The following discussion should be read in conjunction with the consolidated financial statement and accompanying notes appearing elsewhere in this Annual Report on Form 10-K and may contain certain forward-looking statements. See "Risks Associated with Forward-Looking Statements."

Overview

The Company is a franchisor and food and supply distributor to a system of restaurants operating under the trademark "Pizza Inn". At June 28, 2009, there were 309 Pizza Inn restaurants, consisting of two Company-owned restaurants and 307 franchised restaurants. At June 28, 2009, the domestic restaurants were operated as: (i) 152 Buffet Units; (ii) 38 Delco Units; and (iii) 51 Express Units. The 241 domestic restaurants were located in 18 states predominately situated in the southern half of the United States. Additionally, the Company had 68 international restaurants located in eleven foreign countries.

Diluted earnings per common share were $0.14 as compared to $0.29 per share in the prior year. Net income was $1.2 million as compared to $2.8 million in the prior year, on revenues of $43.8 million in the current year and $49.5 million in the prior year. Pre-tax income from continuing operations was $1.9 million for fiscal 2009 as compared to $2.9 million in the prior year.

A significant portion of the decrease in net income during the fiscal year ended June 28, 2009 was due to income tax expense and a non-recurring legal settlement of $0.3 million in the current fiscal year, compared to an income tax benefit and a legal settlement recovered in the prior year of $0.3 million. In the absence of these items, net income would have been $2.0 million, or $.23 per share, for the fiscal year ended June 28, 2009 compared to $2.4 million, or $0.25 per share, for the same period in the prior year.

Results of operations for fiscal 2009 and 2008 included 52 weeks and 53 weeks, respectively.

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

                                                            Fiscal Year Ended
Domestic Restaurants                                      June 28,     June 29,
                                                            2009         2008
Chainwide retail sales Buffet Units (in thousands)      $  110,659   $  117,347
Chainwide retail sales Delco Units (in thousands)       $   10,510   $   11,791
Chainwide retail sales Express Units (in thousands)     $    4,984   $    5,883
Average number of Buffet Units                                 154          161
Average number of Delco Units                                   40           42
Average number of Express Units                                 54           59

Revenues

Revenues are primarily derived from sales of food, paper products and equipment and supplies by Norco to franchisees, franchise royalties and franchise fees. 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, the latter of which is driven by changes in same store sales and restaurant count.

Food and supply sales by Norco include food and paper products, equipment and other distribution revenues. Food and supply sales decreased 14%, or $6.0 million, to $37.8 million in fiscal 2009 from $43.8 million the prior year. The decrease in food and supply sales was due primarily to the combined impact of
(i) a 20% decrease in cheese prices, (ii) a 6.6% decline in chainwide domestic retail sales resulting from an average of 14 fewer units, and (iii) 2.0% lower domestic comparable store sales than prior year. There was also an additional week of food and supply sales in the prior year. A $0.4 million decrease in equipment sales was primarily the result of the Company's decision to discontinue the sale of such items to franchisees.

Franchise Revenue

Franchise revenue, which includes income from royalties and franchise fees, decreased 16%, or $0.8 million, in fiscal 2009 compared to the prior year primarily due to lower retail sales resulting from fewer stores and lower comparable store sales, decreased international development fees and lower domestic franchise fees due to fewer buffet openings than in the prior year. In addition, the prior year included an additional week of domestic royalties. The following chart summarizes the major components of franchise revenue (in thousands):

                                       Fiscal Year Ended
                                     June 28,     June 29,
                                       2009         2008
Domestic royalties                 $    3,587   $    3,995
International royalties                   499          494
Domestic franchise fees                    94          215
International development fees             --          266
Franchise revenue                  $    4,180   $    4,970

Restaurant Sales

Restaurant sales, which consist of revenue generated by the Company-owned
restaurants, increased 153%, or $1.1 million, in fiscal 2009 compared to the
prior year. The increase was primarily the result of sales generated by the new
Company store in Denton, Texas. These non-comparable sales were offset slightly
by the additional week of sales in the prior year. The following chart details
revenues at Company-owned restaurants (in thousands):

                                            Fiscal Year Ended
                                          June 28,     June 29,
                                            2009         2008
Plano, Texas                            $      715   $      741
Denton, Texas - opened October 2008          1,158           --
Total restaurant sales                  $    1,873   $      741

Cost of Sales

Cost of sales decreased 11% or $4.5 million in fiscal 2009 compared to the prior year. This decrease was primarily the result of lower food and supply sales, the effect of the extra week in the prior year and lower cheese cost. Cost of sales, as a percentage of food and supply sales and restaurant sales, remained the same for both years at 92%.

Franchise Expenses

Franchise expenses include selling, general and administrative expenses (primarily wages and travel expenses) directly related to the sale and continuing service of franchises and territories. These expenses decreased 24%, or $0.6 million, in fiscal 2009 compared to the prior year. This decrease was primarily the result of lower amortization of re-aquired development franchise rights and lower payroll and travel expenses, offset slightly by higher administrative expenses. The following chart summarizes the variances in franchise expenses (in thousands):

                                              Fiscal Year Ended
                                            June 28,     June 29,
                                              2009         2008
Payroll                                   $    1,346   $    1,814
Administrative expenses                           87           33
Travel                                           176          318
Research and development                          75           75
Trade shows                                       52           19
Training materials                                42            7
Depreciation and amortization                     46          192
Professional fees                                 66           43
Utilities                                         39           37
             Total franchise expenses     $    1,929   $    2,538

General and Administrative Expenses

General and administrative expenses increased 11%, or $0.3 million, in fiscal
2009 compared to last year. The following chart summarizes the variances in
general and administrative expenses (in thousands):

                                                           Fiscal Year Ended
                                                         June 28,     June 29,
                                                           2009         2008
Legal and other professional fees                      $      825   $      994
Depreciation and amortization                                  97           69
Payroll                                                     1,352        1,514
Allocated overhead                                           (952 )     (1,253 )
Company stores                                                269           80
Information technology                                        132          141
Repairs and maintenance                                        41           37
Utilities                                                     184          160
Administrative expenses and other                             432          403
Occupancy costs                                               639          715
Stock compensation                                            198           51
         Total general and administrative expenses     $    3,217   $    2,911

The decrease in legal and other professional fees was primarily the result of higher accounting fees relating to an internal controls assessment and other compliance work associated with the Sarbanes-Oxley Act of 2002 in fiscal 2008. The decrease in payroll was due to the additional week in the prior year and fewer employees in the current year. The decrease in allocated overhead was associated with the overall decrease in overhead expenses. The increase in company store expenses was primarily the result of pre-opening expenses and other costs relating to the new store in Denton, Texas. The increase in stock compensation was due to options granted during fiscal year 2009.

Severance

Severance expense decreased 83%, or $0.3 million, from the prior year. The prior year included $0.3 million for the departure of the Company's former President and CEO in August of 2007.

Provision for Bad Debt

Bad debt provision related to accounts receivable from franchisees decreased by $71,000 to $75,000 in fiscal 2009 compared to $146,000 in the prior year. The prior year included an additional allowance for a receivable previously awarded by a default judgment. During fiscal 2008 management determined this judgment was unrealizable and recorded the additional provision for bad debt expense to fully reserve the balance. The Company believes that the restaurant closings in fiscal year 2009 did not have a material impact on collectibility of outstanding receivables and royalties because most of these closed restaurants were low volume units. For 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 prior to delivery and royalty and advertising fees are collected as add-ons to the delivered price of weekly food orders.

Loss on Sale of Assets

Fiscal year 2008 included a loss on miscellaneous used equipment and signage sold from the closed Houston stores. There were no asset sales in fiscal 2009.

Provision for (Recovery of) Litigation Costs

Fiscal 2009 included a settlement payment and associated legal fees of $0.3 million, while the prior year included a net recovery of $0.3 million from litigation settlements.

Interest Expense

Interest expense increased 24%, or $11,000, for the year ended June 28, 2009, compared to prior year due to borrowings on the revolver in the current year.

Income Tax Expense (Benefit)

The Company booked an income tax expense of $0.5 million for the year ended June 28, 2009 compared to an income tax benefit of $0.1 million for the prior year. As of June 24, 2007 we had recorded a valuation allowance based on our assessment that the realization of a portion of our net deferred tax assets did not meet the "more likely than not" criterion under SFAS No. 109, "Accounting for Income Taxes." During fiscal 2008, we determined that, based upon a number of factors, including our cumulative taxable income in recent quarters and our expected profitability in future years, substantially all of our net deferred tax assets are "more likely than not" realizable through future earnings. The entire valuation allowance was released as a result of this determination and was the primary reason the effective tax rate for fiscal 2008 was not consistent with the standard 34% corporate rate.

Restaurant Openings and Closings

During fiscal 2009, a total of 14 new restaurants opened, including 10 domestic and 4 international restaurants. Domestically, 24 restaurants were closed by franchisees or terminated by the Company, typically because operations were not up to Company standards or there was poor financial performance. In addition, 4 international restaurants were closed. The majority of net store closings were Express Units, which are typically smaller volume stores, and lower volume Buffet Units. The Company opened more units and closed fewer units in the current year than in the prior year. The following chart summarizes restaurant openings and closings for the year ended June 28, 2009 compared to the prior year:

Fiscal year ended June 28, 2009

                                      Beginning                           End of
Domestic                              of Period     Opened     Closed     Period
  Buffet Units                              158          3          9        152
  Delco Units                                41          1          4         38
  Express Units                              56          6         11         51
International Units                          68          4          4         68
Total                                       323         14         28        309


Fiscal year ended June 29, 2008

                                      Beginning                           End of
Domestic                              of Period     Opened     Closed     Period
  Buffet Units                              166          6         14        158
  Delco Units                                42          1          2         41
  Express Units                              68          1         13         56
International Units                          77          3         12         68
Total                                       353         11         41        323

Sources and Uses of Funds

Cash flows from operating activities are generally the result of net income adjusted for depreciation and amortization and changes in working capital. In fiscal 2009, cash provided by operations was $1.5 million compared to $2.4 million in fiscal 2008. Cash generated from operations in fiscal 2009 was lower primarily due to decreased net income and timing differences in operating assets and liabilities, net of the change in deferred income taxes.

The Company used cash in investing activities of approximately $1.0 million in fiscal 2009 mainly for the new Company store in Denton, Texas, remodeling the Plano, Texas company store and the purchase of computer and software upgrades in the corporate office. The Company used net cash flows from investing activities of approximately $0.1 million in fiscal 2008.

Cash flows from financing activities generally reflect changes in the Company's net borrowings during the period, together with treasury stock purchases and exercise of stock options. During fiscal 2009, the Company used $2.0 million to repurchase treasury stock and increased net borrowings on its revolving credit facility of $0.6 million, for a net use of cash for financing activities of $1.4 million. During fiscal 2008, the Company used cash of $3.0 million to repurchase treasury stock.

Credit Facilities

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"). 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 a range of 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 May 30, 2008, the Company and CIT Group entered into a Third Amendment to Financing Agreement modifying certain terms of the CIT Credit Facility. The amendment permits the Company to repurchase up to $7.0 million of the Company's common stock. As of June 28, 2009, there was $0.6 million of borrowings outstanding on the CIT Credit Facility at an interest rate of 3.5% and we had additional borrowing availability of $2.0 million.

Liquidity

We expect to fund continuing operations, planned capital expenditures, new restaurant openings and any additional repurchases of our common stock for the next fiscal year from operating cash flow and amounts available under our revolving line of credit. Based on budgeted and year-to-date cash flow information, we believe that we have sufficient liquidity to satisfy our cash requirements for the 2010 fiscal year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company's management to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. The Company bases its estimates on historical experience and various other assumptions that it believes are reasonable under the circumstances. Estimates and assumptions are reviewed periodically. Actual results could differ materially from estimates.

The Company believes the following critical accounting policies require estimates about the effect of matters that are inherently uncertain, are susceptible to change, and therefore require subjective judgments. Changes in the estimates and judgments could significantly impact the Company's results of operations and financial condition in future periods.

Accounts receivable consist primarily of receivables generated from food and supply sales to franchisees and franchise royalties. The Company records a provision for doubtful receivables to allow for any amounts which may be unrecoverable based upon an analysis of the Company's prior collection experience, customer creditworthiness and current economic trends. Actual realization of accounts receivable could differ materially from the Company's estimates.

Inventory, which consists primarily of food, paper products and supplies primarily warehoused by the Company's two third-party distributors, is stated at lower of cost or market, with cost determined according to the weighted average cost method. The valuation of inventory requires us to estimate the amount of obsolete and excess inventory. The determination of obsolete and excess inventory requires us to estimate the future demand for the Company's products within specific time horizons, generally six months or less. If the Company's demand forecast for specific products is greater than actual demand and the Company fails to reduce purchasing accordingly, the Company could be required to write down additional inventory, which would have a negative impact on the Company's gross margin.

The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets compared to their carrying value. If impairment is recognized, the carrying value of the impaired asset is reduced to its fair value, based on discounted estimated future cash flows. During fiscal years 2009 and 2008, the Company tested its long-lived assets for impairment and determined no impairment exists.

The Company continually evaluates the realizability of its deferred tax assets based upon the Company's analysis of existing tax credits by jurisdiction and expectations of the Company's ability to utilize these tax assets through a review of estimated future taxable income and establishment of tax strategies. These estimates could be materially impacted by changes in future taxable income, the results of tax strategies or changes in tax law.

The Company assesses its exposures to loss contingencies from legal matters based upon factors such as the current status of the cases and consultations with external counsel and provides for the exposure by accruing an amount if it is judged to be probable and can be reasonably estimated. If the actual loss from a contingency differs from management's estimate, operating results could be adversely impacted.

In February 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 159, Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments, including employee stock option plans and operating leases accounted for in accordance with SFAS No. 13, Accounting for Leases, at their fair value. The Company has chosen not to change the valuation method of any of its financial assets or liabilities.

In December 2007, the FASB issued SFAS No. 141 (Revised), Business Combinations. SFAS No. 141(R) improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this Statement is not expected to have a material impact on the Company's financial position or results of operations.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This statement sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. SFAS No. 165 also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date (i.e., whether the evaluation date represents the date the financial statements were issued or were available to be issued). This statement is effective for interim or annual reporting periods ending after June 15, 2009. During the year ended June 28, 2009, the Company adopted SFAS No. 165. The Company evaluated subsequent events through the date and time the financial statements were issued on September 23, 2009. The adoption of SFAS No. 165 did not have a significant impact on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification™ (the "Codification") and the Hierarchy of Generally Accepted Accounting Principles. SFAS No. 168 confirmed that the Codification will become the single official source of authoritative U.S. Generally accepted accounting principles ("GAAP"), (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related literature. After that date, only one level of authoritative GAAP will exist. All other literature will be considered non-authoritative. The Codification does not change GAAP; instead, it introduces a new structure that is organized in an easily accessible, user-friendly online research system. The Codification, which changes the referencing of financial standards, becomes effective for interim and annual periods ending on or after September 15, 2009. The Company will apply the Codification beginning in the first quarter of fiscal 2010. The adoption of SFAS No. 168 is not expected to have a material impact on our consolidated financial statements.