Results of Operations

Net Revenues: Net revenues for fiscal 2008 increased $927,000 (3.7%) to $25,882,000 from $24,955,000 for fiscal 2007. Same store restaurant sales decreased $263,000 or (1.48%), during fiscal 2008. Restaurants are included in same store sales after they have been open a full fifteen months and only Good Times restaurants are included while dual branded restaurants are excluded. Restaurant sales increased $90,000 due to one non-traditional company-owned restaurant not included in same store sales and increased $1,593,000 due to six new, acquired or dual branded company-owned restaurants that were opened or acquired in fiscal 2007 and 2008. Restaurant sales decreased $391,000 due to one company-owned restaurant sold to a franchisee in May 2007. Net revenues decreased $102,000 in fiscal 2008 due to a decrease in franchise fees of $70,000 and a decrease in franchise royalties of $32,000.

Our third and fourth quarter same store restaurant sales declines of 5.7% and 10.8%, respectively, reflect the adverse impact the macroeconomic environment is having on consumers' discretionary spending and the proliferation of heavy promotion of $1 value menus and discounting by competitors. Additionally, we are comparing the 2008 sales declines to same store sales increases of 10% and 11.9%, respectively, in the same quarters of fiscal 2007 when we introduced Bambino Burgers. We had shown same store sales growth in sixteen consecutive quarters leading into the third quarter of this fiscal year. Our outlook for fiscal 2009 remains cautious as the economic pressures may continue to impact consumer spending and we anticipate that we will continue to face increased competitive pricing pressure. While we are implementing several broad product and brand initiatives during fiscal 2009 to improve our core value proposition, we are not planning to implement a broader $1 menu and our sales may be adversely affected during the economic recession.

Total restaurant sales for Good Times and its franchisees were $42,195,000 for fiscal 2008 compared to $42,304,000 for fiscal 2007.

Average restaurant sales (including double drive thru restaurants and restaurants with dining rooms but excluding dual brand restaurants) for fiscal 2007 and 2008 were as follows:

Fiscal 2008 Fiscal 2007 Company operated $916,000 $930,000
Franchise operated $801,000 $819,000

For factors which may affect future results of operations, please refer to the section entitled "Current Fiscal Year Initiatives" in Item 1 on pages 17-18 of this report and a related discussion of planned product and system changes discussed in the section entitled "Concept and Business Strategy" in Item 1 on pages 15-17 of this report.

Restaurant Operating Costs: Restaurant operating costs as a percent of restaurant sales were 91.1% for fiscal 2008 compared to 88.3% in fiscal 2007.

The changes in restaurant-level costs are explained as follows:

Restaurant-level costs for the period ended September 30, 2007 88.3%

Increase in food and packaging costs                             .4%
Increase in payroll and other employee benefit costs            1.5%
Increase in occupancy and other operating costs                 1.2%
Decrease in pre-open costs                                     (.3%)
Depreciation and amortization costs                               0%

Food and Packaging Costs: Food and packaging costs for fiscal 2008 increased $413,000 from $7,589,000 (31.3% of restaurant sales) in fiscal 2007 to $8,002,000 (31.7% of restaurant sales). We experienced unprecedented increases in commodity costs including beef, bakery, soft drinks, dairy and packaging costs with the majority of those increases occurring in May through July 2008.

Our weighted food and packaging costs have increased approximately 12% since the beginning of the fiscal 2008 year. However, food and packaging costs increased only slightly as a percent of restaurant sales due to menu price increases taken in October 2007 and May 2008. The cumulative weighted menu price increases taken during the fiscal year were approximately 4.8%. We anticipate limited price increases in fiscal 2009 with continued cost pressure on several core commodities.

Payroll and Other Employee Benefit Costs: For fiscal 2008 payroll and other employee benefit costs increased $717,000 from $8,063,000 (33.3% of restaurant sales) in fiscal 2007 to $8,780,000 (34.8% of restaurant sales).

The increase in payroll and other employee benefit costs for fiscal 2008 is primarily due to an increase in restaurant sales and the addition of new and acquired company-owned restaurants opened in late fiscal 2007 and during 2008, as well as a state mandated increase in the minimum wages paid to hourly employees in January 2007 and 2008. Payroll and benefit costs are semi-variable and therefore increase or decrease as sales fluctuate. Additionally, the new restaurants operate at a higher labor cost as a percent of sales due to higher initial labor costs at new stores until they reach mature staffing levels. The three dual branded restaurants also have a higher labor cost as a percent of sales than Good Times single brand restaurants.

We have reduced our labor hours allocation through increased efficiencies and improved our sales per employee hour efficiencies on service hours, thereby eliminating approximately $300,000 of annual fixed payroll costs.

Occupancy and Other Costs: For fiscal 2008, occupancy and other costs increased $488,000 from $4,393,000 (18.1% of restaurant sales) in fiscal 2007 to $4,881,000 (19.3% of restaurant sales). The $488,000 increase in occupancy and other costs are primarily attributable to:

§ Increases in building rent of $159,000 due to the new and purchased restaurants.

§ Increases in bank fees of $50,000 due to a greater number of customer transactions using credit cards in addition to credit card sales at the new and purchased restaurants.

§ Increases in property taxes of $66,000 related to the new and purchased restaurants.

§ Increases in utility costs of $114,000 related to the new and purchased restaurants, as well as utility rate increases.

Occupancy costs may increase as a percent of sales as new company-owned restaurants are developed due to higher rent associated with sale-leaseback operating leases, as well as increased property taxes on those locations.

New Store Pre-opening Costs: For fiscal 2008, new store pre-opening costs decreased $80,000 from $118,000 in fiscal 2007 to $38,000. New store pre-opening costs in fiscal 2008 are related to one new company-owned restaurant that opened in October 2008. Fiscal 2007 new store pre-opening costs were related to the opening of two new company-owned restaurants.

Depreciation and Amortization Costs: For fiscal 2008, depreciation and amortization costs increased $60,000 from $1,223,000 in fiscal 2007 to $1,283,000. Depreciation costs increased due to the addition of new company-owned restaurants in late fiscal 2007 and two restaurants acquired from a franchisee in March 2008.

Selling, General and Administrative Costs:For fiscal 2008, selling, general and administrative costs increased $342,000 from $3,226,000 (13.3% of restaurant sales) in fiscal 2007 to $3,567,000 (14.1% of restaurant sales) in fiscal 2008. The increase in selling, general and administrative costs are partially attributable to increased advertising costs, which increased to $1,525,000 (6% of restaurant sales) for fiscal 2008 from $1,427,000 (5.9% of restaurant sales) for fiscal 2007, and an increase in general and administrative costs, which increased to $2,042,000 (8.1% of restaurant sales) for fiscal 2008 from $1,799,000 (7.4% of restaurant sales) for fiscal 2007 (as explained below).

The increase in advertising costs is due to the increase in restaurant sales (contributions based on sales are made to the advertising funds).

We anticipate that fiscal 2009 advertising will consist primarily of television advertising, on-site and point-of-purchase merchandising totaling approximately 5.8% of restaurant sales.

The $243,000 increase in general and administrative cost is primarily attributable to:

§ Professional services cost increase of $127,000 related to 1) the Company's Sarbanes Oxley 404 compliance of $62,000; 2) legal costs of $43,000 related to the Omaha, Nebraska expansion and the Company's 2008 Omnibus Equity Incentive Compensation Plan; and 3) $23,000 of costs related to a brand positioning research project.

§ Write off of $81,000 in preliminary site costs related to the Omaha, Nebraska expansion.

We have reduced planned selling, general and administrative and franchise costs by approximately $450,000 for fiscal 2009 through the elimination of executive management positions, salary reductions and professional services costs.

Franchise Costs: For fiscal 2008, franchise costs increased $151,000 from $161,000 (.6% of total revenues) in fiscal 2007 to $312,000 (1.2% of total revenues).

The increase in franchise costs for fiscal 2008 is attributable to the addition of a Vice President of Franchise Development hired on October 1, 2007. This position was eliminated in July 2008 in conjunction with Good Times' exit from the planned Omaha, Nebraska expansion.

Gain on disposal of restaurants and equipment:For fiscal 2008, the gain on disposal of restaurants and equipment increased $18,000 to $35,000 from $17,000. The $35,000 gain on disposal of restaurants and equipment in fiscal 2008 is from the partial recognition of deferred gains related to two sale-leaseback transactions that were completed in fiscal 2004 and 2006.

Income (Loss) from Operations: The loss from operations was $946,000 in fiscal 2008 compared to income from operations of $200,000 in fiscal 2007.

Net Income (Loss): Net loss was $1,076,000 for fiscal 2008 compared to net income of $29,000 in fiscal 2007. The change from fiscal 2007 to fiscal 2008 was primarily attributable to the matters discussed in the "Net Revenues", "Food and Packaging Costs", "Selling, General and Administrative Costs" and "Franchise Costs" sections of Item 6. In addition, 1) minority interest expense decreased $98,000 due to decreased income from restaurant operations of the joint venture restaurants for fiscal 2008 and 2) net interest expense increased $43,000 in fiscal 2008 due to increased interest expense on debt and reduced earnings on cash reserves in the current period.

Liquidity and Capital Resources

Cash and Working Capital: As of September 30, 2008, we had $1,414,000 of cash and cash equivalents on hand. We currently plan to use the cash balance and cash generated from operations for increasing our working capital reserves and for recurring capital expenditures. Management believes that the current cash on hand and additional cash expected from operations in fiscal 2009 will be sufficient to cover our working capital requirements for fiscal 2009.

As of September 30, 2008, we had a working capital deficit of $2,082,000 primarily from our development line-of-credit of $2,180,000 shown as a current liability maturing in July 2009. We have a fully-developed site that we are marketing for a sale-leaseback transaction with expected net proceeds of approximately $1,600,000 which will be used to reduce the line of credit. Because restaurant sales are collected in cash and accounts payable for food and paper products are paid two to four weeks later, restaurant companies often operate with working capital deficits. We anticipate that working capital deficits will be incurred in the future as new Good Times restaurants are opened.

Financing: In May 2007, the Company borrowed $1,100,000 from Wells Fargo Bank under a note payable with an eight year term with a floating interest rate at .50% below prime. We simultaneously entered into an interest rate swap transaction with Wells Fargo Bank for the full $1,100,000 with a fixed interest rate of 7.7% for the full eight year term coinciding with the note payable. Partial proceeds from the loan were used to: 1) payoff our existing GE Capital notes payable of $398,000; and 2) fund new store construction. The balance of the proceeds were used to partially fund the purchase of two existing restaurants from a franchisee. We anticipate that we will be in default of certain technical loan covenants as of December 31, 2008 on the Wells Fargo note and we are working with Wells Fargo to modify these covenants based upon our fiscal 2009 plan and cash flow. We have never been in payment default nor do we expect to be in the future.

On March 1, 2008, we purchased two restaurants from an existing franchisee for total consideration of $1,330,000. We simultaneously sold the land, building and improvements related to one of the restaurants in a sale-leaseback transaction, the proceeds of which were used for the purchase of the restaurants. Net cash used in the purchase transaction was $272,000. After accounting for both the acquisition and the sale-leaseback, assets of $490,000 were recorded, a deferred gain of $26,000 was recognized as a cost of the consideration and notes receivable due from the franchisee of $250,000 were forgiven. We believe the $1,330,000 represents the fair value of the franchisee acquired.

In July 2008, we entered into a $2,500,000 promissory note with an unrelated third party (PFGI II, LLC). The promissory note constitutes a revolving line-of-credit for the development of new restaurants which may be advanced and repaid on a monthly basis from time to time. Prior to maturity, no principal payments are required and monthly payments of interest only at the prime rate plus 2% (with a minimum rate of 8%) are due, with all unpaid principal due in July 2009. The loan is secured by separate leasehold deeds of trust and security agreements related to six company-owned restaurants and a first deed of trust on the property developed. The total outstanding balance on the line of credit was $2,180,000 at September 30, 2008. Of the $2,180,000 outstanding balance, $1,574,000 is related to the construction of one company-owned restaurant in Firestone, Colorado that opened in October 2008. The restaurant is currently under contract for a sale-leaseback. The remaining balance is related to a land purchase in Aurora, Colorado that will be either developed into a company-owned restaurant or sold in fiscal 2009.

Additional commitments for the development of new restaurants in fiscal 2009 will depend on the Company's sales trends, cash generated from operations and our access to capital in the sale-leaseback markets.

Cash Flows: Net cash provided by operating activities was $619,000 for fiscal 2008 compared to $1,763,000 in fiscal 2007. The decreased net cash provided by operating activities for fiscal 2008 was the result of net loss of $1,076,000 and non-cash reconciling items totaling $1,695,000 (comprised principally of depreciation and amortization of $1,283,000, minority interest of $113,000, $185,000 of non-cash expenses associated with our planned exit activity from the Omaha, Nebraska market and our stock option compensation expense and increases in operating assets and liabilities totaling $114,000).

Net cash used in investing activities in fiscal 2008 was $2,787,000 compared to $2,057,000 in fiscal 2007. The fiscal 2008 activity reflects payments for the purchase of property and equipment of $3,282,000, proceeds from a sale-leaseback transaction of $747,000, net payments received on loans made to franchisees of $20,000 and $272,000 used to purchase two restaurants from a franchisee.

Net cash provided by financing activities in fiscal 2008 was $1,117,000 compared to $146,000 in fiscal 2007. The fiscal 2008 activity includes principal payments on notes payable and long term debt of $120,000, net borrowings on the revolving line-of-credit of $1,430,000, distributions to minority interests in partnerships of $297,000 and proceeds from the exercise of stock options of $104,000.

Contingencies and Off-Balance Sheet Arrangements:We are contingently liable on several ground leases that have been subleased or assigned to franchisees. We have never experienced any losses nor do we anticipate any future losses from these contingent lease liabilities.

Critical Accounting Policies and Estimates

Notes Receivable: We evaluate the collectability of our note receivables from franchisees annually. Historically, such amounts have been fully repaid and we believe the collateral and guarantees are adequate to provide for future payments; therefore no allowances for amounts estimated to be uncollectable have been provided.

Impairment of Long-Lived Assets: We review our long-lived assets annually for potential impairment as well as their estimated remaining life. Historically, we have not been required to impair our long-term assets nor revise their estimated life, however, the restaurant industry is extremely competitive and we continue to be responsive to changes in its operating environment. Therefore such estimates are considered significant and subject to change.

Income Taxes: The deferred tax assets are reviewed periodically for recoverability, and valuation allowances are adjusted as necessary. We believe it is more likely than not that the recorded deferred tax assets will be realized.

Variable Interest Entities: In December 2003, the Financial Accounting Standards Board (the "FASB") finalized FASB Interpretation No. 46R, Consolidation of Variable Interest Entities--An Interpretation of ARB 51 (FIN 46R). FIN 46R expands the scope of ARB 51 and can require consolidation of "Variable Interest Entities (VIEs)." Once an entity is determined to be a VIE, the party with the controlling financial interest, the primary beneficiary, is required to consolidate it. We have several franchisees with notes payable to the Company and after analysis we have determined that, while these franchisees are Variable Interest Entities as defined by FIN 46R, we are not the primary beneficiary of the entities, and therefore they are not required to be consolidated under FIN 46R.

New Accounting Pronouncements: In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
157 ("SFAS 157"). The Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS 157 is not expected to have a material effect on the Company's financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159. "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007 which will be effective for our fiscal year beginning October 1, 2008. The adoption of this statement is not expected to have a material impact on the Company's financial position or results of operations.

In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), "Business Combinations" ("FAS 141 (R)"), which establishes accounting principles and disclosure requirements for all transactions in which a company obtains control over another business. This accounting pronouncement is effective for fiscal years beginning after December 15, 2008, which will effective for our fiscal year beginning October 1, 2009. We are currently evaluating the requirements of FAS 141 and have not yet determined the impact on our financial statements.

In December 2007, the FASB issued FASB Statement No. 160, "Noncontrolling Interests in Consolidated Financial Statements and amendment to ARB No. 51" ("FAS 160"). This standard prescribes the accounting by a parent company for minority interests held by other parties in a subsidiary of the parent company. FAS 160 is effective for fiscal years beginning after December 15, 3008, which will be effective for our fiscal year beginning October 1, 2009. We are currently evaluating the requirements of FAS 160 and have not yet determined the impact on our financial statements.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative instruments and Hedging Activities" ("SFAS 161"). SFAS 161 amends and expands the disclosure requirements in SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, which will be effective for our interim period beginning January 1, 2009. We are currently evaluating the requirements of FAS 161 and have not yet determined the impact on our financial statements.

Pre-approval of non-audit services: On October 16, 2008, the Audit Committee of the Board of Directors of Good Times Restaurants Inc. approved in advance certain non-audit services to be performed by Hein & Associates, Good Times' independent auditor. These non-audit services are to consist primarily of corporate income tax compliance services.