Relative only to continuing operations, the reconciliation of the expense (benefit) for income taxes to the expected income tax expense (benefit), computed using the statutory tax rate, was as follows:

For the quartertwo quarters ended November 23, 2005,February 15, 2006, including both continuing and discontinued operations, the Company generated gross taxable income of approximately $825,000$2.9 million, which will be offset by net operating loss carryforwards from prior years. However, the Company will incur an Alternative Minimum Tax (“AMT”) liability of approximately $18,000 for the period.$64,000. The AMT liability may be used as a credit in the future if regular income tax exceeds future AMT.

For fiscal years 2004 and 2003, including both continuing and discontinued operations, the Company generated net operating lossesloss carryforwards of approximately $4.0 million and $31.7 million, respectively, which will fully expire in 2024 and 2023, respectively, if not utilized. Due to the Company’s cumulative loss carryforward position, no federal income taxes were paid in fiscal 2004 or fiscal 2003. The tax benefit of the operating losses for book purposes in fiscal years 2004 and 2003 was netted against a valuation allowance because loss carrybacks were exhausted with the fiscal 2002 tax filing and the future realization of loss carryforwards was uncertain. For book purposes in fiscal years after 2004, tax expense and benefits will be offset against the valuation allowance until such time as the future realization of loss carryforwards becomes reasonably certain.

The balance of the net operating loss carryovers at the end of fiscal year 2005 was approximately $29.2 million. At the end of the second quarter fiscal 2006, which ended February 15, 2006, remaining net operating loss carryovers were approximately $26.3 million.

The Company's federal income tax returns have been periodically reviewed by the Internal Revenue Service. The Company's 2003, 2002, 2001, and 2000 returns are currently under review. Management believes that adequate provisions for income taxes have been reflected in the financial statements and is not aware of any significant exposure items that have not been reflected in the financial statements. The IRS review could result in a reduction of the cumulative net operating losses that are currently being carried forward to offset future taxable income.

The cost and accumulated depreciation of property plant and equipment at November 23, 2005,February 15, 2006, and August 31, 2005, together with the related estimated useful lives used in computing depreciation and amortization, were as follows:

On August 31, 2005, Luby’s, Inc. entered into an amended and restated $45.0 million unsecured Revolving Credit Facility Agreement (the “Revolving Credit Facility”) among Luby’s, Inc. and a syndicate of three independent banks. The Revolving Credit Facility may, subject to certain terms and conditions, be increased by an additional $15.0 million for a total facility size of $60.0 million. The Revolving Credit Facility allows up to $10.0 million of the available credit to be extended in the form of letters of credit. The Revolving Credit Facility terminates on, and all amounts owing thereunder must be repaid on, August 31, 2008.

At any time throughout the term of the loan, the Company has the option to elect one of two bases of interest rates. One interest rate option is the greater of (a) the federal funds effective rate plus 0.5%, or (b) prime, plus, in either case, an applicable spread that ranges from 0% to 0.25% per annum. The other interest rate option is LIBOR (London InterBank Offered Rate) plus an applicable spread that ranges from 1.00% to 1.75% per annum. The applicable spread under each option is dependent upon certain measures of the Company’s financial performance at the time of election.

The Company also pays a quarterly commitment fee based on the unused portion of the Revolving Credit Facility, which is also dependent upon the Company’s financial performance, ranging from 0.25% to 0.35% per annum. The Company also is obligated to pay certain fees in respect of any letters of credit issued as well as an administrative fee to the lender acting as administrative agent. Finally, the Company was obligated to pay to the lenders a one-time fee in connection with the closing of the Revolving Credit Facility.

The Revolving Credit Facility contains customary events of default and covenants and restrictions on the Company’s ability to engage in certain activities, including financial performance covenantsmeasures and limitations on capital expenditures, asset sales and acquisitions, and contains customary events of default. As of November 23, 2005,acquisitions. At February 15, 2006, the Company was in full compliance with all covenants.

All amounts owed by Luby’s, Inc. under the Revolving Credit Facility are guaranteed by its subsidiaries.

The Company’s total outstanding debt of $10.0$7.2 million as of November 23, 2005,February 15, 2006, is due and payable on August 31, 2008, under the terms of the Revolving Credit Facility.

Additionally, as of November 23, 2005,at February 15, 2006, the Company hashad a total of approximately $1.7$5.8 million committed under letters of credit throughwhich have been issued as security for the payment of insurance obligations classified as accrued expenses on the balance sheet. Of these letters of credit, approximately $5.1 were issued under the Revolving Credit Facility. An additional $700,000 in letters of credit, issued under a separate arrangement with one of the banks in the Revolving Credit Facility group.group, are collateralized by held-to-maturity time deposits. As of March 2, 2006, the total amount committed under letters of credit was reduced to $5.1 million.

Total interestInterest expense incurred year to date as of February 15, 2006 and February 9, 2005, was $643,000 and $2.9 million, respectively. Approximated $416,000 and $2.4 million in interest payment were made for the first fiscal quarter of 2006 and 2005, was $346,000 and $1.6 million, respectively. Interest paid approximated $266,000 and $1.2 million in the first fiscal quarter of 2006 and 2005,same periods, respectively.

In accordance with Company guidelines, management periodically reviews the financial performance of each store for indicators of impairment or indicators that closure would be appropriate. Where indicators are present, such as three full fiscal years of negative cash flows or other unfavorable market conditions, the carrying values of assets are written down to the estimated future discounted cash flows or fully written off in the case of negative cash flows anticipated in the future. Estimated future cash flows are based upon regression analyses generated from similar Company restaurants, discounted at the Company's weighted-average cost of capital.

Estimated lease settlements under the Company’s 2001 disposal plan were originally charged to expense under “Provision for (Reversal of) Asset Impairments and Restaurant Closings.” Subsequent adjustments to these lease settlements for actual exit costs incurred are also reflected in the “Provision for (Reversal of) Asset Impairments and Restaurant Closings.”

The Company recognizedactivity reflected in the following impairment (credits)/charges to income from operations:

From the third quarter of fiscal year 2003 through November 23, 2005,February 15, 2006, the Company has closed 6264 operating stores. The operating results of these locations have been reclassified and reported as discontinued operations for all periods presented as required by Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sales and broadens the presentation of discontinued operations to include more disposal transactions. The Company adopted SFAS No. 144 in the first quarter of fiscal year 2003, as required. The following are the sales and pretax losses reported for all discontinued locations:

The Company has continued to apply the proceeds from the sale of closed restaurants to pay down its debt. Of the total debt paid down during the first quartertwo quarters of fiscal years 2006 and 2005, $1.7$3.7 million and $2.9$10.0 million, respectively, resulted from sales proceeds related to business plan assets. Proceeds from the sale of properties held for sale as of November 23, 2005,February 15, 2006, may also be applied to pay down debt, but under the terms of the Company’s new credit facility,Revolving Credit Facility, there is no requirement to do so.

In accordance with EITF 87-24, “Allocation of Interest to Discontinued Operations,” interest on debt that is required to be repaid as a result of a disposal transaction should be allocated to discontinued operations. For the first quartersecond quarters of fiscal years 2006 and 2005 approximately $72,000,$50,000, and $655,000,$543,000, respectively, in interest expense were allocated to discontinued operations, while approximately $122,000, and $1.2 million, respectively, were allocated to discontinued operations.operations in the first two quarters of 2006 and 2005. The basis of the allocation to discontinued operations was an application of the credit facility's historical effective interest rates to the portion of the estimated total debt that equals the amount related to current and future business plan disposals as explained in the previous paragraph.

Relative to the business plan, as the Company has formally settled lease terminations or has reached definitive agreements to terminate leases, the related charges have been recorded. As of February 15, 2006 and August 31, 2005, no lease exit costs associated with the business plan met these criteria and, consequently, were not accrued as of that date.those dates. However, for the quarter ended November 23, 2005,February 15, 2006, the Company recognized approximately $410,000 in$200,000 for termination costs paid under definitive lease settlement agreements. Furthermore, the Company has not accrued future rental costs in instances where locations closed; however, management has the ability to sublease at amounts equal to or greater than the rental costs. The Company does not accrue employee settlement costs; these charges are expensed as incurred.

The following summarizes discontinued operations for the periods presented:

The impairments are related to write downs taken on properties closed and designated for immediate disposal. The assets of these individual closed units have been written down to their net realizable values. Impairments in value are determined based on comparisons made to similar property values in their respective markets and historical sale results. As the assets are recorded at their estimated net realizable value, there can be no assurance that the carrying value will equal the actual net proceeds upon sale. The Company offsets any gains or losses from applicable property disposals against impairments to arrive at net impairments. Dispositions of properties held for sale are expected to be completed within one year.

Other items include allocated interest, lease settlements, employment termination and shut-down costs, as well as operating losses through each restaurant's closing date and carrying costs incurred until the final disposal of these locations.

There are no active restaurant operations included in discontinued operations. Continuing cash flows used by discontinued operations consist primarily of costs related to the ownership and maintenance of properties that are being held for sale, and rental costs associated with leases that have not yet terminated. These activities are expected to cease within the next year as Company-owned properties are sold and leases are settled.

At November 23, 2005,February 15, 2006, the Company had a total of ninesix properties recorded at approximately $6.0$4.2 million in property held for sale. Of the ninesix properties remaining, one is related to prior disposal plans. In the first quarter of fiscal year 2006, two properties were reclassified from property held for sale to property plant and equipment. These properties are to be used to support operations. TwoFive properties were sold during the first quarter of fiscal year 2006. On September 1,August 31, 2005, the Company had a total of thirteen properties recorded at $9.3 million in property held for sale.

The Company is actively marketing the locations currently classified as property held for sale. When sold, proceeds from properties that have been identified as held for sale, are expected to be used to reduce outstanding debt. All propertyProperty held for sale consists primarily of already-closed restaurant properties. Property held for sale is valued at the lower of net depreciable value or net realizable value.

The Company’s results of discontinued operations will be affected to the extent proceeds from the sales exceed or are less than net book value.

The Company has no off-balance-sheetoff-balance sheet structured financing arrangements.

Three wage and hour investigations by the U.S. Department of Labor related to the application of wait staff tip pool sums have recently been consolidated in the Houston district. The Company has not received sufficient data to determineDuring the financial impact tosecond quarter of 2006, the Company if any, oraccrued an estimate for the probable outcomeanticipated settlement costs associated with these claims in payroll and related costs. However, final resolution of these claims may be different from the matter. The Company intends to vigorously defend its position.amount accrued.

The Company is presently, and from time to time, is subject to pending claims and lawsuits arising in the ordinary course of business. In the opinion of management, the resolution of any pending legal proceedings will not have a material adverse effect on the Company's operations or financial position.

At November 23, 2005,By February 15, 2006, the Company replaced the $5 million in surety bonds with letters of credit under the Company’s Revolving Credit Facility (as described in Note 6). This replacement allowed for a reduction in the required amount of $5.0 million have been issuedsecurity to cover the insurance obligations and provide the Company with a more cost effective collateral option as security for the payment of insurance obligations classified as accrued expenses on the balance sheet.obligations.

Christopher J. Pappas, the Company's Chief Executive Officer, and Harris J. Pappas, the Company's Chief Operating Officer, own two companies, Pappas Partners, L.P. and Pappas Restaurants, Inc. (the "Pappas Entities"), that may provide services to the Company under the terms of the Affiliate Services Agreement and the Master Sales Agreement.

Under the terms of the Master Sales Agreement, the Pappas Entities may provide specialized (customized) equipment fabrication and basic equipment maintenance, including stainless steel stoves, shelving, rolling carts and chef tables, to the Company. 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 monitoring pricing of the transactions associated with the Master Sales Agreement, the Finance and Audit Committee of the Company’s Board of Directors has periodically in the past used independent valuation consultants. The Company paid approximately $2,400$2,000 in the first quartertwo quarters of fiscal year 2006 and approximately $47,000$48,000 in the first quartertwo quarters of fiscal year 2005 under the terms of the Master Sales Agreement. All of such costsAgreement, which related to custom-fabricated and refurbished equipment.

The Company leases a facility, which is referred to as the Houston Service Center, from the Pappas Entities. The Houston Service Center serves as a centralized restaurant service center to support field operations. The facility is also used for repair and storage of new and used equipment.  The building at this location has 22,253 square feet of warehouse space and 5,664 square feet of office space. The lease is on a month-to-month basis and the monthly rental rate is approximately $0.24 per square foot. The Company paid approximately $20,000$34,000 and $41,000, repsectively, in each of the first two quarters of fiscal years 2006 and 2005 under the terms of that lease.

The Company also leases a warehouse facility, which is referred to as the Storage Facility, from the Pappas Entities. The Storage Facility is used to house the Company's equipment inventory. The Storage Facility complements the Houston Service Center with approximately 27,000 square feet of warehouse space at an approximate monthly lease rate of $0.21 per square foot. The Company paid approximately $17,000$28,000 and $35,000, respectively, for the first two quarters of each of the first quarters of fiscal years 2006 and 2005 under the terms of this lease.

The Company also leases space for one of its restaurants in a retail strip center in Houston, Texas, that is owned by a limited partnership of which 50% is owned by Christopher J. Pappas and Harris J. Pappas. The Company's restaurant has rented approximately 7% of the space in that center since July 1969. The Company paid approximately $42,000 for$83,000 in each of the first two quarters of fiscal years 2006 and 2005, respectively, under the terms of this lease.

Affiliated rents paid for the Houston Service Center, the Storage Facility and the Houston restaurant lease combined represented 10.9%9.9% and 8.3%8.8% of total rents for continuing operations during the first two quarters of each of the fiscal years 2006 and 2005, respectively.

Under the terms of a Purchase Agreement, dated as of March 9, 2001, and as amended as of June 7, 2004, among the Company, Christopher J. Pappas and Harris J. Pappas, the Company has agreed to submit three persons designated by Christopher J. Pappas and Harris J. Pappas as nominees for election to the Company's Board of Directors. Christopher J. Pappas and Harris J. Pappas have designated themselves and Frank Markantonis to serve on the Board of Directors. Messrs. Pappas retain their right for so long as they both are executive officers of the Company.

Christopher J. Pappas, the Company’s President and Chief Executive Officer, is a member of the Board of Directors of Amegy Bank, National Association, which is a lender under, and Documentation Agent of, the Revolving Credit Facility.

On November 9, 2005, the Company entered into new three year employment agreements with each of Christopher J. Pappas and Harris J. Pappas. Christopher J. Pappas and Harris J. Pappas are brothers.

Ernest Pekmezaris, Chief Financial Officer of the Company, is also the Treasurer of Pappas Restaurants, Inc. Compensation for the services provided by Mr. Pekmezaris to Pappas Restaurants, Inc. is paid entirely by that entity.

Peter Tropoli, Senior Vice President-AdministrationPresident- General Counsel and General CounselSecretary of the Company, is an attorney who, from time to time, has provided litigation services to entities controlled by Christopher J. Pappas and Harris J. Pappas. Mr. Tropoli is the stepson of Frank Markantonis, who, as previously mentioned, is a director of the Company.

Paulette Gerukos, Vice President of Human Resources of the Company, is the sister-in-law of Harris J. Pappas, the Chief Operating Officer.

The Company has an Executive Stock Option Plan as well as Incentive Stock Plans for officers and employees (“Employee Stock Plans”) and a Non-employee Director Stock Option Plan for non-employee directors. These plans authorize the granting of stock options, restricted stock, and other types of awards consistent with the purpose of the plans (see(See Note 12 to the Company's Consolidated Financial Statements included in the 2005 Form 10-K). The number of shares authorized for issuance under the Company's plans as of November 23, 2005February 15, 2006 totals 5,100,000,5,200,000, of which 1,998,8572,113,461 shares were available for future issuance. Stock options granted under these plans are granted with an exercise price equal to the market price of the Company's stock at the date of grant except for the Executive Stock Option Plan. Option awards under the Executive Stock Option Plan vest 50% on the first anniversary of the grant date, 25% on the second anniversary of the grant date, and the remaining 25% on the third anniversary of the grant date and expire ten years from the grant date. Option awards under the Employee Stock Plans generally vest 25% each year on the anniversary of the grant date and expire six to ten years from the grant date. Option awards under the Non-employee Director Stock Option Plan generally vest 100% on the first anniversary of the grant date and expire ten years from the grant date.

Prior to August 31, 2005, the Company accounted for its stock based compensation under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and the disclosures required by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." In accordance with APB Opinion No. 25, no stock-based compensation cost was reflected in the Company's prior year net income for grants of stock options to employees because the Company granted stock options with an exercise price equal to the market value of the stock on the date of grant. The reported stock based compensation expense, net of related tax effects, in the table below represents compensation costs associated with restricted stock grants.

Had the Company used the fair value based accounting method for stock compensation expense prescribed by SFAS Nos. 123 and 148 for the first quarterperiods ended November 17, 2004,February 9, 2005, the Company's consolidated net lossincome and net lossincome per share would have been increaseddecreased to the pro-forma amounts illustrated as follows:

Effective September 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123R using the modified prospective method. Under this method, compensation cost in the first quartertwo quarters of fiscal year 2006 includes the portion of awards vesting in the period for (a) all share-based payments granted prior to, but not vested as of August 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No.123 and (b) all share based payments granted subsequent to August 31, 2005, based on the grant date fair value estimated using the Black-Scholes option pricing model. Before adoption of SFAS No. 123R, pro forma disclosures reflected the fair value of each option grant estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

Results of prior periods do not reflect any restated amounts, and the Company had no cumulative effect adjustment upon adoption of SFAS No. 123R under the modified prospective method. The Company's policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight line basis over the requisite service period for the entire award. Additionally, the Company's policy is to reserve shares held in treasury to satisfy stock option exercises under the Executive Stock Option Plan.

The adoption of SFAS No. 123R decreased the Company's first quarter of fiscal year 2006 reported operating income, income before income taxes and reported net income for the first two quarters of fiscal year 2006 by $69,000,with no impact on either$184,000, and reduced both basic orand diluted net income per share.share by $0.01. The expense, before income tax effect, is reflected in general and administrative expense.expenses. The Company's adoption of SFAS No. 123R did not affect operating income, income before income taxes, net income, cash flow from operations, cash flow from financing activities, or basic and diluted net income per share in the comparable first quarterperiod of fiscal year 2005.

Partly in anticipation of the adoption of SFAS No.123R, in recent years the Company has adjusted the mix of employee long-term incentive compensation by reducing stock options awarded and increasing certain cash based compensation and other equity based awards. Compensation cost for share basedshare-based payment arrangements recognized in general and administrative expenses for the first quartertwo quarters of fiscal year 2006 was $69,000$184,000 for stock options and $43,000$97,000 for restricted stock. The total income tax effect of these expenses was offset by a valuation allowance and, therefore, no benefit was recognized in the income statement for the first quartertwo quarters of fiscal year 2006 for share basedshare-based compensation arrangements.

The fair value of each option award is estimated on the date of grant using the Black ScholesBlack-Scholes option pricing model, which determines inputs as shown in the following table. Because of differences in option terms and historical exercise patterns among the plans, the Company has segregated option awards into three homogenous groups for the purpose of determining fair values for its options. Valuation assumptions are determined separately for the three groups which represent, respectively, the Executive Stock Option Plan, the Employee Stock Plans and the Non-employee Director Stock Option Plan. The assumptions are as follows:

A summary of the Company's stock option activity as of November 23, 2005,February 15, 2006, and changes during the first quartertwo quarters of fiscal year 2006 is presented in the following table: