The following discussion should be read in conjunction with the consolidated financial statements, accompanying notes and selected financial data appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended June 29, 2008, and may contain certain forward-looking statements that are based on current management expectations. Generally, verbs in the future tense and the words "believe," "expect," "anticipate," "estimate," "intends," "opinion," "potential" and similar expressions identify forward-looking statements. Forward-looking statements in this report include, without limitation, statements relating to our business objectives, our customers and our franchisees, our liquidity and capital resources, the impact of our historical and potential business strategies on our business, financial condition, and operating results and the expected effects of potentially adverse litigation outcomes. Our actual results could differ materially from our expectations. Further information concerning our business, including additional factors that could cause actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q, are set forth in our Annual Report on Form 10-K for the year ended June 29, 2008. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as may be required by applicable law, we do not undertake, and specifically disclaim any obligation to, publicly update or revise such statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Overview

The Company is a franchisor and food and supply distributor to a system of restaurants operating under the trade name "Pizza Inn." Our distribution division is Norco Restaurant Services Company ("Norco"). At March 29, 2009, there were 316 domestic and international Pizza Inn restaurants, consisting of two Company-owned domestic restaurants, 246 franchised domestic restaurants, and 68 franchised international restaurants. The 248 domestic restaurants consisted of: (i) 152 restaurants that offer dine-in, carry-out, and in many cases, delivery services ("Buffet Units"); (ii) 40 restaurants that offer delivery and carry-out services only ("Delco Units"); and (iii) 56 restaurants that are typically located within a convenience store, college campus building, airport terminal, or other commercial facility and offer quick carry-out service from a limited menu ("Express Units"). The 248 domestic restaurants were located in 17 states predominately situated in the southern half of the United States. The 68 international restaurants were located in 10 foreign countries.

Diluted income per common share decreased to $0.05 for the three month period ended March 29, 2009 compared to $0.09 for the comparable period ended March 23, 2008. Net income for the three month period ended March 29, 2009 decreased $537,000 to $361,000 from $898,000 for the comparable period in the prior fiscal year, on revenues of $10,757,000 for the three month period ended March 29, 2009 and $11,668,000 for the comparable period in the prior fiscal year. Diluted income per common share decreased to $0.09 for the nine month period ended March 29, 2009 compared to $0.21 for the comparable period ended March 23, 2008. Net income for the nine month period ended March 29, 2009 decreased $1,306,000 to $790,000 from $2,096,000 for the comparable period in the prior fiscal year, on revenues of $33,423,000 for the nine month period ended March 29, 2009 and $36,441,000 for the comparable period in the prior fiscal year.

The decrease in net income during the three month period ended March 29, 2009, was primarily due to income tax expense in the current fiscal year compared to an income tax benefit in the prior year. The decrease in net income during the nine month period ended March 29, 2009, was primarily due to income tax expense and a non-recurring legal settlement of $263,000 in the current fiscal year, compared to an income tax benefit and a legal settlement recovered in the prior year of $284,000. In the absence of these items, net income would have been $564,000, or $.07 per share, for the three months ended March 29, 2009 compared to $682,000, or $.07 per share, for the same period in the prior year and $1,491,000, or $0.17 per share, for the nine months ended March 29, 2009 compared to $1,596,000, or $0.16 per share, for the same period in the prior year.

Management believes that key performance indicators in evaluating financial results include domestic chain-wide retail sales and the number and type of operating restaurants. The following table summarizes these key performance indicators.

                                                           Three Months Ended
                                                         March 29,     March 23,
                                                           2009          2008
Domestic retail sales Buffet Units (in thousands)      $    28,297   $    28,982
Domestic retail sales Delco Units (in thousands)       $     2,578   $     2,839
Domestic retail sales Express Units (in thousands)     $     1,287   $     1,320
  Total domestic retail sales (in thousands)           $    32,162   $    33,141

Average number of domestic Buffet Units                        152           162
Average number of domestic Delco Units                          40            42
Average number of domestic Express Units                        56            58


                                                           Nine Months Ended
                                                         March 29,     March 23,
                                                           2009          2008
Domestic retail sales Buffet Units (in thousands)      $    83,008   $    85,654
Domestic retail sales Delco Units (in thousands)       $     7,983   $     8,705
Domestic retail sales Express Units (in thousands)     $     3,826   $     4,443
  Total domestic retail sales (in thousands)           $    94,817   $    98,802

Average number of domestic Buffet Units                        153           162
Average number of domestic Delco Units                          40            42
Average number of domestic Express Units                        55            60

Revenues

Currently our revenues are derived from restaurant operations, sales of food, paper products and supplies by Norco to franchisees, franchise royalties and franchise fees. Our financial results are dependent in large part upon the pricing and cost of these products and supplies to franchisees, and the level of chain-wide retail sales, which are driven by changes in same store sales and restaurant count. In prior years, our revenues also included the sale of equipment to franchisees.

Food and Supply Sales

Food and supply sales by Norco include food and paper products, equipment and other distribution revenues. Food and supply sales for the three month period ended March 29, 2009 decreased 11%, or $1,180,000, to $9,136,000 from $10,316,000 compared to the same period in the prior fiscal year. For the three month period ended March 29, 2009, total domestic chain-wide retail sales decreased 3%, or $979,000, compared to the same period in the prior fiscal year due to a lower store count and lower comparable sales. As a result of this decrease in retail sales and a 34% decrease in cheese prices, domestic food and paper sales decreased 11%, or $1,170,000, compared to the same period in the prior fiscal year.

Food and supply sales for the nine month period ended March 29, 2009 decreased 10% or $3,354,000, to $28,915,000 from $32,269,000 compared to the same period in the prior fiscal year. During the nine month period ended March 29, 2009, international sales and equipment sales decreased by $830,000. For the nine month period ended March 29, 2009, total domestic chain-wide retail sales decreased 4%, or $3,985,000, compared to the same period in the prior fiscal year due to a lower store count and lower comparable sales. As a result of this decrease in retail sales and a 14% decrease in cheese prices, domestic food and paper sales decreased 7%, or $2,303,000, compared to the same period in the prior fiscal year.

Franchise Revenue

Franchise revenue, which includes income from royalties, license fees and area development and foreign master license sales, decreased 11%, or $125,000, to $1,056,000 for the three month period ended March 29, 2009 compared to $1,181,000 in the comparable period for the prior fiscal year. This decrease is primarily attributable to lower domestic royalties resulting from lower retail sales compared to the comparable period in the prior fiscal year. Franchise revenues decreased 13%, or $479,000, to $3,164,000 for the nine month period ended March 29, 2009 compared to $3,643,000 for the comparable period in the prior fiscal year. This decrease is primarily attributable to lower international franchise fees and lower domestic royalties resulting from lower retail sales compared to the comparable period in the prior fiscal year. The following chart summarizes the major components of franchise revenue (in thousands):

                                     Three Months Ended
                                   March 29,     March 23,
                                     2009          2008
Domestic royalties               $       912   $       981
International royalties                  129           145
Domestic franchise fees                   15            55
International franchise fees              --            --
Franchise revenue                $     1,056   $     1,181


                                     Nine Months Ended
                                   March 29,     March 23,
                                     2009          2008
Domestic royalties               $     2,701   $     2,926
International royalties                  379           360
Domestic franchise fees                   84           191
International franchise fees              --           166
Franchise revenue                $     3,164   $     3,643

Restaurant Sales

Restaurant sales, which consist of revenue generated by Company-owned restaurants, increased 230%, or $394,000, to $565,000 for the three month period ended March 29, 2009 compared to $171,000 for the comparable period in the prior fiscal year. Restaurant sales increased 154%, or $815,000, to $1,344,000 for the nine month period ended March 29, 2009 compared to $529,000 for the comparable period in the prior fiscal year. The Company opened a new store in Denton, Texas on October 15, 2008 accounting for $391,000 of the increase over the same quarter in the prior year and $804,000 of the increase over the prior year to date.

Costs and Expenses

Cost of Sales

Cost of sales, which includes primarily direct materials, distribution fees and labor directly related to food and supply sales and restaurant sales, decreased 8%, or $725,000, for the three month period ended March 29, 2009 compared to the comparable period for the prior fiscal year. Cost of sales decreased 8%, or $2,296,000, for the nine month period ended March 29, 2009 compared to the comparable period in the prior fiscal year. These decreases were primarily the result of lower food and supply sales, distribution fees and payroll costs, as well as lower commodity costs.

Franchise Expenses

Franchise expenses include selling, general and administrative expenses directly related to the sale and continuing service of domestic and international franchises. These expenses decreased 20%, or $126,000 for the three month period ended March 29, 2009 compared to the comparable period in the prior fiscal year. These expenses decreased 26%, or $503,000 for the nine month period ended March 29, 2009 compared to the comparable period for the prior fiscal year. These savings were primarily the result of lower payroll and travel expenses due to eliminated or unfilled positions compared to the same periods in the prior fiscal year. The following chart summarizes the major components of franchise expenses (in thousands):

                           Three Months Ended
                         March 29,     March 23,
                           2009          2008
Payroll                $       356   $       446
Travel                          47            72
Other                           94           105
Franchise expenses     $       497   $       623


                           Nine Months Ended
                         March 29,     March 23,
                           2009          2008
Payroll                $       927   $     1,359
Travel                         128           242
Other                          391           348
Franchise expenses     $     1,446   $     1,949

General and Administrative Expenses

General and administrative expenses increased 22%, or $144,000, to $793,000 for the three month period ended March 29, 2009 compared to $649,000 for the comparable period for the prior fiscal year. General and administrative expenses increased 18%, or $359,000, to $2,336,000 for the nine month period ended March 29, 2009 compared to $1,977,000 for the comparable period for the prior fiscal year. The following chart summarizes the major components of general and administrative expenses (in thousands):

                                            Three Months Ended
                                          March 29,     March 23,
                                            2009          2008
Payroll                                 $       345   $       367
Legal fees                                       70            69
Other professional fees                         161           115
Insurance and taxes                              46            65
Company stores                                   51            16
Allocated overhead                             (267 )        (300 )
Occupancy                                       120           110
Other                                           219           195
Stock compensation expense                       48            12
General and administrative expenses     $       793   $       649


                                            Nine Months Ended
                                          March 29,     March 23,
                                            2009          2008
Payroll                                 $     1,009   $     1,181
Legal fees                                      143           279
Other professional fees                         433           383
Insurance and taxes                             177           170
Company stores                                  201            52
Allocated overhead                             (739 )        (931 )
Occupancy                                       336           312
Other                                           626           517
Stock compensation expense                      150            14
General and administrative expenses     $     2,336   $     1,977

The increase in general and administrative expenses during the three months ended March 29, 2009 was primarily due to the addition of general and administrative expenses associated with the new Company owned store in Denton, Texas, an increase in other professional fees resulting from outsourced purchasing services and the utilization of a site selection service, an increase in stock compensation expense related to stock option grants and a reduction in the allocation of overhead to the revenue producing units. These increases were offset by a reduction in payroll due to open and eliminated positions, and reductions in insurance and tax expenses

The increase in general and administrative expenses during the nine months ended March 29, 2009 was primarily due to the addition of general and administrative expenses associated with the new Company owned store in Denton, Texas (including pre opening and marketing costs of $87,000), an increase in other professional fees resulting from outsourced purchasing services and the utilization of a site selection service, an increase in stock compensation expense related to stock option grants and a reduction in the allocation of overhead to the revenue producing units. These increases were offset by a reduction in payroll due to open and eliminated positions, and a decrease in legal fees.

Provision for Bad Debts

Provision for bad debt expense decreased 85%, or $85,000, to $15,000 for the three month period ended March 29, 2009 compared to $100,000 for the comparable period in the prior fiscal year. Provision for bad debt expense decreased 62%, or $98,000, to $60,000 for the nine month period ended March 29, 2009 compared to $158,000 for the comparable period for the prior fiscal year. The decrease is primarily due to the recording of an additional allowance in the quarter ended March 23, 2008 for a receivable obtained by a default judgment that management determined to be unrealizable.

Interest expense was relatively unchanged for the three month and nine month periods ended March 29, 2009 from the comparable periods in the prior fiscal year.

Provision for Income Tax

For the three month and nine month periods ended March 29, 2009, income tax expense of $203,000 and $438,000, respectively, are calculated on an effective income tax rate that is consistent with the statutory U.S. federal income tax rate of 34% adjusted for the state income tax effects and permanent difference items. Management believes that future operations will generate sufficient taxable income, along with the reversal of temporary differences, to fully realize the net deferred tax asset of $792,000. The $216,000 net income tax benefit recorded during the three months ended March 23, 2008 was due to the release of a valuation allowance offset by the provision for the 2008 federal and state income tax obligations and the utilization of the Company's net operating loss.

Discontinued Operations

   Discontinued operations includes losses from two Company-owned stores closed
in Houston, Texas during the quarter ended September 23, 2007. Below is a
summary of discontinued operations (in thousands):



                                                Three Months Ended
                                               March 29,     March 23,
                                                 2009          2008
Sales                                        $        --   $         -
Cost of Sales                                         --            --
General and Administrative                            30            42
  Total loss from discontinued operations    $       (30 ) $       (42 )


                                                 Nine Months Ended
                                               March 29,     March 23,
                                                 2009          2008
Sales                                        $        --   $        62
Cost of Sales                                         --            24
General and Administrative                           136           211
  Total loss from discontinued operations    $      (136 ) $      (173 )

Restaurant Openings and Closings

During the three month period ended March 29, 2009, two new domestic Express Units and three international Units were opened by Pizza Inn franchisees. Seven domestic restaurants were closed by franchisees (four Buffet Units and three Express Units) and three international restaurants were closed, typically because of unsatisfactory standards of operation or poor performance. We do not believe that these closings had any material impact on the collectibility of our outstanding receivables and royalties due to us because (i) these amounts have been reserved for or are otherwise collectable and (ii) these closed restaurants were generally lower volume restaurants whose financial impact on our business as a whole was not significant. For those restaurants that are anticipated to close or are exhibiting signs of financial distress, credit terms are typically restricted, weekly food orders are required to be paid for on delivery and/or with certified funds and royalty and advertising fees are collected as add-ons to the delivered price of weekly food orders.

The following charts summarize restaurant activity for the three and nine month periods ended March 29, 2009 and March 23, 2008:

Three months ended March 29, 2009

                                      Beginning                           End of
Domestic                              of Period     Opened     Closed     Period
  Buffet Units                              156         --          4        152
  Delco Units                                40         --         --         40
  Express Units                              57          2          3         56
International Units                          68          3          3         68
Total                                       321          5         10        316

Three months ended March 23, 2008

                                      Beginning                           End of
Domestic                              of Period     Opened     Closed     Period
  Buffet Units                              165          1          5        161
  Delco Units                                42         --          1         41
  Express Units                              59          1          2         58
International Units                          75         --          1         74
Total                                       341          2          9        334

Nine months ended March 29, 2009

                                      Beginning                           End of
Domestic                              of Period     Opened     Closed     Period
  Buffet Units                              158          3          9        152
  Delco Units                                41          1          2         40
  Express Units                              56          6          6         56
International Units                          68          4          4         68
Total                                       323         14         21        316

Nine months ended March 23, 2008

                                      Beginning                           End of
Domestic                              of Period     Opened     Closed     Period
  Buffet Units                              166          6         11        161
  Delco Units                                42         --          1         41
  Express Units                              68          1         11         58
International Units                          77          3          6         74
Total                                       353         10         29        334

Our primary sources of liquidity are cash flows from operating activities and use of our credit facilities from time to time.

Cash flows from operating activities generally reflect net income adjusted for depreciation and amortization, changes in working capital and accrued expenses. In the nine month period ended March 29, 2009, cash provided by operations was $1,105,000 as compared to cash provided by operating activities of $1,057,000 in the comparable period for the prior year. This increase in cash provided by operating activities was due to an increase in accounts receivable collections and less prepaid expenditures from the prior year, offset by lower adjusted net income and a decrease in the Company's trade payables and accrued expense balances.

Cash flows from investing activities generally reflect capital expenditures for the purchase of Company assets. The Company used cash of $984,000 for the nine month period ended March 29, 2009, primarily for a new Company store that opened in Denton, Texas and for computer upgrades to its corporate systems. This compares to cash provided by investing activities of $12,000 from the proceeds of assets sold of $108,000 less expenditures of $96,000 for computer and related equipment for the same period in the prior fiscal year.

Cash flows from financing activities generally reflect changes in the Company's borrowings during the period and repurchases of outstanding shares of our common stock. Net cash used for financing activities was $939,000 in the nine month period ended March 29, 2009 compared to cash used of $1,935,000 for the comparable period in the prior fiscal year. This reduction in cash used by financing activities was due to borrowing $527,000 on the line of credit and a reduction in repurchases of outstanding stock outstanding.

Management believes that future operations will generate sufficient taxable income, along with the reversal of temporary differences, to fully realize the net deferred tax asset of $792,000 without reliance on material non-routine income.

On January 23, 2007, the Company and The CIT Group / Commercial Services, Inc. ("CIT") entered into an agreement for a revolving credit facility of up to $3.5 million (the "CIT Credit Facility"). CIT may terminate the CIT Credit Facility only as of January 23, 2012 or the same date any year thereafter, and then only by giving the Company at least 90 days prior written notice of such termination. The actual availability on the CIT Credit Facility is determined by advance rates on eligible inventory and accounts receivable. Interest on borrowings outstanding on the CIT Credit Facility is at a rate equal to the prime rate plus an interest rate margin of 0.0% to 0.5% or, at the Company's option, at the LIBOR rate plus an interest rate margin of 2.0% to 3.0%. The specific interest rate margin is based on the Company's performance under certain financial ratio tests. An annual commitment fee is payable on any unused portion of the CIT Credit Facility at a rate of 0.375%. All of the Company's (and its subsidiaries') personal property assets (including, but not limited to, accounts receivable, inventory, equipment, and intellectual property) have been pledged to secure payment and performance of the CIT Credit Facility, which is subject to customary covenants for asset-based loans.

On June 27, 2007, the Company and CIT entered into an agreement to amend the CIT Credit Facility to (i) allow the Company to repurchase Company stock in an amount up to $3,000,000, (ii) allow the Company to make permitted cash distributions or cash dividend payments to the Company's shareholders in the ordinary course of business and (iii) increase the aggregate capital expenditure limit from $750,000 to $3,000,000 per fiscal year. On May 30, 2008, the Company again amended the CIT Credit Facility to permit the Company to repurchase up to $7,000,000 of the Company's common stock. As of March 29, 2009, $527,000 was . . .