FORM
10-KSB
 U.S. SECURITIES AND
EXCHANGE COMMISSIONWashington, DC
20549
 
 (Mark one)
 
 T
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
year ended: November 30, 2007
  £
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
transition period from ______ to ______
 Commission
file number: 0-31555
   BAB,
Inc.
 (Name of
small business issuer in its charter)
  Delaware
              
              36-4389547(State
      or other jurisdiction of incorporation)
              
              (IRS
      Employer or organization Identification
No.)
  500 Lake
Cook Road, Suite 475   Deerfield, Illinois 60015
  (Address
of principal executive offices) (Zip Code)
  Issuer's
telephone number: (847) 948-7520
  Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the small business issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
  T Yes  
 £ No
  Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of small business issuer’s knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. T
  State
issuer's revenues for its most recent fiscal year:
  $3,994,899
  The
aggregate market value of the voting stock held by nonaffiliates computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of a specified date within the past 60 days: $3,267,624
based on 3,630,693 shares held by nonaffiliates as of February 4, 2008; Closing
price ($.90) for said shares in the NASDAQ OTC Bulletin Board as of such
date.
 
 State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 7,263,508shares of Common Stock,
as of February 4, 2008.
  Transitional
Small Business Disclosure Format (check one):  £
Yes T
No
  
 1
  FORM10-KSB INDEX
  PART
      IItem
      1
              
              Description of Business
              
              3OverviewCustomersSuppliersLocationsStore OperationsFranchisingCompetitionTrademarks and Service MarksGovernment RegulationEmployeesItem
      2
              
              Description of Property
              
              7Item
      3
              
              Legal Proceedings
              
              7Item
      4
              
              Submission of Matters to a Vote of Security
      Holders
              
              7PART
      IIItem
      5.
              
              Market for the Common Equity and Related Stockholder
      Matters
              
              8Item
      6.
              
              Management's Discussion and Analysis of Financial Condition
      and Results of Operations
              
              9Item
      7.
              
              Financial Statements
              
              13Item
      8.
              
              Changes in and Disagreement with Accountants on Accounting
      and Financial Disclosure
              
              33Item
      8A.
              
              Controls and Procedures
              
              34Item
      8B.
              
              Other Information
              
              34PART
      IIIItem
      9.
              
              Directors, Executive Officers, Promoters and Control Persons
      and Corporate Governance; Compliance with Section 16(a) of the Exchange
      Act
              
              34Code of Ethics
              
              35Item
      10.
              
              Executive Compensation
              
              37Item
      11.
              
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              
              38Item
      12.
              
              Certain Relationships, Related Transactions and Director
      Independence
              
              39Item
      13.
              
              Exhibits and Reports on Form 8-K
              
              40Item
      14.
              
              Principal Accountant Fees and Services
              
              40Exhibits
  2
 Index
  PART
I
   ITEM1. DESCRIPTION OF BUSINESS
 OVERVIEW
  BAB, Inc.
(the "Company") was incorporated under the laws of the State of Delaware on July
12, 2000.  The Company currently operates, franchises and licenses bagel
and muffin retail units under the Big Apple Bagels ("BAB"), My Favorite Muffin
("MFM") and Brewster's Coffee trade names. At November 30, 2007, the Company had
129 units in operation in 26 states, including 2 International units in
United Arab Emirates. The Company additionally derives income from the sale of
its trademark bagels, muffins and coffee through nontraditional channels of
distribution including under licensing agreements with Mrs. Fields Famous Brands
(Mrs. Fields), Kohr Bros. Frozen Custard and through direct home delivery
of specialty muffin gift baskets and coffee.
 
 The BAB
brand franchised and Company-owned stores feature daily baked bagels, flavored
cream cheeses, premium coffees, gourmet bagel sandwiches and other related
products. Licensed BAB units serve the Company's par-baked frozen bagel and
related products baked daily.  BAB units are primarily concentrated in the
Midwest and Western United States.  The MFM brand consists of units
operating as "My Favorite Muffin," featuring a large variety of freshly baked
muffins, coffees and related products, and units operating as "My Favorite
Muffin and Bagel Cafe," featuring these products as well as a variety of
specialty bagel sandwiches and related products.  MFM units are primarily
in the Middle Atlantic States.   Although the Company doesn't actively
market Brewster's stand-alone franchises, Brewster's coffee products are sold in
the Company-owned store and most franchised units.  In addition, the
Company’s franchised and Company-owned stores derive income from wholesale of
Jacobs Bros. Bagels, also registered as a trademark of the Company.
 
 The
Company has grown significantly since its initial public offering through growth
in franchise units and the development of alternative distribution channels for
its branded products.  The Company is leveraging on the natural synergy of
distributing muffin products in existing BAB units and, alternatively, bagel
products and Brewster's Coffee in existing MFM units. The Company expects to
continue to realize efficiencies in servicing the combined base of BAB and MFM
franchisees.
 
 Operating
Income
 
 The
Company reported net income of $1,244,000 for the year ended November 30, 2007,
and net income of $717,000 for the year ended November 30, 2006.  The
Company believes that with its continued focus on franchising and licensing
operations, it will continue to be profitable.  The Company will also
continue to review and institute cost controls where deemed
necessary.
  Food Service
Industry
 
 Food
service businesses are often affected by changes in consumer tastes; national,
regional, and local economic conditions; demographic trends; traffic patterns;
and the type, number and location of competing restaurants. Multi-unit food
service chains, such as the Company's, can also be substantially adversely
affected by publicity resulting from problems with food quality, illness, injury
or other health concerns or operating issues stemming from one store or a
limited number of stores. The food service business is also subject to the risk
that shortages or interruptions in supply caused by adverse weather or other
conditions could negatively affect the availability, quality and cost of
ingredients and other food products. In addition, factors such as inflation,
increased food and labor costs, regional weather conditions, availability and
cost of suitable sites and the availability of experienced management and hourly
employees may also adversely affect the food service industry in general and the
Company's results of operations and financial condition in
particular.
  3
 Index
  CUSTOMERS
 
 The
Company-owned store sells to the general public; therefore, the Company is not
dependent on a particular customer or small group of customers.  Regarding
the Company's franchising operation, the franchisees represent a varied
geographic and demographic group.  Among some of the primary services the
Company provides to its franchisees are marketing assistance, training,
time-tested successful recipes, bulk purchasing discounts, food service
knowledgeable personnel and brand recognition.
 
 SUPPLIERS
 
 The
Company's major suppliers are Coffee Bean International, Dawn Food Products,
Inc., Schreiber Foods,   Hawkeye Foodservice and Coca-Cola. 
The Company is not dependent on any of these suppliers for future growth and
profitability since the products purchased from these suppliers are readily
available from other sources.
 
 LOCATIONS
 
 The
Company has 126 franchised locations, 2 licensees and 1 Company-owned
store.   Of the 126 locations, 124 are locatedin 26 states and 2
International units are located in the United Arab Emirates.
 
 STORE OPERATIONS
 
 BIG APPLE
BAGELS--BAB franchised and Company-owned stores daily bake a variety of fresh
bagels and offer up to 11 varieties of cream cheese spreads.   Stores
also offer a variety of breakfast and lunch bagel sandwiches, salads, soups,
various dessert items, fruit smoothies, gourmet coffees and other beverages. A
typical BAB store is in an area with a mix of both residential and
commercial properties and ranges from 1,500 to 2,000 square feet. The Company's
current store design is approximately 2,000 square feet, with seating capacity
for 30 to 40 persons, and includes 750 square feet devoted to production and
baking. A satellite store is typically smaller than a production store,
averaging 600 to 1,000 square feet. Although franchise stores may vary in size
from the Company-owned store and from other franchise stores, store layout is
generally consistent.
 
 MY
FAVORITE MUFFIN--MFM franchised stores bake 20 to 25 varieties of muffins daily,
from over 250 recipes, plus a variety of bagels. They also serve gourmet
coffees, beverages and, at My Favorite Muffin and Bagel Cafe locations, a
variety of bagel sandwiches and related products. While some MFM units are
located in shopping mall locations with minimal square footage of 400 to 800
square feet, the typical retail center prototype unit is approximately 2,000
square feet with seating for 30 to 40 persons. A typical MFM franchise store is
located within a three-mile radius of at least 25,000 residents in an area with
a mix of both residential and commercial properties.
 
 BREWSTER'S
COFFEE--Although the Company doesn't have, or actively market Brewster's
stand-alone franchises, Brewster's coffee products are sold in
the  Company-owned store and most of the franchised
units.
 
 FRANCHISING
 
 The
Company requires payment of an initial franchise fee per store, plus an ongoing
5% royalty on net sales. Additionally, BAB and MFM franchisees are members of
a marketing fund requiring an ongoing 3% contribution, consisting of 1% for
general system-wide marketing, and 2% for the local advertising and marketing.
The Company currently requires a franchise fee of $25,000 on a franchisee's
first BAB or MFM store. The fee for subsequent production stores is $20,000,
$15,000 for a satellite location and $10,000 for a kiosk.
 
 The
Company's current Uniform Franchise Offering Circular provides for,
among other things, the opportunity for prospective franchisees to enter into a
preliminary agreement for their first production store. This agreement enables a
prospective franchisee a period of 60 days in which to locate a site. The fee
for this preliminary agreement is $10,000. If a site is not located and approved
by the franchiser within the 60 days, the prospective franchisee will receive a
refund of $7,000. If a site is approved, the entire $10,000 will be applied
toward the initial franchise fee.  See also last paragraph under
"Government Regulation" section in this 10-KSB.
  4
 Index
  The
Company's franchise agreement provides a franchisee with the right to develop
one store at a specific location. Each franchise agreement is for a term of 10
years with the right to renew. Franchisees are expected to be in operation no
later than 10 months following the signing of the franchise
agreement.
 
 The
Company currently advertises its franchising opportunities at franchise trade
shows, and in directories, newspapers, the internet and business opportunity
magazines worldwide.  In addition, prospective franchisees contact the
Company as a result of patronizing an existing store.
 
 COMPETITION
 
 The quick
service restaurant industry is intensely competitive with respect to product
quality, concept, location, service and price. There are a number of national,
regional and local chains operating both owned and franchised stores which may
compete with the Company on a national level or solely in a specific market or
region. The Company believes that because the industry is extremely fragmented,
there is a significant opportunity for expansion in the bagel, muffin and coffee
concept chains.
 
 The
Company believes the primary direct competitors of its bagel concept units are
Bruegger's Bagel Bakery and New World Coffee-Manhattan Bagel Inc., which
operates under Einstein Bros. Bagels, Noah's NY Bagel, Manhattan Bagel Bakery
and Chesapeake Bagel Bakery brands.  There are several other regional bagel
chains with fewer than 50 stores, all of which may be expected to compete with
the Company. There is not a major national competitor in the muffin business,
but there are a number of local and regional operators. Additionally, the
Company competes directly with a number of national, regional and local coffee
concept stores and brand names.
 
 The
Company competes against numerous small, independently owned bagel bakeries, and
national fast food restaurants, such as Dunkin' Donuts, McDonald's, Panera and
Starbucks, that offer bagels, muffins, coffee and related products as part of
their product offerings.  In the supermarket bakery sections, the Company's
bagels compete against Thomas' Bagels and other brands of fresh and frozen
bagels. Certain of these competitors may have greater product and name
recognition and larger financial, marketing and distribution capabilities than
the Company.  In addition, the Company believes the startup costs
associated with opening a retail food establishment offering similar products on
a stand-alone basis are competitive with the startup costs associated with
opening its concept stores and, accordingly, such startup costs are not an
impediment to entry into the retail bagel, muffin or coffee
businesses.
 
 The
Company believes that its stores compete favorably in terms of food quality and
taste, convenience, customer service and value, which the Company believes are
important factors to its targeted customers.  Competition in the food
service industry is often affected by changes in consumer taste, national,
regional and local economic and real estate conditions, demographic trends,
traffic patterns, the cost and availability of labor, consumer purchasing power,
availability of product and local competitive factors.  The Company
attempts to manage or adapt to these factors, but not all such factors are
within the Company's control and such factors could cause the Company and some,
or all, of its franchisees to be adversely affected.
 
 The
Company competes for qualified franchisees with a wide variety of investment
opportunities in the restaurant business, as well as other industries.
Investment opportunities in the bagel bakery cafe business include franchises
offered by New World Coffee-Manhattan Bagel Inc.  The Company's continued
success is dependent to a substantial extent on its reputation for providing
high quality and value with respect to its service, products and franchises.
This reputation may be affected not only by the performance of the Company-owned
store but also by the performance of its franchise stores, over which the
Company has limited control.
  5
 Index
  TRADEMARKSAND SERVICE MARKS
 
 The
trademarks, trade names and service marks used by the Company contain common
descriptive English words and thus may be subject to challenge by users of these
words, alone or in combination with other words, to describe other services or
products. Some persons or entities may have prior rights to these names or marks
in their respective localities. Accordingly, there is no assurance that such
marks are available in all locations. Any challenge, if successful, in whole or
in part, could restrict the Company's use of the marks in areas in which the
challenger is found to have used the name prior to the Company's use. Any such
restriction could limit the expansion of the Company's use of the marks into
that region, and the Company and its franchisees may be materially and adversely
affected.
 
 The
trademarks and service marks "Big Apple Bagels," "Brewster's Coffee" and "My
Favorite Muffin" are registered under applicable federal trademark law. These
marks are licensed by the Company to its franchisees pursuant to franchise
agreements.   In February, 1999 the Company acquired the trademark of
"Jacobs Bros. Bagels" upon purchasing certain assets of Jacobs Bros. The "Jacobs
Bros. Bagels" mark is also registered under applicable federal trademark
law.
 
 The
Company is aware of the use by other persons and entities in certain geographic
areas of names and marks which are the same as or similar to the Company's
marks. Some of these persons or entities may have prior rights to those names or
marks in their respective localities. Therefore, there is no assurance that the
marks are available in all locations. It is the Company's policy to pursue
registration of its marks whenever possible and to vigorously oppose any
infringement of its marks.
 
 GOVERNMENTREGULATION
 
 The
Company is subject to the Trade Regulation Rule of the Federal Trade Commission
(the "FTC") entitled “Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures'' (the "FTC Franchise Rule") and
state and local laws and regulations that govern the offer, sale and termination
of franchises and the refusal to renew franchises. Continued compliance with
this broad federal, state and local regulatory network is essential and costly;
the failure to comply with such regulations may have a material adverse effect
on the Company and its franchisees. Violations of franchising laws and/or state
laws and regulations regulating substantive aspects of doing business in a
particular state could limit the Company's ability to sell franchises or subject
the Company and its affiliates to rescission offers, monetary damages,
penalties, imprisonment and/or injunctive proceedings. In addition, under court
decisions in certain states, absolute vicarious liability may be imposed upon
franchisers based upon claims made against franchisees. Even if the Company is
able to obtain insurance coverage for such claims, there can be no assurance
that such insurance will be sufficient to cover potential claims against the
Company.
 
 The
Company and its franchisees are required to comply with federal, state and local
government regulations applicable to consumer food service businesses, including
those relating to the preparation and sale of food, minimum wage requirements,
overtime, working and safety conditions, citizenship requirements, as well as
regulations relating to zoning, construction, health and business licensing.
Each store is subject to regulation by federal agencies and to licensing and
regulation by state and local health, sanitation, safety, fire and other
departments. Difficulties or failures in obtaining the required licenses or
approvals could delay or prevent the opening of a new Company-owned or franchise
store, and failure to remain in compliance with applicable regulations could
cause the temporary or permanent closing of an existing store. The Company
believes that it is in material compliance with these provisions. Continued
compliance with these federal, state and local laws and regulations is costly
but essential, and failure to comply may have an adverse effect on the Company
and its franchisees.
  6
 Index
  The
Company's franchising operations are subject to regulation by the FTC under the
Uniform Franchise Act which requires, among other things, that the Company
prepare and periodically update a comprehensive disclosure document known as a
Uniform Franchise Offering Circular (UFOC) in connection with the sale and
operation of its franchises. In addition, some states require a franchiser to
register its franchise with the state before it may offer a franchise to a
prospective franchisee. The Company believes its UFOC, together with any
applicable state versions or supplements, comply with both the FTC guidelines
and all applicable state laws regulating franchising in those states in which it
has offered franchises.
 
 The
Company is also subject to a number of state laws, as well as foreign laws (to
the extent it offers franchises outside of the United States), that regulate
substantive aspects of the franchiser-franchisee relationship, including, but
not limited to, those concerning termination and non-renewal of a
franchise.
 
 EMPLOYEES
 
 As of
November 30, 2007, the Company employed 33 persons, consisting of 15
working in the Company-owned store, of which 13 are part-time
employees.  The remaining employees are responsible for Corporate
management and oversight, advertising and franchising.  None of the
Company's employees are subject to any collective bargaining agreements and
management considers its relations with its employees to be good.
 
 ITEM2. DESCRIPTION OF PROPERTY
 
 The
Company's principal executive office, consisting of approximately 7,150 square
feet, is located in Deerfield, Illinois and is leased pursuant to a lease
expiring February 28, 2011.  Additionally, the Company leases space for its
Company-owned store. The lease term for the store is for an initial term of five
years and contains an option for renewal for two five-year terms. (See Note 7 in
the audited consolidated financial statements included herein.)
  ITEM3. LEGAL PROCEEDINGS
  None
  ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  None
  7
 Index
  PART
II
  ITEM5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
 
 The
following table sets forth the quarterly high and low sale prices for the
Company's Common Stock, as reported in the Nasdaq Small Cap Market for the two
years ended November 30, 2007.  The Company's Common Stock is traded on the
NASDAQ OTC-Bulletin Board under the symbol "BABB."
 
 
 Year
      Ended: November 30, 2006
              Low
              HighFirst
      quarter
              0.90
              1.22Second
      quarter
              0.73
              1.01Third
      quarter
              0.85
              1.01Fourth
      quarter
              0.95
              1.07Year
      Ended: November 30, 2007
              Low
              HighFirst
      quarter
              0.85
              1.01Second
      quarter
              0.88
              1.02Third
      quarter
              0.98
              1.15Fourth
      quarter
              0.90
              1.02
 
 
 As of
February 4, 2008, the Company's Common Stock was held by 178 holders of record.
Registered ownership includes nominees who may hold securities on behalf of
multiple beneficial owners. The Company estimates that the number of beneficial
owners of its common stock at February 4, 2008, is approximately 1,400 based
upon information provided by a proxy services firm.
 
 
 STOCK
OPTIONS
 
 In May
2001, the Company's Board of Directors approved a Long-Term Incentive and Stock
Option Plan (Plan), with an amendment in May 2003 to increase the Plan from the
reserve of 1,100,000 shares to 1,400,000 shares of common stock for grant.
  A total of 1,400,000 stock options have been granted since plan
inception.  In 2007, zero options were granted.  In 2006,
2005, 2004 and 2003, 290,000, 95,000, 115,000, and 300,000 stock options,
respectively, were granted to directors, officers and employees.  Zero
options were granted during fiscal year 2007.  As of November 30,
2007, 1,400,000 stock options were granted to directors, officers and employees,
leaving zero options available for grant.  As of February 4, 2008,
there were 1,007,627 stock options exercised or forfeited under the stock option
plan.  (See Note 6 of the audited consolidated financial statements
included herein.)
  8
 Index
  DIVIDEND
POLICY
 
 The Board
of Directors of the Company declared quarterly cash dividends of $.02 per share
on March 9, 2007, June 5, 2007, September 5, 2007, and November 26,
2007  A $.02 per share special dividend was also declared on November
26, 2007.  These dividends were payable on April 10, 2007, July 2,
2007, October 2, 2007,  and January 4, 2008, respectively, in the
amounts of $145,262, $145,262, $145,270, and $290,540.  (See Note 5 of
the audited consolidated financial statements included herein.)
 
 The Board
of Directors of the Company declared quarterly cash dividends of $.02 per share
on March 13, 2006, May 25, 2006, September 6, 2006, and November 16,
2006.  A $.02 per share special dividend was also declared on November
16, 2006.  These dividends were payable on April 13, 2006, July 5,
2006, October 9, 2006, and January 11, 2007, respectively, in the amounts of
$144,445, $144,459, $144,459, and $290,524.  (See Note 5 of the
audited consolidated financial statements included herein.)
 
 Although there can be no assurances
that the Company will be able to pay dividends in the future, it is the
Company’s intent that future dividends will be considered after reviewing
returns to shareholders, profitability expectations and financing needs and will
be declared at the discretion of the Board of Directors. It is the Company’s
intent going forward to declare and pay cash dividends on a quarterly
basis.
 
 ITEM6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
 The
selected financial data contained herein has been derived from the consolidated
financial statements of the Company included elsewhere in this Report on Form
10-KSB. The data should be read in conjunction with the consolidated financial
statements and notes thereto.  Certain statements contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations,
including statements regarding the development of the Company's business, the
markets for the Company's products, anticipated capital expenditures, and the
effects of completed and proposed acquisitions, and other statements and
disclosures contained herein and throughout this Annual Report regarding matters
that are not historical facts, are forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995). In such cases,
we may use words such as "believe," "intend," "expect," "anticipate" and the
like.  Because such statements include risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Certain risks and uncertainties are wholly or
partially outside the control of the Company and its management, including its
ability to attract new franchisees; the continued success of current
franchisees; the effects of competition on franchisee and Company-owned store
results; consumer acceptance of the Company's products in new and existing
markets; fluctuation in development and operating costs; brand awareness;
availability and terms of capital; adverse publicity; acceptance of new product
offerings; availability of locations and terms of sites for store development;
food, labor and employee benefit costs; changes in government regulation
(including increases in the minimum wage); regional economic and weather
conditions; the hiring, training, and retention of skilled corporate and
restaurant management; and the integration and assimilation of acquired
concepts; Accordingly, readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof.  The Company undertakes no obligation to publicly release
the results of any revision to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
  9
 Index
  GENERAL
 
 The
Company has 126 franchised, 2 licensed units, and 1 Company-owned store as
of the end of 2007. Units in operation at the end of 2006 included 136
franchised, 3 licensed and 1 Company-owned store.  System-wide revenues in
2007 were $46 million compared to $47 million in 2006.
 
 The
Company's revenues are derived primarily from the ongoing royalties paid to the
Company by its franchisees, from the operation of the Company-owned store and
receipt of initial franchise fees.  Additionally, the Company derives
revenue from the sale of licensed products  (My Favorite Muffin mix, Big
Apple Bagels cream cheese and Brewster's coffee), and through licensing
agreements (Kohr Bros. and Mrs. Fields).
 
 
 YEAR
2007 COMPARED TO YEAR 2006
 
 Total
revenues from all sources increased $78,000, or 2.0%, to $3,995,000 in 2007 from
$3,917,000 in the prior year primarily due to an increase in Sign Shop revenue
and other non-traditional sources of income.
 
 Royalty
revenue from franchise stores was down $58,000, or 2.5%, to $2,218,000 in 2007
as compared to $2,275,000 in 2006.  Franchise fee revenue decreased
$37,000, or 13.7%, to $235,000, in 2007 versus $272,000 in 2006.  The
Company opened 6 stores in 2007 versus 8 in 2006.  At November 30,
2007, the Company had 7 units under development, versus 8 at November 30,
2006.  More new franchises are opening in developing centers which
leads to longer timeframes between execution of franchise agreements and
occupancy.  Licensing fees and other income increased $189,000, or
21.7%, to $1,058,000 in 2007 as compared to $869,000 in 2006.  Sign Shop
revenue was $127,000 higher in 2007 as a result of work associated with
marketing promotions kicked off at the November 2006 Franchise
Convention.
  Total
operating expenses of $3,303,000, were 82.7% of total revenues for 2007 versus
$3,228,000, or 82.4%, for 2006.  However, $34,000 expense was recorded
for adoption of SFAS 123(R) for stock options in 2007.  Excluding this
expense, total operating expenses would have been 81.8% of revenues in 2007
which is comparable to 2006.
  Corporate
office payroll and payroll related expenses increased $47,000, or 3.2%, to
$1,529,000, from $1,481,000,  in 2006. Occupancy expense increased
$4,000, or 2.8% in 2007, to $141,000, from $137,000 in
2006.  Professional fees decreased $35,000, or 18.7%, to $152,000 in
2007, from $187,000 in 2006, and Other expenses increased $114,000, or 24.2%, to
$586,000 in 2007 from $472,000 in 2006, with $84,000 related to Sign Shop
revenues which, as noted above, increased $127,000.  There was a reduction
in depreciation and amortization expense of $25,000, or 35.7% in 2007, to
$45,000, from $70,000, in 2006.
  Income
from operations for the period ended November 30, 2007 was $692,000 as compared
to $690,000 in 2006.
 
 Interest
income increased $11,000, to $68,000, in 2007, compared to $57,000, in 2006, as
a result of the Company investing excess cash in higher yielding investments for
the full fiscal year.
 
 Interest
expense decreased $14,000 to $16,000 in 2007, compared to $30,000 in 2006,
primarily due to a decrease in outstanding debt.  The Company paid off
its outstanding bank debt in July, 2007.
  Included
in 2007 net income was a $500,000 deferred tax benefit recognized for a
reduction in the valuation reserve associated with the tax benefit of net
operating loss carryforwards for income tax purposes.  There was no
such benefit recorded in 2006.
 
 Net
income totaled $1,244,000, or 31.1% of revenue in 2007 as compared to $717,000,
or 18.3% of revenue in the prior year.  Included in 2007 net
income was a $500,000 deferred tax benefit recognized for a reduction in the
valuation reserve associated with the tax benefit of net operating loss
carryforwards for income tax purposes.
  10
 Index
  LIQUIDITY
AND CAPITAL RESOURCES
 
 The net
cash provided from operating activities totaled $673,000 during 2007. Cash
provided from operating activities principally represents net income of
$1,244,000, plus depreciation and amortization of $45,000 and share-based
compensation of $34,000, less bad debt of $5,000 and deferred tax benefit of
$500,000, plus changes in notes receivable of $12,000, inventory of $2,000 and
unexpended Marketing Fund contributions of $67,000, less changes in trade
accounts receivable of $11,000, restricted cash of $38,000, Marketing Fund
contributions receivable of $7,000, prepaid expenses and other of $29,000,
accounts payable of $15,000, accrued liabilities of $74,000 and deferred revenue
of $51,000.  Cash provided from operating activities in 2006 totaled
$868,000. This cash principally represented net income of $717,000, plus
depreciation and amortization of $70,000 and the loss on sale of equipment of
$18,000, less bad debt of $8,000, plus changes in trade accounts receivable of
$12,000, Marketing Fund contributions receivable of $1,000, notes receivable of
$69,000, inventory of $19,000, prepaid expenses and other of $35,000, accrued
liabilities of $12,000, and unexpended Marketing Fund contributions of $28,000,
less changes in restricted cash of $30,000, accounts payable of $37,000, and
deferred revenue of $36,000.
 
 Cash used
for investing activities during 2007 totaled $57,000, consisting of purchase of
equipment of $19,000 and trademark renewal expenditures of
$38,000.  Cash used for investing activities during 2006 totaled
$10,000, consisting of the purchase of equipment of $14,000, offset by proceeds
from the sale of equipment of $4,000.
 
 Financing
activities used $898,000 during 2007, due to the repayment of notes payable of
$193,000 and the payment of dividends equal to $726,000, offset by proceeds of
$21,000 from the exercise of options.  Financing activities used
$1,272,000 during 2006, due to the repayment of notes payable of $267,000 and
the payment of dividends equal to $1,011,000, offset by proceeds of $6,000 from
the exercise of options.
 
 It is the
Company’s intent that future dividends will be considered after reviewing
returns to shareholders, profitability expectations and financing needs and will
be declared at the discretion of the Board of Directors.  It is the
Company’s intent going forward to declare and pay dividends on a quarterly
basis.
 
 The
Company believes execution of this policy will not have any material adverse
effects on its cash or its ability to fund current operations or future capital
investments.
 
 The
Company has no financial covenants on any of its outstanding debt.
 
 OFF
BALANCE SHEET ARRANGEMENTS
 
 The
Company has no off balance sheet arrangements, other than the lease commitments
disclosed in Note 7 of the audited consolidated financial statements included
herein.
  11
 Index
  CRITICAL
ACCOUNTING POLICIES
 
 
 The
Company's significant accounting policies are presented in the Notes to the
Consolidated Financial Statements (see Note 2 of the audited consolidated
financial statements included herein).  While all of the significant
accounting policies impact the Company's Consolidated Financial Statements, some
of the policies may be viewed to be more critical.  The more critical
policies are those that are most important to the portrayal of the Company's
financial condition and results of operations and that require management's most
difficult, subjective and/or complex judgments and estimates.   Management
bases its judgments and estimates on historical experience and various other
factors that are believed to be reasonable under the circumstances.  The
results of judgments and estimates form the basis for making judgments about the
Company's value of assets and liabilities that are not readily apparent from
other sources.  Actual results could differ from those estimates under
different assumptions or conditions.   Management believes the following
are its most critical accounting policies because they require more significant
judgments and estimates in preparation of its consolidated financial
statements.
 
 Revenue
Recognition
 
 Systems
royalty fees represent a 5% charge from franchised stores’ net retail and
wholesale sales. Royalty revenues are recognized on the accrual basis using
estimates based on past history and seasonality.
 
 The
Company recognizes franchise fee revenue upon the opening of a franchise store.
Direct costs associated with the franchise sales are deferred until the
franchise fee revenue is recognized.  These costs include site approval,
construction approval, commissions, blueprints and training costs.
 
 The
Company earns a licensing fee from the sale of par-baked bagels from a
third-party commercial bakery and from the sale of coffee from a coffee bean
roaster for the sale of BAB branded product to the franchised and licensed
units.
 
 Long-Lived
Assets
 
 Property
and equipment are recorded at cost.  Improvements and replacements are
capitalized, while expenditures for maintenance and routine repairs that don't
extend the life of the asset are charged to expense as incurred. 
Depreciation is calculated on the straight-line basis over the estimated useful
lives of the assets.  Property, equipment and leasehold improvements are
stated at cost, less accumulated depreciation.  Estimated useful lives for
the purpose of depreciation and amortization are 3 to 7 years for property and
equipment and 10 years, or the term of the lease if less, for leasehold
improvements.
 
 The
Company's intangible assets consist primarily of trademarks and goodwill.
 SFAS 142, "Goodwill and Other Intangible Assets" requires that assets with
indefinite lives no longer be amortized, but instead be subject to annual
impairment tests.  The Company no longer amortizes goodwill or
trademarks.  No impairment was recorded for the years ended November
30, 2007 and 2006.  (See Note 2 of the audited consolidated financial
statements included herein.)
 
 Concentrations of Credit
Risk
 
 Certain
financial instruments potentially subject the Company to concentrations of
credit risk.  These financial instruments consist primarily of royalty and
wholesale accounts receivables.   Amounts due from franchisees
represented approximately 61% and 60% of the receivable balance at November 30,
2007 and 2006, respectively.  The Company believes it has
maintained adequate reserves for doubtful accounts.  The Company
reviews the collectibility of receivables periodically taking into account
payment history and industry conditions.
 
 Valuation Allowance and
Deferred Taxes
 
 A
valuation allowance is the portion of a deferred tax asset for which it is more
likely than not that a tax benefit will not be realized.
  12
 Index
  As of
November 30, 2007, the Company has cumulative net operating loss carryforwards
expiring between 2012 and 2021 for U.S. federal income tax purposes of
approximately $6,178,000.   A valuation allowance has been established
for $1,232,000 at November 30, 2007 for the deferred tax benefit related to
those loss carryforwards and other deferred tax assets for which it is
considered more likely than not that the benefit will not be realized.  
(See Note 3 of the audited consolidated financial statements included
herein.)
 
 Recent Accounting
Pronouncements
 
 
 In July
2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.  FIN No. 48 clarifies the
accounting and reporting for uncertainties in income tax law.  FIN No.
48 prescribes a comprehensive model for the financial statement recognition,
measurement, presentation, and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns.  FIN No. 48 is effective
for fiscal years beginning after December 15, 2006.  The Company has
not yet determined the impact, if any, that may result from the adoption of FIN
No. 48.
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements.  Where applicable, SFAS No. 157 simplifies
and codifies related guidance within GAAP and does not require any new fair
value measurements.  SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years.  Earlier adoption is
encouraged.  The adoption of SFAS No. 157 is not expected to have a
material impact on the Company’s financial position or results of
operations.
  Effective
December 1, 2006, the Company adopted the provisions of FASB Statement No. 123
(revised 2004), “Share-Based Payment” (“SFAS 123R”) using the modified
prospective transition method.  Under this method, prior periods are
not revised for comparative purposes and the Company recognizes compensation
cost using a fair-value based method for all share-based payments granted after
November 30, 2006, plus any awards granted to employees up through November 30,
2006 that remain unvested at that time.  Prior to December 1, 2006,
the Company accounted for its share-based compensation plans in accordance with
the provisions of Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees.”  The Company recorded
compensation cost arising from share-based payment arrangements in
payroll-related expenses on the Condensed Consolidated Statement of Operations
for the Company’s stock option plan of $34,000 for the twelve months ended
November 30, 2007.
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities(“SFAS 159”).
SFAS 159 allows entities to measure at fair value many financial
instruments and certain other assets and liabilities that are not otherwise
required to be measured at fair value. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The company has not yet determined
what impact, if any, that may result from adoption of SFAS No. 159.
 
 ITEM7. FINANCIAL STATEMENTS
 
 The
Consolidated Financial Statements and Report of Independent Registered Public
Accounting Firm is included immediately following.
  13
 Index
  BAB,
Inc.
  Years
Ended November 30, 2007 and November 30, 2006
 
 
 C o n t e n t
s
 
 
 Reports
of Independent Registered Public Accounting Firms
 
 Consolidated
Balance Sheets
 
 Consolidated
Statements of Income
  Consolidated
Statements of Stockholders’
Equity
 
 Consolidated
Statements of Cash Flows
 
 Notes to
Consolidated Financial Statements
  14
 Index
  Report
of Independent Registered Public Accounting Firm
 
 
 Stockholders
and Board of Directors of BAB, Inc.
 
 We have
audited the accompanying consolidated balance sheet of BAB, Inc. as of November
30, 2007 and the related consolidated statements of income, stockholders’ equity
and cash flows for the year then ended.  These consolidated financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
 
  We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements.  An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation.  We believe that our audit provides a reasonable basis
for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of BAB, Inc. as of November 30,
2007, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
   By:  /s/
Frank L. Sassetti & Co.
 
 
 Oak Park,
Illinois
 February
4, 2008
  15
 Index
  Report
of Independent Registered Public Accounting Firm
 
 
 Stockholders
and Board of Directors of BAB, Inc.
 
 We have
audited the accompanying consolidated balance sheet of BAB, Inc. as of November
30, 2006 and the related consolidated statements of income, stockholders’ equity
and cash flows for the year then ended.  These consolidated financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
 
  We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements.  An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation.  We believe that our audit provides a reasonable basis
for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of BAB, Inc. as of November 30,
2006, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
   By:  /s/
McGladrey and Pullen, LLP
 
 
 Chicago,
Illinois
 February
27, 2007
  16
 Index
  BAB,
Inc
 Consolidated
Balance Sheets
 November
30 2007 and 2006
 
 2007
              
              
              2006ASSETSCurrent
      AssetsCash
              
              $
              1,510,292
              
              
              $
              1,792,666Restricted
      cash
              
              
              271,970
              
              
              
              234,114ReceivablesTrade
      accounts receivable (net of allowance for doubtful accounts of $6,170 in
      2007 and $32,352 in 2006)
              
              
              104,995
              
              
              
              92,377Marketing
      fund contributions receivable from franchisees and stores
              
              
              36,756
              
              
              
              29,478Notes
      receivable (net of allowance for doubtful accounts of $8,639 in 2007 and
      $10,690 in 2006)
              
              
              3,866
              
              
              
              8,262Inventories
              
              
              43,946
              
              
              
              46,048Prepaid
      expenses and other current assets
              
              
              129,575
              
              
              
              100,439Total
      Current Assets
              
              
              2,101,400
              
              
              
              2,303,384Property,
      plant and equipment (net of accumulated depreciation of $526,661 in 2007
      and $372,350 in 2006)
              
              
              79,879
              
              
              
              100,761Notes
      receivable (net of allowance of $4,642 in 2007 and $5,906 in
      2006)
              
              
              1,419
              
              
              
              5,282Trademarks
              
              
              763,667
              
              
              
              763,667Goodwill
              
              
              3,542,772
              
              
              
              3,542,772Definite
      lived intangible assets (net of accumulated amortization of $307,288in
      2007 and $302,486 in 2006)
              
              
              36,204
              
              
              
              2,896Deferred
      tax asset
              
              
              500,000
              
              
              
              -Total
      Noncurrent Assets
              
              
              4,923,941
              
              
              
              4,415,378Total
      Assets
              
              $
              7,025,341
              
              
              $
              6,718,762LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesCurrent
      portion of long-term debt
              
              $
              23,051
              
              
              $
              192,740Accounts
      payable
              
              
              40,470
              
              
              
              55,961Accrued
      expenses and other current liabilities
              
              
              371,458
              
              
              
              445,506Dividends
      payable
              
              
              290,540
              
              
              
              290,524Unexpended
      marketing fund contributions
              
              
              253,616
              
              
              
              186,479Deferred
      franchise fee revenue
              
              
              190,000
              
              
              
              210,000Deferred
      licensing revenue
              
              
              82,135
              
              
              
              76,579Total
      Current Liabilities
              
              
              1,251,270
              
              
              
              1,457,789Long-term
      debt (net of current portion)
              
              
              228,516
              
              
              
              251,567Deferred
      revenue (net of current portion)
              
              
              9,508
              
              
              
              45,818Total
      Noncurrent Liabilities
              
              
              238,024
              
              
              
              297,385Total
      Liabilities
              
              
              1,489,294
              
              
              
              1,755,174Stockholders'
      EquityCommon
      stock ($.001 par value; 15,000,000 shares authorized;8,466,953 and
      8,426,377 shares issued, and 7,263,508 and 7,222,932 shares outstanding as
      of November 30, 2007 and 2006, respectively)
              
              
              13,508,257
              
              
              
              13,508,216Additional
      paid-in capital
              
              
              932,038
              
              
              
              876,999Treasury
      stock
              
              
              (222,781
              )
              
              
              (222,781
              )Accumulated
      deficit
              
              
              (8,681,467
              )
              
              
              (9,198,846
              )Total
      Stockholders' Equity
              
              
              5,536,047
              
              
              
              4,963,588Total
      Liabilities and Stockholders' Equity
              
              $
              7,025,341
              
              
              $
              6,718,762See
      accompanying notes
  17
 Index
  BAB,
Inc
 Consolidated
Statements of Income
 November
30, 2007 and 2006
 
 
 2007
              
              
              2006REVENUESRoyalty
      fees from franchised stores
              
              $
              2,217,820
              
              
              $
              2,275,483Net
      sales by Company-owned stores
              
              
              484,399
              
              
              
              500,689Franchise
      fees
              
              
              235,000
              
              
              
              272,219Licensing
      fees and other income
              
              
              1,057,680
              
              
              
              869,000Total
      Revenues
              
              
              3,994,899
              
              
              
              3,917,391OPERATING
      EXPENSESStore
      food, beverage and paper costs
              
              
              155,800
              
              
              
              159,615Store
      payroll and other operating expenses
              
              
              437,024
              
              
              
              472,029Selling,
      general and administrative expenses:Payroll
      and payroll-related expenses
              
              
              1,528,656
              
              
              
              1,481,174Occupancy
              
              
              141,109
              
              
              
              137,268Advertising
      and promotion
              
              
              122,937
              
              
              
              110,055Professional
      service fees
              
              
              151,781
              
              
              
              186,644Travel
      expenses
              
              
              134,886
              
              
              
              139,337Depreciation
      and amortization
              
              
              44,812
              
              
              
              69,653Other
              
              
              586,187
              
              
              
              472,115Total
      Operating Expenses
              
              
              3,303,192
              
              
              
              3,227,890Income
      from operations
              
              
              691,707
              
              
              
              689,501Interest
      income
              
              
              67,612
              
              
              
              56,790Interest
      expense
              
              
              (15,606
              )
              
              
              (29,684
              )Income
      before provision for income taxes
              
              
              743,713
              
              
              
              716,607Provision
      (benefit) for income taxesCurrent
      tax (benefit)
              
              
              -
              
              
              
              -Deferred
      tax (benefit)
              
              
              (500,000
              )
              
              
              -(500,000
              )
              
              
              -Net 
      Income
              
              $
              1,243,713
              
              
              $
              716,607Net
      Income per share - Basic
              
              $
              0.17
              
              
              $
              0.10Net
      Income per share - Diluted
              
              $
              0.17
              
              
              $
              0.10Weighted
      average shares outstanding - Basic
              
              
              7,261,651
              
              
              
              7,222,560Weighted
      average shares outstanding - Diluted
              
              
              7,278,066
              
              
              
              7,259,149Cash
      dividends declared per share
              
              $
              0.10
              
              
              $
              0.10
 
 
 See
accompanying notes
  18
 Index
  BAB,
Inc
 Consolidated
Statements of Stockholders’ Equity
 November
30, 2007 and 2006
 
 AdditionalCommon
      Stock
              
              
              Paid-In
              
              
              Treasury
      Stock
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Capital
              
              
              Shares
              
              
              Amount
              
              
              Deficit
              
              
              TotalNovember
      30, 2005
              
              
              8,412,391
              
              
              $
              13,508,202
              
              
              $
              870,935
              
              
              
              (1,203,445
              )
              
              $
              (222,781
              )
              
              $
              (9,191,567
              )
              
              $
              4,964,789Stock
      Options Exercised
              
              
              13,986
              
              
              
              14
              
              
              
              6,064
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,078Dividends
      Declared
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (723,886
              )
              
              
              (723,886
              )Net
      Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              716,607
              
              
              
              716,607November
      30, 2006
              
              
              8,426,377
              
              
              
              13,508,216
              
              
              
              876,999
              
              
              
              (1,203,445
              )
              
              
              (222,781
              )
              
              
              (9,198,846
              )
              
              
              4,963,588SFAS
      No. 123(R)
              
              
              
              
              
              
              
              
              
              
              34,415
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              34,415Stock
      Options Exercised
              
              
              40,576
              
              
              
              41
              
              
              
              20,624
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              20,665Dividends
      Declared
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (726,334
              )
              
              
              (726,334
              )Net
      Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,243,713
              
              
              
              1,243,713November
      30, 2007
              
              
              8,466,953
              
              
              $
              13,508,257
              
              
              $
              932,038
              
              
              
              (1,203,445
              )
              
              $
              (222,781
              )
              
              $
              (8,681,467
              )
              
              $
              5,536,047
 
 See accompanying
notes
  19
 Index
  BAB,
Inc
 Consolidated
Statements of Cash Flow
 November
30, 2007 and 2006
 
 2007
              
              
              2006Operating
      activitiesNet
      income
              
              $
              1,243,713
              
              
              $
              716,607Depreciation
      and amortization
              
              
              44,812
              
              
              
              69,653Loss
      on sale of equipment
              
              
              -
              
              
              
              17,651Provision
      for uncollectible accounts, net of recoveries
              
              
              (4,840
              )
              
              
              (8,346
              )Share-based
      compensation
              
              
              34,415
              
              
              
              -Provision
      for deferred taxes
              
              
              (500,000
              )
              
              
              -Changes
      in:Trade
      accounts receivable
              
              
              (11,093
              )
              
              
              11,733Restricted
      cash
              
              
              (37,856
              )
              
              
              (30,059
              )Marketing
      fund contributions receivable
              
              
              (7,278
              )
              
              
              911Notes
      Receivable
              
              
              11,573
              
              
              
              69,352Inventories
              
              
              2,102
              
              
              
              19,207Prepaid
      expenses and other
              
              
              (29,137
              )
              
              
              35,050Accounts
      payable
              
              
              (15,491
              )
              
              
              (37,466
              )Accrued
      liabilities
              
              
              (74,048
              )
              
              
              12,164Unexpended
      marketing fund contributions
              
              
              67,137
              
              
              
              27,566Deferred
      revenue
              
              
              (50,754
              )
              
              
              (36,162
              )Net
      Cash Provided by Operating Activities
              
              
              673,255
              
              
              
              867,861Investing
      activitiesPurchase
      of equipment
              
              
              (19,127
              )
              
              
              (14,327
              )Proceeds
      from sale of equipment
              
              
              -
              
              
              
              4,500Capitalization
      of trademark renewals
              
              
              (38,109
              )Net
      Cash Used In Investing Activities
              
              
              (57,236
              )
              
              
              (9,827
              )Financing
      activitiesRepayment
      of borrowings
              
              
              (192,740
              )
              
              
              (266,825
              )Proceeds
      from exercise of stock options
              
              
              20,665
              
              
              
              6,077Payment
      of dividends
              
              
              (726,318
              )
              
              
              (1,011,144
              )Net
      Cash Used In Financing Activities
              
              
              (898,393
              )
              
              
              (1,271,892
              )Net
      Increase (Decrease) in Cash
              
              
              (282,374
              )
              
              
              (413,858
              )Cash,
      Beginning of Period
              
              
              1,792,666
              
              
              
              2,206,524Cash,
      End of Period
              
              $
              1,510,292
              
              
              $
              1,792,666Supplemental
      disclosure of cash flow information:Interest
      paid
              
              $
              16,454
              
              
              $
              30,977Income
      taxes paid
              
              $
              -
              
              
              $
              -
 
 Supplemental
disclosure of noncash investing and financing activities:
 
 On
November 26, 2007, a quarterly $0.02 per share cash dividend and a $0.02 per
share special dividend was declared, payable January 4, 2008, and recorded as a
dividend payable in the amount of $290,540 at November 30, 2007.  On
November 16, 2006, a quarterly $0.02 per share cash dividend and a special
dividend of $0.02 per share was declared, payable January 11, 2007, and was
recorded as a dividend payable in the amount of $290,524 at November 30,
2006.
 
 See
accompanying notes
  20
 Index
  BAB,
Inc
 Notes
to the Consolidated Financial Statements
 November
30, 2007 and 2006
 
 
 Note
1 - Nature of Operations
 
 BAB, Inc.
(the ”Company”) was incorporated under the laws of the State of Delaware on July
12, 2000.  The Company currently operates, franchises and licenses
bagel, muffin and coffee retail units under the Big Apple Bagels (“BAB”), My
Favorite Muffin (“MFM”) and Brewster’s Coffee trade names.  The
Company additionally derives income from the sale of its trademark bagels,
muffins and coffee through nontraditional channels of distribution, including
under license agreements and through direct home delivery of specialty muffin
baskets and coffee.
 
 The
Company has four wholly owned subsidiaries: BAB Systems, Inc. (Systems); BAB
Operations, Inc. (Operations); Brewster’s Franchise Corporation (BFC); and My
Favorite Muffin Too, Inc.    Systems was incorporated on
December 2, 1992, and was primarily established to franchise BAB specialty bagel
retail stores.  Operations was formed on August 30, 1995, primarily to
operate Company-owned stores, including one which currently serves as the
franchise training facility.  BFC was established on February 15, 1996
to franchise ”Brewster’s Coffee” concept coffee stores.  My Favorite
Muffin Too, Inc., a New Jersey corporation, was acquired on May 13,
1997.  My Favorite Muffin Too, Inc. franchises ”MFM” concept muffin
stores.  The assets of Jacobs Bros. Bagels (Jacobs Bros.) were
acquired on February 1, 1999.  (See Note 6.)
 
 
 Note
2 - Summary of Significant Accounting Policies
 
 Principles of
Consolidation
 The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries.  All intercompany accounts and transactions
have been eliminated in consolidation.
 
 Use of
Estimates
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.
 
 Revenue
Recognition
 Systems royalty fees represent a 5%
charge from franchised stores’ net retail and wholesale
sales.  Royalty revenues are recognized on the accrual basis
using estimates based on past history and seasonality.
 
 The
Company recognizes franchise fee revenue upon the opening of a franchise
store.  Direct costs associated with franchise sales are deferred
until the franchise fee revenue is recognized.  These costs include
site approval, construction approval, commissions, blueprints and training
costs.
  21
 Index
  BAB,
Inc
 Notes
to the Consolidated Financial Statements
 November
30, 2007 and 2006
 
 
 Note
2 - Summary of Significant Accounting Policies (Continued)
 
 The
Company earns a licensing fee from the sale of par-baked bagels from a
third-party commercial bakery and from the sale of coffee from a coffee bean
roaster for the sale of BAB branded product to the franchised and licensed units
noted in the table below.  Stores which have been opened, and unopened
stores for which a Franchise Agreement has been executed at November 30, 2007
and 2006 are as follows:
 
 
 2007
              
              
              2006Stores
      openedCompany-owned
              
              
              1
              
              
              
              1Franchisee-owned
              
              
              126
              
              
              
              136Licensed
              
              
              2
              
              
              
              3129
              
              
              
              140Unopened
      storesFranchise
      Agreement
              
              
              7
              
              
              
              8136
              
              
              
              148
 
 
 Segments
 In June
1997, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (SFAS) No. 131, “Disclosures about Segments of an
Enterprise and Related Information,” which established annual reporting
standards for an enterprise’s operating segments and related disclosures about
its products, services, geographic areas and major customers. The Company’s
operations are within two reportable segments operating in the United States:
Company Store Operations and Franchise Operations.
 
 Marketing
Fund
 Systems
established a Marketing Fund during 1994.  Franchisees and the
Company-owned store are required to contribute to the Fund based on their retail
sales. The Marketing Fund also earns revenues from commissions paid by certain
vendors on the sale of BAB licensed products to franchisees.
 
 Cash
 Bank
deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to
$100,000.  Deposits may from time to time exceed federally insured
limits.  As of November 30, 2007 and 2006, the Fund cash balances,
which are to be accounted for separately as mandated by the UFOC, were $208,513
and $155,300, respectively.  Also included in restricted cash at
November 30, 2007 and 2006 is a $63,457 and $78,814 certificate of deposit,
respectively, that serves as collateral for a Letter of Credit for the Corporate
Office facility lease entered with IL-Corporate 500 Centre, L.L.C., as required
by the lease.
  22
 Index
  BAB,
Inc
 Notes
to the Consolidated Financial Statements
 November
30, 2007 and 2006
 
 
 Note
2 - Summary of Significant Accounting Policies (Continued)
 
 Accounts
Receivable
 Receivables
are carried at original invoice amount less estimates made for doubtful
accounts.  Management determines the allowances for doubtful accounts
by reviewing and identifying troubled accounts on a periodic basis and by using
historical experience applied to an aging of accounts.  A receivable
is considered to be past due if any portion of the receivable balance is
outstanding 90 days past the due date.  Receivables are written off
when deemed uncollectible.  Recoveries of receivables previously
written off are recorded as income when received.  Certain receivables
have been converted to unsecured interest bearing notes.
 
 Inventories
 Inventories
are valued at the lower of cost or market under the first-in, first-out (FIFO)
method.
 
 Property, Plant and
Equipment
 Property
and equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization.  Depreciation is calculated using the
straight-line method over the estimated useful lives of the
assets.  Estimated useful lives are 3 to 7 years for property and
equipment and 10 years, or term of lease, if less, for leasehold
improvements.  Maintenance and repairs are charged to expense as
incurred.  Expenditures that materially extend the useful lives of
assets are capitalized.
 
 Goodwill and Other
Intangible Assets
 The
Company’s intangible assets consist primarily of trademarks and
goodwill.  SFAS No. 142, ”Goodwill and Other Intangible Assets”
requires that assets with indefinite lives no longer be amortized, but instead
be subject to annual impairment tests using a discounted cash flow model to
determine the assets fair value. The Company no longer amortizes goodwill or
trademarks, but instead, the Company’s intangible assets are tested annually for
impairment. No impairment was recorded for the years ended November 30, 2007 and
2006.
 
 The net
book value of intangible assets with definite lives totaled $36,204 and $2,896
at November 30, 2007 and 2006, respectively.  The gross value of
definite lived intangible assets and their respective accumulated amortization
are as follows:
 
 Accumulated
      AmortizationDefinite
      Lived Intangible Assets
              
              Original
      Cost
              
              
              November
      30, 2007Master
      Lease Origination Fees
              
              $
              95,382
              
              
              $
              95,382Trademark
      Renewals
              
              $
              38,110
              
              
              $
              1,906
 
 
 Definitive
lived intangible assets are being amortized over their useful
lives.  Trademark renewal expenditures of $38,110 were capitalized in
2007 and will be amortized over a life of 10 years.  The Company
recorded amortization expense for definitive lived intangible assets of $4,802
and $9,157 for the years ended November 30, 2007 and 2006, respectively, and
will record approximately $2,000 per year over the next five
years.
  23
 Index
  BAB,
Inc
 Notes
to the Consolidated Financial Statements
 November
30, 2007 and 2006
 
 Note
2 - Summary of Significant Accounting Policies (Continued)
 
 Advertising and Promotion
Costs
 The
Company expenses advertising and promotion costs as
incurred.  Advertising and promotion expense was $122,937 and $110,055
in 2007 and 2006, respectively.  Included in advertising expense was
$74,564 and $73,171 in 2007 and 2006, respectively, related to the Company’s
franchise operations.
 
 Income
Taxes
 Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.  The benefits from net
operating losses carried forward may be impaired or limited in certain
circumstances.  In addition, a valuation allowance can be provided for
deferred tax assets when it is more likely than not that all or some portion of
the deferred tax asset will not be realized.  The Company reduced the
valuation allowance on the net deferred tax assets by $500,000 for the period
ended November 30, 2007.  (See Note 3.)
 
 Earnings Per
Share
 The
Company computes earnings per share (“EPS”) under SFAS No. 128, “Earnings per
Share.”  Basic net earnings are divided by the weighted average number
of common shares outstanding during the year to calculate basic net earnings per
common share.  Diluted net earnings per common share are calculated to
give effect to the potential dilution that could occur if warrants, options or
other contracts to issue common stock were exercised and resulted in the
issuance of additional common shares.
 
 2007
              
              
              2006Numerator:Net
      income available to common shareholders
              
              $
              1,243,713
              
              
              $
              716,607Denominator:Weighted
      average outstanding sharesBasic
              
              
              7,261,651
              
              
              
              7,222,560Earnings
      per Share - Basic
              
              $
              0.17
              
              
              $
              0.10Effect
      of dilutive common stock
              
              
              16,415
              
              
              
              36,589Weighted
      average outstanding sharesDiluted
              
              
              7,278,066
              
              
              
              7,259,149Earnings
      per share - Diluted
              
              $
              0.17
              
              
              $
              0.10
 
 At
November 30, 2007 and 2006, there are 267,500 unexercised options that are not
included in the computation of dilutive EPS because their impact would be
antidilutive based on current market prices.
  24
 Index
 
 BAB,
Inc
 Notes
to the Consolidated Financial Statements
 November
30, 2007 and 2006
 
 
 Note
2 - Summary of Significant Accounting Policies (Continued)
 
 
 Stock-Based
Compensation
 Effective
December 1, 2006, the Company adopted the provisions of FASB Statement No. 123
(revised 2004), “Share-Based Payment” (“SFAS 123R”) using the modified
prospective transition method.  Under this method, prior periods are
not revised for comparative purposes and the Company recognizes compensation
cost using a fair-value based method for all share-based payments granted after
November 30, 2006, plus any awards granted to employees up through November 30,
2006 that remain unvested at that time.  Prior to December 1, 2006,
the Company accounted for its share-based compensation plans in accordance with
the provisions of Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees.”  The Company recorded
compensation cost arising from share-based payment arrangements in
payroll-related expenses on the Condensed Consolidated Statement of Operations
for the Company’s stock option plan of $34,000 for the twelve months ended
November 30, 2007.
 
 
 Stock
Warrants
 Stock
warrants granted as consideration in purchase acquisitions have been recorded as
an addition to additional paid-in capital in the accompanying balance sheet
based on the fair value of such stock warrants on the date of the
acquisition.
 
 
 Fair Value of Financial
Instruments
 The
carrying amounts of financial instruments including cash, accounts receivable,
notes receivable, accounts payable and short-term debt approximate their fair
values because of the relatively short maturity of these
instruments.  The carrying value of long-term debt, including the
current portion, approximate fair value based upon market prices for the same or
similar instruments.
  25
 Index
 
 BAB,
Inc
 Notes
to the Consolidated Financial Statements
 November
30, 2007 and 2006
 
 Note
2 - Summary of Significant Accounting Policies (Continued)
 
 
 Recent Accounting
Pronouncements
 
 
 In July
2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.  FIN No. 48 clarifies the
accounting and reporting for uncertainties in income tax law.  FIN No.
48 prescribes a comprehensive model for the financial statement recognition,
measurement, presentation, and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns.  FIN No. 48 is effective
for fiscal years beginning after December 15, 2006.  The Company has
not yet determined the impact, if any, that may result from the adoption of FIN
No. 48.
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements.  Where applicable, SFAS No. 157 simplifies
and codifies related guidance within GAAP and does not require any new fair
value measurements.  SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years.  Earlier adoption is
encouraged.  The adoption of SFAS No. 157 is not expected to have a
material impact on the Company’s financial position or results of
operations.
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities(“SFAS 159”).
SFAS 159 allows entities to measure at fair value many financial
instruments and certain other assets and liabilities that are not otherwise
required to be measured at fair value. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The company has not yet determined
the impact, if any, that may result from adoption of SFAS No.
159.
  26
 Index
 
 BAB,
Inc
 Notes
to the Consolidated Financial Statements
 November
30, 2007 and 2006
 
 Note
      3 - Income TaxesThe
      components of the income tax (benefit) provision are as
      follows:2007
              
              
              2006Federal
      income tax provision computed at federal statutory rate
              
              $
              252,862
              
              
              $
              243,646State
      income taxes net of federal tax provision
              
              
              35,832
              
              
              
              34,526Other
      adjustments
              
              
              10,879
              
              
              
              6,544Change
      in valuation allowance
              
              
              (644,530
              )
              
              
              (151,566
              )Utilization
      of net operating losses
              
              
              (155,043
              )
              
              
              (133,150
              )Income
      Tax (Benefit)
              
              $
              (500,000
              )
              
              $
              -Deferred
      income tax assets (liabilities) are as follows:2007
              
              
              2006Deferred
      revenue
              
              
              109,328
              
              
              
              129,030Deferred
      rent revenue
              
              
              15,912
              
              
              
              15,811Marketing
      Fund net contributions
              
              
              80,940
              
              
              
              60,287Allowance
      for doubtful accounts
              
              
              2,395
              
              
              
              12,558Allowance
      for doubtful accounts-notes receivable
              
              
              5,155
              
              
              
              6,442Accrued
      expenses
              
              
              20,707
              
              
              
              12,577Net
      operating loss carryforwards
              
              
              2,398,332
              
              
              
              2,553,375Valuation
      allowance
              
              
              (1,232,302
              )
              
              
              (2,031,875
              )Total
      Deferred Income Tax Assets
              
              $
              1,400,467
              
              
              $
              758,205Depreciation
      and amortization
              
              
              (895,694
              )
              
              
              (751,583
              )Franchise
      Costs
              
              
              (4,773
              )
              
              
              (6,622
              )Total
      Deferred Income Tax Liabilities
              
              $
              (900,467
              )
              
              $
              (758,205
              )Total
      Net Deferred Tax Assets/Liabilities
              
              $
              500,000
              
              
              $
              -
 
 
 As of
November 30, 2007, the Company has net operating loss carryforwards expiring
between 2012 and 2021 for U.S. federal income tax purposes of approximately
$6,178,000.  A valuation allowance has been established for $1,232,000
and $2,032,000 as of November 30, 2007 and 2006, respectively, for the deferred
tax benefit related to those loss carryforwards and other deferred tax assets,
that are more likely than not that the deferred tax asset will not be
realized.  The reduction in the valuation allowance of $800,000 is a
result of recognition of net operating loss carryforwards and management’s
projections of future taxable income.
  27
 Index
 
 BAB,
Inc
 Notes
to the Consolidated Financial Statements
 November
30, 2007 and 2006
 
 
 Note
4 - Long-Term Obligations
 
 Long-term
      debt consisted of the following:2007
              
              
              2006Bank
      note payable
              
              $
              0
              
              
              $
              170,735Note
      payable to former stockholder
              
              $
              251,567
              
              
              $
              273,572$
              251,567
              
              
              $
              444,307Less
      current portion
              
              $
              (23,051
              )
              
              $
              (192,740
              )Long-Term
      Debt, Net of Current Portion
              
              $
              228,516
              
              
              $
              251,567
 
 
 On June
25, 2004, the Company entered into a Business Loan and Security Agreement (“Bank
Agreement”) with Associated Bank which provided for a term loan in the original
amount of $723,700.  The term loan under the Bank Agreement is secured
by substantially all of the assets of the Company and is to be repaid in monthly
installments of $21,900, including interest at a rate of 5.5 % per annum, with a
final payment due July 1, 2007.  The balance of this note payable as
of November 30, 2006 was $170,735.  The note was paid in full in July,
2007.
 
 On
September 6, 2002, the Company signed a note payable requiring annual
installments of $35,000, including interest at a rate of 4.75% per annum, for a
term of 15 years, in the original amount of $385,531.  The Company
purchased and retired 1,380,040 shares of BAB common stock from a former
stockholder.  The balance of this note payable was $251,567 and
$273,572 as of November 30, 2007 and 2006, respectively.
 
 As of
November 30, 2007, annual maturities on long-term obligations due are as
follows:
 
 Year
      Ending November 30:2008
              
              
              $23,0512009
              
              
              $24,1462010
              
              
              $25,2922011
              
              
              $26,494Thereafter
              
              
              $152,584Total
              
              
              $251,567
  28
 Index
  BAB,
Inc
 Notes
to the Consolidated Financial Statements
 November
30, 2007 and 2006
 
 
 Note 5 - Stockholders’
Equity
 
 On March
9, 2007, June 5, 2007, and September 5, 2007, a $.02 per share dividend was
declared, and was paid on April 10, 2007, July 2, 2007, and October 2, 2007,
respectively.  On November 26, 2007, a $.02 quarterly dividend and a
$.02 special dividend was declared, payable January 4, 2008. A dividend payable,
in the amount of $290,540, was recorded at November 30, 2007.  On
March 13, 2006, May 25, 2006, and September 6, 2006, a $.02 per share dividend
was declared, and was paid on April 13, 2006, July 5, 2006, and October 9, 2006,
respectively. On November 16, 2006, a $.02 quarterly dividend and a $.02 special
dividend was declared, payable January 11, 2007. A dividend payable, in the
amount of $290,524, was recorded at November 30, 2006.
 
 
 Note
6 - Stock Options and Warrants
 
 In May
2001, the Company approved a Long-Term Incentive and Stock Option Plan
(Plan).  The Plan reserves 1,400,000 shares of common stock for
grant.  The Plan will terminate on May 25, 2011.  The Plan
permits granting of awards to employees and non-employee Directors and agents of
the Company in the form of stock appreciation rights, stock awards and stock
options.  The Plan is currently administered by a Committee of the
Board of Directors appointed by the Board.  The Plan gives broad
powers to the Board and Committee to administer and interpret the Plan,
including the authority to select the individuals to be granted options and
rights, and to prescribe the particular form and conditions of each option or
right granted.
 
 Under the
Plan, the exercise price of each option equals the market price of the Company’s
stock on the date of grant.  The options granted vary in vesting from
immediate to a vesting period over five years.  The options granted
are exercisable within a 10 year period from the date of grant.  All
stock issued from the granted options must be held for one year from date of
exercise.  Options issued and outstanding expire on various dates
through November 28, 2016.  Range of exercise prices of options
outstanding as of November 30, 2007 are $0.46 to $1.27.
 
 Activity
under the Plan during the two years ended November 30 is as
follows:
 
 2007
              
              
              2006Options
              
              Weighted
      average exercise price
              
              
              Options
              
              Weighted
      average exercise priceOptions
      outstanding at beginning of year
              
              432,949
              
              $1.064
              
              
              163,034
              
              $0.722Granted
              
              0
              
              $0.00
              
              
              290,000
              
              $1.221Forfeited
              
              0
              
              $0.00
              
              
              (6,099)
              
              $0.833Exercised
              
              (40,576)
              
              $0.509
              
              
              (13,986)
              
              $0.434Outstanding
      at end of year
              
              392,373
              
              $1.121
              
              
              432,949
              
              $1.064
  29
 Index
 
 BAB,
Inc
 Notes
to the Consolidated Financial Statements
 November
30, 2007 and 2006
 
 Note
6 - Stock Options and Warrants (Continued)
 
 Options
      Outstanding
              
              
              Options
      ExercisableRange
      of exercise price
              
              Options
      outstanding
              
              Weighted
      average remaining contractual life
              
              Weighted
      average exercise price
              
              
              Options
      exercisable
              
              Weighted
      average exercise price$0.46
              
              9,473
              
              6.0
              
              $0.460
              
              
              9,473
              
              $0.460$0.60
              
              10,000
              
              6.6
              
              $0.600
              
              
              10,000
              
              $0.600$0.88
      - $0.97
              
              65,400
              
              7.2
              
              $0.935
              
              
              43,600
              
              $0.935$0.86
              
              20,000
              
              7.5
              
              $0.860
              
              
              20,000
              
              $0.860$1.15
      - $1.27
              
              72,500
              
              8.0
              
              $1.216
              
              
              24,166
              
              $1.216$0.97
              
              20,000
              
              9.0
              
              $0.970
              
              
              20,000
              
              $0.970$1.25
              
              100,000
              
              9.0
              
              $1.250
              
              
              --
              
              --$1.25
              
              95,000
              
              9.0
              
              $1.250
              
              
              --
              
              --392,373
              
              
              
              $1.121
              
              
              127,239
              
              $0.920
   The
aggregate intrinsic value in the table below is before income taxes, based on
the Company’s closing stock price of $.98 as of the last business day of the
period ended November 30, 2007.  Total intrinsic value of those
options exercised during the quarter and twelve months ended November 30, 2007
is $200 and $19,000, respectively.
  Options
      Outstanding
              
              
              Options
      ExercisableOutstanding
              
              
              Wghtd.
      Avg.
              
              Wghtd.
      Avg.
              
              
              Aggregate
              
              
              Exercisable
              
              
              Wghtd.
      Avg.
              
              
              Aggregateat
      11/30/07
              
              
              Remaining
      Life
              
              Exercise
      Price
              
              
              Intrinsic
      Value
              
              
              at
      11/30/07
              
              
              Exercise
      Price
              
              
              Intrinsic
      Value392,373
              
              
              
              8.29
              
              
              $
              1.12
              
              
              $
              -
              
              
              
              127,239
              
              
              $
              0.92
              
              
              $
              7,634
   Effective
December 1, 2006, the Company adopted the provisions of FASB Statement No. 123
(revised 2004), “Share-Based Payment” (“SFAS 123R”) using the modified
prospective transition method.  Under this method, prior periods are
not revised for comparative purposes and the Company recognizes compensation
cost using a fair-value based method for all share-based payments granted after
November 30, 2006, plus any awards granted to employees up through November 30,
2006 that remain unvested at that time.  Prior to December 1, 2006,
the Company accounted for its share-based compensation plans in accordance with
the provisions of Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees.”  The Company recorded
compensation cost arising from share-based payment arrangements in
payroll-related expenses on the Condensed Consolidated Statement of Operations
for the Company’s stock option plan of $34,000 for the twelve months ended
November 30, 2007.
  The
following table illustrates the pro forma effect on the Company’s net income and
net income per share as if the Company had adopted the fair value based method
of accounting for stock-based compensation under FASB No. 123, “Accounting for
Stock-Based Compensation,” for 2006 and the assumptions used to estimate the
fair value of options granted under the stock option plan for that
period.
  30
 Index
  BAB,
Inc
 Notes
to the Consolidated Financial Statements
 November
30, 2007 and 2006
 
 Note
6 - Stock Options and Warrants (Continued)
 
 2006Pro
      forma impact of fair value methodReported
      net income
              
              $
              716,607Less:  Fair
      value impact of employee stock compensation
              
              
              (43,460
              )Pro
      forma net income
              
              $
              673,147Earnings
      per common shareBasic
      - as reported
              
              $
              0.10Diluted
      - as reported
              
              $
              0.10Basic
      - pro forma
              
              $
              0.09Diluted
      - pro forma
              
              $
              0.09Weighted
      average Black Scholes fair value assumptions for options granted during
      year ended November 30, 2006Risk
      free interest rate
              
              
              4.67
              %Expected
      life
              
              10.0
      yrsExpected
      volatility
              
              
              0.527Expected
      dividend yield
              
              
              6.4
              %Fair
      Value of grants
              
              $
              0.29
 
 On
February 1, 1999, the Company purchased certain assets of a related group of
entities doing business as Jacobs Bros. Bagels, a chain operating retail bagel
stores in the Chicago, Illinois area.  The assets acquired included 8
retail locations and a central commissary facility paid for with $950,000 in
cash and issuance of warrants to acquire 333,332 shares of the Company’s common
stock.  The warrants provide for the purchase of 183,332 and 150,000
shares of common stock at an exercise price of $1.88 and $2.25 per share,
respectively.  The warrants were first exercisable on February 1, 2000
and expired on January 31, 2006.  Noneof the
warrants were exercised.
 
 Note
7 - Commitments
 
 The
Company rents its Corporate Office and the Company-owned store under leases
which require it to pay real estate taxes, insurance and general repairs and
maintenance.  Rent expense for the years ended November 30, 2007 and
November 30, 2006 was $119,449 and $122,128, net of sublease income of $127,666
and $123,950, respectively.  Monthly rent is recorded on a
straight-line basis over the term of the lease with a deferred rent liability
being recognized.  As of November 30, 2007, future minimum annual
rental commitments under leases, net of sublease income of $133,031 in 2008,
$138,944 in 2009, and $11,661 in 2010 are as follows:
 
 Year
      Ending November 30:2008
              
              $
              120,9462009
              
              $
              130,0102010
              
              $
              149,314Thereafter
              
              $
              76,708Total
              
              $
              476,978
  31
 Index
 
 BAB,
Inc
 Notes
to the Consolidated Financial Statements
 November
30, 2007 and 2006
 
 
 Note
8 – Employee Benefit Plan
 
 The
Company maintains a qualified 401(k) plan which allows eligible participants to
make pretax contributions.  Company contributions are
discretionary.  The Company contributed $15,000 in 2007 and
2006.
 
 
 Note
9 - Segment Information
 
 Segment
information has been reclassified to reflect licensing fees revenue, goodwill
and certain definite lived assets and the amortization expense related to these
intangibles in Systems, so as to reflect a truer segment income stream and asset
relationship, as the business is focused on the franchise division.
 
 The
following tables present segment information for the years ended November 30,
2007 and 2006:
  32
 Index
  
 BAB,
Inc
 Notes
to the Consolidated Financial Statements
 November
30, 2007 and 2006
 
 
 Note
9 - Segment Information (Continued)
 
 Net
      Revenues
              
              
              Operating
      Income (Loss)2007
              
              
              2006
              
              
              2007
              
              
              2006Company
      Store Operations
              
              $
              890,972
              
              
              $
              759,490
              
              
              $
              (141,544
              )
              
              $
              (246,238
              )Franchise
      Operations and Licensing Fees
              
              
              3,103,927
              
              
              
              3,157,901
              
              
              
              1,800,333
              
              
              
              1,783,954$
              3,994,899
              
              
              $
              3,917,391
              
              
              $
              1,658,789
              
              
              $
              1,537,716Corporate
      Expenses
              
              
              
              
              
              
              
              
              
              
              (967,082
              )
              
              
              (848,215
              )Interest
      Income, Net of Interest Expense
              
              
              
              
              
              
              
              
              
              
              52,006
              
              
              
              27,106Net
      Income before provision for taxes
              
              
              
              
              
              
              
              
              
              $
              743,713
              
              
              $
              716,607Income
      tax expense benefit
              
              
              
              
              
              
              
              
              
              
              500,000
              
              
              
              -Net
      Income
              
              
              
              
              
              
              
              
              
              $
              1,243,713
              
              
              $
              716,607
 
 
 Operating
      Segment DataIdentifiable
              
              
              Capital
              
              
              Depreciation
      andAssets
              
              
              Expenditures
              
              
              AmortizationYear
      Ended November 30, 2007:Company
      Store Operations
              
              $
              74,891
              
              
              $
              848
              
              
              $
              20,237Franchise
      Operations (other than goodwill)
              
              
              2,189,741
              
              
              
              56,389
              
              
              
              24,575Goodwill
      and Other Intangible Assets
              
              
              2,848,872$
              5,113,504
              
              
              $
              57,237
              
              
              $
              44,812Year
      Ended November 30, 2006:Company
      Store Operations
              
              $
              95,910
              
              
              $
              7,464
              
              
              $
              48,080Franchise
      Operations (other than goodwill)
              
              
              189,194
              
              
              
              6,863
              
              
              
              21,573Goodwill
      and Other Indefinite Lived Intangible Assets
              
              
              4,306,439$
              4,591,543
              
              
              $
              14,327
              
              
              $
              69,653
 
 
 Reconciliation
      to Total Assets as Reported
              
              2007
              
              
              2006Assets-Total
      reportable segments - Identifiable assets
              
              $
              5,113,504
              
              
              $
              4,591,543Unallocated
      AmountsCash
              
              
              1,782,262
              
              
              
              2,026,780Prepaid
      expenses and other current assets
              
              
              129,575
              
              
              
              100,439Total
      Consolidated Assets
              
              $
              7,025,341
              
              
              $
              6,718,762
 
 There
were no sales to any individual customer during either year in the two-year
period ended November 30, 2007 that represented 10% or more of net
sales.
 
 
 ITEM8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
 
 None
  33
 Index
  ITEM8A. CONTROLS AND PROCEDURES
 
 Disclosure
controls
 
 The Chief
Executive Officer and the Chief Financial Officer have evaluated the
effectiveness of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as
amended) as of November 30, 2007.  Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.  Based on that evaluation, Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of such date to ensure that
information required to be disclosed in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and
forms.
 
 Internal
control over financial reporting
 
 The Chief
Executive Officer and the Chief Financial Officer confirm that there was no
change in the Company’s internal control over financial reporting during the
year ended November 30, 2007 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
  ITEM8B.  OTHER INFORMATION
  None
   PART
III
  
 ITEM9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
 
 Section
16(a) of the Securities Exchange Act of 1934 requires the Company's executive
officers and directors, and persons who beneficially own more than ten percent
of the Company's Common Stock, to file initial reports of ownership and reports
of changes in ownership with the Securities and Exchange Commission (the "SEC").
Executive officers, directors and greater than ten percent beneficial owners are
required by the SEC to furnish the Company with copies of all Section 16(a)
forms they file.
 
 Based
upon a review of the copies of such forms furnished to the Company, the Company
believes that all Section 16(a) filing requirements applicable to its executive
officers and directors were met during the year ended November 30,
2007.
  34
 Index
  CODEOF
ETHICS
  BAB,
Inc.
 Code of
Ethics
 November
30, 2007
 
 BAB, Inc.
(the Company) is formally establishing, although it believes it has complied
with the tenants of such a document during its existence, a Code of Ethics,
pursuant to Section 406 of the Sarbanes-Oxley Act, which is designed to deter
wrongdoing and to promote:
 
 ·
              Honest
      and ethical conduct, including the ethical handling of actual or apparent
      conflicts of interest between personal and professional
      relationships;
 ·
              Full,
      fair, accurate, timely and understandable disclosure in reports and
      documents that the Company files with, or submits to, the Securities and
      Exchange Commission, and in other public communications made by the
      Company;
 ·
              Compliance
      with applicable government laws, rules and
  regulations;
 ·
              The
      prompt internal reporting of violations of the Code to the appropriate
      person or persons identified in the Code;
and
 ·
              Accountability
      for adherence to the Code.
 
 The Code
of Ethics promulgated by Sarbanes-Oxley, expects the highest standard of ethical
conduct and fair dealing of its Senior Financial Officers (SFO), defined as the
Chief Executive Officer and Chief Financial Officer.  While, per
Sarbanes-Oxley, this policy is intended to only cover the actions of the SFO,
the Company expects it’s Controller, other officers, directors and employees
will also review this Code and abide by its provisions.  The Company's
reputation is a valuable asset and as such must continually be guarded by all
associated with the Company so as to earn the trust, confidence and respect of
our suppliers, customers and shareholders.
 
 The
Company's SFO are committed to conducting business in accordance with the
highest ethical standards.  The SFO must comply with all applicable laws,
rules and regulations.  Furthermore, SFO must not commit an illegal or
unethical act, or instruct or authorize others to do so.
 
 CONFLICTS OF
INTEREST
 
 The SFO
must act in the best interests of the Company, and should avoid any situation
that presents an actual, potential or apparent conflict between their personal
interests and the interests of the Company.
 
 The SFO
have a conflict when their personal interests, relationships or activities, or
those of a member of their immediate family, interfere or conflict, or even
appear to interfere or conflict, with the Company's interests.  A conflict
of interest prevents one from acting objectively with the Company's best
interests in mind, or prevents one from exercising sound, ethical business
judgment.
 
 PUBLIC
COMMUNICATIONS
 
 The
Company is committed to providing Company information to the public in a manner
that complies with all applicable legal and regulatory requirements and that
promotes investor confidence by facilitating fair, orderly and efficient
behavior.  The Company's reports and documents filed with the Securities
and Exchange Commission, as well as any other public communications, must be
complete, fair, accurate and timely.  The SFO must do everything in their
power to comply with these standards.
  35
 Index
  CODE OF ETHICS
(Continued)
 
 
 GIFTS
 
 The SFO
may not give or receive kickbacks, rebates, gifts, services or any other
benefits, other than gifts of nominal value (amounts would be considered in
excess of nominal value if they create the appearance of impropriety, or
actually influence the Company to give preferential, versus arms-length,
treatment to the provider) from a supplier, competitor, government official,
customer or any other person the Company does, or expects to do business
with.
 
 LOANS
 
 SFO may
not accept loans, or loan guarantees, from the Company, or from any persons or
entities, either doing business with, or seeking business with the
Company.  The Company will not make any loans to SFO, officers, directors,
employees or any outside parties doing business with, or seeking business with
the Company.
 
 CONFIDENTIAL
INFORMATION
 
 SFO,
officers, directors and employees are to respect the confidentiality of Company,
employee, supplier, customer, competitor and any other persons or entities'
information that is not a matter of public record.   Confidential
information must not be used for personal gain.
 
 COMPLIANCE WITH THIS
CODE
 
 SFO are
expected to fully comply with this Code.  This Code will be strictly
enforced and any violations will be dealt with immediately, and depending on the
severity of noncompliance, could lead to disciplinary action including
termination.  Furthermore, violations involving unlawful behavior will be
reported to appropriate outside authorities.  If anyone is unclear as to
the possibility of a violation of this Code, he should seek the opinion of the
Company's Vice President and General Counsel, the Audit Committee and/or outside
legal counsel.
 
 If SFO,
officers, directors and employees have knowledge, or are suspicious of any
non-compliance with this Code, or are concerned that circumstances could lead to
a violation of this Code, they should discuss this with their immediate
supervisor, the Company's Vice President and General Counsel, the Audit
Committee and/or outside legal counsel.
 
 The
Company will not allow any retaliation against an employee, officer, or director
who acts in good faith in reporting any actual or suspected violation. 
Open communication of issues and concerns without fear of retribution or
retaliation is vital to the success of this Code.
 
 ADHERENCE TO THE
CODE
 
 The Vice
President and General Counsel will have primary authority and responsibility for
the enforcement of this Code, subject to the supervision of the Audit Committee
of the Board of Directors, and shall promptly notify the Audit Committee of any
violation of this Code.
  36
 Index
  ITEM10. EXECUTIVE COMPENSATION
 
 The
following table sets forth the cash compensation earned by executive officers
that received annual salary and bonus compensation of more than $100,000 during
years 2007, 2006 and 2005 (the "Named Executive Officers"). The Company has no
employment agreements with any of its executive officers.
 
 
 Summary
Compensation Table
 
 
 Annual
      Compensation
              Long
      Term CompensationAwards
              PayoutsRestricted
              SecuritiesStock
              Underlying
              LTIP
              All
      OtherName
      and
              Year
              Salary
              Bonus
              Other
              Awards
              Options/SARS(#)
              Payouts
              CompensationPrincipal
      Position
              End
              ($)
              ($)
              ($)
              ($)
              
              ($)
              ($)Michael
      W. Evans, President and CEO
              2007
              253,290
              64,761
              --
              --
              --
              --
              --2006
              245,571
              72,178
              --
              --
              70,000
              --
              --2005
              233,492
              35,851
              --
              --
              20,000
              --
              --Michael
      K. Murtaugh, Vice President and General Counsel
              2007
              188,746
              48,572
              --
              --
              --
              --
              --2006
              184,033
              54,135
              --
              --
              70,000
              --
              --2005
              175,902
              26,888
              --
              --
              20,000
              --
              --Jeffrey
      M. Gorden, Chief Financial Officer
              2007
              137,210
              11,000
              --
              --
              --
              --
              --2006
              132,957
              9,500
              --
              --
              30,000
              --
              --2005
              126,430
              --
              --
              --
              6,000
              --
              --
 
  Stock
options were issued at fair market value on the issue date to officers owning
less than 10% of the Company stock and 110% of fair market value at issue date
to those officers having a 10% or greater ownership of Company
stock.  All options expire 10 years after date of grant.  No
options were issued in 2007.  Options issued during 2006 were as
follows:  (1) 75,000 on December 7, 2005 with a fair market issue
price of $1.15 and vests 1/3 in 12 months, 1/3 in 24 months, and 1/3 in 36
months from the issue date; (2) 20,000 issued November 15, 2006 with a fair
market value of $.97 with immediate vesting; (3) 100,000 issued November 15,
2006 with a fair market value of $1.25 that vest after 5 years; and (4) 95,000
issued November 28, 2006 with a fair market value of $1.25 that vest after 5
years.  Options issued to the above officers totaled 170,000 shares or
58.6% of total options issued.  During 2005, 75,000 options were
issued on January 25, 2005 with a fair market issue price of $0.88 and vests as
follows: 1/3 in 12 months, 1/3 in 24 months and 1/3 in 36 months from issue date
and 20,000 options issued June 1, 2005 with a fair market issue price of $0.86
and vests immediately.  Options issued to the above officers totaled
52,000 shares or 54.7% of total options issued.
  Options
and percentages issued to officers, as discussed above, include amounts issued
to John J. Bracken (former Vice President Operations), who retired in November,
2005.
  37
 Index
  Indemnification of Directors
and Officers
 The
Company's Certificate of Incorporation limits personal liability for breach of
fiduciary duty by its directors to the fullest extent permitted by the Delaware
General Corporation Law (the "Delaware Law"). Such Certificate eliminates the
personal liability of directors to the Company and its shareholders for damages
occasioned by breach of fiduciary duty, except for liability based on breach of
the director's duty of loyalty to the Company, liability for acts omissions not
made in good faith, liability for acts or omissions involving intentional
misconduct, liability based on payments or improper dividends, liability based
on violation of state securities laws, and liability for acts occurring prior to
the date such provision was added. Any amendment to or repeal of such provisions
in the Company's Articles of Incorporation shall not adversely affect any right
or protection of a director of the Company for with respect to any acts or
omissions of such director occurring prior to such amendment or
repeal.
 
 In
addition to the Delaware Law, the Company's Bylaws provide that officers and
directors of the Company have the right to indemnification from the Company for
liability arising out of certain actions to the fullest extent permissible by
law. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers or persons
controlling the Company pursuant to such indemnification provisions, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
 
 
 ITEM11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 The
following table sets forth as of February 4, 2008 the record and beneficial
ownership of Common Stock held by (i) each person who is known to the Company to
be the beneficial owner of more than 5% of the Common Stock of the Company; (ii)
each current director; (iii) each "named executive officer" (as defined in
Regulation S-B, Item 402 under the Securities Act of 1933); and (iv) all
executive officers and directors of the Company as a group. Securities reported
as "beneficially owned" include those for which the named persons may exercise
voting power or investment power, alone or with others. Voting power and
investment power are not shared with others unless so stated. The number and
percent of shares of Common Stock of the Company beneficially owned by each such
person as of February 4, 2008 includes the number of shares, which such person
has the right to acquire within sixty (60) days after such date.   All
shares have been adjusted for a 4:1 stock dividend as of January 20,
2003.
  38
 Index
 
 Name
      and Address
              
              Shares
              PercentageMichael
      W. Evans
                500
      Lake Cook Road, Suite 475
                Deerfield,
      IL 60015
              
              2,833,279(1)(2)(3)(4)
              38.33Michael
      K. Murtaugh
                500
      Lake Cook Road, Suite 475
                Deerfield,
      IL 60015
              
              2,729,966
      (1)(2)(4)(5)
              36.93Holdings
      Investment, LLC
                220
      DeWindt Road
                Winnetka,
      IL 60093
              
              2,096,195
      (1)
              28.36Jeffrey
      M. Gorden
                500
      Lake Cook Road, Suite 475
                Deerfield,
      IL 60015
              
              90,833
      (6)
              1.23Steven
      G. Feldman
                750
      Estate Drive, Suite 104
                Deerfield,
      IL 60015
              
              40,000
      (7)
              .54James
      A. Lentz
                1415
      College Lane South
                Wheaton,
      IL 60187
              
              34,932
      (8)
              .47All
      executive officers and directors as a group (5 persons)
              
              3,632,815(1)(2)(3)(4)(5)(6)(7)(8)
              49.15
 
 
 (1)
Includes all shares held of record by Holdings Investments, LLC. Messrs. Evans
and Murtaugh are members and managers of the LLC and together control all voting
power of the stock owned by the LLC.
 (2)
Includes 33,333 stock options fully exercisable as of 2/04/08.
 (3)
Includes 3,500 shares inherited by spouse.
 (4)
Includes 22,222 shares held by children.
 (5)
Includes 5,004 shares held in an IRA.
 (6)
Includes 11,166 stock options fully exercisable as of 2/04/08.
 (7)
Includes 30,000 stock options fully exercisable as of 2/04/08.
 (8)
Includes 20,000 stock options fully exercisable as of 2/04/08.
 
 
 ITEM12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
 
 The
following information relates to certain relationships and transactions between
the Company and related parties, including officers and directors of the
Company. It is the Company's policy that it will not enter into any transactions
with officers, directors or beneficial owners of more than 5% of the Company's
Common Stock, or any entity controlled by or under common control with any such
person, on terms less favorable to the Company than could be obtained from
unaffiliated third parties and all such transactions require the consent of the
majority of disinterested members of the Board of Directors.
  39
 Index
  Management
believes that the following transactions were effected on terms no less
favorable to the Company than could have been realized in arm's length
transactions with unaffiliated parties.
 
 Executive Officers and
Directors
 Michael
K. Murtaugh, the Company's Vice President and General Counsel, was the sole
stockholder of Bagel One, Inc., which owned and operated a Big Apple Bagels
franchise store in Illinois.   A note receivable owed by Bagel One,
Inc. to Systems, guaranteed by Mr. Murtaugh, effective March 2000 in the
amount of $30,025 for a term of 6 years bearing 9% interest, had an
outstanding balance at November 30, 2005 of $2,244 and there are no payments in
arrears.  This note was paid off in full during fiscal year
2006.
   ITEM13. EXHIBITS AND REPORTS ON FORM 8-K
  See Index
to Exhibits
 
 
 ITEM14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 On May
23, 2007, BAB, Inc. (“Company”) dismissed McGladrey & Pullen, LLP as its
independent registered public accounting firm.  This action was
approved by the Company’s Board of Directors.  On May 23, 2007, the
Company engaged Frank L. Sassetti & Co. to be its independent registered
public accounting firm.  The Company’s engagement of Frank L. Sassetti
& Co. was recommended by the Audit Committee and approved by the Company’s
Board of Directors.
 
 The audit
reports of McGladrey & Pullen, LLP on the consolidated financial statements
of BAB, Inc. and Subsidiaries as of and for the year ended November 30, 2006 did
not contain an adverse opinion or a disclaimer of opinion, and was not qualified
or modified as to uncertainty, audit scope or accounting
principles.
 
 McGladrey
& Pullen, LLP was appointed as the Company’s auditor on November 29,
2006.  This occurred after BAB, Inc. (“Company”) was notified that a
majority of the partners of Altschuler, Melvoin and Glasser LLP (AM&G),
including the lead audit partner for the Company, had become partners of
McGladrey & Pullen, LLP and, as a consequence, that AM&G was compelled
to resign and would no longer be the auditor for the Company.
 
 The
decision to engage McGladrey & Pullen, LLP was approved by the Board of
Directors.
 
 In
connection with the audits of the Company’s consolidated financial statements
for each of the fiscal years ended November 30, 2006 and 2005, and through the
date of this Current Report, there were: (1) no disagreements between the
Company and McGladrey & Pullen, LLP on any matters of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of McGladrey &
Pullen, LLP, would have caused McGladrey & Pullen, LLP to make reference to
the subject matter of the disagreement in their reports on the Company’s
financial statements for such years, and (2) no reportable events within the
meaning set forth in Item 304(a)(1)(iv)(B) of Regulation S-B.
 
 
 Audit
fees relate to audit work performed on the financial statements as well as work
that generally only the independent auditor can reasonably be expected to
provide, including discussions surrounding the proper application of financial
accounting and/or reporting standards and reviews of the financial statements
included in quarterly reports filed on Form 10-Q.  Fees for audit services
provided by McGladrey and Pullen, LLP in fiscal 2007 amounted to $14,000, with
fees earned by Frank L. Sassetti & Co. for audit services for the year ended
November 30, 2007 amounting to $52,000.  Fees for audit services
provided by AM&G for the year ended November 30, 2006 amounted to $17,000,
and fees for audit services provided by McGladrey and Pullen, LLP amounted to
$62,000 for the year ended November 30, 2006.
  40
 Index
  ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES (Continued)
 
 
 Tax
compliance services were provided by RSM McGladrey for 2007 and 2006 and fees
billed amounted to $18,250 and $20,000, respectively.
 
 During
the year ended November 30, 2007 and 2006, Frank L. Sassetti & Co, McGladrey
& Pullen, LLP, AM&G, and American Express Tax and Business Services,
Inc. did not perform any management consulting services for the
Company.
 
 Preapproval of Policies and
Procedures by Audit Committee
 The
accountants provide a quote for services to the Audit Committee before work
begins for the fiscal year.  After discussion, the Audit Committee then
makes a recommendation to the Board of Directors on whether to accept the
proposal.
 
 Percentage of Services
Approved by Audit Committee
 All
services were approved by the Audit Committee.
  41
 Index
 
 INDEXTO EXHIBITS
  The
following Exhibits are filed herewith:
  INDEX
      NUMBER
              
              DESCRIPTION3.1
              
              Articles
      of Incorporation (See Form 10-KSB for year ended November 30,
      2006)3.2
              
              Bylaws
      of the Company (See Form 10-KSB for year ended November 30,
      2006)21.1
              
              List
      of Subsidiaries of the Company31.1, 31.2
              
              Section
      302 of the Sarbanes-Oxley Act of 200232.1, 32.2
              
              Section
      906 of the Sarbanes-Oxley Act of
2002
  SIGNATURES
 
 In
accordance with Section 13 of the Exchange Act, the Small business issuer has
duly caused this report on Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized.
  BAB,
INC.
  Dated:
February 27, 2008
 By /s/
Michael W. Evans
 Michael
W. Evans, Chief Executive Officer and President (Principal Executive
Officer)
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report on Form
10-KSB has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
 
 
 Dated:
February 27, 2008
 By /s/
Michael W. Evans
 Michael
W. Evans, Chief Executive Officer and President (Principal Executive
Officer)
   Dated:
February 27, 2008
 By /s/
Michael K. Murtaugh
 Michael
K. Murtaugh, Director and Vice President/General Counsel and
Secretary
   Dated:
February 27, 2008
 By /s/
Jeffrey M. Gorden
 Jeffrey
M. Gorden, Chief Financial Officer and Treasurer (Principal Financial and
Accounting Officer)
   Dated:
February 27, 2008
 By /s/
Steven G. Feldman
 Steven G.
Feldman, Director
   Dated:
February 27, 2008
 By /s/
James A. Lentz
 James A.
Lentz, Director
  42
 Index
  EXHIBIT
3.1 - Certificate of Incorporation
 
 See Form
10-KSB for year ended November 30, 2006
  
 EXHIBIT
3.2 - Bylaws of BAB, Inc.
 
 See Form
10-KSB for year ended November 30, 2006
   EXHIBIT
21.1 – List of Subsidiaries of the Company
   BAB
Systems, Inc., an Illinois corporation
 BAB
Operations, Inc., an Illinois corporation
 Brewster's
Franchise Corporation, an Illinois corporation
 My
Favorite Muffin Too, Inc., a New Jersey corporation




43