UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

For the Fiscal Year Ended August 25, 2004

For the Transition Period From                      to                     

Commission file number 1-8308

Luby’s, Inc.

Through December 3, 2004:
2211 Northeast Loop 410
San Antonio, Texas 78217

After December 3, 2004:
13111 Northwest Freeway, Suite 600
Houston, Texas 77040

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

The aggregate market value of the shares of Common Stock of the registrant held by nonaffiliates of the registrant as of October 20, 2004, was approximately $134,131,624 (based upon the assumption that directors and executive officers are the only affiliates).

The aggregate market value of the shares of Common Stock of the registrant held by nonaffiliates of the registrant as of February 11, 2004, was approximately $78,838,744 (based upon the assumption that directors and executive officers are the only affiliates).

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o

As of October 20, 2004, there were 22,480,004 shares of the registrant’s Common Stock outstanding, which does not include 4,933,063 treasury shares.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the following document are incorporated by reference into the designated parts of this Form 10-K:

Definitive Proxy Statement relating to 2005 annual meeting of shareholders (in Part III)

EXPLANATORY NOTE

This Amendment No. 2 to the Annual Report on Form 10-K for Luby’s, Inc. (the “Company”) for the fiscal year ended August 25, 2004 (SEC File Number 1-8308) is being filed to correct previously issued financial statements for fiscal years 2004, 2003 and 2002. The corrections are to account for scheduled rent increases on a straight-line basis, and for determining lives used in the calculation of depreciation of leasehold improvements for certain leased properties in a manner consistent with views recently expressed by the SEC and other recent interpretations. See Note 2 to the Company’s audited consolidated financial statements for additional discussion. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the filing of the Amendment No. 1 on Form 10-K/A.

Page 2

Luby’s, Inc.
Form 10-K
Year ended August 25, 2004
Table of Contents

Additional Information

The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge via hyperlink on its website at www.lubys.com. The Company makes these reports available as soon as reasonably practicable upon filing with the SEC. Information on the Company’s website is not incorporated into this report.

Page 3

PART I

Item 1. Business

Overview

Luby’s, Inc. (formerly, Luby’s Cafeterias, Inc.) was originally incorporated in Texas in 1959 and was reincorporated in Delaware on December 31, 1991. Until December 3, 2004, the Company’s administrative offices will be located at 2211 Northeast Loop 410, P. O. Box 33069, San Antonio, Texas 78265-3069. On December 3, 2004, the Company will relocate its corporate offices to 13111 Northwest Freeway, Suite 600, Houston, Texas 77040.

Luby’s, Inc. was restructured into a holding company on February 1, 1997, at which time all of the operating assets were transferred to Luby’s Restaurants Limited Partnership, a Texas limited partnership composed of two wholly owned, indirect corporate subsidiaries of the Company. All restaurant operations are conducted by the partnership. Unless the context indicates otherwise, the word “Company” as used herein includes the partnership and the consolidated corporate subsidiaries of Luby’s, Inc.

As of October 20, 2004, the Company operated 136 restaurants under the name “Luby’s.” These establishments are located in close proximity to retail centers, business developments, and residential areas throughout five states (listed under Item 2). Of the 136 restaurants, 94 are at locations owned by the Company and 42 are on leased premises. Two of the restaurants primarily serve seafood, one is a steak buffet, three are full-time buffets, 11 are cafeteria-style restaurants with all-you-can-eat options, and 119 are traditional cafeterias.

Operations

The Company’s operations provide guests with a wide variety of delicious, home-style food, with the majority of locations serving cafeteria-style. Daily, each restaurant offers 20 to 22 entrees, 12 to 14 vegetable dishes, 12 to 16 salads, and 16 to 20 varieties of desserts. Food is prepared in small quantities throughout serving hours, and frequent quality checks are conducted.

The Company’s historical marketing research has shown that its products appeal to a broad range of value-oriented consumers with particular success among families with children, seniors, shoppers, travelers, and business people looking for a quick, home-style meal at a reasonable price. During fiscal 2004, the Company spent approximately 1.3% of its sales on traditional marketing venues, including television, newsprint, radio, point-of-purchase, and local-store marketing. The Company has invested in distinctive store marquees to enhance guest awareness of specific store promotions, with marquees at 99 operating locations as of the end of fiscal 2004.

Luby’s restaurants are generally open for lunch and dinner seven days a week. All of the restaurants sell take-out orders, and many of them have separate food-to-go entrances, which provide guests the option of enjoying complete and flavorful meals at the office or at home. Take-out orders accounted for 13.7% of sales in fiscal 2004. Breakfast is served on weekends in 34 of its restaurants, accounting for 1.2% of sales. Those locations offer a wide array of popular breakfast foods served buffet style. They also have made-to-order omelet, pancake, and waffle stations.

Each restaurant is operated as a separate unit under the control of a general manager who has responsibility for day-to-day operations, including food production and personnel employment and supervision. The Company’s philosophy is to grant authority to its restaurant managers to direct the daily operations of their stores and, in turn, to compensate them on the basis of their performance, believing this strategy to be a significant factor in restaurant profitability. Of the total number of general managers employed by the Company, 95 have been employed for more than ten years.

The Company operates from a centralized purchasing arrangement to obtain the economic benefit of bulk purchasing and lower prices for most of its food products. The arrangement involves a competitively selected prime vendor for each of its three major purchasing regions.

Page 4

Foods are prepared fresh daily at the Company’s restaurants. Menus are reviewed periodically by a committee of managers and chefs. The committee introduces newly developed recipes to ensure offerings are varied and that seasonal food preferences are incorporated.

Quality control teams also help to maintain uniform standards of food preparation. The teams visit each restaurant as necessary and work with the staff to check adherence to Company recipes, train personnel in new techniques, and implement systems and procedures used universally throughout the Company.

During the fiscal year ended August 25, 2004, the Company closed approximately 10 underperforming units, of which approximately four were adopted into its business plan. Additionally, three stores closed in fiscal 2003 were also adopted into the plan.

As of the fiscal year-end, the Company had a workforce of approximately 7,400, consisting of 6,800 nonmanagement restaurant workers; 400 restaurant managers, associate managers, and assistant managers; and 200 clerical, administrative, and executive employees. Employee relations are considered to be good. The Company has never had a strike or work stoppage and is not subject to collective bargaining agreements.

Service Marks

The Company uses several service marks, including “Luby’s,” and believes that such marks are of material importance to its business. The Company has federal registrations for its service marks as deemed appropriate.

The Company is not the sole user of the name Luby’s in the cafeteria business. A cafeteria using the name Luby’s is being operated in Texas by an unaffiliated company. The Company’s legal counsel is of the opinion that the Company has the paramount right to use the name Luby’s as a service mark in the United States and that the other user could be precluded from expanding its use of the name as a service mark.

Competition and Other Factors

The foodservice business is highly competitive, and there are numerous restaurants and other foodservice operations in each of the markets where the Company operates. The quality of food served, in relation to price and public reputation, is an important factor in foodservice competition. Neither the Company nor any of its competitors has a significant share of the total market in any area in which the Company competes. The Company believes that its principal competitors include family-style and fast-casual restaurants, buffets, and quick-service establishments in the home-meal-replacement category.

The Company’s facilities and food products are subject to state and local health and sanitation laws. In addition, the Company’s operations are subject to federal, state, and local regulations with respect to environmental and safety matters, including regulations concerning air and water pollution and regulations under the Americans with Disabilities Act and the federal Occupational Safety and Health Act. Over the years, such laws and regulations have resulted in increased costs that have been absorbed by the Company, in turn, improving its compliance.

Item 2. Properties

The Company’s restaurants typically contain 8,000 to 10,500 square feet of floor space and can seat 250 to 300 guests simultaneously.

Luby’s restaurants are well maintained and in good condition. In order to maintain appearance and utility, the Company refurbishes and updates its restaurants and equipment and performs scheduled maintenance.

As of October 20, 2004, the Company’s restaurants are regionally located as follows: two in Arizona, two in Arkansas, two in Louisiana, three in Oklahoma, and 127 in Texas.

The Company owns the underlying land and buildings in which 94 of its restaurants are located. Several of these restaurant properties contain excess building space, which is rented to tenants unaffiliated with the Company.

Page 5

In addition to the owned locations, 42 other restaurants are held under leases, including 17 in regional shopping malls. Most of the leases provide for a combination of fixed-dollar and percentage rentals. Many require the Company to pay additional amounts related to property taxes, hazard insurance, and maintenance of common areas. See Note 10 of the Notes to Consolidated Financial Statements for information concerning the Company’s lease rental expenses and lease commitments. Of the 42 restaurant leases, the current terms of 23 expire before 2010, ten from 2010 to 2014, and nine thereafter. Thirty-six of the leases can be extended beyond their current terms at the Company’s option.

In addition to the properties currently in operation, the Company also has 26 locations on the market for sale.

The Company is moving its corporate offices from San Antonio, Texas, to Houston, Texas, with the relocation expected to be completed by December 3, 2004. After the relocation, the Company’s primary administrative offices will consist of 26,000 square feet of leased space located at 13111 Northwest Freeway in Houston, Texas.

The Company maintains public liability insurance and property damage insurance on its properties in amounts which management believes to be adequate.

Item 3. Legal Proceedings

The Company is from time to time subject to pending claims and lawsuits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of such claims and lawsuits will not have a material adverse effect on the Company’s operations or consolidated financial position. There are no material legal proceedings to which any director, officer, or affiliate of the Company, or any associate of any such director or officer, is a party, or has a material interest, adverse to the Company.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted during the fourth quarter of the fiscal year ended August 25, 2004, to a vote of security holders of the Company.

Item 4A. Executive Officers of the Registrant

Certain information is set forth below concerning the executive officers of the Company, each of whom has been elected to serve until his successor is duly elected and qualified:

Page 6

PART II

Stock Prices

The Company’s common stock is traded on the New York Stock Exchange under the symbol LUB. The following table sets forth, for the last two fiscal years, the high and low sales prices on the New York Stock Exchange from the consolidated transaction reporting system.

There were no sales of unregistered securities or issuer purchases of equity securities in fiscal 2004. As of October 20, 2004, there were approximately 3,344 record holders of the Company’s common stock.

Page 7

Item 6. Selected Financial Data

The following selected financial data are derived from the Company’s consolidated financial statements and have been restated to reflect adjustments to the original Form 10-K that are further discussed in “Explanatory Note” in the forepart of this Form 10-K/A and in Note 2 to Consolidated Financial Statements, “Restatement of Financial Statements” in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K/A.

Five-Year Summary of Operations

Page 8

Five-Year Summary Notes continued on next page.

Page 9

Five-Year Summary of Operations (continued)

Note: In fiscal year 2002, the Company moved from 12 calendar months to 13 four-week periods. The first period of fiscal year 2002 began September 1, 2001, and covered 26 days. All subsequent periods covered 28 days. Fiscal year 2002, the Company’s conversion year from months to periods, was 362 days in length. Fiscal 2003 and most years thereafter are 364 days in length.

Note: The Company’s business plan, as approved in fiscal 2003, called for the closure of approximately 50 locations. In accordance with the plan, the entire fiscal activity of the applicable stores closed through the end of the 2004 fiscal year were reclassified to discontinued operations. For comparison purposes, in prior fiscal years the entire activity for the same locations closed in fiscal 2003 and fiscal 2004 has also been reclassified to discontinued operations.

Restatement of Financial Statements
The Company completed a review of its historical lease accounting expense calculations to determine whether the lease expense it had previously reported were materially in accordance with the views expressed by the Office of the Chief Accountant of the SEC on February 7, 2005 in a letter to the American Institute of Certified Public Accountants and other recent interpretations regarding certain operating lease accounting issues and their application under Generally Accepted Accounting Principles (“GAAP”). As a result of its review, the Company determined that its historical calculations for scheduled rent increases, and of determining lives used in the calculation of depreciation of leasehold improvements for certain leased properties, were materially different from current interpretations of GAAP. The Company has restated its consolidated financial statements in this Report for each of the fiscal years ended August 25, 2004, August 27, 2003 and August 28, 2002 to effect the appropriate changes.

As previously reported, the Company historically recognized scheduled rent increases as they occurred over the lease term. The Company annually reviewed its lease accounting expense calculations to determine whether the amounts it calculated were materially in accordance with GAAP. However, under current interpretations of GAAP, the Company has determined that the lease term used in calculating straight-line expense should commence on the date the Company takes possession of the leased space, which is generally six months prior to a store’s opening date. Additionally, the Company has determined that rent expense should be recorded on a straight-line basis over lease periods that are consistent with or greater than the number of periods over which depreciation of leasehold improvements is recorded. Historically, the life used for rent expense purposes in some instances was shorter than the life used for depreciation purposes. Excluding tax impacts, the Company has recorded adjustments to “Other liabilities,” “Property and equipment-at cost, net,” and “Retained earnings” on the consolidated balance sheets and to “Occupancy and other operating expenses,” “Depreciation and amortization,” “Provision for asset impairments and restaurant closings” and “Discontinued operations, net of taxes” on the consolidated statements of operations to correct historical accounting methods.

The cumulative effect of these accounting changes is a reduction to retained earnings of $5.9 million as of the beginning and end of fiscal year 2002 and incremental increases to retained earnings of $1.9 million and $461,000 for the fiscal years 2003 and 2004, respectively. See Note 2 to the consolidated financial statements for summaries of the effects of related consolidated statements of operations, shareholders’ equity and cash flows for each of the three fiscal years in the period ended August 25, 2004. The accompanying Management’s Discussion and Analysis incorporates the effects of these corrections.

RESULTS OF OPERATIONS

Fiscal 2004 Compared to Fiscal 2003

Sales increased $4.8 million, or 1.6%, in fiscal 2004 compared to fiscal 2003. Of the total increase, $6.6 million was

Page 10

due to a 2.2% increase in same-store sales. (See Same-Store Sales under Trends and Uncertainties for the definition of same-store sales.) This increase was offset by a decrease in sales of $1.8 million related to five stores closed prior to the adoption of the 2003 business plan, which therefore were not reclassified into discontinued operations. Despite store closures and the effects of increased competition in the marketplace, sales performance has improved. Promotions, new combination meals, and improved product and service execution have all contributed to this overall increase in sales.

Cost of food increased $637,000, or 0.8%, principally due to the increase in sales in fiscal 2004 compared to fiscal 2003. Upward pressure on beef pricing due to lower production numbers, reduced cattle weights, and an overall higher demand has negatively impacted food cost. Despite general commodity increases in food pricing, specifically related to the beef and dairy markets, food costs have experienced a slight decline as a percentage of sales, which decreased from 27.2% to 26.9%. Management’s discipline in the utilization of monthly budgeting and protein tracking tools in combination with various promotional offerings have assisted in reducing food costs. More specifically, food costs have declined in a higher commodity climate due to improved execution at each location in combination with carefully selected entree offerings for promotions which overall have very attractive cost structures.

Payroll and related costs decreased $2.1 million, or 2.4%, and as a percentage of sales decreased from 28.8% to 27.7%. The decrease is due to continued improvements made in labor deployment and efficiency as a result of various Company initiatives to better manage labor costs, offset by an increase in estimated workers’ compensation costs.

Occupancy and other operating expenses increased $3.8 million, or 4.2%, due primarily to increased advertising expense and higher insurance costs. Occupancy and other operating expenses, as a percentage of sales, increased 0.7% to 30.6% from 29.9%. The launch of the Company’s new marketing campaign, featuring television advertising, led to an increase in marketing costs. Insurance costs increased as a result of higher cost of insurance coverage and related premiums. These increases were primarily offset by a reduction in property tax expense due to store closures and related property sales.

Depreciation and amortization expense decreased $628,000, or 3.6%, due to fewer depreciable properties resulting from impairments and property sales.

Due to the current-year accrual of voluntary severance costs in relation to the relocation of the corporate offices from San Antonio, Texas, to Houston, Texas, voluntary severance costs increased by $860,000. See Note 6 of the Notes to Consolidated Financial Statements for more information.

General and administrative expenses decreased $3.6 million, or 15.3%. As a percentage of sales, general and administrative expenses decreased 1.3% to 6.4% compared to 7.7%. This decrease is due to fewer regional management positions due to store closures. It is also a result of lower professional and consulting services fees associated with a fixed-asset cost-segregation study on tax depreciation and consulting fees related to the debt refinancing, both of which occurred in the prior year.

The provision for asset impairments and restaurant closings decreased by $1.1 million primarily due to a gain realized on the sale of a property which had been previously impaired, coupled with significant impairment charges incurred in the prior year. This provision included write-downs to currently operating restaurants of $1.2 million offset by a gain of $500,000 related to one property sale.

Interest expense increased $484,000, or 6.4%, due to the accelerated amortization of the subordinated debt discount resulting from the amended subordinated note agreements, coupled with an increase in the effective interest rate on outstanding debt prior to the debt refinancing in June 2004. Subsequent to the debt refinancing, interest expense has declined principally due to lower amortization of the discount on the restructured subordinated debt, coupled with the effect of a lower senior debt balance.

Other income decreased $4.4 million primarily due to gains on sales of assets recognized in the prior year, which reflected the sale of five previously closed stores. These gains were partially offset by a loan commitment fee expensed in fiscal 2003.

Page 11

No provision for income taxes on continuing operations was provided for in fiscal 2004 because the Company’s loss carryforward was sufficient to offset income from continuing operations.

The loss from discontinued operations decreased by $23.1 million principally due to numerous impairment charges incurred in the prior year on various locations which were closed as a part of the Company’s business plan offset by ongoing periodic property maintenance costs incurred until the properties are sold.

Fiscal 2003 Compared to Fiscal 2002

Sales decreased $14.7 million, or 4.6%, in fiscal 2003 compared to fiscal 2002. Of the total decline, $11.8 million was due to the closure of 20 restaurants since August 31, 2001, that were not included in the business plan and therefore were not reclassified into discontinued operations, and $7.5 million was due to a 2.5% decrease in same-store sales. These decreases were offset by the positive impact of two additional days of sales of $2.0 million and the opening of three restaurants since August 28, 2002, that accounted for $2.6 million in sales.

The cost of food increased $1.7 million, or 2.1%, and as a percentage of sales increased from 25.4% to 27.2% in fiscal 2003 compared to fiscal 2002. Early in the fiscal year, the increase in food cost was related primarily to efforts to implement value offerings for the Company’s guests. Those offerings were a planned part of the Company’s strategy aimed at increasing value while maintaining quality. Also in the beginning of the year, fresh produce pricing was negatively impacted by increased transportation costs due to the higher cost of diesel fuel. Toward the end of the year, upward pressure on beef pricing due to lower availability, reduced cattle weights, and an overall higher demand negatively impacted food cost. These increases completely offset reductions due to store closures. Even so, the increases were partially mitigated in the later part of the year by targeted cost control programs.

Payroll and related costs decreased $13.4 million, or 13.3%, and as a percentage of sales decreased from 31.7% to 28.8%. The decrease was due primarily to improved labor deployments and efficiencies resulting from various Company initiatives to manage labor costs, lower workers’ compensation cost estimates resulting from the Company’s in-house training and safety programs, and stores closed prior to the adoption of the business plan.

Page 12

Occupancy and other operating expenses decreased $3.9 million, or 4.1%. As a percentage of sales, occupancy and other operating expenses increased 0.2% to 29.9% compared to 29.7%. Several factors contributed to this fluctuation. Net repairs and maintenance costs decreased primarily due to increased efficiencies from the Company’s in-house repair program as provided by its in-house service center. Food-to-go packaging costs further declined due to less expensive packaging. These decreases were partially offset by property/employee insurance, which increased principally due to premium increases for owned properties coupled with pass-through insurance adjustments from landlords of leased properties, as well as premium increases for directors’ and officers’ liability.

Depreciation and amortization expense was approximately equal to the prior fiscal year, with a decrease of $33,000.

General and administrative expenses increased $2.1 million, or 10.0%. Several factors contributed to this increase. As a percentage of sales, general and administrative expenses increased 1.0% to 7.7%, compared to 6.7%. Professional fees increased principally due to a fixed-asset, cost-segregation study on tax depreciation. Consulting costs increased principally due to fees paid to outside firms relating to the Company’s bank group. Excluding those items, the Company showed higher year-over-year general and administrative expenses because of the increased investment in support personnel to improve its focus on operational efficiencies and facilities maintenance.

Interest expense was approximately equal to the prior fiscal year, with only a slight decrease of $66,000. The payoff of loans on officers’ life insurance policies, which were surrendered during the prior year, in addition to amortization of the loss on interest rate swaps and principal reductions on the outstanding bank debt, contributed to this decrease. These decreases were partially offset by an increase in the effective interest rate on outstanding debt coupled with an increase in the amortization of the discount on the subordinated notes. Approximately $2.7 million and $2.6 million were reclassified from interest expense to discontinued operations in fiscal 2003 and 2002, respectively. These reclassifications related to the launch of the Company’s business plan whereby the proceeds from certain properties closed and sold are committed to paying down debt.

Other income increased $4.7 million primarily due to gains on the sales of assets, which reflect the sale of nine previously closed stores. These gains were partially offset by a loan commitment fee expensed in fiscal 2003.

The income tax benefit decreased by $2,000. No benefit was recorded in fiscal 2003 because the realization of loss carryforward utilization is uncertain.

The loss from discontinued operations increased by $23.5 million principally due to approximately $19.4 million in noncash impairments, with the remainder in carrying costs, allocated bank debt interest, and certain settlement fees incurred on various locations closed as part of the Company’s business plan. The impairment charges included reductions in the fourth quarter of 2003 from gains on the disposal of properties previously held for sale.

Relative to prior closure plans, the Company had a reserve for restaurant closings of approximately $1.7 million and $3.1 million at August 27, 2003, and August 28, 2002, respectively. Excluding certain lease termination settlements, all material cash outlays required for the store closings originally planned as of August 31, 2001, were made prior to August 27, 2003. See further discussion in Note 8 of the Notes to Consolidated Financial Statements.

EBITDA

The Company’s operating performance is evaluated using several measures. One of those measures, EBITDA, is derived from the Income (Loss) From Operations GAAP measurement. EBITDA has historically been used by the Company’s lenders to measure compliance with certain financial debt covenants. The Company’s senior debt agreements define EBITDA as the consolidated income (loss) from operations set forth in the Company’s consolidated statements of operations before depreciation, amortization, other noncash expenses, interest expense, taxes, noncash income and extraordinary gains or losses, and other nonrecurring items of income or expense as approved by the required lenders.

EBITDA increased by $5.4 million from fiscal 2003 to 2004 compared to a decrease of $1.2 million from fiscal 2002 to 2003. These net changes were due to various applicable reasons noted in the Results of Operations section above. Prior year amounts have been reclassified to conform to the current year presentation.

Page 13

As noted previously, prior year amounts have been reclassified to conform to the current year presentation, including the applicable reclassifications of store activity discontinued in accordance with the implementation of the business plan. While the Company and many in the financial community consider EBITDA to be an important measure of operating performance, it should be considered in addition to, but not as a substitute for or superior to, other measures of financial performance prepared in accordance with U.S. generally accepted accounting principles, such as operating income and net income. In addition, the Company’s definition of EBITDA is not necessarily comparable to similarly titled measures reported by other companies.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalents and Working Capital

Cash and cash equivalents increased by $340,000 from the end of the preceding fiscal year to August 25, 2004, primarily due to improved cash management strategies. Short-term investments decreased by $16.1 million due to payments made to reduce the senior debt.

The Company received a comprehensive income tax refund of $13.4 million in the third quarter of fiscal 2003 that resulted from changes in tax legislation that extended carrybacks of net operating losses. In addition, the refund was higher than the original fiscal 2002 estimate primarily due to increases in tax depreciation relative to an updated cost-segregation study.

The Company had a working capital deficit of $24.0 million as of August 25, 2004, compared to $104.9 million as of August 27, 2003. The improvement was primarily attributable to the reclassification of the debt to long-term liabilities subsequent to the debt refinancing. Excluding the reclassification of the senior debt and subordinated notes explained in the Debt section below, the Company’s working capital deficit increased $17.7 million. That increase in the deficit was primarily attributable to debt paydown and refinancing. The Company’s working capital requirements are expected to be met through cash flows from operations and the available line of credit.

Capital expenditures for the fiscal year ended August 25, 2004, were $8.9 million. Consistent with prior fiscal years, the Company used most of its capital funds to maintain its investment in existing operating units. Based on the business plan, the Company again expects to be able to fund all capital expenditures in Fiscal 2005 using cash flows from operations and expects to spend approximately $12 million to $14 million.

Page 14

DEBT

Previous Senior Debt

During the mid-1990’s, the Company entered into a revolving line of credit with a group of four banks. The line was primarily used for financing long-term objectives, including capital acquisitions and a stock repurchase program. These large demands of cash contributed to the capacity under that credit facility being fully exhausted in fiscal 2001.

From March 2001 until the fourth quarter of fiscal 2004, the Company financed capital acquisitions and working capital needs through careful cash management and the provision of an additional $10 million in subordinate financing from the Company’s CEO and the COO. The additional subordinate financing was funded toward the end of fiscal 2001. Although no further borrowings were allowed under the senior credit facility, the bank group subsequently authorized an extension of its maturity date, allowing the Company time to seek a replacement to the credit facility that would provide the financing on more favorable terms. During this period, the Company implemented a new business plan that included the closure of certain underperforming stores and the use of proceeds from resulting property sales to pay down the line of credit.

New Senior Debt

The Company’s failure to arrange replacement financing by the extended maturity date of the credit facility caused a technical default under that facility. However in the fourth quarter of fiscal 2004, the Company successfully refinanced the senior credit facility with two new instruments. The first is a secured, three-year line of credit for $50 million. Of the total line, only $36.3 million was originally drawn in connection with the refinancing. This instrument was funded by a new group of independent lenders.

In addition to the new line of credit, the Company concurrently negotiated another secured, three-year term loan for $27.9 million. The term loan was funded by a third-party financial institution not related to any member of the bank group that funded the new line of credit. Under the term-loan agreement, no periodic principal payments are required other than net proceeds from properties currently marked for sale. Any balance remaining at the loan’s maturity must be paid in full.

In the fourth quarter of fiscal 2004, as a result of the refinancing, the Company’s new senior debt was in good standing. Pursuant to the terms of the Subordination and Intercreditor Agreement dated June 7, 2004, if the new senior debt were to be in default at some time in the future, Chris and Harris Pappas have a contractual right (but no obligation) to purchase those loans.

At August 25, 2004, the Company’s outstanding senior debt balance was $51.5 million. From its new revolving line of credit, the Company had an outstanding debt balance of $28.0 million. This level is down $8.3 million from its original drawn amount of $36.3 million, which occurred in June 2004. Of the $8.3 million reduction, $2.7 million was derived from a sale leaseback of one property, and $5.6 million was from excess cash. From its term loan, the Company had an outstanding debt balance of $23.5 million. This level is down $4.4 million from its original note balance of $27.9 million, which also occurred in June 2004. The reduction was primarily made with proceeds received on the sale of properties. Of the $50 million total commitment under the line of credit, $20.8 million was available to the Company at August 25, 2004.

Additionally, as of August 25, 2004, the Company has approximately $2.2 million available under letters of credit through a separate arrangement with another bank.

Both the new line of credit and the term loan contain financial performance covenants, provisions limiting the use of the Company’s cash, and descriptions of certain events of default that could be triggered by changes in the Company’s relationship with its CEO and its COO. As the focus continues toward further strengthening operational and financial performance, management believes that the two new debt instruments will provide the proper level of financing to improve its liquidity. Additionally, the Company expects to be able to maintain compliance with the specific requirements of each agreement.

As of August 25, 2004, substantially all of the Company’s assets were pledged as collateral under the line of credit and the term loan. These pledged assets included the Company’s owned real estate, improvements, equipment, and fixtures.

Page 15

Subordinated Notes

As mentioned earlier, in the fourth quarter of fiscal 2001, the Company’s CEO, Christopher J. Pappas, and Harris J. Pappas, the Company’s COO, formally loaned the Company a total of $10 million in exchange for convertible subordinated notes. While certain terms of the original notes have since been modified, they are still in place as of August 25, 2004, with maturity dates of June 6, 2011. At a stated conversion price of $5.00 per shares, the notes are convertible into 2.0 million shares of the Company’s common stock. As a result of the amended subordinated note agreements, at the earlier of June 7, 2005, a default under the senior debt, or a “change in control” as defined in the amended notes, the conversion price will lower to $3.10 per share for 3.2 million shares.

Because the stated conversion price represented a discount from the market price ($5.63) of the Company’s common stock on the commitment date, a beneficial conversion feature of $8.2 million was created. This was recorded as a discount to debt with an offset to paid-in capital. The discount is being amortized over the term of the notes through noncash charges to interest expense amounting to approximately $1.2 million per year.

The Company has agreed to reserve shares held in treasury for issuance to the holders of the subordinated notes upon conversion of the debt. The Company’s treasury shares have also been reserved for two other purposes — the issuance of shares to Messrs. Pappas upon exercise of the options granted to them on March 9, 2001, and for shares issuable under the Company’s Nonemployee Director Phantom Stock Plan. In accordance with an agreement between Messrs. Pappas and the Company dated June 7, 2004, Chris and Harris Pappas have agreed to limit their exercise of stock options to a number that will ensure the “net treasury shares available” are not exceeded. Pursuant to the terms of that agreement, the Company indicated that it will use reasonable efforts to list on the New York Stock Exchange additional shares which would permit full exercise of those options. “Net Treasury Shares Available” is defined in the debt agreements as the number of shares of common stock then held by the Company in treasury, minus the number of shares of common stock issuable or issued after June 7, 2004, under the Nonemployee Director Phantom Stock Plan, minus the number of shares of common stock issuable or issued upon conversion of the subordinated notes, calculated assuming the lowest conversion price stated in the subordinated notes.

COMMITMENTS AND CONTINGENCIES

Officer Loans

In fiscal 1999, the Company guaranteed loans relating to purchases of Luby’s stock by various officers of the Company pursuant to the terms of a shareholder-approved plan. Under the officer loan program, shares were purchased and funding was provided by bank loans to the participating officers. Per the original terms of the guaranteed loan agreements, these instruments only required annual interest to be paid by the individual debtors, with the entire principal balances due upon their respective original maturity dates, which occurred during the period from January through March of 2004. As of August 25, 2004, the total of the principal balances due under these loans was approximately $1.0 million. The purchased Company stock has been and can be used by borrowers to satisfy a portion of their loan obligation. As of August 25, 2004, based on the market price on that day, approximately $315,000, or 30.9% of the note balances, could have been covered by stock, while approximately $705,000, or 69.1%, would have remained outstanding.

In connection with the renegotiation of its senior debt, the Company arranged for the issuance of a letter of credit, entered into on June 7, 2004, for approximately $1.2 million. That amount is intended as an estimate to cover principal and cumulative accrued interest that was due as of September 30, 2004. After that date, JPMorgan Chase Bank can use the letter of credit to draw on the current line of credit to pay down any portion of the unpaid officer loans, as well as the accrued interest, for any loans that are in default. As of the date of this report, JPMorgan Chase Bank has not taken any action to draw upon the letter of credit.

In anticipation of the maturity of its obligation to purchase the loans, the Company worked out settlement agreements with several of the debtors pursuant to which the Company would contribute up to $530,000 under the terms of the settlement agreement. As of August 25, 2004, the Company has recognized a liability of $530,000 in accrued expenses and other liabilities.

Page 16

Off-Balance-Sheet Arrangements

The Company has no off-balance-sheet structured financing arrangements; however, under the terms of applicable SEC rules, the Company’s obligation to repurchase the officer loans could be deemed a guarantee contract, which the SEC considers an off-balance-sheet arrangement. If the Company is required to purchase the officer loans, it would have a maximum cash payout exposure of approximately $1.2 million.

Contractual Obligations

As of August 25, 2004, the Company had contractual obligations and other commercial commitments as described below.

In addition to the commitments represented in the above tables, the Company enters into a number of cancelable and noncancelable commitments during the year. Typically, these commitments are for less than a year in duration and are generally focused on food inventory. The Company does not maintain any long-term or exclusive commitments or arrangements to purchase products from any single supplier. Substantially all of the Company’s product purchase commitments are cancelable up to 30 days prior to the vendor’s scheduled shipment date.

Long-term liabilities reflected in the Company’s consolidated financial statements as of August 25, 2004, included deferred income taxes ($5.1 million), deferred gain on the sale of property ($382,000), amounts accrued for benefit payments under the Company’s supplemental executive retirement plan ($488,000) and deferred compensation agreements ($551,000), accrued insurance reserves ($3.9 million), deferred rent liabilities ($4.3 million) and reserve for restaurant closings ($500,000).

The Company is also contractually obligated to the chief executive officer and the chief operating officer pursuant to employment agreements. See the Related Parties section of “Affiliations and Related Parties” for further information.

Page 17

AFFILIATIONS AND RELATED PARTIES

Affiliations

The Company entered into an Affiliate Services Agreement effective August 31, 2001, with two companies, Pappas Partners, L.P. and Pappas Restaurants, Inc., which are restaurant entities owned by Christopher J. Pappas and Harris J. Pappas. That agreement, as amended on July 23, 2002, limited the scope of expenditures therein to professional and consulting services. The Company completed this amendment due to a significant decline in the use of professional and consulting services from Pappas entities.

Additionally, on July 23, 2002, the Company entered into a Master Sales Agreement with the same Pappas entities. Through this agreement, the Company contractually separated the design and fabrication of equipment and furnishings from the Affiliate Services Agreement. The Master Sales Agreement covers the costs incurred for modifications to existing equipment, as well as custom fabrication, including stainless steel stoves, shelving, rolling carts, and chef tables. These items are custom-designed and built to fit the designated kitchens and are also engineered to give a longer service life than comparably manufactured equipment.

The pricing of equipment, repair, and maintenance is set and evaluated periodically and is considered by management to be primarily at or below market for comparable goods and services. To assist in periodically monitoring pricing of the transactions associated with the Master Sales Agreement and the Affiliate Services Agreement, the Finance and Audit Committee of the Company’s Board of Directors has periodically in the past used independent valuation consultants.

As part of the affiliation with the Pappas entities, the Company leases a facility, the Houston Service Center, in which Luby’s has installed a centralized restaurant service center to support field operations. The building at this location has 22,253 square feet of warehouse space and 5,664 square feet of office space. It is leased from the Pappas entities by the Company at an approximate monthly rate of $0.24 per square foot. From this center, Luby’s repair and service teams are dispatched to the Company’s restaurants when facility or equipment maintenance and servicing are needed. The facility is also used for repair and storage of new and used equipment. The amount paid by the Company pursuant to the terms of this lease was approximately $82,000, $79,000, and $78,000 for fiscal 2004, 2003, and 2002, respectively.

The Company previously leased a location from an unrelated third party. That location is used to house increased equipment inventories due to store closures under the business plan. The Company considered it more prudent to lease this location rather than to pursue purchasing a storage facility, as its strategy is to focus its capital expenditures on its operating restaurants. In a separate transaction, the third-party property owner sold the location to the Pappas entities during the fourth quarter of fiscal 2003, with the Pappas entities becoming the Company’s landlord for that location effective August 1, 2003. The storage site complements the Houston Service Center with approximately 27,000 square feet of warehouse space at an approximate monthly rate of $0.21 per square foot. The amount paid by the Company pursuant to the terms of this lease was approximately $69,000 for fiscal 2004.

In another separate contract, pursuant to the terms of a ground lease dated March 25, 1994, the Company paid rent to PHCG Investments for a Luby’s restaurant the Company operated in Dallas, Texas, until that location was closed early in the third quarter of fiscal 2003. Christopher J. Pappas and Harris J. Pappas are general partners of PHCG Investments. Preceding the store’s closure, the Company entered into a lease termination agreement with a third party unaffiliated with the Pappas entities. That agreement severed the Company’s interest in the PHCG property in exchange for a payment of cash to the Company. The Company also obtained the right to remove fixtures and equipment from the premises, and it was released from any future obligations under the lease agreement. The closing of the transaction was completed during the third quarter of fiscal 2003, resulting in a gain of $735,000, and the gross proceeds were used to pay down debt. The amount paid by the Company pursuant to the terms of this lease before its termination was approximately $42,000 and $85,000 in fiscal 2003 and 2002, respectively. No costs were incurred under this lease in fiscal 2004.

Page 18

Late in the third quarter of fiscal 2004, Chris and Harris Pappas became limited partners in a limited partnership which purchased a retail strip center in Houston, Texas. Messrs. Pappas own a 50% limited partnership interest. Neither of Messrs. Pappas own any interest in the general partner of the limited partnership. The general partner of the limited partnership controls the operational decisions of the partnership. One of the Company’s restaurants has rented approximately 7% of the space in that center since July of 1969. No changes were made to the Company’s lease terms as a result of the transfer of ownership of the center to the new partnership. The amount paid by the Company pursuant to the terms of this lease since the Pappas’s inclusion as limited partners was $56,000 in fiscal 2004. Management is under instruction that no amendments can be made to this lease without the approval of the Finance and Audit Committee.

Affiliated rents paid for the Houston Service Center, the separate storage facility, the Dallas property, and the Houston property leases combined represented 5.2%, 4.3%, and 3.6% of total rents for continuing operations for fiscal 2004, 2003, and 2002, respectively.

The following compares current and prior fiscal year-to-date charges incurred under the Master Sales Agreement, the Affiliate Services Agreement, and affiliated property leases to the Company’s total capital expenditures, as well as relative general and administrative expenses and occupancy and other operating expenses included in continuing operations:

Related Parties

In June 2004, new two-year employment contracts were finalized for Chris and Harris Pappas. As in the past three years, they will both continue to devote their primary time and business efforts to Luby’s, while maintaining their roles at Pappas Restaurants, Inc.

Page 19

TRENDS AND UNCERTAINTIES

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. The Company’s same-store sales calculation measures the relative performance of a certain group of restaurants. Specifically, to qualify for inclusion in this group, a store must have been in operation for 18 consecutive accounting periods. 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.

The following shows the same-store sales change for comparative historical quarters:

The first quarter of fiscal 2002 includes September 11, 2001. In the third and fourth quarters of fiscal 2002, the Company was able to maintain its comparative cash flow level with declining sales by lowering operating costs. Even with national economic issues, such as military operations overseas and continued concerns about domestic terrorism, there was less quarterly same-store sales variability in fiscal 2003 than in the prior fiscal year.

In fiscal 2004, the Company chose a strategy based on offering bundled combination meals in lieu of all-you-can-eat promotions offered in the prior year. The strategic change began to show positive results in the second quarter and continued through the fiscal year-end. Additionally, the Company’s holiday promotions, which included a focus on Thanksgiving and Christmas in the second quarter and an emphasis on the entire Lenten season in the third quarter, were critical in positively improving the Company’s same-store sales performance.

The Company is constantly seeking additional opportunities to lower costs and increase sales. Notwithstanding the positive results of the most recent three quarters, consistent future declines in same-store sales could cause a reduction in operating cash flow. Considering that the prior defaults on the Company’s original credit facility were eliminated in the fourth quarter of fiscal 2004 with new alternate financing as described previously, significant problems with the new instruments are not currently anticipated. If, however, severe declines in cash flows were to develop in the future, the new financing agreements could be negatively affected. As a possible result, the lenders may choose to accelerate the maturity of any outstanding obligation, pursue foreclosure on assets pledged as collateral, and terminate their agreement.

Existing Programs

In addition to those described earlier, the Company has initiated a number of programs since March 2001. These programs, as listed below, were intended to address the decline in total and same-store sales, while prudently managing costs and increasing overall profitability:

Page 20

Impairment

Statement of Financial Accounting Standards (SFAS) No. 144 requires the Company to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers a history of operating losses or negative cash flows and unfavorable changes in market conditions to be its main indicators of potential impairment. Assets are generally evaluated for impairment at the restaurant level. If a restaurant does not meet its financial investment objectives or continues to incur negative cash flows or operating losses, an impairment charge may be recognized in future periods.

Insurance and Claims

Workers’ compensation and employee injury claims expense increased in comparison with the prior fiscal year due to a revision in reserve estimates resulting from the use of more comparable Texas nonsubscriber work injury loss history by the Company’s provider of actuarial estimates. Actual claims settlements and expenses may differ from estimated loss provisions. The Company cannot make any assurances as to the ultimate level of claims under the in-house safety program or whether declines in incidence of claims as well as claims costs experienced under the program will continue in future periods.

The Company may be the subject of claims or litigation from guests and employees alleging injuries as a result of its operations. In addition, unfavorable publicity from such allegations could have an adverse impact on financial results, regardless of their validity or ultimate outcome.

Minimum Wage and Labor Costs

From time to time, the U.S. Congress considers an increase in the federal minimum wage. The restaurant industry is intensely competitive, and in such case, the Company may not be able to transfer all of the resulting increases in operating costs to its guests in the form of price increases. In addition, since the Company’s business is labor-intensive, shortages in the labor pool or other inflationary pressure could increase labor costs.

RESERVE FOR RESTAURANT CLOSINGS

The Company’s reserve for restaurant closings is associated with prior disposal plans. The reserve declined from $1.7 million at August 27, 2003, to $500,000 at August 25, 2004, primarily due to the payment of and reductions in certain accrued lease settlement costs of approximately $1.2 million. (See Note 8 of the Notes to Consolidated Financial Statements.)

CRITICAL ACCOUNTING POLICIES

The Company has identified the following policies as critical to its business and the understanding of its results of operations. The Company believes it is improbable that materially different amounts would be reported relating to the accounting policies described below if other acceptable approaches were adopted. However, the application of these accounting policies, as described below, involve the exercise of judgment and use of assumptions as to future uncertainties; therefore, actual results could differ from estimates generated from their use.

Income Taxes

The Company records 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. The Company periodically reviews the recoverability of tax assets recorded on the balance sheet and provides valuation allowances as management deems necessary. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. Historically, the Company has been periodically reviewed by the Internal Revenue Service. The Company is currently under review for the 2002, 2001, and 2000 fiscal years.

Page 21

Impairment of Long-Lived Assets

The Company periodically evaluates long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable The Company estimates 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 time periods for estimating future cash flows 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. The Company considers 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 discounted cash flows or appraisals, if available.

Property Held for Sale

The Company also periodically reviews long-lived assets against its plans to retain or ultimately dispose of properties. If the Company decides to dispose of a property, it will be moved to property held for sale and 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. The Company routinely monitors the estimated value of property held for sale and records adjustments to these values as required. The Company will periodically measure and analyze its estimates against third-party appraisals.

Insurance and Claims

The Company periodically reviews its workers’ compensation, work injury, and general liability reserves to ensure reasonableness. Accrued claims’ liabilities are recorded for the estimated ultimate costs to settle both reported claims and claims incurred but not reported. These estimates are based on actuarially determined ultimate cost estimates adjusted for factors and circumstances surrounding all current and prior year claims as periodically reviewed by the Company’s internal risk management staff. Assumptions and judgments are used in evaluating the effect that the factors and circumstances surrounding reported claims have on estimated claims costs. Unexpected changes in claim-estimate-related factors and actuarial estimates could result in costs that are materially different than initially reported. The Company’s ongoing in-house safety and claims program focuses on safety training and rigorous scrutiny of new claims, which has reduced costs significantly in comparison to plans previously administered by third parties. The possibility exists that future claims-related liabilities could increase due to unforeseen circumstances.

Stock-Based Compensation

The Company accounts for its employee stock compensation plans using the intrinsic-value method of accounting set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and the related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock.

NEW ACCOUNTING PRONOUNCEMENTS

SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123,” was issued in December 2002 and is effective for fiscal years ending after December 15, 2002. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this pronouncement amends the disclosure requirements of SFAS No. 123 to require more prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company currently plans to continue to apply the intrinsic-value-based method to account for stock options and is complying with the disclosure requirements of SFAS No. 148.

Page 22

INFLATION

The Company’s policy is to maintain stable menu prices without regard to seasonal variations in food costs. General increases in costs of food, wages, supplies, and services make it necessary for the Company to increase its menu prices from time to time. To the extent prevailing market conditions allow, the Company intends to adjust menu prices to maintain profit margins.

FORWARD-LOOKING STATEMENTS

The Company wishes to caution readers that various factors could cause its actual financial and operational results to differ materially from those indicated by forward-looking statements made from time to time in news releases, reports, proxy statements, registration statements, and other written communications (including the preceding sections of this Management’s Discussion and Analysis), as well as oral statements made from time to time by representatives of the Company. Except for historical information, matters discussed in such oral and written communications are forward-looking statements that involve risks and uncertainties, including but not limited to general business conditions, the impact of competition, the success of operating initiatives, changes in the cost and supply of food and labor, the seasonality of the Company’s business, taxes, inflation, governmental regulations, and the availability of credit, as well as other risks and uncertainties disclosed in periodic reports on Form 10-K and Form 10-Q.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from changes in interest rates affecting its variable-rate debt. As of August 25, 2004, $61.5 million, the total amount of debt subject to interest rate fluctuations, was outstanding under its senior debt and subordinated notes. Assuming a consistent level of debt, a 1% change in interest rates effective from the beginning of the year would result in an increase or decrease in annual interest expense of approximately $615,000.

Although the Company is not currently using interest rate swaps, it has previously used and may in the future use these instruments to manage cash flow risk on a portion of its variable-rate debt.

Page 23

Item 8. Financial Statements and Supplementary Data

LUBY’S, INC.
FINANCIAL STATEMENTS

Years Ended August 25, 2004, August 27, 2003, and August 28, 2002
with Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Luby’s, Inc.

We have audited the accompanying consolidated balance sheets of Luby’s, Inc. at August 25, 2004, and August 27, 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended August 25, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Luby’s, Inc. at August 25, 2004, and August 27, 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 25, 2004, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, in 2003 the Company was required to change its method of accounting for discontinued operations. Also, as discussed in Note 2, the accompanying financial statements have been restated.

     /s/ERNST & YOUNG LLP

San Antonio, Texas
October 13, 2004 (except for Note 2, as to which the date is March 28, 2005).

Page 24

Luby’s, Inc.

See accompanying notes.

Page 25

Luby’s, Inc.

See accompanying notes.

Page 26

Luby’s, Inc.

See accompanying notes.

Page 27

Luby’s, Inc.

See accompanying notes.

Page 28

Luby’s, Inc.

Note 1. Nature of Operations and Significant Accounting Policies

Nature of Operations

Luby’s, Inc., is based in San Antonio, Texas (through December 3, 2004, thereafter, in Houston, Texas). As of August 25, 2004, the Company owned and operated 138 restaurants, with 128 in Texas and the remainder in four other states. The Company’s restaurants are located convenient to shopping and business developments as well as to residential areas. Accordingly, the restaurants appeal primarily to shoppers, travelers, store and office personnel at lunch, and to families at dinner.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Luby’s, Inc. and its wholly owned subsidiaries. Luby’s, Inc. was restructured into a holding company on February 1, 1997, at which time all of the operating assets were transferred to Luby’s Restaurants Limited Partnership, a Texas limited partnership composed of two wholly owned, indirect corporate subsidiaries of the Company. All restaurant operations are conducted by the partnership. Unless the context indicates otherwise, the word “Company” as used herein includes Luby’s, Inc., the partnership, and the consolidated corporate subsidiaries of Luby’s, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments such as money market funds that have a maturity of three months or less. Amounts receivable from credit card companies are also considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction.

Inventories

The food and supply inventories are stated at the lower of cost (first-in, first-out) or market.

Property Held for Sale

As further discussed in Note 8, property held for sale is recorded at amounts not in excess of what management currently expects to receive upon sale, less costs of disposal. The Company routinely monitors the estimated value of property held for sale and records adjustments to these values as required.

Debt Issuance Costs

Debt issuance costs include costs incurred in connection with the refinancing of the Company’s debt in fiscal year 2004. These costs are amortized using the effective interest method over the respective term of the debt to which they specifically relate.

Financial Instruments

The estimated fair value of financial instruments held by the Company approximates the carrying value.

Self-Insurance Accruals

The Company self-insures a significant portion of expected losses under our workers’ compensation, work injury, and general liability programs. Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred claims, both reported and not yet reported. These recorded estimated liabilities are based on judgments and independent actuarial estimates, which include the use of claim-development factors based on loss history; economic conditions; the frequency or severity of claims and claim development patterns; and claim reserve, management, and settlement practices.

Page 29

Derivative Financial Instruments

The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its amendments, Statement Nos. 137 and 138, on September 1, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at fair value. The Company did not have any derivative instruments in fiscal 2004 or 2003.

Revenue Recognition

Revenue from restaurant sales is recognized when food and beverage products are sold. Unearned revenues are recorded as a liability for dining cards that have been sold but not yet redeemed and are recorded at their expected redemption value. When dining cards are redeemed, revenue is recognized and unearned revenue is reduced.

Advertising Expenses

Advertising costs are expensed as incurred. Management changed its strategic focus in fiscal 2004 to an increased emphasis in this area. Total advertising expense was $4.1 million, $1.1 million, and $889,000 in fiscal 2004, 2003, and 2002, respectively, of which $54,000, $120,000, and $0 in fiscal 2004. 2003, and 2002, respectively, related to stores included in discontinued operations and was reclassified accordingly.

Depreciation and Amortization

The Company depreciates the cost of plant and equipment over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the lesser of their estimated useful lives or the related lease lives. Depreciation of buildings is provided on a straight line basis over the estimated useful lives (generally 20 to 33 years, not to exceed 25 years for buildings located on leased properties).

Operating Leases

The Company leases restaurant and administrative facilities under operating leases. Lease agreements generally include rent holidays, rent escalation clauses and contingent rent provisions for percentage of sales in excess of specified levels. Most of our lease agreements include renewal periods at the Company’s option. We recognize rent holiday periods and scheduled rent increases on a straight-line basis over the lease term beginning with the date the Company takes possession of the leased space. We record tenant improvement allowances and rent holidays as deferred rent expense on the consolidated statements of operations.

Impairment of Long-Lived Assets

Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. The Company evaluates impairments on a restaurant-by-restaurant basis and uses three or more years of negative cash flows and other market conditions as indicators of impairment.

Income Taxes

Deferred income taxes are computed using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities (temporary differences) and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In management’s opinion, adequate provisions for income taxes have been made for all years. Historically, the Company has been periodically reviewed by the Internal Revenue Service. The Company is currently under review for the 2002, 2001, and 2000 fiscal years.

Discontinued Operations

In August 2001, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company was required to adopt SFAS No. 144 as of August 29, 2002. The adoption of SFAS No. 144 extended the reporting of discontinued operations to all components of an entity from a segment of an entity. Beginning in fiscal 2003, all qualifying disposal plans were reported as discontinued operations, and operations related to those disposals in prior years were reclassified as

Page 30

required. The results of disposal plans prior to the adoption continue to be included in continuing operations for all periods presented.

Stock-Based Compensation

The Company accounts for its employee stock compensation plans using the intrinsic value method of accounting set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and the related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock.

Page 31

The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had converted to the fair-value method of expensing stock options, as alternatively allowed under SFAS No. 123:

^(a) Income taxes have been offset by a valuation allowance. See Note 4 of Notes to Consolidated Financial Statements.

Comprehensive Income

Comprehensive income (loss) includes adjustments for certain revenues, expenses, gains, and losses that are excluded from net income in accordance with U.S. generally accepted accounting principles, such as adjustments to the interest rate swaps.

Earnings Per Share

The Company presents basic income (loss) per common share and diluted loss per common share in accordance with SFAS No. 128, “Earnings Per Share.” The convertible subordinated notes have been excluded from the calculation of potentially dilutive shares since they are antidilutive. Basic income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares outstanding during each period presented. In fiscal years 2004, 2003, and 2002, dilutive shares had a minimal effect on income (loss) per share.

Accounting Periods

The Company’s fiscal year consists of 13 four-week periods ending on the last Wednesday in August.

Use of Estimates

In preparing financial statements in conformity with U.S. generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from these estimates.

New Accounting Pronouncements

SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123,” was issued in December 2002 and is effective for fiscal years ending after December 15, 2002. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this pronouncement amends the disclosure requirements of SFAS No. 123 to require more prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company currently plans to continue to apply the intrinsic-value based method to account for stock options and is complying with the disclosure requirements of SFAS No. 148.

Page 32

Reclassifications

Where applicable, prior period results have been reclassified to show the retroactive effect of discontinued operations per the business plan. Reclassification facilitates more meaningful comparability to the Company’s current information. As stores are closed in the future and presented in discontinued operations, quarterly and annual financial amounts, where applicable, will be reclassified for further comparability. Certain other reclassifications of prior period results have been made to conform to the current year presentation.

Note 2. Restatement of Financial Statements

The Company completed a review of its historical lease accounting expense calculations to determine whether the lease expense it had previously reported were materially in accordance with the views expressed by the Office of the Chief Accountant of the SEC on February 7, 2005 in a letter to the American Institute of Certified Public Accountants and other recent interpretations regarding certain operating lease accounting issues and their application under Generally Accepted Accounting Principles (“GAAP”). As a result of its review, the Company determined that its historical calculations for scheduled rent increases, and of determining lives used in the calculation of depreciation of leasehold improvements for certain leased properties, were materially different from current interpretations of GAAP. The Company has restated its consolidated financial statements in this Report for each of the fiscal years ended August 25, 2004, August 27, 2003 and August 28, 2002 to effect the appropriate changes.

As previously reported, the Company historically recognized scheduled rent increases as they occurred over the lease term. The Company annually reviewed its lease accounting expense calculations to determine whether the amounts it calculated were materially in accordance with GAAP. However, under current interpretations of GAAP, the Company has determined that the lease term should commence on the date the Company takes possession of the leased space, which is generally six months prior to a store’s opening date. Additionally, the Company has determined that rent expense should be recorded on a straight-line basis over lease periods that are consistent with or greater than the number of periods over which depreciation of leasehold improvements is recorded. Historically, the life used for rent expense purposes in some instances was shorter than the life used for depreciation purposes. Excluding tax impacts, the Company has recorded adjustments to “Other liabilities,” “Property and equipment—at cost, net,” and “Retained earnings” on the consolidated balance sheets and to “Occupancy and other operating expenses,” “Depreciation and amortization,” “Provision for asset impairments and restaurant closings” and “Discontinued operations, net of taxes” on the consolidated statements of operations to correct historical accounting methods.

The Company has restated its consolidated balance sheets as of August 25, 2004 and August 27, 2003, and the related consolidated statements of operations, shareholders equity and cash flows for each of the three fiscal years in the period ended August 25, 2004 for the misstatements discussed above. The cumulative effect of these accounting changes is an increase to retained earnings of $5.9 million as of the beginning and end of fiscal year 2002 and incremental decreases to retained earnings of, $1.9 million and $461,000 for the fiscal years 2003 and 2004, respectively.

Following is a summary of the effects of these accounting corrections on the consolidated balance sheets as of August 25, 2004 and August 27, 2003 (in thousands):

Page 33

Page 34

     Following is a summary of the effects of these accounting corrections on the consolidated statements of operations for the three fiscal years ended August 25, 2004 (in thousands):

Page 35