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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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

For the Fiscal Year Ended December 29,
2002

or



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

For the transition period
from                     to                     .

Commission File Number: 0-25123



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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)15210 N. Scottsdale Rd., Ste.
    300
    Scottsdale, AZ(Address of principal executive
    offices) |  | 86-0815086(I.R.S. Employer
    Identification No.)85254(Zip Code)

Registrants telephone number, including
area code: (602) 957-8986

Securities registered pursuant to
Section 12(b) of the Act: NONE

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $.001 par value


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 report(s), and
(2) has been subject to such filing requirements for the
past 90 days. 
 Yes þ No
o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K. þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the Act).

 Yes þ No
o

The aggregate market value as of the last day of
the second fiscal quarter, June 30, 2002, is $782,397,212.

On February 7, 2003 there were outstanding
25,070,372 shares of the Registrants Common Stock.

Documents Incorporated by Reference

(to the extent indicated herein)


Specified portions of the registrants Proxy
Statement with respect to the Annual Meeting of Stockholders to
be held April 9, 2003 are incorporated by reference into
Part III of this Report.



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TABLE OF CONTENTS



|         |                                                                                               |  |  |  |  |  |  | 
|-------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  
|         | Item 1. Business                                                                             
|         | Item 2. Properties                                                                           
|         | Item 3. Legal Proceedings                                                                    
|         | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II 
|         | Item 5. Market for the Registrants Common Stock and Related Stockholder Matters             
|         | Item 6. Selected Financial Data                                                              
|         | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|         | Item 7A. Quantitative and Qualitative Disclosures about Market Risks                         
|         | Item 8. Financial Statements and Supplementary Data                                          
|         | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III
|         | Item 10. Directors and Executive Officers of the Registrant                                  
|         | Item 11. Executive Compensation                                                              
|         | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|         | Item 13. Certain Relationships and Related Transactions                                      
|         | Item 14. Controls and Procedures                                                             
|PART IV 
|         | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|EX-10.21
|EX-10.22
|EX-21.1 
|EX-23.1 
|EX-99.1 
|EX-99.2 



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TABLE OF CONTENTS

|         |     |  |  |                                                                                           |  |  |    | 
|-------- | --- |  |  | ----------------------------------------------------------------------------------------- |  |  | -- | 
|Item     |     |  |  | Page                                                                                     
|         |     |  |  |                                                                                          
|PART I  
|         | 1.  |  |  | Business                                                                                  |  |  | 3  | 
|         | 2.  |  |  | Properties                                                                                |  |  | 19 | 
|         | 3.  |  |  | Legal Proceedings                                                                         |  |  | 21 | 
|         | 4.  |  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |  | 21 | 
|PART II 
|         | 5.  |  |  | Market for the Registrants Common Stock and
    Related Stockholder Matters              |  |  | 21 | 
|         | 6.  |  |  | Selected Financial Data                                                                   |  |  | 21 | 
|         | 7.  |  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |  | 23 | 
|         | 7A. |  |  | Quantitative and Qualitative Disclosures About
    Market Risks                           |  |  | 33 | 
|         | 8.  |  |  | Financial Statements and Supplementary Data                                               |  |  | 34 | 
|         | 9.  |  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |  | 54 | 
|PART III
|         | 10. |  |  | Directors and Executive Officers of the Registrant                                        |  |  | 54 | 
|         | 11. |  |  | Executive Compensation                                                                    |  |  | 54 | 
|         | 12. |  |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |  | 55 | 
|         | 13. |  |  | Certain Relationships and Related Transactions                                            |  |  | 55 | 
|         | 14. |  |  | Controls and Procedures                                                                   |  |  | 55 | 
|PART IV 
|         | 15. |  |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |  |  | 56 | 

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PART I






|        |         
|------- | --------
|Item 1. | Business

General

P.F. Changs owned and operated 79 full
service, or Bistro, restaurants as of December 29, 2002
that feature a blend of high quality, traditional Chinese
cuisine and American hospitality in a sophisticated,
contemporary bistro setting. Our restaurants offer intensely
flavored, highly memorable culinary creations, prepared from
fresh ingredients, including premium herbs and spices imported
directly from China. Our menu is focused on select dishes
created to capture the distinct flavors and styles of the five
major culinary regions of China: Canton, Hunan, Mongolia,
Shanghai and Szechwan. By adhering to the Chinese culinary
precepts of fanand tsai,a balancing of
rice, noodles and grains with meat, seafood and vegetables, the
Bistros menu offers an array of taste, texture, color and
aroma. The menu is highlighted by dishes such as Changs
Spicy Chicken, Orange Peel Beef, Peking Dumplings, Chicken in
Soothing Lettuce Wrap, Szechwan-Style Long Beans and Dan Dan
Noodles. Our traditional cuisine is complemented by a full
service bar offering an extensive selection of wines, specialty
drinks, Asian beers, cappuccino and espresso. We offer superior
customer service in a high energy atmosphere featuring a display
kitchen, exhibition wok cooking and a decor that includes wood
and slate floors, mounted life-size terra cotta replicas of
Xian warriors and narrative murals depicting 12th century
China.

We also owned and operated 16 limited service, or
Pei Wei, restaurants as of December 29, 2002. We believe
that there is an opportunity to leverage our knowledge and
expertise in Chinese and Asian cuisine. Accordingly, we have
developed Pei Wei Asian Diner, a concept that caters to a
quicker, more casual dining experience as compared to P.F.
Changs China Bistro. Pei Wei opened its first unit in July
2000 in the Phoenix, Arizona area, four units in 2001, and
eleven units in 2002. These restaurants are located in Arizona,
Dallas, Texas and Southern California.

Concept and Strategy

P.F. Changs objectives are to develop and
operate a nationwide system of restaurants that offer guests a
sophisticated dining experience, create a loyal customer base
that generates a high level of repeat business and provide
superior returns to our investors. To achieve our objectives, we
strive to offer high quality Chinese cuisine in a memorable
atmosphere while delivering superior customer service and an
excellent dining value. Key to our expansion strategy and
success at the restaurant level is our management philosophy
which allows regional managers, certain general managers and
certain executive chefs to become partners and participate in
the cash flows of the restaurants for which they have
responsibility. We believe we have demonstrated the viability of
the P.F. Changs concept in a wide variety of markets
across the United States. We intend to continue our expansion
program and believe the management equity participation provided
by our partnership programs should position us to continue this
expansion without sacrificing P.F. Changs restaurant level
operating performance and return on investment.

Menu

The menu for our Bistro restaurants offers a
harmony of taste, texture, color and aroma by balancing the
principles of fanand tsaifoods. Fanfoods include rice, noodles, grains and dumplings, while
vegetables, meat, poultry and seafood are tsaifoods. Our chefs are trained to produce distinctive Chinese
cuisine with traditional recipes from the five major culinary
regions of China: Canton, Hunan, Mongolia, Shanghai and
Szechwan. The intense heat of Mandarin-style wok cooking sears
in the clarity and distinct flavor of fresh ingredients. Slow
roasted Cantonese-style ducklings and BBQ spare ribs are
prepared in vertical ovens, while handmade shrimp, pork and
vegetable dumplings, as well as flavorful fish and vegetables,
are prepared in custom-made steamer cabinets. We also offer
several vegetarian dishes for our customers who enjoy true
vegetarian items. MSG is not added to any ingredients at P.F.
Changs.

In addition to the core menu, the Bistro menu
also offers special lunch and dinner selections. These special
selections are developed by our executive chefs around the
country and are modified several times a

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year to provide our guests with fresh, new
tastes. Individual items that are well received by guests
migrate to the core menu. Fresh produce, seafood, meat, poultry
and specialty items that are specific to a certain region of the
United States or to a specific season are featured on a daily
basis. Extensive research and development, including trips to
China by our corporate executive chef, continually reinforce our
commitment to training P.F. Changs chefs and enhancing our
menu offerings.


The Bistros entrees range in price from
$8.00 to $18.00, and our appetizers range in price from $4.00 to
$8.00. The average check per guest, including alcoholic
beverages, is approximately $17.00 to $18.00. Sales of alcoholic
beverages, featuring an extensive selection of wines, all of
which are offered by the glass, constitute approximately 17% of
revenues. Lunch and dinner contribute approximately 30% and 70%
of revenues, respectively.

The menu for our limited service concept, Pei
Wei, also offers a variety of intensely flavored culinary
creations; however, this menu is more concise and includes not
only Chinese cuisine but other Asian dishes as well. Our guests
can enjoy some of their favorite Chinese dishes available at the
Bistro, such as Soothing Lettuce Wraps and Orange Peel Beef,
while also sampling other items such as Vietnamese Salad Rolls
and Pad Thai. Pei Wei entrees range in price from $6.00 to
$9.00, with appetizers ranging from $3.00 to $7.00. We do offer
beer and wine at Pei Wei and these purchases comprise
approximately 3% of sales. Take-out sales comprise approximately
40% of total revenues. The average check per dine-in guest at
Pei Wei, including beer and wine sales, is approximately $8.00
to $9.00.

Operations

We utilize a partnership structure to facilitate
the development, leadership and operation of our restaurants. We
have entered into a series of partnership agreements with our
regional managers (Market Partners and Area
Partners), certain of our general managers
(Operating Partners) and certain of our executive
chefs (Chef Partners). Each partner is required to
make a cash capital contribution at fair value to their
respective partnership. We do not finance any partner capital
contributions. For this capital contribution, the partner
receives an ownership interest generally ranging from two to
seven percent in a specific restaurant or region. Each partner
shares in the income or loss of the restaurant or region they
oversee.

P.F. Changs strives to create a
sophisticated dining experience through the careful selection,
training and supervision of personnel. The staff of a typical
Bistro restaurant consists of a general manager, two or three
managers, an executive chef, one or two sous chefs and
approximately 125 hourly employees, many of whom work part-time.
The staff of a typical Pei Wei restaurant consists of a general
manager, one or two managers, an executive chef, and one sous
chef, as well as approximately 35 hourly employees. The general
manager of each restaurant is responsible for the day-to-day
operations of that restaurant, including hiring, training and
development of personnel, as well as operating results. The
executive chef is responsible for product quality, purchasing,
food costs and kitchen labor costs. P.F. Changs requires
our general managers and executive chefs to have significant
experience in the full service restaurant industry.

P.F. Changs has a comprehensive eight week
management development program. This program consists of four
weeks of culinary training, including both culinary job
functions and culinary management, with the remaining four weeks
focused on service strategies, guest relations, office
management and shift management. All management and culinary
personnel are required to successfully complete all sections of
this program. Upon the completion of each four week section,
each trainee must successfully complete a comprehensive
certification.

The general managers are responsible for
selecting hourly employees for their restaurants. The general
managers and regional managers are responsible for administering
our hourly staff training programs that are developed by the
training and culinary departments. The hourly employee
development program lasts between one and two weeks and focuses
on both technical and cultural knowledge.

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Marketing

P.F. Changs focuses its business strategy
on providing high quality, traditional Chinese cuisine served by
an attentive staff in a distinctive environment at an affordable
price. By focusing on the food, service and ambiance of the
restaurant, we have created an environment that fosters repeat
patronage and encourages word-of-mouth recommendations. We
believe that word-of-mouth advertising is a key component in
driving guests initial trial and subsequent visits.

To attract new customers, P.F. Changs has
also implemented a local, regional and national marketing
strategy through paid advertising, public relations efforts and
community involvement to maintain and build awareness throughout
each community in which we operate. In order to increase local
awareness of our restaurants, we build relationships with local
radio personalities who provide testimonials to their listening
audiences. We select stations that are consistently among the
highest rated stations in their markets. Likewise, the radio
personalities are very well recognized in their communities, not
only on their station, but also in the market as a whole.

P.F. Changs also undertakes specialty
programs such as concierge and accommodation programs targeted
to build relationships with the local hotel concierges, who
offer personal recommendations to the guests of their
establishments. Community involvement with local organizations,
participation in non-profit benefits and auctions, chef
demonstrations and cooking classes also increase consumer
awareness.

We also advertise in in-flight magazines for
airlines that carry a high level of traffic in our markets, in
order to make frequent travelers aware of our locations across
the country.

Competition

The restaurant business is intensely competitive
with respect to food quality, price-value relationships,
ambiance, service and location, and many existing restaurants
compete with P.F. Changs at each of our locations. Key
competitive factors in the industry include the quality and
value of the food, quality of service, price, dining experience,
restaurant location and the ambiance of the facilities. For the
Bistro, our primary competitors include mid-priced, full service
casual dining restaurants. For Pei Wei, our main competitors are
other value-priced, quick service concepts as well as locally
owned and operated Chinese restaurants. There are many
well-established competitors with substantially greater
financial, marketing, personnel and other resources than ours.
In addition, many of our competitors are well established in the
markets where our operations are, or in which they may be,
located. While we believe that our restaurants are distinctive
in design and operating concept, other companies may develop
restaurants that operate with similar concepts.

Management Information Systems

P.F. Changs utilizes an integrated
information system to manage the flow of information within each
restaurant and between the restaurants and the corporate office.
This system includes a point-of-sales local area network that
helps facilitate the operations of the restaurant by recording
sales transactions and printing orders in the appropriate
locations within the restaurant. Additionally, the point of
sales system is utilized to authorize, batch and transmit credit
card transactions, to record employee time clock information, to
schedule labor and to produce a variety of management reports.
Select information that is captured from this system is
transmitted to the corporate office on a daily basis, which
enables senior management to continually monitor operating
results. We believe that our current point of sales system will
be an adequate platform to support our continued expansion.

Purchasing

P.F. Changs purchasing programs provide our
restaurants with high quality ingredients at competitive prices
from reliable sources. Consistent menu specifications, as well
as purchasing and receiving guidelines, ensure freshness and
quality. Because we utilize only fresh ingredients in all of our
menu offerings, inventory is maintained at a modest level. We
negotiate short-term and long-term contracts depending on demand
for our products. These contracts generally average in duration
from two to twelve months. With the exception of

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produce, which is purchased locally, we utilize
Distribution Market Advantage as the primary distributor of
product to all of our restaurants. Distribution Market Advantage
is a cooperative of multiple food distributors located
throughout the United States. We have a non-exclusive contract
with Distribution Market Advantage on terms and conditions that
we believe are consistent with those made available to similarly
situated restaurant companies. We believe that competitively
priced alternative distribution sources are available should
they become necessary. Chinese-specific ingredients are usually
sourced directly from Hong Kong, China and Taiwan. We have
developed an extensive network of importers in order to maintain
an adequate supply of items that conform to our brand and
product specifications.


Employees

At December 29, 2002, P.F. Changs
employed approximately 12,500 persons, 129 of whom were
executive office personnel, 836 of whom were unit management
personnel and the remainder of whom were hourly restaurant
personnel. Our employees are not covered by a collective
bargaining agreement. We consider our employee relations to be
good.

Unit Economics

P.F. Changs believes that unit economics
are critical to the long-term success of any restaurant concept.
Accordingly, we focus on unit-level returns, over time, as a key
measurement of our success or failure. For analysis purposes, we
group our restaurants by the year in which they opened. We then
compare each class to its peers over time as well as
the performance of the entire system. These unit economics are
set forth below.

Please note that the restaurant level return
on invested capital is not a generally accepted accounting
principle measure of performance and does not represent a return
on an individual stockholders investment in P.F.
Changs.Rather, it measures the
return on the capital invested in the restaurants by
P.F. Changs. The restaurant-level return on invested
capital is calculated as the quotient of the restaurant income
(loss) before minority interests, interest (income) expense,
net, income taxes, rent expense and preopening adjustment
divided by the total restaurant invested capital. Interest
(income) expense, net, income taxes and rent expense are
excluded from this calculation to provide for an evaluation of
operational results of individual restaurants without the
variability introduced by different forms of financing and
ownership, such as purchased and financed versus leased.

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|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |      |         |        |  |         |         |           |  |       |         |   |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |    |  |   |         |   |  |   |         |  
|-------------------------------------------------------------- |  | --------------------------------------------------- | ------- | ---------------- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | ------ |  | ------- | ------- | --------- |  | ----- | ------- | - |  | - | ------ | -- |  | - | ---- | - |  | - | ------- | - |  | - | ------ | -- |  | - | ------- | - |  | - | ------- | -
|                                                               |  |                                                     |         |                  |  |      |         |     
|                                                               |  | Bistro Units Opened in                              |         | Total Restaurant |  |      |         |     
|                                                               |  |                                                     |         |                  |  |      |         |     
|                                                               |  | Pre 1996                                            |         | 1996             |  | 1997 |         | 1998 |  | 1999 |         | 2000 |  | 2001 |         | 2002 |  | 2003 |         | Bistro |  | Pei Wei |         | Corporate |  | Total
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |      |         |        |  |         |         |           |  |      
|                                                               |  |                                                    
|                                                               |  | (Dollars in thousands, except average weekly sales)
|Fiscal 2002                                                    |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |      |         |        |  |         |         |           |  |       |         |   |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |    |  |   |         |   |  |   |         |  
|Units(1)                                                       |  |                                                     | 4       |                  |  |      | 3       |      |  |      | 6       |      |  |      | 10      |      |  |      | 13      |        |  |         | 16      |           |  |       | 13      |   |  |   | 14     |    |  |   |      |   |  |   | 79      |   |  |   | 16     |    |  |   |         |   |  |   | 95      |  
|Sales weeks                                                    |  |                                                     | 208     |                  |  |      | 156     |      |  |      | 312     |      |  |      | 520     |      |  |      | 676     |        |  |         | 832     |           |  |       | 676     |   |  |   | 297    |    |  |   |      |   |  |   | 3,677   |   |  |   | 524    |    |  |   |         |   |  |   | 4,201   |  
|Average weekly sales                                           |  | $                                                   | 119,602 |                  |  | $    | 148,614 |      |  | $    | 109,566 |      |  | $    | 117,855 |      |  | $    | 106,620 |        |  | $       | 103,599 |           |  | $     | 103,926 |   |  | $ | 94,744 |    |  |   |      |   |  | $ | 108,837 |   |  | $ | 41,795 |    |  |   |         |   |  | $ | 100,474 |  
|Change in comparable store sales(2)                            |  |                                                     | (2.4    | )%               |  |      | 5.3     | %    |  |      | 3.4     | %    |  |      | 2.8     | %    |  |      | 6.5     | %      |  |         | 9.8     | %         |  |       | 6.7     | % |  |   |        |    |  |   |      |   |  |   | 5.3     | % |  |   | (6.1   | )% |  |   |         |   |  |   |         |  
|Restaurant-level operating margin                              |  |                                                     | 21.2    | %                |  |      | 22.0    | %    |  |      | 19.2    | %    |  |      | 21.3    | %    |  |      | 20.3    | %      |  |         | 19.1    | %         |  |       | 17.1    | % |  |   | 13.4   | %  |  |   |      |   |  |   | 19.3    | % |  |   | 11.0   | %  |  |   |         |   |  |   | 19.1    | %
|Revenues                                                       |  | $                                                   | 24,877  |                  |  | $    | 23,183  |      |  | $    | 34,185  |      |  | $    | 61,284  |      |  | $    | 72,075  |        |  | $       | 86,194  |           |  | $     | 70,252  |   |  | $ | 28,140 |    |  | $ |     |   |  | $ | 400,190 |   |  | $ | 21,901 |    |  | $ |        |   |  | $ | 422,091 |  
|Total restaurant operating costs                               |  |                                                     | 19,604  |                  |  |      | 18,063  |      |  |      | 27,574  |      |  |      | 48,172  |      |  |      | 57,357  |        |  |         | 69,583  |           |  |       | 58,186  |   |  |   | 24,301 |    |  |   |     |   |  |   | 322,840 |   |  |   | 19,499 |    |  |   |        |   |  |   | 342,339 |  
|General and Administrative                                     |  |                                                     |        |                  |  |      |        |      |  |      |        |      |  |      |        |      |  |      |        |        |  |         |        |           |  |       |        |   |  |   |       |    |  |   |     |   |  |   |        |   |  |   |       |    |  |   | 20,590  |   |  |   | 20,590  |  
|Depreciation and Amortization                                  |  |                                                     | 403     |                  |  |      | 388     |      |  |      | 805     |      |  |      | 1,826   |      |  |      | 2,368   |        |  |         | 3,330   |           |  |       | 2,713   |   |  |   | 963    |    |  |   |     |   |  |   | 12,796  |   |  |   | 840    |    |  |   | 735     |   |  |   | 14,371  |  
|Preopening expense                                             |  |                                                     |        |                  |  |      |        |      |  |      |        |      |  |      |        |      |  |      |        |        |  |         |        |           |  |       | 98      |   |  |   | 4,258  |    |  |   | 660  |   |  |   | 5,016   |   |  |   | 1,318  |    |  |   |        |   |  |   | 6,334   |  
|Interest (income) expense and other income,
    net            |  |                                                     | 29      |                  |  |      | 87      |      |  |      | 31      |      |  |      | 22      |      |  |      | 4       |        |  |         |        |           |  |       | (11     | ) |  |   |       |    |  |   |     |   |  |   | 162     |   |  |   | 20     |    |  |   | (223    | ) |  |   | (41     | )
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |      |         |        |  |         |         |           |  |       |         |   |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |    |  |   |         |   |  |   |         |  
|Income (loss) before minority interest and income
    taxes(3) |  |                                                     | 4,841   |                  |  |      | 4,645   |      |  |      | 5,775   |      |  |      | 11,264  |      |  |      | 12,346  |        |  |         | 13,281  |           |  |       | 9,266   |   |  |   | (1,382 | )  |  |   | (660 | ) |  |   | 59,376  |   |  |   | 224    |    |  | $ | (21,102 | ) |  | $ | 38,498  |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |      |         |        |  |         |         |           |  |       |         |   |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |    |  |   |         |   |  |   |         |  
|Rent expense(4)                                                |  |                                                     | 1,454   |                  |  |      | 1,263   |      |  |      | 1,608   |      |  |      | 2,495   |      |  |      | 2,594   |        |  |         | 3,566   |           |  |       | 2,482   |   |  |   | 1,041  |    |  |   |      |   |  |   | 16,503  |   |  |   | 1,164  |    |  |   |         |   |  |   |         |  
|Interest (income) expense and other income,
    net            |  |                                                     | 29      |                  |  |      | 87      |      |  |      | 31      |      |  |      | 22      |      |  |      | 4       |        |  |         |        |           |  |       | (11     | ) |  |   |       |    |  |   |     |   |  |   | 162     |   |  |   | 20     |    |  |   |         |   |  |   |         |  
|Preopening Adjustment(5)                                       |  |                                                     |        |                  |  |      |        |      |  |      |        |      |  |      |        |      |  |      |        |        |  |         |        |           |  |       |         |   |  |   | (133   | )  |  |   | 660  |   |  |   | 527     |   |  |   | 69     |    |  |   |         |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |      |         |        |  |         |         |           |  |       |         |   |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |    |  |   |         |   |  |   |         |  
|Restaurant income (loss), as adjusted                          |  | $                                                   | 6,324   |                  |  | $    | 5,995   |      |  | $    | 7,414   |      |  | $    | 13,781  |      |  | $    | 14,944  |        |  | $       | 16,847  |           |  | $     | 11,737  |   |  | $ | (474   | )  |  | $ |     |   |  | $ | 76,568  |   |  | $ | 1,477  |    |  |   |         |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |      |         |        |  |         |         |           |  |       |         |   |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |    |  |   |         |   |  |   |         |  
|Average restaurant assets employed(6)                          |  | $                                                   | 1,442   |                  |  | $    | 2,376   |      |  | $    | 4,941   |      |  | $    | 15,137  |      |  | $    | 21,101  |        |  | $       | 33,799  |           |  | $     | 27,935  |   |  | $ | 10,738 |    |  |   |      |   |  | $ | 117,469 |   |  | $ | 6,070  |    |  |   |         |   |  |   |         |  
|Present value of remaining lease obligations(7)                |  |                                                     | 2,625   |                  |  |      | 3,852   |      |  |      | 6,555   |      |  |      | 12,350  |      |  |      | 13,269  |        |  |         | 19,328  |           |  |       | 15,355  |   |  |   | 5,928  |    |  |   |      |   |  |   | 79,262  |   |  |   | 4,173  |    |  |   |         |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |      |         |        |  |         |         |           |  |       |         |   |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |    |  |   |         |   |  |   |         |  
|Total restaurant invested capital                              |  | $                                                   | 4,067   |                  |  | $    | 6,228   |      |  | $    | 11,496  |      |  | $    | 27,487  |      |  | $    | 34,370  |        |  | $       | 53,127  |           |  | $     | 43,290  |   |  | $ | 16,666 |    |  |   |      |   |  | $ | 196,731 |   |  | $ | 10,243 |    |  |   |         |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |      |         |        |  |         |         |           |  |       |         |   |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |    |  |   |         |   |  |   |         |  
|Restaurant-level return on invested capital                    |  |                                                     | 155.5   | %                |  |      | 96.3    | %    |  |      | 64.5    | %    |  |      | 50.1    | %    |  |      | 43.5    | %      |  |         | 31.7    | %         |  |       | 27.1    | % |  |   | (2.8   | )% |  |   |      |   |  |   | 38.9    | % |  |   | 14.4   | %  |  |   |         |   |  |   |         |  

7



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##### Table of Contents



|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |        |         |         |  |           |        |       |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------- |  | --------------------------------------------------- | ------- | ---------------- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ------ | ------- | ------- |  | --------- | ------ | ----- |  | - | ------ | -- |  | - | ---- | - |  | - | ------- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                               |  |                                                     |         |                  |  |      |         |     
|                                                               |  | Bistro Units Opened in                              |         | Total Restaurant |  |      |         |     
|                                                               |  |                                                     |         |                  |  |      |         |     
|                                                               |  | Pre 1996                                            |         | 1996             |  | 1997 |         | 1998 |  | 1999 |         | 2000 |  | 2001 |         | 2002 |  | Bistro |         | Pei Wei |  | Corporate |        | Total
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |        |         |         |  |           |        |      
|                                                               |  |                                                    
|                                                               |  | (Dollars in thousands, except average weekly sales)
|Fiscal 2001                                                    |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |        |         |         |  |           |        |       |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Units(1)                                                       |  |                                                     | 4       |                  |  |      | 3       |      |  |      | 6       |      |  |      | 10      |      |  |        | 13      |         |  |           | 16     |       |  |   | 13     |    |  |   |      |   |  |   | 65      |   |  |   | 5      |   |  |   |         |   |  |   | 70      |  
|Sales weeks                                                    |  |                                                     | 208     |                  |  |      | 156     |      |  |      | 312     |      |  |      | 520     |      |  |        | 676     |         |  |           | 832    |       |  |   | 265    |    |  |   |      |   |  |   | 2,969   |   |  |   | 101    |   |  |   |         |   |  |   | 3,070   |  
|Average weekly sales                                           |  | $                                                   | 122,532 |                  |  | $    | 141,120 |      |  | $    | 105,979 |      |  | $    | 114,641 |      |  | $      | 100,136 |         |  | $         | 94,600 |       |  | $ | 99,186 |    |  |   |      |   |  | $ | 105,377 |   |  | $ | 58,535 |   |  |   |         |   |  | $ | 103,836 |  
|Change in comparable store sales(2)                            |  |                                                     | (2.3    | )%               |  |      | 3.1     | %    |  |      | 3.1     | %    |  |      | 4.5     | %    |  |        | 6.7     | %       |  |           | 5.5    | %     |  |   |        |    |  |   |      |   |  |   | 3.8     | % |  |   |        |   |  |   |         |   |  |   |         |  
|Restaurant-level operating margin                              |  |                                                     | 22.7    | %                |  |      | 22.6    | %    |  |      | 20.6    | %    |  |      | 22.1    | %    |  |        | 20.0    | %       |  |           | 16.4   | %     |  |   | 11.8   | %  |  |   |      |   |  |   | 19.3    | % |  |   | 19.4   | % |  |   |         |   |  |   | 19.3    | %
|Revenues                                                       |  | $                                                   | 25,487  |                  |  | $    | 22,015  |      |  | $    | 33,065  |      |  | $    | 59,613  |      |  | $      | 67,692  |         |  | $         | 78,708 |       |  | $ | 26,284 |    |  | $ |     |   |  | $ | 312,864 |   |  | $ | 5,912  |   |  | $ |        |   |  | $ | 318,776 |  
|Total restaurant operating costs                               |  |                                                     | 19,694  |                  |  |      | 17,032  |      |  |      | 26,263  |      |  |      | 46,446  |      |  |        | 54,146  |         |  |           | 65,776 |       |  |   | 23,174 |    |  |   |     |   |  |   | 252,531 |   |  |   | 4,765  |   |  |   |        |   |  |   | 257,296 |  
|General and Administrative                                     |  |                                                     |        |                  |  |      |        |      |  |      |        |      |  |      |        |      |  |        |        |         |  |           |       |       |  |   |       |    |  |   |     |   |  |   |        |   |  |   |       |   |  |   | 16,359  |   |  |   | 16,359  |  
|Depreciation and Amortization                                  |  |                                                     | 378     |                  |  |      | 380     |      |  |      | 796     |      |  |      | 1,800   |      |  |        | 2,425   |         |  |           | 3,385  |       |  |   | 874    |    |  |   |     |   |  |   | 10,038  |   |  |   | 190    |   |  |   | 836     |   |  |   | 11,064  |  
|Preopening expense                                             |  |                                                     |        |                  |  |      |        |      |  |      |        |      |  |      |        |      |  |        |        |         |  |           | 46     |       |  |   | 4,298  |    |  |   | 133  |   |  |   | 4,477   |   |  |   | 622    |   |  |   |        |   |  |   | 5,099   |  
|Interest and other (income) expense, net                       |  |                                                     |        |                  |  |      | 112     |      |  |      |        |      |  |      |        |      |  |        |        |         |  |           |       |       |  |   |       |    |  |   |     |   |  |   | 112     |   |  |   |       |   |  |   | (1,012  | ) |  |   | (900    | )
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |        |         |         |  |           |        |       |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Income (loss) before minority interest and income
    taxes(3) |  |                                                     | 5,415   |                  |  |      | 4,491   |      |  |      | 6,006   |      |  |      | 11,367  |      |  |        | 11,121  |         |  |           | 9,501  |       |  |   | (2,062 | )  |  |   | (133 | ) |  |   | 45,706  |   |  |   | 335    |   |  | $ | (16,183 | ) |  | $ | 29,858  |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |        |         |         |  |           |        |       |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Rent expense(4)                                                |  |                                                     | 1,486   |                  |  |      | 1,285   |      |  |      | 1,591   |      |  |      | 2,441   |      |  |        | 2,489   |         |  |           | 3,337  |       |  |   | 947    |    |  |   |      |   |  |   | 13,576  |   |  |   | 357    |   |  |   |         |   |  |   |         |  
|Interest and other expense, Net                                |  |                                                     |        |                  |  |      | 112     |      |  |      |        |      |  |      |        |      |  |        |        |         |  |           |       |       |  |   |       |    |  |   |     |   |  |   | 112     |   |  |   |       |   |  |   |         |   |  |   |         |  
|Preopening Adjustment(5)                                       |  |                                                     |        |                  |  |      |        |      |  |      |        |      |  |      |        |      |  |        |        |         |  |           |       |       |  |   | (25    | )  |  |   | 133  |   |  |   | 108     |   |  |   | 155    |   |  |   |         |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |        |         |         |  |           |        |       |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Restaurant income (loss), as adjusted                          |  | $                                                   | 6,901   |                  |  | $    | 5,888   |      |  | $    | 7,597   |      |  | $    | 13,808  |      |  | $      | 13,610  |         |  | $         | 12,838 |       |  | $ | (1,140 | )  |  | $ |     |   |  | $ | 59,502  |   |  | $ | 847    |   |  |   |         |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |        |         |         |  |           |        |       |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Average restaurant assets employed(6)                          |  | $                                                   | 1,424   |                  |  | $    | 2,696   |      |  | $    | 5,639   |      |  | $    | 16,755  |      |  | $      | 23,466  |         |  | $         | 36,948 |       |  | $ | 10,773 |    |  |   |      |   |  | $ | 97,701  |   |  | $ | 1,261  |   |  |   |         |   |  |   |         |  
|Present value of remaining lease obligations(7)                |  |                                                     | 3,200   |                  |  |      | 3,977   |      |  |      | 6,962   |      |  |      | 12,787  |      |  |        | 13,763  |         |  |           | 19,794 |       |  |   | 6,695  |    |  |   |      |   |  |   | 67,178  |   |  |   | 817    |   |  |   |         |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |        |         |         |  |           |        |       |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Total restaurant invested capital                              |  | $                                                   | 4,624   |                  |  | $    | 6,673   |      |  | $    | 12,601  |      |  | $    | 29,542  |      |  | $      | 37,229  |         |  | $         | 56,742 |       |  | $ | 17,468 |    |  |   |      |   |  | $ | 164,879 |   |  | $ | 2,078  |   |  |   |         |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |      |  |        |         |         |  |           |        |       |  |   |        |    |  |   |      |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Restaurant-level return on invested capital                    |  |                                                     | 149.2   | %                |  |      | 88.2    | %    |  |      | 60.3    | %    |  |      | 46.7    | %    |  |        | 36.6    | %       |  |           | 22.6   | %     |  |   | (6.5   | )% |  |   |      |   |  |   | 36.1    | % |  |   | 40.8   | % |  |   |         |   |  |   |         |  

8



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##### Table of Contents



|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |        |  |         |        |           |  |       |        |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------- |  | --------------------------------------------------- | ------- | ---------------- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | ------ |  | ------- | ------ | --------- |  | ----- | ------ | - |  | - | --- | - |  | - | ------- | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                               |  |                                                     |         |                  |  |      |         |     
|                                                               |  | Units Opened in                                     |         | Total Restaurant |  |      |         |     
|                                                               |  |                                                     |         |                  |  |      |         |     
|                                                               |  | Pre 1996                                            |         | 1996             |  | 1997 |         | 1998 |  | 1999 |         | 2000 |  | 2001 |         | Bistro |  | Pei Wei |        | Corporate |  | Total
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |        |  |         |        |           |  |      
|                                                               |  |                                                    
|                                                               |  | (Dollars in thousands, except average weekly sales)
|Fiscal 2000                                                    |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |        |  |         |        |           |  |       |        |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Units(1)                                                       |  |                                                     | 4       |                  |  |      | 3       |      |  |      | 6       |      |  |      | 10      |        |  |         | 13     |           |  |       | 16     |   |  |   |     |   |  |   | 52      |   |  |   | 1      |   |  |   |         |   |  |   | 53      |  
|Sales weeks                                                    |  |                                                     | 208     |                  |  |      | 156     |      |  |      | 312     |      |  |      | 520     |        |  |         | 676    |           |  |       | 380    |   |  |   |     |   |  |   | 2,252   |   |  |   | 23     |   |  |   |         |   |  |   | 2,275   |  
|Average weekly sales                                           |  | $                                                   | 125,427 |                  |  | $    | 136,843 |      |  | $    | 102,782 |      |  | $    | 109,716 |        |  | $       | 93,878 |           |  | $     | 88,253 |   |  |   |     |   |  | $ | 103,710 |   |  | $ | 58,723 |   |  |   |         |   |  | $ | 103,255 |  
|Change in comparable store sales(2)                            |  |                                                     | 9.3     | %                |  |      | 10.9    | %    |  |      | 11.0    | %    |  |      | 14.2    | %      |  |         | 10.7   | %         |  |       |        |   |  |   |     |   |  |   | 11.7    | % |  |   |        |   |  |   |         |   |  |   |         |  
|Restaurant-level operating margin                              |  |                                                     | 23.5    | %                |  |      | 24.3    | %    |  |      | 21.3    | %    |  |      | 21.8    | %      |  |         | 18.0   | %         |  |       | 9.5    | % |  |   |     |   |  |   | 19.4    | % |  |   | 16.3   | % |  |   |         |   |  |   | 19.3    | %
|Revenues                                                       |  | $                                                   | 26,089  |                  |  | $    | 21,348  |      |  | $    | 32,068  |      |  | $    | 57,052  |        |  | $       | 63,462 |           |  | $     | 33,535 |   |  | $ |    |   |  | $ | 233,554 |   |  | $ | 1,351  |   |  | $ |        |   |  | $ | 234,905 |  
|Total restaurant operating costs                               |  |                                                     | 19,960  |                  |  |      | 16,169  |      |  |      | 25,240  |      |  |      | 44,624  |        |  |         | 52,009 |           |  |       | 30,336 |   |  |   |    |   |  |   | 188,338 |   |  |   | 1,131  |   |  |   |        |   |  |   | 189,469 |  
|General and Administrative                                     |  |                                                     |        |                  |  |      |        |      |  |      |        |      |  |      |        |        |  |         |       |           |  |       |       |   |  |   |    |   |  |   |        |   |  |   |       |   |  |   | 12,290  |   |  |   | 12,290  |  
|Depreciation and Amortization                                  |  |                                                     | 359     |                  |  |      | 360     |      |  |      | 762     |      |  |      | 1,865   |        |  |         | 2,514  |           |  |       | 1,293  |   |  |   |    |   |  |   | 7,153   |   |  |   | 50     |   |  |   | 671     |   |  |   | 7,874   |  
|Preopening expense                                             |  |                                                     |        |                  |  |      |        |      |  |      |        |      |  |      |        |        |  |         | (5     | )         |  |       | 5,043  |   |  |   | 25  |   |  |   | 5,063   |   |  |   | 137    |   |  |   |        |   |  |   | 5,200   |  
|Interest and other (income) expense, net                       |  |                                                     | 4       |                  |  |      | 115     |      |  |      |        |      |  |      |        |        |  |         |       |           |  |       |       |   |  |   |    |   |  |   | 119     |   |  |   |       |   |  |   | (80     | ) |  |   | 39      |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |        |  |         |        |           |  |       |        |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Income (loss) before minority interest and income
    taxes(3) |  |                                                     | 5,766   |                  |  |      | 4,704   |      |  |      | 6,066   |      |  |      | 10,563  |        |  |         | 8,944  |           |  |       | (3,137 | ) |  |   | (25 | ) |  |   | 32,881  |   |  |   | 33     |   |  | $ | (12,881 | ) |  | $ | 20,033  |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |        |  |         |        |           |  |       |        |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Rent expense(4)                                                |  |                                                     | 1,514   |                  |  |      | 1,235   |      |  |      | 1,597   |      |  |      | 2,246   |        |  |         | 2,349  |           |  |       | 1,378  |   |  |   |    |   |  |   | 10,319  |   |  |   | 82     |   |  |   |         |   |  |   |         |  
|Preopening adjustment(5)                                       |  |                                                     |        |                  |  |      |        |      |  |      |        |      |  |      |        |        |  |         |       |           |  |       | (551   | ) |  |   | 25  |   |  |   | (526    | ) |  |   |       |   |  |   |         |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |        |  |         |        |           |  |       |        |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Restaurant income (loss), as adjusted                          |  | $                                                   | 7,284   |                  |  | $    | 6,054   |      |  | $    | 7,663   |      |  | $    | 12,809  |        |  | $       | 11,293 |           |  | $     | (2,310 | ) |  | $ |    |   |  | $ | 42,793  |   |  | $ | 115    |   |  |   |         |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |        |  |         |        |           |  |       |        |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Average restaurant assets employed(6)                          |  | $                                                   | 1,497   |                  |  | $    | 3,013   |      |  | $    | 6,278   |      |  | $    | 18,321  |        |  | $       | 25,797 |           |  | $     | 9,805  |   |  |   |     |   |  | $ | 64,711  |   |  | $ | 240    |   |  |   |         |   |  |   |         |  
|Present value of remaining lease obligations(7)                |  |                                                     | 3,715   |                  |  |      | 4,072   |      |  |      | 7,315   |      |  |      | 13,150  |        |  |         | 14,193 |           |  |       | 5,146  |   |  |   |     |   |  |   | 47,591  |   |  |   | 152    |   |  |   |         |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |        |  |         |        |           |  |       |        |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Total restaurant invested capital                              |  | $                                                   | 5,212   |                  |  | $    | 7,085   |      |  | $    | 13,593  |      |  | $    | 31,471  |        |  | $       | 39,990 |           |  | $     | 14,951 |   |  |   |     |   |  | $ | 112,302 |   |  | $ | 392    |   |  |   |         |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |         |      |  |      |         |        |  |         |        |           |  |       |        |   |  |   |     |   |  |   |         |   |  |   |        |   |  |   |         |   |  |   |         |  
|Restaurant-level return on invested capital                    |  |                                                     | 139.8   | %                |  |      | 85.4    | %    |  |      | 56.4    | %    |  |      | 40.7    | %      |  |         | 28.2   | %         |  |       | (15.5  | ) |  |   |     |   |  |   | 38.1    | % |  |   | 29.3   | % |  |   |         |   |  |   |         |  

9



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##### Table of Contents



|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |        |           |  |       |      |   |  |   |   |  |  |   |         |   |  |   |   |  |  |   |        |   |  |   |         |  
|-------------------------------------------------------------- |  | --------------------------------------------------- | ------- | ---------------- |  | ---- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ------ |  | ------- | ------ | --------- |  | ----- | ---- | - |  | - | - |  |  | - | ------- | - |  | - | - |  |  | - | ------ | - |  | - | ------- | -
|                                                               |  |                                                     |         |                  |  |      |         |     
|                                                               |  | Units Opened in                                     |         | Total Restaurant |  |      |         |     
|                                                               |  |                                                     |         |                  |  |      |         |     
|                                                               |  | Pre 1996                                            |         | 1996             |  | 1997 |         | 1998 |  | 1999 |        | 2000 |  | 2001 |        | Bistro |  | Pei Wei |        | Corporate |  | Total
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |        |           |  |      
|                                                               |  |                                                    
|                                                               |  | (Dollars in thousands, except average weekly sales)
|Fiscal 1999                                                    |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |        |           |  |       |      |   |  |   |   |  |  |   |         |   |  |   |   |  |  |   |        |   |  |   |         |  
|Units(1)                                                       |  |                                                     | 4       |                  |  |      | 3       |      |  |      | 6      |      |  |      | 10     |        |  |         | 13     |           |  |       |      |   |  |   |   |  |  |   | 36      |   |  |   |   |  |  |   |        |   |  |   | 36      |  
|Sales weeks                                                    |  |                                                     | 212     |                  |  |      | 159     |      |  |      | 318    |      |  |      | 530    |        |  |         | 330    |           |  |       |      |   |  |   |   |  |  |   | 1,549   |   |  |   |   |  |  |   |        |   |  |   | 1,549   |  
|Average weekly sales                                           |  | $                                                   | 115,119 |                  |  | $    | 123,509 |      |  | $    | 92,685 |      |  | $    | 96,119 |        |  | $       | 87,378 |           |  |       |      |   |  |   |   |  |  | $ | 98,964  |   |  |   |   |  |  |   |        |   |  | $ | 98,964  |  
|Change in comparable store sales(2)                            |  |                                                     | 9.5     | %                |  |      | 11.5    | %    |  |      | 15.2   | %    |  |      | 13.4   | %      |  |         |        |           |  |       |      |   |  |   |   |  |  |   | 12.0    | % |  |   |   |  |  |   |        |   |  |   | 12.0    | %
|Restaurant-level operating margin                              |  |                                                     | 23.8    | %                |  |      | 23.4    | %    |  |      | 20.8   | %    |  |      | 19.6   | %      |  |         | 11.5   | %         |  |       |      |   |  |   |   |  |  |   | 19.5    | % |  |   |   |  |  |   |        |   |  |   | 19.5    | %
|Revenues                                                       |  | $                                                   | 24,405  |                  |  | $    | 19,638  |      |  | $    | 29,474 |      |  | $    | 50,943 |        |  | $       | 28,835 |           |  | $     |     |   |  | $ |  |  |  | $ | 153,295 |   |  | $ |  |  |  | $ |       |   |  | $ | 153,295 |  
|Total restaurant operating costs                               |  |                                                     | 18,605  |                  |  |      | 15,044  |      |  |      | 23,344 |      |  |      | 40,972 |        |  |         | 25,512 |           |  |       |     |   |  |   |  |  |  |   | 123,477 |   |  |   |  |  |  |   |       |   |  |   | 123,477 |  
|General and Administrative                                     |  |                                                     |        |                  |  |      |        |      |  |      |       |      |  |      |       |        |  |         |       |           |  |       |     |   |  |   |  |  |  |   |        |   |  |   |  |  |  |   | 9,648  |   |  |   | 9,648   |  
|Depreciation and Amortization                                  |  |                                                     | 347     |                  |  |      | 369     |      |  |      | 827    |      |  |      | 1,852  |        |  |         | 1,020  |           |  |       |     |   |  |   |  |  |  |   | 4,415   |   |  |   |  |  |  |   | 560    |   |  |   | 4,975   |  
|Preopening expense                                             |  |                                                     |        |                  |  |      |        |      |  |      |       |      |  |      | (33    | )      |  |         | 3,826  |           |  |       | 551  |   |  |   |  |  |  |   | 4,344   |   |  |   |  |  |  |   |       |   |  |   | 4,344   |  
|Interest and other (income) expense, net                       |  |                                                     | 7       |                  |  |      | 163     |      |  |      |       |      |  |      |       |        |  |         |       |           |  |       |     |   |  |   |  |  |  |   | 170     |   |  |   |  |  |  |   | (602   | ) |  |   | (432    | )
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |        |           |  |       |      |   |  |   |   |  |  |   |         |   |  |   |   |  |  |   |        |   |  |   |         |  
|Income (loss) before minority interest and
    income taxes(3) |  |                                                     | 5,446   |                  |  |      | 4,062   |      |  |      | 5,303  |      |  |      | 8,152  |        |  |         | (1,523 | )         |  |       | (551 | ) |  |   |  |  |  |   | 20,889  |   |  |   |  |  |  | $ | (9,606 | ) |  | $ | 11,283  |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |        |           |  |       |      |   |  |   |   |  |  |   |         |   |  |   |   |  |  |   |        |   |  |   |         |  
|Rent expense(4)                                                |  |                                                     | 1,404   |                  |  |      | 1,044   |      |  |      | 1,463  |      |  |      | 1,986  |        |  |         | 1,013  |           |  |       |     |   |  |   |  |  |  |   | 6,910   |   |  |   |  |  |  |   |        |   |  |   |         |  
|Interest and other expense, net                                |  |                                                     | 7       |                  |  |      | 163     |      |  |      |       |      |  |      |       |        |  |         |       |           |  |       |     |   |  |   |  |  |  |   | 170     |   |  |   |  |  |  |   |        |   |  |   |         |  
|Preopening adjustment(5)                                       |  |                                                     |        |                  |  |      |        |      |  |      |       |      |  |      |       |        |  |         | (405   | )         |  |       | 551  |   |  |   |  |  |  |   | 146     |   |  |   |  |  |  |   |        |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |        |           |  |       |      |   |  |   |   |  |  |   |         |   |  |   |   |  |  |   |        |   |  |   |         |  
|Restaurant income (loss), as adjusted                          |  | $                                                   | 6,857   |                  |  | $    | 5,269   |      |  | $    | 6,766  |      |  | $    | 10,138 |        |  | $       | (915   | )         |  | $     |     |   |  | $ |  |  |  | $ | 28,115  |   |  | $ |  |  |  |   |        |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |        |           |  |       |      |   |  |   |   |  |  |   |         |   |  |   |   |  |  |   |        |   |  |   |         |  
|Average restaurant assets employed(6)                          |  | $                                                   | 1,507   |                  |  | $    | 3,342   |      |  | $    | 6,981  |      |  | $    | 19,729 |        |  | $       | 12,797 |           |  |       |      |   |  |   |   |  |  | $ | 44,356  |   |  |   |   |  |  |   |        |   |  |   |         |  
|Present value of remaining lease obligations(7)                |  |                                                     | 4,171   |                  |  |      | 4,156   |      |  |      | 7,621  |      |  |      | 13,440 |        |  |         | 6,600  |           |  |       |      |   |  |   |   |  |  |   | 35,988  |   |  |   |   |  |  |   |        |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |        |           |  |       |      |   |  |   |   |  |  |   |         |   |  |   |   |  |  |   |        |   |  |   |         |  
|Total restaurant invested capital                              |  | $                                                   | 5,678   |                  |  | $    | 7,498   |      |  | $    | 14,602 |      |  | $    | 33,169 |        |  | $       | 19,397 |           |  |       |      |   |  |   |   |  |  | $ | 80,344  |   |  |   |   |  |  |   |        |   |  |   |         |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |        |           |  |       |      |   |  |   |   |  |  |   |         |   |  |   |   |  |  |   |        |   |  |   |         |  
|Restaurant-level return on invested capital                    |  |                                                     | 120.8   | %                |  |      | 70.3    | %    |  |      | 46.3   | %    |  |      | 30.6   | %      |  |         | (4.7   | )%        |  |       |      |   |  |   |   |  |  |   | 35.0    | % |  |   |   |  |  |   |        |   |  |   |         |  

10



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##### Table of Contents



|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |      |           |  |       |   |  |  |   |   |  |  |   |        |   |  |   |   |  |  |   |        |   |  |   |        |  
|-------------------------------------------------------------- |  | --------------------------------------------------- | ------- | ---------------- |  | ---- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ------ |  | ------- | ---- | --------- |  | ----- | - |  |  | - | - |  |  | - | ------ | - |  | - | - |  |  | - | ------ | - |  | - | ------ | -
|                                                               |  |                                                     |         |                  |  |      |         |     
|                                                               |  | Units Opened in                                     |         | Total Restaurant |  |      |         |     
|                                                               |  |                                                     |         |                  |  |      |         |     
|                                                               |  | Pre 1996                                            |         | 1996             |  | 1997 |         | 1998 |  | 1999 |        | 2000 |  | 2001 |        | Bistro |  | Pei Wei |      | Corporate |  | Total
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |      |           |  |      
|                                                               |  |                                                    
|                                                               |  | (Dollars in thousands, except average weekly sales)
|Fiscal 1998                                                    |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |      |           |  |       |   |  |  |   |   |  |  |   |        |   |  |   |   |  |  |   |        |   |  |   |        |  
|Units(1)                                                       |  |                                                     | 4       |                  |  |      | 3       |      |  |      | 6      |      |  |      | 10     |        |  |         |      |           |  |       |   |  |  |   |   |  |  |   | 23     |   |  |   |   |  |  |   |        |   |  |   | 23     |  
|Sales weeks                                                    |  |                                                     | 208     |                  |  |      | 156     |      |  |      | 312    |      |  |      | 149    |        |  |         |      |           |  |       |   |  |  |   |   |  |  |   | 825    |   |  |   |   |  |  |   |        |   |  |   | 825    |  
|Average weekly sales                                           |  | $                                                   | 104,637 |                  |  | $    | 110,374 |      |  | $    | 80,171 |      |  | $    | 94,207 |        |  |         |      |           |  |       |   |  |  |   |   |  |  | $ | 94,586 |   |  |   |   |  |  |   |        |   |  | $ | 94,586 |  
|Change in comparable store sales(2)                            |  |                                                     | 10.6    | %                |  |      | 17.7    | %    |  |      | 7.8    | %    |  |      |        |        |  |         |      |           |  |       |   |  |  |   |   |  |  |   | 12.8   | % |  |   |   |  |  |   |        |   |  |   | 12.8   | %
|Restaurant-level operating Margin                              |  |                                                     | 24.3    | %                |  |      | 22.6    | %    |  |      | 16.8   | %    |  |      | 10.6   | %      |  |         |      |           |  |       |   |  |  |   |   |  |  |   | 19.1   | % |  |   |   |  |  |   |        |   |  |   | 19.1   | %
|Revenues                                                       |  | $                                                   | 21,765  |                  |  | $    | 17,218  |      |  | $    | 25,013 |      |  | $    | 14,037 |        |  | $       |     |           |  | $     |  |  |  | $ |  |  |  | $ | 78,033 |   |  | $ |  |  |  | $ |       |   |  | $ | 78,033 |  
|Total restaurant operating costs                               |  |                                                     | 16,479  |                  |  |      | 13,324  |      |  |      | 20,823 |      |  |      | 12,552 |        |  |         |     |           |  |       |  |  |  |   |  |  |  |   | 63,178 |   |  |   |  |  |  |   |       |   |  |   | 63,178 |  
|General and administrative                                     |  |                                                     |        |                  |  |      |        |      |  |      |       |      |  |      |       |        |  |         |     |           |  |       |  |  |  |   |  |  |  |   |       |   |  |   |  |  |  |   | 6,245  |   |  |   | 6,245  |  
|Depreciation and amortization                                  |  |                                                     | 301     |                  |  |      | 393     |      |  |      | 798    |      |  |      | 383    |        |  |         |     |           |  |       |  |  |  |   |  |  |  |   | 1,875  |   |  |   |  |  |  |   | 509    |   |  |   | 2,384  |  
|Preopening expense                                             |  |                                                     |        |                  |  |      |        |      |  |      | 82     |      |  |      | 3,696  |        |  |         | 405  |           |  |       |  |  |  |   |  |  |  |   | 4,183  |   |  |   |  |  |  |   |       |   |  |   | 4,183  |  
|Interest and other expense, net                                |  |                                                     | 12      |                  |  |      | 207     |      |  |      |       |      |  |      |       |        |  |         |     |           |  |       |  |  |  |   |  |  |  |   | 219    |   |  |   |  |  |  |   | 958    |   |  |   | 1,177  |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |      |           |  |       |   |  |  |   |   |  |  |   |        |   |  |   |   |  |  |   |        |   |  |   |        |  
|Income (loss) before minority interest and income
    taxes(3) |  |                                                     | 4,973   |                  |  |      | 3,294   |      |  |      | 3,310  |      |  |      | (2,594 | )      |  |         | (405 | )         |  |       |  |  |  |   |  |  |  |   | 8,578  |   |  |   |  |  |  | $ | (7,712 | ) |  | $ | 866    |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |      |           |  |       |   |  |  |   |   |  |  |   |        |   |  |   |   |  |  |   |        |   |  |   |        |  
|Rent expense(4)                                                |  |                                                     | 1,241   |                  |  |      | 872     |      |  |      | 1,297  |      |  |      | 604    |        |  |         |     |           |  |       |  |  |  |   |  |  |  |   | 4,014  |   |  |   |  |  |  |   |        |   |  |   |        |  
|Interest and other expense, net                                |  |                                                     | 12      |                  |  |      | 207     |      |  |      |       |      |  |      |       |        |  |         |     |           |  |       |  |  |  |   |  |  |  |   | 219    |   |  |   |  |  |  |   |        |   |  |   |        |  
|Preopening adjustment(5)                                       |  |                                                     |        |                  |  |      |        |      |  |      | 82     |      |  |      | (191   | )      |  |         | 405  |           |  |       |  |  |  |   |  |  |  |   | 296    |   |  |   |  |  |  |   |        |   |  |   |        |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |      |           |  |       |   |  |  |   |   |  |  |   |        |   |  |   |   |  |  |   |        |   |  |   |        |  
|Restaurant income (loss), as adjusted                          |  | $                                                   | 6,226   |                  |  | $    | 4,373   |      |  | $    | 4,689  |      |  | $    | (2,181 | )      |  | $       |     |           |  | $     |  |  |  | $ |  |  |  | $ | 13,107 |   |  | $ |  |  |  |   |        |   |  |   |        |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |      |           |  |       |   |  |  |   |   |  |  |   |        |   |  |   |   |  |  |   |        |   |  |   |        |  
|Average restaurant assets employed(6)                          |  | $                                                   | 1,648   |                  |  | $    | 3,681   |      |  | $    | 7,598  |      |  | $    | 5,642  |        |  |         |      |           |  |       |   |  |  |   |   |  |  | $ | 18,569 |   |  |   |   |  |  |   |        |   |  |   |        |  
|Present value of remaining lease obligations(7)                |  |                                                     | 4,568   |                  |  |      | 4,232   |      |  |      | 7,876  |      |  |      | 3,623  |        |  |         |      |           |  |       |   |  |  |   |   |  |  |   | 20,299 |   |  |   |   |  |  |   |        |   |  |   |        |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |      |           |  |       |   |  |  |   |   |  |  |   |        |   |  |   |   |  |  |   |        |   |  |   |        |  
|Total restaurant invested capital                              |  | $                                                   | 6,216   |                  |  | $    | 7,913   |      |  | $    | 15,474 |      |  | $    | 9,265  |        |  |         |      |           |  |       |   |  |  |   |   |  |  | $ | 38,868 |   |  |   |   |  |  |   |        |   |  |   |        |  
|                                                               |  |                                                     |         |                  |  |      |         |      |  |      |        |      |  |      |        |        |  |         |      |           |  |       |   |  |  |   |   |  |  |   |        |   |  |   |   |  |  |   |        |   |  |   |        |  
|Restaurant-level return on invested capital                    |  |                                                     | 100.2   | %                |  |      | 55.3    | %    |  |      | 30.3   | %    |  |      | (23.5  | )%     |  |         |      |           |  |       |   |  |  |   |   |  |  |   | 33.7   | % |  |   |   |  |  |   |        |   |  |   |        |  

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Units include all restaurants opened in the
    period indicated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(2) | A unit becomes comparable in its eighteenth month
    of operation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) | For purposes of this calculation, restaurant
    income (loss) before minority interest and income taxes
    represents restaurant revenues less all restaurant-specific
    operating costs, depreciation and amortization, preopening
    expenses and interest (income) expense, net. Preopening costs
    are aggregated in the month in which a restaurant opens. General
    and administrative expense, interest expense on general
    corporate debt, depreciation on general corporate assets and
    amortization of goodwill are excluded from the calculation.
|   
|(4) | Rent expense consists of minimum contractual
    rents plus contingent percentage rents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(5) | Preopening adjustment represents preopening costs
    incurred in a fiscal year other than the fiscal year in which a
    restaurant opened. As noted in footnote (3) above, for
    purposes of this calculation, preopening costs are aggregated
    and expensed in the month in which a restaurant opens rather
    than in the fiscal year in which the costs were incurred and
    expensed for financial statement purposes.                                                                                                                                        
|   
|(6) | Average restaurant assets employed represents the
    12 month average of all restaurant-specific long-term
    assets, net of any accumulated depreciation and amortization,
    determined on a prorated basis for restaurants opened within the
    period.                                                                                                                                                                                                                                                                                                             
|   
|(7) | Present value of remaining lease obligations
    represents the 12 month average discounted present value of
    restaurant lease payments to the date of lease expiration, using
    a 10 percent discount rate, determined on a prorated basis
    for restaurants opened within the period.                                                                                                                                                                                                                                                                             

Access to Information

Our Internet address is www.pfchangs.com.
We make available at this address, free of charge, our annual
report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC.

12



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##### Table of Contents



Risk Factors

Failure of
our existing or new restaurants to achieve predicted results
could have a negative impact on our revenues and performance
results.

We operated 79 full service, or Bistro,
restaurants and 16 limited service, or Pei Wei, restaurants as
of December 29, 2002, 25 of which have been opened within
the last twelve months. The results achieved by these
restaurants may not be indicative of longer-term performance or
the potential market acceptance of restaurants in other
locations. We cant assure you that any new restaurant that
we open will have similar operating results to those of prior
restaurants. We anticipate that our new restaurants will
commonly take several months to reach planned operating levels
due to inefficiencies typically associated with new restaurants,
including lack of market awareness, inability to hire sufficient
staff and other factors. The failure of our existing or new
restaurants to perform as predicted could negatively impact our
revenues and results of operations.

If we do not
expand our restaurant operations, our operating revenue could
decline.

Critical to our future success is our ability to
successfully expand our operations. We have expanded from seven
restaurants at the end of 1996 to 95 restaurants as of
December 29, 2002. We expect to open 17 Bistros and
14 Pei Wei restaurants in 2003. Our ability to expand
successfully will depend on a number of factors, including:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | identification and availability of suitable
    locations;                                             
|
| |  | competition for restaurant sites;                                                                      
|
| |  | negotiation of favorable lease arrangements;                                                           
|
| |  | timely development of commercial, residential,
    street or highway construction near our restaurants;
|
| |  | management of the costs of construction and
    development of new restaurants;                        
|
| |  | securing required governmental approvals and
    permits;                                              
|
| |  | recruitment of qualified operating personnel,
    particularly managers and chefs;                     
|
| |  | weather conditions                                                                                     
|
| |  | competition in new markets; and                                                                        
|
| |  | general economic conditions.                                                                           

The opening of additional restaurants in the
future will depend in part upon our ability to generate
sufficient funds from operations or to obtain sufficient equity
or debt financing on favorable terms to support our expansion.
We may not be able to open our planned new restaurants on a
timely basis, if at all, and, if opened, these restaurants may
not be operated profitably. We have experienced, and expect to
continue to experience, delays in restaurant openings from time
to time. Delays or failures in opening planned new restaurants
could have an adverse effect on our business, financial
condition, results of operations or cash flows.

Implementing
our growth strategy may strain our management resources and
negatively impact our competitive position.

Our growth strategy may strain our management,
financial and other resources. We must maintain a high level of
quality and service at our existing and future restaurants,
continue to enhance our operational, financial and management
capabilities and locate, hire, train and retain experienced and
dedicated operating personnel, particularly managers and chefs.
We may not be able to effectively manage these and other factors
necessary to permit us to achieve our expansion objectives, and
any failure to do so could negatively impact our competitive
position.

13



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##### Table of Contents



The
inability to develop and construct our restaurants within
projected budgets and time periods will adversely affect our
business and financial condition.

Each P.F. Changs full service and limited
service restaurant is distinctively designed to accommodate
particular characteristics of each location and to blend local
or regional design themes with our principal trade dress and
other common design elements. This presents each location with
its own development and construction risks. Many factors may
affect the costs associated with the development and
construction of our restaurants, including:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | labor disputes;                                                                                     
|
| |  | shortages of materials and skilled labor;                                                           
|
| |  | weather interference;                                                                               
|
| |  | unforeseen engineering problems;                                                                    
|
| |  | environmental problems;                                                                             
|
| |  | construction or zoning problems;                                                                    
|
| |  | local government regulations;                                                                       
|
| |  | modifications in design to the size and scope of
    the projects; and                              
|
| |  | other unanticipated increases in costs, any of
    which could give rise to delays or cost overruns.

If we are not able to develop additional
P.F. Changs and Pei Wei restaurants within
anticipated budgets or time periods, our business, financial
condition, results of operations or cash flows will be adversely
affected.

Potential
labor shortages may delay planned openings or damage customer
relations.

Our success will continue to be dependent on our
ability to attract and retain a sufficient number of qualified
employees, including kitchen staff and waitstaff, to keep pace
with our expansion schedule. Qualified individuals needed to
fill these positions are in short supply in certain areas. Our
inability to recruit and retain qualified individuals may delay
the planned openings of new restaurants while high employee
turnover in existing restaurants may negatively impact customer
service and customer relations, resulting in an adverse effect
on our revenues or results of operations.

Changes in
general economic and political conditions affect consumer
spending and may harm our revenues and operating
results.

Our country currently is in a recession and we
believe that these weak general economic conditions will
continue through 2003. As the economy struggles we are concerned
that our customers may become more apprehensive about the
economy and reduce their level of discretionary spending. We
believe that a decrease in discretionary spending could impact
the frequency with which our customers choose to dine out or the
amount they spend on meals while dining out, thereby decreasing
our revenues. Additionally, the continued military responses to
the terrorist attacks on the United States, possible future
terrorist attacks and the growing threat of war may exacerbate
current economic conditions and lead to further weakening in the
economy. Adverse economic conditions and any related decrease in
discretionary spending by our customers could have an adverse
effect on our revenues and operating results.

Fluctuations
in operating results may cause profitability to
decline.

Our operating results may fluctuate significantly
as a result of a variety of factors, including:



| |   |                                    
| | - | -----------------------------------
| |  | general economic conditions;       
|
| |  | consumer confidence in the economy;
|
| |  | changes in consumer preferences;   

14



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##### Table of Contents





| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | competitive factors, including the performance of
    restaurant stocks;
|
| |  | weather conditions;                                                     
|
| |  | timing of new restaurant openings and related
    expenses              
|
| |  | revenues contributed by new restaurants;                                
|
| |  | increases or decreases in comparable restaurant
    revenues.           

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. 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 as well as labor and operating
costs. Therefore, results for any one quarter are not
necessarily indicative of results to be expected for any other
quarter or for a full fiscal year, and, from time to time in the
future, our results of operations may be below the expectations
of public market analysts and investors. This discrepancy could
cause the market price of our common stock to decline. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations.

Intense
competition in the restaurant industry could prevent us from
increasing or sustaining our revenues and
profitability.

The restaurant industry is intensely competitive
with respect to food quality, price-value relationships,
ambiance, service and location, and many restaurants compete
with us at each of our locations. Our competitors at the Bistro
concept include mid-price, full service casual dining
restaurants. For Pei Wei, our main competitors are other
value-priced, quick-service concepts as well as locally owned
and operated Chinese restaurants. There are many
well-established competitors with substantially greater
financial, marketing, personnel and other resources than ours,
and many of our competitors are well established in the markets
where we have restaurants, or in which we intend to locate
restaurants. Additionally, other companies may develop
restaurants that operate with similar concepts.

Any inability to successfully compete with the
other restaurants in our markets will prevent us from increasing
or sustaining our revenues and profitability and result in a
material adverse effect on our business, financial condition,
results of operations or cash flows. We may also need to modify
or refine elements of our restaurant system to evolve our
concept in order to compete with popular new restaurant formats
or concepts that develop from time to time. We cannot assure you
that we will be successful in implementing these modifications
or that these modifications will not reduce our profitability.

Increases in
the minimum wage may have a material adverse effect on our
business and financial results.

A number of our employees are subject to various
minimum wage requirements. The federal minimum wage has remained
at $5.15 per hour since September 1, 1997. However, many of
our employees work in restaurants located in California and
receive compensation equal to the California minimum wage, which
rose from $6.25 per hour effective January 1, 2001 to $6.75
per hour effective January 1, 2002. There may be similar
increases implemented in other jurisdictions in which we operate
or seek to operate. The possibility exists that the federal
minimum wage will be increased in the near future. These minimum
wage increases may have a material adverse effect on the
Companys business, financial condition, results of
operations or cash flows.

Our
inability to retain key personnel could negatively impact our
business.

Our success will continue to be highly dependent
on our key operating officers and employees. We must continue to
attract, retain and motivate a sufficient number of qualified
management and operating personnel,

15



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##### Table of Contents



including regional managers (market and area
partners), general managers (operating partners) and executive
chefs (chef partners), to keep pace with an aggressive expansion
schedule. Individuals of this caliber are historically in short
supply and this shortage may limit our ability to effectively
penetrate new market areas. Additionally, the ability of these
key personnel to maintain consistency in the quality and
atmosphere of our restaurants is a critical factor in our
success. Any failure to do so may harm our reputation and result
in a loss of business.




| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | 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 produce, which is purchased locally by each restaurant,
we rely on Distribution Market Advantage as the primary
distributor of our product. 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 that 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. 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.



| |                                                                  
| | -----------------------------------------------------------------
| | Rising insurance costs could negatively
    impact profitability.

The cost of insurance (workers compensation
insurance, general liability insurance, health insurance and
directors and officers liability) have risen significantly in
the past year and are expected to continue to increase in 2003.
These increases could have a negative impact on our
profitability if we are not able to negate the effect of such
increases by continuing to improve our operating efficiencies.



| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | 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:



| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | environmental;                                                   
|
| |  | 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 INS. Given the location of many of our
restaurants, even if we operate those restaurants in strict
compliance with INS requirements, our employees may not all meet
federal citizenship or residency requirements, which could lead
to disruptions in our work force.

Approximately 17% of our revenues at the Bistro
and 3% at Pei Wei 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

16



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##### Table of Contents



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 regulations could
negatively impact our business and our reputation.



| |                                                                     
| | --------------------------------------------------------------------
| | Litigation could have a material adverse
    effect on our business.

We are from time to time the subject of
complaints or litigation from guests alleging food-borne
illness, injury or other food quality, health or operational
concerns. We may be adversely affected by publicity resulting
from such allegations, regardless of whether such allegations
are valid or whether we are liable. We are also subject to
complaints or allegations from former or prospective employees
from time to time. A lawsuit or claim could result in an adverse
decision against us that could have a materially adverse effect
on our business.

We are subject to state dram shop
laws and regulations, which generally provide that a person
injured by an intoxicated person may seek to recover damages
from an establishment that wrongfully served alcoholic beverages
to such person. While we carry liquor liability coverage as part
of our existing comprehensive general liability insurance, we
may still be subject to a judgment in excess of our insurance
coverage and we may not be able to obtain or continue to
maintain such insurance coverage at reasonable costs, or at all.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | Compliance with changing regulation of
    corporate governance and public disclosure may result in
    additional expenses.

Keeping abreast of, and in compliance with,
changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley
Act of 2002, new SEC regulations and Nasdaq Stock Market rules,
has required an increased amount of management attention and
external resources. We remain committed to maintaining high
standards of corporate governance and public disclosure. As a
result, we intend to invest all reasonably necessary resources
to comply with evolving standards, and this investment may
result in increased general and administrative expenses and a
diversion of management time and attention from
revenue-generating activities to compliance activities.



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Future changes in financial accounting
    standards may cause adverse unexpected operating results and
    affect our reported results of operations.

A change in accounting standards can have a
significant effect on our reported results and may affect our
reporting of transactions completed before the change is
effective. As an example, any changes requiring that we record
compensation expense in the statement of operations for employee
stock options using the fair value method could have a
significant negative effect on our reported results. New
pronouncements and varying interpretations of pronouncements
have occurred and may occur in the future. Changes to existing
rules or the questioning of current practices may adversely
affect our reported financial results.

Special Note Regarding Forward-Looking
Statements

Some of the statements in this Form 10-K and
the documents we incorporate by reference constitute
forward-looking statements. 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

17



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##### Table of Contents



document 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 and elsewhere in this
Form 10-K, including, but not limited to, anticipated
restaurant openings, anticipated costs and sizes of future
restaurants and the adequacy of anticipated sources of cash to
fund our future capital requirements. Because we cannot
guarantee future results, levels of activity, performance or
achievements, you should not place undue reliance on these
forward-looking statements.


18



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##### Table of Contents






Item 2.     Properties

The following table depicts existing Bistros as
of the date of this 10-K.

|               |  |                     |    |                |  |  |       | 
|-------------- |  | ------------------- | -- | -------------- |  |  | ----- | 
|               |  |                     |    | Average       
|State          |  | Number of Locations |    | Square Footage
|               |  |                     |    |               
|Alabama        |  |                     | 1  |                |  |  | 6,650 | 
|Arizona        |  |                     | 6  |                |  |  | 6,500 | 
|California     |  |                     | 16 |                |  |  | 6,500 | 
|Colorado       |  |                     | 3  |                |  |  | 7,000 | 
|Florida        |  |                     | 7  |                |  |  | 6,700 | 
|Georgia        |  |                     | 3  |                |  |  | 5,950 | 
|Illinois       |  |                     | 3  |                |  |  | 7,800 | 
|Indiana        |  |                     | 2  |                |  |  | 7,050 | 
|Louisiana      |  |                     | 1  |                |  |  | 5,850 | 
|Massachusetts  |  |                     | 1  |                |  |  | 5,750 | 
|Maryland       |  |                     | 2  |                |  |  | 6,750 | 
|Michigan       |  |                     | 2  |                |  |  | 6,800 | 
|Minnesota      |  |                     | 1  |                |  |  | 7,200 | 
|Missouri       |  |                     | 2  |                |  |  | 7,050 | 
|North Carolina |  |                     | 2  |                |  |  | 6,750 | 
|Nebraska       |  |                     | 1  |                |  |  | 7,100 | 
|New Jersey     |  |                     | 1  |                |  |  | 7,300 | 
|New Mexico     |  |                     | 1  |                |  |  | 7,100 | 
|Nevada         |  |                     | 3  |                |  |  | 9,250 | 
|New York       |  |                     | 2  |                |  |  | 6,900 | 
|Ohio           |  |                     | 3  |                |  |  | 6,600 | 
|Oklahoma       |  |                     | 1  |                |  |  | 7,100 | 
|Pennsylvania   |  |                     | 1  |                |  |  | 7,150 | 
|Tennessee      |  |                     | 4  |                |  |  | 6,750 | 
|Texas          |  |                     | 6  |                |  |  | 6,700 | 
|Utah           |  |                     | 2  |                |  |  | 5,300 | 
|Virginia       |  |                     | 2  |                |  |  | 6,400 | 
|Washington     |  |                     | 1  |                |  |  | 5,700 | 
|Wisconsin      |  |                     | 1  |                |  |  | 6,450 | 

The following table depicts existing Pei Wei
locations as of the date of this 10-K.

|           |  |                     |    |                |  |  |       | 
|---------- |  | ------------------- | -- | -------------- |  |  | ----- | 
|           |  |                     |    | Average       
|State      |  | Number of Locations |    | Square Footage
|           |  |                     |    |               
|Arizona    |  |                     | 10 |                |  |  | 3,000 | 
|California |  |                     | 2  |                |  |  | 3,400 | 
|Colorado   |  |                     | 1  |                |  |  | 3,250 | 
|Texas      |  |                     | 6  |                |  |  | 3,000 | 

In 2003, P.F. Changs intends to open
17 Bistros (the majority of which will be in new markets)
and 14 Pei Weis (most in existing markets with a portion in
new markets including Houston, Denver and Las Vegas). As of date
of this 10-K, two of the 17 planned new Bistros and three of the
14 planned new Pei Weis were open.

19



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##### Table of Contents



Expansion Strategy and Site
Selection

P.F. Changs is actively developing Bistro
restaurants in both new and existing markets and has planned an
expansion strategy targeted at major metropolitan areas
throughout the United States. Within each targeted metropolitan
area, we identify specific trade areas with high traffic
patterns and suitable demographic characteristics, including
population density, consumer attitudes and affluence. Within an
appropriate trade area, we evaluate specific sites that provide
visibility, accessibility and exposure to traffic volume. Our
site criteria are flexible, as is evidenced by the variety of
environments and facilities in which we currently operate. These
facilities include freestanding buildings, regional malls, urban
properties and entertainment centers. Each restaurant is
designed to convey a unique expression of local styles
incorporated into the P.F. Changs decor that maximizes the
value and visibility of the site.

We intend to continue to develop Bistros that
typically range in size from 6,000 square feet to 7,000 square
feet, and that require, on average, a total capitalized
investment of approximately $3.4 million per restaurant.
This total investment includes the capitalized lease value of
the property, which can vary greatly depending on the specific
trade area. We expect that our planned future restaurants will
require, on average, a total cash investment per restaurant of
approximately $2.3 million. Preopening expenses are
expected to average approximately $325,000 per restaurant. We
currently lease the sites for all of our restaurants and do not
intend to purchase real estate for our sites in the future.

We intend to initially develop our Pei Wei
restaurants in markets in which the Bistro has a strong presence
in an effort to leverage the Bistros established brand
identity. The restaurants will be approximately 3,000 to 3,200
square feet in size and will require, on average, a total
capitalized investment of approximately $1.3 million per
restaurant. This total investment cost includes the capitalized
lease value of the property, which can vary greatly depending on
the specific trade area. We expect the cash investment to
approximate $750,000 per restaurant. Preopening expenses for our
Pei Wei restaurants are expected to total approximately $110,000
per restaurant. We currently lease the sites for all of our
restaurants and do not intend to purchase real estate for our
sites in the future.

Current restaurant leases have expiration dates
ranging from 2004 to 2023, with the majority of the leases
providing for five-year options to renew for at least one
additional term. Generally, our leases provide for a minimum
annual rent, and most leases require additional percentage rent
based on sales volume in excess of minimum levels at the
particular location. Most of the leases require us to pay the
costs of insurance, taxes, and a portion of the lessors
operating costs. We do not anticipate any difficulties renewing
existing leases as they expire.

P.F. Changs executive offices are currently
located in approximately 17,000 square feet of leased space
in Scottsdale, Arizona.

20



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##### Table of Contents






Item 3.     Legal
Proceedings

P.F. Changs was not involved in any
material legal proceedings as of December 29, 2002.




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

None.




PART II




Item 5.     Market
for the Registrants Common Stock and Related Stockholder
Matters

P.F. Changs common stock is traded on the
Nasdaq Stock Market under the symbol PFCB.

The following table sets forth the high and low
price per share of our common stock on the Nasdaq Stock Market
for each quarterly period for our two most recent fiscal years.

|                   |  |      |       |     |  |  |       | 
|------------------ |  | ---- | ----- | --- |  |  | ----- | 
|Quarter Ended      |  | High |       | Low
|                   |  |      |       |    
|April 1, 2001      |  |      | 20.00 |     |  |  | 15.03 | 
|July 1, 2001       |  |      | 20.47 |     |  |  | 16.13 | 
|September 30, 2001 |  |      | 22.46 |     |  |  | 16.46 | 
|December 30, 2001  |  |      | 24.75 |     |  |  | 17.95 | 
|March 30, 2002     |  |      | 33.62 |     |  |  | 23.65 | 
|June 30, 2002      |  |      | 39.98 |     |  |  | 30.54 | 
|September 29, 2002 |  |      | 33.43 |     |  |  | 26.76 | 
|December 29, 2002  |  |      | 36.89 |     |  |  | 28.08 | 

On April 3, 2002, P.F. Changs declared
a stock split effected in the form of a stock dividend by
issuing one share of common stock for each outstanding share of
common stock, payable on May 1, 2002 to stockholders of
record on April 17, 2002. Stock prices in the preceding
table and share numbers included or incorporated in this report
reflect the Stock Dividend.

P.F. Changs intends to retain earnings for
use in the operation and expansion of its business and therefore
does not anticipate paying any cash dividends in the foreseeable
future.

On February 12, 2003, there were
72 holders of record of P.F. Changs common stock.




Item 6.     Selected
Financial Data

The following selected consolidated financial
data should be read in conjunction with the consolidated
financial statements and notes thereto and Item 7,
Managements Discussion and Analysis of Financial Condition
and Results of Operations.

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SELECTED CONSOLIDATED FINANCIAL DATA

|                                                                      |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |        |         |         | 
|--------------------------------------------------------------------- | ----------------------------- | ------------------------------------- | -------------------------------- | ------ | ------ | ------ | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------- | ------- | 
|                                                                      |                               | Fiscal                                |                                  | Fiscal |        | Fiscal |         | Fiscal |        | Fiscal 
|                                                                      |                               | Year                                  |                                  | Year   |        | Year   |         | Year   |        | Year   
|                                                                      |                               | 1998                                  |                                  | 1999   |        | 2000   |         | 2001   |        | 2002   
|                                                                      |                               |                                       |                                  |        |        |        |         |        |        |        
|                                                                      |                               |                                      
|                                                                      |                               | (In thousands, except per share data)
|Statements of Income Data:                                            |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |       
|Revenues                                                              |                               | $                                     | 78,033                           |        |        | $      | 153,295 |        |        | $       | 234,905 |        |        | $       | 318,776 |        |        | $       | 422,091 |       
|Costs and expenses:                                                   |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |       
|                                                                      | Restaurant operating costs:   |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |        |        
|                                                                      |                               | Cost of sales                         |                                  |        | 21,709 |        |         |        | 42,136 |         |         |        | 64,720 |         |         |        | 86,368 |         |         |        | 112,571 |        
|                                                                      |                               | Labor                                 |                                  |        | 22,721 |        |         |        | 45,569 |         |         |        | 69,685 |         |         |        | 97,094 |         |         |        | 133,536 |        
|                                                                      |                               | Operating                             |                                  |        | 13,319 |        |         |        | 25,907 |         |         |        | 40,312 |         |         |        | 53,932 |         |         |        | 70,775  |        
|                                                                      |                               | Occupancy                             |                                  |        | 5,429  |        |         |        | 9,865  |         |         |        | 14,752 |         |         |        | 19,902 |         |         |        | 25,457  |        
|                                                                      |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |       
|                                                                      |                               |                                       | Total restaurant operating costs |        |        | 63,178 |         |        |        | 123,477 |         |        |        | 189,469 |         |        |        | 257,296 |         |        |         | 342,339 | 
|                                                                      | General and administrative    |                                       |                                  | 6,245  |        |        |         | 9,648  |        |         |         | 12,290 |        |         |         | 16,359 |        |         |         | 20,590 |        
|                                                                      | Depreciation and amortization |                                       |                                  | 2,384  |        |        |         | 4,975  |        |         |         | 7,874  |        |         |         | 11,064 |        |         |         | 14,371 |        
|                                                                      | Preopening expense            |                                       |                                  | 4,183  |        |        |         | 4,344  |        |         |         | 5,200  |        |         |         | 5,099  |        |         |         | 6,334  |        
|                                                                      |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |       
|Income from operations                                                |                               |                                       | 2,043                            |        |        |        | 10,851  |        |        |         | 20,072  |        |        |         | 28,958  |        |        |         | 38,457  |       
|Interest income (expense) and other income,
    net                   |                               |                                       | (1,177                           | )      |        |        | 432     |        |        |         | (39     | )      |        |         | 900     |        |        |         | 41      |       
|                                                                      |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |       
|Income before minority interest and provision for
    income taxes    |                               |                                       | 866                              |        |        |        | 11,283  |        |        |         | 20,033  |        |        |         | 29,858  |        |        |         | 38,498  |       
|Minority interest                                                     |                               |                                       | (669                             | )      |        |        | (2,469  | )      |        |         | (4,317  | )      |        |         | (5,550  | )      |        |         | (6,435  | )     
|                                                                      |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |       
|Income before provision for income taxes                              |                               |                                       | 197                              |        |        |        | 8,814   |        |        |         | 15,716  |        |        |         | 24,308  |        |        |         | 32,063  |       
|Provision for income taxes                                            |                               |                                       | (48                              | )      |        |        | (2,778  | )      |        |         | (5,987  | )      |        |         | (8,689  | )      |        |         | (11,171 | )     
|                                                                      |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |       
|Net income                                                            |                               |                                       | 149                              |        |        |        | 6,036   |        |        |         | 9,729   |        |        |         | 15,619  |        |        |         | 20,892  |       
|Convertible redeemable preferred stock accretion                      |                               |                                       | (888                             | )      |        |        |        |        |        |         |        |        |        |         |        |        |        |         |        |       
|                                                                      |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |       
|Net income (loss) available to common
    stockholders                |                               | $                                     | (739                             | )      |        | $      | 6,036   |        |        | $       | 9,729   |        |        | $       | 15,619  |        |        | $       | 20,892  |       
|                                                                      |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |       
|Basic net income (loss) per share                                     |                               | $                                     | (0.12                            | )      |        | $      | 0.30    |        |        | $       | 0.47    |        |        | $       | 0.66    |        |        | $       | 0.85    |       
|                                                                      |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |       
|Diluted net income (loss) per share                                   |                               | $                                     | (0.12                            | )      |        | $      | 0.27    |        |        | $       | 0.43    |        |        | $       | 0.61    |        |        | $       | 0.81    |       
|                                                                      |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |       
|Shares used in calculation of basic net income
    (loss) per share   |                               |                                       | 5,972                            |        |        |        | 20,434  |        |        |         | 20,752  |        |        |         | 23,728  |        |        |         | 24,688  |       
|                                                                      |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |       
|Shares used in calculation of diluted net income
    (loss) per share |                               |                                       | 5,972                            |        |        |        | 22,310  |        |        |         | 22,708  |        |        |         | 25,470  |        |        |         | 25,924  |       
|                                                                      |                               |                                       |                                  |        |        |        |         |        |        |         |         |        |        |         |         |        |        |         |         |       

|                            |  |              |        |            |  |              |        |              |  |              |         |  |  |   |         |  |  |   |         | 
|--------------------------- |  | ------------ | ------ | ---------- |  | ------------ | ------ | ------------ |  | ------------ | ------- |  |  | - | ------- |  |  | - | ------- | 
|                            |  | As of        |        | As of      |  | As of        |        | As of        |  | As of       
|                            |  | December 27, |        | January 2, |  | December 31, |        | December 30, |  | December 29,
|                            |  | 1998         |        | 2000       |  | 2000         |        | 2001         |  | 2002        
|                            |  |              |        |            |  |              |        |              |  |             
|Balance Sheet Data:         |  |              |        |            |  |              |        |              |  |              |         |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents   |  | $            | 18,857 |            |  | $            | 5,333  |              |  | $            | 6,390   |  |  | $ | 20,799  |  |  | $ | 39,089  | 
|Total assets                |  |              | 69,187 |            |  |              | 81,707 |              |  |              | 115,926 |  |  |   | 173,030 |  |  |   | 218,450 | 
|Short- and long-term debt   |  |              | 2,352  |            |  |              | 1,829  |              |  |              | 16,692  |  |  |   | 2,092   |  |  |   | 3,074   | 
|Common stockholders equity |  |              | 58,229 |            |  |              | 64,790 |              |  |              | 77,342  |  |  |   | 136,835 |  |  |   | 175,225 | 

|                                       |  |              |      |            |  |              |      |              |  |              |       |   |  |  |       |   |  |  |       |  
|-------------------------------------- |  | ------------ | ---- | ---------- |  | ------------ | ---- | ------------ |  | ------------ | ----- | - |  |  | ----- | - |  |  | ----- | -
|                                       |  | Year         |      | Year       |  | Year         |      | Year         |  | Year        
|                                       |  | Ended        |      | Ended      |  | Ended        |      | Ended        |  | Ended       
|                                       |  | December 27, |      | January 2, |  | December 31, |      | December 30, |  | December 29,
|                                       |  | 1998         |      | 2000       |  | 2000         |      | 2001         |  | 2002        
|                                       |  |              |      |            |  |              |      |              |  |             
|Consolidated Financial Ratios:         |  |              |      |            |  |              |      |              |  |              |       |   |  |  |       |   |  |  |       |  
|Return on Total Average Assets         |  |              | 0.31 | %          |  |              | 8.00 | %            |  |              | 9.85  | % |  |  | 10.81 | % |  |  | 10.67 | %
|Return on Average Stockholders Equity |  |              | 0.55 | %          |  |              | 9.81 | %            |  |              | 13.69 | % |  |  | 14.59 | % |  |  | 13.39 | %

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Overview

As of December 29, 2002, we owned and
operated 79 full service restaurants, or Bistros, that combine a
distinctive blend of high quality, traditional Chinese cuisine
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 P.F. Changs
restaurants and the hiring of an experienced management team,
led by Richard Federico and Robert Vivian,
P.F. Changs Chief Executive Officer and President,
respectively, to support P.F. Changs founder, Paul
Fleming. Utilizing a partnership management philosophy, we
embarked on a strategic expansion of the concept targeted at
major metropolitan areas throughout the United States.

We also owned and operated 16 limited service
restaurants as of December 29, 2002. We believe that there
is an opportunity to leverage our knowledge and expertise in
Chinese and Asian cuisine. Accordingly, we have developed
Pei Wei Asian Diner, or Pei Wei, a new concept that
will cater to a quicker, more casual dining experience as
compared to P.F. Changs China Bistro. Pei Wei
opened its first unit in July 2000 in the Phoenix, Arizona area,
four units in 2001, and eleven units in 2002. These restaurants
are located in Arizona, Dallas, Texas and Southern California.

We intend to open 17 new Bistros in 2003. The
majority of full service units that we intend to develop in 2003
will be located in new markets across the United States. We have
signed lease agreements or letters of intent for all of our
development planned for fiscal 2003. We intend to continue to
develop full service restaurants that typically range in size
from 6,000 square feet to 7,000 square feet, and that require,
on average, a total cash investment of approximately
$2.3 million and total invested capital of approximately
$3.4 million per restaurant. Preopening expenses are
expected to average approximately $325,000 per restaurant. This
total capitalized investment includes the capitalized lease
value of the property, which can vary greatly depending on the
specific trade area. See Risk Factors 
Development and Construction Risks.

We also intend to develop 14 Pei Wei
restaurants in 2003. We will continue our development in the
Phoenix, Dallas and Southern California markets and plan to
enter additional markets in Houston, Texas; Las Vegas, Nevada;
and Denver, Colorado. Our Pei Wei sites are generally
around 3,000 to 3,200 square feet in size and require an average
total cash investment of approximately $750,000 and total
invested capital of approximately $1.3 million per
restaurant. Preopening expenses at Pei Wei are expected to
total approximately $110,000 per restaurant.

23



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##### Table of Contents



Results of Operations

The operating results of P.F. Changs
for the fiscal years ended December 30, 2001 (fiscal year
2001) and December 29, 2002 (fiscal year 2002), expressed
as a percentage of revenues, were as follows:

|                                                    |                               |                  |                                  |                  |      |         |       |              |      |        |       |         |      |      |       |     |      |      |       |     |      |      |       |      |      |      | 
|--------------------------------------------------- | ----------------------------- | ---------------- | -------------------------------- | ---------------- | ---- | ------- | ----- | ------------ | ---- | ------ | ----- | ------- | ---- | ---- | ----- | --- | ---- | ---- | ----- | --- | ---- | ---- | ----- | ---- | ---- | ---- | 
|                                                    |                               |                  |                                  |                 
|                                                    |                               | Fiscal Year 2001 |                                  | Fiscal Year 2002
|                                                    |                               |                  |                                  |                 
|                                                    |                               | Consolidated     |                                  | Bistro           |      | Pei Wei |       | Consolidated |      | Bistro |       | Pei Wei
|                                                    |                               |                  |                                  |                  |      |         |       |              |      |        |       |        
|Statements of Income Data:                          |                               |                  |                                  |                  |      |         |       |              |      |        |       |         |      |      |       |     |      |      |       |     |      |      |       |     
|Revenues                                            |                               |                  | 100.0                            | %                |      |         | 100.0 | %            |      |        | 100.0 | %       |      |      | 100.0 | %   |      |      | 100.0 | %   |      |      | 100.0 | %   
|Costs and expenses:                                 |                               |                  |                                  |                  |      |         |       |              |      |        |       |         |      |      |       |     |      |      |       |     |      |      |       |     
|                                                    | Restaurant operating costs:   |                  |                                  |                  |      |         |       |              |      |        |       |         |      |      |       |     |      |      |       |     |      |      |       |      |     
|                                                    |                               | Cost of sales    |                                  |                  | 27.1 |         |       |              | 27.1 |        |       |         | 27.7 |      |       |     | 26.7 |      |       |     | 26.6 |      |       |      | 28.4 |     
|                                                    |                               | Labor            |                                  |                  | 30.5 |         |       |              | 30.4 |        |       |         | 31.9 |      |       |     | 31.6 |      |       |     | 31.3 |      |       |      | 37.1 |     
|                                                    |                               | Operating        |                                  |                  | 16.9 |         |       |              | 17.0 |        |       |         | 13.9 |      |       |     | 16.8 |      |       |     | 16.8 |      |       |      | 16.1 |     
|                                                    |                               | Occupancy        |                                  |                  | 6.2  |         |       |              | 6.2  |        |       |         | 7.4  |      |       |     | 6.0  |      |       |     | 6.0  |      |       |      | 7.5  |     
|                                                    |                               |                  |                                  |                  |      |         |       |              |      |        |       |         |      |      |       |     |      |      |       |     |      |      |       |     
|                                                    |                               |                  | Total restaurant operating costs |                  |      | 80.7    |       |              |      | 80.7   |       |         |      | 80.6 |       |     |      | 81.1 |       |     |      | 80.7 |       |      |      | 89.0 | 
|                                                    | General and administrative    |                  |                                  | 5.1              |      |         |       | 4.9          |      |        |       | 18.7    |      |      |       | 4.9 |      |      |       | 4.5 |      |      |       | 12.3 |     
|                                                    | Depreciation and amortization |                  |                                  | 3.5              |      |         |       | 3.5          |      |        |       | 3.7     |      |      |       | 3.4 |      |      |       | 3.4 |      |      |       | 4.2  |     
|                                                    | Preopening expense            |                  |                                  | 1.6              |      |         |       | 1.4          |      |        |       | 10.5    |      |      |       | 1.5 |      |      |       | 1.3 |      |      |       | 6.0  |     
|                                                    |                               |                  |                                  |                  |      |         |       |              |      |        |       |         |      |      |       |     |      |      |       |     |      |      |       |     
|Income (loss) from operations                       |                               |                  | 9.1                              |                  |      |         | 9.5   |              |      |        | (13.5 | )       |      |      | 9.1   |     |      |      | 10.2  |     |      |      | (11.6 | )   
|Interest and other income (expense), net            |                               |                  | 0.3                              |                  |      |         | 0.3   |              |      |        | 0.0   |         |      |      | 0.0   |     |      |      | 0.0   |     |      |      | (0.1  | )   
|Minority interest                                   |                               |                  | (1.7                             | )                |      |         | (1.8  | )            |      |        | (0.7  | )       |      |      | (1.5  | )   |      |      | (1.6  | )   |      |      | (0.1  | )   
|                                                    |                               |                  |                                  |                  |      |         |       |              |      |        |       |         |      |      |       |     |      |      |       |     |      |      |       |     
|Income (loss) before provision for income
    taxes |                               |                  | 7.6                              |                  |      |         | 8.0   | %            |      |        | (14.2 | )%      |      |      | 7.6   |     |      |      | 8.7   | %   |      |      | (11.8 | )%  
|                                                    |                               |                  |                                  |                  |      |         |       |              |      |        |       |         |      |      |       |     |      |      |       |     |      |      |       |     
|Provision for income taxes                          |                               |                  | (2.7                             | )                |      |         |       |              |      |        |       |         |      |      | (2.6  | )   |      |      |       |     |      |      |       |     
|                                                    |                               |                  |                                  |                  |      |         |       |              |      |        |       |         |      |      |       |     |      |      |       |     |      |      |       |     
|Net income                                          |                               |                  | 4.9                              | %                |      |         |       |              |      |        |       |         |      |      | 4.9   | %   |      |      |       |     |      |      |       |     
|                                                    |                               |                  |                                  |                  |      |         |       |              |      |        |       |         |      |      |       |     |      |      |       |     |      |      |       |     

Certain percentage amounts do not sum to total
due to rounding.

P.F. Changs operates on a
52/53 week year, with the fiscal year ending on the Sunday
closest to December 31. Fiscal years 2001 and 2002 all were
comprised of 52 weeks.

Year Ended December 29, 2002 Compared to
Year Ended December 30, 2001

Revenues

P.F. Changs revenues are derived
entirely from food and beverage sales. Consolidated revenues
increased by $103.3 million, or 32.4%, to
$422.1 million in the year ended December 29, 2002
from $318.8 million in the year ended December 30,
2001. Each segment contributed to the increase as follows:

Bistro:     Revenues
increased by $87.3 million at our Bistro restaurants. This
increase was attributable to revenues of $28.1 million
generated by new restaurants opened in 2002, a
$44.0 million increase in revenues in 2002 for restaurants
that opened in 2001 and a $15.2 million increase in
revenues for restaurants opened prior to 2001. Increased
customer visits as well as a modest price increase in the last
half of the second quarter of 2001 produced comparable
restaurant sales gains of 5.3% in 2002. Restaurants are included
in this comparable restaurant measure once they reach their
eighteenth month of operation.

Pei Wei:     Revenues
increased by $16.0 million at our Pei Wei restaurants. The
increase was primarily attributable to revenues of
$9.8 million generated by our eleven new restaurants opened
in 2002 and a $6.5 million increase in revenues in 2002 for
the four restaurants that opened in 2001.

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##### Table of Contents



Costs and
Expenses

Cost of Sales.Cost
of sales is composed of the cost of food and beverages.
Consolidated cost of sales increased by $26.2 million, or
30.3%, to $112.6 million in the year ended
December 29, 2002 from $86.4 million in the year ended
December 30, 2001. Cost of sales decreased as a percentage
of revenues to 26.7% in the year ended December 29, 2002
from 27.1% in the year ended December 30, 2001. Each
segment contributed to the decrease as a percentage of revenues
as follows:



| |                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:     Cost of
    sales at the Bistro decreased as a percentage of revenues to
    26.6% in the year ended December 29, 2002 from 27.1% in the
    year ended December 30, 2001. This decrease was primarily
    the result of lower commodity prices in seafood, offset by a
    slight increase in poultry prices.                                            
|
| | Pei Wei:     Cost of
    sales at Pei Wei increased as a percentage of revenues to 28.4%
    in the year ended December 29, 2002 from 27.7% in the year
    ended December 30, 2001. This increase was primarily the
    result of inefficiencies related to new store openings, which in
    2002 were concentrated toward the end of the year more so than
    2001.

Labor.Labor
expenses consist of restaurant management salaries, hourly staff
payroll costs and other payroll-related items. Consolidated
labor expenses increased by $36.4 million, or 37.5%, to
$133.5 million in the year ended December 29, 2002
from $97.1 million in the year ended December 30,
2001. Labor expenses as a percentage of revenues increased to
31.6% in the year ended December 29, 2002 from 30.5% in the
year ended December 30, 2001. Each segment contributed to
the increase as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:     As a
    percentage of revenues, labor expenses at the Bistro increased
    to 31.3% in the year ended December 29, 2002 from 30.4% in
    the year ended December 30, 2001. This increase was
    primarily due to higher workers compensation and health
    insurance costs as well as an increase in Californias
    hourly minimum wage from $6.25 to $6.75 effective
    January 1, 2002. We continue to experience pressure on
    labor costs across the system due to continued increases in
    workers compensation and health insurance costs as well as
    increases in certain state minimum wages, such as in California.
    We expect that higher workers compensation and health insurance
    costs will continue to exert upward pressure on our labor costs
    on a year-over-year basis in 2003.            
|
| | Pei Wei:     As a
    percentage of revenues, labor expenses at Pei Wei increased
    to 37.1% in the year ended December 29, 2002 from 31.9% in
    the year ended December 30, 2001. This increase was
    primarily due to typical labor inefficiencies at our newest
    restaurants, most of which opened in the last half of the year.
    Higher workers compensation costs also contributed slightly to
    the overall increase in labor. We expect that new store openings
    will continue to exert pressure on our overall labor costs at
    Pei Wei until such time that the revenue base is sufficient to
    offset new unit inefficiencies. We also expect that higher
    workers compensation and health insurance costs will continue to
    exert upward pressure on our labor costs on a year-over-year
    basis in 2003.

Operating.Operating
expenses consist primarily of various restaurant-level costs,
which are generally variable and are expected to fluctuate with
revenues. Our experience to date has been that operating costs
associated with a newly opened restaurant, for approximately its
first four to six months of operation, are materially greater
than what can be expected after that time, both in aggregate
dollars and as a percentage of revenues. Consolidated operating
expenses increased by $16.9 million, or 31.4%, to
$70.8 million in the year ended December 29, 2002 from
$53.9 million in the year ended December 30, 2001.
Operating expenses decreased as a percentage of revenues to
16.8% in the year ended December 29, 2002 from 16.9% in the
year ended December 30, 2001. Each segment contributed to
decrease as a percentage of revenues as follows:



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:     Operating
    expenses as a percentage of revenues decreased at our Bistro
    restaurants to 16.8% in the year ended December 29, 2002
    from 17.0% in the year ended December 30, 2001. This
    decrease was primarily attributable to the sales leverage
    achieved on the portion of these operating costs that are fixed
    in nature.
|
| | Pei Wei:     Operating
    expenses as a percentage of revenues increased significantly at
    our Pei Wei restaurants to 16.1% for the year ended
    December 29, 2002 from 13.6% in the year ended
    December 30,                                                                                                                                       

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##### Table of Contents



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | 2001. This increase was primarily attributable to
    inefficiencies associated with new stores in their first few
    months of operations.

Occupancy.Occupancy
costs include both fixed and variable portions of rent, common
area maintenance charges, property insurance and property taxes.
Consolidated occupancy costs increased by $5.6 million, or
28.1%, to $25.5 million in the year ended December 29,
2002 from $19.9 million in the year ended December 30,
2001. Occupancy costs decreased as a percentage of revenues to
6.0% in the year ended December 29, 2002 from 6.2% in the
year ended December 30, 2001. Each segment contributed to
the decrease as a percentage of revenues as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:     Occupancy
    costs at the Bistro decreased as a percentage of revenues to
    6.0% for the year ended December 29, 2002 from 6.2% for the
    year ended December 30, 2001. This decrease in occupancy
    was primarily the result of the sales leverage achieved on
    occupancy costs that are fixed in nature and more favorable
    lease terms associated with new restaurants, both of which were
    partially offset by higher property and general liability
    insurance costs.
|
| | Pei Wei:     Occupancy
    costs at Pei Wei increased slightly as a percentage of revenues
    to 7.5% for the year ended December 29, 2002 from 7.4% for
    the year ended December 30, 2001. This increase was
    primarily the result of higher property and general liability
    insurance costs.                                                                                                                                                                                                 

General and Administrative.General and administrative expenses
are composed of expenses associated with corporate and
administrative functions that support development and restaurant
operations and provide an infrastructure to support future
growth, including management and staff salaries, employee
benefits, travel, legal and professional fees, technology and
market research. Consolidated general and administrative
expenses increased to $20.6 million in the year ended
December 29, 2002 from $16.4 million in the year ended
December 30, 2001. Consolidated general and administrative
expenses decreased as a percentage of revenues to 4.9% in the
year ended December 29, 2002 from 5.1% in the year ended
December 30, 2001. Each segment contributed to the increase
in dollars as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:     General and
    administrative expenses at the Bistro increased by
    $2.6 million to $17.9 million in the year ended
    December 29, 2002 from $15.3 million in the year ended
    December 30, 2001. This increase was due primarily to the
    addition of corporate management personnel, which resulted in
    approximately $1.8 million of additional compensation and
    benefits expense, as well as additional costs to support a
    larger restaurant base, including an additional $510,000 in
    accounting, legal and occupancy costs. General and
    administrative expenses decreased as a percentage of revenues
    from 4.9% to 4.5% as a result of our ability to continue to
    leverage our infrastructure costs over our growing revenue base.                                                                                                                                  
|
| | Pei Wei:     General and
    administrative expenses at Pei Wei increased by
    $1.6 million to $2.7 million in the year ended
    December 29, 2002 from $1.1 million in the year ended
    December 30, 2001. This increase was due primarily to the
    addition of corporate management personnel, which resulted in
    approximately $1.0 million of additional compensation and
    benefits expense, as we continue to expand the concept and add
    infrastructure to support our operations. Pei Wei also
    experienced significant increases in general and administrative
    expenses in the following areas: travel expenses associated with
    new store openings, consulting, legal and occupancy costs.
    General and administrative expenses decreased as a percentage of
    revenues from 18.7% to 12.3% as a result of our increasing
    revenue base associated with our new store openings.

Depreciation and Amortization.Depreciation and amortization expenses
include the depreciation of fixed assets and the amortization of
intangibles associated with the acquisition of ownership
interests from partners in our restaurants. Consolidated
depreciation and amortization increased by $3.3 million, or
29.7%, to $14.4 million in the year ended December 29,
2002 from $11.1 million in the year ended December 30,
2001. Depreciation and amortization decreased as a percentage of
revenues to 3.4% in the year ended December 29, 2002 from
3.5% in the year ended December 30, 2001. Each segment
contributed to the increase in dollars as follows:



| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:     At our
    Bistro restaurants, depreciation and amortization increased by
    $2.5 million to $13.4 million for the year ended
    December 29, 2002 from $10.9 million for the year
    ended December 30,

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2001. This increase was primarily due to
    depreciation and amortization on restaurants opened in 2002
    totaling $940,000 as well as a full years depreciation and
    amortization on restaurants opened in 2001, offset by a decrease
    of $440,000 in amortization related to goodwill which we ceased
    amortizing on December 31, 2001 in accordance with SFAS
    No. 142.                                          
|
| | Pei Wei:     At our Pei
    Wei restaurants, depreciation and amortization increased by
    $710,000 to $928,000 for the year ended December 29, 2002
    from $218,000 for the year ended December 30, 2001. This
    increase was primarily due to depreciation and amortization on
    restaurants opened in 2002 totaling $370,000 as well as a full
    years depreciation and amortization on restaurants opened
    in 2001.

Preopening Expense.Preopening costs, which are expensed
as incurred, consist of expenses incurred prior to opening a new
restaurant and are comprised principally of manager salaries and
relocation, employee payroll and related training costs.
Consolidated preopening expenses in the year ended
December 29, 2002 increased to $6.3 million from
$5.1 million in the year ended December 30, 2001.
Preopening expenses decreased as a percentage of revenues to
1.5% in the year ended December 29, 2002 from 1.6% in the
year ended December 30, 2001. Each segment contributed to
the increase in dollars as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:     Preopening
    expenses increased by $500,000 to $5.0 million as of the
    year ended December 29, 2002 from $4.5 million as of
    the year ended December 30, 2001. This increase was
    primarily due to the opening of 14 Bistros in 2002 as compared
    to 13 Bistros in 2001 as well as the current year effect of
    opening two Bistros in January 2003 compared to only one in
    January 2002.
|
| | Pei Wei:     Preopening
    expenses increased by $700,000 to $1.3 million as of the
    year ended December 29, 2002 from $600,000 as of the year
    ended December 30, 2001. This increase was primarily due to
    our opening 11 Pei Weis in 2002 as compared to four Pei Weis in
    2001.                                                                                                                         



| |                                   
| | ----------------------------------
| | Interest and Other Income,
    Net

Consolidated net interest and other income was
$41,000 in the year ended December 29, 2002 as compared to
$900,000 in the year ended December 30, 2001. The decrease
was primarily a result of lower interest income earned on our
cash reserves given current interest rates.



| |                  
| | -----------------
| | Minority Interest

Minority interest represents the portion of our
net earnings (losses) which are attributable to the collective
ownership interests of our minority investors. P.F. Changs
employs a partnership management structure in connection with
which we have entered into a series of partnership agreements
with our regional managers, certain of our general managers, and
certain of our executive chefs. We also have minority
shareholders in our Pei Wei Asian Diner, Inc. subsidiary.
Consolidated minority interest for the year ended
December 29, 2002 increased to $6.4 million from
$5.5 million for the year ended December 30, 2001. As
a percentage of revenues, minority interest decreased to 1.5% of
revenues for the year ended December 29, 2002 from 1.7% of
revenues for the year ended December 30, 2001. The majority
of this decrease as a percentage of revenues resulted from the
purchase of minority partnership interests at the Bistro in 2002.



| |                           
| | --------------------------
| | Provision for Income Taxes

Our effective tax rate for 2002 was 34.8%. For
2001, the effective tax rate was 35.8%. The income tax provision
for 2001 and 2002 differs from the expected provision for income
taxes, derived by applying the statutory income tax rate,
primarily as a result of FICA tip credits.

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##### Table of Contents



Year Ended December 30, 2001 Compared to
Year Ended December 31, 2000

The operating results of P.F. Changs for
the fiscal years ended December 31, 2000 (fiscal year
2000), and December 30, 2001 (fiscal year 2001), expressed
as a percentage of revenues, were as follows:

|                                         |                               |                  |                                  |                  |      |      |       |     |      |      | 
|---------------------------------------- | ----------------------------- | ---------------- | -------------------------------- | ---------------- | ---- | ---- | ----- | --- | ---- | ---- | 
|                                         |                               | Fiscal Year 2000 |                                  | Fiscal Year 2001
|                                         |                               | Consolidated     |                                  | Consolidated    
|                                         |                               |                  |                                  |                 
|Statements of Income Data:               |                               |                  |                                  |                  |      |      |       |    
|Revenues                                 |                               |                  | 100.0                            | %                |      |      | 100.0 | %  
|                                         | Costs and expenses:           |                  |                                  |                  |      |      |       |     |     
|                                         | Restaurant operating costs:   |                  |                                  |                  |      |      |       |     |     
|                                         |                               | Cost of sales    |                                  |                  | 27.6 |      |       |     | 27.1 |     
|                                         |                               | Labor            |                                  |                  | 29.7 |      |       |     | 30.5 |     
|                                         |                               | Operating        |                                  |                  | 17.2 |      |       |     | 16.9 |     
|                                         |                               | Occupancy        |                                  |                  | 6.3  |      |       |     | 6.2  |     
|                                         |                               |                  |                                  |                  |      |      |       |    
|                                         |                               |                  | Total restaurant operating costs |                  |      | 80.8 |       |     |      | 80.7 | 
|                                         | General and administrative    |                  |                                  | 5.2              |      |      |       | 5.1 |     
|                                         | Depreciation and amortization |                  |                                  | 3.4              |      |      |       | 3.5 |     
|                                         | Preopening expense            |                  |                                  | 2.2              |      |      |       | 1.6 |     
|                                         |                               |                  |                                  |                  |      |      |       |    
|Income from operations                   |                               |                  | 8.4                              |                  |      |      | 9.1   |    
|Interest and other income (expense), net |                               |                  | 0.0                              |                  |      |      | 0.3   |    
|Minority interest                        |                               |                  | (1.8                             | )                |      |      | (1.7  | )  
|                                         |                               |                  |                                  |                  |      |      |       |    
|Income before provision for income taxes |                               |                  | 6.6                              |                  |      |      | 7.6   |    
|Provision for income taxes               |                               |                  | (2.5                             | )                |      |      | (2.7  | )  
|                                         |                               |                  |                                  |                  |      |      |       |    
|Net income                               |                               |                  | 4.1                              | %                |      |      | 4.9   | %  
|                                         |                               |                  |                                  |                  |      |      |       |    

Certain percentage amounts do not sum to total
due to rounding.

Consolidated amounts are listed for the fiscal
years 2000 and 2001 comparison because our Pei Wei concept was
not a material component of our consolidated results until
fiscal year 2002.

P.F. Changs operates on a 52/53 week
year, with the fiscal year ending on the Sunday closest to
December 31. Fiscal years 2000, and 2001 all were comprised
of 52 weeks.



| |         
| | --------
| | Revenues

Revenues increased by $83.9 million, or
35.7%, to $318.8 million in the year ended
December 30, 2001 from $234.9 million in the year
ended December 31, 2000. The increase was primarily
attributable to revenues of $28.7 million generated by new
restaurants opened in 2001, a $47.3 million increase in
revenues in 2001 for restaurants that opened in 2000 and a
$7.9 million increase in revenues for restaurants opened
prior to 2000. Increased customer visits as well as a modest
price increase in the fourth quarter of 2000 and the last half
of the second quarter of 2001 produced comparable restaurant
sales gains of 3.8% in 2001.



| |                   
| | ------------------
| | Costs and Expenses

Cost of Sales.Cost
of sales decreased as a percentage of revenues to 27.1% in the
year ended December 30, 2001 from 27.6% in the year ended
December 31, 2000. This decrease was primarily the result
of lower commodity prices in seafood, offset by a slight
increase in beef prices.

Labor.Labor
expenses as a percentage of revenues increased to 30.5% in the
year ended December 30, 2001 from 29.7% in the year ended
December 31, 2000. The increase in labor expenses was
primarily due to higher workers compensation and health
insurance costs as well as an increase in Californias
hourly minimum wage from $5.75 to $6.25 effective
January 1, 2001. We continue to experience pressure on
labor costs across

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the system due to continued increases in workers
compensation and health insurance costs as well as increases in
certain state minimum wages, such as in California. We expect
that higher insurance costs will continue to exert upward
pressure on our labor costs on a year-over-year basis in 2002.


Operating.Operating
expenses decreased as a percentage of revenues to 16.9% in the
year ended December 30, 2001 from 17.2% in the year ended
December 31, 2000. The decrease was primarily attributable
to efficiencies in operating expense purchasing as well as radio
advertising efficiencies, offset by higher utility costs across
our system, particularly in the California market.

Occupancy.Occupancy
costs decreased nominally as a percentage of revenues to 6.2% in
the year ended December 30, 2001 from 6.3% in the year
ended December 31, 2000. The decrease in occupancy was
primarily the result of the increased revenue base offset by
higher insurance costs.

General and Administrative.General and administrative expenses
increased to $16.4 million, or 5.1% of revenues, in the
year ended December 30, 2001 from $12.3 million, or
5.2% of revenues, in the year ended December 31, 2000, due
primarily to the addition of corporate management personnel,
which resulted in approximately $2.3 million of additional
compensation and benefits expense, as well as additional costs
to support a larger restaurant base, including an additional
$440,000 in legal, occupancy and insurance costs. The decrease
as a percentage of revenues was due primarily to our expanding
revenue base and our ability to leverage the duties and
responsibilities of our regional manager partners. Also, of the
total increase, approximately $900,000 related to additional
infrastructure for the Pei Wei concept.

Depreciation and Amortization.Depreciation and amortization
increased to $11.1 million in the year ended
December 30, 2001 from $7.9 million in the year ended
December 31, 2000. This increase was primarily due to
depreciation and amortization on restaurants opened in 2001
totaling $916,000 as well as a full years depreciation and
amortization on restaurants opened in 2000.

Preopening Expense.Preopening expenses in the year ended
December 30, 2001 decreased to $5.1 million from
$5.2 million in the year ended December 31, 2000 due
primarily to the fact that we opened 16 Bistros in 2000 as
compared to 13 in 2001, offset by additional preopening costs
incurred at four new Pei Wei restaurants.

Interest and
Other Income (Expense), Net

Net interest and other income (expense) was
$900,000 in the year ended December 30, 2001 as compared to
$(39,000) in the year ended December 31, 2000. The increase
was due to the interest earned on cash proceeds from the private
equity placement that occurred in January of 2001. In addition,
part of this cash was used to pay off the borrowings under our
credit facility, thereby decreasing our interest expense.

Minority
Interests

Minority interests represents the portion of our
net earnings (losses) which are attributable to the collective
ownership interests of our minority investors. P.F. Changs
has provided a partnership management structure in which we have
entered into a series of partnership agreements with our
regional managers, certain of its general managers, and certain
of our executive chefs. Minority interests for the year ended
December 30, 2001 increased to $5.5 million from
$4.3 million for the year ended December 31, 2000, due
primarily to the addition of new restaurants and an increase in
the operating profit of many of our existing restaurants.

Provision for
Income Taxes

Our effective tax rate for 2001 was 35.8%. For
2000, the effective tax rate was 38.1%. The income tax provision
for 2000 and 2001 differs from the expected provision for income
taxes, derived by applying the statutory income tax rate,
primarily as a result of FICA tip credits.

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Quarterly Results

The following tables set forth certain unaudited
quarterly information for each of the eight fiscal quarters in
the two year period ended December 29, 2002, expressed as a
percentage of revenues, except for revenues which are expressed
in thousands. This quarterly information has been prepared on a
consistent basis with the audited financial statements and, in
the opinion of management, includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair
presentation of the information for the periods presented.

Our quarterly operating results may fluctuate
significantly as a result of a variety of factors, and operating
results for any quarter are not necessarily indicative of
results for a full fiscal year.

The operating results of P.F. Changs for
such eight fiscal quarters expressed as a percentage of
revenues, except for revenues which are expressed in thousands,
were as follows:

|                                                                   |                               |               |                                  |             |      |         |        |         |      |         |        |         |      |         |        |         |      |      |        |     |      |      |         |     |      |      |         |     |      |      |         |     |      |      | 
|------------------------------------------------------------------ | ----------------------------- | ------------- | -------------------------------- | ----------- | ---- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | ---- | ---- | ------ | --- | ---- | ---- | ------- | --- | ---- | ---- | ------- | --- | ---- | ---- | ------- | --- | ---- | ---- | 
|                                                                   |                               |               |                                  |            
|                                                                   |                               | Fiscal 2001   |                                  | Fiscal 2002
|                                                                   |                               |               |                                  |            
|                                                                   |                               | First         |                                  | Second      |      | Third   |        | Fourth  |      | First   |        | Second  |      | Third   |        | Fourth 
|                                                                   |                               | Quarter       |                                  | Quarter     |      | Quarter |        | Quarter |      | Quarter |        | Quarter |      | Quarter |        | Quarter
|                                                                   |                               |               |                                  |             |      |         |        |         |      |         |        |         |      |         |        |        
|Revenues                                                           |                               | $             | 72,420                           |             |      | $       | 76,457 |         |      | $       | 80,555 |         |      | $       | 89,344 |         |      | $    | 97,500 |     |      | $    | 101,650 |     |      | $    | 107,052 |     |      | $    | 115,889 |    
|Costs and expenses:                                                |                               |               |                                  |             |      |         |        |         |      |         |        |         |      |         |        |         |      |      |        |     |      |      |         |     |      |      |         |     |      |      |         |    
|                                                                   | Restaurant operating costs:   |               |                                  |             |      |         |        |         |      |         |        |         |      |         |        |         |      |      |        |     |      |      |         |     |      |      |         |     |      |      |         |     |     
|                                                                   |                               | Cost of sales |                                  |             | 27.7 | %       |        |         | 27.2 | %       |        |         | 27.0 | %       |        |         | 26.5 | %    |        |     | 27.1 | %    |         |     | 26.3 | %    |         |     | 26.7 | %    |         |     | 26.6 | %   
|                                                                   |                               | Labor         |                                  |             | 30.0 |         |        |         | 30.6 |         |        |         | 30.4 |         |        |         | 30.8 |      |        |     | 31.5 |      |         |     | 31.6 |      |         |     | 31.9 |      |         |     | 31.5 |     
|                                                                   |                               | Operating     |                                  |             | 16.9 |         |        |         | 17.0 |         |        |         | 17.2 |         |        |         | 16.6 |      |        |     | 16.4 |      |         |     | 16.7 |      |         |     | 17.0 |      |         |     | 16.8 |     
|                                                                   |                               | Occupancy     |                                  |             | 6.2  |         |        |         | 6.3  |         |        |         | 6.4  |         |        |         | 6.1  |      |        |     | 6.3  |      |         |     | 6.1  |      |         |     | 6.0  |      |         |     | 5.8  |     
|                                                                   |                               |               |                                  |             |      |         |        |         |      |         |        |         |      |         |        |         |      |      |        |     |      |      |         |     |      |      |         |     |      |      |         |    
|                                                                   |                               |               | Total restaurant operating costs |             |      | 80.8    |        |         |      | 81.1    |        |         |      | 81.0    |        |         |      | 80.0 |        |     |      | 81.3 |         |     |      | 80.7 |         |     |      | 81.6 |         |     |      | 80.7 | 
|                                                                   | General and administrative    |               |                                  | 5.1         |      |         |        | 5.3     |      |         |        | 5.1     |      |         |        | 5.0     |      |      |        | 5.1 |      |      |         | 5.4 |      |      |         | 5.0 |      |      |         | 4.2 |     
|                                                                   | Depreciation and amortization |               |                                  | 3.5         |      |         |        | 3.5     |      |         |        | 3.5     |      |         |        | 3.5     |      |      |        | 3.4 |      |      |         | 3.4 |      |      |         | 3.4 |      |      |         | 3.3 |     
|                                                                   | Preopening expense            |               |                                  | 0.9         |      |         |        | 1.8     |      |         |        | 2.1     |      |         |        | 1.6     |      |      |        | 0.6 |      |      |         | 1.5 |      |      |         | 2.2 |      |      |         | 1.6 |     
|                                                                   |                               |               |                                  |             |      |         |        |         |      |         |        |         |      |         |        |         |      |      |        |     |      |      |         |     |      |      |         |     |      |      |         |    
|Income from operations                                             |                               |               | 9.7                              |             |      |         | 8.3    |         |      |         | 8.3    |         |      |         | 9.9    |         |      |      | 9.6    |     |      |      | 9.0     |     |      |      | 7.8     |     |      |      | 10.1    |    
|Interest income (expense), net                                     |                               |               | 0.5                              |             |      |         | 0.4    |         |      |         | 0.2    |         |      |         | 0.0    |         |      |      | 0.0    |     |      |      | 0.0     |     |      |      | 0.0     |     |      |      | 0.0     |    
|                                                                   |                               |               |                                  |             |      |         |        |         |      |         |        |         |      |         |        |         |      |      |        |     |      |      |         |     |      |      |         |     |      |      |         |    
|Income before minority interest and provision for
    income taxes |                               |               | 10.2                             |             |      |         | 8.7    |         |      |         | 8.5    |         |      |         | 9.9    |         |      |      | 9.6    |     |      |      | 9.0     |     |      |      | 7.8     |     |      |      | 10.1    |    
|Minority interest                                                  |                               |               | (1.8                             | )           |      |         | (1.7   | )       |      |         | (1.7   | )       |      |         | (1.7   | )       |      |      | (1.5   | )   |      |      | (1.6    | )   |      |      | (1.4    | )   |      |      | (1.6    | )  
|                                                                   |                               |               |                                  |             |      |         |        |         |      |         |        |         |      |         |        |         |      |      |        |     |      |      |         |     |      |      |         |     |      |      |         |    
|Income before provision for income taxes                           |                               |               | 8.4                              |             |      |         | 7.0    |         |      |         | 6.8    |         |      |         | 8.2    |         |      |      | 8.1    |     |      |      | 7.4     |     |      |      | 6.3     |     |      |      | 8.5     |    
|Provision for income taxes                                         |                               |               | (3.1                             | )           |      |         | (2.5   | )       |      |         | (2.4   | )       |      |         | (2.9   | )       |      |      | (2.8   | )   |      |      | (2.6    | )   |      |      | (2.2    | )   |      |      | (3.0    | )  
|                                                                   |                               |               |                                  |             |      |         |        |         |      |         |        |         |      |         |        |         |      |      |        |     |      |      |         |     |      |      |         |     |      |      |         |    
|Net income                                                         |                               |               | 5.3                              | %           |      |         | 4.5    | %       |      |         | 4.4    | %       |      |         | 5.3    | %       |      |      | 5.3    | %   |      |      | 4.8     | %   |      |      | 4.1     | %   |      |      | 5.6     | %  
|                                                                   |                               |               |                                  |             |      |         |        |         |      |         |        |         |      |         |        |         |      |      |        |     |      |      |         |     |      |      |         |     |      |      |         |    

Certain percentage amounts do not sum to total
due to rounding.

Historically, P.F. Changs has 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.

In addition, our experience to date has been that
labor and operating costs associated with a newly opened
restaurant, for approximately its first four to six 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

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preopening expenses, labor and operating costs
until such time as a larger base of restaurants in operation
mitigates such impact.


Liquidity and Capital Resources

P.F. Changs has funded its capital
requirements since its inception through sales of equity
securities, debt financing and cash flows from operations. Net
cash provided by operating activities was $26.1 million,
$43.7 million and $55.3 million for fiscal years 2000,
2001 and 2002, 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.

We use cash primarily to fund the development and
construction of new restaurants. Net cash used in investing
activities in fiscal years 2000, 2001 and 2002 was
$37.4 million, $51.8 million, and $35.4 million,
respectively. Investment activities consisted of capital
expenditures of $37.4 million, $35.9 million and
$43.5 million in fiscal years 2000, 2001 and 2002,
respectively, as well as investments in short-term instruments
of $13.3 million and in long-term instruments of
$1.7 million in fiscal 2001 and sales of short-term
instruments of $9.5 million in fiscal 2002. We intend to
open 17 new Bistro restaurants and 14 new Pei Wei
restaurants in fiscal year 2003. We expect that our planned
future Bistro restaurants will require, on average, a total cash
investment per restaurant of approximately $2.3 million.
Preopening expenses are expected to average approximately
$325,000 per restaurant. Total cash investment per each
Pei Wei restaurant is expected to average $750,000 with
preopening expenses estimated at $110,000 per location.

Net cash provided by (used in) financing
activities in fiscal years 2000, 2001 and 2002 was
$12.4 million, $22.6 million and $(1.6) million,
respectively. Financing activities in fiscal year 2000 consisted
primarily of borrowings under our credit facility offset by
distributions to our partners. Financing activities in fiscal
year 2001 consisted principally of the proceeds from our private
equity placement, offset by the subsequent repayment of the
borrowings under our credit facility and distributions to our
partners. Financing activities in fiscal year 2002 consisted
primarily of repayments on long term debt, distributions to our
partners and the proceeds from the exercise of stock options.

In December of 2002, the Company entered into a
senior secured revolving credit facility with a commercial
lending institution. The credit facility allows for borrowings
up to $20 million at an interest rate ranging from 125 to
200 basis points over the applicable London Interbank
Offered Rate (LIBOR). At any time, but only one time, the
Company has the right to increase the credit facility up to the
maximum aggregate principal amount of $50 million provided
the Company is in compliance with the terms of the facility. The
revolving credit facility expires on December 20, 2005 and
contains certain restrictions and conditions which require the
Company to: maintain a certain minimum tangible net worth, an
adjusted leverage ratio at a maximum of 3.50:1, and a minimum
fixed-charge coverage ratio no less than 1.25:1. Shares of the
Companys subsidiary, Pei Wei Asian Diner, Inc. serve as
collateral for the credit facility. The Company had no
borrowings outstanding under the credit facility as of
December 29, 2002.

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 its available funds will depend
on many factors, including the pace of expansion, real estate
markets, site locations and the nature of the arrangements
negotiated with landlords. We believe that our cash flow from
operations together with our current cash reserves will be
sufficient to fund our projected capital requirements through
2003. In the event that additional capital is required, we will
first access our existing credit facility. In the unlikely event
that additional capital is required, we may seek to raise such
capital through public or private equity or debt financings.
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.

As of December 29, 2002, there were
120 partners within the P.F. Changs China Bistro,
Inc. system. During 2002, we purchased the interests of six of
our minority partners for a total of approximately
$4.5 million, of which the majority was recorded as
intangibles. Approximately $1.5 million of the total
purchase price was paid in cash while the remaining balance has
been recorded as debt on the balance sheet at December 29,
2002. These transactions were accretive to the Companys
financial results for the year ended

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December 29, 2002 and resulted in an
additional $0.02 of earnings per share given that increased
amortization expense was less than the portion of earnings that
would have been charged to minority interest. In 2003, we will
have the opportunity to purchase 11 additional partnership
interests. If all of these interests are fully purchased in
their entirety, the total purchase price will approximate $7 to
$9 million based upon the estimated fair value of the
respective interests at December 29, 2002. Such amounts are
subject to change based upon changes in the estimated fair value
of the respective interests from December 29, 2002 through
the date of purchase. If all of these interests are purchased by
the Company in 2003, the estimated financial impact would be an
additional $0.02 of earnings per share.


Critical Accounting Policies

Our significant accounting policies are disclosed
in Note 1 to our consolidated financial statements. The
following discussion addresses our most critical accounting
policies, which are those that require significant judgment.



| |                      
| | ---------------------
| | Partnership Structure

P.F. Changs utilizes a partnership
structure to facilitate the development, leadership and
operation of its restaurants. Each partner is required to make a
cash capital contribution at fair value in exchange for a
specified interest in the restaurant or region the partner is
also separately employed to manage. The ownership interest
purchased by each partner generally ranges between two and seven
percent of the restaurant or region the partner oversees. At the
end of a specific term (generally five years), P.F. Changs
has the right, but not the obligation, to purchase the minority
partners interest in the partners respective
restaurant or region at fair market value. The estimated fair
value for such purchases and sales is determined by reference to
current industry purchase metrics as well as the historical cash
flows of the subject restaurants or regions
financial results. We have the option to pay the agreed upon
purchase price in cash or common stock of the company over a
period of time not to exceed five years. Given that there is no
public market for these interests, the fair value determinations
are subjective and require the use of various estimates for
which significant judgments are required. Periodically we hire
third-party appraisers to verify that our methodology for
estimating fair value is appropriate. The use of fair value in
these transactions is critical to the accounting treatment of
these transactions as fair value equity purchases and sales.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

We review property and equipment (which includes
leasehold improvements) and intangibles with finite lives (those
assets resulting from the acquisition of minority interests in
the operating rights of certain of our restaurants) for
impairment when events or circumstances indicate these assets
might be impaired. We test impairment using historical cash
flows and other relevant facts and circumstances as the primary
basis for its estimates of future cash flows. The analysis is
performed at the restaurant, or partnership level for indicators
of permanent impairment. This process requires the use of
estimates and assumptions, which are subject to a high degree of
judgment. If these assumptions change in the future, we may be
required to record impairment charges for these assets.



| |                       
| | ----------------------
| | Impairment of Goodwill

At least annually, we assess the recoverability
of goodwill that is related to our purchase of interests in
various restaurants at the formation of P.F. Changs. We
test impairment at the concept level for this goodwill and use
historical cash flows and other relevant facts and circumstances
as the primary basis for our estimates of future cash flows.
This process requires the use of estimates and assumptions,
which are subject to a high degree of judgment. If these
assumptions change in the future, we may be required to record
impairment charges for these assets.

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| |               
| | --------------
| | Self Insurance

We are self-insured for a significant portion of
our current and prior years exposures related to our
workers compensation, general liability, medical and dental
programs. In estimating our self insurance reserves, we utilize
estimates of expected losses, based on statistical analyses of
historical industry data as well as our own estimates based on
P.F. Changs actual historical trends. These assumptions
are closely monitored and adjusted when warranted by changing
circumstances. Should a greater amount of claims occur compared
to what was estimated, or medical costs increase beyond what was
expected, reserves might not be sufficient, and additional
expense may be recorded or actual experience could be more
favorable then estimated resulting in expense reductions.

New Accounting Standards

In June 2002, the Financial Accounting Standards
Board issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS
No. 146 supersedes Emerging Issues Task Force
(EITF) No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a
Restructuring). SFAS No. 146 eliminates the
provisions of EITF No. 94-3 that required a liability to be
recognized for certain exit or disposal activities at the date
an entity committed to an exit plan. SFAS No. 146 requires
a liability for costs associated with an exit or disposal
activity to be recognized when the liability is incurred. SFAS
No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. P.F. Changs
does not expect the adoption of this statement to have an impact
on its results of operations or financial position.

In December 2002, the Financial Accounting
Standards Board issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure. SFAS No. 148 amends FASB Statement
No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
to SFAS No. 123s fair value method of accounting for
stock-based employee compensation. Statement 148 also amends the
disclosure provisions of SFAS No. 123 and APB Opinion
No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of
the effects of an entitys accounting policy with respect
to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to
require companies to account for employee stock options using
the fair value method, the disclosure provisions of SFAS
No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for
that compensation using the fair value method of SFAS
No. 123 or the intrinsic value method of APB Opinion
No. 25. As allowed by SFAS No. 123, the Company has
elected to continue to utilize the accounting method prescribed
by APB Opinion No. 25 and has adopted the disclosure
requirements of SFAS No. 123.

Inflation

The primary inflationary factors affecting our
operations are food, labor, insurance and utility costs. A large
number of our restaurant personnel are paid at rates based on
the applicable minimum wage, and increases in the minimum wage
can affect our labor costs. Additionally, further increases in
workers compensation and health insurance costs could also
affect our labor costs.




Item 7A.     Quantitative
and Qualitative Disclosures about Market Risks

Management believes that the market risk
associated with P.F. Changs market risk sensitive
instruments as of December 29, 2002 is not material, and
therefore, disclosure is not required.

33



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Item 8.     Financial
Statements and Supplementary Data

P.F. CHANGS CHINA BISTRO, INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                   |                                                                                                                                               |      |  |    | 
|---------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                                   |                                                                                                                                               | Page
|                                   |                                                                                                                                               |     
|Consolidated Financial Statements: |                                                                                                                                               |      |  |   
|                                   | Report of Independent Auditors                                                                                                                |      |  | 35 | 
|                                   | Consolidated Balance Sheets at December 30,
    2001 and December 29, 2002                                                                    |      |  | 36 | 
|                                   | Consolidated Statements of Income for the Years
    Ended December 31, 2000, December 30, 2001 and
    December 29, 2002                      |      |  | 37 | 
|                                   | Consolidated Statements of Common
    Stockholders Equity for the Years Ended December 31,
    2000, December 30, 2001 and December 29, 2002 |      |  | 38 | 
|                                   | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2000, December 30, 2001 and
    December 29, 2002                  |      |  | 39 | 
|                                   | Notes to Consolidated Financial Statements                                                                                                    |      |  | 40 | 

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders 
 P.F. Changs China Bistro, Inc.

We have audited the accompanying consolidated
balance sheets of P.F. Changs China Bistro, Inc. (the
Company) as of December 30, 2001 and
December 29, 2002, and the related consolidated statements
of income, common stockholders equity, and cash flows for
each of the three years in the period ended December 29,
2002. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of P.F. Changs China
Bistro, Inc. at December 30, 2001 and December 29,
2002 and the results of its operations and its cash flows for
each of the three years in the period ended December 29,
2002, in conformity with accounting principles generally
accepted in the United States.

As discussed in Note 1 to the consolidated
financial statements, in 2002 the Company changed its method of
accounting for goodwill.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

Phoenix, Arizona

January 31, 2003


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P.F. CHANGS CHINA BISTRO, INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                        |                                                                                                                                                                         |                |         |              |  |   |         |         | 
|--------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------- | ------------ |  | - | ------- | ------- | 
|                                                                                                                                        |                                                                                                                                                                         | December 30,   |         | December 29,
|                                                                                                                                        |                                                                                                                                                                         | 2001           |         | 2002        
|                                                                                                                                        |                                                                                                                                                                         |                |         |             
|                                                                                                                                        |                                                                                                                                                                         |               
|                                                                                                                                        |                                                                                                                                                                         | (In thousands)
|ASSETS                                                                                                                                 
|Current assets:                                                                                                                         |                                                                                                                                                                         |                |         |              |  |   |         |        
|                                                                                                                                        | Cash and cash equivalents                                                                                                                                               |                | $       | 20,799       |  |   | $       | 39,089  | 
|                                                                                                                                        | Short-term investments                                                                                                                                                  |                |         | 13,300       |  |   |         | 3,800   | 
|                                                                                                                                        | Inventories                                                                                                                                                             |                |         | 2,066        |  |   |         | 2,319   | 
|                                                                                                                                        | Prepaids and other current assets                                                                                                                                       |                |         | 3,451        |  |   |         | 6,176   | 
|                                                                                                                                        |                                                                                                                                                                         |                |         |              |  |   |         |        
|Total current assets                                                                                                                    |                                                                                                                                                                         |                | 39,616  |              |  |   | 51,384  |        
|Construction-in-progress                                                                                                                |                                                                                                                                                                         |                | 6,137   |              |  |   | 13,557  |        
|Property and equipment, net                                                                                                             |                                                                                                                                                                         |                | 114,020 |              |  |   | 137,055 |        
|Goodwill                                                                                                                                |                                                                                                                                                                         |                | 6,819   |              |  |   | 6,819   |        
|Intangibles, net of accumulated amortization of
    $64,000 and $476,000 at December 30, 2001 and
    December 29, 2002, respectively   |                                                                                                                                                                         |                | 1,773   |              |  |   | 5,773   |        
|Other assets                                                                                                                            |                                                                                                                                                                         |                | 4,665   |              |  |   | 3,862   |        
|                                                                                                                                        |                                                                                                                                                                         |                |         |              |  |   |         |        
|Total assets                                                                                                                            |                                                                                                                                                                         | $              | 173,030 |              |  | $ | 218,450 |        
|                                                                                                                                        |                                                                                                                                                                         |                |         |              |  |   |         |        
|LIABILITIES AND COMMON STOCKHOLDERS
    EQUITY                                                                                        
|Current liabilities:                                                                                                                    |                                                                                                                                                                         |                |         |              |  |   |         |        
|                                                                                                                                        | Accounts payable                                                                                                                                                        |                | $       | 5,764        |  |   | $       | 7,051   | 
|                                                                                                                                        | Construction payable                                                                                                                                                    |                |         | 2,656        |  |   |         | 3,600   | 
|                                                                                                                                        | Accrued expenses                                                                                                                                                        |                |         | 16,282       |  |   |         | 15,497  | 
|                                                                                                                                        | Unearned revenue                                                                                                                                                        |                |         | 4,150        |  |   |         | 6,894   | 
|                                                                                                                                        | Current portion of long-term debt, including
    $264,000 and $1,021,000 due to related parties at
    December 30, 2001 and December 29, 2002, respectively            |                |         | 448          |  |   |         | 1,633   | 
|                                                                                                                                        |                                                                                                                                                                         |                |         |              |  |   |         |        
|Total current liabilities                                                                                                               |                                                                                                                                                                         |                | 29,300  |              |  |   | 34,675  |        
|Long-term debt, including $458,000 and $828,000
    due to related parties at December 30, 2001 and
    December 29, 2002, respectively |                                                                                                                                                                         |                | 1,644   |              |  |   | 1,441   |        
|Deferred income tax liability                                                                                                           |                                                                                                                                                                         |                | 3,360   |              |  |   | 4,261   |        
|Minority interests                                                                                                                      |                                                                                                                                                                         |                | 1,891   |              |  |   | 2,848   |        
|Commitments and contingencies                                                                                                           |                                                                                                                                                                         |                |         |              |  |   |         |        
|Common stockholders equity:                                                                                                            |                                                                                                                                                                         |                |         |              |  |   |         |        
|                                                                                                                                        | Common stock, $0.001 par value, 40,000,000 shares
    Authorized: 23,895,566 shares issued and outstanding at
    December 30, 2001 and 25,001,775 at December 29, 2002 |                |         | 24           |  |   |         | 25      | 
|                                                                                                                                        | Additional paid-in capital                                                                                                                                              |                |         | 110,617      |  |   |         | 128,114 | 
|                                                                                                                                        | Retained earnings                                                                                                                                                       |                |         | 26,194       |  |   |         | 47,086  | 
|                                                                                                                                        |                                                                                                                                                                         |                |         |              |  |   |         |        
|Total common stockholders equity                                                                                                       |                                                                                                                                                                         |                | 136,835 |              |  |   | 175,225 |        
|                                                                                                                                        |                                                                                                                                                                         |                |         |              |  |   |         |        
|Total liabilities and common stockholders
    equity                                                                                   |                                                                                                                                                                         | $              | 173,030 |              |  | $ | 218,450 |        
|                                                                                                                                        |                                                                                                                                                                         |                |         |              |  |   |         |        

See accompanying notes to consolidated financial
statements.

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P.F. CHANGS CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF INCOME

|                                                                   |                               |                                          |                                  |              |        |              |         |        |        |         |         |        |         |         | 
|------------------------------------------------------------------ | ----------------------------- | ---------------------------------------- | -------------------------------- | ------------ | ------ | ------------ | ------- | ------ | ------ | ------- | ------- | ------ | ------- | ------- | 
|                                                                   |                               | Year Ended                               |                                  | Year Ended   |        | Year Ended  
|                                                                   |                               | December 31,                             |                                  | December 30, |        | December 29,
|                                                                   |                               | 2000                                     |                                  | 2001         |        | 2002        
|                                                                   |                               |                                          |                                  |              |        |             
|                                                                   |                               |                                         
|                                                                   |                               | (In thousands, except per share amounts)
|Revenues                                                           |                               | $                                        | 234,905                          |              |        | $            | 318,776 |        |        | $       | 422,091 |       
|Costs and expenses:                                                |                               |                                          |                                  |              |        |              |         |        |        |         |         |       
|                                                                   | Restaurant operating costs:   |                                          |                                  |              |        |              |         |        |        |         |         |        |        
|                                                                   |                               | Cost of sales                            |                                  |              | 64,720 |              |         |        | 86,368 |         |         |        | 112,571 |        
|                                                                   |                               | Labor                                    |                                  |              | 69,685 |              |         |        | 97,094 |         |         |        | 133,536 |        
|                                                                   |                               | Operating                                |                                  |              | 40,312 |              |         |        | 53,932 |         |         |        | 70,775  |        
|                                                                   |                               | Occupancy                                |                                  |              | 14,752 |              |         |        | 19,902 |         |         |        | 25,457  |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |        |         |         |       
|                                                                   |                               |                                          | Total restaurant operating costs |              |        | 189,469      |         |        |        | 257,296 |         |        |         | 342,339 | 
|                                                                   | General and administrative    |                                          |                                  | 12,290       |        |              |         | 16,359 |        |         |         | 20,590 |        
|                                                                   | Depreciation and amortization |                                          |                                  | 7,874        |        |              |         | 11,064 |        |         |         | 14,371 |        
|                                                                   | Preopening expense            |                                          |                                  | 5,200        |        |              |         | 5,099  |        |         |         | 6,334  |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |        |         |         |       
|Income from operations                                             |                               |                                          | 20,072                           |              |        |              | 28,958  |        |        |         | 38,457  |       
|Interest and other income (expense):                               |                               |                                          |                                  |              |        |              |         |        |        |         |         |       
|                                                                   | Interest expense              |                                          |                                  | (399         | )      |              |         | (302   | )      |         |         | (263   | )      
|                                                                   | Interest and other income     |                                          |                                  | 360          |        |              |         | 1,202  |        |         |         | 304    |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |        |         |         |       
|Income before minority interest and provision for
    income taxes |                               |                                          | 20,033                           |              |        |              | 29,858  |        |        |         | 38,498  |       
|Minority interest                                                  |                               |                                          | (4,317                           | )            |        |              | (5,550  | )      |        |         | (6,435  | )     
|                                                                   |                               |                                          |                                  |              |        |              |         |        |        |         |         |       
|Income before provision for income taxes                           |                               |                                          | 15,716                           |              |        |              | 24,308  |        |        |         | 32,063  |       
|Provision for income taxes                                         |                               |                                          | (5,987                           | )            |        |              | (8,689  | )      |        |         | (11,171 | )     
|                                                                   |                               |                                          |                                  |              |        |              |         |        |        |         |         |       
|Net income                                                         |                               | $                                        | 9,729                            |              |        | $            | 15,619  |        |        | $       | 20,892  |       
|                                                                   |                               |                                          |                                  |              |        |              |         |        |        |         |         |       
|Net income per share:                                              |                               |                                          |                                  |              |        |              |         |        |        |         |         |       
|                                                                   | Basic                         |                                          | $                                | 0.47         |        |              | $       | 0.66   |        |         | $       | 0.85   |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |        |         |         |       
|                                                                   | Diluted                       |                                          | $                                | 0.43         |        |              | $       | 0.61   |        |         | $       | 0.81   |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |        |         |         |       
|Weighted average shares used in computation:                       |                               |                                          |                                  |              |        |              |         |        |        |         |         |       
|                                                                   | Basic                         |                                          |                                  | 20,752       |        |              |         | 23,728 |        |         |         | 24,688 |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |        |         |         |       
|                                                                   | Diluted                       |                                          |                                  | 22,708       |        |              |         | 25,470 |        |         |         | 25,924 |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |        |         |         |       

See accompanying notes to consolidated financial
statements.

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P.F. CHANGS CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF COMMON
STOCKHOLDERS EQUITY

|                                                                           |  |                             |        |            |  |          |    |          |  |       |         |  |  |   |        |  |  |   |         | 
|-------------------------------------------------------------------------- |  | --------------------------- | ------ | ---------- |  | -------- | -- | -------- |  | ----- | ------- |  |  | - | ------ |  |  | - | ------- | 
|                                                                           |  |                            
|                                                                           |  | Common Stockholders Equity
|                                                                           |  |                            
|                                                                           |  |                             |        |           
|                                                                           |  | Common Stock                |        | Additional |  |         
|                                                                           |  |                             |        | Paid-In    |  | Retained |    |         
|                                                                           |  | Shares                      |        | Amount     |  | Capital  |    | Earnings |  | Total
|                                                                           |  |                             |        |            |  |          |    |          |  |      
|                                                                           |  |                            
|                                                                           |  | (In thousands)             
|Balances, January 2, 2000                                                  |  |                             | 20,510 |            |  | $        | 20 |          |  | $     | 63,924  |  |  | $ | 846    |  |  | $ | 64,790  | 
|Issuance of common stock under stock option plans                          |  |                             | 354    |            |  |          |   |          |  |       | 1,203   |  |  |   |       |  |  |   | 1,203   | 
|Issuance of common stock under employee stock
    purchase plan            |  |                             | 42     |            |  |          |   |          |  |       | 411     |  |  |   |       |  |  |   | 411     | 
|Tax benefit from disqualifying stock option
    dispositions               |  |                             |       |            |  |          |   |          |  |       | 1,209   |  |  |   |       |  |  |   | 1,209   | 
|Net income                                                                 |  |                             |       |            |  |          |   |          |  |       |        |  |  |   | 9,729  |  |  |   | 9,729   | 
|                                                                           |  |                             |        |            |  |          |    |          |  |       |         |  |  |   |        |  |  |   |         | 
|Balances, December 31, 2000                                                |  |                             | 20,906 |            |  |          | 20 |          |  |       | 66,747  |  |  |   | 10,575 |  |  |   | 77,342  | 
|Issuance of common stock, net of issuance costs
    of $66,000             |  |                             | 2,500  |            |  |          | 4  |          |  |       | 40,764  |  |  |   |       |  |  |   | 40,768  | 
|Issuance of common stock under stock option plans                          |  |                             | 342    |            |  |          |   |          |  |       | 1,333   |  |  |   |       |  |  |   | 1,333   | 
|Issuance of common stock under employee stock
    purchase plan            |  |                             | 38     |            |  |          |   |          |  |       | 537     |  |  |   |       |  |  |   | 537     | 
|Issuance of common stock through exercise of
    outstanding warrant       |  |                             | 110    |            |  |          |   |          |  |       |        |  |  |   |       |  |  |   |        | 
|Tax benefit from disqualifying stock option
    dispositions               |  |                             |       |            |  |          |   |          |  |       | 1,236   |  |  |   |       |  |  |   | 1,236   | 
|Net income                                                                 |  |                             |       |            |  |          |   |          |  |       |        |  |  |   | 15,619 |  |  |   | 15,619  | 
|                                                                           |  |                             |        |            |  |          |    |          |  |       |         |  |  |   |        |  |  |   |         | 
|Balances, December 30, 2001                                                |  |                             | 23,896 |            |  |          | 24 |          |  |       | 110,617 |  |  |   | 26,194 |  |  |   | 136,835 | 
|Issuance of common stock under stock option plans                          |  |                             | 1,066  |            |  |          | 1  |          |  |       | 4,885   |  |  |   |       |  |  |   | 4,886   | 
|Issuance of common stock under employee stock
    purchase plan            |  |                             | 40     |            |  |          |   |          |  |       | 825     |  |  |   |       |  |  |   | 825     | 
|Issuance of common stock of Pei Wei subsidiary
    under stock option plan |  |                             |       |            |  |          |   |          |  |       | 111     |  |  |   |       |  |  |   | 111     | 
|Tax benefit from disqualifying stock option
    dispositions               |  |                             |       |            |  |          |   |          |  |       | 11,676  |  |  |   |       |  |  |   | 11,676  | 
|Net income                                                                 |  |                             |       |            |  |          |   |          |  |       |        |  |  |   | 20,892 |  |  |   | 20,892  | 
|                                                                           |  |                             |        |            |  |          |    |          |  |       |         |  |  |   |        |  |  |   |         | 
|Balances, December 29, 2002                                                |  |                             | 25,002 |            |  | $        | 25 |          |  | $     | 128,114 |  |  | $ | 47,086 |  |  | $ | 175,225 | 
|                                                                           |  |                             |        |            |  |          |    |          |  |       |         |  |  |   |        |  |  |   |         | 

See accompanying notes to consolidated financial
statements.

38



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                        |                                                                                 |                                   |         |              |        |              |         |        |       |   |         |        |        |  
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | --------------------------------- | ------- | ------------ | ------ | ------------ | ------- | ------ | ----- | - | ------- | ------ | ------ | -
|                                                                                                        |                                                                                 | Year Ended                        |         | Year Ended   |        | Year Ended  
|                                                                                                        |                                                                                 | December 31,                      |         | December 30, |        | December 29,
|                                                                                                        |                                                                                 | 2000                              |         | 2001         |        | 2002        
|                                                                                                        |                                                                                 |                                   |         |              |        |             
|                                                                                                        |                                                                                 |                                  
|                                                                                                        |                                                                                 | (In thousands)                   
|Operating Activities:                                                                                   |                                                                                 |                                   |         |              |        |              |         |        |       |   |         |       
|Net income                                                                                              |                                                                                 | $                                 | 9,729   |              |        | $            | 15,619  |        |       | $ | 20,892  |       
|Adjustments to reconcile net income to net cash
    provided by operating activities:                   |                                                                                 |                                   |         |              |        |              |         |        |       |   |         |       
|                                                                                                        | Depreciation and amortization                                                   |                                   |         | 7,432        |        |              |         | 10,561 |       |   |         | 13,960 |       
|                                                                                                        | Amortization of intangibles                                                     |                                   |         | 442          |        |              |         | 503    |       |   |         | 411    |       
|                                                                                                        | Deferred income taxes (benefit)                                                 |                                   |         | 1,717        |        |              |         | 1,042  |       |   |         | 901    |       
|                                                                                                        | Tax benefit from disqualifying stock option
    dispositions credited to equity |                                   |         | 1,209        |        |              |         | 1,236  |       |   |         | 11,676 |       
|                                                                                                        | Minority interest                                                               |                                   |         | 4,317        |        |              |         | 5,550  |       |   |         | 6,435  |       
|                                                                                                        | Changes in operating assets and liabilities:                                    |                                   |         |              |        |              |         |        |       |   |         |        |       
|                                                                                                        |                                                                                 | Inventories                       |         |              | (598   | )            |         |        | (383  | ) |         |        | (253   | )
|                                                                                                        |                                                                                 | Prepaids and other current assets |         |              | (1,039 | )            |         |        | (491  | ) |         |        | (2,725 | )
|                                                                                                        |                                                                                 | Other assets                      |         |              | (516   | )            |         |        | (899  | ) |         |        | 803    |  
|                                                                                                        |                                                                                 | Accounts payable                  |         |              | 583    |              |         |        | 2,636 |   |         |        | 1,287  |  
|                                                                                                        |                                                                                 | Accrued expenses                  |         |              | 1,718  |              |         |        | 6,973 |   |         |        | (785   | )
|                                                                                                        |                                                                                 | Unearned revenue                  |         |              | 1,117  |              |         |        | 1,357 |   |         |        | 2,744  |  
|                                                                                                        |                                                                                 |                                   |         |              |        |              |         |        |       |   |         |       
|Net cash provided by operating activities                                                               |                                                                                 |                                   | 26,111  |              |        |              | 43,704  |        |       |   | 55,346  |       
|Investing Activities:                                                                                   |                                                                                 |                                   |         |              |        |              |         |        |       |   |         |       
|Capital expenditures                                                                                    |                                                                                 |                                   | (37,381 | )            |        |              | (35,921 | )      |       |   | (43,471 | )     
|Sales (purchases) of investments                                                                        |                                                                                 |                                   |        |              |        |              | (15,000 | )      |       |   | 9,500   |       
|Purchases of minority interests                                                                         |                                                                                 |                                   | (63     | )            |        |              | (924    | )      |       |   | (1,457  | )     
|                                                                                                        |                                                                                 |                                   |         |              |        |              |         |        |       |   |         |       
|Net cash used in investing activities                                                                   |                                                                                 |                                   | (37,444 | )            |        |              | (51,845 | )      |       |   | (35,428 | )     
|Financing Activities:                                                                                   |                                                                                 |                                   |         |              |        |              |         |        |       |   |         |       
|Proceeds from revolving credit facility, net of
    repayments                                          |                                                                                 |                                   | 15,000  |              |        |              | (15,000 | )      |       |   |        |       
|Repayments of long-term debt                                                                            |                                                                                 |                                   | (281    | )            |        |              | (250    | )      |       |   | (1,901  | )     
|Proceeds from sale of common stock                                                                      |                                                                                 |                                   |        |              |        |              | 40,768  |        |       |   |        |       
|Proceeds from sale of subsidiary common stock                                                           |                                                                                 |                                   |        |              |        |              |        |        |       |   | 111     |       
|Proceeds from stock options exercised and
    employee stock purchases                                  |                                                                                 |                                   | 1,614   |              |        |              | 1,870   |        |       |   | 5,711   |       
|Proceeds from minority investors contributions                                                          |                                                                                 |                                   | 442     |              |        |              | 555     |        |       |   | 934     |       
|Distributions to minority members and partners                                                          |                                                                                 |                                   | (4,385  | )            |        |              | (5,393  | )      |       |   | (6,483  | )     
|                                                                                                        |                                                                                 |                                   |         |              |        |              |         |        |       |   |         |       
|Net cash provided by (used in) financing
    activities                                                 |                                                                                 |                                   | 12,390  |              |        |              | 22,550  |        |       |   | (1,628  | )     
|                                                                                                        |                                                                                 |                                   |         |              |        |              |         |        |       |   |         |       
|Net increase in cash and cash equivalents                                                               |                                                                                 |                                   | 1,057   |              |        |              | 14,409  |        |       |   | 18,290  |       
|Cash and cash equivalents at the beginning of the
    year                                              |                                                                                 |                                   | 5,333   |              |        |              | 6,390   |        |       |   | 20,799  |       
|                                                                                                        |                                                                                 |                                   |         |              |        |              |         |        |       |   |         |       
|Cash and cash equivalents at the end of the year                                                        |                                                                                 | $                                 | 6,390   |              |        | $            | 20,799  |        |       | $ | 39,089  |       
|                                                                                                        |                                                                                 |                                   |         |              |        |              |         |        |       |   |         |       
|Supplemental Disclosures of Cash Flow
    Information:                                                  |                                                                                 |                                   |         |              |        |              |         |        |       |   |         |       
|Cash paid for interest                                                                                  |                                                                                 | $                                 | 896     |              |        | $            | 358     |        |       | $ | 195     |       
|Cash paid for income taxes                                                                              |                                                                                 |                                   | 6,960   |              |        |              | 4,223   |        |       |   | 2,019   |       
|Purchase of minority interests through issuance
    of long-term debt and conversion to members capital |                                                                                 |                                   | 346     |              |        |              | 778     |        |       |   | 2,955   |       

See accompanying notes to consolidated financial
statements.

39



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 29, 2002


1.     Summary of
Significant Accounting Policies

Organization
and Nature of Operations

P.F. Changs China Bistro, Inc. (the
Company) operates two restaurant concepts consisting
of restaurants throughout the United States under the name of
P.F. Changs China Bistro and Pei Wei
Asian Diner. The Company was formed in 1996 and became
publicly traded in 1998.

Fiscal
Year

The Companys fiscal year ends on the Sunday
closest to the end of December and included 52 weeks in
2000, 2001 and 2002.

Use of
Estimates

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

Principles of
Consolidation

The Companys consolidated financial
statements include the accounts and operations of the Company
and its subsidiaries and partnerships in which it owns more than
a 50 percent interest. All material balances and
transactions between the consolidated entities have been
eliminated. Minority interest is recorded as a reduction of the
reported income or expense unless the amount would result in a
reduction of expense for which the minority partner would not be
responsible.

Cash and Cash
Equivalents

The Companys cash and cash equivalent
balances are not pledged or restricted. The Companys
policy is to invest cash in excess of operating requirements in
income-producing investments. Income-producing investments with
maturities of three months or less at the time of investment are
reflected as cash equivalents. Cash equivalents at
December 29, 2002 consist primarily of money market funds.

Investments

The Company accounts for investments in
accordance with Financial Accounting Standard No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. The Companys investments are classified
as available for sale, and have been recorded at fair value
which approximates cost. At December 29, 2002 and
December 30, 2001, $3.8 million and $13.3 million
respectively was recorded as Short-term investments, consisted
of preferred stock investments in Dividends Received Eligible
Auction Market Stock (DREAMS) offered under private
placements by a subsidiary of Bank of America. Under the terms
of the investment arrangement, the Company participates in
periodic auctions that are generally held every 49 days and
that determine the dividend rate. The Company has the
opportunity to offer to sell its investment during such periodic
auctions subject to availability of buying bidders. The Company
may also sell the investment to certain accredited investors.
Under the prospectus it is the intention of the issuer to
maintain a rating for the DREAMS at a grade of Aa3 by
Moodys.

40



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##### Table of Contents



Receivables

Receivables, which we classified in Prepaid
and other current assets, consist primarily of amounts due
from landlords or other parties for the reimbursement of
leasehold improvements paid by the Company.



| |            
| | -----------
| | Inventories

Inventories consist of food and beverages and are
stated at the lower of cost or market using the first-in,
first-out method.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost, which
includes capitalized interest during the construction and
development period. Furniture, fixtures and equipment are
depreciated on a straight-line basis over the estimated useful
service lives of the related assets, which approximates seven
years. Leasehold improvements are amortized over the shorter of
the useful life of the asset or the length of the related lease
term. China and smallwares are depreciated over two years up to
50 percent of their original cost, and subsequent additions
are expensed as purchased. During the years ended
December 31, 2000 and December 30, 2001, the Company
capitalized $533,000 and $77,000, respectively, of interest
costs.

The Company follows Statement of Financial
Accounting Standards SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which
requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and
the undiscounted cash flow estimated to be generated by those
assets are less than the assets carrying amount. The
Companys policy is to evaluate long-lived assets for
impairment at the restaurant level.



| |         
| | --------
| | Goodwill

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 141 (SFAS)
No. 141, Business Combinations, and No. 142
(SFAS) No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer
be amortized, but will be subject to annual impairment tests in
accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives.

P.F. Changs adopted the standard effective
January 1, 2002. The standard affects the treatment of
goodwill acquired in the purchase of interests in various
restaurants at the formation of the Company. In accordance with
SFAS No. 142, P.F. Changs ceased amortization on
$6.8 million of goodwill existing as of that date. Had the
standard been in effect for the year ended December 30,
2001, net income would have increased by $280,000, resulting in
no impact in basic net income per share and a one cent increase
in diluted net income per share. P.F. Changs is required
to perform goodwill impairment tests on an annual basis at a
minimum and more frequently under certain circumstances.
Impairment tests are performed with respect to goodwill at the
segment level of reporting. As of December 29, 2002, no
impairment of goodwill has been recognized. There can be no
assurance that future goodwill impairment tests will not result
in a charge to earnings.



| |                  
| | -----------------
| | Intangible Assets

Intangible assets consist of the excess of fair
market value over cost as a result of the acquisition of certain
minority partnership interests in the operating rights of
certain of P.F. Changs partnerships and/or operating
restaurants. Intangible assets are carried at cost less
accumulated amortization. Amortization is computed over the
estimated useful lives of the respective assets, generally
fifteen years. Amortization expense of intangible assets totaled
$64,000 and $411,000 for the years ended December 30, 2001
and December 29, 2002. Estimated amortization expense for
each of the five succeeding fiscal years is as follows:
2003  2007, $420,000 for each year. Impairment
tests are performed with respect to these intangible assets at
the reporting level of the interests acquired, generally at the
partnership or restaurant level.

41



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##### Table of Contents





| |                  
| | -----------------
| | Accrued Insurance

The Company is self-insured for certain
exposures, principally general liability and workers
compensation (including customer claims) for the first $100,000
or $250,000 of individual claims, depending on the type of
claim. The Company has paid amounts to its carrier that are in
excess of the claims known to date and has provided additional
accrued liabilities for its estimate of ultimate claims. In
developing these estimates, the Company uses historical
experience factors to estimate the ultimate claim exposure.
Given the estimation nature of this area, and the number of
known and yet to be determined claims, it is reasonably possible
that future adjustments to these estimates will be required.
Based upon the information known at December 29, 2002,
management believes it has provided adequate reserves for its
self-insured exposure.



| |                 
| | ----------------
| | Unearned Revenue

Unearned revenue represents gift certificates
sold for which revenue recognition criteria, generally
redemption, has not been met.



| |                    
| | -------------------
| | Revenue Recognition

Revenues from food, beverage and alcohol sales
are recognized as products are sold.



| |            
| | -----------
| | Advertising

The Company expenses advertising as incurred.
Advertising expense for the years ended December 31, 2000,
December 30, 2001 and December 29, 2002 was
approximately $2,442,000, $2,304,000 and $2,464,000 respectively.



| |                   
| | ------------------
| | Preopening Expense

Preopening expenses, consisting primarily of
manager salaries and relocation expense, employee payroll and
related training costs incurred prior to the opening of a
restaurant, are expensed as incurred.



| |             
| | ------------
| | Income Taxes

The Company utilizes the liability method of
accounting for income taxes as set forth in SFAS No. 109,
Accounting for Income Taxes. Under the liability
method, deferred taxes are determined based on the difference
between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. Recognition of
deferred tax assets is limited to amounts considered by
management to be more likely than not of realization in future
periods.

Minority interests relating to the income or loss
of consolidated partnerships includes no provision for income
taxes as any tax liability related thereto is the responsibility
of the individual minority investors.



| |                         
| | ------------------------
| | Stock-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 accounts for stock
option grants in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB) No. 25 and related
Interpretations, and, accordingly, recognizes no compensation
expense for the stock option grants.

The following table represents the effect on net
income and earnings per share if the Company had applied the
fair value based method and recognition provisions of Statement
of Financial Accounting

42



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##### Table of Contents



Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, to
stock-based employee compensation:


|                                             |                                                                                                                                                |                       |       |              |  |              |        |        |  |   |        |        | 
|-------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ----- | ------------ |  | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                             |                                                                                                                                                | Year Ended            |       | Year Ended   |  | Year Ended  
|                                             |                                                                                                                                                | December 31,          |       | December 30, |  | December 29,
|                                             |                                                                                                                                                | 2000                  |       | 2001         |  | 2002        
|                                             |                                                                                                                                                |                       |       |              |  |             
|                                             |                                                                                                                                                |                      
|                                             |                                                                                                                                                | (In thousands, except
|                                             |                                                                                                                                                | per share amounts)   
|Net income, as reported                      |                                                                                                                                                | $                     | 9,729 |              |  | $            | 15,619 |        |  | $ | 20,892 |       
|                                             | Deduct: Total stock-based employee compensation
    expense determined under fair value methods for all awards, net
    of related tax effects |                       |       | 1,056        |  |              |        | 1,479  |  |   |        | 2,232  | 
|                                             |                                                                                                                                                |                       |       |              |  |              |        |        |  |   |        |       
|Pro forma net income                         |                                                                                                                                                | $                     | 8,673 |              |  | $            | 14,140 |        |  | $ | 18,660 |       
|                                             |                                                                                                                                                |                       |       |              |  |              |        |        |  |   |        |       
|Net income per share:                        |                                                                                                                                                |                       |       |              |  |              |        |        |  |   |        |       
|                                             | Basic, as reported                                                                                                                             |                       | $     | 0.47         |  |              | $      | 0.66   |  |   | $      | 0.85   | 
|                                             |                                                                                                                                                |                       |       |              |  |              |        |        |  |   |        |       
|                                             | Basic, pro forma                                                                                                                               |                       | $     | 0.42         |  |              | $      | 0.60   |  |   | $      | 0.76   | 
|                                             |                                                                                                                                                |                       |       |              |  |              |        |        |  |   |        |       
|                                             | Diluted, as reported                                                                                                                           |                       | $     | 0.43         |  |              | $      | 0.61   |  |   | $      | 0.81   | 
|                                             |                                                                                                                                                |                       |       |              |  |              |        |        |  |   |        |       
|                                             | Diluted, pro forma                                                                                                                             |                       | $     | 0.38         |  |              | $      | 0.56   |  |   | $      | 0.72   | 
|                                             |                                                                                                                                                |                       |       |              |  |              |        |        |  |   |        |       
|Weighted average shares used in computation: |                                                                                                                                                |                       |       |              |  |              |        |        |  |   |        |       
|                                             | Basic                                                                                                                                          |                       |       | 20,752       |  |              |        | 23,728 |  |   |        | 24,688 | 
|                                             |                                                                                                                                                |                       |       |              |  |              |        |        |  |   |        |       
|                                             | Diluted                                                                                                                                        |                       |       | 22,708       |  |              |        | 25,470 |  |   |        | 25,924 | 
|                                             |                                                                                                                                                |                       |       |              |  |              |        |        |  |   |        |       

As required, the pro forma disclosures above
include options granted since January 1, 1995.
Consequently, the effects of applying SFAS 123 for
providing pro forma disclosures may not be representative of the
effects on reported net income for future years until all
options outstanding are included in the pro forma disclosures.
For purposes of pro forma disclosures, the estimated fair value
of stock-based compensation plans and other options is amortized
to expense primarily over the vesting period. See Note 6
for further discussion of the Companys stock-based
employee compensation.



| |                     
| | --------------------
| | Net Income Per Share

Net income per share is computed in accordance
with SFAS No. 128, Earnings per Share. Basic
net income per share is computed based on the weighted average
of common shares outstanding during the period. Diluted net
income per share is computed based on the weighted average
number of common shares and common stock equivalents, which
includes options outstanding under our stock option plans and
outstanding warrants. None of the Companys shares were
excluded from the net income per share computation due to their
anti-dilutive effect for the year ended December 30, 2001.
For the year ended December 29, 2002, there were 71,000 of
the Companys shares excluded from the calculation due to
their anti-dilutive effect. In addition to the potentially
dilutive shares of the Companys stock addressed above,
there is an additionally potentially dilutive effect of Pei Wei
stock options unexercised should the fair value of such stock
increase above the grant price and Pei Wei have a positive net
worth and profitability.

For purposes of computing net income per share,
the number of common shares has been restated to reflect a stock
split effected in the form of a stock dividend of one share of
common stock for each share of common stock outstanding, paid on
May 1, 2002 to stockholders of record as of April 17,
2002. All references to the number of shares, per share amounts
and any other reference to the shares in the financial
statements and the accompanying notes, unless otherwise noted,
reflect the dividend on a retroactive basis. Previously awarded
stock options and other stock programs have been adjusted to
reflect the stock dividend.

43



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##### Table of Contents





| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The carrying amount of cash and cash equivalents,
investments, receivables, accounts payable, and accrued expenses
approximate fair value because of the immediate or short-term
maturity of these financial instruments. The fair value of
long-term debt is determined using current applicable rates for
similar instruments and collateral as of the balance sheet date
and approximates the carrying value of such debt.



| |                  
| | -----------------
| | Segment Reporting

The Company accounts for its segments in
accordance with SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information. SFAS
No. 131 requires that a public company report annual and
interim financial and descriptive information about its
reportable operating segments. Operating segments, as defined,
are components of an enterprise about which separate financial
information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate
resources and in assessing performance. Based on the
Companys methods of internal reporting and management
structure, P.F. Changs has two reportable segments, that
of the Bistro and that of Pei Wei.



| |                              
| | -----------------------------
| | Concentrations of Credit Risk

Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist
primarily of cash investments and receivables. The Company
maintains cash and cash equivalents, funds on deposit and
certain other financial instruments with financial institutions
that are considered in the Companys investment strategy.
Concentrations of credit risk with respect to receivables are
limited as the Companys receivables are primarily with its
landlords for the reimbursement of tenant improvements.



| |                  
| | -----------------
| | Reclassifications

Certain amounts shown in the prior periods
consolidated financial statements have been reclassified to
conform to the current year consolidated financial statements
presentation.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In August 2001, the Financial Accounting
Standards Board issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets
(SFAS) No. 144, which addresses financial
accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121,
Accounting for the Impairment or Disposal of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and
the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations for
a disposal of a segment of a business. SFAS No. 144 was
effective for fiscal years beginning after December 15,
2001, with earlier application encouraged. The Companys
adoption of SFAS No. 144 had no effect on the
Companys financial position or results of operation.

In June 2002, the Financial Accounting Standards
Board issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS
No. 146 supersedes Emerging Issues Task Force
(EITF) No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a
Restructuring). SFAS No. 146 eliminates the
provisions of EITF No. 94-3 that required a liability to be
recognized for certain exit or disposal activities at the date
an entity committed to an exit plan. SFAS No. 146 requires
a liability for costs associated with an exit or disposal
activity to be recognized when the liability is incurred. SFAS
No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not
expect the adoption of this statement to have a material impact
on its results of operations or financial position.

In December 2002, the Financial Accounting
Standards Board issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure. SFAS No. 148 amends FASB Statement
No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
to SFAS No. 123s fair value method of accounting for
stock-based employee compensation. Statement 148 also amends the
disclosure provisions of SFAS No. 123 and APB Opinion
No. 28, Interim Financial Reporting, to require

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disclosure in the summary of significant
accounting policies of the effects of an entitys
accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in
annual and interim financial statements. While SFAS No. 148
does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all
companies with stock-based employee compensation, regardless of
whether they account for that compensation using the fair value
method of SFAS No. 123 or the intrinsic value method of APB
Opinion No. 25. As allowed by SFAS No. 123, the
Company has elected to continue to utilize the accounting method
prescribed by APB Opinion No. 25 and has adopted the
disclosure requirements of SFAS No. 123 as of
December 29, 2002.


2.     Property and
Equipment

Property and equipment consists of the following:

|                                               |  |                |         |              |  |   |         | 
|---------------------------------------------- |  | -------------- | ------- | ------------ |  | - | ------- | 
|                                               |  | December 30,   |         | December 29,
|                                               |  | 2001           |         | 2002        
|                                               |  |                |         |             
|                                               |  |               
|                                               |  | (In thousands)
|Leasehold improvements                         |  | $              | 105,166 |              |  | $ | 129,534 | 
|Furniture, fixtures and equipment              |  |                | 30,994  |              |  |   | 42,030  | 
|China and smallwares                           |  |                | 3,454   |              |  |   | 4,406   | 
|                                               |  |                |         |              |  |   |         | 
|                                               |  |                | 139,614 |              |  |   | 175,970 | 
|Less accumulated depreciation and amortization |  |                | 25,594  |              |  |   | 38,915  | 
|                                               |  |                |         |              |  |   |         | 
|                                               |  | $              | 114,020 |              |  | $ | 137,055 | 
|                                               |  |                |         |              |  |   |         | 

3.     Accrued
Expenses

Accrued expenses consists of the following:

|                          |  |                |        |              |  |   |        | 
|------------------------- |  | -------------- | ------ | ------------ |  | - | ------ | 
|                          |  | December 30,   |        | December 29,
|                          |  | 2001           |        | 2002        
|                          |  |                |        |             
|                          |  |               
|                          |  | (In thousands)
|Accrued payroll           |  | $              | 4,396  |              |  | $ | 5,455  | 
|Sales and use tax payable |  |                | 2,244  |              |  |   | 2,555  | 
|Property tax payable      |  |                | 2,157  |              |  |   | 2,684  | 
|Accrued insurance         |  |                | 2,023  |              |  |   | 1,816  | 
|Accrued rent              |  |                | 2,171  |              |  |   | 2,588  | 
|Other accrued expenses    |  |                | 3,291  |              |  |   | 399    | 
|                          |  |                |        |              |  |   |        | 
|                          |  | $              | 16,282 |              |  | $ | 15,497 | 
|                          |  |                |        |              |  |   |        | 

4.     Credit
Facility

In December of 2002, the Company entered into a
senior secured revolving credit facility with a commercial
lending institution. The credit facility allows for borrowings
up to $20 million at an interest rate ranging from 125 to
200 basis points over the applicable London Interbank Offered
Rate (LIBOR). At any time, but only one time, the Company has
the right to increase the credit facility up to the maximum
aggregate principal amount of $50 million provided the
Company is in compliance with the terms of the facility. The
revolving credit facility expires on December 20, 2005 and
contains certain restrictions and conditions which require the
Company to: maintain a certain minimum tangible net worth, an
adjusted leverage ratio at a maximum of 3.50: 1, and a
minimum fixed-charge coverage ratio no less than 1.25: 1.
Shares of the Companys subsidiary Pei Wei Asian Diner,
Inc. serve as collateral for the credit facility. The Company
had no borrowings outstanding under the credit facility as of
December 29, 2002.

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5.     Long-Term
Debt

Long-term debt consists of the following:

|                                                                                                                                                                                                                                                                          |                      |                |       |              |  |   |       |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | -------------- | ----- | ------------ |  | - | ----- | ----- | 
|                                                                                                                                                                                                                                                                          |                      | December 30,   |       | December 29,
|                                                                                                                                                                                                                                                                          |                      | 2001           |       | 2002        
|                                                                                                                                                                                                                                                                          |                      |                |       |             
|                                                                                                                                                                                                                                                                          |                      |               
|                                                                                                                                                                                                                                                                          |                      | (In thousands)
|$2.0 million in unsecured promissory notes,
    payable to related parties from the sale of minority partner
    interests, in annual installments of $1.0 million plus
    interest, with rates ranging from 225 basis points over LIBOR to
    8%, until September 2004 |                      | $              | 723   |              |  | $ | 1,864 |      
|$1.2 million in unsecured promissory notes,
    payable to a former minority partner, in annual installments of
    $0.6 million plus interest, with an interest rate of 225 basis
    points over LIBOR, until January 2004                                              |                      |                |      |              |  |   | 1,210 |      
|$1.6 million promissory note, paid in 2002                                                                                                                                                                                                                                |                      |                | 1,209 |              |  |   |      |      
|$0.4 million equipment loan, paid in 2002                                                                                                                                                                                                                                 |                      |                | 160   |              |  |   |      |      
|                                                                                                                                                                                                                                                                          |                      |                |       |              |  |   |       |      
|                                                                                                                                                                                                                                                                          |                      |                | 2,092 |              |  |   | 3,074 |      
|                                                                                                                                                                                                                                                                          | Less current portion |                |       | 448          |  |   |       | 1,633 | 
|                                                                                                                                                                                                                                                                          |                      |                |       |              |  |   |       |      
|                                                                                                                                                                                                                                                                          |                      | $              | 1,644 |              |  | $ | 1,441 |      
|                                                                                                                                                                                                                                                                          |                      |                |       |              |  |   |       |      

The aggregate annual payments of long-term debt
outstanding at December 29, 2002, are summarized as
follows: 2003 - $1.6 million; 2004
- $1.4 million. The related party debt is due to
current minority investors in operating partnerships of the
Company who are also employed at the restaurants included in
such partnerships.

6.     Preferred
Stock and Common Stockholders Equity

Preferred
Stock

The board of directors is authorized to issue up
to 10,000,000 shares of preferred stock and to determine
the powers, preferences, privileges, rights, including voting
rights, qualifications, limitations and restrictions of those
shares without any further vote or act by the common
stockholders. There was no outstanding preferred stock as of
December 30, 2001 and December 29, 2002.

In connection with the original capitalization of
the Company, a warrant to purchase 124,380 shares of
preferred stock, convertible into 124,380 shares of common
stock, was issued to an investment bank with an exercise price
of $2.00 per common share. This warrant was exercised in the
first quarter of 2001 in accordance with the cashless exercise
provision contained therein for an aggregate of
111,090 shares of common stock.

Common
Stock

In January of 2001, the Company raised
$40.8 million in cash through a private equity placement of
1.25 million shares of common stock with two large mutual
fund companies. The Company used $15 million of the
proceeds to repay outstanding borrowings under its credit
facility. In April 2002, the Company amended the Certificate of
Incorporation to increase the number of authorized shares of
common stock from 20 million to 40 million.

Stock Option
Plans

In August 1996, the Company adopted the 1996
Stock Option Plan (1996 Plan), and in July 1997, the
Company adopted the 1997 Restaurant Management Stock Option Plan
(1997 Plan). Options under the 1996 Plan may be
granted to employees, consultants and directors to purchase the
Companys common stock at an exercise price that equals or
exceeds the fair value of such shares on the date such option is
granted. Options under the 1997 Plan may be granted to key
employees of the Company who are actively engaged in

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the management and operation of the
Companys restaurants to purchase the Companys common
stock at an exercise price that equals or exceeds the fair value
of such shares on the date such option is granted. Vesting
periods are determined at the discretion of the board of
directors, and options currently outstanding at
December 29, 2002 vest over five years. Options may be
exercised immediately upon grant, subject to a right by the
Company to repurchase any unvested shares at the exercise price.
Any options granted shall not be exercisable after ten years.
Upon certain changes in control of the Company, the 1996 and
1997 Plans provide for two additional years of immediate
vesting. The Company has reserved a total of
2,173,000 shares of common stock for issuance under the
1996 and 1997 Plans, all of which have been granted as of
December 29, 2002.


During 1998, the Companys Board of
Directors approved the 1998 Stock Option Plan (1998 Plan) which
provides for discretionary grants of incentive stock options and
nonqualified stock options to the Companys employees,
including officers, directors, consultants, advisors, and other
independent contractors. A total of 2,213,770 additional shares
of common stock have been reserved for issuance under the 1998
Plan. The option price per share for an incentive stock option
may not be less than 100 percent of the fair market value
of a share of common stock on the grant date. The option price
per share for a nonstatutory stock option may not be less than
85 percent of the fair market value of a share of common
stock on the grant date. The Companys Compensation
Committee has the authority to, among other things, determine
the vesting schedule for each option granted. All options expire
within 10 years. The 1998 Plan includes an automatic
grant program for outside directors. Pursuant to this program,
each outside director will be granted an option to purchase
30,000 shares of common stock at the time he or she is
first elected or appointed a director of the Company. In
addition, each outside director remaining in office will be
granted an option to purchase 15,000 immediately fully vested
shares on the day following each annual meeting of stockholders.

During 1999, the Companys Board of
Directors approved the 1999 Nonstatutory Stock Option Plan
(1999 Plan), which provides for discretionary grants of
nonqualified stock options to the Companys employees. The
1999 Plan prohibits grants to officers or directors. A
total of 800,000 shares of common stock have been reserved for
issuance under the 1999 Plan. The option price per share
may not be less than 85 percent of the fair market value of
a share of common stock on the grant date. The Companys
Compensation Committee has the authority to, among other things,
determine the vesting schedule for each option granted. All
options expire within 10 years.

Pro forma information regarding net income and
net income per share, as disclosed in Note 1, has been
determined as if the Company had accounted for its employee
stock-based compensation plans and other stock options under the
fair value method of SFAS No. 123. The fair value for
these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following
weighted-average assumptions used for grants under the option
plans:

|                                         |  |      |      |      |  |      |      |   |  |  |      |  
|---------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                         |  | 2000 |      | 2001 |  | 2002
|                                         |  |      |      |      |  |     
|Weighted average risk-free interest rate |  |      | 5.5  | %    |  |      | 5.5  | % |  |  | 4.0  | %
|Expected life of options (years)         |  |      | 5.00 |      |  |      | 5.00 |   |  |  | 5.00 |  
|Expected stock volatility                |  |      | 55.9 | %    |  |      | 43.3 | % |  |  | 49.3 | %
|Expected dividend yield                  |  |      | 0.0  | %    |  |      | 0.0  | % |  |  | 0.0  | %

The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price
volatility. Because changes in the subjective input assumptions
can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options. The weighted-average fair value
of options granted for the years ended December 31, 2000,
December 30, 2001 and December 29, 2002 was $8.44,
$8.59 and $14.60, respectively.

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Information regarding activity for stock options
outstanding under the Plans is as follows:

|                                         |                      |                     |         |           |   |          |           |            |   |   |       |       | 
|---------------------------------------- | -------------------- | ------------------- | ------- | --------- | - | -------- | --------- | ---------- | - | - | ----- | ----- | 
|                                         |                      |                    
|                                         |                      | Outstanding Options
|                                         |                      |                    
|                                         |                      |                     |         | Weighted-
|                                         |                      | Shares              |         |           |   | Average 
|                                         |                      | Available           |         |           |   | Exercise
|                                         |                      | For Options         |         | Shares    |   | Price   
|                                         |                      |                     |         |           |   |         
|Outstanding at January 2, 2000           |                      |                     | 37,950  |           |   |          | 2,675,514 |            |   | $ | 3.99  |      
|                                         | Authorized           |                     |         | 800,000   |   |          |           |           |   |   |       |      | 
|                                         | Granted              |                     |         | (538,000  | ) |          |           | 538,000    |   |   |       | 15.56 | 
|                                         | Exercised            |                     |         |          |   |          |           | (364,364   | ) |   |       | 3.12  | 
|                                         | Forfeited (canceled) |                     |         | 22,208    |   |          |           | (22,208    | ) |   |       | 9.47  | 
|                                         |                      |                     |         |           |   |          |           |            |   |   |       |      
|Outstanding at December 31, 2000         |                      |                     | 322,158 |           |   |          | 2,826,942 |            |   |   | 6.25  |      
|                                         | Authorized           |                     |         | 600,000   |   |          |           |           |   |   |       |      | 
|                                         | Granted              |                     |         | (643,500  | ) |          |           | 643,500    |   |   |       | 18.80 | 
|                                         | Exercised            |                     |         |          |   |          |           | (351,440   | ) |   |       | 3.94  | 
|                                         | Forfeited (canceled) |                     |         | 77,262    |   |          |           | (77,262    | ) |   |       | 15.10 | 
|                                         |                      |                     |         |           |   |          |           |            |   |   |       |      
|Outstanding at December 30, 2001         |                      |                     | 355,920 |           |   |          | 3,041,740 |            |   |   | 8.92  |      
|                                         | Authorized           |                     |         | 1,000,000 |   |          |           |           |   |   |       |      | 
|                                         | Granted              |                     |         | (485,750  | ) |          |           | 485,750    |   |   |       | 30.55 | 
|                                         | Exercised            |                     |         |          |   |          |           | (1,055,371 | ) |   |       | 4.60  | 
|                                         | Forfeited (canceled) |                     |         | 85,192    |   |          |           | (85,192    | ) |   |       | 19.44 | 
|                                         |                      |                     |         |           |   |          |           |            |   |   |       |      
|Outstanding at December 29, 2002         |                      |                     | 955,362 |           |   |          | 2,386,927 |            |   | $ | 14.88 |      
|                                         |                      |                     |         |           |   |          |           |            |   |   |       |      
|Options exercisable at December 29, 2002 |                      |                     |         |           |   |          | 1,241,180 |            |   | $ | 9.38  |      
|                                         |                      |                     |         |           |   |          |           |            |   |   |       |      

Information regarding options outstanding and
exercisable at December 29, 2002 is as follows:

|                |  |                     |         |                     |  |                |           |             |  |                |       |  |  |  |         |  |  |   |       | 
|--------------- |  | ------------------- | ------- | ------------------- |  | -------------- | --------- | ----------- |  | -------------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                |  |                     |         |                    
|                |  | Options Outstanding |         | Options Exercisable
|                |  |                     |         |                    
|                |  |                     |         | Weighted-           |  |                |           |            
|                |  |                     |         | Average             |  | Weighted-      |           |             |  | Weighted-     
|Range of        |  | Number              |         | Remaining           |  | Average        |           | Number      |  | Average       
|Exercise Prices |  | Outstanding         |         | Contractual Life    |  | Exercise Price |           | Exercisable |  | Exercise Price
|                |  |                     |         |                     |  |                |           |             |  |               
|$1.20$5.00     |  |                     | 578,547 |                     |  |                | 3.5 years |             |  | $              | 1.68  |  |  |  | 578,003 |  |  | $ | 1.68  | 
|$5.01$10.00    |  |                     | 150,091 |                     |  |                | 6.0 years |             |  |                | 7.16  |  |  |  | 90,764  |  |  |   | 6.98  | 
|$10.01$15.00   |  |                     | 524,367 |                     |  |                | 7.0 years |             |  |                | 13.04 |  |  |  | 256,618 |  |  |   | 12.77 | 
|$15.01$20.00   |  |                     | 664,422 |                     |  |                | 8.2 years |             |  |                | 18.50 |  |  |  | 255,795 |  |  |   | 18.24 | 
|$20.01$25.00   |  |                     | 22,500  |                     |  |                | 9.0 years |             |  |                | 24.39 |  |  |  |        |  |  |   |      | 
|$25.01$30.00   |  |                     | 57,000  |                     |  |                | 9.7 years |             |  |                | 29.16 |  |  |  |        |  |  |   |      | 
|$30.01$35.00   |  |                     | 390,000 |                     |  |                | 9.5 years |             |  |                | 31.15 |  |  |  | 60,000  |  |  |   | 32.93 | 

Since options are generally exercisable upon date
of grant, options exercisable, included in the above table,
represent vested options that are not subject to repurchase by
the Company.

During 2001, Pei Wei Asian Diner,
Inc.s Board of Directors approved the Pei Wei Asian
Diner, Inc. 2001 Stock Option Plan (2001 Pei Wei Plan),
which provides for discretionary grants of incentive stock
options and nonqualified stock options to employees, consultants
and directors of Pei Wei Asian Diner, Inc. A total of 169
shares of common stock have been reserved for issuance under the
2001 Pei Wei Plan. As of December 29, 2002,
111 options have been granted at prices ranging from $7,396
to $15,195 and 15 have been exercised at $7,396. The Company
holds 960 shares of common stock of Pei Wei Asian Diner.

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Employee
Stock Purchase Plan

During 1998, the Companys Board of
Directors approved the 1998 Employee Stock Purchase Plan
(Purchase Plan) and reserved 800,000 shares for issuance
thereunder. The Purchase Plan permits eligible employees to
purchase common stock at a discount, but only through payroll
deductions, during concurrent 24 month offering periods.
Each offering period will be divided into four consecutive
6-month purchase periods. The price at which stock is purchased
under the Purchase Plan is equal to 85 percent of the lower
of the fair market value of the common stock on the first day of
the offering period and the fair market value of the common
stock on the last day of the purchase period.

7.     Benefit
Plan

Effective July 1, 1997, the Company adopted
a 401(k) Defined Contribution Benefit Plan (the Plan), which
covers substantially all employees of the Company that have
completed one year of service and have attained the age of
21 years old. The Plan permits participants to contribute
to the Plan, subject to Internal Revenue Code restrictions, and
the plan also permits the Company to make discretionary matching
contributions. During the years ended December 31, 2000,
December 30, 2001 and December 29, 2002, the Company
did not make any contributions to the Plan.

8.     Employment
Agreements

In August 2002, P.F. Changs executed
employment agreements with its Chief Executive Officer and also
its President; and the President of Pei Wei Asian Diner, Inc.,
its majority owned subsidiary. The term for these agreements is
three years and the agreements prohibit these officers from
competing with P.F. Changs China Bistro and Pei Wei Asian
Diner in the area of Chinese and Asian food concepts during the
term of the agreements and for one year after termination.

The agreements with the Chief Executive Officer
and the President of the Company also provide for immediate
vesting of unvested stock options, and the extension of the
expiration date to three years, after the occurrence of certain
events. These events include a change in control of the Company,
termination of the executives employment by the Company
without cause or separation of employment by the executive for
good reason (as defined in the agreements). These
provisions in the employment agreements resulted in a
modification under FIN No. 44 to APB No. 25. Should
any of these events occur, the Company may be required to record
an expense based upon the difference between the original grant
price and the fair value at the modification date for the number
of shares ultimately affected by the modification. As of
December 29, 2002, approximately 968,000 shares were
affected by this agreement of which 250,000 shares were
unvested.

The agreement with the President of Pei Wei Asian
Diner, Inc. contains similar provisions with respect to a change
in control for Pei Wei Asian Diner, Inc. and termination without
cause but also includes a provision whereby the Company could be
required to repurchase his shares of common stock in this
subsidiary at fair value should a termination without cause or
for good reason (as defined in the agreement) occur.
The agreement covers ten shares of Pei Wei Asian Diner, Inc.
common stock issued as of December 29, 2002, and options to
purchase 46 shares of which 40 were unvested as of
December 29, 2002.

9.     Partnership
Structure

P.F. Changs utilizes a partnership
structure to facilitate the development, leadership and
operation of its restaurants. Each partner is required to make a
capital contribution in exchange for a specified interest in the
restaurant or region the partner is employed to manage. The
ownership interest purchased by each partner generally ranges
between two and seven percent of the restaurant or region the
partner oversees. At the end of a specific term (generally five
years), P.F. Changs has the right, but not the obligation,
to purchase the minority partners interest in the
partners respective restaurant or region at fair market
value. An estimated fair value is determined by reference to
current industry purchase metrics as well as the average cash
flows of the subject restaurants or regions
financial results. The Company has the option to pay the agreed
upon purchase price in cash or common stock of the company over
a period of time not to exceed five years.

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As of December 29, 2002, there were 120
partners within the P.F. Changs China Bistro, Inc. system.
During 2002, we purchased interests held by six of our minority
partners for a total of approximately $4.5 million, of
which the majority was recorded as intangibles. Approximately
$1.5 million of the total purchase price was paid in cash
while the remaining balance has been recorded as amounts due to
related parties on the balance sheet at December 29, 2002.
These transactions were accretive to the Companys
financial results for the year ended December 29, 2002 and
resulted in an additional $0.02 of diluted earnings per share.
In 2003, we will have the opportunity to purchase 11 additional
partnership interests.

10.     Income
Taxes

Income tax expense (benefit) consisted of the
following:

|         |          |                |       |              |  |              |       |       |  |   |        |       | 
|-------- | -------- | -------------- | ----- | ------------ |  | ------------ | ----- | ----- |  | - | ------ | ----- | 
|         |          | Year Ended     |       | Year Ended   |  | Year Ended  
|         |          | December 31,   |       | December 30, |  | December 29,
|         |          | 2000           |       | 2001         |  | 2002        
|         |          |                |       |              |  |             
|         |          |               
|         |          | (In thousands)
|Federal: |          |                |       |              |  |              |       |       |  |   |        |      
|         | Current  |                | $     | 3,676        |  |              | $     | 6,398 |  |   | $      | 8,094 | 
|         | Deferred |                |       | 1,460        |  |              |       | 886   |  |   |        | 766   | 
|         |          |                |       |              |  |              |       |       |  |   |        |      
|         |          |                | 5,136 |              |  |              | 7,284 |       |  |   | 8,860  |      
|State:   |          |                |       |              |  |              |       |       |  |   |        |      
|         | Current  |                |       | 594          |  |              |       | 1,249 |  |   |        | 2,176 | 
|         | Deferred |                |       | 257          |  |              |       | 156   |  |   |        | 135   | 
|         |          |                |       |              |  |              |       |       |  |   |        |      
|         |          |                | 851   |              |  |              | 1,405 |       |  |   | 2,311  |      
|         |          |                |       |              |  |              |       |       |  |   |        |      
|         |          | $              | 5,987 |              |  | $            | 8,689 |       |  | $ | 11,171 |      
|         |          |                |       |              |  |              |       |       |  |   |        |      

The Companys effective tax rate differs
from the federal statutory rate for the following reasons:

|                                             |  |                |        |              |  |              |       |   |  |   |        |  
|-------------------------------------------- |  | -------------- | ------ | ------------ |  | ------------ | ----- | - |  | - | ------ | -
|                                             |  | Year Ended     |        | Year Ended   |  | Year Ended  
|                                             |  | December 31,   |        | December 30, |  | December 29,
|                                             |  | 2000           |        | 2001         |  | 2002        
|                                             |  |                |        |              |  |             
|                                             |  |               
|                                             |  | (In thousands)
|Income tax expense at federal statutory rate |  | $              | 5,500  |              |  | $            | 8,508 |   |  | $ | 11,223 |  
|State taxes, net of federal expense          |  |                | 678    |              |  |              | 913   |   |  |   | 1,502  |  
|FICA tip credit                              |  |                | (1,744 | )            |  |              | (411  | ) |  |   | (967   | )
|Increase (decrease) in valuation allowance   |  |                | 1,516  |              |  |              | (358  | ) |  |   | (1,158 | )
|Other, net                                   |  |                | 37     |              |  |              | 38    |   |  |   | 571    |  
|                                             |  |                |        |              |  |              |       |   |  |   |        |  
|                                             |  | $              | 5,987  |              |  | $            | 8,689 |   |  | $ | 11,171 |  
|                                             |  |                |        |              |  |              |       |   |  |   |        |  

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The income tax effects of temporary differences
that give rise to significant portions of deferred tax assets
and liabilities are as follows:

|                             |                                        |                |        |              |  |              |        |       |  |   |       |       | 
|---------------------------- | -------------------------------------- | -------------- | ------ | ------------ |  | ------------ | ------ | ----- |  | - | ----- | ----- | 
|                             |                                        | As of          |        | As of        |  | As of       
|                             |                                        | December 31,   |        | December 30, |  | December 29,
|                             |                                        | 2000           |        | 2001         |  | 2002        
|                             |                                        |                |        |              |  |             
|                             |                                        |               
|                             |                                        | (In thousands)
|Deferred tax assets:         |                                        |                |        |              |  |              |        |       |  |   |       |      
|                             | Preopening expenses                    |                | $      | 572          |  |              | $      | 644   |  |   | $     | 486   | 
|                             | FICA tip and AMT credit carryforward   |                |        | 1,516        |  |              |        | 1,158 |  |   |       | 2,646 | 
|                             | Other                                  |                |        | 100          |  |              |        | 264   |  |   |       | 473   | 
|                             |                                        |                |        |              |  |              |        |       |  |   |       |      
|                             |                                        |                | 2,188  |              |  |              | 2,066  |       |  |   | 3,605 |      
|Deferred tax liabilities:    |                                        |                |        |              |  |              |        |       |  |   |       |      
|                             | Depreciation on property and equipment |                |        | 2,688        |  |              |        | 3,902 |  |   |       | 7,285 | 
|                             | Goodwill amortization                  |                |        | 302          |  |              |        | 366   |  |   |       | 581   | 
|                             |                                        |                |        |              |  |              |        |       |  |   |       |      
|                             |                                        |                | 2,990  |              |  |              | 4,268  |       |  |   | 7,866 |      
|Valuation allowance          |                                        |                | (1,516 | )            |  |              | (1,158 | )     |  |   |      |      
|                             |                                        |                |        |              |  |              |        |       |  |   |       |      
|Net deferred tax liabilities |                                        | $              | 2,318  |              |  | $            | 3,360  |       |  | $ | 4,261 |      
|                             |                                        |                |        |              |  |              |        |       |  |   |       |      

The FICA tip credit carryforward begins to expire
in 2021. For the year ended December 31, 2000, the
valuation allowance increased by $1,516,000 as a result of
uncertainties with respect to the recoverability of credit
carryforwards. For the years ended December 30, 2001 and
December 29, 2002, the valuation decreased by $358,000 and
$1,158,000, respectively, as such credits were either utilized
or assessed as probable of utilization prior to their
expiration. This decision was based upon an analysis of the
Companys situation and plans.

At December 29, 2002, the Company took
advantage of additional tax deductions available relating to the
exercise of non-qualified stock options and disqualifying
dispositions of incentive stock options. Accordingly, for the
year ended December 29, 2002, the Company recorded a
$11.7 million increase to equity with a corresponding
$11.7 million reduction to income tax liability. Quarterly
adjustments for the exercise of non-qualified stock options and
disqualifying dispositions of incentive stock options may vary
as they relate to the actions of the option holder or
shareholder.

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11.     Net Income
Per Share

The following table sets forth the computation of
basic and diluted net income per share:

|                                                                                                                    |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |        |       | 
|------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ---------------------------------------- | ------ | ------------ | ----- | ------------ | ------ | ------ | ----- |  | ------ | ------ | ----- | 
|                                                                                                                    |                                                                                                        | Year Ended                               |        | Year Ended   |       | Year Ended  
|                                                                                                                    |                                                                                                        | December 31,                             |        | December 30, |       | December 29,
|                                                                                                                    |                                                                                                        | 2000                                     |        | 2001         |       | 2002        
|                                                                                                                    |                                                                                                        |                                          |        |              |       |             
|                                                                                                                    |                                                                                                        |                                         
|                                                                                                                    |                                                                                                        | (In thousands, except per share amounts)
|Numerator:                                                                                                          |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|                                                                                                                    | Numerator for basic and diluted net income per
    share  net income available to common stockholders |                                          | $      | 9,729        |       |              | $      | 15,619 |       |  | $      | 20,892 |      
|                                                                                                                    |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|Denominator:                                                                                                        |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|                                                                                                                    | Denominator for basic net income per
    share  weighted-average shares                               |                                          |        | 20,752       |       |              |        | 23,728 |       |  |        | 24,688 |      
|                                                                                                                    | Effect of dilutive securities:                                                                         |                                          |        |              |       |              |        |        |       |  |        |        |      
|                                                                                                                    |                                                                                                        | Employee and director stock options      |        |              | 1,844 |              |        |        | 1,730 |  |        |        | 1,236 | 
|                                                                                                                    |                                                                                                        | Warrants                                 |        |              | 112   |              |        |        | 12    |  |        |        |      | 
|                                                                                                                    |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|Denominator for diluted net income per
    share  adjusted for weighted average shares and
    assumed conversions |                                                                                                        |                                          | 22,708 |              |       |              | 25,470 |        |       |  | 25,924 |       
|                                                                                                                    |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|Net income per share:                                                                                               |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|                                                                                                                    | Basic                                                                                                  |                                          | $      | 0.47         |       |              | $      | 0.66   |       |  | $      | 0.85   |      
|                                                                                                                    |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|                                                                                                                    | Diluted                                                                                                |                                          | $      | 0.43         |       |              | $      | 0.61   |       |  | $      | 0.81   |      
|                                                                                                                    |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       

Options to purchase 2,386,927 shares of
common stock ranging from $1.20 to $32.93 per share were
outstanding at December 29, 2002, most of which were
included in dilutive securities given that only
71,000 shares were antidilutive.

12.     Commitments
and Contingencies

Operating Leases

The Company leases restaurant and office
facilities and equipment and certain real property under
operating leases having terms expiring between 2003 and 2023.
The restaurant facility and real property leases primarily have
renewal clauses of five to 15 years exercisable at the
option of the Company with rent escalation clauses stipulating
specific rent increases, some of which are based on the consumer
price index. Certain of these leases require the payment of
contingent rentals based on a percentage of gross revenues, as
defined. Rent expense for the years ended December 31,
2000, December 30, 2001 and December 29, 2002 was
approximately $10,629,000, $14,249,000 and $18,055,000,
respectively. Contingent rent included in rent expense for the
years ended December 31, 2000, December 30, 2001 and
December 29, 2002 was approximately $3,225,000, $4,246,000
and $5,348,000, respectively.

At December 29, 2002, the Company had
entered into other lease agreements for restaurant facilities
currently under construction or yet to be constructed. In
addition, the leases also contain provisions for additional
contingent rent based upon gross revenues, as defined in the
leases. Future minimum lease

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payments under operating leases (including
restaurants to be opened after December 29, 2002) are as
follows (in thousands):


|           |                              |   |         |         | 
|---------- | ---------------------------- | - | ------- | ------- | 
|2003       |                              | $ | 16,200  |        
|2004       |                              |   | 17,303  |        
|2005       |                              |   | 16,701  |        
|2006       |                              |   | 16,293  |        
|2007       |                              |   | 16,467  |        
|Thereafter |                              |   | 120,728 |        
|           |                              |   |         |        
|           | Total minimum lease payments |   |         | 203,692 | 
|           |                              |   |         |        

The Company leases a building and certain
furniture and equipment from a partnership in which the Company
owns an approximate six percent interest. Annual rent payments
are contingent based on a percentage of gross revenues. The
respective period rent expense is included in the
above-disclosed amounts.

13.     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. There
were no material amounts of revenues or transfers among
reportable segments.

The table below presents information about
reportable segments:

|                  |                            |                |   |         |  |         |   |         |  |  |   |        |  
|----------------- | -------------------------- | -------------- | - | ------- |  | ------- | - | ------- |  |  | - | ------ | -
|                  |                            | Total          |   | Bistro  |  | Pei Wei
|                  |                            |                |   |         |  |        
|                  |                            |               
|                  |                            | (In thousands)
|Fiscal Year 2002: |                            |                |   |         |  |         |   |         |  |  |   |       
|                  | Revenues                   |                | $ | 422,091 |  |         | $ | 400,190 |  |  | $ | 21,901 |  
|                  | Income before income taxes |                |   | 32,063  |  |         |   | 34,651  |  |  |   | (2,588 | )
|                  | Capital expenditures       |                |   | 43,471  |  |         |   | 33,244  |  |  |   | 10,227 |  
|                  | Total assets               |                |   | 218,450 |  |         |   | 205,351 |  |  |   | 13,099 |  
|Fiscal Year 2001: |                            |                |   |         |  |         |   |         |  |  |   |       
|                  | Revenues                   |                | $ | 318,776 |  |         | $ | 312,864 |  |  | $ | 5,912  |  
|                  | Income before income taxes |                |   | 24,308  |  |         |   | 25,150  |  |  |   | (842   | )
|                  | Capital expenditures       |                |   | 35,921  |  |         |   | 33,460  |  |  |   | 2,461  |  
|                  | Total assets               |                |   | 173,030 |  |         |   | 168,882 |  |  |   | 4,148  |  
|Fiscal Year 2000: |                            |                |   |         |  |         |   |         |  |  |   |       
|                  | Revenues                   |                | $ | 234,905 |  |         | $ | 233,554 |  |  | $ | 1,351  |  
|                  | Income before income taxes |                |   | 15,716  |  |         |   | 15,908  |  |  |   | (192   | )
|                  | Capital expenditures       |                |   | 37,381  |  |         |   | 36,614  |  |  |   | 767    |  
|                  | Total assets               |                |   | 115,926 |  |         |   | 114,066 |  |  |   | 1,860  |  

14.     Interim
Financial Results (Unaudited)

The following tables set forth certain unaudited
consolidated financial information for each of the four quarters
in fiscal 2001 and 2002. In managements opinion, this
unaudited quarterly information has been prepared on the same
basis as the audited consolidated financial statements and
includes all necessary adjustments, consisting only of normal
recurring adjustments, that management considers necessary for a
fair presentation of the unaudited quarterly results when read
in conjunction with the Consolidated Financial

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Statements and Notes. The Company believes that
quarter-to-quarter comparisons of its financial results are not
necessarily indicative of future performance.


|                                            |  |                                       |        |                              |  |         |        |         |  |         |        |         |  |         |        |         |  |   |        |  |  |   |         |  |  |   |         |  |  |   |         | 
|------------------------------------------- |  | ------------------------------------- | ------ | ---------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ |  |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                            |  |                                       |        |                             
|                                            |  | Year Ended December 30, 2001          |        | Year Ended December 29, 2002
|                                            |  |                                       |        |                             
|                                            |  | First                                 |        | Second                       |  | Third   |        | Fourth  |  | First   |        | Second  |  | Third   |        | Fourth 
|                                            |  | Quarter                               |        | Quarter                      |  | Quarter |        | Quarter |  | Quarter |        | Quarter |  | Quarter |        | Quarter
|                                            |  |                                       |        |                              |  |         |        |         |  |         |        |         |  |         |        |        
|                                            |  |                                      
|                                            |  | (In thousands, except per share data)
|Revenues                                    |  | $                                     | 72,420 |                              |  | $       | 76,457 |         |  | $       | 80,555 |         |  | $       | 89,344 |         |  | $ | 97,500 |  |  | $ | 101,650 |  |  | $ | 107,052 |  |  | $ | 115,889 | 
|Restaurant operating profit                 |  |                                       | 13,877 |                              |  |         | 14,397 |         |  |         | 15,296 |         |  |         | 17,910 |         |  |   | 18,222 |  |  |   | 19,569  |  |  |   | 19,617  |  |  |   | 22,344  | 
|Income before provision for income taxes    |  |                                       | 6,124  |                              |  |         | 5,295  |         |  |         | 5,532  |         |  |         | 7,357  |         |  |   | 7,877  |  |  |   | 7,494   |  |  |   | 6,786   |  |  |   | 9,906   | 
|Net income                                  |  |                                       | 3,890  |                              |  |         | 3,390  |         |  |         | 3,568  |         |  |         | 4,771  |         |  |   | 5,120  |  |  |   | 4,871   |  |  |   | 4,417   |  |  |   | 6,484   | 
|Basic net income per share                  |  |                                       | 0.17   |                              |  |         | 0.14   |         |  |         | 0.15   |         |  |         | 0.20   |         |  |   | 0.21   |  |  |   | 0.20    |  |  |   | 0.18    |  |  |   | 0.26    | 
|Diluted net income per share                |  |                                       | 0.15   |                              |  |         | 0.13   |         |  |         | 0.14   |         |  |         | 0.19   |         |  |   | 0.20   |  |  |   | 0.19    |  |  |   | 0.17    |  |  |   | 0.25    | 
|Basic weighted average shares outstanding   |  |                                       | 23,338 |                              |  |         | 23,812 |         |  |         | 23,860 |         |  |         | 23,904 |         |  |   | 24,088 |  |  |   | 24,727  |  |  |   | 24,944  |  |  |   | 24,994  | 
|Diluted weighted average shares outstanding |  |                                       | 25,108 |                              |  |         | 25,458 |         |  |         | 25,610 |         |  |         | 25,706 |         |  |   | 25,894 |  |  |   | 26,008  |  |  |   | 25,841  |  |  |   | 25,954  | 

Note: During the fourth quarter of 2002, the
Company recorded a $750,000 expense reduction for amounts
previously accrued during the year for a sales incentive program
that fell short of its goal.




Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.




PART III




Item 10.     Directors
and Executive Officers of the Registrant

The information required by Item 10 with
respect to Directors and Executive Officers is incorporated by
reference from the information under the captions Director
Nominees and Executive Officers, respectively,
contained in the Companys definitive proxy statement in
connection with the solicitation of proxies for the
Companys 2002 Annual Meeting of Stockholders to be held on
April 9, 2003 (the Proxy Statement).




Item 11.     Executive
Compensation

The information required by this item is
incorporated by reference from the information under the caption
Executive Compensation contained in the Proxy
Statement.

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Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

Securities Authorized for Issuance Under
Equity Compensation Plans.Information
about P.F. Changs China Bistro, Inc. equity compensation
plans at December 29, 2002 was as follows (number of shares
in thousands):

|                                                              |  |                   |           |                   |  |               |       |  |  |   |           |    
|------------------------------------------------------------- |  | ----------------- | --------- | ----------------- |  | ------------- | ----- |  |  | - | --------- | ---
|                                                              |  |                   |           |                   |  | Number of    
|                                                              |  | Number of Shares  |           | Weighted          |  | Shares       
|                                                              |  | to be Issued Upon |           | Average           |  | Remaining    
|                                                              |  | Exercise of       |           | Exercise Price of |  | Available for
|                                                              |  | Outstanding       |           | Outstanding       |  | Future       
|Plan Category                                                 |  | Options           |           | Options           |  | Issuance     
|                                                              |  |                   |           |                   |  |              
|Equity compensation plans approved by
    shareholders(a)     |  |                   | 1,890,229 |                   |  |               | 12.16 |  |  | $ | 1,533,463 | (c)
|Equity compensation plans not approved by
    shareholders(b) |  |                   | 657,882   |                   |  |               | 21.97 |  |  |   | 60,715    |    
|                                                              |  |                   |           |                   |  |               |       |  |  |   |           |    
|Total                                                         |  |                   | 2,548,111 |                   |  |               |       |  |  | $ | 1,594,178 |    
|                                                              |  |                   |           |                   |  |               |       |  |  |   |           |    



---



|    |                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Consists of four P.F. Changs stock plans:
    1996 Stock Option Plan, 1997 Restaurant Management Stock Option
    Plan, 1998 Stock Option Plan and 1998 Employee Stock Purchase
    Plan.
|   
|(b) | Consists of P.F. Changs China Bistro 1999
    Nonstatutory Stock Option Plan. See Notes to Consolidated
    Financial Statements, Note 6Stock Option Plans.                           
|   
|(c) | Includes 630,816 shares reserved for issuance
    under the 1998 Employee Stock Purchase Plan.                                                                                            

Information about employee and executive stock
option grants at December 29, 2002 was as follows:

|                                                                                           |  |      |      |      |  |      |      |   |  |  |      |  
|------------------------------------------------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                                                           |  | 2002 |      | 2001 |  | 2000
|                                                                                           |  |      |      |      |  |     
|Net grants during the period as % of outstanding
    shares                                |  |      | 1.6  | %    |  |      | 2.4  | % |  |  | 2.5  | %
|Grants to named executive officers* as % of total
    options granted                      |  |      | 23.7 | %    |  |      | 28.3 | % |  |  | 42.6 | %
|Grants to named executive officers* as % of
    outstanding shares                         |  |      | 0.5  | %    |  |      | 0.8  | % |  |  | 1.1  | %
|Cumulative options held by named executive
    officers* as % of total options outstanding |  |      | 47.1 | %    |  |      | 39.1 | % |  |  | 49.0 | %



---



| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Named executive officers are defined by the SEC
    for inclusion in the Proxy Statement as the Chief Executive
    Officer and each of the four other most highly compensated
    executive officers.

The information required by Item 403 of
Regulation S-K in this item is incorporated by reference
from information under the caption Security Ownership of
Certain Beneficial Owners and Management contained in the
Proxy Statement.




Item 13.     Certain
Relationships and Related Transactions

The information required by this item is
incorporated by reference from the information under the caption
Certain Relationships and Related Transactions
contained in the Proxy Statement.




Item 14.     Controls
and Procedures

(a) Under the supervision and with the
participation of our management, including our principal
executive officer and principal accounting officer, we conducted
an evaluation of our disclosure controls and procedures, as such
term is defined under Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange
Act), within 90 days of the filing date of this
report. Based on their evaluation, our principal executive
officer and principal accounting officer concluded that our
disclosure controls and procedures are effective.

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(b) There have been no significant changes
(including corrective actions with regard to significant
deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in
paragraph (a) above.




PART IV




Item 15.     Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K

(a)     Documents filed
as part of this report:



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | 1.     The following
    Financial Statements of the Company are included in
    Part II, Item 8 of this Annual Report on
    Form 10-K:



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | Report of Independent Auditors;                                                                                                               
|
| | Consolidated Balance Sheets at December 30,
    2001 and December 29, 2002;                                                                   
|
| | Consolidated Statements of Income for the Years
    Ended December 31, 2000, December 30, 2001 and
    December 29, 2002;                     
|
| | Consolidated Statements of Common
    Stockholders Equity for the Years Ended December 31,
    2000, December 30, 2001 and December 29, 2002;
|
| | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2000, December 30, 2001 and
    December 29, 2002;                 
|
| | Notes to Consolidated Financial Statements.                                                                                                   



| |                                              
| | ---------------------------------------------
| | 2.     Schedules to
    Financial Statements:



| |                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All financial statement schedules have been
    omitted because they are either inapplicable or the information
    required is provided in the Companys Consolidated
    Financial Statements and Notes thereto, included in
    Part II, Item 8 of this Annual Report on
    Form 10-K.



| |                         
| | ------------------------
| | 3.     Index to Exhibits

|        |           |                      |  |                                                                                                                          
|------- | --------- | -------------------- |  | -------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |                     
|Number  |           | Description Document
|        |           |                     
|        | 3.1(1)    |                      |  | Amended and Restated Certificate of Incorporation.                                                                       
|        | 3.2(2)    |                      |  | Amended and Restated By-laws.                                                                                            
|        | 4.1(3)    |                      |  | Specimen Common Stock Certificate.                                                                                       
|        | 4.2(3)    |                      |  | Amended and Restated Registration Rights
    Agreement dated May 1, 1997.                                                
|        | 10.1(3)  |                      |  | Form of Indemnification Agreement for directors
    and executive officers.                                              
|        | 10.2(3)  |                      |  | 1998 Stock Option Plan and forms of agreement
    thereunder.                                                            
|        | 10.3(3)  |                      |  | 1997 Restaurant Manager Stock Option Plan and
    forms of Agreement thereunder.                                         
|        | 10.4(3)  |                      |  | 1996 Stock Option Plan and forms of Agreement
    thereunder.                                                            
|        | 10.5(3)  |                      |  | 1998 Employee Stock Purchase Plan.                                                                                       
|        | 10.6(3)  |                      |  | Employment Agreement between Paul M. Fleming and
    the Company dated January 1, 1996, as amended
    September 2, 1998.
|        | 10.11(4)  |                      |  | Office Lease between the Company and
    PHXAZ-Kierland Commons, LLC, dated September 17, 1999.                          
|        | 10.13(5) |                      |  | 1999 Nonstatutory Stock Option Plan.                                                                                     
|        | 10.15(6)  |                      |  | First Amendment to Office Lease between the
    Company and PHXAZ-Kierland Commons, LLC, dated August 22,
    2001.      
|        | 10.16(7)  |                      |  | Common Stock Purchase Agreement dated
    January 11, 2001.                                                              
|        | 10.17(6) |                      |  | Pei Wei Asian Diner, Inc. 2001 Stock Option Plan.                                                                        

56



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|        |           |                      |  |                                                                                                                                                            
|------- | --------- | -------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |                     
|Number  |           | Description Document
|        |           |                     
|        | 10.18(8) |                      |  | Employment Agreement between Richard L. Federico
    and the Company dated August 3, 2002.                                                                 
|        | 10.19(8) |                      |  | Employment Agreement between Robert T. Vivian and
    the Company dated August 2, 2002.                                                                    
|        | 10.20(8) |                      |  | Employment Agreement by and among Russell Owens,
    Pei Wei Asian Diner, Inc. and the Company dated August 6,
    2002.                                   
|        | 10.21     |                      |  | Second Amendment to office lease between the
    Company and PHXAZ-Kierland Commons, LLC, dated November 12,
    2002.                                     
|        | 10.22     |                      |  | Line of Credit Agreement between the Company and
    Bank of America dated December 20, 2002.                                                              
|        | 21.1      |                      |  | List of Subsidiaries.                                                                                                                                      
|        | 23.1      |                      |  | Consent of Ernst & Young, LLP, Independent
    Auditors.                                                                                                   
|        | 99.1      |                      |  | 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.
|        | 99.2      |                      |  | Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 for Kristina
    K. Cashman.



---



| |   |                                         
| | - | ----------------------------------------
| |  | Management Contract or Compensatory Plan



|    |                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q dated
    April 25, 2002.     
|   
|(2) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q dated
    October 24, 2001.   
|   
|(3) | Incorporated by reference to the
    Registrants Registration Statement on Form S-1 (File
    No. 333-59749).
|   
|(4) | Incorporated by reference to the
    Registrants Form 10-K dated March 3, 2000.                              
|   
|(5) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K dated
    March 6, 2001.         
|   
|(6) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K dated
    February 19, 2002.     
|   
|(7) | Incorporated by reference to the
    Registrants Form 10-Q, dated April 1, 2001.                             
|   
|(8) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q dated
    October 23, 2002.   

(b) Reports on Form 8-K:



| |      
| | -----
| | None.

57



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on February 12,
2003.



| |                                
| | -------------------------------
| | P.F. CHANGS CHINA BISTRO, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ RICHARD FEDERICO

| |                                     
| | ------------------------------------
| |                                     
| | Richard Federico                    
| | Chairman and Chief Executive Officer

Pursuant to the requirement of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|          |  |                                                |  |                                                                                  |  |                  
|--------- |  | ---------------------------------------------- |  | -------------------------------------------------------------------------------- |  | -----------------
|          |  |                                                |  |                                                                                 
|Signature |  | Title                                          |  | Date                                                                            
|          |  |                                                |  |                                                                                 
|         
|By:       |  | /s/ RICHARD L. FEDERICORichard L. Federico     |  | Chairman, Chief Executive Officer and Director
    (Principal Executive Officer) |  | February 12, 2003
|         
|By:       |  | /s/ KRISTINA K. CASHMANKristina Cashman        |  | Chief Financial Officer and Secretary (Principal
    Accounting Officer)         |  | February 12, 2003
|         
|By:       |  | /s/ KENNETH J. WESSELSKenneth J. Wessels       |  | Director                                                                         |  | February 12, 2003
|         
|By:       |  | /s/ R. MICHAEL WELBORNR. Michael Welborn       |  | Director                                                                         |  | February 12, 2003
|         
|By:       |  | /s/ JAMES G. SHENNAN, JR.James G. Shennan, Jr. |  | Director                                                                         |  | February 12, 2003
|         
|By:       |  | /s/ F. LANE CARDWELL, JR.F. Lane Cardwell, Jr. |  | Director                                                                         |  | February 12, 2003

58



---



##### Table of Contents



I, Richard L. Federico, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of P.F. Changs China
    Bistro, Inc.;                                                                                                                                                                                                                                                     
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of the
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether there were significant changes in
    internal controls or in other factors that could significantly
    affect internal controls subsequent to the date of our most
    recent evaluation, including any corrective actions with regard
    to significant deficiencies and material weaknesses.



| |                                     
| | ------------------------------------
| | /s/ RICHARD L. FEDERICO             
| | Chairman and Chief Executive Officer

Date: February 12, 2003

59



---



##### Table of Contents



I, Kristina K. Cashman, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of P.F. Changs China
    Bistro, Inc.;                                                                                                                                                                                                                                                     
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of the
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether there were significant changes in
    internal controls or in other factors that could significantly
    affect internal controls subsequent to the date of our most
    recent evaluation, including any corrective actions with regard
    to significant deficiencies and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ KRISTINA K. CASHMAN                  
| | Chief Financial Officer and
    Secretary

Date: February 12, 2003

60



---



##### Table of Contents



INDEX TO EXHIBITS

|        |           |                      |  |                                                                                                                                                            
|------- | --------- | -------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |                     
|Number  |           | Description Document
|        |           |                     
|        | 3.1(1)    |                      |  | Amended and Restated Certificate of Incorporation.                                                                                                         
|        | 3.2(2)    |                      |  | Amended and Restated By-laws.                                                                                                                              
|        | 4.1(3)    |                      |  | Specimen Common Stock Certificate.                                                                                                                         
|        | 4.2(3)    |                      |  | Amended and Restated Registration Rights
    Agreement dated May 1, 1997.                                                                                  
|        | 10.1(3)  |                      |  | Form of Indemnification Agreement for directors
    and executive officers.                                                                                
|        | 10.2(3)  |                      |  | 1998 Stock Option Plan and forms of agreement
    thereunder.                                                                                              
|        | 10.3(3)  |                      |  | 1997 Restaurant Manager Stock Option Plan and
    forms of Agreement thereunder.                                                                           
|        | 10.4(3)  |                      |  | 1996 Stock Option Plan and forms of Agreement
    thereunder.                                                                                              
|        | 10.5(3)  |                      |  | 1998 Employee Stock Purchase Plan.                                                                                                                         
|        | 10.6(3)  |                      |  | Employment Agreement between Paul M. Fleming and
    the Company dated January 1, 1996, as amended
    September 2, 1998.                                  
|        | 10.11(4)  |                      |  | Office Lease between the Company and
    PHXAZ-Kierland Commons, LLC, dated September 17, 1999.                                                            
|        | 10.13(5) |                      |  | 1999 Nonstatutory Stock Option Plan.                                                                                                                       
|        | 10.15(6)  |                      |  | First Amendment to Office Lease between the
    Company and PHXAZ-Kierland Commons, LLC, dated August 22,
    2001.                                        
|        | 10.16(7)  |                      |  | Common Stock Purchase Agreement dated
    January 11, 2001.                                                                                                
|        | 10.17(6) |                      |  | Pei Wei Asian Diner, Inc. 2001 Stock Option Plan.                                                                                                          
|        | 10.18(8) |                      |  | Employment Agreement between Richard L. Federico
    and the Company dated August 3, 2002.                                                                 
|        | 10.19(8) |                      |  | Employment Agreement between Robert T. Vivian and
    the Company dated August 2, 2002.                                                                    
|        | 10.20(8) |                      |  | Employment Agreement by and among Russell Owens,
    Pei Wei Asian Diner, Inc. and the Company dated August 6,
    2002.                                   
|        | 10.21     |                      |  | Second Amendment to office lease between the
    Company and PHXAZ-Kierland Commons, LLC, dated November 12,
    2002.                                     
|        | 10.22     |                      |  | Line of Credit Agreement between the Company and
    Bank of America dated December 20, 2002.                                                              
|        | 21.1      |                      |  | List of Subsidiaries.                                                                                                                                      
|        | 23.1      |                      |  | Consent of Ernst & Young, LLP, Independent
    Auditors.                                                                                                   
|        | 99.1      |                      |  | 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.
|        | 99.2      |                      |  | Certification pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002 for Kristina
    K. Cashman.



---



| |   |                                         
| | - | ----------------------------------------
| |  | Management Contract or Compensatory Plan



|    |                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q dated
    April 25, 2002.     
|   
|(2) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q dated
    October 24, 2001.   
|   
|(3) | Incorporated by reference to the
    Registrants Registration Statement on Form S-1 (File
    No. 333-59749).
|   
|(4) | Incorporated by reference to the
    Registrants Form 10-K dated March 3, 2000.                              
|   
|(5) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K dated
    March 6, 2001.         
|   
|(6) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K dated
    February 19, 2002.     
|   
|(7) | Incorporated by reference to the
    Registrants Form 10-Q, dated April 1, 2001.                             
|   
|(8) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q dated
    October 23, 2002.