MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Net Revenues: Net revenues for fiscal 2012 decreased $897,000 (-4.4%) to $19,706,000 from $20,603,000 for fiscal 2011. Same store restaurant sales increased $534,000 (+3.1%) during fiscal 2012. 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 $116,000 due to one restaurant purchased from a franchisee in August 2012. Restaurant sales decreased $95,000 due to one non-traditional company-owned restaurant not included in same store sales and decreased $269,000 due to one dual branded company-owned restaurant sold in July 2012. Restaurant sales also decreased $1,196,000 due to two company-owned restaurants sold in fiscal 2011 and one company-owned restaurant sold in fiscal 2012. Net revenues increased $12,000 in fiscal 2012 due to an increase in franchise royalties and fees.

The positive same store sales results for fiscal 2012 reflect the continuation of the positive momentum we experienced in fiscal 2011 when same store sales increased 6.2%. Same store sales were negatively impacted in the fourth quarter of fiscal 2012 by road construction and road closures at two of our restaurants.
The estimated loss of sales related to these two restaurants in the fourth quarter was $100,000. Factoring out the sales declines at the two affected locations, our same store sales would have increased approximately 1.2% in the fourth quarter of fiscal 2012 which would have been the sixth consecutive quarter of same store sales increases.

Our outlook for fiscal 2013 is cautiously optimistic based on the last two years of positive sales trends; however our sales trends are influenced by many factors and the macroeconomic environment remains challenging for smaller restaurant chains. Our average transaction increased in fiscal 2012 compared to fiscal 2011 and we are continuing to manage our marketing communications to balance growth in customer traffic and the average customer expenditure.

Average restaurant sales for company-owned and co-developed restaurants (including double drive thru restaurants and restaurants with dining rooms but excluding dual brand restaurants and out of market restaurants) for fiscal 2011 and 2012 were as follows:

Fiscal 2012 Fiscal 2011 Company-operated $807,000 $779,000

Company operated restaurants' sales range from a low of $473,000 to a high of $1,487,000.

For factors which may affect future results of operations, please refer to the section entitled "Current Fiscal Year Initiatives" in Item 1 on pages 6 - 7 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 4 - 6 of this report.

Restaurant Operating Costs: Restaurant operating costs as a percent of restaurant sales were 93.5% for fiscal 2012 compared to 95.8% in fiscal 2011.

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

Restaurant-level costs for the period ended September 30, 2011   95.8%
Decrease in food and packaging costs                           (1.7%)
Decrease in payroll and other employee benefit costs            (.2%)
Decrease in occupancy and other operating costs                 (.2%)
Decrease in depreciation and amortization costs                 (.2%)
Restaurant-level costs for the period ended September 30, 2012   93.5%

Food and Packaging Costs: Food and packaging costs for fiscal 2012 decreased $649,000 from $7,241,000 (35.9% of restaurant sales) in fiscal 2011 to $6,592,000 (34.2% of restaurant sales).

In fiscal 2011 our weighted food and packaging costs increased approximately 5%. We implemented a 1.2% menu price increase in February 2011, a 1.1% menu price increase in late May 2011 and a 2.4% menu price increase in September 2011.

In fiscal 2012 our weighted food and packaging costs decreased slightly. The total menu price increases taken during fiscal 2012 were 1.6%, all of which were taken in the last five months of the fiscal year. We anticipate cost pressure on several core commodities, including beef, bacon and dairy for fiscal 2013.
However, we anticipate our food and packaging costs as a percentage of sales will remain consistent with fiscal 2012 in fiscal 2013 from a combination of price increases, product sales mix changes and recipe modifications.

Payroll and Other Employee Benefit Costs: For fiscal 2012, payroll and other employee benefit costs decreased $352,000 from $7,043,000 (34.9% of restaurant sales) in fiscal 2011 to $6,691,000 (34.7% of restaurant sales).

The decrease in payroll and other employee benefit expenses as a percent of restaurant sales for fiscal 2012 is primarily the result of higher restaurant sales. Because payroll costs are semi-variable in nature they decrease as a percentage of restaurant sales when there is an increase in restaurant sales. Additionally payroll and other employee benefits decreased approximately $519,000 in fiscal 2012 due to two company-owned restaurants sold in February and May 2011, one company-owned restaurant sold in December 2011 and one company owned restaurant sold in July 2012. We anticipate payroll and other employee benefit costs will decrease as a percentage of sales in fiscal 2013 due to the operating leverage on increasing sales.

Occupancy and Other Costs: For fiscal 2012, occupancy and other costs decreased $233,000 from $4,172,000 (20.7% of restaurant sales) in fiscal 2011 to $3,939,000 (20.4% of restaurant sales). The $233,000 decrease in occupancy and other costs is primarily attributable to:

·

Decrease in building rent of $159,000 primarily due to the four restaurants sold in fiscal 2012 and fiscal 2011.

·

Decrease of $221,000 in all other restaurant operating costs due to the four restaurants sold in fiscal 2012 and fiscal 2011.

The decreases above were offset by the following cost increases:

·

Increases in various other restaurant operating costs of $123,000 at existing restaurants comprised primarily of repairs and maintenance utility costs and bank fees.

·

An adjustment of $38,000 to our liability for the accretion of deferred rent in fiscal 2012 due to two sold restaurants. This compares to an adjustment of $62,000 in fiscal 2011 due to sold restaurants.

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.

Depreciation and Amortization Costs: For fiscal 2012, depreciation and amortization costs decreased $93,000 from $888,000 in fiscal 2011 to $795,000.
Depreciation costs primarily decreased due to the four restaurants sold in fiscal 2012 and 2011 as well as due to declining depreciation expense in our aging company-owned and joint-venture restaurants.

General and Administrative Costs: For fiscal 2012, general and administrative costs increased $77,000 from $1,281,000 (6.2% of total revenues) in fiscal 2011 to $1,358,000 (6.9% of total revenues).

The $77,000 increase in general and administrative expenses in fiscal 2012 is primarily attributable to:

·

Increase in payroll and employee benefit costs of $64,000 due to the reinstatement of certain management level salaries that were reduced in fiscal 2009 and 2010.

·

Increase in professional services of $10,000.

·

Decrease of $19,000 in miscellaneous income.

·

Net increases in various other expenses of $16,000.

Advertising Costs: For fiscal 2012, advertising costs increased $39,000 from $757,000 (3.8% of restaurant sales) in fiscal 2011 to $796,000 (4.1% of restaurant sales).

Contributions are made to the advertising materials fund and regional advertising cooperative based on a percentage of sales and there was a slight increase in the percentage contribution for fiscal 2012 compared to fiscal 2011.

We anticipate that fiscal 2013 advertising expense will remain consistent with fiscal 2012 and will consist primarily of radio advertising, social media and on-site and point-of-purchase merchandising totaling approximately 4.3% of restaurant sales.

Franchise Costs: For fiscal 2012 franchise costs decreased $10,000 from $70,000 (.3% of total revenues) in fiscal 2011 to $60,000 (.3% of total revenues).

The decrease in franchise costs for fiscal 2012 is primarily attributable to a lower allocation of costs incurred due to fewer franchise restaurants in the system.

Gain on Restaurant Asset Sales For fiscal 2012 the gain on restaurant asset sales decreased to $51,000 compared to $184,000 in fiscal 2011. The gain on restaurant assets sales in fiscal 2012 is comprised of a $24,000 deferred gain on a previous sale lease-back transaction, an $89,000 gain on the sale of two company-owned restaurants, offset by a $62,000

loss to adjust the book value of a property in Firestone, Colorado to its fair market value.

The $184,000 gain on restaurant asset sales in fiscal 2011 was primarily related to the $168,000 gain on the sale of two company-owned restaurants in February and May 2011 and the sale of one co-developed building related to a restaurant closed in fiscal 2010.

Loss from Operations: The loss from operations was $474,000 in fiscal 2012 compared to a loss from operations of $665,000 in fiscal 2011. The decrease in loss from operations for the fiscal year is due primarily to matters discussed in the "Restaurant Operating Costs", "General and Administrative Costs", "Franchise Costs" and "Loss (Gain) on Restaurant Assets" sections above.

Net Loss: The net loss was $668,000 for fiscal 2012 compared to $895,000 in fiscal 2011. The change from fiscal 2011 to fiscal 2012 was primarily attributable to the matters discussed in the "Net Revenues", "Restaurant Operating Costs", "Selling, General and Administrative Costs" and "Franchise Costs" sections of Item 6, as well as 1) a decrease in net interest expense of $90,000 compared to the same prior year period; and 2) an increase in other expenses of $37,000 compared to the same prior year period.

Net interest expense decreased in fiscal 2012 compared to the same prior year period primarily due to a reduction in the principal balances outstanding on the notes payable to Wells Fargo Bank and PFGI II. Net interest expense for fiscal 2012 includes non-cash amortization of debt issuance costs of $26,000 related to warrants issued in conjunction with the extension of the PFGI II loan in January, 2010.

Net interest expense for fiscal 2011 includes non-cash amortization of debt issuance costs of $48,000 related to: 1) warrants issued in conjunction with the extension of the PFGI II loan in January, 2010; and 2) beneficial conversion rights and warrants related to the loan agreement with W Capital and John T. MacDonald entered into in February 2010. (See "Financing" below).

Income Attributable to Non-controlling Interests: For fiscal 2012 the income attributable to non-controlling interests was $109,000 compared to $118,000 in fiscal 2011. The loss from non-controlling interest represents the limited partner's share of income in the co-developed restaurants.

Liquidity and Capital Resources

Cash and Working Capital: As of September 30, 2012, we had a working capital excess of $848,000. 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 may be incurred in the future and possibly increase if and when new Good Times restaurants are opened. We believe that we will have sufficient capital to meet our working capital, long term debt obligations and recurring capital expenditure needs in fiscal 2013 and beyond. We will require additional capital sources for the development of new restaurants. Additionally, we may sell or sublease select underperforming company operated restaurants if we believe the realizable asset value is greater than the long term cash flow value or if the asset does not fit our longer term distribution and location of restaurants.

Financing:

Wells Fargo Note Payable: The balance of our loan from Wells Fargo Bank, N.A. ("Wells Fargo") at September 30, 2012 was $232,000. We subsequently used a portion of the proceeds received by the Company from the sale of Series C Convertible Preferred Stock to SII to pay in full the outstanding balance, along with the associated interest rate swap with Wells Fargo.

PFGI II LLC Promissory Note: In July 2008, we borrowed $2,500,000 from PFGI II, LLC ("PFGI II"), an unrelated third party, and issued a promissory note in the principal amount of $2,500,000 to PFGI II (the "PFGI II Note"). The PFGI II Note has subsequently been amended on several occasions. During 2011 and 2012, the interest rate on the note was 8.65%. In April 2012 PFGI II agreed to extend the loan to December 31, 2013 on the existing note terms if a sale leaseback has not been completed on the Firestone property. The note balance at September 30, 2012 was $1,318,000. On November 30, 2012 we entered into a sale lease-back transaction on the Firestone property with net proceeds of $1,380,000 and we used $765,000 to pay down the PFGI II Note. The remaining balance of $545,000 is due on or before January 31, 2013 which we anticipate repaying from the proceeds of a sale leaseback transaction.

SII Investment Transactions: On December 13, 2010, we closed on a private placement of 1,400,000 shares of our Common Stock to SII for an aggregate purchase price of $2,100,000 (or $1.50 per share), pursuant to the terms of a Securities Purchase Agreement between the Company and SII dated October 29, 2010, as amended December 13, 2010. As a result of the completion of the investment transaction with SII, SII became the beneficial owner of approximately 51.4

percent of the Company's outstanding Common Stock. The proceeds from the transaction were used to pay approximately $288,000 of expenses related to the transaction, repay $585,000 in short term loans, reduce accrued liabilities by $200,000, reduce accounts payable by approximately $150,000 and the balance going to increase the Company's working capital.

On September 28, 2012, we closed on a second investment transaction with SII, in which the Company sold and issued to SII 355,451 shares of Series C Convertible Preferred Stock for an aggregate purchase price of $1,500,000 (or $4.22 per share) pursuant to the Purchase Agreement, with each share of Series C Convertible Preferred Stock convertible at the option of the holder into two shares of our Common Stock, subject to certain anti-dilution adjustments. As a result of this transaction, SII's beneficial ownership interest in the Company increased to 60.9 percent. The proceeds from this transaction were used to pay approximately $40,000 of expenses related to the transaction and to repay $232,000 to Wells Fargo, with the balance of the proceeds going to increase the Company's working capital.

Cash Flows: Net cash used in operating activities was $22,000 for fiscal 2012 compared to net cash used in operating activities of $539,000 in fiscal 2011.
The increase in net cash used in operating activities from continuing operations for fiscal 2012 was the result of a net loss of $668,000 and non-cash reconciling items totaling $846,000 (comprised principally of 1) depreciation and amortization of $795,000; 2) amortization of debt issuance costs of $26,000;
3) $69,000 of stock option compensation expense; 4) a $51,000 gain on asset sales; 5) a $116,000 increase in other receivables and other assets: and 7) net increases in operating assets and liabilities totaling $77,000).

Net cash provided by investing activities in fiscal 2012 was $594,000 compared to $954,000 in fiscal 2011. The fiscal 2012 activity reflects payments for the purchase of property and equipment of $314,000, proceeds from the sales of fixed assets of $913,000 and $5,000 loans to franchisees and others, net of payments received on loans.

Net cash used in financing activities in fiscal 2012 was $803,000 compared to net cash provided by financing activities of $3,000 in fiscal 2011. The fiscal 2012 activity includes principal payments on notes payable and long term debt of $650,000, costs related to the preferred stock sale of $32,000 and distributions to non-controlling interests in partnerships of $121,000.

Contingencies and Off-Balance Sheet Arrangements: We remain contingently liable on various land leases underlying restaurants that were previously sold to franchisees. We have never experienced any losses related to these contingent lease liabilities; however, if a franchisee defaults on the payments under the leases, we would be liable for the lease payments as the assignor or sublessor of the lease. Currently we have not been notified nor are we aware of any leases in default under which we are contingently liable. However there can be no assurance that there will not be in the future, which could have a material adverse effect on our future operating results.

Critical Accounting Policies and Estimates: We follow accounting standards set by the Financial Accounting Standards Board, commonly referred to as the "FASB." The FASB sets generally accepted accounting principles (GAAP) that we follow to ensure we consistently report our financial condition, results of operations, and cash flows. Over the years, the FASB and other designated GAAP-setting bodies, have issued standards in the form of FASB Statements, Interpretations, FASB Staff Positions, EITF consensuses, AICPA Statements of Position, etc.

The FASB recognized the complexity of its standard-setting process and embarked on a revised process in 2004 that culminated in the release on July 1, 2009, of the FASB Accounting Standards Codification,™ sometimes referred to as the Codification or ASC. To the Company, this means instead of following the Statements, Interpretations, Staff Positions, etc., we will follow the guidance in Topics as defined in the ASC. The Codification does not change how the Company accounts for its transactions or the nature of related disclosures made. However, when referring to guidance issued by the FASB, the Company refers to topics in the ASC rather than Statements, etc. The above change was made effective by the FASB for periods ending on or after September 15, 2009. We have updated references to GAAP in this Annual Report on Form 10-K to reflect the guidance in the Codification.

Notes Receivable: We evaluate the collectability of our note receivables from franchisees annually. The aggregate notes receivable on the consolidated balance sheet at September 30, 2012 were $20,000.

Discontinued Operations: The Company analyzes its operations on a regional basis, when evaluating closed restaurant operations for consideration as to the classification between continuing operations and discontinued operations. Prior to 2010 the Company evaluated operations at the restaurant level. In its reevaluation the Company determined that as most of the Company's restaurants are within the Denver metropolitan region and share common advertising, distribution, supervision, and to a certain extent even customers, the Company believes it appropriate to perform its analysis on a regional basis. During fiscal 2011 the Company closed two restaurants, and in fiscal 2012, the Company closed an additional two restaurants. The operations related to these restaurants are reflected as part of continuing operations as they were within one continuing operating region.

Non-controlling Interests: Non-controlling interests, previously called minority interests, are presented as a separate item in the equity section of the consolidated balance sheet. Consolidated net income or loss attributable to non-controlling interests are presented on the face of the consolidated statement of operations. Additionally, changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions, and that deconsolidation of a subsidiary is recorded as a gain or loss based on the fair value on the deconsolidation date.

Impairment of Long-Lived Assets: We review our long-lived assets for impairment, including land, property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the capitalized costs of the assets to the future undiscounted net cash flows expected to be generated by the assets and the expected cash flows are based on recent historical cash flows at the restaurant level (the lowest level that cash flows can be determined).

An analysis was performed on a restaurant by restaurant basis at September 30, 2012. Assumptions used in preparing expected cash flows were as follows:

·

Sales projections are as follows: Fiscal 2013 sales are projected to increase 6% with respect to fiscal 2012 and for fiscal years 2014 to 2027 we have used annual increases of 2% to 3%. The 6% increase in fiscal 2013 is due to the addition of breakfast sales. We believe the 2% to 3% increase in the fiscal years beyond 2013 is a reasonable expectation of growth and that it would be unreasonable to expect no growth in our sales. These increases include menu price increases in addition to any real growth. Historically our weighted menu prices have increased 1.5% to 6%.

·

Our variable and semi-variable restaurant operating costs are projected to increase proportionately with the sales increases as well as increasing an additional 1.5% per year consistent with inflation.

·

Our other fixed restaurant operating costs are projected to increase 1.5% to 2% per year.

·

Food and packaging costs are projected to decrease approximately .5% as a percentage of sales in relation to our fiscal 2012 food and packaging costs as a result of menu price increases and other menu initiatives.

·

Salvage value has been estimated on a restaurant by restaurant basis considering each restaurant's particular equipment package and building size.

Given the results of our impairment analysis at September 30, 2012 there are no restaurants which are impaired as their projected undiscounted cash flows show recoverability of their asset values.

Our impairment analysis included a sensitivity analysis with regard to the cash flow projections that determine the recoverability of each restaurant's assets. The results indicate that even with a 15% decline in our projected cash flows we would still not have any potential impairment issues. However if we elect to sublease, close or otherwise exit a restaurant location impairment could be required.

Each time we conduct an impairment analysis in the future we will compare actual results to our projections and assumptions, and to the extent our actual results do not meet expectations, we will revise our assumptions and this could result in impairment charges being recognized.

All of the judgments and assumptions made in preparing the cash flow projections are consistent with our other financial statement calculations and disclosures. The assumptions used in the cash flow projections are consistent with other forward-looking information prepared by the company, such as those used for internal budgets, discussions with third parties, and/or reporting to management or the board of directors.

Projecting the cash flows for the impairment analysis involves significant estimates with regard to the performance of each restaurant, and it is reasonably possible that the estimates of cash flows may change in the near term resulting in the need to write down operating assets to fair value. If the assets are determined to be impaired, the amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value. Fair value would be determined using forecasted cash flows discounted using an estimated average cost of capital and the impairment charge would be recognized in income from operations.

Income Taxes: We account for income taxes under the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. 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.

The Company is subject to taxation in various jurisdictions. The Company continues to remain subject to examination by U.S. federal authorities for the years 2009 through 2012. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company's financial condition, results of operations, or cash flows. Therefore, no reserves for uncertain income tax positions have been recorded. The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company has accrued $0 for interest and penalties as of September 30, 2012.

Variable Interest Entities: Once an entity is determined to be a Variable Interest Entity (VIE), the party with the controlling financial interest, the primary beneficiary, is required to consolidate it. We have two franchisees with notes payable to the Company and after analysis we have determined that, while these franchisees are VIE's, we are not the primary beneficiary of the entities, and therefore they are not required to be consolidated.

Fair Value of Financial Instruments: Fair value is established under a framework for measuring fair value under GAAP and enhances disclosure about fair value measurements.

New Accounting Pronouncements: There are no current pronouncements that affect the Company.

Subsequent Events:

At September 30, 2012 we classified $1,380,000 as assets held for sale in the accompanying consolidated balance sheet. These costs are related to a site in Firestone, Colorado which has been fully developed. On November 30, 2012 we completed a sale lease-back transaction on the property. The net sale leaseback proceeds of $1,380,000 were used to reduce the PFGI II term loan by $765,000 and to increase our working capital.

On November 30, 2012 we purchased the real estate underlying an existing restaurant from our landlord for $760,000. In connection with the real estate purchase we have entered into an additional sale leaseback agreement that is expected to close in January 2013 and we expect to recognize net proceeds of $870,000. We entered into an amendment to the PFGI II loan agreement whereby we will repay the remaining loan balance out of the sale leaseback proceeds from the closing on this sale leaseback transaction.

On December 5, 2012 we entered into an agreement to purchase a restaurant from a franchisee for a total of $1,250,000, including the real estate and operating business with an anticipated closing date of December 31, 2012. We will pay $650,000 in cash and issue a short term note of $600,000. We have entered into a sale leaseback agreement for the real estate that we expect will yield approximately $1,050,000 in net proceeds by March 31, 2013.

ITEM 7A.