10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 4, 2010

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission file number: 0-25123

P.F. Chang’s China Bistro, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	86-0815086 (I.R.S. Employer Identification No.)
7676 East Pinnacle Peak Road Scottsdale, Arizona (Address of principal executive offices)	85255 (Zip Code)

Registrant’s telephone number, including area code:
(480) 888-3000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).* Yes o No o

* The registrant has not yet been phased into the interactive data requirements.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of July 4, 2010, there were 23,112,586 outstanding shares of the registrant’s Common Stock.

TABLE OF CONTENTS

Item	Page
PART I FINANCIAL INFORMATION
1. Financial Statements		2
Consolidated Balance Sheets at July 4, 2010 and January 3, 2010		2
Consolidated Statements of Income for the Three and Six Months Ended July 4, 2010 and June 28, 2009		3
Consolidated Statement of Equity for the Six Months Ended July 4, 2010 and June 28, 2009		4
Consolidated Statements of Cash Flows for the Six Months Ended July 4, 2010 and June 28, 2009		5
Notes to Unaudited Consolidated Financial Statements		6
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
3. Quantitative and Qualitative Disclosures About Market Risk		27
4. Controls and Procedures		27
PART II OTHER INFORMATION
1. Legal Proceedings		28
1A. Risk Factors		28
2. Unregistered Sales of Equity Securities and Use of Proceeds		28
3. Defaults Upon Senior Securities		28
4. Removed and Reserved		28
5. Other Information		28
6. Exhibits		29
Signatures		30
Index to Exhibits		31
Exhibit 31.1
Exhibit 31.2
Exhibit 31.3
Exhibit 32.1
Exhibit 32.2
Exhibit 32.3

1

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands)

	July 4,			January 3,
	2010			2010
	(Unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	38,258		$	63,499
Inventories		5,497			5,291
Other current assets		36,425			38,449
Total current assets		80,180			107,239
Property and equipment, net		478,855			497,928
Goodwill		6,819			6,819
Intangible assets, net		21,106			22,241
Other assets		20,074			17,923
Total assets	$	607,034		$	652,150
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	18,703		$	19,825
Construction payable		1,542			1,600
Accrued expenses		61,852			77,088
Unearned revenue		26,524			35,844
Current portion of long-term debt, including $131 and $976 due to related parties at July 4, 2010 and January 3, 2010, respectively		194			41,236
Total current liabilities		108,815			175,593
Lease obligations		116,743			116,547
Long-term debt		1,235			1,212
Other liabilities		16,748			18,488
Total liabilities		243,541			311,840
Commitments and contingencies (Note 12)		—			—
Equity:
PFCB common stockholders’ equity:
Common stock, $0.001 par value, 40,000,000 shares authorized: 23,112,586 shares and 22,911,054 shares issued and outstanding at July 4, 2010 and January 3, 2010, respectively		23			28
Additional paid-in capital		234,209			217,181
Treasury stock, at cost, 5,317,173 shares and 5,064,733 shares at July 4, 2010 and January 3, 2010, respectively		(157,158	)		(146,022	)
Accumulated other comprehensive loss		—			(294	)
Retained earnings		281,969			264,456
Total PFCB common stockholders’ equity		359,043			335,349
Noncontrolling interests		4,450			4,961
Total equity		363,493			340,310
Total liabilities and equity	$	607,034		$	652,150

See accompanying notes to unaudited consolidated financial statements.

2

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended						Six Months Ended
	July 4,			June 28,			July 4,			June 28,
	2010			2009			2010			2009
Revenues	$	312,838		$	301,360		$	623,209		$	611,197
Costs and expenses:
Cost of sales		81,717			79,657			165,730			162,729
Labor		102,295			98,111			206,770			198,818
Operating		51,597			48,809			104,350			99,500
Occupancy		18,609			17,403			36,447			34,781
General and administrative		19,765			20,523			38,818			40,337
Depreciation and amortization		19,335			18,575			38,336			37,071
Preopening expense		832			461			965			949
Partner investment expense		(135	)		(91	)		(124	)		(555	)
Total costs and expenses		294,015			283,448			591,292			573,630
Income from operations		18,823			17,912			31,917			37,567
Interest and other income (expense), net		(665	)		(437	)		(1,080	)		(1,377	)
Income from continuing operations before taxes		18,158			17,475			30,837			36,190
Provision for income taxes		(5,144	)		(5,108	)		(8,932	)		(10,061	)
Income from continuing operations, net of tax		13,014			12,367			21,905			26,129
Income (loss) from discontinued operations, net of tax		—			(474	)		6			(517	)
Net income		13,014			11,893			21,911			25,612
Less: Net income attributable to noncontrolling interests		241			288			447			658
Net income attributable to PFCB	$	12,773		$	11,605		$	21,464		$	24,954
Basic income per share:
Income from continuing operations attributable to PFCB common stockholders	$	0.56		$	0.52		$	0.94		$	1.10
Income (loss) from discontinued operations, net of tax, attributable to PFCB common stockholders		0.00			(0.02	)		0.00			(0.03	)
Net income attributable to PFCB common stockholders	$	0.56		$	0.50		$	0.94		$	1.07
Diluted income per share:
Income from continuing operations attributable to PFCB common stockholders	$	0.55		$	0.51		$	0.93		$	1.08
Income (loss) from discontinued operations, net of tax, attributable to PFCB common stockholders		0.00			(0.02	)		0.00			(0.03	)
Net income attributable to PFCB common stockholders	$	0.55		$	0.49		$	0.93		$	1.05
Weighted average shares used in computation:
Basic		22,828			23,057			22,730			23,249
Diluted		23,277			23,526			23,190			23,660
Amounts attributable to PFCB:
Income from continuing operations, net of tax	$	12,773		$	12,079		$	21,458		$	25,471
Income (loss) from discontinued operations, net of tax		—			(474	)		6			(517	)
Net income attributable to PFCB	$	12,773		$	11,605		$	21,464		$	24,954

See accompanying notes to unaudited consolidated financial statements.

3

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
(Unaudited)

	PFCB Common Stockholders
													Accumulated
													other
	Common Stock						Additional			Treasury			comprehensive			Retained			Noncontrolling
	Shares			Amount			paid-in capital			stock			loss			earnings			interests			Total
Balances, December 28, 2008		24,114		$	27		$	206,667		$	(106,372	)	$	(755	)	$	221,259		$	8,581		$	329,407
Issuance of common stock under stock option plans		78			1			926			—			—			—			—			927
Issuance of common stock under employee stock purchase plan		21			—			349			—			—			—			—			349
Issuance of restricted stock under incentive plans, net of forfeitures		(25	)		—			—			—			—			—			—			—
Purchases of treasury stock		(826	)		—			—			(19,551	)		—			—			—			(19,551	)
Share-based compensation expense (1)		—			—			4,112			—			—			—			—			4,112
Tax benefit from share-based compensation, net		—			—			106			—			—			—			—			106
Unrealized gain on derivatives		—			—			—			—			154			—			—			154
Distributions to noncontrolling interest partners		—			—			—			—			—			—			(1,103	)		(1,103	)
Contributions from noncontrolling interest partners		—			—			—			—			—			—			10			10
Purchases of noncontrolling interests		—			—			(1,000	)		—			—			—			(2,275	)		(3,275	)
Partner investment expense		—			—			—			—			—			—			(555	)		(555	)
Partner bonus expense, imputed		—			—			—			—			—			—			261			261
Net income		—			—			—			—			—			24,954			658			25,612
Balances, June 28, 2009		23,362		$	28		$	211,160		$	(125,923	)	$	(601	)	$	246,213		$	5,577		$	336,454
Balances, January 3, 2010		22,911		$	28		$	217,181		$	(146,022	)	$	(294	)	$	264,456		$	4,961		$	340,310
Issuance of common stock under stock option plans		436			—			11,284			—			—			—			—			11,284
Issuance of common stock under employee stock purchase plan		41			—			1,586			—			—			—			—			1,586
Shares withheld for taxes on restricted stock, net of forfeitures		(23	)		—			(57	)		—			—			—			—			(57	)
Purchases of treasury stock		(252	)		(5	)		—			(11,136	)		—			—			—			(11,141	)
Share-based compensation expense (1)		—			—			2,684			—			—			—			—			2,684
Tax benefit from share-based compensation, net		—			—			1,784			—			—			—			—			1,784
Unrealized gain on derivatives		—			—			—			—			294			—			—			294
Distributions to noncontrolling interest partners		—			—			—			—			—			—			(726	)		(726	)
Contributions from noncontrolling interest partners		—			—			—			—			—			—			10			10
Purchases of noncontrolling interests		—			—			(259	)		—			—			—			(331	)		(590	)
Partner investment expense		—			—			—			—			—			—			(124	)		(124	)
Partner bonus expense, imputed		—			—			—			—			—			—			213			213
Cash dividends paid		—			—			6			—			—			(3,951	)		—			(3,945	)
Net income		—			—			—			—			—			21,464			447			21,911
Balances, July 4, 2010		23,113		$	23		$	234,209		$	(157,158	)	$	—		$	281,969		$	4,450		$	363,493

(1) Share-based compensation expense includes equity-settled awards only.

See accompanying notes to unaudited consolidated financial statements.

4

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Six Months Ended
	July 4,			June 28,
	2010			2009
Operating Activities:
Net income	$	21,911		$	25,612
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		38,336			37,071
Share-based compensation		5,610			5,058
Net lease termination charges in discontinued operations		35			712
Partner investment expense		(124	)		(555	)
Partner bonus expense, imputed		213			261
Deferred income taxes		(4,555	)		(1,542	)
Tax (benefit) shortfall from share-based compensation, net		(1,870	)		(106	)
Other		135			61
Changes in operating assets and liabilities:
Inventories		(206	)		25
Other current assets		2,907			23,818
Other assets		(484	)		(1,342	)
Accounts payable		(1,122	)		3,400
Accrued expenses		(14,801	)		(5,002	)
Unearned revenue		(9,320	)		(7,961	)
Lease obligations		293			(1,644	)
Other liabilities		821			999
Net cash provided by operating activities		37,779			78,865
Investing Activities:
Capital expenditures		(18,305	)		(20,773	)
Receivable under loan facility (Note 12)		(1,814	)		—
Capitalized interest		(53	)		(97	)
Net cash used in investing activities		(20,172	)		(20,870	)
Financing Activities:
Repayments of long-term debt		(41,042	)		(44,857	)
Proceeds from net share issuances		12,813			1,276
Purchases of treasury stock		(11,141	)		(19,551	)
Payments of cash dividends		(3,945	)		—
Distributions to noncontrolling interest partners		(726	)		(1,103	)
Purchases of noncontrolling interests		(590	)		(3,275	)
Payments of capital lease obligations		(97	)		(90	)
Contributions from noncontrolling interest partners		10			10
Tax benefit (shortfall) from share-based compensation, net		1,870			106
Net cash used in financing activities		(42,848	)		(67,484	)
Net decrease in cash and cash equivalents		(25,241	)		(9,489	)
Cash and cash equivalents at the beginning of the period		63,499			40,951
Cash and cash equivalents at the end of the period	$	38,258		$	31,462
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes, net of refunds	$	16,909		$	3,801
Cash paid for interest	$	1,353		$	2,259

See accompanying notes to unaudited consolidated financial statements.

5

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

As of July 4, 2010, P.F. Chang’s China Bistro, Inc. (the “Company” or “PFCB”) owned and operated 199 full service restaurants throughout the United States under the name P.F. Chang’s China Bistro (the “Bistro”). The Company also owned and operated 167 quick casual restaurants under the name Pei Wei Asian Diner (“Pei Wei”). Additionally, there are four Bistro restaurants in international markets that are operated by business partners under licensing agreements, and two Bistro restaurants operated in Hawaii under a joint venture arrangement in which the Company owns a noncontrolling interest.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended July 4, 2010 are not necessarily indicative of the results that may be expected for the year ending January 2, 2011.

The consolidated balance sheet at January 3, 2010 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2010.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Principles of Consolidation and Presentation

The Company’s consolidated financial statements include the accounts and operations of the Company and its majority-owned subsidiaries. All material balances and transactions between the consolidated entities have been eliminated. Noncontrolling interests are reported below net income under the heading “Net income attributable to noncontrolling interests” in the consolidated income statements and shown as a component of equity in the consolidated balance sheets.

Recent Accounting Literature

Consolidation of Variable Interest Entities — Amended
(Included in ASC 810 “Consolidation”, SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”)

SFAS No. 167 amends FASB Interpretation No. 46(R) “Consolidation of Variable Interest Entities” regarding certain guidance for determining whether an entity is a variable interest entity and modifies the methods allowed for determining the primary beneficiary of a variable interest entity. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS No. 167 is effective for the first annual reporting period beginning after November 15, 2009, with earlier adoption prohibited. The adoption of SFAS No. 167 in fiscal 2010 did not have a material impact on the Company’s consolidated financial statements.

Improving Disclosures about Fair Value Measurements (ASU No. 2010-06)
(Included in ASC 820 “Fair Value Measurements and Disclosures”)

Accounting Standards Update (“ASU”) No. 2010-06 requires new disclosures regarding recurring or nonrecurring fair value measurements. Entities will be required to separately disclose significant transfers into and out of Level 1 and Level 2 measurements in the fair value hierarchy and describe the reasons for the transfers. Entities will also be required to provide information on purchases, sales, issuances and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. In addition, entities must provide fair value measurement disclosures for each class of assets and liabilities, and disclosures about the valuation techniques used in determining fair value for Level 2 or Level 3 measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the gross basis reconciliation for the Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010. The adoption of ASU 2010-06 did not have a material impact on the Company’s consolidated financial statements. There were no transfers between Level 1 and Level 2 measurements in the fair value hierarchy during the three and six months ended July 4, 2010.

6

2. Discontinued Operations

Discontinued operations include results attributable to 10 Pei Wei restaurants that were closed during the fourth quarter of 2008. Income (loss) from discontinued operations includes both the historical results of operations as well as estimated and actual lease termination costs associated with the 10 closed Pei Wei restaurants.

Income (loss) from discontinued operations, net of tax is comprised of the following (in thousands):

	Three Months Ended					Six Months Ended
	July 4,		June 28,			July 4,			June 28,
	2010		2009			2010			2009
Revenues	$	—	$	—		$	—		$	—
Income (loss) from discontinued operations before income tax benefit(1)		—		(778	)		10			(848	)
Income tax benefit (expense)		—		304			(4	)		331
Income (loss) from discontinued operations, net of tax	$	—	$	(474	)	$	6		$	(517	)

⁽¹⁾ Includes lease termination charges, deferred rent write-offs upon lease termination and deferred rent amortization.

The Company continues to pursue lease termination agreements with each of the closed Pei Wei restaurants’ landlords as well as potential sub-tenant agreements. Lease termination agreements for seven of the ten locations have been executed as of July 4, 2010.

Activity associated with the lease termination accrual is summarized below (in thousands):

	July 4, 2010			June 28, 2009
Beginning balance	$	1,416		$	2,379
Cash payments		(223	)		(1,505	)
Charges		35			1,402
Ending balance	$	1,228		$	2,276

Charges include additional amounts recognized based on availability of new information, which led to updated estimates of anticipated lease termination costs for certain closed locations where the accrual recorded at the time of lease termination was insufficient. Cash payments include settlement payments as well as ongoing rent and other property-related payments. From store closure date through July 4, 2010, the Company has recognized and reported in discontinued operations a total of $4.1 million in lease termination charges for the closed Pei Wei locations. The lease termination accrual is included in accrued expenses on the consolidated balance sheets with the timing of payments uncertain.

3. Income from Continuing Operations Attributable to PFCB per Share

Basic income from continuing operations attributable to PFCB per share is computed based on the weighted average number of common shares outstanding during the period. Diluted income from continuing operations attributable to PFCB per share is computed based on the weighted average number of shares of common stock and potentially dilutive securities, which includes options, restricted stock and restricted stock units (“RSUs”) outstanding under the Company’s equity plans and employee stock purchase plan. For the three months ended July 4, 2010 and June 28, 2009, 1.0 million and 2.2 million, respectively, of the Company’s options were excluded from the calculation due to their anti-dilutive effect. For the six months ended July 4, 2010 and June 28, 2009, 1.2 million and 2.3 million, respectively, of the Company’s shares were excluded from the calculation due to their anti-dilutive effect.

The Company began paying quarterly variable cash dividends to its shareholders during the second quarter of 2010. The Company’s restricted stock awards are considered participating securities as the awards include non-forfeitable rights to dividends with respect to unvested shares and as such, must be included in the computation of earnings per share pursuant to the two-class method. Under the two-class method, a portion of net income is allocated to participating securities, and therefore is excluded from the calculation of earnings per share allocated to common shares. For the three and six months ended July 4, 2010, the calculation of basic and diluted earnings per share pursuant to the two-class method resulted in an immaterial difference from the amounts displayed in the consolidated income statements. There were no participating securities for the six months ended June 28, 2009.

7

4. Other Current Assets

Other current assets consist of the following (in thousands):

	July 4,		January 3,
	2010		2010
Current portion of deferred tax asset	$	10,049	$	11,036
Income taxes receivable		7,160		2,388
Receivables		7,527		15,752
Prepaid rent		5,531		5,508
Other		6,158		3,765
Total other current assets	$	36,425	$	38,449

5. Other Assets

Other assets consist of the following (in thousands):

	July 4,		January 3,
	2010		2010
Liquor licenses, net	$	6,776	$	6,836
Software, net		5,714		5,459
Restoration Plan investments		3,920		3,454
Receivable under loan facility(1)		1,814		—
Deposits		1,293		1,411
Other assets, net		557		763
Total other assets	$	20,074	$	17,923

⁽¹⁾ See Note 12 for further details on the receivable under the loan facility.

6. Accrued Expenses

Accrued expenses consist of the following (in thousands):

	July 4,		January 3,
	2010		2010
Accrued payroll	$	17,377	$	26,262
Accrued insurance		17,323		17,426
Sales and use tax payable		5,110		7,104
Property tax payable		3,819		3,638
Accrued rent		2,774		3,730
Derivative liability		—		471
Other accrued expenses		15,449		18,457
Total accrued expenses	$	61,852	$	77,088

8

7. Long-Term Debt

Credit Facility

The senior credit facility (“Credit Facility”) which allows for borrowings of up to $75.0 million expires on August 30, 2013 and contains customary representations, warranties, negative and affirmative covenants, including a requirement to maintain a maximum leverage ratio, as defined, of 2.5:1 and a minimum fixed charge coverage ratio, as defined, of 1.25:1, as well as customary events of default and certain default provisions that could result in acceleration of the Credit Facility. The Company was in compliance with these restrictions and conditions as of July 4, 2010 as the Company’s leverage ratio was 0.97:1 and the fixed charge coverage ratio was 2.38:1.

The Credit Facility is guaranteed by the Company’s material existing and future domestic subsidiaries. The Company repaid total outstanding borrowings of $40.0 million under the Credit Facility during the second quarter of fiscal 2010. As of July 4, 2010, the Company had $14.1 million committed for the issuance of letters of credit, which is required by insurance companies for the Company’s workers’ compensation and general liability insurance programs. Available borrowings under the Credit Facility were $60.9 million at July 4, 2010.

Interest Rate Swap

During the second quarter of fiscal 2008, the Company entered into an interest rate swap with a notional amount of $40.0 million. The purpose of this transaction was to provide a hedge against the effects of changes in interest rates on a portion of the Company’s current variable rate borrowings. The Company had designated the interest rate swap as a cash flow hedge of its exposure to variability in future cash flows attributable to interest payments on a $40.0 million tranche of floating rate debt.

Under the terms of the interest rate swap, the Company paid a fixed rate of 3.32% on the $40.0 million notional amount and received payments from its counterparty based on the 1-month LIBOR rate for a term which ended on May 20, 2010. Interest rate differentials paid or received under the swap agreement were recognized as adjustments to interest expense. The interest rate swap expired on May 20, 2010.

8. Other Liabilities

Other liabilities consist of the following (in thousands):

	July 4,		January 3,
	2010		2010
Deferred income tax liability	$	4,156	$	9,436
Deferred compensation		4,301		3,653
Performance units		4,172		2,402
Cash-settled awards		2,610		1,453
Other		1,509		1,544
Total other liabilities	$	16,748	$	18,488

9. Fair Value Measurements

The Company’s financial assets and financial liabilities measured at fair value at July 4, 2010 and January 3, 2010 are summarized below (in thousands):

			Quoted Prices in
			Active Markets
			for Identical		Significant Other		Significant
			Assets/Liabilities		Observable Inputs		Unobservable Inputs
	July 4, 2010		(Level 1)		(Level 2)		(Level 3)		Valuation Technique
Money markets	$	32,283	$	—	$	32,283	$	—	market approach
Restoration Plan investments		3,920		—		3,920		—	market approach
Total	$	36,203	$	—	$	36,203	$	—

9

				Quoted Prices in
				Active Markets
				for Identical		Significant Other			Significant
				Assets/Liabilities		Observable Inputs			Unobservable Inputs
	January 3, 2010			(Level 1)		(Level 2)			(Level 3)		Valuation Technique
Money markets	$	54,655		$	—	$	54,655		$	—	market approach
Restoration Plan investments		3,454			—		3,454			—	market approach
Interest rate swap liability		(471	)		—		(471	)		—	income approach
Total	$	57,638		$	—	$	57,638		$	—

The Company invests excess cash in money market funds and reflects these amounts within cash and cash equivalents on the consolidated balance sheet at a net value of 1:1 for each dollar invested. Money market investments held by the Company were invested primarily in government backed securities at July 4, 2010.

The Company’s Restoration Plan investments are considered trading securities and are reported at fair value based on third party broker statements. Such amounts are reflected within other assets in the consolidated balance sheets. The realized and unrealized holding gains and losses related to these investments are recorded in interest and other income (expense), net in the consolidated income statements.

The fair value of the Company’s interest rate swap was estimated using the net present value of a series of cash flows on both the fixed and floating legs of the swap and was reflected within accrued expenses in the consolidated balance sheet. These cash flows were based on yield curves which take into account the contractual terms of the derivative, including the period to maturity and market-based parameters such as interest rates and volatility. The yield curves used in the valuation model are based on published data for counterparties with an AA rating. Market practice in pricing derivatives initially assumes all counterparties have the same credit quality. The Company mitigated derivative credit risk by transacting with highly-rated counterparties. The interest rate swap expired on May 20, 2010. See Note 7 for a discussion of the Company’s interest rate swap.

10. Share-Based Compensation

The Company has granted equity-classified awards in the form of stock options, restricted stock and restricted stock units (“RSUs”), and has issued liability-classified awards in the form of performance units, cash-settled stock appreciation rights (“SARs”) and cash-settled stock-based awards (restricted cash units or “RCUs”) to certain employees and directors.

Equity-Classified Awards

Stock options were granted for a fixed number of shares with an exercise price equal to or greater than the fair value of the shares at the date of grant. Restricted stock and RSUs were granted with the fair value determined based on the Company’s closing stock price on the date of grant. Share-based compensation expense for equity-classified awards is amortized to expense over the vesting period. During the second quarter of fiscal 2010, the Company issued RSUs to members of its Board of Directors.

Liability-Classified Awards

Performance Units

The cash value of the performance units will be equal to the amount, if any, by which the Company’s final average stock price as defined in the agreements, exceeds the strike price. The total value of the performance units is subject to a maximum value of $12.50 per unit. The fair value of the performance units is remeasured at each reporting period until the awards are settled. At July 4, 2010 and June 28, 2009, the fair value per performance unit was $7.25 and $5.52, respectively, calculated using a Monte-Carlo simulation model which incorporates the historical performance, volatility and correlation of the Company’s stock price and the Russell 2000 Index. At July 4, 2010 and January 3, 2010, the recorded liability of the performance units was $4.2 million and $2.4 million, respectively. There were no performance unit awards granted during the six months ended July 4, 2010.

10

Total cumulative expense recognized for the performance units from date of grant through July 4, 2010 was $4.2 million based on the current estimated fair value of $7.25 per unit. If the value of the performance units at settlement date is $12.50, the maximum value per unit, the Company would recognize total additional share-based compensation expense of $10.8 million over the remaining term of the award agreements ending on January 1, 2012. The amount and timing of the recognition of additional expense will be dependent on the estimated fair value at each quarterly reporting date. Any increases in award fair value may not occur ratably over the remaining six quarters of the award term; therefore, share-based compensation expense related to the performance units could vary significantly in future periods.

Cash-Settled Awards

The cash value of the SARs will be based on the appreciation, if any, of the Company’s stock price on the date of settlement compared to the Company’s stock price on the date of grant, and the cash value of the RCUs will be based on the Company’s stock price on the date of settlement. The fair value of SARs is equal to the value calculated per the Black-Scholes model and the fair value of RCUs is equal to the sum of the value calculated per the Black-Scholes model and the Company’s stock price at the reporting date. The fair value of SARs and RCUs is remeasured at each reporting period until the awards are settled. At July 4, 2010 and January 3, 2010, the recorded liability of cash-settled awards was $2.6 million and $1.5 million, respectively.

SARs were granted to a member of the Board of Directors who joined the Board during the first quarter of fiscal 2010. SARs and RCUs were granted to members of the Board of Directors during the second quarter of fiscal 2009. No SARs or RCUs were granted during the second quarter of fiscal 2010.

The fair value of the SARs and RCUs was estimated using a Black-Scholes option pricing model with the following weighted average assumptions:

	Three and Six Months Ended						Three and Six Months Ended
	July 4, 2010						June 28, 2009
	RCUs			SARs			RCUs			SARs
Weighted average risk-free interest rate		0.8	%		1.4	%		3.0	%		2.3	%
Expected life of cash-settled awards (years)		2.6			4.1			9.9			4.5
Expected stock volatility		50.6	%		45.2	%		43.3	%		43.6	%
Expected dividend yield(1)		0.0	%		0.0	%		0.0	%		0.0	%

⁽¹⁾ Unvested SARs and RCUs are eligible to receive cash dividend-equivalents during the vesting period, and as such, no expected dividend yield is included in the fair value assumptions for these awards.

Share-based compensation expense for performance units, SARs and RCUs is recognized ratably over the service period with the impact of updated fair value recognized as cumulative adjustments to share-based compensation expense at the end of each reporting period.

Share-Based Compensation Expense

Share-based compensation expense from continuing operations for equity and liability-classified awards is classified as follows (in thousands):

	Three Months Ended						Six Months Ended
	July 4, 2010			June 28, 2009			July 4, 2010			June 28, 2009
Equity-classified awards:
Labor	$	32		$	88		$	77		$	191
General and administrative		1,504			1,911			2,607			3,921
Liability-classified awards:
General and administrative		1,140			731			2,957			946
Total share-based compensation(1)		2,676			2,730			5,641			5,058
Less: tax benefit		(768	)		(811	)		(1,658	)		(1,431	)
Total share-based compensation, net of tax	$	1,908		$	1,919		$	3,983		$	3,627

⁽¹⁾ Share-based compensation expense includes expense related to the cash payment of dividend equivalent units on unvested RCUs and expense related to the payment of cash dividends on unvested restricted stock awards that are not expected to ultimately vest.

11

Non-Vested Share-Based Compensation Expense

At July 4, 2010, non-vested share-based compensation for equity-classified awards, net of forfeitures totaled $2.4 million for stock options and $2.9 million for restricted stock and RSUs. This expense will be recognized over the remaining weighted average vesting period, which is approximately 1.5 years for stock options and 1.2 years for restricted stock and RSUs.

At July 4, 2010, non-vested share-based compensation for liability-classified awards (based on current fair value, which is updated each reporting period), totaled $4.5 million for performance units and $3.9 million for RCU and SAR awards. This expense will be recognized over the remaining weighted average vesting period, which is approximately 1.5 years for performance units and 2.1 years for RCU and SAR awards.

11. Segment Reporting

The Company operates primarily in the United States food-service industry and has determined that its reportable segments are those that are based on the Company’s methods of internal reporting and management structure. The Company’s reportable segments are Bistro and Pei Wei. Additionally, licensing fees related to Bistro restaurants operated by business partners pursuant to development and licensing agreements and licensing fees related to a new premium line of frozen entrées operated under a licensing agreement are reported within Shared Services and Other. There were no material amounts of revenues or transfers among reportable segments.

The following table presents information about reportable segments (in thousands):

			Shared Services
	Total		and Other			Bistro		Pei Wei
For the Three Months Ended July 4, 2010:
Revenues	$	312,838	$	1,336		$	233,365	$	78,137
Segment profit		39,044		806			30,109		8,129
Capital expenditures		11,564		1,193			8,397		1,974
Depreciation and amortization		19,335		530			14,043		4,762
For the Three Months Ended June 28, 2009:
Revenues	$	301,360	$	—		$	227,144	$	74,216
Segment profit (loss)		38,517		(489	)		31,533		7,473
Capital expenditures		12,587		341			9,494		2,752
Depreciation and amortization		18,575		489			13,646		4,440
For the Six Months Ended July 4, 2010:
Revenues	$	623,209	$	1,465		$	464,132	$	157,612
Segment profit		71,129		435			54,862		15,832
Capital expenditures		18,305		1,642			13,660		3,003
Depreciation and amortization		38,336		1,030			27,897		9,409
For the Six Months Ended June 28, 2009:
Revenues	$	611,197	$	—		$	462,285	$	148,912
Segment profit (loss)		77,640		(907	)		64,339		14,208
Capital expenditures		20,773		1,963			14,790		4,020
Depreciation and amortization		37,071		907			27,374		8,790
As of July 4, 2010:
Total assets	$	607,034	$	22,736		$	483,562	$	100,736
Goodwill		6,819		—			6,566		253
As of January 3, 2010:
Total assets	$	652,150	$	20,293		$	522,940	$	108,917
Goodwill		6,819		—			6,566		253

12

In addition to using consolidated results in evaluating the Company’s financial results, a primary measure used by executive management in assessing the performance of existing restaurant concepts is segment profitability (sometimes referred to as restaurant operating income). Segment profitability is defined as income from operations before general and administrative, preopening and partner investment expenses, but including a deduction for net income attributable to noncontrolling interests. Because preopening and partner investment expenses are associated with expansion of the Company’s business and vary in timing and magnitude, they make an accurate assessment of ongoing operations more difficult and are therefore excluded. Additionally, general and administrative expenses are only included in the Company’s consolidated financial results as these costs relate to support of both restaurant businesses and are generally not specifically identifiable to individual restaurant operations. As the Company’s expansion is funded entirely from its ongoing restaurant operations, segment profitability is one consideration when determining whether and when to open additional restaurants.

Reconciliation of Segment profit to Income from continuing operations before taxes (in thousands):

	For the Three Months Ended						For the Six Months Ended
	July 4,			June 28,			July 4,			June 28,
	2010			2009			2010			2009
Segment profit	$	39,044		$	38,517		$	71,129		$	77,640
Less: General and administrative		(19,765	)		(20,523	)		(38,818	)		(40,337	)
Less: Preopening expense		(832	)		(461	)		(965	)		(949	)
Less: Partner investment expense		135			91			124			555
Less: Interest and other income (expense), net		(665	)		(437	)		(1,080	)		(1,377	)
Add: Net income attributable to noncontrolling interests		241			288			447			658
Income from continuing operations before taxes	$	18,158		$	17,475		$	30,837		$	36,190

12. Commitments and Contingencies

The Company is engaged in various legal actions, which arise in the ordinary course of its business. The Company is also currently under examination by various taxing authorities for years not closed by the statute of limitations. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of the Company’s management, based upon the information available at this time, that the outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations, liquidity or financial condition of the Company.

During 2009, the Company entered into an agreement with FRC Balance LLC, d/b/a True Food Kitchen, to provide debt capital for the early-stage development of True Food Kitchen restaurants. The agreement provides for up to a $10.0 million loan facility to develop True Food Kitchen restaurants and can, under certain conditions, be converted by P.F. Chang’s into a majority equity position in True Food Kitchen. As of July 4, 2010, the Company had advanced $1.8 million under the loan facility to True Food Kitchen.

13. Subsequent Events

Cash Dividends

During February 2010, the Board of Directors approved the initiation of a quarterly variable cash dividend based on the Company’s desire to consistently return excess cash flow to its shareholders. The amount of the cash dividend will be computed based on 45% of the Company’s quarterly net income. Based on seasonal fluctuations in the Company’s quarterly net income, the amount of cash dividend payments, which are based on a fixed percentage of net income, may fluctuate between quarters.

Based on the Board of Directors authorization, on July 28, 2010 the Company announced a cash dividend of $0.25 per share which will be paid August 23, 2010 to all shareholders of record at the close of business on August 9, 2010. Based on shares outstanding at July 4, 2010, total dividend payments to be paid during the third quarter of fiscal 2010 will approximate $5.8 million.

Global Brand Development

In July 2010, the Company signed a development and license agreement with International Restaurant Services, Inc., a leading casual dining restaurant operator in Puerto Rico, to develop four restaurants over the next six years. The first location in Puerto Rico is scheduled to open during the first half of fiscal 2012.

13

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This information should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended January 3, 2010 contained in our 2009 Annual Report on Form 10-K.

Some of the statements in this section contain forward—looking statements, which involve risks and uncertainties. In some cases, forward-looking statements can be identified by terms such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “forecast”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this section involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include the matters listed under “Risk Factors” in Item 1A (a detailed description of which can be found under the caption “Risk Factors” in our most recently filed Form 10-K) and elsewhere in this Form 10-Q, including, but not limited to, failure of our existing or new restaurants to achieve predicted results; changes in general economic and political conditions that affect consumer spending; changes in government legislation may increase our labor costs; our dependence on the financial performance of restaurants concentrated in certain geographic areas; and intense competition in the restaurant industry. Because we cannot guarantee future results, levels of activity, performance or achievements, undue reliance should not be placed on these forward-looking statements.

Overview

We own and operate two restaurant concepts in the Asian niche: P.F. Chang’s China Bistro (“Bistro”) and Pei Wei Asian Diner (“Pei Wei”).

Bistro

As of July 4, 2010, we owned and operated 199 full service Bistro restaurants that feature a blend of high quality, Chinese-inspired cuisine and attentive service in a high energy contemporary bistro setting. P.F. Chang’s was formed in early 1996 with the acquisition of the four original Bistro restaurants and the hiring of an experienced management team. Utilizing a partnership management philosophy, we embarked on a strategic expansion of the concept targeted at major metropolitan areas throughout the United States. We own and operate all of our restaurants in the U.S. with the exception of two Bistro restaurants located in Hawaii which are operated under a joint venture arrangement in which we own a noncontrolling interest. Additionally, four international Bistro restaurants were open in Mexico and the Middle East under international development and licensing agreements as of July 4, 2010.

We intend to open four new Bistro restaurants during fiscal 2010, two of which were open by the end of the second quarter of 2010. Our Bistro restaurants typically range in size from 6,000 to 7,500 square feet, and require an average total invested capital of approximately $3.5 million to $4.0 million per restaurant (net of estimated tenant incentives). This total capitalized investment includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. We expect that our planned future restaurants will require, on average, a total cash investment per restaurant of approximately $2.5 million to $3.0 million (net of estimated tenant incentives). Preopening expenses are expected to average approximately $350,000 to $400,000 per restaurant during fiscal 2010.

Pei Wei

As of July 4, 2010, we owned and operated 167 quick casual Pei Wei restaurants that serve freshly prepared, wok-seared, contemporary pan-Asian cuisine in a relaxed, warm environment with friendly, attentive counter service and take-out flexibility. We opened our first Pei Wei restaurant in July 2000 in the Phoenix, Arizona area and have expanded the concept significantly since that time.

We intend to open two new Pei Wei restaurants during fiscal 2010, one of which was open by the end of the second quarter of 2010. Our Pei Wei restaurants are generally 2,800 to 3,400 square feet in size and require an average total invested capital of approximately $1.5 million per restaurant (net of estimated tenant incentives). This total capitalized investment cost includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. We expect that our planned future restaurants will require, on average, a total cash investment per restaurant of approximately $750,000 to $850,000 (net of estimated tenant incentives). Preopening expenses are expected to average approximately $140,000 to $160,000 per restaurant during fiscal 2010.

14

Global Brand Development

International

We are selectively pursuing international expansion of our Bistro restaurants. During fiscal 2009, we signed two development and licensing agreements with partners who will develop and operate Bistro restaurants in international markets. We also signed one development and licensing agreement with a new partner in early fiscal 2010. Our license agreements typically provide for us to receive an initial territory fee, store opening fees and ongoing royalty revenues based on a percentage of international restaurant sales. Our partners collectively expect to open five to seven restaurants during fiscal 2010.

In July 2010, we signed a development and license agreement with International Restaurant Services, Inc., a leading casual dining restaurant operator in Puerto Rico, to develop four restaurants over the next six years. The first location in Puerto Rico is scheduled to open during the first half of fiscal 2012.

We continue to engage in discussions with additional potential partners regarding expansion of the Bistro into various international markets.

Retail

During 2009, we entered into an exclusive licensing agreement with Unilever to develop and launch a new premium line of frozen Asian-style entrées in the U.S., under the P.F. Chang’s brand. During the second quarter of 2010, the new product line became available in retail outlets. We receive ongoing royalty revenues based on a percentage of product sales, with such percentages escalating over the first three years of the agreement, which we began recognizing during the second quarter of 2010.

Other Ventures

During 2009, we entered into an agreement with FRC Balance LLC, d/b/a True Food Kitchen, to provide debt capital for the early-stage development of True Food Kitchen restaurants. The agreement provides for up to a $10.0 million loan facility to develop True Food Kitchen restaurants and can, under certain conditions, be converted by us into a majority equity position in True Food Kitchen. As of July 4, 2010, we had advanced $1.8 million under the loan facility to True Food Kitchen.

Change in Partnership Structure — Pei Wei

We utilize a partnership philosophy to facilitate the development, leadership and operation of our Pei Wei restaurants. Historically, this philosophy was embodied in a traditional legal partnership structure, which included capital contributions from our partners in exchange for an ownership stake in the profits and losses of our restaurants. Effective April 2010 for new store openings, Pei Wei began employing a different structure to achieve the same goal. Our Market Partners and Regional Vice Presidents (still “partners” in the philosophical, but not legal sense) no longer have a direct ownership stake in the profits and losses of restaurants, but are instead eligible to receive monthly incentive payments based upon the profitability of the restaurants in their region, as well as participate in an incentive program that rewards improvements in the operating performance of the restaurants in their market or region. As a result of these changes, incentive payments made to the individuals participating in the new plan are classified as compensation rather than as net income attributable to noncontrolling interests. Accordingly, compensation expense is reflected in the consolidated income statement as general and administrative expense for these Pei Wei operators. Partner investment expense will no longer be recognized for new Pei Wei restaurant openings beginning in April 2010 as a result of this change. The Bistro has been operating under this structure since the beginning of fiscal 2007.

Critical Accounting Policies

Our critical accounting policies are those that require significant judgment. There have been no material changes to the critical accounting policies previously reported in our 2009 Annual Report on Form 10-K other than the change of the following.

15

Share-Based Compensation

We account for share-based compensation based on fair value measurement guidance. We use the Black-Scholes option pricing model, which requires the input of subjective assumptions, for our options and cash-settled liability awards, with the exception of performance units. These assumptions include estimating 1) expected term, 2) common stock price volatility over the expected term and 3) the number of awards that will ultimately not vest (“forfeitures”). For performance units, a Monte Carlo simulation model is used to calculate fair value. The Monte Carlo simulation model incorporates the historical performance, volatility and correlation of our stock price and the Russell 2000 Index.

The cash value of the performance units will be equal to the amount, if any, by which our final average stock price, as defined in the agreements, exceeds the strike price. The strike price will be adjusted, either up or down, based on the percentage change in the Russell 2000 Index during the performance period, as defined in the agreements, which approximates three years. The performance units were granted in February 2009, and since the grant date, the Russell 2000 Index has increased 29% while our stock has appreciated 104% over the same time period.

Total cumulative expense recognized for the performance units from date of grant through July 4, 2010 was $4.2 million based on the current estimated fair value of $7.25 per unit. If the value of the performance units at settlement date is the maximum value per unit of $12.50, we would recognize total additional share-based compensation expense of $10.8 million over the remaining term of the award agreements ending on January 1, 2012. The amount and timing of the recognition of additional expense will be dependent on the estimated fair value at each quarterly reporting date. Any increases in award fair value may not occur ratably over the remaining six quarters of the award term; therefore, share-based compensation expense related to the performance units could vary significantly in future periods.

Additionally, we use assumptions to estimate the expected forfeiture rate related to restricted stock and the cash-settled liability awards in determining the share-based compensation for these awards. Changes in these assumptions can materially affect fair value and our estimates of share-based compensation and consequently, the related amount recognized in the consolidated statements of income.

Results of Operations

The following tables set forth certain unaudited quarterly information for the three and six month periods ended July 4, 2010 and June 28, 2009, respectively. This quarterly information has been prepared on a basis consistent with the audited financial statements and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. Our quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any quarter are not necessarily indicative of results for a full fiscal year.

16

Results for the three month periods ended July 4, 2010 and June 28, 2009

Our consolidated operating results were as follows (dollars in thousands):

	Three Months Ended
				% of						% of						%
	July 4, 2010			Revenues			June 28, 2009			Revenues			Change			Change
Revenues	$	312,838			100.0	%	$	301,360			100.0	%	$	11,478			3.8	%
Costs and expenses:
Cost of sales		81,717			26.1	%		79,657			26.4	%		2,060			2.6	%
Labor		102,295			32.7	%		98,111			32.6	%		4,184			4.3	%
Operating		51,597			16.5	%		48,809			16.2	%		2,788			5.7	%
Occupancy		18,609			5.9	%		17,403			5.8	%		1,206			6.9	%
General and administrative		19,765			6.3	%		20,523			6.8	%		(758	)		(3.7	%)
Depreciation and amortization		19,335			6.2	%		18,575			6.2	%		760			4.1	%
Preopening expense		832			0.3	%		461			0.2	%		371			80.5	%
Partner investment expense		(135	)		0.0	%		(91	)		(0.0	%)		(44	)		48.4	%
Total costs and expenses		294,015			94.0	%		283,448			94.1	%		10,567			3.7	%
Income from operations		18,823			6.0	%		17,912			5.9	%		911			5.1	%
Interest and other income (expense), net		(665	)		(0.2	%)		(437	)		(0.1	%)		(228	)		52.2	%
Income from continuing operations before taxes		18,158			5.8	%		17,475			5.8	%		683			3.9	%
Provision for income taxes		(5,144	)		(1.6	%)		(5,108	)		(1.7	%)		(36	)		0.7	%
Income from continuing operations, net of tax		13,014			4.2	%		12,367			4.1	%		647			5.2	%
Loss from discontinued operations, net of tax		—			0.0	%		(474	)		(0.2	%)		474			100.0	%
Net income		13,014			4.2	%		11,893			3.9	%		1,121			9.4	%
Less: Net income attributable to noncontrolling interests		241			0.1	%		288			0.1	%		(47	)		(16.3	%)
Net income attributable to PFCB	$	12,773			4.1	%	$	11,605			3.9	%	$	1,168			10.1	%

Certain percentage amounts may not sum due to rounding.

Selected operating statistics for the Bistro were as follows (dollars in thousands):

	Three Months Ended
			% of						% of						%
	July 4, 2010		Revenues			June 28, 2009			Revenues			Change			Change
Revenues	$	233,365		100.0	%	$	227,144			100.0	%	$	6,221			2.7	%
Costs and expenses:
Cost of sales		60,914		26.1	%		59,749			26.3	%		1,165			1.9	%
Labor		76,769		32.9	%		73,286			32.3	%		3,483			4.8	%
Operating		38,183		16.4	%		36,373			16.0	%		1,810			5.0	%
Occupancy		13,254		5.7	%		12,412			5.5	%		842			6.8	%
Depreciation and amortization		14,043		6.0	%		13,646			6.0	%		397			2.9	%
Preopening expense		765		0.3	%		280			0.1	%		485			—
Partner investment expense		—		0.0	%		(20	)		0.0	%		20			100.0	%
Net income attributable to noncontrolling interests		93		0.0	%		145			0.1	%		(52	)		(35.9	%)

Percentages over 100% are not displayed.

17

Selected operating statistics for Pei Wei were as follows (dollars in thousands):

	Three Months Ended
				% of						% of						%
	July 4, 2010			Revenues			June 28, 2009			Revenues			Change			Change
Revenues	$	78,137			100.0	%	$	74,216			100.0	%	$	3,921			5.3	%
Costs and expenses:
Cost of sales		20,803			26.6	%		19,908			26.8	%		895			4.5	%
Labor		25,526			32.7	%		24,825			33.4	%		701			2.8	%
Operating		13,414			17.2	%		12,436			16.8	%		978			7.9	%
Occupancy		5,355			6.9	%		4,991			6.7	%		364			7.3	%
Depreciation and amortization		4,762			6.1	%		4,440			6.0	%		322			7.3	%
Preopening expense		67			0.1	%		181			0.2	%		(114	)		(63.0	%)
Partner investment expense		(135	)		(0.2	%)		(71	)		(0.1	%)		(64	)		90.1	%
Net income attributable to noncontrolling interests		148			0.2	%		143			0.2	%		5			3.5	%

Revenues

Our revenues are derived primarily from food and beverage sales. Each segment contributed as follows:

Bistro: The increase in revenues was primarily attributable to incremental new store revenues of $8.1 million, comprised of a full quarter of revenues from the seven new stores that opened the last three quarters of fiscal 2009 and revenues generated by the two new Bistro restaurants that opened during the first half of 2010. The increase was partially offset by a $1.9 million decrease in revenues for stores open prior to the second quarter of 2009 due to a decline in the average check, which includes the benefit of a one to two percent price increase which went into effect mid-May 2010, partially offset by an increase in overall guest traffic.

Pei Wei: The increase in revenues was primarily attributable to incremental new store revenues of $2.6 million, comprised of a full quarter of revenues from the six new stores that opened the last three quarters of fiscal 2009 and revenues generated by the one new Pei Wei restaurant that opened during the first half of 2010. The increase was also due to a $1.3 million increase in revenues for stores open prior to the second quarter of 2009 driven by an increase in overall guest traffic combined with an increase in the average check, which includes the benefit of an approximate one percent price increase which went into effect mid-April 2010.

Costs and Expenses

Cost of Sales

Cost of sales is comprised of the cost of food and beverages. Each segment contributed as follows:

Bistro: Cost of sales as a percentage of revenues decreased primarily due to the benefit of menu price increases and favorable beef pricing partially offset by the impact of greater sales discounts, including the January 2010 happy hour rollout.

Pei Wei: Cost of sales as a percentage of revenues decreased primarily due to favorable beef pricing and the net impact of product mix shifts partially offset by the impact of higher costs related to limited time offer menu items.

Labor

Labor expenses consist of restaurant management salaries, hourly staff payroll costs, other payroll-related items and imputed partner bonus expense. Imputed partner bonus expense represents the portion of restaurant-level operating results that is allocable to certain noncontrolling partners, but is presented as bonus expense for accounting purposes. Each segment contributed as follows:

Bistro: Labor expenses as a percentage of revenues increased primarily due to the impact of greater sales discounts (principally related to the January 2010 happy hour rollout), higher hourly wage rates, higher health insurance costs and higher state unemployment taxes. These increases were partially offset by the benefit of reduced workers’ compensation insurance liabilities and, to a lesser extent, improved operational efficiencies.

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Pei Wei: Labor expenses as a percentage of revenues decreased primarily due to the benefit of increased leverage on higher average weekly sales, the benefit of reduced workers’ compensation insurance liabilities and lower management incentive accruals. These decreases were partially offset by higher culinary labor costs.

Operating

Operating expenses consist primarily of various restaurant-level costs such as repairs and maintenance, utilities and marketing, certain of which are variable and may fluctuate with revenues. Also, expenditures associated with marketing programs are discretionary in nature and the timing and amount of marketing spend will vary. Each segment contributed as follows:

Bistro: Operating expenses as a percentage of revenues increased primarily due to increased marketing spend and higher utilities costs.

Pei Wei: Operating expenses as a percentage of revenues increased primarily due to increased marketing spend partially offset by the benefit of increased leverage on higher average weekly sales.

Occupancy

Occupancy costs include both fixed and variable portions of rent, common area maintenance charges, property and general liability insurance and property taxes. Each segment contributed as follows:

Bistro: Occupancy costs as a percentage of revenues increased primarily due to higher general liability costs and, to a lesser extent, the impact of decreased leverage on lower average weekly sales.

Pei Wei: Occupancy costs as a percentage of revenues increased primarily due to higher property tax expense and, to a lesser extent, higher general liability insurance costs. These increases were offset by the benefit of increased leverage on higher average weekly sales.

General and Administrative

General and administrative expenses are comprised of costs associated with corporate and administrative functions that support restaurant development and operations and provide infrastructure to support future growth including, but not limited to, management and staff compensation, employee benefits, travel, legal and professional fees, technology and market research. Realized and unrealized holding gains (losses) related to investments in the Restoration Plan, a nonqualified deferred compensation plan, are included within general and administrative expense, with a corresponding offset in interest and other income (expense), net.

Consolidated general and administrative costs decreased primarily due to lower compensation expense resulting from unrealized holding losses associated with investments in the Restoration Plan, lower management salaries due to lower headcount and lower franchise tax expense. These decreases were partially offset by higher health insurance costs.

Depreciation and Amortization

Depreciation and amortization expenses include the depreciation of fixed assets, gains and losses on disposal of assets and the amortization of intangible assets, software and non-transferable liquor license fees. Each segment contributed as follows:

Bistro: Depreciation and amortization increased primarily due to additional depreciation on restaurants that opened during the last three quarters of fiscal 2009 and the first half of 2010. As a percentage of revenues, depreciation and amortization remained consistent with prior year primarily due to the impact of decreased leverage on lower average weekly sales and an increase in current year retirements offset by smallwares assets whose costs have been fully expensed.

Pei Wei: Depreciation and amortization increased primarily due to additional depreciation on restaurants that opened during the last three quarters of fiscal 2009 and the first half of 2010. As a percentage of revenues, depreciation and amortization increased primarily due to additional depreciation related to new digital menu boards installed during fiscal 2009. These increases were partially offset by smallwares assets whose costs have been fully expensed and, to a lesser extent, the benefit of increased leverage on higher average weekly sales.

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Preopening Expense

Preopening expenses, which are expensed as incurred, consist of expenses incurred prior to opening a new restaurant and are comprised principally of manager salaries, employee payroll and related training costs. Preopening expenses also include straight-line rent expense for the period between the possession date of leased premises and the restaurant opening date. Each segment contributed as follows:

Bistro: Preopening expense increased primarily due to the impact of two new restaurant openings during the second quarter of 2010 compared to no new restaurant openings during the second quarter of 2009, partially offset by the timing of expenses for new restaurant openings scheduled for the remainder of 2010 compared to fiscal 2009.

Pei Wei: Preopening expense decreased primarily due to the timing of expenses for new restaurant openings scheduled for fiscal 2010 compared to fiscal 2009.

Partner Investment Expense

Partner investment expense represents the difference between the imputed fair value of noncontrolling interests at the time our partners invest in our restaurants and our partners’ cash contributions for those ownership interests. Additionally, for those interests that are bought out prior to the restaurant reaching maturity (typically after five years of operation), partner investment expense includes a reversal of previously recognized expense for the difference between the fair value of the noncontrolling interest at inception date and the fair value at the date of repurchase, to the extent that the former is greater. Each segment contributed as follows:

Bistro: All partner investment expense activity for the Bistro is related to early buyouts of noncontrolling interests. The change in partner investment expense resulted from having no early buyouts of noncontrolling interests during the second quarter of 2010 compared to the second quarter of 2009.

Pei Wei: All partner investment expense activity for Pei Wei is related to the impact of early buyouts of noncontrolling interests during the second quarter of 2010 compared to the second quarter of 2009.

Interest and Other Income (Expense), Net

Interest expense primarily consists of interest costs in excess of amounts capitalized related to our outstanding credit line and other borrowings, as well as accretion expense related to our conditional asset retirement obligations. Interest income earned primarily relates to interest-bearing overnight deposits. Realized and unrealized holding gains (losses) related to investments in the Restoration Plan are included within other income (expense), with a corresponding offset in general and administrative expense.

The change in consolidated interest and other income (expense), net was primarily due to $0.4 million of unrealized holding losses during the current year compared to $0.3 million of unrealized holding gains in the prior year associated with investments in the Restoration Plan. Additionally, lower interest expense resulting from the repayment of the entire $40.0 million in outstanding credit line borrowings during the second quarter of 2010 contributed to the change.

Provision for Income Taxes

Our effective tax rate from continuing operations, including discrete items and deduction for noncontrolling interests, was 28.7% for the second quarter of 2010 compared to 29.7% for the second quarter of 2009. The income tax rate for both fiscal 2010 and fiscal 2009 differed from the expected provision for income taxes, which is derived by applying the statutory income tax rate, primarily as a result of FICA tip credits. Our effective tax rate for 2010 is expected to be higher than our historic rate due to the impact of income from continuing operations from our non-tipped concept as well as higher anticipated income from operations. Because there are no tipped employees at Pei Wei, as Pei Wei contributes more net income, and if Bistro’s income from operations grows at a rate greater than revenue growth, the impact of Bistro’s tip credit on the company’s effective tax rate will continue to decrease.

Management has evaluated all positive and negative evidence concerning the realizability of deferred tax assets and has determined that, with the exception of a small amount of state net operating losses, we will recognize sufficient future taxable income to realize the benefit of our deferred tax assets.

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Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests represents the portion of our net income which is attributable to the collective ownership interests of our noncontrolling partners. In certain of our restaurants, we employ a partnership management structure whereby we have entered into a series of partnership agreements with our regional managers, certain of our general managers and certain of our executive chefs. Each segment contributed as follows:

Bistro: The change in net income attributable to noncontrolling interests was primarily due to the full year impact of noncontrolling interest buyouts that occurred during fiscal 2009 and, to a lesser extent, the impact of noncontrolling interest buyouts occurring during fiscal 2010. These buyouts reduced the number of noncontrolling interests from 40 at the beginning of fiscal 2009 to 18 as of July 4, 2010.

Pei Wei: The change in net income attributable to noncontrolling interests was primarily due to the impact of 91 noncontrolling interest buyouts occurring since the beginning of fiscal 2009 offset by the impact of higher restaurant net income.

Results for the six month periods ended July 4, 2010 and June 28, 2009

Our consolidated operating results were as follows (dollars in thousands):

	Six Months Ended
				% of						% of
	July 4, 2010			Revenues			June 28, 2009			Revenues			Change			% Change
Revenues	$	623,209			100.0	%	$	611,197			100.0	%	$	12,012			2.0	%
Costs and expenses:
Cost of sales		165,730			26.6	%		162,729			26.6	%		3,001			1.8	%
Labor		206,770			33.2	%		198,818			32.5	%		7,952			4.0	%
Operating		104,350			16.7	%		99,500			16.3	%		4,850			4.9	%
Occupancy		36,447			5.8	%		34,781			5.7	%		1,666			4.8	%
General and administrative		38,818			6.2	%		40,337			6.6	%		(1,519	)		(3.8	%)
Depreciation and amortization		38,336			6.2	%		37,071			6.1	%		1,265			3.4	%
Preopening expense		965			0.2	%		949			0.2	%		16			1.7	%
Partner investment expense		(124	)		0.0	%		(555	)		(0.1	%)		431			(77.7	%)
Total costs and expenses		591,292			94.9	%		573,630			93.9	%		17,662			3.1	%
Income from operations		31,917			5.1	%		37,567			6.1	%		(5,650	)		(15.0	%)
Interest and other income (expense), net		(1,080	)		(0.2	%)		(1,377	)		(0.2	%)		297			(21.6	%)
Income from continuing operations before taxes		30,837			4.9	%		36,190			5.9	%		(5,353	)		(14.8	%)
Provision for income taxes		(8,932	)		(1.4	%)		(10,061	)		(1.6	%)		1,129			(11.2	%)
Income from continuing operations, net of tax		21,905			3.5	%		26,129			4.3	%		(4,224	)		(16.2	%)
Income (loss) from discontinued operations, net of tax		6			0.0	%		(517	)		(0.1	%)		523			—
Net income		21,911			3.5	%		25,612			4.2	%		(3,701	)		(14.5	%)
Less: Net income attributable to noncontrolling interests		447			0.1	%		658			0.1	%		(211	)		(32.1	%)
Net income attributable to PFCB	$	21,464			3.4	%	$	24,954			4.1	%	$	(3,490	)		(14.0	%)

Certain percentage amounts may not sum due to rounding. Percentages over 100% are not displayed.

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Selected operating statistics for the Bistro were as follows (dollars in thousands):

	Six Months Ended
			% of						% of
	July 4, 2010		Revenues			June 28, 2009			Revenues			Change			% Change
Revenues	$	464,132		100.0	%	$	462,285			100.0	%	$	1,847			0.4	%
Costs and expenses:
Cost of sales		123,625		26.6	%		122,712			26.5	%		913			0.7	%
Labor		154,961		33.4	%		149,337			32.3	%		5,624			3.8	%
Operating		76,729		16.5	%		73,346			15.9	%		3,383			4.6	%
Occupancy		25,894		5.6	%		24,853			5.4	%		1,041			4.2	%
Depreciation and amortization		27,897		6.0	%		27,374			5.9	%		523			1.9	%
Preopening expense		791		0.2	%		574			0.1	%		217			37.8	%
Partner investment expense		—		0.0	%		(168	)		(0.0	%)		168			100.0	%
Net income attributable to noncontrolling interests		164		0.0	%		324			0.1	%		(160	)		(49.4	%)

Selected operating statistics for Pei Wei were as follows (dollars in thousands):

	Six Months Ended
				% of						% of
	July 4, 2010			Revenues			June 28, 2009			Revenues			Change			% Change
Revenues	$	157,612			100.0	%	$	148,912			100.0	%	$	8,700			5.8	%
Costs and expenses:
Cost of sales		42,105			26.7	%		40,017			26.9	%		2,088			5.2	%
Labor		51,809			32.9	%		49,481			33.2	%		2,328			4.7	%
Operating		27,621			17.5	%		26,154			17.6	%		1,467			5.6	%
Occupancy		10,553			6.7	%		9,928			6.7	%		625			6.3	%
Depreciation and amortization		9,409			6.0	%		8,790			5.9	%		619			7.0	%
Preopening expense		174			0.1	%		375			0.3	%		(201	)		(53.6	%)
Partner investment expense		(124	)		(0.1	%)		(387	)		(0.3	%)		263			(68.0	%)
Net income attributable to noncontrolling interests		283			0.2	%		334			0.2	%		(51	)		(15.3	%)

Revenues

Each segment contributed as follows:

Bistro: The increase in revenues was primarily attributable to incremental new store revenues of $16.2 million, comprised of a full six months of revenues from the seven new stores that opened the last three quarters of fiscal 2009 and revenues generated by the two new Bistro restaurants that opened during the first half of fiscal 2010. The increase was partially offset by a $14.4 million decrease in revenues for stores open prior to the second quarter of 2009 due to a decline in the average check, which includes the benefit of a one to two percent price increase which went into effect mid-May 2010, partially offset by an increase in overall guest traffic.

Pei Wei: The increase in revenues was primarily attributable to incremental new store revenues of $5.9 million, comprised of a full six months of revenues from the six new stores that opened the last three quarters of fiscal 2009 and revenues generated by the one new Pei Wei restaurant that opened during the first half of fiscal 2010. The increase was also due to a $2.8 million increase in revenues for stores open prior to the second quarter of 2009 driven by an increase in overall guest traffic combined with an increase in the average check, which includes the benefit of approximately a one percent price increase which went into effect mid-April 2010.

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Costs and Expenses

Cost of Sales

Each segment contributed as follows:

Bistro: Cost of sales as a percentage of revenues increased primarily due to the impact of greater sales discounts, including the January 2010 happy hour rollout, partially offset by the benefit of menu price increases and favorable beef pricing.

Pei Wei: Cost of sales as a percentage of revenues decreased slightly primarily due to favorable beef pricing partially offset by the impact of higher costs related to limited time offer menu items.

Labor

Each segment contributed as follows:

Bistro: Labor expenses as a percentage of revenues increased primarily due to the impact of greater sales discounts and additional hospitality labor costs (principally related to the January 2010 happy hour rollout), higher hourly wage rates, higher state unemployment taxes and higher health insurance costs. These increases were partially offset by lower management incentive costs and the benefit of reduced workers’ compensation insurance liabilities.

Pei Wei: Labor expenses as a percentage of revenues decreased primarily due to lower manager salaries resulting from the benefit of increased leverage on higher average weekly sales, the benefit of reduced workers’ compensation insurance liabilities and lower management incentive accruals. These decreases were partially offset by higher culinary labor costs and higher state unemployment taxes.

Operating

Each segment contributed as follows:

Bistro: Operating expenses as a percentage of revenues increased primarily due to increased marketing spend, the impact of decreased leverage on lower average weekly sales and higher menu printing costs.

Pei Wei: Operating expenses as a percentage of revenues decreased slightly primarily due to the benefit of increased leverage on higher average weekly sales and lower restaurant supplies costs. These decreases were partially offset by increased marketing spend.

Occupancy

Each segment contributed as follows:

Bistro: Occupancy costs as a percentage of revenues increased primarily due to the impact of decreased leverage on lower average weekly sales.

Pei Wei: Occupancy costs as a percentage of revenues remained consistent primarily due to an increase in property tax expense partially offset by the impact of increased leverage on higher average weekly sales.

General and Administrative

Consolidated general and administrative costs decreased primarily due to lower management salaries and incentive accruals, and, to a lesser extent, lower franchise tax expense, lower legal costs and lower compensation expense resulting from unrealized holding losses associated with investments in the Restoration Plan. These decreases were partially offset by higher share-based compensation expense principally resulting from our liability-classified awards and higher health insurance costs.

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Depreciation and Amortization

Each segment contributed as follows:

Bistro: Depreciation and amortization increased primarily due to additional depreciation on restaurants that opened during the last three quarters of fiscal 2009 and the first half of 2010. As a percentage of revenues, depreciation and amortization increased primarily due to the impact of decreased leverage on lower average weekly sales partially offset by smallwares assets whose costs have been fully expensed.

Pei Wei: Depreciation and amortization increased primarily due to additional depreciation on restaurants that opened during the last three quarters of fiscal 2009 and the first half of 2010. As a percentage of revenues, depreciation and amortization increased primarily due to additional depreciation related to new digital menu boards installed during fiscal 2009. These increases were partially offset by a decrease due to smallwares assets whose costs have been fully expensed and, to a lesser extent, the benefit of increased leverage on higher average weekly sales.

Preopening Expense

Each segment contributed as follows:

Bistro: Preopening expense increased primarily due to the impact of two new restaurant openings during the first half of 2010 compared to one new restaurant opening during the first half of 2009, partially offset by the timing of expenses for new restaurant openings scheduled for the remainder of 2010 compared to fiscal 2009.

Pei Wei: Preopening expense decreased primarily due to the impact of one new restaurant opening during the first half of 2010 compared to two new restaurant openings during the first half of 2009, and, to a lesser extent, the timing of expenses for new restaurant openings scheduled for the remainder of 2010 compared to fiscal 2009.

Partner Investment Expense

Each segment contributed as follows:

Bistro: All partner investment expense activity for the Bistro is related to early buyouts of noncontrolling interests. The change in partner investment expense resulted from having fewer early buyouts of noncontrolling interests during the first half of 2010 compared to the first half of 2009.

Pei Wei: Partner investment expense increased primarily due to the impact of fewer early buyouts during the first half of 2010 compared to the first half of 2009.

Interest and Other Income (Expense), Net

The change in consolidated interest and other income (expense), net was primarily due to lower interest expense resulting from the repayment of the entire $40.0 million in outstanding credit line borrowings during the second quarter of 2010. Additionally, $0.2 million of unrealized holding losses during the current year compared to $0.2 million of unrealized holding gains in the prior year associated with investments in the Restoration Plan contributed to the change.

Provision for Income Taxes

Our effective tax rate from continuing operations, including discrete items and deduction for noncontrolling interests, was 29.4% for the first half of 2010 compared to 28.3% for the first half of 2009. The income tax rate for both fiscal 2010 and fiscal 2009 differed from the expected provision for income taxes, which is derived by applying the statutory income tax rate, primarily as a result of FICA tip credits. Our effective tax rate for 2010 is expected to be higher than our historic rate due to the impact of income from continuing operations from our non-tipped concept as well as higher anticipated income from operations. Because there are no tipped employees at Pei Wei, as Pei Wei contributes more net income, and if Bistro’s income from operations grows at a rate greater than revenue growth, the impact of Bistro’s tip credit on the company’s effective tax rate will continue to decrease.

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Management has evaluated all positive and negative evidence concerning the realizability of deferred tax assets and has determined that, with the exception of a small amount of state net operating losses, we will recognize sufficient future taxable income to realize the benefit of our deferred tax assets.

Net Income Attributable to Noncontrolling Interests

Each segment contributed as follows:

Bistro: The change in net income attributable to noncontrolling interests was primarily due to the full year impact of noncontrolling interest buyouts that occurred during fiscal 2009 and, to a lesser extent, the impact of noncontrolling interest buyouts occurring during fiscal 2010. These buyouts reduced the number of noncontrolling interests from 40 at the beginning of fiscal 2009 to 18 as of July 4, 2010.

Pei Wei: The change in net income attributable to noncontrolling interests was primarily due to the impact of 91 noncontrolling interest buyouts occurring since the beginning of fiscal 2009 offset by the impact of higher restaurant net income.

Liquidity and Capital Resources

Cash Flow

Our primary sources of liquidity are cash provided by operations and borrowings under our credit facility. Historically, our need for capital resources has been driven by our construction of new restaurants. More recently, our need for capital resources has also been driven by repayments of long-term debt and repurchases of our common stock.

The following table presents a summary of our cash flows for the six months ended July 4, 2010 and June 28, 2009 (in thousands):

	July 4, 2010			June 28, 2009
Net cash provided by operating activities	$	37,779		$	78,865
Net cash used in investing activities		(20,172	)		(20,870	)
Net cash used in financing activities		(42,848	)		(67,484	)
Net decrease in cash and cash equivalents	$	(25,241	)	$	(9,489	)

Operating Activities

Our funding requirements since inception have been met through sales of equity securities, debt financing and cash flows from operations. Net cash provided by operating activities exceeded net income for the periods shown principally due to the effect of depreciation and amortization, a net decrease in operating liabilities in the current year and a net increase in operating assets and liabilities in the prior year, share-based compensation expense as well as lease termination charges. The change in operating activities is primarily due to cash paid for income taxes, timing of rent payments, collection of tenant incentives due from landlords and lower net income.

Investing Activities

We have historically used cash primarily to fund the development and construction of new restaurants. Investment activities were primarily related to capital expenditures of $18.3 million and $20.8 million during the first half of fiscal years 2010 and 2009, respectively, and receivable under loan facility to True Food Kitchen of $1.8 million during the first half of fiscal year 2010. Capital expenditures were relatively lower compared to the prior year primarily due to the number of future restaurant openings in the third quarter (two future restaurants during the third quarter of 2010 compared to five new restaurants during the third quarter of 2009).

We intend to open four new Bistro restaurants and two new Pei Wei restaurants in fiscal year 2010, of which two Bistros and one Pei Wei restaurant were open by the end of the second quarter of 2010. We expect that our planned future Bistro restaurants will require, on average, a total cash investment per restaurant of approximately $2.5 million to $3.0 million (net of estimated tenant incentives). We expect to spend approximately $350,000 to $400,000 per restaurant for preopening costs. Total cash investment per each Pei Wei restaurant is expected to average $750,000 to $850,000 (net of estimated tenant incentives) and we expect to spend $140,000 to $160,000 per restaurant for preopening costs. We expect total gross capital expenditures for fiscal 2010 to approximate $30.0 million to $40.0 million ($25.0 million to $35.0 million, net of tenant incentives).

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Financing Activities

Financing activities during the first half of fiscal 2010 and 2009 included $41.0 million and $44.9 million, respectively, in debt repayments and $11.1 million and $19.6 million, respectively, in repurchases of common stock. Additionally, financing activities included proceeds from stock options exercised and employee stock purchases of $12.8 million and $1.3 million during the first half of fiscal 2010 and 2009, respectively, and payment of cash dividends totaling $4.0 million during the first half of fiscal year 2010. Financing activities also included purchases of noncontrolling interests, distributions to noncontrolling interest partners, and the tax benefit from share-based compensation.

Future Capital Requirements

Our capital requirements, including development costs related to the opening of additional restaurants, have historically been significant. Our future capital requirements and the adequacy of our available funds will depend on many factors, including the operating performance of our restaurants, the pace of expansion, real estate markets, site locations, the nature of the arrangements negotiated with landlords and any potential repurchases of our common stock.

For fiscal 2010, we believe that our cash flow from operations will significantly exceed our projected capital requirements. As a result, we plan to continue evaluating other uses of capital, including, but not limited to cash dividends and repurchases of our common stock.

In the longer term, in the unlikely event that additional capital is required, we may seek to raise such capital through public or private equity or debt financing. Future capital funding transactions may result in dilution to current shareholders. We cannot ensure that such capital will be available on favorable terms, if at all.

Credit Facility

The senior credit facility (“Credit Facility”) which allows for borrowings of up to $75.0 million expires on August 30, 2013 and contains customary representations, warranties, negative and affirmative covenants, including a requirement to maintain a maximum leverage ratio, as defined, of 2.5:1 and a minimum fixed charge coverage ratio, as defined, of 1.25:1, as well as customary events of default and certain default provisions that could result in acceleration of the Credit Facility. We were in compliance with these restrictions and conditions as of July 4, 2010 as the leverage ratio was 0.97:1 and the fixed charge coverage ratio was 2.38:1.

During the second quarter of fiscal 2010, we repaid total outstanding borrowings of $40.0 million under the Credit Facility and currently have $14.1 million committed for the issuance of letters of credit, which is required by insurance companies for our workers’ compensation and general liability insurance programs. Available borrowings under the Credit Facility were $60.9 million at July 4, 2010.

Cash Dividends

During February 2010, the Board of Directors approved the initiation of a quarterly variable cash dividend based on our desire to consistently return excess cash flow to our shareholders. The amount of the cash dividend will be computed based on 45% of our quarterly net income and is expected to total approximately $0.90 per share related to fiscal 2010. Based on seasonal fluctuations in quarterly net income, the amount of cash dividend payments, which are based on a fixed percentage of net income, may fluctuate between quarters.

Based on the Board of Directors authorization, on July 28, 2010 we announced a cash dividend of $0.25 per share which will be paid August 23, 2010 to all shareholders of record at the close of business on August 9, 2010. Based on shares outstanding at July 4, 2010, total dividend payments to be paid during the third quarter of fiscal 2010 will approximate $5.8 million.

Share Repurchase Program

Under share repurchase programs authorized by our Board of Directors, we have repurchased a total of 5.3 million shares of our common stock for $157.2 million at an average price of $29.56 since July 2006. Included in this total are 0.3 million shares of our common stock repurchased during the first half of 2010 for $11.1 million at an average price of $44.14. At July 4, 2010, there remains $89.1 million available under our current share repurchase authorization of $100.0 million, which expires December 2011.

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Purchases of Noncontrolling Interests

As of July 4, 2010, there were 37 partners within our partnership system representing 125 partnership interests. During the first half of fiscal 2010, we had the opportunity to purchase four noncontrolling interests which had reached the five-year threshold period during the year, as well as 14 additional noncontrolling interests which (i) had reached the end of their initial five-year term in prior years (ii) related to partners who left the Company prior to the initial five-year term or (iii) related to partners who requested an early buyout of their interest. We purchased these 18 noncontrolling interests in their entirety for a total of $0.6 million, all of which was paid in cash.

During the remainder of fiscal 2010, we will have the opportunity to purchase seven additional noncontrolling interests which will reach their five-year anniversary. If all of those interests are purchased, the total purchase price will approximate less than $1.0 million based upon the estimated fair value of the respective interests at July 4, 2010.

New Accounting Standards

See Recent Accounting Literature section of Note 1 to our consolidated financial statements for a summary of new accounting standards.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk primarily from changes in commodities prices as well as fluctuations in the fair value of our cash-settled awards.

Commodities Prices

We purchase certain commodities such as beef, pork, poultry, seafood and produce. These commodities are generally purchased based upon market prices established with vendors. These purchase arrangements may contain contractual features that fix the price paid for certain commodities. Historically, we have not used financial instruments to hedge commodity prices because these purchase arrangements help control the ultimate cost paid and any significant commodity price increases have historically been relatively short-term in nature.

Cash-Settled Awards

We issued cash-settled awards during fiscal 2009 and fiscal 2010, including performance units, cash-settled stock appreciation rights and cash-settled stock-based awards. The fair value of these awards is remeasured at each reporting period until the awards are settled and is affected by market changes in our stock price and, in the case of performance units, the relative performance of our stock price to the performance of the Russell 2000 Index. Fair value fluctuations are recognized as cumulative adjustments to share-based compensation expense. See Note 10 to our consolidated financial statements for further discussion of the fair value calculations and fluctuations of our cash-settled awards.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including the Co-CEOs and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Co-CEOs and CFO concluded that our disclosure controls and procedures were effective as of July 4, 2010. These conclusions were communicated to the Audit Committee.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

27

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

Risks that could have a negative impact on our business, revenues and performance results include risks associated with the following: failure of our existing or new restaurants to achieve expected results; changes in general economic and political conditions that affect consumer spending; changes in government legislation that may increase labor costs; the dependency of sales concentrated in certain geographic areas or generated by corporate spending; intense competition in the restaurant industry; Global Brand Development initiatives that may impact our brand; damage to our brands or reputation; litigation; adverse public or medical opinions about the health effects of consuming our products; failure to comply with governmental regulations; changes in food costs; the inability to retain key personnel; development is critical to our long-term success; federal, state and local tax rules; fluctuating insurance requirements and costs; marketing programs may not be successful; potential labor shortages that may delay planned openings; the inability to develop and construct our restaurants within projected budgets and time periods; the seasonality of our business.

A more detailed description of each of these risk factors can be found under the caption “Risk Factors” in our most recent Form 10-K, filed on February 17, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Under share repurchase programs authorized by our Board of Directors, we have repurchased a total of 5.3 million shares of our common stock for $157.2 million at an average price of $29.56 since July 2006. Included in this total are 0.3 million shares of our common stock repurchased during the first half of 2010 for $11.1 million at an average price of $44.14. At July 4, 2010, there remains $89.1 million available under our current share repurchase authorization of $100.0 million, which expires December 2011.

The following table sets forth our share repurchases of common stock during each period in the second quarter of fiscal 2010:

	Total				Total Number of Shares
	Number of		Average Price		Purchased as Part of		Maximum Dollar Value of Shares
	Shares		Paid per		Publicly Announced		that May Yet Be Purchased
Period	Purchased		Share		Programs		Under the Programs
April 5, 2010 - May 9, 2010		51,240	$	45.65		51,240	$	95,822,890
May 10, 2010 - June 6, 2010		46,900	$	43.53		46,900	$	93,781,333
June 7, 2010 - July 4, 2010		105,500	$	44.13		105,500	$	89,125,618
Total		203,640				203,640	$	89,125,618

Item 3. Defaults Upon Senior Securities

None

Item 4. (Removed and Reserved)

Item 5. Other Information

None

28

Item 6. Exhibits

Exhibit
Number	Description Document
3(i)(1)	Amended and Restated Certificate of Incorporation.
3(ii)(2)	Amended and Restated Bylaws.
4.1(3)	Specimen Common Stock Certificate.
4.2(3)	Amended and Restated Registration Rights Agreement dated May 1, 1997.
31.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
31.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Robert T. Vivian.
31.3	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Mark D. Mumford.
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Robert T. Vivian.
32.3	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Mark D. Mumford.

(1)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on April 25, 2002.
(2)	Incorporated by reference to the Registrant’s Form 8-K filed on August 14, 2009.
(3)	Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-59749).

29

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on July 28, 2010.

P.F. CHANG’S CHINA BISTRO, INC.
By:	/s/ RICHARD L. FEDERICO
	Richard L. Federico
	Chairman and Co-Chief Executive Officer
By:	/s/ ROBERT T. VIVIAN
	Robert T. Vivian
	Co-Chief Executive Officer
By:	/s/ MARK D. MUMFORD
	Mark D. Mumford
	Chief Financial Officer

Date: July 28, 2010

30

INDEX TO EXHIBITS

Exhibit
Number	Description Document
3(i)(1)	Amended and Restated Certificate of Incorporation.
3(ii)(2)	Amended and Restated Bylaws.
4.1(3)	Specimen Common Stock Certificate.
4.2(3)	Amended and Restated Registration Rights Agreement dated May 1, 1997.
31.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
31.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Robert T. Vivian.
31.3	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Mark D. Mumford.
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Robert T. Vivian.
32.3	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Mark D. Mumford.

(1)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on April 25, 2002.
(2)	Incorporated by reference to the Registrant’s Form 8-K filed on August 14, 2009.
(3)	Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-59749).

31

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Richard L. Federico, certify that:

1. I have reviewed this quarterly report on Form 10-Q of P.F. Chang’s China Bistro, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting;

By:	/s/ RICHARD L. FEDERICO
	Richard L. Federico
	Chairman and Co-Chief Executive Officer

Date: July 28, 2010

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Robert T. Vivian, certify that:

1. I have reviewed this quarterly report on Form 10-Q of P.F. Chang’s China Bistro, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting;

By:	/s/ ROBERT T. VIVIAN
	Robert T. Vivian
	Co-Chief Executive Officer

Date: July 28, 2010

EX-31.3

Exhibit 31.3

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Mark D. Mumford, certify that:

1. I have reviewed this quarterly report on Form 10-Q of P.F. Chang’s China Bistro, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of the internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting;

By:	/s/ MARK D. MUMFORD
	Mark D. Mumford
	Chief Financial Officer

Date: July 28, 2010

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

In connection with the Quarterly Report of P.F. Chang’s on Form 10-Q for the quarter ended July 4, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Rick L. Federico, Co-Chief Executive Officer of P.F. Chang’s China Bistro, Inc. (the “Registrant”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

July 28, 2010	/s/ RICHARD L. FEDERICO
	Richard L. Federico
	Chairman & Co-Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

In connection with the Quarterly Report of P.F. Chang’s on Form 10-Q for the quarter ended July 4, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Robert T. Vivian, Co-Chief Executive Officer of P.F. Chang’s China Bistro, Inc. (the “Registrant”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

July 28, 2010	/s/ ROBERT T. VIVIAN
	Robert T. Vivian
	Co-Chief Executive Officer

EX-32.3

EXHIBIT 32.3

CERTIFICATION OF CHIEF FINANCIAL OFFICER

In connection with the Quarterly Report of P.F. Chang’s on Form 10-Q for the quarter ended July 4, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Mark D. Mumford, Chief Financial Officer of P.F. Chang’s China Bistro, Inc. (the “Registrant”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

July 28, 2010	/s/ MARK D. MUMFORD
	Mark D. Mumford
	Chief Financial Officer