Overview

As of September 27, 2008, we had franchises operating under the following brands: Play it Again Sports®, Once Upon a Child®, Plato's Closet®, Music Go Round® and Wirth Business Credit®. Management closely tracks the following financial criteria to evaluate current business operations and future prospects:
royalties, franchise fees, leasing activity, selling, general and administrative expenses.

Our most profitable sources of franchising revenue are royalties earned from our franchise partners and franchise fees for new openings and transfers.

During the first nine months of 2008, our royalties increased $1,167,900 or 7.7% compared to the first nine months of 2007. Franchise fees increased $44,000 or 3.4% compared to the same period last year. During the first nine months of 2008, revenue generated from the Company's leasing activities was $5,920,000 compared to $2,944,700 in the same period last year. (See Note 13 - "Segment Reporting.") The Company's leasing portfolio was $45.8 million at September 27, 2008 compared to $33.2 million at September 29, 2007.

Management continually monitors the level and timing of selling, general and administrative expenses. The major components of selling, general and administrative expenses include salaries, wages and benefits, advertising, travel, occupancy, legal and professional fees. During the first nine months ended September 27, 2008, selling, general and administrative expense increased $678,000, or 4.7%, compared to the same period last year primarily due to amortization of initial direct costs, stock option expenses, sales commissions and bank charges.

Management also monitors several nonfinancial factors in evaluating the current business operations and future prospects, including franchise openings and closings and franchise renewals. The following is a summary of our franchising activity for the first nine months ended September 27, 2008:

                                                                         NINE MONTHS ENDING 9/27/08
                                                                         AVAILABLE
                             TOTAL                           TOTAL          FOR           COMPLETED
                            12/29/07    OPENED    CLOSED    9/27/08       RENEWAL         RENEWALS
Play It Again Sports®
Franchised Stores - US
and Canada                       374        11       (20 )      365                5                5

Once Upon A Child®
Franchised Stores - US
and Canada                       228         8        (5 )      231                6                6

Plato's Closet®
Franchised Stores - US
and Canada                       211        24        (2 )      233                0                0

Music Go Round®
Franchised Stores                 38         0        (1 )       37                5                5

Total Franchised Stores          851        43       (28 )      866               16               16

Wirth Business Credit®
Territories                       41        20        (3 )       58                0                0
Total
Franchises/Territories           892        63       (31 )      924               16               16

Renewal activity is a key focus area for management. Our franchisees sign 10-year agreements with us. The renewal of existing franchise agreements as they approach their expiration is an indicator that management monitors to determine the health of our business and the preservation of future royalties. During the nine months ended September 27, 2008, the Company renewed 16 franchise agreements of the 16 franchise agreements that were available for renewal.

Our ability to grow our profits is dependent on our ability to: (i) effectively support our franchise partners so that they produce higher revenues, (ii) open new franchises, (iii) increase lease originations and minimize write-offs in our leasing portfolios, and (iv) control our selling, general and administrative expenses.

Results of Operations



The following table sets forth for the periods indicated, certain income
statement items as a percentage of total revenue:



                                          Three Months Ended                Nine Months Ended
                                    September 27,    September 29,    September 27,    September 29,
                                        2008             2007             2008             2007
Revenue:
Royalties                                    62.9 %           65.5 %           61.3 %           65.7 %
Leasing income                               22.6             14.8             22.2             12.7
Merchandise sales                             8.5             10.0             10.0             14.1
Franchise fees                                4.7              7.3              5.0              5.6
Other                                         1.3              2.4              1.5              1.9
Total revenues                              100.0 %          100.0 %          100.0 %          100.0 %

Cost of merchandise sold                     (8.0 )           (9.6 )           (9.6 )          (13.5 )
Leasing expense                              (5.1 )           (3.4 )           (5.3 )           (2.6 )
Provision for credit losses                  (6.3 )           (1.8 )           (4.6 )           (1.8 )
Selling, general and
administrative expenses                     (52.0 )          (57.7 )          (56.4 )          (62.2 )
Income from operations                       28.6             27.5             24.1             19.9
Loss from equity investments                 (1.6 )           (1.2 )           (1.1 )           (1.5 )
Interest expense                             (3.4 )           (4.8 )           (3.7 )           (4.7 )
Interest and other income                     1.3              1.6              0.9              1.8
Income before income taxes                   24.9             23.1             20.2             15.5
Provision for income taxes                  (10.1 )           (8.9 )           (8.2 )           (6.0 )
Net income                                   14.8 %           14.2 %           12.0 %            9.5 %

Comparison of Three Months Ended September 27, 2008 to Three Months Ended September 29, 2007

Revenue

Revenue for the quarter ended September 27, 2008 totaled $9.1 million compared to $7.9 million for the comparable period in 2007.

Royalties increased to $5.7 million for the third quarter of 2008 from $5.2 million for the same period in 2007, a 10.2% increase. The increase was due to higher Plato's Closet® and Once Upon A Child® royalties of $487,000 and $114,000, respectively. The increase in Plato's Closet® and Once Upon A Child® royalties is primarily due to having 24 additional Plato's Closet® and five additional Once Upon A Child® franchise stores in the third quarter of 2008 compared to the same period last year and higher franchisee retail sales in both brands.

Merchandise sales include the sale of product to franchisees either through the Play It Again Sports® buying group, or through our Computer Support Center (together, "Direct Franchisee Sales"). For the third quarter of 2008, Direct Franchisee Sales were $777,600 compared to $797,600 for the third quarter of 2007. The decrease is a result of management's strategic decision to have more franchisees purchase merchandise directly from vendors and having 16 fewer Play It Again Sports® stores open than one year ago.

Franchise fees decreased to $431,900 for the third quarter of 2008 compared to $584,100 for the third quarter of 2007. The decrease is due to opening 19 franchises in the third quarter of 2008, compared to 30 in the same period of 2007.

Leasing income increased to $2,060,400 for the third quarter of 2008 compared to $1,173,200 for the same period in 2007. The increase is due to a larger lease portfolio in 2008 compared to 2007.

Cost of Merchandise Sold

Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold decreased $33,500 or 4.4% for the third quarter of 2008 compared to the same period last year. The decrease was primarily due to a decrease in Direct Franchisee Sales discussed in the revenue section. Cost of merchandise sold as a percentage of Direct Franchisee Sales for the third quarter of 2008 and 2007 were 94.0% and 95.8%, respectively.

Leasing Expense

Leasing expense increased to $471,000 in the third quarter of 2008 compared to $268,700 in the third quarter of 2007. The increase is due to interest on increased borrowings in connection with the growth of our lease portfolio.

Provision for Credit Losses

Provision for credit losses increased to $571,800 in the third quarter of 2008 compared to $142,100 in the third quarter of 2007. The increase is due to a higher provision level for net charge-offs in the leasing segment.

The $156,600, or 3.4%, increase in selling, general and administrative expenses in the third quarter of 2008 compared to the same period in 2007 is primarily due to increases in amortization of initial direct costs, legal fees and a decrease in capitalized initial direct costs of $104,000, $42,000 and $86,000, respectively, partially offset by a $68,000 decrease in franchisee commissions.

Loss from Equity Investments

During the third quarter of 2008 and 2007, we recorded losses of $145,200 and $92,400, respectively, from our investment in Tomsten. This represents our pro rata share of losses for the period. As of September 27, 2008, the Company owns 18.3% of the outstanding common stock of Tomsten.

Interest Expense

Interest expense decreased to $309,600 in the third quarter of 2008 compared to $381,300 in the third quarter of 2007. The decrease is due to lower interest rates and $2.2 million net repayment on the line of credit since year end.

Income Taxes

The provision for income taxes was calculated at an effective rate of 40.5% and 38.4% for the third quarter of 2008 and 2007, respectively. The lower effective rate in 2007 compared to 2008 reflects a lower amount of non-deductible expenses.

Comparison of Nine Months Ended September 27, 2008 to Nine Months Ended September 29, 2007

Revenue

Revenue for the nine months ended September 27, 2008 totaled $26.7 million compared to $23.1 million for the comparable period in 2007.

Royalties increased to $16.4 million for the first nine months of 2008 from $15.2 million for the same period in 2007, a 7.7% increase. The increase was due to higher Plato's Closet® and Once Upon A Child® royalties of $1,098,000 and $311,000, respectively, partially offset by lower Play It Again Sports® royalties of $281,000. The increase in Plato's Closet® and Once Upon A Child® royalties is primarily due to having 24 additional Plato's Closet® and five Once Upon A Child® franchise stores in the first nine months of 2008 compared to the same period last year and higher franchisee retail sales in both brands.

Merchandise sales include the sale of product to franchisees either through the Play It Again Sports® buying group, or through our Computer Support Center (together, "Direct Franchisee Sales"). For the first nine months of 2008, Direct Franchisee Sales were $2,685,400 compared to $3,250,300 for the first nine months of 2007. The decrease is a result of management's strategic decision to have more franchisees purchase merchandise directly from vendors and having 16 fewer Play It Again Sports® stores open than one year ago.

Franchise fees increased to $1,345,500 for the first nine months of 2008 compared to $1,301,500 for the first nine months of 2007. The Company opened 63 franchise territories in the first nine months of 2008, compared to 66 in the same period of 2007.

Leasing income increased to $5,920,000 for the first nine months of 2008 compared to $2,944,700 for the same period in 2007. The increase is due to a larger lease portfolio in 2008 compared to 2007.

Cost of Merchandise Sold

Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold decreased $554,100 or 17.8% for the first nine months of 2008 compared to the same period last year. The decrease was primarily due to a decrease in Direct Franchisee Sales discussed in the revenue section. Cost of merchandise sold as a percentage of Direct Franchisee Sales for the first nine months of 2008 and 2007 were 95.5% and 96.0%, respectively.

Leasing Expense

Leasing expense increased to $1,420,000 in the first nine months of 2008 compared to $601,900 in the first nine months of 2007. The increase is due to interest on increased borrowings in connection with the growth of the Company's lease portfolio.

Provision for Credit Losses

Provision for credit losses increased to $1,226,100 in the first nine months of 2008 compared to $421,800 in the first nine months of 2007. The increase is due to a higher provision level for net charge-offs in the leasing segment.

Selling, General and Administrative

The $678,000 or 4.7%, increase in selling, general and administrative expenses in the first nine months of 2008 compared to the same period in 2007 is primarily due to increases in amortization of initial direct costs, stock option expenses, sales commissions, bank charges and legal fees of $363,000, $144,000, $130,000, $119,000 and $78,000, respectively; partially offset by a $233,000 decrease in advertising expenses.

Loss from Equity Investments

During the first nine months of 2008 and 2007, we recorded losses of $281,700 and $344,600, respectively, from our investment in Tomsten. This represents our pro rata share of losses for the period. As of September 27, 2008, the Company owns 18.3% of the outstanding common stock of Tomsten.

Interest Expense

Interest expense decreased to $998,200 in the first nine months of 2008 compared to $1,101,900 in the first nine months of 2007. The decrease is due to lower interest rates and $2.2 million net repayment on the line of credit since year end.

Interest and Other Income

During the first nine months of 2008, the Company had interest and other income of $246,300 compared to $423,300 of interest and other income in the first nine months of 2007. The decrease is primarily due to the sale of the Commercial Credit Group senior subordinated notes in August 2007.

Income Taxes

The provision for income taxes was calculated at an effective rate of 40.5% and 38.9% for the first nine months of 2008 and 2007, respectively. The lower effective rate in 2007 compared to 2008 reflects a lower amount of non-deductible expenses.

Segment Comparison of the Three Months Ended September 27, 2008 to

Three Months Ended September 29, 2007

Franchising segment operating income

The franchising segment's third quarter 2008 operating income increased by $272,500 or 9.9% to $3.0 million from $2.8 million for the third quarter 2007. The increase was primarily due to higher royalty income of $531,900 or 10.2%, partially offset by lower franchise fees and other income. The increase in royalties was primarily due to higher Plato's Closet® and Once Upon A Child® royalties of $487,000 and $114,000, respectively. The increase in Plato's Closet® and Once Upon A Child® royalties is primarily due to having 24 additional Plato's Closet® and five additional Once Upon A Child® franchise stores open in the third quarter of 2008 compared to the same period last year and higher franchisee retail sales in both brands.

Leasing segment operating loss

The leasing segment's third quarter 2008 operating loss decreased $148,800 or 26.5% to ($412,300) compared to a loss of ($561,000) during the third quarter of 2007. This improvement was primarily due to a $887,200 increase in leasing income, partially offset by a $738,400 increase in direct costs, including corporate allocations and provision for credit losses associated with the leasing segment.

Segment Comparison of the Nine Months Ended September 27, 2008 to

Nine Months Ended September 29, 2007

Franchising segment operating income

The franchising segment's first nine months of 2008 operating income increased by $576,600 or 8.5% to $7.4 million from $6.8 million for the first nine months of 2007. The increase in segment contribution was primarily due to higher royalty income of $1,167,900 or 7.7%, partially offset by higher allocated corporate costs. The increase in royalties was primarily due to higher Plato's Closet® and Once Upon A Child® royalties of $1,098,000 and $311,000, respectively, partially offset by lower Play It Again Sports® royalties of $281,000. The increase in Plato's Closet® and Once Upon A Child® royalties is primarily due to having 24 additional Plato's Closet® and five additional Once Upon A Child® franchise stores open in the first nine months of 2008 compared to the same period last year and higher franchisee retail sales in both brands.

Leasing segment operating loss

The leasing segment's first nine months of 2008 operating loss decreased $1,258,700 or 57.5% to ($0.9 million) compared to a loss of ($2.2 million) during the first nine months of 2007. This improvement was primarily due to a $3.0 million increase in leasing income, partially offset by a $1.7 million increase in direct costs, including corporate allocations and provision for credit losses associated with the leasing segment.

Liquidity and Capital Resources

Our primary sources of liquidity have historically been cash flow from operations and borrowings. The components of the income statement that affect our liquidity include non-cash items for depreciation and compensation expense related to stock options. The most significant component of the balance sheet that affects liquidity is long-term investments. Long-term investments includes $7.2 million of illiquid investment in two private companies: Tomsten, Inc. and BridgeFunds LLC. We ended the third quarter of 2008 with $2.9 million in cash and cash equivalents and a current ratio (current assets divided by current liabilities) of 1.3 to 1.0 compared to $0.8 million in cash and cash equivalents and a current ratio of 1.0 to 1.0 at the end of the third quarter of 2007.

Operating activities provided cash of $6.4 million for the first nine months of 2008 compared to $4.0 million for the same period last year. Cash provided by operating assets and liabilities include an increase in advance and security deposits of $722,700 due to increased lease originations. Accrued liabilities provided cash of $228,200 primarily due to increased amounts owed in lease equipment and interest accrued on borrowings. Accounts receivable provided cash of $241,200, primarily due to lease chargeback collections. Cash utilized by operating assets and liabilities include a $328,700 decrease in accounts payable primarily due to a decrease in buying group activity.

Investing activities used $5.8 million of cash during the first nine months of 2008 compared to $13.6 million during the same period of 2007. The 2008 activities consisted primarily of the purchase of equipment for lease contracts of $16.8 million and collections on lease receivables of $11.2 million.

Financing activities provided $1.0 million of cash during the first nine months of 2008 compared to $9.3 million during the same period of 2007. The 2008 activities were proceeds from discounted leases of $2.9 million and a $1.0 million tax benefit on exercised warrants, net payments of $2.3 million on the line of credit and subordinated notes and $0.6 million used to purchase 31,370 shares of our common stock.

As of September 27, 2008, the Company had no off balance sheet arrangements.

On June 10, 2008, we amended and restated our 364-Day Revolving Credit Agreement with LaSalle Bank National Association ("LaSalle") to, among other things, join The PrivateBank and Trust Company as lender and Documentation Agent, appoint LaSalle as Administrative Agent, increase the aggregate commitment to $55.0 million and extend the term to June 15, 2013. The Amended and Restated Revolving Credit Agreement (the "Credit Facility") permits us to borrow up to the aggregate commitment subject to certain borrowing base limitations.

The Credit Facility allows us to choose between three interest rate options in connection with its borrowings. The interest rate options are the Base Rate, LIBOR and Fixed Rate (all as defined within the Credit Facility) plus an applicable margin of 0%, 2.00% and 2.00%, respectively. Interest periods for LIBOR borrowings can be one, two, three or six months, and interest periods for Fixed Rate borrowings can be one, two, three, four or five years as selected by us. The Credit Facility also provides for non-utilization fees of 0.25% per annum on the daily average of the unused commitment.

As of September 27, 2008, our borrowing availability under the Credit Facility was $55.0 million (the lesser of the borrowing base or the aggregate line of credit). There were $14.0 million in borrowings outstanding under the Credit Facility bearing Fixed Rate interest ranging from 4.58% to 5.76% and having initial terms ranging from three years to five years, leaving $41.0 million available for additional borrowings.

The Credit Facility will be used for growing our leasing business, stock repurchases and general corporate purposes. The Credit Facility is secured by a lien against substantially all of our assets, contains customary financial conditions and covenants, and requires maintenance of minimum levels of debt service coverage and tangible net worth and maximum levels of leverage (all as defined within the Credit Facility). As of September 27, 2008, we were in compliance with all of our financial covenants.

On April 19, 2006, we announced the filing of a "shelf registration" on Form S-1 registration statement with the Securities and Exchange Commission for the sale of up to $50 million of renewable subordinated unsecured notes with maturities from three months to ten years. In June 2006, the Form S-1 registration became effective. In March 2007, we filed Post-Effective Amendment Number 2 to the public offering that was declared effective March 30, 2007. In November 2007, we filed a Post-Effective Amendment Number 3 for the public offering that was declared effective November 29, 2007. In March 2008, we filed Post-Effective Amendment Number 4 for the public offering that was declared effective March 27, 2008. We have in the past and continue to intend to use the net proceeds from the offering to pay down our credit facility, expand our leasing portfolio, to make acquisitions, to repurchase common stock and for other general corporate purposes. As of September 27, 2008, $25.5 million of the renewable subordinated notes have been sold.

We believe that the combination of our cash on hand, the cash generated from our franchising business, cash generated from discounting sources, our bank line of credit as well as our renewable subordinated unsecured notes, will be adequate to fund our planned operations, including leasing activity, for 2008 and 2009.

Critical Accounting Policies

The Company prepares the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, the Company is required to make certain estimates, judgments and assumptions that it believes is reasonable based on information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. There can be no assurance that actual results will not differ from these estimates. The critical accounting policies that the Company believes are most important to aid in fully understanding and evaluating the reported financial results include the following:

Revenue Recognition - Royalty Revenue and Franchise Fees

The Company collects royalties from each franchise based on a percentage of retail store gross sales. The Company recognizes royalties as revenue when earned. At the end of each accounting period, estimates of royalty amounts due are made based on applying historical weekly sales information to the number of weeks of unreported franchisee sales. If there are significant changes in the actual performances of franchisees versus estimates, royalty revenue would be impacted. During the first nine months of 2008, the Company collected $30,500 more than estimated at December 29, 2007. As of September 27, 2008, royalty receivables were $1,278,100.

The Company collects franchise fees when franchise agreements are signed and recognize the franchise fees as revenue when the franchise is opened, which is when the Company has performed substantially all initial services required by the franchise agreement. Franchise fees collected from franchisees but not yet recognized as income are recorded as deferred revenue in the liability section of the Company's balance sheet. As of September 27, 2008, deferred franchise fees were $817,300.

The Company currently uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of the awards on the date of grant using an option-pricing model is affected by stock price as well as assumptions regarding a number of complex and subjective variables. These variables include implied volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

The Company evaluates the assumptions used to value awards on an annual basis. If factors change and the Company employs different assumptions for estimating stock-based compensation expense in future periods or if the Company decides to use a different valuation model, the future periods may differ significantly from what it has recorded in the current period and could materially affect operating income, net income and net income per share.

Impairment of Long-term Investments

The Company evaluates its long-term investments for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying . . .