Filed by Bowne Pure Compliance

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 1, 2007


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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o

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 1, 2007, there were 25,805,649 outstanding shares of the registrant’s Common Stock.

PART I
FINANCIAL INFORMATION


Item 1.		*Unaudited Consolidated Financial Statements*

P.F. CHANG’S CHINA BISTRO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)


	July 1,			December 31,
	2007			2006
	(Unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	9,469		$	31,589
Inventories		4,349			4,232
Prepaids and other current assets		24,373			28,995

Total current assets		38,191			64,816
Property and equipment, net		467,324			421,770
Deferred income tax assets		1,749			—
Goodwill		6,819			6,819
Intangible assets, net		20,939			12,644
Other assets		9,440			7,996

Total assets	$	544,462		$	514,045


LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	11,902		$	15,255
Construction payable		14,526			9,075
Accrued expenses		58,302			55,848
Unearned revenue		13,254			18,226
Current portion of long-term debt, including $3,289 and $3,542 due to related parties at July 1, 2007 and December 31, 2006, respectively		6,415			5,487

Total current liabilities		104,399			103,891
Long-term debt, including $3,015 and $588 due to related parties at July 1, 2007 and December 31, 2006 respectively		14,779			13,723
Lease obligation		79,316			71,682
Other liabilities		1,326			1,909
Minority interests		20,334			33,315
Commitments and contingencies (Note 9)		—			—
Common stockholders’ equity:
Common stock, $0.001 par value, 40,000,000 shares authorized: 25,805,649 shares and 25,373,019 shares issued and outstanding at July 1, 2007 and December 31, 2006, respectively		27			27
Additional paid-in capital		189,142			174,101
Treasury stock, at cost, 1,397,261 shares outstanding at July 1, 2007 and December 31, 2006, respectively		(46,373	)		(46,373	)
Retained earnings		181,512			161,770

Total common stockholders’ equity		324,308			289,525

Total liabilities and common stockholders’ equity	$	544,462		$	514,045

See accompanying notes to unaudited consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


	Three Months Ended						Six Months Ended
	July 1,			July 2,			July 1,			July 2,
	2007			2006			2007			2006
	(In thousands, except per share amounts)

Revenues	$	267,409		$	225,981		$	531,815		$	454,594
Costs and expenses:
Cost of sales		73,011			61,285			145,926			124,725
Labor		90,665			75,380			179,899			152,317
Operating		42,436			36,210			83,630			71,051
Occupancy		15,615			12,725			30,523			25,218
General and administrative		15,806			14,037			32,528			27,289
Depreciation and amortization		13,606			10,565			26,285			20,920
Preopening expense		3,296			2,817			5,836			4,511
Partner investment expense		(468	)		925			(1,869	)		1,125

Total costs and expenses		253,967			213,944			502,758			427,156

Income from operations		13,442			12,037			29,057			27,438
Interest and other income, net		179			568			522			1,060

Income before minority interest and provision for income taxes		13,621			12,605			29,579			28,498
Minority interest		(1,121	)		(2,033	)		(2,768	)		(4,055	)

Income before provision for income taxes		12,500			10,572			26,811			24,443
Provision for income taxes		(3,223	)		(2,483	)		(7,069	)		(6,541	)

Net income	$	9,277		$	8,089		$	19,742		$	17,902


Net income per share:
Basic	$	0.36		$	0.30		$	0.77		$	0.68

Diluted	$	0.36		$	0.30		$	0.76		$	0.66


Weighted average shares used in computation:
Basic		25,708			26,546			25,598			26,516

Diluted		26,129			27,258			26,088			27,249

See accompanying notes to unaudited consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Six Months Ended
	July 1,			July 2,
	2007			2006
	(In thousands)
Operating Activities:
Net income	$	19,742		$	17,902
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		26,285			20,920
Equity based compensation		4,797			4,751
Deferred income taxes		(811	)		(4,219	)
Partner investment expense		(1,869	)		1,125
Partner bonus expense, imputed		669			959
Tax benefit from disqualifying stock option dispositions credited to equity		(4,136	)		(1,365	)
Minority interest		2,768			4,055
Other		(25	)		—
Changes in operating assets and liabilities:
Inventories		(117	)		(158	)
Prepaids and other current assets		7,064			3,082
Other assets		(1,774	)		(326	)
Accounts payable		(3,353	)		(4,086	)
Accrued expenses		2,454			5,334
Lease obligation		7,711			3,224
Unearned revenue		(4,972	)		(4,597	)
Other liabilities		57			—

Net cash provided by operating activities		54,490			46,601

Investing Activities:
Capital expenditures		(64,371	)		(41,782	)
Purchase of minority interests		(9,461	)		(1,214	)
Capitalized interest		(751	)		(421	)
Purchase of short-term investments		—			(12,835	)
Sale of short-term investments		—			10,655

Net cash used in investing activities		(74,583	)		(45,597	)

Financing Activities:
Repayments of long-term debt		(14,293	)		(4,409	)
Proceeds from stock options exercised and employee stock purchases		6,108			2,859
Borrowings on credit facility		6,000			—
Distributions to minority partners		(4,128	)		(5,069	)
Tax benefit from disqualifying stock option dispositions credited to equity		4,136			1,365
Proceeds from minority partners’ contributions		227			430
Payments of capital lease obligation		(77	)		(71	)
Purchase of subsidiary common stock		—			(7,345	)

Net cash used in financing activities		(2,027	)		(12,240	)

Net decrease in cash and cash equivalents		(22,120	)		(11,236	)
Cash and cash equivalents at the beginning of the period		31,589			31,948

Cash and cash equivalents at the end of the period	$	9,469		$	20,712


Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	982		$	661
Cash paid for income taxes, net of refunds		1,400			7,085

Supplemental Disclosure of Non-Cash Items:
Purchase of minority interests through issuance of long-term-debt and conversion to members’ capital	$	10,276		$	(333	)
Change in construction payable		5,451			3,100

See accompanying notes to unaudited consolidated financial statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

As of July 1, 2007, P.F. Chang’s China Bistro, Inc. (the “Company”) owned and operated 157 full service restaurants throughout the United States under the name of “P.F. Chang’s China Bistro.” The Company also owned and operated 126 quick casual restaurants under the name of “Pei Wei Asian Diner” and one full service restaurant under the name “Taneko Japanese Tavern.”

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended July 1, 2007 are not necessarily indicative of the results that may be expected for the year ending December 30, 2007.

The consolidated balance sheet at December 31, 2006 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles 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 December 31, 2006.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles 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.

Share-Based Compensation

The Company grants stock options for a fixed number of shares to certain employees and directors with an exercise price equal to or greater than the fair value of the shares at the date of grant. The Company also grants restricted stock with a fair value determined based on the Company’s closing stock price on the date of grant. On January 2, 2006, the Company adopted the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 123 (revised 2004) (SFAS 123R), Share-Based Payment, and SEC Staff Accounting Bulletin No. 107 (SAB 107), Share-Based Payment, requiring the measurement and recognition of all share-based compensation under the fair value method. The Company implemented SFAS 123R using the modified prospective transition method, which does not result in the restatement of previously issued financial statements.

The fair value for options granted during the three and six months ended July 1, 2007 and July 2, 2006 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:


	Three Months Ended						Six Months Ended
	July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006

Weighted average risk-free interest rate		4.6	%		4.9	%		4.6	%		4.9	%
Expected life of options (years)		5.0			6.1			4.6			6.1
Expected stock volatility		35.0	%		35.0	%		35.0	%		35.0	%
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

The estimated fair value of share-based compensation plans and other options is amortized to expense over the vesting period. See Note 6 to the consolidated financial statements for further discussion of the Company’s share-based employee compensation.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. The standard expands required disclosures about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS 157 on its consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize the impact of a tax position in the Company’s financial statements if that position is more likely than not to be sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements. See Note 7 to the consolidated financial statements for further discussion of the Company’s adoption of FIN 48.

In May 2007, the FASB issued FASB Staff Position No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (“the FSP”). The FSP provides guidance about how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Under the FSP, a tax position could be effectively settled on completion of examination by a taxing authority if the entity does not intend to appeal or litigate the result and it is remote that the taxing authority would examine or re-examine the tax position. Application of the FSP shall be upon the initial adoption date of FIN 48. The FSP did not have a material impact on the Company’s consolidated financial statements.

In March 2006, the FASB Emerging Issues Task Force issued Issue 06-3 (“EITF 06-3”), How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement. A tentative consensus was reached that a company should disclose its accounting policy (i.e., gross or net presentation) regarding presentation of taxes within the scope of EITF 06-3. If taxes are significant and reported on a gross basis, a company should disclose the amount of such taxes for each period for which an income statement is presented. The guidance is effective for periods beginning after December 15, 2006. The Company presents sales tax on a net basis in its consolidated financial statements.

2. Net Income Per Share

Net income per share is computed in accordance with SFAS 128, Earnings per Share. Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed based on the weighted average number of shares of common stock and potentially dilutive securities, which includes options outstanding under the Company’s stock option plans. For the three months ended July 1, 2007 and July 2, 2006, 1.6 million and 1.7 million, respectively, of the Company’s shares were excluded from the calculation due to their anti-dilutive effect. For the six months ended July 1, 2007 and July 2, 2006, 1.5 million and 1.2 million, respectively, of the Company’s shares were excluded from the calculation due to their anti-dilutive effect.

3. Intangible Assets

Intangible assets consist of the following (in thousands):


	July 1,			December 31,
	2007			2006

Intangible assets, gross	$	23,433		$	14,343
Accumulated amortization		(2,494	)		(1,699	)

Intangible assets, net	$	20,939		$	12,644

Intangible assets as of July 1, 2007 include additional intangible assets recognized upon the Company’s buyout of minority partner interests when the Company’s purchase price exceeded the imputed fair value at the time of the original investment.

4. Accrued Expenses

Accrued expenses consist of the following (in thousands):


	July 1,		December 31,
	2007		2006

Accrued payroll	$	17,094	$	18,099
Sales and use tax payable		6,084		6,531
Property tax payable		3,751		3,159
Accrued insurance		15,230		13,701
Accrued rent		3,439		3,708
Other accrued expenses		12,704		10,650

Total accrued expenses	$	58,302	$	55,848

5. Credit Facility

On August 4, 2006, the Company entered into a credit agreement with a commercial lending institution which allows for borrowings of up to $50.0 million at an interest rate of 50 basis points over the applicable London Interbank Offered Rate (“LIBOR”). The revolving credit facility expires on August 4, 2011 and contains certain restrictions and conditions which require the Company to maintain a maximum adjusted leverage ratio of 2.25:1 and a minimum fixed-charge coverage ratio of 1.25:1. The Company was in compliance with these restrictions and conditions as of July 1, 2007. As of July 1, 2007, the Company had borrowings outstanding under the credit facility totaling $10.0 million with an average interest rate of 6.0% as well as $9.7 million committed for the issuance of a letter of credit, which is required by insurance companies for the Company’s workers’ compensation and general liability insurance programs. Available borrowings under the line of credit were $30.3 million as of July 1, 2007.

6. Share-Based Compensation

Share-based compensation expense includes compensation expense, recognized over the applicable vesting periods, for new share-based awards and for share-based awards granted prior to, but not yet vested as of, the Company’s adoption of SFAS No. 123 (Revised 2004), “Share-Based Payment” on January 2, 2006. At July 1, 2007, non-vested share-based compensation, net of estimated forfeitures, totaled $18.0 million for stock options and $2.0 million for restricted stock. This expense will be recognized over the remaining weighted average vesting period which is approximately 2.4 years for stock options and 2.1 years for restricted stock.

Reported share-based compensation is classified as follows (in thousands):


	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
Labor	$	201		$	372		$	409		$	716
General and administrative		2,279			2,189			4,388			4,035

Total share-based compensation		2,480			2,561			4,797			4,751
Less: tax benefit		(682	)		(711	)		(1,319	)		(1,318	)

Total share-based compensation, net of tax	$	1,798		$	1,850		$	3,478		$	3,433

7. Income Taxes

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation, the Company recognized no material adjustment to the liability for unrecognized income tax benefits that existed as of December 31, 2006. At the date of adoption, the Company had $2.1 million of unrecognized tax benefits, all of which would impact the Company’s effective tax rate if recognized. As of July 1, 2007, the Company had $1.6 million of unrecognized tax benefits.

It is the Company’s policy to recognize interest and penalties related to uncertain tax positions in income tax expense. As of both the date of adoption and July 1, 2007, the Company had accrued $0.2 million of interest and $0.1 million of penalties related to uncertain tax positions.

8. Segment Reporting

The Company operates exclusively in the 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. During fiscal 2006, the Company opened Taneko Japanese Tavern, a new full service restaurant located in Scottsdale, Arizona, which is reported within Shared Services and Other. There were no material amounts of revenues or transfers among reportable segments.

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


			Shared Services
	Total		and Other			Bistro		Pei Wei
For the Three Months Ended July 1, 2007:
Revenues	$	267,409	$	586		$	208,174	$	58,649
Income (loss) before provision for income taxes		12,500		(7,581	)		20,044		37
Capital expenditures		35,686		92			25,180		10,414
Depreciation and amortization		13,606		388			10,054		3,164

For the Three Months Ended July 2, 2006:
Revenues	$	225,981	$	—		$	183,705	$	42,276
Income (loss) before provision for income taxes		10,572		(6,095	)		17,124		(457	)
Capital expenditures		24,380		961			15,429		7,990
Depreciation and amortization		10,565		281			8,220		2,064

For the Six Months Ended July 1, 2007:
Revenues	$	531,815	$	1,308		$	415,202	$	115,305
Income (loss) before provision for income taxes		26,811		(15,537	)		42,056		292
Capital expenditures		64,371		135			45,476		18,760
Depreciation and amortization		26,285		761			19,537		5,987

For the Six Months Ended July 2, 2006:
Revenues	$	454,594	$	—		$	370,629	$	83,965
Income (loss) before provision for income taxes		24,443		(11,747	)		35,431		759
Capital expenditures		41,782		1,338			27,210		13,234
Depreciation and amortization		20,920		561			16,316		4,043

As of July 1, 2007:
Total assets	$	544,462	$	33,175		$	408,538	$	102,749
Goodwill		6,819		—			6,566		253

As of December 31, 2006:
Total assets	$	514,045	$	29,755		$	395,263	$	89,027
Goodwill		6,819		—			6,566		253

9. 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 calendar years 2003 through 2005. 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 expected 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.

10. Subsequent Event

In July 2007, the Company’s Board of Directors authorized a program to repurchase up to $50.0 million of the Company’s outstanding shares of common stock from time to time in the open market or in private at prevailing market prices over the next two years. The Company intends to use cash on hand and available credit lines to repurchase shares.


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 December 31, 2006 contained in our 2006 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, you can identify forward-looking statements 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, the inability to develop and construct our restaurants within projected budgets and time periods and our ability to successfully expand our operations. Because we cannot guarantee future results, levels of activity, performance or achievements, you should not place undue reliance on these forward-looking statements.

Overview

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

Bistro

As of July 1, 2007, we owned and operated 157 full service Bistro restaurants that feature a blend of high quality, traditional Chinese cuisine with attentive service and American hospitality in a sophisticated, 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 with the exception of a Bistro restaurant located in Honolulu, Hawaii which opened in September 2006 under a joint venture arrangement in which we own a minority interest.

We intend to open 19 new Bistros during fiscal 2007, five of which were open by the end of the second quarter of 2007. We will continue our development in existing markets and plan to enter eight new markets in 2007. We have signed lease agreements for all of our development planned for fiscal 2007. We intend to continue to develop Bistro restaurants that typically range in size from 6,000 to 7,500 square feet, and that require, on average, a total cash investment of approximately $2.8 million to $3.0 million and total invested capital of approximately $4.0 million per restaurant (net of estimated landlord reimbursements). This total capitalized investment includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. Preopening expenses are expected to average approximately $415,000 per restaurant during 2007, which includes approximately $50,000 per restaurant in preopening rent.

Pei Wei

As of July 1, 2007, we owned and operated 126 quick casual Pei Wei restaurants that offer a modest menu of freshly prepared, high quality Asian cuisine served in a relaxed, warm environment offering attentive counter service and take-out flexibility. Pei Wei opened its first unit in July 2000 in the Phoenix, Arizona area and has expanded significantly since then.

We intend to open 37 Pei Wei restaurants in 2007, 19 of which were open by the end of the second quarter of 2007. We will continue our development in existing markets and plan to enter nine new markets in 2007. We have signed lease agreements for all of our development planned for fiscal 2007. Our Pei Wei restaurants are generally 2,800 to 3,400 square feet in size and require an average total cash investment of approximately $750,000 to $850,000 and total invested capital of approximately $1.4 million per restaurant (net of estimated landlord reimbursements). Preopening expenses are expected to average approximately $140,000 per restaurant during 2007, which includes approximately $27,000 per restaurant in preopening rent.

Taneko

On October 2, 2006, we opened our first Taneko restaurant in Scottsdale, Arizona, featuring natural, organic and seasonal ingredients highlighting the diverse cooking styles of Japan. Inspired by izakayas, or local taverns, Taneko offers an extensive variety of food and beverages in a comfortable atmosphere.

Change in Partnership Structure

We utilize a partnership philosophy to facilitate the development, leadership and operation of our 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 January 2007 for new store openings, the Bistro began employing a different structure to achieve the same goal. At the restaurant level, our Operating and Culinary Partners (still “partners” in the philosophical, but not legal sense) no longer have a direct ownership stake in the profits and losses of a restaurant, but are instead eligible to receive monthly incentive payments based upon the profitability of the restaurant, as well as participate in an incentive program that rewards long-term improvements in the operating performance of the restaurant. As a result of these changes, awards made to the individuals participating in the new plan are classified as compensation rather than as minority interest expense. Accordingly, compensation expense for our Operating and Culinary Partners is reflected in the consolidated income statement as Labor Expense. Additionally, a similar structure exists for our Market Partners and Regional Vice Presidents, with related compensation reflected as General and Administrative Expense in the consolidated income statement. Partner investment expense is no longer recognized for new Bistro restaurant openings beginning in 2007 as a result of this change. Additionally, many existing legal partners have requested an early buyout of their partnership interest as a result of their desire to participate in the new plan, the financial impact of which is discussed under “Partner Investment Expense” in Results of Operations.

The Pei Wei partnership structure is not affected by the changes at the Bistro and the traditional partnership structure remains in effect for new Pei Wei restaurant openings during 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 2006 Annual Report on Form 10-K.

Results of Operations

The following tables set forth certain unaudited quarterly information for the three and six month periods ended July 1, 2007 and July 2, 2006, 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 of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. P.F. Chang’s 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.

One of the factors that has in the past caused fluctuations in our operating results is preopening expenses. Historically, we have experienced variability in the amount and percentage of revenues attributable to preopening expenses. We typically incur the most significant portion of preopening expenses associated with a given restaurant within the two months immediately preceding, and the month of, the opening of the restaurant. Additionally, there may be variability in the amount and percentage of revenues attributable to partner investment expense as a result of the timing of opening new Pei Wei restaurants and the timing of purchasing partner interests. Partner investment expense generally represents the difference between the imputed fair value of our partners’ ownership interests and our partners’ cash capital contribution for these interests.

In addition, our experience to date has been that labor and operating costs associated with a newly opened restaurant for the first several months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had and is expected to continue to have, a meaningful impact on preopening expenses, labor, operating and partner investment costs until such time as a larger base of restaurants in operation mitigates such impact.

Results for the three months ended July 1, 2007 and July 2, 2006

Our consolidated operating results for the three months ended July 1, 2007 and July 2, 2006 were as follows (dollars in thousands):


	Three months ended
	July 1,			% of			July 2,			% of
	2007			Revenues			2006			Revenues			Change			% Change

Revenues	$	267,409			100.0	%	$	225,981			100.0	%	$	41,428			18.3	%
Costs and expenses:
Cost of sales		73,011			27.3	%		61,285			27.1	%		11,726			19.1	%
Labor		90,665			33.9	%		75,380			33.4	%		15,285			20.3	%
Operating		42,436			15.9	%		36,210			16.0	%		6,226			17.2	%
Occupancy		15,615			5.8	%		12,725			5.6	%		2,890			22.7	%
General and administrative		15,806			5.9	%		14,037			6.2	%		1,769			12.6	%
Depreciation and amortization		13,606			5.1	%		10,565			4.7	%		3,041			28.8	%
Preopening expense		3,296			1.2	%		2,817			1.2	%		479			17.0	%
Partner investment expense		(468	)		(0.2	%)		925			0.4	%		(1,393	)		—

Total costs and expenses		253,967			95.0	%		213,944			94.7	%		40,023			18.7	%

Income from operations		13,442			5.0	%		12,037			5.3	%		1,405			11.7	%
Interest and other income, net		179			0.1	%		568			0.3	%		(389	)		(68.5	%)
Minority interest		(1,121	)		(0.4	%)		(2,033	)		(0.9	%)		912			(44.9	%)

Income before provision for income taxes		12,500			4.7	%		10,572			4.7	%		1,928			18.2	%
Provision for income taxes		(3,223	)		(1.2	%)		(2,483	)		(1.1	%)		(740	)		29.8	%

Net income	$	9,277			3.5	%	$	8,089			3.6	%	$	1,188			14.7	%

Certain percentage amounts do not sum to total due to rounding. Percentages over 100% not displayed.

Operating results for the Bistro for the three months ended July 1, 2007 and July 2, 2006 were as follows (dollars in thousands):


	Three months ended
	July 1,			% of			July 2,			% of
	2007			Revenues			2006			Revenues			Change			% Change

Revenues	$	208,174			100.0	%	$	183,705			100.0	%	$	24,469			13.3	%
Costs and expenses:
Cost of sales		56,696			27.2	%		49,810			27.1	%		6,886			13.8	%
Labor		69,827			33.5	%		60,753			33.1	%		9,074			14.9	%
Operating		32,194			15.5	%		28,653			15.6	%		3,541			12.4	%
Occupancy		11,598			5.6	%		9,928			5.4	%		1,670			16.8	%
General and administrative		5,907			2.8	%		5,319			2.9	%		588			11.1	%
Depreciation and amortization		10,054			4.8	%		8,220			4.5	%		1,834			22.3	%
Preopening expense		1,790			0.9	%		1,575			0.9	%		215			13.7	%
Partner investment expense		(753	)		(0.4	%)		570			0.3	%		(1,323	)		—

Total costs and expenses		187,313			90.0	%		164,828			89.7	%		22,485			13.6	%

Income from operations		20,861			10.0	%		18,877			10.3	%		1,984			10.5	%
Interest and other income, net		20			0.0	%		—			0.0	%		20			—
Minority interest		(837	)		(0.4	%)		(1,753	)		(1.0	%)		916			(52.3	%)

Income before provision for income taxes	$	20,044			9.6	%	$	17,124			9.3	%	$	2,920			17.1	%

Certain percentage amounts do not sum to total due to rounding. Percentages over 100% not displayed.

Operating results for Pei Wei for the three months ended July 1, 2007 and July 2, 2006 were as follows (dollars in thousands):


	Three months ended
	July 1,			% of			July 2,			% of
	2007			Revenues			2006			Revenues			Change			% Change

Revenues	$	58,649			100.0	%	$	42,276			100.0	%	$	16,373			38.7	%
Costs and expenses:
Cost of sales		16,070			27.4	%		11,475			27.1	%		4,595			40.0	%
Labor		20,480			34.9	%		14,627			34.6	%		5,853			40.0	%
Operating		10,004			17.1	%		7,557			17.9	%		2,447			32.4	%
Occupancy		3,963			6.8	%		2,797			6.6	%		1,166			41.7	%
General and administrative		2,878			4.9	%		2,485			5.9	%		393			15.8	%
Depreciation and amortization		3,164			5.4	%		2,064			4.9	%		1,100			53.3	%
Preopening expense		1,506			2.6	%		1,126			2.7	%		380			33.7	%
Partner investment expense		285			0.5	%		355			0.8	%		(70	)		(19.7	%)

Total costs and expenses		58,350			99.5	%		42,486			100.5	%		15,864			37.3	%

Income from operations		299			0.5	%		(210	)		(0.5	%)		509			—
Interest and other income, net		22			0.0	%		33			0.1	%		(11	)		(33.3	%)
Minority interest		(284	)		(0.5	%)		(280	)		(0.7	%)		(4	)		1.4	%

Income before provision for income taxes	$	37			0.1	%	$	(457	)		(1.1	%)	$	494			—

Certain percentage amounts do not sum to total due to rounding. Percentages over 100% not displayed.

Revenues

Our revenues are derived primarily from food and beverage sales. Each segment contributed to current year revenue growth as follows:

Bistro: The increase in revenues was attributable to revenues of $24.4 million generated by the 20 new Bistro restaurants that opened during the first half of 2007 and the second half of 2006, partially offset by a slight net decrease in revenues for restaurants that opened prior to the second quarter of 2006. An effective price increase of approximately 2-3% impacted all restaurants and also contributed to the increase in revenues. Such increases were partially offset by a decline in overall guest traffic during the second quarter of fiscal 2007.

Pei Wei: The increase in revenues was attributable to revenues of $14.3 million generated by the 38 new Pei Wei restaurants that opened during the first half of 2007 and the second half of 2006 and a $2.0 million increase in revenues for restaurants that opened prior to the second quarter of 2006. An effective price increase of approximately 1-2% impacting all restaurants and a slight increase in overall guest traffic also contributed to the increase in revenues.

In addition to the revenues earned by Bistro and Pei Wei, consolidated revenues include $0.6 million of revenues generated by our Taneko concept.

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 at the Bistro increased slightly due to an adjustment resulting from a modification of our accounting policy related to rebate accruals during the second quarter of 2006. Excluding this adjustment, cost of sales as a percentage of revenues decreased slightly primarily due to lower pork and seafood expense resulting from favorable pricing, improved yields and increased purchasing through national distribution contracts, partially offset by slightly higher poultry prices and increased produce expense.

Pei Wei: Cost of sales as a percentage of revenues at Pei Wei increased due to an adjustment resulting from a modification of our accounting policy related to rebate accruals during the second quarter of 2006. Excluding this adjustment, cost of sales as a percentage of revenues decreased slightly primarily due to lower pork expense resulting from favorable pricing and yields partially offset by higher poultry costs.

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 are allocable to minority partners, but are presented as bonus expense for accounting purposes. Each segment contributed as follows:

Bistro: Labor expenses as a percentage of revenues at the Bistro increased primarily due to higher management incentive costs principally resulting from the 2007 change in the Bistro partnership structure as well as wage rate pressure across all labor categories. The impact of these factors was partially offset by the benefit of reduced workers’ compensation insurance liabilities resulting from lower than anticipated claims development.

Pei Wei: Labor expenses as a percentage of revenues at Pei Wei increased primarily due to decreased leverage resulting from lower average weekly sales, increased management incentive costs and continued wage rate pressure in culinary positions.

Operating

Operating expenses consist primarily of various restaurant-level costs such as repairs and maintenance, utilities and marketing, which are generally variable and fluctuate with revenues. Our experience to date has been that operating costs during the first four to nine months of a newly opened restaurant are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Each segment contributed as follows:

Bistro: Operating expenses as a percentage of revenues at our Bistro restaurants decreased due to an adjustment resulting from a modification of our accounting policy related to utility accruals during the second quarter of 2006. Excluding this adjustment, operating expenses as a percentage of revenues increased primarily due to higher disposable supplies expenses, increased marketing spending and higher maintenance contract costs.

Pei Wei: Operating expenses as a percentage of revenues at our Pei Wei restaurants decreased due to an adjustment resulting from a modification of our accounting policy related to utility accruals during the second quarter of 2006. Excluding this adjustment, operating expenses as a percentage of revenues were consistent with prior year. This was primarily due to reduced take-out supplies, disposable supplies and menu printing costs partially offset by higher utilities and maintenance expenses and increased marketing spending as well as the impact of decreased leverage resulting from lower average weekly sales.

Occupancy

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

Bistro: Occupancy costs as a percentage of revenues at the Bistro increased primarily due to higher general liability insurance costs for 2007 and a slight increase in property tax expense due to new stores opening in geographic areas with higher property tax rates.

Pei Wei: Occupancy costs as a percentage of revenues at Pei Wei increased primarily due decreased leverage resulting from lower average weekly sales and higher general liability insurance costs for 2007.

General and Administrative

General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support restaurant development and operations and provide infrastructure to support future growth, including management and staff salaries, employee benefits, travel, legal and professional fees, technology and market research. Each segment contributed as follows:

Bistro: General and administrative costs at the Bistro increased primarily due to higher management incentive accruals due to the impact of the 2007 change in the Bistro partnership structure.

Pei Wei: General and administrative costs at Pei Wei increased primarily due to an increase in compensation and benefits expense related to the addition of development and operating partners, higher management incentive accruals and, to a lesser extent, increased health insurance costs and higher share-based compensation expense. As a percentage of revenues, Pei Wei’s general and administrative costs decreased compared to the prior year due to improved leveraging of general and administrative costs resulting from additional store openings.

Shared Services and Other: General and administrative costs for Shared Services and Other increased $0.9 million principally due to higher compensation and benefits expense primarily related to the addition of corporate management personnel, and, to a lesser extent, increased share-based compensation expense.

Depreciation and Amortization

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

Bistro: Depreciation and amortization increased primarily due to additional depreciation and amortization on restaurants opened during the last half of fiscal 2006 and during the first half of fiscal 2007 and, to a lesser extent, an increase in amortization of intangible and other assets. As a percentage of revenues, depreciation and amortization increased due to higher average capital expenditures for new restaurants and increased remodeling costs at existing restaurants.

Pei Wei: Depreciation and amortization increased primarily due to additional depreciation and amortization on restaurants opened during the last half of fiscal 2006 and during the first half of fiscal 2007. As a percentage of revenues, depreciation and amortization increased due to decreased leverage resulting from lower average weekly sales and higher average capital expenditures for new restaurants.

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 and relocation costs, employee payroll and related training costs. Preopening expenses also include straight-line rent 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 timing of costs related to upcoming third and fourth quarter new restaurant openings compared to the prior year.

Pei Wei: Preopening expense increased primarily due to the impact of opening ten new Pei Wei restaurants during the second quarter of 2007 compared to seven new Pei Wei restaurants during the second quarter of 2006, partially offset by a slight decrease in average per location preopening costs incurred during the current year principally due to opening additional new stores in mature markets which typically results in lower preopening costs due to operational efficiencies.

Partner Investment Expense

Partner investment expense represents the difference between the imputed fair value of our legal partners’ ownership interests at the time the partners invest in their restaurants and our partners’ cash contributions for those ownership interests. Additionally, for those partners who 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 partner’s 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: Partner investment expense at the Bistro decreased due to the change in partnership structure discussed above, which led to a significant increase in early buyouts of minority partner interests during the first half of fiscal 2007. These early buyouts resulted in a $0.8 million reversal during the second quarter of previously recognized partner investment expense due to the fair value of the partner’s interest at inception date exceeding the fair value of the partner’s interest at repurchase date. Additionally, as a result of the change in partnership structure, partner investment expense is no longer recognized at the time a new restaurant opens.

Pei Wei: Partner investment expense at Pei Wei decreased primarily due to expense reductions related to minority partner buyouts and, to a lesser extent, the impact of a lower imputed fair value of partnership interests in new Pei Wei restaurants in 2007. These items were partially offset by the impact of opening ten new restaurants during the second quarter of fiscal 2007 compared to opening seven new restaurants during the second quarter of fiscal 2006.

Interest and Other Income (Expense), Net

Consolidated interest and other income (expense), net decreased primarily due to lower interest income resulting from the sale of interest-bearing securities to finance our share repurchase program, which commenced during the third quarter of fiscal 2006 (see “Share Repurchase Program” in the Liquidity and Capital Resources section for further detail). Interest income earned during 2007 primarily relates to interest-bearing overnight deposits.

Minority Interest

Minority interest represents the portion of our net earnings which is attributable to the collective ownership interests of our minority investors. As previously discussed, in many 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: Minority interest as a percentage of revenues at the Bistro decreased due to the impact of partner buyouts occurring during the first half of fiscal 2007, which resulted in a reduction in the number of minority interests from 357 as of July 2, 2006 to 182 minority interests as of July 1, 2007.

Pei Wei: Minority interest as a percentage of revenues at Pei Wei decreased slightly due to the impact of lower restaurant net income and partner buyouts occurring during the first half of fiscal 2007 compared to the prior year.

Provision for Income Taxes

Our effective tax rate was 25.8% for the second quarter of fiscal 2007 compared to 23.5% for the second quarter of fiscal 2006. The income tax rates for the second quarter of fiscal 2007 and fiscal 2006 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.

See Note 7 to the consolidated financial statements for a discussion of our adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.

Results for the six months ended July 1, 2007 and July 2, 2006

Our consolidated operating results for the six months ended July 1, 2007 and July 2, 2006 were as follows (dollars in thousands):


	Six months ended
	July 1,			% of			July 2,			% of
	2007			Revenues			2006			Revenues			Change			% Change

Revenues	$	531,815			100.0	%	$	454,594			100.0	%	$	77,221			17.0	%
Costs and expenses:
Cost of sales		145,926			27.4	%		124,725			27.4	%		21,201			17.0	%
Labor		179,899			33.8	%		152,317			33.5	%		27,582			18.1	%
Operating		83,630			15.7	%		71,051			15.6	%		12,579			17.7	%
Occupancy		30,523			5.7	%		25,218			5.5	%		5,305			21.0	%
General and administrative		32,528			6.1	%		27,289			6.0	%		5,239			19.2	%
Depreciation and amortization		26,285			4.9	%		20,920			4.6	%		5,365			25.6	%
Preopening expense		5,836			1.1	%		4,511			1.0	%		1,325			29.4	%
Partner investment expense		(1,869	)		(0.4	%)		1,125			0.2	%		(2,994	)		—

Total costs and expenses		502,758			94.5	%		427,156			94.0	%		75,602			17.7	%

Income from operations		29,057			5.5	%		27,438			6.0	%		1,619			5.9	%
Interest and other income, net		522			0.1	%		1,060			0.2	%		(538	)		(50.8	%)
Minority interest		(2,768	)		(0.5	%)		(4,055	)		(0.9	%)		1,287			(31.7	%)

Income before provision for income taxes		26,811			5.0	%		24,443			5.4	%		2,368			9.7	%
Provision for income taxes		(7,069	)		(1.3	%)		(6,541	)		(1.4	%)		(528	)		8.1	%

Net income	$	19,742			3.7	%	$	17,902			3.9	%	$	1,840			10.3	%

Certain percentage amounts do not sum to total due to rounding. Percentages over 100% not displayed.

Operating results for the Bistro for the six months ended July 1, 2007 and July 2, 2006 were as follows (dollars in thousands):


	Six months ended
	July 1,			% of			July 2,			% of
	2007			Revenues			2006			Revenues			Change			% Change

Revenues	$	415,202			100.0	%	$	370,629			100.0	%	$	44,573			12.0	%
Costs and expenses:
Cost of sales		113,477			27.3	%		101,581			27.4	%		11,896			11.7	%
Labor		139,139			33.5	%		123,405			33.3	%		15,734			12.7	%
Operating		63,878			15.4	%		56,550			15.3	%		7,328			13.0	%
Occupancy		22,815			5.5	%		19,787			5.3	%		3,028			15.3	%
General and administrative		11,834			2.9	%		10,436			2.8	%		1,398			13.4	%
Depreciation and amortization		19,537			4.7	%		16,316			4.4	%		3,221			19.7	%
Preopening expense		3,046			0.7	%		2,641			0.7	%		405			15.3	%
Partner investment expense		(2,679	)		(0.6	%)		996			0.3	%		(3,675	)		—

Total costs and expenses		371,047			89.4	%		331,712			89.5	%		39,335			11.9	%

Income from operations		44,155			10.6	%		38,917			10.5	%		5,238			13.5	%
Interest and other income, net		71			0.0	%		—			0.0	%		71			—
Minority interest		(2,170	)		(0.5	%)		(3,486	)		(0.9	%)		1,316			(37.8	%)

Income before provision for income taxes	$	42,056			10.1	%	$	35,431			9.6	%	$	6,625			18.7	%

Certain percentage amounts do not sum to total due to rounding. Percentages over 100% not displayed.

Operating results for Pei Wei for the six months ended July 1, 2007 and July 2, 2006 were as follows (dollars in thousands):


	Six months ended
	July 1,			% of			July 2,			% of
	2007			Revenues			2006			Revenues			Change			% Change

Revenues	$	115,305			100.0	%	$	83,965			100.0	%	$	31,340			37.3	%
Costs and expenses:
Cost of sales		31,921			27.7	%		23,144			27.6	%		8,777			37.9	%
Labor		40,031			34.7	%		28,912			34.4	%		11,119			38.5	%
Operating		19,386			16.8	%		14,501			17.3	%		4,885			33.7	%
Occupancy		7,599			6.6	%		5,431			6.5	%		2,168			39.9	%
General and administrative		5,908			5.1	%		4,784			5.7	%		1,124			23.5	%
Depreciation and amortization		5,987			5.2	%		4,043			4.8	%		1,944			48.1	%
Preopening expense		2,789			2.4	%		1,729			2.1	%		1,060			61.3	%
Partner investment expense		810			0.7	%		129			0.2	%		681			—

Total costs and expenses		114,431			99.2	%		82,673			98.5	%		31,758			38.4	%

Income from operations		874			0.8	%		1,292			1.5	%		(418	)		(32.4	%)
Interest and other income, net		16			0.0	%		36			0.0	%		(20	)		(55.6	%)
Minority interest		(598	)		(0.5	%)		(569	)		(0.7	%)		(29	)		5.1	%

Income before provision for income taxes	$	292			0.3	%	$	759			0.9	%	$	(467	)		(61.5	%)

Certain percentage amounts do not sum to total due to rounding. Percentages over 100% not displayed.

Revenues

Each segment contributed to current year revenue growth as follows:

Bistro: The increase in revenues was attributable to revenues of $44.7 million generated by 20 new Bistro restaurants that opened during the first half of 2007 and the second half of 2006, partially offset by a $0.2 million net decrease in revenues for restaurants that opened prior to the second quarter of 2006. An effective price increase of approximately 2-3% impacted all restaurants and also contributed to the increase in revenues. Such increases were partially offset by a decline in overall guest traffic during the first half of fiscal 2007.

Pei Wei: The increase in revenues was attributable to revenues of $25.3 million generated by 38 new Pei Wei restaurants that opened during the first half of 2007 and the second half of 2006 and a $6.0 million increase in revenues for restaurants that opened prior to the second quarter of 2006. An effective price increase of approximately 2% impacted all restaurants and also contributed to the increase in revenues. Such increases were partially offset by a slight decline in overall guest traffic during the first half of fiscal 2007.

In addition to the revenues earned by Bistro and Pei Wei, consolidated revenues include $1.3 million of revenues generated by our Taneko concept.

Costs and Expenses

Cost of Sales

Each segment contributed as follows:

Bistro: Cost of sales as a percentage of revenues at the Bistro decreased slightly primarily due to lower pork and seafood expense resulting from favorable pricing, improved yields and increased purchasing through national distribution contracts partially offset by higher produce expense. An adjustment resulting from a modification of our accounting policy related to rebate accruals during the second quarter of 2006 partially offset this decrease.

Pei Wei: Cost of sales as a percentage of revenues at Pei Wei increased slightly primarily due to an adjustment resulting from a modification of our accounting policy related to rebate accruals during the second quarter of 2006. Excluding this adjustment, cost of sales as a percentage of revenues decreased slightly primarily due to lower pork expense resulting from favorable pricing and yields partially offset by higher other food expense.

Labor

Each segment contributed as follows:

Bistro: Labor expenses as a percentage of revenues at the Bistro increased primarily due to higher management incentive costs principally resulting from the 2007 change in the Bistro partnership structure and, to a lesser extent, the impact of wage rate pressure across all labor categories and decreased leverage resulting from lower average weekly sales. The impact of these factors was partially offset by the benefit of reduced workers’ compensation insurance liabilities resulting from lower than anticipated claims activity.

Operating

Each segment contributed as follows:

Bistro: Operating expenses as a percentage of revenues at our Bistro restaurants increased slightly including an adjustment resulting from a modification of our accounting policy related to utility accruals during the second quarter of 2006. Excluding this adjustment, operating expenses as a percentage of revenues increased primarily due to higher maintenance contract costs, higher disposable supplies expenses, increased marketing spending and menu printing costs related to our new Yunnan menu and new menu format introduced during the first quarter of 2007.

Pei Wei: Operating expenses as a percentage of revenues at our Pei Wei restaurants decreased due to an adjustment resulting from a modification of our accounting policy related to utility accruals during the second quarter of 2006. Excluding this adjustment, operating expenses as a percentage of revenues were consistent with prior year. This was primarily due to reduced take-out supplies, disposable supplies and menu printing costs partially offset by higher utilities and maintenance expenses, increased marketing spending as well as the impact of decreased leverage resulting from lower average weekly sales.

Occupancy

Each segment contributed as follows:

Bistro: Occupancy costs as a percentage of revenues at the Bistro increased primarily due to higher general liability insurance costs for 2007 combined with decreased leverage resulting from lower average weekly sales.

Pei Wei: Occupancy costs as a percentage of revenues at Pei Wei increased slightly primarily due to decreased leverage resulting from lower average weekly sales combined with higher general liability insurance costs for 2007.

General and Administrative

Each segment contributed as follows:

Bistro: General and administrative costs at the Bistro increased primarily due to higher management incentive accruals due to the impact of the 2007 change in the Bistro partnership structure.

Pei Wei: General and administrative costs at Pei Wei increased primarily due to an increase in compensation and benefits expense related to the addition of development and operating partners, higher management incentive accruals, increased health insurance costs and higher share-based compensation expense. As a percentage of revenues, Pei Wei’s general and administrative costs decreased compared to the prior year due to improved leveraging of general and administrative costs resulting from additional store openings.

Shared Services and Other: General and administrative costs for Shared Services and Other increased $2.8 million principally due to higher compensation and benefits expense primarily related to the addition of corporate management personnel, increased share-based compensation expense and, to a lesser extent, higher consulting and marketing costs.

Depreciation and Amortization

Each segment contributed as follows:

Bistro: Depreciation and amortization increased primarily due to additional depreciation and amortization on restaurants opened during the last half of fiscal 2006 and during the first half of fiscal 2007 and, to a lesser extent, an increase in amortization of intangible and other assets. As a percentage of revenues, depreciation and amortization increased due to higher average capital expenditures for new restaurants and decreased leverage resulting from lower average weekly sales.

Pei Wei: Depreciation and amortization increased primarily due to additional depreciation and amortization on restaurants opened during the last half of fiscal 2006 and during the first half of fiscal 2007. As a percentage of revenues, depreciation and amortization increased due to higher average capital expenditures for new restaurants and decreased leverage resulting from lower average weekly sales.

Preopening Expense

Each segment contributed as follows:

Bistro: Preopening expense increased primarily due to the timing of costs related to upcoming third and fourth quarter new restaurant openings compared to the prior year.

Pei Wei: Preopening expense increased primarily due to the impact of opening 19 new Pei Wei restaurants during the first half of 2007 compared to 11 new Pei Wei restaurants during the first half of 2006, partially offset by a slight decrease in average per location preopening costs incurred during the current year principally due to opening additional new stores in mature markets, which typically results in lower preopening costs due to operational efficiencies.

Partner Investment Expense

Each segment contributed as follows:

Bistro: Partner investment expense at the Bistro decreased due to the change in partnership structure discussed above, which led to a significant increase in early buyouts of minority partner interests during the first half of fiscal 2007. These early buyouts resulted in a $2.7 million reversal of previously recognized partner investment expense due to the fair value of the partner’s interest at inception date exceeding the fair value of the partner’s interest at repurchase date. Additionally, as a result of the change in partnership structure, partner investment expense is no longer recognized at the time a new restaurant opens.

Pei Wei: Partner investment expense at Pei Wei increased primarily due to the impact of opening 19 new restaurants during the first half of fiscal 2007 compared to opening 11 new restaurants during the first half of fiscal 2006, as well as expense reductions related to minority partner buyouts in the prior year. These increases were partially offset by the impact of a lower imputed fair value of partnership interests in new Pei Wei restaurants in 2007.

Interest and Other Income (Expense), Net

Minority Interest

Each segment contributed as follows:

Pei Wei: Minority interest as a percentage of revenues at Pei Wei decreased due to the impact of lower restaurant net income and partner buyouts occurring during the first half of fiscal 2007, which resulted in fewer minority partners compared to the prior year.

Provision for Income Taxes

Our effective tax rate was 26.4% for the first half of fiscal 2007 compared to 26.8% for the first half of fiscal 2006. Disregarding the impact of reserve adjustments in both periods, our effective tax rate was 27.5% and 27.8% for the first half of fiscal 2007 and 2006, respectively. The income tax rates for the first half of fiscal 2007 and fiscal 2006 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.

Liquidity and Capital Resources

Cash Flow

Our primary source of liquidity is cash provided by operations, though we also borrow under our credit facility from time to time. Historically, our need for capital resources has primarily resulted from our construction of new restaurants. In fiscal 2006, our need for capital resources was also driven by the repurchase of our common stock and Pei Wei minority interests.

The following table presents a summary of our cash flows for the six months ended July 1, 2007 and July 2, 2006 (in thousands):


	2007			2006
Net cash provided by operating activities	$	54,490		$	46,601
Net cash used in investing activities		(74,583	)		(45,597	)
Net cash used in financing activities		(2,027	)		(12,240	)

Net decrease in cash and cash equivalents	$	(22,120	)	$	(11,236	)

Operating Activities

We have funded our capital requirements since inception through sales of equity securities, debt financing and cash flows from operations. Net cash provided by operating activities was $54.5 million and $46.6 million for the first half of fiscal 2007 and 2006, respectively. Net cash provided by operating activities exceeded the net income for the periods due principally to the effect of depreciation and amortization, an increase in operating liabilities and the effect of minority interest, share-based compensation and partnership-related non-cash expenses.

Investing Activities

We use cash primarily to fund the development and construction of new restaurants. Net cash used in investing activities during the first half of fiscal 2007 and 2006 was $74.6 million and $45.6 million, respectively, and primarily related to capital expenditures of $64.4 million and $41.8 million during the first half of fiscal 2007 and 2006, respectively. Capital expenditures during the current year increased compared to the prior year primarily due to a higher number of new restaurant openings.

We intend to open 19 new Bistro restaurants and 37 new Pei Wei restaurants in fiscal year 2007. We expect that our planned future Bistro restaurants will require, on average, a total cash investment per restaurant of approximately $2.8 million to $3.0 million. We expect to spend approximately $365,000 per restaurant for preopening costs, which excludes non-cash rent expense of approximately $50,000. Total cash investment per each Pei Wei restaurant is expected to average $750,000 to $850,000 and we expect to spend $113,000 per restaurant for preopening costs, which excludes non-cash rent expense of approximately $27,000. The anticipated total cash investment per restaurant is based on recent historical averages which have increased over prior years due to increases in construction related costs of steel, aluminum and lumber. We expect total capital expenditures for fiscal 2007 to approximate $120.0 million to $125.0 million.

Investment activities also include purchases of minority interests of $9.5 million and $1.2 million during the first half of fiscal 2007 and 2006. We purchased 183 partnership interests during the first half of 2007. This represents an increase in the historical rate of purchases resulting primarily from the implementation of our new Bistro partnership structure at the beginning of the current year and the corresponding desire of many of our existing partners to sell their partnership interest and instead participate in our new management incentive compensation programs.

Additionally, net purchases of short-term investments totaling $2.2 million were included for the first half of fiscal 2006.

Financing Activities

Financing activities during the first half of fiscal 2007 and 2006 included proceeds from stock options exercised and employee stock purchases, distributions to minority partners, debt repayments and the tax benefit from disqualifying stock option dispositions. Additionally, financing activities during the first half of fiscal 2007 included $6.0 million of credit line borrowings and financing activities during the first half of fiscal 2006 included $7.3 million related to the purchase of Pei Wei minority interests.

Future capital requirements

Our capital requirements, including development costs related to the opening of additional restaurants, have been and will continue to be significant. Our future capital requirements and the adequacy of our available funds will depend on many factors, including 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. We believe that our cash flow from operations, together with our current cash reserves and available credit lines, will be sufficient to fund our projected capital requirements through 2007 and the foreseeable future. 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 can not assure you that such capital will be available on favorable terms, if at all.

Credit Facility

On August 4, 2006, we entered into a credit agreement with a commercial lending institution which allows for borrowings up to $50.0 million at an interest rate of 50 basis points over the applicable London Interbank Offered Rate (“LIBOR”). The revolving credit facility expires on August 4, 2011 and contains certain restrictions and conditions which require us to maintain a maximum adjusted leverage ratio of 2.25:1 and a minimum fixed-charge coverage ratio of 1.25:1. We were in compliance with these restrictions and conditions as of July 1, 2007. We had borrowings of $10.0 million outstanding under the credit facility as of July 1, 2007 and $9.7 million committed for the issuance of a letter of credit which is required by insurance companies for our workers’ compensation and general liability insurance programs. Available borrowings under the line of credit were $30.3 million as of July 1, 2007.

Share Repurchase Program

In July 2006, our Board of Directors authorized a program to repurchase up to $50.0 million of our outstanding shares of common stock from time to time in the open market or in private at prevailing market prices over the next year. We have funded our share repurchases to date primarily with cash on hand, however, we have also negotiated a $50.0 million revolving credit facility referenced above to provide additional liquidity and offer flexibility in funding our share repurchases. We repurchased 1.4 million shares of our common stock for $46.4 million during fiscal 2006 and none thus far in fiscal 2007. The remaining $3.6 million available under this share repurchase authorization expired during July 2007.

In July 2007, our Board of Directors authorized a program to repurchase up to $50.0 million of our outstanding shares of common stock from time to time in the open market or in private at prevailing market prices over the next two years. We intend to use cash on hand and available credit lines to repurchase shares.

Partnership Activities

As of July 1, 2007, there were 138 partners within the P.F. Chang’s China Bistro, Inc. partnership system. During the first half of fiscal 2007, we had the opportunity to purchase 19 partner interests which had reached the five-year threshold period during the quarter, as well as 179 additional partner interests which had either (i) 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 elected an early repurchase of their minority interest by the Company due to the opportunity to participate in the new Bistro management incentive compensation program. We purchased 183 of these interests in their entirety for a total of approximately $19.7 million. Of the total purchase price, approximately $9.5 million was paid in cash, while the remaining balance has been recorded as debt on the consolidated balance sheet at July 1, 2007.

During the remainder of fiscal 2007, we will have the opportunity to purchase 19 additional partnership interests which will reach their five-year anniversary. If all of these interests are purchased, the total purchase price would approximate $2.0 million to $2.5 million based upon the estimated fair value of the respective interests at July 1, 2007. If we purchase all of these interests in 2007, the estimated liquidity impact would be a reduction of cash of approximately $0.7 million to $0.8 million during the year.

Minority Interest Purchase

On January 9, 2006, we purchased the 13 percent minority interest held by key employees in our Pei Wei Asian Diner subsidiary for a value of approximately $22.8 million, thereby making Pei Wei Asian Diner a wholly owned subsidiary. The purchase price consideration consisted of $7.3 million in cash and the conversion of outstanding options to purchase 98,100 shares of Pei Wei Asian Diner, Inc. common stock into options to purchase 306,782 shares of P.F. Chang’s common stock. There was no additional intrinsic value associated with the converted options to purchase P.F. Chang’s common stock for the key employees. The transaction did not involve any changes in management or key positions in Pei Wei.

New Accounting Standards

See Recent Accounting Pronouncements 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 fluctuations in interest rates on our short-term investments and revolving credit facility. Our revolving credit facility allows for borrowings up to $50.0 million bearing interest at variables rates of LIBOR plus 0.50%. We held no short-term investments at December 31, 2006. We had borrowings of $10.0 million outstanding under our credit facility and promissory notes totaling $11.2 million at July 1, 2007. A hypothetical 100 basis point change in interest rates would not have a material impact on our results of operations.


Item 4.		*Controls and Procedures*

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

During the last fiscal quarter, there have been no significant changes in our internal controls or in other factors that could significantly affect our internal control over financial reporting.

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 predicted results; the inability to develop and construct our restaurants within projected budgets and time periods; our ability to successfully expand our operations; increases in the minimum wage; intense competition in the restaurant industry; changes in general economic and political conditions that affect consumer spending; fluctuations in operating results; our inability to retain key personnel; failure to comply with governmental regulations; future changes in financial accounting standards; changes in how we account for certain aspects of our partnership program; strain on our management resources resulting from implementing our growth strategy; potential labor shortages that may delay planned openings; changes in food costs; rising insurance costs; litigation; and expenses associated with compliance with changing regulation of corporate governance and public disclosure. 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 14, 2007. There have been no material changes to these risk factors other than the change of the following.

Failure to comply with governmental regulations could harm our business and our reputation.

We are subject to regulation by federal agencies and to licensing and regulation by state and local health, sanitation, building, zoning, safety, fire and other departments relating to the development and operation of restaurants. These regulations include matters relating to:

	•		the environment;

	•		building construction;

	•		zoning requirements;

	•		the preparation and sale of food and alcoholic beverages; and

	•		employment.

Our facilities are licensed and subject to regulation under state and local fire, health and safety codes. The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. We may not be able to obtain necessary licenses or other approvals on a cost-effective and timely basis in order to construct and develop restaurants in the future.

Various federal and state labor laws govern our operations and our relationship with our employees, including minimum wage, overtime, working conditions, fringe benefit and citizenship requirements. In particular, we are subject to the regulations of the Bureau of Citizenship and Immigration Services, or BCIS. The United States Congress has recently been considering changes to Federal immigration laws and various states are also in the process of considering or have already adopted new immigration laws. Some of these new laws may adversely affect our operations by increasing our obligations for compliance and oversight. Though we require all workers to provide us with the government-specified documentation evidencing their employment eligibility, some of our employees may, without our knowledge, be unauthorized workers. Unauthorized workers are subject to seizure and deportation and may subject us to fines, penalties or loss of our business license in certain jurisdictions. Any material disruption of our business, as a result of seizure of our workers, changes in immigration law, or significantly increased labor costs at our facilities in the future, could have a material adverse effect on our business, financial condition and operating results.

Our business can be adversely affected by negative publicity resulting from complaints or litigation alleging poor food quality, food-borne illness or other health concerns or operating issues stemming from one or a limited number of restaurants. Unfavorable publicity could taint public perception of our restaurants.

Approximately 15 percent of our revenues at the Bistro, two percent at Pei Wei and 30 percent at Taneko are attributable to the sale of alcoholic beverages. We are required to comply with the alcohol licensing requirements of the federal government, states and municipalities where our restaurants are located. Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. If we fail to comply with federal, state or local regulations, our licenses may be revoked and we may be forced to terminate the sale of alcoholic beverages at one or more of our restaurants.

The federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. We are required to comply with the Americans with Disabilities Act and regulations relating to accommodating the needs of the disabled in connection with the construction of new facilities and with significant renovations of existing facilities.

Failure to comply with these and other regulations could negatively impact our business and our reputation.

Changes in food costs could negatively impact our revenues and results of operations.

Our profitability is dependent in part on our ability to anticipate and react to changes in food costs. Other than for a portion of our commodities, like produce, which is purchased locally by each restaurant and certain other specialty items that we purchase from Chinese import/export brokers, we rely on Distribution Market Advantage as the primary distributor of our ingredients. Distribution Market Advantage is a cooperative of multiple food distributors located throughout the nation. We have a non-exclusive contract with Distribution Market Advantage on terms and conditions which we believe are consistent with those made available to similarly situated restaurant companies. Although we believe that alternative distribution sources are available, any increase in distribution prices or failure to perform by the Distribution Market Advantage could cause our food costs to fluctuate. Any disruption in the supply of specialty items from China due to quality or availability issues could also cause our food costs to fluctuate. Additional factors beyond our control, including adverse weather conditions and governmental regulation, may affect our food costs. We may not be able to anticipate and react to changing food costs through our purchasing practices and menu price adjustments in the future, and failure to do so could negatively impact our revenues and results of operations.


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

None


Item 3.		*Defaults Upon Senior Securities*

None


Item 4.		*Submission of Matters to a Vote of Security Holders*

Our Annual Meeting of Stockholders was held on April 27, 2007. There were three proposals up for approval. The results of voting are as follows:

1) The election of the Board of Directors:


	Total Votes		Total Votes
	For		Against		Abstain
Richard L. Federico		24,480,695		332,770		6,162
F. Lane Cardwell, Jr.		20,769,830		4,036,653		12,944
Lesley H. Howe		24,761,606		52,660		5,361
M. Ann Rhoades		20,768,451		4,038,403		12,773
James G. Shennan, Jr.		20,769,097		4,037,564		12,966
R. Michael Welborn		24,754,158		60,451		5,018
Kenneth J. Wessels		24,764,676		50,953		3,998

Subsequent to the Annual Meeting of Stockholders, Kenneth A. May was appointed as an additional member of the Board of Directors.

2) To ratify the appointment of KPMG LLP as the Company’s independent auditors for the fiscal year ending December 30, 2007:

Total Votes

For

Against

Abstain

24,784,538

31,000

4,089

3) To approve any adjournments of the meeting to another time or place, if necessary in the judgment of proxy holders, for the purpose of soliciting additional proxies in favor of any of the foregoing proposals:

Total Votes

For

Against

Abstain

13,808,795

10,344,691

666,141


Item 5.		*Other Information*

None


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 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 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 December 8, 2006.

(3)		Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-59749).


	P.F. CHANG’S CHINA BISTRO, INC.
	By:	/s/ RICHARD L. FEDERICO
		Richard L. Federico
		Chairman and Chief Executive Officer Principal Executive Officer


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


Item		Page

PART I FINANCIAL INFORMATION

1.	Unaudited Consolidated Financial Statements		2

	Consolidated Balance Sheets as of July 1, 2007 and December 31, 2006		2

	Consolidated Statements of Income for the Three and Six Months Ended July 1, 2007 and July 2, 2006		3

	Consolidated Statements of Cash Flows for the Six Months Ended July 1, 2007 and July 2, 2006		4

	Notes to Unaudited Consolidated Financial Statements		5

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9

3.	Quantitative and Qualitative Disclosures About Market Risk		22

4.	Controls and Procedures		22

PART II OTHER INFORMATION

1.	Legal Proceedings		23

1A.	Risk Factors		23

2.	Unregistered Sales of Equity Securities and Use of Proceeds		23

3.	Defaults Upon Senior Securities		23

4.	Submission of Matters to a Vote of Security Holders		24

5.	Other Information		24

6.	Exhibits		24

	Signatures		25

	Index to Exhibits		26