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 September 28, 2008


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		86-0815086
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

7676 East Pinnacle Peak Road		85255
Scottsdale, Arizona		(Zip Code)
(Address of principal executive offices)

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, 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 September 28, 2008, there were 23,788,091 outstanding shares of the registrant’s Common Stock.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED BALANCE SHEETS


	September 28,			December 30,
	2008			2007
	(Unaudited)			(Note 1)
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	23,964		$	24,055
Inventories		4,677			4,649
Prepaids and other current assets		33,064			32,552

Total current assets		61,705			61,256
Property and equipment, net		526,761			520,145
Goodwill		6,819			6,819
Intangible assets, net		24,154			22,004
Other assets		13,427			12,406

Total assets	$	632,866		$	622,630


LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	14,808		$	17,745
Construction payable		4,683			11,319
Accrued expenses		64,221			59,259
Unearned revenue		18,888			25,346
Current portion of long-term debt, including $3,930 and $3,507 due to related parties at September 28, 2008 and December 30, 2007, respectively		6,026			6,932

Total current liabilities		108,626			120,601
Long-term debt, including $1,098 and $3,002 due to related parties at September 28, 2008 and December 30, 2007, respectively		82,691			90,828
Lease obligations		105,948			93,435
Other liabilities		11,125			6,710
Minority interests		11,512			17,169
Commitments and contingencies (Note 11)		—			—
Common stockholders’ equity:
Common stock, $0.001 par value, 40,000,000 shares authorized: 23,788,091 shares and 24,151,888 shares issued and outstanding at September 28, 2008 and December 30, 2007, respectively		27			27
Additional paid-in capital		203,542			196,385
Treasury stock, at cost, 3,634,979 shares and 3,240,943 shares at September 28, 2008 and December 30, 2007, respectively		(106,372	)		(96,358	)
Accumulated other comprehensive loss		(47	)		—
Retained earnings		215,814			193,833

Total common stockholders’ equity		312,964			293,887

Total liabilities and common stockholders’ equity	$	632,866		$	622,630

See accompanying notes to unaudited consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 28,			September 30,			September 28,			September 30,
	2008			2007			2008			2007
	(In thousands, except per share amounts)

Revenues	$	298,359		$	270,282		$	911,018		$	800,789
Costs and expenses:
Cost of sales		81,075			73,865			248,248			219,263
Labor		99,140			91,789			304,807			270,959
Operating		52,767			43,816			151,336			127,080
Occupancy		17,594			15,970			53,349			46,384
General and administrative		18,152			17,186			55,801			49,364
Depreciation and amortization		17,510			14,749			51,593			40,827
Preopening expense		1,519			4,939			6,152			10,774
Partner investment expense		99			(71	)		10			(1,940	)
Asset impairment charge		7,510			—			7,510			—

Total costs and expenses		295,366			262,243			878,806			762,711

Income from operations		2,993			8,039			32,212			38,078
Interest and other income (expense), net		(895	)		(10	)		(2,778	)		512
Minority interest		(367	)		(808	)		(1,559	)		(3,576	)

Income from continuing operations before provision for income taxes		1,731			7,221			27,875			35,014
Provision for income taxes		1,055			(1,618	)		(5,794	)		(9,023	)

Income from continuing operations		2,786			5,603			22,081			25,991
Income (loss) from discontinued operations, net of tax		176			(328	)		(100	)		(974	)

Net Income	$	2,962		$	5,275		$	21,981		$	25,017


Basic income per share:
Income from continuing operations	$	0.12		$	0.22		$	0.93		$	1.01
Income (loss) from discontinued operations, net of tax		0.01			(0.02	)		(0.01	)		(0.03	)

Net Income	$	0.13		$	0.20		$	0.92		$	0.98


Diluted income per share:
Income from continuing operations	$	0.12		$	0.21		$	0.91		$	1.00
Income (loss) from discontinued operations, net of tax		0.00			(0.01	)		0.00			(0.04	)

Net Income	$	0.12		$	0.20		$	0.91		$	0.96


Weighted average shares used in computation:
Basic		23,613			25,773			23,828			25,656

Diluted		23,927			26,105			24,156			26,093

See accompanying notes to unaudited consolidated financial statements.

P.F. CHANG’S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	September 28,			September 30,
	2008			2007
	(In thousands)
Operating Activities:
Net income	$	21,981		$	25,017
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		51,702			41,140
Asset impairment charge		7,510			—
Share-based compensation		6,451			7,390
Deferred income taxes		2,365			339
Minority interest		1,559			3,576
Partner bonus expense, imputed		716			932
Other		82			68
Partner investment expense		10			(1,940	)
Tax benefit from disqualifying stock option dispositions credited to equity		(323	)		(4,465	)
Changes in operating assets and liabilities:
Inventories		(28	)		(174	)
Prepaids and other current assets		370			8,920
Other assets		(1,647	)		(2,774	)
Accounts payable		(2,937	)		890
Accrued expenses		4,962			(2,528	)
Lease obligation		12,640			11,914
Unearned revenue		(6,458	)		(4,432	)
Other long-term liabilities		576			368

Net cash provided by operating activities		99,531			84,241

Investing Activities:
Capital expenditures		(69,439	)		(115,948	)
Purchase of minority interests		(6,754	)		(11,716	)
Capitalized interest		(585	)		(1,249	)

Net cash used in investing activities		(76,778	)		(128,913	)

Financing Activities:
Repayments of long-term debt		(11,510	)		(30,006	)
Purchases of treasury stock		(10,014	)		—
Distributions to minority members and partners		(2,750	)		(5,428	)
Payments of capital lease obligation		(127	)		(117	)
Borrowings on credit facility		—			41,000
Proceeds from stock options exercised and employee stock purchases		1,009			7,699
Debt issuance costs		—			(243	)
Proceeds from minority investors’ contributions		225			337
Tax benefit from disqualifying stock option dispositions credited to equity		323			4,465

Net cash provided by (used in) financing activities		(22,844	)		17,707

Net decrease in cash and cash equivalents		(91	)		(26,965	)
Cash and cash equivalents at the beginning of the period		24,055			31,589

Cash and cash equivalents at the end of the period	$	23,964		$	4,624


Supplemental Disclosure of Cash Flow Information:
Cash paid for interest		4,200			1,341
Cash paid for income taxes, net of refunds		6,716			4,524

Supplemental Disclosure of Non-Cash Items:
Purchase of minority interests through issuance of long-term-debt and conversion to members’ capital		2,431			11,268
Change in construction payable		(6,636	)		2,227

See accompanying notes to unaudited consolidated financial statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

As of September 28, 2008, P.F. Chang’s China Bistro, Inc. (the “Company”) owned and operated 182 full service restaurants throughout the United States under the name of P.F. Chang’s China Bistro (the “Bistro”). The Company also owned and operated 165 quick casual restaurants under the name of Pei Wei Asian Diner (“Pei Wei”).

At the end of fiscal 2007, the Company announced its planned exit from its Taneko Japanese Tavern (“Taneko”) restaurant and, as a result, classified Taneko as a discontinued operation in its consolidated financial statements. On August 1, 2008, the Company completed the sale of Taneko’s long-lived assets. See Note 3 for further discussion.

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 U.S. 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 nine month periods ended September 28, 2008 are not necessarily indicative of the results that may be expected for the year ending December 28, 2008.

The consolidated balance sheet at December 30, 2007 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. 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 December 30, 2007.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. 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.

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 and restricted stock units with a fair value determined based on the Company’s closing stock price on the date of grant.

The fair value for options granted during the three and nine months ended September 28, 2008 and September 30, 2007 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:


	Three Months Ended					Nine Months Ended
	September 28,		September 30,			September 28,			September 30,
	2008 (1)		2007			2008			2007
Weighted average risk-free interest rate		—		4.7	%		3.1	%		4.7	%
Expected life of options (years)		—		5.5			5.5			5.5
Expected stock volatility		—		35.0	%		35.0	%		35.0	%
Expected dividend yield		—		0.0	%		0.0	%		0.0	%


(1)		There were no stock options granted during the three months ended September 28, 2008.

The estimated fair value of share-based compensation is amortized to expense over the vesting period. See Note 8 for further discussion of the Company’s share-based compensation.

Derivatives

All derivatives are recognized on the balance sheet at fair value as either assets or liabilities. The fair value of the Company’s derivative financial instruments is determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market data inputs. The Company reports its derivative assets or liabilities in other assets or other liabilities, as applicable. The accounting for the change in the fair value of a derivative financial instrument depends on its intended use and the resulting hedge designation, if any, as discussed below.

A cash flow hedge is a derivative designed to hedge the exposure of variable future cash flows that is attributable to a particular risk associated with an existing recognized asset or liability, or a forecasted transaction. For derivative financial instruments that qualify as cash flow hedges, the effective portions of the gain or loss on the derivatives are recorded in accumulated other comprehensive (loss) income and reclassified into earnings when the hedged cash flows are recognized into earnings. The amount that is reclassified into earnings, as well as any ineffective portion of the gain or loss, as determined by the accounting requirements, are reported as a component of interest and other income (expense). If a hedge is de-designated or terminated prior to maturity, the amount previously recorded in accumulated other comprehensive (loss) income is recognized into earnings over the period that the hedged item impacts earnings. If a hedge relationship is discontinued because it is probable that a forecasted transaction will not occur according to the original strategy, any related amounts previously recorded in accumulated other comprehensive (loss) income are recognized into earnings immediately.

During the second quarter of 2008, the Company hedged a portion of its existing long-term variable-rate debt through the use of an interest rate swap. This derivative instrument effectively fixes the interest expense on a portion of the Company’s long-term debt for the duration of the swap. See Note 7 for further discussion of the Company’s interest rate swap.

Recent Accounting Pronouncements

In October 2008, the FASB issued Staff Position (FSP) No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” which clarifies the application of Statement No. 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The Staff Position is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before September 30, 2008. The implementation of FAS 157-3 did not have a material impact on the Company’s consolidated financial statements.

In April 2008, the Financial Accounting Standards Board (“FASB”) issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). This change is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R and other GAAP. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, which will require the Company to adopt these provisions in the first quarter of fiscal 2009. The Company is currently evaluating the impact of adopting FSP 142-3 on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, (“SFAS 161”). SFAS 161 requires companies to provide enhanced disclosures about derivative instruments and hedging activities to enable investors to better understand the effects of such instruments and activities on a company’s financial position, financial performance and cash flows. Under SFAS 161, companies are required to disclose the fair values of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for fiscal years beginning after November 15, 2008, and the Company will adopt these provisions in the first quarter of fiscal 2009. The Company is currently evaluating the impact of adopting SFAS 161 on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date. SFAS 141R significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, preacquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, under SFAS 141R, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS 141R provides guidance regarding what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008 with early application prohibited. The Company will adopt SFAS 141R beginning in the first quarter of fiscal 2009 and will change its accounting treatment for business combinations on a prospective basis.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008 with early application prohibited. The Company will adopt SFAS 160 beginning in the first quarter of fiscal 2009 and is currently evaluating the impact of adopting SFAS 160 on its consolidated financial statements.

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 establishes a common definition for fair value to be applied to U.S. GAAP requiring the use of fair value establishes a framework for measuring fair value and expands required disclosures about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007; however, FASB Staff Position FAS 157-2 Effective Date of FASB Statement No. 157 delayed the effective date of SFAS 157 for most nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The implementation of SFAS 157 for financial assets and financial liabilities, effective December 31, 2007, did not have a material impact on the Company’s consolidated financial statements. The Company is still assessing the impact of SFAS 157 for nonfinancial assets and nonfinancial liabilities on its consolidated financial statements.

SFAS 157 established a three-level hierarchy of valuation techniques used to measure fair value, defined as follows:

	•		Unadjusted Quoted Prices — The fair value of an asset or liability is based on unadjusted quoted prices, in active markets for identical assets or liabilities. An example would be a marketable equity security that is actively traded on the New York Stock Exchange. (Level 1)

	•		Pricing Models with Significant Observable Inputs — The fair value of an asset or liability is based on information derived from either an active market quoted price, which may require further adjustment based on the attributes of the financial asset or liability being measured, or an inactive market transaction. Examples of such instruments would include (i) a quoted price for an actively traded equity investment that is adjusted for a contractual trading restriction, or (ii) the fair value derived from a trade of an identical or similar security in an inactive market. (Level 2)

	•		Pricing Models with Significant Unobservable Inputs — The fair value of an asset or liability is primarily based on internally derived assumptions surrounding the timing and amount of expected cash flows for the financial instrument. Therefore, these assumptions are unobservable in either an active or inactive market. An example would be the retained interest in a securitization trust. (Level 3)

The Company’s financial assets and financial liabilities measured at fair value on a recurring basis are summarized below:


	Fair Value Measurements as of September 28, 2008
				Quoted Prices in		Significant
				Active Markets for		Other			Significant
				Identical		Observable			Unobservable
	September 28,			Assets/Liabilities		Inputs			Inputs
	2008			(Level 1)		(Level 2)			(Level 3)		Valuation Technique
	(In thousands)
Money Markets	$	23,073		$	—	$	23,073		$	—	market approach
401(k) Restoration Plan investments	$	1,355		$	—	$	1,355		$	—	market approach
Interest rate swap liability		(77	)		—		(77	)		—	income approach

Total	$	24,351		$	—	$	24,351		$	—

The Company invests excess cash from its operating cash accounts in overnight 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. The Company’s investment in overnight money market funds is guaranteed by the federal government under the Treasury Temporary Guarantee Program for Money Market Funds. This program expires on December 19, 2008.

The Company’s 401(k) Restoration Plan (the “Restoration Plan”) is a nonqualified deferred compensation plan which allows officers and highly compensated employees to defer receipt of a portion of their compensation and contribute such amounts to one or more investment funds. The Company entered into a rabbi trust agreement to protect the assets of the Restoration Plan and reports the accounts of the rabbi trust in its consolidated financial statements. The investments are included within other assets and offsetting obligations are included within other liabilities on the consolidated balance sheet. These investments are considered trading securities and are reported at fair value based on third party broker statements. The realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, is recorded in operating income.

The fair value of the Company’s interest rate swap is estimated using net present value of a series of cash flows on both the fixed and floating legs of the swap. These cash flows are 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 mitigates derivative credit risk by transacting with highly rated counterparties. Management has evaluated the credit and nonperformance risks associated with its derivative counterparty and believes them to be insignificant and not warranting a credit adjustment at September 28, 2008. See Note 6 for a discussion of the Company’s interest rate swap.

2. Restaurant Closings and Asset Impairment Charges

As part of ongoing profitability initiatives, the Company will be closing 10 underperforming Pei Wei restaurants during the fourth quarter of 2008. This decision, which was reached during the third quarter of 2008, was the result of a rigorous evaluation of the Company’s entire store portfolio. The Company reviewed each location’s past and present operating performance combined with projected future results. The locations selected for closure represent restaurants with lower profitability that are not projected to provide acceptable returns in the foreseeable future.

During the third quarter of 2008, the Company recognized non-cash asset impairment charges of $7.5 million ($4.7 million net of tax) related to the write-off of the carrying value of long-lived assets associated with the 10 Pei Wei stores being closed. The Company also anticipates additional charges will be recognized during the fourth quarter of 2008 related to lease termination costs and severance payments. The Company anticipates reflecting these charges as well as all historical operations related to the closed stores within discontinued operations in the consolidated financial statements during the fourth quarter of 2008.

3. Discontinued Operations

The Company opened its Taneko restaurant on October 1, 2006 in Scottsdale, Arizona. As a result of the operating losses realized by Taneko and management’s increased focus on the Company’s core Bistro and Pei Wei restaurant concepts, at the end of fiscal 2007, the Company decided to exit operation of the Taneko business. As of December 30, 2007, the Company classified Taneko as held for sale and determined that Taneko met the criteria for classification as a discontinued operation in the accompanying consolidated financial statements. On August 1, 2008, the Company completed the sale of Taneko’s long-lived assets.

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


	Three Months Ended						Nine Months Ended
	September 28,			September 30,			September 28,			September 30,
	2008			2007			2008			2007

Revenues	$	54		$	598		$	1,269		$	1,906

Income (loss) from discontinued operations before income tax benefit		269			(500	)		(152	)		(1,482	)
Income tax (expense) benefit		(93	)		172			52			508

Income (loss) from discontinued operations, net of tax	$	176		$	(328	)	$	(100	)	$	(974	)

Results for discontinued operations for the three and nine months ended September 28, 2008 included a net benefit including the reversal of unamortized deferred lease obligations related to tenant incentive allowances previously received from Taneko’s landlord.

4. 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, restricted stock and restricted stock units (“RSUs”) outstanding under the Company’s stock option plans and the employee stock purchase plan. For the three months ended September 28, 2008 and September 30, 2007, 2.3 million and 1.6 million, respectively, of the Company’s shares were excluded from the calculation due to their anti-dilutive effect. For the nine months ended September 28, 2008 and September 30, 2007, 2.3 million and 1.6 million, respectively, of the Company’s shares were excluded from the calculation due to their anti-dilutive effect.

5. Intangible Assets

Intangible assets are comprised of intangible assets recognized upon the Company’s buyout of minority partner interests when the Company’s purchase price exceeds the imputed fair value at the time of the original investment. Intangible assets consist of the following (in thousands):


	September 28,			December 30,
	2008			2007

Intangible assets, gross	$	29,175		$	25,408
Accumulated amortization		(5,021	)		(3,404	)

Intangible assets, net	$	24,154		$	22,004

6. Accrued Expenses

Accrued expenses consist of the following (in thousands):


	September 28,		December 30,
	2008		2007

Accrued payroll	$	21,646	$	20,100
Sales and use tax payable		4,655		6,215
Property tax payable		4,357		3,635
Accrued insurance		16,638		13,831
Accrued rent		4,585		4,136
Other accrued expenses		12,340		11,342

Total accrued expenses	$	64,221	$	59,259

7. Long-Term Debt

Credit Facility

On August 31, 2007, the Company entered into a senior credit facility (“Credit Facility”) with several commercial financial institutions, which allows for borrowings of up to $150.0 million. The Credit Facility 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 September 28, 2008 as the Company’s leverage ratio was 1.71:1 and the fixed charge coverage ratio was 2.22:1.

The Credit Facility is guaranteed by the Company’s material existing and future domestic subsidiaries. As of September 28, 2008, the Company had borrowings outstanding under the Credit Facility totaling $80.0 million as well as $11.3 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 $58.7 million at September 28, 2008.

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 is 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 has 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 pays a fixed rate of 3.32% on the $40.0 million notional amount and receives payments from its counterparty based on the 1-month LIBOR rate for a term ending on May 20, 2010, effectively resulting in a fixed rate on the LIBOR component of the $40.0 million notional amount. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense.

At September 28, 2008, the recorded fair value of the interest rate swap was a liability balance of approximately $77,000 (approximately $47,000 net of tax). The liability is included in other liabilities in the consolidated balance sheet and is offset by a corresponding amount in stockholders’ equity, representing the net unrealized losses included in accumulated other comprehensive loss. At September 28, 2008, accumulated other comprehensive loss, as reflected in common stockholders’ equity consisted of unrealized losses on interest rate swap contracts totaling approximately $47,000, net of tax.

The Company utilizes the hypothetical derivative method, as defined in SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” to measure hedge effectiveness. There was no hedge ineffectiveness recognized during the period ended September 28, 2008.

8. Share-Based Compensation

Share-based compensation expense includes compensation expense, recognized over the applicable vesting periods, for share-based awards granted after January 2, 2006 and for share-based awards granted prior to, but not yet vested as of the Company’s adoption of FASB SFAS No. 123 (revised 2004) (“SFAS 123R”), Share-Based Payment, and SEC Staff Accounting Bulletin No. 107, Share-Based Payment on January 2, 2006. At September 28, 2008, non-vested share-based compensation, net of actual forfeitures for options and estimated forfeitures for restricted stock, totaled $11.2 million for stock options and $2.5 million for restricted stock and RSUs. This expense will be recognized over the remaining weighted average vesting period which is approximately 1.9 years for stock options and 1.4 years for restricted stock and RSUs.

Share-based compensation from continuing operations is classified as follows (in thousands):


	Three Months Ended						Nine Months Ended
	September 28,			September 30,			September 28,			September 30,
	2008			2007			2008			2007
Labor	$	120		$	197		$	416		$	606
General and administrative		1,845			2,372			5,992			6,705

Total share-based compensation		1,965			2,569			6,408			7,311
Less: tax benefit		(501	)		(674	)		(1,634	)		(1,919	)

Total share-based compensation, net of tax	$	1,464		$	1,895		$	4,774		$	5,392

Share-based compensation presented above excludes approximately $5,000 and $24,000 ($3,000 and $16,000, net of tax), for the three months ended September 28, 2008 and September 30, 2007, respectively, from discontinued operations. Share-based compensation excludes approximately $43,000 and $79,000 ($28,000 and $52,000, net of tax), for the nine months ended September 28, 2008 and September 30, 2007, respectively, from discontinued operations.

9. Income Taxes

The Company’s effective tax rate from continuing operations for the three months ended September 28, 2008 and September 30, 2007 was (60.9%) and 22.4%, respectively. The Company’s effective tax rate from continuing operations for the nine months ended September 28, 2008 and September 30, 2007 was 20.8% and 25.8%, respectively. The effective tax rate for both the three and nine months ended September 28, 2008 includes the additional tax benefit of the reduction of forecasted pretax income for the full year driven primarily by store closure-related impairment charges, and, to a lesser extent, the impact of a change in estimate related to amended tax returns.

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 on January 1, 2007. As a result of the implementation, the Company recognized no material adjustment to its liability for unrecognized income tax benefits that existed as of December 31, 2006. As of September 28, 2008 and December 30, 2007, the Company had $1.1 million and $1.2 million, respectively, of unrecognized tax benefits, all of which would impact the Company’s effective tax rate if recognized.

For both September 28, 2008 and December 30, 2007, the Company had accrued $0.3 million of interest and $0.1 million of penalties related to uncertain tax positions.

10. 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. Assets held for sale related to discontinued operations are included in total assets for Shared Services. There were no material amounts of revenues or transfers among reportable segments.

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


	Total		Shared Services			Bistro		Pei Wei
For the Three Months Ended September 28, 2008:
Revenues	$	298,359	$	—		$	226,443	$	71,916
Segment profit		29,906		(345	)		26,492		3,759
Capital expenditures		23,647		(21	)		18,621		5,047
Depreciation and amortization		17,510		345			12,771		4,394

For the Three Months Ended September 30, 2007:
Revenues	$	270,282	$	—		$	208,544	$	61,738
Segment profit		29,285		(471	)		25,475		4,281
Capital expenditures		51,577		84			40,340		11,153
Depreciation and amortization		14,749		471			10,861		3,417

For the Nine Months Ended September 28, 2008:
Revenues	$	911,018	$	—		$	694,504	$	216,514
Segment profit		100,126		(1,037	)		87,109		14,054
Capital expenditures		69,439		178			53,794		15,467
Depreciation and amortization		51,593		1,037			37,830		12,726

For the Nine Months Ended September 30, 2007:
Revenues	$	800,789	$	—		$	623,746	$	177,043
Segment profit		92,700		(1,025	)		79,661		14,064
Capital expenditures		115,948		219			85,816		29,913
Depreciation and amortization		40,827		1,025			30,398		9,404

As of September 28, 2008:
Total assets	$	632,866	$	56,002		$	462,392	$	114,472
Goodwill		6,819		—			6,566		253

As of December 30, 2007:
Total assets	$	622,630	$	36,813		$	467,659	$	118,158
Goodwill		6,819		—			6,566		253

In addition to using consolidated GAAP 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 minority interest. Because preopening and partner investment expenses are solely related to expansion of the Company’s business, they make an accurate assessment of its 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 concepts 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 a primary consideration when determining whether and when to open additional restaurants.

Reconciliation of Non-GAAP Financial Information to GAAP measures:


	Three Months Ended						Nine Months Ended
	September 28,			September 30,			September 28,			September 30,
	2008			2007			2008			2007

Segment profit	$	29,906		$	29,285		$	100,126		$	92,700
Less: General and administrative		(18,152	)		(17,186	)		(55,801	)		(49,364	)
Less: Preopening expense		(1,519	)		(4,939	)		(6,152	)		(10,774	)
Less: Partner investment expense		(99	)		71			(10	)		1,940
Less: Asset impairment charge		(7,510	)		—			(7,510	)		—
Less: Interest & other income (expense), net		(895	)		(10	)		(2,778	)		512

Income from continuing operations before provision for income taxes		1,731			7,221			27,875			35,014

11. 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.

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 30, 2007 contained in our 2007 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 adequacy of anticipated sources of cash to fund our capital requirements and development of new restaurants, our ability to successfully expand our operations by developing and constructing our restaurants within projected budgets and time periods and changes in general economic and political conditions that affect consumer spending. 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 two restaurant concepts in the Asian niche: P.F. Chang’s China Bistro (“Bistro”) and Pei Wei Asian Diner (“Pei Wei”). On August 1, 2008, we sold the long-lived assets of Taneko Japanese Tavern (“Taneko”), a third restaurant concept, which had been classified as a discontinued operation in the Company’s unaudited consolidated financial statements at the end of fiscal 2007.

Bistro

As of September 28, 2008, we owned and operated 182 full service Bistro restaurants that feature a blend of high quality, traditional Chinese 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 with the exception of two Bistro restaurants located in Hawaii which are operated under a joint venture arrangement in which we own a minority interest.

We intend to open 17 new Bistros during fiscal 2008, 10 of which were open by the end of the third quarter of 2008. We have continued our development in existing markets and by the end of 2008, will have entered five new markets. We have signed lease agreements for all of our new Bistro restaurants planned for fiscal 2008. 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, both of which are 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 $400,000 per restaurant during 2008.

Pei Wei

As of September 28, 2008, we owned and operated 165 quick casual Pei Wei restaurants that offer a modest menu of freshly prepared, high quality Asian cuisine served 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.

In fiscal 2008, we have slowed our growth substantially and limited the number of openings in new markets through the planned development of 25 new restaurants, primarily located in mature or under-penetrated markets. As of the end of the third quarter of 2008, 21 of these new restaurants were open. Our Pei Wei restaurants are generally 2,800 to 3,400 square feet in size and require an average total cash investment of approximately $800,000 to $900,000 and total invested capital of approximately $1.5 million per restaurant, both of which are net of estimated landlord reimbursements. Preopening expenses are expected to average approximately $150,000 per restaurant during 2008. We have signed lease agreements for all of our new Pei Wei restaurants planned for fiscal 2008.

Restaurant Closings and Asset Impairment Charges

As part of ongoing profitability initiatives, we will be closing 10 underperforming Pei Wei restaurants during the fourth quarter of 2008. This decision was a result of a rigorous evaluation of our entire store portfolio. We reviewed each location’s past and present operating performance combined with projected future results. The locations selected for closure represent restaurants with lower profitability that are not projected to provide acceptable returns in the foreseeable future.

During the third quarter of 2008, we recognized non-cash asset impairment charges of $7.5 million ($4.7 million net of tax) related to the planned closure of 10 underperforming Pei Wei stores. These asset impairment charges reduced current quarter diluted earnings per share by $0.19. We also anticipate that additional charges related to these store closures will be recognized during the fourth quarter of 2008 for lease termination costs and severance payments. We anticipate reflecting these charges as well as all historical operations related to the closed stores within discontinued operations in the consolidated financial statements during the fourth quarter of 2008.

We expect Pei Wei restaurant operating income margins to improve by approximately 70-80 basis points in fiscal 2009 as a result of these store closures.

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 2007 Annual Report on Form 10-K.

Results of Operations

The following tables set forth certain unaudited quarterly information for the three and nine month periods ended September 28, 2008 and September 30, 2007, 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. 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.

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.

Results for the three months ended September 28, 2008 and September 30, 2007

Our consolidated operating results for the three months ended September 28, 2008 and September 30, 2007 were as follows (dollars in thousands):


	Three months ended
	September 28,			% of			September 30,			% of
	2008			Revenues			2007			Revenues			Change			% Change

Revenues	$	298,359			100.0	%	$	270,282			100.0	%	$	28,077			10.4	%
Costs and expenses:
Cost of sales		81,075			27.2	%		73,865			27.3	%		7,210			9.8	%
Labor		99,140			33.2	%		91,789			34.0	%		7,351			8.0	%
Operating		52,767			17.7	%		43,816			16.2	%		8,951			20.4	%
Occupancy		17,594			5.9	%		15,970			5.9	%		1,624			10.2	%
General and administrative		18,152			6.1	%		17,186			6.4	%		966			5.6	%
Depreciation and amortization		17,510			5.9	%		14,749			5.5	%		2,761			18.7	%
Preopening expense		1,519			0.5	%		4,939			1.8	%		(3,420	)		(69.2	%)
Partner investment expense		99			0.0	%		(71	)		(0.0	%)		170			—
Asset impairment charge		7,510			2.5	%		—			0.0	%		7,510			—

Total costs and expenses		295,366			99.0	%		262,243			97.0	%		33,123			12.6	%

Income from operations		2,993			1.0	%		8,039			3.0	%		(5,046	)		(62.8	%)
Interest and other income (expense), net		(895	)		(0.3	%)		(10	)		(0.0	%)		(885	)		—
Minority interest		(367	)		(0.1	%)		(808	)		(0.3	%)		441			(54.6	%)

Income before provision for income taxes		1,731			0.6	%		7,221			2.7	%		(5,490	)		(76.0	%)
Provision for income taxes		1,055			0.4	%		(1,618	)		(0.6	%)		2,673			—

Income from continuing operations		2,786			0.9	%		5,603			2.1	%		(2,817	)		(50.3	%)
Income (loss) from discontinued operations, net of tax		176			0.1	%		(328	)		(0.1	%)		504			—

Net Income	$	2,962			1.0	%	$	5,275			2.0	%	$	(2,313	)		(43.8	%)

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

Selected operating statistics for the Bistro for the three months ended September 28, 2008 and September 30, 2007 were as follows (dollars in thousands):


	Three months ended
	September 28,			% of			September 30,			% of
	2008			Revenues			2007			Revenues			Change			% Change

Revenues	$	226,443			100.0	%	$	208,544			100.0	%	$	17,899			8.6	%
Costs and expenses:
Cost of sales		61,430			27.1	%		56,943			27.3	%		4,487			7.9	%
Labor		74,387			32.9	%		69,946			33.5	%		4,441			6.3	%
Operating		38,556			17.0	%		32,981			15.8	%		5,575			16.9	%
Occupancy		12,536			5.5	%		11,739			5.6	%		797			6.8	%
Minority interest		271			0.1	%		599			0.3	%		(328	)		(54.8	%)
Depreciation and amortization		12,771			5.6	%		10,861			5.2	%		1,910			17.6	%
Preopening expense		732			0.3	%		2,974			1.4	%		(2,242	)		(75.4	%)
Partner investment expense		(103	)		(0.0	%)		(433	)		(0.2	%)		330			(76.2	%)

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

Selected operating statistics for Pei Wei for the three months ended September 28, 2008 and September 30, 2007 were as follows (dollars in thousands):


	Three months ended
	September 28,		% of			September 30,		% of
	2008		Revenues			2007		Revenues			Change			% Change

Revenues	$	71,916		100.0	%	$	61,738		100.0	%	$	10,178			16.5	%
Costs and expenses:
Cost of sales		19,645		27.3	%		16,922		27.4	%		2,723			16.1	%
Labor		24,753		34.4	%		21,843		35.4	%		2,910			13.3	%
Operating		14,211		19.8	%		10,835		17.5	%		3,376			31.2	%
Occupancy		5,058		7.0	%		4,231		6.9	%		827			19.5	%
Minority interest		96		0.1	%		209		0.3	%		(113	)		(54.1	%)
Depreciation and amortization		4,394		6.1	%		3,417		5.5	%		977			28.6	%
Preopening expense		787		1.1	%		1,965		3.2	%		(1,178	)		(59.9	%)
Partner investment expense		202		0.3	%		362		0.6	%		(160	)		(44.2	%)

Certain percentage amounts may 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 as follows:

Bistro: The increase in revenues was attributable to revenues of $24.7 million generated by the 20 new Bistro restaurants that opened during the first three quarters of 2008 and the last quarter of 2007. The increase was also due to an increase in revenues of $1.0 million generated by restaurants that opened during the third quarter of 2007, which is primarily a result of a full three months of revenues during the third quarter of 2008. Revenues for stores that opened prior to the first quarter of 2007 declined by $7.7 million as a significant reduction in overall guest traffic more than offset the benefit of a four to five percent average check increase, reflecting the net impact of price increases and menu mix changes. Additionally, the impact of Hurricane Ike resulted in $0.4 million of lost revenue during the third quarter of fiscal 2008 as a result of temporary store closures at five Bistro locations in the Houston area.

Pei Wei: The increase in revenues was attributable to revenues of $10.4 million generated by the 28 new Pei Wei restaurants that opened during the first three quarters of 2008 and the last quarter of 2007. The increase was also due to an increase in revenues of $1.3 million generated by restaurants that opened during the third quarter of 2007, which is primarily a result of a full three months of revenues during the third quarter of 2008. Revenues for stores that opened prior to the first quarter of 2007 decreased by $1.5 million primarily due to a significant reduction in overall guest traffic partially offset by the benefit of a slightly higher average check, reflecting the net impact of price and menu mix changes. Additionally, the impact of Hurricane Ike resulted in $0.5 million of lost revenue during the third quarter of fiscal 2008 as a result of temporary store closures at 13 Pei Wei locations in the Houston area.

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 from the prior year primarily due to lower poultry expense resulting principally from recognition of anticipated rebate benefits, as well as lower seafood costs resulting from product mix shifts and favorable pricing. The decrease was partially offset by an increase in meat expense due to product mix shifts, grill menu promotions and increased pricing, as well as higher wok oil costs.

Pei Wei: Cost of sales as a percentage of revenues decreased primarily due to lower seafood expense resulting from the deletion of scallops from the Pei Wei menu, partially offset by higher wok oil costs and higher poultry costs, including the benefit of anticipated rebate benefits.

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 decreased primarily due to improved labor efficiency in culinary and hospitality positions. The decrease was partially offset by higher management incentive costs principally resulting from the 2007 change in the Bistro partnership structure, the benefit of reduced workers’ compensation insurance liabilities in the third quarter of 2007 resulting from lower than anticipated claim development from prior claim years and the impact of decreased leverage on lower average weekly sales on the portion of labor expenses that is fixed in nature.

Pei Wei: Labor expenses as a percentage of revenues decreased primarily due to improved labor efficiency in culinary and hospitality positions as well as lower management salaries resulting from reduced management headcount. The decrease is partially offset by higher hourly labor costs resulting from the utilization of additional key hourly employees as well as the benefit of reduced workers’ compensation insurance liabilities in the third quarter of 2007 resulting from lower than anticipated claim development from prior claim years and the impact of decreased leverage on lower average weekly sales on the portion of labor expenses that is fixed in nature.

Operating

Operating expenses consist primarily of various restaurant-level costs such as repairs and maintenance, utilities and marketing, certain of which are 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 increased primarily due to higher marketing spend, higher utility costs and the impact of decreased leverage on lower average weekly sales on the portion of operating costs that is fixed in nature.

Pei Wei: Operating expenses as a percentage of revenues increased primarily due to higher marketing spend, higher utility costs and the impact of decreased leverage resulting from lower average weekly sales on the portion of operating costs that is fixed in nature as well as higher menu printing costs related to a new menu roll-out.

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 decreased slightly primarily due to lower building rent expense resulting from a greater number of contingent rent-only locations as well as lower general liability insurance. The benefits resulting from these declines were partially offset by the impact of decreased leverage on lower average weekly sales.

Pei Wei: Occupancy costs as a percentage of revenues increased slightly primarily due to the impact of decreased leverage resulting from lower average weekly sales, partially offset by lower property taxes.

Minority Interest

Minority interest represents the portion of our net earnings which is attributable to the collective ownership interests of our minority partners. 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 decreased due to the impact of partnership interest buyouts occurring during fiscal 2007 and the first three quarters of fiscal 2008. These buyouts reduced the number of minority interests from 152 as of September 30, 2007 to 73 as of September 28, 2008.

Pei Wei: Minority interest as a percentage of revenues decreased due to the net impact of partnership interest buyouts occurring during fiscal 2007 and the first three quarters of fiscal 2008, as well as lower restaurant net income.

Depreciation and Amortization

Depreciation and amortization expenses include the depreciation and amortization of fixed assets, gains and losses on disposal of 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 on restaurants that opened during the last quarter of fiscal 2007 and the first three quarters of fiscal 2008. As a percentage of revenues, depreciation and amortization increased due to the impact of decreased leverage resulting from lower average weekly sales.

Pei Wei: Depreciation and amortization increased primarily due to additional depreciation on restaurants that opened during the last quarter of fiscal 2007 and the first three quarters of fiscal 2008. As a percentage of revenues, depreciation and amortization increased due to the impact of decreased leverage resulting from lower average weekly sales.

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 expense for the period between the possession date of leased premises and the restaurant opening date. Each segment contributed as follows:

Bistro: Preopening expenses decreased primarily as a result of there being no Bistro restaurant openings during the third quarter of 2008 compared to five new Bistro restaurants during the third quarter of 2007, as well as the timing of expenses related to a lower number of scheduled new restaurant openings in the remainder of fiscal 2008 and early fiscal 2009 compared to the last quarter of fiscal 2007 and early fiscal 2008.

Pei Wei: Preopening expenses decreased primarily due to the impact of opening six new Pei Wei restaurants during the third quarter of 2008 compared to 11 new Pei Wei restaurants during the third quarter of 2007, as well as the timing of expenses related to a lower number of scheduled new restaurant openings in the remainder of fiscal 2008 and early fiscal 2009 compared to the last quarter of fiscal 2007 and early fiscal 2008.

Partner Investment Expense

Partner investment expense represents the difference between the imputed fair value of our 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: The change in partner investment expense resulted primarily from changes in partnership structure beginning in 2007 which led to a significant increase in early buyouts of minority partner interests beginning in fiscal 2007. Early buyouts resulted in a $0.1 million reversal of previously recognized partner investment expense during the third quarter of 2008 compared to a $0.4 million reversal during the third quarter of 2007, in each case due to the fair value of the partners’ interests at inception date exceeding the fair value of the partners’ interests at repurchase date.

Pei Wei: Partner investment expense decreased primarily due to opening six new Pei Wei restaurants during the third quarter of 2008 compared to 11 new Pei Wei restaurants during the third quarter of 2007, partially offset by lower expense reductions related to minority partnership interest buyouts in the third quarter of 2008 compared to the third quarter of 2007.

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.

Interest and Other Income (Expense), Net

Interest income earned during the third quarter of fiscal 2007 primarily related to interest-bearing overnight deposits as lower borrowing levels resulted in full capitalization of interest expense. Interest expense recognized during the third quarter of 2008 primarily consists of interest costs in excess of amounts capitalized related to our outstanding credit line and other borrowings. Accretion expense related to our conditional asset retirement obligations was also recognized in interest expense during fiscal 2008 and 2007.

Consolidated interest and other income (expense), net decreased primarily due to higher interest expense in 2008 resulting from greater interest incurred due to a higher level of outstanding credit line borrowings in 2008, a portion of which exceeded our limit for capitalization during 2008. We expect to continue to recognize net interest expense during 2008 until such time as we lower our outstanding debt levels.

Provision for Income Taxes

Our effective tax rate from continuing operations was (60.9%) for the third quarter of fiscal 2008 compared to 22.4% for the third quarter of fiscal 2007. The current quarter includes the additional tax benefit of the reduction of forecasted pretax income for the full year driven primarily by store closure-related impairment charges, and, to a lesser extent, the impact of a change in estimate related to amended tax returns. Besides the effect of the impairment charges and the change in estimate related to the amended returns, the income tax rate for the third quarter of both fiscal 2008 and fiscal 2007 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.

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.

Results for the nine months ended September 28, 2008 and September 30, 2007

Our consolidated operating results for the nine months ended September 28, 2008 and September 30, 2007 were as follows (dollars in thousands):


	Nine months ended
	September 28,			% of			September 30,			% of
	2008			Revenues			2007			Revenues			Change			% Change

Revenues	$	911,018			100.0	%	$	800,789			100.0	%	$	110,229			13.8	%
Costs and expenses:
Cost of sales		248,248			27.2	%		219,263			27.4	%		28,985			13.2	%
Labor		304,807			33.5	%		270,959			33.8	%		33,848			12.5	%
Operating		151,336			16.6	%		127,080			15.9	%		24,256			19.1	%
Occupancy		53,349			5.9	%		46,384			5.8	%		6,965			15.0	%
General and administrative		55,801			6.1	%		49,364			6.2	%		6,437			13.0	%
Depreciation and amortization		51,593			5.7	%		40,827			5.1	%		10,766			26.4	%
Preopening expense		6,152			0.7	%		10,774			1.3	%		(4,622	)		(42.9	%)
Partner investment expense		10			0.0	%		(1,940	)		(0.2	%)		1,950			—
Asset impairment charge		7,510			0.8	%		—			0.0	%		7,510			—

Total costs and expenses		878,806			96.5	%		762,711			95.2	%		116,095			15.2	%

Income from operations		32,212			3.5	%		38,078			4.8	%		(5,866	)		(15.4	%)
Interest and other income (expense), net		(2,778	)		(0.3	%)		512			0.1	%		(3,290	)		—
Minority interest		(1,559	)		(0.2	%)		(3,576	)		(0.4	%)		2,017			(56.4	%)

Income before provision for income taxes		27,875			3.1	%		35,014			4.4	%		(7,139	)		(20.4	%)
Provision for income taxes		(5,794	)		(0.6	%)		(9,023	)		(1.1	%)		3,229			(35.8	%)

Income from continuing operations		22,081			2.4	%		25,991			3.2	%		(3,910	)		(15.0	%)
Loss from discontinued operations, net of tax		(100	)		(0.0	%)		(974	)		(0.1	%)		874			(89.7	%)

Net Income	$	21,981			2.4	%	$	25,017			3.1	%	$	(3,036	)		(12.1	%)

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

Selected operating statistics for the Bistro for the nine months ended September 28, 2008 and September 30, 2007 were as follows (dollars in thousands):


	Nine months ended
	September 28,			% of			September 30,			% of
	2008			Revenues			2007			Revenues			Change			% Change

Revenues	$	694,504			100.0	%	$	623,746			100.0	%	$	70,758			11.3	%
Costs and expenses:
Cost of sales		188,839			27.2	%		170,420			27.3	%		18,419			10.8	%
Labor		229,858			33.1	%		209,085			33.5	%		20,773			9.9	%
Operating		111,483			16.1	%		96,859			15.5	%		14,624			15.1	%
Occupancy		38,247			5.5	%		34,554			5.5	%		3,693			10.7	%
Minority interest		1,138			0.2	%		2,769			0.4	%		(1,631	)		(58.9	%)
Depreciation and amortization		37,830			5.4	%		30,398			4.9	%		7,432			24.4	%
Preopening expense		3,732			0.5	%		6,020			1.0	%		(2,288	)		(38.0	%)
Partner investment expense		(848	)		(0.1	%)		(3,112	)		(0.5	%)		2,264			(72.8	%)

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

Selected operating statistics for Pei Wei for the nine months ended September 28, 2008 and September 30, 2007 were as follows (dollars in thousands):


	Nine months ended
	September 28,		% of			September 30,		% of
	2008		Revenues			2007		Revenues			Change			% Change

Revenues	$	216,514		100.0	%	$	177,043		100.0	%	$	39,471			22.3	%
Costs and expenses:
Cost of sales		59,409		27.4	%		48,843		27.6	%		10,566			21.6	%
Labor		74,949		34.6	%		61,874		34.9	%		13,075			21.1	%
Operating		39,853		18.4	%		30,221		17.1	%		9,632			31.9	%
Occupancy		15,102		7.0	%		11,830		6.7	%		3,272			27.7	%
Minority interest		421		0.2	%		807		0.5	%		(386	)		(47.8	%)
Depreciation and amortization		12,726		5.9	%		9,404		5.3	%		3,322			35.3	%
Preopening expense		2,420		1.1	%		4,754		2.7	%		(2,334	)		(49.1	%)
Partner investment expense		858		0.4	%		1,172		0.7	%		(314	)		(26.8	%)

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

Revenues