State issuer's revenues for its most recent fiscal year: $3,023,276.$2,674,822.

The aggregate market value of the voting common equity held by nonaffiliates as of the last business day of the registrant’s most recently completed second fiscal quarter was: $3,012,163$2,936,209 based on 4,634,0984,735,820 shares held by nonaffiliates as of May 31, 2011;2012; Closing price ($.65).62) for said shares in the NASDAQ OTC Bulletin Board as of such date.

BAB, Inc (“the Company”) has fourtwo wholly owned subsidiaries: BAB Systems, Inc. (“Systems”); and BAB Operations, Inc. (“Operations”); Brewster’s Franchise Corporation (“BFC”) and My Favorite Muffin Too, Inc..  Systems was incorporated on December 2, 1992, and was primarily established to franchise Big Apple Bagel (“BAB”) specialty bagel retail stores.  Operations was formed on August 30, 1995, primarily to operate Company-owned stores.  The last one of the Company-owned stores was sold and became a franchise location November 30, 2011.  BFC was established on February 15, 1996 to franchise “Brewster’s Coffee” concept coffee stores.  My Favorite Muffin Too, Inc., a New Jersey corporation, was acquired on May 13, 1997.  My Favorite Muffin Too, Inc. franchises1997 and is included as a part of Systems. Brewster’s Franchise Corporations (“Brewster’s”) was established on February 15, 1996.  Brewster’s coffee is sold in BAB and My Favorite Muffin (“MFM”) concept muffin stores which are includedlocations as part of the Systemswell as through license agreements.  Operations was formed on August 30, 1995, primarily to operate Company-owned stores.  The last Company-owned store was sold and became a franchise operating and financial information.location November 30, 2011.  The assets of Jacobs Bros. Bagels (“Jacobs Bros.”) were acquired on February 1, 1999. All branded wholesale business uses this trademark.

The Company was incorporated under the laws of the State of Delaware on July 12, 2000.  The Company currently operates franchises and licenses bagel and muffin retail units under the BAB and MFM trade names. At November 30, 2011,2012, the Company had 101100 franchise units and 86 licensed units in operation in 2624 states.  The Company additionally derives income from the sale of its trademark bagels, muffins and coffee through nontraditional channels of distribution including under licensing agreements with Mrs. Fields Famous Brands (Mrs. Fields), Kohr Bros. Frozen Custard, Braeda Cafe, Kaleidoscoops, Green Beans Coffee, Sodexo and through direct home delivery of specialty muffin gift baskets and coffee.

The BAB franchised brand consists of units operating as “Big Apple Bagels,” featuring daily baked bagels, flavored cream cheeses, premium coffees, gourmet bagel sandwiches and other related products. Licensed BAB units serve the Company's par-baked frozen bagel and related products baked daily.  BAB units are primarily concentrated in the Midwest and Western United States.  The MFM brand consists of units operating as "My Favorite Muffin," featuring a large variety of freshly baked muffins, coffees and related products, and units operating as "My Favorite Muffin and Bagel Cafe," featuring these products as well as a variety of specialty bagel sandwiches and related products.  MFM units are primarily in the Middle Atlantic States.   Although the Company doesn't actively market Brewster's stand-alone franchises, Brewster's coffee products are sold in most franchised units.     

The Company has grown significantly since its initial public offering through growth in franchise units and the development of alternative distribution channels for its branded products.  The Company is leveraging on the natural synergy of distributing muffin products in existing BAB units and, alternatively, bagel products and Brewster's Coffee in existing MFM units. The Company expects to continue to realize efficiencies in servicing the combined base of BAB and MFM franchisees.

The Company reported net income of $394,000$419,000 and $410,000$394,000 for the years ended November 30, 2012 and 2011, and 2010, respectively. 

The Company’s franchisees represent a varied geographic and demographic group.  Among some of the primary services the Company provides to its franchisees are marketing assistance, training, time-tested successful recipes, bulk purchasing discounts, food service knowledgeable personnel and brand recognition.

The Company's major suppliers are Coffee Bean International, Dawn Food Products, Inc., Schreiber Foods, Coca-Cola and Hawkeye Foodservice.U.S. Foods.  The Company is not dependent on any of these suppliers for future growth and profitability since like products purchased from these suppliers are available from other sources.

BIG APPLE BAGELS--BAB franchised stores daily bake a variety of fresh bagels and offer up to 11 varieties of cream cheese spreads.   Stores also offer a variety of breakfast and lunch bagel sandwiches, salads, soups, various dessert items, fruit smoothies, gourmet coffees and other beverages. A typical BAB store is in an area with a mix of both residential and commercial properties and ranges from 1,500 to 2,000 square feet. The Company's current store design is approximately 1,800 square feet, with seating capacity for 20 to 30 persons, and includes approximately 750 square feet devoted to production and baking. A satellite store is typically smaller than a production store, averaging 800 to 1,200 square feet. Although franchise stores may vary in size from other franchise stores, store layout is generally consistent.

MY FAVORITE MUFFIN--MFM franchised stores daily bake 20 to 25 varieties of muffins from over 250 recipes, plus a variety of bagels. They also serve gourmet coffees, beverages and, at My Favorite Muffin and Bagel Cafe locations, a variety of bagel sandwiches and related products. The typical MFM store design is approximately 1,800 square feet, with seating capacity for 20 to 30 persons.

BREWSTER'S COFFEE--Although the Company doesn't have, or actively market, Brewster's stand-alone franchises, Brewster's coffee products are sold in most of the franchised units.

The Company's current Franchise Disclosure DocumentDocuments (“FDD”) providesprovide for, among other things, the opportunity for prospective franchisees to enter into a Preliminary Agreement for their first production store. This agreement enables a prospective franchisee a period of 60 days in which to locate a site. The fee for this Preliminary Agreement is $10,000. If a site is not located and approved by the franchisor within the 60 days, the prospective franchisee will receive a refund of $7,000. If a site is approved, the entire $10,000 will be applied toward the initial franchise fee.  See also last paragraph under "Government Regulation" section in this 10-K.

The Company currently advertises its franchising opportunities in directories, newspapers and the internet.  In addition, prospective franchisees contact the Company as a result of patronizing an existing store.

The quick service restaurant industry is intensely competitive with respect to product quality, concept, location, service and price. There are a number of national, regional and local chains operating both owned and franchised stores which compete with the Company on a national level or solely in a specific market or region. The Company believes that because the industry is extremely fragmented, there is a significant opportunity for expansion in the bagel, muffin and coffee concept chains.

The Company believes the primary direct competitors of its bagel concept units are Bruegger's Bagel Bakery and New World Coffee-Manhattan Bagel Inc.,Einstein Noah Restaurant Group, which operates underoperate Einstein Bros. Bagels, Noah's NYPanera Bread Company and Bruegger's Bagel and Manhattan Bagel Bakery brands.Bakery.  There are several other regional bagel chains with fewer than 50 stores, all of which may compete with the Company. There is no major national competitor in the muffin business, but there are a number of local and regional operators. Additionally, the Company competes directly with a number of national, regional and local coffee concept stores and brand names.

The Company also competes against numerous small, independently owned bagel bakeries and national fast food restaurants, such as Dunkin' Donuts, McDonald's Panera and Starbucks that offer bagels, muffins, coffee and related products as part of their product offerings.  Other competition includes supermarket bakery sections and prepackaged, fresh and frozen bagels. Certain of these competitors may have greater product and name recognition and larger financial, marketing and distribution capabilities than the Company.  In addition, the Company believes the startup costs associated with opening a retail food establishment offering similar products on a stand-alone basis are competitive with the startup costs associated with opening its concept stores and, accordingly, such startup costs are not an impediment to entry into the retail bagel, muffin or coffee businesses.

The Company believes that its stores compete favorably in terms of food quality and taste, convenience and customer service and value, which the Company believes are important factors to its targeted customers.  Competition in the food service industry is often affected by changes in consumer tastes, national, regional and local economic and real estate conditions, demographic trends, traffic patterns, the cost and availability of labor, consumer purchasing power, availability of product and local competitive factors.  The Company attempts to manage or adapt to these factors, but not all such factors are within the Company's control, and such factors could cause the Company and some, or all, of its franchisees to be adversely affected.

The trademarks, trade names and service marks used by the Company contain common descriptive English words and thus may be subject to challenge by users of these words, alone or in combination with other words, to describe other services or products. Some persons or entities may have prior rights to these names or marks in their respective localities. Accordingly, there is no assurance that such names and marks are available in all locations. Any challenge, if successful, in whole or in part, could restrict the Company's use of the names and marks in areas in which the challenger is found to have used the name or mark prior to the Company's use. Any such restriction could limit the expansion of the Company's use of the names or marks into that region, and the Company and its franchisees may be materially and adversely affected.

The trademarks and service marks "Big Apple Bagels," "My Favorite Muffin" and "Brewster's Coffee" are registered under applicable federal trademark law. These marks are licensed by the Company to its franchisees pursuant to Franchise Agreements.   In February 1999, the Company acquired the trademark of "Jacobs Bros. Bagels" upon purchasing certain assets of Jacobs Bros. The "Jacobs Bros. Bagels" mark is also registered under applicable federal trademark law.  The trademarks and service marks for “SweetDuet Frozen Yogurt and Gourmet Muffins” are currently pending.

The Company is aware of the use by other persons and entities in certain geographic areas of names and marks which are the same as or similar to the Company's names and marks. Some of these persons or entities may have prior rights to those names or marks in their respective localities. Therefore, there is no assurance that the names and marks are available in all locations. It is the Company's policy to pursue registration of its names and marks whenever possible and to vigorously oppose any infringement of its names and marks.

The Company is subject to the Trade Regulation Rule of the Federal Trade Commission (the "FTC") entitled “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures'' (the "FTC Franchise Rule") and state and local laws and regulations that govern the offer, sale and termination of franchises and the refusal to renew franchises. Continued compliance with this broad federal, state and local regulatory network is essential and costly; the failure to comply with such regulations may have a material adverse effect on the Company and its franchisees. Violations of franchising laws and/or state laws and regulations regulating substantive aspects of doing business in a particular state could limit the Company's ability to sell franchises or subject the Company and its affiliates to rescission offers, monetary damages, penalties, imprisonment and/or injunctive proceedings. In addition, under court decisions in certain states, absolute vicarious liability may be imposed upon franchisors based upon claims made against franchisees. Even if the Company is able to obtain insurance coverage for such claims, there can be no assurance that such insurance will be sufficient to cover potential claims against the Company.

The Company and its franchisees are required to comply with federal, state and local government regulations applicable to consumer food service businesses, including those relating to the preparation and sale of food, minimum wage requirements, overtime, working and safety conditions, citizenship requirements, as well as regulations relating to zoning, construction, health and business licensing. Each store is subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, safety, fire and other departments. Difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of a new Company-owned or franchise store, and failure to remain in compliance with applicable regulations could cause the temporary or permanent closing of an existing store. The Company believes that it is in material compliance with these provisions. Continued compliance with these federal, state and local laws and regulations is costly but essential, and failure to comply may have an adverse effect on the Company and its franchisees.

The Company's franchising operations are subject to regulation by the FTC under the Uniform Franchise Act which requires, among other things, that the Company prepare and periodically update a comprehensive disclosure document known as a FDD in connection with the sale and operation of its franchises. In addition, some states require a franchisor to register its franchise with the state before it may offer a franchise to a prospective franchisee. The Company believes its FDD, together with any applicable state versions or supplements, comply with both the FTC guidelines and all applicable state laws regulating franchising in those states in which it has offered franchises.

The Company is also subject to a number of state laws, as well as foreign laws (to the extent it offers franchises outside of the United States), that regulate substantive aspects of the franchisor-franchisee relationship, including, but not limited to, those concerning termination and non-renewal of a franchise.

As of November 30, 2011,2012, the Company employed 1720 persons in the Corporate headquarters, consisting of 1517 full time and 23 part-time employees.  The employees are responsible for corporate management and oversight, accounting, advertising and franchising.  None of the Company's employees are subject to any collective bargaining agreements and management considers its relations with its employees to be good.

The Company's principal executive office, consisting of approximately 7,150 square feet, is located in Deerfield, Illinois and is leased.  The Company elected to extend the lease term under the first amendment to the original lease and it expires September 30, 2018.   There is an option to extend the lease for an additional five years.

The following table sets forth the quarterly high and low sale prices for the Company's common stock, as reported in the Nasdaq Small Cap Market for the two years ended November 30, 20112012 and 2010.2011.  The Company's common stock is traded on the NASDAQ OTC-Bulletin Board under the symbol "BABB." 

As of February 15, 2012,2013, the Company's Common Stock was held by 163161 holders of record. Registered ownership includes nominees who may hold securities on behalf of multiple beneficial owners. The Company estimates that the number of beneficial owners of its common stock at February 15, 2012,2013, is approximately 1,100 based upon information provided by a proxy services firm.

In May 2001, the Company's Board of Directors approved a Long-Term Incentive and Stock Option Plan (Plan), with an amendment in May 2003 to increase the Plan from the reserve of 1,100,000 shares to 1,400,000 shares of Common Stock for grant.  A total of 1,400,000 stock options have been granted to directors, officers and employees.  In 20112012 and 2010,2011, no options were granted.  As of February 11, 2011,2012, there were 1,031,627 stock options exercised or forfeited under the Plan.  (See Note 6 of the audited consolidated financial statements included herein.)

The Board of Directors declared a cash distribution/dividend on February 27, May 25 and September 6, 2012 of $0.01 per share, paid April 9, July 6, and October 4, 2012, respectively.

The Board of Directors declared a $0.01 quarterly and $0.02 special cash distribution/dividend on December 6, 2010, paid January 5, 20112011.  The Board of Directors declared a $0.01 quarterly cash distribution/dividend and a $0.02 special distribution/dividend andon   February 25, May 23 and September 6, 2011, a distribution/dividend of $0.01 per share was declared and paid April 15, July 5, and October 4, 2011, respectively.

TheOn December 3, 2012 the Board of Directors declared a $0.01 quarterly and a $0.04 special cash distribution/dividend of $0.01 per sharewhich was paid on December 7, 2009, March 9, May 20, and September 3, 2010, paid January 4, April 14, July 8 and September 3, 2010.27, 2012, totaling $363,000.

Although there can be no assurances that the Company will be able to pay cash distributions/dividends in the future, it is the Company’s intent that future cash distributions/dividends will be considered based on profitability expectations and financing needs and will be declared at the discretion of the Board of Directors. It is the Company’s intent going forward to declare and pay cash distributions/dividends on a quarterly basis if warranted.

The selected financial data contained herein has been derived from the consolidated financial statements of the Company included elsewhere in this Report on Form 10-K. The data should be read in conjunction with the consolidated financial statements and notes thereto.  Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, including statements regarding the development of the Company's business, the markets for the Company's products, anticipated capital expenditures, and the effects of completed and proposed acquisitions, and other statements and disclosures contained herein and throughout this Annual Report regarding matters that are not historical facts, are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). In such cases, we may use words such as "believe," "intend," "expect," "anticipate" and the like.  Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Certain risks and uncertainties are wholly or partially outside the control of the Company and its management, including its ability to attract new franchisees; the continued success of current franchisees; the effects of competition on franchisee store results; consumer acceptance of the Company's products in new and existing markets; fluctuation in development and operating costs; brand awareness; availability and terms of capital; adverse publicity; acceptance of new product offerings; availability of locations and terms of sites for store development; food, labor and employee benefit costs; changes in government regulation (including increases in the minimum wage); regional economic and weather conditions; the hiring, training, and retention of skilled corporate and restaurant management; and the integration and assimilation of acquired concepts.  Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof.  The Company undertakes no obligation to publicly release the results of any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The Company has 101100 franchised and 86 licensed units at the end of 2011.2012. Units in operation at the end of 20102011 included 98101 franchised 7and 8 licensed and 1 Company-owned store.units.  System-wide revenues were $38 million 2012 and $36 million in 2011 and 2010 were $36 million.2011.

The Company's revenues are derived primarily from the ongoing royalties paid to the Company by its franchisees and from receipt of initial franchise fees.  Through November 30, 2011 the Company received revenue from the operation of the Company-owned store.  On November 30, 2011 the Company-owned store was sold to a franchisee.  This sale will decrease the Company’s total revenues in future years, but it will not have a negative impact on its net income.  Additionally, the Company derives revenue from the sale of licensed products (My Favorite Muffin mix, Big Apple Bagels cream cheese and Brewster's coffee), and through licensing agreements (Kohr Bros., Braeda Café, Kaleidoscoops, Green Beans Coffee Sodexo and Mrs. Fields)Sodexo).  Also included in licensing fees and other income is Operation’s Sign Shop results.  For franchise consistency and convenience, the Sign Shop provides the majority of signage to franchisees, and the former Company-owned store, including but not limited to, posters, menu panels, build charts, outside window stickers and counter signs.

Total revenues from all sources increased $109,000,decreased $348,000, or 3.7%11.5%, to $3,023,000$2,675,000 in 20112012 from $2,914,000$3,023,000 in the prior year primarily because the Company had no Company-owned store revenues in 2012 versus $403,000 in 2011 and due to increasesa decrease in royaltyfranchise fee revenue of $176,000 and royalty fees of $23,000,$178,000 in 2012, off-set by decreasesincreases in licensing fees of $47,000$134,000 and Company-owned storeroyalty revenue of $42,000.$99,000.

Royalty revenue from franchise stores increased $23,000,$99,000, or 1.3%5.6%, to $1,859,000 in 2012 as compared to $1,760,000 in 2011 as compared to $1,737,000 in 2010.2011.  Franchise fee revenue increased $176,000,decreased $178,000, or 167.6%63.3%, to $103,000 in 2012 versus $281,000 in 2011 versus $105,000 in 2010.  The Company opened2011.  During fiscal 2012 there were 4 store openings and 5 transfers compared to 9 stores openings and transferred 8 storestransfers in 2011 versus opening 4 franchise stores and transferring 5 in 2010.2011.  At November 30, 2012 and 2011 the Company had 1 unit under development versus 3 at November 30, 2010.development.  In fiscal 2012 there were no Company-owned store revenues decreased $42,000 or 9.4%,compared to $403,000 from $445,000 in 2010.2011.  Licensing fees and other income decreased $47,000,increased $134,000, or 7.5%23.1%, to $713,000 in 2012 as compared to $579,000 in 2011 as compared to $626,000 in 2010.2011.  The declineincrease in licensing and other income was primarily due to an $83,000 decreaseincrease of $156,000 in audit/settlement income, a total of $185,000 in 20112012 versus 2010.  In addition, in 2010 there was $17,000 in gift card revenue and $5,000 from lease income versus none$29,000 in 2011. This decline was offset by an increase in Sign Shop revenueDuring 2012 the Company had one settlement of $48,000 and an increase in license fee revenue of $9,000.$171,000.

Total operating expenses in 20112012 were $2,236,000, or 83.6% of revenues, compared to $2,620,000, or 86.7% of total revenues compared to total operating expenses in 2010 of $2,502,000, or 85.9% of total revenues.2011. Total operating expenses increased $118,000,decreased $384,000, or 4.7%14.6%, in 20112012 compared to 2010.

Corporate office payroll and payroll related expenses increased $85,000, or 6.7%6.3%, in 2011,2012, to $1,433,000, from $1,348,000 from $1,263,000, in 20102011, primarily due to a full-time franchise trainer for all of 2012 and an increase in executive bonuses paid in 2011 versus 2010 and 2 additional employees, one full time and one part time hired in2012 compared to 2011.  Professional fees decreased $36,000,increased $26,000, or 21.3%19.5%, in 2011,2012, to $159,000, from $133,000 from $169,000 in 20102011 primarily due to decreasedincreased legal expenses forrelated to franchise collection expense.  Travel increased $8,000,collections.  This was offset by an $18,000, or 18.6%10.3%, decrease in occupancy expenses in 2012 totaling $157,000 compared to $51,000$175,000 in 2011 from $43,000 in 2010primarily due to increased travela $37,000 rent credit for morean unused construction allowance which was offset by higher rent expense in 2012, a $13,000, or 17.8%, decrease in advertising and promotion expense totaling $60,000 in 2012 compared to $73,000 in 2011, and a $7,000, or 26.9% decrease to $19,000 in 2012 compared to $26,000 in 2011 primarily because there was no Company-owned store openings in 2012 versus 2011.  In addition, there was a $56,000, or 13.5%, decrease in other expenses to $360,000 in 2012 compared to $416,000 in 2011

Interest income was $3,000 in 2012 versus $4,000 in 2011, versus $8,000 in 2010, as a result of lower interest rates.

Interest expense was $7,000 in 2012 versus $8,000 in 2011, versus $10,000 in 2010, as a result of lessa decrease in outstanding debt.

 

Net income totaled $394,000, or 13.0%, of revenue in 2011 as compared to $410,000, or 14.1%, of revenue in the prior year.  Income tax expense for 20112012 was $15,000 compared to $5,000 in 2011 for Illinois state income taxes as net operating loss carryforwards were not allowed to offset taxable income in 2012 or 2011. There was no

Net income tax expensetotaled $419,000, or 15.7%, of revenue in 2012 as compared to $394,000, or 13.0%, of revenue in the prior year.  Earnings per share for 2010.basic and diluted outstanding shares is $.06 for 2012 and $.05 for 2011.

At November 30, 2012, the Company had working capital of $992,000 and unrestricted cash of $1,256,000.  At November 30, 2011, the Company had working capital of $807,000 and unrestricedunrestricted cash of $1,236,000.  At November 30, 2010

During fiscal 2012, the Company had working capitalnet income of $1,063,000$419,000 and unrestrictedoperating activities provided cash of $1,243,000.

For financing activities in fiscal 2011, $26,0002012, $28,000 was used for repayment of debt and $436,000 for cash distributions/dividend payments to common stockholders. For financing activities in fiscal 2010, $25,0002011, $26,000 was used for repayment of debt and $291,000$436,000 for cash distributions/dividend payments to common stockholders.

Although there can be no assurances that the Company will be able to pay cash distributions/dividends in the future, it is the Company’s intent that future cash distributions/dividends will be considered based on profitability expectations and financing needs and will be declared at the discretion of the Board of Directors. It is the Company’s intent going forward to declare and pay cash distributions/dividends on a quarterly basis if warranted. On November 28, 2011,December 3, 2012 the Board of Directors authorizeddeclared a $0.01 per share quarterly and a $0.04 special cash distribution/dividend and a $0.02 per share special cash distribution/dividend.  The cash distribution/dividendwhich was paid January 4, 2011.on December 27, 2012, totaling $363,000. 

The Company has no off balance sheet arrangements, other than the lease commitments disclosed in Note 7 of the audited consolidated financial statements included herein.

The Company's significant accounting policies are presented in the Notes to the Consolidated Financial Statements (see Note 2 of the audited consolidated financial statements included herein).  While all of the significant accounting policies impact the Company's Consolidated Financial Statements, some of the policies may be viewed to be more critical.  The more critical policies are those that are most important to the portrayal of the Company's financial condition and results of operations and that require management's most difficult, subjective and/or complex judgments and estimates.   Management bases its judgments and estimates on historical experience and various other factors that are believed to be reasonable under the circumstances.  The results of judgments and estimates form the basis for making judgments about the Company's value of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from those estimates under different assumptions or conditions.   Management believes the following are its most critical accounting policies because they require more significant judgments and estimates in preparation of its consolidated financial statements.

Royalty fees from franchised stores represent a 5% fee on net retail and wholesale sales of franchised units.  Royalty revenues are recognized on an accrual basis using actual franchise receipts.  Generally, franchisees report and remit royalties on a weekly basis.  The majority of month-end receipts are recorded on an accrual basis based on actual numbers from reports received from franchisees shortly after the month-end.  Estimates are utilized in certain instances where actual numbers have not been received and such estimates are based on the average of the last 10 weeks actual reported sales.

The Company recognizes franchise fee revenue on the store’s opening. Direct costs associated with the sale of franchises are deferred until the franchise fee revenue is recognized.  These costs include site approval, construction approval, commissions, blueprints and training costs.

The Company earns a licensing fee from the sale of BAB branded products, which includes coffee, cream cheese, muffin mix and par baked bagels from a third-party commercial bakery to the franchised and licensed units.

Property and equipment are recorded at cost.  Improvements and replacements are capitalized, while expenditures for maintenance and routine repairs that don't extend the life of the asset are charged to expense as incurred.  Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets.  Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation.  Estimated useful lives for the purpose of depreciation and amortization are 3 to 7 years for property and equipment and 10 years, or the term of the lease if less, for leasehold improvements.

Following the guidelines contained in ASC 350, the corporation tests goodwill and intangible assets that are not subject to amortization for impairment annually or more frequently if events or circumstances indicate that impairment is possible.  Goodwill and intangible assets were tested at the end of the first fiscal quarter, February 28, 20112012 and 20102011 and it was found that the carrying value of goodwill and intangible assets were not impaired.

The impairment tests performed at February 28, 20112012 and 20102011 were based on a discounted cash flow model using management’s business plan projected for expected future cash flows.  Based on the computation of the discounted cash flows, it was determined that the fair value of goodwill and intangible assets were not impaired.

Certain financial instruments potentially subject the Company to concentrations of credit risk.  These financial instruments consist primarily of royalty and wholesale accounts receivables.   The Company believes it has maintained adequate reserves for doubtful accounts.  The Company reviews the collectibility of receivables periodically taking into account payment history and industry conditions.

A valuation allowance is the portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized.

As of November 30, 2011,2012, the Company has cumulative net operating loss carryforwards expiring between 20122013 and 2029 for U.S. federal income tax purposes of approximately $5,857,000.$4,676,000.   A valuation allowance has been established for $1,756,000$1,249,000 at November 30, 20112012 for the deferred tax benefit related to those loss carryforwards and other net deferred tax assets for which it is considered more likely than not that the benefit will not be realized. (See Note 3 of the audited consolidated financial statements included herein.)

Management does not believe that there are any other recently issued and effective, or not yet effective, pronouncements as of November 30, 20112012 that would have, or are expected to have, any significant effect on the Company’s consolidated financial position, cash flows or results of operations.

Stockholders and Board of Directors of BAB, Inc.

We have audited the accompanying consolidated balance sheets of BAB, Inc. and subsidiariesSubsidiaries as of November 30, 20112012 and 20102011 and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BAB, Inc. and subsidiaries as of November 30, 20112012 and 2010,2011, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

By:  /s/ Sassetti LLC

At November 30, 20112012 there are 360,400350,000 of unexercised options that are not included in the computation of dilutive EPS because their impact would be antidilutive due to the market price of the common stock being higher than the option prices.  At November 30, 20102011 there were 368,373360,000 unexercised options that were not included in diluted EPS because their impact would be antidilutive due to the market price of the common stock being higher than the option prices.

The Company recognizes compensation cost using a fair-value based method for all share-based payments granted after November 30, 2006, plus any awards granted to employees up through November 30, 2006 that remain unvested at that time.  The Company had no recorded compensation expense arising from share-based payment arrangements in payroll-related expenses on the Consolidated Statement of Income for the Company’s stock option plan of $9,645in 2012 and $9,948$10,000 for the yearsyear ended November 30, 2011 and 2010, respectively.2011.

The carrying amounts of financial instruments including cash, accounts receivable, notes receivable, accounts payable and short-term debt approximate their fair values because of the relatively short maturity of these instruments.  The carrying value of long-term debt, including the current portion, approximate fair value based upon market prices for the same or similar instruments.

Management does not believe that there are any other recently issued and effective, or not yet effective, pronouncements as of November 30, 20112012 that would have, or are expected to have, any significant effect on the Company’s consolidated financial position, cash flows or results of operations.

As of November 30, 20112012 the Company has net operating loss carryforwards expiring between 20122013 and 2029 for U.S. federal income tax purposes of approximately $5,857,267.$4,676,000.  The Company routinely reviews the future realization of tax assets based on projected future reversals of taxable temporary differences, available tax planning strategies and projected future taxable income.  A valuation allowance has been established for $1,755,814$1,249,000 and $1,857,466$1,756,000 as of November 30, 20112012 and 2010,2011, respectively, for the deferred tax benefit related to those loss carryforwards and other deferred tax assets, that are more likely than not that the deferred tax asset will not be realized.  The decrease in the valuation allowance of $101,652$507,000 in 20112012 is a result of expiration of $339,000 of the 1997 net operating loss, the recognition of a portion of the net operating loss carryforwards and an increase in deferred tax liabilities relating primarily to depreciation and amortization.

On September 6, 2002, the Company signed a note payable requiring annual installments of $35,000, including interest at a rate of 4.75% per annum, for a term of 15 years, in the original amount of $385,531.$386,000.  The Company purchased and retired 1,380,040 shares of BAB common stock from a former stockholder.  The balance of this note payable was $152,584$125,000 and $179,078$153,000 as of November 30, 20112012 and 2010,2011, respectively.

As of November 30, 2011,2012, annual maturities on long-term obligations due are as follows:

The Board of Directors declared a cash distribution/dividend on February 27, May 25 and September 6, 2012 of $0.01 per share, paid April 9, July 6, and October 4, 2012, respectively.

The Board of Directors declared a $0.01 quarterly and $0.02 special cash distribution/dividend on December 6, 2010, paid January 5, 20112011.  The Board of Directors declared a $0.01 quarterly cash distribution/dividend and a $0.02 special distribution/dividend andon   February 25, May 23 and September 6, 2011, a distribution/dividend of $0.01 per share was declared and paid April 15, July 5, and October 4, 2011.

TheOn December 3, 2012 the Board of Directors declared a $0.01 quarterly and a $0.04 special cash distribution/dividend of $0.01 per sharepayable on December 7, 2009, March 9, May 20, and September 3, 2010, paid January 4, April 14, July 8 and September 3, 2010.27, 2012.

In May 2001, the Company approved a Long-Term Incentive and Stock Option Plan (“Plan”).  The Plan reserved 1,400,000 shares of common stock for grant, all of which have been granted as of November 30, 2009.  The Plan terminated on May 25, 2011.  The Plan permitted granting of awards to employees and non-employee Directors and agents of the Company in the form of stock appreciation rights, stock awards and stock options.  The Plan was administered by a Committee of the Board of Directors appointed by the Board.  The Plan gave broad powers to the Board and Committee to administer and interpret the Plan, including the authority to select the individuals to be granted options and rights and to prescribe the particular form and conditions of each option or right granted.

Under the Plan, the exercise price of each option equals the market price of the Company’s stock on the date of grant.  The options granted vary in vesting from immediate to a vesting period over five years.  The options granted are exercisable within a 10 year period from the date of grant.  All stock issued from the granted options must be held for one year from date of exercise.  Options issued and outstanding expire on various dates through November 28, 2016.  The range of exercise prices of options outstanding at November 30, 20112012 are $0.46 to $1.38.

During fiscal 20112012 and 20102011 no options were granted or exercised.  Activity under the Plan during the two years ended November 30 is as follows:

The aggregate intrinsic value in the table below is before income taxes, based on the Company’s closing stock price of $0.58$0.63 as of the last business day of the period ended November 30, 2011.2012.  There were no options exercised in 20112012 or 2010.2011.

The Company rents its Corporate office, and rented its former Company-owned store location under leases which require it to pay base rent, real estate taxes, insurance and general repairs and maintenance.  In October 2011, theThe Corporate office lease was extendedis through September 30, 2018. The former Company-owned store lease will expireexpired December 31, 2011 and will not be renewed.  The Company-owned store was sold November 30, 2011 and a one month sub-lease agreement with the new franchisee was signed.  The franchisee entered into its own lease with the landlord effective January 1, 2012.  Rent expense for the years ended November 30, 2012 and 2011 was $153,000 and 2010 was $149,089 and $156,836,$224,000, respectively.  Monthly rent is recorded on a straight-line basis over the term of the lease with a deferred rent liability being recognized.  As of November 30, 2011,2012, future minimum annual rental commitments under the Corporate lease are as follows:

The Company maintains a qualified 401(k) plan which allows eligible participants to make pretax contributions.  Company contributions are discretionary.  The Company did not make a contribution in 20112012 or 2010.2011.

Segment information has been reclassified to reflect licensing fees revenue, goodwill and certain definite lived assets and the amortization expense related to these intangibles in Systems, so as to reflect a truer segment income stream and asset relationship, as the business is focused on the franchise division.

The following table presents segment information for the years ended November 30, 20112012 and 2010:2011: There were no sales to any individual customer during either year that represented 10% or more of net sales.