5

                            SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934


FILED  BY  REGISTRANT     [X]
FILED  BY  A  PARTY  OTHER  THAN  THE  REGISTRANT     [  ]
CHECK  THE  APPROPRIATE  BOX:
     [  ]     PRELIMINARY  PROXY  STATEMENT
     [  ]     CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14A-6(E)14A-B(E)(2))
     [X]     DEFINITIVE  PROXY  STATEMENT
     [  ]     DEFINITIVE  ADDITIONAL  MATERIALS
     [  ]     SOLICITING  MATERIAL  PURSUANT  TO  240.14A-11(C)  OR  240.14A-12





                                 PIZZA INN, INC.
                 (NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

PAYMENT  OF  FILING  FEE  (CHECK  THE  APPROPRIATE  BOX):
[X]     NO  FEE  REQUIRED.

[ ]     FEE COMPUTED ON TABLE BELOW PER EXCHANGE ACT RULES 14A-6(I)(1) AND 0-11.
     1)  TITLE  OF EACH CLASS OF SECURITIES TO WHICH TRANSACTION APPLIES:
     2)  AGGREGATE  NUMBER  OF  SECURITIES  TO  WHICH  TRANSACTION  APPLIES:
     3)  PER UNIT PRICE OR OTHER UNDERLYING VALUE OF TRANSACTION COMPUTED
         PURSUANT TO EXCHANGE ACT RULE 0-11 (SET FOR THE AMOUNT ON WHICH
         THE FILING FEE IS CALCULATED AND  STATE  HOW  IT  WAS  DETERMINED):
     4)  PROPOSED  MAXIMUM  AGGREGATE  VALUE  OF  TRANSACTION:
     5)  TOTAL  FEE  PAID:

[  ]     FEE  PAID PREVIOUSLY WITH PRELIMINARY MATERIALS.
[ ]      CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY EXCHANGE ACT
         RULE 0-11(A)(2)AND IDENTIFY THE FILING FOR WHICH THE OFFSETTING FEE
         WAS PAID PREVIOUSLY.  IDENTIFY THE PREVIOUS FILING BY REGISTRATION
         STATEMENT NUMBER, OR THE FORM OR SCHEDULE AND THE DATE OF ITS  FILING.
         1)  AMOUNT PREVIOUSLY PAID:
         2) FORM, SCHEDULE OR REGISTRATION STATEMENT NO:
         3)  FILING  PARTY:
         4)  DATE  FILED:




                                 PIZZA INN, INC.
                             3551  PLANO  PARKWAY
                          THE  COLONY,  TEXAS  75056
                               (469)  384-5000

                   NOTICE  OF  ANNUAL  MEETING  OF  SHAREHOLDERS

                       TO  BE  HELD  FEBRUARY 11,DECEMBER  15,  2004

To  our  Shareholders:

     The  Annual Meeting of Shareholders of Pizza Inn, Inc. (the "Company") will
be  held  at  the  Company's  corporate offices, 3551 Plano Parkway, The Colony,
Texas  75056,  on  Wednesday, February 11,December 15, 2004, at 11:10:00 a.m., Dallas time, for
the  following  purposes:

     1.     To  elect  threefour  Class  III  directors;

     2.     To  consider  and  vote upon a proposal to approve the adoption of a
stock  award  plan  for  non-employee  directors as a successor plan to the 1993
Outside  Directors  Stock  Award  Plan  that  expired  in  2003;

     3.     To consider and vote upon a proposal to approve the adoption of a
stock award plan for employees as a successor plan to the 1993 Employee Stock
Award Plan  that  expired  in  2003;

     4.     To consider and vote upon a proposal to amend the Company's Restated
Articles  of  Incorporation  to  declassify  the  board  of  directors;  and

     2.5.     To transact such other business as may properly come before the
meeting or  any  postponements  or  adjournments  thereof.

On October 27, 2003,These  items  are  more fully described in the Companyproxy statement, which is part of
this  notice.  We have not received a notice from Newcastle Partners,
L.P.  ("Newcastle")of other matters that it  intends  to  (1)  nominate  a  competing slate of
directorsmay be properly
presented  at  the  Annual Meeting, (2) present at the Annual Meeting proposals to
repeal certain of the amendments to the Company's bylaws adopted by the Board of
Directors on December 18, 2002 (the "Bylaw Amendments") and (3) seek approval to
have  all  of  its  expenses  incurred  in  connection  with  any proxy or other
solicitation materials reimbursed by the Company. Newcastle has also advised the
Company  that  it  intends  to  solicit  shareholders through a proxy statement.

     THE  BOARD  RECOMMENDS  A  VOTE  "FOR"  THE ELECTION OF ITS NOMINEES ON THE
ENCLOSED  WHITE  PROXY  CARD.  THE  BOARD FURTHER RECOMMENDS THAT YOU REJECT ANY
PROXY  SOLICITATION  BY  NEWCASTLE  AND  THAT  YOU  VOTE  "AGAINST"  NEWCASTLE'S
PROPOSALS TO REPEAL THE BYLAW AMENDMENTS AND TO SEEK REIMBURSEMENT FOR ITS PROXY
SOLICITATION EXPENSES, IF SUCH PROPOSALS ARE PRESENTED AT THE ANNUAL MEETING. WE
URGE  YOU  TO  VOTE "FOR" THE BOARD'S NOMINEES NAMED IN THIS PROXY STATEMENT AND
NOT  TO  EXECUTE  ANY  PROXY  CARD  SENT  TO  YOU  BY  NEWCASTLE.annual  meeting.

Only  shareholders  of  record  at the close of business on December 31, 2003October 18, 2004 are
entitled  to  notice  of,  and to vote at, this meeting and any postponements or
adjournments  thereof.

     By  Order  of  the  Board  of  Directors,

                                                  B.  Keith  Clark/s/ Rod J. McDonald

    Rod  J.  McDonald
The  Colony,  Texas                              Corporate  Secretary
January 13,November 16,  2004

     THIS  ANNUAL MEETING IS OF PARTICULAR IMPORTANCE TO ALL SHAREHOLDERS OF THE
COMPANY BECAUSE OF THE ATTEMPT BY NEWCASTLE TO TAKE OVER YOUR BOARD.

     WHETHER  OR  NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, PLEASE COMPLETE,
DATE,  AND SIGN THE ENCLOSED WHITE PROXY, CARD, AND MAIL IT IN THE STAMPED ENVELOPE ENCLOSED
FOR  YOUR  CONVENIENCE. THE ENCLOSED WHITE PROXY CARD IS REVOCABLE AT ANY TIME PRIOR TO ITS
USE.
                             YOUR VOTE IS IMPORTANT.


                                 PIZZA INN, INC.
                               3551  PLANO  PARKWAY
                           THE  COLONY,  TEXAS  75056
                                (469)  384-5000

                            PROXY  STATEMENT  FOR  THE
                        ANNUAL  MEETING  OF  SHAREHOLDERS

                        TO  BE  HELD  FEBRUARY 11,DECEMBER  15,  2004

     The  Board  of  Directors  of

     Pizza  Inn,  Inc.,  a  Missouri  corporation (the "Company"), is soliciting
proxies to be voted at the Annual Meeting of Shareholders (the "Annual Meeting")
to  be  held at the Company's corporate offices, 3551 Plano Parkway, The Colony,
Texas 75056, on Wednesday, February 11,December 15, 2004, 11:at 10:00 a.m., Dallas time, and at
any  postponements  or  adjournments  thereof.  This  Proxy  Statement  and  the
enclosed  form  of  proxy  were first mailed to the Company's shareholders on or
about  January 13,November  16,  2004.

     If  the  enclosed WHITE proxy card is signed and returned before the Annual Meeting, it will be
voted  in  accordance  with the directions on the proxy.proxy or, if no directions are
made,  by  the  proxies  named  therein  in their discretion.  A proxyshareholder may
be revokedrevoke  a  proxy  at  any  time  before it is voted by execution of a subsequent
proxy,  voting  the shares in person at the Annual Meeting, or by signedgiving written
notice  to Pizza Inn, Inc., c/o American StockSecurities Transfer 59  Maiden  Lane,  New  York,  NY  10007,Corporation, Transfer Agent,
2591  Dallas  Parkway,  Suite  102, Frisco, Texas 75034 at any time prior to the
close  of  the  polls  at  the  Annual  Meeting  stating that the proxy has been
revoked.  If  you hold shares through a bank or bybrokerage firm, you must contact
that firm to revoke any prior voting in personinstructions.  The Company must receive the
notice  or  a  new  proxy  card  before the vote is taken at the Annual Meeting.

                          OUTSTANDING  CAPITAL  STOCK

     The record date for shareholders entitled to notice of, and to vote at, the
Annual  Meeting  is  December 31, 2003.October  18,  2004.  At the close of business on that date,
there  were  outstanding  10,073,67410,138,674  shares  of  Common  Stock,  $.01 par value per
share
("Common  Stock").  No  other  class of securities of the Company is entitled to
notice  of,  or  to  vote  at,  the  Annual  Meeting.

                       ACTION  TO  BE  TAKEN  AT  THE  MEETING

     The  accompanying  WHITE  proxy,  card, unless the shareholder otherwise specifies in the
proxy,  will  be  voted:

1.     FOR  the  election of the threefour Class III director nominees named herein, to
serve  for  a  term  of two years each (or one year if the proposal to amend the
Company's  Restated  Articles  of  Incorporation  is  adopted)  or  until  their
respective  successors  are  elected  and  qualified;

2.     AGAINSTFOR  the  repeal of certainapproval of the amendmentsadoption of a stock award plan for non-employee
directors  as  a  successor  plan to the Company's bylaws
adopted  by1993 Outside Directors Stock Award Plan
that  expired  in  2003;

3.   FOR the Boardapproval of Directors on December 18, 2002, if Newcastle Partners,
L.P.  ("Newcastle")  presentsthe adoption of an incentive stock award plan
for  employees  as  a  proposal at the Annual Meeting to repeal those
amendments;

3.     AGAINST the reimbursement by the Company of costs and expenses (including
any  litigation  expenses)  incurred  by  Newcastle  in  connection  with  its
solicitation  of  proxies  in  connection with this Annual Meeting, if Newcastle
presents  a  proposal  at  the  Annual Meeting for the Company to reimburse such
costs  and  expenses  and/or  to  recommendsuccessor plan to the Board1993 Employee Stock Award Plan that
expired  in  2003;

4.     FOR  the  amendment  of  Directors that the  Company  reimburse  Newcastle  for  such  expenses;Company's  Restated  Articles  of
Incorporation  to  declassify  the  board  of  directors;  and

4.5.     In  the  discretion of the proxy holders, as to the transaction
of  such  other  business  as  may  properly  come  before  the  meeting  or any
postponements  or  adjournments  thereof.

     The  Board  of Directors is not presently aware of any other business to be
brought  before  the  Annual  Meeting.

                                QUORUM AND VOTING

     The  presence,  in  person or by proxy, of the holders of a majority of the
outstanding  shares  of  Common Stock is necessary to constitute a quorum at the
Annual  Meeting.  In  deciding  all  questions,  a  holder  of  Common  Stock (a
"Shareholder")  is  entitled  to one vote, in person or by proxy, for each share
held  in  his  name  on  the  record date. Cumulative voting for the election of
directors  is not permitted. Thus, a Shareholder is not entitled to cumulate his
votes  and  cast  them  all  for  any  single nominee or to spread his votes, so
cumulated,  among  more  than  one  nominee.  Directors  mustwill  be  elected  by a
plurality  of  the votes cast.  To be elected as a director, a candidate must be
one  of  the threefour candidates who receive the most votes out of all votes cast at
the  Annual  Meeting.  With  respect to all other matters voted on at the Annual
Meeting,  the  affirmative  vote  of  the  holders  of  a majority of the shares
present,  in  person  or  by  proxy,  at the Annual Meeting will be required for
passage.

     A  Shareholder who is present, in person or by proxy, and who withholds his
vote  in  the election of directors, will be counted for purposes of determining
whether  a  quorum  exists,  but the withholding of his vote will not affect the
election of directors.  A Shareholder who is present, in person or by proxy, and
who  abstains  from voting on other proposals, will be counted for purposes of a
quorum,  and  the  abstention  will  have  the same effect as a vote against the
proposals.  Broker  non-votes  will be considered shares present and counted for
purposes  of  determining whether a quorum exists if voting instructions are given
as  to at least one of the matters to be voted on;exists; however, the presence of such
shares  will  have  no  effect  on  the outcome of the vote.  If a quorum is not
present,  in  person or by proxy, the meeting may adjournbe postponed or adjourned from
time  to  time  until  a  quorum  is  obtained.

     With  respect  to the election of directors, theThe  enclosed WHITE proxy, card, if executed and returned, will be voted as directed on
the proxy or, in the absence of such direction, FORfor the election of the nominees
named onas  directors.  If  any  other  matters  properly  come  before the WHITEmeeting, the
enclosed  proxy card  as  directors.will be voted by the proxy holders in accordance with their best
judgment. The Board believes that all the nominees will be available to serve as
directors.  If any nominee is unable to serve, the Board may decide to do one of
two  things. The Board may recommend a substitute nominee, or the Board may fill
the  vacancy later. The shares represented by all valid proxies may be voted for
the  election  of  a  substitute  if  one  is  nominated.


                                  On October 27, 2003, the Company received a notice from Newcastle Partners, L.P.
("Newcastle")  that it intends to (1) nominate a competing slate of directors at
the  Annual  Meeting,  (2) present at the Annual Meeting proposals to repeal the
Bylaw  Amendments  and (3) seek approval to have all of its expenses incurred in
connection  with  any  proxy  or  other solicitation materials reimbursed by the
Company.  If  Newcastle  presents  the  proposals  mentioned above at the Annual
Meeting,  the enclosed WHITE proxy card, if executed and returned, will be voted
as  directed  on  the  proxy  or, in the absence of such direction, AGAINST such
proposals.

If  any  other matters properly come before the meeting, the enclosed proxy will
be  voted  by  the  proxy  holders  in  accordance  with  their  best  judgment.

                                THE PROXY CONTEST

     As  of  November  15, 2003, Newcastle was the beneficial owner of 3,583,780
shares  of  the  Company's Common Stock, which represents over 35% of the issued
and  outstanding Common Stock of the Company.  The majority of these shares were
purchased  pursuant to an option granted in December 2002 to Newcastle by Mr. C.
Jeffrey  Rogers,  the  Company's  former Chief Executive Officer. Pursuant to an
agreement  with  the  Company  entered  into  at the time Newcastle acquired the
shares  from  Mr.  Rogers,  the  Board  of  Directors  was required to appoint a
representative  of  Newcastle  to  each  class  of directors of the Company.  On
December  19,  2002, Mark E. Schwarz and Steven J. Pully were appointed to serve
as  Newcastle's representatives on the Board of Directors in accordance with the
Company's  agreement  with  Newcastle.

     At the meeting of the Board of Directors on August 26, 2003, the Nominating
and  Corporate  Governance  Committee  requested  that  the  Board  approve  its
recommendation  to  re-nominate  all of the existing directors whose terms would
expire  at  the  upcoming  annual  meeting.  Mr. Schwarz stated that he had been
interviewing  potential director nominees for the Board to consider, but had not
yet  finished  his  interview  process.  At  Mr. Schwarz's request, the Board of
Directors  deferred  the  nomination  process until the next regularly scheduled
Board  meeting  on  October  14,  2003.

On October 13, 2003, the Board received a memorandum from Mr. Schwarz listing 18
potential  candidates  for  the Board to consider nominating for election at the
annual  meeting.  At the October 14, 2003 Board meeting, Mr. Schwarz stated that
he  had  asked  Mr.  Taylor  and  Mr.  Ungerman  to  step down from the Board of
Directors  and  that  two  new persons should be nominated to replace them.  The
other  members  of  the  Board  inquired  as to whether Mr. Schwarz had specific
nominees  for  the  Board  to  consider.  Mr. Schwarz stated that he had not yet
finished  his  interview  process  and  that  he  did  not  have  any  specific
recommendations  for  the  Board  at  that  time.

During  the  October 14, 2003 meeting, the Board of Directors determined that it
needed  to  make a decision as to the nominees for the annual meeting due to the
October  27,  2003  deadline  for  filing  the  Company's  proxy  statement. The
Company's  proxy  statement was due 120 days after its fiscal year ended on June
28, 2003. The members of the Nominating and Corporate Governance Committee again
proposed  that  all three existing directors whose terms were expiring should be
re-nominated.  The  Board  members discussed that the experience, qualifications
and  familiarity  with the Company's business made the existing directors valued
members  of  the Board. The Board also took into consideration the fact that Mr.
Schwarz was not prepared at that time to make any specific recommendation to the
Board.  The  Board voted to re-nominate all three existing directors who were up
for  re-election,  with  Mr.  Schwarz and Mr. Pully voting against the proposal.

On  October  27,  2003, the Company received a letter from Newcastle stating its
intent  to nominate Steven J. Pully, Barry M. Barron, Sr., and Robert B. Page to
the  Board  of  Directors  of  the  Company at the Annual Meeting and to solicit
proxies  from  shareholders  with  respect  to  the  election  of  its nominees.

     On  November  7,  2003,  the  Company  received  a  subsequent  letter from
Newcastle stating that it intended to substitute Ramon D. Phillips for Robert B.
Page  as  one  of  its  nominees  for  election  at  the  Annual  Meeting.

     On  November  10,  2003,  the  Board  of  Directors  held  two meetings and
discussed,  among other things, certain matters related to the proposed director
nominations.  At  that time, the Board of Directors postponed the Annual Meeting
until  January  21,  2004  in order to permit the Board and Newcastle additional
time  to  discuss  the  nominees to be proposed by the Board of Directors at the
Annual  Meeting  and  to  evaluate  additional information regarding whether the
election  of  two  new  directors proposed by Newcastle could cause a "Change of
Control" as defined in the employment agreements between the Company and each of
Ronald  W.  Parker,  B.  Keith  Clark,  Ward T. Olgreen and Shawn M. Preator, as
discussed  below.

     On  November  11,  2003,  the  Company  received  a  subsequent letter from
Newcastle  stating  that  it  intends  to substitute Robert B. Page for Barry M.
Barron,  Sr.  as  one  of  its  nominees  for  election  at  the Annual Meeting.

     On  November 16, 2003, the Board of Directors met and further discussed the
"Change of Control" issue and Newcastle's desire for two additional Board seats.

     On  December 4, 2003, Newcastle presented a proposal regarding a resolution
of  its  dispute  with  the  Company  regarding  the proxy contest threatened by
Newcastle.  As proposed by Newcastle, it would withdraw its alternative slate of
directors  and  support a mutually agreed slate of directors under the following
conditions:

(i)     Mr.  Page  would  be  presented on the Company slate for election to the
Board,  one of each of Messrs. Schwarz, Pully or Page would be appointed to each
Board  committee,  and  Mr.  Pully  would  be  named  Chairman  of  the  Board;
(ii)     the  Board  of Directors would designate each of Messrs. Schwarz, Pully
and Page as an incumbent director as defined in the Company's existing executive
employment  contracts,  and each employee with a contract would waive the Change
of  Control  provision  with  regards  to  these  three  individuals;
(iii)     the  Board  will  repeal  the bylaw amendments adopted on December 18,
2002,  agree  not  to  change  the bylaws or the employment contracts before the
January  21,  2004  meeting,  and agree that any future changes to the Company's
bylaws  or the existing executive employment contracts can only be approved by a
supermajority  vote  of  five  of  the  seven  directors;  and
(iv)     the  Company  will  reimburse  Newcastle  for  all its legal and travel
expenses  related  to these negotiations and its threatened proxy contest, which
expenses  are  currently  undetermined.

     After  review  and  discussion  by  the  five  non-Newcastle directors (the
"Existing Directors"), a counter proposal was submitted to Newcastle on December
8, 2003.  Following the points as listed above, the Existing Directors responded
as  followings:

(i)     the  Existing  Directors  are  not  opposed to including Mr. Page on the
Company  slate  or  the  committee  representation request, but believe that the
Chairman  of  the  Board  should  continue to be elected on an annual basis by a
majority  of  the  Board  of  Directors;
(ii)     the  Board  of  Directors  does  not  have  the  ability to designate a
director as incumbent as defined in the Company's executive employment contracts
and  the  individual  employees  have  not agreed to waive the Change of Control
provision;
(iii)     the  Existing  Directors  are  not  opposed  to  revising the relevant
sections  of  the  bylaws  in a manner to be agreed upon with Newcastle, but are
opposed  to  a  supermajority  voting  requirement;
(iv)     the Company and Newcastle will agree to bear their own legal and travel
expenses.

The Board  of Directors was unable  to reach  a mutually agreeable compromise on
these issues.

On  January 6, 2004, the Board of Directors met and voted to postpone the Annual
Meeting until February 11, 2004 to allow sufficient time for all shareholders to
receive  and  consider  the  Company's  proxy solicitation materials and to vote
prior  to  the  Annual  Meeting.

     The Board of Directors opposes the election of Messrs. Phillips and Page to
the Board of Directors. Although Mr. Page was among the candidates listed in the
memorandum  provided  by  Mr.  Schwarz  to the Board of Directors on October 13,
2003, he was not discussed at the October 14, 2003 meeting.  In addition, he has
not  been  discussed  at  subsequent  Board  meetings, none of the non-Newcastle
representatives of the Board have spoken with Mr. Page and, therefore, the Board
of  Directors  has not had an adequate opportunity to assess his qualifications.
From the receipt of the October 13, 2003 candidate memorandum to the October 27,
2003 filing date, there was not sufficient time to contact and adequately assess
the  qualifications  of  18 potential candidates.  In addition, Mr. Page was not
identified by Newcastle as one of its director designees until October 27, 2003.
A  scheduled meeting between Mr. Page and Mr. Parker in October was cancelled by
Newcastle.  Mr.  Page  was  not discussed at the Company's two November 10, 2003
meetings  discussed  above because Mr. Page had been removed by Newcastle as one
of  its  director  designees.  Furthermore, the Board believes that the existing
directors  will be better able to serve the interests of the shareholders of the
Company  based  on  their  experience,  qualifications  and familiarity with the
Company's  business.

     The  employment  agreements for each of Mr. Ronald Parker, Mr. Keith Clark,
Mr.  Shawn  Preator  and Mr. Ward Olgreen provide that that if the employment of
any  of these executive officers were to terminate for any reason (including the
voluntary  termination  of  employment by such officer) within 12 months after a
"Change of Control", the Company would be required to make a lump sum payment to
the  officer  in  the following amounts: $5.4 million to Mr. Parker, $762,000 to
Mr.  Clark,  $630,000 to Mr. Olgreen and $597,000 to Mr. Preator.  The aggregate
of  these  payments  for  which  the  Company  would  be  obligated  to  pay  is
approximately  $7.4  million.  Such  amounts  include tax gross-up payments as a
result  of  excise  taxes that such persons would be required to pay due to such
payments  being  deemed  to  be  "excess  parachute payments" under the Internal
Revenue  Code.  Of this amount, approximately $3.3 million of the amount paid to
Mr.  Parker,  $451,000  of  the amount paid to Mr. Clark, $362,000 of the amount
paid  to Mr. Olgreen and $369,000 of the amount paid to Mr. Preator would not be
deductible  by  the  Company  for  federal  income  tax  purposes.

In  addition,  if  Mr.  Parker were no longer the Chief Executive Officer of the
Company,  the  Company  would  be in default under approximately $9.5 million of
indebtedness  owed  to  Wells  Fargo  Bank  (Texas). Additionally, the Company's
interest  rate  swap agreement will be in default, and as of September 28, 2003,
the  payoff  amount  was  approximately  $800,000.

Under each of the employment agreements, a "Change of Control" is deemed to have
occurred if "individuals who, as of [December 16, 2002], constitute[d] the Board
(the  "Incumbent  Board") cease for any reason to constitute at least a majority
of  the  Board;  provided,  however,  that  any  individual  becoming a director
subsequent  to [December 16, 2002] whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual  were  a  member  of  the  Incumbent  Board,  but excluding, for this
purpose,  any  such  individual  whose  initial assumption of office occurs as a
result  of  either  an  actual or threatened election contest (as such terms are
used  in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange
Act  of  1934) or other actual or threatened solicitation of proxies or consents
by  or  on  behalf  of  a  Person  other  than  the  Board."

     Counsel  to  the  Company  has  delivered  to  the  Board its written legal
opinion  that,  subject  to  the  assumptions,  limitations,  qualifications and
exceptions  contained  therein,  it  is  of  the opinion that a Texas court in a
properly  presented and argued case should conclude that Messrs. Schwarz, Pully,
Phillips  and  Page  would  not  constitute  members  of the Incumbent Board and
therefore, if the Newcastle nominees are elected to the Board in connection with
a  proxy  contest, a "Change of Control" as defined in the employment agreements
discussed  above  would be deemed to occur. The opinion of counsel is based upon
certain  assumptions,  limitations,  qualifications  and exceptions, including a
certificate  from  the  Company  setting  forth  the  factual  background of the
Company's  relationship  with  Messrs.  Schwarz and Pully, and specifically, the
circumstances  surrounding  the  appointment of Messrs. Schwarz and Pully to the
Board  in  December 2002. The opinion of counsel also notes the absence of legal
precedent concerning the matters covered by the opinion and states that there is
no  assurance  that  a  Texas court would agree with counsel's interpretation of
such  matters.  Counsel  for  Newcastle has informed counsel to the Company that
they  disagree  with  this opinion. Additionally, Messrs. Schwarz and Pully have
informed  the  Board  that  they  believe  themselves to be incumbent directors.

     The  Board  of  Directors  and  management  believe  that  electing Messrs.
Phillips  and  Page (or Mr. Barron) to the Board of Directors is contrary to the
best interests of the Company's shareholders.  The Board of Directors recommends
that  you  reject  Newcastle's nominees and vote FOR the Board's nominees on the
enclosed  WHITE  proxy  card.  WE URGE YOU NOT TO EXECUTE ANY PROXY CARD SENT TO
YOU  BY  NEWCASTLE.

                                  PROPOSAL ONE:

                              ELECTION OF DIRECTORS

     The  Company's  Restated  Articles of Incorporation and By-LawsBylaws provide that
the Board of Directors shall be divided into two Classes.  Currently, a former
Board  member holds one additional Board seat in a non-voting advisory capacity.
The  advisory position is not elected, but may be appointed from time to time by
vote  of  the  Board of Directors for a period of time as approved by the Board.
The terms of the threefour
Class  III  directors  expire  at the Annual Meeting.  The Board has nominated for
election  at  the  Annual  Meeting  all of the incumbent Class III directors. Each
nominated  director  will  serve  for  a term of two years.  Each nominee of the
Board has expressed his intention to serve the entire term for which election is
sought.sought,  but  if any of them is unable to serve at the time the election occurs,
the  proxy will be voted for the election of another nominee to be designated by
the Board. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"FOR EACH OF THE THREEFOUR NOMINEE
DIRECTORS  LISTED  BELOW.DIRECTORS.

On  October  20,  2004,  the Board of Directors approved a proposal to amend the
Company's  Restated  Articles  of  Incorporation  to  delete  Section  8.2,  the
provision  that divides the Board into two classes of directors. The following  table  listsamended and
substituted  Section  8.2  would  provide  for one class of directors. Under the
namesamendment,  if approved by the shareholders, the four director nominees proposed
in  this  proxy,  if  elected, will hold office until the 2005 annual meeting of
shareholders,  at  which  time  they,  or  their successors, would be subject to
election  as  members  of  a  single  class  of seven directors. Those directors
currently referred to as Class II directors, who were elected at the 2003 annual
meeting  of  shareholders  to  hold  office  until  the  2005  annual meeting of
shareholders,  will  complete  their  terms  at  the  2005  annual  meeting  of
shareholders,  at  which  time  they,  or  their successors, would be subject to
election  as members of a single class of seven directors. Members of the single
class,  or  their  successors,  would  be subject to re-election every year. The
proposal  to  amend the Restated Articles of Incorporation requires the approval
of holders of a majority of the shares present in person or represented by proxy
and  ages,entitled  to  vote.

If  the  proposed amendment is not approved by the shareholders, the two classes
of  directors  will  continue,  and  the four Class I nominees, if elected, will
serve  two  year  terms.

Following  is  the  biographical information, as of November 15, 2003,October 1, 2004, of the threefour
nominee directors, the four Class Ithree directors whose terms of office will continue after
the  Annual  Meeting, the advisory director,  the  class  to  which  each  director has been or will be
elected,  the  year  in  which  each  director was first elected, and the annual
meeting  (assuming  that  it  is  held  in  December)  at which the term of each
director  will  expire.

                                       Director     Term
Nominee  Directors                          Age     Class      Since    Expires
- ------------------                          ---     -----      -----    -------
Steve A. Ungerman                            59       II        1990       2003
F. Jay Taylor                                80       II        1994       2003
Steven J. Pully                              43       II        2002       2003

Continuing  Directors
- ---------------------NOMINEES

     Bobby L. Clairday, 60        I        1990       2004
Ronald W. Parker                             53        I        1993       2004
Butler E. Powell                             65        I        1998       2004
Mark E. Schwarz                              43        I        2002       2004

Advisory  Director
- ------------------
Ramon D. Phillips (a)                        70       n/a       2002        n/a

(a)        Mr.  Phillips  previously  served  as  a  Class  I Director from 1990
through 2002. The position  of Advisory Director is subject to Board discretion.


                               EXECUTIVE OFFICERS

 The following table sets forth certain information, as of November 15, 2003,
regarding  the  Company's  executive  officers:
                                                                    Executive
                                                                      Officer
Name                 Age     Position                                   Since
- ----                 ---     --------                                   -----
Ronald W. Parker      53     President and Chief Executive Officer       1992

B.  Keith  Clark      41     Senior  Vice President-  Corporate  Development,
                             Secretary   and  General  Counsel           1997

Ward  T.  Olgreen     44     Senior Vice President of Franchise Operations
                             and Concept Development                     1995

Shawn  M.  Preator    34     Chief Financial Officer and Vice President of
                              Distribution                               1999

Danny K. Meisenheimer 43     Vice President of Marketing                 2003

Michael  L.  Iglesias 42     Vice  President  of Franchise Development   2001

James D. Shoemake     36     Vice President of Franchise Services        2002

Barry L. Hill         42     Vice President of Training                  2002

Brian  L.  Waters     52     Vice President of Purchasing -  Norco
                             Division                                    2000

Susan  A. Milliman    38     Vice President of Recruiting and Employee
                             Services                                    2001

  BIOGRAPHIES OF NOMINEE DIRECTORS, CONTINUING DIRECTORS, AND ADVISORY DIRECTOR

     Bobby  L.  Clairday61, is an Area Developer of Pizza Inn restaurants and he
is  President, a Director, and sole shareholder of Clairday Food Services, Inc.,
a  Pizza  Inn  franchisee  operating  Pizza  Inn  restaurants  in Arkansas.  Mr.
Clairday  is  also sole shareholder of Advance Food Services, Inc., a franchisee
operating  Pizza Inn restaurants in Arkansas.  From 1990 until his election as a
Director  of  the Company in January 1993, Mr. Clairday was an ex-officio member
of  the  Board  of  Directors,  serving  as  a  representative  of ourthe Company's
franchisees.  He  has  served  as  the  President  of  the  Pizza Inn Franchisee
Association  and  as  a member of various committees and associations affiliated
with the Pizza Inn restaurant system.  Mr. Clairday has been a franchisee of the
Company  for  over  twenty  years  and  a  member  of  the  BoardClass I Director for over nine years.

     Ronald  W.  Parker, 54, was appointed President and Chief Executive Officer
of the Company in August 2002. Mr. Parker joined the Company in October 1992 and
was elected Executive Vice President, Chief Operating Officer, and a Director in
January  1993.  He  was  appointed  President in July 2000. From October 1989 to
September  1992,  he  was  Executive  Vice  President and General Manager of the
Bonanza  restaurant division of Metromedia Steakhouses, Inc. and its predecessor
Metsa, Inc.  From 1983 to 1989, Mr. Parker served in several executive positions
for USACafes, the franchisor of the Bonanza restaurant chain. From 1974 to 1983,
Mr.  Parker  served  in  several  executive  positions with Chart House, Inc., a
restaurant  company  with  more  than 600 units of various brands. He previously
worked  with  a  national  accounting  firm  from  1972 to 1974. Mr. Parker also
currently  serves  on  the  Board  of  Directors  of  the  Cotton  Bowl Athletic
Association,  the  Mississippi  State University Foundation, and the Mississippi
State University Bulldog Club, Inc. Foundation. Mr. Parker was previously on the
Board  of  Directors  of  the  Mississippi  State University Alumni Association.

     Butler  E.  Powell, 65, is Vice President of Business Banking with Hibernia
National  Bank in Metairie, Louisiana.  He has served in various capacities with
the  bank  and its predecessors since 1983.  He graduated from Loyola University
in  New  Orleans  with  BBA  and MBA degrees and spent 3 1/2over three years with the
national  accounting  firm Ernst and Ernst before entering the banking industry.
Mr.  Powell  was the former President and a Director of the New Orleans Athletic
Club  and  served  on  the  Foundation  Board of East Jefferson Hospital. He was
elected  a  Class  I  Director  of  the  Company  in  January  1998.

     Steven  J.  Pully  is  the  President  of  Newcastle Capital Management, L.P., a
private  investment  management  firm  that  is the general partner of Newcastle
Partners, L.P. Mr. Pully is also a director and officer of Geoworks Corporation,
a  director of Max-Worldwide, Inc. and a director and Chief Executive Officer of
privately-held  Pinnacle  Frames  and  Accents,  Inc. Prior to joining Newcastle
Capital  Management, L.P. in late 2001, from May 2000 to December 2001, he was a
managing  director in the mergers and acquisitions department of Banc of America
Securities  and  from January 1997 to May 2000 he was a senior managing director
at  Bear  Stearns.  Prior  to becoming an investment banker, Mr. Pully practiced
securities  and  corporate law at the law firm Baker & Botts. Mr. Pully is a CPA
and  a  member  of the Texas Bar. Mr. Pully was appointed a Director in December
2002  to  fill  a  vacant  Class  II  Board  seat.

Mark  E.  Schwarz,  44,  is  the  Chairman,  Chief  Executive  Officer, and
Portfolio  Manager  of  Newcastle Capital Management, L.P., a private investment
management  firm  he  founded  in  1992 that is the general partner of Newcastle
Partners, L.P. Mr. Schwarz was appointed Chairman of the Board of the Company in
February  2004.  Mr.  Schwarz  is also Chairman of the Board and Chief Executive
Officer  of  Hallmark  Financial  Services,  Inc., aChairman of the Board of Bell
Industries,  Inc.,  Chairman  of the Board of New Century Equity Holdings Corp.,
director  and Chief Executive Officer of Geoworks Corporation, and a director of
Bell Industries, Inc., Nashua  Corporation,  S  L  Industries,  andInc.,  Web  Financial  Corporation.Corporation, and
privately-held  Pinnacle Frames and Accents, Inc. From 1995 through 1999, he was
also  a Vice President of Sandera Capital Management and in 1998 and 1999 he was
a  director  of  Aydin  Corporation.  Mr.  Schwarz  was  appointed a Director in
December  2002  to  fill  a  vacant  Class  I  Board  seat.

                              F.  Jay  TaylorCONTINUING  DIRECTORS

     Robert  B.  Page,  45,  is  an arbitrator in Ruston, Louisiana who is affiliated with the
American  Arbitration  Associationa franchisee of Shoney's, Inc., a family dining
restaurant  chain.  From  November 2000 until September 2002, Mr. Page was Chief
Operations  Officer of Gordon Biersch Brewery Restaurant Inc., a group of casual
dining  restaurants.  From 1993 through 2000 he worked for Romacorp, Inc., which
owns  Tony  Roma's,  a  chain  of  casual dining restaurants, where he was Chief
Executive  Officer  and the  Federal Mediationa board member from 1998 through 2000, and Conciliation
Service.  He formerly served as a Director of USACafes, Earth Resources,President and
Mid
South  Railroad.  HeChief Operations Officer from 1993 through 1998. Mr. Page was elected a director of First Guaranty Bank in 2001. Dr.
Taylor,  who  received  his Ph.D. from Tulane University, served as President of
Louisiana  Tech  University  from  1962  to  1987  and  currently  serves as its
President  Emeritus.  Mr.  Taylor was elected aClass II
Director  of  the  Company  in  1994.

Steve  A.  Ungerman  is  a practicing attorney in Dallas, Texas. From January 1,
1998  through  December  31, 2000 he was Of Counsel to the law firm of Boswell &
Kober, P.C.  From August 1997 to December 1997, he was employed by MedSynergies,
Inc.,  a  physician  practice  management  company,  in  the capacity of Special
Projects.  From September 1996 to August 1997, he was President of MedSynergies,
Inc.  From September 1996 to December 1997, he was Of Counsel to the law firm of
Ungerman,  Sweet  &  Brousseau.  Prior  to September 1996, he practiced law as a
shareholder  of  Ungerman  & Ungerman, P.C. and its predecessors for 28 years in
the  areas  of business matters, commercial finance and mediation.  Mr. Ungerman
received  his  Juris  Doctor  degree from Southern Methodist University.  He was
elected  a  Director  and  Chairman  of the Board of Directors of the Company in
September  1990.February  2004.

     Ramon  D. Phillips, 71, is the former Chairman of the Board, President, and
Chief  Executive  Officer  of  Hallmark  Financial  Services,  Inc., a financial
services  company. He served as Chairman, President, and Chief Executive Officer
of  Hallmark  from 1989 through 2000, and as Chairman through August 2001. Prior
to  Hallmark,  Mr.  Phillips  had over fifteen years experience in the franchise
restaurant  industry,  serving  in  an  executive  position  withas  Controller  for Kentucky Fried Chicken, Inc.
(1969-1974)  and  as  Executive  Vice  President and Chief Financial Officer for
Pizza  Inn,  Inc.  (1974-1989). He was elected a Director of the Company in 1990
and  served  through  2002.  He  served  as an Advisory Director in 2002 and was
re-elected  as  a  Class  II  Director  in  2003.

     Steven J. Pully, 44, is the President of Newcastle Capital Management, L.P.
Mr.  Pully  is also Chief Executive Officer and a director of New Century Equity
Holdings  Corp.,  an officer and director of Geoworks Corporation, a director of
Max  Worldwide,  Inc.,  and  a  director  of  privately-held Pinnacle Frames and
Accents,  Inc. Prior to joining Newcastle Capital Management, L.P. in late 2001,
from  May  2000  to December 2001, he was a managing director in the mergers and
acquisitions  department  of  Banc  of America Securities, Inc. and from January
1997  to  May  2000  he was a senior managing director in the investment banking
department  of  Bear  Stearns. Prior to becoming an investment banker, Mr. Pully
practiced  securities  and  corporate  law at the law firm of Baker & Botts. Mr.
Pully  is a CPA, a CFA, and a member of the Texas Bar. Mr. Pully was appointed a
Director  in  December  2002  to  fill  a  vacant  Class  II  Board  seat.

              INFORMATION  REGARDING  THE  BOARD  AND  ITS  COMMITTEES

     The  Board  has  adopted  a  set  of  Corporate  Governance  Guidelines  on
governance  practices  followed by the Company in order to assure that the Board
will  have the necessary authority and practices in place to review and evaluate
the  Company's  business  operations  as  needed  and to make decisions that are
independent  of  the  Company's  management. The guidelines are also intended to
align  the  interests  of  directors  and management with those of the Company's
shareholders.  The  Governance Guidelines set forth the practices the Board will
follow  with  respect  to  Board  composition  and selection, Board meetings and
involvement of senior management, Chief Executive Officer performance evaluation
and  succession  planning, and Board committee composition and compensation. The
Governance  Guidelines  are  intended to be compliant with changes to The Nasdaq
Stock Market ("Nasdaq") listing standards and Securities and Exchange Commission
(the  "SEC")  rules adopted to implement provisions of the Sarbanes-Oxley Act of
2002  (the  "Sarbanes-Oxley  Act").  The  Board has six committees: an Executive
Committee,  an Audit Committee, a Compensation Committee, a Finance Committee, a
Nominating  and  Governance  Committee,  and a Strategic Planning Committee. The
Governance  Guidelines,  as  well  as the charters for certain Board committees,
including  the  Nominating  and  Governance  Committee,  may  be  viewed  at
http://www.pizzainn.com.

     The  Board  met  nine  times  during  the  last  fiscal year. All directors
attended  75%  of  more  of the Board meetings and meetings of the committees on
which  they  served.  Below  is  a  table  that  provides membership and meeting
information  for  each  of  the  Board  committees:

                                                         Nominating    Strategic
Name           Executive Audit Compensation Finance    & Governance     Planning
- --------------------------------------------------------------------------------
Mr.  Schwarz       X*
Mr.  Clairday
Mr.  Page                  X        X          X*               X            X**
Mr.  Parker        X
Mr.  Phillips      X       X*       X          X                X            X**
Mr.  Powell                X
Mr.  Pully                          X*         X                X*

Number of Meetings
 in Fiscal 2004    10      9        5          3                1            14^
- --------------------------------------------------------------------------------
*   Committee  Chairman
**  Committee  Co-Chairman
^   Includes  five  meetings  with  the  Company's  management  team.

     Independent  directors  meet  twice annually apart from other Board members
and  management representatives. Each of the Company's directors, other than Mr.
Clairday  and  Mr. Parker, qualify as "independent" in accordance with published
Nasdaq  listing  requirements.

     Below  is  a  description  of  each  committee  of  the  Board. Each of the
committees has authority to engage legal counsel or other experts or consultants
as  it  deems  appropriate  to  carry  out  its  responsibilities. The Board has
determined  that  each  member  of  each committee meets the applicable laws and
regulations  regarding  "independence"  when  applicable and that each member is
free  of  any  relationship that would interfere with his individual exercise of
independent  judgment.

     Executive Committee. This Committee will consider issues as directed by the
     -------------------
Chairman  of  the Board. It also may exercise the authority of the Board between
Board  meetings,  except to the positionextent that the Board has delegated authority to
another  committee  or  to  other  persons,  and  except as otherwise limited by
Missouri  law.

     Audit  Committee.  The  Company  has a separately designated standing audit
     ----------------
committee  established  in accordance with Section 3(a)(58)(A) of advisorythe Securities
Exchange  Act of 1934.  The responsibilities of this Committee include reviewing
the financial reports and other financial information provided by the Company to
any  governmental body or the public; the Company's systems of internal controls
regarding  finance, accounting, legal compliance, and ethics that management and
the  Board  have  established; the Company's auditing, accounting, and financial
reporting  processes  generally;  and such other functions as the Board may from
time  to  time assign to the Committee.  In performing its duties, the Committee
seeks  to  maintain  an  effective  working  relationship  with  the  Board, the
independent  accountant,  and management of the Company. The specific duties and
functions  of  the Audit Committee are set forth in the Audit Committee Charter.
The  Charter is reviewed annually and updated as necessary to reflect changes in
regulatory  requirements,  authoritative  guidelines,  and  evolving  practices.

     Management  is responsible for the preparation, presentation, and integrity
of  the  Company's  financial  statements,  accounting  and  financial reporting
principles, internal controls, and procedures designed to ensure compliance with
accounting  standards,  applicable  laws,  and  regulations.  The  Company's
independent  auditor,  BDO  Seidman  LLP,  is  responsible  for  performing  an
independent  audit  of  the  consolidated financial statements and expressing an
opinion  on the conformity of those financial statements with generally accepted
accounting  principles.

     Compensation  Committee. The primary responsibilities of this Committee are
     -----------------------
to (a) review and recommend to the Board the compensation of the Chief Executive
Officer  and  other  officers  of  the  Company, (b) review executive bonus plan
allocations,  (c)  oversee and advise the Board on the adoption of policies that
govern  the  Company's  compensation  programs,  (d)  oversee  the  Company's
administration of its equity-based compensation and other benefit plans, and (e)
approve  grants  of stock options to officers and employees of the Company under
its stock plans. The Compensation Committee's role includes producing the report
on  executive  compensation  required by SEC rules and regulations. The specific
duties and functions of the Compensation Committee are set forth in its charter.
This charter is reviewed annually and updated as necessary to reflect changes in
regulatory  requirements,  authoritative  guidelines,  and  evolving  practices.

     Finance  Committee.  The  primary responsibilities of this Committee are to
     ------------------
(a) monitor present and future capital requirements and opportunities pertaining
to  the Company's business, and (b) review and provide guidance to the Board and
management  about  all  proposals  concerning  major  financial  policies of the
Company.  The  Finance  Committee's  role  includes  designating  officers  and
employees  who  can  execute  documents  and act on behalf of the Company in the
ordinary  course  of  business under previously approved banking, borrowing, and
other  financing  arrangements.

     Nominating  and  Governance Committee. The primary responsibilities of this
     -------------------------------------
Committee  are  to  (a) determine the slate of director nominees for election to
the  Board,  (b)  identify  and recommend candidates to fill vacancies occurring
between  annual  shareholder  meetings,  and (c) review, evaluate, and recommend
changes  to  the Company's Corporate Governance Guidelines. The Committee's role
includes  periodic review of the compensation paid to non-employee directors for
annual  retainers  and  meeting fees and making recommendations to the Board for
any  adjustments.  The  specific responsibilities and functions of the Committee
are  set  forth  in  December  2002.its  Charter.

     From  time to time the Committee reviews the Board to assess the skills and
characteristics  required  of  Board  members  in  the  context  of  the current
composition  of  the  Board.  This  assessment  includes  issues of diversity in
numerous  factors, understanding of and achievements in the restaurant industry,
board  service,  business,  finance, marketing, and community involvement. These
factors,  and  any  other qualifications considered useful by the Committee, are
reviewed  in the context of an assessment of the perceived needs of the Board at
a  particular  point.  As a result, the priorities and emphasis of the Committee
and  of  the  Board may change from time to time to take into account changes in
business and other trends, and the portfolio of skills and experience of current
and  prospective  Board members. Therefore, while focused on the achievement and
the ability of potential candidates to make a positive contribution with respect
to  such factors, the Committee has not established specific minimum criteria or
qualifications  that  a  nominee  must  possess.

     Consideration  of  new Board nominee candidates typically involves a series
of  internal  discussions,  review  of  information  concerning  candidates, and
interviews  with  selected  candidates. In general, candidates for nomination to
the  Board  are  suggested by Board members or by employees. In 2004 the Company
did  not  employ  a search firm or pay fees to other third parties in connection
with seeking or evaluating Board nominee candidates. The Committee will consider
director  candidates  recommended  by  shareholders.  The  Committee  evaluates
candidates  proposed  by  shareholders  using  the  same  criteria  as for other
candidates.  The name of any recommended candidate for director, together with a
brief  biographical sketch, a document indicating the candidate's willingness to
serve  if  elected, and evidence of the nominating person's ownership of Company
stock  should be sent to the Corporate Secretary of the Company using one of the
methods  set  forth  in  "Communications from Shareholders to the Board," below.

     Strategic  Planning  Committee. This Committee was constituted on April 21,
     ------------------------------
2004  specifically  to  work  with the Company's senior management to create and
implement a strategic plan for the Company. The Committee and Company management
assemble and analyze data pertaining to the Company's business plan, competitive
environment  and  objectives,  and  other  factors  relevant  to  the  Company's
concepts,  products,  and services, ultimately preparing and recommending plans,
timetables,  strategies,  options,  and  procedures  for the Company's long-term
growth  and  success. Upon completion and presentation of a final strategic plan
to  be  implemented  and  monitored by management, the Committee will transition
into  an oversight role, and ultimately may be dissolved, subject to reformation
from  time  to  time  as  the  Board  may  deem  necessary.

     Communications  from  Shareholders  to  the  Board

     The Board recommends that shareholders initiate any communications with the
Board  in writing and send them in care of the Corporate Secretary. Shareholders
can send communications by e-mail to corporate_secretary@pizzainn.com, by fax to
(469)  384-5061,  or by mail to Corporate Secretary, Pizza Inn, Inc., 3551 Plano
Parkway,  The  Colony,  TX  75056. This centralized process assists the Board in
reviewing  and responding appropriately to shareholder communications. The names
of  specific  intended  Board  members should be noted in the communication. The
Board has instructed the Corporate Secretary to forward such correspondence only
to the intended recipients; however, the Board has also instructed the Corporate
Secretary, prior to forwarding any correspondence, to review such correspondence
and,  in  his  discretion,  not to forward certain items if they are deemed of a
commercial  or  frivolous  nature  or  otherwise  inappropriate  for the Board's
consideration.  In such cases, that correspondence may be forwarded elsewhere in
the  Company  for  review  and  possible  response.

     Director  Compensation

     As  an  employee  of  the  Company, Mr. Parker receives no compensation for
serving  as  a  director,  except  that  he,  like all directors, is eligible to
receive  reimbursement of any expenses incurred in attending Board and committee
meetings.  During fiscal year 2004, each other director received as compensation
for  serving  on  the  Board  and  committees  of  the  Board:

- -     An  annual  retainer  of  $17,000;

     An  annual  retainer  of  $6,000  for  the  Chairman  of  the  Board;  and

     A  per  meeting fee of $1,000 for Board meetings and $250 fee for committee
meetings.

Members  of  the Strategic Planning Committee receive a per diem fee of $500 for
each  day  they  are  directly  engaged  in  the  discharge  of  Committee
responsibilities.

     In  addition to  annual  and  meeting  fees, each non-employee director was
eligible  to  receive stock option awards under the 1993 Outside Directors Stock
Award  Plan  (the  "1993  Plan") until the 1993 Plan's expiration on October 13,
2003.  Under  the  1993  Plan, eligible directors would receive, as of the first
day  of  the  Company's fiscal year, options for Common Stock equal to twice the
number  of  shares of Common Stock purchased during the preceding fiscal year or
purchased by exercise of previously granted options during the first ten days of
the  current fiscal year.  On the first day of the first fiscal year immediately
following  the  day  on  which  a non-employee director first became eligible to
participate in the 1993 Plan, that director would receive options to acquire two
shares  of Common Stock for each share of Common Stock owned by such director on
the  first day of the fiscal year. The exercise price of the options is not less
than  the closing price for the Common Stock on Nasdaq on the date of the option
grant.  Each  eligible  director was entitled to options for no more than 20,000
shares  per  fiscal  year.  Stock  options  granted  under the 1993 Plan have an
exercise  price  equal  to  the  market price of the Common Stock on the date of
grant  and  are  first  exercisable  one  year  after  grant.

     Since  the  beginning  of  fiscal year 2004, stock options for 5,000 shares
were  granted  to  Mr. Schwarz pursuant to the 1993 Plan at an exercise price of
$2.15  per  share.

Expiration  of the 1993 Plan does not affect vesting, exercise, or expiration of
options  previously  granted  pursuant to such Plan; however, no further options
may  be  granted.

     The  Board  expects  to grant stock option awards to non-employee directors
beginning  in  calendar  year  2005,  with awards retroactive to the 1993 Plan's
October  13,  2003  expiration  date,  if the shareholders approve Proposal Two,
"Adoption  of  a  Non-Employee  Directors  Stock  Option  Award  Plan."


                               EXECUTIVE OFFICERS

     The  following table sets forth certain information, as of October 1, 2004,
regarding  the  Company's  executive  officers:
                                                                       Executive
                                                                         Officer
Name                  Age     Position                                     Since
- ----                  ---     --------                                     -----
Ronald W. Parker      54      President  and  Chief  Executive  Officer     1992
Ward T. Olgreen       45      Senior Vice President of Franchise Operations
                              and Concept Development                       1995
Shawn M. Preator      35      Chief  Financial  Officer  and  Vice
                              President  of  Distribution                   1999
Rod J. McDonald       43      Secretary and General Counsel                 2004

Danny K. Meisenheimer 44      Vice  President  of  Marketing                2003

                      BIOGRAPHIES OF NON-DIRECTOR OFFICERS

     B.  Keith  Clark was appointed Senior Vice President- Corporate Development
in  October 2002. He joined the Company in February 1997 and was elected General
Counsel  and  Secretary  of  the  Company in March 1997.  From June 1994 through
February  1997,  he  was  Assistant  General  Counsel and Assistant Secretary of
American  Eagle  Group, Inc., a property and casualty insurance holding company.
From  January  1990 through May 1994, Mr. Clark was a corporate associate in the
Dallas  office  of  Akin,  Gump,  Strauss,  Hauer  & Feld, L.L.P., a diversified
international  law  firm.  Mr.  Clark served on the Company's Board of Directors
from  September  2002  through  December  2002.  Since 1999 Mr. Clark has been a
member  of  the Board of Directors of the Visiting Nurse Association of Texas, a
non-profit  corporation  providing a variety of home health care services, where
he  currently  serves  as  Chairman  of  the  Board.

Ward  T. Olgreen was appointed Senior Vice President of Franchise Operations and
Concept  Development  in  December  2002.  He  was  appointed  Vice President of
Concept  Development  in  February  1999  and  Senior  Vice President of Concept
Development in July 2000.  He joined the Company in September 1991 and served in
a variety of operational positions until his appointment in January 1995 as Vice
President  of  International Operations and Brand R& D.&D.  Mr. Olgreen was a Branch
Manager  for  GCS  Service,  Inc., a restaurant equipment service provider, from
June  1986  through  July  1991.

     Shawn  M.  Preator was appointed Chief Financial Officer and Vice President
of  Distribution  in  October 2002.  He was elected Vice President in June 2000.
He  was  elected  Controller,  Treasurer, and Assistant Secretary in April 1999.
Prior  to  that  election,  Mr.  Preator  had  been Assistant Controller for the
Company  since July 1998. Prior to joining the Company, Mr. Preator was a Senior
Financial Analyst at LSG/Sky Chefs, Inc., an international airline caterer, from
September  1996  to  July 1998.  Prior to September 1996, Mr. Preator worked for
the  accounting  firm  Ernst  &  Young  LLP  in  its  audit  department.

Rod  J. McDonald was appointed Corporate Secretary and General Counsel in August
2004.  Mr.  McDonald  joined  the  Company  in  September 1997 and had served as
Assistant  General  Counsel of the Company since that time. Prior to joining the
Company,  he  was  Vice  President  and  Assistant  General  Counsel  for  TCBY
Enterprises,  Inc.

Danny  K. Meisenheimer was appointed Vice President of Marketing in January 2003
after  joining  the  Company in December 2002. Prior to joining the Company, Mr.
Meisenheimer  served as Vice President of Marketing for Furr's Restaurant Group,
Inc.  since  1995. Mr. Meisenheimer joined the Marketing Department of Furr's in
1991.

Michael L. Iglesias was appointed Vice President of Franchise Development in May
2001.  From  May 1996 through May 2001, he was Director of Franchise Development
for  the  Company.  Prior to joining the Company, Mr. Iglesias was an Area Sales
Representative  for  TCBY  Systems,  Inc.

James  D.  Shoemake  was  appointed  Vice President of Franchise Services in May
2002.  Mr.  Shoemake  had been Division Vice President of Traditional Operations
since  2000. He joined the Company in 1997 as a Franchise Operations Consultant.
Prior  to  joining  the  Company,  Mr.  Shoemake  was  an International Business
Consultant  for  European  and  Asian  Markets  for  Brice  Group,  Inc.

     Barry  L.  Hill  was  appointed Vice President of Training in May 2002. Mr.
Hill  had  been Director of Field Training and New Store Opening for the Company
since  1999. He joined the Company in 1998 as Training Manager. Prior to joining
the  Company,  Mr.  Hill  was Director of Training for Whataburger for 15 years.

Brian  L.  Waters was appointed Vice President of Purchasing - Norco Division in
September  2000. He joined the Company in August 1996 as Director of Purchasing.
Prior  to joining the Company, Mr. Waters was Senior Purchasing Manager for Fast
Food  Merchandisers  from  1993  to  1996.

Susan  A.  Milliman  was  appointed  Vice  President  of Recruiting and Employee
Services in July 2001. Ms. Milliman had been Director of Human Resources for the
Company  since  1996.  Prior  to  joining  the Company, Ms. Milliman was a Human
Resources  Generalist  for  Claim  Services  Resource  Group.

             SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

     The  following table sets forth certain information, as of November 15,
2003,October 1, 2004,
with  respect  to  the  beneficial ownership of Common Stock by: (a) each person
known  to  the Company to be a beneficial owner of more than five percent of the
outstanding  Common  Stock;  (b)  each director, nominee director, and executive
officer  named in the section entitled "Summary Compensation Table";Table;" and (c) all
directors  and  executive officers as a group (17(11 persons).  Except as otherwise
indicated,  each  of  the  persons  named  in the table below is believed by the
Company  to  possess sole voting and investment power with respect to the shares
of  Common  Stock  beneficially  owned  by  such  person.  Information as to the
beneficial  ownership of Common Stock by directors and executive officers of the
Company  has  been furnished by the respective directors and executive officers.


    Name                             Shares                              Percent
 and Address of                   Beneficially                          of Class
                                                                         5%-------
Beneficial Owner                     Owned
- -------------------                   ------------------------                      -----

C.  Jeffrey  Rogers  (a)
5529  St.  Andrews  Ct
Plano, Texas 75093                      (a)                                 (a)

Newcastle Partners,  L.P.
Newcastle Capital Management, L.P.
Newcastle Capital Group, L.L.C.
(b)
300  Crescent  Court,  Ste.  1110
Dallas,  TX  75201  3,583,780                          35.610%(a)            3,627,130                              35.79%

Ronald  W.  Parker  (c)(b)
3551  Plano  Parkway
The  Colony,  TX  75056              1,018,173                           9.875%

Steve  A.  Ungerman  (d)                30,566                     Less than 1%851,821                               8.40%

Mark  E.  Schwarz  (a)(b)          3,647,130                               35.9%
Robert  B.  Page                          -0-                                -0-
Butler  E.  Powell  (c)                 35,000(b)               32,500                       Less than  1%
Bobby  L.  Clairday (e)(c)               48,900                       Less than  1%
Ramon  D.  Phillips (d)               11,590                       Less than  1%
Steven  J.  Pully   (b)                    -0-                              -0-
Mark  E.  Schwarz  (b)               3,593,780                          35.693%
F.  Jay  Taylor  (c)                    20,000(a)                8,929                       Less than  1%
B.  Keith  Clark  (c)(f)               168,486                           1.660%
Ward  T.  Olgreen   (c)                 167,739                           1.653%(b)              169,659                               1.67%
Shawn  M.  Preator  53,918(b)               56,165                       Less than  1%
Danny K. Meisenheimer                  2871,092                       Less than  1%

 All  Directors  and                3,994,965                             39.42%
   Executive  Officers  as  a  Group

(g)                           5,250,661                        52.170  %


(a)     Mr.  Rogers  was  a  Director  and the Company's Chief Executive Officer
until  August  21,  2002. For additional information, see "Severance Agreement".
On  August  21,  2002,  Mr.  Rogers  beneficially  owned approximately 3,650,000
shares, or approximately 35% of the total shares then outstanding. On January 3,
2003,  Mr.  Rogers  filed  with  the  Securities  Exchange  Commission  a Form 4
Statement  of  Changes  in  Beneficial  Ownership  showing  ownership of 205,000
shares,  or  approximately  2% of the total shares then outstanding. The Company
cannot  confirm  subsequent  changes, if any, in Mr. Rogers' ownership position.

(b)     Newcastle  Capital  Management, L.P. is the general partner of Newcastle
Partners,  L.P.,  Newcastle  Capital  Group,  L.L.C.  is  the general partner of
Newcastle  Capital  Management, L.P., and Mark  E.Mr. Schwarz is the managing partner of
Newcastle  Partners,  L.P.  Accordingly,  each  of Newcastle Capital Management,
L.P., Newcastle Group, L.L.C., and Mark E. Schwarz may be deemed to beneficially
own  the  shares  of Common Stock beneficially owned by Newcastle Partners, L.P.
In  addition,  Newcastle  Partners,  L.P.,  Newcastle  Capital Management, L.P.,
Newcastle  Group, L.L.C., Markand Messrs. Schwarz Stevenand Pully Ramon D. Phillips and Robert P. Page are members of a Section
13(d)13D reporting group and may be deemed to beneficially own shares of Common Stock
owned  by the other members of the broup.group.  Newcastle Partners, L.P., and Mr.Messrs.
Schwarz  are the only members of the group toand  Pully  also  directly  own  shares  of  Common  Stock.

(c)(b)     Includes vested options and options vesting within 60 days of November
15,  2003October 1,
2004  under  the Company's stock option plans, as follows: 242,50062,500 shares for Mr.
Parker;  12,5005,000  shares  for  Mr.  Schwarz;  20,000 shares for Mr. Powell; 10,000 shares for Mr. Taylor; 106,500
shares  for  Mr. Clark; 76,50066,500
shares  for  Mr.  Olgreen;  and  44,500  shares  for  Mr.  Preator.

(d)     Includes  12,283  shares  for  which  Mr.  Ungerman  shares  voting  and
investment  power  with  his  wife.

(e)     Includes  18,200  shares  for  which(c)     Mr.  Clairday  shares voting and investment power for 18,200 shares with
his  wife.

(f)     Includes  4,000(d)     Mr.  Phillips  shares  held  by  K&A  Clark  Family  Partnership, L.P.

(g)     Excludesvoting and investment power for 5,333 shares owned by Mr. Rogers who was a Director and an executive
officer  until  August  21,  2002.

                COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS

     The  Board  currently  consistswith
the  other  shareholders  of  seven  authorized  directors  and  one
non-voting  advisory  director  as  described  in  "Proposal  One:  Election  of
Directors"  on  page  5.

The  Board  has  established Audit, Compensation, Executive, Finance, Nominating
and  Governance,  and  Stock  Award Plan Committees. The Audit Committee selects
independent  auditors  and  reviews  audit  results.  The Compensation Committee
reviews  and  approves  remuneration  for  officers  of the Company. The Finance
Committee  reviews  and  oversees  the Company's capital structure and operating
results.  The Executive Committee considers business as directed by the Chairman
of  the Board. The Nominating and Governance Committee considers recommendations
for  and qualifications of nominees for Director, and provides senior management
guidance  in  matters  of  the  Company's  governance.     The  Nominating  and
Governance  Committee  will  consider nominees recommended by shareholders.  See
"Shareholder Proposals" for the procedures required to be followed in submitting
such  recommendations. The Stock Award Plan Committee administers the 1993 Stock
Award  Plan  and  the  1993  Outside  Directors  Stock  Award  Plan.

     As  of November 15, 2003, Messrs. Taylor, Powell, Pully, and Ungerman serve
on  the  Audit  Committee;  Messrs.  Powell,  Taylor,  and Ungerman serve on the
Compensation  Committee;  Messrs.  Clairday  and Powell serve on the Stock Award
Plan  Committee;  Messrs.  Ungerman,  Parker, and Schwarz serve on the Executive
Committee;  Messrs.  Schwarz,  Parker,  Powell, and Taylor, serve on the Finance
Committee;  and Messrs. Taylor and Powell serve on the Nominating and Governance
Committee.

During  fiscal  year 2003, the Board of Directors held four meetings.  The Audit
Committee  met  four  times,  the  Compensation  Committee  met three times, the
Executive  Committee met twelve times, and the Finance Committee met four times.
In  addition,  the  Board of Directors and the Compensation and Stock Award Plan
Committees  took  several  actions  by  unanimous  written  consent  in  lieu of
meetings.  Each  of  the  directors attended at least three-fourths of the total
number  of  meetings  held  by  the Board and the committees on which he served.

                       COMPENSATION  OF  DIRECTORS

     A director who is an employee of the Company is not compensated for service
as  a  member  of  the Board of Directors or any Committee of the Board. Outside
directors receive an annual fee of $17,000 plus meeting fees equal to $1,000 per
Board  meeting  and  $250  per  Committee meeting attended.  The Chairman of the
Board  receives  an  additional  $6,000 annual fee for serving in that capacity.
Directors  are  also  reimbursed  for  Board  related  expenses.

     Under  the  1993  Outside  Directors  Stock Award Plan each elected outside
director  is  eligible  to  receive, as of the first day of the Company's fiscal
year,  options  for  Common  Stock equal to twice the number of shares of Common
Stock  purchased  during  the  preceding fiscal year or purchases by exercise of
previously granted options during the first ten days of the current fiscal year.
On the first day of the first fiscal year immediately following the day on which
an  outside  director  first  becomes eligible to participate in this plan, that
outside  director  shall  receive an option to acquire one share of Common Stock
for  each  share of Common Stock owned by such director on this first day of the
fiscal  year.  No  outside  director  shall be entitled to options for more than
20,000  shares  per  fiscal  year.  Stock options granted under the plan have an
exercise  price  equal  to  the  market price of the Common Stock on the date of
grant  and  are  first  exercisable  one  year  after  grant.

     Since  the  beginning  of  fiscal  year 2003, stock options were granted to
outside  directors pursuant to such plan as follows: on July 1, 2002 options for
10,000  shares  were  granted  to  Mr. Powell at an exercise price of $1.280 per
share.Wholesale  Software  International,  Inc.

                             AUDIT COMMITTEE REPORT

     The  Audit Committee of the Board is responsible for providing independent,
objective oversight of the Company's accounting functions and internal controls.
The  Audit  Committee  is  composed  of  fourthree  independent  directors and acts under a
written  charter  adopted  and  approved  by the Board of Directors on April 15,
2003. The Committee reviews its Charter on an annual basis.  Each of the members
of  the Audit  Committee  is  independent  as  defined  by the National Association of
Securities Dealers' listing standards and as required by the Sarbanes-Oxley Act  of 2002 ("Act").Act.
After  a  full review and analysis, the Board of Directors positively reaffirmed
that  each  member  of  the Audit  Committee is independent within the meaning of Rule
4200(a)(14) of the National Association of Securities Dealers' listing standards
and the rules and regulations of the Securities  and  Exchange  Commission (the "SEC"),SEC, as such requirements are defined as of
the  mailing date of this proxy statement. The Board annually reviews the Nasdaq
listing  standards'  definition  of independence for audit committee members and
makes  an  annual  determination  of  the independence of Committee members. The
Board  of  Directors  has  also  determined  that  at  least  one  member of the
Audit
Committee, Mr. Pully,Phillips, is an "audit committee financial expert" (asexpert," as defined by
SEC  rules  and  regulations).regulations.  This  designation  results  from  a  disclosure
requirement  of  the  SEC  related to Mr. Phillips' experience and understanding
with  respect  to certain accounting and auditing matters. The SEC believes this
designation does not impose upon Mr. Phillips any duty, obligation, or liability
that  is  greater  than  is  generally  imposed  on him as a member of the Audit
Committee  and  the  Board,  and  that  his  designation  as  an audit committee
financial  expert  pursuant  to  this  SEC requirement does not affect the duty,
obligation,  or  liability  of  any  other  member of the Audit Committee or the
Board.  For  an  overview  of Mr. Pully's qualifications,Phillips' relevant experience, see the section
entitled  "Biographies of Nominee Directors, Continuing Directors,
and  Advisory  Director""Continuing  Directors"  above.

     The responsibilities of the Audit Committee include reviewing the financial
reports  and  other  financial  information  provided  by  the  Company  to  any
governmental  body  or  the  public;  the Company's systems of internal controls
regarding  finance,  accounting, legal compliance and ethics that management and
the  Board  have  established;  and  the  Company's  auditing,  accounting,  and
financial  reporting  processes  generally.  Consistent  with this function, the
Audit  Committee  encourages  continuous  improvement  of, and adherence to, the
Company's  policies,  procedures,  and  practices  at  all  levels.

     The  Committee  has  been  established  to:  (a)  assist  the  Board in its
oversight  responsibilities  regarding:  (1)  the  integrity  of  the  Company's
financial  statements,  (2)  the  Company's compliance with legal and regulatory
requirements,  and  (3)  the  independent  accountant's  qualifications  and
independence;  (b)  prepare  the report required by the United States Securities
and  Exchange Commission (the "SEC") for inclusion in the Company's annual proxy
statement;  (c)  retain  and terminate the Company's independent accountant; (d)
approve  audit  and  non-audit  services  to  be  performed  by  the independent
accountant;  and  (e) perform such other functions as the Board may from time to
time  assign  to  the  Committee.  In performing its duties, the Committee shall
seek  to  maintain  an  effective  working  relationship  with  the  Board,  the
independent  accountant,  and  management  of  the  Company.

     The  Audit  Committee  reviewed  and  discussed  the  Company's  audited financial
statements  with  management.  The Audit  Committee also discussed with the
independent  accountantsBDO Seidman LLP
the  matters required to be discussed by Statement on Auditing Standards No. 61,
(Communications"Communications  with  Audit  Committees).  The Company's
independent  accountantsCommittees."  In  addition,  BDO  Seidman LLP also
provided  to  the  Audit  Committee  the written disclosures and the letter required by
Independence  Standards  Board  Standard  No.  1, (Independence"Independence Discussions with
Audit  Committees),Committees," and the Audit Committee discussed with the  independent  accountantsBDO Seidman LLP that firm's
independence.

     The  Audit  Committee  is  responsible  for  recommending  to  the  Board that the
Company's  financial  statements  be  included  in  the Company's annual report.
Based  on  the  discussions  with  the independent accountantsBDO  Seidman  LLP  concerning  the audit, the
financial  statement  review,  and  other  such  matters  deemed  relevant  and
appropriate  by  the  Audit Committee, the Audit Committee recommended to the Board that the
June  29, 200327,  2004  audited  financial statements be included in the Company's 20032004
Annual  Report  on  Form  10-K.

     In  accordance  with the rules of the Securities and Exchange Commission,SEC, the foregoing information, which
is  required  by paragraphs (a) and (b) of Regulation S-K Item 7 of Schedule 14A,306, shall not be
deemed  to be "soliciting material", or to be "filed" with the CommissionSEC or subject to
the  Commission'sSEC's  Regulation  14A,  other  than  as  provided  in that Item, or to the
liabilities  of  Section  18 of the Securities Exchange Act of 1934, as amended,
except to the extent that the Company specifically requests that the information
be  treated  as soliciting material or specifically incorporates it by reference
into  a  document  filed  under  the  Securities Act of 1933, as amended, or the
Securities  Exchange  Act  of  1934,  as  amended.

SUBMITTED  BY  THE  AUDIT  COMMITTEE
           OF  THE  COMPANY'S  BOARD  OF  DIRECTORS

               Dr.  F.  Jay  Taylor,Submitted  by  the  Audit  Committee:  Ramon  D.  Phillips,  Chairman
                           Robert  B.  Page
                           Butler  E.  Powell

                        Steven  J.  Pully
               Steve  A.  Ungerman


FEES PAID TO INDEPENDENT AUDITORS

     The  Audit  Committee  has  selected  BDO  Seidman  LLP  certified  public
accountants  as the independent auditors of the Company for fiscal year 2005.  A
representative of BDO Seidman LLP will be present at the Annual Meeting, will be
available  to  respond to appropriate questions, and will have an opportunity to
make  a  statement.

For  fiscal  2004,  the  Audit  Committee  selected  BDO  Seidman LLP to replace
PricewaterhouseCoopers  LLP, which was the Company's independent auditor for the
fiscal  year  ending June 29, 2003.  The decision to change accountants was made
by vote of the Committee, and the dismissal of PricewaterhouseCoopers LLP became
effective  on October 8, 2003.  During fiscal years 2002 and 2003, there were no
disagreements between the Company's senior management and PricewaterhouseCoopers
LLP's  senior  audit  personnel  on  any  matter  of  accounting  principles  or
practices,  financial  statement disclosure, or auditing scope or procedure such
that  would have caused PricewaterhouseCoopers LLP to have made reference to the
subject  matter  of such disagreements in connection with its audit report.  The
Company  does not anticipate that a representative of PricewaterhouseCoopers LLP
will  be  present  at  the  Annual Meeting, nor does it anticipate that any such
representative  will  be  available  to make a statement or to answer questions.

The following table shows the fees the Company paid or accrued for the audit and
other  services  provided  by  PricewaterhouseCoopers LLP in fiscal 2003 and BDO
Seidman  LLP  in  fiscal  2004.

                         PRICEWATERHOUSECOOPERS                     BDO  SEIDMAN
                            2003           2004                            2004
- --------------------------------------------------------------------------------
Audit  Fees          $    129,540            --                       $   74,000
Audit-Related Fees   $     13,656            --                       $      --
Tax  Fees            $     13,345        $  9,300                     $      950
All  Other  Fees     $     35,579        $ 12,500                     $    3,050
                     -----------------------------------------------------------
Total                $    192,120        $ 21,800                     $   78,000

     AUDIT  FEES   This  category  represents  aggregate  fees  billed  by
PricewaterhouseCoopers  LLP  and  BDO  Seidman  LLP  for  professional  services
rendered  for  the  audit  of  the Company's annual financial statements for the
years  ended  June  29, 2003 and June 27, 2004, respectively, and the reviews of
the  financial  statements included in the Company's Forms 10-Q for those years.

AUDIT-RELATED  FEES   These  fees consist of assurance and related services that
are  reasonably  related  to  the  performance  of  the  audit  or review of the
Company's  financial  statements.  This  category  includes  fees related to the
performance  of  audits  and  attest  services  not  required  by  statute  or
regulations,  audits  of  the  Company's  benefits  plans,  and  accounting
consultations  regarding  the  application  of  generally  accepted  accounting
principles  to  proposed  transactions.

TAX  FEES    Fees billed by PricewaterhouseCoopers LLP for fiscal years 2003 and
2004  for  tax  return preparation and foreign tax analysis, and for a change in
tax  accounting  method,  and  fees  billed  by BDO Seidman LLP for tax services
during  fiscal  2004.

     ALL  OTHER  FEES    Fees paid to PricewaterhouseCoopers LLP and BDO Seidman
LLP  in  2003  and 2004 generally include services pertaining to the question of
change  of  control  of  the  Board  and  the  Company following the election of
directors  at the Company's 2003 Annual Meeting of Shareholders, consultation on
a potential business opportunity, and for PricewaterhouseCoopers, LLP, review of
the  Company's franchise offering circular.  Fees paid to PricewaterhouseCoopers
LLP  in  fiscal  2004  also  include  services  related  to  the  transfer  of
audit-related  materials  from  PricewaterhouseCoopers  LLP  to BDO Seidman LLP.

In  considering  and  authorizing these payments to the independent auditors for
services  unrelated  to  performance  of  the  audit  of the Company's financial
statements,  the  Committee  has  determined  that the cost segregation analysis
services,  tax  return preparation, foreign tax analysis and calculation, review
of  the Company's franchise offering circular, and transfer of materials related
to  the  audit  engagement  undertaken  by  the  independent  auditors  are  not
inconsistent  with  the  independent  auditor's  performance  of  the  audit and
financial  statement  review  functions  and are compatible with maintaining the
independent  auditor's  independence.

Policy  of  the  Audit  Committee  for  Pre-Approval  of  Audit  and Permissible
Non-Audit  Services  of  the  Independent  Auditor

     The  Audit  Committee  is  responsible for appointing, setting compensation
for,  and  overseeing  the  work of, the independent auditor. In accordance with
Audit  Committee policy and the requirements of law, all services to be provided
by BDO Seidman LLP are pre-approved by the Audit Committee. Pre-approval applies
to  audit services, audit-related services, tax services, and other services. In
some  cases,  pre-approval  is  provided by the full Audit Committee for up to a
year,  and  relates to a particular defined task or scope of work and is subject
to  a  specific  budget. In other cases, the Chairman of the Audit Committee has
the  delegated  authority  from  the  Audit  Committee to pre-approve additional
services,  and  such  pre-approvals  are  then  communicated  to  the full Audit
Committee.

                           SUMMARY COMPENSATION TABLE

     The  following  table  sets  forth  the  annual  compensation  of the Chief
Executive  Officer and the other four most highly compensated executive officers
of the Company for the fiscal years ended June 27, 2004, June 29, 2003, and June
30,  2002  and June
24,  2001  (designated  as  years  2004,  2003,  and  2002,  and  2001)respectively).
Annual Compensation ------------------------------------------------------- Long-Term Compensation Awards ------------------ All Securities - OtherUnder- Name Other Annual Underlying Compensation Compensationlying Options (d) (and Principal Position) Year Salary ($) Bonus ($) Compensation ($) (b)(a) (# of shares) ------ ------------- --------- -------------- ------------------------------- ------------------ --------------- ---------- --------------------- ------------- C. Jeffrey Rogers . . . . . . 2003(a)$ 126,308 $ 0 $ 15,772 0 $ 422,000 (Former ChiefRonald W. Parker. . . . . . . . . 20022004 $ 663,523550,000 $ 361,000275,000 $ 242,702176,084 0 0 Executive Officer). . . . . . 2001 $ 619,424 $ 475,000 $ 263,233 62,500 0 Ronald W. Parker. .(President and Chief) . . . . . 2003 $ 537,755 $ 275,000 $ 179,050179,910 0 0 (President and Chief)Executive Officer). . . . . . . 2002 $ 507,885 $ 277,300 $ 287,863 0 0 Executive Officer)B. Keith Clark (b) (Senior. . . . . . . 20012004 $ 473,892195,000 $ 275,00026,500 $ 203,945 62,5005,961 0 B. Keith Clark (Senior. Vice President, Secretary,. . . 2003 $ 186,035 $ 53,325 $ 2,993 0 0 Vice President, Secretary,and General Counsel). . . . . . 2002 $ 161,884 $ 42,500 $ 0 0 0 and General Counsel). . . . . 2001 $ 148,538 $ 22,000 $ 0 40,000 0 Ward T. Olgreen . . . . . . . . 2004 $ 168,000 $ 33,600 $ 7,539 0 (Senior Vice President. . . . . 2003 $ 160,904 $ 34,700 $ 3,769 0 0 (Senior Vice President. .of Franchise Operations and . . 2002 $ 147,596 $ 32,250 $ 0 0 0 of Franchise Operations and . 2001 $ 134,615 $ 17,250 $ 0 37,500 0 Concept Development) Shawn M. Preator. . . . . . . . 2004 $ 150,000 $ 30,000 $ 5,961 0 (Chief Financial Officer and. . 2003 $ 139,650 $ 42,750 $ 3,042 0 0 (Chief Financial Officer and.Vice President of Distribution) 2002 $ 107,923 $ 21,000 $ 0 0 0 Vice President of Distribution)2001 $ 92,737 $ 22,500 $ 0 36,000 0 Danny K. Meisenheimer . . . . .2003. 2004 $ 136,102 $ 27,000 $ 0 0 Vice President of . . . . . . . 2003 (c) $ 65,244 $ 13,000 $ 0 0 0 (Vice President of Marketing) (c )Marketing
(a) Mr. Rogers was a Director and the Company's Chief Executive Officer until August 21, 2002. Figures shown are for the period July 1, 2002 through August 21, 2002. For additional information, see "Severance Agreement". (b) Includes:Includes for Mr. Rogers,Parker, quarterly payments of $37,500 for life and disability insurance benefits, (which includes thesecondary medical benefits, and supplemental retirement benefits in 2004, and an annual payment of related taxes) of $86,489$77,546 for such benefits in 20022003 and 2001,2002; supplemental retirement benefits (which includes the payment of related taxes) of $43,860 in 2002 and 2001, and life and disability insurance benefits (which includes the payment of related taxes) of $11,050 in 2003 and $43,860 in 2002 and 2001; for Mr. Parker, in 2003 a $150,000 allowance for life and disability benefits, secondary medical benefits, and supplemental retirement benefits, a car allowance of $17,330 in 2003, and life insurance benefits (which includes the payment of related taxes) of $10,879 in 2003, and $77,546 in 2002 and 2001, supplemental retirement benefits (which includes the payment of related taxes) of $43,860 in 2002 and 2001,2002; and life and disability insurance benefits (which includes the payment of related taxes) of $43,860 in 20022003 and 2001; in 2003 a car allowance of $2,993 for2002. (b) Mr. Clark $3,769 for Mr. Olgreen,was Senior Vice President, Secretary, and $3,042 for Mr. Preator.General Counsel of the Company until July 7, 2004. (c) Includes compensation for Mr. Meisenheimer from his employment date of December 31, 2002. (d) Amounts paid pursuant to Severance Agreement dated August 21, 2002, as follows: severance payments of $195,000 and $120,000; $50,000 for continuing insurance coverage; $25,000 for executive recruiting services; and $32,000 for legal expenses. For additional information, see "Severance Agreement". AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information regarding stock options exercised during fiscal year 20032004 and unexercised stock options held at the end of fiscal year 20032004 by the Chief Executive Officer and the other four most highly compensated executive officers of the Company. The closing bid price for the Company's Common Stock, as reported by the National Association of Securities Dealers Automated Quotation System, was $2.15$2.82 on June 27, 2003,25, 2004, the last trading day of the Company's fiscal year. Value of Number of Unexercised Unexercised In-the-Money Options at Options at Shares Fiscal Year End Fiscal Year Acquired on Value Realized (Exercisable/ End (Exercisable/ Name Exercise (#) ($) Unexercisable)(#) Unexercisable) - --------- ------------- -------------- ----------------- -------------- Ronald W. Parker -- -- 242,500 (e) $ -0- -0- (u) $ -0- B. Keith Clark -- -- 106,500 (e) $ 4,500 -0- (u) $ -0- Ward T. Olgreen -- -- 76,500 (e) $ 4,500 -0- (u) $ -0- Shawn M. Preator -- -- 44,500 (e) $ 4,500 -0- (u) $ -0- Danny K. Meisenheimer -- -- -0- (e) $ -0- -0- (u) $ -0- C. Jeffrey Rogers (a) -- -- -0- (e) $ -0- -0- (u) $ -0- (a) Mr. Rogers was a Director and the Company's Chief Executive Officer until August 21, 2002. For additional information, see "Severance Agreement" below.
Value of Number of Unexercised Unexercised In-the-Money Options at Options at Shares Fiscal Year End Fiscal Year Acquired on Value Realized (Exercisable/ End (Exercisable/ Name Exercise (#) ($) Unexercisable) (#) Unexercisable) - --------------------- ------------ ---------------- ------------------ ------------------- Ronald W. Parker. . . -- -- 62,500 (e) $ 0 0 (u) $ 0 B. Keith Clark.(a). . 30,000 22,800 61,500 (e) $ 0 0 (u) $ 0 Ward. T. Olgreen. . . -- -- 76,500 (e) $24,600 0 (u) $ 0 Shawn M. Preator. . . -- -- 44,500 (e) $24,600 0 (u) $ 0 Danny K. Meisenheimer -- -- 0 (e) $ 0 0 (u) $ 0
(e) Denotes exercisable options. (u) Denotes unexercisable options. (a) Mr. Clark was Senior Vice President, Secretary, and General Counsel of the Company until July 7, 2004. OPTION GRANTS IN LAST FISCAL YEAR DuringThe following table sets forth information regarding stock options granted during fiscal year 20032004, pursuant to the Company did not grant any stock optionsCompany's 1993 Stock Award Plan, to the Chief Executive Officer or any ofand the other four most highly compensated executive officers of the Company.
Individual Grants Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term - ----------------------- ------------------------------ % of Total Options Granted to Exercise Options Employees in Price Expiration Name Granted (#) Fiscal Year ($/Share) Date 5% 10% - ------ ------------- ---------------------------------------- ------------------------------ ------------ --------- ---------- --------- ------- ---- Ronald W. Parker 0 - $ - - $- $ - $- B. Keith Clark 0 - $ - - $- $ - $- Ward T. Olgreen 0 - $ - - $- $ - $- Shawn M. Preator 0 - $ - - $- $ - $- Danny K. Meisenheimer 0 - $ - - $ - $- C. Jeffrey Rogers (a) 0 - $ - - $ - $-
(a) Mr. Rogers was a Director and the Company's Chief Executive Officer until August 21, 2002. For additional information, see "Severance Agreement" below. COMPENSATION COMMITTEE AND STOCK AWARD PLAN COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors is comprised of three independent, non-employee directors. The Compensation Committee is responsible for establishing the level of compensation of the executive officers of the Company. TheCompany and will be responsible for administering the 2004 Non-Employee Director Stock Option Award Plan and the 2004 Employee Incentive Stock Award Plan Committee, which administersif approved by the 1993 Stock Award Plan, is also composed of three non-employee directors.shareholders. The Compensation Committee and the Board have adopted a charter for the Compensation Committee to conform to the Committee's responsibilities tounder the revised Nasdaq standards, of Nasdaq, new rules adopted by the Securities and Exchange Commission,SEC, and the provisions of the Sarbanes-Oxley Act of 2002.Act. Compensation Philosophy and Practice In its administration and periodic review of executive compensation, the Compensation Committee believes in aligning the interests of the executive officers with those of the Company's shareholders. To accomplish this, the Compensation Committee seeks to structure and maintain a compensation program that is directly and materially linked to operating performance and enhancement of shareholder value. The Company intends for allTax Deductibility under Section 162(m) As noted, the Company's compensation paid to its executives to be fully deductible under federal income tax laws. Thepolicy is primarily based upon the practice of pay-for-performance. Section 162(m) of the Internal Revenue Code imposes certain limitationsa limitation on the deductibility of nonperformance-based compensation in excess of $1 million per year paid to executives.the Chief Executive Officer and the other most highly compensated executive officers of the Company. The Compensation Committee currently believes that performance based bonuses and stock options grantedthe Company should be able to continue to manage its executive compensation program for these officers will continueso as to be fully deductible.preserve the related federal income tax deductions. CHIEF EXECUTIVE OFFICER The salary and bonuscompensation of Ronald W. Parker, as Chief Executive Officer of the Company, from August 21, 2002,is based on his employment agreement as more fully described under "Executive Employment Contracts" below. Mr. Parker's employment agreement was approved by the then members of the Board of Directors of the Company and the Compensation Committee as constituted on December 16, 2002. The term of the employment agreement continues through December 31, 2007. Under his employment agreement, Mr. Parker's compensation is determined by the Compensation Committee, the Board of Directors of the Company, or the Stock Award Plan Committee (whose function has been assumed by the Compensation Committee), based on the recommendations of the Compensation Committee. In reviewingThe Compensation Committee's recommendations with respect to Mr. Parker's compensation, however, are subject to other provisions in his employment agreement, including the Compensation Committee foundprovisions that provide that Mr. Parker's total annual compensation may not be reduced to less than an annual salary of $550,000 and a mandatory minimum annual bonus equal to $275,000. Additionally, Mr. Parker is entitled to receive under his compensation terms to beemployment agreement certain defined benefits, which, in line with compensation packages of chief executive officers at similar companies.fiscal 2004, totaled approximately $176,084. The bonus program established in Mr. Parker's employment agreement wasis based on Companythe Company's performance related toin the areas of revenue growth, net income, new store openings, store sales, Company stock price, store closings, and Company expenses. Termination provisions were foundexpenses, subject to payment of the minimum bonus described above. The current Compensation Committee has reviewed the compensation of Mr. Parker and has evaluated Mr. Parker's compensation by comparing it to the compensation of chief executive officers in the restaurant industry, and by considering the Company's current structure and performance, among other things. As a result of this review, the Compensation Committee believes the total amount of Mr. Parker's compensation to be industry competitivewell in excess of the compensation of chief executive officers at comparable companies and in line with historicalbased upon the Company's performance and expected future contributions, and help to ensure his continued leadership. See section entitled "Executive Employment Contracts". FORMER CHIEF EXECUTIVE OFFICERfor the last completed fiscal year. The salary and bonusCompensation Committee also believes that the compensation of C. Jeffrey Rogers,the Chief Executive Officer, as well as other officers and employees of the Company, through August 21, 2002, was paid pursuantshould be more directly tied to his most recent Employment Agreement, effective asindividual performance and the performance of July 1, 1999, as amended on April 20, 2001.the Company. EXECUTIVE OFFICERS SalariesSubject to existing employment agreements, salaries of the executive officers, excluding Mr. Parker, are reviewed annually and adjusted based on competitive practices, changes in level of responsibilities and in certain cases, individual performance measured against goals. The Compensation Committee strongly believes that maintaining a competitive salary structure is in the best interest of shareholders. It believes the Company's long-term success in its marketplace is best achieved through recruitment and retention of high caliber executives who are highlyamong the most skilled and talented in the industry. Bonus targetsThe Compensation Committee also believes that compensation levels for the four most highly paidCompany's executive officers other than the Chief Executive Officer, are set annually. The 2003 bonusesshould be tied to individual and Company performance. Subject to existing employment agreements, salary and bonus for Mr. Olgreen, and Mr. Preator, and for Mr. Clark, prior to his resignation from the Company in July 2004, are based upon their employment agreements as more fully described under "Executive Employment Contracts" below. Mr. Olgreen, Mr. Preator, and Mr. Meisenheimer wereMeisenheimer's bonus for 2004 was based on individual performance, the performance of departmentsthe department within theirhis area of responsibility, and certain goals related to Company operations for the fiscal year. STOCK OPTIONS The Company established the 1993 Employee Stock Award Plan ("Employee Option Plan") for the purpose of aligning employee and shareholder interests. Under this plan,the Employee Option Plan, stock options arewere granted from time to time to certain executive officers, as well as other employees, based upon their relative positions and responsibilities, as well as historical and expected contributions to Company growth. During fiscal yearyears 2003 and 2004, the Company did not grant stock options to employees. The term of the Employee Option Plan expired on October 13, 2003. Expiration does not affect vesting, exercise, or expiration of options previously granted pursuant to the Plan. Upon expiration of the Employee Option Plan no further option grants can be made. The Board expects to grant stock option awards to eligible employees beginning in calendar year 2005 if the shareholders approve Proposal Three "Adoption of an Employee Incentive Stock Option Award Plan." Submitted by the: COMPENSATION COMMITTEE STOCK AWARD PLAN COMMITTEE Butler E. Powell,the Compensation Committee: Steven J. Pully, Chairman Bobby L. Clairday, Chairman F. Jay Taylor Butler E. Powell Steve A. UngermanRobert B. Page Ramon D. Phillips EXECUTIVE EMPLOYMENT CONTRACTS Ronald W. Parker, B. Keith Clark, Ward T. Olgreen, and Shawn M. Preator each entered into an Employment Agreement with the Company on December 16, 2002 whichthat contained the following provisions: (i) a term that currently extends through December 31, 2007 for Mr. Parker and December 31, 2005 for Messrs. Clark, Olgreen and Preator; (ii) the respective executive's compensation will be determined each year by the Compensation Committee; (iii) each executive may be terminated with or without cause, with cause including, but not limited to, breach of monetary obligation to the Company, violation of the employment agreement, fraud against the Company, and failure to substantially perform required duties, each as described in suchthe agreement; (iv) each executive shall receive an annual salary not less than his current salary and a bonus for Mr. Parker of not less than fifty percent of his annual salary based on Company performance related to revenue, net income, new store openings, store sales, Company stock price, store closings, and Company expenses, and a bonus for each of Messrs. Clark, Olgreen and Preator of not less than twenty percent of their respective annual salary based on individual performance, the performance of departments within their responsibility, and certain goals related to Company operations for the fiscal year; (v) each executive is bound by obligations to the Company related to the protection of the Company's trade secrets and confidential information; and (vi) each executive is bound to arbitrate disputes related to theirhis employment agreement. Mr. Parker, Mr. Clark, Mr. Olgreen, or Mr. Preator may terminate theirhis respective agreementsagreement at any time within 12 months after a "change of control"of the Company occurs. Change of control is defined as: (a) a transfer of substantially all of the assets of the Company to any person, group, or entity other than a person, group, or entity that is controlled by the executive; (b) the Company is merged with or into another corporation and the shareholders of the Company prior to such merger own less than 50% of the voting stock of the Company or other surviving corporation after the merger; (c) an unapproved change in the majority of the Company's Board of Directors; or (d) a person, entity, or group (other than (i) the Company or (ii) an employee benefit plan sponsored by the Company) acquires 50% or more of the voting stock of the Company. If the Company terminates Mr. Parker's employment without cause, or if Mr. Parker terminates his employment upon a "change of control," he will be entitled to a lump sum payment equal to four times (i) his highest annual salary over the last three years plus (ii) the highest bonus and other cash compensation received by Mr. Parker during the last three years. If the Company terminates Mr. Clark's, Mr. Olgreen's or Mr. Preator's employment without cause, or if Mr. Clark, Mr. Olgreen, or Mr. Preator terminates his employment upon a "change of control", he will be entitled to a lump sum payment equal to two and one-half times the base amount of his annual compensation, as calculated according to Section 280G of the Internal Revenue Code. In addition, Mr. Parker, Mr. Clark, Mr. Olgreen, and Mr. ParkerPreator would be entitled to an additional "tax gross-up" paymentgross-up payment" as a result of any excise tax that such person is required to pay as a result of such payment being deemed to be an "excess parachute payment" under the Internal Revenue Code. Each agreement includes a noncompetition covenant that would apply for a stated number of years after termination of employment. The number of years for the non-competition covenant is equal to the number of years by which the respective executive's compensation is multiplied pursuant to any severance payments made to such executive. See "The Proxy Contest" for additional information with respect to the potential effects of the election at the Annual Meeting of Newcastle's nominees to the Board of Directors. C. Jeffrey Rogers and the Company entered into an Employment Agreement, executed October 1, 1999 and effective as ofOn July 1, 1999, and an Amendment to the Employment Agreement executed April 20, 2001, for a term to extend through June 30, 2004.7, 2004 Mr. Rogers' employment agreement terminated upon his resignation from the Company on August 21, 2002. Certain benefits and payments to Mr. Rogers' provided for in the agreement ceased at that time. See the section below entitled "Severance Agreement". SEVERANCE AGREEMENT On August 21, 2002, Mr. Rogers and the Company entered into a Severance Agreement and Release (the "Severance Agreement") in connection with Mr. Rogers' resignation ofClark resigned his position as Senior Vice President, Secretary, and General Counsel of the Company, citing provisions of his employment contract requiring him to give notice of his election to terminate his employment within twelve months of a Director and Chief Executive Officer"change of control" of the Company. PursuantThe Company disputes that a "change of control" of the Company has occurred and, pursuant to the terms of Mr. Clark's employment contract, has initiated arbitration proceedings to resolve the Severance Agreement, Mr. Rogers agreed, among other things, to (1) resign from all positions with the Company and its affiliates, (2) generally release the Company from potential claims that he might have against the Company, including any claims for severance payment under his employment agreement, (3) not disclose the Company's confidential information, and (4) enter into a covenant not to sue the Company, its affiliates, officers, or employees. In return, the Company agreed to pay Mr. Rogers approximately $415,000, consisting of accrued vacation, severance pay, life insurance premiums, executive recruiting assistance, and legal fees, plus the amount of any unpaid salary through August 21, 2002.dispute. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On October 6, 1999, the Company loaned C. Jeffrey Rogers, the Company's Chief Executive Officer, approximately $1.95 million to acquire 700,000 shares of the Company's Common Stock through the exercise of vested stock options previously granted to him by the Company. The interest rate on the loan was the same floating interest rate the Company pays on its credit facility with Wells Fargo (Texas), N. A. ("Wells Fargo"). As collateral for the loan, Mr. Rogers granted the Company a second lien on 2,749,000 shares of the Company's Common Stock and certain real property. The Company agreed to subordinate its loan to an existing personal loan made by Wells Fargo to Mr. Rogers. The Wells Fargo loan was secured by a first lien on the collateral pledged to the Company. The principal amount outstanding at all times during fiscal year 2002 was approximately $1,949,000. In August 2002, the Board, based upon a review of certain financial information provided by Mr. Rogers, determined that the collection of the promissory note was doubtful. The Company recorded a charge in the fourth quarter of fiscal 2002 to fully reserve for the possible nonpayment. On August 21, 2002, Mr. Rogers resigned from the Company. On December 9, 2002, Mr. Rogers repaid the loan to the Company, including all accrued interest expense and related costs. The Company reversed the pre-tax reserve in the second quarter of fiscal 2003. On October 6, 1999, the Company loaned Ronald W. Parker, the Company's President and Chief Operating Officer, approximately $557,000$560,000 to acquire 200,000 shares of the Company's Common Stock through the exercise of vested stock options previously granted to him by the Company. On July 7, 2000, the Company loaned Mr. Parker approximately $302,000 to acquire an additional 200,000 shares of the Company's Common Stock through the exercise of vested stock options previously granted to him by the Company. The interest rate on the loans is the same floating interest rate the Company pays on its credit facility with Wells Fargo. As collateral for the loans, Mr. Parker granted the Company (i) a first lien on 100,000 previously purchased shares of the Company's Common Stock and certain real property, and (ii) a second lien inon certain additional real property. After the July 7, 2000 loan, the principal amount outstanding was $859,000. Mr. Parker paid the Company approximately $170,000 of the principal amount, leaving a current principal loan balance at fiscal year end of approximately $689,000. All amounts are due and payable on each loan on June 30, 2004.$862,000. The Board of Directors approved each loan, with the specific terms and collateral being approved by the Compensation Committee. On October 30, 2000, Mr. Parker paid the Company approximately $165,000 of the principal amount of the loans, and on June 10, 2004 Mr. Parker paid the remaining principal balance and accrued interest in full. The Company has released all liens on the shares of Common Stock and the real property pledged by Mr. Parker as collateral for the loans. The Company currently has no outstanding loans to its officers or directors. Bobby L. Clairday is President and sole shareholder of Clairday Food Services, Inc. and is sole shareholder of Advance Food Services, Inc., both of which are franchisees of the Company. Mr. Clairday also holds area development rights in his own name. Mr. Clairday currently operates 1211 restaurants in Arkansas, either individually or through the corporations noted above. As franchisees, the two corporations purchase a majority of their food and other supplies from the Company's distribution division. In fiscal year 2003,2004, purchases by these franchisees made up 6%4.4% of the Company's food and supply sales,sales. Royalty payments by Mr. Clairday and royalties,such franchisees were 3.2% of the Company's royalty revenues, and license fees and area development fees from Mr. Clairday and such franchisees made up 4%6.3% of the Company's franchise revenues. SHAREHOLDER PROPOSALS REPEAL OF BYLAW AMENDMENTS AND REIMBURSEMENT OF EXPENSES OnAs of October 27, 2003,1, 2004 Advance Food Services, Inc. and Clairday Food Services, Inc. collectively owed the Company received a noticeapproximately $946,329, primarily for royalties and purchases of products from Newcastle that it intends to solicit the consent of shareholders at the Annual Meeting through a proxy statement to repeal certain of the amendments to the Company's bylaws adopted bydistribution division ("Clairday Debt"). Of the Board of Directors of the Company on December 18, 2002 (the "Bylaw Amendments") and to seek approval to have all of its expenses incurred in connection with any proxy or other solicitation materials reimbursed by the Company. On November 7, 2003, the Company received a subsequent letter from Newcastle advising the Company that the specific shareholder proposals that it intends to present at the Annual Meeting are as follows: - - the adoption of a resolution repealing the amendment to Article III, Section 7, new Article III, Section 13 and new Article IV, Section 6 of the Amended and Restated Bylaws of Pizza Inn adopted by the Pizza Inn Board on December 18, 2002; and - - the adoption of a resolution recommending to the Pizza Inn Board that Pizza Inn reimburse Newcastle for all expenses (including any litigation expenses) it incurs in connection with its solicitation of proxies for the Annual Meeting. REPEAL OF BYLAW AMENDMENTS The amendments to the Company's bylaws that Newcastle seeks to repeal are discussed below. Article III, Section 7 (which deals with who is authorized to call a special meeting of shareholders) was amended to delete the ability of shareholders owning at least one-third (1/3) intotal amount of the entire capital stockClairday Debt outstanding on that date, approximately $556,434 represents normal and customary 30-day purchase and payment cycles for these franchisees, which often pay 1 to 15 or 16 to 30 days outside of terms. The balance of the Clairday Debt, approximately $335,318, represents amounts incurred by Advance Foods, Inc. during a period in 1996 and 1997 following Mr. Clairday's sale of that company to unrelated third parties and prior to his reacquisition of the company in 1997 ("Advance Foods Debt"). The Company issuedcarries the Advance Foods Debt on its books as past due trade receivables, with no interest accrual. From time to time Mr. Clairday makes payments toward reduction of the Advance Foods Debt, and outstanding to call a special meeting. Article III, Section 13 (which requires shareholders to provide advance notice to the Company of matters that shareholders wishwill from time to raise at shareholder meetings)time set off certain payments due Mr. Clairday or Advance Foods, Inc. against the Advance Foods Debt, reducing the balance owed. The last payment made by Mr. Clairday toward the Advance Foods Debt was added to$5,232 in June 2000, and the Bylaws. The full text of Article III, Section 13 is as follows: SECTION 13. BUSINESS AT SHAREHOLDERS' MEETING.last set-off applied by the Company against the Advance Foods Debt was $1,167 in April 2001. No payment or set off was applied during fiscal 2004. At any meetingJune 27, 2004, the amount of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the directionAdvance Foods Debt was $335,318. As of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before a meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than fifty (50) days nor more than seventy-five (75) days prior to the meeting; provided, however, that in the event that less than sixty-five (65) days notice or prior public disclosure of theNovember 16, 2004 mail date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received no later than the close of business on the fifteenth (15th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such shareholder's notice to the Secretary shall set forth (a) as to each matter the shareholder proposes to bring before the meeting, a brief description of business desired to be brought before the meeting and the reasons for conducting such business at the meeting, and (b) as to the shareholder giving the notice (i) the name and record address of the shareholder, (ii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the shareholder and (iii) any material interest of the shareholder in such business. No business shall be conducted at a meeting of the shareholders unless proposed in accordance with the procedures set forth herein. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the foregoing procedure and such business shall not be transacted. To the extent this Section 13 shall be deemed by the Board of Directors or the Securities and Exchange Commission, or finally adjudged by a court of competent jurisdiction, to be inconsistent with the right of shareholders to request inclusion of a proposal in the Corporation's proxy statement, pursuantMr. Clairday was engaged in negotiations with his lenders to Rule 14a-8 promulgated underfinance the Securities Exchange Act of 1934, as amended, such rule shall prevail. Article IV, Section 6 (which requires shareholders to provide advance notice toAdvance Foods Debt and pay the Company of individuals that shareholders desire to nominate for election to the Board of Directors at a meeting of the shareholders called for the purpose of electing directors) was also added to the bylaws. The full text of Article IV, Section 6 is as follows: SECTION 6. NOMINATIONS TO BOARD OF DIRECTORS. Nominations of persons for election to the Board of Directors of the Corporation at a meeting of the shareholders may be made by or at the direction of the Board of Directors or may be made at a meeting of shareholders by any shareholder of the Corporation who is entitled to vote for the election of Directors at the meeting in compliance with the notice procedures set forth in this Section 6 of Article IV. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than fifty (50) days nor more than seventy-five (75) days prior to the meeting; provided, however, that in the event that less than sixty-five (65) days notice or prior public disclosure of the date of the meeting is given or made no later than the close of business on the fifteenth (15th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such shareholder's notice to the Secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a Director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the person and (iv) any other information related to the person that is required to be disclosed in solicitations for proxies for election of Directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended; and (b) as to the shareholder giving the notice (i) the name and record address of the shareholder and (ii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the shareholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as Director of the Corporation. No person shall be eligible for election as a Director of the Corporation at a meeting of the shareholders unless such person has been nominated in accordance with the procedures set forth herein. If the facts warrant, the Chairman of the meeting shall determine and declare to the meeting that a nomination does not satisfy the requirements set forth in the preceding sentence and the defective nomination shall be disregarded. Nothing in this Section 6 shall be construed to affect the requirements for proxy statements of the Corporation under Regulation 14A of the Exchange Act. At the time the Board of Directors approved the Bylaw Amendments, it determined that the amendments were in the best interests of the Company. The Board of Directors continues to believe that the Bylaw Amendments are in the best interest of the Company and therefore recommends that shareholders vote AGAINST the repeal of the Bylaw Amendments. The Bylaw Amendments established an advance notice procedure with regard to the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors (the "nomination procedure") and with regard to certain matters to be brought before a meeting of shareholders (the "business procedure"). If the chairman presiding at the meeting determines that a person was not nominated in accordance with the nomination procedure, such person will not be eligible for election as a director, or if the chairman presiding determines that other business was not properly brought before such meeting in accordance with the business procedure, such business will not be conducted at such meeting. Nothing in the nomination procedure or the business procedure preclude discussion by any shareholder of any nomination or business properly made or brought before the annual meeting of shareholders in accordance with the procedures specified in the bylaws. By requiring advance notice of nominations by shareholders, the nomination procedure affords the Board of Directors an opportunity to consider the qualification of the proposed nominees and, to the extent deemed necessary or desirable by the Board of Directors, to inform the shareholders about such qualifications. By requiring advance notice of proposed business, the business procedure provides the Board of Directors with an opportunity to inform shareholders of any business proposed to be conducted at a meeting and the Board of Directors' position on any such proposal, enabling shareholders to better determine whether they desire to attend the meeting or grant a proxy to the Board of Directors as to the disposition of such business. In addition, the business procedure provides for a more orderly procedure for conducting the annual meeting of shareholders. Although our bylaws do not give the Board of Directors any power to approve or disapprove shareholder nominations for the election of directors or any other business desired by shareholders to be conducted at an annual meeting, our bylaws may have the effect of precluding a nomination for the election of directors or of precluding any other business at a particular annual meeting if the proper procedures are not followed. The Bylaw Amendments also limited the calling of special meetings of shareholders to the chief executive officer or a majority of the Board of Directors. This amendment eliminated the ability of the holders of 1/3 of the Company's outstanding stock from accelerating a meeting of shareholders in order to bring a proposal for shareholder approval. The purpose of this amendment was to prevent a significant shareholder or proxy contestant from forcing shareholder consideration of a proposal before the Board has had an opportunity to review the proposal. The Bylaw Amendments may discourage or deter a third party from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of the Company, even if the conduct of such business or such attempt might be beneficial to the Company and its shareholders. The existence of anti-takeover provisions (whether the intention of these provisions is to effect an anti-takeover plan or whether the anti-takeover effect is merely incidental) has disadvantages and advantages to the shareholders. On the one hand, the existence of anti-takeover provisions may tend to lower the market price of the Company's Common Stock because the Company may be less attractive to third parties who would otherwise be interested in accumulating stock in a takeover attempt, but are discouraged from doing so because of the anti-takeover provisions. Anti-takeover provisions may also result in an issuer's management becoming entrenched and not readily susceptible to changes in management sought by the shareholders. On the other hand, the existence of anti-takeover provisions may be helpful to the Company and the shareholders because they might make the Company less vulnerable to a takeover of the Company at a time when the market price of the Common Stock is low relative to the perceived value of the Company, and the existence of anti-takeover provisions might insulate the Company's management from pressure to enter into transactions or take other actions that might not be in the best interest of the shareholders. EXPENSE REIMBURSEMENT Because the Board of Directors believes that the repeal of the Bylaw Amendments would not be in the best interest of the Company, the Board of Directors does not believe that the Company should reimburse Newcastle for the expenses (including any litigation expenses) incurred by it in connection with any proxy or other solicitation materials seeking the repeal of the Bylaw Amendments. RECOMMENDATION OF BOARD OF DIRECTORS IF NEWCASTLE PRESENTS ITS PROPOSALS TO REPEAL THE BYLAW AMENDMENTS AT THE ANNUAL MEETING AND/OR TO SEEK REIMBURSEMENT OF ITS PROXY SOLICITATION EXPENSES, THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "AGAINST" THESE PROPOSALS. INDEPENDENT AUDITORS For the Company's fiscal year beginning June 30, 2003, the Audit Committee has selected BDO Seidman LLP certified public accountants as the independent auditors of the Company for fiscal year 2004. A representative of BDO Seidman LLP will be present at the Annual Meeting, will be available to respond to appropriate questions, and will have an opportunity to make a statement. For fiscal 2004, BDO Seidman replaces PricewaterhouseCoopers LLP, which was the Company's independent auditor for the fiscal year ending June 29, 2003. The Company does not anticipate that a representative of PricewaterhouseCoopers will be present at the Annual Meeting, nor does it anticipate that a representative will be available to make a statement or to answer questions. The decision to change accountants was made by vote of the Board's Audit Committee, and the dismissal of PricewaterhouseCoopers became effective on October 8, 2003. During fiscal years 2002 and 2003, there were no disagreements between the Company's senior management and PricewaterhouseCoopers' senior audit personnel on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure such that would have caused PricewaterhouseCoopers to have made reference to the subject matter of such disagreements in connection with its audit report. AUDIT FEES. The aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered for the audit of the Company's annual financial statements for the year ended June 29, 2003 and the reviews of the financial statements included in the Company's Forms 10-Q for that year were $129,540. FINANCIAL INFORMATION SYSTEM DESIGN AND IMPLEMENTATION FEES. During fiscal year 2003, PricewaterhouseCoopers LLP did not bill the Company for any professional services for financial information systems design and implementation. ALL OTHER FEES. All other fees billed by PricewaterhouseCoopers LLP for fiscal year 2003 totaled $62,580, including audit-related services of $13,656 and non-audit services of $48,924. Non-audit services generally include fees for a change in tax accounting method, tax return preparation, foreign tax analysis and calculation, and review of the Company's Franchise Offering Circular. In considering and authorizing these payments to PricewaterhouseCoopers LLP for services unrelated to performance of the audit of the Company's financial statements, the Audit Committee has determined that the change in tax accounting method services, tax return preparation, foreign tax analysis and calculation, and review of the Company's franchise offering circular undertaken by PricewaterhouseCoopers LLP are not inconsistent with its performance of the audit and financial statement review functions and are compatible with maintaining its independence.full. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 ("Act") requires the Company's executive officers and directors and the persons who own more than ten percent of the Company's Common Stock to file initial reports of ownership of Common Stock and reports of changes of ownership with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. and to furnish the Company with copies of such reports. The Company believes that, during the preceding fiscal year and prior fiscal years, all of the Company's executive officers, directors and holders of more than 10% of its Common Stock timely filed all reports required by Section 16(a) of the Exchange Act.Act, except as previously disclosed and except for the following filings made on behalf of the following directors: For Mr. Schwarz, a Form 4 Statement of Changes in Beneficial Ownership of Securities reflecting purchase of 7,500 shares of Common Stock on June 30, 2003 was not timely filed. A filing was made on July 14, 2003. For Mr. Phillips, a Form 4 Statement of Changes in Beneficial Ownership of Securities reflecting sale of 5,290 shares of Common Stock on April 2, 2004 was not timely filed. A filing was made on April 13, 2004. PROPOSAL TWO: ADOPTION OF NON-EMPLOYEE DIRECTORS STOCK AWARD PLAN There will be presented to the meeting a proposal to adopt the 2004 Non-Employee Directors Stock Award Plan ("2004 Plan"). The 2004 Plan will replace the 1993 Outside Directors Stock Award Plan, which expired by its terms on October 13, 2003. The Board believes that an equity-based incentive plan is an integral component of an attractive compensation program that will attract, retain, and reward qualified non-employee directors, to the benefit of the Company and its shareholders. The Board has approved the 2004 Plan and directed that it be submitted to the shareholders for approval. Description of the Proposed 2004 Plan Administration. The 2004 Plan is administered by the Compensation Committee, which is comprised of three non-employee directors who are not employed by the Company and who satisfy the "independence" requirements under rules issued by the SEC and Nasdaq. Eligibility. All non-employee directors of the Company ("Non-Employee Directors") are eligible to participate in the 2004 Plan. A Non-Employee Director is a member of the Company's Board of Directors who is not, and has not been during the immediately preceding 12-month period, an employee of the Company. Shares Subject to the Plan. The total number of shares of Common Stock that may be issued to Non-Employee Directors under the 2004 Plan shall not exceed 200,000. Awards granted under the 2004 Plan that expire or terminate without being exercised may be regranted. Awards and Limitations. Under the 2004 Plan, options to acquire two shares of Common Stock shall be granted on the first day of each 2004 Plan year (currently a plan year is the Company's fiscal year) for each share of Common Stock purchased by a Non-Employee Director during each preceding 2004 Plan year, up to a maximum award of 50,000 shares per Non-Employee Director per 2004 Plan year. Exercise Price. The exercise price for any option granted under the 2004 Plan may not be less than the fair market value of the Common Stock on the date of grant. Fair market value is defined in the 2004 Plan as the closing price for the Common Stock on Nasdaq on the date of the option award. The fair market value of the Common Stock was $2.85 on November 3, 2004. Terms of Option Awards. For all awards under the 2004 Plan, the minimum vesting period is six months after grant and the maximum exercise period is five years after vesting. Payment for shares purchased pursuant to exercise of an option award must be made at the time of exercise in cash or other payment method approved by the Committee. Term of the 2004 Plan. The 2004 Plan terminates three years from December 15, 2004 or such earlier date as the Board may determine and no awards may be granted thereafter. Option Exercise and Transfer. Awards granted pursuant to the 2004 Plan may not be transferred other than as provided in the 2004 Plan and may only be exercised by the participant, or, in the event of his death, by his heirs or estate. Upon the death (or permanent disability) of a participant while serving as a Non-Employee Director, any outstanding unvested award becomes immediately vested and the option award may be exercised by the participant's heirs, estate, or guardian within one year following the participant's death (or commencement of such disability), after which any unexercised option award terminates. If a Non-Employee Director's service as a member of the Board terminates for any reason other than death or disability, all unvested and all unexercised vested option awards terminate, but under certain circumstances the Director may have three months within which to exercise vested options. In the event of a "change of control" of the Company, as defined in the 2004 Plan, all outstanding option awards will become immediately vested and exercisable. Plan Amendment and Modification. The Committee may amend or terminate the 2004 Plan, including modification or waiver of terms as they apply to individual participants. However, shareholder approval is required for any amendment that would: increase the aggregate number of shares of Common Stock issuable under the 2004 Plan; materially increase the benefits accruing to participants in the 2004 Plan; or modify the eligibility requirements for, or decrease the minimum exercise price of, any options. No amendment or termination of the 2004 Plan may adversely affect the rights of any participant under any then outstanding award without the consent of the participant. The 2004 Plan provides for automatic adjustments to prevent dilution or enlargement of the participant's rights in the event of a stock split, stock dividend, or similar transaction. No adjustments or reduction of the exercise price of any outstanding award may be made in the event of a decline in the price of the Common Stock, either by reducing the exercise price of outstanding awards or by canceling outstanding awards in connection with regranting incentives at a lower price to the same Participant. Federal Income Tax Consequences Under the Directors Plan. Option awards under the Plan are treated as nonqualified options. Nonqualified Stock Options. Nonqualified stock option awards granted under the Plan do not qualify as "incentive stock options" and will not qualify for any special tax benefits to the participant. A participant generally will not recognize any taxable income at the time the nonqualified option award is granted. However, upon its exercise, the participant will recognize ordinary income for federal tax purposes measured by the excess of the then fair market value of the Common Stock over the exercise price. The income realized by the participant will not be subject to income and other employee withholding taxes. A participant's basis for determination of gain or loss upon the subsequent disposition of Common Stock acquired upon the exercise of a nonqualified option award will be the amount paid for such Common Stock plus any ordinary income recognized as a result of the exercise of such option award. Upon disposition of any Common Stock acquired pursuant to the exercise of a nonqualified option award, the difference between the sale price and the participant's basis in the Common Stock will be treated as a capital gain or loss and generally will be characterized as long-term gain or loss if the Common Stock has been held for more than one year at its disposition. In general, there will be no federal income tax deduction allowed to the Company upon the grant or termination of a nonqualified option award or a sale of disposition of the Common Stock acquired upon the exercise of a nonqualified option award. However, upon the exercise of a nonqualified option award or a sale or disposition of the Common Stock acquired upon the exercise of a nonqualified option award, the Company will be entitled to a deduction for federal income tax purposes equal to the amount of ordinary income that a participant is required to recognize as a result of the exercise, provided that the deduction is not otherwise disallowed under the Internal Revenue Code. NEW PLAN BENEFITS The following table sets forth information, as of November 3, 2004, concerning the benefits or amounts that will be received by or allocated to the non-employee directors and all non-employee directors as a group under the 2004 Plan, to the extent such benefits or amounts are determinable as of November 3, 2004: 2004 PLAN NAME AND POSITION DOLLAR VALUE ($) NUMBER OF UNITS (1) ----------------- ---------------- --------------- Mark E. Schwarz, Director 71,250 25,000 (2) Steven J. Pully, Director 50,895 17,858 (3) (1) The awards under the 2004 Plan and the shares underlying any such award may be subject to certain vesting, exercise, acceleration, and/or other rights, restrictions, and conditions, at various exercise prices, in each case, as determined by the Compensation Committee. (2) On November 3, 2004, the Compensation Committee awarded Mark E. Schwarz an option to purchase 25,000 shares of common stock of the Company at an exercise price of $2.85 per share. The option will vest on November 3, 2005 and will expire on November 3, 2010. (3) On November 3, 2004, the Compensation Committee awarded Steven J. Pully an option to purchase 17,858 shares of common stock of the Company at an exercise price of $2.85 per share. The option will vest on November 3, 2005 and will expire on November 3, 2010. Recommendation of the Board of Directors The Board believes that the adoption of the 2004 Plan will enable the Company and its shareholders, through the future grant of stock options based upon a Director's increase in equity position, to continue to secure the benefit of the incentives inherent in director stock ownership. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS APPROVE THE 2004 PLAN. PROPOSAL THREE: APPROVAL OF AN EMPLOYEE STOCK AWARD PLAN There will be presented to the meeting a proposal to adopt the 2004 Employee Incentive Stock Award Plan (the "Employee Plan"). The Employee Plan will replace the 1993 Employee Stock Award Plan, which expired by its terms on October 13, 2003. The Board believes stock options play an important role in attracting and retaining the services of outstanding personnel and in encouraging such employees to have a greater financial investment in the Company (although the Employee Plan does not necessarily require them to hold for investment the stock received under the Employee Plan). The Board has approved the Employee Plan and directed that it be submitted to the shareholders for approval. Description of the Proposed Employee Plan Administration. The Employee Plan is administered by the Compensation Committee ("Committee"), which is comprised of three non-employee directors who are not employed by the Company, who are not eligible to receive awards under the Employee Plan, and who satisfy the "independence" requirements under rules issued by the SEC and Nasdaq. Eligibility. All regular, full-time employees of the Company, its operating divisions, affiliates, subsidiaries, Company-operated restaurants, and other employees designated from time to time by the Committee ("Employees or "Participants") are eligible to participate in the Employee Plan. As of November 1, 2004, there were approximately 150 individuals eligible to participate in the Employee Plan. Shares Subject to the Plan. The total number of shares of Common Stock that may be issued or transferred to Employees under the Employee Plan shall not exceed 500,000. Awards granted under the Employee Plan that expire or terminate without being exercised may be regranted. Awards and Limitations. No Employee may receive grants under the Employee Plan in any given year that, singly or in the aggregate, cover more than 50,000 shares of Common Stock. Exercise Price. The exercise price for any option granted under the Employee Plan may not be less than the fair market value of the Common Stock on the date of grant. Fair market value is defined in the Employee Plan as the closing price for the Common Stock on Nasdaq on the date of the option award. The fair market value of the Common Stock was $2.85 on November 3, 2004. Terms of Option Awards. For all awards under the Employee Plan, the minimum vesting period is six (6) months after grant and the maximum exercise period is five years after vesting. Payment for shares purchased pursuant to exercise of an option award must be made at the time of exercise in cash or other payment method approved by the Committee. Term of the Employee Plan. The Employee Plan terminates three years from December 15, 2004 or such other date as the Board may determine, and no awards may be granted thereafter. Option Exercise and Transfer. Awards granted pursuant to the Employee Plan may not be transferred other than as provided in the Employee Plan and may only be exercised by the participant, or, in the event of his death, by his heirs or estate. Upon the death (or permanent disability) of an Employee, any outstanding unvested award becomes immediately vested and the option award may be exercised by the Employee's heirs, estate, or guardian within one year following the Employee's death (or commencement of such disability), after which any unexercised option award terminates. If an Employee's employment terminates for any reason other than death or disability, any unvested option awards terminate, and the Employee will have thirty (30) days within which to exercise vested options. In the event of a "change of control" of the Company, as defined in the Employee Plan, all outstanding option awards will become immediately vested and exercisable. Plan Amendment and Modification. The Committee may amend or terminate the Employee Plan, including modification or waiver of terms as they apply to individual Participants. However, shareholder approval is required for any amendment that would: increase the aggregate number of shares of Common Stock issuable under the Employee Plan; materially increase the benefits accruing to Participants in the Employee Plan; or modify the eligibility requirements for, or decrease the minimum exercise price of, any options. No amendment or termination of the Employee Plan may adversely affect the rights of any Participant under any then outstanding award without the consent of the Participant. The Employee Plan provides for automatic adjustments to prevent dilution or enlargement of the Participant's rights in the event of a stock split, stock dividend, or similar transaction. No adjustments or reduction of the exercise price of any outstanding award may be made in the event of a decline in the price of the Common Stock, either by reducing the exercise price of outstanding awards or by canceling outstanding awards in connection with regranting incentives at a lower price to the same Participant. Federal Income Tax Consequences Under the Employee Plan. Following is an explanation of the U.S. federal income tax consequences for grantees who are subject to tax in the U.S. Incentive Stock Options. Option awards under the Plan are treated as incentive options ("ISO"). The grant of an ISO does not result in income for the grantee or a deduction for the Company. The exercise of an ISO would not result in income for the grantee if the grantee (i) does not dispose of the shares within two (2) years after the date of grant or one (1) year after the transfer of shares upon exercise, and (ii) is an employee of the Company from the date of grant and through and until three (3) months before the exercise date. If these requirements are met, the basis of the shares upon later disposition would be the option price. Any gain will be taxed to the Employee as long-term capital gain and the Company would not be entitled to an deduction. The excess of the market value on the exercise date over the option price is an item of tax preference, potentially subject to the alternative minimum tax. If the Employee disposes of the shares prior to the expiration of either of the holding periods, the Employee would recognize ordinary income and the Company would be entitled to a deduction equal to the lesser of the fair market value of the shares on the exercise date minus the option price or the amount realized on disposition minus the option price. Any gain in excess of the ordinary income portion would be taxable as long-term or short-term capital gain. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS APPROVE THE EMPLOYEE PLAN. PROPOSAL FOUR: APPROVAL OF AN AMENDMENT TO THE COMPANY'S RESTATED ARTICLES OF INCORPORATION TO DECLASSIFY THE BOARD OF DIRECTORS On October 20, 2004, the Board of Directors approved a proposal to amend the Company's Restated Articles of Incorporation to delete Section 8.2, which currently provides that the Board be divided into two classes of Directors, Class I and Class II, with each class elected for a term expiring at the annual meeting of the Company's shareholders held in the second year following their election. The amended and substituted Section 8.2 would provide for one class of Directors beginning with the slate of Directors proposed to the shareholders at the annual meeting of the Company's shareholders in 2005. Members of the single class would be subject to re-election every year. The proposal to amend the Restated Articles of Incorporation requires the approval of holders of a majority of the shares present in person or represented by proxy and entitled to vote. The text of the existing and proposed versions of Section 8.2 is set forth below. Current Section 8.2 of the Company's Restated Articles of Incorporation. - ------------------------------------------------------------------------------- 8.2 The directors shall be divided into two (2) classes with respect to the time for which they severally hold office, designated Class I and Class II. Class I shall be composed of four (4) directors who shall hold office until the 1994 Annual meeting and until their respective successors shall be elected and shall qualify. Class II shall be composed of three (3) directors (the initial members of this class being designated in the Plan), who shall hold office until the annual meeting of the shareholders in 1993 and until their respective successors shall be elected and shall qualify. Upon expiration of the initial terms of the office of directors as classified above, their successors shall be elected for a term expiring at the annual meeting of the Corporation's shareholders held in the second year following the year of their election. Any director elected to fill any vacancy on the Board of Directors shall hold office for the remainder of the full term of the class of directors in which such vacancy occurs. Section 8.2 as amended to reflect the changes discussed above in Proposal --------------------------------------------------------------------------- Four. --- 8.2 Beginning with the Company's 2004 annual meeting of shareholders, if the shareholders vote to amend the Restated Articles to so provide, there shall be one (1) class of directors, who shall be elected annually. Those directors currently referred to as Class I Directors, who are nominated for election at the 2004 annual meeting of shareholders, if elected, will hold office until the 2005 annual meeting of shareholders, at which time they, or their successors, must be nominated for election as members of a single class of directors. Those directors currently referred to as Class II Directors, who were elected at the 2003 annual meeting of shareholders to hold office until the 2005 annual meeting of shareholders, will complete their terms at the 2005 annual meeting of shareholders, at which time they, or their successors, must be nominated for election as members of a single class of directors. Any director elected to fill any vacancy on the Board of Directors shall hold office for the remainder of the full term of the director whose position such newly elected director fills. If Proposal Four is not approved by the shareholders, directors will continue to be elected by class, with the members of each class holding office for a term to expire at the annual meeting of the Company's shareholders held in the second year following the year of their election. Recommendation of the Board of Directors Management and the Board of Directors believes that one class of directors to be annually re-elected is consistent with good governance practices and provides greater accountability of the Board to the Company's shareholders. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS APPROVE THIS AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION. INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON Our non-employee directors may benefit from the 2004 Plan as non-employee directors may be eligible to participate in the 2004 Plan and may receive benefits and awards under the 2004 Plan. Certain non-employee directors have already received awards under the 2004 Plan that are subject to shareholder approval of the 2004 Plan. These awards are described in this Proxy Statement under the caption "NEW PLAN BENEFITS". The Board of Directors, in approving the 2004 Plan, may have different and/or conflicting interests than or with the shareholders of the Company. In addition, the Board of Directors, management of the Company, and the shareholders affiliated with the Company may have different and/or conflicting interests than or with the shareholders of the Company that are not affiliated with the Company in any capacity other than in their capacity as a shareholder of the Company. SHAREHOLDER PROPOSALS FOR THE 20042005 ANNUAL MEETING If a shareholder wishes to present a proposal at the Annual Meeting of Shareholders tentatively scheduled for January 25,December 14, 2005, the shareholder must deliver his or her proposal to the Company at its principal executive offices no later than August 5, 2004, in such form as required under rules issued by the Securities and Exchange Commission,July 15, 2005 in order to have that proposal included in the proxy materials of the Company for such Annual Meeting of Shareholders. UnlessIf a shareholder wishes to present a proposal at the Company's advance notice bylaw provision2005 Annual Meeting of Shareholders, but does not wish to include the proposal in the proxy materials of the Company for such Annual Meeting of Shareholders, the shareholder must notify the Company in writing of his or her intent to make such presentation no later than September 28, 2005 or the Company shall have the right to exercise its discretionary voting authority when such proposal is repealedpresented at the Annual Meeting if a shareholder intends to submit a matter for consideration at next year's meeting, other than by submitting aof Shareholders, without including any discussion of that proposal to be included in the Company's proxy statement, the shareholder must give timely notice according to the Company's bylaws. Those bylaws provide that, to be timely, a shareholder's notice must be received by the Company's Corporate Secretary at 3551 Plano Parkway, The Colony, Texas 75056, not less than 50 days nor more than 75 days prior to the meeting. However, if less than 65 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, the shareholders must deliver notice to the Company no later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. For each matter the shareholder intends to bring before the meeting, the notice must specify: (a) the name and address of the shareholder as they appear on the books of the Company; (b) the class and number of shares of the Company's stock that are beneficially owned by the shareholder; (c) any material interest of the shareholder in the proposed business described in the notice; (d) if such business is a nomination for director, each nomination sought to be made, together with the reasons for each nomination, a description of the qualifications and business or professional experience of each proposed nominee and a statement signed by each nominee indicating his or her willingness to serve if elected, and disclosing the information about him or her that is required by the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder to be disclosed in the proxy materials for the meeting involved if heAnnual Meeting. To be in proper form, a shareholder's notice must include the specified information concerning the proposal or she werenominee as described in the Company's Bylaws. A shareholder who wishes to submit a nominee of the Company for election as one of its directors; (e) if such businessproposal or nomination is other than a nomination for director, the nature of the business, the reasons why it is soughtencouraged to be raised and submitted for a vote of the shareholders and if and why it is deemed by the shareholder to be beneficialseek independent counsel with regard to the Company;Company's Bylaws and (f) if so requestedSEC requirements. The Company will not consider any proposal or nomination that does not meet its Bylaw requirements and the SEC's requirements for submitting a proposal or nomination. Notices of intention to present proposals at the Company's 2005 Annual Meeting of Shareholders should be addressed to the Corporate Secretary, Pizza Inn, Inc., 3551 Plano Parkway, The Colony, TX 75056, or by fax to (469) 384-5061, or by e-mail to corporate_secretary@pizzainn.com. -------------------------------- The Company reserves the Company, allright to reject, rule out of order, or take other information that would be required to be filed with the Securities and Exchange Commission (the "SEC") if,appropriate action with respect to the business proposed to be brought before the meeting, the person proposing such business was a participant in a solicitation subject to Section 14 of the Exchange Act.any proposal that does not comply with these and other applicable requirements. STOCK PERFORMANCE GRAPH The following graph compares the cumulative annual total shareholder return (change in share price plus reinvestment of any dividends) on the Company's Common Stock versus two indexes for the past five fiscal years. The graph assumes $100 was invested on the last trading day of the fiscal year ending June 28, 1998. Prior to the first quarter of fiscal year 1998 and subsequent to the second quarter of fiscal year 2001, the Company did not pay cash dividends on its Common Stock during the applicable period. The Dow Jones Equity Market Index is a published broad equity market index. The Dow Jones Entertainment and Leisure Restaurant Index is compiled by Dow Jones and Company, Inc., and is comprised of seven public companies, weighted for the market capitalization of each company, engaged in restaurant or related businesses (CKE Restaurants, Inc., Brinker International, Inc., Cracker Barrel Old Country Store, Inc., Darden Restaurants, Inc., McDonald's Corporation, Tricon Global Restaurants, Inc., and Wendy's International, Inc.).
PIZZA INN INC NEW Cumulative Total Return 6/28/1998 6/27/1999 6/25/2000 6/24/2001 6/30/2002 6/29/2003 6/27/2004 PIZZA INN, INC. . . . . . 100.00 69.93 75.45 48.48 28.60 48.03107.90 69.33 40.89 68.69 90.09 DOW JONES US TOTAL MARKET 100.00 115.99 131.10 111.93 92.17 93.20113.03 96.50 79.46 80.51 96.13 DOW JONES US RESTAURANTS. 100.00 111.42 88.09 90.35 107.16 96.0879.06 81.09 96.18 86.50 106.18
MISCELLANEOUS The accompanying proxy is being solicited on behalf of the Board of Directors of the Company. The expensecost of preparing, printing, and mailing the proxy and the material used in the solicitation thereofhas been or will be borne by the Company. The Company anticipates that its costs and expenses related to the solicitation of proxies pursuant to this proxy statement will be approximately $35,000 more than what the Company would normally spend for the solicitation of proxies in connection with an annual meeting. In addition to the use of the mails, proxiesProxies may also be solicited by directors, officers, and officersemployees of the Company in person or by personal interview, telephone, telefax, or telefax.email without compensation for those activities other than reimbursement for out-of-pocket expenses. Arrangements may also be made with brokerage houses and other custodians, nominees, and fiduciaries for the forwarding of solicitation materials to the beneficial owners of stock held of record by such persons, and the Company may reimburse them for reasonable out-of-pocket expenses of such solicitation. A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K EXCLUDING EXHIBITS, DATED SEPTEMBER 25, 2003,24, 2004, IS BEING FURNISHED TO SHAREHOLDERS WITH THIS PROXY STATEMENT. COPIES OF SUCH EXHIBITS WILL BE FURNISHED UPON WRITTEN REQUEST AND UPON REIMBURSEMENT OF THE COMPANY'S REASONABLE EXPENSES FOR FURNISHING SUCH EXHIBITS. REQUESTS SHOULD BE ADDRESSED TO PIZZA INN, INC., 3551 PLANO PARKWAY, THE COLONY, TEXAS 75056, ATTENTION: CORPORATE SECRETARY. This Proxy, when properly executed, will be voted by the Proxies in the manner designated below. If this Proxy is returned signed but without a clear voting designation, the Proxies will vote FOR Item 1, Item 2, Item 3, and Item 4. Please mark Your votes as indicated IN THIS EXAMPLE. [X] THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 1, ITEM 2, ITEM 3, AND ITEM 4. Item 1. ELECTION OF CLASS I DIRECTORS. Nominees: Bobby L. Clairday, Ronald W. Parker, Butler E. Powell, Mark E. Schwarz WITHHELD FOR FOR ALL WITHHELD FOR: (Write that nominee's name in the space provided below). [ ] [ ] ------------------------------------------------------ Item 2. ADOPTION OF A NON-EMPLOYEE DIRECTORS STOCK OPTION AWARD PLAN. FOR AGAINST ABSTAIN [ ] [ ] [ ] Item 3. ADOPTION OF AN EMPLOYEE INCENTIVE STOCK OPTION AWARD PLAN. FOR AGAINST ABSTAIN [ ] [ ] [ ] Item 4. AMENDMENT OF THE RESTATED ARTICLES OF INCORPORATION TO DECLASSIFY THE BOARD OF DIRECTORS. FOR AGAINST ABSTAIN [ ] [ ] [ ] If you plan to attend the Annual WILL Meeting, please mark the WILL ATTEND ATTEND block. [ ] Date , 2004 _____________________________________________ Signature _____________________________________________ Signature if held jointly NOTE: Please sign as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee, or guardian, please give full title. FOLD AND DETACH HERE PROXY (1) THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF PIZZA INN, INC. 3551 PLANO PARKWAY THE COLONY, TEXAS 75056 ANNUAL MEETING OF SHAREHOLDERS ON FEBRUARY 11,DECEMBER 15, 2004 The undersigned, revoking all proxies heretofore given, hereby appoints B. Keith ClarkRod J. McDonald and Shawn M. Preator, or either of them, as proxies of the undersigned, with full power of substitution and resubstitution, to vote on behalf of the undersigned the shares of Pizza Inn, Inc. (the "Company") that the undersigned is entitled to vote at the Annual Meeting of Shareholders to be held at 11:10:00 a.m., Dallas time, on Wednesday, February 11,December 15, 2004, at the Company's corporate offices, 3551 Plano Parkway, The Colony, Texas 75056, and at all adjournments thereof, as fully as the undersigned would be entitled to vote if personally present, as specified on the reverse side of this card and on such other matters as may properly come before the meeting or any adjournments thereof. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting. (Continued and to be signed on the reverse side) ANNUAL MEETING OF SHAREHOLDERS OF PIZZA INN, INC. February 11, 2004 Please date, sign and mail your proxy card in the envelope provided as soon as possible. Please detach along the perforated line and mail in the envelope provided. The Board of Directors recommends a vote FOR Item 1. PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE.. [X] 1. ELECTION OF CLASS II DIRECTORS. Nominees: [ }Steven J. Pully, [ }F. Jay Taylor, { }Steve A. Ungerman [ ] FOR ALL NOMINEES [ ] WITHHOLD AUTHORITY FOR ALL NOMINEES [ ] FOR ALL EXCEPT (see instructions below) INSTRUCTION: To withhold authority to vote for any individual nominee(s), mark "FOR ALL EXCEPT" and fill in the circle next to each nominee you wish to withhold as shown here [ X } FOR AGAINST ABSTAIN 2. APPROVAL TO ADOPT A RESOLUTION TO REPEAL THE FOLLOWING AMENDMENT OF THE AMENDED AND RESTATED BYLAWS OF THE COMPANY ADOPTED ON DECEMBER 18, 2002: AMENDMENT TO ARTICLE III, SECTION 7 THAT ELIMINATES THE ABILITY OF SHAREHOLDERS TO CALL A SPECIAL MEETING OF SHAREHOLDERS. [ ] [ ] [ ] 3. APPROVAL TO ADOPT A RESOLUTION TO REPEAL THE FOLLOWING AMENDMENT OF THE AMENDED AND RESTATED BYLAWS OF THE COMPANY ADOPTED ON DECEMBER 18, 2002: NEW ARTICLE III, SECTION 13 THAT REQUIRES SHAREHOLDERS TO COMPLY WITH CERTAIN PROCEDURES IN ORDER TO BRING BUSINESS BEFORE A SHAREHOLDERS MEETING. [ ] [ ] [ ] 4. APPROVAL TO ADOPT A RESOLUTION TO REPEAL THE FOLLOWING AMENDMENT OF THE AMENDED AND RESTATED BYLAWS OF THE COMPANY ADOPTED ON DECEMBER 18, 2002: NEW ARTICLE IV, SECTION 6 THAT REQUIRES SHAREHOLDERS TO COMPLY WITH CERTAIN PROCEDURES IN ORDER TO NOMINATE DIRECTORS. [ ] [ ] [ ] 5. REIMBURSEMENT OF NEWCASTLE PROXY SOLICATION EXPENSES. [ ] [ ] [ ] THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST ITEMS 2,3,4 AND 5 IF THEY ARE PRESENTED AT THE ANNUAL MEETING. This Proxy, when properly executed, will be voted by the Proxies in the manner designated below. If this Proxy is returned signed but without a clear voting designation, the Proxies will vote FOR Item 1 and AGAINST Items 2,3, 4 and 5. Mark "X" here if you plan to attend the meeting. [ ] To change the address on your account, please check the box at right and indicate your new address in the address space above. Please note that changes to the registered name(s) on the account may not be submitted via this method. [ ] Signature of Shareholder Date: Signature of Shareholder Date: NOTE: Please sign exactly as your names appear on this Proxy. When shares are held jointly, each holder should sign. When signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If the signer is a corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer is a partnership, please sign in partnership name by authorized person.