Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and footnotes for the period ended November 19, 2008 included in Item 1 of Part I of this Quarterly Report on Form 10-Q, and the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended August 27, 2008.

Overview

As of November 19, 2008, we operated 120 restaurants, of which 119 are traditional cafeterias and one primarily serves seafood. These establishments are located in close proximity to retail centers, business developments and residential areas in four states. Of the 120 restaurants, 89 are located on property that we own and 31 are on leased premises.

Accounting Periods

Our fiscal year ends on the last Wednesday in August. As such, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. Each of the first three quarters of each fiscal year consists of three four-week periods, while the fourth quarter normally consists of four four-week periods. Comparability between quarters may be affected by varying lengths of the quarters, as well as the seasonality associated with the restaurant business.

Same-Store Sales

The restaurant business is highly competitive with respect to food quality, concept, location, price, and service, all of which may have an effect on same-store sales. Our same-store sales calculation measures the relative performance of a certain group of restaurants. To qualify for inclusion in this group, a store must have been in operation for 18 consecutive accounting periods. Stores that close on a permanent basis are removed from the group in the fiscal quarter when operations cease at the restaurant, but remain in the same-store group for previously reported fiscal quarters. Although management believes this approach leads to more effective year-over-year comparisons, neither the time frame nor the exact practice may be similar to those used by other restaurant companies.

Hurricane Ike

Hurricane Ike struck southeast Texas in September 2008 causing massive power outages and inflicting wide-spread damage in the greater Houston area. Over 40 Luby's locations in the Houston area were closed over varying lengths of time due to the storm. Restaurant sales were negatively impacted by approximately 273 days in the aggregate when some of our locations were unable to open due to storm damage or loss of power. We estimate approximately $1.5 million in lost sales from these store closures which were partially offset by post-hurricane sales. During the quarter, we incurred direct costs of $0.9 million for damages, auxiliary power, food loss and other miscellaneous costs. We are seeking to recover a portion of lost profits, property damages, and some expenses incurred through insurance claims.

RESULTS OF OPERATIONS

First Quarter Fiscal Year 2009 compared to First Quarter Fiscal Year 2008

Sales

Total sales decreased approximately $4.4 million, or 6.0%, in the first quarter of fiscal year 2009 compared to the first quarter of fiscal year 2008, consisting of a $5.7 million decrease in restaurant sales and a $1.3 million increase in culinary contract services revenue. The $5.7 million decline in restaurant sales included a $2.6 million reduction in sales related to closed operations. On a same-store basis, sales decreased approximately $4.5 million, or 6.7%, due primarily to declines in guest traffic partially offset by higher menu prices. Excluding the lost sales from Hurricane Ike and the estimated unfavorable calendar shift, same-store sales were down 3.8%.

Cost of Food

Food costs decreased approximately $1.4 million, or 7.2%, in the first quarter of fiscal year 2009 compared to fiscal year 2008 due to lower sales volumes. As a percentage of restaurant sales, food costs increased 0.3%, to 27.7% in the first quarter of fiscal year 2009 compared to 27.4% in the first quarter of fiscal year 2008, primarily due to increased commodity costs in oils, shortenings, beef, fresh produce and seafood partially offset by higher menu prices.

Payroll and Related Costs

Payroll and related costs increased approximately $0.2 million in the first quarter of fiscal year 2009 compared to fiscal year 2008 due primarily to higher wage rates. As a percentage of restaurant sales, these costs increased 3.3%, to 37.4% in the first quarter of fiscal year 2009 compared to 34.1% in the first quarter of fiscal year 2008, due to significantly reduced restaurant sales. Payroll and related expenses included higher average wages paid to our crew employees and an increase in staffing among the management teams at the restaurants as well as higher training related costs. First quarter of prior year's payroll and related costs, as a percentage of restaurant sales, benefited by 1.2% from a reduction in workers' compensation expense.

Other Operating Expenses

Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, services, supplies and occupancy costs. Other operating expenses increased by approximately $0.8 million, or 4.9%, in the first quarter of fiscal year 2009 compared to the first quarter of fiscal year 2008. As a percentage of restaurant sales, these costs increased 3.1% to 25.1% in the first quarter of fiscal year 2009 compared to 22.0% in the first quarter of fiscal year 2008. Other operating expenses increased primarily due to Hurricane Ike related expenses.

Opening Costs

Opening costs include labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were approximately $153,000 in the first quarter of fiscal year 2009 compared to the first quarter of fiscal year 2008 and consisted of occupancy costs incurred during the period.

Cost of Culinary Contract Services

Cost of culinary contract services increased by approximately $1.1 million in the first quarter of fiscal year 2009 compared to the first quarter of fiscal year 2008. This increase was related to the food, labor and other operating expenses associated with the increase in revenue for this business activity.

Depreciation and Amortization

Depreciation and amortization expense increased by approximately $0.4 million, or 10.4%, in the first quarter of fiscal year 2009 compared to the first quarter of fiscal year 2008 due to the higher depreciable asset base generated by increased capital expenditures in fiscal year 2008, including the opening of three restaurants in fiscal year 2008 as well as upgrades and remodels to existing units.

General and Administrative Expenses

General and administrative expenses include corporate salaries and benefits-related costs, including restaurant area leaders, share-based compensation, professional fees, travel and recruiting expenses and other office expenses. General and administrative expenses increased by approximately $0.1 million, or 2.4%, in the first quarter of fiscal year 2009 compared to the first quarter of fiscal year 2008. As a percentage of total sales, general and administrative expenses increased to 8.9% in the first quarter of fiscal year 2009 compared to 8.1% in the first quarter of fiscal year 2008. The increase was primarily due to a $0.4 million increase in corporate salary expense related to staffing costs including severances partially offset by lower professional fees.

Asset Charges

The provision for asset impairments, net decreased by approximately $0.7 million in the first quarter of fiscal year 2009 compared with fiscal year 2008. There were no impairments taken in the first quarter of fiscal year 2009. However, in the first quarter of fiscal year 2008, there were write-downs of selected underperforming units to net realizable value based on an estimate of net sales proceeds, partially offset by a reversal of a previously recognized impairment related to one ground lease unit which will be reopened.

The net loss (gain) on disposition of property and equipment increased by approximately $0.5 million in the first quarter of fiscal year 2009 compared with the first quarter of fiscal year 2008. The loss in the first quarter of fiscal year 2008 included significant retirements of assets that were replaced due to increased remodel activity. The net gain in the first quarter of fiscal year 2009 is the net of normal asset retirement activity offset by the gain on the sale of a closed restaurant property.

Interest Income

Interest income decreased by approximately $0.2 million primarily related to lower cash and short term investment balances.

Interest Expense

Interest expense remained comparable to the prior quarter.

Interest Related to Income Taxes

The interest related to income taxes in the first quarter of fiscal year 2008 includes the reversal of previously recognized interest expense associated with the settled tax audit contingencies and the interest portion of an income tax refund.

Other Income, Net

Other income, net, consisted primarily of the following components: net rental property income and expenses relating to property for which we are the landlord; prepaid sales tax discounts earned through our participation in state tax prepayment programs; oil and gas royalty income; and de-recognition of gift certificate liability resulting from the expiration of state statutes of limitation on gift certificate amounts. Other income remained comparable to the prior quarter.

Taxes

The net income tax benefit for the first quarter of fiscal year 2009 primarily reflects the tax benefit recognized due to the pre-tax loss in the first quarter of fiscal year 2009 at an effective tax rate of 33.9%. The net income tax benefit for the first quarter of fiscal year 2008 included $2.8 million in nonrecurring net tax benefit partially offset by $1.3 million in income tax expense at an effective tax rate of 38.5%. The net income tax benefit of $2.8 million included a reversal of tax accruals for contingencies that did not materialize following the completion of tax audits and an income tax refund receivable, partially offset by the reversal of unrealized deferred tax assets related to stock options.

Discontinued Operations

The loss from discontinued operations remained comparable to the prior quarter.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalents

General. Our primary sources of short-term and long-term liquidity are cash flows from operations and our revolving credit facility.

Our cash requirements consist principally of:

• capital expenditures for new store development and construction, restaurant renovations and upgrades and information technology; and

• working capital.

A continued decline in our cash flow from operations could require us to utilize our credit facility. Under the current terms of our revolving credit facility, capital expenditures and the amount of borrowings are limited based on our trailing cash flows, as defined in the agreement. Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with other financing alternatives in place or available, will be sufficient to meet our capital expenditures and working capital requirements during the next twelve months.

As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories, and our vendors grant trade credit for purchases such as food and supplies. We also continually invest in our business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets.

Cash and cash equivalents decreased to $2.4 million from $4.6 million at the beginning of the fiscal year. This decrease is primarily due to a decrease in cash provided by operating activities. We generally reinvest available cash flows from operations to develop new restaurants or enhance existing restaurants.

The following table summarizes our cash flows from operating, investing and financing activities:

                                                        Quarter Ended
                                               November 19,       November 21,
                                                   2008               2007
                                                (84 days)          (84 days)
                                                       (In thousands)
      Total cash provided by (used in):
      Operating activities                    $        1,653     $        6,844
      Investing activities                            (3,866 )          (29,673 )
      Financing activities                                -              11,200

      Decrease in cash and cash equivalents   $       (2,213 )   $      (11,629 )

Operating Activities. In the first quarter of fiscal year 2009, operating cash flow decreased $5.2 million to $1.7 million compared to the first quarter of fiscal year 2008, primarily due to a decline in restaurant sales and increased restaurant expenses and general and administrative expenses.

Investing Activities. Cash flows used in investing activities were $3.9 million in the first quarter of fiscal year 2009 compared to $29.7 million in the first quarter of fiscal year 2008, primarily due to decreased purchases of property and equipment, which includes new restaurant construction in progress. Our capital expenditure program includes, among other things, investments in new locations, restaurant remodeling, and information technology enhancements. We used $5.5 million for purchases of property and equipment in the first quarter of fiscal year 2009 compared to $7.9 million in the first quarter of fiscal year 2008. We expect to spend approximately $12.0 million to $17.0 million on capital expenditures in fiscal year 2009.

Financing Activities. Cash provided by financing activities decreased $11.2 million to zero, compared to the first quarter of fiscal year 2008, due primarily to the nonrecurrance of proceeds from the exercise of stock options. Borrowings under the revolver during the first quarter of fiscal year 2009 were repaid prior to November 19, 2008.

Status of Long-Term Investments and Liquidity

At November 19, 2008, we held $8.85 million, par value ($8.03 million, net book value) in auction rate municipal bonds as long-term investments. These securities are long-term bonds with underlying maturities in years 2019 through 2042 but have historically had short-term features intended for the investor's liquidity. Prior to the collapse of the auction rate securities market in February 2008, these bonds were purchased or sold through a Dutch-auction process in short-term intervals of 7, 28 or 35 days, whereby the interest rate on the security is reset. The prevailing market auction failures resulted in the long-term investments classification and an other than temporary impairment loss of $0.82 million in fiscal year 2008. For additional information, see Note 5, "Investments" to our Consolidated Financial Statements included in Item 1 of Part I of this report.

Given our current cash position, expected future cash flow from operations and our available borrowing capacity under our revolving credit facility, we believe the current and near term illiquidity of the auction rate municipal bonds will not adversely affect management's ability to achieve its operating goals.

Status of Trade Accounts and Other Receivables, Net

We monitor our receivables aging and record provisions for uncollectability as appropriate. Credit terms of accounts receivable associated with our culinary contract service business vary from 30 to 60 days based on contract terms.

Working Capital

We had a working capital deficit of $20.8 million as of November 19, 2008, compared to a working capital deficit of $17.8 million as of August 27, 2008, primarily due to a $3.3 million increase in accounts payable and accrued expenses and other liabilities. We expect to meet our working capital requirements through cash flows from operations and availability under the 2007 Revolving Credit Facility.

Capital Expenditures

Capital expenditures consist of purchases of real estate for future restaurant sites, new units construction, purchases of new and replacement restaurant furniture and equipment, and ongoing remodeling programs. Capital expenditures for the first quarter of fiscal year 2009 were approximately $5.5 million, and related to maintaining our investment in existing operating units as well as constructing new units. We expect to be able to fund all capital expenditures in fiscal year 2009 using cash flows from operations and our available credit. We expect to spend approximately $12.0 million to $17.0 million on capital expenditures in fiscal year 2009.

DEBT

2007 Revolving Credit Facility

On July 13, 2007, we entered into a $50.0 million unsecured Revolving Credit Facility (the "2007 Revolving Credit Facility") with Wells Fargo Bank, National Association, as Administrative Agent, and Amegy Bank, National Association, as Syndication Agent. The 2007 Revolving Credit Facility may, subject to certain terms and conditions, be increased by an additional $50.0 million for a total facility size of $100.0 million. The 2007 Revolving Credit Facility allows for up to $15.0 million of the available credit to be extended in the form of letters of credit. All amounts owed by us under the 2007 Revolving Credit Facility are guaranteed by our subsidiaries and must be repaid in full upon the maturity date on June 30, 2012.

At any time throughout the term of the facility, we have the option to elect one of two bases of interest rates. One interest rate option is the greater of
(a) the Federal Funds Effective Rate plus 0.50%, or (b) prime, plus, in either case, an applicable spread that ranges from zero to 0.50% per annum. The other interest rate option is the London InterBank Offered Rate plus a spread that ranges from 0.75% to 2.00% per annum. The applicable spread under each option is dependent upon certain measures of our financial performance at the time of each election.

We pay a quarterly commitment fee based on the unused available balance of the 2007 Revolving Credit Facility, which is also dependent upon our financial performance, ranging from 0.20% to 0.30% per annum. We also pay quarterly fees with respect to any letters of credit issued and outstanding. In addition, we were obligated to pay the lenders a one-time fee in connection with the closing of the 2007 Revolving Credit Facility.

The 2007 Revolving Credit Facility contains customary covenants and restrictions on our ability to engage in certain activities, including financial performance covenants and limitations on capital expenditures, asset sales and acquisitions and contains customary events of default. As of November 19, 2008, we were in compliance with all covenants.

At November 19, 2008, we had a total of approximately $2.7 million committed under letters of credit, issued under the 2007 Revolving Credit Facility, which have been issued as security for the payment of insurance obligations classified as accrued expenses on the balance sheet. An additional $12.3 million may be issued under letters of credit.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Consolidated Financial Statements included in Item 1 of Part 1 of this report are prepared in conformity with U.S. generally accepted accounting principles. Preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the amounts of assets and liabilities in the financial statements and revenues and expenses during the reporting periods. Management believes the following are critical accounting policies due to the significant, subjective and complex judgments and estimates used when preparing our consolidated financial statements. Management regularly reviews these assumptions and estimates with the Finance and Audit Committee of our Board of Directors.

Income Taxes

We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes", as interpreted by FIN 48. We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carrybacks and carryforwards. We periodically review the recoverability of tax assets recorded on the balance sheet and provide valuation allowances as management deems necessary.

Management makes judgments regarding the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions as well as by the Internal Revenue Service. In management's opinion, adequate provisions for income taxes have been made for all years. We regularly assess the potential outcomes of examinations in determining the adequacy of our provision for income taxes and our income tax liabilities. We believe that we have adequately provided for any reasonable and foreseeable outcome related to uncertain tax matters.

Impairment of Long-Lived Assets

We periodically evaluate long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We estimate future cash flows expected to result from the use and possible disposition of the asset and will recognize an impairment loss when the sum of the undiscounted estimated future cash flows is less than the carrying amounts of such assets. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management's subjective judgments. The span of time for which future cash flows are estimated is often lengthy, which increases the sensitivity to assumptions made. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. We consider the likelihood of possible outcomes in determining the best estimate of future cash flows. The measurement for such an impairment loss is then based on the fair value of the asset as determined by either discounted cash flows or appraisals.

Investments

We invest in two types of securities, held-to-maturity and available-for-sale. Securities held-to-maturity are reported at amortized cost. Available-for-sale securities are reported at fair value. Fair value is a subjective estimate based on our judgment. Securities available-for-sale consist of auction rate securities. Declines in fair value of held to maturity and available-for-sale securities are analyzed to determine if the decline is temporary or "other than temporary". Temporary unrealized gains and losses on available-for-sale securities are excluded from earnings and reported in shareholders' equity. Other than temporary declines reduce earnings. Any increases in other than temporary declines in fair value will not be realized until the securities are sold.

Property Held for Sale

We also periodically review long-lived assets against our plans to retain or ultimately dispose of properties. Property is moved into property held for sale when the restaurant is closed. Property held for sale is actively marketed. Property held for sale is recorded at amounts not in excess of what management currently expects to receive upon sale, less costs of disposal. We routinely monitor the estimated value of property held for sale and record adjustments to these values as required. We periodically measure and analyze our estimates against third-party appraisals.

Insurance and Claims

We self-insure a significant portion of risks and associated liabilities under our employee injury, workers' compensation and general liability programs. We maintain insurance coverage with third party carriers to limit our per-occurrence claim exposure. We have recorded accrued liabilities for self-insurance based upon analysis of historical data and actuarial estimates, and we review these amounts on a quarterly basis to ensure that the liability is appropriate.

The significant assumptions made by the actuary to estimate self-insurance reserves, including incurred but not reported claims, are as follows:
(1) historical patterns of loss development will continue in the future as they have in the past (Loss Development Method), (2) historical trend patterns and loss cost levels will continue in the future as they have in the past (Bornhuetter-Ferguson Method), and (3) historical claim counts and exposures are used to calculate historical frequency rates and average claim costs are analyzed to get a projected severity (Frequency and Severity Method). The results of these methods are blended by the actuary to provide the reserves estimates. The third party actuary utilizes methods and assumptions that are in accordance with generally accepted actuarial practices and we believe the conclusions reached are reasonable.

Actual workers' compensation and employee injury claims expense may differ from estimated loss provisions. The ultimate level of claims under the in-house safety program are not known, and declines in incidence of claims as well as claims costs experiences or reductions in reserve requirements under the program may not continue in future periods.

Share-Based Compensation

We adopted the provisions of SFAS No. 123, "Share-Based Payments (Revised 2004)" (SFAS 123R), effective September 1, 2005. Among other things, SFAS 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement utilizing the fair values on the date of the grant.

INFLATION

Our policy is to maintain stable menu prices without regard to seasonal variations in food costs. General increases in cost of food, wages, supplies, transportation and services may require us to increase our menu prices from time to time. To the extent prevailing market conditions allow, we intend to adjust menu prices to maintain profit margins.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains statements that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this Form 10-Q, other than statements of historical facts, are "forward-looking statements" for purposes of these provisions, including any statements regarding:

• future operating results;

• future capital expenditures;

. . .