10-K: Annual report pursuant to Section 13 and 15(d)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 26, 2005.
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____.

COMMISSION FILE NUMBER 0-12919

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

MISSOURI 47-0654575
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

3551 PLANO PARKWAY
THE COLONY, TEXAS 75056
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (469) 384-5000
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 EACH
(Title of class)

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 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. [X]

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

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

As of December 26, 2004, the last business day of the registrant's most recently
completed second fiscal quarter, the aggregate market value of the voting and
non-voting common equity held by non-affiliates was $14,371,275, computed by
reference to the price at which the common equity was last sold, or the average
bid and asked price of such common equity, as of such date.

As of September 19, 2005, there were 10,108,494 shares of the registrant's
common stock outstanding.


DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report is incorporated by
reference from the registrant's definitive proxy statement required to be filed
pursuant to Regulation 14A in connection with the registrant's next annual
meeting of shareholders, which is expected to be held in December 2005.




PART I

ITEM 1 - BUSINESS

GENERAL

Pizza Inn, Inc. and its subsidiaries (collectively referred to as the
"Company", "Pizza Inn" or in the first person notations of "we", "us" and "our")
operate and franchise pizza buffet, delivery/carry-out and express restaurants
domestically and internationally under the trademark "Pizza Inn". Through our
Norco Restaurant Services Company ("Norco") division, we are also a food,
equipment and supply distributor to our domestic and international system of
restaurants.

On September 19, 2005, the Pizza Inn system consisted of 391 restaurants,
including four Company-owned restaurants, and 387 franchised restaurants. The
domestic franchised restaurants are comprised of 191 buffet restaurants, 50
delivery/carry-out restaurants and 71 express restaurants. The international
franchised restaurants are comprised of 17 buffet restaurants, 44
delivery/carry-out restaurants and 14 express restaurants. Domestic restaurants
are located predominantly in the southern half of the United States, with Texas,
North Carolina, and Arkansas accounting for approximately 35%, 14%, and 8%,
respectively, of the total number of domestic restaurants.

OUR HISTORY

Pizza Inn has offered consumers affordable, quality pizza since 1958, when
the first Pizza Inn restaurant opened in Dallas, Texas. We awarded our first
franchise in 1963 and opened our first buffet restaurant in 1969. We began
franchising the Pizza Inn brand internationally in the late 1970s. In 1993, our
stock began trading on the NASDAQ Stock Market, and presently trades on the
NASDAQ SmallCap Market under the ticker symbol "PZZI".

OUR CONCEPTS

We offer three concepts: buffet, delivery/carry-out and express. Each is
designed to enhance the smooth flow of food ordering, preparation and service,
and we believe that the overall configuration of each results in simplified
operations, lower training and labor costs, increased efficiency and improved
consistency and quality of our food products. Our restaurants may be configured
to adapt to a variety of building shapes and sizes, offering the flexibility
necessary for our concepts to be operated at any number of otherwise suitable
locations.

Our focused menu is designed to present an appealing variety of high
quality of pizza and side items to our customers. Our basic buffet restaurant
menu offers three main crusts (Original Thin Crust, New York Pan and Italian),
with standard toppings and special combinations of toppings. Buffet restaurants
also offer pasta, salad, sandwiches, appetizers, desserts and beverages,
including beer and wine in some locations, in an informal, family-oriented
atmosphere. We occasionally offer other items on a limited promotional basis.
Delivery/carryout restaurants usually offer the three main crusts and some
combination of side items. We believe that our focus on three main crust types
creates a better brand identity among customers, improves operating efficiency
and maintains food quality and consistency.

Our buffet and delivery/carry-out concepts feature crusts that are
hand-made from dough made fresh in the restaurant each day. We do not use a
centralized commissary for mass production of dough and our dough is never
frozen (with the exception of certain dough products used in the express concept
for pizza, discussed below). Pizza Inn pizzas are made from a proprietary
all-in-one flour mixture, real mozzarella cheese and a proprietary mix of
classic pizza spices. Domestically, all ingredients and toppings can be
purchased from Norco, which makes deliveries to each domestic restaurant in our
system at least once a week. In international markets, the menu mix of toppings
and side items is occasionally adapted to local tastes.

Buffet Restaurants
-------------------

These restaurants offer dine-in and carryout service and, in many cases,
also offer delivery service. They are generally located in free standing
buildings or in-line locations in retail developments in close proximity to
offices, shopping centers and residential areas. The current standard buffet
restaurants are between 3,000 and 5,000 square feet in size and seat 120 to 185
customers. The interior decor is designed to promote a casual, lively,
contemporary, family-style atmosphere. Buffet restaurants also offer catering
service.

The buffet is typically offered at prices from $4.29 to $5.99, and the
average ticket price per meal, including a drink, is approximately $6.38 per
person for fiscal year 2005. These averages are slightly higher in restaurants
offering beer and wine.

We are developing and implementing a new image and layout for our domestic
buffet concept, which we believe may increase retail sales and market share
through a stronger market presence, greater brand awareness and enhanced
customer satisfaction. This program involves significant exterior and interior
changes in signage, color schemes and work flow and dining area configuration,
including the addition of a back-fed buffet bar offering attractive and
efficient presentation, a greater variety of products and increased operating
efficiency. The design features vibrant colors, graphic accents, a contemporary
interior and updated signage and logos. Some restaurants will feature game
rooms, which will offer a range of electronic game entertainment for the entire
family. Interiors will feature selected memorabilia capturing some of the
milestones in our nearly 50 years of operation. Additionally, guests will enjoy
the convenience of curbside service. This new buffet concept is being
introduced in several new Company-owned restaurants, as well as in new and
certain existing franchised restaurants.

Delivery/Carryout Restaurants
------------------------------

These restaurants offer delivery and carryout service only and are
typically located in shopping centers or other in-line retail developments.
These relatively small restaurants, occupying approximately 1,000 square feet,
are primarily production facilities and, in most instances, do not offer
seating. Because these restaurants do not typically offer dine-in areas, they
usually do not require expensive real estate leasehold or ownership costs and
are relatively less expensive to build and equip. The decor of these
restaurants is designed to be bright and highly visible and feature neon,
lighted displays and awnings.

We attempt to locate these restaurants strategically to facilitate timely
delivery service and to provide easy access for carryout service. We believe
that there are continuing opportunities for strategic development for the
delivery/carry-out concept, whether as a primary means of market development in
carefully targeted areas, or as "in-fills" in buffet markets to serve an
identifiable customer segment and capture additional market share.

Express Restaurants
--------------------

These restaurants offer us the opportunity to serve our customers through a
variety of non-traditional points of sale. Express restaurants are typically
located in a convenience store, food court, college campus, airport terminal,
athletic facility or other commercial facility. They have limited or no seating
and solely offer quick carryout service of a limited menu of pizza and other
foods and beverages. An express restaurant typically occupies approximately 200
to 400 square feet and is commonly operated by the same person who owns the
commercial host facility or who is licensed at one or more locations within the
facility. We have developed a high-quality pre-prepared crust that is topped
and cooked on-site, allowing this concept to offer a lower initial investment
and reduced labor and operating costs while maintaining product quality and
consistency. Like the delivery/carry-out restaurants, express restaurants are
primarily production-oriented facilities and, therefore, do not require all of
the equipment, labor, real estate or square footage of a traditional buffet
restaurant.

SITE SELECTION

We consider the restaurant site selection process critical to the
restaurant's long-term success and devote significant resources to the
investigation and evaluation of potential sites. The site selection process
includes a review of trade area demographics and other competitive factors. We
also rely on the franchisee's knowledge of the trade area and market
characteristics when selecting a location for a franchised restaurant. A member
of the Company's development team will visit each potential domestic
Company-owned restaurant location. We try to locate franchised and
Company-operated restaurants in retail strip centers or freestanding buildings
offering visibility, curb appeal and accessibility.


DEVELOPMENT AND OPERATIONS

We intend to continue our expansion domestically in markets where we
believe there exists significant long-term earnings growth potential, and where
we believe that we can use our competitive strengths to establish brand
recognition and gain local market share. We believe our franchise-oriented
business model will allow us eventually to expand our franchised restaurant base
with limited capital expenditures and working capital requirements. While we
plan to expand our domestic restaurant base primarily through opening new
franchised restaurants, we also will continually evaluate our mix of
Company-operated and franchised restaurants and may strategically develop
Company-operated restaurants, acquire franchised restaurants and re-franchise
Company-operated restaurants. We believe that our most promising development
and system growth opportunities lie with experienced, well-capitalized,
multi-restaurant operators.

The specific rate at which we will be able to expand through franchise
development is determined in part by our success at selecting qualified
franchisees, by identifying satisfactory sites in appropriate markets and by our
ability to continue training and monitoring our franchisees.

Franchise Operations
---------------------

We have adopted a franchising strategy that has two major components:
continued development within our existing market areas and new development in
strategically targeted domestic territories. We also intend to continue to seek
appropriate international development opportunities.

Franchise and development agreements. Our current forms of franchise
agreements provide for: (i) a franchise fee of $20,000 for a buffet restaurant,
$7,500 for a delivery/carry-out restaurant and $5,000 for an express restaurant,
(ii) an initial franchise term of 20 years for a buffet restaurant and ten years
for a delivery/carry-out or express restaurant, plus a renewal term of ten years
for each concept, (iii) required contributions equal to 1% of gross sales to the
Pizza Inn Advertising Plan ("PIAP") or to the Company, as discussed below, (iv)
royalties equal to 4% of gross sales for a buffet or delivery/carry-out
restaurant, and 5% or 6%, as determined by the respective franchise agreements,
of gross sales for an express restaurant, and (v) required advertising
expenditures of at least 5% of gross sales for a buffet or delivery/carry-out
restaurant, and 2% for an express restaurant. From time to time, the Company
offers, to certain experienced restaurant operators, area developer rights in
new and existing domestic markets. An area developer pays a negotiated fee to
purchase the right to operate or develop restaurants within a defined territory.
The area developer typically agrees to multi-restaurant development schedule and
assists the Company in local franchise service and quality control in exchange
for half of the franchise fees and royalties from all restaurants within the
territory during the term of the agreement.

The Pizza Inn concept was first franchised in 1963. Since that time,
industry franchising concepts and development strategies have changed, and the
Company's present franchise relationships are evidenced by a variety of
contractual forms. Common to those forms are provisions that: (i) provide for
an initial franchise term of 20 years (except as described below) and a renewal
term, (ii) require the franchisee to follow the Pizza Inn system of restaurant
operation and management, (iii) require the franchisee to pay a franchise fee
and continuing royalties, and (iv) except for express restaurants, prohibit the
development of one restaurant within a specified distance from another.

Training. The Company offers numerous training programs for the benefit of
franchisees and their restaurant crew managers. The training programs, taught
by experienced Company employees, focus on food preparation, service, cost
control, sanitation, safety, local store marketing, personnel management and
other aspects of restaurant operation. The training programs include group
classes, supervised work in Company-operated restaurants and special field
seminars. Initial and some supplemental training programs are offered free of
charge to franchisees, who pay their own travel and lodging expenses.
Restaurant managers train their staff through on-the-job training, utilizing
videotapes and printed materials produced by the Company.

Standards. We enforce a variety of standards over franchise operations to
protect and enhance our brand. All franchisees are required to operate their
restaurants in compliance with written policies, standards and specifications,
which include matters such as menu items, ingredients, materials, supplies,
services, furnishings, decor and signs. Our efforts to maintain a consistent
level of operations may result from time to time in closing certain restaurants
that are not capable of achieving and maintaining a consistent level of quality
operations. Each franchisee has full discretion to determine the prices to be
charged to customers. We also provide ongoing support to our franchisees,
including training, marketing assistance and consultation to franchisees who
experience financial or operational difficulties.

Company Operations
-------------------

One of our long-term objectives is to continue to selectively expand the
number of Company-owned restaurants by identifying appropriate opportunities in
our targeted markets. We intend to concentrate our efforts in certain
identified markets by opening a limited number of restaurants at locations
developed by the Company or by selectively identifying opportunities to acquire
restaurants operated by franchisees at negotiated prices. We believe that
moving forward, our domestic network of Company- owned restaurants will play an
important strategic role in our predominately franchised operating structure.
In addition to generating revenues and earnings, we expect to use domestic
Company-owned restaurants as test sites for new products and promotions as well
as restaurant operational improvements and as a forum for training new managers
and franchisees. We also believe that as the number gradually increases, our
Company-owned restaurants may add to the economies of scale available for
advertising, marketing and other costs.

We currently operate one buffet restaurant and one delivery/carry-out
restaurant in the Dallas, Texas market. We are presently developing two
additional buffet restaurants in Houston, Texas that were recently acquired from
franchisees and we are constructing a new restaurant in Dallas, Texas. We
anticipate that these restaurants will be open late in the second quarter of
fiscal 2006. We are also considering opportunities to acquire select
franchisee-owned restaurants in other markets. We do not currently intend to
operate any delivery/carry-out restaurants or express restaurants other than the
one we currently own.

Our ability to open Company-owned restaurants is affected by a number of
factors, including, the terms of available financing, our ability to locate
suitable sites, negotiate acceptable lease or purchase terms, secure appropriate
local governmental permits and approvals and our capacity to supervise
construction and to recruit and train management personnel.

International Operations
-------------------------

From time to time we also offer master franchise rights to develop Pizza
Inn restaurants in certain foreign countries, with negotiated fees, development
schedules and ongoing royalties. A master licensee for a foreign country pays a
negotiated fee to purchase the right to develop and operate Pizza Inn
restaurants within a defined territory, typically for a term of 20 years, plus a
ten-year renewal option. The master licensee agrees to a multi-restaurant
development schedule and the Company trains the master licensee to monitor and
assist franchisees in their territory with local service and quality control,
with support from the Company. In return, the master licensee typically retains
half the franchise fees and half the royalties on all restaurants within the
territory during the term of the agreement. Master licensees may open
restaurants that they own and operate, or they may open sub-franchised
restaurants owned and operated by third parties through agreements with the
master licensee, but subject to our approval.

We opened our first restaurant outside of the United States in the late
1970s, and, as of June 26, 2005, there were 74 restaurants operating
internationally, with 43 of those restaurants operated or sub-licensed by our
franchisees in the United Arab Emirates and Saudi Arabia. Our master licensee
in Saudi Arabia has also developed several express restaurants at U. S. military
facilities.

Our ability to continue to develop select international markets is affected
by a number of factors, including our ability to locate experienced,
well-capitalized developers who can commit to an aggressive multi-restaurant
development schedule and achieve maximum initial market penetration with a
minimum of direct control by the Company.

FOOD AND SUPPLY DISTRIBUTION

We believe that Norco, our food and supply distribution system, results in
lower operating costs, improved food quality and increased customer
satisfaction. Norco is able to leverage the advantages of volume purchasing of
food, equipment and supplies for the franchisees' benefit in the form of a
concentrated, one-truck delivery system, pricing efficiencies and product
consistency. We negotiate directly with major suppliers to obtain competitive
prices. Operators are able to purchase all products and ingredients from Norco,
thereby reducing the logistical difficulties and added expense of maintaining
multiple inventory, purchasing and delivery records. In order to assure product
quality and consistency, our franchisees are required to purchase, from Norco,
certain food products that are proprietary to the Pizza Inn system, including
our flour mixture and spice blend. In addition, almost all franchisees purchase
other supplies from Norco. Franchisees may also purchase non-proprietary
products and supplies from other suppliers who meet our requirements for quality
and reliability.

Norco operates its central distribution facility six days per week, and
delivers to all domestic restaurants weekly, utilizing a fleet of refrigerated
tractor-trailers operated by Company drivers and independent owner-operators.
Norco also ships products and equipment to international franchisees.
Non-proprietary food and ingredients, equipment and other supplies distributed
by Norco are generally available from several qualified sources. With the
exception of several proprietary food products, the Company is not dependent
upon any one supplier or limited group of suppliers. The Company contracts with
established food processors for the production of its proprietary products.

We have not experienced any significant shortages of supplies or any delays
in receiving our food or beverage inventories, restaurant supplies or products,
and do not anticipate any difficulty in obtaining inventories or supplies in the
foreseeable future. Prices charged to us by our suppliers are subject to
fluctuation, and we may from time to time attempt to pass increased costs and
savings on to our franchisees. We do not engage in commodity hedging.

ADVERTISING

By communicating a common brand message at the regional, local market and
store levels, we believe we can create and reinforce a strong, consistent
marketing message to consumers and increase our market share. We offer or
facilitate a number of ways for the brand image and message to be promoted at
the local and regional levels.

PIAP is a Texas non-profit corporation that is responsible for creating and
producing print advertisements, television and radio commercials and in-store
promotional materials, along with related advertising services for use by its
members. Each operator of a buffet or delivery/carry-out restaurant, including
the Company, is entitled to membership in PIAP. Nearly all of the Company's
existing franchise agreements for buffet and delivery/carry-out restaurants
require the franchisees to become members of PIAP. Members contribute 1% of
their gross sales to PIAP. PIAP is managed by a board of trustees comprised
solely of franchisee representatives who are elected by the members each year.
The Company does not have any ownership interest in PIAP. The Company provides
certain administrative, marketing and other services to PIAP and is paid by PIAP
for such services. As of September 19, 2005, the Company-operated stores and
substantially all of our franchisees were members of PIAP. Operators of express
restaurants do not participate in PIAP; however, they contribute up to 1% of
their gross sales directly to the Company to help fund purchases of express
restaurant marketing materials and similar expenditures.

Groups of franchisees in some of the Pizza Inn system's market areas have
formed local advertising cooperatives. These cooperatives, which may be formed
voluntarily or may be required by the Company under the franchise agreements,
establish contributions to be made by their members and direct the expenditure
of these contributions on local media advertising using materials developed by
PIAP and/or the Company. Franchisees are required to conduct independent
marketing efforts in addition to their participation in PIAP and local
cooperatives.

We provide Company-operated and franchised restaurants with catalogs for
the purchase of marketing and promotional items and pre-approved print and radio
marketing materials. We have also developed an internet-based system, Pizza Inn
Inn-tranet, by which all of our restaurants may communicate with us and place
orders for marketing and promotional products.

TRADEMARKS AND QUALITY CONTROL

The Company owns various trademarks, including the name "Pizza Inn," that
are used in connection with the restaurants and have been registered with the
United States Patent and Trademark Office. The duration of our trademarks is
unlimited, subject to periodic renewal and continued use. In addition, the
Company has obtained trademark registrations in several foreign countries and
has periodically re-filed and applied for registration in others. We believe
that we hold the necessary rights for protection of the trademarks essential to
our business and it is our regular policy to monitor the use of our trademarks
around the world.

The Company requires all restaurants to satisfy certain quality standards
governing the products and services offered through use of the Company's
trademarks.

GOVERNMENT REGULATION

We and our franchisees are subject to various federal, state and local laws
affecting the operation of our restaurants. Each Pizza Inn restaurant is
subject to licensing and regulation by a number of governmental authorities,
which include health, safety, sanitation, wage and hour, building and fire
agencies in the state or municipality in which the restaurant is located.
Difficulties in obtaining, or the failure to obtain, required licenses or
approvals could delay or prevent the opening of a new restaurant or require the
temporary or permanent closing of existing restaurants in a particular area.
Our distribution center is subject to regulation by state and local health and
fire codes, and the operation of our trucks is subject to U.S. Department of
Transportation regulations. We are also subject to state and federal
environmental regulations.

We are subject to Federal Trade Commission ("FTC") regulation and to
various state laws regulating the offer and sale of franchises. Several state
laws also regulate the substantive aspects of the franchisor-franchisee
relationship. The FTC requires us to furnish to prospective franchisees a
franchise offering circular containing prescribed information. Substantive
state laws that regulate the franchisor-franchisee relationship presently exist
in a number of states, and bills have been introduced in Congress from time to
time that would provide for further federal regulation of the
franchisor-franchisee relationship in certain respects. Some foreign countries
also have disclosure requirements and other laws regulating franchising and the
franchisor-franchisee relationship. Further government initiatives, such as
proposed minimum wage rate increases, could adversely affect Pizza Inn as well
as the restaurant industry in general.

EMPLOYEES

As of September 19, 2005, we had approximately 167 employees, including 56
in our corporate office, 70 at our Norco division and 17 full-time and 24
part-time employees at the Company-operated restaurants. None of the Company's
employees are currently covered by collective bargaining agreements. We believe
that our employee relations are excellent.

INDUSTRY AND COMPETITION

The restaurant industry is intensely competitive with respect to price,
service, location and food quality, and there are many well-established
competitors with substantially greater brand recognition and financial and other
resources than Pizza Inn. Competitors include a large number of international,
national and regional restaurant chains, as well as local restaurants and pizza
operators. Some of our competitors may be better established in the markets
where our restaurants are located or may be located. Within the pizza segment
of the restaurant industry, we believe that our primary competitors are national
pizza chains and several regional chains, including chains executing a "take and
bake" concept. A change in the pricing or other market strategies of one or
more of our competitors could have an adverse impact on our sales and earnings.

With respect to the sale of franchises, we compete with many franchisors of
restaurants and other business concepts. We believe that the principal
competitive factors affecting the sale of franchises are product quality and
price, value, consumer acceptance, franchisor experience and support and the
quality of the relationship maintained between the franchisor and its
franchisees. In general, there is also active competition for management
personnel and attractive commercial real estate sites suitable for our
restaurants.

Our Norco division competes with both national and local distributors of
food, equipment and other restaurant suppliers. The distribution industry is
very competitive. The Company believes that the principal competitive factors
in the distribution industry are product quality, customer service and price.
Norco is the sole authorized supplier of certain proprietary products that all
Pizza Inn restaurants are required to use.

AVAILABLE INFORMATION

The Company files reports, including reports on Form 10-Q and Form 10-K,
with the Securities and Exchange Commission ("SEC"). The public may read and
copy any materials we file with the SEC at the SEC's Public Reference Room at
100 F Street, N.E. Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. The address of that site is http://www.sec.gov.
------------------

We make available free of charge on or through our Internet website
(http://www.pizzainn.com) our annual report on Form 10-K, quarterly reports on
-----------------
Form 10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. We voluntarily will provide electronic or paper copies
of our filings free of charge upon written request to: Corporate Secretary,
Pizza Inn, Inc., 3551 Plano Parkway, The Colony, TX 75056.

FORWARD-LOOKING STATEMENTS

This Form 10-K contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), including
information within Management's Discussion and Analysis of Financial Condition
and Results of Operations. The following cautionary statements are being made
pursuant to the provisions of the PSLRA and with the intention of obtaining the
benefits of the "safe harbor" provisions of the PSLRA. Although we believe that
our expectations are based upon reasonable assumptions, actual results may
differ materially from those in the forward-looking statements as a result of
various factors, including, but not limited to, the factors discussed in this
Form 10-K under the heading "Risk Factors".

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should
carefully consider the following factors, as well as other information contained
in this report, before deciding to invest in shares of our common stock. These
risks could materially adversely affect our business, financial condition or
results of operations. The trading price of our common stock could also be
materially adversely affected by any of these risks.

IF WE ARE NOT ABLE TO COMPETE EFFECTIVELY, OUR BUSINESS, SALES AND EARNINGS
COULD BE MATERIALLY ADVERSELY AFFECTED.

The restaurant industry in general, as well as the pizza segment of the
industry, is intensely competitive, both internationally and domestically, with
respect to price, service, location and food quality. We compete against many
regional and local businesses. There are many well-established competitors with
substantially greater brand awareness and financial and other resources than we
have. Some of these competitors have been in existence for a substantially
longer period than we have and may be better established in markets where
restaurants we operate or that are operated by our franchisees are, or may be,
located. Experience has shown that a change in the pricing or other marketing
or promotional strategies, including new product and concept developments, of
one or more of our major competitors can have an adverse impact on sales and
earnings and our systemwide restaurant operations.

We could also experience increased competition from existing or new
companies in the pizza segment of the restaurant industry. If we are unable to
compete, we could experience downward pressure on prices, lower demand for our
products, reduced margins, the inability to take advantage of new business
opportunities and the loss of market share, all of which would have a material
adverse effect on our operating results.

We also compete on a broader scale with quick service, fast casual and
other international, national, regional and local restaurants. The overall food
service market and the quick service restaurant sector are intensely competitive
with respect to food quality, price, service, and convenience and concept.

We compete within the food service market and the restaurant industry not
only for customers, but also for management and hourly employees, suitable real
estate sites and qualified franchisees. Norco is also subject to competition
from outside suppliers. If other suppliers, who meet our qualification
standards, were to offer lower prices or better service to our franchisees for
their ingredients and supplies and, as a result, our franchisees chose not to
purchase from Norco, our financial condition, business and results of operations
would be adversely affected.

IF WE ARE NOT ABLE TO IMPLEMENT OUR GROWTH STRATEGY SUCCESSFULLY, WHICH
INCLUDES OPENING NEW DOMESTIC AND INTERNATIONAL RESTAURANTS AND REIMAGING
EXISTING RESTAURANTS, OUR ABILITY TO INCREASE OUR REVENUES AND OPERATING PROFITS
COULD BE MATERIALLY ADVERSELY AFFECTED.

A significant component of our growth strategy is opening new domestic and
international franchise restaurants. We and our franchisees face many
challenges in opening new restaurants, including, among other things, selection
and availability of suitable restaurant locations and suitable employees,
increases in food, paper, labor, utilities, fuel, employee benefits, insurance
and similar costs, negotiation of suitable lease or financing terms, constraints
on permitting and construction of restaurants, higher than anticipated
construction costs, the hiring, training and retention of management and other
personnel and securing required domestic or foreign governmental permits and
approvals.

The opening of additional franchise restaurants and our reimaging program also
depends, in part, upon the availability of prospective franchisees who meet our
criteria. Our reimaging program may require considerable management time as
well as start-up expenses for market development before any significant revenues
and earnings are generated.

Accordingly, there can be no assurance that we will be able to meet planned
growth targets, open restaurants in markets now targeted for expansion or
operate in existing markets profitably. In addition, even if we are able to
continue to open new restaurants, we may not be able to keep restaurants from
closing at a faster rate than we are able to open restaurants.

AN INCREASE IN THE COST OF CHEESE OR OTHER COMMODITIES, INCLUDING FUEL AND
LABOR, COULD ADVERSELY AFFECT OUR PROFITABILITY AND OPERATING RESULTS.

An increase in our operating costs could adversely affect our
profitability. Factors such as inflation, increased food costs, increased labor
and employee benefit costs and increased energy costs may adversely affect our
operating costs. Most of the factors affecting costs are beyond our control
and, in many cases, we may not be able to pass along these increased costs to
our customers or franchisees even if we attempted to do so. Most ingredients
used in our pizza, particularly cheese, are subject to significant price
fluctuations as a result of seasonality, weather, availability, demand and other
factors. Sustained increases in fuel and utility costs could adversely affect
the profitability of our restaurant and distribution businesses. Labor costs
are largely a function of the minimum wage for a majority of our restaurant and
distribution center personnel and, generally, are a function of the availability
of labor.

SHORTAGES OR INTERRUPTIONS IN THE SUPPLY OR DELIVERY OF FOOD PRODUCTS COULD
ADVERSELY AFFECT OUR OPERATING RESULTS.

We, and our franchisees are dependent on frequent deliveries of food
products that meet our specifications. Shortages or interruptions in the supply
of food products caused by unanticipated demand, problems in production or
distribution by Norco or otherwise, inclement weather (including hurricanes and
other natural disasters) or other conditions could adversely affect the
availability, quality and cost of ingredients, which would adversely affect our
operating results.

CHANGES IN CONSUMER PREFERENCES AND PERCEPTIONS COULD DECREASE THE DEMAND
FOR OUR PRODUCTS, WHICH WOULD REDUCE SALES AND HARM OUR BUSINESS.

Restaurant businesses are affected by changes in consumer tastes, national,
regional and local economic conditions, demographic trends, disposable
purchasing power, traffic patterns and the type, number and location of
competing restaurants. For example, if prevailing health or dietary preferences
cause consumers to avoid pizza and other products we offer in favor of foods
that are perceived as more healthy, our business and operating results would be
harmed. Moreover, because we are primarily dependent on a single product, if
consumer demand for pizza should decrease, our business would suffer more than
if we had a more diversified menu, as many other food service businesses do.

HEALTH CONCERNS OR DISEASE-RELATED DISRUPTIONS ABOUT COMMODITIES THAT WE
USE TO MAKE PIZZA COULD MATERIALLY ADVERSELY AFFECT THE AVAILABILITY AND COST OF
SUCH COMMODITIES.

Health- or disease-related disruptions or consumer concerns about the
commodity supply could materially adversely impact the availability and/or cost
of such commodities, thereby materially adversely impacting restaurant
operations and our financial results.

WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, AND ANY FAILURE TO COMPLY
WITH EXISTING OR INCREASED REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS AND
OPERATING RESULTS.

We are subject to numerous federal, state, local and foreign laws and
regulations, including those relating to the preparation and sale of food;
building and zoning requirements; environmental protection; minimum wage,
citizenship, overtime and other labor requirements; compliance with the
Americans with Disabilities Act; and working and safety conditions.

A significant number of hourly personnel employed by our franchisees and by us
are paid at rates related to the federal minimum wage. Accordingly, further
increases in the federal minimum wage or the enactment of additional state or
local wage proposals may increase labor costs for our systemwide operations.
Additionally, labor shortages in various markets could result in higher required
wage rates.

If we fail to comply with existing or future laws and regulations, we may
be subject to governmental or judicial fines or sanctions. In addition, our
capital expenditures could increase due to remediation measures that may be
required if we are found to be noncompliant with any of these laws or
regulations.

We are also subject to a Federal Trade Commission rule and to various state
and foreign laws that govern the offer and sale of franchises. Additionally,
these laws regulate various aspects of the franchise relationship, including
terminations and the refusal to renew franchises. The failure to comply with
these laws and regulations in any jurisdiction or to obtain required government
approvals could result in a ban or temporary suspension on future franchise
sales, fines or other penalties or require us to make offers of rescission or
restitution, any of which could adversely affect our business and operating
results.

IF WE ARE NOT ABLE TO CONTINUE PURCHASING OUR KEY PIZZA INGREDIENTS FROM
OUR CURRENT SUPPLIERS OR FIND SUITABLE REPLACEMENT SUPPLIERS OUR FINANCIAL
RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED.

We are dependent on a few suppliers for our key ingredients. Domestically, we
rely upon sole suppliers for our cheese, flour mixture and certain other key
ingredients. Alternative sources for these ingredients may not be available on
a timely basis to supply these key ingredients or be available on terms as
favorable to us as under our current arrangements. Our domestic restaurants
purchase substantially all food and related products from our distribution
division. Accordingly, both our Company-operated and franchised restaurants
could be harmed by any prolonged disruption in the supply of products from
Norco. Additionally, domestic franchisees are only required to purchase the
flour mixture, spice blend and certain other items from Norco and changes in
purchasing practices by domestic franchisees could adversely affect the
financial results of our distribution operation.

OUR INTERNATIONAL AND DOMESTIC OPERATIONS COULD BE MATERIALLY ADVERSELY
AFFECTED BY SIGNIFICANT CHANGES IN INTERNATIONAL, REGIONAL, AND LOCAL ECONOMIC
AND POLITICAL CONDITIONS.

Our international and domestic operations are subject to many factors,
including currency regulations and fluctuations, culture and consumer
preferences, diverse government regulations and structures, availability and the
cost of land and construction, ability to source ingredients and other
commodities in a cost-effective manner and differing interpretation of the
obligations established in franchise agreements with international franchisees.
Accordingly, there can be no assurance that our operations will achieve or
maintain profitability or meet planned growth rates.

EACH OF THE FOREGOING RISK FACTORS THAT COULD AFFECT RESTAURANT SALES OR
COSTS COULD DISPROPORTIONATELY AFFECT THE FINANCIAL VIABILITY OF NEWLY OPENED
RESTAURANTS AND FRANCHISEES IN UNDER-PENETRATED OR EMERGING MARKETS AND,
CONSEQUENTLY, OUR OVERALL RESULTS OF OPERATIONS.

A decline in or failure to improve financial performance for this group of
restaurants or franchisees could lead to an inability to successfully recruit
new franchisees and open new restaurants and lead to restaurant closings at
greater than anticipated levels and therefore impact contributions to marketing
funds, our royalty stream, our distribution operations and support services
efficiencies and other system-wide results of operations.

WE FACE RISKS OF LITIGATION FROM CUSTOMERS, FRANCHISEES, EMPLOYEES AND
OTHERS IN THE ORDINARY COURSE OF BUSINESS, WHICH DIVERTS OUR FINANCIAL AND
MANAGEMENT RESOURCES. ANY ADVERSE LITIGATION OR PUBLICITY MAY NEGATIVELY IMPACT
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Claims of illness or injury relating to food quality or food handling are
common in the food service industry. In addition to decreasing our sales and
profitability and diverting our management resources, adverse publicity or a
substantial judgment against us could negatively impact our financial condition,
results of operations and brand reputation, hindering our ability to attract and
retain franchisees and grow our business.

Further, we may be subject to employee, franchisee and other claims in the
future based on, among other things, discrimination, harassment, wrongful
termination and wage, rest break and meal break issues, including those relating
to overtime compensation. If one or more of these claims were to be successful
or if there is a significant increase in the number of these claims, our
business, financial condition and operating results could be harmed.

For example, an adverse outcome to the proceedings involving Ronald W.
Parker, the Company's former President and Chief Executive Officer, and B. Keith
Clark, the Company's former Senior Vice President Secretary and General Counsel,
could materially affect the Company's financial position and results of
operations. In the event the Company is unsuccessful, it could be liable to Mr.
Parker for approximately $5.4 million under his employment agreement and for
approximately $775,000 under Mr. Clark's employment agreement plus accrued
interest and legal expenses. No accrual for any amount has been made as of June
26, 2005. See the discussion under "Legal Proceedings" in this report.

OUR EARNINGS AND BUSINESS GROWTH STRATEGY DEPENDS ON THE SUCCESS OF OUR
FRANCHISEES, AND WE MAY BE HARMED BY ACTIONS TAKEN BY OUR FRANCHISEES THAT ARE
OUTSIDE OF OUR CONTROL.

A significant portion of our earnings comes from royalties generated by our
franchised restaurants. Franchisees are independent operators, and their
employees are not our employees. We provide limited training and support to
franchisees, but the quality of franchised restaurant operations may be
diminished by any number of factors beyond our control. Consequently,
franchisees may not successfully operate restaurants in a manner consistent with
our standards and requirements, or may not hire and train qualified managers and
other store personnel. If they do not, our image and reputation may suffer, and
revenues could decline. While we try to ensure that our franchisees maintain
the quality of our brand and branded products, our franchisees may take actions
that adversely affect the value of our intellectual property or reputation. Our
domestic and international franchisees may not operate their franchises
successfully. If one or more of our key franchisees were to become insolvent or
otherwise were unable or unwilling to pay us our royalties, our business and
results of operations would be adversely affected.

LOSS OF KEY PERSONNEL OR OUR INABILITY TO ATTRACT AND RETAIN NEW QUALIFIED
PERSONNEL COULD HURT OUR BUSINESS AND INHIBIT OUR ABILITY TO OPERATE AND GROW
SUCCESSFULLY.

Our success will depend to a significant extent on our leadership team and
other key management personnel. We may not be able to retain our executive
officers and key personnel or attract additional qualified management. Our
success also will depend on our ability to attract and retain qualified
personnel to oversee our restaurants, distribution center and international
operations. The loss of these employees or our inability to recruit and retain
qualified personnel could have a material adverse effect on our operating
results.

OUR CURRENT INSURANCE COVERAGE MAY NOT BE ADEQUATE, AND INSURANCE PREMIUMS
FOR SUCH COVERAGE MAY INCREASE AND WE MAY NOT BE ABLE TO OBTAIN INSURANCE AT
ACCEPTABLE RATES, OR AT ALL.

Our insurance policies may not be adequate to protect us from liabilities
that we incur in our business. In addition, in the future our insurance
premiums may increase and we may not be able to obtain similar levels of
insurance on reasonable terms, or at all. Any such inadequacy of, or inability
to obtain, insurance coverage could have a material adverse effect on our
business, financial condition and results of operations.

OUR ANNUAL AND QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT
FLUCTUATIONS DEPENDING ON VARIOUS FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL,
AND IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, OUR
SHARE PRICE MAY DECLINE SIGNIFICANTLY.

Our sales and operating results can vary significantly from quarter to
quarter and year to year depending on various factors, many of which are beyond
our control. These factors include variations in the timing and volume of our
sales and our franchisees' sales; the timing of expenditures in anticipation of
future sales; sales promotions by us and our competitors; changes in competitive
and economic conditions generally; and changes in the cost or availability of
our ingredients (including cheese), fuel or labor. As a result, our results of
operations may decline quickly and significantly in response to changes in order
patterns or rapid decreases in demand for our products. We anticipate that
fluctuations in operating results will continue in the future.

ITEM 2 - PROPERTIES

The Company owns a 40,000 square foot facility housing its corporate office
and training center and a 100,000 square foot warehouse and distribution
facility. These buildings were constructed on approximately 11 acres of land in
The Colony, Texas in 2001.

The Company currently owns two Pizza Inn restaurants in the Dallas, Texas
area. One Company-owned restaurant, a buffet, is operated from a leased
location of approximately 3,865 square feet. Annual lease payments are
approximately $14.00 per square foot. The lease expires in 2007 but has
continuous three-year renewal options. The other Company-owned restaurant, a
delivery/carry-out restaurant, was constructed on land the Company purchased
north of Dallas, in Little Elm, Texas, in June 2003.

In July 2005, the Company acquired the assets of two existing buffet
restaurants from Houston, Texas-area franchisees. We are in the process of
remodeling these restaurants and anticipate reopening them in October 2005.
One location has approximately 4,100 square feet and the other has approximately
2,750 square feet. Both are leased at rates of approximately $18.00 per square
foot. The leases expire in 2015 and each has at least one renewal option.

In July 2005, the Company leased approximately 4,100 square feet of space
in a retail development in Dallas, Texas for the operation of a buffet
restaurant at an annual rate of approximately $30.00 per square foot. We are
currently in the process of finishing out the space and expect to have the
restaurant operating in October 2005. The lease has a five-year term with
multiple renewal options.

We also own property in Prosper, Texas that was purchased in August 2004
with the intention of constructing and operating a buffet restaurant. We have
decided not to pursue development at that location and currently have the
property under contract to sell to a third party.

ITEM 3 - LEGAL PROCEEDINGS

We are subject to claims and legal actions in the ordinary course of our
business. With the possible exception of the matters set forth below, we
believe that all such claims and actions currently pending against us are either
adequately covered by insurance or would not have a material adverse effect on
the Company's annual results of operations or financial condition if decided in
a manner that is unfavorable to us.

On June 15, 2004, B. Keith Clark provided the Company with notice of his
intent to resign as Senior Vice President - Corporate Development, Secretary and
General Counsel of the Company effective as of July 7, 2004. By letter dated
June 24, 2004, Mr. Clark notified the Company that he reserved his right to
assert that the election of Ramon D. Phillips and Robert B. Page to the Board of
Directors of the Company at the February 11, 2004 annual meeting of shareholders
constituted a "change of control" of the Company under his executive
compensation agreement (the "Clark Agreement"). As a result of the alleged
change of control under the Clark Agreement, Clark claims that he was entitled
to terminate the Clark Agreement within twelve (12) months of February 11, 2004
for "good reason" (as defined in the Clark Agreement) and is entitled to
severance. On August 6, 2004, the Company instituted an arbitration proceeding
against Mr. Clark with the American Arbitration Association in Dallas, Texas
pursuant to the Clark Agreement seeking declaratory relief that Mr. Clark is not
entitled to severance payments or any other further compensation from the
Company. On January 18, 2005, the Company amended its claims against Mr. Clark
to include claims for compensatory damages, consequential damages and
disgorgement of compensation paid to Mr. Clark under the Clark Agreement. Mr.
Clark has filed claims against the Company for breach of the Clark Agreement,
seeking the severance payment provided for in the Clark Agreement plus a bonus
payment for 2003 of approximately $12,500. The arbitration hearing is scheduled
to begin on November 8, 2005.

The Company disagrees with Mr. Clark's claim that a "change of control" has
occurred under the Clark Agreement or that he is entitled to terminate the Clark
Agreement for "good reason." On May 4, 2004, the Board of Directors obtained a
written legal opinion that the "change of control" provision in the Clark
Agreement was not triggered by the results of the February 11, 2004 annual
meeting. Due to the nature of the preliminary stages of the arbitration
proceeding and the general uncertainty surrounding the outcome of this type of
legal proceeding, it is not possible for the Company to provide any certain or
meaningful analysis, projections or expectations at this time regarding the
outcome of this matter. Although the ultimate outcome of the arbitration
proceeding cannot be projected with certainty, the Company believes that its
claims against Mr. Clark are well founded and intends to vigorously pursue all
relief to which it may be entitled. An adverse outcome to the proceeding could
materially affect the Company's financial position and results of operations. In
the event the Company is unsuccessful, it could be liable to Mr. Clark for the
severance payment of approximately $762,000, the $12,500 bonus payment and costs
and fees. No accrual for any such amounts has been made as of June 26, 2005.

On October 5, 2004 the Company filed a lawsuit against the law firm Akin,
Gump, Strauss, Hauer & Feld, ("Akin Gump") and J. Kenneth Menges, one of the
firm's partners. Akin Gump served as the Company's principal outside lawyers
from 1997 through May 2004, when the Company terminated the relationship. The
petition alleges that during the course of representation of the Company, the
firm and Mr. Menges, as the partner in charge of the firm's services for the
Company, breached certain fiduciary responsibilities to the Company by giving
advice and taking action to further the personal interests of certain of the
Company's executive officers to the detriment of the Company and its
shareholders. Specifically, the petition alleges that the firm and Mr. Menges
assisted in the creation and implementation of so-called "golden parachute"
agreements, which, in the opinion of the Company's current counsel, provided for
potential severance payments to those executives in amounts greatly
disproportionate to the Company's ability to pay, and that, if paid, could
expose the Company to significant financial liability which could have a
material adverse effect on the Company's financial position. This matter is in
its preliminary stages, and the Company is unable to provide any meaningful
analysis, projections or expectations at this time regarding the outcome of this
matter. However, the Company believes that its claims against Akin Gump and Mr.
Menges are well founded and intends to vigorously pursue all relief to which it
may be entitled. On January 25, 2005, Akin Gump filed a motion with the court
asking for this matter to be abated pending a determination in the Clark and
Parker arbitrations. The court denied the motion but ruled that it would not
set a trial date until after completion of the Clark and Parker arbitration
hearings.

On December 11, 2004, the Board of Directors of the Company terminated the
Executive Compensation Agreement dated December 16, 2002 between the Company and
its then Chief Executive Officer, Ronald W. Parker ("Parker Agreement"). Mr.
Parker's employment was terminated following ten days written notice to Mr.
Parker of the Company's intent to discharge him for cause as a result of
violations of the Parker Agreement. Written notice of termination was
communicated to Mr. Parker on December 13, 2004. The nature of the cause
alleged was set forth in the notice of intent to discharge and based upon
Section 2.01(c) of the Parker Agreement, which provides for discharge for "any
intentional act of fraud against the Company, any of its subsidiaries or any of
their employees or properties, which is not cured, or with respect to which
Executive is not diligently pursuing a cure, within ten (10) business days of
the Company giving notice to Executive to do so." Mr. Parker was provided with
an opportunity to cure as provided in the Parker Agreement as well as the
opportunity to be heard by the Board of Directors prior to the termination.

On January 12, 2005, the Company instituted an arbitration proceeding
against Mr. Parker with the American Arbitration Association in Dallas, Texas
pursuant to the Parker Agreement seeking declaratory relief that Mr. Parker is
not entitled to severance payments or any other further compensation from the
Company. In addition, the Company is seeking compensatory damages,
consequential damages and disgorgement of compensation paid to Mr. Parker under
the Parker Agreement. On January 31, 2005, Mr. Parker filed claims against the
Company for breach of the Parker Agreement, seeking the severance payment
provided for in the Parker Agreement for a termination of Mr. Parker by the
Company for reason other than for cause (as defined in the Parker Agreement),
plus interest, attorney's fees and costs. No date for an arbitration hearing has
been set.

Due to the preliminary stages of the arbitration proceeding and the general
uncertainty surrounding the outcome of this type of legal proceeding, it is not
possible for the Company to provide any certain or meaningful analysis,
projections or expectations at this time regarding the outcome of this matter.
Although the ultimate outcome of the arbitration proceeding cannot be projected
with certainty at this time, the Company believes that its claims against Mr.
Parker are well founded and intends to vigorously pursue all relief to which it
may be entitled. An adverse outcome to the proceeding could materially affect
the Company's financial position and results of operations. In the event the
Company is unsuccessful, it could be liable to Mr. Parker for approximately $5.4
million under the Parker Agreement plus accrued interest and legal expenses. No
accrual for any amount has been made as of June 26, 2005.

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

The following matters were submitted to a vote of security holders during
the fourth quarter of the Company's fiscal year 2005 at the Company's 2004
Annual Meeting of Shareholders on June 23, 2005.

Item 1. Election of Class I Directors.