Overview

In the following discussion, the term "same-store sales" refers to the sales of only those Company-owned units open 18 months as of the beginning of the current fiscal quarter and which remained open through the end of the fiscal quarter.

Fiscal Third Quarter 2009 Results

Net earnings for the third quarter of fiscal year 2009 were $3,803, or $0.13 per diluted share, contrasted to a net loss of ($9,797), or ($0.35) per diluted share in the third quarter of fiscal year 2008. Last year's third quarter loss included $8,735, or $0.31 per diluted share, net of tax impairment charges related to underperforming restaurants. Quarterly same-store sales increased 5.0% due to an increase in guest traffic of 13.4%, offset by an 8.4% contraction in the average guest check. Net sales increased 1.6% from $143,303 to $145,648 in the current quarter.

Fiscal Year 2009 Results (Year-to-date)

Year-to-date net earnings through the third quarter of fiscal year 2009 were $2,616, or $0.09 per diluted share, contrasted to a net loss of ($13,794), or ($0.49) per diluted share for the same period a year ago. Last year's third quarter loss included $8,735, or $0.31 per diluted share, net of tax impairment charges related to underperforming restaurants. Year-to-date same-store sales increased 2.2%. Net sales decreased 0.8% from $468,071 to $464,342 in the current year because we operated 21 fewer Company-owned restaurants following the closure and refranchising of certain units during the second quarter of the previous year.

During the first three quarters of fiscal year 2009, we closed one Company-owned restaurant and refranchised seven Company-owned restaurants to franchisees, bringing the total number of Company-owned restaurants to 415. Franchisees also closed two restaurants, bringing the total number of franchised units to 73.

Management Direction

New management, during the fourth quarter of fiscal year 2008, enacted a change in strategic direction under which we began to operate in a manner designed to generate cash. Our long-term objective is to maximize intrinsic business value per share of the Company. (Intrinsic value is computed by taking all future cash flows into and out of the business and then discounting the resultant number at an appropriate interest rate.) Thus, our financial goal is to maximize free cash flow and return on invested capital. We regard capital allocation as immensely important to creating shareholder value. Steak n Shake is transforming into a holding company. Its basic premise is to reinvest cash generated from its operating subsidiaries into any investments with the objective of achieving high risk-adjusted returns. Pursuant to a resolution of the Company's Board of Directors on June 17, 2009, all investment and other capital allocation decisions are made for the Company by Sardar Biglari, Chairman and Chief Executive Officer.

Critical Accounting Estimates

Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosure of contingent assets and liabilities. Critical accounting policies are those we believe are most important to portraying our financial condition and results of operations and also require the most subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. On an ongoing

basis, we evaluate our estimates and assumptions based on historical experience and other factors that are believed to be relevant under the circumstances. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 24, 2008.

Results of Operations

  The following table sets forth the percentage relationship to total revenues,
unless otherwise indicated, of items included in our condensed consolidated
Statements of Operations for the periods indicated:

                                  Twelve Weeks Ended            Forty Weeks Ended
                                July 1,        July 2,        July 1,        July 2,
                                 2009            2008          2009           2008
Revenues:
Net sales                           99.5 %         99.3 %         99.4 %         99.3 %
Franchise fees                       0.5 %          0.7 %          0.6 %          0.7 %
Total revenues                     100.0 %        100.0 %        100.0 %        100.0 %

Costs and expenses:
Cost of sales (1)                   23.9 %         24.8 %         24.2 %         24.7 %
Restaurant operating costs
(1)                                 52.8 %         55.3 %         54.5 %         55.4 %
General and administrative           5.4 %          7.7 %          5.9 %          7.5 %
Depreciation and
amortization                         4.7 %          5.4 %          5.1 %          5.5 %
Marketing                            5.6 %          4.6 %          5.5 %          4.9 %
Interest                             2.3 %          2.3 %          2.4 %          2.3 %
Rent                                 2.4 %          2.3 %          2.5 %          2.4 %
Pre-opening costs                    0.0 %          0.1 %          0.0 %          0.3 %
Asset impairments and
provision for restaurant
closing                              0.0 %          9.8 %          0.2 %          3.0 %
Gain on disposal of property        (0.1 )%        (0.3 )%        (0.0 )%        (0.1 )%
Other income, net                   (0.4 )%        (0.2 )%        (0.2 )%        (0.3 )%

Earnings (loss) before
income taxes                         3.7 %        (11.2 )%         0.4 %         (5.0 )%

Income taxes                         1.1 %         (4.4 )%        (0.1 )%        (2.1 )%

Net earnings (loss)                  2.6 %         (6.8 )%         0.6 %         (2.9 )%

(1) Cost of sales and restaurant operating costs are expressed as a percentage of net sales.

Comparison of Twelve Weeks Ended July 1, 2009 to Twelve Weeks Ended July 2, 2008

Net earnings (loss)
We recorded net earnings of $3,803, or $0.13 per diluted share, for the current quarter as compared with a net loss of ($9,797) or ($0.35) per diluted share for the third quarter of fiscal year 2008. Last year's third quarter loss included $8,735, or $0.31 per diluted share, net of tax impairment charges related to underperforming restaurants.

Revenues
Net sales increased 1.6% from $143,303 to $145,648 in the current quarter compared to the third quarter of fiscal year 2008. We operated 21 fewer Company-owned restaurants in the current quarter following the closure and refranchising of

certain units since the same period of the prior year. However, third quarter same-store sales increased 5.0% compared with the same quarter in the prior year, which more than offset the decrease in sales resulting from the closure and refranchising of units. The increase in same-store sales was driven by an increase in guest traffic of 13.4%, partially offset by an 8.4% contraction in average guest check.

Franchise fees decreased slightly in the current fiscal quarter due to a decrease in franchisee same store-sales of 2.1%, resulting in lower royalty fees accrued. The decrease in franchise fees was partially offset by the growth in the number of franchised units from 69 at the end of the third quarter of fiscal year 2008 to 73 at the end of the current quarter.

Costs and expenses
Cost of sales was $34,814 or 23.9% of net sales, compared with $35,527 or 24.8% of net sales in the third quarter of fiscal year 2008 primarily due to favorable shifts in the sales mix.

Restaurant operating costs were $76,880 or 52.8% of net sales, compared with $79,241 or 55.3% of net sales in the third quarter of fiscal year 2008. Labor and benefit costs declined by $1,760 due primarily to improvements in productivity and wage and benefit management.

As part of our focus to reduce our cost structure, general and administrative expenses decreased $3,170 (28.7%) to $7,886 and decreased as a percentage of total revenues from 7.7% to 5.4%. Wages, payroll taxes, and related benefits declined by approximately $920 due to reductions in staffing that occurred during the third and fourth quarters of fiscal year 2008. Legal and professional fees, travel, and outside services declined $700.

Marketing expense increased $1,564 (23.5%) to $8,230 and increased as a percentage of total revenues from 4.6% to 5.6%.

Interest expense in the third quarter of fiscal year 2009 included a $536 prepayment penalty paid to The Prudential Insurance Company of America as a part of the repayment and termination of the Company's Senior Note Agreement and Private Shelf Facility. Interest expense related to obligations under leases decreased $189.

Rent expense increased $198 primarily due to sale-leaseback transactions entered into during the second half of fiscal year 2008.

Asset impairments and provision for restaurant closing decreased to $63 in the current quarter compared to $14,089, or 9.8% of total revenue in the third quarter of fiscal year 2008. The decrease was due to prior year impairment charges including $8,794 related to 18 restaurants with low operating performances, $4,818 related to 12 stores that were planned to and did close in fourth quarter of fiscal year 2008, and $477 related to three stores involved in sale-leaseback transactions.

Income taxes
Our effective income tax rate decreased from 39.4% to 28.9% for the same period in the prior year primarily due to the change from a pre-tax loss to pre-tax earnings. Federal income tax credits will decrease the effective income tax rate in conjunction with pre-tax earnings while increasing the effective income tax rate in conjunction with a pre-tax loss.

Comparison of Forty Weeks Ended July 1, 2009 to Forty Weeks Ended July 2, 2008

Net earnings (loss)
We recorded net earnings of $2,616, or $0.09 per diluted share, for the current year-to-date period as compared with a net loss of ($13,794) or ($0.49) per diluted share for the same period of fiscal year 2008. Last year's third quarter loss included $8,735, or $0.31 per diluted share, net of tax impairment charges related to underperforming restaurants.

Revenues
Net sales decreased 0.8% from $468,071 to $464,342 in the current year-to-date period because we operated 21 fewer Company-owned restaurants following the closure and refranchising of certain units during the second quarter of the previous year. This decrease was offset by year-to-date same-store sales increase of 2.2% compared with the same period of fiscal year 2008. The increase in same-store sales was driven by an increase in guest traffic of 7.1%, partially offset by a 4.9% contraction in average guest check.

Franchise fees decreased $392 (12.6%) to $2,713 in the current year-to-date period. This is due to a decrease in franchisee same store sales of 1.5%, which resulted in lower royalty fees accrued. The decrease in franchise fees was partially offset by the growth in the number of franchised units from 69 at the end of the third quarter of fiscal year 2008 to 73 at the end of the current quarter.

Costs and expenses
Year-to-date cost of sales was $112,456 or 24.2% of net sales, compared with $115,658 or 24.7% of net sales in the same period of fiscal year 2008 primarily due to favorable shifts in the sales mix.

Year-to-date restaurant operating costs were $253,088 or 54.5% of net sales, compared with $259,090 or 55.4% of net sales in the same period of fiscal year 2008. Labor and benefit costs declined by $4,740 due primarily to improvements in productivity and wage and benefit management.

As part of our plan to reduce our cost structure, general and administrative expenses decreased $8,216 (23.1%) to $27,330 and decreased as a percentage of total revenues from 7.5% to 5.9%. Wages, payroll taxes, and related benefits declined by approximately $3,880 due to reductions in staffing that occurred during the third and fourth quarters of fiscal year 2008. Legal and professional fees, travel, and outside services declined $2,300.

Marketing expense increased $2,603 (11.3%) to $25,646 and increased as a percentage of total revenues from 4.9% to 5.5%.

Year-to-date interest expense included a $536 prepayment penalty paid to The Prudential Insurance Company of America as a part of the repayment and termination of the Company's Senior Note Agreement and Private Shelf Facility during the third quarter of fiscal year 2009. A prepayment penalty of $506 was also paid during the first quarter of fiscal year 2009. Interest expense related to obligations under leases decreased $469.

Rent expense increased slightly as a percentage of total revenues primarily due to sale-leaseback transactions entered into during the second half of fiscal year 2008.

Year-to-date pre-opening costs recorded during fiscal year 2008 reflect the opening of nine new units. We did not open any new units in the current year-to-date period.

Asset impairments and provision for restaurant closing was $980, or 0.2% of total revenues in the current year-to-date period, which related primarily to the loss on disposal of held for sale assets and adjustments to the carrying value of held for sale properties we continue to own. For the third quarter of fiscal year 2008, we incurred asset impairment charges of $14,089, or 3.0% of total revenues. The decrease period over period was due to prior year impairment charges including $8,794 related to 18 restaurants with low operating performances, $4,818 related to 12 stores that were planned to and did close in fourth quarter of fiscal year 2008, and $477 related to three stores involved in sale-leaseback transactions.

Income taxes
Our effective income tax rate for the current year-to-date period is (32.7%). The effective income tax rate for the same year-to-date period in the prior year was 41.8%. The negative effective income tax rate for the current year-to-date period is primarily due to our total income tax credits exceeding the amount of total income tax expense calculated before considering these

income tax credits. This results in recording a current year-to-date income tax benefit which, when divided by pre-tax income, results in a negative effective income tax rate percentage. The amount of our income tax credits remains relatively constant regardless of the amount of pre-tax income or loss. Our two most significant income tax credits are the Work Opportunity Tax Credit and the Employer's FICA Tip Credit.

Liquidity and Capital Resources

We generated $41,115 in cash flows from operations during the forty weeks ended July 1, 2009 as compared to $23,571 during the forty weeks ended July 2, 2008. The increase resulted primarily from $13,157 related to income tax refunds, net of the year-to-date tax provision.

Net cash provided by investing activities of $6,132 during the forty weeks ended July 1, 2009 resulted primarily from proceeds of $9,277 related to the sale of five parcels of land, two restaurant properties, and the transfer of two Company-owned buildings to a franchisee. We closed one Company-owned restaurant and refranchised seven Company-owned restaurants to a franchisee during the current year-to-date period.

Net cash used in investing activities of $16,981 during the forty weeks ended July 2, 2008 resulted primarily from capital expenditures of $28,512. During that year-to-date period, we opened nine new Company-owned restaurants and refranchised eight Company-owned restaurants to franchisees. We received proceeds of $11,531 from the sale of eight parcels of land and from the transfer of three Company-owned buildings and various equipment to franchisees during the same period of fiscal year 2008.

Capital expenditures for the remainder of fiscal year 2009 will be limited principally to maintenance capital expenditures. We intend to meet our working capital needs and fund capital expenditures by using existing cash, anticipated cash flows from operations, net operating loss carryback tax refunds, existing credit facilities, and the sale of excess properties. We continually review available financing alternatives. In addition, we may consider, on an opportunistic basis, strategic decisions to create value and improve operating performance.

Senior Note Agreement
As of September 24, 2008 we had outstanding borrowings under the Senior Note Agreement and Private Shelf Facility (the "Senior Note Agreement") totaling $16,429.

During the first quarter of fiscal year 2009, we made a principal prepayment of $4,471 on the Senior Note Agreement. As a result of this prepayment, we incurred a $506 prepayment penalty which is included in interest expense in the condensed consolidated Statement of Operations.

During the third quarter of fiscal year 2009, we made a principal prepayment of $11,958 on the Senior Note Agreement. As a result of this prepayment, we incurred a $536 prepayment penalty which is included in interest expense in the condensed consolidated Statement of Operations. As of July 1, 2009 we have satisfied in full all outstanding borrowings under the Senior Note Agreement.

Revolving Credit Facility
Effective June 19, 2009, the capacity to borrow under our Revolving Credit Facility ("Facility") was adjusted from $25,000 to $20,000. In accordance with the November 21, 2008 amendment, our capacity to borrow under the Facility would be reduced by a like amount of any principal prepayment under the Senior Note Agreement, but not to be reduced below $20,000. Interest is based on the One Month LIBOR plus 350 basis points and the Facility expires January 30, 2010. We intend to either renew the Facility or negotiate a new facility prior to its maturity. At July 1, 2009, outstanding borrowings under the Facility were $13,680 at an interest rate of 3.8%.

Our Facility contains restrictions and covenants customary for credit agreements of this type which, among other things, require us to maintain certain financial ratios. The amendments executed on November 21, 2008 include revised financial covenants. These covenants include, among others, requirements to limit the ratio of total liabilities to tangible net worth (as defined in the amendments) to a maximum of 1.10 and to maintain a minimum fixed charge coverage ratio (as defined in the amendments) of 1.20. On July 1, 2009, our ratio of total liabilities to tangible net worth was 0.82 and our fixed charge coverage ratio was 2.23. We were in compliance with all covenants under the amended agreement as of July 1, 2009.

The Facility is secured with the deposit accounts, accounts receivable, inventory, equipment, general intangibles, fixtures, and all other personal property.

We also have one note in the amount of $73 outstanding as of July 1, 2009.

New Accounting Standards

See Note 3 to the Condensed Consolidated Financial Statements (Unaudited) on page 6 of this report.

Effects of Governmental Regulations and Inflation

Most of our employees are paid hourly rates related to federal and state minimum wage laws. Any increase in the legal minimum wage would directly increase our operating costs, and the federal minimum wage increased on July 24, 2009. We are also subject to various federal, state and local laws related to zoning, land use, safety standards, working conditions, and accessibility standards. Any changes in these laws that require improvements to our restaurants would increase operating costs. In addition, we are subject to franchise registration requirements and certain related federal and state laws regarding franchise operations. Any changes in these laws could affect our ability to attract and retain franchisees.

Inflation in food, labor, fringe benefits, energy costs, transportation costs, and other operating costs directly affects our operations.

Risks Associated with Forward-Looking Statements

Certain statements contained in this report represent forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In general, forward-looking statements include estimates of future revenues, cash flows, capital expenditures or other financial items, as well as assumptions underlying any of the foregoing. Forward-looking statements reflect management's current expectations regarding future events and use words such as "anticipate," "believe," "expect," "may" and other similar terminology. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. These forward-looking statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties.
Our actual future results and trends may differ materially depending on a variety of factors, many beyond our control, including, but not limited to:

· the success of our plan to increase store traffic on a profitable basis;
· competition in the restaurant industry for guests, staff, locations, and new products;

· disruptions in the overall economy and the financial markets;
· our ability to comply with the restrictions and covenants to our debt agreements;

· declines in the market price of our common stock;
· the potential to recognize additional impairment charges on our long-lived assets;

· fluctuations in food commodity and energy prices and the availability of food commodities;
· the ability of our franchisees to operate profitable restaurants;

· the poor performance or closing of even a small number of restaurants;
· changes in guest preferences, tastes, and dietary habits;

· changes in minimum wage rates and the availability and cost of qualified personnel;
· harsh weather conditions or losses due to casualties;

· unfavorable publicity relating to food safety or food-borne illness;
· exposure to liabilities related to the ownership and leasing of significant amounts of real estate;

· our ability to comply with existing and future governmental regulations;
· our ability to adequately protect our trademarks, service marks, and other components of our brand; and

· other risks identified in the periodic reports we file with the Securities and Exchange Commission.

Refer to our Annual Report on Form 10-K for the fiscal year ended September 24, 2008 for a detailed discussion of each of the risks identified above. In addition, refer to Part II, Item 1A, "Risk Factors" on page 23 of this report.

Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and may not be realized. Additional risks and uncertainties not currently known to us or that are currently deemed immaterial may also become important factors that may harm our business, financial condition, results of operations or cash flows. We assume no obligation to update forward-looking statements except as required in our periodic reports.