Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and footnotes for the period ended May 9, 2012 included in Item 1 of Part I of this Quarterly Report on Form 10-Q, and the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2011.

The following presents an analysis of the results and financial condition of our continuing operations. Except where indicated otherwise, the results of discontinued operations are excluded from this discussion.

Overview

Luby's, Inc. is a multi-branded company operating in the restaurant industry and the contract food services industry. Our primary brands include Luby's Cafeterias, Luby's Culinary Contract Services and Fuddruckers. Also included in our brands are Bob Luby's Seafood, Luby's, Etc. and Koo Koo Roo Chicken Bistro. We purchased substantially all of the assets of Fuddruckers, Inc., Magic Brands, LLC and certain of their affiliates (collectively, "Fuddruckers") in July 2010; accordingly, the quarter ended November 17, 2010 was the first full fiscal quarter in which the operations of Fuddruckers branded restaurants were included in our results of operations.

As of May 9, 2012, we owned and operated 154 restaurants, including 92 traditional cafeterias, 58 gourmet hamburger restaurants, 3 upscale fast serve chicken restaurants, and 1 seafood restaurant. These establishments are located in close proximity to retail centers, business developments and residential areas mostly throughout the United States.

Also as of May 9, 2012, we operated 18 culinary contract service facilities. These facilities are located within healthcare and education settings in Texas and Louisiana. These facilities provide food service options to varied populations including in-hospital-room patient meal service, retail food-court style restaurant dining, and coffee/snack kiosks.

Also as of May 9, 2012, we are a franchisor for a network of 124 Fuddruckers restaurants. The owners of these franchise units pay royalty revenue to us as a franchisor.

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. Our Fuddruckers units were included in this measurement beginning with our fiscal third quarter of 2012. 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.

RESULTS OF OPERATIONS

For the Third Quarter and Year-to-Date Fiscal Year 2012 versus the Third Quarter and Year-to-Date Fiscal Year 2011

Total sales increased $0.7 million, or 0.9 %, in the quarter ended May 9, 2012 compared to the quarter ended May 4, 2011, primarily due to an increase in culinary contract sales. The $0.1 million decrease in restaurant sales included a $1.2 million decrease in sales at our Luby's Cafeteria restaurants offset by a $1.1 million increase in sales from our Fuddruckers restaurants in the quarter ended May 9, 2012. The $0.8 million increase in culinary contract services sales resulted primarily from larger sales volume facilities replacing smaller facilities where contracts ended as well as growth in sales volume at facilities that have been in operation for more than one year. On a same store basis, restaurant sales increased 1.1% in the quarter ended May 9, 2012 compared to the quarter ended May 4, 2011. Luby's Cafeterias included in the same-store metric increased 0.1% and Fuddruckers restaurants included in the same-store metric increased 4.6%. The fiscal quarter ended May 9, 2012 was the first fiscal quarter in which the Fuddruckers and Koo Koo Roo restaurants were included in our same store sales calculation.

Total sales increased approximately $7.7 million, or 3.3%, in the three quarters ended May 9, 2012 compared to the three quarters ended May 4, 2011, consisting of a $4.4 million increase in restaurant sales, a $0.2 million increase in Fuddruckers franchise revenue, and a $3.1 million increase in culinary contract services sales. The $4.4 million increase in restaurant sales included a $0.6 million increase in sales at our Luby's Cafeteria restaurants and a $3.8 million increase in sales from our Fuddruckers and Koo Koo Roo restaurants in the three quarters ended May 9, 2012. On a same-store basis, restaurant sales increased 2.1% during the three quarters ended May 9, 2012 compared to the three quarters ended May 4, 2011. The Luby's Cafeteria-branded restaurants were included in the same store sales definition for each of the three quarters ended May 9, 2012, but the Fuddruckers restaurants only met the definition in the quarter ended May 9, 2012. The improved same-store sales was primarily due to improving economic conditions, our focus on various marketing media avenues, complemented with continued momentum with local restaurant marketing efforts, as well as customer acceptance of our remodeling initiatives at select restaurants and a rebuild at one location.

Cost of Food

Food costs decreased $0.6 million, or 2.9%, in the quarter ended May 9, 2012 compared to the quarter ended May 4, 2011, due primarily to careful food cost management, menu mix management, and moderating food commodity prices, particularly in the area of beef and seafood. As a percentage of restaurant sales, food costs decreased 0.8%, to 27.4%, in the quarter ended May 9, 2012 compared to 28.2% in the quarter ended May 4, 2011. Food costs as a percentage of sales also decreased due to a higher average spend per customer as a result of modest menu price increases taken at both of our core restaurant brands prior to the quarter ended May 9, 2012 and a reduction in the frequency and breadth of discounted limited time offers at our Luby's Cafeteria restaurants used to generate customer traffic.

Food costs decreased approximately $1.6 million, or 2.5%, in the three quarters ended May 9, 2012 compared to the three quarters ended May 4, 2011. As a percentage of restaurant sales, food costs decreased 1.3%, to 27.9% in the three quarters ended May 9, 2012 compared to 29.2% in the three quarters ended May 4, 2011, primarily due to a higher average spend per customer as a result of modest menu price increases taken at both of our core restaurant brands prior to the quarter ended May 9, 2012 and a reduction in the frequency and breadth of discounted limited time offers at our Luby's Cafeteria restaurants used to generate customer traffic.

Payroll and Related Costs

Payroll and related costs decreased $0.6 million in the quarter ended May 9, 2012 compared to the quarter ended May 4, 2011. Hourly labor costs decreased significantly as we improved productivity from further refinement of our labor scheduling processes, with particular emphasis on shift scheduling and increased flexibility to adjust daily to changing customer traffic. The quarter ended May 4, 2011 was a period of increased guest traffic generated from significant use of limited time offers. The higher guest traffic in the prior year required deployment of more hourly crew members. Management labor costs increased in the quarter ended May 9, 2012 compared to the quarter ended May 4, 2011 as we deployed more restaurant management personnel into our units to support sales building initiatives. As a percentage of restaurant sales, payroll and related costs decreased 0.6%, to 33.0%, in the quarter ended May 9, 2012 compared to 33.6% in the quarter ended May 4, 2011, due in part to leveraging our labor costs on a higher volume of sales.

Payroll and related costs decreased approximately $0.3 million in the three quarters ended May 9, 2012 compared to the three quarters ended May 4, 2011, due to lower hourly labor costs offset by higher management labor costs. Management labor costs increased as we deployed more restaurant management personnel into our units at a higher average salary in our efforts to support sales building initiatives. Hourly labor costs decreased as we improved productivity from further refinement of our labor scheduling processes, with particular emphasis on shift scheduling and increased flexibility to adjust daily to changing customer traffic. The three quarters ended May 4, 2011 were also a period of increased guest traffic generated from extensive use of limited time offers. The higher guest traffic in the prior year quarters required deployment of more hourly crew members. As a percentage of restaurant sales, payroll and related costs decreased 0.8%, to 33.9%, in the three quarters ended May 9, 2012 compared to 34.7% in the three quarters ended May 4, 2011, due in part to leveraging our labor costs on a higher volume of sales.

Other Operating Expenses

Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, restaurant services, restaurant supplies and occupancy costs. Other operating expenses increased by $0.2 million, or 1.1%, for the quarter ended May 9, 2012 compared to the quarter ended February 9, 2011, primarily due to (1) a $0.2 million increase in marketing and advertising expense; (2) a $0.1 million increase in utility costs; offset by (3) a $0.1 million net reduction in restaurant services, supplies, occupancy costs, insurance costs, and other operating expenses in the aggregate. As a percentage of restaurant sales, other operating expenses increased 0.2%, to 22.3%, in the quarter ended May 9, 2012 compared to 22.1% in the quarter ended May 4, 2011, due to the cost reductions enumerated above as well as the ability to leverage the fixed cost components of certain operating costs over an increased sales volume.

Other operating expenses decreased by approximately $1.2 million, or 2.3%, in the three quarters ended May 9, 2012 compared to the three quarters ended May 4, 2011, primarily due to (1) a $0.3 million reduction in utilities expense on lower usage and electric utility rates; (2) a reduction of $0.5 million in repairs and maintenance costs in part due to some post-Fuddruckers acquisition costs in the prior year not recurring in the current year; (3) a $0.3 million reduction in insurance costs; and (4) a net $0.1 million reduction restaurant services and supplies, occupancy, marketing and advertising expenses, and other operating expenses.

Opening Costs

Opening costs include labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were $33 thousand in the quarter ended May 9, 2012 compared to $34 thousand in the quarter ended May 4, 2011. The quarter ended May 9, 2012 and the quarter ended May 4, 2011 included carrying costs of locations to be developed for future restaurant openings.

Opening costs were approximately $110 thousand in the three quarters ended May 9, 2012 compared to approximately $178 thousand in the three quarters ended May 4, 2011. Opening costs in the three quarters ended May 9, 2012 and the three quarters ended May 4, 2011 included the carrying costs of locations to be developed for future restaurant openings. The three quarters ended May 4, 2011 also included the opening costs for one Company-operated unit that was previously operated as a franchisee unit, and the support costs associated with franchisees opening two units.

Cost of Culinary Contract Services

At May 9, 2012 and May 4, 2011, culinary contract services operated 18 facilities. Cost of culinary contract services includes the food, labor, and other direct operating expenses associated with generating culinary contract services revenue. Cost of culinary contract services increased $0.7 million in the quarter ended May 9, 2012 compared to the quarter ended May 4, 2011 and $3.0 million in the three quarters ended May 9, 2012 compared to the three quarters ended May 4, 2011. The increases reflect the higher costs associated with operating at some larger volume facilities, and the growth in volume at certain facilities that have been operating for the whole year. Also included in the cost of culinary contract services for the three quarters ended May 9, 2012 is a provision for possible uncollectible amounts at two facilities.

Depreciation and Amortization

Depreciation and amortization expense increased $0.4 million to $4.3 million in the quarter ended May 9, 2012 compared to the quarter ended May 4, 2011 as new assets were placed in service from remodel activity and due to the shortening of the depreciable life of assets in a few leased units.

Depreciation and amortization expense increased by approximately $0.5 million, or 4.5%, in the three quarters ended May 9, 2012 compared to the three quarters ended May 4, 2011 as new assets were placed in service due to remodel activity and due to the shortening of the depreciable life of assets in a few leased units, offset by certain assets reaching the end of their depreciable lives.

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 $0.2 million, or 3.1%, in the quarter ended May 9, 2012 compared to the quarter ended May 4, 2011. The increase was primarily due to higher salary and benefits expenses. As a percentage of total sales, general and administrative expenses increased 0.2% to 8.6% in the quarter ended May 9, 2012 from 8.4% in the quarter ended May 4, 2011.

General and administrative expenses increased by approximately $0.8 million, or 3.8%, in the three quarters ended May 9, 2012 compared to the three quarters ended May 4, 2011. The increase was primarily due to higher salary and benefits expense. General and administrative expenses were 8.5% of total sales in the three quarters ended May 9, 2012 and in the three quarters ended May 4, 2011.

Asset Impairments

There were no asset impairment charges in the quarter ended May 9, 2012 or in the quarter ended May 4, 2011.

An impairment charge of $175 thousand for the three quarters ended May 9, 2012 related to one culinary contract services location.

Impairment charges of $84 thousand for the three quarters ended May 4, 2011 related to a reduction to net realizable value for one property previously classified as property held for sale that is now under development.

Net Loss on Disposition of Property and Equipment

The net loss on disposition of property and equipment in the quarter ended May 9, 2012 of $124 thousand reflects normal asset retirement activity and the loss on disposal of equipment at one closed Fuddruckers unit. The net loss on dispositions of property and equipment in the quarter ended May 4, 2011, of $28 thousand reflects normal asset retirement activity.

The net loss on disposition of property and equipment was approximately $205 thousand in the three quarters ended May 9, 2012 and primarily reflects normal asset retirement activity and loss on disposal of equipment of two closed units.

For the three quarters ended May 4, 2011, the net loss from normal asset retirement activity and net loss on disposal of equipment at two closed units was exactly offset by the gain on a property sold in the first quarter of fiscal year 2011.

Interest Income

Interest income was $3 thousand in the quarter ended May 9, 2012 and less than $1 thousand in the quarter ended May 4, 2011. Interest income was $6 thousand in the three quarters ended May 9, 2012 and $4 thousand in the three quarters ended May 4, 2011, primarily related to marginally higher average cash balances.

Interest Expense

Interest expense in the quarter ended May 9, 2012 decreased $0.4 million compared to the interest expense in the quarter ended May 4, 2011, due to lower outstanding debt balances resulting from the application of cash from operations and property sales to our debt balance.

Interest expense in the three quarters ended May 9, 2012 decreased approximately $1.1 million compared to the three quarters ended May 4, 2011, due to lower outstanding debt balances resulting from the application of cash from operations and property sales to our debt balance.

Other Income, Net

Other income, net consists 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; and oil and gas royalty income. Other income, net decreased $0.1 million in the quarter ended May 9, 2012 compared to the quarter ended May 4, 2011.

Other income, net decreased $0.2 million in the three quarters ended May 9, 2012 compared to the three quarters ended May 4, 2011.

Taxes

For the quarter ended May 9, 2012, the income taxes related to continuing operations resulted in a tax provision of $1.5 million compared to a net tax provision of $1.4 million for the quarter ended May 4, 2011. For the quarter ended May 9, 2012, there was no change to the valuation allowance related to deferred tax assets. For the quarter ended May 4, 2011, there was no change to the valuation allowance. Income tax benefits from employment tax credits, and adjusting these to tax return filings, resulted in a higher effective tax rate for the quarter ended May 4, 2011 relative to the quarter ended May 9, 2012.

For the three quarters ended May 9, 2012, the income taxes related to continuing operations resulted in a net tax provision of $2.5 million compared to a tax provision of $0.2 million for the three quarters ended May 4, 2011. For the three quarters ended May 9, 2012, there was no change to the valuation allowance related to deferred tax assets. For the three quarters ended May 4, 2011, the valuation allowance related to deferred taxes increased by $0.1 million and resulted in a higher effective tax rate for the three quarters ended May 4, 2011 relative to the three quarters ended May 9, 2012.

Discontinued Operations

The loss from discontinued operations was $0.1 million in the quarter ended May 9, 2012 compared to a loss of $0.4 million in the quarter ended May 4, 2011. The loss for the quarter ended May 9, 2012 included (1) $0.2 million in carrying costs associated with assets that were related to discontinued operations; offset by (2) a net $0.1 million income tax benefit related to discontinued operations.

The loss in the quarter ended May 4, 2011 included (1) $0.1 million in losses on sales of assets that were classified as discontinued operation assets; (2) $0.3 million in carrying costs associated with assets that were classified as discontinued operations assets; and (3) $0.1 million impairment charge for assets that were classified as discontinued operations assets; offset by (4) a net $0.1 million income tax benefit related to discontinued operations.

The loss from discontinued operations was $0.7 million in the three quarters ended May 9, 2012 compared to income of $0.4 million in the three quarters ended May 4, 2011. The loss for the three quarters ended May 9, 2012 included (1) $0.6 million in carrying costs associated with assets that were classified as discontinued operations assets; and (2) a $0.5 million impairment charge for assets that were classified as discontinued operations assets; offset by (3) a net $0.4 million income tax benefit related to discontinued operations.

The income of $0.4 million in the three quarters ended May 4, 2011 included $2.1 million in gains on sales of assets classified as discontinued operations assets, offset by (1) $1.0 million in carrying costs associated with assets that were classified as discontinued operations assets; (2) a $0.5 million impairment charge for assets that were classified as discontinued operations assets; and
(3) a net $0.2 million income tax provision related to discontinued operations.

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. Cash flow from operations during the first three quarters of fiscal year 2012 was significantly improved over cash flow from operations during the first three quarters of fiscal year 2011. Due to the improved cash flow from operations, we increased our capital expenditures. Net cash provided by operating activities was $20.7 million for the three quarters ended May 9, 2012 compared to $6.6 million for the three quarters ended May 4, 2011. We plan to continue the level of capital and repair and maintenance expenditures necessary to keep our restaurants attractive and operating efficiently.

Our cash requirements consist principally of:

• payments to reduce our debt

• capital expenditures for construction, restaurant renovations, purchase of property for development of our restaurant brands and for use as rental property and upgrades and information technology

• working capital primarily from our Company-owned restaurants and culinary contract services agreements.

Cash from operations and proceeds from the sale of assets allowed for debt repayments and capital expenditures during the three quarters ended May 9, 2012. Under the current terms of our revolving credit facility, as amended through October 20, 2011, capital expenditures and the amount of borrowings are limited based on our EBITDA, as defined in the credit agreement, as amended, governing the revolving credit facility. Based upon our level of past and projected capital requirements, we expect that proceeds from the sale of assets and 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, higher levels of accounts receivable are typical for culinary contract services and franchises. 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 provided by operating activities of $20.7 million was offset by cash used in financing activities of $7.0 million and cash used in investing activities of $13.7 million during the three quarters ended May 9, 2012.

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

                                                         Three Quarters ended
                                                       May 9,            May 4,
                                                        2012              2011
                                                     (36 weeks)        (36 weeks)
                                                            (In thousands)
  Total cash provided by (used in):
  Operating activities                               $    20,714      $      6,598
  Investing activities                                   (13,657 )           3,089
  Financing activities                                    (7,001 )         (10,755 )

  Increase (decrease) in cash and cash equivalents   $        56      $     (1,068 )

Operating Activities. In the three quarters ended May 9, 2012, cash provided by operating activities was $20.7 million compared to $6.6 million for the three quarters ended May 4, 2011, an increase of $14.1 million. Cash provided by operating activities before changes in operating assets and liabilities was $19.5 million for the three quarters ended May 9, 2012 compared to $11.8 million for the three quarters ended May 4, 2011, an increase of $7.6 million. The $7.6 million increase was primarily due to improved operating results from our Luby's Cafeteria and Fuddruckers restaurants.

Changes in operating assets and liabilities was a net source of $1.3 million in cash for the three quarters ended May 9, 2012 compared to a net use of cash of $5.2 million for the three quarters ended May 4, 2011, a $6.5 million change. Cash provided by changes in operating assets and liabilities is the result of the net changes in asset and liability balances during the quarters. The $6.5 million decrease in the use of cash during the three quarters ended May 9, 2012 compared to the three quarters ended May 4, 2011 was due to a $2.6 million change in trade and other receivables, a $0.8 million change in prepayments, a $1.6 million change in the collection of rent incentives and a change in the timing of accruals and payments of payroll of $3.0 million, offset by a $1.7 million reduction in accrued payables of taxes other than income taxes.

Investing Activities. We generally reinvest available cash flows from operations to develop new restaurants, enhance existing restaurants and support our culinary contract services business. Cash used by investing activities was $13.7 million in the three quarters ended May 9, 2012 compared to cash provided by investing activities of $3.1 million in the three quarters ended May 4, 2011. In the first quarter of fiscal year 2011, we acquired one franchised location for $0.3 million. Proceeds from property sales were $8.5 million in the three quarters ended May 4, 2011 and $2.6 million in the three quarters ended May 9, 2012. We increased our purchases of equipment and new restaurant construction from $5.1 million in the three quarters ended May 4, 2011 to $16.1 million in the three quarters ended May 9, 2012. Our capital expenditure program includes, among other things, investments in new restaurant and culinary contract services locations, restaurant remodeling, information technology enhancements and purchase of property for development.

Financing Activities. Cash used in financing activities was $7.0 million during the three quarters ended May 9, 2012, primarily due to reducing our debt from $21.5 million at August 31, 2011 to $14.5 million at May 9, 2012. Cash used in financing activities was $10.8 million in the three quarters ended May 4, 2011, primarily due to reducing our debt from $41.5 million at August 25, 2010 to $31.0 million at May 4, 2011.

Status of Trade Accounts and Other Receivables, Net

We monitor the aging of our receivables, including Fuddruckers . . .