BUFFETS INC, 10-K, 1997-04-01

BUFFETS INC
10-K, 1997-04-01
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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

For the fiscal year ended: Commission file number:
January 1, 1997 0-14370

BUFFETS, INC.
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(Exact name of registrant as specified in its charter)

Minnesota 41-1462294
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(State of incorporation) (IRS Employer Identification No.)

10260 Viking Drive, Eden Prairie, Minnesota 55344-4668
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(Address of principal executive offices) (Zip code)

(612) 942-9760
(Registrant's telephone number, including area code)

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

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

Common stock, par value $.01 per share
Preferred Share Purchase Rights
7% Convertible Subordinated Notes due 2002

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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

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 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. / /

The aggregate market value of the shares of voting stock held by
non-affiliates of the registrant was approximately $291,903,227.00 at March 26,
1997, based on the closing sale price for that date as reported on The Nasdaq
National Market.

On March 26, 1997, there were 45,204,504 shares of common stock of the
Company, par value $.01 per share, outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Proxy Statement for its 1997 Annual Meeting to
be held May 13, 1997 are incorporated by reference in Part III. Portions of
Registrant's Annual Report to Shareholders for the fiscal year ended January
1, 1997 (the "1996 Annual Report") are incorporated by reference in Parts II
and IV.

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PART I

ITEM 1. BUSINESS

GENERAL

Buffets, Inc., a Minnesota corporation, was organized in 1983. Its
executive offices are located at 10260 Viking Drive, Eden Prairie, Minnesota
55344-4668. In September 1996, Buffets acquired HomeTown Buffet, Inc., a
Delaware corporation ("HomeTown Buffet"), as discussed below. References herein
to the "Company" are to Buffets, Inc. and its subsidiaries, Dinertainment, Inc.,
Evergreen Buffets Inc., HTB Ventures I, Inc., HTB Ventures II, Inc., HomeTown
Buffet, HomeTown Construction and Development, Inc., OCB Restaurant Co., OCB
Realty Co., OCB Purchasing Co. and OCB Property Co., unless the context
indicates otherwise.

On September 20, 1996, HomeTown Buffet merged with Country Delaware, Inc.,
a Delaware corporation and a wholly-owned subsidiary of the Company, with
HomeTown Buffet as the surviving corporation (the "Merger"). Under the Merger,
HomeTown Buffet became a wholly-owned subsidiary of the Company. In connection
with the Merger, which was accounted for as a pooling of interests, the Company
issued a total of 13,733,728 shares of its common stock in exchange for all
outstanding shares of HomeTown Buffet common stock (at an exchange ratio of 1.17
shares of Company common stock for each share of HomeTown Buffet common stock).
The Company also assumed options covering, in the aggregate, 1,967,167 shares of
the Company's common stock in substitution for previously outstanding options to
acquire shares of HomeTown Buffet's common stock. In addition, the Company
guaranteed the obligations of HomeTown Buffet under its outstanding 7%
Subordinated Convertible Notes, and the Company's common stock will be issued
upon any conversion thereof. Approximately $41.5 million in principal amount of
these notes were outstanding at the time of the Merger.

The Company is principally engaged in the development and operation of
"buffet" restaurants under the names "Old Country Buffet" ("Country Buffet" in
the state of Colorado) and "HomeTown Buffet." The Company obtained a federal
trademark registration covering the words "Old Country Buffet" in June of 1985.
Under the Merger, the Company gained access to a perpetual license to the
"HOMETOWN" mark, including a California state trademark registration, a U.S.
application pending to register "HOMETOWN BUFFET," and a U.S. trademark for
"HTB" in the restaurant field.

As of March 25, 1997, the Company operated 355 Company-owned restaurants
(256 Old Country Buffets, 96 HomeTown Buffets, and three Roadhouse Grills) in 34
states (including ten new openings and one closing since fiscal year-end 1996
and eight Old Country Buffets converted to HomeTown Buffets). The Company
contemplates that approximately 25 Company-owned restaurants will be opened in
1997. In addition, the Company has 24 franchised restaurants (five Old Country
Buffets and 19 HomeTown Buffets) are in operation in ten states.

The Company's restaurants offer a wide variety of freshly prepared menu
items, including soups, salads, entrees, vegetables, non-alcoholic beverages and
desserts, presented in a self-

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service buffet format in which customers select the items and portions of
their choice. The restaurants' typical dinner entrees include chicken,
carved roast beef and ham, and two or three other hot entrees such as
casseroles, shrimp and fish. Chicken, fish and two or three other entrees
usually are offered at lunch. The Company's restaurants utilize uniform
menus, recipes and ingredient specifications, except for certain variations
adopted in response to regional preferences.

The Company's restaurants range in size from approximately 5,500 to 15,740
square feet, seat from 225 to 600 people, and generally include areas that can
be partitioned to accommodate private meetings and group outings. The decor is
attractive and informal. To date, the Company has located its restaurants
primarily within or adjacent to strip or neighborhood shopping centers. The
Company has 75 freestanding locations, 21 of which it owns. The Company's
restaurants generally are open from 11:00 a.m. to 8:00 p.m. or 9:00 p.m. A
majority of the Company's restaurants also serve breakfast from 8:00 a.m. to
11:30 a.m. on weekends.

FORWARD-LOOKING INFORMATION

Certain statements in this Annual Report and in the Company's press
releases and oral statements made by or with the approval of the Company's
executive officers constitute or will constitute "forward-looking statements."
All forward-looking statements involve risks and uncertainties, and actual
results may be materially different. The following factors are among those that
could cause the Company's actual results to differ materially from those set
forth in such forward-looking statements.

The ability of the Company to open new restaurants depends on a number of
factors, including its ability to find suitable locations and negotiate
acceptable leases and land purchases, its ability to attract and retain a
sufficient number of qualified restaurant managers and the availability of
capital. The proportion of new restaurants that will be free-standing units,
either owned or leased, rather than strip mall locations will depend upon the
availability of suitable mall locations. The costs of restaurant development
and conversion will depend upon the level of contributions from landlords for
leasehold improvements, the actual number of free-standing sites utilized in
such development and whether such sites involve land purchases, the cost of
building supplies and general construction risks and costs. The Company's
ability to generate revenue as currently expected, unexpected expenses and the
need for additional funds to react to changes in the marketplace, including
unexpected increases in personnel costs and food supply costs, may impact
whether the Company has sufficient cash resources to fund its restaurant
development and conversion plans for 1997 and early 1998.

Other factors that could cause actual results of the Company to differ
materially from those contained in any such forward-looking statements include
the success and timing of the continuing integration of the operations of
Buffets and HomeTown Buffet, general economic conditions, the actions of
existing and future competitors, weather factors, the success of conversions,
unforeseen health developments, and regulatory constraints. The Company assumes
no obligation to publicly release the results of any revision or updates to
these forward-looking statements to reflect future events or unanticipated
occurrences.

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SCATTER SYSTEM FORMAT

Menu items generally are presented to diners using a "scatter system"
rather than a conventional straight buffet serving line. Under the scatter
system, six to eight separate food islands or counters are used to present
various courses of each meal to diners (for example, salads on one island,
desserts on another), with diners able to proceed directly to those islands
presenting the menu items they desire at the time. The scatter system promotes
easier food access and has helped reduce the long lines that often occurred
during peak hours in the Company's restaurants utilizing the conventional
straight-line serving format. The scatter system was introduced by the Company
in August 1989 and has been utilized in all of its restaurants developed since
March 1990. In addition, because of the success of the scatter system, the
Company pursued a remodeling program from February 1990 through 1995 with the
goal of converting substantially all of its then-existing restaurants from the
conventional straight-line format to the scatter system. The last restaurant
was converted in 1995.

SMALL BATCH PREPARATION

To ensure freshness, hot foods and bakery items are prepared repeatedly
throughout the day in relatively small batches. Restaurant managers closely
monitor the servicing area for the quality and availability of all items. The
Company believes the freshness achieved through small batch preparation
contributes significantly to the high quality of its food.

ALL-INCLUSIVE PRICE

Depending on the market area, the Company's buffet restaurants
currently charge an all-inclusive price of $5.49 to $6.29 for lunch, Monday
through Saturday, and $6.99 to $9.19 for dinner Monday through Sunday. On
Saturday and Sunday, certain restaurants serve breakfast at prices ranging
from $5.69 to $6.59. Reduced prices are available to senior citizens who
purchase an annual senior club card for $1.00 per year and to children under
the age of ten or twelve depending on the market area. Children's prices for
all meals are $.40 to $.55 per year of their age from two through ten or
twelve. Customers pay prior to entering the dining area and are assisted to
tables by restaurant employees. They may return for second helpings and
additional beverages and desserts without additional charge. This
all-inclusive pricing approach exists at virtually all of the Company's
restaurants, although alternative pricing and service arrangements are
occasionally implemented on a test basis.

RESTAURANT OPERATIONS AND CONTROLS

GENERAL. In order to maintain a consistently high level of food quality
and service in all of its restaurants, the Company has established uniform
operational standards which are implemented by the managers of each restaurant.
All restaurants are required to be operated in accordance with rigorous
standards and specifications relating to the quality of ingredients, preparation
of food, maintenance of premises and employee conduct.

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MENU SELECTION AND PURCHASING. Headquarters personnel prepare and
periodically revise standard recipes and menus and a list of approved
ingredients and supplies based upon the quality, availability, cost and
customer acceptance of various menu items. Food quality is maintained
through centralized coordination with suppliers and frequent restaurant
visits by District Representatives and other management personnel.

The Company purchases its food and beverage inventories and restaurant
supplies from independent suppliers approved by headquarters personnel, who
negotiate quality specifications, delivery schedules and pricing and payment
terms (typically 28 days) directly with the suppliers. Although all supplier
invoices are paid from Company headquarters, restaurant managers place orders
for inventories and supplies with, and receive shipments directly from,
suppliers. Restaurant managers approve invoices before forwarding them to
Company headquarters for payment. To date, the Company has not experienced
any difficulties in obtaining food and beverage inventories or restaurant
supplies, and the Company does not anticipate that any material difficulties
will develop in the foreseeable future.

RESTAURANT MANAGEMENT. Each restaurant typically employs a General
Manager, Kitchen Manager, Service Manager, and one to two assistant managers.
Each of the Company's restaurant general managers has primary responsibility
for day-to-day operations in one of the Company's restaurants, including
customer relations, food service, cost controls, restaurant maintenance,
personnel relations, implementation of Company policies and the restaurant's
profitability. A portion of each general manager's and other restaurant
manager's compensation depends directly on the restaurant's profitability.
In addition, restaurant managers receive stock options under the Company's
current stock option program entitling them to acquire an equity interest in
the Company. The Company believes that its compensation policies have been
important in attracting, motivating and retaining qualified operating
personnel.

Each restaurant general manager reports to a District Representative,
each of whom in turn reports to a regional director (currently 13 persons).
Each regional director reports to one of the Company's Executive Vice
President of Operations.

The Company maintains centralized financial and accounting controls for its
restaurants. On a daily basis, restaurant managers forward customer counts,
sales, labor costs and deposit information to Company headquarters. On a weekly
basis, restaurant managers forward a summarized profit and loss statement, sales
report, and supplier invoices. Payroll data is forwarded every two weeks.

MANAGEMENT TRAINING. The Company has a series of training programs that
are designed to provide managers with the appropriate knowledge and skills
necessary to be successful in their current position. All new managers hired
from outside the Company and hourly employees considered for promotion to
management are required to complete two weeks of classroom training at the
Buffets Training Center. After their two weeks at the Training Center, they
continue their training for six weeks in a Certified Training Restaurant. This
eight-week program provides the basic operating skills and management functions
necessary to shift-manage a Company restaurant. The information covered
includes basic management skills, food

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production, labor management, operating programs and personnel management.
After completing their time in the Certified Training Restaurant, the
managers-in-training continue their development using a structured,
self-paced, Management Skills Training Manual in their assigned restaurant.

Advancement is tied to both current operational performance and
training. Individuals designated for promotion to General Manager attend a
General Manager two-week training program conducted at the Training Center.
This program focuses on advanced management skills with emphasis on team
building and performance accountability. General Managers being considered
for promotion to District Representative complete a one-week training program
for new District Representatives. This training is conducted at the
Company's Training Center and focuses on coaching and development,
performance management, advanced problem solving and action plans.

In addition to these programs, a series of field seminars are conducted
for all existing management covering topics from ServSafe, the Company's food
safety procedures, to management skills.

FOOD QUALITY AND SAFETY. The Company is dedicated to serving fresh,
appealing, highly varied and wholesome food to its guests. This has been
pivotal to maintaining high guest satisfaction and is a primary contributor
to the Company's past success. In recent years, other reputable food service
companies have had their businesses substantially impacted by food-borne
illness incidents, some of which involved third party food suppliers and
transporters outside of their reasonable control. The Company has
implemented rigorous standards, training and other programs to minimize the
risk of such occurrences in its operations. There can be no assurance,
however, that these will be fully effective in preventing all food-borne
illness transmission, or that new illnesses resistant to current precautions
will not develop in the future.

FRANCHISING AND JOINT VENTURES

OLD COUNTRY BUFFET FRANCHISES. There currently are five franchised Old
Country Buffet restaurants in Nebraska and Oklahoma, owned by two
franchisees. The Company's Old Country Buffet franchise agreements generally
have initial terms of 15 years and require the franchisee to pay an initial
fee of $25,000 and continuing royalties equal to four percent of the
franchisee's sales. The Company has an agreement with each franchisee
whereby the Company has options exercisable at various times over the next
several years to repurchase the Old Country Buffet restaurants developed by
such franchisee at a predetermined formula price based principally on
restaurant gross sales.

HOMETOWN BUFFET FRANCHISES. HomeTown Buffet has three franchisees: HTB
Restaurants, Inc. ("HTB Restaurants"), Chi-Chi's, Inc. ("Chi-Chi's") and
Carlton A. Hargrave, Inc. ("Hargrave").

HomeTown Buffet and HTB Restaurants were parties to a multiple unit
agreement providing for the exclusive development of up to 27 restaurants
over a period ending

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December 31, 1997 in Arizona, Colorado, Idaho, Montana, Nevada, New Mexico,
Utah and Wyoming. Under this agreement, HTB Restaurants' exclusive right to
develop HomeTown Buffet restaurants in the states specified was contingent
upon HTB Restaurants meeting the development schedule set forth in the
agreement. HomeTown Buffet, having concluded that HTB Restaurants was in
breach of its obligation to develop restaurants under the agreement,
terminated the multiple unit agreement. HTB Restaurants made a demand to
arbitrate this matter. In January 1997, HomeTown prevailed in the
arbitration on this issue, and HTB Restaurants' exclusive development rights
under the agreement terminated. HTB Restaurants has, however, filed a motion
to have the decision of the arbitrator vacated or modified. See "Item 3.
Legal Proceedings" below.

With respect to each franchised restaurant, HTB Restaurants and HomeTown
Buffet enter into a separate franchise agreement. HTB Restaurants paid an
initial franchise fee for each new HomeTown Buffet restaurant opened and a
percentage royalty fee based on gross sales. Under its agreements with HTB
Restaurants, HomeTown Buffet has a right of first refusal with respect to the
sale of the HomeTown Buffet restaurants operated by HTB Restaurants and any
transfer of franchise rights granted by HomeTown to HTB Restaurants would
require HomeTown Buffet's consent, which may not unreasonably be withheld.

In May 1993, Chi-Chi's opened a HomeTown Buffet restaurant in Peabody,
Massachusetts. Chi-Chi's opened a second franchised unit in March 1994 in
Wichita, Kansas.

Hargrave operates a single franchised restaurant in Calexico,
California, which opened in December 1993. HomeTown Buffet served as general
contractor for the restaurant and in connection with the construction loaned
Hargrave approximately $150,000. The loan was fully paid in 1994. In April
1995 HomeTown Buffet made a loan to Hargrave in the principal amount of
$100,000 and an additional $100,000 in October 1995 under a promissory note
that permits Hargrave to borrow up to $200,000 in principal amount. The note
provides for interest to be paid at 1% above the announced reference rate of
US Bank of Oregon. All outstanding principal and interest on the note was
due on December 31, 1995 and remain due and payable at this time. HomeTown
Buffet agreed to defer Hargrave's franchise royalty payments, commencing
April 1995.

HomeTown Buffet's standard franchise agreement has a 15-year term (with
two five-year renewal options) and provides for a one-time payment to
HomeTown Buffet of an initial franchise fee and a continuing royalty fee at a
variable rate of between 2% and 4% of gross sales. HomeTown Buffet collects
weekly sales reports from its franchisees as well as periodic and annual
financial statements.

Each HomeTown Buffet franchisee is responsible for selecting the
location for its restaurant, subject to HomeTown Buffet approval. HomeTown
Buffet considers such factors as demographics, competition, traffic volume
and patterns, parking, site layout, size and other physical characteristics
in approving proposed sites. In addition, all site and building plans and
specifications must be approved by HomeTown Buffet.

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Franchisees must operate their HomeTown Buffet restaurants in compliance
with HomeTown Buffet's operating and recipe manuals. Franchisees are not
required to purchase food products or other supplies through HomeTown
Buffet's or the Company's suppliers. Each franchised restaurant is required
to at all times have a designated Manager and Assistant Manager who have
completed the required manager training program. For the opening of a
restaurant, HomeTown Buffet provides consultation and makes its personnel
generally available to a franchisee. In addition, HomeTown Buffet sends a
team of personnel to the restaurant for up to two weeks to assist the
franchisee and its managers in the opening, the initial marketing and
training effort as well as the overall operation of the restaurant.

HomeTown Buffet may terminate a franchise agreement for a number of
reasons, including a franchisee's failure to pay royalty fees when due,
failure to comply with applicable laws, or repeated failure to comply with
one or more requirements of the franchise agreement. Many state franchise
laws limit the ability of a franchisor to terminate or refuse to renew a
franchise. Generally, a franchisee may terminate a franchise agreement only
if HomeTown Buffet violates a material and substantial provision of the
agreement and fails to remedy the violation within a specified period. The
Company does not anticipate that the termination of any single franchise
agreement would have a materially adverse effect on its operations.
Termination by a multiple-unit franchisee of several franchise agreements for
various locations could, however, have a materially adverse effect on the
Company's operations.

JOINT VENTURES. The Company has taken advantage of joint venture
opportunities from time to time, principally as a means of entering new
geographic markets. In November 1988, the Company established Evergreen
Buffets, Inc., a majority owned joint venture subsidiary of the Company, to
develop and operate Old Country Buffet restaurants in Washington and Oregon.
The Company held 90% of the outstanding capital stock of this subsidiary and,
in December 1995, the Company purchased the outstanding capital stock of the
subsidiary held by the minority shareholder in exchange for 92,991 shares of
Company Common Stock and Evergreen Buffets, Inc. thereby became a wholly
owned subsidiary of the Company.

In October 1993, HomeTown Buffet formed two Joint Ventures: HTB
Ventures I, Inc. ("HTB I") and HTB Ventures II, Inc. ("HTB II"). HTB II was
terminated in April 1995 and HTB I was terminated in February 1996. The
Joint Ventures were initially established to provide HomeTown Buffet with a
means of attracting experienced management to help accelerate HomeTown's
expansion into the Midwest. HomeTown Buffet is sole owner of the two
restaurants that were operated by HTB II. Commencing February 29, 1996,
HomeTown Buffet became the sole owner of the ten restaurants that had been
operated by HTB I.

On March 7, 1997, the Company established Dinertainment, Inc. to develop
and operate restaurants that combine Italian-style buffet service with family
oriented games. Initial plans call for one location to be opened in 1997 in
the State of Ohio. The Company holds 80% of the outstanding capital stock of
the subsidiary.

The Company at present is not actively seeking to grant additional
franchises or enter into additional joint ventures relating to its Old Country
Buffets or HomeTown Buffet restaurants.

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COMPETITION

The food service industry is highly competitive. Menu, price, service,
convenience, location and ambiance are all important competitive factors,
with the relative importance of many such factors varying among different
segments of the consuming public.

By providing a wide variety of food and beverages at reasonable prices
in an attractive and informal environment, the Company seeks to appeal to a
broad range of value-oriented consumers. The Company believes that its
primary competitors in this industry segment are other buffet and cafeteria
restaurants, and traditional family and casual dining restaurants with full
menus and table service. The Company believes that its success to date has
been due to its particular approach combining pleasant ambiance, high food
quality, breadth of menu, cleanliness and reasonable prices with satisfactory
levels of service and convenience.

Sales are seasonal, with a lower percentage of annual sales occurring in
most of its current market areas during the winter months. Sales may also be
affected by unusual weather patterns or matters of public interest that
compete for the customers' attention.

ADVERTISING AND PROMOTION

To date the Company has relied primarily on customers' word-of-mouth
recommendations to promote its business. As a result, prior to 1993, annual
advertising costs never exceeded 1.1% of restaurant sales, such costs being
incurred primarily for menu cards, brochures and a limited amount of local
newspaper, radio and television advertising. Based on favorable results, the
Company increased its rate of expenditure on advertising to 1.3% of
restaurant sales in 1994, primarily for increased radio and television
advertising. The Company lowered its advertising spending to .9% of
restaurant sales in 1995 due to the decision in the fourth quarter of 1994 to
use those dollars in food and labor to better serve the guest. In 1996,
advertising costs represented 1.2% of restaurant sales. The Company expects
to spend approximately 1.4% of restaurant sales on advertising in 1997, which
expectation may be impacted by the effectiveness of such advertising and
production costs. The Company is prepared to increase its advertising
expenditures in the future if it determines that further increases are likely
to generate sufficient additional revenues. The Company believes its senior
citizen discount program has encouraged many senior citizens to eat at the
Company's restaurants.

REGULATION

The Company's restaurants must be constructed to meet federal, state and
local building and zoning requirements and must be operated in accordance
with state and local regulations relating to the preparation and serving of
food. The Company is also subject to various federal and state labor laws
which govern its relationships with its employees, including those relating
to minimum wages, overtime and other working conditions. Environmental
regulations have not had a material effect on the operations of the Company.
The Company to date has been successful in

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obtaining all necessary permits and licenses and complying with applicable
regulations, and does not expect to encounter any material difficulties in
the future with respect to these matters.

TRADEMARKS

In June 1985, the Company obtained a federal trademark registration
covering the words "Old Country Buffet." The Company has subsequently
obtained trademark protection for additional marks used in its business,
including the trademarks of HomeTown Buffet in connection with the Merger.
Generally, federal registration of a trademark gives the registrant the
exclusive use of the trademark in the United States in connection with the
goods or services associated with the trademark, subject to the common law
rights of any other person who began using the trademark (or a confusingly
similar mark) prior to the date of federal registration. Because of the
common law rights of such a pre-existing restaurant in certain portions of
Colorado, the Company's restaurants in that state use the name "Country
Buffet." The Company intends to take appropriate steps to develop and
protect its marks.

EMPLOYEES

As of February 26, 1997, the Company employed approximately 24,100
persons, including 40 supervisory and administrative, 1,590 managerial, and
22,470 restaurant employees. Approximately 66% of the Company's restaurant
employees work part-time. Relations with employees have been satisfactory
and no work stoppages due to labor disputes have occurred. The Company
anticipates that its work force will increase by more than 5% by the end of
1997, subject to unexpected turn-over levels, availability of qualified
personnel and changes in restaurant development plans.

RESTAURANT DEVELOPMENT

GENERAL. The Company opened 41 restaurants and closed eight in 1996 and
expects to open approximately 25 restaurants in 1997, of which ten were open
as of March 15, 1997. One restaurant was closed in Euclid, Ohio in 1997. As
of March 25, 1997, the Company has converted eight existing Old Country
Buffets restaurants to HomeTown Buffet restaurants.

GEOGRAPHIC EXPANSION STRATEGY. The Company initially concentrated its
restaurant development in the Midwest, and then after several years expanded
to other regions of the country. The Merger strengthened the Company's
presence in California and other key markets.

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The Company currently operates in 34 states. The Company attempts to cluster
its restaurants in geographic areas to achieve economies of scale in costs of
supervision, marketing and purchasing.

SITE SELECTION CRITERIA. The primary criteria considered by the Company
in selecting new locations are a high level of customer traffic, convenience
to both lunch and dinner customers in demographic groups (such as families
and senior citizens) that tend to favor the Company's restaurants, and the
occupancy cost of the proposed restaurant. The Company has found that these
criteria frequently are satisfied by well-located strip shopping centers that
benefit from cotenancy with strong national retailers and visibility to high
traffic roads. All but 110 of the Company's current restaurants are located
in such centers. Thirty-five of the other 110 restaurants are located in
regional or other enclosed shopping malls and 75 are located in free-standing
structures. The Company will pursue free-standing locations only if the
projected return on investment falls within acceptable ranges. The Company
typically requires a population density of at least 100,000 within five miles
of each new location, and currently is concentrating its development efforts
on urban areas that can accommodate a number of Company restaurants. Because
Old Country Buffet or HomeTown Buffet restaurants typically draw a
significant volume of customers, and because of the Company's financial
strength, the Company often has been able to negotiate favorable lease terms.

RESTAURANT CONSTRUCTION. In an effort to better control costs and
improve quality, the Company is closely involved in the construction of its
restaurants, and also in the acquisition and installation of fixtures and
equipment. The Company generally acts as its own general contractor, using
restaurant designs prepared by the Company's own architectural staff. The
Company normally satisfies the equipment and other restaurant supply needs of
its new restaurants from inventory acquired directly from manufacturers and
stored at the Company's warehouse in Eden Prairie, Minnesota. Restaurants
located in shopping centers typically open approximately 11 weeks after
construction begins, while free-standing restaurants typically open
approximately 17 weeks after construction begins. The average cost to
develop a buffet restaurant located in a shopping center during fiscal 1996
was approximately $679,000 for leasehold improvements (net of landlord
contributions) and approximately $614,000 for equipment and furnishings.
Free-standing owned restaurants developed in 1996 entailed an average land
cost of $700,000 and a average building cost of $1,364,000. It is expected
the increased development of free-standing restaurants will increase the
average cost per unit and associated capital requirements in 1997.

ITEM 2. PROPERTIES

The Company's executive offices are located in approximately 36,000
square feet of leased space in Eden Prairie, Minnesota, for a term ending
October 31, 1998. The Company has the option to extend the lease or seek
other alternatives, including the development of a corporate headquarters in
Eagan, MN on a parcel of land purchased in 1995 for this potential use. The
Company also leases a 22,200 square foot warehouse and training center in
Eden Prairie, Minnesota for a term ending January 31, 1998. The lease has
four one-year options that the Company could exercise to extend the lease
through January 31, 2002. The Company owns a 72,000 square foot facility in
Marshfield, Wisconsin that it utilizes for the fabrication of cabinetry and
fixtures for its restaurants. Until 2001, the Company remains obligated
under certain leases

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related to approximately 32,000 square feet of office space in San Diego,
California, previously utilized by HomeTown Buffet, Inc. as its headquarters.
Over 19,000 square feet have been sublet to third parties and the Company
continues to utilize approximately 6,000 square feet for regional office
purposes.

Most of the Company's restaurants are located in leased facilities,
although the Company will consider land purchases for free-standing
restaurants in instances where a more acceptable return on investment
justifies the additional investment. Seventy-five restaurants are located in
free-standing buildings, 35 are located in regional or other enclosed
shopping malls, and the rest are located in strip or neighborhood shopping
centers. Most of the leases provide for a minimum annual rent and additional
rent calculated as a percentage of restaurant sales, generally 3% to 5%, if
the rents so calculated exceed the minimum. The initial terms of the
Company's leases generally range from ten to fifteen years, and the leases
usually have renewal options for additional periods of five to ten years.

The Company owns substantially all of the equipment, furniture and
fixtures in its restaurants. Leasehold improvements made by the Company in
leased premises usually become the property of the landlord upon expiration
or termination of the lease. To date, most of the Company's strip mall
landlords have agreed to bear a portion of the cost of leasehold improvements
by way of either rent concessions or cash contributions.

ITEM 3. LEGAL PROCEEDINGS

IN RE BUFFETS, INC. SECURITIES LITIGATION, United States District Court
for the District of Minnesota, Master No. 3-94-1447. This action is a
consolidation of four separate lawsuits. The first lawsuit was commenced by
ZSA Asset Allocation Fund and ZSA Equity Fund on or about November 7, 1994.
Three other substantially similar actions were filed shortly thereafter by
alleged shareholders Marc Kushner, Trustee for Service Lamp Corp. Profit
Sharing Plan, Jerrine Fernandes, and John J. Nuttall. By Pretrial Order No.
1, entered in early January 1995, the District Court ordered that the four
lawsuits be consolidated into the single pending action and that plaintiffs
serve and file a Consolidated Amended Class Action Complaint (the
"Complaint"), which was served on or about January 31, 1995. The Court
ordered the dismissal of the Complaint upon motion by the defendants, but
granted plaintiffs leave to replead. Plaintiffs filed their Second Amended,
Consolidated Class Action Complaint (the "Second Complaint") on December 11,
1995. Defendants moved to dismiss the Second Complaint. On September 11,
1996, the District Court dismissed the Second Complaint without prejudice,
with leave to plaintiffs to replead. On November 8, 1996, plaintiffs filed
their Third Amended, Consolidated Class Action Complaint (the "Third
Complaint"). Defendants have moved to dismiss the Third Complaint, but
defendants' motion has not yet been heard by the District Court.

The Third Complaint is against the Company and several of its current
and former officers and directors. In the Third Complaint, plaintiffs seek
to represent a putative class consisting of all persons and entities
(excluding defendants and certain others) who purchased shares of the
Company's Common Stock during the period commencing October 26, 1993 and
ending October 25, 1994 (the "Class Period"). The Third Complaint alleges
that the defendants made

<PAGE>

misrepresentations and omissions of material fact during the Class Period
with respect to the Company's operations and restaurant development
activities, as a result of which the price of the Company's stock allegedly
was artificially inflated during the Class Period. The Third Complaint
further alleges that certain defendants made sales of Common Stock of the
Company during the Class Period while in possession of material undisclosed
information about the Company's operations and restaurant development
activities. The Third Complaint alleges that the defendants' conduct
violated the Securities Exchange Act of 1934 and seeks compensatory damages
in an unspecified amount, prejudgment interest, and an award of attorneys'
fees, costs and expenses.

Management of the Company believes that the action is without merit and
intends to defend it vigorously. Although the outcome of this proceeding
cannot be predicted with certainty, the Company's management believes that
while the outcome may have a material effect on earnings in a particular
period, the outcome should not have a material effect on the financial
condition of the Company.

ACTIONS INVOLVING HTB RESTAURANTS, INC., SUMMIT FAMILY RESTAURANTS,
INC., AND CKE RESTAURANTS, INC. On August 9, 1996, HTB Restaurants, Inc., a
franchisee of HomeTown Buffet, along with its parent entities, Summit Family
Restaurants, Inc. and CKE Restaurants, Inc. (the "Plaintiffs"), filed suit
against the Company and HomeTown Buffet in United States District Court for
the District of Utah, Central Division. The suit alleges, among other
things, that the Company and HomeTown Buffet illegally conspired to restrict
competition and to prevent the Plaintiffs from developing additional HomeTown
Buffet restaurants under the multiple unit agreement between HomeTown Buffet
and HTB Restaurants (the "Multiple Unit Agreement"). The continued viability
of the Multiple Unit Agreement, which provides HTB Restaurants with exclusive
HomeTown Buffet restaurant development rights in the states of Arizona,
Colorado, Idaho, Montana, Nevada, New Mexico, Utah and Wyoming, was the
subject of an arbitration proceeding between HomeTown Buffet and HTB
Restaurants (see below). The suit includes claims against the Company and
HomeTown Buffet for violations of both federal and state antitrust laws,
claims for unfair business practices, and claims for tortious interference
with contract and economic relations. The suit also alleges claims against
HomeTown Buffet for breach of contract and breach of the covenant of good
faith and fair dealing and sought to enjoin the merger between the Company
and HomeTown. On September 19, 1996, the District Court denied Plaintiffs'
motion for preliminary injunctive relief. The Company and HomeTown Buffet
intend to vigorously defend the lawsuit.

HomeTown Buffet previously gave HTB Restaurants notice that it had
breached its obligation to develop restaurants under the Multiple Unit
Agreement and that, therefore, HTB Restaurants' exclusive development rights
thereunder could be terminated. HTB Restaurants and its parent company,
Summit Family Restaurants, Inc. (collectively, the "Claimants"), commenced
binding arbitration proceeding against HomeTown Buffet before the American
Arbitration Association. The Statement of Claim alleged that termination of
the Multiple Unit Agreement was wrongful or improper and requested that
HomeTown Buffet be precluded from terminating HTB Restaurants' exclusive
rights under the Multiple Unit Agreement and/or money damages of up to $20
million. HomeTown Buffet denied Claimants' allegations. The matter was
heard in

<PAGE>

Salt Lake City, Utah in November and December 1996, and in January 1997,
before an arbitrator appointed by the American Arbitration Association. On
January 31, 1997, the arbitrator issued his Award and held that HomeTown
Buffet had not breached any of its obligations to Claimants or acted in bad
faith, and that therefore HomeTown Buffet was entitled to terminate the
Multiple Unit Agreement. The arbitrator also rejected the Claimants' request
for money damages. In February 1997, the Claimants filed a motion in the
United States District Court for the District of Utah, Central Division,
seeking to vacate or modify the Award of the arbitrator. HomeTown Buffet
intends to vigorously oppose the motion.

The Company and HomeTown believe that the suit is without merit, and
intend to vigorously defend the remaining claims under the lawsuit. Although
the outcome of this proceeding cannot be predicted with certainty the
Company's management believes that the outcome should not have a material
effect on the financial condition of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered by this report.

ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT.

The executive officers are elected annually by the Board of Directors to
serve until the next annual meeting of the Board. The following table
contains information regarding the present executive officers, and all
persons chosen to become executive officers, of the Company.

Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- --------------------------------------------------------------------------------
Glenn D. Drasher (45) 1997 Executive Vice President of Marketing
of the Company since January 1997;
Executive Vice President of Country
Kitchen International, family dining
restaurants, June 1996 to January
1997; Vice President of Marketing of
Country Kitchen, September 1993 to
June 1996; Senior Vice President of
Marketing of Chi-Chi's, Inc., Mexican
casual restaurants, 1983 to September
1993.

<PAGE>

Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- --------------------------------------------------------------------------------
David Goronkin (34) 1996 Executive Vice President of Operations
for the Company since September 1996;
Vice President of Operations of
HomeTown Buffet, May 1996 to September
1996; Director of Operations of
HomeTown Buffet, November 1994 to May
1996; various positions, HomeTown
Buffet, 1989 to November 1994.

Clark C. Grant (45) 1986 Executive Vice President of Finance
and Administration since December 1994
and Treasurer of the Company since May
1986; Vice President of Finance of the
Company, January 1991 to December 1994.

Roe H. Hatlen (53) 1983 Founder and Chairman and Chief Executive
Officer of the Company since December
1983; President of the Company, May
1989 to September 1992.

Thomas F. Hubbard (45) 1996 Executive Vice President of Real Estate
and Development of the Company since
September 1996; President of HomeTown
Development and Construction, Inc.
since 1995; Vice President of
Construction and Development for
HomeTown Buffet since 1992; Director
of Construction for HomeTown Buffet
from 1991 through 1992.

<PAGE>

Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- --------------------------------------------------------------------------------
Kerry A. Kramp (41) 1996 President of the Company since September
1996; President of HomeTown Buffet
from December 1995 to September 1996
and its Chief Operating Officer since
May 1995; Vice President of Operations
of HomeTown Buffet from February 1992
to December 1995; Director of
Specialty Foods for Geo. A. Hormel
Company from 1988 to February 1992.

Jean C. Rostollan (45) 1991 Executive Vice President of Purchasing
since September 1996; Executive Vice
President of Development and
Purchasing, January 1995 to September
1996; Assistant Secretary of the
Company since February 1992; Vice
President of Purchasing and
Distribution of the Company, September
1992 to December 1994; Vice President
of Purchasing and Marketing of the
Company, January 1991 to August 1992.

C. Dennis Scott (50) 1996 Co-Founder of the Company; Vice Chairman
and Chief Operating Officer of the
Company since September 1996; Founder
of HomeTown Buffet; Director and Chief
Executive Officer of HomeTown Buffet
since 1989.

<PAGE>

Executive Principal Occupation and
Officer Business Experience
Name and Age Since For Last Five Years
- --------------------------------------------------------------------------------
Michael C. Shrader (53) 1996 Vice President of Human Resources of the
Company since September 1996; Vice
President of Human Resources of
HomeTown Buffet, January 1996 to
September 1996; Director of Human
Resources of HomeTown Buffet, August
1995 to January 1996; Selection
Analyst, the Gallup Organization,
February 1995 to August 1995;
Self-employed business consultant,
March 1993 to February 1995; Vice
President of Human Resources of Red
Robin International, Inc., September
1987 to March 1993.

Rick H. White (39) 1993 Executive Vice President of Operations
of the Company since December 1994;
Vice President of Operations of the
Company, September 1992 to December
1994; Regional Director of the
Company, October 1990 to August 1992.

Neal L. Wichard (54) 1996 Senior Vice President of Real
Estate of the Company since September
1996; Vice Chairman of HomeTown
Buffet, October 1995 to September
1996; Secretary and Director of
HomeTown Buffet, July 1990 to
September 1996.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The information set forth under the caption "Market for the Company's
Common Stock and Related Stockholder Matters" on page 23 of the 1996 Annual
Report is incorporated herein by reference.

<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The information set forth under the caption, "Selected Consolidated Financial
Data" on page 4 of the 1996 Annual Report is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

The information set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 5 through 9
of the Company's 1996 Annual Report is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Except for KPMG Peat Marwick LLP's opinion relating to the consolidated
financial statements of HomeTown Buffet and its subsidiaries as of January 3,
1996 and for the years ended December 28, 1994 and January 3, 1996, the
information required under this Item 8 is incorporated herein by reference to
pages 10 through 23 of the Company's 1996 Annual Report. KPMG Peat Marwick
LLP's opinion appears at page 25 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Incorporated herein by reference to the sections captioned "Number and
Election of Directors," "Certain Information Regarding Board of Directors of the
Company" and "Beneficial Ownership Reporting" in the Proxy Statement for the
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended January 1,
1997. For information concerning executive officers, see Item 4A of this Annual
Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION.

Incorporated herein by reference to the section captioned "Compensation of
Executive Officers" in the Proxy Statement for the Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days of the close of the fiscal year ended January 1, 1997; provided, however,
that the subsection thereof entitled "Compensation Committee Report on Executive
Compensation" is not incorporated herein by reference.

<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Incorporated herein by reference to the similarly captioned section in the
Proxy Statement for the Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission within 120 days of the close of the fiscal
year ended January 1, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Incorporated herein by reference to the section captioned "Certain
Transactions" in the Proxy Statement for the Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission within 120 days of the
close of the fiscal year ended January 1, 1997.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this Report.

1. Financial Statements

Consolidated Balance Sheets at January 3, 1996 and January 1,
1997*

Consolidated Statements of Operations for the Years Ended
December 28, 1994, January 3, 1996 and January 1, 1997*

Consolidated Statements of Stockholders' Equity for the Years
Ended December 28, 1994, January 3, 1996 and January 1, 1997*

Consolidated Statements of Cash Flows for the Years Ended
December 28, 1994, January 3, 1996, and January 1, 1997*

Notes to Consolidated Financial Statements*

Independent Auditors' Report of Deloitte & Touche LLP*

Independent Auditor's Report of KPMG Peat Marwick LLP (See page
25 of this Annual Report on Form 10-K)
- ----------------------

*Incorporated herein by reference to pages 10 through 23 of the
Company's 1996 Annual Report

2. Supplemental Financial Schedules

None

<PAGE>

3. Exhibits

2 Agreement and Plan of Merger by and among the Company,
Country Delaware, Inc., and HomeTown Buffet (1)

3(a) Composite Amended and Restated Articles of Incorporation.
(2)

3(b) By-laws of the Company. (3)

3(c) Form of Rights Agreement, dated as of October 24, 1995
between the Company and the American Stock Transfer &
Trust Company, as Rights Agent (the "Rights Agreement").
(4)

4(a) Indenture dated as of November 27, 1995 related to 7%
Convertible Subordinated Notes of HomeTown Buffet due
2002. (5)

4(b) First Supplemental Indenture dated as of September 20,
1996 among the Company, HomeTown Buffet and Wells Fargo
Bank, N.A. (6)

10(a) 1985 Stock Option Plan. (7)*

10(b) 1988 Stock Option Plan. (8)*

10(d) Second Amended and Restated Credit Agreement by and
between the Company and First Bank National Association.
(10)

10(e) Amendment No. 1 dated as of September 20, 1996 to Second
Amended and Restated Credit Agreement by and between the
Company and First Bank National Association. (11)

10(f) Management Bonus Program.*

10(g) 1991 HomeTown Buffet Stock Option Plan, as amended. (12)*

10(h) Consolidating Promissory Note issued by Kerry A. Kramp to
the Company and related Stock Pledge Agreement, each
dated December 31, 1996.*

10(i) Promissory Note issued by Thomas E. Hubbard to HomeTown
Buffet and related Pledge Agreement, each dated
November 9, 1993. (13)*

<PAGE>

10(j) Promissory Note issued by Thomas E. Hubbard to HomeTown
Buffet and related Pledge Agreement, each dated
August 13, 1996.*

10(k) Promissory Note issued by Michael Shrader to HomeTown
Buffet and related Pledge Agreement, each dated August 7,
1996.*

10(l) Employment Agreement with Kerry A. Kramp dated
September 20, 1996. (14)*

10(m) Multiple Unit Agreement dated October 9, 1991 between HTB
Restaurants, Inc. and HomeTown, and amendments thereto.
(15)

10(n) Form of Franchise Agreement. (16)

10(o) Letter Agreement regarding severance obligations.*

11 Statement Regarding Computation of Per Share Earnings
(Loss).

13 Annual Report to Shareholders for the fiscal year ended
January 1, 1997.

21 Subsidiaries of the Company.

23(a) Consent of Deloitte & Touche LLP.

23(b) Consent of KPMG Peat Marwick LLP.

27 Financial Data Schedule.

- ----------------------------

* Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.

(1) Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K
dated June 3, 1996.

(2) Incorporated by reference to Exhibits to Registration Statement on Form S-3
dated June 2, 1993 (Registration No. 33-63694).

(3) Incorporated by reference to Exhibits to Annual Report on Form 10-K for
fiscal year ended December 29, 1993.

(4) Incorporated by reference to Exhibits to Report on Form 8-K, dated October
24, 1995.

<PAGE>

(5) Incorporated by reference to Exhibit 4.6 to Registration Statement on Form
8-A dated November 7, 1996.

(6) Incorporated by reference to Exhibit 4.7 to Registration Statement on Form
8-A dated November 7, 1996.

(7) Incorporated by reference to Exhibits to Registration Statement on Form S-1
dated October 25, 1985 (Registration No. 33-171).

(8) Incorporated by reference to Exhibits to Annual Report on Form 10-K for
fiscal year ended December 30, 1992.

(9) Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for
the quarter ended October 4, 1995.

(10) Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q
for the quarter ended April 24, 1996.

(11) Incorporated by reference to Exhibit 4.5 to Registration Statement on
Form 8-A dated November 7, 1996.

(12) Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for
the period ended April 24, 1996 (File No. 0-22402).

(13) Incorporated by reference to Exhibits to HomeTown Buffet's Registration
Statement on Form S-1, as amended, effective March 23, 1994 (Registration
No. 33-75810).

(14) Incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report
on Form 10-Q for the period ended October 9, 1996.

(15) Incorporated by reference from Exhibits to HomeTown Buffet's Registration
Statement on Form S-1, as amended, effective September 22, 1993
(Registration No. 33-67326). Confidential treatment for a portion of this
agreement has been granted to HomeTown by the Commission.

(16) Incorporated by reference from Exhibits to HomeTown Buffet's Registration
Statement on Form S-1, as amended, effective September 22, 1993
Registration No. 33-67326.

(b) Reports on Form 8-K.

The Company filed no current Reports on Form 8-K during the fourth quarter
of the fiscal year ended January 1, 1997.

<PAGE>

ANNUAL REPORT AND PROXY STATEMENT

With the exception of the matters specifically incorporated herein by
reference to the Company's 1996 Annual Report to Shareholders or to the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
May 13, 1997, no other portions of the 1996 Annual Report to Shareholders or
Proxy Statement are deemed to be filed as part of this Annual Report on Form
10-K.

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
HomeTown Buffet, Inc.:

We have audited the consolidated balance sheet of HomeTown Buffet, Inc. and
subsidiaries as of January 3, 1996, and the related consolidated statements
of income, stockholders' equity (deficit), and cash flows for each of the
years in the two-year period ended January 3, 1996 (not presented herein).
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HomeTown
Buffet, Inc. and subsidiaries as of January 3, 1996, and the results of
their operations and their cash flows for each of the years in the two-year
period ended January 3, 1996, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

San Diego, California
February 16, 1996, except as to note 6 to the consolidated
financial statements which is as of March 8, 1996

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Buffets, Inc.

March 31, 1997 By /s/ Roe H. Hatlen
- --------------- --------------------------
Date Roe H. Hatlen
Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

Signature Capacity Date
--------- -------- ----

/s/ Roe H. Hatlen Chairman of the Board March 31,1997
- ---------------------------- and Chief Executive
Roe H. Hatlen Officer (Principal
Executive Officer)

/s/ Clark C. Grant Executive Vice President March 31, 1997
- ---------------------------- of Finance and
Clark C. Grant Administration and
Treasurer
(Principal Financial
Officer)

/s/ Marguerite C. Nesset Vice President of March 31, 1997
- ---------------------------- Accounting and
Marguerite C. Nesset Controller (Principal
Accounting Officer)

/s/ C. Dennis Scott Vice Chairman of March 31, 1997
- ---------------------------- the Board, Chief Operating
C. Dennis Scott Officer and Director

/s/ Walter R. Barry, Jr. Director March 31, 1997
- ----------------------------
Walter R. Barry, Jr.

/s/ Christian F. Horn Director March 31, 1997
- ----------------------------
Christian F. Horn

/s/ Raymond A. Lipkin Director March 31, 1997
- ----------------------------
Raymond A. Lipkin

/s/ Alan S. McDowell Director March 31, 1997
- ----------------------------
Alan S. McDowell

/s/ David Michael Winton Director March 31, 1997
- ----------------------------
David Michael Winton

<PAGE>

EXHIBIT INDEX

EXHIBITS

2 Agreement and Plan of Merger by and among
the Company, Country Delaware, Inc.,
and HomeTown Buffet . . . . . . . . . . . . . .Incorporated by Reference

3 (a) Composite Amended and Restated Articles
of Incorporation. . . . . . . . . . . . . . . .Incorporated by Reference

3(b) By-laws of the Company. . . . . . . . . . . . .Incorporated by Reference

3(c) Form of Rights Agreement, dated as of
October 24, 1995 between the Company
and the American Stock Transfer & Trust
Company, as Rights Agent (the "Rights
Agreement"). . . . . . . . . . . . . . . . . . Incorporated by Reference

4(a) Indenture dated as of November 27, 1995
related to 7% Convertible Subordinated Notes
of HomeTown Buffet due 2002 . . . . . . . . . .Incorporated by Reference

4(b) First Supplemental Indenture dated as of
September 20, 1996 among the Company,
HomeTown Buffet and Wells Fargo Bank, N.A . . .Incorporated by Reference

10(a) 1985 Stock Option Plan. . . . . . . . . . . . .Incorporated by Reference

10(b) 1988 Stock Option Plan. . . . . . . . . . . . .Incorporated by Reference

10(d) Second Amended and Restated Credit
Agreement by and between the Company
and First Bank National Association . . . . . .Incorporated by Reference

10(e) Amendment No. 1 dated as of September 20, 1996
to Second Amended and Restated Credit
Agreement by and between the Company and
First Bank National Association . . . . . . . .Incorporated by Reference

10(f) Management Bonus Program. . . . . . . . . . . . . . Filed Electronically

10(g) 1991 HomeTown Buffet Stock Option Plan,
as amended. . . . . . . . . . . . . . . . . . .Incorporated by Reference

<PAGE>

10(h) Promissory Note issued by Kerry A. Kramp to the
Company and related Stock Pledge Agreement,
each dated December 31, 1996. . . . . . . . . . . . Filed Electronically

10(i) Promissory Note issued by Thomas E. Hubbard to
HomeTown Buffet and related Pledge Agreement,
each dated November 9, 1993.. . . . . . . . . .Incorporated by Reference

10(j) Promissory Note issued by Thomas E. Hubbard to
HomeTown Buffet and related Pledge Agreement,
each dated August 13, 1996. . . . . . . . . . . . . Filed Electronically

10(k) Promissory Note issued by Michael Shrader to
HomeTown Buffet and related Pledge Agreement,
each dated August 7, 1996.. . . . . . . . . . . . . Filed Electronically

10(l) Employment Agreement with Kerry A. Kramp
dated September 20, 1996. . . . . . . . . . . .Incorporated by Reference

10(m) Multiple Unit Agreement dated October 9, 1991
between HTB Restaurants, Inc. and HomeTown,
and amendments thereto. . . . . . . . . . . . .Incorporated by Reference

10(n) Form of Franchise Agreement.. . . . . . . . . .Incorporated by Reference

10(o) Letter agreement regarding severance obligations . .Filed Electronically

11 Statement Regarding Computation of Per
Share Earnings (Loss). . . . . . . . . . . . . . . .Filed Electronically

13 Annual Report to Shareholders for the
fiscal year ended January 1, 1997 . . . . . . . . . Filed Electronically

21 Subsidiaries of the Company.. . . . . . . . . . . . Filed Electronically

23(a) Consent of Deloitte & Touche LLP. . . . . . . . . . Filed Electronically

23(b) Consent of KPMG Peat Marwick LLP. . . . . . . . . . Filed Electronically

27 Financial Data Schedule.. . . . . . . . . . . . . . Filed Electronically

<PAGE>
EXHIBIT 10(f)

BUFFETS, INC.
MANAGEMENT BONUS PROGRAM

The Company has a management cash bonus program designed to attract,
retain and provide performance incentives for key management personnel. The
Bonus Program provides for cash bonuses (which vary in amount based upon
individual evaluations) to be paid to certain employees upon attainment by the
Company of predetermined performance objectives. Awards made to the executive
officers of the Company under the Bonus Program are determined by the
Compensation Committee of the Board of Directors.

<PAGE>

PROMISSORY NOTE
("Note")

Principal Sum:
One Hundred Seventy Three Minneapolis, Minnesota
Thousand Nine Hundred Four December 31, 1996
and No/100 Dollars ($173,904.00)

FOR VALUE RECEIVED, the undersigned, Kerry A.
Kramp ("Maker"), promises to pay to the order of Buffets,
Inc., a Minnesota corporation, its successors and assigns
("Holder"), at Holder's office at 10260 Viking Drive, Eden
Prairie, Minnesota 55344, or at any other place designated
in writing by Holder, in lawful money of the United States
of America the Principal Sum set forth above, together with
interest accruing from the date of this Note on the unpaid
principal balance at the rate of eight percent (8%) per
annum or at the highest rate permitted by law, whichever is
less.

1.Payments. Maker shall make payments against the
unpaid balance of principal and interest on a bi-weekly
basis coinciding with Buffets, Inc.'s corporate employee
payroll schedule, in the amount of Six Hundred One and
92/100 Dollars ($601.92) ("bi-weekly payment obligation"),
on each such bi-weekly payroll date, commencing on the
first bi-weekly payroll date after the date of this Note
and continuing thereafter until the outstanding principal
and interest amount is fully repaid or until the remaining
balance is otherwise due and payable as set forth herein.
Maker hereby irrevocably authorizes Holder to set-off the
bi-weekly payment obligation from indebtedness of Holder to
Maker now existing or hereafter accruing, whether arising
related to payroll amounts, bonuses, expense
reimbursements, or otherwise. Maker shall be responsible
for all taxes and other assessments due on the amounts
deducted, such deductions to be made after-tax. Maker's
assignment of his right to otherwise receive such proceeds
and his authorization for Holder to make such deductions
shall be in addition to, and not in lieu of, any other
right of collection of Holder. Holder specifically
reserves the right, in addition to its right of set-off and
deduction, to demand that the bi-weekly payment obligation
be made by Maker in whole or in part in cash or by check.

<PAGE>

The entire remaining unpaid balance of prinicipal and
interest shall be due and payable on December 31, 2000.

2.Acceleration. Holder may, at its option, elect
to declare the entire unpaid balance of this Note
immediately due and payable (i) if any payment is not made
within 10 days of the due date, (ii) if Maker is in default
of the Pledge Agreement (as defined below), or (iii) if for
any reason or no reason Maker's employment with Buffets,
Inc. terminates. Furthermore, this Note shall become
automatically due and payable (including unpaid interest
accrued hereon) without notice or demand should Maker die
or should a petition be filed by or against Maker under the
United States Bankruptcy Code or any other law relating to
insolvency, reorganization, receivership or relief of
debtors, which petition is not subsequently withdrawn or
dismissed within ninety (90) days of filing.

3.Security. This Note is secured by the pledge of
certain securities and other assets, as described in the
Pledge Agreement of even date herewith, a specimen of which
is attached hereto as Exhibit A (the "Pledge Agreement"), to
which reference is made for a description of the collateral
and the rights of Holder and Maker with regard to such
collateral.

4.Prepayment. Maker may prepay this Note without
penalty at any time. Any such prepayment shall be applied
first to pay interest accrued to the date of prepayment and
second to reduce the principal balance, with the most
remote principal payment under this Note being prepaid
first.

5.Presentment and Demand. Maker waives
presentment, demand, notice, protest and all other demands
and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note. In any
action on this Note, Holder need not produce or file the
original of this Note, but need only file a photocopy of
this Note certified by Holder to be a true and correct copy
of this Note.

6.Legal Fees. If any legal action or other
proceeding is brought by Holder for the collection of this
Note, Maker agrees to pay all reasonable sums for Holder's

<PAGE>

attorneys' fees and costs, at trial, on appeal, for any
petition for review, and in any bankruptcy proceeding.

7.Applicable Law. This Note shall be governed by
the substantive laws of the State of Minnesota, except
insofar as Holder may rely on the laws of the United States
to justify the interest rate charged hereunder.

IN WITNESS WHEREOF, the undersigned has executed
this Note as of the date set forth above.

"Maker"

____/Signature/____
Kerry A. Kramp
9043 Victoria Drive
Eden Prairie, MN 55347

STATE OF MINNESOTA)
) ss.
COUNTY OF HENNEPIN)

The foregoing instrument was executed before me
this thirty first day of December 1996, by Mr. Kerry A.
Kramp, personally known to the undersigned notary.

(seal) ____/Signature/____
Notary Public

Exhibit "A"
(SPECIMEN)
STOCK PLEDGE AGREEMENT

This PLEDGE AGREEMENT, dated and effective as of
December 31, 1996 ("Pledge Agreement"), is by and between

<PAGE>

Kerry A. Kramp (the "Pledgor") and Buffets, Inc. (the
"Pledgee").

RECITALS

A.Pledgor previously entered into that certain
promissory note dated August 23, 1993 in favor of HomeTown
Buffet, Inc., together with an accompanying pledge
agreement of even date therewith, and thereafter entered
into another promissory note dated April 13, 1995
(collectively, the "prior notes and pledge").

B.Pledgor acknowledges that HomeTown Buffet, Inc.
assigned its interests in the prior notes and pledge to
Buffets, Inc. effective September 20, 1996.

C.Pledgor requested and Pledgee has agreed that (i)
Pledgee would loan certain additional funds to Pledgor,
(ii) that such additional funds would be consolidated with
the outstanding balance under the prior notes and pledge,
(iii) that the consolidated loan balance would be reflected
in a new Promissory Note of even date herewith (the
"Note"), and (iv) that a new Stock Pledge Agreement would
be entered into securing Pledgor's payment obligations to
Pledgee under the Note according to the terms set forth
herebelow.

D.Pledgor acknowledges that the principal amount
of the Note, One Hundred Seventy Three Thousand Nine
Hundred Four and No/100 Dollars ($173,904.00), correctly
reflects the consolidated balance of the principal and
interest due under the prior notes and pledge as of the
date of the Note, together with all subsequent new advances
through the date of the Note.

E.To induce Pledgee to make the above-described
loan and to secure the obligations of Pledgor under the
Note, Pledgor wishes to pledge his currently outstanding
options to purchase Common Stock of Buffets, Inc.
(including vested options, warrants and rights as of this
date as well as those that vest in the future), any shares
of stock received upon exercise of any of the foregoing and
any funds and other issue realized in the sale of such
stock, and any other securities of Buffets, Inc. owned or
acquired by Pledgor.

<PAGE>

1.Security for Obligations.

This Pledge Agreement secures the payment of all
present and future obligations of Pledgor under the Note,
whether for principal or interest (the "Obligations").

2.Collateral.

The Collateral shall consist of the following:

a.Any and all securities of Buffets, Inc. held
by Pledgor as of the date hereof or hereafter acquired,
including but not limited to (i) Common Stock of Pledgee;
and (ii) options, warrants and rights to purchase Common
Stock of Pledgee (including vested options, warrants and
rights as of this date as well as options, warrants and
rights that vest in the future, to the full extent that the
same can be pledged as collateral as a matter of law
[collectively, "options"]), together with all of the
following proceeds or issue flowing therefrom or in any way
related thereto, regardless of whether the options
themselves may be pledged as a matter of law: any shares of
stock received upon exercise of any options, any proceeds
derived from the exercise of the options or conversion of
the stock received upon exercise, rights of conversion and
any proceeds or resulting asset associated therewith. (All
of the foregoing collectively and severally referred to
herein as the "Pledged Securities"). The certificates
reflecting the Pledged Securities (together with stock
powers properly executed in blank), and other documents
evidencing these securities, have been delivered to
Pledgee, together with all new, substituted and additional
securities issued at any time with respect to those
securities;

b.All now-existing and hereafter-arising
rights with respect to the Pledged Securities, including,
without limitation, all exercise and voting rights and all
rights to cash and noncash dividends on account of the
Pledged Securities; and

<PAGE>

otherwise disposed of, whether such disposition is
voluntary or involuntary, and includes, without limitation,
all rights to payment, including return premiums, with
respect to any insurance relating thereto and also includes
all interest, dividends and other property receivable or
received on account of the collateral or proceeds thereof.

3.Representations and Warranties.

Pledgor represents and warrants that:

a.Except as contemplated herein, delivery and
performance by Pledgor of this Pledge Agreement will not
contravene, constitute a default under or result in the
imposition of a lien upon any property of Pledgor pursuant
to any applicable law or regulation or any contract,
agreement, judgment, order, decree or other instruments
binding upon or affecting Pledgor;

b.This Pledge Agreement constitutes the legal,
valid and binding obligation of Pledgor, enforceable in
accordance with its terms;

c.As of the date hereof, there is no action,
suit or proceeding pending or threatened against Pledgor
that might adversely affect the Collateral in any material
respect;

d.Pledgor is the sole owner of the Pledged
Securities (or, in the case of after acquired Collateral,
at the time Pledgor acquires rights in the Collateral, will
be the sole owner thereof); and

e.No person has (or, in the case of
after-acquired Collateral, at the time the owner of such
Collateral acquires rights therein, will have) any right,
title, claim or interest (by way of security interest or
other lien or charge or otherwise) in, against or to the
Collateral superior to that of Pledgee.

4.Covenants of Pledgor.

Pledgor agrees:

a.To do all acts that may be necessary to

<PAGE>

maintain, preserve and protect the Collateral;

b.Not to use or permit any of the Collateral
to be used unlawfully or in violation of any provision of
any applicable statute, regulation or ordinance or any
policy of insurance covering the Collateral;

c.To pay promptly when due all taxes,
assessments, charges, encumbrances and liens now or
hereafter imposed upon or affecting any of the Collateral
and not to allow or grant any other lien or security
interest with respect to the Collateral superior to that of
Pledgee;

d.To procure, execute and deliver from time to
time any endorsements, assignments, financing statements
and other writings deemed necessary or appropriate by
Pledgee to perfect, maintain and protect its security
interests hereunder and the priority thereof;

e.To appear in and defend any action or
proceeding that may affect Pledgor's title to or Pledgee's
interest in the Collateral;

f.To provide Pledgee with such records or
copies thereof and such other reports and information
relating to the Collateral as Pledgee may reasonably
request from time to time;

g.Not to surrender or lose possession of
(other than to Pledgee) any Collateral or right or interest
therein;

h.To account fully for and promptly deliver to
Pledgee, in the form received, all dividends and other
distributions received in respect of the Collateral,
endorsed to Pledgee, and until so delivered all such
property shall be held by Pledgor in trust for Pledgee,
separate from all other property of such owners and
identified as the property of Pledgee;

i.To deliver to Pledgee such assignments,
stock transfer powers or other documents as Pledgee may
reasonably request in compliance with the terms of this
Pledge Agreement; and

<PAGE>

j.To provide, upon reasonable request, Pledgee
with additional collateral so that the Obligations are at
all times fully secured.

5.Authorized Action by Pledgee.

Pledgor irrevocably appoints Pledgee as his
attorney-in- fact (but Pledgee shall not be obligated to
and shall incur no liability to Pledgor or any third party
for failure so to do) to do any act that Pledgor is
obligated by this Pledge Agreement to do and to exercise
such rights and powers as Pledgor might exercise with
respect to the Collateral, including, without limitation,
the right to:

a.Enter into any extension, reorganization,
deposit, merger, consolidation or other agreement
pertaining to, or deposit, cancel, surrender, accept, hold
or apply other property in exchange for, the Collateral;

b.Transfer the Collateral to Pledgee's own or
its nominee's name; and

c.Take any other action Pledgee deems
advisable for the purpose of protecting the Collateral.

Such care as Pledgee gives to the safekeeping of its own
property of like kind shall constitute reasonable care of
the Collateral when in Pledgee's possession, provided,
however, that Pledgee shall not be required to make any
presentment, demand or protest or give any notice and need
not take any action to preserve any rights against any
prior party or any other person in connection with the
Obligations or with respect to the Collateral.

6.Administration of the Pledged Securities.

<PAGE>

Pledgee shall be entitled to vote or consent, in its
discretion. This irrevocable proxy is coupled with an
interest. In such event, Pledgor agrees to deliver to
Pledgee such further evidence of the grant of such proxy as
Pledgee may request, but no further evidence shall be
required in order to allow Pledgee to exercise its voting
rights.

b.If at any time or from time to time after
the date hereof, with respect to the Pledged Securities,
Pledgor shall receive or shall become entitled to receive
any dividend or any other distribution, whether in
securities or other property, by way of liquidation, stock-
split, spin-off, split-up or reclassification, combination
of shares or the like, or in case of any reorganization,
consolidation or merger, Pledgor shall immediately deliver
all such securities or property, in pledge, to Pledgee as
security for the payment and performance of the Obligations
in the manner provided for in this Pledge Agreement.
Pledgee shall have the authority, whether or not an Event
of Default shall have occurred or be continuing, to receive
any cash or other property distributions with respect to
the Pledged Securities and to apply such payments against
the Obligations in such order as it may elect. Pledgor
shall turn over any such payments to Pledgee immediately.
Pledgee may endorse, in its own name or in that of Pledgor,
any and all instruments by which any payment on the
Collateral may be made, and may take such action as it may
deem appropriate from time to time, in its own name or in
that of Pledgor, to enforce collection of the Collateral.
For such purpose Pledgor constitutes and appoints Pledgee
and each of its officers the attorneys-in-fact of Pledgor,
under powers coupled with interests, with full power and
substitution in each.

c.So long as any of the Obligations remain
outstanding, Pledgor will not transfer, whether by sale,
gift or otherwise, any ownership interest in the Collateral
without Pledgee's prior written approval.

d.Pledgee may exercise any options or warrants
that are included in the Pledged Securities, provided,
however that any securities received upon exercise shall be
subject to this Pledge Agreement.

<PAGE>

e.Upon exercise of Pledgee's rights, all
rights of Pledgor pursuant to paragraphs a and b above
shall cease, and all such rights shall become vested in
Pledgee who shall have the sole right to exercise voting
and other consensual rights and to receive and hold
dividends subject to this Pledge Agreement.

7.Events of Default.

Any one or more of the following events
constitutes an event of default hereunder ("Event of
Default"):

a.Nonpayment of interest or principal on the
Note when due;

b.Breach of any representation, warranty or
covenant of Pledgor under this Pledge Agreement;

c.Death of Pledgor or termination of Pledgor's
employment with Pledgee; and

d.The insolvency of Pledgor; the making by
Pledgor of an assignment for the benefit of creditors; the
initiation by or against Pledgor of any proceeding under
the Federal Bankruptcy Act or any state insolvency law; the
appointment of a receiver for any part of property owned by
Pledgor; or the issuance of a writ or order of attachment
or garnishment against any such property.

8.Rights of Pledgee.

Upon the occurrence of an Event of Default and
in addition to all rights and remedies at law or in equity
or otherwise:

a.Pledgee may foreclose or otherwise enforce
Pledgee's security interest in the Collateral in any manner
permitted by law or provided for herein;

b.Pledgee may sell or otherwise dispose of the
Collateral;

c.Pledgor covenants and agrees that, upon
request of Pledgee, he will deliver to Pledgee for

<PAGE>

cancellation all of the outstanding options and warrants
included in the Pledged securities, free of any lien,
security interest, charge, or any other encumbrance, other
than the pledge provided for herein;

d.Pledgor covenants and agrees that to the
extent options and warrants are not canceled pursuant to
paragraph c, upon request of Pledgee, he will immediately
exercise any outstanding exercisable options included in
the Pledged Securities to the extent that such options are
in-the-money options as of the date of the Event of Default
and deliver to Pledgee the stock received upon exercise
free of any lien, security interest, charge, or any other
encumbrance, other than the pledge provided for herein;

e.Pledgee may register the Collateral in
Pledgee's name and exercise any rights normally incident to
the ownership of the Collateral;

f.Upon 10 days written notice to Pledgor,
Pledgee may list any of the Collateral with a reputable,
independent business opportunity broker for private sale;

g.Any cash held by Pledgee as Collateral and
all proceeds of any sale of Collateral shall be applied as
follows: (i) to pay all of Pledgee's costs and expenses
related to the occurrence of the Event of Default or the
sale of Pledged Securities; (ii) to pay the principal and
interest due on the Note on the date of the sale; and (iii)
the balance of such proceeds, if any, shall be paid to
Pledgor; and

h.The rights and remedies granted to Pledgee
under this Pledge Agreement and the Note, and the Uniform
Commercial Code, shall be cumulative and may be exercised
singly or concurrently with other rights and remedies
Pledgee may have.

9.General Provisions.

<PAGE>

other agreement, all of which rights, powers and remedies
shall be cumulative and may be exercised successively or
concurrently without impairing Pledgee's security interest
in the Collateral.

b.Waiver. Any waiver, forbearance, failure or
delay by Pledgee in exercising, or the exercise or
beginning of exercise by Pledgee of any right, power or
remedy, simultaneous or later, shall not preclude the
further, simultaneous or later exercise thereof, and every
right, power or remedy of Pledgee shall continue in full
force and effect until such right, power or remedy is
specifically waived in a writing executed by Pledgee.

c.Setoff. Pledgor agrees that Pledgee may
exercise its right of setoff, if any, with respect to the
Obligations in the same manner as if the Obligations were
unsecured.

d.Severability. If any of the provisions of
this Pledge Agreement shall be held invalid or
unenforceable, this Pledge Agreement and the rights and
obligations of the parties hereto shall be construed
without reference to such provision and enforced
accordingly.

e.Benefit and Assignment. This Pledge
Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective
successors and assigns. Pledgor may not voluntarily or
involuntarily assign his interests under this Pledge
Agreement without the prior written consent of the Pledgee.

f.Entire Agreement. This Pledge Agreement
embodies the entire agreement and understanding of the
parties and supersedes any and all prior agreements,
arrangements and understandings relating to matters
provided for herein. No amendment or waiver of compliance
with any provision or condition of this Pledge Agreement or
consent pursuant to this Pledge Agreement will be effective
unless evidenced by an instrument in writing signed by the
parties.

g.Headings. The headings in this Pledge
Agreement are for convenience only and will not control or

<PAGE>

affect the meaning or construction of the provisions of
this Pledge Agreement.

h.Notices. Any notice, demand or request
required or permitted to be given under the provisions of
this Pledge Agreement shall be in writing and shall be
deemed to have been duly delivered on the date of personal
delivery or on the date of receipt if mailed by registered
or certified mail, postage prepaid and return receipt
requested, and shall be deemed to have been received on the
date of personal delivery or on the date set forth on the
return receipt, to the following addresses, or to such
other address as any party may request:

Pledgor: Kerry A. Kramp
10260 Viking Drive
Eden Prairie, MN 55344

Pledgee: Buffets, Inc.
Attention: Chief Financial Officer
10260 Viking Drive
Eden Prairie, MN 55344

i.Attorneys' Fees. The prevailing party in
any proceeding required to enforce this Pledge Agreement
shall be entitled to recover from the other all costs and
expenses of enforcement, including reasonable attorneys'
fees prior to and at trial, on appeal, on any petition for
review, in any arbitration, in any administrative or
bankruptcy proceeding, and in any other judicial,
quasi-judicial or nonjudicial proceeding.

j.Applicable Law. This Pledge Agreement shall
be governed by the substantive laws of the State of
Minnesota.

EXECUTED as of the day and year first written
above.

PLEDGOR:
----------------------------
Kerry A. Kramp

<PAGE>

PLEDGEE: Buffets, Inc.

----------------------------
By: Roe H. Hatlen, CEO

STATE OF MINNESOTA)
) ss.
COUNTY OF HENNEPIN)

The foregoing instrument was executed before me
this thirty first day of December 1996, by Mr. Kerry A.
Kramp, personally known to me to be the individual
executing the foregoing document in the capacity of
"Pledgor".

----------------------------
Notary Public

STATE OF MINNESOTA)
) ss.
COUNTY OF HENNEPIN)

The foregoing instrument was executed before me
this thirty first day of December 1996, by Mr. Roe H.
Hatlen, personally known to me to be Chairman and Chief
Executive Officer of Buffets, Inc., the Pledgee under the
foregoing document.

(seal)
----------------------------
Notary Public

<PAGE>

STOCK PLEDGE AGREEMENT

This PLEDGE AGREEMENT, dated and effective as of December 31, 1996
("Pledge Agreement"), is by and between Kerry A. Kramp (the "Pledgor") and
Buffets, Inc. (the "Pledgee").

RECITALS

A. Pledgor previously entered into that certain promissory note dated
August 23, 1993 in favor of HomeTown Buffet, Inc., together with an
accompanying pledge agreement of even date therewith, and thereafter entered
into another promissory note dated April 13, 1995 (collectively, the "prior
notes and pledge").

B. Pledgor acknowledges that HomeTown Buffet, Inc. assigned its interests
in the prior notes and pledge to Buffets, Inc. effective September 20, 1996.

<PAGE>

in a new Promissory Note of even date herewith (the "Note"), and (iv) that a
new Stock Pledge Agreement would be entered into securing Pledgor's payment
obligations to Pledgee under the Note according to the terms set forth
herebelow.

D. Pledgor acknowledges that the principal amount of the Note, One
Hundred Seventy Three Thousand Nine Hundred Four and No/100 Dollars
($173,904.00), correctly reflects the consolidated balance of the principal
and interest due under the prior notes and pledge as of the date of the Note,
together with all subsequent new advances through the date of the Note.

E. To induce Pledgee to make the above-described loan and to secure the
obligations of Pledgor under the Note, Pledgor wishes to pledge his currently
outstanding options to purchase Common Stock of Buffets, Inc. (including
vested options, warrants and rights as of this date as well as those that
vest in the future), any shares of stock received upon exercise of any of the
foregoing and any funds and other issue realized in the sale of such stock,
and any other securities of Buffets, Inc. owned or acquired by Pledgor.

1. Security for Obligations.

This Pledge Agreement secures the payment of all present and future
obligations of Pledgor under the Note, whether for principal or interest (the
"Obligations").

2. Collateral.

The Collateral shall consist of the following:

<PAGE>

related thereto, regardless of whether the options themselves may be pledged
as a matter of law: any shares of stock received upon exercise of any
options, any proceeds derived from the exercise of the options or conversion
of the stock received upon exercise, rights of conversion and any proceeds or
resulting asset associated therewith. (All of the foregoing collectively and
severally referred to herein as the "Pledged Securities"). The certificates
reflecting the Pledged Securities (together with stock powers properly
executed in blank), and other documents evidencing these securities, have
been delivered to Pledgee, together with all new, substituted and additional
securities issued at any time with respect to those securities;

b. All now-existing and hereafter-arising rights with respect to the
Pledged Securities, including, without limitation, all exercise and voting
rights and all rights to cash and noncash dividends on account of the Pledged
Securities; and

c. All proceeds of the foregoing Collateral. For purposes of this Pledge
Agreement, the term "proceeds" includes whatever is receivable or received
when any of the Collateral or proceeds is sold, collected, exchanged or
otherwise disposed of, whether such disposition is voluntary or involuntary,
and includes, without limitation, all rights to payment, including return
premiums, with respect to any insurance relating thereto and also includes
all interest, dividends and other property receivable or received on account
of the collateral or proceeds thereof.

3. Representations and Warranties.

Pledgor represents and warrants that:

a. Except as contemplated herein, delivery and performance by Pledgor of
this Pledge Agreement will not contravene, constitute a default under or
result in the imposition of a lien upon any property of Pledgor pursuant to
any applicable law or regulation or any contract, agreement, judgment, order,
decree or other instruments binding upon or affecting Pledgor;

b. This Pledge Agreement constitutes the legal,

<PAGE>

valid and binding obligation of Pledgor, enforceable in accordance with its
terms;

c. As of the date hereof, there is no action, suit or proceeding pending
or threatened against Pledgor that might adversely affect the Collateral in
any material respect;

d. Pledgor is the sole owner of the Pledged Securities (or, in the case of
after acquired Collateral, at the time Pledgor acquires rights in the
Collateral, will be the sole owner thereof); and

e. No person has (or, in the case of after-acquired Collateral, at the
time the owner of such Collateral acquires rights therein, will have) any
right, title, claim or interest (by way of security interest or other lien or
charge or otherwise) in, against or to the Collateral superior to that of
Pledgee.

4. Covenants of Pledgor.

Pledgor agrees:

a. To do all acts that may be necessary to maintain, preserve and protect
the Collateral;

b. Not to use or permit any of the Collateral to be used unlawfully or in
violation of any provision of any applicable statute, regulation or ordinance
or any policy of insurance covering the Collateral;

c. To pay promptly when due all taxes, assessments, charges, encumbrances
and liens now or hereafter imposed upon or affecting any of the Collateral
and not to allow or grant any other lien or security interest with respect to
the Collateral superior to that of Pledgee;

d. To procure, execute and deliver from time to time any endorsements,
assignments, financing statements and other writings deemed necessary or
appropriate by Pledgee to perfect, maintain and protect its security
interests hereunder and the priority thereof;

<PAGE>

e. To appear in and defend any action or proceeding that may affect
Pledgor's title to or Pledgee's interest in the Collateral;

f. To provide Pledgee with such records or copies thereof and such other
reports and information relating to the Collateral as Pledgee may reasonably
request from time to time;

g. Not to surrender or lose possession of (other than to Pledgee) any
Collateral or right or interest therein;

h. To account fully for and promptly deliver to Pledgee, in the form
received, all dividends and other distributions received in respect of the
Collateral, endorsed to Pledgee, and until so delivered all such property
shall be held by Pledgor in trust for Pledgee, separate from all other
property of such owners and identified as the property of Pledgee;

i. To deliver to Pledgee such assignments, stock transfer powers or other
documents as Pledgee may reasonably request in compliance with the terms of
this Pledge Agreement; and

j. To provide, upon reasonable request, Pledgee with additional collateral
so that the Obligations are at all times fully secured.

5. Authorized Action by Pledgee.

Pledgor irrevocably appoints Pledgee as his attorney-in- fact (but Pledgee
shall not be obligated to and shall incur no liability to Pledgor or any
third party for failure so to do) to do any act that Pledgor is obligated by
this Pledge Agreement to do and to exercise such rights and powers as Pledgor
might exercise with respect to the Collateral, including, without limitation,
the right to:

a. Enter into any extension, reorganization, deposit, merger,
consolidation or other agreement pertaining to, or deposit, cancel,
surrender, accept, hold or apply other property in exchange for, the
Collateral;

<PAGE>

b. Transfer the Collateral to Pledgee's own or its nominee's name; and

c. Take any other action Pledgee deems advisable for the purpose of
protecting the Collateral.

Such care as Pledgee gives to the safekeeping of its own property of like
kind shall constitute reasonable care of the Collateral when in Pledgee's
possession, provided, however, that Pledgee shall not be required to make any
presentment, demand or protest or give any notice and need not take any
action to preserve any rights against any prior party or any other person in
connection with the Obligations or with respect to the Collateral.

6. Administration of the Pledged Securities.

a. So long as Pledgee forbears from exercising its remedies, Pledgor shall
be entitled to vote or consent with respect to the Pledged Securities in any
manner and on all matters not inconsistent herewith and, similarly, Pledgee
shall have no voting rights to the Pledged Securities so long as it forbears
from exercising its remedies. Pledgor hereby grants to Pledgee an
irrevocable proxy for the Pledged Securities, pursuant to which proxy Pledgee
shall be entitled to vote or consent, in its discretion. This irrevocable
proxy is coupled with an interest. In such event, Pledgor agrees to deliver
to Pledgee such further evidence of the grant of such proxy as Pledgee may
request, but no further evidence shall be required in order to allow Pledgee
to exercise its voting rights.

<PAGE>

of Default shall have occurred or be continuing, to receive any cash or other
property distributions with respect to the Pledged Securities and to apply
such payments against the Obligations in such order as it may elect. Pledgor
shall turn over any such payments to Pledgee immediately. Pledgee may
endorse, in its own name or in that of Pledgor, any and all instruments by
which any payment on the Collateral may be made, and may take such action as
it may deem appropriate from time to time, in its own name or in that of
Pledgor, to enforce collection of the Collateral. For such purpose Pledgor
constitutes and appoints Pledgee and each of its officers the
attorneys-in-fact of Pledgor, under powers coupled with interests, with full
power and substitution in each.

c. So long as any of the Obligations remain outstanding, Pledgor will not
transfer, whether by sale, gift or otherwise, any ownership interest in the
Collateral without Pledgee's prior written approval.

d. Pledgee may exercise any options or warrants that are included in the
Pledged Securities, provided, however that any securities received upon
exercise shall be subject to this Pledge Agreement.

e. Upon exercise of Pledgee's rights, all rights of Pledgor pursuant to
paragraphs a and b above shall cease, and all such rights shall become vested
in Pledgee who shall have the sole right to exercise voting and other
consensual rights and to receive and hold dividends subject to this Pledge
Agreement.

7. Events of Default.

Any one or more of the following events constitutes an event of default
hereunder ("Event of Default"):

a. Nonpayment of interest or principal on the Note when due;

b. Breach of any representation, warranty or covenant of Pledgor under
this Pledge Agreement;

c. Death of Pledgor or termination of Pledgor's

<PAGE>

employment with Pledgee; and

d. The insolvency of Pledgor; the making by Pledgor of an assignment for
the benefit of creditors; the initiation by or against Pledgor of any
proceeding under the Federal Bankruptcy Act or any state insolvency law; the
appointment of a receiver for any part of property owned by Pledgor; or the
issuance of a writ or order of attachment or garnishment against any such
property.

8. Rights of Pledgee.

Upon the occurrence of an Event of Default and in addition to all rights
and remedies at law or in equity or otherwise:

a. Pledgee may foreclose or otherwise enforce Pledgee's security interest
in the Collateral in any manner permitted by law or provided for herein;

b. Pledgee may sell or otherwise dispose of the Collateral;

c. Pledgor covenants and agrees that, upon request of Pledgee, he will
deliver to Pledgee for cancellation all of the outstanding options and
warrants included in the Pledged securities, free of any lien, security
interest, charge, or any other encumbrance, other than the pledge provided
for herein;

d. Pledgor covenants and agrees that to the extent options and warrants
are not canceled pursuant to paragraph c, upon request of Pledgee, he will
immediately exercise any outstanding exercisable options included in the
Pledged Securities to the extent that such options are in-the-money options
as of the date of the Event of Default and deliver to Pledgee the stock
received upon exercise free of any lien, security interest, charge, or any
other encumbrance, other than the pledge provided for herein;

e. Pledgee may register the Collateral in Pledgee's name and exercise any
rights normally incident to the ownership of the Collateral;

<PAGE>

f. Upon 10 days written notice to Pledgor, Pledgee may list any of the
Collateral with a reputable, independent business opportunity broker for
private sale;

g. Any cash held by Pledgee as Collateral and all proceeds of any sale of
Collateral shall be applied as follows: (i) to pay all of Pledgee's costs
and expenses related to the occurrence of the Event of Default or the sale of
Pledged Securities; (ii) to pay the principal and interest due on the Note on
the date of the sale; and (iii) the balance of such proceeds, if any, shall
be paid to Pledgor; and

h. The rights and remedies granted to Pledgee under this Pledge Agreement
and the Note, and the Uniform Commercial Code, shall be cumulative and may be
exercised singly or concurrently with other rights and remedies Pledgee may
have.

9. General Provisions.

a. Cumulative Rights. Pledgee's rights, powers and remedies under this
Pledge Agreement shall be in addition to all rights, powers and remedies
given to Pledgee by virtue of any statute or rule of law, or any other
agreement, all of which rights, powers and remedies shall be cumulative and
may be exercised successively or concurrently without impairing Pledgee's
security interest in the Collateral.

b. Waiver. Any waiver, forbearance, failure or delay by Pledgee in
exercising, or the exercise or beginning of exercise by Pledgee of any right,
power or remedy, simultaneous or later, shall not preclude the further,
simultaneous or later exercise thereof, and every right, power or remedy of
Pledgee shall continue in full force and effect until such right, power or
remedy is specifically waived in a writing executed by Pledgee.

c. Setoff. Pledgor agrees that Pledgee may exercise its right of setoff,
if any, with respect to the Obligations in the same manner as if the
Obligations were unsecured.

d. Severability. If any of the provisions of

<PAGE>

this Pledge Agreement shall be held invalid or unenforceable, this Pledge
Agreement and the rights and obligations of the parties hereto shall be
construed without reference to such provision and enforced accordingly.

e. Benefit and Assignment. This Pledge Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns. Pledgor may not voluntarily or involuntarily assign
his interests under this Pledge Agreement without the prior written consent
of the Pledgee.

f. Entire Agreement. This Pledge Agreement embodies the entire agreement
and understanding of the parties and supersedes any and all prior agreements,
arrangements and understandings relating to matters provided for herein. No
amendment or waiver of compliance with any provision or condition of this
Pledge Agreement or consent pursuant to this Pledge Agreement will be
effective unless evidenced by an instrument in writing signed by the parties.

g. Headings. The headings in this Pledge Agreement are for convenience
only and will not control or affect the meaning or construction of the
provisions of this Pledge Agreement.

h. Notices. Any notice, demand or request required or permitted to be
given under the provisions of this Pledge Agreement shall be in writing and
shall be deemed to have been duly delivered on the date of personal delivery
or on the date of receipt if mailed by registered or certified mail, postage
prepaid and return receipt requested, and shall be deemed to have been
received on the date of personal delivery or on the date set forth on the
return receipt, to the following addresses, or to such other address as any
party may request:

Pledgor: Kerry A. Kramp
10260 Viking Drive
Eden Prairie, MN 55344

Pledgee: Buffets, Inc.
Attention: Chief Financial Officer

<PAGE>

10260 Viking Drive
Eden Prairie, MN 55344

i.Attorneys' Fees. The prevailing party in any proceeding required to
enforce this Pledge Agreement shall be entitled to recover from the other all
costs and expenses of enforcement, including reasonable attorneys' fees prior
to and at trial, on appeal, on any petition for review, in any arbitration,
in any administrative or bankruptcy proceeding, and in any other judicial,
quasi-judicial or nonjudicial proceeding.

j.Applicable Law. This Pledge Agreement shall be governed by the
substantive laws of the State of Minnesota.

EXECUTED as of the day and year first written above.

PLEDGOR: __________/Signature/______
Kerry A. Kramp

PLEDGEE: Buffets, Inc.

____/Signature/____________
By: Roe H. Hatlen, CEO

STATE OF MINNESOTA)
) ss.
COUNTY OF HENNEPIN)

The foregoing instrument was executed before me this thirty first day of
December 1996, by Mr. Kerry A. Kramp, personally known to me to be the
individual executing the foregoing document in the capacity of "Pledgor".

<PAGE>

(seal) _____/Signature/___________
Notary Public

STATE OF MINNESOTA)
) ss.
COUNTY OF HENNEPIN)

(seal) ___/Signature/_________
Notary Public

<PAGE>

PROMISSORY NOTE

$85,000 San Diego, California
August 13, 1996

FOR VALUE RECEIVED, the undersigned, Thomas F. Hubbard
("Maker"), promises to pay to the order of HomeTown Buffet, Inc.,
a Delaware corporation, the principal sum of $85,000 together
with interest accruing from the date of this Note on the unpaid
principal balance at the rate of the Prime Rate plus l% per
annum. The Prime Rate shall be the prevailing prime rate of
First Bank of Minneapolis. The initial Prime Rate will be the
rate as of August 13, 1996. The interest rate will be adjusted,
without notice, on the first day of each calendar quarter
beginning October 1, 1996 to reflect the prevailing prime rate on
the last business day of the immediately preceding calendar
quarter.

1. Payments. Principal and interest accrued to the date
of each payment shall be payable in monthly installments on the
thirteenth day of each month in the following manner. No
installments of interest or principal shall be due for the period
from September 13, 1996 through August 12, 1997. For the period
commencing August 13, 1997 through July 13, 2000, installments
shall be paid in level monthly payments and shall be determined
by amortizing principal and interest over a five year period.
The final installment, for the period commencing due on August
13, 2000, shall be equal to the remaining unpaid balance, so that
the entire unpaid principal amount and accrued but unpaid
interest shall be fully paid on or before August 13, 2000.

2. Acceleration. The holder may, at its option, elect to
declare the entire unpaid balance of this Note immediately due
and payable (i) if any payment is not made within 10 days of the
due date, (ii) if Maker is in default of the Pledge Agreement (as
defined below), (iii) if for any reason or no reason Maker's
employment with HomeTown Buffet, Inc. terminates.

3. Security. This Note is secured by the pledge of those
certain securities described in the Pledge Agreement between
Maker and Lender dated August 23, 1993 (the "Pledge Agreement"),
and the Pledge Agreement is hereby amended to include Maker's
obligations under this Note under the definition of "Note" set
out in the Pledge Agreement.

<PAGE>

4. Prepayment. Maker may prepay this Note without penalty
at any time. Any such prepayment shall be applied first to pay
interest accrued to the date of prepayment and second to reduce
the principal balance, with the most remote principal payment
under this Note being prepaid first.

5. Presentment and Demand. Maker waives presentment,
demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or
enforcement of this Note. In any action on this Note, the holder
need not produce or file the original of this Note, but need only
file a photocopy of this Note certified by the holder to be a
true and correct copy of this Note.

6. Legal Fees. If any legal action or other proceeding is
brought by the holder for the collection of this Note, Maker
agrees to pay all reasonable sums for the holder's attorneys'
fees and costs, at trial, on appeal, for any petition for review,
and in any bankruptcy proceeding.

IN WITNESS WHEREOF, the undersigned has executed this Note
as of the date set forth above.

____/signature/____
Thomas F. Hubbard

HOMETOWN BUFFET, INC
(signing for the purpose of amending the Pledge Agreement)

____/signature/____
Glenn E. Glasshagel
Vice President of Finance

<PAGE>

PROMISSORY NOTE

$65,000 San Diego, California
August 7, 1996

FOR VALUE RECEIVED, the undersigned, K. Michael Shrader
("Maker"), promises to pay to the order of HomeTown Buffet, Inc.,
a Delaware corporation, the principal sum of $65,000 together
with interest accruing from the date of this Note on the unpaid
principal balance at the rate of the Prime Rate plus l% per
annum. The Prime Rate shall be the prevailing prime rate of
First Bank of Minneapolis. The initial Prime Rate will be the
rate as of August 7, 1996. The interest rate will be adjusted,
without notice, on the first day of each calendar quarter
beginning October 1, 1996 to reflect the prevailing prime rate on
the last business day of the immediately preceding calendar
quarter.

1. Payments. Principal and interest accrued to the date
of each payment shall be payable in monthly installments on the
seventh day of each month in the following manner. No
installments of interest or principal shall be due for the period
from September 7, 1996 through August 6, 1997. For the period
commencing August 7, 1997 through July 7, 2000, installments
shall be determined by amortizing principal and interest over a
five year period. The final installment, for the period
commencing due on August 7, 2000, shall be equal to the remaining
unpaid balance, so that the entire unpaid principal amount and
accrued but unpaid interest shall be fully paid on or before
August 7, 2000.

3. Security. This Note is secured by the pledge of those
certain securities described in the Pledge Agreement attached as
Exhibit A (the "Pledge Agreement"), to which reference is made
for a description of the collateral and the rights of holder and
Maker with regard to such collateral.

<PAGE>

4. Prepayment. Maker may prepay this Note without penalty
at any time. Any such prepayment shall be applied first to pay
interest accrued to the date of prepayment and second to reduce
the principal balance, with the most remote principal payment
under this Note being prepaid first.

5. Presentment and Demand. Maker waives presentment,
demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or
enforcement of this Note. In any action on this Note, the holder
need not produce or file the original of this Note, but need only
file a photocopy of this Note certified by the holder to be a
true and correct copy of this Note.

IN WITNESS WHEREOF, the undersigned has executed this Note
as of the date set forth above.

____/signature/____
K. Michael Shrader

STOCK PLEDGE AGREEMENT

This PLEDGE AGREEMENT, dated and effective as of
August 7, 1996 ("Pledge Agreement"), is by and between K.
Michael Shrader (the "Pledgor") and HomeTown Buffet, Inc.
(the "Pledgee").

RECITALS

A. Pledgor desires to borrow the principal amount of
$65,000 from Pledgee pursuant to that certain promissory note of
even date herewith (the "Note").

B. To induce Pledgee to make the above-described loan
and to secure the obligations of Pledgor under the Note, Pledgor
wishes to pledge his currently outstanding options to purchase

<PAGE>

Common Stock of the Company (including vested options as of this
date as well as options that vest in the future), any shares of
stock received upon exercise of any options and any other
securities of the Company acquired by Pledgor.

1. Security for Obligations.

This Agreement secures the payment of all present and future
obligations of Pledgor under the Note, whether for principal or
interest (the "Obligations").

2. Collateral.

The Collateral shall consist of the following:

a. Any securities of the Company held by Pledgor including
currently outstanding options to purchase Common Stock of the
Company (including vested options as of this date as well as
options that vest in the future), any shares of stock received
upon exercise of any options, warrants or rights of conversion
and any other securities of the Company acquired by Pledgor, the
certificates for which (together with stock powers properly
executed in blank) , or other documents evidencing these
securities, have been delivered to Pledgee, together with all
new, substituted and additional securities issued at any time
with respect to those securities (collectively and severally, the
"Pledged Securities")

b. All now-existing and hereafter-arising rights with
respect to the Pledged Securities, including, without limitation,
all voting rights and all rights to cash and noncash dividends on
the account of the Pledged Securities; and

c All proceeds of the foregoing Collateral. For purposes
of this Agreement, the term "proceeds" includes whatever is
receivable or received when any of the Collateral or proceeds is
sold, collected, exchanged or otherwise disposed of, whether such
disposition is voluntary or involuntary, and includes, without
limitation, all rights to payment, including return premiums,
with respect to any insurance relating thereto and also includes
all interest, dividends and other property receivable or received
on account of the Collateral or proceeds thereof.

3. Representations and Warranties.

<PAGE>

Pledgor represents and warrants that:

a. Except as contemplated herein, delivery and performance
by Pledgor of this Agreement will not contravene, constitute a
default under or result in the imposition of a lien upon any
property of Pledgor pursuant to any applicable law or regulation
or any contract, agreement, judgment, order, decree or other
instruments binding upon or affecting Pledgor;

b. This Agreement constitutes the legal, valid and binding
obligation of Pledgor, enforceable in accordance with its terms;

c. As of the date hereof, there is no action, suit or
proceeding pending or threatened against either Stockholder that
might adversely affect the Collateral in any material respect;

d. Pledgor is the sole owner of the Pledged Securities
(or, in the case of after-acquired Collateral, at the time
Pledgor acquires rights in the Collateral, will be the sole owner
thereof) ; and

e. No person has (or, in the case of after-acquired
Collateral, at the time the owner of such Collateral acquires
rights therein, will have) any right, title, claim or interest
(by way of security interest or other lien or charge or
otherwise) in, against or to the Collateral superior to that of
Pledgee.

4. Covenants of Pledgor.

Pledgor agrees:

a. To do all acts that may be necessary to maintain,
preserve and protect the Collateral;

b. Not to use or permit any of the Collateral to be
used unlawfully or in violation of any provision of any
applicable statute, regulation or ordinance or any policy of
insurance covering the Collateral;

c. To pay promptly when due all taxes, assessments,
charges, encumbrances and liens now or hereafter imposed upon or
affecting any of the Collateral and not to allow or grant any
other lien or security interest with respect to the Collateral
superior to that of Pledgee;

<PAGE>

d. To procure, execute and deliver from time to time any
endorsements, assignments, financing statements and other
writings deemed necessary or appropriate by Pledgee to perfect,
maintain and protect its security interests hereunder and the
priority thereof;

e. To appear in and defend any action or proceeding that
may affect Pledgor's title to or Pledgee's interest in the
Collateral;

f. To provide Pledgee with such records or copies thereof
and such other reports and information relating to the Collateral
as Pledgee may reasonably request from time to time;

g. Not to surrender or lose possession of (other than to
Pledgee) any Collateral or right or interest therein;

h. To account fully for and promptly deliver to Pledgee,
in the form received, all dividends and other distributions
received in respect of the Collateral, endorsed to Pledgee, and
until so delivered all such property shall be held by Pledgor in
trust for Pledgee, separate from all other property of such
owners and identified as the property of Pledgee;

i. To deliver to Pledgee such assignments, stock transfer
powers or other documents as Pledgee may reasonably request in
compliance with the terms of this Agreement; and

j. To provide, upon reasonable request, the Company with
additional collateral so that the Obligations are at all times
fully secured.

5. Authorized Action by Pledgee.

Pledgor irrevocably appoints Pledgee as his attorney-in-fact
(but Pledgee shall not be obligated to and shall incur no
liability to Pledgor or any third party for failure so to do) to
do any act that Pledgor is obligated by this Agreement to do and
to exercise such rights and powers as Pledgor might exercise with
respect to the Collateral, including, without limitation, the
right to:

a. Enter into any extension, reorganization, deposit,
merger, consolidation or other agreement pertaining to, or

<PAGE>

deposit, cancel, surrender, accept, hold or apply other property
in exchange for, the Collateral;

b. Transfer the Collateral to Pledgee's own or its
nominee's name; and

c. Take any other action Pledgee deems advisable for the
purpose of protecting the Collateral.Such care as Pledgee gives
to the safekeeping of its own property of like kind shall
constitute reasonable care of the Collateral when in Pledgee's
possession, provided, however, that Pledgee shall not be required
to make any presentment, demand or protest or give any notice and
need not take any action to preserve any rights against any prior
party or any other person in connection with the Obligations or
with respect to the Collateral.

6. Administration of the Pledged Securities.

a. So long as Pledgee forbears from exercising its
remedies, Pledgor shall be entitled to vote or consent with
respect to the Pledged Securities in any manner and on all
matters not inconsistent herewith and, similarly, Pledgee shall
have no voting rights to the Pledged Securities so long as it
forbears from exercising its remedies. Pledgor hereby grants to
Pledgee an irrevocable proxy for the Pledged Securities, pursuant
to which proxy Pledgee shall be entitled to vote or consent, in
its discretion. This irrevocable proxy is coupled with an
interest. In such event, Pledgor agrees to deliver to Pledgee
such further evidence of the grant of such proxy as Pledgee may
request, but no further evidence shall be required in order to
allow Pledgee to exercise its voting rights.

<PAGE>

Securities and to apply such payments against the Obligations in
such order as it may elect. Pledgor shall turn over any such
payments to Pledgee immediately. Pledgee may endorse, in its own
name or in that of Pledgor, any and all instruments by which any
payment on the Collateral may be made, and may take such action
as it may deem appropriate from time to time, in its own name or
in that of Pledgor, to enforce collection of the Collateral. For
such purpose Pledgor constitutes and appoints Pledgee and each of
its officers the attorneys-in-fact of Pledgor, under powers
coupled with interests, with full power and substitution in each.

c. So long as any of the Obligations remain outstanding,
Pledgor will not transfer, whether by sale, gift or otherwise,
any ownership interest in the Collateral without Pledgee's prior
written approval.

d. Pledgee may exercise any options or warrants that are
included in the Pledged Securities, provided, however that any
securities received upon exercise shall be subject to this
Agreement.

5. Upon exercise of Pledgee's rights, all rights of
Pledgor pursuant to paragraphs a and b above shall cease, and all
such rights shall become vested in Pledgee who shall have the
sole right to exercise voting and other consensual rights and to
receive and hold dividends subject to this Agreement.

7. Events of Default.

Any one or more of the following events constitutes an
event of default hereunder ("Event of Default"):

a. Nonpayment of interest or principal on the Note when
due;

b. Breach of any representation, warranty or covenant of
Pledgor under this Agreement;

c. Death of Pledgor or termination of Pledgor's employment
with Pledgee; and

<PAGE>

for any part of property owned by Pledgor; or the issuance of a
writ or order of attachment or garnishment against any such
property.

8. Rights of Pledgee.

Upon the occurrence of an Event of Default and in addition
to all rights and remedies at law or in equity or otherwise:

a. Pledgee may foreclose or otherwise enforce Pledgee's
security interest in the Collateral in any manner permitted by
law or provided for herein;

b. Pledgee may sell or otherwise dispose of the
Collateral;

c. Pledgor covenants and agrees that, upon request of the
Company, he will deliver to the Company for cancellation all of
the outstanding options and warrants included in the Pledged
Securities, free of any lien, security interest, charge, or any
other encumbrance, other than the pledge Provided for herein;

d. Pledgor covenants and agrees that to the extent options
and warrants are not cancelled pursuant to paragraph c, upon
request of the Company, he will immediately exercise any
outstanding exercisable options included in the Pledged
Securities to the extent that such options are in-the-money
options as of the date of the Event of Default and deliver to the
Company the stock received upon exercise free of any lien,
security interest, charge, or any other encumbrance, other than
the pledge provided for herein;

e. Pledgee may register the Collateral in Pledgee's name
and exercise any rights normally incident to the ownership of the
Collateral;

f. Upon 10 days written notice to Pledgor, Pledgee may
list any of the Collateral with a reputable, independent business
opportunity broker for private sale;

g. Any cash held by Pledgee as Collateral and all proceeds
of any sale of Collateral shall be applied as follows: (i) to pay
all of Pledgee's costs and expenses related to the occurrence of
the Event of Default or the sale of Pledged Securities; (ii) to
pay the principal and interest due on the Note on the date of the

<PAGE>

sale; and (iii) the balance of such proceeds, if any, shall be
paid to Pledgor; and

h. The rights and remedies granted to Pledgee under this
Agreement and the Note, and the Uniform Commercial Code, shall be
cumulative and may be exercised singly or concurrently with other
rights and remedies Pledgee may have.

9. General Provisions.

a. Cumulative Rights. Pledgee's rights, powers and
remedies under this Agreement shall be in addition to all rights,
powers and remedies given to Pledgee by virtue of any statute or
rule of law, or any other agreement, all of which rights, powers
and remedies shall be cumulative and may be exercised
successively or concurrently without impairing Pledgee's security
interest in the Collateral.

b. Waiver. Any waiver, forbearance, failure or delay by
Pledgee in exercising, or the exercise or beginning of exercise
by Pledgee of any right, power or remedy, simultaneous or later,
shall not preclude the further, simultaneous or later exercise
thereof, and every right, power or remedy of Pledgee shall
continue in full force and effect until such right, power or
remedy is specifically waived in a writing executed by Pledgee.

c. Setoff. Pledgor agrees that Pledgee may exercise its
right of setoff, if any, with respect to the Obligations in the
same manner as if the Obligations were unsecured.

d. Severability. If any of the provisions of this
Agreement shall be held invalid or unenforceable, this Agreement
and the rights and obligations of the parties hereto shall be
construed without reference to such provision and enforced
accordingly.

e. Benefit and Assignment. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto
and their respective successors and assigns. Pledgor may not
voluntarily or involuntarily assign his interests under this
Agreement without the prior consent of the Pledgee.

f. Entire Agreement. This Agreement embodies the entire

<PAGE>

agreement and understanding of the parties and supersedes any and
all prior agreements, arrangements and understandings relating to
matters provided for herein. No amendment or waiver of
compliance with any provision or condition of this Agreement or
consent pursuant to this Agreement will be effective unless
evidenced by an instrument in writing signed by the parties.

g. Headings. The headings in this Agreement are for
convenience only and will not control or affect the meaning or
construction of the provisions of this Agreement.

h. Notices. Any notice, demand or request required or
permitted to be given under the provisions of this Agreement
shall be in writing and shall be deemed to have been duly
delivered on the date of personal delivery or on the date of
receipt if mailed by registered or certified mail, postage
prepaid and return receipt requested, and shall be deemed to have
been received on the date of personal delivery or on the date set
forth on the return receipt, to the following addresses, or to
such other address as any party may request:

Pledgor: K. Michael Shrader
9171 Towne Centre Drive, #575
San Diego, CA 92122

Pledgee: HomeTown Buffet, Inc.
Attention: Chief Financial Officer
9171 Towne Centre Drive, #575
San Diego, CA 92122

i. Attorneys' Fees. The prevailing party in any
proceeding required to enforce this Agreement shall be entitled
to recover from the other all costs and expenses of enforcement,
including reasonable attorneys' fees prior to and at trial, on
appeal, on any petition for review, in any arbitration, in any
administrative or bankruptcy proceeding, and in any other
judicial, quasi-judicial or nonjudicial proceeding.

EXECUTED as of the day and year first written above.

<PAGE>

PLEDGOR: ____/signature/____
K. Michael Shrader

PLEDGEE: HOMETOWN BUFFET, INC.

____/signature/____
C. Dennis Scott, Chairman

<PAGE>

BUFFETS, INC.
10260 VIKING DRIVE
EDEN PRAIRIE, MINNESOTA 55344

June 3, 1996

Mr. C. Dennis Scott
HomeTown Buffet, Inc.
9171 Towne Centre Drive, Suite 575
San Diego, CA 92122

Dear Dennis:

In connection with the proposed combination of Buffets, Inc. and HomeTown
Buffet, Inc., as set forth in the Agreement and Plan of Merger dated June 3,
1996 (the "Merger Agreement"), the parties have agreed to the following
severance obligations for the persons listed on Exhibit 1.04(a) of the Merger
Agreement (the "listed employees"). If, within a period of 12 months after the
Effective Time, any of the listed employees who were employees of HomeTown at
the Effective Time (as defined in the Merger Agreement)(other than Kerry Kramp)
shall be terminated by Buffets without cause (as defined below), they shall be
entitled to the following severance payments from Buffets:

a) If they have not relocated to the Minneapolis metropolitan area as of
such termination, they shall be entitled to a severance payment from
Buffets equal to six months of such person's base salary at HomeTown
in effect immediately prior to the Merger (as defined in the Merger
Agreement); or

b) If they have relocated to the Minneapolis metropolitan area as of such
termination, they shall be entitled to a severance payment from
Buffets equal to nine months of such person's base salary at HomeTown
in effect immediately prior to the Merger.

For these purposes, "cause" shall mean the following: (i) indictment for or a
conviction of, or a plea of nolo contendere to, any felony or gross misdemeanor;
(ii) commission of an act of fraud, theft or embezzlement or commission of
similar acts involving dishonesty or moral turpitude; (iii) employee's failure
to devote substantially all of his working time and efforts during normal
business hours to the business of Buffets and its subsidiaries; (iv) knowingly
providing materially misleading information concerning Buffets or any of its
subsidiaries to Buffets or the Board of Directors of Buffets; (v) a breach by
employeee of any confidentiality or non-compete obligation he may have to
Buffets or its subsidiaries; or (vi) employee's

<PAGE>

Mr. C. Dennis Scott
June 3, 1996
Page 2

failure to substantially perform his material duties as an employee of Buffets.

As a condition for receiving the severance payments described above, a
listed employee will be required to sign a written general release which
releases Buffets, HomeTown and their employees and affiliates from all claims.

Very truly yours,

/s/ Roe H. Hatlen
--------------------------------------
Roe H. Hatlen, Chairman and CEO of
Buffets, Inc.

Agreed to as of the date first written above.

/s/ C. Dennis Scott
- -------------------------------------
C. Dennis Scott, Chairman and CEO of
HomeTown Buffet, Inc.

<PAGE>
EXHIBIT 11

BUFFETS, INC. AND SUBSIDIARIES

CALCULATION OF PRIMARY EARNINGS (LOSS) PER SHARE

(In thousands, except per share amounts)

December 28, January 3, January 1,
1994 1996(2) 1997
- ------------------------------------------------ ------------- ------------- -------------

<S> <C> <C> <C>
Net earnings (loss) $25,304 $32,907 $(7,203)

Weighted average number
of common shares 43,962 44,604 45,068

Diluted effect of stock
options outstanding after
application of treasury stock
method 1,329 700 0
------------- ------------- -------------
45,291 45,304 45,068
------------- ------------- -------------
Net earnings (loss), based
upon weighted average number
of common and common equivalent
shares outstanding $ .56 $ .73 $ (.16)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

CALCULATION OF FULLY DILUTED EARNINGS (LOSS) PER SHARE (1)

(In thousands, except per share amounts)

December 28, January 3, January 1,
1994 1996(2) 1997
- ------------------------------------------------ ------------- ------------- -------------

<S> <C> <C> <C>
Net earnings (loss) $25,304 $32,907 $(7,203)

Weighted average number
of common shares 43,962 44,604 45,068

Diluted effect of stock
options outstanding after
application of treasury stock
method 1,246 829 0
----------- ----------- -----------
45,208 45,433 45,068
------------ ------------ -----------
Net earnings (loss), based
upon weighted average number
of common and common equivalent
shares outstanding $ .56 $ .72 $ (.16)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(1) Fully diluted earnings per share are based upon the more dilutive of the
market price of the stock at the close of the period or the average market
price during the period.

(2) The Company's fiscal year consisted of 53 weeks.

<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (1)

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year (52-53 Weeks) Ended
------------------------------------------------------------------------
December 30, December 29, December 28, January 3, January 1,
1992 1993 1994 1996(2) 1997
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RESTAURANT DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Restaurant sales................. $261,393 $369,580 $484,459 $661,445 $750,707
Restaurant costs................. 217,099 306,016 406,497 567,290 659,784
------------ ------------ ------------ ------------ ------------
Restaurant profits............... 44,294 63,564 77,962 94,155 90,923
Selling, general, and
administrative expenses........ 20,524 28,516 38,460 40,276 47,594
Merger, impairment, and site
closing costs.................. 1,500 1,370 49,572
Other income (expense)........... 323 886 2,586 574 (520)
------------ ------------ ------------ ------------ ------------
Earnings (loss) before income
taxes.......................... 24,093 35,934 40,588 53,083 (6,763)
Income taxes..................... 9,980 13,849 15,284 20,176 440
------------ ------------ ------------ ------------ ------------
Net earnings (loss).............. $ 14,113 $ 22,085 $ 25,304 $ 32,907 $ (7,203)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net earnings (loss) per share.... $ .43 $ .60 $ .56 $ .73 $ (.16)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average common and
common equivalent shares
outstanding.................... 33,069 36,890 45,291 45,304 45,068

BALANCE SHEET DATA:
Property/equipment (net)......... $103,691 $151,954 $248,526 $328,573 $327,721
Total assets..................... 127,991 211,131 290,289 399,752 370,683
Long-term debt (including current
portion)....................... 13,081 978 7,789 64,655 48,633
Stockholders' equity............. 68,212 159,487 205,842 242,434 236,791

RESTAURANT DATA:
Restaurants opened or acquired
during period.................. 30 48 60 65 41
Restaurants closed or relocated
during period.................. (3) (8)
Restaurants open (end of period):
Company-owned.................. 143 191 251 313 346
Franchised..................... 10 15 23 25 24
------------ ------------ ------------ ------------ ------------
Total........................ 153 206 274 338 370
Average weekly sales of
Company-owned restaurants open
during period.................. $ 41,086 $ 43,728 $ 44,395 $ 44,447 $ 43,670
</TABLE>

- ------------------------
(1) All information has been restated to reflect the Company's merger with
HomeTown Buffet, Inc. on September 20, 1996, which was accounted for as a
pooling-of-interests. Accordingly, this information includes the accounts
and operations of the merged entities for all periods presented.

(2) The Company's fiscal year consisted of 53 weeks.

4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The Company operates and franchises high-quality, scatter bar buffet
restaurants principally under the names "Old Country Buffet" and "HomeTown
Buffet." The Company also operates three "Roadhouse Grill" restaurants under
license from Roadhouse Grill, Inc. The Company opened its first Old Country
Buffet restaurant on March 2, 1984. As of January 1, 1997, the Company operated
346 Company-owned restaurants in total, and had 24 franchisee-operated
restaurants.

On September 20, 1996, a wholly-owned subsidiary of the Company merged into
HomeTown Buffet, Inc. (HomeTown Buffet). See Note B to the consolidated
financial statements. As a result of the merger, HomeTown Buffet became a
wholly-owned subsidiary of the Company.

The merger was accounted for as a pooling-of-interests and, accordingly, the
following discussion and the accompanying consolidated financial statements
include the accounts and operations of Buffets and HomeTown Buffet for all
periods presented. The acquisition of HomeTown Buffet enabled the Company to
quickly increase its presence in additional geographic markets, most notably in
California, provided the Company with additional management expertise and depth,
and provided synergistic opportunities. In connection with the merger, the
Company recognized certain merger-related costs during 1996. See "Merger Costs,
Duplicate Site Closing Costs, and Impairment of Assets" on page 6.

Certain information concerning the operating results of the Company is
presented in the table below.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Fifty-Two Fifty-Three Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
December 28, 1994 January 3, 1996 January 1, 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Restaurant sales................... 100.0% 100.0% 100.0%
------- ------- -------
Restaurant costs:
Food costs....................... 34.7 35.6 35.0
Labor costs...................... 27.3 27.9 29.1
Direct and occupancy costs....... 21.9 22.3 23.8
------- ------- -------
Total restaurant costs......... 83.9 85.8 87.9
------- ------- -------
Restaurant profits................. 16.1 14.2 12.1
Selling, general, and
administrative expenses.......... 7.9 6.1 6.3
Merger and merger related costs.... .9
Duplicate site closing costs....... 1.4
Impairment of assets............... 3.7
Other site closing costs........... .3 .2 .6
------- ------- -------
7.9 7.9 (.8)
Other income (expense)............. .5 .1 (.1)
------- ------- -------
Earnings (loss) before income
taxes............................ 8.4 8.0 (.9)
Income taxes....................... 3.2 3.0 .1
------- ------- -------
Net earnings (loss)................ 5.2% 5.0% (1.0)%
------- ------- -------
------- ------- -------
Number of Company-owned restaurants
open at end of period............ 251 313 346
Average weekly sales of
Company-owned restaurants open
during period.................... $ 44,395 $ 44,447 $ 43,670
</TABLE>

Restaurant sales include only sales of restaurants owned by the Company and
its subsidiaries. Restaurant costs reflect only direct restaurant operating
costs, including food, labor, and direct and occupancy costs. Labor costs
include compensation and benefits for both hourly and restaurant management
employees. Direct and occupancy costs consist primarily of costs of supplies,
maintenance, utilities, rent, real estate taxes, insurance, depreciation and
amortization. Selling, general, and administrative expenses reflect all costs
not directly related to the operation of restaurants, consisting primarily of
corporate administrative compensation and overhead, district and regional
management compensation and related management expenses, advertising and
promotional costs and the costs of recruiting, training and supervising
restaurant management personnel.

5
<PAGE>

RESTAURANT SALES

Restaurant sales for 1996 increased $89.3 million or 13.5% over sales in
1995, which in turn had increased by $177.0 million or 36.5% over those achieved
in 1994. The increases in revenues during the three years have been mostly due
to sales generated by new restaurants. In 1996, the Company opened 41
restaurants, compared with 65 new restaurants in 1995 and 60 in 1994. In 1996,
the Company closed four underperforming restaurants and four duplicate site
restaurants (with the fifth closing in early 1997). In 1995, the Company closed
two underperforming restaurants and closed one for relocation. In 1997, the
Company anticipates that it will open approximately 25 restaurants and convert
25 to 30 existing restaurants primarily from Old Country Buffet to HomeTown
Buffet restaurants. The Company's price increases have been in line with
inflation for the past three years.

Average weekly sales per restaurant decreased 1.7% from 1995 to 1996 and
increased .1% from 1994 to 1995. Comparable sales per restaurant decreased 3.4%
from 1995 to 1996 and decreased 2.1% from 1994 to 1995. The average weekly sales
statistic reflects the performance of the Company's restaurants, both new and
old. The Company manages its business on average weekly sales, rather than
comparable restaurant sales, as the best measure of comparative restaurant sales
performance. The comparable restaurant sales statistic would exclude 37% and 48%
for 1996 and 1995, respectively, of the Company's restaurants that had been open
or converted to the scatter system or remodeled for less than two full years at
the end of each fiscal year.

Sales are seasonal, with a lower percentage of annual sales occurring in
most of its current market areas during the winter months.

RESTAURANT COSTS

As a percentage of restaurant sales, total restaurant costs increased to
87.9% in 1996 from 85.8% in 1995 and 83.9% in 1994. Food costs as a percentage
of sales decreased to 35.0% from 35.6% in 1996 from 1995 primarily due to a
decrease in the cost of fruits and vegetables. Food costs as a percentage of
sales increased to 35.6% from 34.7% in 1995 from 1994 due to general food cost
increases and an increase in the number of items offered and menu changes. Labor
costs as a percentage of sales increased to 29.1% in 1996 from 27.9% in 1995,
which in turn had increased from 27.3% in 1994. The increase in labor costs in
the past two fiscal years was primarily due to increases in management and
employee wages as a result of a more competitive labor market and increased
training and staffing of hourly and management employees to better serve the
customer. The increase in 1995 was partially offset by a decrease in workers'
compensation insurance rates in 1995. Direct and occupancy costs as a percentage
of sales were 23.8%, 22.3% and 21.9% in 1996, 1995 and 1994, respectively. The
Company's policy of expensing all pre-opening costs when incurred adversely
affects restaurant costs and restaurant profits during the periods when new
restaurants are developed and opened. However, most restaurants are profitable
within the first month after opening.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Selling, general, and administrative expenses increased $7.3 million and
increased as a percentage of sales to 6.3% in 1996 from 6.1% in 1995. Selling,
general and administrative expenses in 1995 increased $1.8 million, but
decreased as a percentage of sales to 6.1% from 7.9% in 1994. The increase in
selling, general, and administrative expenses in 1996 from 1995 was due
primarily to an increase in advertising costs. The decrease in selling, general,
and administrative costs, as a percentage of sales, in 1995 from 1994 was due to
holding the number of managers relatively constant, increased productivity and
tight cost controls over all areas, especially travel costs. Advertising costs
represented 1.2% of sales during 1996, compared with .9% of sales during 1995
and 1.3% of sales during 1994.

MERGER COSTS, DUPLICATE SITE CLOSING COSTS, AND IMPAIRMENT OF ASSETS

Merger costs related to the HomeTown Buffet merger totaled $17.3 million,
of which $6.6 million was for investment banking, accounting, legal and other
merger costs and $10.7 million was for the closure of five duplicate
restaurants and HomeTown Buffet's San Diego headquarters. During 1996, the
Company also took certain non-merger charges, including $4.5 million relating
to the closure of three non-performing restaurants and $27.7 million relating
to the application of Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of." See "Accounting Pronouncements" on page 8. The Company
determined that an impairment write down was necessary for certain locations
because of a significant drop in average weekly sales and corresponding trend
of increasing operating losses at these locations during the first 40 weeks
of fiscal 1996 (a period that includes the fiscal third quarter, which
traditionally has been a strong quarter for sales). The SFAS No. 121
impairment was determined based upon 38 specific restaurant locations which
had incurred operating or cash flow losses. It was computed using estimated
fair value of the assets and the associated future cash flows of the specific
location. HomeTown Buffet restaurants represented 27% of the impairment.
Depreciation and amortization relating to the impaired assets and the eight
restaurants closed amounted to $3.8 million through the third quarter of
fiscal year 1996 ($2.3 million or $.05 per share after taxes).

In the future, it is reasonably possible although not currently estimable
that the Company will incur future impairment charges. These charges will
generally arise as estimates used in the evaluation and measurement of
impairments relating to the 38 restaurants written down in fiscal 1996 is
refined based on new information or as a result of future events or changes in
circumstances that

6
<PAGE>

cause other restaurants to be impaired. Also, any future expenditures for
impaired restaurants that would normally be capitalized will have to be
immediately evaluated for recoverability. The application of SFAS 121 could
result in lower closure costs or increased gains for impaired restaurants
that are closed or sold, respectively.

OTHER INCOME (EXPENSE)

The substantial reduction in other income in 1996 relates to the increase in
interest expense for the $41.5 million 7% subordinated notes issued by HomeTown
Buffet in November 1995.

INCOME TAXES

In 1996, the Company recorded income tax expense of $440,000 despite of
having a loss before income taxes primarily due to a portion of the
merger-related costs not being deductible for tax purposes and the impact of
state income taxes. Income taxes were 38.0% of earnings before taxes in 1995,
and 37.7% in 1994. The increase in 1995 resulted from the utilization of
HomeTown Buffet's net operating loss carryforwards in 1994 exceeding the
carryforward utilized in 1995. At January 3, 1996, the net operating loss
carryforwards were fully utilized.

LIQUIDITY AND CAPITAL RESOURCES

The Company's restaurants generate cash immediately through sales. New
restaurants are generally profitable shortly after opening. The Company does not
have significant assets in the form of trade receivables or inventory, and often
receives several weeks of trade credit from food and supply purveyors;
therefore, the Company's operations generate substantial amounts of cash which
is available to fund new restaurants. The investment of cash flow from
operations in restaurant property and equipment results in a "working capital
deficit" (current liabilities exceeding current assets) which, to a considerable
extent, represents interest-free financing from trade creditors that the Company
intends to continue to utilize.

In fiscal 1996, net cash provided by operating activities decreased by $14.4
million to $61.7 million, as compared with $76.1 million in 1995 and $69.0
million in 1994. The decrease in net cash provided by operations in 1996 was
primarily due to the decrease in accounts payable. The increase in net cash
provided by operations resulted from increases in depreciation and amortization
and accounts payable from the addition of 65 and 60 restaurants in 1995 and
1994, respectively.

Cash flows used in investing activities total $48.8 million, $116.9 million
and $113.5 million for fiscal 1996, 1995 and 1994, respectively, consisting of
capital expenditures primarily for new restaurants, restaurants acquired, or
remodeling of existing restaurants offset by cash received from landlords.

Cash flows (used in) or provided by financing activities have been
$(16.7) million, $48.4 million and $27.7 million for fiscal 1996, 1995 and
1994, respectively. Cash flows used in financing activities in 1996 consisted
of debt payments of $18.0 million partially offset by $1.3 million received
from the exercise of employee stock options. Cash flows provided by financing
activities in 1995 consisted principally from the proceeds from the issuance
of long-term debt of $47.3 million and $2.1 million from the exercise of
employee stock options. Cash flows provided by financing activities in 1994
consisted of $2.3 million from the exercise of employee stock options, $7.0
million from long-term debt borrowings, and $17.6 million from a secondary
stock offering.

The Company has a $50 million unsecured revolving line of credit. The
Company is required to pay a quarterly commitment fee equal to 1/4 of 1% per
annum on the unused balance. At January 1, 1997, the Company had no borrowings
under the line of credit.

In 1995, HomeTown Buffet issued $41.5 million of 7.0% subordinated
convertible notes due on December 1, 2002. Interest is payable semi-annually on
June 1 and December 1, commencing June 1, 1996. The notes are convertible into
shares of the Company's common stock at a conversion price of $11.67, subject to
adjustment under certain conditions, at any time until maturity. The notes are
subordinated in right of payment to all existing and future senior indebtedness
of the Company. The notes are redeemable in whole or in part, at the option of
the Company, at any time on or after December 2, 1998.

The Company requires significant amounts of capital to fund its
growth. During 1997, the Company expects to open approximately 25 new
restaurants and convert 25 to 30 restaurants primarily from Old Country Buffet
to HomeTown Buffet restaurants. The Company expects to spend approximately $35
to $40 million in aggregate on these new restaurants, depending upon the level
of contributions obtained from landlords for leasehold improvements and the
number of acquisitions of freestanding Company owned sites. The Company also
expects to spend approximately $7 to $10 million on restaurant conversions.

The Company has traditionally grown without purchasing land and constructing
its own freestanding restaurants. In order to obtain the optimal locations for
expansion during 1994, the Company began acquiring land and building
freestanding restaurants. Based on prior years' experience, the Company
anticipates that, if it further pursues the development of freestanding
locations, the cost per location and related cash requirements will increase
substantially over prior years and such costs will not be offset by landlord
contributions that typically have been associated with strip mall locations. The
capital expenditure required for a freestanding location can be over 100%
greater than for a mall location. The Company will carefully evaluate any
additional freestanding locations to determine if it will be able to generate an
acceptable return on investment. The Company estimates that less than 50% of
1997 new locations will be freestanding units built and owned by the Company.

Sources of capital for restaurants to be opened in 1997 and early 1998 are
anticipated to be funds provided by operations, credit received from trade

7
<PAGE>
suppliers, landlord contributions to leasehold improvements and current bank
financing. The Company believes that these sources will be adequate to finance
operations and the additional restaurants included in the Company's restaurant
development plans for 1997 and early 1998. However, in order to remain prepared
for further significant growth in future years, the Company will continue to
evaluate its financing needs and seek additional funding if appropriate. The
Company has not paid any cash dividends on its common stock and, pursuant to its
credit agreement, is restricted from declaring or paying cash dividends without
the approval of the Company's lender. The Board of Directors intends to retain
earnings for the foreseeable future for use in the expansion of the Company's
business.

EXTERNAL FACTORS AFFECTING FUTURE PERFORMANCE

The primary inflationary factors affecting the Company's operations are food
and labor costs. A large number of the Company's non-management restaurant
personnel are paid at or near the minimum wage level and, accordingly, changes
in minimum wage rates affect the Company's labor costs. The cost impact of
possible federal health care reform legislation and the Company's ability to
recover such cost increases in the form of higher prices is not determinable at
this time. The Company does not have any post-employment, retirement, or welfare
benefits; therefore, Statements of Financial Accounting Standards No. 106 and
No. 112 have no impact on the consolidated financial statements.

LITIGATION

The Company is involved in various legal actions arising in the normal
course of business. Management is of the opinion that their outcome will not
have a significant effect on the Company's consolidated financial statements.

The Company and certain of its directors and executive officers have been
named as defendants in litigation brought on behalf of a putative class of all
purchasers of common stock of the Company from October 26, 1993 through October
25, 1994, in the United States District Court for the District of Minnesota, as
described further in Note G to the Company's consolidated financial statements
included in this Annual Report. Management of the Company believes that the
action is without merit and intends to defend it vigorously. Although the
outcome of this proceeding cannot be predicted with certainty, the Company's
management believes that while the outcome may have a material effect on
earnings in a particular period, the outcome should not have a material effect
on the financial condition of the Company.

The Company and HomeTown Buffet are defendants in an action brought by HTB
Restaurants, Inc., a franchisee of HomeTown, along with its parent entities,
Summit Family Restaurants, Inc. and CKE Restaurants, Inc. (the "Plaintiffs").
The suit, which is described further in Note G to the Company's consolidated
financial statement, alleges, among other things, that the Company and HomeTown
Buffet illegally conspired to restrict competition and to prevent the Plaintiffs
from developing additional HomeTown Buffet restaurants. The Company and HomeTown
believe that the suit is without merit, and intend to vigorously defend the
remaining claims under the lawsuit. Although the outcome of this proceeding
cannot be predicted with certainty, the Company's management believes that the
outcome should not have a material effect on the financial condition of the
Company.

ADDITIONAL BUSINESS ACQUISITIONS AND INVESTMENTS

In February 1996, the Company terminated its HTB Ventures I, Inc. joint
venture. Under the termination agreement, the Company acquired the minority
interest in the joint venture and assumed 100% ownership of the ten restaurants
that were operated by the joint venture in consideration for the forgiveness of
the principal and interest on the initial promissory note from the investor and
paid additional cash consideration of $950,000.

On December 18, 1995, the Company acquired the remaining 10% minority
interest in the outstanding common stock of Evergreen Buffets, Inc., a
majority owned subsidiary of the Company, in exchange for 92,991 shares of
the Company's common stock with a market value of $1,267,000 and the
cancellation of a receivable of $83,000 due to the Company from the minority
shareholder.

In April 1995, the Company terminated its HTB Ventures II, Inc. joint
venture. Under the termination agreement, the Company acquired the minority
interest in the joint venture and assumed 100% ownership of the two
restaurants operated by the joint venture in consideration for the
forgiveness of the principal and interest on the initial promissory note from
the investor.

ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
requires that long-lived assets used by the entity be reviewed for impairment
whenever the carrying amount of an asset may not be recoverable. The Company has
determined that the carrying amounts of its long-lived assets and intangibles at
January 1, 1997 are recoverable through expected cash flows from the use of such
assets, after the adjustment discussed in Note C to the consolidated financial
statements.

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" encourages companies to adopt a new accounting method
that accounts for stock compensation awards based on their estimated fair value
at the date they are granted. However, companies are permitted to continue
following current accounting requirements for employee stock-based transactions,
which generally do not result in an expense charge for most options if the
exercise price is at least equal to the fair market

8
<PAGE>

value of the stock at the date of grant. Companies that continue to follow
existing standards are required to disclose in a note to the financial
statements the effect on net income (loss) and net income (loss) per share
had the Company recognized expense for options issued to employees based on
SFAS No. 123. The Company has determined that it will not adopt the fair
value method prescribed by SFAS No. 123 for employee stock-based
transactions. The "as if" disclosures are included in Note F to the
consolidated financial statements.

FORWARD-LOOKING INFORMATION

Certain statements in this Annual Report and in the Company's press releases
and oral statements made by or with the approval of the Company's executive
officers constitute or will constitute "forward-looking statements." All
forward-looking statements involve risks and uncertainties, and actual results
may be materially different. The following factors are among those that could
cause the Company's actual results to differ materially from those set forth in
such forward-looking statements.

The ability of the Company to open new restaurants depends on a number of
factors, including its ability to find suitable locations and negotiate
acceptable leases and land purchases, its ability to attract and retain a
sufficient number of qualified restaurant managers and the availability of
capital. The proportion of new restaurants that will be free-standing units,
either owned or leased, rather than strip mall locations will depend upon the
availability of suitable mall locations. The costs of restaurant development
and conversion will depend upon the level of contributions from landlords for
leasehold improvements, the actual number of free-standing sites utilized in
such development, and whether such sites involve land purchases, the cost of
building supplies and general construction risks and costs. The Company's
ability to generate revenue as currently expected, unexpected expenses and
the need for additional funds to react to changes in the marketplace,
including unexpected increases in personnel costs and food supply costs, may
impact whether the Company has sufficient cash resources to fund its
restaurant development and conversion plans for 1997 and early 1998.

Other factors that could cause actual results of the Company to differ
materially from those contained in any such forward-looking statements include
the success and timing of the continuing integration of the operations of
Buffets and HomeTown Buffet, general economic conditions, the actions of
existing and future competitors, weather factors, the success of conversions,
unforeseen health and safety developments regarding restaurant operations, and
regulatory constraints. The Company assumes no obligation to publicly release
the results of any revision or updates to these forward-looking statements to
reflect future events or unanticipated occurrences.

<PAGE>

BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Fifty-Two Fifty-Three Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
December 28, 1994 January 3, 1996 January 1, 1997
------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
RESTAURANT SALES............................. $484,459 $661,445 $750,707

RESTAURANT COSTS:
Food costs................................. 167,983 235,083 263,137
Labor costs................................ 132,166 184,732 218,121
Direct and occupancy costs................. 106,348 147,475 178,526
-------- -------- --------
Total restaurant costs................... 406,497 567,290 659,784
-------- -------- --------
RESTAURANT PROFITS........................... 77,962 94,155 90,923
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES................................... 38,460 40,276 47,594
Merger and merger related costs (NOTE B)..... 6,584
Duplicate site closing costs (NOTE B)........ 10,702
Impairment of assets (NOTE C)................ 27,739
Other site closing costs..................... 1,500 1,370 4,547
-------- -------- --------
38,002 52,509 (6,243)
OTHER INCOME (EXPENSE):
Franchise fees and royalties............... 1,336 1,356 1,506
Interest income............................ 1,376 607 1,517
Interest expense........................... (138) (1,391) (3,617)
Other...................................... 12 2 74
-------- -------- --------
2,586 574 (520)
-------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES.......... 40,588 53,083 (6,763)

INCOME TAXES (NOTE H)........................ 15,284 20,176 440
-------- -------- --------
NET EARNINGS (LOSS).......................... $ 25,304 $ 32,907 $ (7,203)
-------- -------- --------
-------- -------- --------
NET EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE........................... $ .56 $ .73 $ (.16)
-------- -------- --------
-------- -------- --------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING......................... 45,291 45,304 45,068
</TABLE>

See notes to consolidated financial statements.

10
<PAGE>
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
January 3, 1996 January 1, 1997
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 14,530 $ 10,772
Short-term investments.......................... 27,828
Receivable from landlords....................... 3,212 2,642
Inventory....................................... 4,138 3,653
Notes receivable................................ 11 52
Prepaid rents................................... 1,950 2,782
Other current assets............................ 2,849 2,587
Refundable income taxes......................... 1,829
Deferred income taxes (NOTE H).................. 6,592 11,975
-------- --------
TOTAL CURRENT ASSETS.......................... 62,939 34,463
-------- --------
PROPERTY AND EQUIPMENT:
Land............................................ 13,661 15,686
Buildings....................................... 27,414 30,537
Equipment....................................... 216,452 228,046
Leasehold improvements.......................... 170,794 185,263
-------- --------
428,321 459,532
Less accumulated depreciation and
amortization.................................. 99,748 131,811
-------- --------
328,573 327,721
GOODWILL, net of accumulated amortization of
$1,274 and $1,615 respectively.................. 5,365 5,974
OTHER ASSETS...................................... 2,875 2,525
-------- --------
$ 399,752 $ 370,683
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 36,732 $ 29,483
Accrued payroll and related benefits............ 14,961 16,229
Accrued rents................................... 11,985 13,892
Accrued sales taxes............................. 3,609 3,497
Accrued insurance............................... 4,363 4,390
Accrued store closing costs..................... 1,631 7,703
Other accrued expenses.......................... 3,035 5,779
Income taxes.................................... 615
Current portion of capital leases (NOTE G)...... 2,012 2,055
Short-term debt................................. 2,000
-------- --------
TOTAL CURRENT LIABILITIES..................... 80,328 83,643

LONG-TERM DEBT (NOTE D)........................... 55,500 41,500
LONG-TERM PORTION OF CAPITAL LEASES (NOTE G)...... 7,143 5,078
DEFERRED INCOME................................... 598 405
DEFERRED INCOME TAXES (NOTE H).................... 13,749 3,266
COMMITMENTS AND CONTINGENCIES (NOTE G)
STOCKHOLDERS' EQUITY (NOTE F):
Preferred stock, $.01 par value; authorized
5,000 shares; none issued and outstanding
Common stock, $.01 par value; authorized
60,000 shares; issued and outstanding 44,833
and 45,159 shares, respectively............... 448 452
Additional paid-in capital...................... 114,774 116,330
Retained earnings............................... 127,212 120,009
-------- --------
TOTAL STOCKHOLDERS' EQUITY.................... 242,434 236,791
-------- --------
$ 399,752 $ 370,683
-------- --------
-------- --------
</TABLE>

See notes to consolidated financial statements.
<PAGE>

BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Additional
Common Paid-In Retained
Stock Capital Earnings Total
------- --------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCES, December 29, 1993............. $307 $46,025 $ 69,579 $115,911
Pooling of interests with HomeTown
Buffet, Inc......................... 119 44,035 (578) 43,576
------- --------- --------- ------
BALANCES, December 29, 1993, as
restated.............................. 426 90,060 69,001 159,487
Net earnings.......................... 25,304 25,304
Common stock issued under employees'
stock option plans.................. 4 2,294 2,298
Tax benefit from early disposition of
common stock issued under employees'
stock option plans (NOTE H)......... 1,090 1,090
Issuance of common stock.............. 13 17,550 17,563
Common stock issued for acquisition of
Texas Buffets, Inc.................. 100 100
------- --------- -------- ------
BALANCES, December 28, 1994............. 443 111,094 94,305 205,842
Net earnings.......................... 32,907 32,907
Common stock issued under employees'
stock option plans.................. 4 2,106 2,110
Tax benefit from early disposition of
common stock issued under employees'
stock option plans (NOTE H)......... 308 308
Common stock issued for acquisition of
Evergreen Buffets, Inc.............. 1 1,266 1,267
------- --------- -------- ------
BALANCES, January 3, 1996............... 448 114,774 127,212 242,434
Net loss.............................. (7,203) (7,203)
Common stock issued under employees'
stock option plans.................. 4 1,333 1,337
Tax benefit from early disposition of
common stock issued under employees'
stock option plans (NOTE H)......... 223 223
------- --------- -------- ------
BALANCES, January 1, 1997............... $452 $116,330 $120,009 $236,791
------- --------- -------- -------
------- --------- -------- -------
</TABLE>

See notes to consolidated financial statements.

12
<PAGE>
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Fifty-Two Fifty-Three Fifty-Two
Weeks Ended Weeks Weeks
December 28, Ended January Ended January
1994 3, 1996 1, 1997
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)............................. $25,304 $32,907 $(7,203)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 22,745 32,617 39,504
Amortization of premium/discount in
investments................................. 332 135
Impairment of assets and site closing costs... 1,500 1,370 42,988
Tax benefit from early disposition of common
stock....................................... 1,090 308 223
Deferred income............................... 598 (193)
Deferred income taxes......................... 424 1,636 (15,866)
Changes in assets and liabilities, net of
acquisitions:
Inventory................................... (975) (1,028) 485
Other current assets........................ (2,831) (940) (611)
Refundable income taxes..................... (289) (1,829) 1,829
Other assets................................ (274) (533) (75)
Accounts payable............................ 12,590 5,708 (7,249)
Accrued payroll and related benefits........ 4,798 1,119 1,268
Other accrued expenses...................... 4,919 4,401 5,985
Income taxes payable........................ (295) (356) 615
------------- ------------- -------------
Total adjustments......................... 43,734 43,206 68,903
------------- ------------- -------------
Net cash provided by operating
activities.............................. 69,038 76,113 61,700

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (126,321) (105,463) (78,752)
Cash received from landlords.................... 8,005 5,511 3,101
Purchase of investments......................... (35,889) (123,468) (125,251)
Proceeds from sale of investments............... 40,751 106,556 153,079
Purchase of minority interest in HTB I.......... (950)
------------- ------------- -------------
Net cash used in investing activities..... (113,454) (116,864) (48,773)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under short-term debt................ 1,028 22,564
Payments of short-term debt..................... (21,600) (2,000)
Borrowings under long-term debt................. 7,000 47,255
Debt offering expenses.......................... (319)
Payments of long-term debt...................... (14,000)
Payments of capital leases...................... (189) (1,636) (2,022)
Proceeds from exercise of employee stock
options....................................... 2,298 2,110 1,337
Proceeds from stock offering.................... 17,563
------------- ------------- -------------
Net cash provided by (used in) financing
activities.............................. 27,700 48,374 (16,685)
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS..................................... (16,716) 7,623 (3,758)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.... 23,623 6,907 14,530
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......... $6,907 $14,530 $10,772
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Business acquisitions (NOTE I)
Cash paid during the year for:
Interest (net of capitalized interest of $63,
$305, and $63 in 1994, 1995, and 1996,
respectively)................................. $ 128 $1,380 $3,635
Income taxes.................................... 13,491 14,275 14,661
</TABLE>

See notes to consolidated financial statements.

<PAGE>
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 28, 1994 (52 WEEKS),
JANUARY 3, 1996 (53 WEEKS) AND JANUARY 1, 1997 (52 WEEKS)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS:

Buffets, Inc. and subsidiaries (the Company) owns and operates a chain of
restaurants under the name of Old Country Buffet, Country Buffet, HomeTown
Buffet, and Roadhouse Grill. The Company had 346 Company-owned restaurants and
24 franchised restaurants operating as of January 1, 1997. In addition to
initial franchise fees, franchisees pay royalties based on gross sales.

CONSOLIDATION:

The consolidated financial statements include the accounts of Buffets, Inc.,
and its subsidiaries Evergreen Buffets, Inc. (Evergreen), Dinertainment, Inc.,
HomeTown Buffet, Inc., HomeTown Construction and Development, Inc., HTB Ventures
I, Inc., HTB Ventures II, Inc., OCB Restaurant Co., OCB Realty Co., OCB
Purchasing Co. and OCB Property Co. All significant intercompany transactions
have been eliminated.

FISCAL YEAR:

The Company's fiscal year, which ends on the Wednesday nearest December 31,
is comprised of fifty-two or fifty-three weeks divided into four periods of
sixteen, twelve, twelve and twelve or thirteen weeks, respectively. The fiscal
year ended December 28, 1994 was a fifty-two week year, the fiscal year ended
January 3, 1996 was a fifty-three week year, and the fiscal year ended January
1, 1997 was a fifty-two week year.

CASH EQUIVALENTS:

The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The fair value of cash
equivalents approximates the carrying value because of their short-term
maturity.

SHORT-TERM INVESTMENTS:

At December 31, 1995, short-term investments have been categorized as
held-to-maturity and are, as a result, recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts. Management determines
the appropriate classification of its investments in debt and equity securities
at the time of purchase and reevaluates such determination at each balance sheet
date.

RECEIVABLES FROM LANDLORDS:

The portions of costs for leasehold improvements remaining to be reimbursed
by landlords at year end are recorded as receivables.

INVENTORIES:

Inventories, which consist primarily of food, are stated at the lower of
cost or market. Cost is determined by the first-in, first-out method.

PROPERTY AND EQUIPMENT:

Property and equipment are stated at cost. Depreciation is provided using
the straight-line method for financial reporting purposes and accelerated
methods for income tax reporting purposes. Equipment is depreciated over
estimated useful lives, ranging from three to ten years. Leasehold improvements
are amortized over the terms of the related leases, generally ten to twenty-five
years. Buildings are depreciated over estimated useful lives, generally 39 1/2
years.

GOODWILL:

Goodwill is amortized on a straight-line basis over primarily twenty-five
years.

RECOVERABILITY OF LONG-LIVED ASSETS:

The Company reviews long-lived assets and goodwill related to those assets
for impairment whenever events or changes in circumstances indicate the carrying
value amount of an asset or group of assets may not be recoverable. The Company
considers a history of operating losses to be its primary indicator of potential
impairment. Assets are

<PAGE>

grouped and evaluated for impairment at the lowest level for which there are
identifiable cash flows, individual restaurants. A restaurant is deemed to be
impaired if a forecast of undiscounted future operating cash flows directly
related to the restaurant, including disposal value, if any, is less than its
carrying amount. If a restaurant is determined to be impaired, the loss is
measured as the amount by which the carrying amount of the restaurant exceeds
its fair value. Fair value is based on quoted market prices in active
markets, if available. If quoted market prices are not available, an estimate
of fair value is based on the best information available, including prices
for similar assets or the results of valuation techniques such as discounted
estimated future cash flows as if the decision to continue to use the
impaired restaurant was a new investment decision. The Company generally
measures fair value by discounting estimated future cash flows. Considerable
management judgment is necessary to estimate discounted future cash flows.
Accordingly, actual results could vary significantly from such estimates.

DEFERRED INCOME:

Deferred income represents a payment received from a vendor as part of an
agreement to use the vendor's products exclusively for three years, maintenance
allotment, and training sponsorship.

PRE-OPENING COSTS:

Costs incurred in connection with the opening of new restaurants are
expensed as incurred.

POST-EMPLOYMENT AND POST-RETIREMENT BENEFITS:

The Company does not provide post-employment or post-retirement benefits.

LABOR:

The Company is currently experiencing a labor market that is becoming more
competitive. This, combined with possible legislation requiring health insurance
for all employees, could cause significant increases in labor costs in the
future.

INCOME TAXES:

The Company utilizes Statement of Financial Accounting Standard (SFAS) No.
109, "Accounting for Income Taxes." Under SFAS No. 109, the deferred tax
provision is determined under the liability method. Under this method, deferred
tax assets and liabilities are recognized based on differences between the
financial statement and tax bases of assets and liabilities using presently
enacted tax rates.

USE OF ESTIMATES:

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

NET EARNINGS (LOSS) PER SHARE:

Net earnings (loss) per common and common equivalent share are computed on
the basis of the weighted average number of common shares outstanding during
each year adjusted for incremental shares assumed issued on the exercise of
stock options. For the fiscal year ended January 1, 1997, common stock
equivalents are not included since their effect was antidilutive. Earnings per
share assuming full dilution would be substantially the same.

B. HOMETOWN MERGER

On September 20, 1996, the Company completed the merger of HomeTown Buffet,
Inc. (HomeTown Buffet). The merger was accounted for as a pooling of interests.
Accordingly, all prior period consolidated financial statements presented have
been restated as if the merger took place at the beginning of such periods.
In connection with the merger the Company issued approximately 13,733,700 shares
of its common stock and issued 1,967,200 options in substitution for previously
outstanding HomeTown Buffet stock options. In addition, the Company guaranteed
the obligations of HomeTown Buffet under HomeTown Buffet's outstanding 7%
subordinated convertible notes, and Company common stock will be issued upon any
conversion thereof. Approximately $41.5 million in principal amount of the notes
are currently outstanding.

In connection with the merger the Company incurred approximately $17.3
million of merger and merger-related costs, including $6.6 million for
investment banking, accounting, legal, and other merger costs and $10.7 million
for the closure of five duplicate restaurants and HomeTown Buffet's San Diego
headquarters.

15
<PAGE>

Separate results of operations for the periods prior to the merger were as
follows:

<TABLE>
<CAPTION>
Fifty-Two Fifty-Three Forty
Weeks Ended Weeks Ended Weeks Ended
December 28, January 3, October 9,
1994 1996 1996
-------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
RESTAURANT SALES:
Buffets, Inc.......................... $ 409,744 $ 509,928 $415,980
HomeTown Buffet, Inc.................. 74,715 151,517 164,683
-------------- -------------- -------------
Combined............................ $ 484,459 $ 661,445 $580,663
-------------- -------------- -------------
-------------- -------------- -------------
NET EARNINGS (LOSS):
Buffets, Inc.......................... $ 22,476 $ 26,832 $ 4,260
HomeTown Buffet, Inc.................. 3,644 6,561 (4,536)
Merger and duplicate site closing
costs............................... (11,395)
Adjustments........................... (816) (486) 1,729
-------------- -------------- -------------
Combined............................ $ 25,304 $ 32,907 $ (9,942)
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>

The combined financial results presented above include adjustments made to
conform accounting policies of the two companies relating to rebate income and
pre-opening costs. All other adjustments are reclassifications to conform
financial statement presentation.

C. IMPAIRMENT OF LONG-LIVED ASSETS

During the twelve weeks ended October 9, 1996, the Company determined that
an impairment write down was necessary for certain locations due to a
significant drop in average weekly sales and corresponding trend of increasing
operating losses at certain locations. As a result of this review, the Company
determined a $27.7 million impairment write down was necessary for 38
restaurants and decided to close three restaurants. The write down represented a
reduction of the carrying amounts of the impaired restaurants to their estimated
fair value, as determined by using discounted estimated future cash flows. The
cost of closing the three restaurants in fiscal 1996 was $4.5 million.
Considerable management judgement is necessary to estimate discounted future
cash flows. Accordingly, actual results could vary significantly from such
estimates.

As a result of the reduced carrying amount of the impaired restaurants,
depreciation and amortization expense for the fourth quarter of fiscal 1996 was
reduced by $.7 million and full-year 1997 depreciation and amortization, are
expected to be reduced by $3.0 million.

D. DEBT

The Company has a $50 million unsecured revolving line of credit which
expires June 30, 1999. On July 1, 1999, providing no default or event of default
has occurred and is continuing, the line of credit is convertible, at the
Company's option, to a three year term loan, maturing on July 1, 2002. Among
other things, pursuant to the agreement with the lender, the Company is required
to maintain specified levels of net worth, is limited in net capital
expenditures to $90 million in 1997, is required to meet various financial
performance criteria, and is restricted from declaring or paying cash dividends
to shareholders without the lender's approval. As of January 1, 1997, the
Company had no borrowings under the line of credit. Quarterly, the Company is
required to pay a commitment fee equal to 1/4 of 1% per annum on the unused
balance of the revolving line of credit.

In November 1995, HomeTown Buffet issued $41.5 million of 7.0%
convertible subordinated notes due on December 1, 2002. Interest is payable
semi-annually on June 1 and December 1, commencing June 1, 1996. The notes
are convertible into shares of the Company's common stock at a conversion
price of $11.67, subject to adjustment under certain conditions, at any time
until maturity. The notes are subordinated in right of payment to all
existing and future senior indebtedness, as defined in the Indenture relating
thereto, as amended. The notes are redeemable in whole or in part, at the
option of the Company, at any time on or after December 2, 1998.

Letters of credit are issued by the Company during the ordinary course of
business through a major domestic bank as required by certain insurance
policies. As of January 1, 1997 the Company had outstanding letters of credit
for $4.2 million.

The fair value of the debt is estimated at its carrying value based upon
current rates available to the Company.

16
<PAGE>

E. CORPORATE JOINT VENTURES

In October 1993, the Company formed two joint ventures, HTB Ventures I, Inc.
("HTB I") and HTB Ventures II, Inc. ("HTB II"). HTB I was formed to establish
and operate HomeTown Buffet restaurants in states including, but not limited to,
Illinois and Ohio. The total capital of HTB I included an $800,000 stock
subscription receivable from the Company and a $200,000 promissory note from the
private investor. HTB II was formed to establish and operate HomeTown Buffet
restaurants in states including, but not limited to, Missouri, Kentucky, and
Kansas. The total capital of HTB II included an $800,000 cash investment by the
Company and a $200,000 promissory note from the private investor.

HTB II was terminated in April 1995 and HTB I was terminated in February
1996. Under the termination agreement for HTB II, the Company acquired the
minority interest in that joint venture and assumed 100% ownership of the two
restaurants that were operated by that joint venture in consideration for the
forgiveness of the principal and interest on the initial promissory note from
the investor. The terms of the termination agreement for HTB I were
substantially the same terms as for HTB II, except that in addition to the
forgiveness of the principal and interest on the initial promissory note from
the investor, the Company paid additional cash consideration of $950,000.

F. STOCKHOLDERS' EQUITY

AUTHORIZED SHARES:

The Company has 65 million authorized shares, consisting of 5 million shares
of preferred stock with rights and preferences to be established by the Board of
Directors and 60 million shares of common stock.

SHAREHOLDER PREFERRED STOCK PURCHASE RIGHTS IN THE EVENT OF A CHANGE OF CONTROL:

During 1995, the Company adopted a shareholder rights plan and distributed
to its shareholders one preferred share purchase right for each outstanding
share of common stock. The rights become exercisable only after a person or
group acquires beneficial ownership of 20% or more of the Company's outstanding
common stock or announces a tender offer, the consummation of which would result
in beneficial ownership by a person or group of 20% or more of the Company's
outstanding common stock. Each right will entitle its holder to purchase one
one-hundredth share of a new Series A Junior Participating Preferred Share
(consisting of 600,000 shares, par value $.01 per share) at an exercise price of
$65, subject to adjustment. If a person or group acquires beneficial ownership
of 20% or more of the Company's outstanding common stock, each right will
entitle its holder (other than such person or group) to purchase, at the then
current exercise price of the right, that number of shares of the Company's
common stock having a market value of two times the exercise price of the right,
subject to certain possible adjustments. In addition, if the Company is acquired
in a merger or other business combination transaction, each right will entitle
its holder to purchase, at the then current exercise price of the right, that
number of common shares of the acquiring company (or, in certain cases, one of
its affiliates) having a market value of two times the exercise price of the
right. Following the acquisition by a person or group of beneficial ownership of
20% or more of the Company's outstanding common stock and prior to an
acquisition by any person or group of 50% or more of the Company's outstanding
common stock, the Board of Directors may exchange the outstanding rights (other
than rights owned by such person or group), in whole or in part, for common
stock of the Company (or equivalent securities) at an exchange ratio per right
equal to the result obtained by dividing the exercise price of a right by the
current per share market price of the Company's common stock, subject to
adjustment. The Company may redeem the rights at $.01 per right, subject to
adjustment, at any time prior to an acquisition by a person or group of 20% or
more of the Company's outstanding common stock and--unless there has been a
change in control of the Company's Board--during the 20-day period thereafter
(subject to possible extension). The rights expire on November 13, 2005, unless
extended or earlier redeemed or exchanged by the Company.

STOCK OPTIONS:

Under the Company's 1985, 1988, 1991 and 1995 Stock Option Plans (the
Plans), 6.3 million shares were reserved for future grants. Generally, options
outstanding under the Company's stock option plans: 1) are granted at prices
equal to the market value of the stock on the date of the grant, 2) vest ratably
over a five year vesting period, and 3) expire over a period not greater than
ten years from the date of grant. The 1985 Stock Option Plan expired in 1995.
Under the 1995 Stock Option Plan, 1.0 million shares were reserved for future
grants. The 1991 Stock Option Plan of HomeTown Buffet expired on September 20,
1996. No previously issued options have been repriced.

17
<PAGE>

A summary of the status of the Company's stock options are presented below
(shares in thousands):

<TABLE>
<CAPTION>
Fifty-Two
Weeks Ended Fifty-Three Fifty-Two
December 28, 1994 Weeks Ended Weeks Ended
January 3, 1996 January 1, 1997
------------------- ------------------ -------------------
Wgtd Avg Wgtd Avg Wgtd Avg
Shares Exer Price Shares Exer Price Shares Exer Price
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year... 3,886 $10.48 3,993 $12.05 4,081 $11.49
Granted............................ 1,053 16.75 1,251 10.77 1,296 11.27
Exercised.......................... (456) 5.27 (318) 6.70 (326) 3.85
Canceled........................... (490) 16.01 (845) 14.87 (712) 12.63
------ ------ ------
Outstanding at end of year......... 3,993 $12.05 4,081 $11.49 4,339 $11.81
------ ---------- ------ ---------- ------ ----------
------ ---------- ------ ---------- ------ ----------
Options exercisable at year end.... 1,334 $ 9.70 1,534 $10.36 1,805 $11.54
------ ---------- ------ ---------- ------ ----------
------ ---------- ------ ---------- ------ ----------
Options available for future
grant............................ 2,431 2,003 774
------ ------ ------
------ ------ ------
</TABLE>

The Company applies Accounting Principles Board (APB) Opinion No. 25 and
related interpretations in accounting for the plans. No compensation cost has
been recognized for options issued under the Plans when the exercise price of
the options granted are at least equal to the fair value of the common stock on
the date of grant. Had compensation cost for the Company's stock option plans
been determined based on the fair value at the grant date for awards in 1995 and
1996, consistent with the provisions of SFAS No. 123, the Company's net income
(loss) would have changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net income (loss), as reported......................... $32,907 $(7,203)
Net income (loss), pro forma........................... $30,248 $(9,717)

Net income (loss) per common share, as reported........ $ .73 $ (.16)
Net income (loss) per common share, pro forma.......... $ .67 $ (.22)
</TABLE>

The fair value of each option grant is estimated on the grant date using the
Black-Sholes option-pricing model with the following assumptions and results for
the grants:

<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Dividend yield......................................... None None
Expected volatility.................................... 67.67% 64.21%
Expected life of option................................ 10 10
Risk free interest rate................................ 6.88% 6.68%
Fair value of options on grant date.................... $8.86 $8.45
</TABLE>

<PAGE>
The following table summarizes information about stock options outstanding
at January 1, 1997 (shares in thousands):

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------
Wgtd Avg
Remaining Wgtd Avg Wgtd Avg
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (Years) Price Exercisable Price
- --------------- ----------- ---------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
$ 1.43 - $ 5.54 436 4.74 $ 3.27 352 $ 3.17
$ 5.58 - $ 9.13 517 7.98 $ 8.51 155 $ 7.15
$ 9.19 - $10.33 395 8.38 $ 9.52 79 $ 9.49
$10.34 - $10.75 456 8.14 $10.62 125 $10.56
$10.90 - $12.00 584 8.70 $11.72 71 $11.24
$12.39 - $12.94 480 8.93 $12.76 69 $12.60
$13.00 - $13.63 480 5.80 $13.20 385 $13.11
$14.13 - $16.13 518 6.26 $15.20 321 $15.19
$17.31 - $24.25 396 6.71 $19.58 217 $19.25
$24.63 77 7.19 $24.63 31 $24.61
----- ------
$1.43 - $24.63 4,339 7.33 $11.81 1,805 $11.54
----- ---- ------ ------ --------
----- ----- ------ ------ --------
</TABLE>

18
<PAGE>
G. COMMITMENTS AND CONTINGENCIES

COMMITMENTS:

The Company conducts most of its operations from leased restaurant
facilities, all of which are classified as operating leases. The Company also
leases certain equipment under capital lease agreements. Amortization of assets
under capital leases is included in depreciation expense.

Equipment includes the following capital lease amounts:

<TABLE>
<CAPTION>
January 3, January 1,
1996 1997
------------- -------------
<S> <C> <C>
Equipment............................... $13,068 $12,271
Less accumulated amortization........... 2,298 4,167
------------- -------------
$10,770 $8,104
------------- -------------
------------- -------------
</TABLE>

The following is a schedule of future minimum rental payments required under
capitalized leases and noncancellable operating leases as of January 1, 1997 (in
thousands):

<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------------- -------------
<S> <C> <C>
1997......................................... $ 2,783 $ 34,679
1998......................................... 2,603 35,473
1999......................................... 2,272 35,744
2000......................................... 647 36,284
2001......................................... 36,217
Thereafter................................... 277,930
------ -------------
Total minimum lease payments................. 8,305 $ 456,327
-------------
-------------
Less amount representing interest (at rates
ranging from 6.38% to 11.80%).............. 1,172
------
Present value of net minimum capital lease... 7,133
Less current portion of capital leases....... 2,055
------
Long-term portion of capital leases.......... $ 5,078
------
------
</TABLE>

Certain of these leases require additional rent based on a percentage of net
sales and may require additional payments for real estate taxes and common area
maintenance on the properties. Many of these leases also contain renewal options
exercisable at the election of the Company.

Rent expense was as follows (in thousands):

CONTINGENCIES:

The Company and certain of its directors and executive officers have been
named as defendants in a Third Amended Consolidated Class Action Complaint
(the "complaint") brought on behalf of a putative class of all purchasers of
common stock of the Company from October 26, 1993 through October 25, 1994
(the "class period") in the United States District Court for the District of
Minnesota. The complaint alleges that the defendants made misrepresentations
and omissions of material fact during the class period with respect to the
Company's operations and restaurant development activities, as a result of
which the price of the Company's stock allegedly was artificially inflated
during the class period. The complaint further alleges that certain
defendants made sales of common stock of the Company during the class period
while in possession of material undisclosed information

<PAGE>
about the Company's operations and restaurant development activities. The
complaint alleges that the defendants' conduct violated the Securities
Exchange Act of 1934 and seeks compensatory damages in an unspecified amount,
prejudgement interest, and an award of attorneys fees, costs and expenses.
The defendants have moved to dismiss the current complaint, but the matter
has not yet been heard. The two previous complaints were dismissed without
prejudice. Management of the Company believes that the action is without
merit and intends to defend it vigorously. Although the outcome of this
proceeding cannot be predicted with certainty, the Company's management
believes that while the outcome may have a material effect on earnings in a
particular period, the outcome should not have a material effect on the
financial condition of the Company.

On August 9, 1996 HTB Restaurants, Inc. ("HTB Restaurants"), a franchisee of
HomeTown Buffet, along with its parent entities, Summit Family Restaurants, Inc.
and CKE Restaurants, Inc. (the "Plaintiffs"), filed suit against the Company and
HomeTown Buffet in United States District Court for the District of Utah,
Central Division. The suit alleges, among other things, that the Company and
HomeTown Buffet have illegally conspired to restrict competition and to prevent
the Plaintiffs from developing additional HomeTown Buffet restaurants under the
Multiple Unit Agreement between HomeTown Buffet and HTB Restaurants (the
"Multiple Unit Agreement"). The suit includes claims against the Company and
HomeTown Buffet for violations of both federal and state antitrust laws, claims
for unfair business practices, and claims for tortious interference with
contract and economic relations. The suit also alleges claims against HomeTown
Buffet for breach of contract and breach of the covenant of good faith and fair
dealing. Plaintiffs sought damages and to enjoin the merger between the Company
and HomeTown Buffet. On September 19, 1996, the United States District Court,
denied Plaintiffs' motion for preliminary injunctive relief. On January 31,
1997, an arbitrator confirmed that the Multiple Unit Agreement was terminated
with all of HTB Restaurants development rights. The Company and HomeTown Buffet
believe that the suit is without merit, and intend to vigorously defend the
remaining claims under the lawsuit. Although the outcome of this proceeding
cannot be predicted with certainty, the Company's management believes that the
outcome should not have a material effect on the financial condition of the
Company.

H. INCOME TAXES

The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
Fifty-Two Fifty-Three Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
December 28, January 3, January 1,
1994 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Federal:
Current............................... $ 11,477 $ 15,833 $ 13,872
Deferred.............................. 354 1,257 (13,385)
------- ------- --------------
11,831 17,090 487
State:
Current............................... 2,293 2,399 2,211
Deferred.............................. 70 379 (2,481)
------- ------- --------------
2,363 2,778 (270)
Tax effect from early disposition of
common stock.......................... 1,090 308 223
------- ------- --------------
$ 15,284 $ 20,176 $ 440
------- ------- --------------
------- ------- --------------
</TABLE>

Deferred income taxes are provided to record the income tax effect of
temporary differences that occur when transactions are reported in one period
for financial statement purposes and in another period for tax purposes. The tax
effect of the temporary differences giving rise to the Company's deferred tax
assets and liabilities are as follows (in thousands):

<TABLE>
<CAPTION>
January 3, 1996 January 1, 1997
----------------------- -----------------------
Current Long-Term Current Long-Term
Asset Liability Asset Liability
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Property and equipment....................... $16,036 $5,876
Deferred rent................................ $ 2,984 $ 3,465
Self-insurance reserve....................... 1,476 1,462
Accrued workers' compensation................ 1,161 1,663
Accrued vacation............................. 333 411
Deferred income.............................. 154
Accured store closing costs.................. 4,548
Rebate income................................ 450
Alternative minimum tax credit
carryforward............................... (2,287) (2,610)
Other........................................ 188 272
---------- ---------- ---------- ----------
$ 6,592 $13,749 $ 11,975 $3,266
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

20
<PAGE>

The Company has federal and state alternative minimum tax credit
carryforwards of $2,610,000, which can be carried forward indefinitely.
Future utilization of the carryforward is based on the profitability of
HomeTown Buffet's operations.

The following is a reconciliation of the expected ordinary federal income
tax expense (benefit) (at statutory rates) to the actual income tax provided
(in thousands):

<TABLE>
<CAPTION>
Fifty-Two Fifty-Three Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
December 28, January 3, January 1,
1994 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Expected ordinary federal income tax
expense (benefit)..................... $ 14,206 $ 18,579 $ (2,367)
State income taxes, net of federal
effect................................ 1,808 1,890 (176)
Merger related costs.................... 2,785
General business credits................ (527) (337) (29)
Change in valuation allowance........... (512) (140)
Other................................... 309 184 227
------- ------- -------
$ 15,284 $ 20,176 $ 440
------- ------- -------
------- ------- -------
</TABLE>

I. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

On December 18, 1995, the Company acquired the remaining 10% minority
interest in Evergreen in exchange for 92,991 shares of the Company's common
stock with a market value of $1,267,000. On February 4, 1994, the Company
acquired the remaining 10% minority interest in Texas Buffets, Inc. (Texas) in
exchange for 3,585 shares of the Company's common stock with a market value of
$100,000. The Company also purchased the minority interests in HTB I and HTB II
(see Note E). The acquisition of the minority interests involved the following
non-cash items (in thousands):

<TABLE>
<CAPTION>
Fifty-Two Fifty-Three Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
December 28, January 3, January 1,
1994 1996 1997
------------- --------------------------- -------------
Texas Evergreen HTB II HTB I
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Goodwill................................ $ 693 $ 950
Minority interest....................... $ 155 657 200 200
Cancellation of receivable.............. (55) (83) (200) (200)
Common shares issued.................... (100) (1,267)
----- ------------- ----- -----
Cash consideration paid................. $ 0 $ 0 $ 0 $ 950
----- ------------- ----- -----
----- ------------- ----- -----
</TABLE>

During 1995, the Company incurred non-cash capital lease obligations
totaling $10,002,000 for equipment.

21
<PAGE>
J. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Selected quarterly financial data have been adjusted to reflect the merger,
effective September 20,1996 of HomeTown Buffet. The merger was accounted for
using the pooling-of-interests method of accounting (see Note B).

<TABLE>
<CAPTION>
Year (52 Weeks) Ended January 1, 1997
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Restaurant sales.............. $217,452 $182,302 $180,909 $170,044
Restaurant profits............ 25,181 28,414 21,746 15,582
Earnings (loss) before income
taxes....................... 11,881 16,793 (39,916) 4,479
Net earnings (loss)........... $ 7,297 $ 10,207 $(27,446)* $ 2,739
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings (loss) per
share....................... $ .16 $ .22 $ (.60)* $ .06
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common and
common equivalent shares.... 45,656 45,687 45,073 45,486
</TABLE>

- ------------------------------

* Reflects non-cash and merger charges totaling $49,572,000 ($32,666,000 or
$.72 per share after tax). See Managements Discussion and Analysis of
Results of Operations and Financial Conditions on Merger Costs, Duplicate
Site Closing Costs, and Impairment of Assets.

<TABLE>
<CAPTION>
Year (53 Weeks) Ended January 3, 1996
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Restaurant sales........................ $180,426 $153,868 $162,860 $164,291
Restaurant profits...................... 24,269 23,162 24,091 22,633
Earnings before income taxes............ 12,995 14,591 13,415 12,082
Net earnings............................ $ 8,082 $ 9,076 $ 8,351 $ 7,398
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings per share.................. $ .18 $ .20 $ .18 $ .17
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares..................... 45,120 45,343 45,439 45,407
</TABLE>

22
<PAGE>

--------------------

INDEPENDENT AUDITORS' REPORT

To Stockholders and Board of
Directors Buffets, Inc.

We have audited the accompanying consolidated balance sheets of Buffets,
Inc. and subsidiaries (the Company) as of January 3, 1996 and January 1, 1997
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years (52-53 weeks) in the period ended
January 1, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

The consolidated financial statements give retroactive effect to the
merger of the Company and HomeTown Buffet, Inc. and subsidiaries (HomeTown
Buffet), which has been accounted for as a pooling of interests as described
in Note B to the consolidated financial statements. We did not audit the
consolidated balance sheet of HomeTown Buffet as of January 3, 1996 or the
related statements of operations, stockholders' equity, and cash flows of
HomeTown Buffet for the years ended December 28, 1994 and January 3, 1996,
which statements reflect total assets of $145,857,000 as of January 3, 1996
and total restaurant sales of $74,715,000 and $151,517,000 for the years
ended December 28, 1994 and January 3, 1996, respectively. Those statements,
before the restatements to conform the accounting policies of the two
companies described in Note B to the consolidated financial statements, were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for HomeTown Buffet
for the year ended December 28, 1994 and as of and for the year ended
January 3, 1996, is based solely on the report of such other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors,
the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Buffets, Inc. and
subsidiaries as of January 3, 1996 and January 1, 1997 and the results of
their operations and their cash flows for each of the three years (52-53
weeks) in the period ended January 1, 1997 in conformity with generally
accepted accounting principles.

We also audited the adjustments to conform the accounting policies
described in Note B that were applied to restate the consolidated financial
statements of HomeTown Buffet as of January 3, 1996 and for the years ended
December 28, 1994 and January 3, 1996. In our opinion, such adjustments are
appropriate and have been properly applied.

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota
February 19, 1997

--------------------

STOCK INFORMATION

MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's common stock trades on The Nasdaq Stock Market under the
symbol "BOCB." As of March 17, 1997, the approximate number of holders of the
Company's common stock was 12,988 based upon the number of record holders and
an estimate of individual participants in security position listings.

The following table sets forth the range of high and low closing sale
prices reported on The Nasdaq Stock Market for the period from January 1,
1995 to the end of the calendar year corresponding to the fiscal year covered
by this report. The amounts represent prices between dealers in securities,
without adjustments for retail markups, markdowns or commissions.

The Company has not paid any cash dividends on its common stock and,
pursuant to its credit agreement, is restricted from declaring or paying cash
dividends without the approval of the Company's lender. The Board of
Directors intends to retain earnings for the foreseeable future for use in
the expansion of the Company's business.

High Low
-------- ------
Calendar 1995
First Quarter . . . . . . . . . . . . . $12 1/16 $9 1/8
Second Quarter . . . . . . . . . . . . 14 5/8 9 3/8
Third Quarter . . . . . . . . . . . . . 14 5/8 11 1/4
Fourth Quarter . . . . . . . . . . . . 15 1/2 11 3/8

Calendar 1996
First Quarter . . . . . . . . . . . . . $14 1/2 $11 7/8
Second Quarter . . . . . . . . . . . . 14 1/8 11 5/8
Third Quarter . . . . . . . . . . . . . 14 7/8 9 5/8
Fourth Quarter . . . . . . . . . . . . 11 1/8 8 15/16

--------------------

<PAGE>
EXHIBIT 21

Subsidiaries of Buffets, Inc.

State of
Name of Subsidiaries Incorporation Doing Business As
- -------------------- ------------- -----------------

Dinertainment, Inc. Minnesota
Evergreen Buffets, Inc. Oregon Old Country Buffet
HTB Ventures I, Inc. Delaware
HTB Ventures II, Inc. Delaware
HomeTown Buffet, Inc. Delaware HomeTown Buffet
HomeTown Construction and
Development, Inc. Delaware
OCB Restaurant Co. Minnesota Old Country Buffet
OCB Realty Co. Minnesota
OCB Purchasing Co. Minnesota
OCB Property Co. Minnesota

<PAGE>
EXHIBIT 23(a)

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in the Registration Statements
No. 33-8388, No. 33-30981, No. 33-41958, No. 33-47893, No. 333-1191, and No.
333-15857 of Buffets, Inc. on Form S-8 and in Registration Statement No. 333-663
of Buffets, Inc. on Form S-3 of our report dated February 19, 1997, incorporated
by reference in the Annual Report on Form 10-K of Buffets, Inc. for the fiscal
year ended January 1, 1997.

/s/ Deloitte & Touche LLP

Minneapolis, Minnesota
March 25, 1997

<PAGE>
EXHIBIT 23(b)

The Board of Directors
HomeTown Buffet, Inc.:

We consent to the incorporation by reference in the registration statements
(Nos. 33-8388, 33-30981, 33-41958, 33-47893, 333-01191, and 333-15857) on
Form S-8 and (No. 333-00663) on Form S-3 of Buffets, Inc. of our report dated
February 16, 1996, except as to Note 6 to the consolidated financial
statements which is as of March 8, 1996, relating to the consolidated balance
sheet of HomeTown Buffet, Inc. as of January 3, 1996 and the related
consolidated statements of income, stockholders' equity (deficit), and cash
flows for each of the years in the two-year period, ended January 3, 1996,
which appears in the Annual Report on Form 10-K of Buffets, Inc. for the year
ended January 1, 1997.

/s/ KPMG Peat Marwick LLP

San Diego, California
March 28, 1997

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JANUARY 1, 1997 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE FIFTY-TWO WEEK PERIOD JANUARY 1, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-1997
<PERIOD-START> JAN-04-1996
<PERIOD-END> JAN-01-1997
<CASH> 10,772
<SECURITIES> 0
<RECEIVABLES> 2,642
<ALLOWANCES> 0
<INVENTORY> 3,653
<CURRENT-ASSETS> 34,463
<PP&E> 459,532
<DEPRECIATION> 131,811
<TOTAL-ASSETS> 370,683
<CURRENT-LIABILITIES> 83,643
<BONDS> 46,578
0
0
<COMMON> 452
<OTHER-SE> 236,339
<TOTAL-LIABILITY-AND-EQUITY> 370,683
<SALES> 750,707
<TOTAL-REVENUES> 750,707
<CGS> 659,784
<TOTAL-COSTS> 659,784
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,617
<INCOME-PRETAX> (6,763)
<INCOME-TAX> 440
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,203)
<EPS-PRIMARY> $(.16)
<EPS-DILUTED> $(.16)

</TABLE>