**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

### **Washington, D.C.  20549**

**FORM 10-Q**

**(Mark One)**

**x****                             ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period endedSeptember 30, 2006, or**

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

#### **For the transition period from                         to**

**Commissionfile number 0-25366**

**Western Sizzlin Corporation**

(Exact Name ofRegistrant as Specified in Its Charter)

| **Delaware**                                                    |   | **86-0723400**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **1338  Plantation Road Roanoke, Virginia**                     |   | **24012**                             |
| (Address of  Principal Executive Offices)                       |   | (Zip Code)                            |

 

**(540) 345-3195**

(Registrant’sTelephone Number Including Area Code)

Indicate by check markwhether the registrant: (1)  has filedall reports required to be filed by Section 13 or 15 (d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer.  (See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.) (Check one):

o     LargeAccelerated Filer                     o     AcceleratedFiler                     x     Non-AcceleratedFiler

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). o Yes xNo

As of November 9, 2006,there were 1,191,850 shares of common stock outstanding.

 

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**WesternSizzlin Corporation**

**Form10-Q**

**NineMonths Ended September 30, 2006**

**Tableof Contents**
|                                                                                                         | **Page** |
|---------------------------------------------------------------------------------------------------------|----------|
| ** **                                                                                              |     |
| **PART I. FINANCIAL INFORMATION**                                                                       |     |
| ** **                                                                                              |     |
| **Item 1. Financial Statements (Unaudited)**                                                            |     |
|                                                                                                    |     |
| Consolidated Balance Sheets – September 30, 2006 and  December 31, 2005                            | 2        |
|                                                                                                    |     |
| Consolidated Statements of Operations - Three and Nine  Months Ended September 30, 2006 and 2005        | 3        |
|                                                                                                    |     |
| Consolidated Statement of Changes in Stockholders’  Equity - Nine Months Ended September 30, 2006  | 4        |
|                                                                                                    |     |
| Consolidated Statements of Cash Flows - Nine Months  Ended September 30, 2006 and 2005                  | 5        |
|                                                                                                    |     |
| Notes to Consolidated Financial Statements                                                              | 6-16     |
| ** **                                                                                              |     |
| **Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations** | 16-22    |
| ** **                                                                                              |     |
| **Item 3. Quantitative and Qualitative Disclosure about  Market Risk**                                  | 23       |
| ** **                                                                                              |     |
| **Item 4. Controls and Procedures**                                                                     | 23       |
| ** **                                                                                              |     |
| **PART  II. OTHER INFORMATION**                                                                         |     |
| ** **                                                                                              |     |
| **Item  1. Legal Proceedings**                                                                          | 24       |
| ** **                                                                                              |     |
| **Item  1.A. Risk Factors**                                                                             | 24       |
| ** **                                                                                              |     |
| **Item 6. Exhibits**                                                                                    | 24       |
| ** **                                                                                              |     |
| **Signatures**                                                                                          | 25       |
| ** **                                                                                              |     |
| **Exhibit Index**                                                                                       | 26       |

 

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**PART I.FINANCIAL INFORMATION**

**WESTERNSIZZLIN CORPORATION**

ConsolidatedBalance Sheets

September 30, 2006and December 31, 2005
| ** **                                                                                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                  | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                  | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                  |       |                   |       |                  |       |
| Current assets:                                                                                                                             |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                  |       | $                      | 124,361    |                  | $          | 1,664,848 |   |
| Short-term  investments                                                                                                                     |       | —                 |       | 260,069               |       |
| Trade accounts  receivable, net of allowance for doubtful accounts of $464,692 in 2006 and  $454,458 in 2005                                |       | 754,535                |       | 910,776               |       |
| Current  installments of notes receivable                                                                                                   |       | 217,700                |       | 212,187               |       |
| Income tax  receivable                                                                                                                      |       | 246,818                |       | 17,923                |       |
| Insurance  receivables                                                                                                                      |       | —                 |       | 1,029,954             |       |
| Other  receivables                                                                                                                          |       | 65,100                 |       | 128,375               |       |
| Inventories                                                                                                                                 |       | 86,254                 |       | 83,506                |       |
| Prepaid expenses                                                                                                                            |       | 238,568                |       | 292,721               |       |
| Deferred income  taxes                                                                                                                      |       | 205,224                |       | 226,736               |       |
| Total current  assets                                                                                                                       |       | 1,938,560              |       | 4,827,095             |       |
|                                                                                                                                        |       |                   |       |                  |       |
| Notes receivable, less  allowance for doubtful accounts of $157,871 in 2006 and $119,126 in 2005,  excluding current installments           |       | 849,430                |       | 876,426               |       |
| Property and equipment,  net of accumulated depreciation of $3,778,563 in 2006 and $3,690,965 in 2005                                       |       | 2,366,182              |       | 1,887,450             |       |
| Investment in  marketable security (Note 4)                                                                                                 |       | 4,950,013              |       | —                |       |
| Franchise royalty  contracts, net of accumulated amortization of $8,036,266 in 2006 and  $7,563,545 in 2005                                 |       | 1,418,165              |       | 1,890,887             |       |
| Goodwill                                                                                                                                    |       | 4,310,200              |       | 4,310,200             |       |
| Financing costs, net of  accumulated amortization of $182,822 in 2006 and $136,446 in 2005                                                  |       | 17,389                 |       | 63,764                |       |
| Investment in  unconsolidated joint venture                                                                                                 |       | 240,525                |       | 308,382               |       |
| Deferred income taxes                                                                                                                       |       | 14,056                 |       | 576,467               |       |
| Asset held for sale                                                                                                                         |       | 300,000                |       | 300,000               |       |
| Other assets, net                                                                                                                           |       | 116,693                |       | 435,161               |       |
|                                                                                                                                        |       | $                      | 16,521,213 |                  | $          | 15,475,832 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                              |       |                   |       |                  |       |
| Current liabilities:                                                                                                                        |       |                   |       |                  |       |
| Current  installments of long-term debt                                                                                                     |       | $                      | 209,814    |                  | $          | 1,487,964 |   |
| Accounts payable                                                                                                                            |       | 716,962                |       | 523,939               |       |
| Due to broker  (Note 4)                                                                                                                     |       | 1,693,084              |       | —                |       |
| Accrued expenses  and other                                                                                                                 |       | 315,038                |       | 814,005               |       |
| Total current  liabilities                                                                                                                  |       | 2,934,898              |       | 2,825,908             |       |
| Long-term debt,  excluding current installments                                                                                             |       | 727,401                |       | 848,319               |       |
| Other long-term  liabilities                                                                                                                |       | 63,066                 |       | 42,087                |       |
| Commitments and  contingencies (Note 9)                                                                                                     |       |                   |       |                  |       |
| Stockholders’ equity:                                                                                                                  |       |                   |       |                  |       |
| Common stock,  $.01 par value. Authorized 2,000,000 shares; 1,191,850 issued and outstanding  shares in 2006 and 1,188,850 in 2005 (Note 2) |       | 11,919                 |       | 11,889                |       |
| Additional  paid-in capital                                                                                                                 |       | 8,748,445              |       | 8,681,775             |       |
| Retained  earnings                                                                                                                          |       | 3,299,909              |       | 3,065,854             |       |
| Accumulated  other comprehensive income – unrealized holding gains, net of taxes                                                       |       | 735,575                |       | —                |       |
| Total  stockholders’ equity                                                                                                            |       | 12,795,848             |       | 11,759,518            |       |
|                                                                                                                                        |       | $                      | 16,521,213 |                  | $          | 15,475,832 |   |

 

See accompanyingnotes to consolidated financial statements.

2

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**WESTERN SIZZLIN CORPORATION**

Consolidated Statements of Income(Unaudited)
| ** **                                                         | ** ** | **Three Months**            | ** ** | **Nine Months**             | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **Ended September 30** | ** ** | **Ended September 30** | ** ** |
| ** **                                                         | ** ** | **2006**                         | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                          |       |                             |       |                             |       |   |   |   |   |
| Company-operated  restaurants                                      |       | $                                | 3,393,679  |                             | $          | 3,655,713 |   | $ | 9,971,290 |   | $ | 11,629,512 |   |
| Franchise  operations                                              |       | 1,092,221                        |       | 1,156,042                        |       | 3,376,985 |   | 3,571,541 |   |
|                                                               |       |                             |       |                             |       |   |   |   |   |
| Total revenues                                                     |       | 4,485,900                        |       | 4,811,755                        |       | 13,348,275 |   | 15,201,053 |   |
|                                                               |       |                             |       |                             |       |   |   |   |   |
| Costs and  expenses:                                               |       |                             |       |                             |       |   |   |   |   |
| Company-operated restaurants –food, beverage and  labor costs |       | 2,365,806                        |       | 2,536,402                        |       | 7,098,664 |   | 8,270,047 |   |
| Restaurant occupancy and other                                     |       | 704,991                          |       | 649,308                          |       | 1,877,279 |   | 2,025,361 |   |
| Subleased properties                                               |       | 106,508                          |       | 40,105                           |       | 251,158 |   | 173,472 |   |
| Franchise operations – direct support                         |       | 262,694                          |       | 277,932                          |       | 887,340 |   | 868,627 |   |
| Corporate expenses                                                 |       | 578,986                          |       | 670,049                          |       | 1,843,139 |   | 2,161,724 |   |
| Depreciation and amortization                                      |       | 267,838                          |       | 262,104                          |       | 791,819 |   | 811,078 |   |
| Closed store expense                                               |       | —                           |       | —                           |       | — |   | 350,279 |   |
| Gain on settlement of insurance claims                             |       | —                           |       | —                           |       | — |   | (220,351 | ) |
|                                                               |       |                             |       |                             |       |   |   |   |   |
| Total costs and expenses                                           |       | 4,286,823                        |       | 4,435,900                        |       | 12,749,399 |   | 14,440,237 |   |
|                                                               |       |                             |       |                             |       |   |   |   |   |
| Income from operations                                             |       | 199,077                          |       | 375,855                          |       | 598,876 |   | 760,816 |   |
|                                                               |       |                             |       |                             |       |   |   |   |   |
| Other income  (expense):                                           |       |                             |       |                             |       |   |   |   |   |
| Interest expense                                                   |       | (30,057                          | )          | (63,511                          | )          | (108,404 | ) | (221,428 | ) |
| Loss on early extinguishment of long term debt                     |       | —                           |       | —                           |       | (92,535 | ) | — |   |
| Interest income                                                    |       | 16,343                           |       | 19,021                           |       | 53,443 |   | 53,215 |   |
| Other                                                              |       | (6,483                           | )          | (2,450                           | )          | 13,101 |   | 22,992 |   |
| Equity in loss of joint venture                                    |       | (29,629                          | )          | —                           |       | (67,857 | ) | — |   |
|                                                               |       |                             |       |                             |       |   |   |   |   |
|                                                               |       | (49,826                          | )          | (46,940                          | )          | (202,252 | ) | (145,221 | ) |
| Income before income tax expense                                   |       | 149,251                          |       | 328,915                          |       | 396,624 |   | 615,595 |   |
|                                                               |       |                             |       |                             |       |   |   |   |   |
| Income tax  expense:                                               |       |                             |       |                             |       |   |   |   |   |
| Current                                                            |       | —                           |       | (538                             | )          | — |   | 25,557 |   |
| Deferred                                                           |       | 64,600                           |       | 125,905                          |       | 162,569 |   | 211,046 |   |
| Total income tax  expense                                          |       | 64,600                           |       | 125,367                          |       | 162,569 |   | 236,603 |   |
| Net income                                                         |       | $                                | 84,651     |                             | $          | 203,548 |   | $ | 234,055 |   | $ | 378,992 |   |
|                                                               |       |                             |       |                             |       |   |   |   |   |
| Earnings per  share (Note 3):                                      |       |                             |       |                             |       |   |   |   |   |
| Basic                                                              |       | $                                | .07        |                             | $          | .17 |   | $ | .20 |   | $ | .32 |   |
| Diluted                                                            |       | $                                | .07        |                             | $          | .17 |   | $ | .20 |   | $ | .32 |   |

 

See accompanyingnotes to consolidated financial statements

3

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**WESTERNSIZZLIN CORPORATION**

ConsolidatedStatement of Changes in Stockholders’ Equity

Nine Months EndedSeptember 30, 2006

(Unaudited)
| ** **                                                | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Accumulated  Other** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                                | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | ** **             | ** ** |
| ** **                                                | ** ** | **Shares**            | ** ** | **Dollars** | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income**             | ** ** | **Total**  | ** ** |
| Balances,  December 31, 2005                              |       | 1,188,850             |       | $           | 11,889     |           | $          | 8,681,775         |       | $                      | 3,065,854  |       | $          | — |   | $ | 11,759,518 |   |
| Net income                                                |       | —                |       | —      |       | —         |       | 234,055           |       | —                 |       | 234,055    |       |
| Change in  unrealized holding gains, net of taxes         |       | —                |       | —      |       | —         |       | —            |       | 735,575                |       | 735,575    |       |
| Comprehensive  income                                     |       | —                |       | —      |       | —         |       | —            |       | —                 |       | 969,630    |       |
| Compensation  expense associated with stock options plans |       | —                |       | —      |       | 39,100         |       | —            |       | —                 |       | 39,100     |       |
| Stock options  exercised                                  |       | 3,000                 |       | 30          |       | 27,570         |       | —            |       | —                 |       | 27,600     |       |
| Balances, September 30,  2006                             |       | 1,191,850             |       | $           | 11,919     |           | $          | 8,748,445         |       | $                      | 3,299,909  |       | $          | 735,575 |   | $ | 12,795,848 |   |

 

See accompanyingnotes to consolidated financial statements.

4

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**WESTERNSIZZLIN CORPORATION**

ConsolidatedStatements of Cash Flows

Nine Months EndedSeptember 30, 2006 and 2005

(Unaudited)
| ** **                                                                                                        | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                        | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                        | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                                            |       |                            |       |   |   |
| Net income                                                                                                        |       | $                               | 234,055    |   | $ | 378,992 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                                |       |                            |       |   |   |
| Depreciation and amortization of property and  equipment                                                          |       | 319,098                         |       | 324,726 |   |
| Amortization of franchise royalty contracts                                                                       |       | 472,722                         |       | 472,722 |   |
| Write off of financing costs related to early  extinguishment of long term debt                                   |       | 29,699                          |       | — |   |
| Amortization of financing costs                                                                                   |       | 16,676                          |       | 13,630 |   |
| Loss on sale/disposal of property and equipment                                                                   |       | 57,717                          |       | 359,776 |   |
| Gain from fire casualty                                                                                           |       | —                          |       | (220,351 | ) |
| Cash received from exercise of stock options                                                                      |       | 27,600                          |       | — |   |
| Common stock related to termination of Franchise  Agreement                                                       |       | —                          |       | (15,000 | ) |
| Provision for doubtful accounts                                                                                   |       | 80,000                          |       | 100,320 |   |
| Share based compensation                                                                                          |       | 39,100                          |       | — |   |
| Equity in loss of unconsolidated joint venture                                                                    |       | 67,857                          |       | — |   |
| Provision for deferred income taxes                                                                               |       | 162,570                         |       | 211,046 |   |
| (Increase) decrease in:                                                                                           |       |                            |       |   |   |
| Trade accounts receivable and notes receivable                                                                    |       | 97,724                          |       | 25,561 |   |
| Income tax receivable                                                                                             |       | (228,895                        | )          | — |   |
| Insurance receivable – business interruption                                                                 |       | 244,961                         |       | — |   |
| Other receivables                                                                                                 |       | 63,275                          |       | (117,377 | ) |
| Inventories                                                                                                       |       | (2,748                          | )          | 31,856 |   |
| Prepaid expenses                                                                                                  |       | 54,153                          |       | 22,322 |   |
| Other assets                                                                                                      |       | (59,987                         | )          | (357,607 | ) |
| Increase (decrease) in:                                                                                           |       |                            |       |   |   |
| Accounts payable                                                                                                  |       | 193,023                         |       | (409,016 | ) |
| Accrued expenses                                                                                                  |       | (498,967                        | )          | (597,415 | ) |
| Other long-term liabilities                                                                                       |       | 20,979                          |       | (14,841 | ) |
| Net cash provided by operating activities                                                                         |       | 1,390,612                       |       | 209,344 |   |
|                                                                                                              |       |                            |       |   |   |
| Cash flows from  investing activities:                                                                            |       |                            |       |   |   |
| Short-term investments                                                                                            |       | 260,069                         |       | (3,802 | ) |
| Additions to property and equipment                                                                               |       | (479,892                        | )          | (180,909 | ) |
| Purchase of marketable security                                                                                   |       | (2,100,000                      | )          | — |   |
| Proceeds from sale of property                                                                                    |       | 2,800                           |       | 179,757 |   |
| Proceeds from fire casualty                                                                                       |       | 784,992                         |       | 652,964 |   |
|                                                                                                              |       |                            |       |   |   |
| Net cash (used in) provided by investing activities                                                               |       | (1,532,031                      | )          | 648,010 |   |
|                                                                                                              |       |                            |       |   |   |
| Cash flows from  financing activities:                                                                            |       |                            |       |   |   |
| Payments on long-term debt                                                                                        |       | (1,399,068                      | )          | (1,059,761 | ) |
|                                                                                                              |       |                            |       |   |   |
| Net cash used in financing activities                                                                             |       | (1,399,068                      | )          | (1,059,761 | ) |
|                                                                                                              |       |                            |       |   |   |
| Net decrease in cash and cash equivalents                                                                         |       | (1,540,487                      | )          | (202,407 | ) |
|                                                                                                              |       |                            |       |   |   |
| Cash and cash  equivalents at beginning of period                                                                 |       | 1,664,848                       |       | 2,105,751 |   |
|                                                                                                              |       |                            |       |   |   |
| Cash and cash  equivalents at end of period                                                                       |       | $                               | 124,361    |   | $ | 1,903,344 |   |
|                                                                                                              |       |                            |       |   |   |
| Supplemental  disclosure of cash flow information:                                                                |       |                            |       |   |   |
| Cash payments for interest                                                                                        |       | $                               | 41,266     |   | $ | 230,662 |   |
| Income taxes paid                                                                                                 |       | $                               | 398,880    |   | $ | 25,557 |   |
|                                                                                                              |       |                            |       |   |   |
| Non-cash  investing and financing activities:                                                                     |       |                            |       |   |   |
| Reclassification of deposits from other assets to  property and equipment upon purchase of property and equipment |       | $                               | 378,455    |   | $ | — |   |
| Purchase of investments on margin                                                                                 |       | 1,693,084                       |       | — |   |
| Net unrealized  gain on securities available for sale, net deferred income tax of $421,354                        |       | $                               | 735,575    |   | $ | — |   |

 

See accompanyingnotes to consolidated financial statements.

5

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**WESTERNSIZZLIN CORPORATION**

Notes toConsolidated Financial Statements

NineMonths Ended September 30, 2006 and 2005

(Unaudited)

**(1)****                                 General**

The accompanying unaudited consolidated financialstatements of Western Sizzlin Corporation, (the “Company”) have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America for interim financial reporting information and theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and notes required by accounting principles generally accepted inthe United States of America for complete financial statements.  In the opinion of management, all materialreclassifications and adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation of the results of operations,financial position and cash flows for each period shown have been included. Theunaudited consolidated financial statements and notes are presented aspermitted by Form 10-Q and do not contain certain information included in theCompany’s annual consolidated financial statements and notes.  For further information, refer to theconsolidated financial statements and notes thereto included in the Company’sannual report on Form 10-K for the year ended December 31, 2005.

**(2)****                                 ReverseStock Split and Rights Offering**

On July 31, 2006, the Board of Directors approved a1-for-10 reverse stock split.  The recorddate of the transaction was August 10, 2006. No fractional shares were issued in connection with the reverse stocksplit.  The par value of the common stockremained at $0.01 per share after the reverse stock split.  Unless otherwise indicated, the capital stockaccounts and all share and earnings per share data in this report give effectto the reverse stock split, applied retroactively to all periods presented.

The SEC declared the Company’s Form S-3 RegistrationStatement (as amended) effective as of November 7, 2006.  The Company has set a record date for theoffering of November 9, 2006 and an expiration date of December 8, 2006.  The Company will distribute at no charge tostockholders one transferable right for each share of common stock held on therecorded date.  For every two rightsheld, a stockholder will be entitled to purchase one share of the Company’scommon stock for $7.00.  The net cashproceeds from the sale of the common stock offered, after payment of fees andexpenses, are anticipated to be approximately $4 million.  Net proceeds are expected to be used forgeneral corporate purposes, working capital, to make acquisitions of, orinvestments in, related or unrelated lines of business, as described in theoffering prospectus.

**(3)****                                 StockOptions**

The Company has three stock option plans: the 2005Stock Option Plan, the 2004 Non-Employee Directors’ Stock Option Plan, and the1994 Incentive and Non-qualified Stock Option Plan. Options are no longergranted under the 1994 Plan and only 7,500 options granted to James C. Verneyremain outstanding under that plan.  Underthe 2005 and 2004 Plans, employees and directors may be granted options topurchase shares of common stock at the fair market value on the date of thegrant.  During the nine months endedSeptember 30, 2006, under the provisions of the plans, the contract terms ofstock options for resigning directors were reduced and have been reflected inthe computations of the weighted average contractual term of the outstandingoptions.  Since this modification did notincrease the value of the awards, the modification had no impact oncompensation expense.

6

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Effective January 1, 2006, the Company began recordingcompensation expense associated with the stock options in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-BasedPayment” as interpreted by SEC Staff Accounting Bulletin No. 107.  Previously the Company had accounted forstock options according to the provisions of Accounting Principles BoardOpinion (“APB”) No. 25,  “Accounting forStock Issued to Employees,” and as allowed by SFAS No. 123, “Accounting forStock-Based Compensation”, therefore, no related compensation expense wasrecorded for awards granted with no intrinsic value.  The Company adopted the modified prospectivetransition method provided for under SFAS No. 123R, and consequently has notretroactively adjusted results from prior periods.

As a result of adopting SFAS No.123R, the Companyrecorded $0 and $39,100 of compensation expense for stock options in Generaland Administrative expenses for the three and nine months ended September 30,2006, which had the effect of reducing pre-tax earnings by $39,100, net incomeby approximately $24,000, basic earnings per share by $0.02 and dilutedearnings per share by $0.02 for the nine months ended September 30, 2006. Theadoption of 123R had no impact on the Company’s cash flows.

Options granted under the 2005 and 2004 Plans vest atthe date of the grant, with the exception of options granted to James C.Verney, which vested according to a schedule in his Employment Agreement andare currently all vested.  The fair valueof each option award was estimated on the date of grant using the Black-Scholesoption-pricing model. Assumptions utilized in the model were evaluated andrevised, as necessary, to reflect market conditions and experience.  The risk-free interest rate for periodswithin the contractual life of the option is based on the U.S. Treasury yieldcurve in effect at the time of the grant. Expected volatilities are based on the historical volatility of theCompany’s stock for a period equal to the expected term of the options.  The expected term of the options representsthe period of time that options granted are outstanding and is estimated usinghistorical exercise and termination experience.

Prior to the adoption of SFAS 123R, the benefit of taxdeductions in excess of recognized stock compensation expense was reported as areduction of taxes paid within operating cash flows.  SFAS 123R requires that such benefits be recognizedas a financing cash flow.  The benefit oftax deductions in excess of recognized stock compensation expense for the ninemonths ended September 30, 2006 was immaterial.

The following table illustrates the effect of netearnings and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to options granted under the Company’soption plans for the three and nine months ended September 30, 2005:
| ** **                                                                                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                            | ** ** | **2005**                                             | ** ** | **2005**                                            | ** ** |
|                                                                                                                                                  |       |                                                 |       |                                                |       |
| Net Income:                                                                                                                                           |       |                                                 |       |                                                |       |
| As reported                                                                                                                                           |       | $                                                    | 203,548    |                                                | $          | 378,992 |   |
| Deduct total stock-based employee compensation  expense determined under fair value based method for all outstanding and  unvested awards, net of tax |       | 96,432                                               |       | 130,594                                             |       |
|                                                                                                                                                  |       |                                                 |       |                                                |       |
| Pro forma                                                                                                                                             |       | $                                                    | 107,116    |                                                | $          | 248,398 |   |
|                                                                                                                                                  |       |                                                 |       |                                                |       |
| Basic and  diluted net income per share:                                                                                                              |       |                                                 |       |                                                |       |
| As reported                                                                                                                                           |       | $                                                    | 0.09       |                                                | $          | 0.21 |   |
| Pro forma                                                                                                                                             |       | $                                                    | 0.09       |                                                | $          | 0.21 |   |

 

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The fair value of options granted during the ninemonths ended September 30, 2006 and 2005 was estimated on the date of grantusing the Black-Scholes option pricing model based on the following weightedaverage assumptions in the table below:
|                          | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
|                     |       |                                                |       |   |   |
| Expected term  (years)   |       | 5                                                   |       | 9.1 |   |
| Risk-free  interest rate |       | 5.08                                                | %          | 4.09 | % |
| Volatility               |       | 84.03                                               | %          | 53.47 | % |
| Dividend yield           |       | —                                              |       | — |   |

 

There were 0 and 6,000 stock options granted duringthe three and nine month periods ended September 30, 2006. The estimated fairvalue at the date of grant was $5.10 for the 1,000 stock options granted duringthe first quarter of 2006 and $6.80 for the 5,000 stock options granted duringthe second quarter of 2006. There were no grants during the third quarter of2006. The estimated weighted average fair value of the stock options grantedduring the nine month period ended September 30, 2006 was $6.50.  There were 46,500 stock options grantedduring the nine-month period ended September 30, 2005, all at an estimated fairvalue of $5.77.

The following table summarizes stock optionsoutstanding as of September 30, 2006, as well as activity during the nine-monthperiod then ended:
|                              | ** ** | ** **      | ** ** | ** **                                  | ** ** | **Contractual** | ** ** | ** **    | ** ** |
|------------------------------|------------|-----------------|------------|---------------------------------------------|------------|-----------------|------------|---------------|------------|
| ** **                   | ** ** | ** **      | ** ** | **Exercise Price Per Share** | ** ** | **Term**        | ** ** | **Aggregate** | ** ** |
| ** **                   | ** ** | **Options**     | ** ** | **Weighted**                                | ** ** | **Weighted**    | ** ** | **Intrinsic** | ** ** |
| ** **                   | ** ** | **Outstanding** | ** ** | **Average**                                 | ** ** | **Average**     | ** ** | **Value**     | ** ** |
| Balance, December 31, 2005   |       | 67,000          |       | $                                           | 9.00       |            |       |          | $          | 236,400 |   |
| Granted                      |       | 6,000           |       | 9.80                                        |       |            |       |          |       |
| Exercised                    |       | (3,000          | )          | 9.20                                        |       |            |       | $             | 2,300      |   |
| Expired                      |       | (9,000          | )          | 9.20                                        |       |            |       |          |       |
| Balance,  September 30, 2006 |       | 61,000          |       | $                                           | 9.10       |            | 4.9        |          | $          | 135,200 |   |

 

All options outstanding at September 30, 2006 are exercisable.  At September 30, 2006, there were 39,000shares available for future grants under the plans.  The presentation above reflects the reversestock split effective August 10, 2006 (Note 2).

**(4)****                                 Investmentin Marketable Security**

During the third quarter ended September 30, 2006, theCompany purchased common stock in Friendly Ice Cream Corp. Investment and all othercapital allocation decisions are made by Mr. Biglari, the Company’s Chairman,under the limited authority delegated by the Board of Directors.  The delegated authority includes theauthority to borrow funds in connection with making investments in marketablesecurities, subject to Board reporting requirements and various limitations.  As of the date of this filing, Mr. Biglarihas authority to manage surplus cash up to $5.5 million, and, in addition, hasauthority to borrow a maximum of $2 million. The Company has a margin securities account with Jefferies &Company, Inc. The margin account bears interest at the Federal Funds Target Ratequoted by the Wall Street Journal, plus .5%, or approximately 5.75% as of thedate of this report, with the minimum and maximum amount of any particular loanto be determined by Jefferies, in its discretion, from time to time.  The collateral securing the margin loans arethe Company’s holdings in the marketable security.  The minimum and maximum amount of anyparticular margin may be established by Jefferies, in its discretion,regardless of the amount of

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collateral delivered to Jefferies, and Jefferies maychange such minimum and maximum amounts from time to time.  The Company’s balance of margin debt was$1,693,084 as of September 30, 2006. Subsequent to September 30, 2006, the Company borrowed $695,000 againstits line of credit with Branch Banking and Trust to repay an additional$700,000 borrowed on margin on October 2, 2006.

The Company’s investments in marketable equitysecurities are held for an indefinite period and thus are classified asavailable for sale. Available-for-sale securities are recorded at fair value inInvestments in marketable security on the balance sheet, with the change infair value during the period excluded from earnings and recorded net of tax asa component of other comprehensive income.

Following is a summary of our marketable equitysecurity:
|                         | ** ** | **September 30, 2006** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **Cost**                         | ** ** | **Fair Value** | ** ** | **Gross Unrealized  Gains** | ** ** |
| Friendly Ice Cream Corp |       | $                                | 3,793,084  |   | $ | 4,950,013 |   | $ | 1,156,929 |   |
|                         |            |                                  |            |  |  |  |  |  |  |  |

 

**(5)****                                 Goodwilland Other Intangible Assets**

The Company conforms to the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 142, “Goodwill and Other IntangibleAssets.”  Under SFAS No. 142, goodwilland intangible assets deemed to have indefinite lives are reviewed forimpairment and written down and charged to results of operations when theircarrying amount exceeds their estimated fair value. The Company is required toperform impairment tests each year, or between yearly tests in certaincircumstances, for goodwill. There can be no assurance that future impairmenttests will not result in a charge to earnings.

Therewere no changes in the net carrying amount of goodwill for the three andnine-months ended September 30, 2006 and 2005.

*Amortizing Intangible Assets*

Franchiseroyalty contracts are amortized on a straight-line basis over fifteen years,the estimated average life of the franchise agreements.  The Company assesses the recoverability ofthis intangible asset by determining whether the amortization of the franchiseroyalty contracts balance over their remaining life can be recovered throughundiscounted future operating cash flows of the acquired operation.  The amount of impairment, if any, is measuredbased on projected discounted future operating cash flows using a discount ratereflecting the Company’s average cost of funds.
|                                | ** ** | **As of September 30, 2006** | ** ** |
|--------------------------------|------------|--------------------------------------------------|------------|
| ** **                     | ** ** | **Gross**                                        | ** ** | **Weighted average** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **carrying**                                     | ** ** | **amortization** | ** ** | **Accumulated** | ** ** |
| ** **                     | ** ** | **amount**                                       | ** ** | **period** | ** ** | **amortization** | ** ** |
| Amortizing  intangible assets: | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Franchise Royalty Contracts    |       | $                                                | 9,454,431  |   | 15.0  yrs. |   | $ | 8,036,266 |   |
|                                |            |                                                  |            |  |  |  |  |  |  |

 

Aggregate amortization expense for amortizingintangible assets for the three and nine-month periods ended September 30, 2006was $157,574 and $472,722, respectively. Estimated amortization expense is $630,300 per year through December 31,2008.

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**(6)****                                 EarningsPer Share**

Basic earnings per share excludes dilution and iscomputed by dividing income available to common stockholders by theweighted-average number of common shares outstanding for the period.  Diluted earnings per share reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock or resulted in theissuance of common stock that then shared in the earnings of the Company.  Stock options of 0 and 6,000 shares of commonstock for the three and nine-month periods ended September 30, 2006 and stockoptions of 32,500 and 46,500 shares of common stock for the three andnine-month periods ended September 30, 2005, respectively, were not included incomputing diluted earnings because the effect of these options areanti-dilutive.

The following is a reconciliation of the numeratorsand denominators of the basic and diluted earnings per share computations forthe periods indicated:
|                                            | ** ** | ** **      | ** ** | **Weighted**      | ** ** | ** **         | ** ** |
|--------------------------------------------|------------|-----------------|------------|-------------------|------------|--------------------|------------|
| ** **                                 | ** ** | ** **      | ** ** | **Average**       | ** ** | **Earnings**       | ** ** |
| ** **                                 | ** ** | **Income**      | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
| ** **                                 | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount**         | ** ** |
| **Three  months ended September 30, 2006** |       |            |       |              |       |               |       |
| Net income – basic                    |       | $               | 84,651     |              | 1,191,133  |               | $          | .07 |   |
| Net income – diluted                  |       | $               | 84,651     |              | 1,197,802  |               | $          | .07 |   |
|                                       |       |            |       |              |       |               |       |
| **Three months ended September 30, 2005**  | ** ** | ** **      | ** ** | ** **        | ** ** | ** **         | ** ** |
| Net income – basic                    |       | $               | 203,548    |              | 1,188,857  |               | $          | .17 |   |
| Net income – diluted                  |       | $               | 203,548    |              | 1,188,857  |               | $          | .17 |   |
|                                       |       |            |       |              |       |               |       |
| **Nine  months ended September 30, 2006**  |       |            |       |              |       |               |       |
| Net income – basic                    |       | $               | 234,055    |              | 1,189,656  |               | $          | .20 |   |
| Net income – diluted                  |       | $               | 234,055    |              | 1,198,462  |               | $          | .20 |   |
|                                       |       |            |       |              |       |               |       |
| **Nine months ended September 30, 2005**   | ** ** | ** **      | ** ** | ** **        | ** ** | ** **         | ** ** |
| Net income – basic                    |       | $               | 378,992    |              | 1,189,534  |               | $          | .32 |   |
| Net  income – diluted                 |       | $               | 378,992    |              | 1,189,534  |               | $          | .32 |   |

 

**(7)****                                 ClosedStore Expense**

Closed store expense for the nine months endedSeptember 30, 2006 and 2005 was $0 and $350,279, respectively.  In the three months ended March 31, 2005, theCompany recorded closed store expenses of $350,279, which included impairmentsof $128,471 associated with the end of a subleased property due to a buyout ofthe lease and impairments related to the closing of a Company-operatedrestaurant of $221,808. There was no additional closed store expense orimpairments recorded in the nine months ended September 30, 2006.

**(8)****                                 ReportableSegments**

The Company has organized segmentreporting with additional information to reflect how the Company views itsbusiness activities.  During the thirdquarter of 2006, operating segments of our Company have been identified based onseparate financial information that is evaluated regularly in deciding how toallocate resources and in assessing performance. This format reflects a changefrom previous reports. The Company-operated Restaurant segment consists of theoperations of all Company-operated restaurants and derives its revenues fromrestaurant operations.  This segment alsoincludes net costs incurred from subleases of previously operated locations,which is presented separately. The Franchising segment consists primarily of franchise

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sales and support activities andderives its revenues from sales of franchise and development rights andcollection of royalties from franchisees. The Corporation does not allocatecertain expenses to any business segment. These costs include expenses of the following functions: legal,accounting stockholder relations, personnel not directly related to a segment,information systems and other headquarter activities.  These unallocated expenses are designated underCorporate.  All periods presentedreflects the change in segment reporting.

The following table summarizes reportable segmentinformation:
| ** **                             | ** ** | **Three Months**             | ** ** | **Nine Months**              | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **Ended September 30,** | ** ** | **Ended September 30,** | ** ** |
| ** **                             | ** ** | **2006**                          | ** ** | **2005**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                   |       |                              |       |                              |       |   |   |   |   |
| Revenues from reportable segments:     |       |                              |       |                              |       |   |   |   |   |
| Restaurants                            |       | $                                 | 3,393,679  |                              | $          | 3,655,713 |   | $ | 9,971,290 |   | $ | 11,629,512 |   |
| Franchising                            |       | 1,092,221                         |       | 1,156,042                         |       | 3,376,985 |   | 3,571,541 |   |
| Total revenues                         |       | $                                 | 4,485,900  |                              | $          | 4,811,755 |   | $ | 13,348,275 |   | $ | 15,201,053 |   |
| Depreciation and amortization:         |       |                              |       |                              |       |   |   |   |   |
| Restaurants                            |       | $                                 | 107,377    |                              | $          | 81,659 |   | $ | 313,537 |   | $ | 263,029 |   |
| Franchising                            |       | 157,574                           |       | 157,574                           |       | 472,722 |   | 472,722 |   |
| Corporate                              |       | 2,887                             |       | 22,871                            |       | 5,560 |   | 75,327 |   |
| Total depreciation and amortization    |       | $                                 | 267,838    |                              | $          | 262,104 |   | $ | 791,819 |   | $ | 811,078 |   |
| Interest expense:                      |       |                              |       |                              |       |   |   |   |   |
| Restaurants                            |       | $                                 | 30,057     |                              | $          | 63,468 |   | $ | 108,334 |   | $ | 220,365 |   |
| Corporate                              |       | —                            |       | 43                                |       | 70 |   | 1,063 |   |
| Total interest expense                 |       | $                                 | 30,057     |                              | $          | 63,511 |   | $ | 108,404 |   | $ | 221,428 |   |
| Interest income:                       |       |                              |       |                              |       |   |   |   |   |
| Corporate                              |       | $                                 | 16,343     |                              | $          | 19,021 |   | $ | 53,443 |   | 53,215 |   |
| Total interest income                  |       | $                                 | 16,343     |                              | $          | 19,021 |   | $ | 53,443 |   | $ | 53,215 |   |
| Equity in loss of joint venture:       |       |                              |       |                              |       |   |   |   |   |
| Franchising                            |       | $                                 | 29,629     |                              | $          | — |   | $ | 67,857 |   | $ | — |   |
| Total equity in loss of joint venture  |       | $                                 | 29,629     |                              | $          | — |   | $ | 67,857 |   | $ | — |   |
| Income (loss) from operations:         |       |                              |       |                              |       |   |   |   |   |
| Restaurants                            |       | $                                 | 281,517    |                              | $          | 388,344 |   | $ | 747,822 |   | $ | 1,071,075 |   |
| Subleased properties                   |       | (106,508                          | )          | (42,566                           | )          | (254,667 | ) | (143,015 | ) |
| Franchising                            |       | 671,953                           |       | 720,563                           |       | 2,016,923 |   | 2,230,192 |   |
| Corporate                              |       | (647,885                          | )          | (690,486                          | )          | (1,911,202 | ) | (2,617,787 | ) |
| Gain on settlement of insurance claims |       | —                            |       | —                            |       | — |   | 220,351 |   |
| Total  income from operations:         |       | $                                 | 199,077    |                              | $          | 375,855 |   | $ | 598,876 |   | $ | 760,816 |   |

 
|                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Total assets:                        |       |                   |       |                  |       |
| Restaurants                          |       | $                      | 2,572,131  |                  | $          | 2,341,494 |   |
| Franchising                          |       | 2,380,179              |       | 2,907,946             |       |
| Corporate                            |       | 2,308,690              |       | 5,916,192             |       |
| Investments in marketable securities |       | 4,950,013              |       | —                |       |
| Goodwill of acquired businesses      |       | 4,310,200              |       | 4,310,200             |       |
|                                 |       |                   |       |                  |       |
| Total assets                         |       | $                      | 16,521,213 |                  | $          | 15,475,832 |   |

 

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**(9)****                                 Contingencies**

In the case of allknown contingencies, the Company accrues for an obligation, including estimatedlegal costs, when a loss is probable and the amount is reasonably estimable.  As facts concerning contingencies becomeknown to the Company, the Company reassesses its position with respect toaccrued liabilities and other expenses. These estimates are subject to change as events evolve and as additionalinformation becomes available during the litigation process.  As of September 30, 2006, the Company hasaccrued $175,000 related to the items discussed below.

**LittleRock, Arkansas Lease**

In September 2006,the Company was served with a lawsuit filed in the Circuit Court of PulaskiCounty, Arkansas, captioned *Parks Land Company, LLLP,et al. v. Western Sizzlin Corporation, et al.* The plaintiffs areowners/landlords of four restaurant premises located in the Little Rock,Arkansas metropolitan area which had been leased pursuant to a single leaseagreement and previously occupied by the Company.  Most recently, each of these premises hasbeen subleased to various operators.  Thelease agreement expired pursuant to its terms on June 30, 2006.  The plaintiffs have claimed in their lawsuitunspecified damages allegedly owing for certain repair and maintenance expenseson the premises, for the replacement of certain equipment, for diminution ofproperty value, and for loss of rental income, as well as interest and costs.  At this time the likelihood of an unfavorablecourt outcome, or any potential loss, cannot be made with certainty.  However, the Company is prepared tovigorously contest the plaintiff’s claims and will pursue applicable crossclaims and counterclaims.

**FFCA**

In January 2001,the Company executed a series of Master Lease Agreements (“Agreements”)relating to certain franchised properties formerly operated by other parties as“Quincy’s” restaurants (“Former Quincy’s”). Signed copies of these Agreements were required, pursuant to the termsof the document, to be executed by Franchise Financing Corporation of America,now known as General Electric Franchise Finance Corporation, (the “Lessor”), tobe legally binding; however, no signed copies were ever returned to theCompany.  At the end of January 2002,there remained only 25 Former Quincy’s operated by Company franchisees, theLessor having taken back, in 2001 and 2002, other restaurants previouslyoperated by Company franchisees.  TheAgreements, incomplete for a lack of signature by the Lessor, provided forrental payments from the Company to the Lessor. However, the cost of any rental payments was passed on to thefranchisees operating the properties. During 2002 and 2003, nine of theremaining twenty-five properties were closed and the franchisees discontinuedmaking payments to the Company. On May 15, 2003, the Company sent a letter tothe Lessor, providing notice of the Company’s termination of any tenanciesat-will on any remaining Former Quincy’s units effective May 31, 2003.  No response has ever been received fromLessor.

Following the May 15, 2003 termination of thetenancies at-will, the Company advised five franchisees who continued tooperate former Quincy’s units at that time to make any rent payments directlyto FFCA.  With regard to eleven otherformer Quincy’s units, the Company became aware, on or about May 15, 2003, thatthe franchisees had elected to make their payments directly to FFCA and it isthe Company’s understanding that FFCA has accepted these payments.  There can be no assurances that thefranchisees have made their payments and will continue to make their leasepayments in the future or that they even continue to operate these restaurants.  The Company’s estimate of the total paymentsthat were made directly to the lessor for these sixteen franchisees, or formerfranchisees, is approximately $3,894,000 through September 30, 2006.

While the Company disputes any liability for any ofthe following amounts, to the Company’s knowledge, as of September 30, 2006 atotal of approximately $3,063,000 of rental payments had not been made byeither the franchisees or by the Company with regard to the above-referencednine closed properties.

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In accordance with the Company’s position, the Companyhas returned to FFCA any invoice for rent expense, or tax statement, receivedafter May 15, 2003, with a cover letter explaining that the Company is notresponsible for any such amounts.  TheCompany intends to vigorously contest any potential claims asserted by GeneralElectric Franchise Finance Corporation. While the Company has previously engaged in discussions with the Lessorof the properties to resolve any rental payments claimed by the Lessor underthe Agreements, it is not possible at this time to determine the outcome ofthese discussions.

**Dickson, Tennessee Claim**

In 1994, the Company entered into a lease agreementfor a restaurant located in Dickson, Tennessee. The lease agreement has an original term of 15 years.  The Company ceased operations on the premisesas a restaurant in 1996 and subsequently subleased the property.  The location had been vacant since September2001.  In June 2004, the Company advisedthe landlord that the Company was surrendering the property.  The Company asserted that the landlord was obligatedto attempt to find a replacement tenant.

Thereafter, the landlord filed several collectionactions alleging default under the lease agreement and seeking collection ofunpaid rent, real estate taxes and attorney’s fees.  The landlord’s initial filings were resolvedwith the payment of rent and related obligations.  Later filings were defended on the basis thatthe landlord had failed to mitigate any damages. Judgments granted the landlordin a total amount in excess of $142,000 were appealed.

On April 11, 2006, the Company resolved all disputeswith the landlord with the execution of a formal settlement agreement.  The Company has been released from anyfurther obligations under the lease, and all pending judgments have beensatisfied, in exchange for a payment by the Company to the landlord in theamount of $177,000, also made on April 11, 2006.

**Chubb Claim**

In November 2004, Chubb Insurance filed suit in theCircuit Court for the City of Roanoke against our subsidiary, seeking recoveryof allegedly unpaid premiums in the amount of $97,249.  Western Sizzlin Stores has never been billedby Chubb and never had any direct contractual relations with Chubb.  Payments were sent to an insurance brokerhandling insurance needs for Western Sizzlin Stores.  Chubb’s claim was settled on February 6, 2006with a payment of $15,000.

**Lawrenceville, Georgia Casualty**

On July 11, 2004, the building, improvements, andcontents located on real property owned by the Company in Lawrenceville,Georgia were completely destroyed by fire. As a result of this casualty, the Company terminated the lease of thetenant operating the restaurant on these premises.  Insurance proceeds of $591,000 were receivedin April 2005 and a gain on the casualty of $220,351 was recorded as gain onsettlement of insurance claims during the first quarter of 2005.  The land is currently for sale and theCompany does not anticipate any impairment on this property based on currentestimates of fair value.  In accordancewith the note payable agreement related to the property, the insurance proceedswere remitted to the Company’s lender on April 8, 2005.  Subsequently, in February 2006, the remainderof the loan balance, $280,663, was paid off and the lender accepted the totalrepayment of the loan without the application of a prepayment penalty.

**Waldorf, Maryland Casualty**

In July 2005, a building, improvements, and contents,located upon real property leased by the Company for operation of acompany-owned Great American Buffet restaurant, in Waldorf, Maryland, weretotally destroyed by fire.  The Companyinsured the premises, including buildings and contents, against casualty, suchas fire.  The Company also insured thepremises for the interruption of business income. The fire occurred shortlyafter the Company had provided timely

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notice to the landlord of our desire to extend thelease through a renewal term ending on December 31, 2010.  Since the fire, the Company repeatedlydemanded that the landlord rebuild the premises and asserted that the landlord wasresponsible for any cost to rebuild in excess of the available insuranceproceeds.

In August 2005, the landlord filed an action for adeclaratory judgment in the Circuit Court for Charles County, Maryland. On orabout December 14, 2005, the Company entered into a settlement agreement withthe Landlord which resolved all litigation claims regarding the parties’respective interests in the real property and insurance proceeds covering realand personal property involved in the casualty. Pursuant to this agreement the Company received insurance proceeds ofapproximately $1,030,000 in the first quarter of 2006.

**Other**

The Company is involved in various other claims andlegal actions arising in the ordinary course of business.  In the opinion of the management, theultimate disposition of these matters will not have a material adverse effecton the Company’s financial condition, results of operations or liquidity.

**(10)****                          Changein Estimate**

At December 31, 2005,$83,500 had been accrued for management’s estimate of losses on subleasesthrough the end of the lease termination date of June 30, 2006.  Based on a subsequent guarantee obtained onthe rent and subsequent collection of past due rents, the Company reversed theaccrual as of March 31, 2006 and has included the reversal as a reduction ofrestaurant operating expenses.

**(11)****                          EarlyExtinguishments of Long-Term Debt**

During the first quarter of 2006, the Company paid off threeloans.  The payoffs included a write offof financing costs associated with the early extinguishments of long-term debtof $29,699 and a prepayment penalty assessed on one of the loans of $62,836.

**(12)****                          Investmentin Unconsolidated Joint Venture**

The Company is a partner in a 50/50 joint venture witha franchisee for a new restaurant in Harrisonburg, Virginia.  During October 2005, the joint ventureentered into a loan agreement for $3.05 million and the Company has guaranteed50% of the loan obligation.  The Company estimatedthe fair value of the guarantee to be approximately $30,000 and recorded theamount in other long-term liabilities and its investments in unconsolidatedjoint venture on the accompanying balance sheet at December 31, 2005.  There was no change at September 30, 2006based on the Company’s current estimate of the fair value of theguarantee.  The term of the guaranteeextends through July 1, 2026 and the Company would be required to perform underthe guarantee should the joint venture not be able to meet its scheduledprincipal and interest payments. Pursuant to the joint venture agreement, a cash contribution of $300,000from each 50/50 partner was also made at the closing of this financing.  The Company accounts for its investment usingthe equity method and the Company’s share of the net loss for the joint ventureof $29,629 and $67,857 for the three and nine months ended September 30, 2006is included in equity in loss of unconsolidated joint venture.  The Company has recorded a receivable fromthe joint venture of $116,693 at September 30, 2006 and the corresponding payableis reflected on the balance sheet of the joint venture. The restaurant isscheduled to open December 2006.

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**Financial Data**

The following is selected financial information forthe joint venture at September 30, 2006:
|                                                            | ** ** | **Three Months  Ended**     | ** ** | **Nine Months  Ended**      | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
| ** **                                                 | ** ** | **(unaudited)**                  | ** ** | **(unaudited)**                  | ** ** |
| **Statement of Operations Data:**                          | ** ** | ** **                       | ** ** | ** **                       | ** ** |
| Total revenues                                             |       | $                                | —     |                             | $          | — |   |
| Payroll expense                                            |       | 31,480                           |       | 46,940                           |       |
| Prototype plan expense                                     |       | 238                              |       | 11,201                           |       |
| Smallwares                                                 |       | 5,100                            |       | 5,100                            |       |
| Interest                                                   |       | 13,823                           |       | 32,570                           |       |
| Net loss                                                   |       | (58,735                          | )          | (135,714                         | )          |
| **Balance Sheet Data:**                                    | ** ** | ** **                       | ** ** | ** **                       | ** ** |
| Cash                                                       |       |                             |       | 24,916                           |       |
| Land, leasehold improvements, and construction in progress |       |                             |       | 2,007,689                        |       |
| Loan costs, net                                            |       |                             |       | 13,852                           |       |
| Total assets                                               |       |                             |       | 2,047,088                        |       |
| Loan payable                                               |       |                             |       | 1,396,473                        |       |
| Accounts payable and accrued expenses                      |       |                             |       | 20,729                           |       |
| Members’  equity                                      |       |                             |       | 421,050                          |       |
|                                                            |            |                                  |            |                                  |            |  |  |

 

**(13)         Impact of Recently Issued Accounting Standards**

In July 2006, the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASBStatement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertaintyin income taxes recognized in a company’s financial statements in accordancewith FAS 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interestand penalties, accounting in interim periods, disclosure and transition.  The requirements of FIN 48 are effective forour fiscal year beginning January 1, 2007. We are in the process of evaluating this guidance and therefore have notyet determined the impact that FIN 48 will have on our financial statementsupon adoption.

In September 2006, the FASB issuedStatement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (“SFAS No. 157”). SFAS No. 157 clarifies the principlethat fair value should be based on the assumptions market participants woulduse when pricing an asset or liability and establishes a fair value hierarchythat prioritizes the information used to develop those assumptions. SFASNo. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears, with early adoption permitted. We have not yet determined the impact, ifany, that the implementation of SFAS No. 157 will have on our results ofoperations or financial condition.

In September 2006, the SEC issuedStaff Accounting Bulletin No. 108 “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB No. 108”)*.*SAB No. 108 provides interpretive guidance on how the effects of thecarryover or reversal of prior year misstatements should be considered inquantifying a current year misstatement. The SEC staff believes thatregistrants should quantify errors using both a balance sheet and an incomestatement approach and evaluate whether either approach results in amisstatement that, when all relevant quantitative and qualitative factors areconsidered, is material and therefore must be quantified. SAB No. 108 iseffective for fiscal years ending on or after

15

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November 15, 2006. We have notyet determined the effect, if any, that the application of SAB No. 108will have on our results of operations or financial condition.

**Item 2.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**Overview**

The following discussion may include forward-lookingstatements including anticipated financial performance, business prospects, thefuture opening of Company-operated and franchised restaurants, anticipatedcapital expenditures, and other matters. All statements other than statements of historical fact are forward-lookingstatements.  Section 27A of the SecuritiesAct of 1933 (as amended) and Section 21E of the Securities Exchange Act of 1934(as amended) provide safe harbors for forward-looking statements.  In order to comply with the terms of thesesafe harbors, the Company notes that a variety of factors, individually or inthe aggregate, could cause the Company’s actual results and experience todiffer materially from the anticipated results or other expectations expressedin the Company’s forward-looking statements including, without limitation, thefollowing: the ability of the Company or its franchises to obtain suitablelocations for restaurant development; consumer spending trends and habits;competition in the restaurant segment with respect to price, service, location,food quality and personnel resources; weather conditions in the Company’soperating regions; laws and government regulations; general business andeconomic conditions; availability of capital; success of operating initiativesand marketing and promotional efforts; and changes in accounting policies.  In addition, the Company disclaims any intentor obligation to update those forward-looking statements.

The Company operated and franchised a total of 129restaurants located in 19 states, including 5 Company-owned and 124 franchiserestaurants as of September 30, 2006. The restaurants include a family steakhouse concept and a steak andbuffet concept.

The Company’s objective is to maximize its intrinsicbusiness value per share over the long term. In meeting this objective, the Company will evaluate all investmentalternatives to achieve above-average returns on capital. The Company willcontinue to franchise restaurants and maximize operating results of the fiveCompany-operated restaurants.

The Company seeks to invest in stocks of businesses atprices below their intrinsic business value. The Company’s preferred strategyis to allocate a meaningful amount of capital in each investee, resulting inconcentration.  As of the date of thisfiling, the equity investment portfolio included one stock, Friendly Ice CreamCorporation. The carrying values of the Company’s equity securities are exposedto market price fluctuations, which may be accentuated by a concentrated equityportfolio. A significant decline in the price of major investments may producea large decrease in the Company’s stockholder’s equity. (See Note 4) Operatingdecisions for the Company are made by management. As described above,investment and all other capital allocation decisions are made for the Companyby Mr. Biglari, Chairman of the Board of Directors.

A strategic alliance with Star Buffet, Inc. wasannounced in April 2006.  Star Buffetannounced plans to convert certain of its existing restaurants to the WesternSizzlin brand and to test a newly developed Western Sizzlin buffet prototype.As of September 30, 2006, Star Buffet had not opened or converted anyrestaurants into a Western Sizzlin brand.

On August 10, 2006, the Company effected a 1-for-10reverse stock split pursuant to the discretionary authority granted by thestockholders at the Annual Meeting of Stockholders on June 20, 2006.

The SEC declared the Company’s Form S-3 RegistrationStatement (as amended) effective as of November 7, 2006.  The Company has set a record date of November9, 2006 and an expiration date of December 8, 2006.

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**Results of Operations**

Netincome for the three and nine months ended September 30, 2006 was $84,651 and$234,055 compared to net income of $203,548 and $378,992 for the three and ninemonths ended September 30, 2005.

The following table sets forth for the periodspresented the percentage relationship to total revenues of certain itemsincluded in the consolidated statements of income and certain restaurant datafor the periods presented:
| ** **                                                          | ** ** | **Three Months**             | ** ** | **Nine Months**              | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                          | ** ** | **Ended September 30,** | ** ** | **Ended September 30,** | ** ** |
| ** **                                                          | ** ** | **2006**                          | ** ** | **2005**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                           |       |                              |       |                              |       |   |   |   |   |
| Company-operated  restaurants                                       |       | 75.7                              | %          | 76.0                              | %          | 74.8 | % | 76.5 | % |
| Franchise  royalties and fees                                       |       | 24.3                              |       | 24.0                              |       | 25.2 |   | 23.5 |   |
| Total  revenues                                                     |       | 100.0                             |       | 100.0                             |       | 100.0 |   | 100.0 |   |
|                                                                |       |                              |       |                              |       |   |   |   |   |
| Company-operated  restaurants – food, beverage and labor costs |       | 52.7                              |       | 52.7                              |       | 53.2 |   | 54.4 |   |
| Restaurant  occupancy and other                                     |       | 15.7                              |       | 13.5                              |       | 14.1 |   | 13.3 |   |
| Subleased  restaurant expenses                                      |       | 2.4                               |       | .9                                |       | 1.9 |   | 1.2 |   |
| Franchise  operations – direct support                         |       | 5.9                               |       | 5.8                               |       | 6.6 |   | 5.7 |   |
| Corporate  expenses                                                 |       | 12.9                              |       | 13.9                              |       | 13.8 |   | 14.2 |   |
| Depreciation  and amortization                                      |       | 6.0                               |       | 5.4                               |       | 5.9 |   | 5.3 |   |
| Closed  store expenses                                              |       | —                            |       | —                            |       | — |   | 2.3 |   |
| Gain  on settlement of insurance claims                             |       | —                            |       | —                            |       | — |   | (1.4 | ) |
| Total  costs and expenses                                           |       | 95.6                              |       | 92.2                              |       | 95.5 |   | 95.0 |   |
|                                                                |       |                              |       |                              |       |   |   |   |   |
| Income  from operations                                             |       | 4.4                               |       | 7.8                               |       | 4.5 |   | 5.0 |   |
|                                                                |       |                              |       |                              |       |   |   |   |   |
| Other  income (expense)                                             |       | (1.1                              | )          | (1.0                              | )          | (1.5 | ) | (.9 | ) |
|                                                                |       |                              |       |                              |       |   |   |   |   |
| Income  before income tax expense                                   |       | 3.3                               |       | 6.8                               |       | 3.0 |   | 4.1 |   |
| Income  tax expense                                                 |       | 1.4                               |       | 2.6                               |       | 1.2 |   | 1.6 |   |
| Net income                                                          |       | 1.9                               | %          | 4.2                               | %          | 1.8 | % | 2.5 | % |

 
|                                               | ** ** | **Three Months**            | ** ** | **Nine Months**             | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **Ended September 30** | ** ** | **Ended September 30** | ** ** |
| ** **                                    | ** ** | **2006**                         | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                          |       |                             |       |                             |       |   |   |   |   |
| **Restaurant Data**                           | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of Company-Operated Restaurants:       |       |                             |       |                             |       |   |   |   |   |
| Beginning of period                           |       | 5                                |       | 6                                |       | 5 |   | 6 |   |
| Opened                                        |       | —                           |       | —                           |       | — |   | — |   |
| Closed                                        |       | —                           |       | 1                                |       | — |   | 1 |   |
| Franchised                                    |       | —                           |       | —                           |       | — |   | — |   |
| End  of period                                |       | 5                                |       | 5                                |       | 5 |   | 5 |   |
| Number  of  U.S. Franchised Restaurants: |       |                             |       |                             |       |   |   |   |   |
| Beginning of period                           |       | 130                              |       | 144                              |       | 135 |   | 148 |   |
| Opened                                        |       | —                           |       | 1                                |       | — |   | 3 |   |
| Closed                                        |       | 6                                |       | 5                                |       | 11 |   | 11 |   |
| End of period                                 |       | 124                              |       | 140                              |       | 124 |   | 140 |   |

 

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**Revenues**

Company-operatedrestaurant revenues decreased $262,000 (7.2%) to $3.4 million for the threemonths ended September 30, 2006 as compared to $3.7 million for the comparablethree months ended September 30, 2005.  Revenues for Company-operated restaurants decreased $1.7 million (14.3%)to $10.0 million for the nine months ended September 30, 2006 as compared to$11.6 million for the comparable nine months ended September 30, 2005. Thedecreases are largely attributable to the closing of a Company-operated locationin February, 2005 and a closing of a Company-operated location in July, 2005due to a total loss by fire casualty. Same store sales for the three and nine months ended September 30, 2006,experienced an overall decrease of 0.86% and 0.06%, respectively.

Franchiserevenues decreased 5.5% to $1.1 million for the three months ended September30, 2006 as compared to $1.2 million for the comparable three months endedSeptember 30, 2005.  Franchise revenuesdecreased 5.4% to $3.4 million for the nine months ended September 30, 2006

ascompared to $3.6 million for the nine months ended September 30, 2005.  The decreases are attributable to fewerfranchised units in the system at September 30, 2006 as compared to September30, 2005.  Same store sales for the threeand nine months ended September 30, 2006, experienced an overall increase of2.63% and 1.65%, respectively.

**Costs and Expenses**

Costof Company-operated restaurants, consisting primarily of food, beverage, andlabor costs decreased $170,600 (6.7%) to $2.4 million for the three monthsended September 30, 2006 from $2.5 million for the three months ended September30, 2005.   These costs for the threemonth periods stayed the same as a percentage of Company-operated restaurantsrevenue of 70.0% in 2005 and 2006. For the nine month period ended September30, 2006, the costs of Company-operated restaurants decreased $1.2 million(14.2%) to $7.1 million from $8.3 million in 2005.  These costs for the nine month periods slightlyincreased as a percentage of Company-operated restaurants revenue from 71.1% in2005 to 71.2% in 2006.   The decrease inthe costs was largely attributable to the closing of a Company-operatedlocation in February 2005 and the closing due to fire of a Company-operatedlocation in July, 2005.

Restaurantoccupancy and other, which include utilities, insurance, maintenance, rent andother such costs of the Company-operated restaurants, increased by $55,700(8.6%) for the three months ended September 30, 2006 versus the prior year’scomparable period. These costs for the three month periods increased slightlyas a percentage of Company-operated restaurant revenues from 17.8% in 2005 to20.8% in 2006.  The increases for thethree months ended September 30, 2006 were attributable to increased occupancyand other expenses in the restaurants. For the nine months ended September 30,2006, restaurant occupancy and other, decreased by $148,000 (7.3%) versus theprior year’s comparable period.  Thedecrease was attributable to the closings of two Company-operated locations in2005. These costs for the nine months period increased as a percentage ofCompany-operated restaurant revenues at 18.8% in 2006 and 17.4% in 2005.

Subleasedrestaurant expenses includes net costs associated with subleasing former Companyoperations and maintenance of vacant premises. These expenses increased by $66,000 (165.6%) for the three months endedSeptember 30, 2006 versus the prior year’s comparable period.  For the nine months ended September  30, 2006, these expenses increased by $78,000(44.8%) versus the prior year’s comparable period.  The increases were largely attributable toadditional expenses incurred on repair and maintenance of the facilities anduncollectible rents.

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Costof franchise operations direct support expense were $262,700 for the threemonths ended September 30, 2006 compared to $277,900 in 2005, and were 24.1%and 24.0% as a percentage of franchise operations revenues for 2006 and 2005,respectively.  Cost of franchiseoperations were $887,000 and $869,000 for the nine month periods endedSeptember 30, 2006 and 2005, and were 26.3% and 24.3% as a percentage offranchise operations revenues, respectively. These costs are comparable year to year for the periods presented.

Unallocatedcorporate expenses consist of certain expenses not allocated to any businesssegment.  These expenses include legal,accounting, stockholder relations, personnel not directly related to a segment,information systems, and other headquarter’s activities.  These expenses decreased by $91,000 (13.6%)for the three months ended September 30, 2006 versus the prior year’scomparable period.  For the nine monthsended September 30, 2006, these expenses decreased by $319,000 (14.7%) versusthe prior year’s comparable period.  Thedecreases were attributable to personnel reductions and targeted expensereductions in 2006.

Depreciationand amortization expense was $5,700 (2.2%) more for the three months endedSeptember 30, 2006 versus the three months ended September 30, 2005 and $19,300(2.4%) less for the comparable nine month period then ended.  The increases in the third quarter wereattributable to an increase in capital expenditures placed in service due toremodels of two Company-operated locations during 2006.

Closedstore expenses were $0 and $350,000 for the three and nine months endedSeptember 30, 2005 and there was no closed store expense in 2006 for thecomparable periods.  The first quarter2005 expenses included impairment of $128,000 associated with the end of asubleased property due to a buyout of the lease and impairments related to theclosing of a Company-operated restaurant of $222,000 in February 2005.

**Other Income (Expense)**

Interest expense decreased $33,500 and $113,000 forthe three and nine months ended September 30, 2006 over the comparable periodsin 2005 due to a lower average principal outstanding balance.  Interest income fluctuates according to thelevels of available cash balances.  TheCompany employs a cash management system whereby available balances areinvested on an overnight basis.

Other expense increased $3,000 for the three monthsended September 30, 2006 and increased $57,000 for the nine months endedSeptember 30, 2006 over the comparable periods in 2005.  The increases were largely attributable tothe recording of the equity in loss of joint venture during 2006.

Income tax expense is directly affected by the levelsof pretax income. The Company’s effective tax rate was 43.3% and 38.1% for thethree and nine months ended September 30, 2006 and 41.0% and 38.4% for the sameperiods in 2005.  The increasedpercentages were largely attributable to deferred income tax effect ofunrealized holding gains on the investment in a marketable security.

**Cash and Cash Equivalents**

As of September 30, 2006, the Company had $124,361 ofcash and cash equivalents as compared to $1.9 million as of September 30,2005.  The decline in cash and cashequivalents was largely attributable to a purchase of an investment in amarketable security of $2.1 million, payments of long-term debt of $1.4million, partially offset by proceeds from fire casualty and cash generatedfrom operations of $1.4 million.

**Investment of Available Capital**

The Company’s cash flows have exceeded its workingcapital, financing and capital investment needs, and management expects thatthe Company’s cash flows will continue to exceed its operating cash needs forthe foreseeable future.  The Companyregularly evaluates how best to use

19

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available capital to increase stockholder value.  The Company may pursue investments in theform of acquisitions, joint ventures and partnerships where the Companybelieves attractive returns can be obtained. Further, the Company may determine under certain market conditions thatavailable capital is best utilized to fund investments that it believes offerthe Company attractive return opportunities, whether or not related to itsongoing business activities.

As previously disclosed in Note 4, the Company’s Boardof Directors has delegated authority to direct investment of the Company’ssurplus cash to its Chairman, Sardar Biglari, subject to  Board reporting requirements and variouslimitations that have been or may be from time to time adopted by the Board ofDirectors.  These investments may includesignificant and highly concentrated direct investments with respect to theequity securities of public companies. Any such investments will involve risks, and stockholders shouldrecognize that the Company’s balance sheet may change depending on the performanceof investments.  Furthermore, suchinvestments could be subject to volatility that may affect both the recordedvalue of the investments as well as the Company’s periodic earnings. See RiskFactors, page 25.

**Operating Activities and Cash Flows**

The Company generated approximately $1.4 million inoperating cash flows for the nine months ended September 30, 2006 and $209,000for the nine months ended September 30, 2005. The Company’s primary source of operating cash flows is the operatingprofits generated from Company operations and franchise operations.

**Investing Activities**

During the nine months ended September 30, 2006, theCompany spent $480,000 on capital expenditures compared to $181,000 spentduring the equivalent period in the prior year. Capital expenditures for 2006 included approximately $450,000 for theremodel of two Company-operated stores in Northern Virginia.  The balance of the capital expenditures wasfor necessary replacement of equipment and leasehold improvements in the otherthree Company-operated locations. Also included in investing activities for2006 is a $2.1 million investment in marketable security.  Offsetting uses of cash for investingactivities were proceeds from fire casualties of $785,000 and $653,000 for thenine months ended September 30, 2006 and 2005, respectively.

**Financing Activities**

The Company made payments of long-term debt of $1.4million and $1.1 million for the nine months ended September 30, 2006 and 2005,respectively.

**Liquidity**

The Company’s primary sources of liquidity are cashgenerated from operations and, if needed, borrowings under its existing line ofdebt. The Company continually reviews available financing alternatives.  In addition, the Company may consider, on anopportunistic basis, strategic decisions to create value and improveoperational performance.

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**CRITICAL ACCOUNTING POLICIES**

The discussion andanalysis of financial condition and results of operations is based on theconsolidated financial statements and accompanying notes that have beenprepared in accordance with United States generally accepted accountingprinciples.  The preparation of theseconsolidated financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates.

Application of thecritical accounting policies discussed below requires significant judgments bymanagement, often as a result of the need to make estimates of matters that areinherently uncertain.  If actual resultswere to differ materially from the estimates made, the reported results couldbe materially affected.  The Company isnot currently aware of any reasonably likely events or circumstance that wouldresult in materially different results. Senior management has reviewed thecritical accounting policies and estimates and the Management’s Discussion andAnalysis regarding them with the Audit Committee of the Board of Directors.

*Trade Accounts and NotesReceivable and the Allowance for Doubtful Accounts*

The Company collectsroyalties, and in some cases rent, from franchisees.  The Company views trade accounts and notesreceivable and the related allowance for doubtful accounts as a criticalaccounting estimate since the allowance for doubtful accounts is based onjudgments and estimates concerning the likelihood that individual franchiseeswill pay the amounts included as receivables from them.  In determining the amount of allowance for doubtfulaccounts to be recorded for individual franchisees, the Company considers theage of the receivable, the financial stability of the franchisee, discussionsthat may have occurred with the franchisee and a judgment as to the overallcollectibility of the receivable from the franchisee.  In addition, the Company establishes anallowance for all other receivables for which no specific allowances are deemednecessary.  If average sales or thefinancial health of franchisees were to deteriorate, the Company might have toincrease the allowance for doubtful accounts.

*Investments*

The Company classifiesour marketable securities as available-for-sale, which are reported at fairvalue.  Unrealized holding gains andlosses, net of the related income tax effect, on available-for-sale securitiesare excluded from income and are reported as other comprehensive income instockholders’ equity.  Realized gains andlosses from securities classified as available-for-sale are included in incomeand are determined using the specific identification method for ascertainingthe cost of securities sold.  Allinvestments are marked-to-market based on quoted market prices and recorded attheir fair value.

*Long-lived Assets, Franchise Royalty Contracts andGoodwill*

The Company views thedetermination of the carrying value of long-lived assets, franchise royaltycontracts and goodwill as critical accounting estimates since it must evaluatethe estimated economic useful life in order to properly depreciate or amortizeour long-lived assets and franchise royalty contracts and because it mustconsider if the value of any of our long-lived assets have been impaired,requiring adjustments to the carrying value. Goodwill is not subject to amortization but is subject to at least anannual impairment test to determine if the carrying amount exceeds its fairvalue.

Economic useful life isthe duration of time the asset is expected to be productively employed, whichmay be less than its physical life.  Theestimated economic useful life of an asset is monitored to determine if itcontinues to be appropriate in light of changes in business circumstances.

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*Commitments and Contingencies*

The Company viewsaccounting for contingencies as a critical accounting estimate since losscontingencies arising from claims, assessments, litigation, fines and penaltiesand other sources require judgment as to any probable liabilitiesincurred.  Actual results could differfrom the expected results determined based on such estimates.

**OTHER**

**Impact of Inflation**

Theimpact of inflation on the costs of food and beverage products, labor and realestate can affect the Company’s operations. Management believes the Company has historically been able to pass onincreased costs through certain selected menu price increases and has offsetincreased costs by increased productivity and purchasing efficiencies, butthere can be no assurance that the Company will be able to do so in thefuture.  Management anticipates that theaverage cost of restaurant real estate leases and construction cost couldincrease in the future which could affect the Company’s ability to expand.  In addition, mandated health care oradditional increases in the federal or state minimum wages could significantlyincrease the Company’s costs of doing business.

**Impact of Recently Issued Accounting Standards**

In July 2006, the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASBStatement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertaintyin income taxes recognized in a company’s financial statements in accordancewith FAS 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interestand penalties, accounting in interim periods, disclosure and transition.  The requirements of FIN 48 are effective forour fiscal year beginning January 1, 2007. We are in the process of evaluating this guidance and therefore have notyet determined the impact that FIN 48 will have on our financial statementsupon adoption.

In September 2006, the FASB issuedStatement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (“SFAS No. 157”). SFAS No. 157 clarifies the principlethat fair value should be based on the assumptions market participants woulduse when pricing an asset or liability and establishes a fair value hierarchythat prioritizes the information used to develop those assumptions. SFASNo. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears, with early adoption permitted. We have not yet determined the impact, ifany, that the implementation of SFAS No. 157 will have on our results ofoperations or financial condition.

In September 2006, the SEC issuedStaff Accounting Bulletin No. 108 “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB No. 108”)*.*SAB No. 108 provides interpretive guidance on how the effects of thecarryover or reversal of prior year misstatements should be considered inquantifying a current year misstatement. The SEC staff believes thatregistrants should quantify errors using both a balance sheet and an incomestatement approach and evaluate whether either approach results in amisstatement that, when all relevant quantitative and qualitative factors areconsidered, is material and therefore must be quantified. SAB No. 108 iseffective for fiscal years ending on or after November 15, 2006. We havenot yet determined the effect, if any, that the application of SAB No. 108will have on our results of operations or financial condition.

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**Item 3.    Quantitativeand Qualitative Disclosure about Market Risk**

The Company does not engage in derivative financialinstruments or derivative commodity instruments.  As of September 30, 2006, the Company’sfinancial instruments were not exposed to significant market risk due toforeign currency exchange risk.  TheCompany is exposed to market risk related to interest rates, as well asincreased prices in restaurant industry commodities such as beef.

Thetable below provides information about the Company’s debt obligations that aresensitive to changes in interest rates. The table presents principal cash flows and related weighted averageinterest rates by expected maturity dates.

Debt obligations held for other than trading purposesat September 30, 2006 (dollars in thousands):

#### EXPECTED MATURITY DATE

| ** **            | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Estimated  Fair Value** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|--------------------------------|------------|
| Long-term debt        |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |                           |       |
| Fixed Rate            |       | $        | 89         |     | $          | 163      |       | $        | 119        |     | $          | 109            |       | $         | 121        |                           | $          | 336 |   | $ | 937 |   | $ | 1,011 |   |
| Average Interest Rate |       | 9.88     | %          | 9.96     | %          | 10.03    | %          | 10.07    | %          | 10.07    | %          | 10.07          | %          | 10.00     | %          |                           |       |
|                       |            |          |            |          |            |          |            |          |            |          |            |                |            |           |            |                                |            |  |  |  |  |  |  |  |  |

 

**Item 4.  Controlsand Procedures**

**Our senior management, including the Chief ExecutiveOfficer and Chief Financial Officer, evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934, as amended) as of September 30,2006.  Based on their evaluation as ofDecember 31, 2005, they had concluded that the disclosure controls and procedureswere ineffective in providing reasonable assurance that the informationrequired to be disclosed by us in our annual report on Form 10-K was summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and Form 10-K.  Amaterial weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected.  As of December31, 2005, management identified a material weakness due to limited financialand accounting personnel with the appropriate expertise to ensure that ourannual and periodic financial statements comply with generally acceptedaccounting principles (“GAAP”) and SEC reporting requirements.**

**The ineffective control over the application of GAAP andSEC reporting requirements related to the financial reporting process couldresult in a material misstatement to our annual or interim financial statementsthat may not be prevented or detected. Management is addressing this weakness by having formed a consultingrelationship with an accounting firm other than our independent registeredpublic accounting firm with appropriate expertise in these matters.  We are using this firm to assist with thepreparation and review of our filings beginning with the second quarter of2006.  There were no other changes in ourinternal controls or in other factors that could significantly affect thesecontrols since the evaluation process was completed as of September 30, 2006.**

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**PART II. OTHER INFORMATION**

Item 1.    Legal Proceedings

In addition to those proceedings discussed in theCompany’s consolidated financial statements included in Item 1, Part 1, theCompany is involved in various other claims and legal actions which are routinelitigation matters incidental to the business. In the opinion of the management, the ultimate disposition of theseother matters will not have a material adverse effect on the Company’sfinancial condition, results of operations or liquidity.

Item 1A.Risk Factors

An investment in the common stock of any companyinvolves a degree of risk.  Investorsshould consider carefully the risks and uncertainties described in ourRegistration Statement on Form S-3 (as amended), on file with the SEC andincorporated herein by reference (Exhibit 99.0), which update and are inaddition to those detailed in the Company’s Annual Report on Form 10-K, andthose other risks described elsewhere in this report, before deciding whetherto purchase our common stock.  Additionalrisks and uncertainties not currently known to us or that we currently deemimmaterial may also become important factors that may harm the Company’sbusiness, financial condition, and results of operations.  The occurrence of risk factors could harm theCompany’s business, financial condition, and results of operations for companyoperations, as well as franchised operations. The trading price of the Company’s common stock could decline due to anyof these risks and uncertainties, and stockholders may lose part or all oftheir investment.

Item 6.    Exhibits :

See Exhibit Index on page27.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned hereuntoduly authorized.

 
|                         |   | **Western  Sizzlin Corporation**           |
|-------------------------|--------|--------------------------------------------|
| ** **              |   | ** **                                 |
| ** **              |   | ** **                                 |
| * *                | By:    | */s/ James C. Verney*                      |   |
| * *                |   | James C. Verney                            |
|                    |   | President and Chief Executive Officer      |
|                    |   |                                       |
| * *                | By:    | */s/ Robyn B. Mabe*                        |   |
|                    |   | Robyn B. Mabe                              |
|                    |   | Vice President and Chief Financial Officer |
|                    |   |                                       |
| Date: November  9, 2006 |   |                                       |
|                         |        |                                            |  |  |

 

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**EXHIBIT INDEX**

31.1                           Certificationof Chief Executive Officer pursuant to Rule 13a-14(a).

31.2                           Certificationof Chief Financial Officer pursuant to Rule 13a-14(a).

32.1                           Certificationof Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

32.2                           Certificationof Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

99.0                           RiskFactors (incorporated by reference to pages 5-12 of the Company’s RegistrationStatement on Form S-3 (as amended)).

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