FORM 10-KSB

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   (Mark one)

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

        For the year ended: November 30, 2006

[ ]     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.


[X] 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. [X]


State issuer's revenues for its most recent fiscal year:

$3,917,391


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: $3,741,662
based on 3,704,616 shares held by nonaffiliates as of February 16, 2007; Closing
price ($1.01), bid ($0.96) and ask ($1.01) prices 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: 7,263,099 shares of Common Stock, as
of February 16, 2007.


Transitional Small Business Disclosure Format (check one):       [  ] Yes [X] No

                                      -1-
<PAGE>
FORM 10-KSB INDEX

PART I
<TABLE>
<CAPTION>
<S>  <C>                                                                                                      <C>
Item 1            Description of Business                                                                     3
                  -----------------------
                  Overview
                  --------
                  Customers
                  ---------
                  Suppliers
                  ---------
                  Locations
                  ---------
                  Store Operations
                  ----------------
                  Franchising
                  -----------
                  Competition
                  -----------
                  Trademarks and Service Marks
                  ----------------------------
                  Government Regulation
                  ---------------------
                  Employees
                  ---------
Item 2            Description of Property                                                                      7
                  -----------------------
Item 3            Legal Proceedings                                                                            7
                  -----------------
Item 4            Submission of Matters to a Vote of Security Holders                                          7
                  ---------------------------------------------------
PART II

Item 5.           Market for the Common Equity and Related Stockholder Matters                                 8
                  ------------------------------------------------------------
Item 6.           Management's Discussion and Analysis of Financial Condition and Results of                   9
                  Operations
                  ---------------------------------------------------------------------------
Item 7.           Financial Statements                                                                        13
                  --------------------
Item 8.           Changes in and Disagreement with Accountants on Accounting and Financial Disclosure         33
                  -----------------------------------------------------------------------------------
Item 8A.          Controls and Procedures                                                                     33
                  -----------------------

PART III

Item 9.           Directors, Executive Officers, Promoters and Control Persons; Compliance with               33
                  Section 16(a) of the Exchange Act
                  ------------------------------------------------------------------------------
                  Code of Ethics
                  --------------
Item 10.          Executive Compensation                                                                      36
                  ----------------------
Item 11.          Security Ownership of Certain Beneficial Owners and Management                              37
                  ---------------------------------------------------------------
Item 12.          Certain Relationships and Related Transactions                                              38
                  ----------------------------------------------
Item 13.          Exhibits and Reports on Form 8-K                                                            39
                  --------------------------------
Item 14.          Principal Accountant Fees and Services                                                      39
                  --------------------------------------
                  Exhibits
</TABLE>

                                      -2-
<PAGE>
                                     PART I

ITEM 1. 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, muffin and coffee retail units under the Big Apple Bagels
("BAB"), My Favorite Muffin ("MFM") and Brewster's Coffee trade names. At
November 30, 2006, the Company had 140 units in operation in 26 states, and 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 store features 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.

The Company has grown significantly since its initial public offering in
November 1995 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 $717,000 for the year ended November 30,
2006, and net income of $693,000 for the year ended November 30, 2005. 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-
<PAGE>
                                    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 136 franchised locations, 3 licensees and 1 Company-owned store.
Of the 136 locations, 134 are located in 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 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 all
Company-owned 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 1% contribution based on net
sales. 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 and $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-
<PAGE>

The Company's franchise agreements provide 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-
<PAGE>
                          TRADEMARKS AND SERVICE MARKS

The trademarks, tradenames 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.

                              GOVERNMENT REGULATION

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-
<PAGE>

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, 2006, the Company employed 33 persons, consisting of 14
working in the Company-owned store, of which 10 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.

ITEM 2. 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 January 31, 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.)

ITEM 3. LEGAL PROCEEDINGS


None


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


None

                                      -7-
<PAGE>
PART II

ITEM 5. 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, 2006. The Company's Common Stock is traded on the
NASDAQ OTC-Bulletin Board under the symbol "BABB."
<TABLE>
<CAPTION>
<S>                                                                   <C>                        <C>
      Year Ended: November 30, 2005                                    Low                       High
      -------------------------------------------------------------------------------------------------------
      First quarter                                                   0.75                       1.00
      Second quarter                                                  0.78                       0.97
      Third quarter                                                   0.85                       1.30
      Fourth quarter                                                  0.90                       1.45

      Year Ended: November 30, 2006                                    Low                       High
      -------------------------------------------------------------------------------------------------------
      First quarter                                                   0.90                       1.22
      Second quarter                                                  0.73                       1.01
      Third quarter                                                   0.85                       1.01
      Fourth quarter                                                  0.95                       1.07
</TABLE>

As of February 16, 2007, the Company's Common Stock was held by 185 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 16, 2007, 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 2006, 2005, 2004 and 2003, 290,000, 95,000, 115,000, and 300,000
stock options, respectively, were granted to directors, officers and employees.
As of November 30, 2006, 1,400,000 stock options were granted to directors,
officers and employees, leaving zero options available for grant. As of February
16, 2007, there were 1,007,218 stock options exercised or forfeited under the
stock option plan. (See Note 6 of the audited consolidated financial statements
included herein.)

                                      -8-
<PAGE>

DIVIDEND POLICY

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.)

The Board of Directors of the Company declared semi-annual cash dividends of
$0.02 per share on May 12, 2005, payable June 21, 2005 to common stockholders of
record as of May 31, 2005. On October 7, 2005, the Board of Directors of the
Company declared a $0.02 semi-annual dividend and a special dividend of $0.06
per share, payable January 3, 2006 to common stockholders of record as of
December 7, 2005. This transaction was recorded as a dividend payable of
$577,781 as of November 30, 2005.

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.

ITEM 6.  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-
<PAGE>
                                     GENERAL

The Company has 136 franchised, 3 licensed units, and 1 Company-owned store as
of the end of 2006. Units in operation at the end of 2005 included 145
franchised, 3 licensed, and 2 Company-owned stores. System-wide revenues in 2006
were $ 47 million compared to $48 million in 2005.

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).

During 2006, even though revenue declined due to fewer Company-owned stores and
slightly lower franchising revenues, the Company continued to control costs.
Total operating expenses decreased to $3,228,000, or 82.4% of total revenue in
2006 compared to $4,398,000, or 85.8% in 2005.

                         YEAR 2006 COMPARED TO YEAR 2005

Total revenues from all sources decreased $1,208,000, or 23.6%, to $3,917,000 in
2006 from $5,125,000 in the prior year primarily due to fewer Company-owned
store locations in 2006 versus 2005. Net sales at Company-owned stores decreased
$939,000, or 65.2% to $501,000 in 2006, versus $1,440,000 in 2005 because the
Company had one Company-owned store in 2006, versus three in 2005.

Royalty revenue from franchise stores was down $2,000, or .1%, to $2,275,000 in
2006 as compared to $2,277,000 in 2005. Franchise fee revenue increased $55,000,
or 25.2%, to $272,000, in 2006 versus $218,000 in 2005. The Company opened 8
stores in 2006 versus 5 in 2005. At November 30, 2006, the Company had 8 units
under development, the same as November 30, 2005. 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 decreased
$321,000, or 27.0%, to $869,000 in 2006 as compared to $1,190,000 in 2005. A
trademark infringement lawsuit against a former franchisee resulted in $90,000
of income in 2005. Sign Shop revenue was $130,000 higher in 2005 as a result of
2004 post convention sales. The Company received $34,000 for the sale of assets
from a franchise location temporarily managed by the Company-owned store
division in 2005, and the Company had $29,000 more sublease rental income in
2005. Total operating expenses of $3,227,890, were 82.4% of total revenues for
2006 versus $4,398,112, or 85.8%, for 2005. Expenses declined because there was
only one Company-owned store operating for a majority of 2006, versus three
stores in 2005, and because of continued tight cost controls.
Corporate office payroll and payroll related expenses increased $49,000, or
3.4%, to $1,481,000, from $1,432,000, in 2005. Occupancy expense increased
$12,000, or 9.7% in 2006, to $137,000, from $125,000 in 2005. Professional fees
decreased $21,000, or 10.1%, to $187,000 in 2006, from $208,000 in 2005, and
Other expenses decreased $135,000, or 22.3%, to $472,000 in 2006 from $607,000
in 2005. There was a reduction in depreciation and amortization expense of
$15,000, or 17.7% in 2006, to $70,000, from $85,000, in 2005. Provision for
uncollectible accounts decreased $44,000, to ($8,000), in 2006 compared to
$36,000, in 2005. Income from operations for the period ended November 30, 2006
was $690,000 as compared to $727,000 in 2005. Interest income increased $47,000,
to $57,000, in 2006, compared to $10,000, in 2005, as a result of the Company
investing excess cash in higher yielding investments. Interest expense decreased
$14,000 to $30,000 in 2006, compared to $44,000 in 2005, primarily due to a
decrease in outstanding debt.

Net income totaled $717,000, or 18.3% of revenue in 2006 as compared to
$693,000, or 13.5% of revenue in the prior year.

                                      -10-
<PAGE>
                         LIQUIDITY AND CAPITAL RESOURCES

The net cash provided from operating activities totaled $868,000 during 2006.
Cash provided from operating activities principally represents net income of
$717,000, plus depreciation and amortization of $70,000, plus the loss on the
sale of equipment of $18,000, less the change in the provision for doubtful
accounts of ($8,000), plus a reduction in trade accounts receivable of $12,000,
less an increase in restricted cash of $30,000, plus a decrease in Marketing
Fund contributions receivable of $900, plus a decrease in inventory of $19,000,
plus a decrease in notes receivable of $69,000, plus a decrease in prepaid
expenses of $35,000, less a decrease in accounts payable of $37,000, a decrease
in accrued liabilities of $62,000, plus an increase in unexpended Marketing Fund
contributions of $28,000, and less a decrease in deferred revenue of $36,000.
Cash provided from operating activities in 2005 totaled $974,000. This cash
principally represented net income of $693,000, plus depreciation and
amortization of $85,000, plus the increase in provision for doubtful accounts of
$36,000, plus a reduction in trade accounts receivable of $94,000, plus a
reduction in restricted cash of $118,000, plus a reduction in Marketing Fund
contributions receivable of $34,000, plus a reduction in notes receivable of
$31,000, plus an increase in deferred revenue of $191,000, offset by a decrease
in accrued liabilities of $93,000, a decrease in Marketing Fund obligations of
$151,000, an increase in prepaid and other assets of $22,000, an increase in
inventories of $1,000, and a decrease in accounts payable of $39,000.

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. Cash used for investing activities during 2005 totaled
$16,000, for the purchase of property and equipment.

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. Financing activities used
$946,000 during 2005, due to the repayment of notes payable of $253,000 and the
payment of dividends of $717,000, offset by proceeds of $24,000 from the
exercise of stock 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-
<PAGE>
                          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 from franchised stores represent a fee of 5% of net retail
sales of franchised units. 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.
Beginning in 2003, SFAS 142, "Goodwill and Other Intangible Assets" was adopted
by the Company. This 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. (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 60% and 55% of the receivable balance at November 30, 2006 and
2005, 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-
<PAGE>

As of November 30, 2006, the Company has cumulative net operating loss
carryforwards expiring between 2017 and 2021 for U.S. federal income tax
purposes of approximately $6,578,000. The net operating loss carryforwards are
subject to limitation in any given year as a result of the Company's initial
public offering and may be further limited if certain other events occur. A
valuation allowance has been established for $2,032,000 at November 30, 2006 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.) In prior years, the Company established a full valuation
allowance because it believed there was uncertainty as to realization of the net
operating loss carryforward deferred tax asset based on historical operating
results. The full valuation allowance still exists at the end of 2006 because
the Company believes it is appropriate.

Recent Accounting Pronouncements


In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." SFAS
No. 123(R) establishes accounting standards for transactions in which a company
exchanges its equity instruments for goods or services. In particular, this
Statement will require companies to record compensation expense for all
share-based payments, such as employee stock options, at fair market value. This
Statement is effective as of the beginning of the first annual reporting period
that begins after December 15, 2005 (the Company's period beginning December 1,
2006). Adoption of SFAS No. 123(R) is not expected to have a material impact on
the Company's consolidated financial position, results of operations or cash
flows.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, - a replacement of APB Opinion No. 20 and FASB Statement No. 3."
This Statement replaces APB Opinion No. 20, "Accounting Changes," and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements,"
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This Statement shall
be effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. Early adoption is permitted for
accounting changes and correction of errors made in fiscal years beginning after
the date this Statement is issued. Adoption of SFAS No. 154 is not expected to
have a material impact on the Company's consolidated financial position, results
of operations or cash flows.

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.

ITEM 7. FINANCIAL STATEMENTS

The Consolidated Financial Statements and Report of Independent Registered
Public Accounting Firm is included immediately following.

                                      -13-
<PAGE>
                                    BAB, Inc.
               Years Ended November 30, 2006 and November 30, 2005

                                 C o n t e n t s


Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Stockholders' Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements



                                      -14-
<PAGE>

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.

As disclosed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of Securities and Exchange Commission Staff Accounting
Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements", on November 30,
2006.


By:  /s/ McGladrey and Pullen, LLP


Chicago, Illinois
February 27, 2007

                                      -15-
<PAGE>

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, 2005, 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, 2005, 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/ ALTSCHULER, MELVOIN AND GLASSER LLP


Chicago, Illinois
January 20, 2006

                                      -16-
<PAGE>
                                    BAB, Inc
                           Consolidated Balance Sheets
                            November 30 2006 and 2005
<TABLE>
<CAPTION>
<S>                                                                    <C>            <C>
                                                                         2006           2005
                                                                      ------------   ------------
ASSETS
   Current Assets
      Cash                                                             $1,792,666     $2,206,524
      Restricted cash                                                     234,114        204,055
      Receivables
           Trade accounts receivable (net of allowance for doubtful
            accounts of $32,352 in 2006 and $83,220 in 2005)               92,377        104,110
           Marketing fund contributions receivable from franchisees
            and stores                                                     29,478         30,389
           Notes receivable (net of allowance for doubtful accounts of
            $10,690 in 2006 and $7,769 in 2005)                             8,262         33,700
      Inventories                                                          46,048         65,255
      Prepaid expenses and other current assets                           100,439        135,488
                                                                      ------------   ------------
           Total Current Assets                                         2,303,384      2,779,521
                                                                      ------------   ------------

      Property, plant and equipment                                       100,761        169,081
      Notes receivable (net of allowance for doubtful accounts of
       $5,906 in 2006)                                                      5,282         40,849
      Trademarks                                                          763,667        763,666
      Goodwill                                                          3,542,772      3,542,772
      Other (net of accumulated amortization of $302,486 in 2006
      and $293,329 in 2005)                                                 2,896         12,053
                                                                      ------------   ------------
           Total Noncurrent Assets                                      4,415,378      4,528,421
                                                                      ------------   ------------

           Total Assets                                                $6,718,762     $7,307,942
                                                                      ============   ============

LIABILITIES AND STOCKHOLDERS' EQUITY
   Current Liabilities
      Current portion of long-term debt                                  $192,740       $266,824
      Accounts payable                                                     55,961         93,428
      Accrued expenses and other current
       liabilities                                                        445,506        507,279
      Dividends payable                                                   290,524        577,781
      Unexpended marketing fund contributions                             186,479        158,913
      Deferred franchise fee revenue                                      210,000        210,000
      Deferred licensing revenue                                           76,579         71,579
                                                                      ------------   ------------
           Total Current Liabilities                                    1,457,789      1,885,804
                                                                      ------------   ------------

   Long-term debt (net of current portion)                                251,567        444,307
   Deferred revenue (net of current portion)                               45,818         86,980
                                                                      ------------   ------------
           Total Noncurrent Liabilities                                   297,385        531,287
                                                                      ------------   ------------
           Total Liabilities                                            1,755,174      2,417,091
                                                                      ------------   ------------

   Stockholders' Equity
      Common stock ($.001 par value; 15,000,000 shares
       authorized; 8,426,377 and 8,412,391 shares issued,
       and 7,222,932 and 7,208,946 shares outstanding as of
       November 30, 2006 and 2005, respectively)                       13,508,216     13,508,202
      Additional paid-in capital                                          876,999        870,935
      Treasury stock                                                     (222,781)      (222,781)
      Accumulated deficit                                              (9,198,846)    (9,265,505)
                                                                      ------------   ------------
           Total Stockholders' Equity                                   4,963,588      4,890,851
                                                                      ------------   ------------
           Total Liabilities and Stockholders' Equity                  $6,718,762     $7,307,942
                                                                      ============   ============

                              See accompanying notes
</TABLE>

                                      -17-
<PAGE>
                                    BAB, Inc
                        Consolidated Statements of Income
                           November 30, 2006 and 2005
<TABLE>
<CAPTION>
<S>                                                             <C>                 <C>
                                                                      2006                2005
                                                                ----------------    ----------------
Revenues
   Net sales by Company-owned stores                            $       500,689     $     1,440,118
   Royalty fees from franchised stores                                2,275,483           2,277,099
   Franchise fees                                                       272,219             217,500
   Licensing fees and other income                                      869,000           1,190,378
                                                                ----------------    ----------------
             Total Revenues                                           3,917,391           5,125,095
                                                                ----------------    ----------------

Operating Expenses
   Food, beverage and paper costs                                       159,615             500,374
   Store payroll and other operating expenses                           472,029           1,148,849
   Selling, general and administrative expenses:
        Payroll-related expenses                                      1,481,174           1,431,847
        Occupancy                                                       137,268             125,185
        Advertising and promotion                                       110,055             149,648
        Professional service fees                                       186,644             207,529
        Travel expenses                                                 139,337             142,657
        Depreciation and amortization                                    69,653              84,664
        Other                                                           472,115             607,359
                                                                ----------------    ----------------
             Total Operating Expenses                                 3,227,890           4,398,112
                                                                ----------------    ----------------
Income from operations                                                  689,501             726,983
                                                                ----------------    ----------------

Interest income                                                          56,790               9,881
Interest expense                                                        (29,684)            (44,007)

                                                                ----------------    ----------------
Income before provision for income taxes                                716,607             692,857
                                                                ----------------    ----------------
Provision for income taxes
        Current                                                               -                   -
        Deferred                                                              -                   -
                                                                ----------------    ----------------

                                                                ----------------    ----------------
Net Income                                                      $       716,607     $       692,857
                                                                ================    ================

   Net Income per share - Basic                                 $          0.10     $          0.10
                                                                ----------------    ----------------
   Net Income per share - Diluted                               $          0.10     $          0.10
                                                                ----------------    ----------------

   Weighted average number of shares outstanding - Basic              7,222,560           7,183,783
   Weighted average number of shares outstanding - Diluted            7,259,149           7,240,721

                             See accompanying notes
</TABLE>

                                      -18-
<PAGE>
                                    BAB, Inc
                 Consolidated Statements of Stockholders' Equity
                           November 30, 2006 and 2005
<TABLE>
<CAPTION>
<S>      <C> <C>         <C>         <C>           <C>       <C>          <C>            <C>            <C>
                                                  Additional
                               Common Stock        Paid-In         Treasury Stock         Accumulated
                           Shares       Amount     Capital      Shares        Amount        Deficit          Total
                         ------------------------ ---------- --------------------------- -------------- ----------------
November 30, 2004        $8,232,939  $13,508,023   $847,562  $(1,203,445) $    (222,781) $  (9,236,402) $     4,896,402

Stock Options Exercised     179,452          179     23,373                                                      23,552

Dividends Declared                                                                            (721,960)        (721,960)

Net Income                                                                                     692,857          692,857


November 30, 2005,       ----------- ------------ ---------- ------------ -------------- -------------- ----------------
as previously reported    8,412,391   13,508,202    870,935   (1,203,445)      (222,781)    (9,265,505)       4,890,851
                         ----------- ------------ ---------- ------------ -------------- -------------- ----------------

Cumulative effect of
 adjustment to reflect
 adoption of SEC Staff
 Accounting Bulletin No.
 108 (See Note 2)                                                                               73,938           73,938
                         ----------- ------------ ---------- ------------ -------------- -------------- ----------------
November 30, 2005, as
 restated                 8,412,391   13,508,202    870,935   (1,203,445)      (222,781)    (9,191,567)       4,964,789
                         ----------- ------------ ---------- ------------ -------------- -------------- ----------------

Stock Options Exercised      13,986           14      6,064                                                       6,078

Dividends Declared                                                                            (723,886)        (723,886)

Net Income                                                                                     716,607          716,607
                         ----------- ------------ ---------- ------------ -------------- -------------- ----------------
November 30, 2006        $8,426,377  $13,508,216   $876,999  $(1,203,445) $    (222,781) $  (9,198,846) $     4,963,588
                         ----------- ------------ ---------- ------------ -------------- -------------- ----------------
</TABLE>
                             See accompanying notes

                                      -19-
<PAGE>
                                    BAB, Inc
                      Consolidated Statements of Cash Flow
                           November 30, 2006 and 2005
<TABLE>
<CAPTION>
<S>                                                             <C>                 <C>
                                                                      2006                2005
                                                                ----------------    ----------------
Operating activities
Net income                                                      $       716,607     $       692,857
Depreciation and amortization                                            69,653              84,664
Loss on sale of equipment                                                17,651                   -
Provision for uncollectible accounts, net of recoveries                  (8,346)             36,000
Changes in:
  Trade accounts receivable                                              11,733              93,640
  Restricted cash                                                       (30,059)            117,550
  Marketing fund contributions receivable                                   911              34,017
  Notes Receivable                                                       69,352              30,597
  Inventories                                                            19,207              (1,148)
  Prepaid expenses and other                                             35,050             (22,233)
  Accounts payable                                                      (37,466)            (39,102)
  Accrued liabilities                                                    12,164             (92,991)
  Unexpended marketing fund contributions                                27,566            (151,084)
  Deferred revenue                                                      (36,162)            191,059
                                                                ----------------    ----------------
      Net Cash Provided by Operating Activities                         867,861             973,826
                                                                ----------------    ----------------

Investing activities
Purchase of equipment                                                   (14,327)            (15,959)
Proceeds from sale of equipment                                           4,500                   -
                                                                ----------------    ----------------
      Net Cash Used In Investing Activities                              (9,827)            (15,959)
                                                                ----------------    ----------------

Financing activities
Repayment of borrowings                                                (266,825)           (252,568)
Proceeds from exercise of stock options                                   6,077              23,552
Payment of dividend                                                  (1,011,144)           (717,161)
                                                                ----------------    ----------------
      Net Cash Used In Financing Activities                          (1,271,892)           (946,177)
                                                                ----------------    ----------------


                    Net Increase (Decrease) in Cash                    (413,858)             11,690

                    Cash, Beginning of Period                         2,206,524           2,194,834
                                                                ----------------    ----------------
                    Cash, End of Period                         $     1,792,666     $     2,206,524
                                                                ================    ================


Supplemental disclosure of cash flow information:
Interest paid                                                   $        30,977     $        45,232
                                                                ================    ================
Income taxes paid                                               $             -     $             -
                                                                ================    ================
</TABLE>

Supplemental disclosure of noncash investing and financing activities:
On November 16, 2006, a quarterly $0.02 per share cash dividend and a $0.02 per
share special dividend was declared, payable January 11, 2007, and recorded as a
dividend payable in the amount of $290,524 at November 30, 2006. On October 7,
2005 a semi-annual $0.02 per share cash dividend and a special dividend of $0.06
per share was declared, payable January 3, 2006, and was recorded as a dividend
payable in the amount of $577,781 at November 30, 2005.

                             See accompanying notes

                                      -20-
<PAGE>
                                    BAB, Inc
                 Notes to the Consolidated Financial Statements
                           November 30, 2006 and 2005


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 direct and indirect 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 from franchised stores represent a fee of 5% of net sales
of franchised units. 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-
<PAGE>
                                    BAB, Inc
                 Notes to the Consolidated Financial Statements
                           November 30, 2006 and 2005


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, 2006 and 2005 are
as follows:


                                                  2006                2005
                                          -------------       -------------
     Stores opened
             Company-owned                           1                   2
             Franchisee-owned                      136                 145
             Licensed                                3                   3
                                          -------------       -------------
                                                   140                 150
     Unopened stores
             Franchise Agreement                     8                   8
                                          -------------       -------------
                                                   148                 158
                                          -------------       -------------


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 (Fund) during 1994. Franchisees and the
Company-owned store are required to contribute to the Fund based on their retail
sales. The 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, 2006 and 2005, the Fund cash balances, which are restricted,
were $155,300 and $128,129 respectively. Also included in restricted cash at
November 30, 2006 and 2005 is a $78,814 and $75,926 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-
<PAGE>
                                    BAB, Inc
                 Notes to the Consolidated Financial Statements
                           November 30, 2006 and 2005


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" was adopted beginning with
the quarter ended February 29, 2003. This 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 has been
recorded for the years ended November 30, 2006 or 2005.

The net book value of intangible assets with definite lives totaled $2,896 and
$12,053 at November 30, 2006 and 2005, respectively. The gross value of definite
lived intangible assets and their respective accumulated amortization are as
follows:
<TABLE>
<CAPTION>
<S>                                                                                  <C> <C>
                                                                     Accumulated Amortization
        Definite Lived Intangible Assets         Original Cost              November 30, 2006
        --------------------------------------------------------------------------------------
        Master Lease Origination Fees                   $95,382                        $92,486
        --------------------------------------------------------------------------------------
</TABLE>

Definitive lived intangible assets are being amortized over their useful lives.
The Company recorded amortization expense for definitive lived intangible assets
of $9,157 for both years ended November 30, 2006 and 2005. The amortization
expense on these intangible assets will be $2,896 for the year ending November
30, 2007.

                                      -23-
<PAGE>
                                    BAB, Inc
                 Notes to the Consolidated Financial Statements
                           November 30, 2006 and 2005

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 $110,055 and $149,648 in 2006 and 2005, respectively.
Included in advertising expense was $73,171 and $66,331 in 2006 and 2005,
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 has established a full
valuation allowance on the net deferred tax assets due to the uncertainty of
realization. (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.

                                            2006            2005
                                         -----------     -----------
Numerator:
Net income available to common
 shareholders                            $  716,607      $  692,857

Denominator:
Weighted average outstanding shares
Basic                                     7,222,560       7,183,783

                                         -----------     -----------
Earnings per Share - Basic               $     0.10      $     0.10
                                         -----------     -----------

Effect of dilutive common stock              36,589          56,938

Weighted average outstanding shares
Diluted                                   7,259,149       7,240,721

                                         -----------     -----------
Earnings per share - Diluted             $     0.10      $     0.10
                                         -----------     -----------

There are 267,500 unexercised options at November 30, 2006 that are not included
in the computation of dilutive EPS because their impact would be antidilutive
based on current market prices.

Stock Options

The Company uses the intrinsic method, as allowed by SFAS No. 123, "Accounting
for Stock-Based Compensation," to account for stock options granted to employees
and directors. No compensation expense is recognized for stock options because
the exercise price of the options is at least equal to the market price of the
underlying stock on the grant date.

                                      -24-
<PAGE>
                                    BAB, Inc
                 Notes to the Consolidated Financial Statements
                           November 30, 2006 and 2005

Note 2 - Summary of Significant Accounting Policies (Continued)

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.


Reclassification
Certain items in prior year Notes to the Consolidated Financial Statements have
been reclassified to conform to the presentation used in 2006.


Adoption of SEC Staff Bulletin No. 108
During the year the Company adopted the SEC Staff issued Staff Accounting
Bulletin (SAB) No. 108 Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements, which addresses
how the effects of prior-year uncorrected misstatements should be considered
when quantifying misstatements in current year financial statements. The
adjustment to Stockholders' Equity, in the amount of $73,938, relates to the
accrual for accounting fees and the period in which services for the respective
fiscal period are performed, and there is no income statement effect because the
related accrual was overstated by the same amount at the beginning and end of
the year.

                                       -25-
<PAGE>
                                    BAB, Inc
                 Notes to the Consolidated Financial Statements
                           November 30, 2006 and 2005

Note 2 - Summary of Significant Accounting Policies (Continued)

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." SFAS
No. 123(R) establishes accounting standards for transactions in which a company
exchanges its equity instruments for goods or services. In particular, this
Statement will require companies to record compensation expense for all
share-based payments, such as employee stock options, at fair market value. This
Statement is effective as of the beginning of the first annual reporting period
that begins after December 15, 2005 (the Company's period beginning December 1,
2006). Adoption of SFAS No. 123(R) is not expected to have a material impact on
the Company's consolidated financial position, results of operations or cash
flows.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, - a replacement of APB Opinion No. 20 and FASB Statement No. 3."
This Statement replaces APB Opinion No. 20, "Accounting Changes," and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements,"
and changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This Statement shall
be effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. Adoption of SFAS No. 154 is not
expected to have a material impact on the Company's consolidated financial
position, results of operations or cash flows.

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.

                                      -26-
<PAGE>
                                    BAB, Inc
                 Notes to the Consolidated Financial Statements
                           November 30, 2006 and 2005
<TABLE>
<CAPTION>
<S>                                                             <C>                 <C>
Note 3 - Income Taxes

The components of the income tax (benefit) provision are as
 follows:
                                                                      2006                2005
                                                                ----------------    ----------------
       Federal income tax provision computed at federal
        statutory rate                                          $       243,646     $       235,571
       State income taxes net of federal tax provision                   34,526              33,382
       Other adjustments                                                  6,544              98,469
       Change in valuation allowance                                   (151,566)           (230,564)
       Utilization of net operating losses                             (133,150)           (136,858)
                                                                ----------------    ----------------

                                                                ----------------    ----------------
Provision for Deferred Income Taxes                             $             -     $             -
                                                                ================    ================

Deferred income tax assets (liabilities) are as follows:
                                                                      2006                2005
                                                                ----------------    ----------------
       Deferred revenue                                                 129,030             143,068
       Deferred rent revenue                                             15,811              15,318
       Marketing Fund net contributions                                  60,285              49,737
       Allowance for doubtful accounts                                   12,558              32,304
       Allowance for doubtful accounts-notes receivable                   6,442               3,016
       Accrued expenses                                                  12,577               3,882
       Net operating loss carryforwards                               2,553,375           2,686,525
       Other                                                                  -                   -
       Valuation allowance                                           (2,031,875)         (2,316,591)
                                                                ----------------    ----------------

            Total Deferred Income Tax Assets                    $       758,205     $       617,259
                                                                ----------------    ----------------

       Depreciation and amortization                                   (751,583)           (611,126)
       Franchise Costs                                                   (6,622)             (6,133)
                                                                ----------------    ----------------
            Total Deferred Income Tax Liabilities               $      (758,205)    $      (617,259)
                                                                ----------------    ----------------

                                                                ----------------    ----------------
            Total Net Deferred Tax Assets/Liabilities           $             -     $             -
                                                                ================    ================
</TABLE>

As of November 30, 2006, the Company has net operating loss carryforwards
expiring between 2017 and 2021 for U.S. federal income tax purposes of
approximately $6,578,000. The net operating loss carryforwards are subject to
limitation in any given year as a result of the Company's initial public
offering and may be further limited if certain other events occur. A valuation
allowance has been established for $2,031,875 and $2,316,591 as of November 30,
2006 and 2005, respectively, for the deferred tax benefit related to those loss
carryforwards and other deferred tax assets.

                                      -27-
<PAGE>
                                    BAB, Inc
                 Notes to the Consolidated Financial Statements
                           November 30, 2006 and 2005

Note 4 - Long-Term Obligations

Long-term debt consisted of the following:
                                                    2006         2005
                                                 -----------  -----------

        Bank note payable                        $  170,735   $  416,552
        Note payable to former stockholder       $  273,572   $  294,579
                                                 -----------  -----------

                                                 $  444,307   $  711,131
        Less current portion                      ($192,740)   ($266,824)
                                                 -----------  -----------

        Long-Term Debt, Net of Current Portion   $  251,567   $  444,307
                                                 -----------  -----------

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
was $170,735 and $416,552 as of November 30, 2006 and 2005, respectively.

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 $273,572 and $294,579 as of November 30, 2006
and 2005, respectively.

As of November 30, 2006, annual maturities on long-term obligations due are as
follows:

                Year Ending November 30:
                ----------------------------  --------------
                                       2007        $192,740
                                       2008         $23,051
                                       2009         $24,146
                                       2010         $25,292
                                       2011         $26,494
                                  Thereafter       $152,585
                ----------------------------      ----------

                                       Total       $444,308

                                      -28-
<PAGE>
                                    BAB, Inc
                 Notes to the Consolidated Financial Statements
                           November 30, 2006 and 2005

Note 5 - Stockholders' Equity

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. On May
12, 2005, a $0.02 per share dividend was declared and was paid on June 21, 2005.
On October 7, 2005, an $0.08 cash dividend was declared consisting of a $0.02
semi-annual and a $0.06 special dividend payable January 3, 2006. This
transaction was recorded as a dividend payable in the amount of $577,781 at
November 30, 2005.

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 or 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 granted as of November 30, 2006 are
$0.065 to $1.27.

Activity under the Plan during the two years ended November 30, is as follows:
<TABLE>
<CAPTION>
<S>                                      <C>            <C>                      <C>            <C>
                                                    2006                                    2005
                                      ------------------------------------------------------------------------
                                        Options    Weighted average             Options    Weighted average
                                                     exercise price                          exercise price
-------------------------------------- ---------- --------------------         ---------- --------------------

Options outstanding at beginning of
 year                                    163,034        $0.722                   258,486        $0.246
Granted                                  290,000        $1.221                    95,000        $0.914
Forfeited                                 (6,099)       $0.833                   (11,000)       $0.727
Exercised                                (13,986)       $0.434                  (179,452)       $0.132
-------------------------------------- ---------- --------------------         ---------- --------------------

Outstanding at end of year               432,949        $1.064                   163,034        $0.722
</TABLE>

                                      -29-
<PAGE>
                                    BAB, Inc
                 Notes to the Consolidated Financial Statements
                           November 30, 2006 and 2005

Note 6 - Stock Options and Warrants (Continued)
<TABLE>
<CAPTION>
<S>      <C>        <C>                 <C>                <C>                <C>               <C>
                           Options Outstanding                                     Options Exercisable
--------------------------------------------------------------------------------------------------------------
                                 Weighted average
   Range of         Options          remaining        Weighted average        Options      Weighted average
 exercise price    outstanding    contractual life      exercise price       exercisable     exercise price
---------------- -------------- -------------------- --------------------  -------------- --------------------
 $0.46 - $0.51      50,049              7.0                $0.500             28,634            $0.507
     $0.60          10,000              7.6                $0.600             10,000            $0.600
 $0.88 - $0.97      65,400              8.0                $0.935             21,800            $0.935
     $0.86          20,000              8.5                $0.860             20,000            $0.860
 $1.15 - $1.27      72,500              9.0                $1.216               --                --
     $0.97          20,000             10.0                $0.970             20,000            $0.970
     $1.25          100,000            10.0                $1.250               --                --
     $1.25          95,000             10.0                $1.250               --                --
                 --------------                      --------------------  -------------- --------------------
                    432,949                                $1.064             100,434           $0.772
</TABLE>

The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting and Disclosure of Stock-Based Compensation." Accordingly, no
employee compensation expense has been recognized for the Plan in the financial
statements. Had employee compensation expense for the Company's Plan been
recorded in the financial statements, consistent with provisions of SFAS No.
123, net earnings would have been reduced by $43,460 in fiscal 2006 and $31,710
in fiscal 2005 based on the Black-Scholes option-pricing model. The Company's
net income and net income per share for 2006 and 2005 would have been as
follows:

                                                  2006        2005
                                               ----------- -----------
Pro forma impact of fair value method
Reported net income                            $  716,607  $  692,857
Less: Fair value impact of employee stock
      compensation                                (43,460)    (31,710)
                                               ----------- -----------
Pro forma net income                           $  673,147  $  661,147
                                               ----------- -----------

Earnings per common share
Basic - as reported                            $     0.10  $     0.10
Diluted - as reported                          $     0.10  $     0.10
Basic - pro forma                              $     0.09  $     0.09
Diluted - pro forma                            $     0.09  $     0.09

Weighted average Black Scholes fair value
 assumptions
Risk free interest rate                              4.67%       4.00%
Expected life                                     10.0 yrs     5.3 yrs
Expected volatility                                 0.527       2.548
Expected dividend yield                               6.4%        5.5%
Fair Value of grants                           $     0.29  $     0.60


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. None of the warrants were exercised.

                                      -30-
<PAGE>
                                    BAB, Inc
                 Notes to the Consolidated Financial Statements
                           November 30, 2006 and 2005

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, 2006 and November 30,
2005 was $122,128 and $212,739, net of sublease income of $123,950 and $140,108,
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,
2006, future minimum annual rental commitments under leases, net of sublease
income of $126,423 in 2007, $128,648 in 2008, $130,913 in 2009 and $10,941 in
2010 are as follows:


                   Year Ending November30:
         -------------------------------------
                   2007               $120,672
                   2008               $125,858
                   2009               $137,394
                   2010               $149,911
             Thereafter                $67,818
         -------------------------------------
                  Total               $601,653

Note 8 - Related Party Transactions

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 six years bearing 9% interest, had an outstanding balance
of $0 and $2,244 as of November 30, 2006 and 2005, respectively. There are no
payments in arrears. Interest income recognized and received by Systems amounted
to $47 and $300 in 2006 and 2005, respectively. The note was paid off in full in
2006.

Note 9 - 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 both 2006 and 2005.

Note 10 - 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 has changed focus to the franchise
division.

                                      -31-
<PAGE>
                                    BAB, Inc
                 Notes to the Consolidated Financial Statements
                           November 30, 2006 and 2005

The following tables present segment information for the years ended November
30, 2006 and 2005:
<TABLE>
<CAPTION>
<S>                                                  <C>              <C>              <C>              <C>
                                                       Net Revenues                         Operating Income (Loss)
                                                           2006             2005             2006             2005
                                                     ---------------- ---------------- ---------------- ----------------
Company Store Operations                             $       759,490  $     1,906,888  $      (246,238) $      (364,624)
Franchise Operations and Licensing Fees                    3,157,901        3,218,207        1,783,954        1,805,089
                                                     ---------------- ---------------- ---------------- ----------------
                                                     $     3,917,391  $     5,125,095  $     1,537,716  $     1,440,465
                                                     ---------------- ----------------
Corporate Expenses                                                                            (848,215)        (713,482)
Interest Expense, Net of Interest Income                                                        27,106          (34,126)
                                                                                       ---------------- ----------------
Net Income                                                                             $       716,607  $       692,857
                                                                                       ================ ================


Operating Segment Data
                                                                        Identifiable        Capital     Depreciation and
                                                                           Assets        Expenditures     Amortization
                                                                      ---------------- ---------------- ----------------
Year Ended November 30, 2006:
Company Store Operations                                              $        95,910  $         7,464  $        48,080
Franchise Operations (other than goodwill)                                    189,194            6,863           21,573
Goodwill and Other Indefinite Lived Intangible Assets                       4,306,439
                                                                      ---------------- ---------------- ----------------
                                                                      $     4,591,543  $        14,327  $        69,653
                                                                      ================ ================ ================

Year Ended November 30, 2005:
Company Store Operations                                              $       187,467  $        14,422  $        66,752
Franchise Operations (other than goodwill)                                    267,969            1,537           17,912
Goodwill and Other Indefinite Lived Intangible Assets                       4,306,439
                                                                      ---------------- ---------------- ----------------
                                                                      $     4,761,875  $        15,959  $        84,664
                                                                      ================ ================ ================


Reconciliation to Total Assets as Reported                                  2006             2005
                                                                      ---------------- ----------------

Assets-Total reportable segments - Identifiable
 assets                                                               $     4,591,543  $     4,761,875

Unallocated Amounts
     Cash                                                                   2,026,780        2,410,579
     Prepaid expenses and other current assets                                100,439          135,488

                                                                      ---------------- ----------------
Total Consolidated Assets                                             $     6,718,762  $     7,307,942
                                                                      ================ ================
</TABLE>

There were no sales to any individual customer during either year in the
two-year period ended November 30, 2006 that represented 10% or more of net
sales.

                                      -32-
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None

ITEM 8A. 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, 2006. 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, 2006 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 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,
2006.

                                      -33-
<PAGE>

CODE OF ETHICS

                                    BAB, Inc.
                                 Code of Ethics
                                November 30, 2006

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:

     o    Honest and ethical  conduct,  including the ethical handling of actual
          or apparent  conflicts of interest  between  personal and professional
          relationships;
     o    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;
     o    Compliance with applicable government laws, rules and regulations;
     o    The  prompt  internal  reporting  of  violations  of the  Code  to the
          appropriate   person  or  persons   identified  in  the  Code;  and  o
          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.

                                      -34-
<PAGE>

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.

                                      -35-
<PAGE>

ITEM 10. 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 2006, 2005 and 2004 (the "Named Executive Officers"). The
Company has no employment agreements with any of its executive officers.

Summary Compensation Table
<TABLE>
<CAPTION>
<S>                   <C>        <C>             <C>                                <C>
                                        Annual Compensation                         Long Term Compensation
                              ------------------------------------------------------------------------------------------
                                                                               Awards                   Payouts
                              ------------------------------------------------------------------------------------------
                                                                      Restricted  Securities
                                                                        Stock     Underlying      LTIP      All Other
------------------------------
      Name and         Year       Salary          Bonus       Other     Awards  Options/SARS(#) Payouts   Compensation
 Principal Position    End          ($)            ($)         ($)       ($)                      ($)          ($)
------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------
                      2006       245,571         72,178        --        --         70,000        --           --
 Michael W. Evans,  ----------------------------------------------------------------------------------------------------
  President and CEO   2005       233,492         35,851        --        --         20,000        --           --
                    ----------------------------------------------------------------------------------------------------
                      2004       221,209         39,600        --        --         20,000        --           --
------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------
                      2006       184,033         54,135        --        --         70,000        --           --
Michael K. Murtaugh,----------------------------------------------------------------------------------------------------
 Vice President and   2005       175,902         26,888        --        --         20,000        --           --
   General Counsel  ----------------------------------------------------------------------------------------------------
                      2004       165,906         29,700        --        --         20,000        --           --
------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------
                      2006       132,957         9,500         --        --         30,000        --           --
Jeffrey M. Gorden,  ----------------------------------------------------------------------------------------------------
  Chief Financial     2005       126,430           --          --        --         6,000         --           --
       Officer      ----------------------------------------------------------------------------------------------------
                      2004       121,919         5,000         --        --         5,500         --           --
------------------------------------------------------------------------------------------------------------------------
</TABLE>

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. 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. During 2004,
95,000 options were issued on December 2, 2003 with a fair market issue price of
$0.46 and vests as follows: 1/3 in 12 months, 1/3 in 24 months and 1/3 in 36
months from the issue date and 20,000 options were issued July 1, 2004 with a
fair market issue price of $.60 and vests immediately.
Options issued to the above officers totaled 48,500 or 42.2% of options granted
in 2004.

Options and percentages issued to officers, as discussed above, include amounts
issued to John J. Bracken (former Vice President Operations), who retired
November, 2005.

                                      -36-
<PAGE>

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.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of February 16, 2007 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 16, 2007 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.

                                      -37-
<PAGE>
<TABLE>
<CAPTION>
<S>                       <C>                                      <C>       <C>   <C>                    <C>
--------------------------------------------------------------------------------------------------------------------
                   Name and Address                                        Shares                      Percentage
--------------------------------------------------------------------------------------------------------------------
Michael W. Evans
500 Lake Cook Road, Suite 475                                      2,829,946 (1)(2)(3)(4)                 38.45
Deerfield, IL 60015
--------------------------------------------------------------------------------------------------------------------
Michael K. Murtaugh
500 Lake Cook Road, Suite 475                                      2,760,133 (1)(2)(4)(5)                 37.50
Deerfield, IL 60015
--------------------------------------------------------------------------------------------------------------------
Holdings Investment, LLC
220 DeWindt Road                                                      2,096,195 (1)(6)                    28.48
Winnetka, IL 60093
--------------------------------------------------------------------------------------------------------------------
Jeffrey M. Gorden
500 Lake Cook Road, Suite 475                                            87,167 (7)                       1.18
Deerfield, IL 60015
--------------------------------------------------------------------------------------------------------------------
Steven G. Feldman
750 Estate Drive, Suite 104                                              40,000 (8)                        .54
Deerfield, IL 60015
--------------------------------------------------------------------------------------------------------------------
James A. Lentz
1415 College Lane South                                                  34,932 (9)                        .47
Wheaton, IL 60187
--------------------------------------------------------------------------------------------------------------------
All executive officers and directors as a group
(5 persons)                                                 3,655,983 (1)(2)(3)(4)(5)(6)(7)(8)(9)         49.67
--------------------------------------------------------------------------------------------------------------------
</TABLE>

(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 20,000 stock options fully exercisable as of 2/16/07.
(3)  Includes 3,500 shares inherited by spouse
(4)  Includes 22,222 shares held by children
(5)  Includes 2,540 shares held by 401 (k) trust.
(6)  Mr.  Thomas  F.  Pick  has  beneficial  ownership  of  25.18%  of  Holdings
     Investment,  LLC,  which is the  equivalent of 527,884  shares of BAB, Inc.
     Common stock.
(7)  Includes 7,500 stock options fully exercisable as of 2/16/07.
(8)  Includes 30,000 stock options fully exercisable as of 2/16/07.
(9)  Includes 20,000 stock options fully exercisable as of 2/16/07.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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.

                                      -38-
<PAGE>

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.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

REPORTS ON FORM 8-K
-------------------

12/4/06 On December 4, 2006, the Company announced a change in small business
issuer's certifying accountant. A majority of the partners at AM&G, LLP have
become partners of McGladrey & Pullen, LLP. McGladrey & Pullen, LLP was
appointed as the Company's new auditor.

9/6/06 On September 6, 2006, the Board of Directors of BAB, Inc. authorized a
$0.02 per share quarterly cash dividend. The dividend is payable October 9, 2006
to stockholders of record as of September 18, 2006.

5/25/06 On May 25, 2006, the Board of Directors of BAB, Inc. authorized a $0.02
per share quarterly cash dividend. The dividend is payable July 5, 2006 to
stockholders of record as of June 14, 2006.

3/13/06 On March 10, 2006, the Board of Directors of BAB, Inc. authorized a
$0.02 per share quarterly cash dividend. The dividend is payable April 13, 2006
to stockholders of record as of March 23, 2006.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The Board of Directors, upon recommendation of the Audit Committee, appointed
the firm Altschuler, Melvoin & Glasser LLP ("AM&G") certified public accountants
for 2005. On November 29, 2006, 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. McGladrey & Pullen, LLP was
appointed as the Company's new auditor.

The audit reports of AM&G on the consolidated financial statements of BAB, Inc.
and Subsidiaries as of and for the years ended November 30, 2005 and 2004 did
not contain an adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting principles.

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, 2005 and 2004, and through the
date of this Current Report, there were: (1) no disagreements between the
Company and AM&G 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 AM&G, would have caused AM&G 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.

                                      -39-
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES (Continued)

AM&G had, at the time it was initially appointed to be the Company's auditor, a
relationship with American Express Tax and Business Services, Inc. (TBS) from
which it leased auditing staff who were full time, permanent employees of TBS
and through which its partners provided non-audit services. As a result of this
arrangement, AM&G had no full time employees and therefore, none of the audit
services performed were provided by permanent full-time employees of AM&G.
Effective October 1, 2005, TBS was acquired by RSM McGladry, Inc. (RSM) and
AM&G's relationship with TBS has been replaced with a similar relationship with
RSM. AM&G manages and supervises the audit and audit staff, and is exclusively
responsible for the opinion rendered in connection with its examination.

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
provide by AM&G for the years ended November 30, 2006 and 2005 amounted to
$17,000 and $70,000, respectively, and fees for audit services provided by
McGladrey and Pullen, LLP amounted to $62,000 for the year ended November 30,
2006.

Tax compliance services were provided by RSM McGladrey for 2006 and fees billed
amounted to $20,000. In 2005, tax compliance services were provided by TBS for
which fees amounted to $24,000.

During the year ended November 30, 2006 and 2005, McGladrey & Pullen, LLP, AM&G,
and TBS 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

                                      -40-
<PAGE>

                                INDEX TO EXHIBITS

The following Exhibits are filed herewith:

INDEX NUMBER            DESCRIPTION
------------            -----------
3.1                     Articles of Incorporation as included within
3.2                     Bylaws of the Company
21.1                    List of Subsidiaries of the Company
31.1, 31.2              Section 302 of the Sarbanes-Oxley Act of 2002
32.1, 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 28, 2007
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 28, 2007
By /s/ Michael W. Evans
   --------------------
Michael W. Evans, Chief Executive Officer and President
(Principal Executive Officer)

Dated: February 28, 2007
By /s/ Michael K. Murtaugh
   -----------------------
Michael K. Murtaugh, Director and Vice President/General Counsel and Secretary

Dated: February 28, 2007
By /s/ Jeffrey M. Gorden
   ---------------------
Jeffrey M. Gorden, Chief Financial Officer and Treasurer (Principal Financial
and Accounting Officer)

Dated: February 28, 2007
By /s/ Steven G. Feldman
   ---------------------
Steven G. Feldman, Director

Dated: February 28, 2007
By /s/ James A. Lentz
   ------------------
James A. Lentz, Director

                                      -41-