**UNITED STATES**

# **SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

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**x**                                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

**Forthe fiscal year ended January 29, 2007**

**OR**

**o**                                   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 asSpecified in its Charter)

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| **Delaware**                     |   | **84-1430786**       |
|----------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of |   | (I.R.S. Employer     |
| Incorporation or  Organization)  |   | Identification  No.) |

 

| **1312 N. Scottsdale Rd.**                |   | **85257**  |
|-------------------------------------------|--------|------------|
| **Scottsdale,  Arizona**                  |   | (Zip Code) |
| (Address of  Principal Executive Offices) |   |       |

 

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

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**Securities registered pursuant to Section 12(b) of theAct:** 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 awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x.

Indicate by check mark whether registrant is a large accelerated filer,an accelerated filer or a non-accelerated filer (as defined in Exchange ActRule 12b-2).

| Large Accelerated Filer o |   | Accelerated Filer o |   | Non-Accelerated Filer x |
|--------------------------------|--------|--------------------------|--------|------------------------------|

 

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

AtAugust 14, 2006, the last business day of the registrant’s second fiscalquarter, there were outstanding 3,170,675 shares of the registrant’s commonstock, $.001 par value.  The aggregatemarket value of common stock held by non-affiliates of the registrant(1,182,087 shares) based on the last reported sale price of the common stock asreported on the NASDAQ Small Cap Market on August 14, 2006, ($8.04 per share)was $9,503,979.  For purposes of thiscomputation, all executive officers, directors, and 10% beneficial owners ofthe registrant were deemed to be affiliates. Such determination should not be deemed an admission that such executiveofficers, directors, or 10% beneficial owners are, in fact, affiliates of theregistrant.

Thenumber of shares outstanding of the registrant’s common stock was 3,170,675shares as of April 17, 2007.

Documentsincorporated by reference: Portions of the registrant’s Proxy Statement for the2007 Annual Meeting of Stockholders, to be filed with the Securities andExchange Commission within 120 days after January 29, 2007, are incorporated byreference into Part III of this Form 10-K.

TheExhibit Index is contained in Part IV herein on Page E-1.

 

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**STAR BUFFET, INC., ANDSUBSIDIARIES**

**Index to Annual Report onForm 10-K**

**For the Fiscal Year EndedJanuary 29, 2007**

** **
|           | ** ** | ** **                                                                                                           | ** ** | **Page** |
|-----------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------|
|      |       | **PART I**                                                                                                           |       |     |
|      |       | ** **                                                                                                           |       |     |
| ITEM 1.   |       | BUSINESS                                                                                                             |       | 1        |
|      |       |                                                                                                                 |       |     |
| ITEM  1A. |       | RISK  FACTORS                                                                                                        |       | 6        |
|      |       |                                                                                                                 |       |     |
| ITEM 1B.  |       | UNRESOLVED STAFF COMMENTS                                                                                            |       | 9        |
|      |       |                                                                                                                 |       |     |
| ITEM 2.   |       | PROPERTIES                                                                                                           |       | 9        |
|      |       |                                                                                                                 |       |     |
| ITEM  3.  |       | LEGAL  PROCEEDINGS                                                                                                   |       | 10       |
|      |       |                                                                                                                 |       |     |
| ITEM 4.   |       | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                  |       | 11       |
|      |       |                                                                                                                 |       |     |
|      |       | **PART II**                                                                                                          |       |     |
|      |       |                                                                                                                 |       |     |
| ITEM 5.   |       | MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES |       | 12       |
|      |       |                                                                                                                 |       |     |
| ITEM 6.   |       | SELECTED FINANCIAL DATA                                                                                              |       | 14       |
|      |       |                                                                                                                 |       |     |
| ITEM 7.   |       | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTSOF  OPERATIONS                          |       | 17       |
|      |       |                                                                                                                 |       |     |
| ITEM 7A.  |       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                                                          |       | 26       |
|      |       |                                                                                                                 |       |     |
| ITEM 8.   |       | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                          |       | 27       |
|      |       |                                                                                                                 |       |     |
| ITEM 9.   |       | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING ANDFINANCIAL  DISCLOSURE                                |       | 27       |
|      |       |                                                                                                                 |       |     |
| ITEM 9A.  |       | CONTROLS AND PROCEDURES                                                                                              |       | 27       |
|      |       |                                                                                                                 |       |     |
| ITEM  9B. | ** ** | OTHER  INFORMATION                                                                                                   |       | 27       |
|      | ** ** |                                                                                                                 |       |     |
|      |       | **PART  III**                                                                                                        |       |     |
|      |       | ** **                                                                                                           |       |     |
| ITEM 10.  |       | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                                   |       | 28       |
|      |       |                                                                                                                 |       |     |
| ITEM 11.  |       | EXECUTIVE COMPENSATION                                                                                               |       | 28       |
|      |       |                                                                                                                 |       |     |
| ITEM 12.  |       | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT ANDRELATED STOCKHOLDER  MATTERS                      |       | 28       |
|      |       |                                                                                                                 |       |     |
| ITEM 13.  |       | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                       |       | 28       |
|      |       |                                                                                                                 |       |     |
| ITEM 14.  |       | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                               |       | 28       |
|      |       |                                                                                                                 |       |     |
|      |       | **PART IV**                                                                                                          |       |     |
|      |       |                                                                                                                 |       |     |
| ITEM 15.  |       | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                           |       | 29       |
|      |       |                                                                                                                 |       |     |
|      |       | SIGNATURES                                                                                                           |       | 30       |
|      |       |                                                                                                                 |       |     |
|      |       | EXHIBIT  INDEX                                                                                                       |       | E-1      |
|      |       |                                                                                                                 |       |     |
|      |       | FINANCIAL STATEMENTS                                                                                                 |       | F-1      |

 

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**Cautionary Statements Regarding Forward-Looking Statements**

Thisannual report on Form 10-K contains forward-looking statements, within themeaning of the Securities Exchange Act of 1934 and the Securities Act of 1933,which are subject to known and unknown risks, uncertainties and other factorswhich may cause the actual results, performance or achievements of the Companyto be materially different from any future results, performance or achievementsexpressed 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 shouldnot place undue reliance on these forward-looking statements, which speak only asof the date of this annual report on Form 10-K. All these forward-lookingstatements are based on information available to the Company at this time, andthe Company assumes no obligation to update any of these statements. Actualresults could differ from those projected in these forward-looking statementsas a result of many factors, including those identified in the section titled “RiskFactors” under Item 1A and elsewhere. You should review and consider thevarious disclosures made by the Company in this report, and those detailed fromtime to time in the Company’s filings with the Securities and ExchangeCommission, that attempt to advise you of the risks and factors that may affectthe Company’s future results.

**PART I**

**Item 1. *Business***

**Overview**

Star Buffet, Inc., aDelaware corporation (“Star” and collectively with its subsidiaries, the “Company”),is a multi-concept restaurant holding company. As of January 29, 2007, theCompany owned and operated 14 franchised HomeTown Buffets, six JB’s Familyrestaurants, five Whistle Junction restaurants, four BuddyFreddys restaurants,four K-BOB’S Steakhouses, two Holiday House Family restaurants, one WesternSizzlin restaurant, one JJ North’s County Buffet, one Pecos Diamond Steakhouseand one Casa Bonita Mexican theme restaurant. The Company also had threerestaurants currently closed for remodeling and repositioning, four restaurantsleased to third-party operators and the net assets of another closed restaurantreported as property held for sale. The Company’s restaurants are located inArizona, Colorado, Florida, Georgia, Idaho, Montana, New Mexico, Texas, Utah,Washington and Wyoming.

**Recent Developments**

On April 22, 2007 the principal of Holiday HouseCorporation (“HHC”) notified the Company that he planned to turn control of thebusiness and associated assets over to the Company.  On April 23, 2007 the Company began operatingthe business.  The Company hired HHC’semployees, notified HHC’s creditors of its intent to operate the business andcommenced negotiations with HHC’s landlord to craft an acceptable facilitylease.  Management believes that thetotal amount of the note receivable from HHC will be recovered.

On February 23, 2007, the Board of Directors approvedthe Company’s fourth annual dividend. This year the dividend is $0.60 per common share and is payable on June6, 2007 to shareholders of record on May 8, 2007.

On January 30, 2007, the Company announced in a pressrelease that it had completed the acquisition of a Western Sizzlin restaurantin Magee, Mississippi.  The purchaseprice was $1,400,000 which included the land, building and restaurantequipment.  The transaction includedseller financing of $900,000.

**Business**

The Company’s objective is to operate a portfolio ofmid-scale, family-oriented, well-established restaurant brands throughout thesoutheastern and western United States. The Company believes that certainmanagement practices, when applied uniformly across a diversified base ofrestaurants concepts, will result in consistently profitable financialperformance. Key elements of the Company’s management practices are:

•               *Performance Measurements.*The Company has developed food, labor and customerservice performance measurements and reporting mechanisms that allow managementto effectively monitor restaurant-level operations, benchmark restaurantperformance statistics and communicate best-practices across its restaurantoperations. Through the use of its restaurant-level incentive and bonusprograms oriented toward motivating employees, as well as its traditionalrecognition programs, the Company seeks to motivate its employees, minimizeturnover and foster an environment where employees are 

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encouragedto share their ideas and cost saving suggestions with management.

•               *Cost Control.*The Company has been able to maintain a minimalcorporate management structure by expanding the number of restaurantssupervised by field managers, having corporate personnel oversee multipleadministrative functions and appropriate outsourcing of certain functions whencost effective. The Company’s corporate infrastructure provides purchasing,information systems, finance, accounting and payroll so that restaurantmanagers can focus on restaurant operations and guest satisfaction.

•   *Brand Management.*TheCompany’s strategy is to separately manage each of its restaurant brands  Although each brand is positioned somewhatdifferently in the market, the Company utilizes many of the same marketingtechniques such as local store marketing, radio advertising and promotionalmailers to increase customer awareness and loyalty.

**Segment and Related Reporting**

The Company has fourreporting segments: HomeTown Buffet, North’s Star, Florida Buffets Division andSummit Restaurant Division. The Company’s reportable segments are based onbrand similarities and certain contractual requirements. The HomeTown Buffetsegment includes the Company’s 14 franchised HomeTown Buffet restaurants. TheNorth’s Star segment includes a JJ North’s Country Buffet restaurant and aWestern Sizzlin restaurant.  The North’sStar segment also includes two non-operating restaurants, a JJ North’s CountryBuffet and a North’s Star Buffet.  TheNorth’s Star Buffet restaurant is leased to a third party.  Results for fiscal 2007 also include 33 weeksof operations for a JJ North’s Country Buffet restaurant that was closed whenthe lease expired and was not renewed. The Florida Buffets Division includes two BuddyFreddys restaurants, twoBuddyFreddys Country Buffet restaurants, two Holiday House restaurants and fiveWhistle Junction restaurants. Results for fiscal 2007 also include 19 weeks ofoperations for one Buddy Freddys restaurant that was closed when the leaseexpired and was not renewed. In addition, another four restaurants in FloridaBuffet Division are currently non-operating with two leased to third parties.The Summit Restaurants Division includes the Company’s eight JB’s Restaurants,which includes two non-operating JB’s Restaurants of which one is leased to athird party. The Summit Restaurants Division also includes the Casa Bonitarestaurant in Denver, Colorado, four K-BOB’S Steakhouses and one Pecos DiamondSteakhouse.   (See Item 15, FinancialStatements, Note 8.)

**Growth Strategy**

The Company seeks growth primarily through theacquisition of existing restaurants which management believes can benefit fromthe Company’s management practices. The Company may supplement its program ofacquisitions with the purchase of restaurant properties that can be convertedto the Company’s  existing brands andminority investments in or strategic alliances with other restaurant chains.The Company’s growth strategy is designed to capitalize on the opportunities managementperceive, to acquire profitable, well-managed restaurants.

·                  *Acquisitions.*The Company believes that a number of acquisitionopportunities exist in the mid-scale, family-oriented restaurant segment thatincludes buffets, cafeterias, grill/buffets, family dining and familysteakhouses.. The Company believes that many restaurants in this segment areprivately owned and may be available for acquisition particularly when theowners decide to retire.  Other restaurantsmay become available for purchase when corporate owners decide to convert froma company store to a franchisor business model or when a company is faced witha financial reorganization.

·                  *Restaurant Conversions.* In recent years, a number of chains in thefamily dining and budget steakhouse segments of the restaurant industry haveexperienced operational difficulties and declining performance. The Companybelieves that these difficulties are the result of increasing competition fromcasual dining chains and casual steakhouses which offer superior productquality and service at only moderately higher prices. Many of these familydining restaurants and budget steakhouses occupy desirable locations andprovide opportunities to acquire desirable restaurant locations at competitiveprices. The Company believes that these locations can be acquired and convertedat lower prices or leased at lower rates when compared to the cost of newconstruction.

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·                  *Minority Investments andStrategic Alliances.*The Companyintends to seek minority investments in, or strategic alliances with, otherrestaurant chains. The Company believes that minority investments can providean attractive investment opportunity for the Company and may facilitate theacquisition of such chains at a later date. The Company believes that strategicalliances can be an excellent corporate arrangement and may result in moreproductive use of under-performing restaurant properties at lower cost and lessrisk than outright acquisition.

**Restaurant Concepts**

**HomeTown Buffet Division**

*General.*The Company, through its subsidiary HTB Restaurants,Inc. (“HTB”), has a franchise agreement with HomeTown Buffet, Inc., awholly-owned subsidiary of Buffets, Inc.  HTB entered into a franchise agreement foreach location which requires among other items, the payment of a continuingroyalty fee to HomeTown Buffet, Inc. The royalty fee is based on 2% of theaggregate gross sales of all the Company’s HomeTown Buffet restaurants. Each ofthe franchise agreements has a 20-year term (with two five-year renewal options).The franchisor requires HTB to operate each restaurant in conformity withFranchise Operating Manuals, Recipe Manuals and Menus and HTB is to use itsbest efforts to achieve the highest practicable level of sales and promptlymake royalty payments. The franchise agreement restricts the Company fromoperating restaurants within a geographic radius of the franchisor’srestaurants.

The HomeTown franchisor may terminate a franchiseagreement for a number of reasons, including HTB’s failure to pay royalty feeswhen due, failure to comply with applicable laws or repeated failure to complywith one or more requirements of the franchise agreement. Many state franchiselaws limit the ability of a franchisor to terminate or refuse to renew afranchise. Such laws generally provide that a franchisor may terminate afranchise agreement only if the franchisee violates a material and substantialprovision of the agreement and fails to remedy the violation within a specifiedperiod.

HTB operates 14 HomeTown Buffet restaurants in Arizona(8), Colorado (1), New Mexico (2), Utah (2) and Wyoming (1). The restaurantsare approximately 10,200 square feet and seat approximately 375 customers.

**North’s Star Division**

*General.* TheNorth’s Star Division consists of two JJ North’s Country Buffet restaurants andone North’s Star Buffet restaurant and one Western Sizzlin restaurant inGriffin, Georgia. The Company’s two JJ North’s Country Buffet restaurants arelocated in Idaho and Washington. The JJ North’s Country Buffet restaurantlocated in Boise, Idaho is closed for remodeling and repositioning, and theNorth’s Star Buffet restaurant located in Arizona is leased to a third party.The restaurants are approximately 6,500 to 9,000 square feet and seatapproximately 210 to 320 customers.

**Florida Buffets Division**

*General.* TheCompany, through several transactions, has acquired 15 properties in Floridawhich currently operate under the brand names BuddyFreddys Country Buffet (6),Whistle Junctions (5), BuddyFreddys (2) and Holiday House (2).  The Whistle Junction restaurants wereacquired by the Company on November 28, 2006. Four of the six BuddyFreddysCountry Buffet restaurants have been closed for repositioning. Two of theseclosed restaurants have been leased to third-party operators and the net assetsof one closed restaurant are classified as property held for sale. BuddyFreddysrestaurants and Whistle Junction restaurants average approximately 10,000square feet with seating for approximately 350 guests. Holiday House restaurantsaverage approximately 5,500 square feet with seating for approximately 170guests.

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* *

**Summit  Restaurants Division**

*General*.  The Company, through its subsidiary SummitFamily Restaurants, Inc., (“Summit”), operates eight JB’s Restaurants inArizona (1), Montana (2), Utah (4) and Idaho (1) and one Casa Bonita restaurantlocated in Denver, Colorado.  Inaddition, on January 31, 2006 Summit acquired three K-BOB’S Restaurantoperations, two in Texas and one in Tucumcari, New Mexico.  Subsequently on February 28, 2006 Summitacquired a fourth K-BOB’S Restaurant operation in Dumas, Texas.  On July 11, 2006, Summit acquired a PecosDiamond Steakhouse in Artesia, New Mexico. Two of the eight JB’s restaurants were closed for repositioning at theend of fiscal 2006, with one of the two being leased to a third-party operator.The JB’s restaurants are approximately 4,300 to 5,600 square feet in size andseat approximately 110 to 180 customers. The Casa Bonita facility is approximately 52,000 square feet withseating capacity for approximately 4,000 customers.  K-BOB’S Restaurants are approximately 4,800square feet with seating capacity for 155 customers. The Pecos DiamondSteakhouse is approximately 5,000 square feet with seating capacity for 150customers.

In connection with the acquisition of certain JB’sRestaurants in 1998 from JB’s Family Restaurants, Inc., a subsidiary of CKERestaurants, Inc., the Company entered into a one-year franchise agreement foreach location requiring among other items, the payment of royalty fees. Afterthe acquisition of certain JB’s Restaurants, the Company negotiated a ten-yearoption for annual renewable franchise agreements for each of the JB’sRestaurants the Company operates.  InFebruary 2000, the Company elected not to renew these franchise agreements. TheCompany entered into a License Agreement with the JB’s Licensor for each JB’sRestaurant in November 2002. The license agreement is being amortized as anintangible asset and allows the Company to use the JB’s trademarks through August31, 2012 with an option for an additional ten years. The Company acquired theJB’s license agreement in November 2002 for $773,000. Amortization expense forfiscal 2006, 2005 and 2004 was $78,000 each year.

During the fiscalyear ending January 30, 2006 the Company provided management and supportservices to K-BOB’S USA, Inc, for six K-BOB’S Restaurant operations through astrategic alliance agreement entered into between the companies on February 1,2005.  Three of the operations includedin that strategic alliance agreement are those acquired January 31, 2006.  The Company continued to provide services toK-BOB’S USA, Inc. for the remaining units until the agreement was terminated inJune 2006.  The charge for services wasone and a half percent of revenues.  Themanagement fee was approximately $11,000 and $48,000 for the years endingJanuary 29, 2007 and January 30, 2006, respectively.

**Licenses, Trademarks and Service Marks**

The Company owns the trademarks and service marks forBuddyFreddys, Casa Bonita, Holiday House, Pecos Diamond Steakhouse and WhistleJunction and has a license agreement with CKE Restaurants, Inc. for use of the “Star”name and design. The Company has an agreement with North’s Restaurants, Inc.for a permanent, royalty-free, transferable license to use the intangibleproperty of JJ North’s. The Company utilizes the HomeTown Buffet mark pursuantto various franchise agreements. The Company has a license agreement to use theJB’s trademark through August 31, 2022 and has agreements to permit, undercertain circumstances, the use of the K-BOB’S Steakhouse and Western Sizzlinbrands.

###### **Competition**

The Company competes on the basis of the quality andvalue of food products offered, price, service, location, ambiance and overalldining experience.  The Company’scompetitors include a large and diverse group of restaurant chains andindividually owned restaurants.  Thenumber of restaurants with operations similar to those of the Company has grownconsiderably in recent years.  As theCompany and its principal competitors expand operations in various geographicareas, competition can be expected to intensify.

**Seasonality**

The Company’s business is moderately seasonal in naturebased on locations in the northern and southern states. For the majority of theCompany’s restaurants, the highest volume periods are in the first and secondfiscal quarters and lowest volume periods typically occur during the third andfourth fiscal quarters.

**Employees**

As of April 17, 2007, the Company employed approximately1,700 persons, of whom approximately 1,690 were restaurant

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employees. Restaurant employees include salaried management and bothfull-time and part-time workers paid on an hourly basis. No Company employeesare covered by collective bargaining agreements. The Company believes that itsrelations with its employees are generally good.

**Directors and Executive Officers**

Thefollowing table sets forth certain information regarding the Company’sdirectors and executive officers:

| Name                              | ** ** | **Age** | ** ** | **Position**                                     |
|-----------------------------------|------------|---------|------------|--------------------------------------------------|
| Robert E. Wheaton                 |       | 55      |       | Chief Executive Officer,  President and Chairman |
| Ronald E. Dowdy                   |       | 50      |       | Group Controller, Treasurer  and Secretary       |
| Thomas G. Schadt                  |       | 65      |       | Director                                         |
| Phillip “Buddy” Johnson |       | 55      |       | Director                                         |
| Craig B. Wheaton                  |       | 50      |       | Director                                         |
| B. Thomas M. Smith, Jr.           |       | 72      |       | Director                                         |
| Todd S. Brown                     |       | 50      |       | Director                                         |

 

*Robert E. Wheaton*has served as the Chief Executive Officer and President and as a director ofthe Company since its formation in July 1997. Mr. Wheaton has been Chairman ofthe Board since September 1998. Mr. Wheaton served as Executive Vice Presidentof CKE Restaurants, Inc. from January 1996 through January 1999. From April1995 to January 1996, he served as Vice President and Chief Financial Officerof 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 1991as 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 andSecretary since February 1999. Mr. Dowdy served as Controller to Holiday HouseCorporation 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’sinitial public offering in September 1997. Mr. Schadt has been the ChiefExecutive Officer of a privately-held beverage distribution company, BearCreek, L.L.C., since 1995. From 1976 to 1994, he held several positions withPepsiCo, Inc., most recently, Vice President of Food Service.

*Phillip “Buddy” Johnson*has served as a director of the Company sinceFebruary 1999. Mr. Johnson has served as the Supervisor of Elections ofHillsborough County since March 2003. From March 2001 until March 2003, heserved as the Director of the Division of Real Estate in the Florida Departmentof Business and Professional Regulations. Mr. Johnson served as President ofthe BuddyFreddys Division from April 1998 until March 2001. From 1980 until1998, he was the founding Chairman and CEO of BuddyFreddys Enterprises. From1991 to 1996, Mr. Johnson served as Republican floor leader in the FloridaHouse of Representatives. Mr. Johnson also served on the executive committee ofThe Foundation for Florida’s Future, a non-profit corporation established in1995 by former governor, Jeb Bush.

*Craig B. Wheaton*has served as a director of the Company sinceFebruary 1999. Mr. Wheaton is a partner in the law firm Kilpatrick StocktonLLP. His main areas of practice include employee benefits, executivecompensation and general corporate law. Mr. Wheaton received his B.A. degree,with honors, from the University of Virginia and his J.D. degree from WakeForest University. From 1993 to 1998, Mr. Wheaton was a member of the TaxCouncil of the North Carolina Bar Association Section on Taxation and chair ofits Employee Benefits Committee from 1995 to 1997. He is a member and formerpresident of the Triangle Benefits Forum. He is a member of the SouthernEmployee Benefits Conference, the Employee Benefits Committee of the AmericanBar Association’s Section of Taxation, the National Pension Assistance Project’sNational Lawyers Network, and the National Association of Stock PlanProfessionals.

*B.Thomas M. Smith, Jr.* has served as a director of the Companysince June 2002.  Mr. Smith was aconsultant with ITT Corp. from January 1996 to December 1996 and is nowretired.  From 1988 until 1995, he wasVice President and Director of Corporate Purchasing for ITT Corp.  Mr. Smith served as director of RepublicBancorp from June 1999 until April 2005.

*Todd S.Brown* has served as a director of the Company since June2004.  Mr. Brown has served Brown CapitalAdvisors, Inc. as the President since November 1999. From 1994 to November1999, Mr. Brown served as Senior Vice President, Chief Financial Officer andDirector of Phoenix Restaurant Group, Inc. (formerly DenAmerica Corp.). Mr.Brown served as Senior Manager in Audit

 

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and Consulting atDeloitte Touche LLP from 1980 to 1994. Mr. Brown received an MBA from theUniversity of Missouri in 1980 and a BA from Southern Methodist University in1978.

The auditcommittee 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. Allthree members of the audit committee are “independent” as determined inaccordance with the NASDAQ listing standards.

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

***Our Growth Strategy Depends Uponour Ability to Acquire and Successfully Integrate Additional Restaurants.***The Company intends continue to pursue a strategy ofmoderate growth, primarily through acquisitions. The success of this strategywill depend in part on the ability of the Company to acquire additionalrestaurants or to convert acquired sites into restaurants, within both existingand new markets.  The success of theCompany’s growth strategy is dependent upon numerous factors, many of which arebeyond the Company’s control, including the availability of suitableacquisition opportunities, the availability of appropriate financing, andgeneral economic conditions.  The Companymust compete with other restaurant operators for acquisition opportunities andwith other restaurant operators, retail stores, companies and developers fordesirable site locations.  Many of theseentities have substantially greater financial and other resources than theCompany. Many of its acquired restaurants may be located in geographic marketsin which the Company has limited or no operating experience. There can be noassurance that the Company will be able to identify, negotiate and consummateacquisitions or that acquired restaurants or converted restaurants can beoperated profitably and successfully integrated into the Company’s operations.

**Acquisitions involve a number ofspecial risks that could adversely affect the Company’s business, results ofoperations and financial condition, including the diversion of management’sattention, the assimilation of the operations and personnel of the acquiredrestaurants and the potential loss of key employees.  In particular, the failure to maintainadequate operating and financial control systems or unexpected difficultiesencountered during expansion could materially and adversely affect the Company’sbusiness, financial condition and results of operations.  There can be no assurance that anyacquisition will not materially and adversely affect the Company or that anysuch acquisition will enhance the Company’s business.  Furthermore, the Company is unable to predictthe likelihood of any additional acquisitions being proposed or completed inthe near future.**

**A strategy of growth throughacquisitions requires access to significant capital resources. If the Companydetermines to make a sizeable acquisition, the Company may be required to selladditional equity or debt securities or obtain additional creditfacilities.  The sale of additionalequity or convertible debt securities could result in additional dilution tothe Company’s stockholders. At present, the Company has only limitedavailability under its credit facility which expires on June 15, 2007.  There can be no assurance that this creditfacility will be replaced or a new credit facility will be established by theCompany for any such acquisition.**

**     Since inception, the Company’s acquisitionstrategy has, in certain circumstances, incorporated loans to sellers tofacilitate certain proposed transactions. In most cases, these loans are secured and include, as part of terms andconditions, the Company’s right to convert the loan into ownership of therestaurants.  Also, certain of theseloans contain favorable interest rates and repayment terms if the loans are notconverted to ownership for one or more reasons. This financing strategy entails significant risk.  Currently, the Company has three loansreceivable outstanding and one significant-sized loan receivable is in default.  However, because the Company anticipates fullrecovery of amounts outstanding through either repayment or conversion toownership, historically no provision for doubtful accounts has beenestablished.  While estimates to datehave been within our expectations, a change in the financial condition ofspecific restaurant companies or in overall industry trends may result infuture adjustments to Company estimates of recoverability of these receivables.**

***Operating Results can beAdversely 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 leasescontain escalating or fair market renewal rates. There can be no assurance thatthese facility leases can renewed or if they are renewed, can be done so atlease rates that permit the restaurant to be operated at a profit.

***Dependence Upon and RestrictionsResulting from HomeTown Franchise Agreements.*** The Company operates its 14 HomeTown BuffetRestaurants through its wholly-owned subsidiary, HTB Restaurants, Inc., whichis a party to a Franchise Agreement with the HomeTown Franchisor for each suchrestaurant.

**The performance of the Company’sHomeTown Buffet restaurant operations is directly related to the success of theHomeTown Buffet restaurant system, including the management and financialcondition of HomeTown as well as restaurants operated by**

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**HomeTownand their other franchisees.  Theinability of such restaurants to compete effectively could have a materialadverse effect on the Company’s operations. The success of the Company’s HomeTown Buffet restaurants depends in parton the effectiveness of the HomeTown franchisor’s marketing efforts, newproduct development programs, quality assurance and other operational systemsover which the Company has little or no control.  For example, adverse publicity involvingHomeTown restaurants operated by the franchisor or their other franchiseescould have a material adverse effect on the Company’s business, financialcondition and results of operations.**

**The Company’s operations withrespect to its HomeTown restaurants are subject to certain restrictions imposedby policies and procedures of HomeTown currently in effect, which may changefrom time to time.  These restrictionslimit the Company’s ability to modify the menu items and decor of itsrestaurants and may have the effect of limiting the Company’s ability to pursueits business plan. Furthermore, the franchise agreement with the HomeTownfranchisor imposes substantial restrictions on the Company’s ability to operatecertain restaurant formats and to open additional restaurants in certaingeographical areas.**

***Dependence Upon and RestrictionsResulting from JB’s License Agreement.*** The Company, through its subsidiary Summit,operates six JB’s Restaurants in Arizona, Montana and Utah. The Company enteredinto a License Agreement with the JB’s Licensor for each such restaurant inNovember 2002. The license agreement allows the Company to use the JB’strademarks through August 31, 2012 with an option for an additional ten years.

**The performance of the Company’s JB’sRestaurant operations is directly related to the success of the JB’s Restaurantsystem, including the management and financial condition of the JB’s Licensoras well as the number of restaurants operated by the JB’s Licensor and theirother licensees or franchisees.  Theinability of such restaurants to compete effectively could have a materialadverse effect on the Company’s operations as well as the number ofrestaurants.  The success of the Company’sJB’s Restaurants depends in part on the effectiveness of the JB’s Licensor’smarketing efforts, new product development programs, quality assurance andother operational systems over which the Company has little or no control.  For example, adverse publicity involving JB’sRestaurants operated by the licensor or its other licensees or franchiseescould have a material adverse effect on the Company’s business, financialcondition and results of operations.**

***Dependence Upon and RestrictionsResulting from K-BOB’S License Agreement.*** The Company, through its subsidiary Summit,operates four K-BOB’S Restaurants in New Mexico and Texas. The Company enteredinto multiple License Agreements with the K-BOB’S Licensor for each restaurant.The license agreement allows the Company to use the K-BOB’S trademarks.

**The performance of the Company’sK-BOB’S restaurant operations is directly related to the success of the K-BOB’SRestaurant system, including the management and financial condition of theK-BOB’S Licensor as well as the number of restaurants operated by the K-BOB’SLicensor and their other licensees or franchisees.  The success of the Company’s K-BOB’SRestaurants depends in part on the effectiveness of the K-BOB’S Licensor’smarketing efforts, new product development programs, quality assurance andother operational systems over which the Company has little or no control.  For example, adverse publicity involvingK-BOB’S Restaurants operated by the licensor or its other licensees orfranchisees could have a material adverse effect on the Company’s business,financial condition and results of operations.**

***Dependence Upon and RestrictionsResulting from Western Sizzlin License Agreement.*** The Company, through its subsidiary Star BuffetManagement, Inc., operates two Western Sizzlin Restaurants in Georgia andMississippi. The Company entered into a License Agreement with the WesternSizzlin Licensor for each restaurant. The license agreement allows the Companyto use the Western Sizzlin trademarks.

**The performance of the Company’sWestern Sizzlin Restaurant operations is directly related to the success of theWestern Sizzlin Restaurant system, including the management and financialcondition of the Western Sizzlin Licensor as well as the number of restaurantsoperated by the Western Sizzlin Licensor and their other licensees orfranchisees.  The success of the Company’sWestern Sizzlin Restaurants depends in part on the effectiveness of the WesternSizzlin Licensor’s marketing efforts, new product development programs, qualityassurance and other operational systems over which the Company has little or nocontrol.  For example, adverse publicityinvolving Western Sizzlin Restaurants operated by the licensor or its otherlicensees or franchisees could have a material adverse effect on the Company’s business,financial condition and results of operations.**

***The Company’s Quarterly Resultsare 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 fromquarter to quarter.  In particular, theCompany’s quarterly results can vary as a result of acquisitions and costsincurred to integrate newly acquired entities. Conversely,

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**theCompany’s restaurant revenue and results of operations can vary due torestaurant closures and associated costs connected with these closures.  A number of the Company’s restaurants arelocated in areas which are susceptible to severe winter weather conditions ortropical storm patterns which may have a negative impact on customer trafficand restaurant revenues.  Accordingly,the Company believes that period-to-period comparisons of its operating resultsare not necessarily meaningful and that such comparisons cannot be relied uponas indicators of future performance. Seasonal and quarterly fluctuations can have a material adverse effecton the Company’s business, results of operation and financial condition.**

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

***The Restaurant Industry isComplex and Volatile.***Food service businesses are often affected by changes in consumer tastes,national, regional and local economic conditions and demographic trends. Theperformance of individual restaurants may be adversely affected by factors suchas traffic patterns, demographic considerations and the type, number andlocation of competing restaurants. Multi-unit food service businesses such as the Company’s can also bematerially and adversely affected by publicity resulting from poor food quality,illness, injury or other health concerns or operating issues stemming from onerestaurant or a limited number of restaurants. The Company’s business could beadversely affected by terrorist attacks directed toward the food supply chainor public concerns about the safety of the food supply chain. Dependence onfrequent deliveries of fresh produce and groceries subjects food servicebusinesses such as the Company’s to the risk that shortages or interruptions insupply, caused by adverse weather or other conditions, could adversely affectthe availability, quality and cost of ingredients. The Company’s profitabilityis highly sensitive to increases in food, labor and other operating costs thatcannot always be passed on to its guests in the form of higher prices orotherwise compensated for.  In addition,unfavorable trends or developments concerning factors such as inflation,increased food, labor, employee benefits, including increases in hourly wageand unemployment tax rates and utility costs, increases in the number andlocations of competing buffet-style restaurants, regional weather conditionsand the availability of experienced management and hourly employees may alsoadversely 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 theCompany’s guests could reduce traffic in some or all of the Company’srestaurants or impose practical limits on pricing, either of which could have amaterial adverse effect on the Company’s business, financial condition andresults of operations.

***The Company is Dependent on ItsKey Personnel.*** TheCompany believes that its success will depend in part on the services of itskey executives, including Robert E. Wheaton, Chairman of the Board, ChiefExecutive Officer and President.  TheCompany does not maintain key man life insurance.  The loss of the services of Mr. Wheaton couldhave a material adverse effect upon the Company’s business, financial conditionand results of operations, as there can be no assurances that a qualifiedreplacement would be available in a timely manner if at all.

***The Restaurant Industry isSubject to Substantial Government Regulation.*** The restaurant industry is subject to federal,state and local government regulations, including those relating to thepreparation and sale of food as well as building and zoning requirements.  In addition, the Company is subject to lawsgoverning its relationship with employees, including minimum wage requirements,overtime, working and safety conditions and citizenship requirements.  The failure to obtain or retain food licensesor an increase in the minimum wage rate, employee benefit costs or other costsassociated with employees, could have a material adverse effect on the Company’sbusiness, financial condition and results of operations.  Many of the Company’s employees are paidhourly rates based upon the federal and state minimum wage laws.  Changes in federal, state or localrequirements increasing the minimum wage may result in higher labor costs tothe Company.

***Effect of Certain Charter andBylaw Provisions.***Certain provisions of the Company’s Certificate of Incorporation and Bylaws mayhave the effect of making it more difficult for a third party to acquire, ordiscourage a third party from attempting to acquire, control of theCompany.  Such provisions could limit theprice that certain investors might be willing to pay in the future for sharesof the Company’s Common Stock.  TheCompany’s Certificate of Incorporation allows the Company to issue up to1,500,000 shares of currently undesignated Preferred Stock, to determine thepowers, preferences, rights, qualifications and limitations or restrictionsgranted to or imposed on any un-issued series of that Preferred Stock, and tofix the number of shares constituting any such series and

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**thedesignation of such series, without any vote or future action by thestockholders.  The Preferred Stock couldbe issued with voting, liquidation, dividend and other rights superior to therights of the Common Stock.  TheCertificate of Incorporation also prohibits the ability of stockholders to callspecial meetings.  The Company’s Bylawsrequire advance notice to nominate a director or take certain otheractions.  Such provisions may make itmore difficult for stockholders to take certain corporate actions and couldhave the effect of delaying or preventing a change in control of the Company.  In addition, the Company has not elected tobe excluded from the provisions of Section 203 of the Delaware GeneralCorporation Law, which imposes certain limitations on transactions between acorporation and “interested” stockholders, as defined in such provisions.**

***Possible Volatility of StockPrice.*** The stock markethas from time to time experienced significant price and volume fluctuationsthat are unrelated to the operating performance of particular companies.  The volume of trading in the market for theCompany’s common stock is limited, which may make it difficult to liquidateyour investment and can increase price volatility.  Due to changes in the balance of buy and sellorders and other factors, the price of the Company’s common stock can changefor reasons unrelated to the performance of the business of the Company.  Fluctuations in the Company’s operatingresults, failure of such operating results to meet the expectations of stockmarket analysts and investors, changes in stock market analyst recommendationregarding the Company, the success or perceived success of competitors of theCompany, as well as changes in general economic or market conditions andchanges in the restaurant industry may also have a significant adverse affecton the market price of the Common Stock.

***Sale of a Substantial Number ofShares of Our Common Stock Could Cause the Market Price to Decline.*** Sales of a substantial number of shares of ourcommon stock in the public market could substantially reduce the prevailingmarket price of our common stock. As of April 17, 2007, 3,170,675 shares ofcommon stock were outstanding and 528,000 shares were issuable upon exercise ofoutstanding options at exercise prices of $5.00, $6.70 and $12.00. The Companycannot predict the effect, if any, that sales of shares of the Company’s commonstock or the availability of such shares for sale will have on prevailingmarket prices. However, substantial amounts of the Company’s common stock couldbe sold in the public market, which may adversely affect prevailing marketprices for the common stock.

***Control by One PrincipalStockholder.*** Robert E.Wheaton, Chairman of the Board, Chief Executive Officer and President,currently beneficially owns approximately 48% of our total equity securities,assuming exercise of vested employee stock options, and possesses approximately48% of the total voting power. Thus Mr. Wheaton has the ability to control orsignificantly influence all matters requiring the approval of our stockholders,including the election of our directors. Sales of a substantial number ofshares of our common stock by Mr. Wheaton or other principal shareholders inthe public market could substantially reduce the prevailing market price of ourcommon stock.

**Item 1B.  *UnresolvedStaff Comments***

The Company is not anaccelerated filer, a large accelerated filer, or a well known seasoned issuerand consequently is not subject to the requirements of this item 1B.

**Item 2.*Properties***

The Company’s corporateheadquarters are located in Scottsdale, Arizona.

The Company’s restaurantsare primarily freestanding locations. As of January 29, 2007 32 of 47 of theCompany’s restaurant facilities were leased. The leases expire on dates rangingfrom 2007 to 2013 with the majority of the leases providing for renewaloptions. All leases provide for specified periodic rental payments and mostcall for additional rent based upon revenue volume. Most leases provide forperiodic rent increases and require the Company to maintain the property,property and general liability insurance and pay associated taxes and expenses.

The following is a summary of the Company’s restaurantproperties as of January 29, 2007:
| ** ** | ** ** | **HomeTown  Buffet** | ** ** | **North’s  Star** | ** ** | **Florida  Buffets** | ** ** | **Summit  Restaurants** | ** ** | **Total** | ** ** |
|------------|------------|----------------------|------------|------------------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|
| Owned      |       | 3                    |       | 1                      |       | 5                    |       | 6                       |       | 15        |       |
| Leased     |       | 11                   |       | 3                      |       | 10                   |       | 8                       |       | 32        |       |
| Total      |       | 14                   |       | 4                      |       | 15                   |       | 14                      |       | 47        |       |

 

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As of January 29, 2007, the Company’s restaurants are located in thefollowing states:

**Number of Restaurants**

 
| **State**  | ** ** | **HomeTown  Buffet** | ** ** | **North’s  Star** | ** ** | **Florida  Buffets** | ** ** | **Summit  Restaurants** | ** ** | **Total** | ** ** |
|------------|------------|----------------------|------------|------------------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|
| Arizona    |       | 8                    |       | 1                      |       | —               |       | 1                       |       | 10        |       |
| Colorado   |       | 1                    |       | —                 |       | —               |       | 1                       |       | 2         |       |
| Florida    |       | —               |       | —                 |       | 15                   |       | —                  |       | 15        |       |
| Georgia    |       | —               |       | 1                      |       | —               |       | —                  |       | 1         |       |
| Idaho      |       | —               |       | 1                      |       | —               |       | 1                       |       | 2         |       |
| Montana    |       | —               |       | —                 |       | —               |       | 2                       |       | 2         |       |
| New Mexico |       | 2                    |       | —                 |       | —               |       | 2                       |       | 4         |       |
| Texas      |       | —               |       | —                 |       | —               |       | 3                       |       | 3         |       |
| Utah       |       | 2                    |       | —                 |       | —               |       | 4                       |       | 6         |       |
| Washington |       | —               |       | 1                      |       | —               |       | —                  |       | 1         |       |
| Wyoming    |       | 1                    |       | —                 |       | —               |       | —                  |       | 1         |       |
| Total      |       | 14                   |       | 4                      |       | 15                   |       | 14                      |       | 47        |       |

 

As of January 29, 2007, the Company’s non-operating restaurants arelocated in the following states:

**Number of Non-Operating Restaurants**

 
| **State** | ** ** | **HomeTown  Buffet** | ** ** | **North’s  Star** | ** ** | **Florida  Buffets** | ** ** | **Summit  Restaurants** | ** ** | **Total** | ** ** |
|-----------|------------|----------------------|------------|------------------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|
| Arizona   |       | —               |       | 1                      |       | —               |       | —                  |       | 1         |       |
| Florida   |       | —               |       | —                 |       | 4                    |       | —                  |       | 4         |       |
| Idaho     |       | —               |       | 1                      |       | —               |       | 1                       |       | 2         |       |
| Utah      |       | —               |       | —                 |       | —               |       | 1                       |       | 1         |       |
| Total     |       | —               |       | 2                      |       | 4                    |       | 2                       |       | 8         |       |

 

Four of the non-operating restaurants have been leasedto third-party operators, and one is currently being remodeled and will beoperated by the Company.  Two restaurantsremain closed for remodeling and repositioning and the net assets of one closedrestaurant are classified as property held for sale.

**Item 3.*Legal Proceedings***

     In 1998, the Company had previously suedNorth’s Restaurants, Inc. (“North’s”) which resulted in a negotiated settlementin favor of the Company represented by an Amended and Restated Promissory Note(the “Star Buffet Promissory Note).  As aresult of North’s failing to live up to its obligations under the Star BuffetPromissory Note, on March 2, 2004, the Company filed a second action against North’s in the United States DistrictCourt, District of Utah, Central Division, Case No. 2:04CV00211, seeking notless than $2,934,453 plus interest at the default rate as set forth in the StarBuffet Promissory Note.  In January 2005,the court granted the Company’s motion for summary judgment, ruling that North’shad failed to pay amounts owed to the Company. The Company obtained a judgment against North’s in the amount of$3,059,905.78, plus $15,980.45 in attorney’s fees and costs.

     In a related proceeding, North’s othersecured creditor, Pacific Mezzanine, initiated litigation against North’sseeking a monetary judgment and the appointment of a receiver. On October 4,2004, the Circuit Court of the State of Oregon for the County of Jacksonapproved an order appointing a receiver.

     Prior to August 2006, the receiver hadremitted only approximately $56,000 in loan repayments. In April, 2006 theCompany noticed all relevant parties of its intent to foreclose to seek to expeditethe liquidation of North’s assets and repay amounts owed to the Company.  Subsequent to the notice, the receiver movedto have the Company’s foreclosure of North’s assets set aside so that certain

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ofNorth’s assets could be sold to a third party. The motion was approved.  OnAugust 7, 2006, the receiver paid the Company approximately $1,291,000 from apartial sale of the assets. The Company’snote, together with the obligation to the other significant creditor of North’s,is secured by the real and personal property, landlord leases, trademarks andall other intellectual property owned by North’s. The Company believes currentand future cash flows including potential asset sales are adequate for recoveryof the remaining principal amount of the note receivable. The Company has notrecognized any interest income with respect to this note since August2003.  The Company has not provided anallowance for bad debts for the note as of January 29, 2007.

The Company is from time to time the subject of complaintsor litigation from customers alleging injury on properties operated by theCompany, illness or other food quality, health or operational concerns. Adversepublicity resulting from such allegations may materially adversely affect theCompany and its restaurants, regardless of whether such allegations are validor whether the Company is liable. The Company also is the subject of complaintsor allegations from employees from time to time. The Company believes that thelawsuits, claims and other legal matters to which it has become subject in thecourse of its business are not material to the Company’s business, financialcondition or results of operations, but an existing or future lawsuit or claimcould result in an adverse decision against the Company that could have amaterial adverse effect on the Company’s business, financial condition andresults of operations.

**Item 4.*Submission of Matters to a Vote of SecurityHolders***

No matters were submitted to theshareholders of the Company during the fourth quarter of fiscal 2007.

 

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**PART II**

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

**Market Information and Holders.** The Company’s Common Stock is listed on the NASDAQCapital Market under the symbol “STRZ”. As of April 17, 2007, there wereapproximately 512 record holders of the Company’s Common Stock. The followingtable sets forth the high and low bid quotations for the Common Stock, asreported by NASDAQ.
| **Fiscal Year** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
| ** **           | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First  Quarter       |       | $        | 9.46       |     | $          | 6.98 |   | $ | 8.75 |   | $ | 6.19 |   |
| Second  Quarter      |       | 8.39     |       | 7.02     |       | 9.24 |   | 6.53 |   |
| Third  Quarter       |       | 8.85     |       | 7.80     |       | 8.47 |   | 6.80 |   |
| Fourth Quarter       |       | 9.97     |       | 8.01     |       | 8.07 |   | 6.26 |   |
|                      |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

**Dividends.** On February 23, 2007, the Board of Directorsapproved the Company’s fourth annual dividend. The dividend this year is $0.60per common share and is payable on June 6, 2007 to shareholders of record onMay 8, 2007.

**Equity Compensation Plan Information.**

The following table gives information about our sharesof 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 plans  approved by  security holders     |       | 528,000                                                                                                              |       | $                                                                           | 11.56      |                                                                                                                                                                                                             | 1,000      |   |
| Equity  compensation plans not  approved by  security holders |       | —                                                                                                               |       | —                                                                      |       | —                                                                                                                                                                                                           |       |
| Total                                                         |       | 528,000                                                                                                              |       | $                                                                           | 11.56      |                                                                                                                                                                                                             | 1,000      |   |

 

The exercise price of the options granted andexercisable at January 29, 2007 is $5.00 for 12,000 options, $6.70 for 28,000options and $12.00 for 488,000 options.

 

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**STOCKPRICE PERFORMANCE GRAPH**

** **
| ** **                           | ** ** | **Cumulative Total Return** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | **1/02**                              | ** ** | **1/03** | ** ** | **1/04** | ** ** | **1/05** | ** ** | **1/06** | ** ** | **1/07** | ** ** |
|                                 |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| STAR BUFFET, INC                     |       | 100.00                                |       | 82.75 |   | 196.48 |   | 246.08 |   | 305.41 |   | 396.88 |   |
| NASDAQ COMPOSITE                     |       | 100.00                                |       | 69.40 |   | 108.83 |   | 110.64 |   | 126.10 |   | 136.65 |   |
| DOW JONES US  RESTAURANTS & BARS |       | 100.00                                |       | 72.41 |   | 110.17 |   | 136.76 |   | 154.35 |   | 181.85 |   |

 

The Stock Price Performance Graph shall not be deemedincorporated by reference by any general statement incorporating by referencethis report on Form 10-K into any filing under the Securities Act of 1933 orunder the Securities Exchange Act of 1934, except to the extent that wespecifically incorporate this information by reference, and shall not otherwisebe deemed filed under such Acts.

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**Item 6.*Selected Financial Data***

Thefollowing paragraphs set forth selected consolidated financial data for theperiods indicated. The selected consolidated financial data for each of thefive fiscal years in the period ended January 29, 2007, has been derived fromour consolidated financial statements for those years, which have been auditedby Mayer Hoffman McCann P.C., our independent accountants.

Theselected and other data presented below should be read in conjunction with the “ConsolidatedFinancial Statements”, and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included elsewhere in this Form 10-K.

Theoperating results for the 52-week period ended January 29, 2007 included 52weeks of operations for the Company’s 14 franchised HomeTown Buffetrestaurants, six JB’s Family restaurants, four BuddyFreddys restaurants (two ofthe four BuddyFreddys restaurants are BuddyFreddys Country Buffet restaurants),three K-BOB’S Steakhouses, two Holiday House Family restaurants, one JJ North’sCountry Buffet restaurant, and one Casa Bonita Mexican theme restaurant.  The results also included the following, oneK-BOB’S Steakhouse for 48 weeks, one Pecos Diamond Steakhouse for 29 weeks, oneWestern Sizzlin restaurant for 16 weeks and five Whistle Junction restaurantsfor 9 weeks.  In addition, operatingresults include 19 weeks for one Buddy Freddy’s Country Buffet and 33weeks for one JJ North’s Country Buffet restaurant closed during the fiscalyear 2007.  Eight restaurants were closed at the end of the 2007fiscal year for repositioning. Four of the eight closed restaurants have beenleased to third-property operators, three restaurants remain closed forremodeling and repositioning and another closed restaurant was reported asproperty held for sale.

Theoperating results for the 52-week period ended January 30, 2006 included 52weeks of operations for the Company’s 14 franchised HomeTown Buffetrestaurants, six JB’s restaurants, five BuddyFreddys restaurants (three of thefive BuddyFreddys restaurants were BuddyFreddys Country Buffet restaurants),two JJ North’s Country Buffet restaurants, two Holiday House restaurants andone Casa Bonita restaurant.  In addition,operating results included 10 weeks for one JB’s restaurant and one CasaBonita restaurant closed during the fiscal year 2006.  Inaddition to the above, the Company purchased in September 2005 a restaurantfacility in Rexburg, Idaho.  The Companyleases the restaurant facility to a JB’s franchisee. Eight restaurants were closed at the end of the 2006fiscal year for repositioning. Three of the eight closed restaurants wereleased to third-property operators, four restaurants were held for remodelingand repositioning and another closed restaurant was reported as property heldfor sale.  One of the four restaurantsclosed for remodeling and repositioning located in Laramie, Wyoming was sold inMarch 2006.

Theoperating results for the 53-week period ended January 31, 2005 included 53weeks of operations for the Company’s 14 franchised HomeTown Buffetrestaurants, seven JB’s restaurants, five BuddyFreddys restaurants (three ofthe five BuddyFreddys restaurants were BuddyFreddys Country Buffetrestaurants), two JJ North’s Country Buffet restaurants, two Casa Bonitarestaurants, and two Holiday House restaurants. In addition, operating results included 30, 34 and 52 weeks forthree JJ North’s Country Buffet restaurants closed during fiscal year 2005 and35 and 51 weeks for two HomeTown Buffet restaurants. Results for 2005 alsoincluded 34 weeks of operations for one North’s Star Buffet restaurant and 39weeks of operations for one JB’s Restaurant. Eight restaurants were closed at the end of the 2005 fiscal year forrepositioning. Four of the eight closed restaurants were leased tothird-property operators, three restaurants were held for remodeling andrepositioning and one closed restaurant was property held for sale.

Theoperating results for the 52-week period ended January 26, 2004 included 52weeks of operations for 16 franchised HomeTown Buffet restaurants, eight JB’srestaurants, five BuddyFreddys restaurants (three of the five BuddyFreddysrestaurants were BuddyFreddys Country Buffet restaurants), five JJ North’sCountry Buffet restaurants, two Casa Bonita restaurants, two Holiday Houserestaurants and one North’s Star Buffet restaurant.  In addition, operating results included 19and 2 weeks for two BuddyFreddys Country Buffet restaurants closed duringfiscal year 2004 and 12 weeks of operations for one JJ North’s Country Buffetrestaurant and 5 weeks of operations for one JB’s Restaurant. Five restaurantswere closed at the end of the 2004 fiscal year for repositioning. Three of thefive closed restaurants were leased to third-property operators and one closedrestaurant was property held for sale. One property was sold during fiscal2004.

Theoperating results for the 52-week period ended January 27, 2003 included 52weeks of operations for 16 franchised HomeTown Buffet restaurants, nine JB’srestaurants, seven BuddyFreddys restaurants (five of the seven BuddyFreddysrestaurants were BuddyFreddys Country Buffet restaurants), six JJ North’sCountry Buffet restaurants, two Casa Bonita restaurants, two Holiday Houserestaurants and one North’s Star Buffet restaurant.  In addition, operating results included 23and 9 weeks for two BuddyFreddys Country Buffet restaurants closed duringfiscal year 2003 and 19 weeks of operations for one JJ North’s Country Buffetrestaurant and 30 weeks of operations for one JJ North’s Family Restaurantopened July 2002. Seven restaurants were closed at the end of the 2003 fiscalyear for repositioning. Two of the seven closed restaurants were leased and theproperty of another one was under contract to be sold and was reported asproperty held for sale. During the first quarter of fiscal 2004, threerestaurants were closed that resulted in an impairment of leaseholdimprovements of $188,000 included in the fourth quarter of 2003.

 

14

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**SELECTED FINANCIAL DATA**

**(In thousands except per share amounts and restaurant unit data)**
| ** **                                                                                                  | ** ** | **Fifty-Two**               | ** ** | **Fifty-Two**               | ** ** | **Fifty-Three**             | ** ** | **Fifty-Two**               | ** ** | **Fifty-Two**               | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                  | ** ** | **Weeks**                   | ** ** | **Weeks**                   | ** ** | **Weeks**                   | ** ** | **Weeks**                   | ** ** | **Weeks**                   | ** ** |
| ** **                                                                                                  | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** |
| ** **                                                                                                  | ** ** | **Jan. 29, 2007** | ** ** | **Jan. 30, 2006** | ** ** | **Jan. 31, 2005** | ** ** | **Jan. 26, 2004** | ** ** | **Jan. 27, 2003** | ** ** |
| **Consolidated  Statements of Operations Data:**                                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Total  revenues                                                                                             |       | $                           | 58,648     |                        | $          | 56,305                      |       | $                           | 64,856     |                        | $          | 68,090 |   | $ | 74,798 |   |
| Costs  and expenses                                                                                         |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| Food costs                                                                                                  |       | 20,789                      |       | 19,429                      |       | 22,336                      |       | 23,275                      |       | 25,867                      |       |
| Labor costs                                                                                                 |       | 19,674                      |       | 18,260                      |       | 21,712                      |       | 23,015                      |       | 25,695                      |       |
| Occupancy and other expenses                                                                                |       | 12,772                      |       | 11,763                      |       | 12,963                      |       | 14,042                      |       | 15,960                      |       |
| General and administrative expenses                                                                         |       | 2,426                       |       | 2,179                       |       | 2,694                       |       | 2,433                       |       | 3,739                       |       |
| Depreciation and amortization                                                                               |       | 2,069                       |       | 2,120                       |       | 2,440                       |       | 2,670                       |       | 3,485                       |       |
| Impairment of long-lived assets                                                                             |       | —                      |       | 369                         |       | 2,838                       |       | 1,083                       |       | 1,831                       |       |
| Total costs and expenses                                                                                    |       | 57,730                      |       | 54,120                      |       | 64,983                      |       | 66,518                      |       | 76,577                      |       |
| Income  (loss) from operations                                                                              |       | 918                         |       | 2,185                       |       | (127                        | )          | 1,572                       |       | (1,779                      | )          |
| Interest  expense                                                                                           |       | (616                        | )          | (648                        | )          | (640                        | )          | (569                        | )          | (614                        | )          |
| Gain  on sale of assets                                                                                     |       | 230                         |       | —                      |       | —                      |       | —                      |       | —                      |       |
| Reversal  of litigation accrual                                                                             |       | —                      |       | —                      |       | —                      |       | 400                         |       | —                      |       |
| Other  income, net                                                                                          |       | 422                         |       | 680                         |       | 427                         |       | 319                         |       | 272                         |       |
| Income  (loss) before income taxes (benefit)                                                                |       | 954                         |       | 2,217                       |       | (340                        | )          | 1,722                       |       | (2,121                      | )          |
| Income  taxes (benefit)                                                                                     |       | 238                         |       | 420                         |       | (168                        | )          | 609                         |       | (815                        | )          |
| Income  (loss) before cumulative effect of a change in  accounting principle                                |       | 716                         |       | 1797                        |       | (172                        | )          | 1,113                       |       | (1,306                      | )          |
| Cumulative  effect of a change in accounting principle —  net of tax benefit                           |       | —                      |       | —                      |       | —                      |       | —                      |       | (560                        | )          |
| Net  income (loss)                                                                                          |       | $                           | 716        |                        | $          | 1797                        |       | $                           | (172       | )                           | $          | 1,113 |   | $ | (1,866 | ) |
| Income  (loss) per common share before cumulative  effect of a change in accounting principle — basic  |       | $                           | 0.23       |                        | $          | 0.60                        |       | $                           | (0.06      | )                           | $          | 0.38 |   | $ | (0.44 | ) |
| Income  (loss) per common share before cumulative  effect of a change in accounting principle —diluted |       | $                           | 0.23       |                        | $          | 0.56                        |       | $                           | (0.06      | )                           | $          | 0.38 |   | $ | (0.44 | ) |
| Cumulative  effect of a change in accounting principle —  net of tax benefit                           |       | —                      |       | —                      |       | —                      |       | —                      |       | (0.19                       | )          |
| Net  income (loss) per common share — basic                                                            |       | $                           | 0.23       |                        | $          | 0.60                        |       | $                           | (0.06      | )                           | $          | 0.38 |   | $ | (0.63 | ) |
| Net  income (loss) per common share — diluted                                                          |       | $                           | 0.23       |                        | $          | 0.56                        |       | $                           | (0.06      | )                           | $          | 0.38 |   | $ | (0.63 | ) |
| Weighted  average shares outstanding — basic                                                           |       | 3,147                       |       | 2,990                       |       | 2,950                       |       | 2,950                       |       | 2,950                       |       |
| Weighted  average shares outstanding — diluted                                                         |       | 3,164                       |       | 3,209                       |       | 2,950                       |       | 2,950                       |       | 2,950                       |       |
| **Balance sheet data:**                                                                                     | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Total  assets                                                                                               |       | $                           | 34,168     |                        | $          | 34,824                      |       | $                           | 34,880     |                        | $          | 35,954 |   | $ | 39,446 |   |
| Total  debt and capital lease obligations  including  current portion                                       |       | 7,621                       |       | 7,815                       |       | 8,207                       |       | 7,967                       |       | 9,134                       |       |
| Stockholders’  equity                                                                                  |       | $                           | 19,178     |                        | $          | 20,284                      |       | $                           | 19,775     |                        | $          | 20,790 |   | $ | 19,677 |   |
| **Other data:**                                                                                             | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Operating  units (1)                                                                                        |       |                        |       |                        |       |                        |       |                        |       |                        |       |
| HomeTown Buffet                                                                                             |       | 14                          |       | 14                          |       | 14                          |       | 16                          |       | 16                          |       |
| North’s Star                                                                                           |       | 2                           |       | 2                           |       | 2                           |       | 6                           |       | 7                           |       |
| Florida Buffets                                                                                             |       | 11                          |       | 7                           |       | 7                           |       | 7                           |       | 9                           |       |
| Summit Restaurants                                                                                          |       | 12                          |       | 7                           |       | 9                           |       | 10                          |       | 12                          |       |
| Non-Operating                                                                                               |       | 8                           |       | 8                           |       | 8                           |       | 5                           |       | 7                           |       |
| **Total**                                                                                                   |       | 47                          |       | 38                          |       | 40                          |       | 44                          |       | 51                          |       |

----

(1)             At the end of the respective periods.

 

15

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*Supplemental Quarterly Financial Data (Unaudited)*. Quarterly financial results for the 52 weeks ended January 29, 2007, andthe 52 weeks ended January 30, 2006 are summarized below.

(In thousands except per sharedata)
| ** **                         | ** ** | **For the 52 Weeks Ended January 29, 2007** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **FIRST**                                                                      | ** ** | **SECOND** | ** ** | **THIRD** | ** ** | **FOURTH** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **QUARTER**                                                                    | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **TOTAL** | ** ** |
| Revenues                           |       | $                                                                              | 18,762     |   | $ | 13,632 |   | $ | 12,185 |   | $ | 14,068 |   | $ | 58,648 |   |
| Income  (loss) from operations     |       | 778                                                                            |       | 581 |   | (401 | ) | (40 | ) | 918 |   |
| Income  (loss) before income taxes |       | 996                                                                            |       | 503 |   | (474 | ) | (71 | ) | 954 |   |
| Income  taxes (benefit)            |       | 324                                                                            |       | 193 |   | (219 | ) | (60 | ) | 238 |   |
| Net  income (loss)                 |       | $                                                                              | 672        |   | $ | 310 |   | $ | (255 | ) | $ | (11 | ) | $ | 716 |   |
| Earnings  (loss) per share:        |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Basic                              |       | $                                                                              | 0.22       |   | $ | 0.10 |   | $ | (0.08 | ) | $ | (0.00 | ) | $ | 0.23 |   |
| Diluted                            |       | $                                                                              | 0.21       |   | $ | 0.10 |   | $ | (0.08 | ) | $ | (0.00 | ) | $ | 0.23 |   |

 

    (In thousands except pershare data)
| ** **                         | ** ** | **For the 52 Weeks Ended January 30, 2006** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **FIRST**                                                                      | ** ** | **SECOND** | ** ** | **THIRD** | ** ** | **FOURTH** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **QUARTER**                                                                    | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **TOTAL** | ** ** |
| Revenues                           |       | $                                                                              | 18,869     |   | $ | 13,788 |   | $ | 11,493 |   | $ | 12,155 |   | $ | 56,305 |   |
| Income  (loss) from operations     |       | 1,424                                                                          |       | 860 |   | (160 | ) | 61 |   | 2,185 |   |
| Income  (loss) before income taxes |       | 1,338                                                                          |       | 1,050 |   | (156 | ) | (15 | ) | 2,217 |   |
| Income  taxes (benefit)            |       | 462                                                                            |       | 342 |   | (54 | ) | (330 | ) | 420 |   |
| Net  income (loss)                 |       | $                                                                              | 876        |   | $ | 708 |   | $ | (102 | ) | $ | 315 |   | $ | 1797 |   |
| Earnings  (loss) per share:        |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Basic                              |       | $                                                                              | 0.30       |   | $ | 0.24 |   | $ | (0.03 | ) | $ | 0.10 |   | $ | 0.60 |   |
| Diluted                            |       | $                                                                              | 0.27       |   | $ | 0.22 |   | $ | (0.03 | ) | $ | 0.10 |   | $ | 0.56 |   |

 

 (In thousands except per share data)

 

16

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**Item 7.*Management’s Discussion and Analysis ofFinancial Condition and Results of Operations***

The following Management’s Discussion and Analysis ofFinancial Condition and Results of Operations should be read in conjunctionwith the consolidated financial statements, and the notes thereto, presentedelsewhere in this Form 10-K. The operating results for the 52-weekperiod ended January 29, 2007 and for the 52-week period ended January 30, 2006and the 53-week period ended  January 31,2005 are based on the composition of restaurant operations as discussed in Item6 — Selected Financial Data.

Star Buffet, Inc., aDelaware corporation (“Star” and collectively with its subsidiaries, the “Company”),is engaged in the restaurant industry. As of January 29, 2007, the Companyowned and operated 14 franchised HomeTown Buffets, six JB’s Family restaurants,five Whistle Junction restaurants, four BuddyFreddys restaurants, four K-BOB’SSteakhouses, two Holiday House Family restaurants, one Western Sizzlinrestaurant, one JJ North’s County Buffet, one Pecos Diamond Steakhouse and oneCasa Bonita Mexican theme restaurant.  The Company also had three restaurants currently closed for remodelingand repositioning, four restaurants leased to third-party operators and the netassets of another closed restaurant reported as property held for sale. TheCompany’s restaurants are located in eight western states and Florida, Georgiaand Texas.

The Company’s sales were$58.6 million in fiscal 2007, a 4.2 percent increase from $56.3 million infiscal 2006.  Sales from the Company’s 11new store openings in fiscal 2007 were approximately $5.8 million. Sales lostfrom closed stores represented approximately $3.6 million.  Same store sales decreased approximately1.2%.  The net income for fiscal 2007 was$716,000 ($0.23 per diluted share) compared with net income for fiscal 2006 of$1,797,000 ($0.56 per diluted share). Fiscal 2006 was impacted by non-cash charges of $369,000 for impairmentof long-lived assets compared to $0 of non-cash charges for impairment oflong-lived assets in fiscal 2007.

The implementation of the Company’s acquisition andstrategic alliance strategies, and the costs associated with integrating new,under-performing or unprofitable restaurants, acquired or otherwise operated bythe Company may affect the comparability of historical and future periods andhave a material adverse effect on the Company’s results of operations.

Operating performance of our restaurants is directly andheavily influenced by the overall state of the national and local economieswhere our restaurants are located. When overall economic conditions negativelyimpact the financial performance of an individual restaurant, we periodicallyconsider all the factors influencing that restaurant, such as operationalefficiencies, local demographic changes, local construction activity,competition and other related factors. We then assess the possibility ofwhether we can improve both the short-term and long-term financial results, atleast to a level sufficient to recover our investment in the leaseholdimprovements and equipment assets. There have been and likely will continue tobe situations where we will make the decision that an asset is impaired and awrite-down is required.

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**Results of Operations**

Thefollowing table summarizes the Company’s results of operations as a percentageof total revenues for the fifty-two weeks ended January 29, 2007 (“fiscal 2007”),and for the fifty-two weeks ended January 30, 2006 (“fiscal 2006”) and thefifty-three weeks ended January 31, 2005 (“fiscal 2005”).
| ** **                                  | ** ** | **Fifty-Two  Weeks**       | ** ** | **Fifty-Two  Weeks**       | ** ** | **Fifty-Three  Weeks**     | ** ** |
|---------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** |
| ** **                                  | ** ** | **January 29,  2007** | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** |
| Total revenues                              |       | 100.0                      | %          | 100.0                      | %          | 100.0                      | %          |
| Costs and expenses:                         |       |                       |       |                       |       |                       |       |
| Food costs                                  |       | 35.5                       |       | 34.5                       |       | 34.4                       |       |
| Labor costs                                 |       | 33.6                       |       | 32.4                       |       | 33.5                       |       |
| Occupancy and other expenses                |       | 21.8                       |       | 20.9                       |       | 20.0                       |       |
| General and administrative  expenses        |       | 4.1                        |       | 3.9                        |       | 4.1                        |       |
| Depreciation and amortization               |       | 3.5                        |       | 3.8                        |       | 3.8                        |       |
| Impairment of long-lived  assets            |       | 0.0                        |       | 0.7                        |       | 4.4                        |       |
| Total costs and expenses                    |       | 98.4                       |       | 96.1                       |       | 100.2                      |       |
| Income (loss) from operations               |       | 1.6                        |       | 3.9                        |       | (0.2                       | )          |
| Interest expense                            |       | (1.1                       | )          | (1.2                       | )          | (1.0                       | )          |
| Other income, net                           |       | 0.6                        |       | 1.2                        |       | 0.7                        |       |
| Income (loss) before income taxes (benefit) |       | 1.6                        |       | 3.9                        |       | (0.5                       | )          |
| Income taxes (benefit)                      |       | 0.4                        |       | 0.7                        |       | (0.2                       | )          |
| Net  income (loss)                          |       | 1.2                        | %          | 3.2                        | %          | (0.3                       | )%         |

 

     Summarized financialinformation concerning the Company’s reportable segments is shown in thefollowing table. The other assets presented in the consolidated balance sheetand not in the reportable segments relate to the Company as a whole, and notindividual segments. Also certain corporate overhead income and expenses in theconsolidated statements of operations are not included in the reportablesegments.

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

 

18

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| **52 Weeks Ended   January 30, 2006** | ** ** | **HomeTown  Buffet** (1) | ** ** | **North’s  Star** (2) | ** ** | **Florida  Buffets** (3) | ** ** | **Summit  Restaurants**(4) | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|-------------------------------|------------|----------------------------|------------|-----------|------------|-----------|------------|
| Revenues                                                       |       | $                             | 28,210     |                            | $          | 2,267                         |       | $                          | 10,841     |      | $          | 14,987    |       | $ | — |   | $ | 56,305 |   |
| Food cost                                                      |       | 10,455                        |       | 927                             |       | 3,919                         |       | 4,128                      |       | 19,429    |       |      |       |
| Labor cost                                                     |       | 8,572                         |       | 812                             |       | 3,597                         |       | 5,279                      |       | 18,260    |       |      |       |
| Interest income                                                |       | —                        |       | —                          |       | —                        |       | —                     |       | 361       |       | 361       |       |
| Interest expense                                               |       | (181                          | )          | —                          |       | —                        |       | —                     |       | (467      | )          | (648      | )          |
| Depreciation & amortization                                |       | 996                           |       | 86                              |       | 588                           |       | 383                        |       | 67        |       | 2,120     |       |
| Impairment of long-lived assets                                |       | 18                            |       | 74                              |       | 202                           |       | 75                         |       | —    |       | 369       |       |
| Income  (loss) before income taxes                             |       | 1,441                         |       | (328                            | )          | 429                           |       | 2,230                      |       | (1,555    | )          | 2,217     |       |
|                                                                |            |                               |            |                                 |            |                               |            |                            |            |           |            |           |            |  |  |  |  |  |  |

 

(1) The same store sales declined this yearresulting in higher food costs for HomeTown Buffet as a percentage of sales.The lower same store sales also resulted in a higher labor cost as a percent ofsales. The Hometown Buffet division also had higher maintenance, repairs andutilities expense in the current year compared to the prior year. Managementbelieves sales decreased because of general economic conditions includinghigher gas prices and increased competition in certain areas. Utility expenseincreased this year as compared to the prior year primarily because of highercosts for both electricity and gas.

(2)During the third quarter of fiscal 2007, the Company closed the JJ North’srestaurant in Bend, Oregon and acquired the Western Sizzlin in Griffin,Georgia.  The sales in the new Western Sizzlin were higher than the closed JJNorth’s resulting in slightly higher sales for the year.  Food and labor costs were higher in the newWestern Sizzlin as compared to the closed JJ North’s resulting in higher costsin the fiscal year as compared to the prior year.  The North’s Star division had highermaintenance, repairs and utilities expense in the current year compared to theprior year.  Utility expense increasedthis year as compared to the prior year primarily because of higher costs forboth electricity and gas.

(3) Theincrease in income before income taxes in the Florida Division was primarilythe result of lower depreciation and amortization expense and no impairment oflong-lived assets in the current year. These improvements were partially offsetby higher costs for food, labor and general and administrative expenses.

(4) Theincrease in sales from the four new K-BOB’S Restaurants and the Pecos DiamondSteakhouse of approximately $4.2 million more than offset the sales loss ofapproximately $1.6 million from the Casa Bonita Restaurant closed during thethird quarter of fiscal 2006 in the Summit Restaurant division. The increase inincome before income taxes was primarily attributed to the $234,000 gain onselling the restaurant facility in Laramie, Wyoming and higher salevolume.  Food cost as a percentage ofrevenue increased slightly due to the mix of restaurant concepts.  Labor cost as a percentage of revenueincreased due to the mix of restaurant concepts and minimum wage increases.

*Comparison of Fiscal 2007 to Fiscal 2006*

Total revenues increased $2.3 million or 4.2% from $56.3million in fiscal 2006 to $58.6 million in fiscal 2007.  There was a $5.8 million increase in2007 from 11 new store openings.  Saleslost from closed stores represented approximately $3.6 million.  Same store sales decreased approximately1.2%.

     Food costs as a percentageof total revenues increased from 34.5% during in fiscal 2006 to 35.5% in fiscal2007.  The increase as a percentage oftotal revenues was primarily attributable to the closing of one Casa Bonitarestaurant in the third quarter of fiscal 2007. The Casa Bonita restaurantshave traditionally had a lower food cost than the full line buffets.  In addition to the food cost increasingbecause of the changing sales mix, each division had higher food costs for thefiscal year.  The increase in food costsprimarily in the Hometown Buffet division was a result of menu improvements.

     Labor costs as a percentage of totalrevenues increased from 32.4% in fiscal 2006 to 33.6% in fiscal 2007 and actuallabor costs increased by $1,414,000. The increase in labor cost and as apercentage of revenue resulted primarily from higher starting wages in certainmarkets in fiscal 2007 as compared to the fiscal year 2006.  The minimum wage increases in Arizona,Colorado, Florida, Montana, and Washington increased wage costs for the Companystarting in January 2007.  In response tothe increased costs, the Company increased

19

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menupricing in January 2007 with the goal of maintaining labor costs as percentageof sales consistent with prior results, although there can be no assurance thatthis will be the result (see the discussion under “Risk Factors”).

Occupancy and other expenses as a percent of totalrevenues increased from 20.9% in fiscal 2006 to 21.8% in fiscal 2007. Theincrease as a percentage of revenues for the 52-week period ended January 29,2007 was primarily attributable to decreased revenues in the stores openedduring both years and increased variable expenses. The fixed portion ofoccupancy costs is primarily fixed costs for property leases and related commonarea maintenance and property taxes. Increases in variable costs were attributable to increases of $310,000in repairs and maintenance, $326,000 in utility costs and $101,000 foradvertising costs.

General and administrative expenses as a percentage oftotal revenues increased from 3.9% in fiscal 2006 to 4.1% in fiscal 2007 andactual costs increased by $248,000.  Theincrease for the 52-week period ended January 29, 2007 was primarilyattributable to higher corporate and field payroll expenses as compared to theprior fiscal year.

Depreciation and amortization as a percent of totalrevenues decreased from 3.8% in fiscal 2006 to 3.5% in fiscal 2007. Thedecrease as a percentage of revenue is primarily attributable to certainequipment and impaired assets being fully depreciated for the 52-week periodended January 29, 2007 as compared to the 52-week period ended January 30,2006.  The decrease is also attributed toincreased sales for the 52 week period ended January 29, 2007 as compared tothe 52 week period ended January 30, 2006. Actual depreciation and amortization decreased by $51,000.

Impairment of long-lived assets decreased from 0.7% infiscal 2006 to 0.0% in fiscal 2007. The impairment in fiscal 2006 totaled$78,000 for one store closure and the impairment of two restaurants’ leaseholdimprovements where projected undiscounted cash flows were less than the netbook value of the assets. Fiscal 2006 also included $291,000 for impairment toequipment held for future use. Management does not believe impairment indicators are present at January29, 2007.

Interest expense as a percent of total revenuesdecreased from 1.2% in fiscal 2006 to 1.1% in fiscal 2007. The decrease isprimarily attributable to higher sales in fiscal 2007.

The income tax provision totaled $238,000 or 25% ofpre-tax income in fiscal 2007 as compared to $420,000 or 19% of pre-tax incomein fiscal 2006.  The adjustment of estimatedincome tax accruals in fiscal 2006 includes adjustments from an IRS exam whichlowered the income tax expense for the year.

*Comparison of Fiscal 2006 to Fiscal 2005*

Total revenues decreased $8.6 million or 13.3% from$64.9 million in fiscal 2005 to $56.3 million in fiscal 2006. On a52-week basis, after adjusting for the $1.1 million of sales contributed by theadditional 53rd week in fiscal 2005, total sales would have been $63.8 millionfor fiscal 2005.  There was an 11.0%decrease in 2006 from 2005 on this basis. Sales lost from closed stores represented approximately $5.5 million ofthe decrease.  Same store sales decreasedapproximately 3.4% adjusted for 52-weeks in both years.

Foodcosts as a percent of total revenues increased from 34.4% in fiscal 2005 to34.5% in fiscal 2006. The increase as a percentage of total revenues wasprimarily attributable to lower same store sales.

Labor costs as a percent of total revenues decreasedfrom 33.5% in fiscal 2005 to 32.4% in fiscal 2006. The decrease as a percentageof revenue resulted from the elimination of labor inefficiencies in locationsthat were closed. The Company closed two stores during fiscal 2006 and closedseven stores during fiscal 2005.

Occupancy and other expenses as a percent of total revenuesincreased from 20.0% in fiscal 2005 to 20.9% in fiscal 2006. The increase as apercentage of revenues for the 52-week period ended January 30, 2006 wasprimarily attributable to decreased revenues in the stores opened during bothyears and expenses incurred in closing one restaurant in the third quarter offiscal 2006. The fixed portion of occupancy costs is primarily fixed costs forproperty leases and related common area maintenance and property taxes.  The actual costs decreased by $1.2 million infiscal 2006 primarily attributable to not having rent and utilities in thestores that closed during the prior year.

General and administrative expenses as a percentage oftotal revenues decreased from 4.1% in fiscal 2005 to 3.9% in fiscal 2006 andactual costs decreased by $515,000.  Thedecrease for the 52-week period ended January 30, 2006 was primarilyattributable to lower corporate insurance costs of $354,000, lower fieldadministrative costs of $62,000, lower royalties cost of $81,000 and lower

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public fees of $49,000.

Depreciation and amortization as a percent of totalrevenues stayed at 3.8% in fiscal 2005 and 3.8% in fiscal 2006. This wasprimarily attributable to certain equipment and impaired assets being fullydepreciated for the 52-week period ended January 30, 2006 as compared to the53-week period ended January 31, 2005, which resulted in the same percentage ofrevenue since the revenues declined in the 2006 fiscal year.  Actual depreciation and amortizationdecreased by $320,000.

Impairment of long-lived assets decreased from 4.4% infiscal 2005 to 0.7% in fiscal 2006. The impairment in fiscal 2006 totaled$78,000 for one store closure and the impairment of two restaurants’ leaseholdimprovements where projected undiscounted cash flows were less than the netbook value of the assets. Fiscal 2006 also included $291,000 for impairment toequipment held for future use.  Theimpairment in fiscal 2005 was a result of the closure of one JJ North’s CountryBuffet restaurant in the third quarter, the closure of one JJ North’s CountryBuffet restaurant in the fourth quarter, the closure of one HomeTown Buffetrestaurant in the third quarter, the closure of one HomeTown Buffet restaurantin the fourth quarter and the impairment of four restaurants’ leaseholdimprovements where projected undiscounted cash flows were less than the netbook value of the assets. Fiscal 2005 also included a goodwill impairment of$1,230,000 related to five restaurants.

Interest expense as a percent of total revenuesincreased from 1.0% in fiscal 2005 to 1.2% in fiscal 2006. The increase wasprimarily attributable to lower sales in fiscal 2006.

The income tax provision totaled $420,000 in fiscal 2006as compared to an income tax benefit of $168,000 in fiscal 2005.  The income tax provision in fiscal 2006included more general business tax credits than in prior years due to InternalRevenue Service rulings on employment tax credits.

**Liquidity and Capital Resources**

**      The Company has historically financedoperations through a combination of cash on hand, cash provided from operationsand available borrowings under bank lines of credit. As of January 29, 2007,the Company had $418,000 in cash and cash equivalents as compared to $491,000in cash and cash equivalents at January 30, 2006. The net working capitaldeficit was $(4,912,000) and $(4,510,000) at January 29, 2007 and January 30,2006, respectively.   The Company spentapproximately $2,505,000 on capital expenditures in fiscal 2007 includingapproximately $700,000 to purchase the equipment, building and land in theK-BOB’S Restaurant in Dumas, Texas and $850,000 to purchase the equipment,building and land in the Pecos Diamond Steakhouse Restaurant in Artesia, NewMexico.  The Company used approximately$100,000 to advance loans to strategic partners and $2,695,000 to pay dividendsin fiscal 2007.  The Company also reducedits note receivable from K-BOB’S Capital Resource Group, Ltd. by $1,285,500 onJanuary 31, 2006 when the Company purchased three K-BOB’S Restaurants.  The Company also received a payment of$1,291,000 on August 7, 2006 from North’s Restaurant, Inc. which reduced theCompany’s note receivable. The Company received approximately $873,000 from theexercise of stock options during fiscal 2007. Long-term debt decreased byapproximately $181,000 in fiscal 2007 primarily as a result normal principalpayments and the sale of the restaurant facility in Laramie, Wyoming and theresulting debt payment of approximately $616,000 which was offset by thefinancing of the Dumas restaurant property for approximately $564,000 and**the financing of the July2006 purchase of the Pecos Diamond Steakhouse in Artesia, New Mexico with a$595,000 5-year mortgage on the building and land.

Cash provided by operations was$2.7 million for fiscal 2007 and $3.9 million for fiscal 2006.

The Company intends to continue to modestly expandoperations through the acquisition of restaurants.. During fiscal 2007, theCompany acquired four K-BOB’S Steakhouse restaurants and in April 2006 enteredinto a strategic alliance with Western Sizzlin’ Corporation to pursue theacquisition of certain restaurants.  Inaddition, the Company opened one Pecos Diamond Steakhouse, one Western Sizzlinrestaurant and five Whistle Junction restaurants during the year.  Subsequent to year end, the Company openedone additional Western Sizzlin restaurant, one additional Whistle Junctionrestaurant and one Holiday House Family restaurant. The Company has some ofthis equipment available from stores closed in previous periods. There can beno assurance that the Company will be able to acquire additional restaurants orlocations or, if acquired, that these restaurants will have a positivecontribution to the Company’s results of operations.

    The Company has a revolving line of credit withM&I Marshall & Ilsley Bank (the “revolving line of credit”) whichprovides working capital for the Company. The revolving line of credit bearsinterest at LIBOR plus two percent per annum and is renewable subject to creditreview on an annual basis. The revolving line of credit contains covenantswhich require the Company to maintain

 

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certainfinancial ratios and other covenants that restrict the annual payment forcapital expenditures and dividends. As of January 29, 2007, the Company is in compliance with thesecovenants.

OnMay 24, 2006, the Company extended the revolving line of credit due date fromMay 31, 2006 to June 15, 2007 and increased the credit limit from $2,000,000 to$3,000,000. The revolving line ofcredit balance was $336,000 on January 29, 2007 and $334,000 on April 17,2007.  As of April 17, 2007, $2,666,000was available on the revolving line of credit. In addition, the revolving line of credit was amended to permit theCompany to pay up to $2,700,000 in annual dividends and to spend up to$8,000,000 in fiscal 2007 and up to $3,000,000 in subsequent years in capital expenditures.The revolving line of credit also permits the Company to repurchase up to250,000 shares of common stock, although as of April 17, 2007, no shares hadbeen repurchased.

TheCompany believes that available cash, availability under the revolving line ofcredit and cash flow from operations will be sufficient to satisfy its workingcapital and capital expenditure requirements during the next 12 months.Management does not believe the net working capital deficit will have anyeffect on the Company’s ability to operate the business and meet obligations asthey come due in the next 12 months. The Company projects that operating cashflows will exceed planned capital expenditures in the next 12 months and thatfunds will be available to return capital to stockholders in the form ofdividends, share repurchases or both. There can be no assurance, however, thatcash and cash flow from operations will be sufficient to satisfy its workingcapital and capital requirements for the next 12 months or beyond.

Itis possible that changes in the Company’s operating results, unavailable loancapacity from the existing credit facility, acceleration of the Company’scapital expenditure plans, potential acquisitions or other events may cause theCompany to seek additional financing. Additional financing may be raisedthrough public or private equity and/or debt financing or from othersources.  Additionally, the Company’srevolving line of credit expires on June 15, 2007. Although it is unlikely atthis time, there can be no assurance that required financings will be availableon acceptable terms or at all.

On February 1, 2001, the Company entered into apromissory note secured by a first mortgage with Victorium Corporation for$460,000 to purchase the real estate of the BuddyFreddys Country Buffet inOcala, Florida. The fixed rate (7.5%) mortgage requires monthly payments of$4,264 including interest and matures in 15 years. The balance at January 29,2007 and January 30, 2006 was    $325,000and $362,000, respectively.

On October 9, 2001, the Company entered into a $773,00015 year first real estate mortgage with First National Bank of Wyoming.  The mortgage has monthly payments includinginterest of $7,253 and has an October 1, 2016 maturity date with a fixedinterest rate of 7.625%. The mortgage requires the Company to maintainspecified minimum levels of net worth, limits the amount of capitalexpenditures, requires the maintenance of certain fixed charge coverage ratiosand requires a minimum shareholder ownership percentage. The proceeds were usedto pay the FleetBoston Term Loan Facility as required by the Company’sagreement with FleetBoston. The mortgage was secured by the Company’s JB’sRestaurant in Laramie, Wyoming. The balance at January 29, 2007 and January 30,2006 was $0 and $623,000, respectively. The mortgage was paid in full on March 16, 2006 when the property wassold.

On May 2, 2002, the Company entered into a $1,500,000ten year first real estate mortgage with M&I Marshall & IlsleyBank.  The mortgage has monthly paymentsincluding interest of $17,894 and matures on May 2, 2012 with a fixed interestrate of 7.5% for the first five years with interest for years six to tencalculated at the five year LIBOR rate plus 250 basis points with a floor of7.5%. The proceeds were used to pay a prior obligation to FleetBoston FinancialCorporation as required by the Company’s agreement with FleetBoston. Themortgage is secured by the Company’s HomeTown Buffet restaurant in Scottsdale,Arizona. The balance at January 29, 2007 and January 30, 2006 was $877,000 and$1,066,000, respectively.

On December 19, 2003, the Company entered into a$1,470,000 six year first real estate mortgage with Platinum Bank.  The mortgage has monthly payments includinginterest of $12,678 through November 19, 2009 with a balloon payment of$475,000 due on December 19, 2009. The mortgage bears interest at a fixed rateof 6.25% for the first three years with interest for years four to sixcalculated at the three year Atlanta Federal Home Loan Bank advance rate forfixed rate credits plus 325 basis points with a floor of 6.0%. The new rate is8.1% and the new monthly payment is $14,031. The mortgage is secured by the Company’s BuddyFreddys restaurant inPlant City, Florida and a $500,000 personal guarantee of a shareholder. Thebalance at January 29, 2007 and January 30, 2006 was $1,237,000 and $1,339,000,respectively.

On February 25, 2004, the Company entered into a$1,250,000 seven year first real estate mortgage with M&I Marshall &Ilsley Bank.  The mortgage has monthlypayments including interest of $18,396 and matures on February 25, 2011 with afixed interest rate of 6.1%. The proceeds were used to reduce the RevolvingLine of Credit with M&I Marshall & Ilsley Bank. The mortgage is secured

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by the Company’s HomeTown Buffet restaurant in Yuma, Arizona. The balanceat January 29, 2007 and January 30, 2006 was $721,000 and $959,000,respectively.

On July 29, 2004, the Company entered into a $550,000ten year first real estate mortgage with Heritage Bank.  The mortgage has monthly payments includinginterest of $6,319 and matures on August 1, 2014 with a fixed interest rate of6.75%. The mortgage is secured by the Company’s JB’s Restaurant in Great Falls,Montana. The balance at January 29, 2007 and January 30, 2006 was $430,000 and$490,000, respectively.

On October 27, 2004, the Company entered into a$1,275,000 five year first real estate mortgage with Bank of Utah.  The mortgage has monthly payments includinginterest of $14,371 and matures on October 26, 2009 with a balloon payment of$752,000 due on October 26, 2009. The mortgage bears interest at a fixedinterest rate of 6.25%. The mortgage requires the Company to maintain specifiedminimum levels of net worth, limits the amount of capital expenditures andrequires the maintenance of certain fixed charge coverage ratios. The proceedswere used to pay Naisco Investments, L.C., the previous lien holder, and toreduce the Revolving Line of Credit with M&I Marshall & Ilsley Bank. Themortgage is secured by the Company’s HomeTown Buffet restaurant in Layton,Utah. The balance at January 29, 2007 and January 30, 2006 was $1,008,000 and$1,154,000, respectively.

On September 16, 2005, the Company entered into a$300,000 5 year mortgage with Naisbitt Investment Company.  The mortgage has monthly payments includinginterest of $5,870 and matures on September 15, 2010.  The balance at January 29, 2007 and January30, 2006 was $206,000 and $283,000, respectively.

On June 1, 2006, the Company entered into a $564,000five year first real estate mortgage with Dalhart Federal Savings andLoans.  The mortgage has monthly paymentsincluding interest of $6,731 and matures on May 31, 2011 with a fixed interestrate of 7.63%. The mortgage is secured by the Company’s K-BOB’S Restaurant inDumas, Texas. The balance at January 29, 2007 was $525,000.

On November 8, 2006, the Company entered into a $595,000five year first real estate mortgage with Wells Fargo Bank.  The mortgage has monthly payments includinginterest of $8,055 and matures on October 31, 2011 with a fixed interest rateof 7.5%. The mortgage is secured by the Company’s Pecos Diamond Steakhouse inArtesia, New Mexico. The balance at January 29, 2007 was $560,000.

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

As of January 29, 2007, the Company did not have anyoff-balance sheet arrangements as defined in Item 303(a) (4) (ii) of RegulationS-K.

**Commitments and Contractual Obligations**

The Company’s contractual obligations and commitmentsprincipally include obligations associated with our outstanding indebtednessand future minimum operating and capital lease obligations as set forth in thefollowing table:

 
| **Contractual Obligations:**   | ** ** | **Total**                            | ** ** | **Less than  one year** | ** ** | **One to  three years** | ** ** | **Three to  five years** | ** ** | **Greater than  five years** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
| Long-term debt (1)                  |       | $                                    | 5,889      |                              | $          | 434                               |       | $                                  | 3,363      |                                   | $          | 1,666 |   | $ | 426 |   |
| Operating leases (2)                |       | 9,088                                |       | 2,433                             |       | 3,537                             |       | 1,480                              |       | 1,638                                  |       |
| Capital leases (2)                  |       | 1,989                                |       | 309                               |       | 651                               |       | 565                                |       | 464                                    |       |
| Purchase commitments                |       | —                               |       | —                            |       | —                            |       | —                             |       | —                                 |       |
| Total  contractual cash obligations |       | $                                    | 16,936     |                              | $          | 3,176                             |       | $                                  | 7,551      |                                   | $          | 3,711 |   | $ | 2,528 |   |

 

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

(2) See Note 6 to the consolidated financial statementsfor additional information.

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**Impact of Inflation**

Management recognizes that inflation has an impact onfood, construction, labor and benefit costs, all of which can significantlyaffect the Company’s operations. Historically, the Company has been able topass any associated higher costs due to these inflationary factors along to itscustomers because those factors have impacted nearly all restaurant companies.However, management has emphasized cost controls rather than price increasesgiven the competitive pressure within the quick-service restaurant industry.

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

The Company prepares its consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America. The Company’s consolidated financial statements are basedon the application of certain accounting policies, the most significant ofwhich are described in Note 1—Summary of Significant Accounting Policies to theConsolidated Financial Statements included herewith. Certain of these policiesrequire numerous estimates and strategic or economic assumptions that may proveinaccurate or subject to variations and may significantly affect the Company’sreported results and financial position for the period or in future periods.Changes in underlying factors, assumptions or estimates in any of these areascould have a material impact on the Company’s future financial condition andresults of operations. The Company considers the following policies to be themost critical in understanding the judgments that are involved in preparing itsconsolidated financial statements.

Deferred Tax Assets

Periodically, the Company records (or reduces) thevaluation allowance against deferred tax assets to the amount that is morelikely 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 avaluation allowance on certain future tax benefits as required under SFAS 109.  The assets are evaluated each period underthe requirements of SFAS 109.

Property, Buildings and Equipment

Property and equipment and real property undercapitalized leases are carried at cost less accumulated depreciation andamortization. Depreciation and amortization are provided using the straight-linemethod over the following useful lives:

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

 

Building and leasehold improvements are amortized overthe 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 atlease inception for which failure to renew options would result in asubstantial economic penalty. If a lease option was not exercised in thefuture, any remaining unamortized leasehold improvements would be required tobe recognized immediately which could result in a significant charge adverselyaffecting the operating results of that period.

Repairs and maintenance are charged to operations asincurred. Remodeling costs are generally capitalized.

The Company’s accounting policies regarding buildingsand equipment include certain management judgments regarding the estimateduseful lives of such assets, the residual values to which the assets aredepreciated and the determination as to what constitutes increasing the life ofexisting assets. These judgments and estimates may produce materially differentamounts of depreciation and amortization expense than would be reported ifdifferent assumptions were used. As discussed further below, these judgmentsmay also impact the Company’s need to recognize an impairment charge on thecarrying amount of these assets as the cash flows associated with the assetsare realized.

Impairment of Goodwill

Goodwill and other intangible assets primarily representthe excess of the purchase price paid over the fair value of the net assetsacquired in connection with business acquisitions. As of January 29, 2002, theCompany adopted SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”).In accordance with SFAS 142, the Company has ceased amortizing goodwillrecorded in past business combinations effective as of January 29, 2002. As aresult, there is no charge for goodwill amortization expense contained in

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the Company’s statements of operations for the years ended January 29,2007, January 30, 2006 and January 31, 2005.

SFAS 142 requires that goodwill be tested for impairmentby comparing the fair value of each reporting unit that included goodwill tothe carrying amount of the reporting unit. The Company performed the transitional impairment test and determinedthat the carrying amount of relevant reporting units was in excess of the fairvalue of those units.  This resulted in atransitional impairment loss of $849,000 which was reported as a cumulativeeffect of a change in accounting principle, net of a tax benefit of $289,000 inthe first quarter of 2003.  Subsequent toadoption of SFAS 142, the Company evaluates goodwill for impairment annually orwhen a triggering event occurs that indicates a potential impairment may haveoccurred in accordance with SFAS 142. Future impairments of goodwill, if any, will adversely affect theresults of operations in the periods recognized.

Impairment of Long-Lived Assets

The Company determines that an impairment write-down isnecessary for locations whenever events or changes in circumstances indicatethat 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 orDisposal 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 thecarrying amount of an asset to future undiscounted net cash flows expected tobe generated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the assets exceed the fair value of the assets.  Any impairment which would adversely affectoperating results in the affected period.

Judgments made by the Company related to the expecteduseful lives of long-lived assets and the ability of the Company to realizeundiscounted net cash flows in excess of the carrying amounts of such assetsare affected by factors such as the ongoing maintenance and improvements of theassets, changes in economic conditions, and changes in operating performance.As the Company assesses the ongoing expected net cash flows and carryingamounts of its long-lived assets, these factors could cause the Company torealize a material impairment charge and could adversely affect operatingresults in any period.

###### Insurance Programs

The Company is self-insured for general liabilityclaims. The Company has commercial insurance for casualty claims in excess of$2 million per claim and $3 million per year as a risk reduction strategy.Self-insurance accruals include estimates based on historical information andexpected future developments. Differences in estimates and assumptions couldresult in actual liabilities that are materially different from the calculatedaccruals.

###### **NewAccounting Pronouncements**

In May 2005, the FASBissued SFAS 154, *Accounting Changes andError Corrections — a replacement of APB Opinion No. 20 and FASBStatement No. 3.* Previously, the cumulative effect of mostchanges in accounting principles was recognized in the period of the change.SFAS 154 requires companies to recognize changes in accounting principle,including changes required by a new accounting pronouncement when thepronouncement does not include specific transition provisions, retrospectivelyto prior periods’ financial statements. Our adoption of SFAS 154 at thebeginning of fiscal 2007 did not have a material impact on our consolidatedfinancial position or results of operations.

In October 2005, the FASBissued Staff Position No. 13-1 (“FSP 13-1”), *Accountingfor Rental Costs Incurred During a Construction Period*.  Generally, the staff position requirescompanies to expense rental costs incurred during a construction period.  We adopted FSP 13-1 in our fiscal yearbeginning January 31, 2006.  The adoptionof this staff position has not had a material impact on our results ofoperations or financial position.

In February 2006,the FASB issued SFAS 155, *Accountingfor Certain Hybrid Financial Instruments — an amendment of FASB StatementsNo. 133 and 140.* SFAS 155 allows financial instrumentsthat contain an embedded derivative and that otherwise would requirebifurcation to be accounted for as a whole on a fair value basis, at theholders’ election. SFAS 155 also clarifies and amends certain otherprovisions of SFAS 133 and SFAS 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities — a replacement of FASB Statement 125.*Thisstatement is effective for all financial instruments acquired or issued infiscal years beginning after September 15, 2006, which for us is thebeginning of fiscal 2008. We are currently evaluating the impact ofSFAS 155 on our consolidated financial position and results of operations.

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InJune 2006, the FASB issued FIN 48, *Accountingfor Uncertainty in Income Taxes — an interpretation of FASB StatementNo. 109*, which clarifies the accounting for uncertainty inincome taxes recognized in financial statements. FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 requires the recognition, in the financialstatements, of the impact of a tax position, if that position is more likelythan not of being sustained on audit, based on the technical merits of theposition. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods and disclosure.FIN 48 is effective for fiscal years beginning after December 15,2006, which for us is the beginning of fiscal 2008. We are currently evaluatingthe impact of FIN 48 on our consolidated financial position and results ofoperations.

InJune 2006, the FASB ratified EITF consensus 06-3, *How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross versusNet Presentation).* This EITF addresses the presentation of taxes inthe income statement. Gross or net presentation may be elected for eachdifferent type of tax, but similar taxes should be presented consistently.Taxes within the scope of this EITF would include taxes that are imposed on arevenue transaction between a seller and a customer, for example, sales taxes,use taxes, value-added taxes, and some types of excise taxes. Our accountingpolicy is to present the taxes within the scope of EITF 06-3 on a net basis.EITF 06-3 is effective for interim and annual periods beginning afterDecember 15, 2006, which for us is the first quarter of fiscal 2008. Weare currently evaluating the impact of EITF 06-3 on our consolidated results ofoperations.

InSeptember 2006, the FASB issued SFAS 157, *FairValue Measurements.* SFAS 157 establishes a framework formeasuring fair value under GAAP and expands disclosures about fair valuemeasurement. SFAS 157 also creates consistency and comparability in fairvalue measurements among the many accounting pronouncements that require fairvalue measurements but does not require any new fair value measurements.SFAS 157 is effective for fiscal years (including interim periods)beginning after November 15, 2007, which for us is the first quarter offiscal 2009. We are currently evaluating the impact of SFAS 157 on ourconsolidated financial position and results of operations.

InSeptember 2006, the FASB issued SFAS 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans — anamendment of FASB Statements No. 87, 88, 106 and 132(R).*SFAS 158 requires the balance sheet recognition of the funded status ofdefined benefit pension and other postretirement plans, along with a correspondingafter-tax adjustment to stockholders’ equity. Our adoption of SFAS 158 atthe end of fiscal 2007 did not have a material impact on our consolidatedfinancial position or results of operations.

InSeptember 2006, the Securities and Exchange Commission (“SEC”) issued StaffAccounting Bulletin (“SAB”) 108, *Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.* SAB 108 providesinterpretive guidance on how the effects of the carryover or reversal of prioryear misstatements should be considered in quantifying a current yearmisstatement for the purpose of the materiality assessment. Our adoption ofSAB 108 at the end of fiscal 2007 did not have a material impact on ourconsolidated financial position or results of operations.

InFebruary 2007, the FASB issued SFAS 159, *TheFair Value Option for Financial Assets and Financial Liabilities —Including an amendment of FASB Statement No. 115*. This standardamends SFAS 115, *Accounting for CertainInvestment in Debt and Equity Securities*, with respect to accountingfor a transfer to the trading category for all entities with available-for-saleand trading securities electing the fair value option. This standard allowscompanies to elect fair value accounting for many financial instruments andother items that currently are not required to be accounted as such, allowsdifferent applications for electing the option for a single item or groups ofitems, and requires disclosures to facilitate comparisons of similar assets andliabilities that are accounted for differently in relation to the fair valueoption. SFAS 159 is effective for fiscal years beginning afterNovember 15, 2007, which for us is fiscal 2009. We are currentlyevaluating the impact of SFAS 159 on our consolidated financial positionand results of operations.

**Item 7A.*Quantitative and Qualitative Disclosuresabout Market Risk***

**InterestRate Risk**

The Company’sprincipal exposure to financial market risks is the impact that interest ratechanges could have on its $2.0 million Revolving Line of Credit, of which$336,000 and $334,000 was outstanding as of January 29 and April 17, 2007,respectively. The Revolving Line of Credit interest rate is LIBOR plus twopercent per annum (averaging approximately 6.6% in fiscal 2007). A hypotheticalincrease of 100 basis points in short-term interest rates would result in areduction of pre-tax earnings, the amount of which

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would depend on the amount outstanding on the line of credit. All ofour business is transacted in U.S. dollars. Accordingly, foreign exchange ratefluctuations have never had a significant impact on the Company and are notexpected to in the foreseeable future.

**CommodityPrice Risk**

The Company purchasescertain products which are affected by commodity prices and are, therefore,subject to price volatility caused by weather, market conditions and otherfactors which are not considered predictable or within our control. Althoughmany of the products purchased are subject to changes in commodity prices,certain purchasing contracts or pricing arrangements contain risk managementtechniques designed to minimize price volatility. Typically the Company usesthese types of purchasing techniques to control costs as an alternative todirectly managing financial instruments to hedge commodity prices. In manycases, the Company believes it will be able to address commodity cost increaseswhich are significant and appear to be long-term in nature by adjusting itsmenu pricing, menu mix or changing our product delivery strategy. However,increases in commodity prices could result in lower operating margins for ourrestaurant concepts.

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

Seethe Index to Consolidated Financial Statements included at “Item 15. Exhibitsand Financial Statement Schedules”

**Item 9. *Changes in and Disagreements withAccountants on Accounting and Financial Disclosure***

None.

**Item 9A. *Controls and Procedures***

The Company’sdisclosure controls and procedures are designed to ensure that informationrequired to be disclosed in our reports filed under the Securities Exchange Actof 1934, as amended (the Exchange Act), is recorded, processed, summarized, andreported within the required time periods and that such information is accumulatedand communicated to our management, including our Chief Executive Officer andPrincipal Accounting Officer, as appropriate, to allow for timely decisionsregarding required disclosure.

As required byRule 13a-15(b) under the Exchange Act, we conducted an evaluation, under thesupervision and with the participation of our management, including the ChiefExecutive Officer and the Principal Accounting Officer, of the effectivenessand the design and operation of our disclosure controls and procedures as of theend of the period covered by this report. Based on the foregoing, we determined that our disclosure controls andprocedures were effective to ensure that information required to be disclosedby the Company in reports that it files or submits under the SecuritiesExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the rules and forms of the SEC.

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rules 13e-15(f) under the Exchange Act.Our internal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withaccounting principles generally accepted in the United States of America.Internal control over financial reporting includes those written policies andprocedures that:

·        pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and                 dispositions of ourassets;

·        providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial                 statements in accordancewith accounting principles generally accepted in the United States of America;

·        providereasonable assurance that our receipts and expenditures are being made only inaccordance with                 authorization of ourmanagement; and

·        providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or                 disposition of assets thatcould have a material effect on our consolidated financial statements.

Internal controlover financial reporting includes the controls themselves, monitoring andinternal auditing practices and actions taken to correct deficiencies asidentified.

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

Our management assessedthe effectiveness our internal control over financial reporting as ofJanuary 29, 2007. Our management’s assessment was based on criteria foreffective internal control over financial reporting described in “InternalControl — “Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission. Our management’s assessment includedan evaluation of the design of our internal control over financial reportingand testing of the operational effectiveness of our internal control overfinancial reporting. Our management reviewed the results of its assessment withthe Audit Committee of our Board of Directors. Based on this assessment, ourmanagement determined that, as of January 29, 2007, we maintainedeffective internal control over financial reporting.

There was nochange in our internal control over financial reporting during the year endedJanuary 29, 2007, or since that date, that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

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

None.

27

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**PART III**

**Item 10. *Directors and Executive Officers andCorporate Governance***

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

The remaining information is hereby incorporated byreference to the Company’s definitive Proxy Statement for our 2007 AnnualMeeting of Stockholders, to be filed with the Commission within 120 days ofJanuary 29, 2007.

**Item 11. *Executive Compensation***

The information pertaining to executive compensation ishereby incorporated by reference to the Company’s definitive Proxy Statementfor our 2007 Annual Meeting of Stockholders, to be filed with the Commissionwithin 120 days of January 29, 2007.

**Item 12.*Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters***

The information pertaining to security ownership ofcertain beneficial owners and management and equity compensation planinformation is hereby incorporated by reference to the Company’s definitiveProxy Statement for our 2007 Annual Meeting of Stockholders, to be filed withthe Commission within 120 days of January 29, 2007.

**Item 13.*Certain Relationships and RelatedTransaction, and Director Independence***

The information pertaining to certain relationships andrelated transactions is hereby incorporated by reference to the Company’sdefinitive Proxy Statement to for our 2007 Annual Meeting of Stockholders, tobe filed with the Commission within 120 days of January 29, 2007.

**Item 14.*Principal Accountant Fees and Services***

The information withrespect to principal accountant fees and services is hereby incorporated byreference to the Company’s definitive Proxy Statement for our 2007 AnnualMeeting of Stockholders, to be filed with the Commission within 120 days ofJanuary 29, 2007.

 

28

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**PART IV**

**Item 15.*Exhibits and Financial Statement Schedules***

**(a)(1) Index to Consolidated Financial Statements:**
|                                                                                                                                                                      | ** ** | **Page Number** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| Report  of Management Responsibilities                                                                                                                               |       | F-1                  |       |
|                                                                                                                                                                 |       |                 |       |
| Report  of Independent Registered Public Accounting Firm                                                                                                             |       | F-2                  |       |
|                                                                                                                                                                 |       |                 |       |
| Consolidated  Balance Sheets — as of January 29, 2007 and January 30, 2006                                                                                      |       | F-3                  |       |
|                                                                                                                                                                 |       |                 |       |
| Consolidated  Statements of Operations — for the 52-weeks ended January 29, 2007 and  January 30, 2006  and the 53-weeks  ended January 31, 2005                |       | F-5                  |       |
|                                                                                                                                                                 |       |                 |       |
| Consolidated  Statements of Stockholders’ Equity — for the 52-weeks ended January 29, 2007  and  January 30, 2006 and the  53-weeks ended January 31, 2005 |       | F-6                  |       |
|                                                                                                                                                                 |       |                 |       |
| Consolidated  Statements of Cash Flows — for the 52-weeks ended January 29, 2007 and  January 30, 2006  and the 53-weeks  ended January 31, 2005                |       | F-7                  |       |
|                                                                                                                                                                 |       |                 |       |
| Notes to Consolidated Financial Statements                                                                                                                           |       | F-8                  |       |

 

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

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

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

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

 

29

----

 

**SIGNATURES**

Pursuant to the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                |   | STAR BUFFET, INC. |
|----------------|--------|-------------------|
|           |   | (Registrant)      |
|           |   |              |   |   |   |   |
| April 25, 2007 |   | By:               | /s/ Robert E. Wheaton |
|           |   |              | Robert E. Wheaton |
|           |   |              | *Chief Executive Officer and President* |
| * *       |   |              | *(principal executive officer)* |
| * *       |   |              |   |   |   |   |
| April 25, 2007 |   | By:               | /s/ Ronald E. Dowdy |
|           |   |              | Ronald E. Dowdy |
| * *       |   |              | *Group Controller, Treasurer and Secretary* |
| * *       |   |              | *(principal accounting officer)* |

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated.
| Signature                             | ** ** | **Title**                   | ** ** | **Date**       |
|---------------------------------------|------------|-----------------------------|------------|----------------|
| ** **                            | ** ** | ** **                  | ** ** | ** **     |
| /s/ Robert E. Wheaton                 |       | Chief Executive Officer,    |       | April 25, 2007 |
| Robert E. Wheaton                     |       | President and Director      |       |           |
|                                  |       |                        |       |           |
| /s/ Ronald E. Dowdy                   |       | Group Controller, Treasurer |       | April 25, 2007 |
| Ronald E. Dowdy                       |       | and Secretary               |       |           |
|                                  |       |                        |       |           |
| /s/ Thomas G. Schadt                  |       | Director                    |       | April 19, 2007 |
| Thomas G. Schadt                      |       |                        |       |           |
|                                  |       |                        |       |           |
| /s/ Phillip “Buddy” Johnson |       | Director                    |       | April 19, 2007 |
| Phillip “Buddy” Johnson     |       |                        |       |           |
|                                  |       |                        |       |           |
| /s/ Craig B. Wheaton                  |       | Director                    |       | April 19, 2007 |
| Craig B. Wheaton                      |       |                        |       |           |
|                                  |       |                        |       |           |
| /s/ B. Thomas M. Smith, Jr.           |       | Director                    |       | April 19, 2007 |
| B. Thomas M. Smith, Jr.               |       |                        |       |           |
|                                  |       |                        |       |           |
| /s/ Todd S. Brown                     |       | Director                    |       | April 19, 2007 |
| Todd S. Brown                         |       |                        |       |           |

 

30

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**REPORT OFMANAGEMENT RESPONSIBILITIES**

The management ofStar Buffet, Inc. is responsible for the fairness and accuracy of theconsolidated financial statements. The consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America, using management’s best estimates and judgmentswhere appropriate. The financial information throughout this report isconsistent with our consolidated financial statements.

Management hasestablished a system of internal controls that provides reasonable assurancethat assets are adequately safeguarded, and transactions are recordedaccurately, in all material respects, in accordance with management’sauthorization. We maintain a strong audit program that independently evaluatesthe adequacy and effectiveness of internal controls. Our internal controlsprovide for appropriate separation of duties and responsibilities, and thereare documented policies regarding utilization of Company assets and proper financialreporting. These formally stated and regularly communicated policies set highstandards of ethical conduct for all employees.

This annual reportdoes not include an attestation report of the Company’s registered publicaccounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestationby the Company’s registered public accounting firm pursuant to temporary rulesof the Securities and Exchange Commission that permit the Company to provideonly management’s report in this annual report.

The AuditCommittee of the Board of Directors meets regularly to determine thatmanagement and independent auditors are properly discharging their dutiesregarding internal control and financial reporting. The independent auditorsand employees have full and free access to the Audit Committee at any time.

Mayer Hoffman McCann P.C., independent registered publicaccountants, are retained to audit the Company’s consolidated financialstatements.

/s/ Robert E. Wheaton

Robert E. Wheaton,Chairman of the Board and Chief Executive Officer

 

F-1

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Stockholders

STAR BUFFET, INC. ANDSUBSIDIARIES

We have audited theaccompanying consolidated balance sheets of Star Buffet, Inc. and Subsidiaries(a Delaware Corporation) as of January 29, 2007 and January 30, 2006, and therelated consolidated statements of operations, stockholders’ equity and cashflows for each of the three fiscal years in the period ended January 29, 2007.These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our auditsin accordance with auditing standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audits to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall consolidated financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Star Buffet, Inc. and Subsidiariesas of January 29, 2007 and January 30, 2006, and the results of theiroperations and their cash flows for each of the three fiscal years in theperiod ended January 29, 2007, in conformity with U.S. generally acceptedaccounting principles.

/s/ Mayer Hoffman McCannP.C.

MAYER HOFFMAN MCCANN P.C.

Phoenix, Arizona

April 23, 2007

 

F-2

----

 

**STAR BUFFET, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

** **
| ** **                                            | ** ** | **January 29,  2007** | ** ** | **January 30,  2006** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                            | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current  assets:                                      |       |                       |       |                       |       |
| Cash and cash equivalents                             |       | $                          | 418,000    |                       | $          | 491,000 |   |
| Current portion of notes receivable                   |       | 58,000                     |       | 39,000                     |       |
| Receivables, net                                      |       | 435,000                    |       | 297,000                    |       |
| Inventories                                           |       | 548,000                    |       | 429,000                    |       |
| Deferred income taxes                                 |       | 310,000                    |       | 258,000                    |       |
| Prepaid expenses                                      |       | 320,000                    |       | 132,000                    |       |
| Total current assets                                  |       | 2,089,000                  |       | 1,646,000                  |       |
|                                                  |       |                       |       |                       |       |
| Property,  buildings and equipment:                   |       |                       |       |                       |       |
| Property, buildings and equipment, net                |       | 17,479,000                 |       | 15,358,000                 |       |
| Property and equipment under capitalized leases, net  |       | 751,000                    |       | 885,000                    |       |
| Property and equipment leased to third parties, net   |       | 4,291,000                  |       | 3,734,000                  |       |
| Property, buildings and equipment held for future use |       | 1,892,000                  |       | 3,156,000                  |       |
| Property held for sale                                |       | 931,000                    |       | 931,000                    |       |
| Total property, buildings and equipment               |       | 25,344,000                 |       | 24,064,000                 |       |
|                                                  |       |                       |       |                       |       |
| Other  Assets:                                        |       |                       |       |                       |       |
| Notes receivable, net of current portion              |       | 1,873,000                  |       | 4,399,000                  |       |
| Deposits and other                                    |       | 245,000                    |       | 133,000                    |       |
| Total other assets                                    |       | 2,118,000                  |       | 4,532,000                  |       |
|                                                  |       |                       |       |                       |       |
| Deferred  income taxes, net                           |       | 2,097,000                  |       | 2,190,000                  |       |
|                                                  |       |                       |       |                       |       |
| Intangible  assets:                                   |       |                       |       |                       |       |
| Goodwill                                              |       | 1,677,000                  |       | 1,677,000                  |       |
| Other intangible assets, net                          |       | 843,000                    |       | 715,000                    |       |
| Total intangible assets                               |       | 2,520,000                  |       | 2,392,000                  |       |
|                                                  |       |                       |       |                       |       |
| Total assets                                          |       | $                          | 34,168,000 |                       | $          | 34,824,000 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

(Continued)

 

F-3

----

 

**STAR BUFFET, INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS(Continued)**

** **
| ** **                                                                                                          | ** ** | **January 29,  2007** | ** ** | **January 30,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                      | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current  liabilities:                                                                                               |       |                       |       |                       |       |
| Accounts payable-trade                                                                                              |       | $                          | 2,657,000  |                       | $          | 2,178,000 |   |
| Payroll and related taxes                                                                                           |       | 1,281,000                  |       | 1,131,000                  |       |
| Sales and property taxes                                                                                            |       | 901,000                    |       | 666,000                    |       |
| Rent, licenses and other                                                                                            |       | 608,000                    |       | 508,000                    |       |
| Income taxes payable                                                                                                |       | 628,000                    |       | 891,000                    |       |
| Revolving line of credit                                                                                            |       | 336,000                    |       | —                     |       |
| Current maturities of obligations under long-term debt                                                              |       | 434,000                    |       | 640,000                    |       |
| Current maturities of obligations under capital leases                                                              |       | 157,000                    |       | 142,000                    |       |
| Total  current liabilities                                                                                          |       | 7,002,000                  |       | 6,156,000                  |       |
|                                                                                                                |       |                       |       |                       |       |
| Deferred  rent payable                                                                                              |       | 1,294,000                  |       | 1,317,000                  |       |
| Other  long-term liability                                                                                          |       | —                     |       | 34,000                     |       |
| Capitalized  lease obligations, net of current maturities                                                           |       | 1,239,000                  |       | 1,397,000                  |       |
| Long-term  debt, net of current maturities                                                                          |       | 5,455,000                  |       | 5,636,000                  |       |
| Total  liabilities                                                                                                  |       | 14,990,000                 |       | 14,540,000                 |       |
|                                                                                                                |       |                       |       |                       |       |
| Stockholders’  equity:                                                                                         |       |                       |       |                       |       |
| Preferred stock, $.001 par value; authorized 1,500,000 shares;  none issued or outstanding                          |       | —                     |       | —                     |       |
| Common stock,  $.001 par value; authorized 8,000,000 shares; issued and outstanding  3,170,675 and 3,003,425 shares |       | 3,000                      |       | 3,000                      |       |
| Additional paid-in capital                                                                                          |       | 17,491,000                 |       | 16,618,000                 |       |
| Retained earnings                                                                                                   |       | 1,684,000                  |       | 3,663,000                  |       |
| Total  stockholders’ equity                                                                                    |       | 19,178,000                 |       | 20,284,000                 |       |
|                                                                                                                |       |                       |       |                       |       |
| Total liabilities and stockholders’ equity                                                                     |       | $                          | 34,168,000 |                       | $          | 34,824,000 |   |

 

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

 

F-4

----

 

**STAR BUFFET, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

 
| ** **                                         | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Three**                | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **Weeks**                      | ** ** | **Weeks**                      | ** ** | **Weeks**                      | ** ** |
| ** **                                         | ** ** | **Ended**                      | ** ** | **Ended**                      | ** ** | **Ended**                      | ** ** |
| ** **                                         | ** ** | **January 29, 2007** | ** ** | **January 30, 2006** | ** ** | **January 31, 2005** | ** ** |
|                                               |       |                           |       |                           |       |                           |       |
| Total  revenues                                    |       | $                              | 58,648,000 |                           | $          | 56,305,000                     |       | $ | 64,856,000 |   |
| Costs  and expenses                                |       |                           |       |                           |       |                           |       |
| Food costs                                         |       | 20,789,000                     |       | 19,429,000                     |       | 22,336,000                     |       |
| Labor costs                                        |       | 19,674,000                     |       | 18,260,000                     |       | 21,712,000                     |       |
| Occupancy and other expenses                       |       | 12,772,000                     |       | 11,763,000                     |       | 12,963,000                     |       |
| General and administrative expenses                |       | 2,426,000                      |       | 2,179,000                      |       | 2,694,000                      |       |
| Depreciation and amortization                      |       | 2,069,000                      |       | 2,120,000                      |       | 2,440,000                      |       |
| Impairment of long-lived assets                    |       | —                         |       | 369,000                        |       | 2,838,000                      |       |
| Total  costs and expenses                          |       | 57,730,000                     |       | 54,120,000                     |       | 64,983,000                     |       |
| Income  (loss) from operations                     |       | 918,000                        |       | 2,185,000                      |       | (127,000                       | )          |
|                                               |       |                           |       |                           |       |                           |       |
| Interest  expense                                  |       | (616,000                       | )          | (648,000                       | )          | (640,000                       | )          |
| Interest  income                                   |       | 93,000                         |       | 361,000                        |       | 5,000                          |       |
| Gain  on sale of assets                            |       | 230,000                        |       | —                         |       | —                         |       |
| Other  income                                      |       | 329,000                        |       | 319,000                        |       | 422,000                        |       |
| Income  (loss) before income taxes (benefit)       |       | 954,000                        |       | 2,217,000                      |       | (340,000                       | )          |
|                                               |       |                           |       |                           |       |                           |       |
| Income  tax provision (benefit)                    |       | 238,000                        |       | 420,000                        |       | (168,000                       | )          |
|                                               |       |                           |       |                           |       |                           |       |
| Net  income (loss)                                 |       | $                              | 716,000    |                           | $          | 1,797,000                      |       | $ | (172,000 | ) |
|                                               |       |                           |       |                           |       |                           |       |
| Net  income (loss) per common share— basic    |       | $                              | 0.23       |                           | $          | 0.60                           |       | $ | (0.06 | ) |
| Net  income (loss) per common share— diluted  |       | $                              | 0.23       |                           | $          | 0.56                           |       | $ | (0.06 | ) |
| Weighted  average shares outstanding — basic  |       | 3,147,000                      |       | 2,990,000                      |       | 2,950,000                      |       |
| Weighted average shares outstanding — diluted |       | 3,164,000                      |       | 3,209,000                      |       | 2,950,000                      |       |

 

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

 

F-5

----

 

**STAR BUFFET, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

** **
| ** **                        | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Officer’s** | ** ** | ** **   | ** ** | ** **             | ** ** | **Total**  | ** ** |
|-----------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|--------------------|------------|--------------|------------|------------------------|------------|------------|------------|
| ** **                        | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Notes**      | ** ** | **Retained**       | ** ** | **Treasury** | ** ** | **Stockholders’** | ** ** |
| ** **                        | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Receivable**     | ** ** | **Earnings** | ** ** | **Stock**              | ** ** | **Equity** | ** ** |
| Balance  at January 26, 2004 |       | 2,950,000             |       | $           | 3,000      |           | $          | 16,351,000         |       | $            | (1,330,000 | )                      | $          | 5,766,000  |       | $ | — |   | $ | 20,790,000 |   |
| Dividend                          |       | —                |       | —      |       | —         |       | —             |       | (1,475,000   | )          | —                 |       | (1,475,000 | )          |
| Payment  by officer               |       | —                |       | —      |       | —         |       | 632,000            |       | —       |       | —                 |       | 632,000    |       |
| Net  loss                         |       | —                |       | —      |       | —         |       | —             |       | (172,000     | )          | —                 |       | (172,000   | )          |
|                              |       |                  |       |        |       |           |       |               |       |         |       |                   |       |       |       |
| Balance  at January 31, 2005 |       | 2,950,000             |       | 3,000       |       | 16,351,000     |       | (698,000           | )          | 4,119,000    |       | —                 |       | 19,775,000 |       |
| Exercised  stock options.         |       | 53,000                |       | —      |       | 267,000        |       | —             |       | —       |       | —                 |       | 267,000    |       |
| Dividend                          |       | —                |       | —      |       | —         |       | —             |       | (2,253,000   | )          | —                 |       | (2,253,000 | )          |
| Payment  by officer               |       | —                |       | —      |       | —         |       | 698,000            |       | —       |       | —                 |       | 698,000    |       |
|                              |       |                  |       |        |       |           |       |               |       |         |       |                   |       |       |       |
| Net  income                       |       | —                |       | —      |       | —         |       | —             |       | 1,797,000    |       | —                 |       | 1,797,000  |       |
| Balance  at January 30, 2006 |       | 3,003,000             |       | 3,000       |       | 16,618,000     |       | —             |       | 3,663,000    |       | —                 |       | 20,284,000 |       |
|                              |       |                  |       |        |       |           |       |               |       |         |       |                   |       |       |       |
| Exercised  stock options          |       | 168,000               |       | —      |       | 873,000        |       | —             |       | —       |       | —                 |       | 873,000    |       |
| Dividend                          |       | —                |       | —      |       | —         |       | —             |       | (2,695,000   | )          | —                 |       | (2,695,000 | )          |
| Net  income                       |       | —                |       | —      |       | —         |       | —             |       | 716,000      |       | —                 |       | 716,000    |       |
|                              |       |                  |       |        |       |           |       |               |       |         |       |                   |       |       |       |
| Balance at January 29, 2007  |       | 3,171,000             |       | $           | 3,000      |           | $          | 17,491,000         |       | $            | —     |                   | $          | 1,684,000  |       | $ | — |   | $ | 19,178,000 |   |

 

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

 

F-6

----

 

**STAR BUFFET, INC. ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
| ** **                                                                                | ** ** | **Fifty-Two  Weeks Ended  January 29,  2007** | ** ** | **Fifty-Two  Weeks Ended  January 30,  2006** | ** ** | **Fifty-Three  Weeks Ended  January 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Cash  flows from operating activities:                                                    |       |                                                    |       |                                                    |       |                                                      |       |
| Net  income (loss)                                                                        |       | $                                                       | 716,000    |                                                    | $          | 1,797,000                                                 |       | $ | (172,000 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                                                    |       |                                                    |       |                                                      |       |
| Depreciation                                                                              |       | 1,956,000                                               |       | 2,003,000                                               |       | 2,316,000                                                 |       |
| Amortization of franchise and licenses                                                    |       | 91,000                                                  |       | 94,000                                                  |       | 99,000                                                    |       |
| Amortization of loan costs                                                                |       | 22,000                                                  |       | 23,000                                                  |       | 25,000                                                    |       |
| Gain on sale of assets                                                                    |       | (230,000                                                | )          | ―                                                 |       | ―                                                   |       |
| Impairment of long-lived assets                                                           |       | ―                                                 |       | 369,000                                                 |       | 2,838,000                                                 |       |
| Deferred income taxes, net                                                                |       | 41,000                                                  |       | (439,000                                                | )          | (1,087,000                                                | )          |
| Change in operating assets and liabilities:                                               |       |                                                    |       |                                                    |       |                                                      |       |
| Receivables                                                                               |       | (138,000                                                | )          | 123,000                                                 |       | (43,000                                                   | )          |
| Inventories                                                                               |       | (119,000                                                | )          | 36,000                                                  |       | 29,000                                                    |       |
| Prepaid expenses                                                                          |       | (188,000                                                | )          | (58,000                                                 | )          | 50,000                                                    |       |
| Deposits and other                                                                        |       | (112,000                                                | )          | 91  ,000                                                |       | 52,000                                                    |       |
| Deferred rent payable                                                                     |       | (23,000                                                 | )          | (3,000                                                  | )          | (61,000                                                   | )          |
| Accounts payable-trade                                                                    |       | 479,000                                                 |       | 441,000                                                 |       | (1,061,000                                                | )          |
| Income taxes payable                                                                      |       | (263,000                                                | )          | 170,000                                                 |       | 365,000                                                   |       |
| Other accrued liabilities                                                                 |       | 451,000                                                 |       | (781,000                                                | )          | 459,000                                                   |       |
| Total  adjustments                                                                        |       | 1,967,000                                               |       | 2,069,000                                               |       | 3,981,000                                                 |       |
| Net  cash provided by operating activities                                                |       | 2,683,000                                               |       | 3,866,000                                               |       | 3,809,000                                                 |       |
| Cash  flows from investing activities:                                                    |       |                                                    |       |                                                    |       |                                                      |       |
| Payments on notes receivable                                                              |       | 1,323,000                                               |       | 82,000                                                  |       | 20,000                                                    |       |
| Acquisition of property, buildings and equipment                                          |       | (2,505,000                                              | )          | (493,000                                                | )          | (2,947,000                                                | )          |
| Interest income                                                                           |       | (2,000                                                  | )          | (1,000                                                  | )          | (3,000                                                    | )          |
| Issuance of note receivable                                                               |       | (100,000                                                | )          | (1,640,000                                              | )          | —                                                    |       |
| Proceeds from the sale of assets                                                          |       | 171,000                                                 |       | —                                                  |       | —                                                    |       |
| Purchase of license and trademarks                                                        |       | (230,000                                                | )          | (25,000                                                 | )          | —                                                    |       |
| Payments by officer                                                                       |       | —                                                  |       | 698,000                                                 |       | 632,000                                                   |       |
| Net  cash used in investing activities                                                    |       | (1,343,000                                              | )          | (1,379,000                                              | )          | (2,298,000                                                | )          |
| Cash  flows from financing activities:                                                    |       |                                                    |       |                                                    |       |                                                      |       |
| Proceeds from issuance of long-term debt                                                  |       | 1,159,000                                               |       | —                                                  |       | —                                                    |       |
| Payments on long-term debt                                                                |       | (929,000                                                | )          | (577,000                                                | )          | (838,000                                                  | )          |
| Proceeds from stock options exercised                                                     |       | 873,000                                                 |       | 267,000                                                 |       | 3,075,000                                                 |       |
| Proceeds from line of credit, net                                                         |       | 336,000                                                 |       | —                                                  |       | (1,900,000                                                | )          |
| Capitalized loan costs                                                                    |       | (14,000                                                 | )          | (10,000                                                 | )          | (29,000                                                   | )          |
| Principal payments on capital leases                                                      |       | (143,000                                                | )          | (115,000                                                | )          | (97,000                                                   | )          |
| Dividends paid                                                                            |       | (2,695,000                                              | )          | (2,253,000                                              | )          | (1,475,000                                                | )          |
| Net  cash used in financing activities                                                    |       | (1,413,000                                              | )          | (2,688,000                                              | )          | (1,264,000                                                | )          |
|                                                                                      |       |                                                    |       |                                                    |       |                                                      |       |
| Net  increase (decrease) in cash and cash equivalents                                     |       | (73,000                                                 | )          | (201,000                                                | )          | 247,000                                                   |       |
| Cash  and cash equivalents at beginning of period                                         |       | 491,000                                                 |       | 692,000                                                 |       | 445,000                                                   |       |
| Cash and cash equivalents at end of period                                                |       | $                                                       | 418,000    |                                                    | $          | 491,000                                                   |       | $ | 692,000 |   |

 

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

 

F-7

----

 

**STAR BUFFET, INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

A summary of certain significant accounting policies notdisclosed elsewhere in the footnotes to the consolidated financial statementsis set forth below.

**Basis of Presentation**

The accompanying consolidated financial statementsinclude the accounts for Star Buffet, Inc., together with its direct andindirect wholly owned subsidiaries Summit Family Restaurants Inc. (“Summit”),HTB Restaurants, Inc. (“HTB”), Northstar Buffet, Inc. (“NSBI”) and Star BuffetManagement, Inc. (“SBMI”) (collectively the “Company”). The accompanyingconsolidated financial statements include the results of operations and assetsand liabilities of the Company’s operations. Certain estimates, assumptions andallocations were made in preparing such financial statements. Significantintercompany transactions and balances have been eliminated in consolidation.

**Organization and Nature of Operations**

The Company was formed by CKE Restaurants, Inc. (“CKE”)in July 1997 in connection with the reorganization of CKE’s buffet-stylerestaurant business. Pursuant to a contribution agreement among the Company andCKE and certain respective subsidiaries, CKE transferred to Summit the netassets of its two Casa Bonita Mexican theme restaurants, and Summit transferredsubstantially all of its assets and liabilities (primarily those relating tothe JB’s Restaurant system and Galaxy Diner restaurants, but excluding 16HomeTown Buffet restaurants operated by HTB) to a newly formed subsidiary ofCKE. All of the parties to the foregoing transactions (the “FormationTransactions”) were, upon completion thereof, direct or indirect wholly ownedsubsidiaries of CKE, and such Formation Transactions were accounted for asreorganization among companies under common control.

Theoperating results for the 52-week period ended January 29, 2007 included 52weeks of operations for the Company’s 14 franchised HomeTown Buffetrestaurants, six JB’s Family restaurants, four BuddyFreddys restaurants (two ofthe four BuddyFreddys restaurants are BuddyFreddys Country Buffet restaurants),three K-BOB’S Steakhouses, two Holiday House Family restaurants, one JJ North’sCountry Buffet restaurant, and one Casa Bonita Mexican theme restaurant.  The Company also opened the following duringthe year, one K-BOB’S Steakhouse for 48 weeks, one Pecos Diamond Steakhouse for29 weeks, one Western Sizzlin restaurant for 16 weeks and five Whistle Junctionrestaurants for 9 weeks.  In addition,operating results include 19 weeks for one Buddy Freddy’s Country Buffetclosed during the fiscal year 2007.  Results also include 33 weeks for oneJJ North’s Country Buffet restaurant closed during the fiscal year 2007.  Eight restaurantswere closed at the end of the 2007 fiscal year for repositioning. Four of theeight closed restaurants have been leased to third-property operators, threerestaurants remain closed for remodeling and repositioning and another closedrestaurant was reported as property held for sale.

Theoperating results for the 52-week period ended January 30, 2006 includedoperations for the Company’s 14 franchised HomeTown Buffet restaurants, six JB’srestaurants, five BuddyFreddys restaurants (three of the five BuddyFreddysrestaurants are BuddyFreddys Country Buffet restaurants), two JJ North’sCountry Buffet restaurants, two Holiday House restaurants and one Casa Bonitarestaurant.  In addition, operatingresults include 10 weeks for one JB’s restaurant closed during thefiscal year 2006.  Results also include 34 weeks for oneCasa Bonita restaurant closed during the fiscal year 2006. Eight restaurants were closed at the end of the 2006fiscal year for repositioning. Three of the eight closed restaurants have beenleased to third-property operators, four restaurants remain closed forremodeling and repositioning and the closed restaurant in Laramie, Wyoming, wassold in March 2006.  In addition, the Company purchased a restaurantfacility in Rexburg, Idaho in September 2005. The Company leases the restaurant facility to a JB’s franchisee.

Theoperating results for the 53-week period ended January 31, 2005 includedoperations for the Company’s 14 franchised HomeTown Buffet restaurants, sevenJB’s restaurants, five BuddyFreddys restaurants (three of the five BuddyFreddysrestaurants are BuddyFreddys Country Buffet restaurants), two JJ North’sCountry Buffet restaurants, two Casa Bonita restaurants, and two Holiday Houserestaurants.  In addition, operatingresults include 30, 34 and 52 weeks for three JJ North’s Country Buffetrestaurants closed during the fiscal year 2005.  Results also include 35and 51 weeks for two HomeTown Buffet restaurants. Results for 2005 also include

F-8

----

34 weeks of operations for one North’s Star Buffetrestaurant and 39 weeks of operations for one JB’s Restaurant. Eightrestaurants were closed at the end of the 2005 fiscal year for repositioning.Four of the eight closed restaurants were leased to third-property operators,three restaurants remained closed for remodeling and repositioning and oneclosed restaurant was property held for sale.

**Fiscal Year**

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

**Cash Equivalents**

Highly liquid investments with original maturities ofthree months or less when purchased are considered cash equivalents. Thecarrying amounts reported in the consolidated balance sheets for theseinstruments approximate their fair value.

**Revenue Recognition**

The Company’s principal source of revenue is from customer diningtransactions.  Revenue is recognized atthe time the meal is paid for by the customer, in the form of cash or creditcard.

###### **Receivables**

Receivables are stated at an amount management expectsto collect and provides for an adequate reserve for probable uncollectibleamounts.  Amounts deemed to be uncollectibleare written off through a charge to earnings and a credit to a valuationallowance based on management’s assessment of the current status of individualbalances.  A receivable is written offwhen it is determined that all collection efforts have been exhausted.  The Company did not have any reserves for theyears ending January 29, 2007 and January 30, 2006.

###### **ConsiderationReceived from Vendors**

The Company records vendor rebates on products purchasedas a reduction of cost of sales as earned. The allowances are recognized asearned in accordance with the underlying agreement with the vendor.

**Inventories**

Inventories consist of food,beverage, gift shop items and restaurant supplies and are valued at the lowerof cost or market, determined by the first-in, first-out method.

**Property, Buildings and Equipment**

Property and equipment and real property undercapitalized leases are carried at cost less accumulated depreciation andamortization. Depreciation and amortization are provided using thestraight-line method over the following useful lives:

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

 

Building and leasehold improvements are amortized overthe 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 atlease inception for which failure to renew options would result in asubstantial economic penalty.

Property and equipment placed on the market for sale isnot depreciated and is reclassed on the balance sheet as property held forsale. Property and equipment in non-operating units held for remodeling orrepositioning is not depreciated.

F-9

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

###### **Goodwill**

Goodwill and other intangibleassets primarily represent the excess of the purchase price paid over the fairvalue of the net assets acquired in connection with business acquisitions.

The Company reviews goodwill forpossible impairment on an annual basis or when triggering events occur inaccordance with SFAS 142. Goodwill is tested for impairment at the reportingunit level. Because SFAS 142 defines a reporting unit as an operating segmentor one level below an operating segment, the Company reviews goodwill forpossible impairment at the individual restaurant level. Six reporting units(restaurants) had recorded goodwill associated with them for fiscal 2007 andfiscal 2006.

The Company utilizes a two-partimpairment test.  First, the fair valueof the reporting unit is compared to the carrying value (includinggoodwill).  If the carrying value is greaterthan the fair value, the second step is performed.  In the second step, the implied fair value ofthe reporting unit goodwill is compared to the carrying amount ofgoodwill.  If the carrying value isgreater, a loss is recognized. The goodwill impairment test considers theimpact of current conditions and the economic outlook for the restaurantindustry, the general overall economic outlook including market data,governmental and environmental factors, in establishing the assumptions used tocompute the fair value of each reporting unit. We also take into account the historical, current and future (based onprobability) operating results of the eleven reporting units and any otherfacts and data pertinent to valuing the reporting units in our impairment test.Management determined there was no impairment after reviewing all of the dataof our eleven reporting units with recorded goodwill for 2004. In fiscal 2005,the Company impaired the goodwill associated with four reporting units afterevaluating all pertinent data in its annual impairment review and impaired thegoodwill associated with one additional reporting unit resulting from atriggering event (store closure). The amount of the impairment charge was$1,230,000 in fiscal 2005.  In fiscal2007 and fiscal 2006, the Company determined that there was no goodwillimpairment.

The Company has an independentevaluation of goodwill conducted every three years.  The most recent independent valuation wasconducted as of February 1, 2005.

**Other Intangible Assets**

Other intangible assets are comprised of franchise fees,loan acquisition costs, and the JB’s license agreement. Franchise fees areamortized using the straight-line method over the terms of the franchiseagreements, which typically range from 8 to 20 years.  Loan costs are amortized using the straight-linemethod over the lesser of the life of the loan or five years (whichapproximates the effective interest method). The JB’s license agreement isbeing amortized using the straight-line method over 11 years.  In November 2006, the Company acquired thetrademarks and intangible assets of Whistle Junction for $230,000.  These assets have an indefinite asset lifeand are subject to possible impairment on an annual basis or when triggeringevents occur in accordance with SFAS 142.

 
|                            | ** ** | **Gross**             | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|----------------------------|------------|-----------------------|------------|------------------|------------|------------|------------|
| **Fiscal 2007**       | ** ** | **Carrying Amt** | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Franchise and license fees |       | $                     | 1,378,000  |             | $          | (578,000   | )          | $ | 800,000 |   |
| Loan acquisition costs     |       | 113,000               |       | (70,000          | )          | 43,000     |       |
| Total                      |       | $                     | 1,491,000  |             | $          | (648,000   | )          | $ | 843,000 |   |
|                       |       |                  |       |             |       |       |       |
| **Fiscal  2006**           |       |                  |       |             |       |       |       |
| Franchise and license fees |       | $                     | 1,148,000  |             | $          | (485,000   | )          | $ | 663,000 |   |
| Loan acquisition costs     |       | 120,000               |       | (68,000          | )          | 52,000     |       |
| Total                      |       | $                     | 1,268,000  |             | $          | (553,000   | )          | $ | 715,000 |   |

 

F-10

----

Thetable below shows expected amortization for purchased finite intangibles as ofJanuary 29, 2007 for the next five years:
| Fiscal Year | ** ** | ** ** | ** ** |
|------------------|------------|------------|------------|
| 2008             |       | 112,000    |       |
| 2009             |       | 104,000    |       |
| 2010             |       | 102,000    |       |
| 2011             |       | 96,000     |       |
| 2012             |       | 95,000     |       |
| Thereafter       |       | 104,000    |       |
| Total            |       | $          | 613,000    |   |
|                  |            |            |            |  |

 

The Company acquired the JB’slicense agreement in November 2002 for $773,000. Amortization expense for theJB’s license agreement was $78,000 in fiscal 2007, 2006 and 2005.  Amortization of franchise and license feeswere $91,000, $94,000 and $99,000 for the fiscal years ending January 29, 2007,January 30, 2006 and January 31, 2005, respectively.  Amortization of loan costs were $22,000,$23,000 and $25,000 for the fiscal years ending January 29, 2007, January 30,2006 and January 31, 2005, respectively.

**Impairmentof Long-Lived Assets**

The Company determinesthat an impairment write down is necessary for long-lived assets wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to futureundiscounted net cash flows expected to be generated by the asset. If suchassets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the assets exceeds thefair value of the assets.   Impairmentexpense charged to operations was $0, $369,000 and $2,838,000 for the yearsended January 29, 2007, January 30, 2006 and January 31, 2005, respectively.

###### **FairValue of Financial Instruments**

Thecarrying amounts of the Company’s cash and cash equivalents, receivables,accounts payable and accrued expenses approximates fair value because of theshort maturity of these instruments.

The carrying amounts of the Company’s notesreceivable, long-term debt and capital lease obligations approximate fair valueand are based on discounted cash flows using market rates at the balance sheetdate. The use of discounted cash flows can be significantly affected by theassumptions used, including the discount rate and estimates of future cashflows. The derived fair value estimates cannot be substantiated by comparisonto independent markets and, in many cases, could not be realized in immediatesettlement of the instrument.

**Pre-Opening Costs**

Pre-openingcosts are expensed when incurred. The Company incurred and charged tooperations approximately $0 of pre-opening costs during fiscal 2007, 2006 and2005.

**IncomeTaxes**

The Company utilizes the liability method of accountingfor income taxes. Under the liability method, deferred tax assets andliabilities are determined based on the difference between the financialstatement and tax basis of assets and liabilities using enacted tax rates ineffect during the years in which the differences are expected to reverse. Anallowance against deferred tax assets is recorded in whole or in part when itis more likely than not that such tax benefits will not be realized.

**Advertising Expenses**

Advertising costs are charged tooperations as incurred. Amounts charged to operations totaled $670,000, $602,000and $687,000, for the years ended January 29, 2007, January 30, 2006 andJanuary 31, 2005, respectively.

F-11

----

**Insurance Programs**

The Company is self-insured forgeneral liability claims. The Company has commercial insurance for casualtyclaims in excess of $2 million per claim and $3 million per year as a riskreduction strategy. Self-insurance accruals include estimates based onhistorical information and expected future development factors. Differences inestimates and assumptions could result in actual liabilities materiallydifferent from the calculated accruals.  Valuationreserves for the years ended January 29, 2007, January 30, 2006, and January31, 2005, consisted of the following:
| Insurance and claims reserves  (prepaids): | ** ** | **Balance at Beginning  of Period** | ** ** | **Expense Recorded** | ** ** | **Payments Made** | ** ** | **Balance at End  of Period** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------|------------|------------------------|------------|----------------------------------------------|------------|
| Year ended January 29, 2007                          |       | $                                                  | 50,000     |                      | $          | 27,500                 |       | $                                            | (11,000    | ) | $ | 66,500 |   |
| Year ended January 30, 2006                          |       | $                                                  | 40,500     |                      | $          | 22,500                 |       | $                                            | (13,000    | ) | $ | 50,000 |   |
| Year ended  January 31, 2005                         |       | $                                                  | 32,000     |                      | $          | 24,500                 |       | $                                            | (16,000    | ) | $ | 40,500 |   |

 

**Leases**

The Company has various lease commitments on storelocations. Expenses of operating leases with escalating payment terms arerecognized on a straight-line basis over the lives that conform to the relatedterm used to depreciate leasehold improvements on the leased property.Contingent rental payments are triggered by surpassing annual base revenuelevels set forth in certain of our lease agreements.   Contingent rental expense is recorded ineach month that our revenue exceeds the monthly base revenue levels as setforth in certain of our lease agreements. In situations where the contingent rent is based on annual sales orcumulative sales to date, contingent rental expense is recorded when it isdetermined probable that we will exceed the established threshold.

**Use of Estimates**

In preparing the consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andrevenue and expenses during the reporting period. Actual results could differfrom those estimates.

**Earnings (Loss) per Share**

The Company applies Statement of Financial AccountingStandards No. 128 (SFAS No. 128), which requires the calculation of basic anddiluted loss per share. Basic income (loss) per share is computed by dividingnet income (loss) by the weighted average number of common shares outstandingduring the fiscal year. Diluted income (loss) per share is computed on thebasis of the average number of common shares outstanding plus the dilutiveeffect of outstanding stock options and warrants using the “treasury stock”method. The following is a reconciliation of the denominators used to calculatediluted earnings (loss) per share on net income (loss) for the respectivefiscal years:

 
|                                                            | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Three**                | ** ** |
|------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **Weeks**                      | ** ** | **Weeks**                      | ** ** | **Weeks**                      | ** ** |
| ** **                                                 | ** ** | **Ended**                      | ** ** | **Ended**                      | ** ** | **Ended**                      | ** ** |
| ** **                                                 | ** ** | **January 29, 2007** | ** ** | **January 30, 2006** | ** ** | **January 31, 2005** | ** ** |
| ** **                                                 |       |                           |       |                           |       |                           |       |
| Weighted average common shares outstanding — basic    |       | 3,146,974                      |       | 2,989,686                      |       | 2,950,000                      |       |
| Dilutive effect of stock options                           |       | 17,361                         |       | 219,557                        |       | 211,875                        |       |
| Anti-dilutive stock options                                |       | —                         |       | —                         |       | (211,875                       | )          |
| Weighted  average common shares outstanding — diluted |       | 3,164,335                      |       | 3,209,243                      |       | 2,950,000                      |       |

 

Weighted average common shares used in the years endedJanuary 29, 2007 and January 30, 2006 diluted earnings per share computationsexclude stock options to purchase 488,000 shares of common stock due to themarket price of the underlying stock being less than the exercise price.Weighted average common shares used in the year ended January 31, 2005 dilutedloss per share computations exclude stock options to purchase 701,000 shares ofcommon stock as their effect was anti-dilutive.

###### **SegmentReporting**

The Company’s reportablesegments are based on brand similarities. Business results are based on theCompany’s management accounting practices.

F-12

----

###### ** **

###### **ComprehensiveIncome**

The Company does not haveany components of comprehensive income other than net income (loss) and,therefore, comprehensive income equaled net income (loss) for all periodspresented.

**Stock-BasedCompensation**

***Periods prior to the adoption of SFAS 123(R)***

Prior to January 1, 2006, the Company accountedfor stock-based awards under the intrinsic value method, which followed therecognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employee,*and related interpretations. The intrinsic value method of accounting resultedin compensation expense for stock options to the extent option exercise priceswere set below market prices on the date of grant. Also, to the extent stockawards were forfeited prior to vesting, any previously recognized expense wasreversed as an offset to operating expenses in the period of forfeiture.

The following table illustrates the effects on netloss and net loss per share as if the Company had applied the fair valuerecognition provisions of SFAS 123, *Accountingfor Stock Based Compensation*, as amended by SFAS No. 148, *Accounting for Stock-Based Compensation—Transitionand Disclosure*to options granted under the Company’s stock-basedcompensation plans prior to the adoption. For purposes of this pro formadisclosure, the value of the options was estimated using theBlack-Scholes-Merton (“BSM”) option-pricing formula and amortized on astraight-line basis over the respective vesting periods of the awards.Disclosure for the year ended December 31, 2006 is not presented becausestock-based payments were accounted for under SFAS 123 (R)’s fair value methodduring this period.

 
|                                                                                | ** ** | **Fifty-Two**                                                                     | ** ** | **Fifty-Three**                | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **Weeks Ended**                                                              | ** ** | **Weeks Ended**           | ** ** |
| ** **                                                                     | ** ** | **January 30, 2006**                                                    | ** ** | **January 31, 2005** | ** ** |
| ** **                                                                     | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| Net  income (loss) attributable to  common stockholders                        |       |                                                                              |       |                           |       |
| As reported                                                                    |       | $                                                                                 | 1,797      |                           | $          | (172 | ) |
| Employee stock compensation expense included  in net income (loss) as reported |       | —                                                                            |       | —                         |       |
| Pro forma compensation expense                                                 |       | (61                                                                               | )          | —                         |       |
| Pro forma net income (loss)                                                    |       | $                                                                                 | 1,736      |                           | $          | (172 | ) |
| Per  share — basic                                                        |       |                                                                              |       |                           |       |
| As reported                                                                    |       | $                                                                                 | .60        |                           | $          | (.06 | ) |
| Pro forma compensation expense                                                 |       | (.02                                                                              | )          | —                         |       |
| Pro forma net income (loss)                                                    |       | $                                                                                 | .58        |                           | $          | (.06 | ) |
| Per  share — diluted                                                      |       |                                                                              |       |                           |       |
| As reported                                                                    |       | $                                                                                 | .56        |                           | $          | (.06 | ) |
| Pro forma compensation expense                                                 |       | (.02                                                                              | )          | —                         |       |
| Pro  forma net income (loss)                                                   |       | $                                                                                 | .54        |                           | $          | (.06 | ) |

 

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

As of January 1, 2006, the Company adopted SFASNo. 123(R) using the modified prospective method, which requiresmeasurement of compensation cost for all stock-based awards at fair value ondate of grant and recognition of compensation over the service period forawards expected to vest. The fair value of stock options is determined usingthe BSM valuation model, which is consistent with our valuation techniquespreviously utilized for options in footnote disclosures required under SFASNo. 123 *.*Such value isrecognized as expense over the service period, net of estimated forfeitures,using the straight-line method under SFAS 123(R).

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

F-13

----

**New Accounting Pronouncements**

In May 2005, theFASB issued SFAS 154, *AccountingChanges and Error Corrections — a replacement of APB Opinion No. 20and FASB Statement No. 3.* Previously, the cumulative effect ofmost changes in accounting principles was recognized in the period of thechange. SFAS 154 requires companies to recognize changes in accountingprinciple, including changes required by a new accounting pronouncement whenthe pronouncement does not include specific transition provisions,retrospectively to prior periods’ financial statements. Our adoption ofSFAS 154 at the beginning of fiscal 2007 did not have a material impact onour consolidated financial position or results of operations. We will apply theprovisions of SFAS 154 in future periods, when applicable.

In October 2005,the FASB issued Staff Position No. 13-1 (“FSP 13-1”), *Accountingfor Rental Costs Incurred During a Construction Period*.  Generally, the staff position requirescompanies to expense rental costs incurred during a construction period.  We adopted FSP 13-1 in our fiscal yearbeginning January 31, 2006.  The adoptionof this staff position has not had a material impact on our results ofoperations or financial position.

InSeptember 2006, the FASB issued SFAS 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans — anamendment of FASB Statements No. 87, 88, 106 and 132(R).*SFAS 158 requires the balance sheet recognition of the funded status ofdefined benefit pension and other postretirement plans, along with acorresponding after-tax adjustment to stockholders’ equity. Our adoption ofSFAS 158 at the end of fiscal 2007 did not have a material impact on ourconsolidated financial position or results of operations.

In September 2006,the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin(“SAB”) 108, *Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements.* SAB 108 provides interpretive guidance onhow the effects of the carryover or reversal of prior year misstatements shouldbe considered in quantifying a current year misstatement for the purpose of themateriality assessment. Our adoption of SAB 108 at the end of fiscal 2007did not have a material impact on our consolidated financial position orresults of operations.

**Reclassifications**

Certain non-materialamounts in fiscal 2005 and fiscal 2006 have been re-classed to conform to thefiscal 2007 presentation.

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

In February 2006,the FASB issued SFAS 155, *Accountingfor Certain Hybrid Financial Instruments — an amendment of FASB StatementsNo. 133 and 140.* SFAS 155 allows financial instrumentsthat contain an embedded derivative and that otherwise would requirebifurcation to be accounted for as a whole on a fair value basis, at theholders’ election. SFAS 155 also clarifies and amends certain otherprovisions of SFAS 133 and SFAS 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities — a replacement of FASB Statement 125.*Thisstatement is effective for all financial instruments acquired or issued infiscal years beginning after September 15, 2006, which for us is thebeginning of fiscal 2008. We are currently evaluating the impact ofSFAS 155 on our consolidated financial position and results of operations.

InJune 2006, the FASB issued FIN 48, *Accountingfor Uncertainty in Income Taxes — an interpretation of FASB StatementNo. 109*, which clarifies the accounting for uncertainty inincome taxes recognized in financial statements. FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 requires the recognition, in the financialstatements, of the impact of a tax position, if that position is more likelythan not of being sustained on audit, based on the technical merits of theposition. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods and disclosure. FIN 48is effective for fiscal years beginning after December 15, 2006, which forus is the beginning of fiscal 2008. We are currently evaluating the impact ofFIN 48 on our consolidated financial position and results of operations.

InJune 2006, the FASB ratified EITF consensus 06-3, *How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross versusNet Presentation).* This EITF addresses the presentation of taxes inthe income statement. Gross or net presentation may be elected for eachdifferent type of tax, but similar taxes 

F-14

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should be presented consistently. Taxes within thescope of this EITF would include taxes that are imposed on a revenuetransaction between a seller and a customer, for example, sales taxes, usetaxes, value-added taxes, and some types of excise taxes. Our accounting policyis to present the taxes within the scope of EITF 06-3 on a net basis. EITF 06-3is effective for interim and annual periods beginning after December 15,2006, which for us is the first quarter of fiscal 2008. We are currentlyevaluating the impact of EITF 06-3 on our consolidated results of operations.

InSeptember 2006, the FASB issued SFAS 157, *FairValue Measurements.* SFAS 157 establishes a framework formeasuring fair value under GAAP and expands disclosures about fair valuemeasurement. SFAS 157 also creates consistency and comparability in fairvalue measurements among the many accounting pronouncements that require fairvalue measurements but does not require any new fair value measurements.SFAS 157 is effective for fiscal years (including interim periods)beginning after November 15, 2007, which for us is the first quarter offiscal 2009. We are currently evaluating the impact of SFAS 157 on ourconsolidated financial position and results of operations.

InFebruary 2007, the FASB issued SFAS 159, *TheFair Value Option for Financial Assets and Financial Liabilities —Including an amendment of FASB Statement No. 115*. This standardamends SFAS 115, *Accounting for CertainInvestment in Debt and Equity Securities*, with respect to accountingfor a transfer to the trading category for all entities with available-for-saleand trading securities electing the fair value option. This standard allowscompanies to elect fair value accounting for many financial instruments andother items that currently are not required to be accounted as such, allowsdifferent applications for electing the option for a single item or groups ofitems, and requires disclosures to facilitate comparisons of similar assets andliabilities that are accounted for differently in relation to the fair valueoption. SFAS 159 is effective for fiscal years beginning afterNovember 15, 2007, which for us is fiscal 2009. We are currently evaluatingthe impact of SFAS 159 on our consolidated financial position and resultsof operations.

**NOTE 3 —NOTES RECEIVABLE**

Notes receivable consist of the following:

** **
|                                                       | ** ** | **January 29, 2007** | ** ** | **January 30, 2006** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Notes  receivable from North’s Restaurants, Inc. |       | $                              | 1,475,000  |                           | $          | 2,767,000 |   |
| Notes  receivable from strategic partners             |       | 436,000                        |       | 1,634,000                      |       |
| Notes  receivable from landlord                       |       | 20,000                         |       | 37,000                         |       |
| Total  notes receivable                               |       | 1,931,000                      |       | 4,438,000                      |       |
| Less  current portion                                 |       | 58,000                         |       | 39,000                         |       |
| Notes receivable, net of current portion              |       | $                              | 1,873,000  |                           | $          | 4,399,000 |   |

 

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

On February 1, 2005, the Company announced in a pressrelease that it had entered into a strategic alliance with K-BOB’S USA Inc. andrelated affiliates (“K-BOB’S”). In accordance with the terms of the strategicalliance, Star Buffet agreed to lend K-BOB’S up to $1.5 million on a long-termbasis.  The Company loaned K-BOB’S $1.5million and the current balance is $214,500. In exchange, K-BOB’S granted Star Buffet an option to purchase as manyas five corporate owned and operated K-BOB’S restaurants located in New Mexicoand Texas, as well as rights to develop K-BOB’S in other areas in the UnitedStates.  On January 31, 2006, the Companyexercised its option under the terms of the strategic alliance and purchasedthree K-BOB’S restaurants.  In addition,the Company 

F-15

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acquired another K-BOB’Slocation in Texas for cash of $700,000 in February 2006.

On October 7, 2005, the Company entered into a strategicalliance with Holiday House Corporation (“HHC”). In accordance with the termsof the strategic alliance, the Company agreed to lend HHC up to $300,000 on along-term basis.  The Company loaned HHCapproximately $240,000 and the current balance is $221,618.  In exchange, HHC granted the Company anoption to purchase two corporate owned and operated Holiday House restaurantslocated in Florida. The senior secured note, which includes HHC’s principalspersonal guaranties, has past due principal payments of $12,000 as of January29, 2007.

OnApril 22, 2007 the principal of HHC notified the Company that he planned toturn control of the business and associated assets over to the Company.  On April 23, 2007 the Company began operating thebusiness.  The Company hired HHC’semployees, notified HHC’s creditors of its intent to operate the business andcommenced negotiations with HHC’s landlord to craft an acceptable facilitylease.  Management believes that thetotal amount of the note receivable from HHC will be recovered.

Thereceivable from North’s Restaurants, Inc. (“North’s”) originally included$3,123,000 for a term note and $371,000 on a line of credit that was convertedto a note receivable. As a result of a dispute with North’s, management stoppedaccruing interest pending resolution of the dispute with North’s (Note 13). Aspart of a Settlement Agreement entered into on January 26, 2001, North’spromised to pay the Company the principal sum of $3,500,000 with an interestrate of 8% per annum. North’s paid the Company $295,000 pursuant to the termsof the Settlement Agreement and such payment was applied to reduce theprincipal amount owing. The $3.5 million note receivable stipulates thatmonthly payments of principal and interest be made in the amount of $39,954.The loan calls for monthly payments to start on February 26, 2001 and continueon the 26th day ofeach month thereafter, with a final payment of all remaining unpaid principal,accrued interest and other sums due under the note due and payable on September26, 2010. Our collateral includes all real and personal property, landlord leases,trademarks and all other intellectual property associated with sevenrestaurants.  The Company is pari passuwith the only other secured creditor. The other secured creditor is owedapproximately $3,000,000 not including accrued interest.  Since January 31, 2005, the note receivablehas been recorded as a long-term receivable. The Company has not recorded interest income due from North’s sinceAugust 2003.

In 1998, the Company suedNorth’s which resulted in a negotiated settlement in favor of the Companyrepresented by an Amended and Restated Promissory Note (the “Star BuffetPromissory Note).  As a result of North’sfailing to live up to its obligations under the Star Buffet Promissory Note, onMarch 2, 2004, the Company filed a second action against North’s in the United States DistrictCourt, District of Utah, Central Division, Case No. 2:04CV00211, seeking notless than $2,934,453 plus interest at the default rate as set forth in the StarBuffet Promissory Note.  In January 2005,the court granted the Company’s motion for summary judgment, ruling that North’shad failed to pay amounts owed to the Company. The Company obtained a judgment against North’s in the amount of$3,059,905.78, plus $15,980.45 in attorney’s fees and costs.

In a related proceeding,North’s other secured creditor, Pacific Mezzanine, initiated litigation againstNorth’s seeking a monetary judgment and the appointment of a receiver. OnOctober 4, 2004, the Circuit Court of the State of Oregon for the County ofJackson approved an order appointing a receiver.

Prior to August 2006, thereceiver has remitted only approximately $56,000 in loan repayments. In April,2006 the Company noticed all relevant parties of its intent to foreclose toseek to expedite the liquidation of North’s assets and repay amounts owed tothe Company.  Subsequent to the notice,the receiver moved to have the Company’s foreclosure of North’s assets setaside 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 theCompany approximately $1,291,000 from a partial sale of the assets. The Company’s note, together with the obligationto the other significant creditor of North’s, is secured by the real andpersonal property, landlord leases, trademarks and all other intellectualproperty owned by North’s. The balance of the amount due is currently$1,475,000.  The Company believes currentand future cash flows including asset sales are adequate for recovery of theremaining principal amount of the note receivable. The Company has notrecognized any interest income with respect to this note since August2003.  The Company has not provided anallowance for bad debts for the note as of January 29, 2007.

** **

F-16

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**NOTE 4 — PROPERTY, BUILDINGS AND EQUIPMENT AND REAL PROPERTY UNDERCAPITALIZED LEASES**

The components of property,buildings and equipment used in restaurant operations, not including propertyunder capitalized leases, are as follows:
|                                      | ** ** | **January 29,  2007** | ** ** | **January 30,  2006** | ** ** |
|--------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Property,  buildings and equipment:  |       |                       |       |                       |       |
| Furniture, fixtures and equipment    |       | $                          | 13,372,000 |                       | $          | 11,913,000 |   |
| Land                                 |       | 3,410,000                  |       | 3,085,000                  |       |
| Buildings and leasehold improvements |       | 21,501,000                 |       | 20,402,000                 |       |
|                                 |       | 38,283,000                 |       | 35,400,000                 |       |
| Less accumulated depreciation        |       | (20,804,000                | )          | (20,042,000                | )          |
|                                 |       | $                          | 17,479,000 |                       | $          | 15,358,000 |   |

 

The components of property under capitalized leases areas follows:
| Property and equipment under capitalized leases |   | $          | 3,193,000 |       | $ | 3,193,000 |   |
|-------------------------------------------------|--------|------------|-----------|------------|---|-----------|--------|
| Less accumulated amortization                   |   | (2,442,000 | )         | (2,308,000 | ) |
|                                            |   | $          | 751,000   |       | $ | 885,000   |   |

 

Total property, buildings andequipment includes the following land, equipment and buildings and leaseholdscurrently in eight non-operating units. Four of the eight units are leased tothird-party operators, three units are closed for remodeling and repositioningand one unit is included in property held for sale at January 29, 2007. Thecomponents are as follows:
|                                                             | ** ** | **January 29,  2007** | ** ** | **January 31,  2005** | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Property,  buildings and equipment leased to third parties: |       |                       |       |                       |       |
| Equipment                                                   |       | $                          | 1,111,000  |                       | $          | 892,000 |   |
| Land                                                        |       | 1,594,000                  |       | 1,370,000                  |       |
| Buildings and leaseholds                                    |       | 3,752,000                  |       | 3,083,000                  |       |
|                                                        |       | 6,457,000                  |       | 5,345,000                  |       |
|                                                        |       |                       |       |                       |       |
| Less accumulated depreciation                               |       | (2,166,000                 | )          | (1,611,000                 | )          |
|                                                        |       | $                          | 4,291,000  |                       | $          | 3,734,000 |   |

 
|                                                         | ** ** | **January 29,  2007** | ** ** | **January 30,  2006** | ** ** |
|---------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Property,  buildings and equipment held for future use: |       |                       |       |                       |       |
| Equipment                                               |       | $                          | 6,398,000  |                       | $          | 6,431,000 |   |
| Land                                                    |       | 517,000                    |       | 899,000                    |       |
| Buildings and leaseholds                                |       | 852,000                    |       | 1,935,000                  |       |
|                                                    |       | 7,767,000                  |       | 9,265,000                  |       |
|                                                    |       |                       |       |                       |       |
| Less accumulated depreciation                           |       | (5,875,000                 | )          | (6,109,000                 | )          |
|                                                    |       | $                          | 1,892,000  |                       | $          | 3,156,000 |   |

 
|                                        | ** ** | **January 29,  2007** | ** ** | **January 30,  2006** | ** ** |
|----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Property  and buildings held for sale: |       |                       |       |                       |       |
| Land                                   |       | $                          | 567,000    |                       | $          | 567,000 |   |
| Buildings                              |       | 364,000                    |       | 364,000                    |       |
|                                   |       | $                          | 931,000    |                       | $          | 931,000 |   |

 

 

F-17

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** **

Depreciation expense for fiscal 2007, 2006 and 2005totaled $1,956,000, $2,003,000 and $2,316,000, respectively.

**NOTE 5 —LONG-TERM DEBT**

The Company has a revolving line of credit with M&I Marshall &Ilsley Bank (the “revolving line of credit”) which provides working capital forthe Company. The revolving line of credit bears interest at LIBOR plus twopercent per annum and is renewable subject to credit review on an annual basis.The revolving line of credit contains covenants which require the Company tomaintain certain financial ratios and other covenants that restrict the annualpayment for capital expenditures and dividends. As of January 29, 2007, the Company is in compliance with thesecovenants. On May 24, 2006, theCompany extended the revolving line of credit due date from May 31, 2006 toJune 15, 2007 and increased the credit limit from $2,000,000 to $3,000,000. The revolving line of credit balance was$336,000 on January 29, 2007 and $334,000 on April 17, 2007. As of April 17,2007, $2,666,000 was available on the revolving line of credit. In addition,the revolving line of credit was amended to permit the Company to pay up to$2,700,000 in annual dividends and to spend up to $8,000,000 in capitalexpenditures for fiscal year 2007 and $3,000,000 thereafter. The revolving lineof credit also permits the Company to repurchase up to 250,000 shares of commonstock, although as of April 17, 2007, no shares had been repurchased.****The Company will seek to renew or replace theRevolving Line of Credit by June 15, 2007. There can be no assurance theRevolving Line of Credit can be refinanced on acceptable terms or at all.

On February 1, 2001, the Company entered into apromissory note secured by a first mortgage with Victorium Corporation for$460,000 to purchase the real estate of the BuddyFreddys Country Buffet inOcala, Florida. The fixed rate (7.5%) mortgage requires monthly payments of$4,264 including interest and matures in 15 years. The balance at January 29,2007 and January 30, 2006 was   $325,000and $362,000, respectively.

On October 9, 2001, the Company entered into a $773,00015 year first real estate mortgage with First National Bank of Wyoming. Themortgage has monthly payments including interest of $7,253 and has an October1, 2016 maturity date with a fixed interest rate of 7.625%. The mortgagerequires the Company to maintain specified minimum levels of net worth, limitsthe amount of capital expenditures, requires the maintenance of certain fixedcharge coverage ratios and requires a minimum shareholder ownership percentage.The proceeds were used to pay the FleetBoston Term Loan Facility as required bythe Company’s agreement with FleetBoston. The mortgage is secured by theCompany’s JB’s Restaurant in Laramie, Wyoming. The balance at January 29, 2007and January 30, 2006 was $0 and $623,000, respectively. The mortgage was paidin full on March 16, 2006 when the property was sold.

On May 2, 2002, the Company entered into a $1,500,000ten year first real estate mortgage with M&I Marshall & Ilsley Bank. Themortgage has monthly payments including interest of $17,894 and matures on May2, 2012 with a fixed interest rate of 7.5% for the first five years withinterest for years six to ten calculated at the five year LIBOR rate plus 250basis points with a floor of 7.5%. The proceeds were used to pay a priorobligation to FleetBoston Financial Corporation as required by the Company’sagreement with FleetBoston. The mortgage is secured by the Company’s HomeTownBuffet restaurant in Scottsdale, Arizona. The balance at January 29, 2007 andJanuary 30, 2006 was $877,000 and $1,066,000, respectively.

On December 19, 2003, the Company entered into a$1,470,000 six year first real estate mortgage with Platinum Bank. The mortgagehas monthly payments including interest of $12,678 through November 19, 2009with a balloon payment of $475,000 due on December 19, 2009. The mortgage bearsinterest at a fixed rate of 6.25% for the first three years with interest foryears four to six calculated at the three year Atlanta Federal Home Loan Bankadvance rate for fixed rate credits plus 325 basis points with a floor of 6.0%.The new rate is 8.1% and the new monthly payment is $14,031. The mortgage issecured by the Company’s BuddyFreddys restaurant in Plant City, Florida and a$500,000 personal guarantee of a shareholder. The balance at January 29, 2007and January 30, 2006 was $1,237,000 and $1,339,000, respectively.

On February 25, 2004, the Company entered into a$1,250,000 seven year first real estate mortgage with M&I Marshall &Ilsley Bank. The mortgage has monthly payments including interest of $18,396and matures on February 25, 2011 with a fixed interest rate of 6.1%. Theproceeds were used to reduce the Revolving Line of Credit with M&I Marshall& Ilsley Bank. The mortgage is secured by the Company’s HomeTown Buffetrestaurant in Yuma, Arizona. The balance at January 29, 2007 and January 30,2006 was     $721,000 and $959,000,respectively.

On July 29, 2004, the Company entered into a $550,000ten year first real estate mortgage with Heritage Bank. The mortgage hasmonthly payments including interest of $6,319 and matures on August 1, 2014with a fixed interest rate of 6.75%. The mortgage is secured by the Company’sJB’s Restaurant in Great Falls, Montana. The balance at January 29, 2007 andJanuary 30, 2006 was             $430,000and $490,000, respectively.

 

F-18

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On October 27, 2004, the Company entered into a$1,275,000 five year first real estate mortgage with Bank of Utah. The mortgagehas monthly payments including interest of $14,371 and matures on October 26,2009 with a balloon payment of $752,000 due on October 26, 2009. The mortgagebears interest at a fixed interest rate of 6.25%. The mortgage requires theCompany to maintain specified minimum levels of net worth, limits the amount ofcapital expenditures and requires the maintenance of certain fixed chargecoverage ratios. The proceeds were used to pay Naisco Investments, L.C., theprevious lien holder, and to reduce the Revolving Line of Credit with M&IMarshall & Ilsley Bank. The mortgage is secured by the Company’s HomeTownBuffet restaurant in Layton, Utah. The balance at January 29, 2007 and January30, 2006 was $1,008,000 and $1,154,000, respectively.

On September 16, 2005, the Company entered into a$300,000 5 year mortgage with Naisbitt Investment Company. The mortgage hasmonthly payments including interest of $5,870 and matures on September 15,2010. The balance at January 29, 2007 and January 30, 2006 was $206,000 and$283,000, respectively.

On June 1, 2006, the Company entered into a $564,000five year first real estate mortgage with Dalhart Federal Savings and Loans. Themortgage has monthly payments including interest of $6,731 and matures on May31, 2011 with a fixed interest rate of 7.63%. The mortgage is secured by theCompany’s K-BOB’S Restaurant in Dumas, Texas. The balance at January 29, 2007was $525,000.

On November 8, 2006, the Company entered into a $595,000five year first real estate mortgage with Wells Fargo Bank. The mortgage hasmonthly payments including interest of $8,055 and matures on October 31, 2011with a fixed interest rate of 7.5%. The mortgage is secured by the Company’sPecos Diamond Steakhouse in Artesia, New Mexico. The balance at January 29,2007 was $560,000.

Long term debt matures in fiscal years ending afterJanuary 29, 2007 as follows:

** **
| Fiscal Year | ** ** | ** ** | ** ** |
|------------------|------------|------------|------------|
| 2008             |       | 434,000    |       |
| 2009             |       | 787,000    |       |
| 2010             |       | 2,576,000  |       |
| 2011             |       | 656,000    |       |
| 2012             |       | 1,010,000  |       |
| Thereafter       |       | 426,000    |       |
| Total            |       | $5,889,000 |       |

 

**NOTE 6 — LEASES**

TheCompany occupies certain restaurants under long-term capital and operatingleases expiring at various dates through 2013. Most restaurant leases haverenewal options for terms of 5 to 20 years, and substantially all requirepayment of real estate taxes and insurance. Certain leases require the rent tobe the greater of a stipulated minimum rent or a specified percentage of sales.Certain operating lease agreements contain scheduled rent escalation clauseswhich are being amortized over the terms of the lease, ranging from 5 to 11years using the straight line method.

 

F-19

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Minimumlease payments for all leases and the present value of net minimum leasepayments for capital leases as of January 29, 2007 are as follows:
| Fiscal year                                     | ** ** | **Capital** | ** ** | **Operating** | ** ** |
|------------------------------------------------------|------------|-------------|------------|---------------|------------|
| 2008                                                 |       | 309,000     |       | 2,433,000     |       |
| 2009                                                 |       | 319,000     |       | 2,142,000     |       |
| 2010                                                 |       | 332,000     |       | 1,395,000     |       |
| 2011                                                 |       | 277,000     |       | 792,000       |       |
| 2012                                                 |       | 288,000     |       | 688,000       |       |
| Thereafter                                           |       | 464,000     |       | 1,638,000     |       |
| Total minimum lease payments:                        |       | 1,989,000   |       | $9,088,000    |       |
| Less amount representing interest:                   |       | 593,000     |       |          |       |
| Present value of minimum lease payments:             |       | 1,396,000   |       |          |       |
| Less current portion                                 |       | 157,000     |       |          |       |
| Capital  lease obligations excluding current portion |       | $1,239,000  |       |          |       |

 

Aggregate rent expense undernon-cancelable operating leases during fiscal 2007, 2006 and 2005 are asfollows:
|                       | ** ** | **Fifty-Two  Weeks Ended  January 29, 2007** | ** ** | **Fifty-Two  Weeks Ended  January 30, 2006** | ** ** | **Fifty-Three  Weeks Ended  January 31, 2005** | ** ** |
|-----------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Minimum rentals       |       | $                                                           | 2,778,000  |                                                        | $          | 2,702,000                                                     |       | $ | 3,137,000 |   |
| Straight-line rentals |       | (23,000                                                     | )          | (3,000                                                      | )          | (61,000                                                       | )          |
| Contingent rentals    |       | 104,000                                                     |       | 105,000                                                     |       | 87,000                                                        |       |
|                  |       | $                                                           | 2,859,000  |                                                        | $          | 2,804,000                                                     |       | $ | 3,163,000 |   |

 

In fiscal 2007, 2006 and 2005, the Company reduced thedeferred rent payable for stores that were purchased or closed. The $0, $0 and$108,000 decrease in rent expense in 2007, 2006 and 2005, respectively, isrecognized in the straight-line rentals disclosed above.

The Company currently leases four non-operating units totenants under non-cancellable operating leases with terms of five to ten years.The rental income for fiscal 2007, 2006 and 2005 was $279,000, $259,000 and$292,000, respectively. Rental income is recognized on a straight-line basisover the term of the lease and is included in other income in the accompanyingstatements of operations.

Future minimum lease payments receivable in fiscal yearsending after January 29, 2007 is as follows:
| Fiscal Year | ** ** | ** ** | ** ** |
|------------------|------------|------------|------------|
| 2008             |       | 283,000    |       |
| 2009             |       | 208,000    |       |
| 2010             |       | 110,000    |       |
| 2011             |       | 60,000     |       |
| 2012             |       | 60,000     |       |
| Thereafter       |       | 115,000    |       |
| Total            |       | $          | 836,000    |   |
|                  |            |            |            |  |

 

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**NOTE 7 — INCOME TAXES**

Income tax provision (benefit) are comprised of the following:
|            | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Three**                | ** ** |
|------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** ** | ** ** | **Weeks Ended**           | ** ** | **Weeks Ended**           | ** ** | **Weeks Ended**           | ** ** |
| ** ** | ** ** | **January 29, 2007** | ** ** | **January 30, 2006** | ** ** | **January 31, 2005** | ** ** |
| Current:   |       |                           |       |                           |       |                           |       |
| Federal    |       | $                              | 144,000    |                           | $          | 708,000                        |       | $ | 431,000 |   |
| State      |       | 54,000                         |       | 147,000                        |       | 105,000                        |       |
|       |       | 198,000                        |       | 855,000                        |       | 536,000                        |       |
| Deferred:  |       |                           |       |                           |       |                           |       |
| Federal    |       | 36,000                         |       | (389,000                       | )          | (592,000                       | )          |
| State      |       | 4,000                          |       | (46,000                        | )          | (112,000                       | )          |
|       |       | 40,000                         |       | (435,000                       | )          | (704,000                       | )          |
|       |       | $                              | 238,000    |                           | $          | 420,000                        |       | $ | (168,000 | ) |

 

A reconciliationof income tax provision (benefit) at the federal statutory rate of 34% to theCompany’s provision (benefit) for taxes on income is as follows:
|                                                  | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Two**                  | ** ** | **Fifty-Three**                | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **Weeks Ended**           | ** ** | **Weeks Ended**           | ** ** | **Weeks Ended**           | ** ** |
| ** **                                       | ** ** | **January 29, 2007** | ** ** | **January 30, 2006** | ** ** | **January 31, 2005** | ** ** |
| Income tax provision (benefit) at statutory rate |       | $                              | 324,000    |                           | $          | 754,000                        |       | $ | (116,000 | ) |
| State income taxes                               |       | 41,000                         |       | 88,000                         |       | (7,000                         | )          |
| Nondeductible expenses                           |       | 60,000                         |       | 60,000                         |       | 46,000                         |       |
| Federal income tax credits                       |       | (175,000                       | )          | (175,000                       | )          | (175,000                       | )          |
| Adjustment of estimated income tax accruals      |       | (12,000                        | )          | (307,000                       | )          | 84,000                         |       |
|                                             |       | $                              | 238,000    |                           | $          | 420,000                        |       | $ | (168,000 | ) |

 

The adjustment of estimated taxaccruals in fiscal 2006 included adjustments from an IRS exam which lowered theincome tax expense for the year.

Temporary differences give rise toa significant amount of deferred tax assets and liabilities as set forth below:
|                                             | ** ** | **January 29, 2007** | ** ** | **January 30, 2006** | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Current deferred tax assets:                |       |                           |       |                           |       |
| Accrued vacation                            |       | $                              | 83,000     |                           | $          | 81,000 |   |
| Accrued expenses and reserves               |       | 227,000                        |       | 177,000                        |       |
| Total deferred tax assets                   |       | 310,000                        |       | 258,000                        |       |
| Long-term deferred tax assets:              |       |                           |       |                           |       |
| Leases                                      |       | 1,000,000                      |       | 1,061,000                      |       |
| Depreciation, amortization and  impairments |       | 1,084,000                      |       | 1,116,000                      |       |
| State NOL carry forwards                    |       | 13,000                         |       | 193,000                        |       |
| Total deferred tax assets, net              |       | 2,097,000                      |       | 2,370,000                      |       |
| Valuation allowance                         |       | —                         |       | (180,000                       | )          |
| Net long term asset                         |       | 2,097,000                      |       | 2,190,000                      |       |
| Deferred  tax assets                        |       | $                              | 2,407,000  |                           | $          | 2,448,000 |   |

 

While there can be no assurance that the Company willgenerate any earnings or any specific level of earnings in the future years,

 

F-21

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management believes it is morelikely than not that the Company will be able to realize the benefit of thedeferred tax assets existing at January 29, 2007 based on the Company’sexpected future pre-tax earnings. The determination of deferred tax assets issubject to estimates and assumptions. We periodically evaluate our deferred taxassets to determine if our assumptions and estimates should change.

**NOTE 8 — SEGMENT AND RELATED REPORTING**

The Company has fourreporting segments: HomeTown Buffet, North’s Star, Florida Buffets Division andSummit Restaurant Division. The Company’s reportable segments are aggregatedbased on brand similarities of operating segments.

As of January 29, 2007,the Company owned and operated 14 franchised HomeTown Buffets, six JB’s Familyrestaurants, five Whistle Junction restaurants, four BuddyFreddys restaurants,four K-BOB’S Steakhouses, two Holiday House Family restaurants, one WesternSizzlin restaurant, one JJ North’s County Buffet, one Pecos Diamond Steakhouseand one Casa Bonita Mexican theme restaurant. The Company also had threerestaurants currently closed for remodeling and repositioning, four restaurantsleased to third-party operators and the net assets of another closed restaurantreported as property held for sale. The Company’s restaurants are located ineight western states and Florida, Georgia and Texas.

The accounting policies of the reportable segments arethe same as those described in Note 1. The Company evaluates the performance ofits operating segments based on income before income taxes.

Summarized financial information concerning the Company’sreportable segments is shown in the following table. The other assets presentedin the consolidated balance sheet and not in the reportable segments relate tothe Company as a whole, and not individual segments. Also certain corporateoverhead income and expenses in the consolidated statements of operations arenot included in the reportable segments.

(Dollars in Thousands)
| 52 Weeks Ended  January 29, 2007 | ** ** | **HomeTown  Buffet** | ** ** | **North’s  Star** | ** ** | **Florida  Buffets** | ** ** | **Summit  Restaurants** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|------------------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|-----------|------------|
| Revenues                                             |       | $                    | 27,258     |                   | $          | 2,301                |       | $                       | 11,642     |      | $          | 17,447    |       | $ | — |   | $ | 58,648 |   |
| Interest income                                      |       | —               |       | —                 |       | —               |       | —                  |       | 93        |       | 93        |       |
| Interest expense                                     |       | (167                 | )          | —                 |       | —               |       | —                  |       | (449      | )          | (616      | )          |
| Depreciation & amortization                      |       | 989                  |       | 88                     |       | 419                  |       | 509                     |       | 64        |       | 2,069     |       |
| Impairment of long-lived assets                      |       | —               |       | —                 |       | —               |       | —                  |       | —    |       | —    |       |
| Income (loss) before income taxes                    |       | 117                  |       | (364                   | )          | 510                  |       | 2,627                   |       | (1,936    | )          | 954       |       |
| Total  assets                                        |       | 11,173               |       | 2,965                  |       | 8,201                |       | 8,611                   |       | 3,218     |       | 34,168    |       |
|                                                      |            |                      |            |                        |            |                      |            |                         |            |           |            |           |            |  |  |  |  |  |  |

 
| 52 Weeks Ended  January 30, 2006 | ** ** | **HomeTown  Buffet** | ** ** | **North’s  Star** | ** ** | **Florida  Buffets** | ** ** | **Summit  Restaurants** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|------------------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|-----------|------------|
| Revenues                                             |       | $                    | 28,210     |                   | $          | 2,267                |       | $                       | 10,841     |      | $          | 14,987    |       | $ | — |   | $ | 56,305 |   |
| Interest income                                      |       | —               |       | —                 |       | —               |       | —                  |       | 361       |       | 361       |       |
| Interest expense                                     |       | (181                 | )          | —                 |       | —               |       | —                  |       | (467      | )          | (648      | )          |
| Depreciation & amortization                      |       | 996                  |       | 86                     |       | 588                  |       | 383                     |       | 67        |       | 2,120     |       |
| Impairment of long-lived assets                      |       | 18                   |       | 74                     |       | 202                  |       | 75                      |       | —    |       | 369       |       |
| Income (loss) before income taxes                    |       | 1,441                |       | (328                   | )          | 429                  |       | 2,230                   |       | (1,555    | )          | 2,217     |       |
| Total  assets                                        |       | 11,642               |       | 4,206                  |       | 8,365                |       | 6,319                   |       | 4,292     |       | 34,824    |       |
|                                                      |            |                      |            |                        |            |                      |            |                         |            |           |            |           |            |  |  |  |  |  |  |

 

 

F-22

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| 53 Weeks Ended  January 31, 2005 | ** ** | **HomeTown  Buffet** | ** ** | **North’s  Star** | ** ** | **Florida  Buffets** | ** ** | **Summit  Restaurants** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|------------------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|-----------|------------|
| Revenues                                             |       | $                    | 32,282     |                   | $          | 4,290                |       | $                       | 10,785     |      | $          | 17,499    |       | $ | — |   | $ | 64,856 |   |
| Interest  income                                     |       | —               |       | —                 |       | —               |       | —                  |       | 5         |       | 5         |       |
| Interest  expense                                    |       | (192                 | )          | —                 |       | —               |       | —                  |       | (448      | )          | (640      | )          |
| Depreciation  & amortization                     |       | 1,084                |       | 210                    |       | 625                  |       | 457                     |       | 64        |       | 2,440     |       |
| Impairment  of long-lived assets                     |       | 798                  |       | 1,040                  |       | 754                  |       | 246                     |       | —    |       | 2,838     |       |
| Income  (loss) before income taxes                   |       | 1,142                |       | (1,667                 | )          | (24                  | )          | 2,411                   |       | (2,202    | )          | (340      | )          |
| Total assets                                         |       | 12,386               |       | 4,388                  |       | 9,314                |       | 6,576                   |       | 2,216     |       | 34,880    |       |
|                                                      |            |                      |            |                        |            |                      |            |                         |            |           |            |           |            |  |  |  |  |  |  |

 

**NOTE 9 — STOCKHOLDERS’ EQUITY**

**Common Stock**

Holders of Common Stock are entitled to one vote pershare on all matters to be voted upon by the stockholders and do not havecumulative voting rights. Subject to preferences that may be applicable to theholders of outstanding shares of Preferred Stock, if any, at the time, holdersof Common Stock are entitled to receive ratably such dividends, if any, as maybe declared from time to time by the Board of Directors out of funds legallyavailable therefore. In the event of liquidation, dissolution or winding up ofthe Company, the holders of Common Stock shall be entitled to assets of theCompany remaining after payment of the Company’s liabilities and theliquidation preference, if any, of any outstanding Preferred Stock. Alloutstanding shares of Common Stock, are fully paid and non-assessable. Holdersof Common Stock have no preemptive, subscription, redemption or conversionrights. The rights, preferences and privileges of holders of Common Stock aresubject to, and may be adversely affected by, the rights of the holders ofshares of any series of Preferred Stock, which the Company may designate andissue in the future. The Company paid an annual cash dividend of $0.60, $0.50and $0.25 for fiscal 2007, fiscal 2006 and fiscal 2005, respectively. TheCompany also paid a special dividend of $0.25 in fiscal 2007, 2006 and 2005.

**Preferred Stock**

TheBoard of Directors has the authority, without further vote or action by thestockholders, to provide for the issuance of up to 1,500,000 shares ofPreferred Stock from time to time in one or more series with such designations,rights, preferences and privileges and limitations as the Board of Directorsmay determine, including the consideration received therefore. The Board ofDirectors also has authority to determine the number of shares comprising eachseries, dividend rates, redemption provisions, liquidation preferences, sinkingfund provisions, conversion rights and voting rights without approval by theholders of Common Stock. Although it is not possible to state the effect thatany issuance of Preferred Stock might have on the rights of holders of CommonStock, the issuance of Preferred Stock may have one or more of the followingeffects: (i) to restrict the payment of dividends on the Common Stock, (ii) todilute the voting power and equity interests of holders of Common Stock, (iii)to prevent holders of Common Stock from participating in any distribution ofthe Company’s assets upon liquidation until any liquidation preferences grantedto holders of Preferred Stock are satisfied, or (iv) to require approval by theholders of Preferred Stock for certain matters such as amendments to theCompany’s Certificate of Incorporation or any reorganization, consolidation,merger or other similar transaction involving the Company. As a result, theissuance of Preferred Stock may, under certain circumstances, have the effectof delaying, discouraging or preventing bids for the Common Stock at a premiumover the market price thereof, or a change in control of the Company, and couldhave a material adverse effect on the market price for the Common Stock.

**Officer’s Notes Receivable**

Inconnection with the Company’s employment contract with Mr. Robert E. Wheaton,the Company’s President and Chief Executive Officer, the Company agreed toprovide Mr. Wheaton with certain loans solely for the purchase of the Company’scommon stock prior to the enactment of Sarbanes-Oxley Act of 2002. Mr. Wheaton ownsapproximately 48% of the Company’s outstanding common shares and may have theeffective power to elect members of the board of directors and to control thevote on substantially all other matters, without the approval of the otherstockholders. The loans were secured by the common stock and bore interest atthe prevailing rate set forth in the Company’s credit facility with M&IMarshall & Ilsley Bank. Repayment terms stipulate that the 

F-23

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president would repay principal and interest on orbefore the later of the fifth anniversary date of the initial advance under theloan agreement, the date he received a lump sum payment per a terminationclause or six month’s after the termination of his employment. Management haselected not to record any interest income on the loans until the interestincome was paid.  Mr. Wheaton paid$698,000 in principal and $250,000 in interest in June 2005.  There was no remaining principal balance due atJanuary 30, 2006.  Mr. Wheaton paid thelast interest payment of $43,713 on May 22, 2006.

**Common Stock Repurchase**

On January 4,2006, the Company announced that it had received necessary approval from itslender to commence with a buyback program to purchase up to 250,000 commonshares.  Star Buffet’s Board of Directorsoriginally authorized the repurchase of up to 500,000 in 1999, but covenants ineffect in the loan agreements restricted the Company’s ability to implement theprogram.  Under the current agreementwith its lender, Star Buffet may purchase shares on the open market, or throughnegotiated transactions, from time-to-time through June 15, 2007, unlessotherwise extended.  The timing andamount of shares purchased will be based on prevailing market conditions andother factors.  As of April 17, 2007, theCompany had 3,170,675 common shares outstanding.

**NOTE 10 — EMPLOYEE BENEFIT PLANS**

**401(k) Plan**

InMay 1998, the Company established a 401(k) plan available to certain employeeswho have attained age 21, work 30 hours or more per week, and have met certainminimum service requirements. The plan allows participants to allocate up to15% of their annual compensation before taxes for investment in severalinvestment alternatives. Employer contributions are at the discretion of theCompany. The Company’s contributions to the plan were approximately $9,000,$15,000, and $15,000, in administration costs for fiscal 2007, 2006 and 2005,respectively. The Board of Directors has authorized the termination of theCompany’s 401(k) plan. The plan had fewer than 50 participants as of April 18,2006.  As of April 17, 2007, the plan has0 participants and has been terminated.

**1997 StockIncentive Plan**

Infiscal year 1998, the Company adopted the 1997 Stock Incentive Plan (the “1997Plan”), which authorizes the grant of options to purchase up to 750,000 sharesof Common Stock. The 1997 Plan provides for “incentive stock options,” withinthe meaning of section 422 of the Internal Revenue Code of 1986, as amended(the “Code”) and non-statutory options to directors, officers, employees andconsultants of the Company, except that incentive stock options may not begranted to non-employee directors or consultants. The 1997 Plan providesparticipants with incentives which will encourage them to acquire a proprietaryinterest in, and continue to provide services to, the Company. The Board ofDirectors has sole discretion and authority, consistent with the provisions ofthe 1997 Plan, to determine which eligible participants will receive options,time when options will be granted, terms of options granted and number ofshares which will be subject to options granted under the 1997 Plan.

On January 31,2006 we adopted Statement of Financial Accounting Standards No. 123(R), “ShareBased Payment” (SFAS 123(R)).  SFAS 123(R) requires the recognition ofcompensation costs relating to share based payment transactions in thefinancial statements.  We have elected the modified prospectiveapplication method of reporting.  Prior to the adoption of SFAS 123(R) weelected to account for stock-based compensation plans using the intrinsic valuemethod under Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” under which no compensation cost is recognizedand the pro forma effects on earnings and earnings per share are disclosed asif the fair value approach had been adopted.  Our stock-based compensationplans are summarized in the table below:
|                            | ** ** | **Shares**     | ** ** | **Shares**    | ** ** | **Plan**       | ** ** |
|----------------------------|------------|----------------|------------|---------------|------------|----------------|------------|
| **Name of Plan** | ** ** | **Authorized** | ** ** | **Available** | ** ** | **Expiration** | ** ** |
| 1997 Stock  Incentive Plan |       | 750,000        |       | 1,000         |       | February 2015  |       |

 

Stock optionsissued under the terms of the plans have, or will have, an exercise price equalto, or greater than, the fair market value of the common stock at the date ofthe option grant, and expire no later than ten years from the date of grant,with the most recent grant expiring in 2015.   The 1997 Plan provides for thegrant of “incentive stock options,” within the meaning of section 422 of theInternal 

F-24

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RevenueCode of 1986, as amended (the “Code”) and non-statutory stock options todirectors, officers, employees and consultants of the Company, except thatincentive stock options may not be granted to non-employee directors orconsultants. The 1997 Plan provides participants with incentives which willencourage them to acquire a proprietary interest in, and continue to provideservices to, the Company. The Board of Directors has sole discretion andauthority, consistent with the provisions of the 1997 Plan, to determine whicheligible participants will receive options, the time when stock options will begranted, terms of stock options granted and number of shares which will besubject to stock options granted under the 1997 Plan.

The stock optiontransactions and the options outstanding are summarized as follows:
|                                                                   | ** ** | **52 Weeks Ended**   | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **January 29, 2007** | ** ** | **January 30, 2006** | ** ** |
| ** **                                                        | ** ** | **Options**                    | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding at  beginning of period                               |       | 696,000                        |       | $ | 8.90 |   | 701,000 |   | $ | 9.88 |   |
| Granted                                                           |       | —                         |       | — |   | 49,000 |   | $ | 6.70 |   |
| Exercised                                                         |       | 168,000                        |       | $ | 5.22 |   | 53,000 |   | $ | 5.00 |   |
| Forfeited                                                         |       | —                         |       | — |   | 0 |   | $ | 5.00 |   |
| Outstanding at  end of period                                     |       | 528,000                        |       | $ | 11.56 |   | 697,000 |   | $ | 10.04 |   |
|                                                              |       |                           |       |   |   |   |   |   |   |
| Exercisable at  end of period                                     |       | 528,000                        |       | $ | 11.56 |   | 697,000 |   | $ | 10.04 |   |
|                                                              |       |                           |       |   |   |   |   |   |   |
| Weighted average fair value  of options granted during the period |       | $                              | N/A        |   |   |   | $ | 6.70 |   |   |   |
|                                                                   |            |                                |            |  |  |  |  |  |  |  |  |  |  |

 

We have electedthe Black-Scholes method of valuation for fiscal 2006 and used the followingassumptions:
|                                           | ** ** | **52 Weeks Ended**   | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **January 30, 2006** | ** ** |
|                                      |       |                           |       |
| Weighted average  risk free interest rate |       | 4.0%                           |       |
| Expected life                             |       | 5  years                       |       |
| Expected  Dividend rate                   |       | 7.5%                           |       |
| Weighted average  volatility              |       | 37.5%                          |       |

 

F-25

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To estimate expectedlives for this valuation, it was assumed that stock options will be exercisedat varying schedules after becoming fully vested.  It is initially assumedthat all stock options will vest.  Fair value computations are highlysensitive to the volatility factor assumed; the greater the volatility, thehigher the computed fair value of the options granted.

Total fair value ofoptions granted was approximately $0 and $330,000 for the 52 weeks endedJanuary 29, 2007 and January 30, 2006, respectively.  The amounts areamortized ratably over the vesting period of the options.  The effect ofthe change from applying the original provisions of SFAS 123 to the adoption ofSFAS 123(R) would have been a charge of $61,000 to income before income taxesfor the 52 weeks ended January 30, 2006.  There was no tax effect on theincome statement due to a full valuation allowance recorded against thedeferred tax assets.  The adoption of SFAS 123(R) had no effect on cashflows.  The pro forma effect of the adoption of SFAS 123(R) on basic anddiluted earnings per share was a negative $0.02 for the 52 weeks ended January30, 2006.

There were nooptions granted during the 52 weeks ended January 29, 2007.  The followingtable illustrates the pro-forma effect on net income and on the net income pershare for the 52 weeks ended January 30, 2006, as if we had applied the fairvalue recognition provisions of SFAS No. 123.
|                                                   | ** ** | **52 Weeks Ended  January 29, 2006** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------|------------|
| Net income, as  reported                          |       | $                                                        | 1,797,000  |   |
| Compensation  included in net income, as reported |       | —                                                   |       |
| Compensation  expense, net of tax                 |       | 61,000                                                   |       |
| Net income, pro  forma                            |       | 1,736,000                                                |       |
| Basic Earnings  Per Share:                        |       |                                                     |       |
| As reported                                       |       | 0.60                                                     |       |
| Pro forma                                         |       | 0.58                                                     |       |
| Diluted Earnings  per Share:                      |       |                                                     |       |
| As reported                                       |       | 0.56                                                     |       |
| Pro forma                                         |       | 0.54                                                     |       |
|                                                   |            |                                                          |            |  |

 

The followingsummarizes information about stock options outstanding at January 30, 2007:
|                                             | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**     | ** ** |
|---------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Number  Outstanding**      | ** ** | **Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $5.00                                       |       | 12,000                       |       | 2.7                              |       | $ | 5.00 |   | 12,000 |   | $ | 5.00 |   |
| $6.70                                       |       | 28,000                       |       | 8.0                              |       | $ | 6.70 |   | 28,000 |   | $ | 6.70 |   |
| $12.00                                      |       | 488,000                      |       | 0.6                              |       | $ | 12.00 |   | 488,000 |   | $ | 12.00 |   |
|                                        |       | 528,000                      |       |                             |       |   |   | 528,000 |   |   |   |

 

F-26

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For stock options granted during the quarter ended May23, 2005, the weighted average fair value at the date of grant for optionsgranted was estimated using the Black-Scholes pricing model with the followingassumptions:
| Assumptions:                             | ** ** | **16 Weeks ended  May 23, 2005** |
|------------------------------------------|------------|---------------------------------------|
| Weighted average risk-free interest rate |       | 4.0%                                  |
| Weighted average volatility              |       | 37.5%                                 |
| Expected life                            |       | 5 years                               |
| Dividends                                |       | 7.5%                                  |

 

During the first quarter of fiscal 2006, the Company granted 49,200 fullyvested stock options at an exercise price equal to the current fair value ofthe stock.  The Company did not grant anystock options in fiscal 2007.  TheCompany has not granted any stock options in fiscal 2008 as of April 17, 2007.

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

|                                                             | ** ** | **Fifty-Two**              | ** ** | **Fifty-Two**              | ** ** | **Fifty-Three**            | ** ** |
|-------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                  | ** ** | **Weeks**                  | ** ** | **Weeks**                  | ** ** | **Weeks**                  | ** ** |
| ** **                                                  | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** | **Ended**                  | ** ** |
| ** **                                                  | ** ** | **January 29,  2007** | ** ** | **January 30,  2006** | ** ** | **January 31,  2005** | ** ** |
| Cash paid for income taxes                                  |       | $                          | 460,000    |                       | $          | 688,000                    |       | $ | 554,000 |   |
| Cash paid for interest                                      |       | 772,000                    |       | 631,000                    |       | 638,000                    |       |
| Non-cash investing and financing activities are as follows: |       |                       |       |                       |       |                       |       |
| Exchange of property rental  for repair services            |       | $                          | —     |                       | $          | —                     |       | $ | 2,000 |   |
| Acquisition of property with  debt financing                |       | —                     |       | 300,000                    |       | 550,000                    |       |
| Exchange of note receivable  for equipment and leaseholds   |       | 1,285,000                  |       | —                     |       | —                     |       |
| Transfer of debt as a part of the sale of assets            |       | 616,000                    |       | —                     |       | —                     |       |

 

**NOTE 12 — RELATED PARTY TRANSACTIONS**

In connection with theCompany’s employment contract with Mr. Robert E. Wheaton, the Company’sPresident and Chief Executive Officer, the Company agreed to provide Mr.Wheaton with certain loans solely for the purchase of the Company’s commonstock prior to the enactment of Sarbanes-Oxley Act of 2002. Mr. Wheaton ownsapproximately 48% of the Company’s outstanding common shares includingexercisable options which have vested and may have the effective power to electmembers of the board of directors and to control the vote on substantially allother matters, without the approval of the other stockholders. The loans weresecured by the common stock and bore interest at the prevailing rate set forthin the Company’s credit facility with M&I Marshall & Ilsley Bank.Repayment terms stipulate that the president would repay principal and intereston or before the later of the fifth anniversary date of the initial advanceunder the loan agreement, the date he received a lump sum payment per atermination clause or six month’s after the termination of his employment.Management elected not to record any interest income on the loans until theinterest income was paid.  Mr. Wheatonpaid $698,000 in principal and $250,000 in interest in June 2005.   There was no remaining principal balance dueat January 30, 2006.  Mr. Wheaton paidthe final interest payment of $43,713 on May 22, 2006.

**NOTE 13 — COMMITMENTS AND CONTINGENCIES**

The Company is engaged inordinary and routine litigation incidental to its business. Management does notanticipate that any resolution of any of these proceedings will requirepayments that will have a material effect on the Company’s consolidatedstatements of operations or financial position or liquidity.

 

F-27

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HTB entered into afranchise agreement for each location which requires among other items, thepayment of a continuing royalty fee paid to HomeTown Buffet, Inc. The royaltyfee is based on 2% of the aggregate gross sales of all the Company’s HomeTownBuffet restaurants. Each of the franchise agreements has a 20-year term (withtwo five-year renewal options). HTB provides weekly sales reports to theHomeTown franchisor as well as periodic and annual financial statements. HTB isobligated to operate its Hometown Buffet restaurants in compliance with thefranchisor’s requirements. The franchisor requires HTB to operate eachrestaurant in conformity with Franchise Operating Manuals, Recipe Manuals andMenus and HTB is to use it best effort to achieve the highest practicable levelof sales, promptly make royalty payments and restricts operating restaurantswithin a geographic radius of the franchisor’s restaurants. The HomeTownfranchisor may terminate a franchise agreement for a number of reasons,including HTB’s failure to pay royalty fees when due, failure to comply withapplicable laws or repeated failure to comply with one or more requirements ofthe franchise agreement. Many state franchise laws limit the ability of afranchisor to terminate or refuse to renew a franchise. Generally, a franchisormay terminate a franchise agreement only if the franchisee violates a materialand substantial provision of the agreement and fails to remedy the violationwithin a specified period.

The Company entered intoa license agreement for each location which requires among other items, thepayment of certain fees paid to K-BOB’S. The fee where applicable, is based onthe aggregate gross sales. The Company provides sales reports to K-BOB’S aswell as periodic and annual financial statements. The Company is obligated tooperate its K-BOB’S restaurants in compliance with the K-BOB’S requirements.

The Company entered intoan agreement for each location which requires among other items, the payment oflicense fees paid to Western Sizzlin Corporation. The license fee is based onthe aggregate gross. The Company provides weekly sales reports to WesternSizzlin as well as periodic and annual financial statements. The Company isobligated to operate its Western Sizzlin restaurants in compliance with theWestern Sizzlin’s requirements.

In 1998, theCompany had previously sued North’s Restaurants, Inc. (“North’s”) whichresulted in a negotiated settlement in favor of the Company represented by anAmended and Restated Promissory Note (the “Star Buffet Promissory Note).  As a result of North’s failing to live up toits obligations under the Star Buffet Promissory Note, on March 2, 2004, theCompany filed a second action against North’sin the United States District Court, District of Utah, Central Division,Case No. 2:04CV00211, seeking not less than $2,934,453 plus interest at thedefault rate as set forth in the Star Buffet Promissory Note.  In January 2005, the court granted theCompany’s motion for summary judgment, ruling that North’s had failed to payamounts owed to the Company.  The Companyobtained a judgment against North’s in the amount of $3,059,905.78, plus$15,980.45 in attorney’s fees and costs.

In a relatedproceeding, North’s other secured creditor, Pacific Mezzanine, initiatedlitigation against North’s seeking a monetary judgment and the appointment of areceiver. On October 4, 2004, the Circuit Court of the State of Oregon for theCounty of Jackson approved an order appointing a receiver.

Prior to August 2006, the receiver has remitted onlyapproximately $56,000 in loan repayments. In April, 2006 the Company noticedall relevant parties of its intent to foreclose to seek to expedite theliquidation of North’s assets and repay amounts owed to the Company.  Subsequent to the notice, the receiver movedto have the Company’s foreclosure of North’s assets set aside so that certainof North’s assets could be sold to a third party.  The motion was approved.  On August 7, 2006, the receiver paid theCompany approximately $1,291,000 from a partial sale of the assets. The Company’s note, together with the obligationto the other significant creditor of North’s, is secured by the real andpersonal property, landlord leases, trademarks and all other intellectualproperty owned by North’s. The Company believes current and future cash flowsincluding asset sales are adequate for recovery of the remaining principalamount of the note receivable. The Company has not recognized any interestincome with respect to this note since August 2003.  The Company has not provided an allowance forbad debts for the note as of January 29, 2007.

On February 1, 2005, the Company announced in a pressrelease that it had entered into a strategic alliance with K-BOB’S USA Inc. andrelated affiliates. In accordance with the terms of the strategic alliance,Star Buffet agreed to lend K-BOB’S up to $1.5 million on a long-term basis. Inexchange, K-BOB’S granted Star Buffet an option to purchase as many as fivecorporate owned and operated K-BOB’S restaurants located in New Mexico andTexas, as well as rights to develop K-BOB’S in other areas in the UnitedStates.  On January 30, 2006, the Companyexercised its option under the terms of the strategic alliance and purchasedthree K-BOB’S restaurants.

On April 21, 2006, the Company announced in a pressrelease that it had entered into a strategic alliance with Western SizzlinCorporation.. In accordance with the terms of the strategic alliance, theCompany plans to convert certain of its existing restaurants to the WesternSizzlin brand; test a newly developed Western Sizzlin buffet prototype; andseek  at acquire selected Western Sizzlin

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franchised restaurants.Additionally, as an important element of the strategic alliance, the Companyand Western Sizzlin will explore a number of identified opportunities to reduceoperating and administrative expenses.

On April 22, 2007 the principal of HHC notified theCompany that he planned to turn control of the business and associated assetsover to the Company.  On April 23, 2007the Company began operating the business. The Company hired HHC’s employees, notified HHC’s creditors of itsintent to operate the business and commenced negotiations with HHC’s landlordto craft an acceptable facility lease.  Managmentbelieves that the total amount of the note receivable from HHC will berecovered.

On February 23, 2007, the Board of Directors approvedthe Company’s fourth annual dividend. This year the dividend was $0.60 percommon share. The dividend is payable on June 6, 2007 to shareholders of recordon May 8, 2007.

On January 30, 2007, the Company announced in a pressrelease that it has completed the acquisition of a Western Sizzlin restaurantin Magee, Mississippi.  The purchaseprice was $1,400,000 which included the real estate.  The transaction included seller financing of$900,000.

In connection with the Company’s employment contractwith 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 heresigns related to change of control of the Company or is terminated, unlessthe termination is for cause. Mr. Wheaton’s employment contract also includesan annual bonus of $25,000.

**NOTE 14 — SUPPLEMENTAL QUARTERLY FINANCIAL DATA(UNAUDITED)**

Quarterly financial results for the 52 weeks endedJanuary 29, 2007 and the 52 weeks ended January 30, 2006 and the53 weeks ended January 31, 2005, are summarized below.

(In thousands except per sharedata)
| ** **                        | ** ** | **For the 52 Weeks Ended January 29, 2007** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **FIRST**                                                                      | ** ** | **SECOND** | ** ** | **THIRD** | ** ** | **FOURTH** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **QUARTER**                                                                    | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **TOTAL** | ** ** |
| Revenues                          |       | $                                                                              | 18,762     |   | $ | 13,632 |   | $ | 12,185 |   | $ | 14,068 |   | $ | 58,648 |   |
| Income (loss) from operations     |       | 778                                                                            |       | 581 |   | (401 | ) | (40 | ) | 918 |   |
| Income (loss) before income taxes |       | 996                                                                            |       | 503 |   | (474 | ) | (71 | ) | 954 |   |
| Income taxes (benefit)            |       | 324                                                                            |       | 193 |   | (219 | ) | (60 | ) | 238 |   |
| Net income (loss)                 |       | $                                                                              | 672        |   | $ | 310 |   | $ | (255 | ) | $ | (11 | ) | $ | 716 |   |
| Earnings (loss) per share:        |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Basic                             |       | $                                                                              | 0.22       |   | $ | 0.10 |   | $ | (0.08 | ) | $ | (0.00 | ) | $ | 0.23 |   |
| Diluted                           |       | $                                                                              | 0.21       |   | $ | 0.10 |   | $ | (0.08 | ) | $ | (0.00 | ) | $ | 0.23 |   |

 

(In thousands except per sharedata)
| ** **                        | ** ** | **For the 52 Weeks Ended January 30, 2006** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **FIRST**                                                                      | ** ** | **SECOND** | ** ** | **THIRD** | ** ** | **FOURTH** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **QUARTER**                                                                    | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **TOTAL** | ** ** |
| Revenues                          |       | $                                                                              | 18,869     |   | $ | 13,788 |   | $ | 11,493 |   | $ | 12,155 |   | $ | 56,305 |   |
| Income (loss) from operations     |       | 1,424                                                                          |       | 860 |   | (160 | ) | 61 |   | 2,185 |   |
| Income (loss) before income taxes |       | 1,338                                                                          |       | 1,050 |   | (156 | ) | (15 | ) | 2,217 |   |
| Income taxes (benefit)            |       | 462                                                                            |       | 342 |   | (54 | ) | (330 | ) | 420 |   |
| Net income (loss)                 |       | $                                                                              | 876        |   | $ | 708 |   | $ | (102 | ) | $ | 315 |   | $ | 1,797 |   |
| Earnings (loss) per share:        |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Basic                             |       | $                                                                              | 0.30       |   | $ | 0.24 |   | $ | (0.03 | ) | $ | 0.10 |   | $ | 0.60 |   |
| Diluted                           |       | $                                                                              | 0.27       |   | $ | 0.22 |   | $ | (0.03 | ) | $ | 0.10 |   | $ | 0.56 |   |

 

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(In thousands except per sharedata)
| ** **                                                 | ** ** | **For the 53 Weeks Ended January 31, 2005** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **FIRST**                                                                      | ** ** | **SECOND** | ** ** | **THIRD** | ** ** | **FOURTH** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **QUARTER**                                                                    | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **QUARTER** | ** ** | **TOTAL** | ** ** |
| Revenues                                                   |       | $                                                                              | 21,551     |   | $ | 15,539 |   | $ | 13,269 |   | $ | 14,496 |   | $ | 64,856 |   |
| Income (loss) from operations                              |       | 1,043                                                                          |       | 853 |   | (147 | ) | (1,876 | ) | (127 | ) |
| Income (loss) before income taxes                          |       | 940                                                                            |       | 780 |   | (247 | ) | (1,813 | ) | (340 | ) |
| Income taxes (benefit)                                     |       | 329                                                                            |       | 267 |   | (82 | ) | (682 | ) | (168 | ) |
| Net income (loss)                                          |       | $                                                                              | 611        |   | $ | 513 |   | $ | (165 | ) | $ | (1,131 | ) | $ | (172 | ) |
| Earnings (loss) per share:                                 |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Basic                                                      |       | $                                                                              | 0.21       |   | $ | 0.17 |   | $ | (0.06 | ) | $ | (0.38 | ) | $ | (0.06 | ) |
| Diluted                                                    |       | $                                                                              | 0.20       |   | $ | 0.16 |   | $ | (0.06 | ) | $ | (0.38 | ) | $ | (0.06 | ) |
| Amounts indicated may not foot due to quarterly  rounding. |

 

The fiscal 2006 figures include approximately $369,000for impairment expense.

**NOTE 15 — SUBSEQUENT EVENTS**

On April 22, 2007 the principal of HHC notified theCompany that he planned to turn control of the business and associated assetsover to the Company.  On April 23, 2007the Company began operating the business. The Company hired HHC’s employees, notified HHC’s creditors of itsintent to operate the business and commenced negotiations with HHC’s landlordto craft an acceptable facility lease.  Managementbelieves that the total amount of the note receivable from HHC will berecovered.

On February 23, 2007, the Board of Directors approvedthe Company’s fourth annual dividend. The dividend was $0.60 per common share.The dividend is payable on June 6, 2007 to shareholders of record on May 8,2007.

On January 30, 2007, the Company announced in a pressrelease that it has completed the acquisition of a Western Sizzlin restaurantin Magee, Mississippi.  The purchaseprice was $1,400,000 which included the land, building and restaurantequipment.  The transaction includedseller financing of $900,000.

 

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**EXHIBIT INDEX**
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                                                         |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1          |       | Certificate of Incorporation*                                                                                                                                                                                           |
| 3.2          |       | Bylaws,  as amended on September 22, 1997*                                                                                                                                                                              |
| 4.1          |       | Form  of Common Stock Certificate**                                                                                                                                                                                     |
| 10.1         |       | Star  Buffet, Inc. 1997 Stock Incentive Plan (the “1997 Plan”)**                                                                                                                                              |
| 10.2         |       | Form  of Stock Option Agreement for the 1997 Plan**                                                                                                                                                                     |
| 10.3         |       | Form  of Indemnification Agreement**                                                                                                                                                                                    |
| 10.4         |       | Management  Services Agreement with CKE Restaurants, Inc.**                                                                                                                                                             |
| 10.5         |       | Form  of Franchise Agreement with HomeTown Buffet, Inc.**                                                                                                                                                               |
| 10.6         |       | Asset  Purchase Agreement with North’s Restaurants, Inc. dated July 24, 1997**                                                                                                                                     |
| 10.6.1       |       | Amendment  No. 1 to Asset Purchase Agreement dated as of September 30, 1997  (incorporated by reference to the Company’s filing on Form 8-K on October 17,  1997)                                                  |
| 10.6.2       |       | Amended  and Restated Credit Agreement dated as of September 30, 1997 between the  Company and North’s Restaurants, Inc. (incorporated by reference to the  Company’s filing on Form 8-K on October 17, 1997) |
| 10.7         |       | Form  of Contribution Agreement among CKE Restaurants, Inc., Summit Family  Restaurants Inc. and the Company*                                                                                                           |
| 10.8         |       | Form  of Bill of Sale and Assumption Agreement between Summit Family Restaurants  Inc. and Taco Bueno Restaurants, Inc. (formerly known as Casa Bonita  Incorporated)*                                                  |
| 10.9         |       | Form  of Bill of Sale and Assumption Agreement between Summit Family Restaurants  Inc. and JB’s Restaurants, Inc.*                                                                                                 |
| 10.10        |       | License  Agreement with CKE Restaurants, Inc. (incorporated by reference to the  Company’s filing on Form 10-K on April 24, 1998)                                                                                  |
| 10.11        |       | Settlement  Agreement with HomeTown Buffet, Inc. (incorporated by reference to the  Company’s filing on Form  10-K on  April 24, 1998)                                                                             |
| 10.12        |       | Asset  Purchase Agreement among Summit Family Restaurants Inc. and JB’s Family  Restaurants, Inc., dated February 10, 1998 (incorporated by reference to the  Company’s filing on Form 8-K on March 9, 1998)  |
| 10.13        |       | Stock  Repurchase Agreement between Star Buffet, Inc. and CKE Restaurants, Inc.,  dated September 10, 1998 (incorporated by reference to the Company’s filing  on Form 10-K on September 28, 1998)                 |
| 10.14        |       | Revolving  Line of Credit with M&I Marshall & Ilsley Bank dated October 28, 2003  (incorporated by reference to the Company’s filing on Form 10-Q on December  15, 2003)                                   |
| 10.15        |       | Amendment  to Revolving Line of Credit with M&I Marshall & Ilsley Bank dated  February 1, 2005                                                                                                                  |
| 10.16        |       | Amendment  to Revolving Line of Credit with M&I Marshall & Ilsley Bank dated May  24, 2006 (incorporated by reference to the Company’s filing on Form 10-Q on June  29, 2006)                              |
| 14.1         |       | Code  of Ethics (incorporated by reference to the Company’s filing on Form 10-K on  January 31, 2005)                                                                                                              |
| 21.1         |       | List  of Subsidiaries*                                                                                                                                                                                                  |
| 23.1         |       | Consent  of Mayer Hoffman McCann P.C.                                                                                                                                                                                   |
| 31.1         |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  Of 2002                                                                                                                    |
| 31.2         |       | Certification  of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley  Act Of 2002                                                                                                               |
| 32.1         |       | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002                                                                                                                     |
| 32.2         |       | Certification of  Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley  Act Of 2002                                                                                                               |
| 99.1         |       | Press Release dated  April 25, 2007 reporting earnings for fiscal 2007                                                                                                                                                  |

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

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

 

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