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 May 6, 2009 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 May 6, 2009, we operated 121 restaurants, of which 119 are traditional cafeterias and two primarily serve seafood. These establishments are located in close proximity to retail centers, business developments and residential areas in four states. Of the 121 restaurants, 89 are located on property that we own and 32 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 three quarters ended May 6, 2009, we incurred direct costs of $1.3 million for damages, auxiliary power, food loss and other miscellaneous costs. We continue to seek to recover a portion of lost profits, property damages, and some expenses incurred through insurance claims.

In March 2009, we received insurance proceeds of approximately $0.6 million related to a hurricane property damage claim. These proceeds were recognized in income in the third quarter.

RESULTS OF OPERATIONS

For the Third Quarter and Year-to-Date Fiscal Year 2009 versus the Third Quarter and Year-to-Date Fiscal Year 2008

Sales

Total sales decreased approximately $5.6 million, or 7.5%, in the quarter ended May 6, 2009, compared to the quarter ended May 7, 2008, consisting of a $6.7 million decrease in restaurant sales and a $1.1 million increase in culinary contract services revenue due to increases in the number of facilities operated. The $6.7 million decline in restaurant sales included a $1.5 million reduction in sales related to closed operations partially offset by new restaurant sales. On a same-store basis, sales decreased approximately $6.3 million, or 8.9%, due primarily to declines in guest traffic partially offset by higher menu prices. Adjusting for the favorable impact of the timing of Lent in the quarter ended May 6, 2009, we estimate same store sales were down 9.4%. One restaurant was opened during the quarter ended May 6, 2009. One restaurant was opened during the quarter ended May 7, 2008.

Total sales decreased approximately $12.0 million, or 5.4%, in the three quarters ended May 6, 2009, compared to the three quarters ended May 7, 2008, consisting of a $15.7 million decrease in restaurant sales and a $3.8 million increase in culinary contract services revenue due to increases in the number of facilities operated. The $15.7 million decline in restaurant sales included a $6.9 million reduction in sales related to closed operations partially offset by new restaurant sales. On a same-store basis, sales decreased approximately $13.0 million, or 6.3%, due primarily to declines in guest traffic partially offset by higher menu prices. Excluding the lost sales from Hurricane Ike, we estimate same-store sales were down 6.1%. Sales from stores open fewer than 18 periods, and therefore not included in our same-store sales measure, contributed $4.2 million more to restaurant sales for the three quarters ended May 6, 2009 than the three quarters ended May 7, 2008. We closed three restaurants during the three quarters ended May 6, 2009 and six restaurants during the three quarters ended May 7, 2008. We opened one restaurant during the three quarters ended May 6, 2009 and one restaurant during the three quarters ended May 7, 2008.

Cost of Food

Food costs decreased approximately $1.9 million, or 9.7%, in the quarter ended May 6, 2009 compared to the quarter ended May 7, 2008 due to lower sales volumes and lower commodity costs. As a percentage of restaurant sales, food costs decreased 0.1%, to 27.3%, in the quarter ended May 6, 2009 compared to 27.4% in the quarter ended May 7, 2008, primarily due to lower commodity prices and higher average menu prices.

Food costs decreased approximately $4.4 million, or 7.4%, in the three quarters ended May 6, 2009 compared to the three quarters ended May 7, 2008, due to lower sales volumes and lower commodity costs. As a percentage of restaurant sales, food costs decreased 0.1%, to 27.6% in the three quarters ended May 6, 2009 compared to 27.7% in the three quarters ended May 7, 2008, primarily due to lower commodity prices and higher average menu prices.

Payroll and Related Costs

Payroll and related costs decreased approximately $1.2 million in the quarter ended May 6, 2009 compared to the quarter ended May 7, 2008. Payroll and related expenses decreased primarily due to lower crew overtime and lower management costs offset by higher average wages paid to our crew employees. As a percentage of restaurant sales, these costs increased 1.7%, to 36.5%, in the quarter ended May 6, 2009 compared to 34.8% in the quarter ended May 7, 2008, due to reduced restaurant sales.

Payroll and related costs decreased approximately $1.5 million in the three quarters ended May 6, 2009 compared to the three quarters ended May 7, 2008, due primarily to lower use of crew overtime and lower management costs offset by higher average wages paid to our crew employees and higher workers' compensation expense. As a percentage of restaurant sales, payroll and related costs increased 1.9%, to 36.4%, in the three quarters ended May 6, 2009 compared to 34.5% in the three quarters ended May 7, 2008, primarily due to reduced restaurant sales. The change in the workers' compensation expense, as a percentage of restaurant sales, increased payroll and related costs by approximately 0.4% in the three quarters ended May 6, 2009 compared to the three quarters ended May 7, 2008.

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 decreased by approximately $2.2 million, or 12.8%, in the quarter ended May 6, 2009 compared to the quarter ended May 7, 2008. Other operating expenses decreased primarily due to 1) an approximate $0.7 million reduction in repairs and maintenance expense related to improvements in cost controls, 2) an approximate $0.8 million net decrease in restaurant supplies, services and other operating expenses on reduced restaurant sales, and 3) an approximate $0.7 million reduction in utility expense. As a percentage of restaurant sales, other operating expenses decreased 0.9%, to 22.6%, in the quarter ended May 6, 2009 compared to 23.5% in the quarter ended May 7, 2008.

Other operating expenses decreased by approximately $2.7 million, or 5.6%, in the three quarters ended May 6, 2009 compared to the three quarters ended May 7, 2008. Other operating expenses decreased primarily due to 1) an approximate $1.9 million reduction in repairs and maintenance expense related to cost control and preventative maintenance efforts, 2) an approximate $1.1 million reduction in supplies and services expense on reduced restaurant sales and reduced need for replacing restaurant supplies and 3) an approximate $0.8 million reduction in utility expense. The decrease in other operating expenses was partially offset by $1.3 million in Hurricane Ike-related expenses recognized in the three quarters ended May 6, 2009. As a percentage of restaurant sales, other operating expenses increased 0.4%, to 22.9%, in the three quarters ended May 6, 2009 compared to 22.5% in the three quarters ended May 7, 2008 due to lower sales revenue.

Opening Costs

Opening costs include labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were approximately $0.3 million in the quarter ended May 6, 2009 compared to approximately $0.2 million in the quarter ended May 7, 2008. The quarter ended May 6, 2009 included the costs incurred in preparation for a new restaurant opening in addition to the carrying costs of locations which are to be developed for future restaurant openings.

Opening costs were approximately $0.8 million in the three quarters ended May 6, 2009 compared to approximately $0.2 million in the three quarters ended May 7, 2008. Opening costs in the three quarters ended May 6, 2009 included the costs incurred in preparation for a new restaurant opening in addition to the carrying costs of locations which are to be developed for future restaurant openings.

Cost of Culinary Contract Services

Cost of culinary contract services increased by approximately $1.3 million in the quarter ended May 6, 2009 compared to the quarter ended May 7, 2008. Cost of culinary contract services includes the food, labor, and other direct operating expenses associated with culinary contract services. Substantially all of these costs are reimbursable costs incurred within the contract terms. During the quarter ended May 6, 2009, culinary services operated thirteen facilities compared to nine for the quarter ended May 7, 2008.

Cost of culinary contract services increased by approximately $3.5 million in the three quarters ended May 6, 2009 compared to the three quarters ended May 7, 2008. Cost of culinary contract services includes the food, labor, and other direct operating expenses associated with culinary contract services. Substantially all of these costs are reimbursable costs incurred within the contract terms. During the three quarters ended May 6, 2009, culinary services increased the number of operated facilities compared to the three quarters ended May 7, 2008. The increase was due to culinary contract services operating thirteen facilities as of May 6, 2009, compared to operating nine facilities as of May 7, 2008.

Depreciation and Amortization

Depreciation and amortization expense increased by approximately $0.3 million, or 6.4%, in the quarter ended May 6, 2009 compared to the quarter ended May 7, 2008 due to the higher depreciable asset base generated by increased capital expenditures in fiscal year 2008, including the opening of three restaurants and relocation of one unit in fiscal year 2008 as well as upgrades and remodels to existing units.

Depreciation and amortization expense increased by approximately $1.0 million, or 8.2%, in the three quarters ended May 6, 2009 compared to the three quarters ended May 7, 2008 due to the higher depreciable asset base generated by increased capital expenditures in fiscal year 2008, including the opening of three restaurants and relocation of one unit 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 $0.2 million, or 4.3%, in the quarter ended May 6, 2009 compared to the quarter ended May 7, 2008. The increase was due to approximately $0.3 million in professional fees primarily related to the defense of pending claims and $0.1 million in severance payments partially offset by reductions in travel expenses of $0.1 million and other smaller reductions in labor and supplies. As a percentage of total sales, general and administrative expenses increased to 8.6% in the quarter ended May 6, 2009 compared to 7.7% in the quarter ended May 7, 2008.

General and administrative expenses decreased by approximately $0.9 million, or 4.7%, in the three quarters ended May 6, 2009 compared to the three quarters ended May 7, 2008. The decrease was mainly due to a reduction of approximately $0.9 million in professional service fees primarily related to costs in the solicitation of proxies in connection with our 2008 annual meeting of shareholders, for the three quarters ended May 7, 2008, which were partially offset by costs incurred during the three quarters ended May 6, 2009 defending pending claims. As a percentage of total sales, general and administrative expenses increased to 8.5% in the three quarters ended May 6, 2009 compared to 8.4% in the three quarters ended May 7, 2008.

Provision for Asset Impairments, net

There were no impairments to restaurant assets during the quarter ended May 6, 2009 or May 7, 2008.

The provision for asset impairments, net decreased by approximately $0.5 million in the three quarters ended May 6, 2009 compared to the three quarters ended May 7, 2008. The decrease is primarily related to impairment charges on properties held for sale recognized in the three quarters ended May 6, 2009 amounting to less than the impairment charges related to the closing of underperforming units recognized in the three quarters ended May 7, 2008.

Net (Gain) Loss on Disposition of Property and Equipment

The net gain on disposition of property and equipment was a gain of approximately $0.4 million in the quarter ended May 6, 2009. The net gain reflects insurance proceeds of approximately $0.6 million related to property damage associated with Hurricane Ike, which were received in March 2009 and recognized in the quarter ended May 6, 2009. The insurance proceeds were partially offset by normal asset retirement activity. The net loss (gain) on disposition of property and equipment was a net loss primarily due to asset retirement activity associated with restaurant remodels partially offset by the sale of one restaurant unit recognized during the quarter ended May 7, 2008.

The net gain on disposition of property and equipment was a net gain of approximately $0.5 million in the three quarters ended May 6, 2009. The net gain in the three quarters ended May 6, 2009 reflects the gain on the sale of one closed restaurant property, partially offset by normal asset retirement activity. The net loss (gain) on disposition of property and equipment was a net loss of approximately $0.2 million in the three quarters ended May 7, 2008. The net loss in the first three quarters ended May 7, 2008 reflects the disposal of property and equipment due in part to increased remodel activity, partially offset by the gain on the sale of one closed restaurant property.

Interest Income

Interest income decreased by approximately $0.2 million in the quarter ended May 6, 2009 compared to the quarter ended May 7, 2008, primarily related to lower cash and cash equivalents and lower interest rates.

Interest income decreased by approximately $0.7 million in the three quarters ended May 6, 2009 compared to the three quarters ended May 7, 2008, primarily related to lower cash and cash equivalents and lower interest rates.

Interest Expense

Interest expense in the quarter and three quarters ended May 6, 2009 increased slightly compared to the interest expense in the quarter and three quarters ended May 7, 2008 due to borrowing under our revolving credit facility in the three quarters ended May 6, 2009.

Impairment of Fair Market Value of Investment

The provision for impairment charges for decreased fair value of investments increased by approximately $0.7 million during the quarter ended May 6, 2009 compared to the quarter ended May 7, 2008. This impairment charge was recorded in the quarter ended May 6, 2009 due to the continued illiquidity of the auction rate securities markets. The reduction in fair value of the investments was derived through valuation and is considered "other-than-temporary." See "Liquidity and Capital Resources - Status of Long-Term Investments and Liquidity" below for additional information regarding these investments.

Interest Related to Income Taxes

The interest related to income taxes in the three quarters ended May 7, 2008 included 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 in the quarter ended May 6, 2009 decreased slightly compared to the quarter ended May 7, 2008.

Other income, net in the three quarters ended May 6, 2009 increased slightly compared to the three quarters ended May 7, 2008.

Taxes

The income tax benefit for the quarter ended May 6, 2009 increased $0.6 million compared to the quarter ended May 7, 2008.

The income tax benefit for the three quarters ended May 6, 2009 primarily reflects the tax benefit recognized due to the net pre-tax loss from continuing operations at an effective tax rate of 34.3%.

The income tax benefit recorded for the three quarters ended May 7, 2008 reflects an effective tax rate of 29.8% of the results of continuing operations. The net tax benefit for the period included a $2.8 million nonrecurring tax benefit partially offset by $1.3 million in income tax expense. The 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 in the three quarters ended May 6, 2009 to the three quarters ended May 7, 2008.

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. The current macro economic conditions have adversely affected our cash flows from operations. In this environment, we have taken steps to improve customer traffic and increase restaurant sales as well as reduce controllable costs. We have also reduced our discretionary capital expenditures, but will continue the level of capital and repair and maintenance expenditures necessary to keep our restaurants attractive and operating efficiently. In March 2009, we amended our revolving credit facility with our original two banking partners and believe the amended revolving credit facility will provide the needed capital resources to operate.

Our cash requirements consist principally of:

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

• working capital primarily for Company owned restaurants and culinary contract service agreements.

The continued decline in our cash flow from operations required us to utilize our credit facility; as of May 6, 2009, $2.0 million was outstanding. Under the current terms of our amended revolving credit facility, capital expenditures and the amount of borrowings are limited based on our EBITDA, as defined in the agreement. Based upon our level of past and projected capital requirements, 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. However, high levels of accounts receivable are typical for culinary contract services. 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:

                                                          Three Quarters Ended
                                                        May 6,           May 7,
                                                         2009             2008
                                                      (36 weeks)       (36 weeks)
                                                             (In thousands)
   Total cash provided by (used in):
   Operating activities                               $     3,395     $     16,793
   Investing activities                                    (7,566 )        (29,047 )
   Financing activities                                     2,000            6,468

   Increase (decrease) in cash and cash equivalents   $    (2,171 )   $     (5,786 )

Operating Activities. In the three quarters ended May 6, 2009, operating cash flow decreased $13.4 million compared to the three quarters ended May 7, 2008, primarily due to a decline in restaurant sales and increased restaurant expenses and culinary contract services expenses.

Investing Activities. Cash flows used in investing activities were $7.6 million in the three quarters ended May 6, 2009 compared to $29.0 million in the three quarters ended May 7, 2008, primarily due to decreased purchases of short-term investments and 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 $10.3 million for purchases of property and equipment in the three quarters ended May 6, 2009 compared to $25.4 million in the three quarters ended May 7, 2008. We expect to spend approximately $11.0 million to $13.0 million on capital expenditures in fiscal year 2009.

Financing Activities. Cash provided by financing activities decreased $4.5 million, to $2.0 million, compared to the three quarters ended May 7, 2008, due primarily to the non-recurrence of proceeds from the exercise of stock options, net of treasury stock purchases. Net borrowings under our revolving credit facility during the three quarters ended May 6, 2009 were $2.0 million.

Status of Long-Term Investments and Liquidity

At May 6, 2009, we held $8.8 million, par value ($7.2 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 $0.8 million in fiscal year 2008 and $0.8 million in the three quarters ended May 6, 2009. 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 $13.0 million as of May 6, 2009, compared to a working capital deficit of $17.8 million as of August 27, 2008, primarily due to a $2.2 million decrease in cash. We expect to meet our working capital requirements through cash flows from operations and availability under our Amended 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 three quarters ended May 6, 2009 were approximately $10.3 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 $11.0 million to $13.0 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 . . .