      restaurant segments that include buffets, cafeterias, family dining and
      steakhouses. The Company believes that many restaurants in these segments
      are privately owned and may be available for acquisition particularly when
      the owners decide to retire.  Other restaurants may become
      available for purchase when corporate owners decide to convert from a
      company store to a franchisor business model or when a company is faced
      with a financial reorganization.
 
 ·
              Restaurant Conversions.
      In recent years, a number of chains in the family dining and budget
      steakhouse segments of the restaurant industry have experienced
      operational difficulties and declining performance. The Company believes
      that these difficulties are the result of increasing competition from
      national casual dining and steakhouse chains which offer superior product
      quality and service at competitive prices. Many of these restaurants and
      steakhouses occupy desirable locations that the Company believes can be
      acquired and converted to one of its concepts at lower prices or leased at
      lower rates when compared to the cost of new
  construction.
 
 ·
              Minority Investments and
      Strategic Alliances.The Company intends to seek minority
      investments in, or strategic alliances with, other restaurant chains. The
      Company believes that these investments can provide an attractive
      opportunity for the Company and may facilitate the acquisition of
      restaurants at a later date.
  Restaurant
Concepts
 
 Buffet
Division
 
 General.The Buffet Division
includes 42 restaurants in 12 states.  The Buffet Division under the
following concepts operates 19 Barnhill’s Buffets restaurants, 11 HomeTown
Buffets, three BuddyFreddys restaurants, two JJ North’s Grand Buffets and two
Whistle Junction restaurants.  The Buffet Division also has three
former buffet restaurants closed for remodeling and repositioning, a former
buffet restaurant is leased to a third-party operator and another closed
restaurant reported as property held for sale.
 
 The
Company, through its wholly-owned, independently capitalized Star Buffet
Management, Inc. (“SBMI”) subsidiary operates 15 Barnhill’s Buffets with a
perpetual right to utilize the Barnhill’s name and related intellectual
property.  The restaurants are located in Alabama (1), Arkansas (1),
Florida (3), Louisiana (3), Mississippi (4) and Tennessee (3). The restaurants
are approximately 10,000 square feet and seat approximately 375
customers.
 
 The
Company, through its wholly-owned, independently capitalized Starlite Holdings,
Inc. (“Starlite”) subsidiary operates 4 Barnhill’s Buffets with a perpetual
right to utilize the Barnhill’s name and related intellectual
property.  The restaurants are located in Florida (2) and Mississippi
(2).  The restaurants are approximately 10,000 square feet and seat
approximately 375 customers.
 
 The
Company, through its wholly-owned, independently capitalized HTB Restaurants,
Inc. (“HTB”) subsidiary, has franchise agreements with HomeTown Buffet,
Inc., a wholly-owned subsidiary of Buffets Holdings, Inc.  HTB entered
into a franchise agreement for each location which requires among other items,
the payment of a continuing royalty fee to HomeTown Buffet, Inc. HTB
operates 11 HomeTown Buffet restaurants in Arizona (8), New Mexico
(1), Utah (1) and Wyoming (1). The restaurants are approximately 10,000 square
feet and seat approximately 375 customers.
 
 The
Buffet Division also consists of two JJ North’s Grand Buffet restaurants which
are located in Oregon and Washington and five restaurants in Florida under the
brand names BuddyFreddys (3) and Whistle Junction (2).  The
restaurants range from 7,000 to 10,000 square feet and seat approximately 275 to
325 customers.
 
 Non-Buffet
Division
 
 General.The Non-Buffet
Division includes 22 restaurants in 10 states.  The Non-Buffet
Division  under the following concepts operates six JB’s restaurants,
four 4B’s restaurants, three K-BOB’S Steakhouses, two Western Sizzlin
restaurants, two Casa Bonita restaurants, two Holiday House restaurants, a Bar-H
Steakhouse and a Pecos Diamond Steakhouse.  Additionally, a K-BOB’S
Steakhouse was closed for remodeling at the end of fiscal 2009.
 
 2
 The
Company, through its wholly-owned, independently capitalized Summit Family
Restaurants, Inc., (“Summit”) subsidiary, operates six JB’s restaurants in
Montana (2), Utah (3) and Idaho (1); four 4B’S restaurants located in Montana;
three K-BOB’S restaurants located in Texas (2), New Mexico (1); two Casa Bonita
restaurants located in Colorado and Oklahoma; a Bar-H Steakhouse in Dalhart,
Texas and a Pecos Diamond Steakhouse in Artesia, New Mexico. The JB’s and 4B’S
restaurants are approximately 4,000 to 5,500 square feet in size and seat
approximately 110 to 175 customers.  The Casa Bonita facilities are
approximately 52,000 and 26,000 square feet with seating capacity for
approximately 4,000 and 1,500 customers.  K-BOB’S Steakhouses, Pecos
Diamond Steakhouse and Bar-H Steakhouse are approximately 5,000 square feet with
seating capacity for 150 customers.
 
 The
Non-Buffet Division also consists of two Western Sizzlin restaurants one
each located in Arkansas and Mississippi and two Holiday House restaurants in
Florida. The restaurants range from 5,000 to 10,000 square feet and seat
approximately 150 to 250 customers.
 
 Licenses,
Trademarks and Service marks
 
 The
Company owns the trademarks and service marks for BuddyFreddys, Casa Bonita,
Holiday House, Pecos Diamond Steakhouse, Bar-H Steakhouse, 4B’S Restaurants and
Whistle Junction. The Company was granted perpetual, royalty-free, fully
transferable licenses to use the intangible property of JJ North’s Grand Buffet
and Barnhill’s Buffet. The Company utilizes the HomeTown Buffet and Western
Sizzlin’ marks pursuant to various franchise and license agreements. The Company
has a license agreement and, if exercised, one ten year option to use the JB’S
trademark through August 31, 2022.  The Company has a perpetual
license agreement to utilize, under certain circumstances, the K-BOB’S
Steakhouse brand.  Additionally, the Company has a license agreement
with CKE Restaurants, Inc. for use of the “Star” name and design.
 
 Competition
 
 The
Company competes on the basis of the quality and value of food products offered,
price, service, location, ambiance and overall dining experience.  The
Company’s competitors include a large and diverse group of restaurant chains and
individually owned restaurants.  The number of restaurants with
operations similar to those of the Company has grown considerably in recent
years.  As the Company and its principal competitors expand operations
in various geographic areas, competition can be expected to
increase.
 
 Seasonality
 
 The
Company's business is moderately seasonal in nature. For the majority of the
Company’s restaurants, the highest volume periods are in the first and second
fiscal quarters.
  Employees
 
 As of
April 22, 2009, the Company employed approximately 2,490 persons, of whom
approximately 2,482 were restaurant employees. Restaurant employees include
salaried management and both full-time and part-time workers paid on an hourly
basis. No Company employees are covered by collective bargaining agreements. The
Company believes that its relations with its employees are generally
good.
 
 Directors
and Executive Officers
 
 The
following table sets forth certain information regarding the Company's directors
and executive officers:
 
 Name
                      Age
                      PositionRobert
      E. Wheaton
                      57
                      Chief
      Executive Officer, President and ChairmanRonald
      E. Dowdy
                      52
                      Group
      Controller, Treasurer and SecretaryThomas
      G. Schadt
                      67
                      DirectorPhillip
      “Buddy” Johnson
                      57
                      DirectorCraig
      B. Wheaton
                      52
                      DirectorB.
      Thomas M. Smith, Jr.
                      74
                      DirectorTodd
      S. Brown
                      52
                      Director
 
 3
 Robert E. Wheaton has served
as the Chief Executive Officer and President 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. Wheaton served as Executive Vice President of CKE
Restaurants, Inc. from January 1996 through January 1999. From April 1995 to
January 1996, he served as Vice President and Chief Financial Officer of Denny's
Inc., a subsidiary of Flagstar Corporation. From 1991 to 1995, Mr. Wheaton
served as President and Chief Executive Officer and from 1989 to 1991 as Vice
President and Chief Financial Officer of The Bekins Company. Mr. Wheaton is the
brother of Craig B. Wheaton, a director of the Company.
 
 Ronald E. Dowdy has served as
the Group Controller since June 1998 and as Treasurer and Secretary since
February 1999. Mr. Dowdy served as Controller to Holiday House Corporation for
19 years prior to joining the Company.
 
 Thomas G. Schadt has served
as a director of the Company since the completion of the Company’s initial
public offering in September 1997. Mr. Schadt has been the Chief Executive
Officer of a privately-held beverage distribution company, Bear Creek, L.L.C.,
since 1995. From 1976 to 1994, he held several positions with PepsiCo, Inc.,
most recently, Vice President of Food Service.
 
 Phillip “Buddy” Johnsonhas
served as a director of the Company since February 1999. Mr. Johnson served as
the Supervisor of Elections of Hillsborough County from March 2003 to January
2009. From March 2001 until March 2003, he served as the Director of the
Division of Real Estate in the Florida Department of Business and Professional
Regulations. Mr. Johnson served as President of the BuddyFreddys Division from
April 1998 until March 2001. From 1980 until 1998, he was the founding Chairman
and CEO of BuddyFreddys Enterprises. From 1991 to 1996, Mr. Johnson served as
Republican floor leader in the Florida House of Representatives. Mr. Johnson
also 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. Wheatonhas served
as a director of the Company since February 1999. Mr. Wheaton is a partner in
the law firm Kilpatrick Stockton LLP. His main areas of practice include
employee benefits, executive compensation and general corporate law. Mr. Wheaton
received his B.A. degree, with honors, from the University of Virginia and his
J.D. degree from Wake Forest University. From 1993 to 1998, Mr. Wheaton was a
member of the Tax Council of the North Carolina Bar Association Section on
Taxation and chair of its Employee Benefits Committee from 1995 to 1997. He is a
member and former president of the Triangle Benefits Forum. He is a member of
the Southern Employee Benefits Conference, the Employee Benefits Committee of
the American Bar Association’s Section of Taxation, the National Pension
Assistance Project’s National Lawyers Network, and the National Association of
Stock Plan Professionals.
 
 B. Thomas M. Smith, Jr. has
served as a director of the Company since June 2002.  Mr. Smith was a
consultant with ITT Corp. from January 1996 to December 1996 and is now
retired.  From 1988 until 1995, he was Vice President and Director of
Corporate Purchasing for ITT Corp.  Mr. Smith served as director of
Republic Bancorp from June 1999 until April 2005.
 
 Todd S. Brown has served as a
director of the Company since June 2004.  Mr. Brown has served Brown
Capital Advisors, Inc. as the President since November 1999. From 1994 to
November 1999, Mr. Brown served as Senior Vice President, Chief Financial
Officer and Director of Phoenix Restaurant Group, Inc. (formerly DenAmerica
Corp.). Mr. Brown served as Senior Manager in Audit and Consulting at Deloitte
Touche LLP from 1980 to 1994. Mr. Brown received an MBA from the University of
Missouri in 1980 and a BA from Southern Methodist University in
1978.
 
 The audit
committee is comprised of Todd S. Brown, Thomas G. Schadt and B. Thomas M.
Smith, Jr., of which Todd S. Brown is the audit committee financial 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 and Successfully Integrate
Additional Restaurants.
  During
fiscal 2009 and fiscal 2008 the Company acquired or opened a total of 32
restaurants. These acquisitions represent a significant increase in the number
of restaurants operated by the Company and involve risks that could adversely
affect the Company’s business, results of operations and financial condition. In
particular, the failure to maintain adequate operating and financial control
systems or unexpected difficulties encountered during assimilation of the
acquired restaurants could materially and adversely affect the Company’s
business, financial condition and results of operations.  In addition,
acquired restaurants may be located in geographic markets in which the Company
has limited or no operating experience.  There can be no assurance
that any acquisition will not materially and adversely affect the Company or
that any such acquisition will enhance the Company’s
business.  Furthermore, the Company is unable to predict the
likelihood of any additional acquisitions being proposed or completed in the
near future.
 
 4
 The
Company intends to continue to pursue a strategy of moderate growth, primarily
through acquisitions. The success of this strategy will depend in part on the
ability of the Company to acquire additional restaurants or to convert acquired
sites into restaurants.  The success of the Company’s growth strategy
is dependent upon numerous factors, including the availability of suitable
acquisition opportunities, the availability of appropriate financing, and
general economic conditions.  The Company must compete with other
restaurant operators for acquisitions and with other restaurant operators,
retail stores, companies and developers for desirable sites.  Many of
these entities have substantially greater financial and other resources than the
Company. Many of its acquired restaurants may be located in geographic markets
in which the Company has limited or no operating experience. There can be no
assurance that the Company will be able to identify, negotiate and consummate
acquisitions or that acquired restaurants or converted restaurants can be
operated profitably and successfully integrated into the Company’s
operations.
 
 A
strategy of growth through acquisitions requires access to significant capital
resources. If the Company determines to make a sizeable acquisition, the Company
may be required to obtain approval of creditors, or to sell additional equity or
debt securities, or to obtain additional credit facilities.  The sale
of additional equity or convertible debt securities could result in additional
dilution to the Company’s stockholders. At present, the Company has only limited
availability under its Credit Facility and the credit facility restricts the
amount of capital that can be allocated to acquisitions.
 
 Loans to third parties involve risk
of non-payment.  Since inception, the Company’s acquisition
strategy has, in certain circumstances, incorporated loans to sellers to
facilitate certain transactions.  In most cases, 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 contain favorable to the Company interest rates and repayment terms
if the loans are not converted to ownership for one or more
reasons.  This financing strategy entails significant
risk.  Currently, the Company has two loans receivable outstanding and
both are in default.  However, because the Company anticipates full
recovery of amounts outstanding through either repayment or conversion to
ownership, historically no provision for doubtful accounts has been
established.  While estimates to date have been within our
expectations, a change in the financial condition of specific restaurant
companies or in overall industry trends may result in future adjustments to
Company estimates of recoverability of these receivables.
 
 Operating Results can be Adversely
Impacted by the Failure to Renew Facility Leases. The majority of the
Company’s facilities are leased. Certain of these leases contain limited or no
renewal options and other leases contain escalating or fair market renewal
clauses. There can be no assurance that these facility leases can be renewed or
if they are renewed, can be done so at lease rates that permit the restaurant to
be operated at a profit.
 
 Dependence Upon and Restrictions
Resulting from HomeTown Franchise Agreements. The Company operates its
HomeTown Buffet Restaurants through its wholly-owned, independently capitalized
HTB Restaurants, Inc. (“HTB”) subsidiary.  This subsidiary is party to
franchise agreements with the franchisor, HomeTown Buffet.
 
 The
performance of HTB’s HomeTown Buffet restaurants is directly related to the
success of the HomeTown Buffet restaurant system. On January 22, 2008 Buffets
Holdings, Inc., parent of HTB’s franchisor, filed for Chapter 11
reorganization.  The success of HTB’s HomeTown Buffet restaurants
depends in part on the effectiveness of the HomeTown franchisor’s marketing
efforts, new product development initiatives, building retrofit designs, quality
assurance and other operational programs over which HTB has little or no
control.  Furthermore, HTB cannot open new HomeTown Buffets without
the permission of the franchisor.
 
 In recent years HTB’s HomeTown Buffet
restaurants have not performed well.  The Company’s management
believes this is due to the franchisor's financial difficulties and because the
franchisor has not permitted HTB to develop new restaurants.  The lack
of investment in the brand on the part of the franchisor and the franchisor’s
unwillingness to permit HTB to develop new locations has contributed to
significant declines in restaurant level revenue and
profitability.  The Company has closed a number of HomeTown Buffet
restaurants and has determined that it would make no further capital
contributions to the HTB subsidiary.  The Company also plans to close
additional HomeTown Buffet restaurants.
 
 Increases in Menu Prices in Response
to Enacted Minimum Wage Increases. The Company’s profitability is
sensitive to increases in food, labor and other operating costs that cannot
always be passed on to its guests in the form of higher
prices.  Minimum wage increases took effect in states where the
Company’s restaurants are located, in July 2007, January 2008, July 2008 and
January 2009.  These increases and potential future increases directly
increase our labor costs and may indirectly increase other costs as higher wage
costs for service and commodity suppliers are passed on to the
Company.  In connection with higher energy prices, commodity suppliers
have passed on higher wholesale prices and higher transportation
costs.  In anticipation of these past and future increases, the
Company has and will continue to attempt to increase menu prices in fiscal 2010
with the desire to maintain prior profitability.  However, the Company
cannot predict with any certainty that the menu price increases will be
sufficient to maintain its current level of profitability.  In
addition, the increase in menu prices may adversely affect the volume of our
sales reducing future revenues and profitability.
 
 5
 The Company’s Quarterly Results are
Likely to Fluctuate. The Company has in the past experienced, and expects
to continue to experience, significant fluctuations in restaurant revenues and
results of operations from quarter to quarter.  In particular, the
Company’s quarterly results can vary as a result of acquisitions and costs
incurred to integrate newly acquired entities.  Conversely, the
Company’s restaurant revenue and results of operations can vary due to
restaurant closures and associated costs connected with these
closures.  A number of the Company’s restaurants are located in areas
which are susceptible to severe winter weather conditions or tropical storm
patterns which may have a negative impact on customer traffic and restaurant
revenues.  Accordingly, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and that
such comparisons cannot be relied upon as indicators of future
performance.  Seasonal and quarterly fluctuations can have a material
adverse effect on the Company’s business, results of operation and financial
condition.
 
 The Restaurant Industry is Highly
Competitive.  The Company competes on the basis of the quality
and value of food products offered, price, service, location, ambiance and
overall dining experience. As the Company and its principal competitors expand
operations in various geographic areas, competition can be expected to
intensify. Such intensified competition could increase the Company’s operating
costs or adversely affect its revenues or operating margins. A number of
competitors have been in existence longer than the Company and have
substantially greater financial, marketing and other resources and wider
geographical diversity than does the Company.  In addition, the
restaurant industry has few non-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, and long term
commitment to, each of its restaurant sites limits its ability to respond
quickly or effectively to changes in local competitive conditions or other
changes that could affect the Company’s operations.
 
 The Restaurant Industry is Complex
and Volatile. Food service businesses are often affected by changes in
consumer tastes, national, regional and local economic conditions and
demographic trends. The performance of individual restaurants may be adversely
affected by factors such as traffic patterns, demographic considerations and the
type, number and location of competing restaurants.  Multi-unit food
service businesses such as the Company’s can also be materially and adversely
affected by publicity resulting from poor food quality, illness, injury or other
health concerns or operating issues stemming from one restaurant or a limited
number of restaurants. The Company’s business could be adversely affected by
terrorist attacks directed toward the food supply chain or public concerns about
the safety of the food supply chain. Dependence on frequent deliveries of fresh
produce and groceries, subjects food service businesses such as the Company’s to
the risk that shortages or interruptions in supply, caused by adverse weather or
other conditions, could adversely affect the availability, quality and cost of
ingredients. The Company’s profitability is highly sensitive to increases in
food, labor and other operating costs that cannot always be passed on to its
guests in the form of higher prices or otherwise compensated for.  In
addition, unfavorable trends or developments concerning factors such as
inflation, increased food, labor, employee benefits, including increases in
hourly wage and unemployment tax rates utility and  transportation
costs, increases in the number and locations of competing restaurants, regional
weather conditions and the availability of experienced management and hourly
employees may also adversely affect the food service industry in general and the
Company’s business, financial condition and results of operations in
particular.  Changes in economic conditions affecting the Company’s
guests could reduce traffic in some or all of the Company’s restaurants or
impose practical limits on pricing, either of which could have a material
adverse effect on the Company’s business, financial condition and results of
operations.
 
 The Company is Dependent on Its Key
Personnel. The Company believes that its success depends in 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
presently maintain key man life insurance and the loss of the services of Mr.
Wheaton could have a material adverse effect upon the Company’s business,
financial condition and results of operations.
 
 The Restaurant Industry is Subject
to Substantial Government Regulation. The restaurant industry is subject
to federal, state and local government regulations, including those relating to
the preparation and sale of food as well as building and zoning
requirements.  In addition, the Company is subject to laws governing
its relationship with employees, including minimum wage requirements, overtime,
working and safety conditions and citizenship requirements.  The
failure to obtain or retain food licenses or an increase in the minimum wage
rate, employee benefit costs or other costs associated with employees could have
a material adverse effect on the Company’s business, financial condition and
results of operations.
 
 6
 Effect of Certain Charter and Bylaw
Provisions. Certain provisions of the Company’s Certificate of
Incorporation and Bylaws may have the effect of making it more difficult for a
third party to acquire, or discourage a third party from attempting to acquire,
control of the Company.  Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company’s Common Stock.  The Company’s Certificate of Incorporation
allows the Company to issue up to 1,500,000 shares of currently undesignated
preferred stock, to determine the powers, preferences, rights, qualifications
and limitations or restrictions granted to or imposed on any un-issued series of
that preferred stock, and to fix the number of shares constituting any such
series and the designation of such series, without any vote or future action by
the stockholders.  The preferred stock could be issued with voting,
liquidation, dividend and other rights superior to the rights of the common
stock.  The Certificate of Incorporation also prohibits the ability of
stockholders to call special meetings.  The Company’s Bylaws require
advance notice to nominate a director or take certain other
actions.  Such provisions may make it more difficult for stockholders
to take certain corporate actions and could have the effect of delaying or
preventing a change in control of the Company.  In addition, the
Company has not elected to be excluded from the provisions of Section 203 of the
Delaware General Corporation Law, which imposes certain limitations on
transactions between a corporation and "interested" stockholders, as defined in
such provisions.
 
 Possible Volatility of Stock
Price. The stock market has from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies.  The volume of trading for the Company's common
stock is limited.  This may make it difficult to liquidate an investment
and can increase price volatility.  Fluctuations in the Company's
operating results, failure of such operating results to meet the expectations of
stock market analysts and investors, changes in stock market’s analyst
recommendations regarding the Company, the success or perceived success of
competitors of the Company, as well as changes in general economic or market
conditions and changes in the restaurant industry may also have a significant
adverse affect on the market price of the common stock.
 
 Sale of a Substantial Number of
Shares of Our Common Stock Could Cause the Market Price to Decline. Sales
of a substantial number of shares of our common stock in the public market could
substantially reduce the prevailing market price of our common stock. As of
April 22, 2009, 3,213,075 shares of common stock were outstanding and 39,000
shares were issuable upon exercise of outstanding options at exercise prices of
$5.00 and $6.70. The Company cannot predict the effect, if any, that sales of
shares of the Company’s common stock or the availability of such shares for sale
will have on prevailing market prices. However, substantial amounts of the
Company’s common stock could be sold in the public market, which may adversely
affect prevailing market prices for the common stock.
 
 Control by One Principal
Stockholder. Robert E. Wheaton, Chairman of the Board, Chief Executive
Officer and President, currently beneficially owns approximately 45.3% of our
total equity securities, assuming exercise of vested employee stock options, and
possesses approximately 45.3% of the total voting power. Thus Mr. Wheaton has
the ability to control or significantly influence all matters requiring the
approval of our stockholders, including the election of our directors. Sales of
a substantial number of shares of our common stock by Mr. Wheaton or other
principal shareholders in the public market could substantially reduce the
prevailing market price of our common stock.
  Item
2.Properties
 
 The
Company's corporate headquarters is in Scottsdale, Arizona.  A
regional administrative office is located in Salt Lake City, Utah.
 
 The
Company’s restaurants are primarily freestanding locations. As of January 26,
2009, 46 of 64 of the Company’s restaurant facilities were leased. The leases
expire on dates ranging from 2009 to 2025.  The majority of the leases
contain renewal options. All leases provide for specified periodic rental
payments and many call for additional rent based upon revenue volume. Most
leases provide for periodic rent increases and require the Company to maintain
the property, carry property and general liability insurance and pay associated
taxes and expenses.
 
 7
 The
following is a summary of the Company's restaurant properties as of January 26,
2009:
 
 Buffets
                  
                  Non-Buffets
                  
                  TotalOwned
                  9
                  
                  9
                  
                  18Leased
                  33
                  
                  13
                  
                  46Total
                  42
                  
                  22
                  
                  64
  As of
January 26, 2009, the Company’s restaurants are located in the following
states:
 
 Number
      of RestaurantsState
                    Buffets
                    
                    Non-Buffets
                    
                    TotalAlabama
                    1
                    
                    –
                    
                    1Arkansas
                    1
                    
                    1
                    
                    2Arizona
                    9
                    
                    –
                    
                    9Colorado
                    –
                    
                    1
                    
                    1Florida
                    14
                    
                    2
                    
                    16Idaho
                    –
                    
                    1
                    
                    1Louisiana
                    3
                    
                    –
                    
                    3Mississippi
                    6
                    
                    1
                    
                    7Montana
                    –
                    
                    6
                    
                    6New
      Mexico
                    1
                    
                    2
                    
                    3Oklahoma
                    –
                    
                    1
                    
                    1Oregon
                    1
                    
                    –
                    
                    1Tennessee
                    3
                    
                    –
                    
                    3Texas
                    –
                    
                    4
                    
                    4Utah
                    1
                    
                    3
                    
                    4Washington
                    1
                    
                    –
                    
                    1Wyoming
                    1
                    
                    –
                    
                    1Total
                    42
                    
                    22
                    
                    64
 
 As of
January 26, 2009, the Company’s non-operating restaurants are located in the
following states:
 
 Number
      of Non-Operating RestaurantsState
                  Buffets
                  
                  Non-Buffets
                  
                  TotalArizona
                  1
                  
                  –
                  
                  1Florida
                  4
                  
                  –
                  
                  4Texas
                  –
                  
                  1
                  
                  1Total
                  5
                  
                  1
                  
                  6
 
 One of
the six non-operating restaurants has been leased to a third-party operator;
four are closed for remodeling and repositioning and one is closed and reported
as property held for sale.
 
 8
 Item
3.Legal
Proceedings
 
 In
conjunction with the acquisition of certain JJ North’s restaurants from North’s
Restaurants, Inc. (“North’s”) in 1997, the Company provided a credit
facility to North’s and when North’s defaulted the Company sued for enforcement.
In 1998, the Company’s suit with North’s resulted in a negotiated settlement in
favor of the Company represented by an Amended and Restated Promissory Note (the
“Star Buffet Promissory Note).  In a related proceeding, North’s other
secured creditor, Pacific Mezzanine, initiated litigation against North’s
seeking a monetary judgment and the appointment of a receiver.  In April,
2006 the Company noticed all relevant parties of its intent to foreclose to seek
expedited liquidation of North’s assets and repay amounts owed to the
Company.  Subsequent to the notice, the receiver moved to have the
Company’s foreclosure of North’s assets set aside so that certain of North’s
assets could be sold to a third party.  The motion was approved.  On
August 7, 2006, the receiver paid the Company approximately $1,291,000 from
a partial sale of the assets. In August 2007, the receiver notified the
Company that he planned to turn control of the JJ North’s restaurant in Grants
Pass, Oregon and associated assets over to the Company. On September 22, 2007,
the Company hired North’s employees, notified North’s creditors of its intent to
operate the business and negotiated a facility lease with North’s previous
landlord. The transfer of assets from North’s to Star Buffet Management, Inc.
was approved by the court. The Company’s note, together with the obligation to
the other significant creditor of North’s, is secured by the real and personal
property, trademarks and all other intellectual property owned by North’s. The
Company believes future cash flows from asset sales are adequate for recovery of
the remaining principal amount of the note receivable.  The Company has not
provided an allowance for bad debts for the note as of January 26,
2009.
 
 The
Company is from time to time the subject of complaints or litigation from
customers alleging injury on properties operated by the Company, illness or
other food quality, health or operational concerns. Adverse publicity resulting
from such allegations may materially adversely affect the Company and its
restaurants, regardless of whether such allegations are valid or whether the
Company is liable. The Company also is the subject of complaints or allegations
from employees from time to time. The Company believes that the lawsuits, claims
and other legal matters to which it has become subject in the course of its
business are not material to the Company's business, financial condition or
results of operations, but an existing or future lawsuit or claim could result
in an adverse decision against the Company that could have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
 Item
4.Submission of Matters to a
Vote of Security Holders
 
 No
matters were submitted to the shareholders of the Company during the fourth
quarter of fiscal 2009.
   9
 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 NASDAQ Capital
Market under the symbol “STRZ”. As of April 13, 2009, there were approximately
500 holders of record. The following table sets forth the high and low bid
quotations for the Common Stock, as reported by NASDAQ.
 
 Fiscal
      Year
                                        
                                        2009
                                        
                                        
                                        2008High
                                        
                                        
                                        Low
                                        
                                        
                                        High
                                        
                                        
                                        LowFirst
      Quarter
                                        
                                        $
                                        7.70
                                        
                                        
                                        $
                                        4.50
                                        
                                        
                                        $
                                        9.23
                                        
                                        
                                        $
                                        7.80Second
      Quarter
                                        
                                        
                                        5.16
                                        
                                        
                                        
                                        3.75
                                        
                                        
                                        
                                        8.60
                                        
                                        
                                        
                                        7.56Third
      Quarter
                                        
                                        
                                        4.35
                                        
                                        
                                        
                                        3.26
                                        
                                        
                                        
                                        8.08
                                        
                                        
                                        
                                        6.50Fourth
      Quarter
                                        
                                        
                                        4.10
                                        
                                        
                                        
                                        1.84
                                        
                                        
                                        
                                        6.96
                                        
                                        
                                        
                                        5.14
 
 Dividends.  On
February 20, 2009, the Board of Directors voted to indefinitely suspend its
annual dividend. The Company paid an annual cash dividend of $0.60 in both
fiscal 2009 and fiscal 2008 on the outstanding common stock of the
Company.
 
 Equity
Compensation Plan Information.
 
 The
following table gives information about our shares of Common Stock that may be
issued under our equity 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 plansapproved
      by security holders
                  
                  
                  39,000
                  
                  
                  $
                  6.21
                  
                  
                  
                  451,000Equity
      compensation plans notapproved
      by security holders
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  
                  39,000
                  
                  
                  $
                  6.21
                  
                  
                  
                  451,000
 
 The
exercise price of the options granted and exercisable at January 26, 2009 is
$5.00 for 11,000 options and $6.70 for 28,000 options.
 
 10
  Item 7.Management's
Discussion and Analysis of Financial Condition and Results of
Operations
 
 The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the consolidated
financial statements, and the notes thereto, presented elsewhere in this Form
10-K. The operating results for the 52-week period ended January 26, 2009 and
for the 52-week period ended January 28, 2008 are as follows:
 
 The
operating results for the 52-week period ended January 26, 2009 included 52
weeks of operations for the Company’s 14 Barnhill’s Buffet restaurants, 11
franchised HomeTown Buffet restaurants, six JB’s restaurants, three 4B’S
restaurants, three BuddyFreddys restaurants, two Whistle Junction restaurants,
two Western Sizzlin restaurants, two K-BOB’S Steakhouses, two Holiday House
restaurants, two JJ North’s Grand Buffet restaurant, one Pecos Diamond
Steakhouse, one Bar-H Steakhouse and one Casa Bonita Mexican theme
restaurant.  The results also included the following, four Barnhill’s
Buffet restaurants for 47 weeks, one 4B’s restaurant for 34 weeks, one Casa
Bonita Mexican theme restaurant for 26 weeks and one K-BOB’S Steakhouse for 11
weeks.  In addition, operating results include 41 weeks for one
Barnhill’s Buffet restaurant, 38 weeks for one HomeTown Buffet restaurant, 37
weeks for one Western Sizzlin restaurant, 27 weeks for one Whistle Junction
restaurant, 24 weeks for two Whistle Junction restaurants, 17 weeks for one
BuddyFreddys restaurant, 15 weeks for one Holiday House restaurant and 11 weeks
for one JB’S restaurant closed during the fiscal year 2009. The Company also had
four restaurants closed for remodeling and repositioning, one restaurant leased
to a third-party operator and one restaurant closed and reported as property
held for sale.
 
 The
operating results for the 52-week period ended January 28, 2008 included 52
weeks of operations for the Company’s 12 franchised HomeTown Buffet restaurants,
six JB’s restaurants, five Whistle Junction restaurants, two BuddyFreddys
restaurants, two BuddyFreddys Country Buffet restaurants, two Western Sizzlin
restaurants, two K-BOB’S Steakhouses, two Holiday House restaurants, one JJ
North’s Grand Buffet restaurant, one Pecos Diamond Steakhouse and one Casa
Bonita Mexican theme restaurant.  The results also included the
following, one Western Sizzlin restaurant for 32 weeks, one Holiday House
restaurant for 40 weeks, one Bar-H Steakhouse for 35 weeks, one JB’S restaurant
for 35 weeks, two 4B’S restaurants for 26 weeks, one 4B’S restaurant for 15
weeks and one JJ North’s Grand Buffet for 18 weeks.  In addition,
operating results included 39 weeks for one K-BOB’S Steakhouse, 36 weeks for one
K-BOB’S Steakhouse, 36 weeks for one HomeTown Buffet restaurant, 27 weeks for
one HomeTown Buffet restaurant, 27 weeks for one Oklahoma Steakhouse restaurant
and 16 weeks for one Whistle Junction restaurant closed during the fiscal year
2008.  The Company also had five restaurants closed for remodeling and
repositioning, three restaurants leased to a third-party operators and one
restaurant closed and reported as property held for sale.
 
 Consolidated
net income for fiscal 2009 improved approximately $2.9 million to net income of
$943,000 or $0.29 per diluted share as compared with a net loss of $(2,001,000)
or $(0.63) per diluted share for the comparable prior year
period.  The improvement in net income is due to an increase in income
from operations of approximately $5.3 million primarily from new acquisitions
which included lower impairment expense of approximately $1.2 million partially
offset by higher interest expense and an increase in income taxes of
approximately $1.7 million. Total revenues increased approximately $29.1 million
or 42.4% from $68.7 million in fiscal 2008 to $97.8 million in fiscal 2009. The
increase in revenues was primarily attributable to 3 new store openings and 27
newly acquired stores that resulted in additional sales of approximately $36.7
million, partially offset by declines in comparable same store sales of
approximately $3.5 million primarily in the HomeTown Buffet restaurants and the
closure of 14 restaurants. The decline in sales from the 14 closed stores was
approximately $4.2 million.  The Company believes the decline in same
store sales is a result of weaker economic conditions and new restaurant
competition in certain markets.  The decline in sales on a same store
basis significantly impacts consolidated net income because occupancy, salaries,
benefits, and other expenses are primarily fixed in nature and generally do not
vary significantly with restaurant sales volume. Occupancy and other expense
includes major expenditures such as rent, insurance, property taxes, utilities,
maintenance and advertising.
 
 
 11
  Results
of Operations
 
 The
following table summarizes the Company’s results of operations as a percentage
of total revenues for the fifty-two weeks ended January 26, 2009 (“fiscal
2009”), and for the fifty-two weeks ended January 28, 2008 (“fiscal
2008”).
 
 Fifty-Two
                      Weeks
                    
                    
                    Fifty-Two
                      WeeksEnded
                    
                    
                    EndedJanuary
      26, 2009
                    
                    
                    January
      28, 2008Total
      revenues
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %Costs
      and expenses:Food
      costs
                    
                    
                    38.9
                    
                    
                    
                    36.9Labor
      costs
                    
                    
                    32.5
                    
                    
                    
                    34.8Occupancy
      and other expenses
                    
                    
                    20.2
                    
                    
                    
                    22.1General
      and administrative expenses
                    
                    
                    3.0
                    
                    
                    
                    5.2Depreciation
      and amortization
                    
                    
                    2.7
                    
                    
                    
                    3.0Impairment
      of long-lived assets
                    
                    
                    0.2
                    
                    
                    
                    2.0Total
      costs and expenses
                    
                    
                    97.5
                    
                    
                    
                    104.0Income
      (loss) from operations
                    
                    
                    2.5
                    
                    
                    
                    (4.0
                    )Interest
      expense
                    
                    
                    (1.2
                    )
                    
                    
                    (1.2
                    )Other
      income, net
                    
                    
                    0.1
                    
                    
                    
                    0.4Net
      (loss) income
                    
                    
                    1.4
                    
                    
                    
                    (4.8
                    )Income
      taxes (benefit)
                    
                    
                    0.4
                    
                    
                    
                    (1.9
                    )(Loss)
      income before income taxes (benefit)
                    
                    
                    1.0
                    %
                    
                    
                    (2.9
                    )
      %
 
 Summarized
financial information concerning the Company’s reportable segments is shown in
the following table. Also certain corporate overhead income and expenses in the
consolidated statements of operations are not included in the reportable
segments.
  (Dollars
      in Thousands)52
      Weeks Ended
                        January 26, 2009
                      
                      Buffets(1)
                      
                      
                      Non-Buffets(2)
                      
                      
                      Other
                      
                      
                      TotalRevenues
                      
                      $
                      69,467
                      
                      
                      $
                      28,389
                      
                      
                      $
                      -
                      
                      
                      $
                      97,856Food
      cost
                      
                      
                      28,643
                      
                      
                      
                      9,441
                      
                      
                      
                      -
                      
                      
                      
                      38,084Labor
      cost
                      
                      
                      21,445
                      
                      
                      
                      10,409
                      
                      
                      
                      -
                      
                      
                      
                      31,854Interest
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      13
                      
                      
                      
                      13Interest
      expense
                      
                      
                      (6
                      )
                      
                      
                      -
                      
                      
                      
                      (1,147
                      )
                      
                      
                      (1,153
                      )Depreciation
      & amortization
                      
                      
                      1,927
                      
                      
                      
                      650
                      
                      
                      
                      45
                      
                      
                      
                      2,622Impairment
      of long-lived assets
                      
                      
                      198
                      
                      
                      
                      14
                      
                      
                      
                      -
                      
                      
                      
                      212Income
      (loss) before income taxes
                      
                      
                      2,560
                      
                      
                      
                      2,352
                      
                      
                      
                      (3,575
                      )
                      
                      
                      1,337  12
 (Dollars
      in Thousands)52
      Weeks Ended
                        January 28, 2008
                      
                      Buffets
                      
                      
                      Non-Buffets
                      
                      
                      Other
                      
                      
                      TotalRevenues
                      
                      $
                      42,859
                      
                      
                      $
                      25,873
                      
                      
                      $
                      -
                      
                      
                      $
                      68,732Food
      cost
                      
                      
                      16,740
                      
                      
                      
                      8,616
                      
                      
                      
                      -
                      
                      
                      
                      25,356Labor
      cost
                      
                      
                      14,623
                      
                      
                      
                      9,290
                      
                      
                      
                      -
                      
                      
                      
                      23,913Interest
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      24
                      
                      
                      
                      24Interest
      expense
                      
                      
                      (151
                      )
                      
                      
                      -
                      
                      
                      
                      (707
                      )
                      
                      
                      (858
                      )Depreciation
      & amortization
                      
                      
                      1,402
                      
                      
                      
                      626
                      
                      
                      
                      70
                      
                      
                      
                      2,098Impairment
      of long-lived assets
                      
                      
                      647
                      
                      
                      
                      754
                      
                      
                      
                      -
                      
                      
                      
                      1,401Income
      (loss) before income taxes
                      
                      
                      (1,853
                      )
                      
                      
                      1,694
                      
                      
                      
                      (3,157
                      )
                      
                      
                      (3,316
                      )
 
 (1) The
sales increase in the Buffet segment was primarily from the acquisition of 20
Barnhill’s Buffet restaurants.  The food cost as a percentage of
revenue increased this year primarily due to increases in wholesale food prices
as compared to the prior year.  Labor cost decreased as a percentage
of revenue this year primarily due to a lower labor cost in the Barnhill’s
Buffet restaurants as compared to our existing buffet
restaurants.  Income (loss) before income taxes increased primarily
from the additional income from the Barnhill acquisition.
 
 (2) The
food cost as a percentage of revenue in the Non-Buffet segment decreased this
year primarily due to the addition of one Casa Bonita restaurant which has lower
food cost than the other Non-Buffet restaurants offset by increases in wholesale
food prices as compared to the prior year.  Labor cost increased as a
percentage of revenue this year primarily due to minimum wage increases in the
applicable markets.  Income (loss) before income taxes increased
primarily as a result of lower impairment costs in the current fiscal year
compared to the prior fiscal year.
  Comparison
of Fiscal 2009 to Fiscal 2008
  Total
revenues increased $29.1 million or 42.4% from $68.7 million in fiscal 2008 to
$97.8 million in fiscal 2009.  Sales from the Company’s 3 new store
openings and 27 newly acquired stores in fiscal 2009 and fiscal 2008 were a net
increase of approximately $36.7 million. Sales lost from 14 closed stores
represented a net decrease of approximately $4.2 million.  Same store
sales decreased approximately 6.4% primarily due to macro economic factors and
increased competition in certain markets.
 
 Food
costs as a percentage of total revenues increased from 36.9% during in fiscal
2008 to 38.9% in fiscal 2009.  The increase in food costs as a
percentage of total revenue was primarily attributable to the higher wholesale
prices for most commodities.
 
 Labor
costs as a percentage of total revenues decreased from 34.8% in fiscal 2008 to
32.5% in fiscal 2009 while actual labor costs increased by $7.9
million.  The decrease as a percentage of total revenues was primarily
attributable to lower labor costs in the newly acquired Barnhill restaurants as
compared to the existing restaurants.  Labor costs decreased as a
percentage of total revenues despite minimum wage increases in every state in
which the Company operated in fiscal 2009 and fiscal 2008. In response to the
increased costs, the Company has and will continue to attempt to increase menu
pricing with the goal of maintaining food and labor costs as a percentage of
sales consistent with prior results, although there can be no assurance that
expected results will actually occur (see the discussion under “Risk
Factors”).
 
 Occupancy
and other expenses as a percent of total revenues decreased from 22.1% in fiscal
2008 to 20.2% in fiscal 2009. The decrease as a percentage of total revenues was
primarily attributable to a decrease in facility costs as a percentage of
revenues in the current year compared to the prior year. The lower facility cost
as percentage of revenue was the result of lower negotiated and straight-line
rent expense.
 
 General and administrative expenses as
a percentage of total revenues decreased from 5.2% in fiscal 2008 to 3.0% in
fiscal 2009.While the
Company has added 30 new stores and closed 14 stores, there has been no
significant increase in administrative costs or personnel.
 
 13
 Depreciation
and amortization expense increased from $2,098,000 in fiscal 2008 to $2,622,000
in fiscal 2009. The increase was primarily attributable to 30 new store openings
since last year partially offset by the closure of 14 stores.
 
 Impairment
of long-lived assets decreased from 2.0% in fiscal 2008 to 0.2% in fiscal 2009.
The impairment in fiscal 2008 totaled $238,000 for the impairment of one
restaurant’s leasehold improvements and $8,000 for franchise costs where
projected undiscounted cash flows were less than the net book value of the
assets and approximately $29,000 of impairment to equipment held for future use
and approximately $1,126,000 for the impairment of goodwill.  The
impairment in fiscal 2009 totaled $212,000 for leasehold
improvements.
 
 Interest
expense as a percent of total revenues was 1.2% in fiscal 2008 and in fiscal
2009.  Interest expense increased from $858,000 in fiscal 2008 to
$1,153,000 in fiscal 2009 primarily from the Wells Fargo debt used to acquire 20
Barnhill's Buffet restaurants.  However, the interest expense as a percent
of total revenue remained the same because the revenues also increased primarily
from the Barnhills acquisition.
 
 The
income tax provision (benefit) totaled $394,000 or 29.5% of pre-tax income in
fiscal 2009 as compared to $(1,315,000) or (39.7%) of pre-tax income in fiscal
2008.
 
 Liquidity
and Capital Resources
 
 In recent
years, the Company has financed operations through a combination of cash on
hand, cash provided from operations, available borrowings under bank lines of
credit and loans from the principal shareholder.
  As of
January 26, 2009, the Company had $1,118,000 in cash.  Cash and cash
equivalents increased by $382,000 during the fiscal year ended January 26, 2009.
The net working capital deficit was $(9,041,000) and $(8,348,000) at January 26,
2009 and January 28, 2008, respectively.  The Company spent
approximately $7.7 million on capital expenditures in fiscal 2009 including
approximately $5.7 million to purchase 20 Barnhill’s Buffet
restaurants.
  Cash
provided by operations was $3.6 million for fiscal 2009 and $3.0 million for
fiscal 2008.
 
 The Company had a $3,000,000 unsecured
revolving line of credit with M&I Marshall & Ilsley
Bank.  The M&I revolving line of credit bore interest at LIBOR
plus two percent per annum.   The Company replaced the M&I
revolving line of credit on January 31, 2008 with a Credit Facility with Wells
Fargo Bank, N.A.  The Credit Facility included a
$7,000,000 term loan and a $2,000,000 revolving line of credit.  The
Credit Facility was utilized to retire the Company’s unsecured revolving line of
credit with M&I Marshall & Ilsley Bank; to fund the acquisition of
assets associated with sixteen (16) Barnhill’s Buffet restaurants; and to
provide additional working capital.  On February 29, 2008 the Company
amended its Credit Facility with Wells Fargo Bank N.A., increasing the term loan
principal from $7,000,000 to $8,000,000. The increase in the Credit Facility was
used to fund the acquisition of four Barnhill’s Buffet by its newly formed,
wholly-owned, independently capitalized subsidiary, Starlite Holdings,
Inc.  The Credit Facility is guaranteed by Star Buffet’s subsidiaries and
bears interest, at the Company’s option, at Wells Fargo’s base rate plus 0.25%
or at LIBOR plus 2.00%.  The Credit Facility is secured by a first priority
lien on all of the Company’s assets, except for those assets that are currently
pledged as security for existing obligations, in which case Wells Fargo has a
second lien.  The term loan matures on January 31, 2012 and
provides for principal to be amortized at $175,000 per quarter for the initial
six quarters; $225,000 for the next nine quarters; with any
remaining balance due at maturity.  Interest is payable
monthly.  The term loan balance was $5,475,000 on April 22,
2009.  The $2,000,000 revolving line of credit matures on January 31,
2012.  Interest on the revolver is payable monthly.  As of April 22,
2009, the revolving line of credit balance was $700,000.
 
 On
February 1, 2001, the Company entered into a $460,000 15 year fixed rate first
real estate mortgage with Victorium Corporation. The mortgage has monthly
payments including interest of $6,319. The interest rate is 7.5%. The mortgage
is secured by the Company’s restaurant in Ocala, Florida. The balance at January
26, 2009 and January 28, 2008 was $282,000 and $311,000,
respectively.
 
 On May 2,
2002, the Company entered into a $1,500,000 ten year fixed rate first real
estate mortgage with M&I Marshall & Ilsley Bank.  The mortgage
has monthly payments including interest of $17,894. The interest rate is7.5% for
the first five years with interest for years six to ten calculated at the five
year LIBOR rate plus 250 basis points with a floor of 7.5%. The mortgage is
secured by the Company’s HomeTown Buffet restaurant in Scottsdale, Arizona. The
balance at January 26, 2009 and January 28, 2008 was $451,000 and $624,000,
respectively.
 
 14
 On
December 19, 2003, the Company entered into a $1,470,000 six year fixed rate
first real estate mortgage with Platinum Bank.  The mortgage has
monthly payments including interest of $12,678 with a balloon payment of
$1,029,000 due on December 19, 2009. The interest rate is 7.25%.  The
mortgage is secured by the Company’s BuddyFreddys restaurant in Plant City,
Florida.  The balance at January 26, 2009 and January 28, 2008 was
$1,029,000 and $1,115,000, respectively.  The Company will attempt to
refinance the mortgage in fiscal 2010 although there can be no assurance that
the financing can be completed.
 
 On
February 25, 2004, the Company entered into a $1,250,000 seven year fixed rate
first real estate mortgage with M&I Marshall & Ilsley
Bank.  The mortgage has monthly payments including interest of
$18,396. The interest rate is 6.1%. The mortgage is secured by the Company’s
HomeTown Buffet restaurant in Yuma, Arizona. The balance at January 26, 2009 and
January 28, 2008 was $203,000 and $404,000, respectively.
 
 On July
29, 2004, the Company entered into a $550,000 ten year fixed rate first real
estate mortgage with Heritage Bank.  The mortgage had monthly payments
including interest of $6,319. The interest rate was 6.75%. The mortgage was
secured by the Company’s JB’s Restaurant in Great Falls, Montana. The mortgage
was paid in full with a loan from Stockman Bank on August 15, 2008.
 
 On
October 27, 2004, the Company entered into a $1,275,000 five year fixed rate
first real estate mortgage with Bank of Utah.  The mortgage has
monthly payments including interest of $14,371 with a balloon payment of
$719,000 due on October 26, 2009.   The interest rate is 6.25%.
The mortgage requires the Company to maintain specified minimum levels of net
worth, limits the amount of capital expenditures and requires the maintenance of
certain fixed charge coverage ratios.  The mortgage is secured by the
Company’s HomeTown Buffet restaurant in Layton, Utah. The balance at January 26,
2009 and January 28, 2008 was $719,000 and $840,000,
respectively.  The Company refinanced the mortgage in the first
quarter of fiscal 2010 for five years.
 
 On
September 16, 2005, the Company entered into a $300,000 five year fixed rate
real estate mortgage with Naisbitt Investment Company.  The mortgage
has monthly payments including interest of $5,870. The interest rate is 6.5%.
The mortgage is secured by the Company’s JB’s Restaurant in Rexburg,
Idaho.  The balance at January 26, 2009 and January 28, 2008 was
$108,000 and $169,000, respectively.
 
 On June
1, 2006, the Company entered into a $564,000 five year fixed rate first real
estate mortgage with Dalhart Federal Savings and Loan.  The mortgage
has monthly payments including interest of $6,731. The interest rate is 7.63%.
The mortgage is secured by the Company’s K-BOB’S Steakhouse in Dumas, Texas. The
balance at January 26, 2009 and January 28, 2008 was $449,000 and $497,000,
respectively.
 
 On
November 8, 2006, the Company entered into a $595,000 five year fixed rate first
real estate mortgage with Wells Fargo Bank.  The mortgage has monthly
payments including interest of $8,055. The interest rate is 7.5%. The mortgage
is secured by the Company’s Pecos Diamond Steakhouse in Artesia, New Mexico. The
balance at January 26, 2009 and January 28, 2008 was $401,000 and $461,000,
respectively.
 
 On
January 30, 2007, the Company entered into a $900,000 five year fixed rate
real estate mortgage with Fortenberry’s Beef of Magee, Inc.  The mortgage
has monthly payments including interest of $17,821. The interest rate is
7%.  The mortgage is secured by the Company’s Western Sizzlin restaurant in
Magee, Mississippi. The balance at January 26, 2009 and January 28, 2008 was
$573,000 and $740,000, respectively.
 
 On
May 29, 2007, the Company entered into a $500,000 five year fixed rate real
estate mortgage with Dalhart Federal Savings and Loan Association.  The
mortgage has monthly payments including interest 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’s Bar-H Steakhouse
restaurant in Dalhart, Texas.  The balance at January 26, 2009 and
January 28, 2008 was $440,000 and $477,000, respectively.
 
 On
June 19, 2007, the Company entered into a $520,000 five year fixed rate
real estate mortgage with Farmers Bank and Trust.  The mortgage has monthly
payments including interest of $4,676 with a balloon payment of $407,313 due on
June 19, 2012.  The interest rate is 7%.  The mortgage is secured
by the Company’s Western Sizzlin restaurant in Magnolia,
Arkansas.   On July 11, 2008, the Company entered into a
$604,000 five year fixed rate real estate mortgage with Farmers Bank and
Trust.  The mortgage has monthly payments including interest of
$5,264.  The interest rate is 6.5%.  The mortgage is secured by the
Company’s Western Sizzlin restaurant in Magnolia, Arkansas.   The
balance at January 26, 2009 and January 28, 2008 was $587,000 and $508,000,
respectively.
 
 15
 On June
27, 2008, the Company entered into an $86,000 five year fixed rate second real
estate mortgage with Dalhart Federal Savings and Loan.  The mortgage
has monthly payments including interest of $1,387. The interest rate is 6.75%.
The mortgage is secured by the Company’s K-BOB’S Steakhouse in Dumas,
Texas.  In addition, the Company entered into a $140,000 five year
fixed rate second real estate mortgage with Dalhart Federal Savings and Loan
Association.  The mortgage has monthly payments including interest of
$2,756.  The interest rate is 6.75%.  The mortgage is secured by the
Company’s Bar-H Steakhouse restaurant in Dalhart, Texas.  The funds
from both loans were used to reduce the obligation to Wells
Fargo.  The refinancing of these real estate mortgages are part of the
Company’s plan to reduce the term loan in the current year through cash flow
from operations, asset sales and mortgage refinancing. On August 15, 2008, the
Company purchased the land and building in our previously leased 4B’s restaurant
in Great Falls, Montana for $475,000.  The Company entered into a
$354,000 15 year fixed rate real estate mortgage with Stockton
Bank.  The mortgage has monthly payments including interest of
$3,134.  The interest rate is 6.75%.  In addition, the
Company refinanced the JB’s restaurant in Great Falls, Montana.  The
Company entered into a $655,000 15 year fixed rate real estate mortgage with
Stockton Bank.  The mortgage has monthly payments including interest
of $5,805.  The interest rate is 6.75%.  The Company paid
its real estate mortgage with US Bank formerly Heritage Bank in
full.
 
 During
fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert
E. Wheaton, a principal shareholder, officer and director of the Company. 
This loan dated June 15, 2007 is subordinated to the obligation to Wells
Fargo Bank, N.A. and bears interest at 8.5%. In June, 2008, the Company borrowed
an additional $592,000 from Mr. Wheaton under the same terms. This resulted in
an increase in the subordinated note balance from $1,400,000 to
$1,992,000.  The Company expensed and paid $154,000 to Mr. Wheaton for
interest during fiscal 2009. The principal balance and any unpaid interest is
due and payable in full on June 5, 2012. The Company used the funds
borrowed from Mr. Wheaton for working capital requirements.
 
 The
Company believes that cash on hand, availability under the revolving line of
credit and cash flow from operations will be sufficient to satisfy working
capital, capital expenditure and refinancing requirements during the next 12
months.  Additionally, management does not believe that the net
working capital deficit will have any material effect on the Company’s ability
to operate the business or meet obligations as they come
due.  However, there can be no assurance that cash on hand,
availability under the revolving line of credit and cash flow from operations
will be sufficient to satisfy its working capital, capital expenditure and
refinancing requirements.  Furthermore, given uncertain financial
market conditions on February 20, 2009, the Board of Directors voted to
indefinitely suspend the annual dividend on the outstanding common stock of the
Company.
 
 Off-balance
Sheet Arrangements
 
 As of
January 26, 2009, the Company did not have any off-balance sheet arrangements as
defined in Item 303(a) (4) (ii) of Regulation S-K.
 
 Commitments
and Contractual Obligations
 
 The
Company’s contractual obligations and commitments principally include
obligations associated with our outstanding indebtedness and future minimum
operating and capital lease obligations as set forth in the following
table:
 
 (Dollars
      in thousands)Contractual Obligations:
                  
                  Total
                  
                  
                  Less
      than
                    one year
                  
                  
                  One
      to
                    three years
                  
                  
                  Three
      to
                    five years
                  
                  
                  Greater
      than
                    five yearsLong-term
      debt (1)(2)
                  
                  $
                  15,591
                  
                  
                  $
                  3,548
                  
                  
                  $
                  3,158
                  
                  
                  $
                  7,638
                  
                  
                  $
                  1,247Operating
      leases (3)
                  
                  
                  13,991
                  
                  
                  
                  2,858
                  
                  
                  
                  3,932
                  
                  
                  
                  3,050
                  
                  
                  
                  4,151Capital
      leases (3)
                  
                  
                  54
                  
                  
                  
                  54
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Purchase
      commitments
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      contractual cash obligations
                  
                  $
                  29,636
                  
                  
                  $
                  6,460
                  
                  
                  $
                  7,090
                  
                  
                  $
                  10,688
                  
                  
                  $
                  5,398
 
 (1) See
Note 5 to the consolidated financial statements for additional
information.
 (2)
Long-term debt includes note payable to officer.
 (3) See
Note 6 to the consolidated financial statements for additional
information.
  16
 Impact
of Inflation
 
 Management
recognizes that inflation has an impact on food, construction, labor and benefit
costs, all of which can significantly affect the Company’s operations.
Historically, the Company has been able to pass on certain increased costs due
to these inflationary factors along to its customers because those factors have
impacted nearly all restaurant companies.
  Critical
Accounting Policies and Judgments
 
 The Company prepares its consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America. The Company’s consolidated financial statements
are based on the application of certain accounting policies, the most
significant of which are described in Note 1—Summary of Significant Accounting
Policies to the audited consolidated financial statements for the year ended
January 26, 2009, included in the Company’s Annual Report filed on
Form 10-K. Certain of these policies require numerous estimates and
strategic or economic assumptions that may prove inaccurate or may be subject to
variations and may significantly affect the Company’s reported results and
financial position for the current period or future periods. Changes in the
underlying factors, assumptions or estimates in any of these areas could have a
material impact on the Company’s future financial condition and results of
operations. The Company considers the following policies to be the most critical
in understanding the judgments that are involved in preparing its consolidated
financial statements.
  Receivables
  Receivables
are stated at an amount management expects to collect and provides for an
adequate reserve for probable uncollectible amounts.  Amounts deemed to be
uncollectible are written off through a charge to earnings and a credit to a
valuation allowance based on management’s assessment of the current status of
individual balances.  A receivable is written off when it is determined
that all collection efforts have been exhausted.  The Company did not have
a valuation allowance as of January 26, 2009 and January 28, 2008.
  Notes
Receivable
  Notes
receivable are stated at an amount management expects to collect and provides
for an adequate reserve for probable uncollectible amounts.  Amounts deemed
to be uncollectible are written off through a charge to earnings and a credit to
a valuation allowance based on management’s assessment of the current status of
individual balances.  A note receivable is written off when it is
determined that all collection efforts have been exhausted.  The Company
did not have a valuation allowance as of January 26, 2009 and January 28,
2008.
 
 Income
Taxes
 
 Periodically,
the Company records (or reduces) the valuation allowance against deferred tax
assets to the amount that is more likely than not to be realized based upon
recent past financial performance, tax reporting positions, and expectations of
future taxable income.  The Company expects to continue to record a
valuation allowance on certain future tax benefits as required under SFAS
109.  The assets are evaluated each period under the requirements of
SFAS 109. Currently, the Company does not have a valuation allowance against
deferred tax assets since the Company expects to utilize all deferred tax
assets.  FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 requires
recognition in the consolidated financial statements of the impact of a tax
position if it is more likely than not the tax position will be sustained upon
examination based on the technical merits of the position. The Company does not
have any tax positions that require recognition under FIN 48 as of January 26,
2009 and April 22, 2009.
  Property,
Buildings and Equipment
 
 Property
and equipment and real property under capitalized leases are carried at cost
less accumulated depreciation and amortization. Depreciation and amortization
are provided using the straight-line method over the following useful
lives:
 
 17
 YearsBuildings
                  40Building
      and leasehold improvements
                  15
      – 20Furniture,
      fixtures and equipment
                  5 –
      8
 
 Building
and leasehold improvements are amortized over the lesser of the life of the
lease or estimated economic life of the assets. The life of the lease includes
renewal options determined by management at lease inception as reasonably likely
to be exercised. If a previously scheduled lease option is not exercised, any
remaining unamortized leasehold improvements may be required to be expensed
immediately which could result in a significant charge to operating results in
that period.
 
 Property
and equipment in non-operating units or stored in warehouses held for remodeling
or repositioning is not depreciated and is reclassed on the balance sheet as
property, building and equipment held for future use.
 
 Property
and equipment placed on the market for sale is not depreciated and is reclassed
on the balance sheet as property held for sale.
 
 Repairs
and maintenance are charged to operations as incurred. Major equipment
refurbishments and remodeling costs are generally capitalized.
 
 The
Company's accounting policies regarding buildings and equipment include certain
management judgments regarding the estimated useful lives of such assets, the
residual values to which the assets are depreciated and the determination as to
what constitutes increasing the life of existing assets. These judgments and
estimates may produce materially different amounts of depreciation and
amortization expense than would be reported if different assumptions were used.
As discussed further below, these judgments may also impact the Company's need
to recognize an impairment charge on the carrying amount of these assets as the
cash flows associated with the assets are realized.
 
 Impairment
of Goodwill
 
 Goodwill
and other intangible assets primarily represent the excess of the purchase price
paid over the fair value of the net assets acquired in connection with business
acquisitions. As of January 29, 2002, the Company adopted SFAS No. 142, Goodwill
and Other Intangible Assets (“SFAS 142”). In accordance with SFAS 142, the
Company ceased amortizing goodwill recorded in past business combinations
effective as of January 29, 2002. As a result, there is no charge for goodwill
amortization expense contained in the Company’s consolidated statements of
operations for the year ended January 26, 2009.  The Company recorded
an impairment charge of $1,126,000 for goodwill in fiscal year ended January 28,
2008.
 
 SFAS 142
requires that goodwill be tested for impairment by comparing the fair value of
each reporting unit to the carrying amount of the reporting
unit.  Subsequent to the adoption of SFAS 142, the Company evaluates
goodwill for impairment annually or when a triggering event occurs that
indicates a potential impairment may have occurred in accordance with SFAS
142.  Future impairments of goodwill, if any, will adversely affect
the results of operations in the periods recognized.
 
 Impairment
of Long-Lived Assets
 
 The
Company determines that an impairment write-down is necessary for locations
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. As of January 29, 2002, the Company adopted
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(“SFAS 144”). In accordance with SFAS 144, recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.  Any impairment which would adversely affect
operating results in the affected period.
 
 Judgments
made by the Company related to the expected useful lives of long-lived assets
and the ability of the Company to realize undiscounted net cash flows in excess
of the carrying amounts of such assets are affected by factors such as the
ongoing maintenance and improvements of the assets, changes in economic
conditions, and changes in operating performance. As the Company assesses the
ongoing expected net cash flows and carrying amounts of its long-lived assets,
these factors could cause the Company to realize a material impairment charge
and could adversely affect operating results in any period.
 
 18
 Insurance
Programs
 
 Historically,
the Company has purchased first dollar insurance for workers’ compensation
claims; high-deductible primary property coverage; and excess policies for
casualty losses.  Effective January 1, 2008, the Company modified its
program for insuring casualty losses by lowering the self-insured retention
levels from $2 million per occurrence to $100,000 per
occurrence.  Accruals for self-insured casualty losses include
estimates of expected claims payments.  Because of large, self-insured
retention levels, actual liabilities could be materially different from
calculated accruals.
 
 New
Accounting Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157,
Fair Value Measurements
(SFAS 157). In February 2008, FASB issued FSP No. FAS 157-2 which delayed
the applicability of SFAS  157’s fair-value measurements of certain
nonfinancial assets and liabilities for one year. In October 2008,the FASB issued FSP No.
FAS 157-3, Determining
the Fair value of a Financial Asset When the Market for That Asset Is Not Active(collectively SFAS 157). SFAS 157 establishes a framework for
measuring the fair value of assets and liabilities. This framework is intended
to provide increased consistency in how fair value determinations are made under
various existing accounting standards which permit, or in some cases require,
estimates of fair market value. SFAS 157 also expands financial statement
disclosure requirements about a Company’s use of fair value measurements,
including the effect of such measures on earnings. SFAS 157 was adopted in the
beginning of fiscal 2009 for the Company’s financial assets and liabilities. The
Company does not anticipate the application of SFAS 157 to nonfinancial
assets and nonfinancial liabilities will have a material impact on its
consolidated financial statements.
  In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement
No.115 (“SFAS 159”). This standard amends SFAS 115, Accounting for Certain Investment in
Debt and Equity Securities, with respect to accounting for a transfer to
the trading category for all entities with available-for-sale and trading
securities electing the fair value option. This standard allows companies to
elect fair value accounting for many financial instruments and other items that
currently are not required to be accounted as such, allows different
applications for electing the fair value option for a single item or groups of
items, and requires disclosures to facilitate comparisons of similar assets and
liabilities that are accounted for differently in relation to the fair value
option. SFAS 159 is effective for fiscal years beginning after
November 15, 2007, which for us is fiscal 2009. Our adoption of
SFAS 159 at the beginning of fiscal 2009 did not have a material impact on
our consolidated financial position or results of operations.
  Accounting
Pronouncements Not Yet Adopted
 
 In
December 2007, the FASB issued SFAS No. 141(R) (revised 2007), Business Combinations. (“SFAS
141(R)”) will change the accounting for business combinations. Under SFAS
141(R), an acquiring entity will be required to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions. SFAS 141(R) will change the accounting treatment
and disclosures for certain specific items in a business combination. SFAS
141(R) became effective for the Company at the beginning of fiscal 2010.
Acquisitions, if any, after the effective date will be accounted for in
accordance with SFAS 141(R).
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements (“SFAS 160”). SFAS 160 clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement also requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the non-controlling interest and requires disclosure, on the face of the
consolidated statement of income, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. In addition,
this statement establishes a single method of accounting for changes in a
parent’s ownership interest in a subsidiary that does not result in
deconsolidation and requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. SFAS 160 became effective for the
Company at the beginning of fiscal 2010. This statement will be applied
prospectively, except for the presentation and disclosure requirements, which
will be applied retrospectively for all periods presented. The Company does not
currently have any minority or non-controlling interests in a subsidiary and
adoption of SFAS 160 will not have a material impact on its consolidated
financial statements.
 
 19
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an Amendment of SFAS No. 133
(“SFAS 161”). SFAS 161 modifies existing requirements to include qualitative
disclosures regarding the objectives and strategies for using derivatives, fair
value amounts of gains and losses on derivative instruments and disclosures
about credit-risk-related contingent features in derivative agreements. In
addition, SFAS 161 requires the cross-referencing of derivative disclosures
within the consolidated financial statements and notes. This statement is
effective for fiscal years and interim periods be joining after November 15,
2008.  For the Company the statement is effective at the beginning of
the first quarter of its 2010 fiscal year.  The Company does not
currently have any derivative instruments and hedging activities and adoption of
SFAS 161 will not have a material impact on its consolidated financial
statements.
 
 In May
2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion (Including Partial cash
Settlement) (“APB 14-1”). APB 14-1 requires that the liability and equity
components of convertible debt instruments that may be settled in cash (or other
assets) upon conversion (including partial cash settlement) be separately
accounted for in a manner that reflects an issuer’s nonconvertible debt
borrowing rate. The resulting debt discount is amortized over the period the
convertible debt is expected to be outstanding as additional non-cash interest
expense. APB 14-1 is effective for the Company at the beginning of its 2010
fiscal year and early adoption is not permitted. Retrospective application to
all periods presented is required except for instruments that were not
outstanding during any of the periods that will be presented in the annual
financial statements for the period of adoption but were outstanding during an
earlier period. The Company does not currently have any convertible debt
instruments and adoption of APB 14-1 will not have a material impact on its
consolidated financial statements.
  In
May 2008, FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (“SFAS 162”), which is effective 60 days following the
Securities and Exchange Commission’s (“SEC’s”) approval of the Public Company
Accounting Oversight Board (“PCAOB”) Auditing amendments to AU Section 411,
The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. SFAS 162 is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with United States generally accepted
accounting principles (“GAAP”) for nongovernmental entities. Prior to the
issuance of SFAS 162, the GAAP hierarchy was defined in the American Institute
of Certified Public Accountants (“AICPA”) Statement on Auditing Standards
(“SAS”) No. 69, The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.
Although the Company has not completed its analysis of SFAS 162, it is not
expected to have a material impact its consolidated financial
statements.
 In June
2008, the FASB ratified Emerging Issues Task Force (EITF) Issue 07-5, Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF
07-5”). EITF 07-5 provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument’s contingent
exercise and settlement provisions. It also clarifies the impact of foreign
currency denominated strike prices and market-based employee stock option
valuation instruments on the evaluation. EITF 07-5 is effective for the Company
at the beginning of its 2010 fiscal year and cannot be adopted early. The
Company does not currently have any instrument (or an embedded feature) that is
indexed to an entity’s own stock and adoption of EITF 07-5 will not have a
material impact on its consolidated financial statements.
 
 Item
8.Financial Statements and
Supplementary Data
 
 See the
Index to Consolidated Financial Statements included at "Item 15. Exhibits and
Financial Statement Schedules"
 
 Item
9. Changes in and
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 and notes to the consolidated financial
statements. The financial statements were prepared in accordance with the
accounting principles generally accepted in the U.S. and include certain amounts
based on management’s judgment and best estimates. Other financial information
presented is consistent with the financial statements.
  20
 Management
is also responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934. The Company’s internal control over financial
reporting is designed under the supervision of the Company’s principal executive
and accounting officers in order to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. The Company’s internal control over financial reporting includes
those policies and procedures that:
  (i)
              Pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of assets of the
      Company;
  (ii)
              Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of consolidated financial statements in accordance with United
      States generally accepted accounting principles, and that receipts and
      expenditures of the Company are being made only in accordance with
      authorizations of management and directors of the Company;
    and
  (iii)
              Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the consolidated financial
      statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  Our
principal executive officer and principal accounting officer assessed the
effectiveness of the Company’s internal control over financial reporting as of
January 26, 2009. In making this assessment, management used the criteria
established in Internal Control–Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(“COSO”).   Based on this evaluation, our principal
executive officer and principal accounting officer have concluded that the
internal controls over financial reporting were not effective as
of  January 26, 2009 and that two significant deficiencies existed for
the period covered by this Annual Report on Form 10-K. The two significant
deficiencies identified included:
  ·
                Inadequate
      segregation of duties (significant deficiency); and·
                Incorrect
      application of gain contingency (significant
      deficiency).
  A
significant deficiency is a deficiency, or combination of deficiencies in
internal control over financial reporting, that adversely affects the entity’s
ability to initiate, authorize, record, process, or report financial data
reliably in accordance with United States generally accepted accounting
principles such that there is more than a remote likelihood that a misstatement
of the entity’s consolidated financial statements that is more than
inconsequential will not be prevented or detected by the entity’s internal
control. A material weakness is a deficiency or a combination of deficiencies in
internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of the annual or interim consolidated
financial statements will not be prevented or detected on a timely
basis.
  This is a
small public company. Effective internal control contemplates segregation of
duties so that no one individual handles a transaction from inception to
completion. We do not employ enough accounting personnel to permit an adequate
segregation of duties in all respects and thus a significant deficiency in our
internal control exists. Management continues its evaluation of staffing levels
and responsibilities so as to better comply with the segregation of duties
requirements.
  The Company incorrectly
recorded a gain contingency that offset contingent liabilities.  This
incorrect application was corrected in the consolidated financial
statements.
 This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
 
 There have been no changes
to our internal control over financial reporting identified in connection with
our evaluation that occurred during our fourth fiscal quarter that materially
affects, or is reasonably likely to materially affect, our internal control over
financial reporting.
 
 Item
9B. Other
Information
 
 None.
 
 21
 PART
III
 
 Item
10. Director, Executive
Officers and Corporate Governance
 
 Certain
information concerning the current directors and executive officers of the
Company is contained in Item 1 of Part I of this Annual Report on Form
10-K.
 
 The
remaining information is hereby incorporated by reference to the Company’s
definitive Proxy Statement for our 2009 Annual Meeting of Stockholders, to be
filed with the Commission within 120 days of January 26, 2009.
 
 Item
11. Executive
Compensation
 
 The
information pertaining to executive compensation is hereby incorporated by
reference to the Company’s definitive Proxy Statement for our 2009 Annual
Meeting of Stockholders, to be filed with the Commission within 120 days of
January 26, 2009.
 
 Item
12.Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
 
 The
information pertaining to security ownership of certain beneficial owners and
management and equity compensation plan information is hereby incorporated by
reference to the Company’s definitive Proxy Statement for our 2009 Annual
Meeting of Stockholders, to be filed with the Commission within 120 days of
January 26, 2009.
 
 Item
13.Certain Relationships and
Related Transactions, and Director Independence
 
 The
information pertaining to certain relationships and related transactions is
hereby incorporated by reference to the Company’s definitive Proxy Statement to
for our 2009 Annual Meeting of Stockholders, to be filed with the Commission
within 120 days of January 26, 2009.
 
 Item
14.Principal Accountant Fees
and Services
 
 The
information with respect to principal accountant fees and services is hereby
incorporated by reference to the Company’s definitive Proxy Statement for our
2009 Annual Meeting of Stockholders, to be filed with the Commission within 120
days of January 26, 2009.
 
 PART
IV
 
 Item
15.Exhibits and Financial
Statement Schedules
 
 (a)(1)    
Index to Consolidated Financial Statements:
 
 Page NumberReport
      of Independent Registered Public Accounting Firm
                    F-1Consolidated
      Balance Sheets — as of January 26, 2009 and January 28,
    2008
                    F-2Consolidated
      Statements of Operations — for the 52-weeks ended January 26, 2009
      and  January 28, 2008
                    F-4Consolidated
      Statements of Stockholders' Equity — for the 52-weeks ended January 26,
      2009 andJanuary
      28, 2008
                    F-5Consolidated
      Statements of Cash Flows — for the 52-weeks ended January 26, 2009
      and  January 28, 2008
                    F-6Notes
      to Consolidated Financial Statements
                    F-7
 
 (a)(2)     Index
to Financial Statement Schedules:
 
 All
schedules are omitted since the required information is not present in amounts
sufficient to require submission of the schedule, or because the information
required is included in the consolidated financial statements or the notes
thereto.
 
 (a)(3)     Exhibits:
 
 An
"Exhibit Index" has been filed as a part of this Form 10-K beginning on Page E-1
hereof and is incorporated herein by reference.
 
 22
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
  STAR
      BUFFET, INC.
                                        (Registrant)April
      29, 2008
                                      By:
                                      /s/ Robert
      E. WheatonRobert
      E. Wheaton
                                        Chief
      Executive Officer and President
                                        (Principal
      Executive Officer)April
      29, 2008
                                      By:
                                      /s/
      Ronald E. DowdyRonald
      E. Dowdy
                                        Group
      Controller, Treasurer and Secretary
                                        (Principal
      Accounting Officer)
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
 
 Signature
                                                  
                                                  Title
                                                  Date/s/Robert E.
      Wheaton
                                                  
                                                  Chief
      Executive Officer,
                                                  April
      29, 2009Robert
      E. Wheaton
                                                  
                                                  President
      and Director/s/Ronald E.
      Dowdy
                                                  
                                                  Group
      Controller, Treasurer
                                                  April
      29, 2009Ronald
      E. Dowdy
                                                  
                                                  and
      Secretary/s/Thomas G.
      Schadt
                                                  
                                                  Director
                                                  April
      28, 2009Thomas
      G. Schadt/s/Phillip “Buddy”
      Johnson
                                                  
                                                  Director
                                                  April
      28, 2009Phillip
      “Buddy” Johnson/s/Craig B.
      Wheaton
                                                  
                                                  Director
                                                  April
      28, 2009Craig
      B. Wheaton/s/B. Thomas M. Smith,
      Jr.
                                                  
                                                  Director
                                                  April
      28, 2009B.
      Thomas M. Smith, Jr./s/ Todd S.
      Brown
                                                  
                                                  Director
                                                  April
      28, 2009Todd
      S. Brown
 
 
 23
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
   To the
Stockholders
 
 STAR
BUFFET, INC. AND SUBSIDIARIES
 
 We have
audited the accompanying consolidated balance sheets of Star Buffet, Inc. and
Subsidiaries (a Delaware Corporation) as of January 26, 2009 and January 28,
2008, and the related consolidated statements of operations, stockholders'
equity and cash flows for the fiscal years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness 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 financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Star Buffet, Inc. and
Subsidiaries as of January 26, 2009 and January 28, 2008, and the results of
their operations and their cash flows for the fiscal years then ended, in
conformity with U.S. generally accepted accounting principles.
 
  /s/ Mayer
Hoffman McCann P.C.
 
 MAYER
HOFFMAN MCCANN P.C.
 
 Phoenix,
Arizona
 April 29,
2009
  F-1
  STAR
BUFFET, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 January
      26,
                        2009
                      
                      
                      January
      28,
                        2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      1,118,000
                      
                      
                      $
                      736,000Receivables,
      net
                      
                      
                      603,000
                      
                      
                      
                      431,000Income
      tax receivables
                      
                      
                      658,000
                      
                      
                      
                      665,000Inventories
                      
                      
                      647,000
                      
                      
                      
                      412,000Deferred
      income taxes
                      
                      
                      437,000
                      
                      
                      
                      319,000Prepaid
      expenses
                      
                      
                      271,000
                      
                      
                      
                      166,000Total
      current assets
                      
                      
                      3,734,000
                      
                      
                      
                      2,729,000Property,
      buildings and equipment:Property,
      buildings and equipment, net
                      
                      
                      26,529,000
                      
                      
                      
                      20,816,000Property
      and equipment under capitalized leases, net
                      
                      
                      37,000
                      
                      
                      
                      71,000Property
      and equipment leased to third parties,
    net
                      
                      
                      795,000
                      
                      
                      
                      3,126,000Property,
      buildings and equipment held for future use
                      
                      
                      4,143,000
                      
                      
                      
                      2,547,000Property
      held for sale
                      
                      
                      931,000
                      
                      
                      
                      931,000Total
      property, buildings and equipment
                      
                      
                      32,435,000
                      
                      
                      
                      27,491,000Other
      Assets:Notes
      receivable, net of current portion
                      
                      
                      704,000
                      
                      
                      
                      704,000Deposits
      and other
                      
                      
                      376,000
                      
                      
                      
                      623,000Total
      other assets
                      
                      
                      1,080,000
                      
                      
                      
                      1,327,000Deferred
      income taxes
                      
                      
                      2,263,000
                      
                      
                      
                      2,765,000Intangible
      assets:Goodwill
                      
                      
                      551,000
                      
                      
                      
                      551,000Other
      intangible assets, net
                      
                      
                      1,144,000
                      
                      
                      
                      839,000Total
      intangible assets
                      
                      
                      1,695,000
                      
                      
                      
                      1,390,000Total
      assets
                      
                      $
                      41,207,000
                      
                      
                      $
                      35,702,000
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
 
 
 (Continued)
 
 F-2
 STAR
BUFFET, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS (Continued)
 
 January
      26,
                        2009
                      
                      
                      January
      28,
                        2008LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable-trade
                      
                      $
                      4,192,000
                      
                      
                      $
                      4,959,000Checks
      written in excess of bank balance
                      
                      
                      527,000
                      
                      
                      
                      —Payroll
      and related taxes
                      
                      
                      1,859,000
                      
                      
                      
                      1,401,000Sales
      and property taxes
                      
                      
                      1,829,000
                      
                      
                      
                      1,297,000Rent,
      licenses and other
                      
                      
                      766,000
                      
                      
                      
                      808,000Income
      taxes payable
                      
                      
                      —
                      
                      
                      
                      176,000Revolving
      line of credit
                      
                      
                      —
                      
                      
                      
                      1,349,000Current
      maturities of obligations under long-term debt
                      
                      
                      3,548,000
                      
                      
                      
                      1,038,000Current
      maturities of obligations under capital leases
                      
                      
                      54,000
                      
                      
                      
                      49,000Total
      current liabilities
                      
                      
                      12,775,000
                      
                      
                      
                      11,077,000Deferred
      rent payable
                      
                      
                      1,353,000
                      
                      
                      
                      1,846,000Other
      long-term liability
                      
                      
                      493,000
                      
                      
                      
                      493,000Note
      payable to officer
                      
                      
                      1,992,000
                      
                      
                      
                      1,400,000Capitalized
      lease obligations, net of current
    maturities
                      
                      
                      —
                      
                      
                      
                      54,000Long-term
      debt, net of current maturities
                      
                      
                      10,051,000
                      
                      
                      
                      5,557,000Total
      liabilities
                      
                      
                      26,664,000
                      
                      
                      
                      20,427,000Stockholders'
      equity:Preferred
      stock, $.001 par value; authorized 1,500,000 shares;
                        none
      issued or outstanding
                      
                      
                      —
                      
                      
                      
                      —Common
      stock, $.001 par value; authorized 8,000,000 shares;
                        issued
      and outstanding 3,213,075 and 3,170,675 shares
                      
                      
                      3,000
                      
                      
                      
                      3,000Additional
      paid-in capital
                      
                      
                      17,743,000
                      
                      
                      
                      17,491,000(Accumulated
      deficit) Retained earnings
                      
                      
                      (3,203,000
                      )
                      
                      
                      (2,219,000
                      )Total
      stockholders' equity
                      
                      
                      14,543,000
                      
                      
                      
                      15,275,000Total
      liabilities and stockholders' equity
                      
                      $
                      41,207,000
                      
                      
                      $
                      35,702,000
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
 
 F-3
 STAR
BUFFET, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 
 Fifty-Two
                  
                  
                  Fifty-TwoWeeks
                  
                  
                  WeeksEnded
                  
                  
                  EndedJanuary 26, 2009
                  
                  
                  January 28, 2008Total
      revenues
                  
                  $
                  97,856,000
                  
                  
                  $
                  68,732,000Costs
      and expenses
                    Food
      costs
                  
                  
                  38,084,000
                  
                  
                  
                  25,356,000Labor
      costs
                  
                  
                  31,854,000
                  
                  
                  
                  23,913,000Occupancy
      and other expenses
                  
                  
                  19,769,000
                  
                  
                  
                  15,187,000General
      and administrative expenses
                  
                  
                  2,898,000
                  
                  
                  
                  3,549,000Depreciation
      and amortization
                  
                  
                  2,622,000
                  
                  
                  
                  2,098,000Impairment
      of long-lived assets
                  
                  
                  212,000
                  
                  
                  
                  1,401,000Total
      costs and expenses
                  
                  
                  95,439,000
                  
                  
                  
                  71,504,000Income
      (loss)  from operations
                  
                  
                  2,417,000
                  
                  
                  
                  (2,772,000
                  )Interest
      expense
                  
                  
                  (1,153,000
                  )
                  
                  
                  (858,000
                  )Interest
      income
                  
                  
                  13,000
                  
                  
                  
                  24,000Gain
      on sale of assets
                  
                  
                  —
                  
                  
                  
                  31,000Other
      income
                  
                  
                  60,000
                  
                  
                  
                  259,000Income
      (loss) before income taxes (benefit)
                  
                  
                  1,337,000
                  
                  
                  
                  (3,316,000
                  )Income
      tax provision (benefit)
                  
                  
                  394,000
                  
                  
                  
                  (1,315,000
                  )Net
      income (loss)
                  
                  $
                  943,000
                  
                  
                  $
                  (2,001,000
                  )Net
      income (loss) per common share— basic
                  
                  $
                  0.29
                  
                  
                  $
                  (0.63
                  )Net
      income (loss) per common share— diluted
                  
                  $
                  0.29
                  
                  
                  $
                  (0.63
                  )Weighted
      average shares outstanding — basic
                  
                  
                  3,213,000
                  
                  
                  
                  3,171,000Weighted
      average shares outstanding — diluted
                  
                  
                  3,213,000
                  
                  
                  
                  3,171,000
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
 
 F-4
 STAR
BUFFET, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
  
 RetainedAdditional
                                          
                                          
                                          Officer’s
                                          
                                          
                                          Earnings
                                          
                                          
                                          
                                          
                                          
                                          TotalCommon Stock
                                          
                                          
                                          Paid-In
                                          
                                          
                                          Notes
                                          
                                          
                                          (Accumulated)
                                          
                                          
                                          Treasury
                                          
                                          
                                          Stockholders'Shares
                                          
                                          
                                          Amount
                                          
                                          
                                          Capital
                                          
                                          
                                          Receivable
                                          
                                          
                                          Deficit)
                                          
                                          
                                          Stock
                                          
                                          
                                          EquityBalance
      at January 29, 2007
                                          
                                          
                                          3,171,000
                                          
                                          
                                          $
                                          3,000
                                          
                                          
                                          $
                                          17,491,000
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          1,684,000
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          19,178,000Dividend
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (1,902,000
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (1,902,000
                                          )Net
      loss
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (2,001,000
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (2,001,000
                                          )Balance
      at January 28, 2008
                                          
                                          
                                          3,171,000
                                          
                                          
                                          $
                                          3,000
                                          
                                          
                                          $
                                          17,491,000
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          (2,219,000
                                          )
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          15,275,000Stock
      Issued
                                          
                                          
                                          42,000
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          252,000
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          252,000Dividend
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (1,927,000
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (1,927,000
                                          )Net
      income
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          943,000
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          943,000Balance
      at January 26, 2009
                                          
                                          
                                          3,213,000
                                          
                                          
                                          $
                                          3,000
                                          
                                          
                                          $
                                          17,743,000
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          (3,203,000
                                          )
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          14,543,000
   The
accompanying notes are an integral part of the consolidated financial
statements.
 
 
 
 F-5
  STAR
BUFFET, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 Fifty-Two
                      Weeks
      Ended
                      January
      26,
                      2009
                    
                    
                    Fifty-Two
                      Weeks
      Ended
                      January
      28,
                      2008Cash
      flows from operating activities:Net
      (loss) income
                    
                    $
                    943,000
                    
                    
                    $
                    (2,001,000
                    )Adjustments
      to reconcile net income (loss) to netcash
      provided by operating activities:Depreciation
                    
                    
                    2,528,000
                    
                    
                    
                    1,980,000Amortization
      of franchise and licenses
                    
                    
                    94,000
                    
                    
                    
                    95,000Amortization
      of loan costs
                    
                    
                    178,000
                    
                    
                    
                    23,000Gain
      on sale of assets
                    
                    
                    ―
                    
                    
                    
                    (31,000
                    )Impairment
      of long-lived assets
                    
                    
                    212,000
                    
                    
                    
                    1,401,000Deferred
      income taxes, net
                    
                    
                    384,000
                    
                    
                    
                    (677,000
                    )Change
      in operating assets and liabilities:Receivables
                    
                    
                    (172,000
                    )
                    
                    
                    (51,000
                    )Inventories
                    
                    
                    (235,000
                    )
                    
                    
                    136,000Prepaid
      expenses
                    
                    
                    (105,000
                    )
                    
                    
                    154,000Deposits
      and other
                    
                    
                    247,000
                    
                    
                    
                    (378,000
                    )Deferred
      rent payable
                    
                    
                    (493,000
                    )
                    
                    
                    (38,000
                    )Accounts
      payable-trade
                    
                    
                    (767,000
                    )
                    
                    
                    2,302,000Income
      taxes receivable
                    
                    
                    7,000
                    
                    
                    
                    (665,000
                    )Income
      taxes payable
                    
                    
                    (176,000
                    )
                    
                    
                    (452,000
                    )Other
      accrued liabilities
                    
                    
                    949,000
                    
                    
                    
                    1,210,000Total
      adjustments
                    
                    
                    2,651,000
                    
                    
                    
                    5,009,000Net
      cash provided by operating activities
                    
                    
                    3,594,000
                    
                    
                    
                    3,008,000Cash
      flows from investing activities:Payments
      on notes receivable
                    
                    
                    —
                    
                    
                    
                    20,000Acquisition
      of property, buildings and equipment
                    
                    
                    (7,687,000
                    )
                    
                    
                    (4,392,000
                    )Interest
      income
                    
                    
                    —
                    
                    
                    
                    (1,000
                    )Proceeds
      from the sale of assets
                    
                    
                    2,000
                    
                    
                    
                    746,000Purchase
      of license and trademarks
                    
                    
                    —
                    
                    
                    
                    (35,000
                    )Net
      cash used in investing activities
                    
                    
                    (7,685,000
                    )
                    
                    
                    (3,662,000
                    )Cash
      flows from financing activities:Checks written in excess of bank balance
                    
                    
                    527,000
                    
                    
                    
                    —Proceeds
      from issuance of long-term debt
                    
                    
                    12,345,000
                    
                    
                    
                    1,988,000Payments
      on long-term debt
                    
                    
                    (5,341,000
                    )
                    
                    
                    (1,282,000
                    )Loan
      from officer
                    
                    
                    592,000
                    
                    
                    
                    1,400,000Proceeds
      from line of credit
                    
                    
                    (1,349,000
                    )
                    
                    
                    1,013,000Capitalized
      loan costs
                    
                    
                    (325,000
                    )
                    
                    
                    (87,000
                    )Principal
      payments on capital leases
                    
                    
                    (49,000
                    )
                    
                    
                    (158,000
                    )Dividends
      paid
                    
                    
                    (1,927,000
                    )
                    
                    
                    (1,902,000
                    )Net
      cash provided by financing activities
                    
                    
                    4,473,000
                    
                    
                    
                    972,000Net
      increase in cash and cash equivalents
                    
                    
                    382,000
                    
                    
                    
                    318,000Cash
      and cash equivalents at beginning of period
                    
                    
                    736,000
                    
                    
                    
                    418,000Cash
      and cash equivalents at end of period
                    
                    $
                    1,118,000
                    
                    
                    $
                    736,000
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
 
 F-6
  STAR
BUFFET, INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE
1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 A summary
of certain significant accounting policies not disclosed elsewhere in the
footnotes to the consolidated financial statements is set forth
below.
 
 Basis
of Presentation
 
 The
accompanying consolidated financial statements include the accounts for Star
Buffet, Inc., together with its wholly–owned, independently capitalized
subsidiaries Summit Family Restaurants Inc. (“Summit”), HTB Restaurants, Inc.
(“HTB”), Northstar Buffet, Inc. (“NSBI”), Star Buffet Management, Inc. (“SBMI”)
and Starlite Holdings, Inc. (“Starlite”) (collectively the “Company”). The
accompanying consolidated financial statements include the results of operations
and assets and liabilities of the Company’s operations. Significant intercompany
transactions and balances have been eliminated in consolidation.
 
 Organization
and Nature of Operations
 
 The
operating results for the 52-week period ended January 26, 2009 included 52
weeks of operations for the Company’s 14 Barnhill’s Buffet restaurants, 11
franchised HomeTown Buffet restaurants, six JB’s restaurants, three 4B’S
restaurants, three BuddyFreddys restaurants, two Whistle Junction restaurants,
two Western Sizzlin restaurants, two K-BOB’S Steakhouses, two Holiday House
restaurants, two JJ North’s Grand Buffet restaurant, one Pecos Diamond
Steakhouse, one Bar-H Steakhouse and one Casa Bonita Mexican theme
restaurant.  The results also included the following, four Barnhill’s
Buffet restaurants for 47 weeks, one 4B’s restaurant for 34 weeks, one Casa
Bonita Mexican theme restaurant for 26 weeks and one K-BOB’S Steakhouse for 11
weeks.  In addition, operating results include 41 weeks for one
Barnhill’s Buffet restaurant, 38 weeks for one HomeTown Buffet restaurant, 37
weeks for one Western Sizzlin restaurant, 27 weeks for one Whistle Junction
restaurant, 24 weeks for two Whistle Junction restaurants, 17 weeks for one
BuddyFreddys restaurant, 15 weeks for one Holiday House restaurant and 11 weeks
for one JB’S restaurant closed during the fiscal year 2009.  The
Company also had four restaurants closed for remodeling and repositioning, one
restaurant leased to a third-party operator and one restaurant closed and
reported as property held for sale.
 
 The
operating results for the 52-week period ended January 28, 2008 included 52
weeks of operations for the Company’s 12 franchised HomeTown Buffet restaurants,
six JB’s restaurants, five Whistle Junction restaurants, two BuddyFreddys
restaurants, two BuddyFreddys Country Buffet restaurants, two Western Sizzlin
restaurants, two K-BOB’S Steakhouses, two Holiday House restaurants, one JJ
North’s Grand Buffet restaurant, one Pecos Diamond Steakhouse and one Casa
Bonita Mexican theme restaurant.  The results also included the
following, one Western Sizzlin restaurant for 32 weeks, one Holiday House
restaurant for 40 weeks, one Bar-H Steakhouse for 35 weeks, one JB’S restaurant
for 35 weeks, two 4B’S restaurants for 26 weeks, one 4B’S restaurant for 15
weeks and one JJ North’s Grand Buffet for 18 weeks.  In addition,
operating results included 39 weeks for one K-BOB’S Steakhouse, 36 weeks for one
K-BOB’S Steakhouse, 36 weeks for one HomeTown Buffet restaurant, 27 weeks for
one HomeTown Buffet restaurant, 27 weeks for one Oklahoma Steakhouse restaurant
and 16 weeks for one Whistle Junction restaurant closed during the fiscal year
2008.  The Company also had five restaurants closed for remodeling and
repositioning, three restaurants leased to a third-party operators and one
restaurant closed and reported as property held for sale.
 
 Fiscal
Year
 
 The
Company utilizes a 52/53 week fiscal year which ends on the last Monday in
January. The first quarter of each year contains 16 weeks while the other three
quarters each contain 12 weeks except in the 53 week fiscal year, when the
fourth quarter has 13 weeks.
 
 Cash
Equivalents
 
 Highly
liquid investments with original maturities of three months or less when
purchased are considered cash equivalents. Amounts receivable from credit card
companies are also considered cash equivalents because they are both short-term
and highly liquid in nature and are typically converted to cash within three
days of the sales transaction.  The carrying amounts reported in the
consolidated balance sheets for these instruments approximate their fair
value.
 
 F-7
 Revenue
Recognition
 
 The
Company’s principal source of revenue is from customer dining
transactions.  Revenue is recognized at the time the meal is
purchased, primarily by cash or credit card.
 
 Receivables
 
 Receivables
are stated at an amount management expects to collect and provides for an
adequate reserve for probable uncollectible amounts.  Amounts deemed to be
uncollectible are written off through a charge to earnings and a credit to a
valuation allowance based on management’s assessment of the current status of
individual balances.  A receivable is written off when it is determined
that all collection efforts have been exhausted.  The Company did not have
a valuation allowance as of January 26, 2009 and January 28, 2008.
 
 Notes
Receivable
  Notes
receivable are stated at an amount management expects to collect and provides
for an adequate reserve for probable uncollectible amounts.  Amounts deemed
to be uncollectible are written off through a charge to earnings and a credit to
a valuation allowance based on management’s assessment of the current status of
individual balances.  A note receivable is written off when it is
determined that all collection efforts have been exhausted.  The Company
did not have a valuation allowance as of January 26, 2009 and January 28,
2008.
 
 Consideration
Received from Vendors
 
 The
Company records vendor rebates on products purchased as a reduction of cost of
sales. The allowances are recognized as earned in accordance with written
agreements with vendors.
 
 Inventories
 
 Inventories
consist of food, beverage, gift shop items and certain restaurant supplies and
are valued at the lower of cost or market, determined by the first-in, first-out
method.
 
 Property,
Buildings and Equipment
 
 Property,
equipment and real property under capitalized leases are carried at cost less
accumulated depreciation and amortization. Depreciation and amortization are
provided using the straight-line method over the following useful
lives:
 
 YearsBuildings
                  40Building
      and leasehold improvements
                  15
      – 20Furniture,
      fixtures and equipment
                  5 –
      8
 
 Building
and leasehold improvements are amortized over the lesser of the life of the
lease or estimated economic life of the assets. The life of the lease includes
renewal options determined by management at lease inception as reasonably likely
to be exercised. If a previously scheduled lease option is not exercised, any
remaining unamortized leasehold improvements may be required to be expensed
immediately which could result in a significant charge to operating results in
that period.
 
 Property
and equipment in non-operating units or stored in warehouses held for remodeling
or repositioning is not depreciated and is reclassed on the balance sheet as
property, building and equipment held for future use.
 
 Property
and equipment placed on the market for sale is not depreciated and is reclassed
on the balance sheet as property held for sale.
 
 Repairs
and maintenance are charged to operations as incurred. Major equipment
refurbishments and remodeling costs are generally capitalized.
 
 
 F-8
 Goodwill
 
 Goodwill
and other intangible assets primarily represent the excess of the purchase price
paid over the fair value of the net assets acquired in connection with business
acquisitions.
 
 The
Company reviews goodwill for possible impairment on an annual basis or when
triggering events occur in accordance with SFAS 142. Goodwill is tested for
impairment at the reporting unit level. Because SFAS 142 defines a reporting
unit as an operating segment or one level below an operating segment, the
Company reviews goodwill for possible impairment at the individual restaurant
level. Three reporting units (restaurants) had recorded goodwill for fiscal 2009
and fiscal 2008.
 
 The
Company utilizes a two-part goodwill impairment test.  First, the fair
value of the reporting unit is compared to the carrying value (including
goodwill).  If the carrying value is greater than the fair value, the
second step is performed.  In the second step, the implied fair value
of the reporting unit goodwill is compared to the carrying amount of
goodwill.  If the carrying value is greater, a loss is recognized. The
goodwill impairment test considers the impact of current conditions and the
economic outlook for the restaurant industry, the general overall economic
outlook including market data, governmental and environmental factors, in
establishing the assumptions used to compute the fair value of each reporting
unit.  We also take into account the historical, current and future
(based on probability) operating results of the six reporting units and any
other facts and data pertinent to valuing the reporting units in our impairment
test. In fiscal 2009 the Company determined that there was no goodwill
impairment.  In fiscal 2008, the impairment expense for goodwill was
$1,126,000.
 
 The
Company has an independent evaluation of goodwill conducted every three
years.  The most recent independent valuation was conducted as of
February 1, 2008.
  Other
Intangible Assets
 
 Other
intangible assets consist of franchise fees, loan acquisition costs, and the
JB's license agreement. Franchise fees are amortized using the straight-line
method over the terms of the franchise agreements, which typically range from 8
to 20 years.  Loan costs are amortized using the straight-line
method over the lesser of the life of the loan or five years (which approximates
the effective interest method). The JB's license agreement is being amortized
using the straight-line method over 11 years.  The Company has
recorded values for trademarks of Whistle Junction, Holiday House and 4B’s of
$230,000, $25,000 and $25,000, respectively.  These assets have an
indefinite asset life and are subject to possible impairment on an annual basis
or when triggering events occur in accordance with SFAS 142.
 
 Gross
                      
                      
                      AccumulatedFiscal 2009
                      
                      Carrying Amt
                      
                      
                      Amortization
                      
                      
                      NetFranchise
      and license fees
                      
                      $
                      1,363,000
                      
                      
                      $
                      (725,000
                      )
                      
                      $
                      638,000Loan
      acquisition costs
                      
                      
                      777,000
                      
                      
                      
                      (271,000
                      )
                      
                      
                      506,000Total
                      
                      $
                      2,140,000
                      
                      
                      $
                      (996,000
                      )
                      
                      $
                      1,144,000Fiscal 2008Franchise
      and license fees
                      
                      $
                      1,363,000
                      
                      
                      $
                      (631,000
                      )
                      
                      $
                      732,000Loan
      acquisition costs
                      
                      
                      200,000
                      
                      
                      
                      (93,000
                      )
                      
                      
                      107,000Total
                      
                      $
                      1,563,000
                      
                      
                      $
                      (716,000
                      )
                      
                      $
                      839,000
 
 The table
below shows expected amortization for purchased finite intangibles as of January
26, 2009 for the next five years:
 
 Fiscal Year2010
                      
                      
                      265,0002011
                      
                      
                      260,0002012
                      
                      
                      257,0002013
                      
                      
                      68,0002014
                      
                      
                      14,000Thereafter
                      
                      
                      —Total
                      
                      $
                      864,000
 
 F-9
 The
Company acquired the JB’s license agreement in November 2002 for
$773,000.  Amortization expense for the JB’s license agreement was
$78,000 in fiscal 2009 and 2008.  Amortization of franchise and
license fees were $94,000 and $95,000 for the fiscal years ending January 26,
2009 and January 28, 2008, respectively.  Amortization of loan costs
were $178,000 and $23,000 for the fiscal years ending January 26, 2009 and
January 28, 2008, respectively and included in interest expense in the
accompanying consolidated statements of operation.
 
 Impairment
of Long-Lived Assets
 
 The
Company determines that an impairment writedown is necessary for long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.   The impairment 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 of $212,000 in fiscal 2009 was for leasehold
improvements.  Total impairment expense charged to operations was
$212,000 and $1,401,000 for the years ended January 26, 2009 and January 28,
2008, respectively.
 
 Fair
Value of Financial Instruments
 
 The
carrying amounts of the Company’s cash and cash equivalents, receivables,
accounts payable and accrued expenses approximates fair value because of the
short maturity of these instruments.
 
 The
carrying amounts of the Company’s notes receivable, long-term debt and capital
lease obligations approximate fair value and are based on discounted cash flows
using market rates at the balance sheet date. The use of discounted cash flows
can be significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. The derived fair value estimates cannot
be substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument.
 
 Pre-Opening
Costs
 
 Pre-opening
costs are expensed when incurred. The Company incurred and charged to operations
approximately $222,000 and $0 of pre-opening costs during fiscal 2009 and
2008.
 
 Income
Taxes
 
 The
Company utilizes the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect during the years in which the
differences are expected to reverse. An allowance against deferred tax assets is
recorded in whole or in part when it is more likely than not that such tax
benefits will not be realized.
 
 Advertising
Expenses
 
 Advertising
costs are charged to operations as incurred. Amounts charged to operations
totaled $923,000 and $916,000, for the years ended January 26, 2009 and January
28, 2008, respectively.
 
 Insurance
Programs
 
 Historically,
the Company has purchased first dollar insurance for workers’ compensation
claims; high-deductible primary property coverage; and excess policies for
casualty losses.  Effective January 1, 2008, the Company modified its
program for insuring casualty losses by lowering the self-insured retention
levels from $2 million per occurrence to $100,000 per
occurrence.  Accruals for self-insured casualty losses include
estimates of expected claims payments.  Because of large, self-insured
retention levels, actual liabilities could be materially different from
calculated accruals.  Valuation reserves for the years ended January
26, 2009 and January 28, 2008, consisted of the following:
 
 F-10
 Insurance and claims
    reserves
                    
                    Balance at Beginning of
    Period
                    
                    
                    Expense Recorded
                    
                    
                    Payments Made
                    
                    
                    Balance at End of PeriodYear
      ended January 26, 2009
                    
                    $
                    54,000
                    
                    
                    $
                    23,499
                    
                    
                    $
                    (46,999
                    )
                    
                    $
                    30,500Year
      ended January 28, 2008
                    
                    $
                    66,500
                    
                    
                    $
                    2,080
                    
                    
                    $
                    (14,580
                    )
                    
                    $
                    54,000
  Leases
 
 The
Company has various lease commitments on restaurant locations. Expenses of
operating leases with escalating payment terms are recognized on a straight-line
basis over the lives that conform to the related term used to depreciate
leasehold improvements on the leased property.  Contingent rental
payments are triggered when revenues exceed contractual
thresholds.  Contingent rental expense is recorded each period that
revenue exceeds the contractual base.  In situations where the
contingent rent is based on annual sales or cumulative sales to date, contingent
rental expense is recorded when it is determined probable that revenue will
exceed the contractual thresholds.
 
 Use
of Estimates
 
 In
preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenue and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Earnings
(Loss) per Share
 
 The
Company applies Statement of Financial Accounting Standards No. 128 (SFAS No.
128), which requires the calculation of basic and diluted income (loss) per
share.  Basic income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the fiscal year.  Diluted income (loss) per share is computed on the
basis of the average number of common shares outstanding plus the dilutive
effect of outstanding stock options and warrants using the “treasury stock”
method. The following is a reconciliation of the denominators used to calculate
diluted earnings (loss) per share on net income (loss) for the respective fiscal
years:
 
 Fifty-Two
                    
                    
                    Fifty-TwoWeeks
                    
                    
                    WeeksEnded
                    
                    
                    EndedJanuary 26, 2009
                    
                    
                    January 28, 2008Weighted
      average common shares outstanding – basic
                    
                    
                    3,212,842
                    
                    
                    
                    3,170,675Weighted
      average common shares outstanding – diluted
                    
                    
                    3,212,842
                    
                    
                    
                    3,170,675
 
 Weighted
average common shares used in the year ended January 26, 2009 to calculate
diluted earnings per share exclude stock options to purchase 39,000 shares of
common stock as their effect was anti-dilutive.  Weighted average
common shares used in the year ended January 28, 2008 to calculate diluted per
share exclude stock options to purchase 40,000 shares of common stock as their
effect was anti-dilutive.
 
 Segment
Reporting
 
 The
Company’s reportable segments are based on whether the restaurant is a buffet or
non-buffet concept.
 
 F-11
 Stock-Based
Compensation
 
 Adoption
of SFAS 123(R)
  On
January 31, 2006 we adopted Statement of Financial Accounting Standards No.
123(R), Share Based
Payment (SFAS 123(R)).  SFAS 123(R) requires the recognition of
compensation costs relating to share based payment transactions in the financial
statements.  We have elected the modified prospective application method of
reporting.  Prior to the adoption of SFAS 123(R) we elected to account for
stock-based compensation plans using the intrinsic value method under Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” under which no compensation cost is recognized and the pro forma
effects on earnings and earnings per share are disclosed as if the fair value
approach had been adopted.
 
 New
Accounting Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157,
Fair Value Measurements
(SFAS 157). In February 2008, FASB issued FSP No. FAS 157-2 which delayed
the applicability of SFAS 157’s fair-value measurements of certain
nonfinancial assets and liabilities for one year. In October 2008,the FASB issued FSP No.
FAS 157-3, Determining
the Fair value of a Financial Asset When the Market for That Asset Is Not Active(collectively SFAS 157). SFAS 157 establishes a framework for
measuring the fair value of assets and liabilities. This framework is intended
to provide increased consistency in how fair value determinations are made under
various existing accounting standards which permit, or in some cases require,
estimates of fair market value. SFAS 157 also expands financial statement
disclosure requirements about a Company’s use of fair value measurements,
including the effect of such measures on earnings. SFAS 157 was adopted in the
beginning of fiscal 2009 for the Company’s financial assets and liabilities. The
Company does not anticipate the application of SFAS 157 to nonfinancial
assets and nonfinancial liabilities will have a material impact on its
consolidated financial statements.
  In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement
No.115 (“SFAS 159”). This standard amends SFAS 115, Accounting for Certain Investment in
Debt and Equity Securities, with respect to accounting for a transfer to
the trading category for all entities with available-for-sale and trading
securities electing the fair value option. This standard allows companies to
elect fair value accounting for many financial instruments and other items that
currently are not required to be accounted as such, allows different
applications for electing the fair value option for a single item or groups of
items, and requires disclosures to facilitate comparisons of similar assets and
liabilities that are accounted for differently in relation to the fair value
option. SFAS 159 is effective for fiscal years beginning after
November 15, 2007, which for us is fiscal 2009. Our adoption of
SFAS 159 at the beginning of fiscal 2009 did not have a material impact on
our consolidated financial position or results of operations.
  NOTE 2 —Accounting
Pronouncements Not Yet Adopted
 
 In
December 2007, the FASB issued SFAS No. 141(R) (revised 2007), Business Combinations. (“SFAS
141(R)”) will change the accounting for business combinations. Under SFAS
141(R), an acquiring entity will be required to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions. SFAS 141(R) will change the accounting treatment
and disclosures for certain specific items in a business combination. SFAS
141(R) became effective for the Company at the beginning of fiscal 2010.
Acquisitions, if any, after the effective date will be accounted for in
accordance with SFAS 141(R).
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements (“SFAS 160”). SFAS 160 clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement also requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the non-controlling interest and requires disclosure, on the face of the
consolidated statement of income, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest. In addition,
this statement establishes a single method of accounting for changes in a
parent’s ownership interest in a subsidiary that does not result in
deconsolidation and requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated. SFAS 160 became effective for the
Company at the beginning of fiscal 2010. This statement will be applied
prospectively, except for the presentation and disclosure requirements, which
will be applied retrospectively for all periods presented. The Company does not
currently have any minority or non-controlling interests in a subsidiary and
adoption of SFAS 160 will not have a material impact on its consolidated
financial statements.
 
 F-12
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an Amendment of SFAS No. 133
(“SFAS 161”). SFAS 161 modifies existing requirements to include qualitative
disclosures regarding the objectives and strategies for using derivatives, fair
value amounts of gains and losses on derivative instruments and disclosures
about credit-risk-related contingent features in derivative agreements. In
addition, SFAS 161 requires the cross-referencing of derivative disclosures
within the consolidated financial statements and notes. This statement is
effective for fiscal years and interim periods be joining after November 15,
2008.  For the Company the statement is effective at the beginning of
the first quarter of its 2010 fiscal year.  The Company does not
currently have any derivative instruments and hedging activities and adoption of
SFAS 161 will not have a material impact on its consolidated financial
statements.
 
 In May
2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion (Including Partial cash
Settlement) (“APB 14-1”). APB 14-1 requires that the liability and equity
components of convertible debt instruments that may be settled in cash (or other
assets) upon conversion (including partial cash settlement) be separately
accounted for in a manner that reflects an issuer’s nonconvertible debt
borrowing rate. The resulting debt discount is amortized over the period the
convertible debt is expected to be outstanding as additional non-cash interest
expense. APB 14-1 is effective for the Company at the beginning of its 2010
fiscal year and early adoption is not permitted. Retrospective application to
all periods presented is required except for instruments that were not
outstanding during any of the periods that will be presented in the annual
financial statements for the period of adoption but were outstanding during an
earlier period. The Company does not currently have any convertible debt
instruments and adoption of APB 14-1 will not have a material impact on its
consolidated financial statements.
 
 In
May 2008, FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (“SFAS 162”), which is effective 60 days following the
Securities and Exchange Commission’s (“SEC’s”) approval of the Public Company
Accounting Oversight Board (“PCAOB”) Auditing amendments to AU Section 411,
The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles. SFAS 162 is intended to
improve financial reporting by identifying a consistent framework, or hierarchy,
for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with United States generally accepted
accounting principles (“GAAP”) for nongovernmental entities. Prior to the
issuance of SFAS 162, the GAAP hierarchy was defined in the American Institute
of Certified Public Accountants (“AICPA”) Statement on Auditing Standards
(“SAS”) No. 69, The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.
Although the Company has not completed its analysis of SFAS 162, it is not
expected to have a material impact its consolidated financial
statements.
 
 In June
2008, the FASB ratified Emerging Issues Task Force (EITF) Issue 07-5, Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF
07-5”). EITF 07-5 provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument’s contingent
exercise and settlement provisions. It also clarifies the impact of foreign
currency denominated strike prices and market-based employee stock option
valuation instruments on the evaluation. EITF 07-5 is effective for the Company
at the beginning of its 2010 fiscal year and cannot be adopted early. The
Company does not currently have any instrument (or an embedded feature) that is
indexed to an entity’s own stock and adoption of EITF 07-5 will not have a
material impact on its consolidated financial statements.
 
 NOTE
3 — NOTES RECEIVABLE
 
 Notes
receivable consist of the following:
 
 January 26, 2009
                  
                  
                  January 28, 2008Notes
      receivable from North's Restaurants, Inc.
                  
                  $
                  490,000
                  
                  
                  $
                  490,000Notes
      receivable from strategic partners
                  
                  
                  214,000
                  
                  
                  
                  214,000Total
      notes receivable
                  
                  
                  704,000
                  
                  
                  
                  704,000Less
      current portion
                  
                  
                  —
                  
                  
                  
                  —Notes
      receivable, net of current portion
                  
                  $
                  704,000
                  
                  
                  $
                  704,000
 
 F-13
 Since
inception, the Company’s acquisition strategy has incorporated the utilization
of loans to sellers to facilitate certain proposed transactions.  In
most cases, these loans are secured and include, as part of the terms and
conditions, the Company’s right to convert the loan into ownership of the
restaurants.  Also, certain of these loans contain favorable interest
rates and repayment terms if the loans are not converted to ownership for one or
more reasons.  This financing strategy entails significant
risk.  Currently, the Company has two loans outstanding and both are
in default.  However, because the Company anticipates full recovery of
amounts outstanding through either repayment or conversion to ownership, no
provision for doubtful accounts has been established.  Management is
continually evaluating the collectability on an ongoing basis. While estimates
to date have been within our expectations, a change in the financial condition
of specific restaurant companies or in overall industry trends may result in
future adjustments to Company estimates of recoverability of
receivables.
 
 In
conjunction with the acquisition of certain JJ North’s restaurants from North’s
Restaurants, Inc. (“North’s”) in 1997, the Company provided a credit facility to
North’s.  When North’s defaulted the Company sued for enforcement. In
1998, the Company’s suit with North’s resulted in a negotiated settlement in
favor of the Company.  In a related proceeding, North’s other secured
creditor, Pacific Mezzanine, initiated litigation against North’s seeking a
monetary judgment and the appointment of a receiver.  In April, 2006
the Company noticed all relevant parties of its intent to foreclose to seek
expedited liquidation of North’s assets and repay amounts owed to the
Company.  Subsequent to the notice, the receiver moved to have the
Company’s foreclosure of North’s assets set aside so that certain of North’s
assets could be sold to a third party.  The motion was
approved.  On August 7, 2006, the receiver paid the Company
approximately $1,291,000 from a partial sale of the assets. In August 2007, the
receiver notified the Company that he planned to turn control of the JJ North’s
restaurant in Grants Pass, Oregon and associated assets over to the Company. On
September 22, 2007, the Company hired former North’s employees, notified North’s
creditors of its intent to operate the business and negotiated a facility lease
with North’s previous landlord.  The transfer of assets from North’s
to Star Buffet Management, Inc. was approved by the court.  The
Company’s note, together with the obligation to the other significant creditor
of North’s, is secured by the real and personal property, trademarks and all
other intellectual property owned by North’s. The Company believes proceeds from
asset sales are adequate for recovery of the remaining principal amount of the
note receivable.  The Company has not provided an allowance for bad
debts for the note as of January 26, 2009.
 
 NOTE
4 — PROPERTY, BUILDINGS AND EQUIPMENT AND REAL PROPERTY UNDER CAPITALIZED
LEASES
 
 The
components of property, buildings and equipment used in restaurant operations,
not including property under capitalized leases, are as follows:
 
 January
      26,
                        2009
                      
                      
                      January
      28,
                        2008Property,
      buildings and equipment:Furniture,
      fixtures and equipment
                      
                      $
                      24,993,000
                      
                      
                      $
                      13,708,000Land
                      
                      
                      4,285,000
                      
                      
                      
                      4,185,000Buildings
      and leasehold improvements
                      
                      
                      22,592,000
                      
                      
                      
                      23,478,00051,870,000
                      
                      
                      
                      41,371,000Less
      accumulated depreciation
                      
                      
                      (25,341,000
                      )
                      
                      
                      (20,555,000
                      )$
                      26,529,000
                      
                      
                      $
                      20,816,000
  The
components of property under capitalized leases are as follows:
 
 Property
      and equipment under capitalized leases
                  
                  $
                  706,000
                  
                  
                  $
                  706,000Less
      accumulated amortization
                  
                  
                  (669,000
                  )
                  
                  
                  (635,000
                  )$
                  37,000
                  
                  
                  $
                  71,000
 
 F-14
 Total
property, buildings and equipment includes the following land, equipment and
buildings and leaseholds currently in six non-operating units. One of the six
non-operating restaurants has been leased to a third-party operator; four are
closed for remodeling and/or repositioning; one is closed and classified as
property held for sale at January 26, 2009. The components are as
follows:
 
 January
      26,
                              2009
                            
                            
                            January
      28,
                              2008Property,
      buildings and equipment leased to third parties:Equipment
                            
                            $
                            222,000
                            
                            
                            $
                            974,000Land
                            
                            
                            224,000
                            
                            
                            
                            1,266,000Buildings
      and leaseholds
                            
                            
                            685,000
                            
                            
                            
                            2,631,0001,131,000
                            
                            
                            
                            4,871,000Less
      accumulated depreciation
                            
                            
                            (336,000
                            )
                            
                            
                            (1,745,000
                            )$
                            795,000
                            
                            
                            $
                            3,126,000
 
 January
      26,
                            2009
                          
                          
                          January
      28,
                            2008Property,
      buildings and equipment held for future use:Equipment
                          
                          $
                          3,273,000
                          
                          
                          $
                          8,033,000Land
                          
                          
                          2,484,000
                          
                          
                          
                          517,000Buildings
      and leaseholds
                          
                          
                          1,559,000
                          
                          
                          
                          2,066,0007,316,000
                          
                          
                          
                          10,616,000
 Less
      accumulated depreciation
                      
                      
                      (3,173,000
                      )
                      
                      
                      (8,069,000
                      )$
                      4,143,000
                      
                      
                      $
                      2,547,000
 
 
 
 January
      26,
                          2009
                        
                        
                        January
      28,
                          2008Property
      and buildings held for sale:Land
                        
                        $
                        567,000
                        
                        
                        $
                        567,000Buildings
                        
                        
                        364,000
                        
                        
                        
                        364,000$
                        931,000
                        
                        
                        $
                        931,000
 
 Depreciation
expense for fiscal 2009 and 2008 totaled $2,528,000 and $1,980,000,
respectively.  Impairment expense for fiscal 2009 and 2008 totaled
$212,000 and $267,000, respectively.
  NOTE
5 — LONG-TERM DEBT
 
 In recent
years, the Company has financed operations through a combination of cash on
hand, cash provided from operations, available borrowings under bank lines of
credit and loans from the principal shareholder.
  
 F-15
 
  The
Company had a $3,000,000 unsecured revolving line of credit with M&I
Marshall & Ilsley Bank.  The M&I revolving line of credit
bore interest at LIBOR plus two percent per annum.   The Company
replaced the M&I revolving line of credit on January 31, 2008 with a Credit
Facility with Wells Fargo Bank, N.A.The Credit Facility
included a $7,000,000 term loan and a $2,000,000 revolving line of
credit.  The Credit Facility was utilized to retire the Company’s
unsecured revolving line of credit with M&I Marshall & Ilsley Bank;
to fund the acquisition of assets associated with sixteen (16) Barnhill’s Buffet
restaurants; and to provide additional working capital.On February 29, 2008 the
Company amended its Credit Facility with Wells Fargo Bank N.A., increasing the
term loan principal from $7,000,000 to $8,000,000. The increase in the Credit
Facility was used to fund the acquisition of four Barnhill’s Buffet by its newly
formed, wholly-owned, independently capitalized subsidiary, Starlite Holdings,
Inc.  The Credit Facility is guaranteed by Star Buffet’s subsidiaries and
bears interest, at the Company’s option, at Wells Fargo’s base rate plus 0.25%
or at LIBOR plus 2.00%.  The Credit Facility is secured by a first priority
lien on all of the Company’s assets, except for those assets that 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 the
initial six quarters; $225,000 for the next nine quarters; with any
remaining balance due at maturity.  Interest is payable
monthly.  The term loan balance was $5,475,000 on April 22,
2009.  The $2,000,000 revolving line of credit matures on January 31,
2012.  Interest on the revolver is payable monthly.  As of April 22,
2009, the revolving line of credit balance was $700,000.  The Credit
Facility contains a number of covenants and restrictions, including requirements
to meet certain financial ratios and limitations with respect to the Company’s
ability to make capital expenditures or to pay dividends.  The Company’s
quarterly financial covenants associated with this debt began May 19, 2008 
The Company was required to obtain interest rate protection through an interest
rate swap or cap arrangement with respect to not less than 50% of the term loan
amount.  Wells Fargo has agreed to permanently waive the requirement for an
interest rate swap or cap arrangement.  There is a 0.50% fee for the
unused portion of the revolving line of credit and the Company has agreed to
maintain its principal cash management services with Wells Fargo.  In
connection with the Credit Facility, Wells Fargo was granted 42,400 shares of
the Company’s restricted common stock.  The shares were valued at
$252,000 are recorded at a discount on the related debt and will be amortized to
interest expense over the life of the loan.  The credit facility can
be prepaid in whole or part without penalty.  Furthermore, certain
provisions of the Credit Facility require the Company to remit proceeds from
asset dispositions, issuance of debt or equity, insurance proceeds, tax refunds
and fifty percent (50%) of excess cash flow (as defined) to reduce the principal
amount of the term loan and, thereafter, the revolving line of credit. 
Under terms of the Credit Facility, the Company is permitted to pay an annual
dividend under certain circumstances.
 On
February 1, 2001, the Company entered into a $460,000 15 year fixed rate first
real estate mortgage with Victorium Corporation. The mortgage has monthly
payments including interest of $6,319. The interest rate is 7.5%. The mortgage
is secured the Company’s restaurant in Ocala, Florida. The balance at January
26, 2009 and January 28, 2008 was $282,000 and $311,000,
respectively.
 
 On May 2,
2002, the Company entered into a $1,500,000 ten year fixed rate first real
estate mortgage with M&I Marshall & Ilsley Bank.  The mortgage
has monthly payments including interest of $17,894. The interest rate is7.5% for
the first five years with interest for years six to ten calculated at the five
year LIBOR rate plus 250 basis points with a floor of 7.5%. The mortgage is
secured by the Company’s HomeTown Buffet restaurant in Scottsdale, Arizona. The
balance at January 26, 2009 and January 28, 2008 was $451,000 and $624,000,
respectively.
 
 On
December 19, 2003, the Company entered into a $1,470,000 six year fixed rate
first real estate mortgage with Platinum Bank.  The mortgage has
monthly payments including interest of $12,678 with a balloon payment of
$1,029,000 due on December 19, 2009. The interest rate is 7.25%.  The
mortgage is secured by the Company’s BuddyFreddys restaurant in Plant City,
Florida.  The balance at January 26, 2009 and January 28, 2008 was
$1,029,000 and $1,115,000, respectively.  The Company will attempt to
refinance the mortgage in fiscal 2010 although there can be no assurance that
the financing can be completed.
 
 On
February 25, 2004, the Company entered into a $1,250,000 seven year fixed rate
first real estate mortgage with M&I Marshall & Ilsley
Bank.  The mortgage has monthly payments including interest of
$18,396. The interest rate is 6.1%. The mortgage is secured by the Company’s
HomeTown Buffet restaurant in Yuma, Arizona. The balance at January 26, 2009 and
January 28, 2008 was $203,000 and $404,000, respectively.
 
 On July
29, 2004, the Company entered into a $550,000 ten year fixed rate first real
estate mortgage with Heritage Bank.  The mortgage had monthly payments
including interest of $6,319. The interest rate was 6.75%. The mortgage was
secured by the Company’s JB’s Restaurant in Great Falls, Montana. The mortgage
was paid in full with a loan from Stockman Bank on August 15, 2008.
 
 On
October 27, 2004, the Company entered into a $1,275,000 five year fixed rate
first real estate mortgage with Bank of Utah.  The mortgage has
monthly payments including interest of $14,371 with a balloon payment of
$719,000 due on October 26, 2009.   The interest rate is 6.25%.
The mortgage requires the Company to maintain specified minimum levels of net
worth, limits the amount of capital expenditures and requires the maintenance of
certain fixed charge coverage ratios.  The mortgage is secured by the
Company’s HomeTown Buffet restaurant in Layton, Utah. The balance at January 26,
2009 and January 28, 2008 was $719,000 and $840,000,
respectively.  The Company refinanced the mortgage in the first
quarter of fiscal 2010 for five years.
 
 On
September 16, 2005, the Company entered into a $300,000 five year fixed rate
real estate mortgage with Naisbitt Investment Company.  The mortgage
has monthly payments including interest of $5,870. The interest rate is 6.5%.
The mortgage is secured by the Company’s JB’s Restaurant in Rexburg,
Idaho.  The balance at January 26, 2009 and January 28, 2008 was
$108,000 and $169,000, respectively.
 
 F-16
 On June
1, 2006, the Company entered into a $564,000 five year fixed rate first real
estate mortgage with Dalhart Federal Savings and Loan.  The mortgage
has monthly payments including interest of $6,731. The interest rate is 7.63%.
The mortgage is secured by the Company’s K-BOB’S Steakhouse in Dumas, Texas. The
balance at January 26, 2009 and January 28, 2008 was $449,000 and $497,000,
respectively.
 
 On
November 8, 2006, the Company entered into a $595,000 five year fixed rate first
real estate mortgage with Wells Fargo Bank.  The mortgage has monthly
payments including interest of $8,055. The interest rate is 7.5%. The mortgage
is secured by the Company’s Pecos Diamond Steakhouse in Artesia, New Mexico. The
balance at January 26, 2009 and January 28, 2008 was $401,000 and $461,000,
respectively.
 
 On
January 30, 2007, the Company entered into a $900,000 five year fixed rate
real estate mortgage with Fortenberry’s Beef of Magee, Inc.  The mortgage
has monthly payments including interest of $17,821. The interest rate is
7%.  The mortgage is secured by the Company’s Western Sizzlin restaurant in
Magee, Mississippi. The balance at January 26, 2009 and January 28, 2008 was
$573,000 and $740,000, respectively.
 
 On
May 29, 2007, the Company entered into a $500,000 five year fixed rate real
estate mortgage with Dalhart Federal Savings and Loan Association.  The
mortgage has monthly payments including interest 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’s Bar-H Steakhouse
restaurant in Dalhart, Texas.  The balance at January 26, 2009 and
January 28, 2008 was $440,000 and $477,000, respectively.
 
 On
June 19, 2007, the Company entered into a $520,000 five year fixed rate
real estate mortgage with Farmers Bank and Trust.  The mortgage has monthly
payments including interest of $4,676 with a balloon payment of $407,313 due on
June 19, 2012.  The interest rate is 7%.  The mortgage is secured
by the Company’s Western Sizzlin restaurant in Magnolia,
Arkansas.   On July 11, 2008, the Company entered into a
$604,000 five year fixed rate real estate mortgage with Farmers Bank and
Trust.  The mortgage has monthly payments including interest of
$5,264.  The interest rate is 6.5%.  The mortgage is secured by the
Company’s Western Sizzlin restaurant in Magnolia, Arkansas.   The
Company used the funds to payoff the previous loan with Farmers Bank and Trust
of $502,000 and the additional $102,000 was used to reduce the obligation to
Wells Fargo.  The balance at January 26, 2009 and January 28, 2008 was
$587,000 and $508,000, respectively.
 
 On June
27, 2008, the Company entered into an $86,000 five year fixed rate second real
estate mortgage with Dalhart Federal Savings and Loan.  The mortgage
has monthly payments including interest of $1,387. The interest rate is 6.75%.
The mortgage is secured by the Company’s K-BOB’S Steakhouse in Dumas,
Texas.  In addition, the Company entered into a $140,000 five year
fixed rate second real estate mortgage with Dalhart Federal Savings and Loan
Association.  The mortgage has monthly payments including interest of
$2,756.  The interest rate is 6.75%.  The mortgage is secured by the
Company’s Bar-H Steakhouse restaurant in Dalhart, Texas.  The funds
from both loans were used to reduce the obligation to Wells
Fargo.  The refinancing of these real estate mortgages are part of the
Company’s plan to reduce the term loan in the current year through cash flow
from operations, asset sales and mortgage refinancing. On August 15, 2008, the
Company purchased the land and building in our previously leased 4B’s restaurant
in Great Falls, Montana for $475,000.  The Company entered into a
$354,000 15 year fixed rate real estate mortgage with Stockton
Bank.  The mortgage has monthly payments including interest of
$3,134.  The interest rate is 6.75%.  In addition, the
Company refinanced the JB’s restaurant in Great Falls, Montana.  The
Company entered into a $655,000 15 year fixed rate real estate mortgage with
Stockton Bank.  The mortgage has monthly payments including interest
of $5,805.  The interest rate is 6.75%.  The Company paid
its real estate mortgage with US Bank formerly Heritage Bank in
full.
 
 During
fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert
E. Wheaton, a principal shareholder, officer and director of the Company. 
This loan dated June 15, 2007 is subordinated to the obligation to Wells
Fargo Bank, N.A. and bears interest at 8.5%. In June, 2008, the Company borrowed
an additional $592,000 from Mr. Wheaton under the same terms. This resulted in
an increase in the subordinated note balance from $1,400,000 to
$1,992,000.  The Company expensed and paid $154,000 to Mr. Wheaton for
interest during fiscal 2009. The principal balance and any unpaid interest is
due and payable in full on June 5, 2012. The Company used the funds
borrowed from Mr. Wheaton for working capital requirements.
 
 F-17
 Long term
debt and note payable to officer matures in fiscal years ending after January
26, 2009 as follows:
 
 Fiscal Year2010
                      
                      
                      3,548,0002011
                      
                      
                      1,653,0002012
                      
                      
                      1,505,0002013
                      
                      
                      4,842,0002014
                      
                      
                      2,796,000Thereafter
                      
                      
                      1,247,000Total
                      
                      $
                      15,591,000
  NOTE
6 — LEASES
 
 The
Company occupies certain restaurants under long-term capital and operating
leases expiring at various dates through 2025. Many restaurant leases have
renewal options for terms of 2 to 20 years. Most require payment of real estate
taxes, insurance and certain maintenance expenses. Certain leases require the
rent to be the greater of a stipulated minimum rent or a specified percentage of
sales. Certain operating lease agreements contain scheduled rent escalation
clauses which are being amortized over the terms of the lease, ranging from 5 to
11 years using the straight line method.
 
 Fiscal year
                        
                        Capital
                        
                        
                        Operating2010
                        
                        
                        55,000
                        
                        
                        
                        2,858,0002011
                        
                        
                        —
                        
                        
                        
                        2,098,0002012
                        
                        
                        —
                        
                        
                        
                        1,834,0002013
                        
                        
                        —
                        
                        
                        
                        1,753,0002014
                        
                        
                        —
                        
                        
                        
                        1,297,000Thereafter
                        
                        
                        —
                        
                        
                        
                        4,151,000Total
      minimum lease payments:
                        
                        
                        55,000
                        
                        
                        $
                        13,991,000Less
      amount representing interest:
                        
                        
                        1,000Present
      value of minimum lease payments:
                        
                        
                        54,000Less
      current portion
                        
                        
                        54,000Capital
      lease obligations excluding current portion
                        
                        $
                        —
  Minimum
lease payments for all leases and the present value of net minimum lease
payments for capital leases as of January 26, 2009 are as follows:
  Aggregate
rent expense under non-cancelable operating leases during fiscal 2009 and 2008
are as follows:
 
 Fifty-Two
                          Weeks
      Ended
                          January
      26,
                          2009
                        
                        
                        Fifty-Two
                          Weeks
      Ended
                          January
      28,
                          2008Minimum
      rentals
                        
                        $
                        3,665,000
                        
                        
                        $
                        3,213,000Straight-line
      rentals
                        
                        
                        (493,000
                        )
                        
                        
                        (38,000
                        )Contingent
      rentals
                        
                        
                        52,000
                        
                        
                        
                        102,000$
                        3,224,000
                        
                        
                        $
                        3,277,000
 
 The
Company reduces the deferred rent payable for stores in the year that were
purchased or closed.  The $404,000 and $0 decrease in rent expense for
stores purchased or closed in 2009 and 2008, respectively, is recognized in the
straight-line rentals disclosed above.
 
 The
rental income for fiscal 2009 and 2008 was $43,000 and $261,000,
respectively.  In fiscal 2008 the Company leased three non-operating
units to tenants and in fiscal 2009 leased only one to tenants. Rental income is
recognized on a straight-line basis over the term of the lease and is included
in other income in the accompanying statements of operations.
 
 F-18
  NOTE
7 — INCOME TAXES
 
 Income
tax provision (benefit) is comprised of the following:
 
 Fifty-Two
                      
                      
                      Fifty-TwoWeeks
      Ended
                      
                      
                      Weeks
      EndedJanuary 26, 2009
                      
                      
                      January 28, 2008Current:Federal
                      
                      $
                      (19,000
                      )
                      
                      $
                      (563,000
                      )State
                      
                      
                      29,000
                      
                      
                      
                      (75,000
                      )10,000
                      
                      
                      
                      (638,000
                      )Deferred:Federal
                      
                      
                      343,000
                      
                      
                      
                      (609,000
                      )State
                      
                      
                      41,000
                      
                      
                      
                      (68,000
                      )384,000
                      
                      
                      
                      (677,000
                      )$
                      394,000
                      
                      
                      $
                      (1,315,000
                      )
  A
reconciliation of income tax provision (benefit) at the federal statutory rate
of 34% to the Company's provision (benefit) for taxes on income is as
follows:
 
 Fifty-Two
                                                    
                                                    
                                                    Fifty-TwoWeeks
      Ended
                                                    
                                                    
                                                    Weeks
      EndedJanuary 26, 2009
                                                    
                                                    
                                                    January 28, 2008Income
      tax provision (benefit) at statutory rate
                                                    
                                                    $
                                                    455,000
                                                    
                                                    
                                                    $
                                                    (1,127,000
                                                    )State
      income taxes
                                                    
                                                    
                                                    55,000
                                                    
                                                    
                                                    
                                                    (115,000
                                                    )Nondeductible
      expenses
                                                    
                                                    
                                                    60,000
                                                    
                                                    
                                                    
                                                    60,000Federal
      income tax credits
                                                    
                                                    
                                                    (176,000
                                                    )
                                                    
                                                    
                                                    (176,000
                                                    )Adjustment
      of estimated income tax accruals
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    43,000$
                                                    394,000
                                                    
                                                    
                                                    $
                                                    (1,315,000
                                                    )
  Temporary
differences give rise to a significant amount of deferred tax assets and
liabilities as set forth below:
 
 January 26, 2009
                      
                      
                      January 28, 2008Current
      deferred tax assets:Accrued
      vacation
                      
                      $
                      135,000
                      
                      
                      $
                      96,000Accrued
      expenses and reserves
                      
                      
                      302,000
                      
                      
                      
                      223,000Total
      deferred tax assets
                      
                      
                      437,000
                      
                      
                      
                      319,000Long-term
      deferred tax assets:Leases
                      
                      
                      530,000
                      
                      
                      
                      734,000Depreciation,
      amortization and impairments
                      
                      
                      1,382,000
                      
                      
                      
                      1,678,000Other
                      
                      
                      351,000
                      
                      
                      
                      353,000Total
      deferred tax assets
                      
                      
                      2,263,000
                      
                      
                      
                      2,765,000Valuation
      allowance
                      
                      
                      —
                      
                      
                      
                      —Total
      long term tax asset
                      
                      
                      2,263,000
                      
                      
                      
                      2,765,000Deferred
      tax assets
                      
                      $
                      2,700,000
                      
                      
                      $
                      3,084,000
 
 F-19
 While
there can be no assurance that the Company will generate any earnings or any
specific level of earnings in the future years, management believes it is more
likely than not that the Company will be able to realize the benefit of the
deferred tax assets existing at January 26, 2009 based on the Company's expected
future pre-tax earnings. The determination of deferred tax assets is subject to
estimates and assumptions. We periodically evaluate our deferred tax assets to
determine if our assumptions and estimates should change.
 
 NOTE
8 — SEGMENT AND RELATED REPORTING
 
 The
Company has two reporting segments, the Buffet Division and the Non-Buffet
Division. The Company’s reportable segments are aggregated based on operating
similarities.
 
 As of
January 26, 2009, the Company owned and operated 19 Barnhill’s Buffet
restaurants, 11 franchised HomeTown Buffets, six JB’s restaurants, four 4B’s
restaurants, three K-BOB’S Steakhouses, three BuddyFreddys restaurants, two
Whistle Junction restaurants, two Western Sizzlin restaurants, two Holiday House
restaurants, two JJ North’s Grand Buffets, two Casa Bonita Mexican theme
restaurants, one Pecos Diamond Steakhouse and one Bar-H Steakhouse. The Company
also had four restaurants currently closed for remodeling and repositioning, one
restaurant is leased to a third-party operator and the net assets of another
closed restaurant reported as property held for sale. The Company's restaurants
are located in Alabama, Arkansas, Arizona, Colorado, Florida, Idaho, Louisiana,
Mississippi, Montana, New Mexico, Oklahoma, Oregon, Tennessee, Texas, Utah,
Washington and Wyoming.
 
 As of
January 28, 2008, the Company owned and operated 12 franchised HomeTown Buffets,
seven JB’s Family restaurants, five Whistle Junction restaurants, four
BuddyFreddys restaurants, three 4B’S restaurants, three Holiday House Family
restaurants, three Western Sizzlin restaurants,  two JJ North’s Grand
Buffet,  two K-BOB’S Steakhouses, one Pecos Diamond Steakhouse, one
Bar-H Steakhouse and one Casa Bonita Mexican restaurant. The Company also had
six restaurants currently closed for remodeling and repositioning, three
restaurants leased to third-party operators and the net assets of another closed
restaurant reported as 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
Company evaluates the performance of its operating segments based on pre-tax
income.
 
 Summarized
financial information concerning the Company’s reportable segments is shown in
the following table. The other assets presented in the consolidated balance
sheet and not in the reportable segments relate to the Company as a whole, and
not individual segments. Also certain corporate overhead income and expenses in
the consolidated statements of operations are not included in the reportable
segments.
  (Dollars
      in Thousands)52
      Weeks Ended
                          January 26, 2009
                        
                        Buffets
                        
                        
                        Non-Buffets
                        
                        
                        Other
                        
                        
                        TotalRevenues
                        
                        $
                        69,467
                        
                        
                        $
                        28,389
                        
                        
                        $
                        —
                        
                        
                        $
                        97,856Interest
      income
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        13
                        
                        
                        
                        13Interest
      expense
                        
                        
                        (6
                        )
                        
                        
                        —
                        
                        
                        
                        (1,147
                        )
                        
                        
                        (1,153
                        )Depreciation
      & amortization
                        
                        
                        1,927
                        
                        
                        
                        650
                        
                        
                        
                        45
                        
                        
                        
                        2,622Impairment
      of long-lived assets
                        
                        
                        198
                        
                        
                        
                        14
                        
                        
                        
                        —
                        
                        
                        
                        212Income
      (loss) before income taxes
                        
                        
                        2,560
                        
                        
                        
                        2,352
                        
                        
                        
                        (3,575
                        )
                        
                        
                        1,337Total
      assets
                        
                        
                        24,215
                        
                        
                        
                        12,872
                        
                        
                        
                        4,120
                        
                        
                        
                        41,207
  F-20
 (Dollars
      in Thousands)52
      Weeks Ended
                      January 28, 2008
                    
                    Buffets
                    
                    
                    Non-Buffets
                    
                    
                    Other
                    
                    
                    TotalRevenues
                    
                    $
                    42,859
                    
                    
                    $
                    25,873
                    
                    
                    $
                    —
                    
                    
                    $
                    68,732Interest
      income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    24
                    
                    
                    
                    24Interest
      expense
                    
                    
                    (151
                    )
                    
                    
                    —
                    
                    
                    
                    (707
                    )
                    
                    
                    (858
                    )Depreciation
      & amortization
                    
                    
                    1,402
                    
                    
                    
                    626
                    
                    
                    
                    70
                    
                    
                    
                    2,098Impairment
      of long-lived assets
                    
                    
                    647
                    
                    
                    
                    754
                    
                    
                    
                    —
                    
                    
                    
                    1,401Income
      (loss) before income taxes
                    
                    
                    (1,853
                    )
                    
                    
                    1,694
                    
                    
                    
                    (3,157
                    )
                    
                    
                    (3,316
                    )Total
      assets
                    
                    
                    19,223
                    
                    
                    
                    11,818
                    
                    
                    
                    4,661
                    
                    
                    
                    35,702
  NOTE
9 — STOCKHOLDERS’ EQUITY
 
 Common
Stock
 
 Holders
of Common Stock are entitled to one vote per share on all matters to be voted
upon by the stockholders and do not have cumulative voting rights. Subject to
preferences that 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 ratably such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefore. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock shall be entitled to assets of the Company remaining after payment of the
Company's liabilities and the liquidation preference, if any, of any outstanding
Preferred Stock. All outstanding shares of Common Stock are fully paid and
non-assessable. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock, which the
Company may designate and issue in the future. The Company paid an annual cash
dividend of $0.60 in both fiscal 2009 and fiscal 2008. On February 20, 2009, the
Board of Directors voted to suspend its annual dividend
indefinitely.
 
 Preferred
Stock
 
 The Board
of Directors has the authority, without further vote or action by the
stockholders, to provide for the issuance of up to 1,500,000 shares of Preferred
Stock from time to time in one or more series with such designations, rights,
preferences and privileges and limitations as the Board of Directors may
determine, including the consideration received therefore. The Board of
Directors also has authority to determine the number of shares comprising each
series, dividend rates, redemption provisions, liquidation preferences, sinking
fund provisions, conversion rights and voting rights without approval by the
holders of Common Stock. Although it is not possible to state the effect that
any issuance of Preferred Stock might have on the rights of holders of Common
Stock, the issuance of Preferred Stock may have one or more of the following
effects: (i) to restrict the payment of dividends on the Common Stock, (ii) to
dilute the voting power and equity interests of holders of Common Stock, (iii)
to prevent holders of Common Stock from participating in any distribution of the
Company's assets upon liquidation until any liquidation preferences granted to
holders of Preferred Stock are satisfied, or (iv) to require approval by the
holders of Preferred Stock for certain matters such as amendments to the
Company's Certificate of Incorporation or any reorganization, consolidation,
merger or other similar transaction involving the Company. As a result, the
issuance of Preferred Stock may, under certain circumstances, have the effect of
delaying, discouraging or preventing bids for the Common Stock at a premium over
the market price thereof, or a change in control of the Company, and could have
a material adverse effect on the market price for the Common Stock.
 
 F-21
 Common
Stock Repurchase
 
 On
January 4, 2006, the Company announced that it had received necessary approval
from its lender to commence with a buyback program to purchase up to 250,000
common shares.  As of January 26, 2009, the Company has not
repurchased any shares under the buyback program.  The timing and
amount of shares purchased will be based on prevailing market conditions and
other factors.  As of April 22, 2009, the Company had 3,213,075 common
shares outstanding.
 
 NOTE
10 — EMPLOYEE BENEFIT PLANS
  401(k)
Plan
  In May
1998, the Company established a 401(k) plan available to certain employees who
have attained age 21, work 30 hours or more per week, and have met certain
minimum service requirements. The plan allows participants to allocate up to 15%
of their annual compensation before taxes for investment in several investment
alternatives. Employer contributions are at the discretion of the Company. The
Company’s contributions to the plan were approximately $0 and $5,000 for fiscal
2009 and 2008, respectively.  The plan had fewer than 50 participants
as of April 18, 2006 and the Board of Directors authorized the termination of
the plan.  As of April 17, 2007, the plan had 0 participants and had
been terminated.
  1997
Stock Incentive Plan
  In fiscal
year 1998, the Company adopted the 1997 Stock Incentive Plan (the "1997 Plan"),
which authorizes the grant of options to purchase up to 750,000 shares of Common
Stock. The 1997 Plan provides for the award of "incentive stock options," within
the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") and non-statutory options to directors, officers, employees and
consultants of the Company, except that incentive stock options may not be
granted to non-employee directors or consultants. The 1997 Plan provides
participants with incentives which will encourage them to acquire a proprietary
interest in, and continue to provide services to, the Company.  A
special committee appointed by the Board of Directors, has sole discretion and
authority, consistent with the provisions of the 1997 Plan, to determine which
eligible participants will receive options, the time when options will be
granted, the terms of options granted and the number of shares which will be
subject to options granted under the 1997 Plan.
  On
January 31, 2006 we adopted SFAS No. 123(R), “Share Based Payment”.  SFAS
123(R) requires the recognition of compensation costs relating to share based
payment transactions in the consolidated financial statements.  We have
elected the modified prospective application method of reporting.  Prior to
the adoption of SFAS 123(R) we elected to account for stock-based compensation
plans using the intrinsic value method under Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no
compensation cost is recognized and the pro forma effects on earnings and
earnings per share are disclosed as if the fair value approach had been
adopted.  Our stock-based compensation plans are summarized in the table
below:
  Shares
                                
                                Shares
                                
                                PlanName
      of Plan
                                
                                Authorized
                                
                                Available
                                
                                Expiration1997
      Stock Incentive Plan
                                
                                750,000
                                
                                490,000
                                
                                February
      2015
  Stock
options issued under the terms of the plans have, or will have, an exercise
price equal to, or greater than, the fair market value of the common stock at
the date of the option grant, and expire no later than ten years from the date
of grant, with the most recent grant expiring in 2015.
   F-22
  The stock
option transactions and the options outstanding are summarized as
follows:
  52
      Weeks EndedJanuary
      26, 2009
                    
                    
                    January
      28, 2008Options
                    
                    
                    Weighted
      Average
                      Exercise
      Price
                    
                    
                    Options
                    
                    
                    Weighted
      Average
                      Exercise
      PriceOutstanding
      at beginning of period
                    
                    
                    40,000
                    
                    
                    $
                    6.20
                    
                    
                    
                    528,000
                    
                    
                    $
                    11.56Granted
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Exercised
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Forfeited
                    
                    
                    1,000
                    
                    
                    $
                    5.00
                    
                    
                    
                    488,000
                    
                    
                    $
                    12.00Outstanding
      at end of period
                    
                    
                    39,000
                    
                    
                    $
                    6.21
                    
                    
                    
                    40,000
                    
                    
                    $
                    6.20Exercisable
      at end of period
                    
                    
                    39,000
                    
                    
                    $
                    6.21
                    
                    
                    
                    40,000
                    
                    
                    $
                    6.20
  The
following summarizes information about stock options outstanding at January 26,
2009:
  Options
      Outstanding
                      
                      
                      Options
      ExercisableRange
      of Exercise Prices
                      
                      Number
      Outstanding
                      
                      
                      Remaining
      Contractual Life in Years
                      
                      
                      Weighted
      Average Exercise Price
                      
                      
                      Number
      Exercisable
                      
                      
                      Weighted
      Average Exercise Price$5.00
                      
                      
                      11,000
                      
                      
                      
                      0.7
                      
                      
                      $
                      5.00
                      
                      
                      
                      11,000
                      
                      
                      $
                      5.00$6.70
                      
                      
                      28,000
                      
                      
                      
                      6.0
                      
                      
                      $
                      6.70
                      
                      
                      
                      28,000
                      
                      
                      $
                      6.7039,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      39,000
  NOTE
11 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 Fifty-Two
                                            
                                            
                                            Fifty-TwoWeeks
                                            
                                            
                                            WeeksEnded
                                            
                                            
                                            EndedJanuary
      26,
                                              2009
                                            
                                            
                                            January
      28,
                                              2008Cash
      paid for income taxes
                                            
                                            $
                                            190,000
                                            
                                            
                                            $
                                            479,000Cash
      paid for interest
                                            
                                            
                                            968,000
                                            
                                            
                                            
                                            687,000Non-cash
      investing and financing activities are as follows:Exchange
      of other receivable for equipment and leaseholds
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            55,000Exchange
      of note receivable for equipment and leaseholds
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,207,000Adjustment
      relating to lease modification for capital lease
obligation
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,136,000Adjustment
      relating to lease modification for deferred taxes
                                            
                                            
                                            —
                                            
                                            
                                            
                                            590,000Adjustment
      relating to lease modification for fixed assets
                                            
                                            
                                            —
                                            
                                            
                                            
                                            546,000Exchange
      of stock for loan costs
                                            
                                            
                                            252,000
                                            
                                            
                                            
                                            —
 
 
 F-23
 
 NOTE
12 — RELATED PARTY TRANSACTIONS
 
 During
fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert
E. Wheaton, a principal shareholder, officer and director of the Company. 
This loan dated June 15, 2007 is subordinated to the obligation to Wells
Fargo Bank, N.A. and bears interest at 8.5%. In June, 2008, the Company borrowed
an additional $592,000 from Mr. Wheaton under the same terms. This resulted in
an increase in the subordinated note balance from $1,400,000 to
$1,992,000.  The Company expensed and paid $154,000 to Mr. Wheaton for
interest during fiscal 2009. The principal balance and any unpaid interest is
due and payable in full on June 5, 2012. The Company used the funds
borrowed from Mr. Wheaton for working capital requirements.
 
 NOTE
13 — COMMITMENTS AND CONTINGENCIES
 
 Prior to
the Company’s formation in 1998, HTB entered into franchise agreements for each
of its HomeTown Buffet locations which require the payment of a royalty fee to
HomeTown Buffet, Inc. The royalty fee is 2% of the gross sales of each HomeTown
Buffet restaurant. The franchise agreements have a 20-year term (with two
five-year renewal options). The franchisor requires HTB to operate each
restaurant in conformity with Franchise Operating Manuals and Recipe Manuals and
Menus. The franchise agreements also place certain limits on the Company’s
ability to operate competing buffet businesses within specified geographic
areas.  The HomeTown franchisor may terminate a franchise agreement
for a number of reasons, including HTB’s failure to pay royalty fees when due,
failure to comply with applicable laws or repeated failure to comply with one or
more requirements of the franchise agreement. However, many state franchise laws
limit the ability of a franchisor to terminate or refuse to renew a
franchise.
 
 On
February 1, 2005, the Company announced in a press release that it had entered
into a strategic alliance with K-BOB’S USA Inc. and related affiliates. In
accordance with the terms of the strategic alliance, the Company agreed to lend
K-BOB’S up to $1.5 million on a long-term basis. In exchange, K-BOB’S granted
the Company an option to purchase as many as five corporate owned and operated
K-BOB’S restaurants located in New Mexico and Texas.  On January 29,
2007, the Company exercised its option under the terms of the strategic alliance
and purchased three K-BOB’S restaurants. In connection with the purchase, the
Company entered into license agreements which require the payment of certain
fees to K-BOB’S based on the restaurant gross sales.
 
 On April
21, 2006, the Company announced in a press release that it had entered into a
strategic alliance with Western Sizzlin Corporation. In connection with the
strategic alliance, the Company acquired three Western Sizzlin franchised
restaurants and entered into license agreements with Western Sizzlin Corporation
for each. The license agreements require the payment of certain fees to Western
Sizzlin Corporation based on the restaurant gross sales.
 
 In
connection with the Company’s employment contract with Robert E. Wheaton, the
Company’s Chief Executive Officer and President, the Company has agreed to pay
Mr. Wheaton six years salary and bonus if he resigns related to a change of
control of the Company or is terminated, unless the termination is for
cause.
 
 In
addition to the foregoing, the Company and its subsidiaries are engaged in
ordinary and routine litigation incidental to its business. Management does not
anticipate that the resolution of any of these routine proceedings will require
payments that will have a material effect on the Company's consolidated
statements of operations or financial position or liquidity.
 
 NOTE
14 — ACQUISITIONS
 
 The
Company purchased through two independently capitalized subsidiaries certain
operating assets of twenty (20) Barnhill’s Buffet restaurants in two separate
transactions dated January 31, 2008 and February 29, 2008. The two transactions
were subject to Bankruptcy Court approval which was granted for the purchase of
sixteen (16) units on January 31, 2008 and four (4) units on February 29, 2008.
Total consideration paid for the restaurant assets was $6.075 million of which
approximately $5.7 million was allocated to  restaurant equipment and
$375,000 was allocated to for food and related inventories.
 
 F-24
 In
accordance with the terms of the asset purchase agreements, the Company acquired
title to all the necessary restaurant equipment to operate the restaurants and
the intellectual property that permits the perpetual right to utilize the
Barnhill’s Buffet name. The Company negotiated the assumption of certain real
estate lease obligations with terms that ranged in length from less than one (1)
year to twelve (12) years. No other liabilities were assumed in connection with
the two acquisitions. The Company financed the two acquisitions with the Credit
Facility with Wells Fargo Bank, N.A.  The Credit Facility included a
$7,000,000 term loan and a $2,000,000 revolving line of credit.  The
term loan was subsequently increased to $8,000,000 when the additional four (4)
units were purchased on February 29, 2008. In connection with the Credit
Facility, Wells Fargo was granted 42,400 shares of the Company’s restricted
common stock.  The shares were valued at $252,000 and that amount is
being amortized as interest over the life of the loan.
 
 NOTE
15 — SUBSEQUENT EVENTS
 
 On
February 20, 2009, the Board of Directors voted to indefinitely suspend the
annual dividend on the outstanding common stock of the Company.
 
 
 
 F-25
  EXHIBIT
INDEX
 
 ExhibitNo.
                    Description3.1
                    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 Form10-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 (incorporated by reference to the Company’s
      filing on Form 10-K on April 25, 2008)10.15
                    Loan
      Agreement dated June 15, 2007 with Robert E. Wheaton and Suzanne H.
      Wheaton (incorporated by reference to the Company’s filing on Form 10-K on
      April 25, 2008)10.16
                    Asset
      Purchase Agreement dated December 2, 2007 with Barnhill’s Buffet, Inc.
      including First Amendment (incorporated by reference to the Company’s
      filing on Form 10-K on April 25, 2008)10.17
                    Asset
      Purchase Agreement dated February 5, 2008 with Barnhill’s Buffet, Inc.
      including First Amendment14.1
                    Code
      of Ethics21.1
                    List
      of Subsidiaries23.1
                    Consent
      of Mayer Hoffman McCann P.C.31.1
                    Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act Of 200231.2
                    Certification
      of Principal Accounting Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act Of 200232.1
                    Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act Of 200232.2
                    Certification
      of Principal Accounting Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act Of 200299.1
                    Press
      Release dated April 29, 2009 reporting earnings for fiscal
      2009
 __________
 *
              Previously
      filed as an exhibit to the Registration Statement on Form S-1, Amendment
      No. 1 (Registration No. 333-32249).
 **
              Previously
      filed as an exhibit to the Registration Statement on Form S-1, Amendment
      No. 2 (Registration No. 333-32249).
   E-1