##### Table of Contents









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 28,
    2003                                             
|  
|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                                                                                         |  | 86-0815086                              
|(State or other jurisdiction of
    incorporation or organization)                               |  | (I.R.S. Employer
    Identification No.)
|                                                                                                
|15210 N. Scottsdale Rd., Ste. 300
    Scottsdale, AZ(Address of principal executive
    offices) |  | 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 of the registrants common stock as
of the last day of the second fiscal quarter, June 29,
2003, is $1,235,078,898.

On
February 27, 2004 there were outstanding
25,565,988 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 23,
2004 are incorporated by reference into Part III of this
Report.



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Explanatory Note

In response to recent changes concerning the
accounting for certain partnership arrangements at companies
that have partnership programs similar to
P.F. Changs, the Company requested the staff of the
U.S. Securities and Exchange Commission (the
Staff) to review its accounting for the
Companys partnership structure. As a result of its
discussions with the Staff, the Company is restating its
Consolidated Financial Statements for periods prior to
December 28, 2003. These restatements result in a portion
of the Companys partnership program being accounted for
under a compensatory accounting model.

The Company will now i) reclassify a portion
of its minority interest expense to compensation expense for an
employee/partner imputed bonus, ii) record an expense for
the difference between a partners cash capital
contribution and the imputed fair value of that interest and
iii) write off all intangibles balances previously recorded
on the balance sheet on a retrospective basis to reflect the
fact that the Company had the option to repurchase
partners interests at their capital account balances
rather than at fair value.



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TABLE OF CONTENTS

|         |  |                                                                                           |  |      |    |  |  | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- |  |  | 
|Item     |  |                                                                                           |  | Page
|         |  |                                                                                           |  |     
|PART I  
|1.       |  | Business                                                                                  |  |      | 2  | 
|2.       |  | Properties                                                                                |  |      | 11 | 
|3.       |  | Legal Proceedings                                                                         |  |      | 12 | 
|4.       |  | Submission of Matters to a
    Vote of Security Holders                                   |  |      | 13 | 
|PART II 
|5.       |  | Market for the
    Registrants Common Stock and Related Stockholder
    Matters          |  |      | 13 | 
|6.       |  | Selected Financial Data                                                                   |  |      | 14 | 
|7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |  |      | 15 | 
|7A.      |  | Quantitative and Qualitative
    Disclosures About Market Risks                           |  |      | 29 | 
|8.       |  | Financial Statements and
    Supplementary Data                                           |  |      | 30 | 
|9.       |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |  |      | 54 | 
|9A.      |  | Controls and Procedures                                                                   |  |      | 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                        |  |      | 54 | 
|13.      |  | Certain Relationships and
    Related Transactions                                        |  |      | 55 | 
|14.      |  | Principal Accounting Fees
    and Services                                                |  |      | 55 | 
|PART IV 
|15.      |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                      |  |      | 55 | 
|EX-21.1 
|EX-23.1 
|EX-31.1 
|EX-31.2 
|EX-32.1 
|EX-32.2 



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PART I




Item 1.     Business

General

P.F. Changs China Bistro, Inc. (P.F.
Changs) was incorporated in January 1996 as a
Delaware corporation and conducted its initial public offering
in December 1998. We incorporated our subsidiary, Pei Wei
Asian Diner, Inc., in December 1999 as a Delaware corporation.
We report our financial and descriptive information according to
two reportable operating segments: Bistro and Pei Wei (see
Notes to Consolidated Financial Statements 
Note 14  Segment Reporting).

P.F. Changs owned and operated 97 full
service, or Bistro, restaurants as of December 28, 2003
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 33 limited
service, or Pei Wei, restaurants as of December 28,
2003. Pei Wei Asian Diner 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, 11 units in
2002, and 17 units in 2003. These restaurants are located
in Arizona, Colorado, Southern California, Nevada, New Mexico,
and Texas.

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. MSG is not added to
any ingredients at P.F. Changs.

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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 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 33% and 67%
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 offer beer and wine at Pei Wei and these
purchases comprise approximately 2% of sales. Take-out sales
comprise approximately 40% of total revenues. The average check
for a guest dining in at Pei Wei, including beer and wine
sales, is approximately $8.00 to $9.00. Lunch and dinner
contribute approximately 45% and 55% of revenues, respectively.

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 all of
our regional managers (Market Partners and
Area Partners), and with those of our general
managers (Operating Partners) and executive chefs
(Chef Partners) who choose to invest. Each partner
who wishes to participate in the partnership structure is
required to make a cash capital contribution in exchange for
their percentage interest in the 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 invest in based solely on their
percentage interest purchased.

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 45 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 a portion of our 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

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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 28, 2003, P.F. Changs
employed approximately 16,500 persons, 155 of whom
were executive office personnel, 1,070 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 will be available on our website.

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.

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 97 full service, or Bistro,
restaurants and 33 limited service, or Pei Wei, restaurants
as of December 28, 2003, 35 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 cannot assure you that any new restaurant that we
open will have similar operating results to those of prior
restaurants. Our new restaurants 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 130 restaurants as of
December 28, 2003. We expect to open 18 Bistros and
20 Pei Wei restaurants in 2004. 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;                                              

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| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | 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.

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 Bistro
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

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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.

Although it appears that our countrys
current economic conditions are improving, we could still
experience pressures in 2004 associated with a weak economy. Our
customers may become more apprehensive about the economy and
reduce their level of discretionary spending. 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 terrorist attacks on the
United States and possible future terrorist attacks 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;                                        
|
| |  | competitive factors, including the performance of
    restaurant stocks;
|
| |  | weather conditions;                                                     
|
| |  | timing of new restaurant openings and related
    expenses;             
|
| |  | revenues contributed by new restaurants; and                            
|
| |  | 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.

Our financial results may also fluctuate
significantly as a result of recent changes in how we account
for certain aspects of our partnership program.

As is more fully described in Note 1 to our
financial statements, we have revised our accounting method for
certain aspects of our partnership program. The most significant
change that will affect future operating results relates to
non-cash charges to expense for the excess of the imputed fair
value of partner investments over the amount paid by our
partners. After we execute the modification described in the
next sentence, for each new restaurant opening, we will be
recording a non-cash expense for this difference at the time a
partner invests, so the timing and volume of restaurant
openings, the extent of eligible persons electing to invest, and
the determination of the related fair value for the investment,
will create fluctuations in our financial results. We plan to
modify a provision in most of our past partnership agreements
that will result in a non-cash, pre-tax charge of
$11.5 million for all of the unrecognized costs from prior
years associated with the difference between imputed fair value
of partner investments over the amounts paid by our partners.
This charge will be recorded in the period we make the
modification, which we presently expect to be the first quarter
of 2004. As a result of this $11.5 million charge, there
will be a corresponding increase in Minority Interest on the
Balance Sheet.

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For the reasons noted above, 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, including regional managers,
general managers and executive chefs, 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 a portion of our produce, which is purchased locally by
each restaurant, we rely on Distribution Market Advantage as the
primary distributor of our ingredients. Distribution Market
Advantage is a cooperative of multiple food distributors located
throughout the nation. We have a non-exclusive contract with
Distribution Market Advantage on terms and conditions 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

8



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##### Table of Contents



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) has risen significantly over
the past few years and is expected to continue to increase in
2004. 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.
We self insure a substantial portion of our workers
compensation, general liability and health care costs and
unfavorable changes in trends could also have a negative impact
on our profitability.

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 Bureau of Citizenship and Immigration Service
(BCIS). Given the location of many of our
restaurants, even if we operate those restaurants in strict
compliance with BCIS 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 2% 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 license and permit to sell alcoholic
beverages. Typically, licenses must be renewed annually and may
be revoked or suspended for cause at any time. Alcoholic
beverage control regulations relate to numerous aspects of the
daily operations of the restaurants, including minimum age of
guests and employees, hours of operation, advertising, wholesale
purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. If we fail to comply with
federal, state or local regulations our licenses may be revoked
and we may be forced to terminate the sale of alcoholic
beverages at one or more of our restaurants.

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

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

9



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##### Table of Contents



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. Additionally, the costs and expense of
defending ourselves against lawsuits or claims, regardless of
merit, could have an adverse impact on our profitability. (See
Item 3 of the Form 10-K.)

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 differing interpretations with respect to our 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 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.

10



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##### Table of Contents








|        |           
|------- | ----------
|Item 2. | Properties

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

|               |  |           |    |                |  |  |       | 
|-------------- |  | --------- | -- | -------------- |  |  | ----- | 
|               |  | Number of |    | Average       
|State          |  | Locations |    | Square Footage
|               |  |           |    |               
|Alabama        |  |           | 1  |                |  |  | 6,650 | 
|Arizona        |  |           | 6  |                |  |  | 6,500 | 
|California     |  |           | 19 |                |  |  | 6,750 | 
|Colorado       |  |           | 4  |                |  |  | 7,050 | 
|Florida        |  |           | 8  |                |  |  | 6,550 | 
|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       |  |           | 3  |                |  |  | 6,750 | 
|Minnesota      |  |           | 2  |                |  |  | 7,150 | 
|Missouri       |  |           | 2  |                |  |  | 7,050 | 
|North Carolina |  |           | 3  |                |  |  | 6,850 | 
|Nebraska       |  |           | 1  |                |  |  | 7,100 | 
|New Jersey     |  |           | 1  |                |  |  | 7,300 | 
|New Mexico     |  |           | 1  |                |  |  | 7,100 | 
|Nevada         |  |           | 5  |                |  |  | 8,450 | 
|New York       |  |           | 3  |                |  |  | 7,000 | 
|Ohio           |  |           | 5  |                |  |  | 6,400 | 
|Oklahoma       |  |           | 1  |                |  |  | 7,100 | 
|Oregon         |  |           | 1  |                |  |  | 5,600 | 
|Pennsylvania   |  |           | 2  |                |  |  | 7,200 | 
|Tennessee      |  |           | 4  |                |  |  | 6,750 | 
|Texas          |  |           | 10 |                |  |  | 6,800 | 
|Utah           |  |           | 2  |                |  |  | 5,300 | 
|Virginia       |  |           | 4  |                |  |  | 6,750 | 
|Washington     |  |           | 2  |                |  |  | 5,700 | 
|Wisconsin      |  |           | 1  |                |  |  | 6,450 | 

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

|           |  |           |    |                |  |  |       | 
|---------- |  | --------- | -- | -------------- |  |  | ----- | 
|           |  | Number of |    | Average       
|State      |  | Locations |    | Square Footage
|           |  |           |    |               
|Arizona    |  |           | 12 |                |  |  | 3,000 | 
|California |  |           | 6  |                |  |  | 3,300 | 
|Colorado   |  |           | 2  |                |  |  | 3,200 | 
|Nevada     |  |           | 1  |                |  |  | 3,250 | 
|New Mexico |  |           | 1  |                |  |  | 3,350 | 
|Texas      |  |           | 15 |                |  |  | 3,150 | 

In 2004, P.F. Changs intends to open
18 Bistros (approximately half in new and half in existing
markets) and 20 Pei Weis (most in existing markets with a
portion in new markets). As of the date of this 10-K, six of the
18 planned new Bistros and four of the 20 planned new Pei Weis
were open.

11



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##### Table of Contents



Expansion Strategy and Site
Selection

P.F. Changs is actively developing Bistro
and Pei Wei 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 and strip
centers. Each Bistro restaurant is designed to convey a unique
expression of local styles incorporated into the 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 $375,000 per
restaurant. We currently lease the sites for all of our Bistro
restaurants and do not intend to purchase real estate for our
sites in the future.

We intend to continue to 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 average
approximately $110,000 per restaurant. We currently lease the
sites for all of our Pei Wei restaurants and do not intend to
purchase real estate for our sites in the future.

We also expect that for each new restaurant
opened in 2004 that we will incur charges relating to our
partnership program of approximately $275,000 for each Bistro
unit and $60,000 for each Pei Wei unit if all eligible
employees elect to invest as minority partners.

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 30,000 square feet of leased space
in Scottsdale, Arizona.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

In February 2003, a former server filed a class
action complaint against the Company in Orange County Superior
Court in California. The plaintiff alleges that the Company
failed to give food servers, bussers, runners and bartenders the
rest and meal breaks that are required by California law. The
plaintiff seeks on behalf of the entire class of these employees
in California restitution and civil penalties of at least one
hour of wages per employee per day worked for the past three
years. If the plaintiff is able to achieve class certification
and prevails on the merits of the claim, the Company could
potentially be liable for significant amounts. The Company
believes that all of its employees were provided with the
opportunity to take required meal and rest breaks, and therefore
intends to vigorously defend its position. The Company, after
consultation with legal counsel, does not believe that the
ultimate outcome of this matter will have a material adverse
impact on its financial position.

Also in February of 2003, the Company was served
with a 60 day Notice of Intent to Sue under
California Health and Safety Code Section 25249.6. The
plaintiff asserts on behalf of the general public that the
Company failed to provide required warning notices under the
Health and Safety Code provisions

12



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##### Table of Contents



commonly known as Proposition 65 in
connection with the serving of fish potentially containing
unacceptably high levels of mercury. The California Attorney
General has the right to take over this lawsuit and has done so.
The plaintiff has also asserted an unfair competition claim
based on the same facts that may proceed even though the
California Attorney General has taken over the
Proposition 65 claim. The plaintiff seeks civil damages of
$2,500 per day for each alleged violation and a permanent
injunction requiring the Company to post warning notices. The
Company is in the process of working with the California
Attorney General to resolve this matter and intends to
vigorously defend its position with respect to the unfair
competition claim. The Company, after consultation with legal
counsel, does not believe that the ultimate outcome of this
matter will have a material adverse impact on its financial
position.


We are also engaged in other legal actions
arising in the ordinary course of our business and believe that
the ultimate outcome of these actions will not have a material
adverse effect on our results of operations, liquidity or
financial position.






|        |                                                        
|------- | -------------------------------------------------------
|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
|                   |  |      |       |    
|March 31, 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 | 
|March 30, 2003     |  |      | 39.89 |     |  |  | 30.25 | 
|June 29, 2003      |  |      | 49.80 |     |  |  | 36.28 | 
|September 28, 2003 |  |      | 51.22 |     |  |  | 44.01 | 
|December 28, 2003  |  |      | 54.59 |     |  |  | 42.55 | 

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 27, 2004, there were
128 holders of record of P.F. Changs common stock.

13



---



##### Table of Contents








|        |                        
|------- | -----------------------
|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.

Selected Consolidated Financial Data

|                                                                   |                               |                                       |                                  |             |        |             |         |             |        |           |         |        |        |         |         |        |         |         |         |        |         |         | 
|------------------------------------------------------------------ | ----------------------------- | ------------------------------------- | -------------------------------- | ----------- | ------ | ----------- | ------- | ----------- | ------ | --------- | ------- | ------ | ------ | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | 
|                                                                   |                               | Fiscal Year                           |                                  | Fiscal Year |        | Fiscal Year |         | Fiscal Year |        | Fiscal   
|                                                                   |                               | 1999(1)                               |                                  | 2000(1)     |        | 2001(1)     |         | 2002(1)     |        | Year 2003
|                                                                   |                               |                                       |                                  |             |        |             |         |             |        |          
|                                                                   |                               |                                      
|                                                                   |                               | (In thousands, except per share data)
|                                                                   |                               | (Restated)                            |                                  | (Restated)  |        | (Restated)  |         | (Restated)  |        |          
|Statement of Income Data:                                          |                               |                                       |                                  |             |        |             |         |             |        |           |         |        |        |         |         |        |         |         |         |       
|Revenues                                                           |                               | $                                     | 153,295                          |             |        | $           | 234,905 |             |        | $         | 318,776 |        |        | $       | 422,091 |        |         | $       | 559,245 |       
|Costs and expenses:                                                |                               |                                       |                                  |             |        |             |         |             |        |           |         |        |        |         |         |        |         |         |         |       
|                                                                   | Restaurant operating costs:   |                                       |                                  |             |        |             |         |             |        |           |         |        |        |         |         |        |         |         |         |        |        
|                                                                   |                               | Cost of sales                         |                                  |             | 42,136 |             |         |             | 64,720 |           |         |        | 86,368 |         |         |        | 112,571 |         |         |        | 152,788 |        
|                                                                   |                               | Labor                                 |                                  |             | 45,569 |             |         |             | 69,685 |           |         |        | 97,094 |         |         |        | 133,536 |         |         |        | 174,989 |        
|                                                                   |                               | Partner bonus                         |                                  |             | 448    |             |         |             | 761    |           |         |        | 992    |         |         |        | 1,192   |         |         |        | 1,439   |        
|                                                                   |                               | Operating                             |                                  |             | 25,907 |             |         |             | 40,312 |           |         |        | 53,932 |         |         |        | 70,775  |         |         |        | 92,988  |        
|                                                                   |                               | Occupancy                             |                                  |             | 9,865  |             |         |             | 14,752 |           |         |        | 19,902 |         |         |        | 25,457  |         |         |        | 30,559  |        
|                                                                   |                               |                                       |                                  |             |        |             |         |             |        |           |         |        |        |         |         |        |         |         |         |       
|                                                                   |                               |                                       | Total restaurant operating costs |             |        | 123,925     |         |             |        | 190,230   |         |        |        | 258,288 |         |        |         | 343,531 |         |        |         | 452,763 | 
|                                                                   | General and administrative    |                                       |                                  | 9,648       |        |             |         | 12,290      |        |           |         | 16,359 |        |         |         | 20,590 |         |         |         | 28,768 |        
|                                                                   | Depreciation and amortization |                                       |                                  | 4,975       |        |             |         | 7,867       |        |           |         | 11,007 |        |         |         | 13,959 |         |         |         | 18,834 |        
|                                                                   | Preopening expense            |                                       |                                  | 4,344       |        |             |         | 5,200       |        |           |         | 5,099  |        |         |         | 6,334  |         |         |         | 8,654  |        
|                                                                   | Partner investment expense    |                                       |                                  | 629         |        |             |         | 1,385       |        |           |         | 2,744  |        |         |         | 5,798  |         |         |         | 4,196  |        
|                                                                   |                               |                                       |                                  |             |        |             |         |             |        |           |         |        |        |         |         |        |         |         |         |       
|Income from operations                                             |                               |                                       | 9,774                            |             |        |             | 17,933  |             |        |           | 25,279  |        |        |         | 31,879  |        |         |         | 46,030  |       
|Interest income (expense) and other income,
    net                |                               |                                       | 432                              |             |        |             | (39     | )           |        |           | 900     |        |        |         | 41      |        |         |         | 45      |       
|                                                                   |                               |                                       |                                  |             |        |             |         |             |        |           |         |        |        |         |         |        |         |         |         |       
|Income before minority interest and provision for
    income taxes |                               |                                       | 10,206                           |             |        |             | 17,894  |             |        |           | 26,179  |        |        |         | 31,920  |        |         |         | 46,075  |       
|Minority interest                                                  |                               |                                       | (2,021                           | )           |        |             | (3,556  | )           |        |           | (4,558  | )      |        |         | (5,243  | )      |         |         | (7,887  | )     
|                                                                   |                               |                                       |                                  |             |        |             |         |             |        |           |         |        |        |         |         |        |         |         |         |       
|Income before provision for income taxes                           |                               |                                       | 8,185                            |             |        |             | 14,338  |             |        |           | 21,621  |        |        |         | 26,677  |        |         |         | 38,188  |       
|Provision for income taxes                                         |                               |                                       | (2,536                           | )           |        |             | (5,458  | )           |        |           | (7,654  | )      |        |         | (9,097  | )      |         |         | (12,800 | )     
|                                                                   |                               |                                       |                                  |             |        |             |         |             |        |           |         |        |        |         |         |        |         |         |         |       
|Net income                                                         |                               | $                                     | 5,649                            |             |        | $           | 8,880   |             |        | $         | 13,967  |        |        | $       | 17,580  |        |         | $       | 25,388  |       
|Basic net income per share                                         |                               | $                                     | 0.28                             |             |        | $           | 0.43    |             |        | $         | 0.59    |        |        | $       | 0.71    |        |         | $       | 1.00    |       
|                                                                   |                               |                                       |                                  |             |        |             |         |             |        |           |         |        |        |         |         |        |         |         |         |       
|Diluted net income per share                                       |                               | $                                     | 0.25                             |             |        | $           | 0.39    |             |        | $         | 0.55    |        |        | $       | 0.68    |        |         | $       | 0.97    |       
|                                                                   |                               |                                       |                                  |             |        |             |         |             |        |           |         |        |        |         |         |        |         |         |         |       
|Shares used in calculation of basic net income
    per share       |                               |                                       | 20,434                           |             |        |             | 20,752  |             |        |           | 23,728  |        |        |         | 24,688  |        |         |         | 25,345  |       
|                                                                   |                               |                                       |                                  |             |        |             |         |             |        |           |         |        |        |         |         |        |         |         |         |       
|Shares used in calculation of diluted net income
    per share     |                               |                                       | 22,310                           |             |        |             | 22,708  |             |        |           | 25,470  |        |        |         | 25,924  |        |         |         | 26,250  |       
|                                                                   |                               |                                       |                                  |             |        |             |         |             |        |           |         |        |        |         |         |        |         |         |         |       

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|                            |  |                |        |              |  |              |         |              |  |              |         |  |  |   |         |  |  |   |         | 
|--------------------------- |  | -------------- | ------ | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ------- |  |  | - | ------- |  |  | - | ------- | 
|                            |  | As of          |        | As of        |  | As of        |         | As of        |  | As of       
|                            |  | January 2,     |        | December 31, |  | December 30, |         | December 29, |  | December 28,
|                            |  | 2000(1)        |        | 2000(1)      |  | 2001(1)      |         | 2002(1)      |  | 2003        
|                            |  |                |        |              |  |              |         |              |  |             
|                            |  |               
|                            |  | (In thousands)
|                            |  | (Restated)     |        | (Restated)   |  | (Restated)   |         | (Restated)   |  |             
|Balance Sheet Data:         |  |                |        |              |  |              |         |              |  |              |         |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents   |  | $              | 5,333  |              |  | $            | 6,390   |              |  | $            | 20,799  |  |  | $ | 39,089  |  |  | $ | 45,478  | 
|Total assets                |  |                | 81,707 |              |  |              | 115,542 |              |  |              | 171,257 |  |  |   | 212,677 |  |  |   | 273,077 | 
|Short- and long-term debt   |  |                | 1,829  |              |  |              | 16,692  |              |  |              | 2,092   |  |  |   | 3,074   |  |  |   | 1,590   | 
|Common stockholders equity |  |                | 64,175 |              |  |              | 75,878  |              |  |              | 133,719 |  |  |   | 168,797 |  |  |   | 205,711 | 



---



|    |                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company has restated its previously reported
    consolidated financial statements to reflect certain adjustments
    as discussed in Note 1 to its financial statements.






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

Overview

As of December 28, 2003, we owned and
operated 97 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 Bistro restaurants and the
hiring of an experienced management team. Utilizing a
partnership management philosophy, we embarked on a strategic
expansion of the concept targeted at major metropolitan areas
throughout the United States.

As of December 28, 2003, we also owned and
operated 33 limited service restaurants, or Pei Weis, serving
Asian cuisine that cater to a quicker, more casual dining
experience as compared to P.F. Changs China Bistro. These
restaurants are located in Arizona, Colorado, Southern
California, Nevada, New Mexico, and Texas.

We intend to open 18 new Bistros in 2004.
Approximately half of those units that we intend to develop in
2004 will be located in existing markets, and approximately half
of these new restaurants will be in new markets across the
United States. We have signed lease agreements or letters of
intent for all of our development planned for fiscal 2004. 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 $375,000 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 20 Pei Wei restaurants
in 2004. We will continue our development in existing markets
and plan to enter five to six new markets in 2004. Our Pei Wei
restaurants 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 average approximately
$110,000 per restaurant.

15



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##### Table of Contents



Results of Operations

The operating results of P.F. Changs for
the fiscal years ended December 29, 2002 (fiscal year 2002)
and December 28, 2003 (fiscal year 2003), expressed as a
percentage of revenues, were as follows:

|                                                    |                               |                     |                                  |                  |      |            |       |              |      |        |        |         |      |      |       |     |      |      |       |     |      |      |       |     |      |      | 
|--------------------------------------------------- | ----------------------------- | ------------------- | -------------------------------- | ---------------- | ---- | ---------- | ----- | ------------ | ---- | ------ | ------ | ------- | ---- | ---- | ----- | --- | ---- | ---- | ----- | --- | ---- | ---- | ----- | --- | ---- | ---- | 
|                                                    |                               |                     |                                  |                 
|                                                    |                               | Fiscal Year 2002(1) |                                  | Fiscal Year 2003
|                                                    |                               |                     |                                  |                 
|                                                    |                               | Consolidated        |                                  | Bistro           |      | Pei Wei    |       | Consolidated |      | Bistro |        | Pei Wei
|                                                    |                               |                     |                                  |                  |      |            |       |              |      |        |        |        
|                                                    |                               | (Restated)          |                                  | (Restated)       |      | (Restated) |       |              |      |        |        |        
|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       |                                  |                  | 26.7 |            |       |              | 26.6 |        |        |         | 28.4 |      |       |     | 27.3 |      |       |     | 27.1 |      |       |     | 29.2 |     
|                                                    |                               | Labor               |                                  |                  | 31.6 |            |       |              | 31.3 |        |        |         | 37.1 |      |       |     | 31.3 |      |       |     | 31.1 |      |       |     | 32.9 |     
|                                                    |                               | Partner bonus       |                                  |                  | 0.3  |            |       |              | 0.3  |        |        |         | 0.1  |      |       |     | 0.3  |      |       |     | 0.3  |      |       |     | 0.2  |     
|                                                    |                               | Operating           |                                  |                  | 16.8 |            |       |              | 16.8 |        |        |         | 16.1 |      |       |     | 16.6 |      |       |     | 16.7 |      |       |     | 15.7 |     
|                                                    |                               | Occupancy           |                                  |                  | 6.0  |            |       |              | 6.0  |        |        |         | 7.5  |      |       |     | 5.5  |      |       |     | 5.3  |      |       |     | 6.7  |     
|                                                    |                               |                     |                                  |                  |      |            |       |              |      |        |        |         |      |      |       |     |      |      |       |     |      |      |       |    
|                                                    |                               |                     | Total restaurant operating costs |                  |      | 81.4       |       |              |      | 80.9   |        |         |      | 89.2 |       |     |      | 80.9 |       |     |      | 80.6 |       |     |      | 84.6 | 
|                                                    | General and administrative    |                     |                                  | 4.9              |      |            |       | 4.5          |      |        |        | 12.3    |      |      |       | 5.1 |      |      |       | 4.9 |      |      |       | 7.3 |     
|                                                    | Depreciation and amortization |                     |                                  | 3.3              |      |            |       | 3.3          |      |        |        | 4.2     |      |      |       | 3.4 |      |      |       | 3.3 |      |      |       | 3.9 |     
|                                                    | Preopening expense            |                     |                                  | 1.5              |      |            |       | 1.3          |      |        |        | 6.0     |      |      |       | 1.5 |      |      |       | 1.4 |      |      |       | 3.1 |     
|                                                    | Partner investment expense    |                     |                                  | 1.4              |      |            |       | 1.4          |      |        |        | 0.4     |      |      |       | 0.8 |      |      |       | 0.8 |      |      |       | 0.5 |     
|                                                    |                               |                     |                                  |                  |      |            |       |              |      |        |        |         |      |      |       |     |      |      |       |     |      |      |       |    
|Income (loss) from operations                       |                               |                     | 7.6                              |                  |      |            | 8.6   |              |      |        | (12.2  | )       |      |      | 8.2   |     |      |      | 9.0   |     |      |      | 0.6   |    
|Interest and other income (expense), net            |                               |                     | 0.0                              |                  |      |            | 0.0   |              |      |        | (0.1   | )       |      |      | 0.0   |     |      |      | 0.0   |     |      |      | 0.0   |    
|Minority interest                                   |                               |                     | (1.2                             | )                |      |            | (1.3  | )            |      |        | (0.0   | )       |      |      | (1.4  | )   |      |      | (1.5  | )   |      |      | (1.0  | )  
|                                                    |                               |                     |                                  |                  |      |            |       |              |      |        |        |         |      |      |       |     |      |      |       |     |      |      |       |    
|Income (loss) before provision for income
    taxes |                               |                     | 6.3                              |                  |      |            | 7.3   | %            |      |        | (12.3  | )%      |      |      | 6.8   |     |      |      | 7.6   |     |      |      | (0.3  | )% 
|                                                    |                               |                     |                                  |                  |      |            |       |              |      |        |        |         |      |      |       |     |      |      |       |     |      |      |       |    
|Provision for income taxes                          |                               |                     | (2.2                             | )                |      |            |       |              |      |        |        |         |      |      | (2.3  | )   |      |      |       |     |      |      |       |    
|                                                    |                               |                     |                                  |                  |      |            |       |              |      |        |        |         |      |      |       |     |      |      |       |     |      |      |       |    
|Net income                                          |                               |                     | 4.2                              | %                |      |            |       |              |      |        |        |         |      |      | 4.5   | %   |      |      |       |     |      |      |       |    
|                                                    |                               |                     |                                  |                  |      |            |       |              |      |        |        |         |      |      |       |     |      |      |       |     |      |      |       |    

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 2002 and 2003 each were comprised
of 52 weeks.



|    |                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company has restated its previously reported
    consolidated financial statements to reflect certain adjustments
    as discussed in Note 1 to its financial statements.



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 28, 2003 Compared
    to Year Ended December 29, 2002



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

P.F. Changs revenues are derived entirely
from food and beverage sales. Consolidated revenues increased by
$137.1 million, or 32.5%, to $559.2 million in the
year ended December 28, 2003 from $422.1 million in
the year ended December 29, 2002. Each segment contributed
as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:Revenues
    increased by $104.9 million at our Bistro restaurants. This
    increase was attributable to revenues of $45.2 million
    generated by new restaurants opened in 2003, a
    $41.1 million increase in revenues in 2003 for restaurants
    that opened in 2002 and a $18.6 million increase in
    revenues for restaurants opened prior to 2002. Increased
    customer visits as well as a modest price increase in the first

16



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##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | quarter of 2003 produced comparable restaurant
    sales gains of 5.1% in 2003. Restaurants are included in this
    comparable restaurant measure once they reach their eighteenth
    month of operation.                                                                                                                                                                                                           
|
| | Pei Wei:Revenues
    increased by $32.2 million at our Pei Wei restaurants. The
    increase was primarily attributable to revenues of
    $19.2 million generated by our seventeen new restaurants
    opened in 2003, a $12.9 million increase in revenues in
    2003 for the eleven restaurants that opened in 2002 and an
    approximate $100,000 increase in revenues for restaurants opened
    prior to 2002.



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

Cost of Sales.Cost
of sales is composed of the cost of food and beverages.
Consolidated cost of sales increased by $40.2 million, or
35.7%, to $152.8 million in the year ended
December 28, 2003 from $112.6 million in the year
ended December 29, 2002. Cost of sales increased as a
percentage of revenues to 27.3% in the year ended
December 28, 2003 from 26.7% in the year ended
December 29, 2002. Each segment contributed as follows:



| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:Cost of
    sales at the Bistro increased as a percentage of revenues to
    27.1% in the year ended December 28, 2003 from 26.6% in the
    year ended December 29, 2002. This increase was primarily
    the result of higher poultry, produce and dry foods prices.
|
| | Pei Wei:Cost of
    sales at Pei Wei increased as a percentage of revenues to 29.2%
    in the year ended December 28, 2003 from 28.4% in the year
    ended December 29, 2002. This increase was primarily the
    result of higher poultry, produce and dry foods prices.  

Labor.Labor
expenses consist of restaurant management salaries, hourly staff
payroll costs and other payroll-related items. Consolidated
labor expenses increased by $41.5 million, or 31.0%, to
$175.0 million in the year ended December 28, 2003
from $133.5 million in the year ended December 29,
2002. Labor expenses as a percentage of revenues decreased to
31.3% in the year ended December 28, 2003 from 31.6% in the
year ended December 29, 2002. Each segment contributed as
follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:As a
    percentage of revenues, labor expenses at the Bistro decreased
    to 31.1% in the year ended December 28, 2003 from 31.3% in
    the year ended December 29, 2002. This decrease was a
    result of increased sales leverage on those labor costs that are
    fixed in nature, as well as lower workers compensation expense
    given an improvement in claims trends, partially offset by
    higher payroll taxes and health insurance costs.
|
| | Pei Wei:As a
    percentage of revenues, labor expenses at Pei Wei decreased to
    32.9% in the year ended December 28, 2003 from 37.1% in the
    year ended December 29, 2002. This decrease was primarily
    due to improvement in labor efficiencies in our newer units as
    well as the reduced impact of newer restaurants on our expanding
    revenue base.                                                                                            

Partner Bonus.Partner bonus expense consists of a
charge for the portion of our partners allocated profits
(minority interests) which our partners would have earned under
our management bonus plan had those partners not chosen to
become equity owners in their restaurants.



| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:Partner
    bonus expense at the Bistro remained flat at 0.3% of sales for
    both the fiscal year ended December 28, 2003 and
    December 29, 2002.     
|
| | Pei Wei:Partner
    bonus expense at Pei Wei increased nominally to 0.2% of sales
    for the fiscal year ended December 28, 2003 from 0.1%
    December 29, 2002.

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 $22.2 million, or 31.4%, to $93.0
million in the year ended December 28, 2003 from
$70.8 million in the year ended December 29, 2002.
Operating expenses

17



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##### Table of Contents



decreased as a percentage of revenues to 16.6% in
the year ended December 28, 2003 from 16.8% in the year
ended December 29, 2002. Each segment contributed as
follows:




| |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:Operating
    expenses as a percentage of revenues decreased at our Bistro
    restaurants to 16.7% in the year ended December 28, 2003
    from 16.8% in the year ended December 29, 2002. This
    decrease was primarily attributable to the sales leverage
    achieved on the portion of these operating costs that are fixed
    in nature, partially offset by slightly higher utility and
    repairs and maintenance expenses.
|
| | Pei Wei:Operating
    expenses as a percentage of revenues decreased at our Pei Wei
    restaurants to 15.7% for the year ended December 28, 2003
    from 16.1% in the year ended December 29, 2002. This
    decrease was primarily attributable to the reduced impact of new
    restaurants on our expanding revenue base.                                                                                                                

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 $5.1 million, or
20.0%, to $30.6 million in the year ended December 28, 2003
from $25.5 million in the year ended December 29,
2002. Occupancy costs decreased as a percentage of revenues to
5.5% in the year ended December 28, 2003 from 6.0% in the
year ended December 29, 2002. Each segment contributed as
follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:Occupancy
    costs at the Bistro decreased as a percentage of revenues to
    5.3% for the year ended December 28, 2003 from 6.0% for the
    year ended December 29, 2002. This decrease was primarily
    the result of the sales leverage achieved on occupancy costs
    that are fixed in nature, more favorable lease terms associated
    with new restaurants and lower property tax expense.          
|
| | Pei Wei:Occupancy
    costs at Pei Wei decreased as a percentage of revenues to 6.7%
    for the year ended December 28, 2003 from 7.5% for the year
    ended December 29, 2002. This decrease was primarily the
    result of increased sales leverage achieved on those occupancy
    costs that are fixed in nature, more favorable lease terms
    associated with new restaurants and lower property tax expense.

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 $28.8 million in the year ended
December 28, 2003 from $20.6 million in the year ended
December 29, 2002. Consolidated general and administrative
expenses increased as a percentage of revenues to 5.1% in the
year ended December 28, 2003 from 4.9% in the year ended
December 29, 2002. Each segment contributed as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:General and
    administrative expenses at the Bistro increased by
    $6.9 million to $24.8 million in the year ended
    December 28, 2003 from $17.9 million in the year ended
    December 29, 2002. This increase was due primarily to the
    addition of corporate management personnel and higher health
    insurance costs, which resulted in approximately
    $4.3 million of additional compensation and benefits
    expense. In addition to increased travel costs to support a
    larger restaurant base, we also spent an additional
    $1.4 million in accounting, consulting and legal fees in
    our efforts to maintain high standards of corporate governance,
    compliance with the Sarbanes-Oxley Act and new SEC regulations,
    litigation defense and other corporate matters. General and
    administrative expenses increased as a percentage of revenues
    from 4.5% in the year ended December 29, 2002 to 4.9% in
    the year ended December 28, 2003.
|
| | Pei Wei:General and
    administrative expenses at Pei Wei increased by
    $1.3 million to $4.0 million in the year ended
    December 28, 2003 from $2.7 million in the year ended
    December 29, 2002. This increase was due primarily to the
    addition of corporate management personnel, which resulted in
    approximately $1.1 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, accounting, legal and occupancy costs.
    General and administrative expenses decreased as a percentage of
    revenues from 12.3% to 7.3% as a result of our increasing
    revenue base associated with our new store openings.                                                                                   

18



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##### Table of Contents



Depreciation and Amortization.Depreciation and amortization expenses
include the depreciation of fixed assets. Consolidated
depreciation and amortization increased by $4.9 million, or
34.0%, to $18.8 million in the year ended December 28,
2003 from $13.9 million in the year ended December 29,
2002. Depreciation and amortization as a percentage of revenues
was 3.4% for the year ended December 28, 2003 and 3.3% for
the year ended December 29, 2002. Each segment contributed
as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:At our
    Bistro restaurants, depreciation and amortization increased by
    $3.7 million to $16.7 million for the year ended
    December 28, 2003 from $13.0 million for the year
    ended December 29, 2002. This increase was primarily due to
    depreciation and amortization on restaurants opened in 2003
    totaling $1.8 million as well as a full years
    depreciation and amortization on restaurants opened in 2002.
|
| | Pei Wei:At our Pei
    Wei restaurants, depreciation and amortization increased by
    $1.2 million to $2.1 million for the year ended
    December 28, 2003 from $928,000 for the year ended
    December 29, 2002. This increase was primarily due to
    depreciation and amortization on restaurants opened in 2003
    totaling $600,000 as well as a full years depreciation and
    amortization on restaurants opened in 2002.        

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 28, 2003 increased to $8.7 million from
$6.3 million in the year ended December 29, 2002.
Preopening expenses as a percentage of revenues were 1.5% for
both the years ended December 28, and December 29,
2002. Each segment contributed as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:Preopening
    expenses increased by $2.0 million to $7.0 million as
    of the year ended December 28, 2003 from $5.0 million
    as of the year ended December 29, 2002. This increase was
    due to the opening of 18 Bistros in 2003 as compared to 17
    Bistros in 2002, the current year effect of opening three
    Bistros in January 2004 compared to two in January 2003 and
    higher than anticipated average costs for our 2003 new unit
    openings.
|
| | Pei Wei:Preopening
    expenses increased by $400,000 to $1.7 million as of the
    year ended December 28, 2003 from $1.3 million as of
    the year ended December 29, 2002. This increase was
    primarily due to our opening 17 Pei Weis in 2003 as compared to
    11 Pei Weis in 2002, partially offset by lower than anticipated
    average costs for our 2003 new unit openings.                                                                                    

Partner Investment Expense.Partner investment expense consists of
two components: i) the difference between the imputed fair
value of our partners ownership interest at the time the
partner invested in their restaurant and our partners cash
capital contribution for that ownership interest recognized over
a five-year period and ii) the excess, if any, of the
purchase price at the time we repurchase a partners
interest over the imputed fair value of that interest.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:Partner
    investment expense at the Bistro decreased to $3.9 million
    in fiscal year ended December 28, 2003 from
    $5.7 million in fiscal year ended December 29, 2002.
    This decrease was primarily the result of an additional
    $2.5 million recorded in fiscal 2002 as compared to fiscal
    2003 for the excess of the purchase price of partner repurchases
    over the imputed fair value for those partner purchases, offset
    by a $749,000 increase in the accrual of the excess of our
    partners imputed fair value of their ownership interest
    over their actual cash contribution.
|
| | Pei Wei:Partner
    investment expense at Pei Wei increased to $256,000 in fiscal
    year ended December 28, 2003 from $97,000 in fiscal year
    ended December 29, 2002. This increase was the result of an
    increase in the accrual of the excess of our partners
    imputed fair value of their ownership interest over their actual
    cash contribution.                                                                                                                                                                                                                                                          



| |                                             
| | --------------------------------------------
| | Interest and Other Income (Expense),
    Net

Consolidated net interest and other income
(expense) was $45,000 in the year ended December 28,
2003 as compared to $41,000 in the year ended December 29, 2002.
As a percentage of revenues, consolidated net interest income
and other income (expense) was the same for both periods.

19



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##### Table of Contents





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

Minority interest represents the portion of our
net earnings (losses) which is 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 28, 2003 increased to $7.9 million from
$5.2 million for the year ended December 29, 2002. As
a percentage of revenues, minority interest was 1.4% of revenues
for the year ended December 28, 2003 and 1.2% of revenues
for the year ended December 29, 2002. The impact of an
increase in the operating profit at many of our existing
restaurants in 2003 compared to 2002 was slightly offset by the
impact of Pei Weis lower minority investor ownership on
our total minority interest expense.



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

Our effective tax rate for 2003 was 33.5%. For
2002, the effective tax rate was 34.1%. The income tax provision
for 2002 and 2003 differs from the expected provision for income
taxes, derived by applying the statutory income tax rate,
primarily as a result of FICA tip credits.



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

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(1)           |                                  | Fiscal Year 2002(1)
|                                                    |                               |                               |                                  |                    
|                                                    |                               | Consolidated                  |                                  | Bistro              |      | Pei Wei    |       | Consolidated |      | Bistro     |        | Pei Wei   
|                                                    |                               |                               |                                  |                     |      |            |       |              |      |            |        |           
|                                                    |                               | (Restated)                    |                                  | (Restated)          |      | (Restated) |       | (Restated)   |      | (Restated) |        | (Restated)
|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  |     
|                                                    |                               | Partner bonus                 |                                  |                     | 0.3  |            |       |              | 0.3  |            |        |            | 0.3   |      |       |     | 0.3  |      |       |     | 0.3  |      |        |      | 0.1   |     
|                                                    |                               | Operating                     |                                  |                     | 16.9 |            |       |              | 17.0 |            |        |            | 13.6  |      |       |     | 16.8 |      |       |     | 16.8 |      |        |      | 16.1  |     
|                                                    |                               | Occupancy                     |                                  |                     | 6.2  |            |       |              | 6.2  |            |        |            | 7.4   |      |       |     | 6.0  |      |       |     | 6.0  |      |        |      | 7.5   |     
|                                                    |                               |                               |                                  |                     |      |            |       |              |      |            |        |            |       |      |       |     |      |      |       |     |      |      |        |     
|                                                    |                               |                               | Total restaurant operating costs |                     |      | 81.0       |       |              |      | 81.0       |        |            |       | 80.9 |       |     |      | 81.4 |       |     |      | 80.9 |        |      |       | 89.2 | 
|                                                    | General and administrative    |                               |                                  | 5.1                 |      |            |       | 4.9          |      |            |        | 18.7       |       |      |       | 4.9 |      |      |       | 4.5 |      |      |        | 12.3 |      
|                                                    | Depreciation and amortization |                               |                                  | 3.5                 |      |            |       | 3.4          |      |            |        | 3.7        |       |      |       | 3.3 |      |      |       | 3.3 |      |      |        | 4.2  |      
|                                                    | Preopening expense            |                               |                                  | 1.6                 |      |            |       | 1.4          |      |            |        | 10.5       |       |      |       | 1.5 |      |      |       | 1.3 |      |      |        | 6.0  |      
|                                                    | Partner investment expense    |                               |                                  | 0.9                 |      |            |       | 0.9          |      |            |        | 0.3        |       |      |       | 1.4 |      |      |       | 1.4 |      |      |        | 0.4  |      
|                                                    |                               |                               |                                  |                     |      |            |       |              |      |            |        |            |       |      |       |     |      |      |       |     |      |      |        |     
|                                                    |                               | Income (loss) from operations |                                  |                     | 7.9  |            |       |              | 8.3  |            |        |            | (14.1 | )    |       |     | 7.6  |      |       |     | 8.6  |      |        |      | (12.2 | )   
|Interest and other income (expense), net            |                               |                               | 0.3                              |                     |      |            | 0.3   |              |      |            | (0.0   | )          |       |      | 0.0   |     |      |      | 0.0   |     |      |      | (0.1   | )   
|Minority interest                                   |                               |                               | (1.4                             | )                   |      |            | (1.4  | )            |      |            | (0.4   | )          |       |      | (1.2  | )   |      |      | (1.3  | )   |      |      | 0.0    |     
|                                                    |                               |                               |                                  |                     |      |            |       |              |      |            |        |            |       |      |       |     |      |      |       |     |      |      |        |     
|Income (loss) before provision for income
    taxes |                               |                               | 6.8                              | %                   |      |            | 7.2   | %            |      |            | (14.5  | )%         |       |      | 6.3   | %   |      |      | 7.3   | %   |      |      | (12.3  | )%  
|                                                    |                               |                               |                                  |                     |      |            |       |              |      |            |        |            |       |      |       |     |      |      |       |     |      |      |        |     
|Provision for income taxes                          |                               |                               | (2.4                             | )                   |      |            |       |              |      |            |        |            |       |      | (2.2  | )   |      |      |       |     |      |      |        |     
|                                                    |                               |                               |                                  |                     |      |            |       |              |      |            |        |            |       |      |       |     |      |      |       |     |      |      |        |     
|Net income                                          |                               |                               | 4.4                              | %                   |      |            |       |              |      |            |        |            |       |      | 4.2   | %   |      |      |       |     |      |      |        |     
|                                                    |                               |                               |                                  |                     |      |            |       |              |      |            |        |            |       |      |       |     |      |      |       |     |      |      |        |     

20



---



##### Table of Contents



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 each were comprised
of 52 weeks.

(1) The Company has restated its previously
reported consolidated financial statements to reflect certain
adjustments as discussed in Note 1 to its financial
statements.



| |         
| | --------
| | 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
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.                                                                                                                                                                                                                                                                                                                                                                  



| |                   
| | ------------------
| | 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 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 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 continued 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.
|
| | 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                                                                                                                                                                                                                                                                                                                                                                                                                                     

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##### Table of Contents



| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

Partner Bonus.Partner bonus expense consists of a
charge for the portion of our partners allocated profits
(minority interests) which our partners would have earned under
our management bonus plan had those partners not chosen to
become equity owners in their restaurants.



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:Partner
    bonus expense at the Bistro remained the same at 0.3% of sales
    for both the fiscal year ended December 29, 2002 and
    December 30, 2001.             
|
| | Pei Wei:Partner
    bonus expense at Pei Wei decreased nominally from 0.3% of sales
    for the year ended December 30, 2001 to 0.1% for the year
    ended December 29, 2002.

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 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, 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 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 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

22



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##### Table of Contents



to 4.9% in the year ended December 29, 2002
from 5.1% in the year ended December 30, 2001. Each segment
contributed 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 $2.9 million, or
26.4%, to $13.9 million in the year ended December 29,
2002 from $11.0 million in the year ended December 30,
2001. Depreciation and amortization decreased as a percentage of
revenues to 3.3% in the year ended December 29, 2002 from
3.5% in the year ended December 30, 2001. Each segment
contributed as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:At our
    Bistro restaurants, depreciation and amortization increased by
    $2.2 million to $13.0 million for the year ended
    December 29, 2002 from $10.8 million for the year
    ended December 30, 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 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.                                                                                                                         

23



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##### Table of Contents



Partner Investment Expense.Partner investment expense consists of
two components: i) the difference between the imputed fair
value of our partners ownership interest at the time the
partner invested in their restaurant and our partners cash
capital contribution for that ownership interest, recognized
over a five-year period and ii) the excess, if any, of the
purchase price at the time we repurchase a partners
interest over the imputed fair value of that interest.



| |                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bistro:Partner
    investment expense at the Bistro increased to $5.7 million
    in the year ended December 29, 2002 from $2.7 million
    in the year ended December 30, 2001. This increase was
    primarily due to the recording of $2.5 million for the
    excess of the purchase price of partner repurchases over the
    imputed fair value for those partner purchases.
|
| | Pei Wei:Partner
    investment expense at Pei Wei increased to $97,000 in the year
    ended December 29, 2002 from $75,000 in the year ended
    December 30, 2001 as a result of an increase in the accrual
    of the excess of our partners imputed fair value of their
    ownership interest over their actual cash contribution.                                          



| |                               
| | ------------------------------
| | 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

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 34.1%. For
2001, the effective tax rate was 35.4%. 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.

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 28, 2003, expressed as a
percentage of revenues, except for revenues which are expressed
in thousands. This quarterly information has been prepared on a
basis consistent with the audited financial statements and, in
the opinion of management, includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair
presentation of the information for the periods presented.

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

24



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##### Table of Contents



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 2002   |                                  | Fiscal 2003
|                                                                   |                               |               |                                  |            
|                                                                   |                               | First         |                                  | Second      |      | Third      |         | Fourth     |      | First      |         | Second     |      | Third      |         | Fourth 
|                                                                   |                               | Quarter       |                                  | Quarter     |      | Quarter    |         | Quarter    |      | Quarter    |         | Quarter    |      | Quarter    |         | Quarter
|                                                                   |                               |               |                                  |             |      |            |         |            |      |            |         |            |      |            |         |        
|                                                                   |                               | (Restated)    |                                  | (Restated)  |      | (Restated) |         | (Restated) |      | (Restated) |         | (Restated) |      | (Restated) |         |        
|Revenues                                                           |                               | $             | 97,500                           |             |      | $          | 101,650 |            |      | $          | 107,052 |            |      | $          | 115,889 |         |      | $    | 131,595 |     |      | $    | 136,605 |     |      | $    | 139,729 |     |      | $    | 151,316 |    
|Costs and expenses:                                                |                               |               |                                  |             |      |            |         |            |      |            |         |            |      |            |         |         |      |      |         |     |      |      |         |     |      |      |         |     |      |      |         |    
|                                                                   | Restaurant operating costs:   |               |                                  |             |      |            |         |            |      |            |         |            |      |            |         |         |      |      |         |     |      |      |         |     |      |      |         |     |      |      |         |     |     
|                                                                   |                               | Cost of sales |                                  |             | 27.1 | %          |         |            | 26.3 | %          |         |            | 26.7 | %          |         |         | 26.6 | %    |         |     | 26.8 | %    |         |     | 27.2 | %    |         |     | 27.5 | %    |         |     | 27.7 | %   
|                                                                   |                               | Labor         |                                  |             | 31.5 |            |         |            | 31.6 |            |         |            | 31.9 |            |         |         | 31.5 |      |         |     | 31.7 |      |         |     | 31.3 |      |         |     | 31.3 |      |         |     | 30.9 |     
|                                                                   |                               | Partner bonus |                                  |             | 0.3  |            |         |            | 0.3  |            |         |            | 0.3  |            |         |         | 0.3  |      |         |     | 0.3  |      |         |     | 0.3  |      |         |     | 0.3  |      |         |     | 0.2  |     
|                                                                   |                               | Operating     |                                  |             | 16.4 |            |         |            | 16.7 |            |         |            | 17.0 |            |         |         | 16.8 |      |         |     | 16.4 |      |         |     | 16.7 |      |         |     | 16.7 |      |         |     | 16.7 |     
|                                                                   |                               | Occupancy     |                                  |             | 6.3  |            |         |            | 6.1  |            |         |            | 6.0  |            |         |         | 5.8  |      |         |     | 5.6  |      |         |     | 5.6  |      |         |     | 5.5  |      |         |     | 5.2  |     
|                                                                   |                               |               |                                  |             |      |            |         |            |      |            |         |            |      |            |         |         |      |      |         |     |      |      |         |     |      |      |         |     |      |      |         |    
|                                                                   |                               |               | Total restaurant operating costs |             |      | 81.6       |         |            |      | 81.0       |         |            |      | 82.0       |         |         |      | 81.0 |         |     |      | 80.8 |         |     |      | 81.1 |         |     |      | 81.3 |         |     |      | 80.7 | 
|                                                                   | General and administrative    |               |                                  | 5.1         |      |            |         | 5.4        |      |            |         | 5.0        |      |            |         | 4.2     |      |      |         | 5.2 |      |      |         | 5.4 |      |      |         | 4.9 |      |      |         | 5.1 |     
|                                                                   | Depreciation and amortization |               |                                  | 3.3         |      |            |         | 3.3        |      |            |         | 3.3        |      |            |         | 3.3     |      |      |         | 3.2 |      |      |         | 3.3 |      |      |         | 3.4 |      |      |         | 3.6 |     
|                                                                   | Preopening expense            |               |                                  | 0.6         |      |            |         | 1.5        |      |            |         | 2.2        |      |            |         | 1.6     |      |      |         | 1.5 |      |      |         | 0.9 |      |      |         | 1.9 |      |      |         | 1.9 |     
|                                                                   | Partner investment expense    |               |                                  | 3.5         |      |            |         | 0.5        |      |            |         | 1.1        |      |            |         | 0.6     |      |      |         | 0.6 |      |      |         | 0.7 |      |      |         | 1.2 |      |      |         | 0.6 |     
|                                                                   |                               |               |                                  |             |      |            |         |            |      |            |         |            |      |            |         |         |      |      |         |     |      |      |         |     |      |      |         |     |      |      |         |    
|Income from operations                                             |                               |               | 5.9                              |             |      |            | 8.2     |            |      |            | 6.5     |            |      |            | 9.3     |         |      |      | 8.7     |     |      |      | 8.7     |     |      |      | 7.4     |     |      |      | 8.1     |    
|Interest income (expense), net                                     |                               |               | 0.0                              |             |      |            | 0.0     |            |      |            | 0.0     |            |      |            | 0.0     |         |      |      | 0.0     |     |      |      | 0.0     |     |      |      | 0.0     |     |      |      | 0.1     |    
|                                                                   |                               |               |                                  |             |      |            |         |            |      |            |         |            |      |            |         |         |      |      |         |     |      |      |         |     |      |      |         |     |      |      |         |    
|Income before minority interest and provision for
    income taxes |                               |               | 5.9                              |             |      |            | 8.2     |            |      |            | 6.5     |            |      |            | 9.3     |         |      |      | 8.7     |     |      |      | 8.7     |     |      |      | 7.4     |     |      |      | 8.2     |    
|Minority interest                                                  |                               |               | (1.2                             | )           |      |            | (1.3    | )          |      |            | (1.2    | )          |      |            | (1.3    | )       |      |      | (1.5    | )   |      |      | (1.5    | )   |      |      | (1.4    | )   |      |      | (1.3    | )  
|                                                                   |                               |               |                                  |             |      |            |         |            |      |            |         |            |      |            |         |         |      |      |         |     |      |      |         |     |      |      |         |     |      |      |         |    
|Income before provision for income taxes                           |                               |               | 4.7                              |             |      |            | 6.9     |            |      |            | 5.3     |            |      |            | 8.1     |         |      |      | 7.3     |     |      |      | 7.3     |     |      |      | 5.9     |     |      |      | 6.8     |    
|Provision for income taxes                                         |                               |               | (1.5                             | )           |      |            | (2.4    | )          |      |            | (1.8    | )          |      |            | (2.8    | )       |      |      | (2.5    | )   |      |      | (2.4    | )   |      |      | (2.0    | )   |      |      | (2.3    | )  
|                                                                   |                               |               |                                  |             |      |            |         |            |      |            |         |            |      |            |         |         |      |      |         |     |      |      |         |     |      |      |         |     |      |      |         |    
|Net income                                                         |                               |               | 3.2                              | %           |      |            | 4.5     | %          |      |            | 3.5     | %          |      |            | 5.3     | %       |      |      | 4.9     | %   |      |      | 4.8     | %   |      |      | 4.0     | %   |      |      | 4.5     | %  
|                                                                   |                               |               |                                  |             |      |            |         |            |      |            |         |            |      |            |         |         |      |      |         |     |      |      |         |     |      |      |         |     |      |      |         |    

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. Additionally, there
may be variability in the amount and percentage of revenues
attributable to partner investment expense as a result of the
timing of opening new restaurants and the timing of purchasing
partner interests. Partner investment expense represents the
difference between the imputed fair value of our partners
ownership interest and our partners cash capital
contribution for that interest, as well as the excess, if any,
of the purchase price at the time we repurchase a partners
interest over the imputed fair value of that interest.

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 preopening expenses, labor, operating and
partner investment 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 $42.8 million,
$53.8 million and $74.5 million for fiscal years 2001,
2002 and 2003, respectively. Net cash provided by

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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 and partnership related non-cash
expenses.


We use cash primarily to fund the development and
construction of new restaurants. Net cash used in investing
activities in fiscal years 2001, 2002 and 2003 was
$50.9 million, $33.9 million, and $64.9 million,
respectively. Investment activities consisted of capital
expenditures of $35.9 million, $43.5 million and
$63.7 million in fiscal years 2001, 2002 and 2003,
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, sales of short-term
instruments of $9.5 million in fiscal 2002, and investments
in short-term instruments of $1.2 million in 2003. We
intend to open 18 new Bistro restaurants and 20 new Pei Wei
restaurants in fiscal year 2004. 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
$375,000 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 2001, 2002 and 2003 was
$22.6 million, $(1.6) million and $(3.2) million,
respectively. 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 years 2002 and 2003 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, P.F. Changs 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,
we have the right to increase the credit facility up to the
maximum aggregate principal amount of $50 million provided
that we are 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 us
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 our
subsidiary, Pei Wei Asian Diner, Inc. serve as collateral for
the credit facility. P.F. Changs had no borrowings
outstanding under the credit facility as of December 28,
2003, although $1.8 million is committed for the issuance
of a letter of credit which is required by insurance companies
for our workers compensation and general liability insurance
claims.

Our capital requirements, including development
costs related to the opening of additional restaurants, have
been and will continue to be significant. Our future capital
requirements and the adequacy of our available funds will depend
on many factors, including the pace of expansion, real estate
markets, site locations 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
2004. 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 financing.
Future capital funding transactions may result in dilution to
current shareholders. We can not assure you that such capital
will be available on favorable terms, if at all.

As of December 28, 2003, there were 159
partners within the P.F. Changs China Bistro, Inc. system.
During 2003, we had the opportunity to purchase eleven
partners interests, which had reached their five-year
threshold period during the year, as well as one additional
partners interest. Of these opportunities, we purchased
two interests in their entirety, three partial interests and
have passed on the remaining opportunities. These purchases
totaled approximately $1.3 million. Of the total purchase
price, $863,000 was paid in cash while the majority of the
remaining balance has been recorded as amounts due to related
parties on the balance sheet at December 28, 2003. In 2004,
we will have the opportunity to purchase 23 additional
partnership interests. If the entirety of these interests are
purchased, the total purchase price will approximate
$14 million to $17 million based upon the estimated
fair value of the respective interests at December 28,

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2003. These amounts are subject to change based
upon changes in the estimated fair value of the respective
interests from December 28, 2003 through the date of
purchase. If all of these interests are purchased by the Company
in 2004, the estimated financial impact would be an increase to
earnings per share of $0.03 based upon the elimination of the
related minority interest charge in our income statement,
partially offset by the anticipated intangible amortization
expense relating to the purchase, both net of related income
taxes.


Critical Accounting Policies

Our significant accounting policies are disclosed
in Note 2 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 who wishes to
participate in the partnership structure is required to make a
cash capital contribution in exchange for a specified interest
in the partnership. The ownership interest purchased by each
partner generally ranges between two and seven percent of the
restaurant or region the partner oversees. We perform an
assessment of what the imputed fair value of these interests
might be for a passive equity investor (i.e. not someone
actually working in the restaurant) utilizing a discounted cash
flow model. This methodology involves the use of various
estimates relating to future cash flow projections and discount
rates for which significant judgments are required. Any excess
of the imputed fair value of these interests, determined by
using the discounted cash flow model, over the cash contribution
paid by our partners is recognized as expense over the initial
five-year term of the partnership agreement.

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 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 P.F. Changs 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. If and when we repurchase our
partners interests, the excess, if any, of the purchase
price over the imputed fair value of these interests has been
recognized as expense in the month the repurchase occurs for all
fiscal years prior to and including 2003. Subsequent to the date
of the modifications to our agreements as discussed in Risk
Factors, which we anticipate to be in the first quarter of 2004,
the excess, if any, will be recorded in Intangibles and
amortized over 15 years, after the modification has been in
effect for six months. There is also the possibility of
additional charges relating to the modification if, within the
initial five year period of the respective interest, the Company
repurchases said interest at a value larger than required by the
agreements before modification.



| |                                    
| | -----------------------------------
| | 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 our 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.

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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. Actual experience could also be more
favorable than estimated, resulting in expense reductions.

New Accounting Standards

In January 2003, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation
No. 46 (FIN 46), Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51, which addresses consolidation by business
enterprises of variable interest entities (VIEs)
either: (1) that do not have sufficient equity investment
at risk to permit the entity to finance its activities without
additional subordinated financial support, or (2) in which
the equity investors lack an essential characteristic of a
controlling financial interest. In December 2003, the FASB
completed deliberations of proposed modifications to FIN 46
(Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date
of the VIE. VIEs created after January 31, 2003, but prior
to January 1, 2004, may be accounted for either based on
the original interpretation or the Revised Interpretations. For
VIEs created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim
or annual period ending after December 15, 2003. Certain
disclosures are effective immediately. VIEs created after
January 1, 2004 must be accounted for under the Revised
Interpretations. The adoption of FIN No. 46 did not have a
material effect on our consolidated financial position, results
of operations or cash flows.

In April 2003, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
(SFAS) No. 149 (FAS 149), Amendment
of Statement 133 on Derivative Instruments and Hedging
Activities This statement amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under FAS 133. FAS 149 is
effective for contracts entered in to or modified after
June 30, 2003. P.F. Changs does not have any
derivative financial instruments. The adoption of FAS 149
did not have an effect on our financial statements.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This
statement requires that certain instruments that were previously
classified as equity on a companys statement of financial
position now be classified as liabilities. The statement is
effective for financial instruments entered into or modified
after May 31, 2003, and to all other instruments that exist
as of the beginning of the first interim financial reporting
period beginning after June 15, 2003.
P.F. Changs currently has no instruments impacted by
the adoption of this statement and therefore the adoption did
not have an effect on our consolidated financial position,
results of operations or cash flows.

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, increases in workers
compensation and health insurance costs could also affect our
labor costs.

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Purchase Commitments

|                                                                                |  |                        |         |           |  |       |        |       |  |           |        |  |  |   |        |  |  |   |         | 
|------------------------------------------------------------------------------- |  | ---------------------- | ------- | --------- |  | ----- | ------ | ----- |  | --------- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                                                                |  |                       
|                                                                                |  | Payments Due by Period
|                                                                                |  |                       
|                                                                                |  |                        |         | Less than |  | 1-3   |        | 3-5   |  | More than
|Contractural Obligations                                                        |  | Total                  |         | 1 year    |  | Years |        | Years |  | 5 Years  
|                                                                                |  |                        |         |           |  |       |        |       |  |          
|                                                                                |  |                       
|                                                                                |  | (In thousands)        
|Long-Term Debt                                                                  |  | $                      | 1,590   |           |  | $     | 1,454  |       |  | $         | 136    |  |  | $ |       |  |  | $ |        | 
|Capital Lease Obligations                                                       |  |                        |        |           |  |       |       |       |  |           |       |  |  |   |       |  |  |   |        | 
|Operating Leases                                                                |  |                        | 240,010 |           |  |       | 21,168 |       |  |           | 43,189 |  |  |   | 41,789 |  |  |   | 133,864 | 
|Purchase Obligations                                                            |  |                        | 30,323  |           |  |       | 30,323 |       |  |           |       |  |  |   |       |  |  |   |        | 
|Other Long-Term Liabilities Reflected on Balance
    Sheet at December 28, 2003 |  |                        |        |           |  |       |       |       |  |           |       |  |  |   |       |  |  |   |        | 
|                                                                                |  |                        |         |           |  |       |        |       |  |           |        |  |  |   |        |  |  |   |         | 
|Total                                                                           |  | $                      | 271,923 |           |  | $     | 52,945 |       |  | $         | 43,325 |  |  | $ | 41,789 |  |  | $ | 133,864 | 
|                                                                                |  |                        |         |           |  |       |        |       |  |           |        |  |  |   |        |  |  |   |         | 

In determining purchase obligations for this
table we used our interpretation of the definition set forth in
the related rule which states, a purchase
obligation is defined as an agreement to purchase goods or
services that is enforceable and legally binding on the
registrant and that specifies all significant terms, including:
fixed minimum quantities to be purchased; fixed, minimum or
variable/price provisions, and the approximate timing of the
transaction. In applying this definition, we have only
included purchase obligations to the extent the failure to
perform would result in formal recourse to
P.F. Changs. Accordingly, certain procurement
arrangements that indicate we are to purchase future items are
included and to the extent of recourse provision for our failure
to purchase.




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 28, 2003 is not material, and
therefore, disclosure is not required.

29



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##### Table of Contents








|        |                                                
|------- | -----------------------------------------------
|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                                                                                                                |      |  | 31 | 
|                                   | Consolidated Balance Sheets at December 29,
    2002 and December 28, 2003                                                                    |      |  | 32 | 
|                                   | Consolidated Statements of Income for the Years
    Ended December 30, 2001, December 29, 2002 and
    December 28, 2003                      |      |  | 33 | 
|                                   | Consolidated Statements of Common
    Stockholders Equity for the Years Ended December 30,
    2001, December 29, 2002 and December 28, 2003 |      |  | 34 | 
|                                   | Consolidated Statements of Cash Flows for the
    Years Ended December 30, 2001, December 29, 2002 and
    December 28, 2003                  |      |  | 35 | 
|                                   | Notes to Consolidated Financial Statements                                                                                                    |      |  | 36 | 

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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 29, 2002 and
December 28, 2003, and the related consolidated statements
of income, common stockholders equity, and cash flows for
each of the three years in the period ended December 28,
2003. 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 29, 2002 and December 28,
2003 and the results of its operations and its cash flows for
each of the three years in the period ended December 28,
2003, in conformity with accounting principles generally
accepted in the United States.

As described in Note 1, Restatement of
Previously Issued Financial Statements, the Company has
restated previously issued financial statements as of
December 29, 2002 and for the years ended December 29,
2002 and December 30, 2001 and the beginning retained
earnings as of December 31, 2000.

As described in Note 2 to the consolidated
financial statements, in 2002 the Company changed its method of
accounting for goodwill.



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

Phoenix, Arizona

January 30, 2004,


except for the matters disclosed in Note 1


as to which the date is March 12, 2004


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P.F. CHANGS CHINA BISTRO, INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                        |                                                                                                                                                                |                                                                                                                                                                         |         |              |    |   |         |         |    | 
|--------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | ------------ | -- | - | ------- | ------- | -- | 
|                                                                                                                                        |                                                                                                                                                                | December 29,                                                                                                                                                            |         | December 28,
|                                                                                                                                        |                                                                                                                                                                | 2002                                                                                                                                                                    |         | 2003        
|                                                                                                                                        |                                                                                                                                                                |                                                                                                                                                                         |         |             
|                                                                                                                                        |                                                                                                                                                                | (Restated)                                                                                                                                                              |         |             
|                                                                                                                                        |                                                                                                                                                                |                                                                                                                                                                        
|                                                                                                                                        |                                                                                                                                                                | (In thousands)                                                                                                                                                         
|ASSETS                                                                                                                                 
|Current assets:                                                                                                                         |                                                                                                                                                                |                                                                                                                                                                         |         |              |    |   |         |        
|                                                                                                                                        | Cash and cash equivalents                                                                                                                                      |                                                                                                                                                                         | $       | 39,089       |    |   | $       | 45,478  |   
|                                                                                                                                        | Short-term investments                                                                                                                                         |                                                                                                                                                                         |         | 3,800        |    |   |         | 5,000   |   
|                                                                                                                                        | Inventories                                                                                                                                                    |                                                                                                                                                                         |         | 2,319        |    |   |         | 2,911   |   
|                                                                                                                                        | Prepaids and other current assets                                                                                                                              |                                                                                                                                                                         |         | 6,176        |    |   |         | 6,313   |   
|                                                                                                                                        |                                                                                                                                                                |                                                                                                                                                                         |         |              |    |   |         |        
|Total current assets                                                                                                                    |                                                                                                                                                                |                                                                                                                                                                         | 51,384  |              |    |   | 59,702  |        
|Construction-in-progress                                                                                                                |                                                                                                                                                                |                                                                                                                                                                         | 13,557  |              |    |   | 16,445  |        
|Property and equipment, net                                                                                                             |                                                                                                                                                                |                                                                                                                                                                         | 137,055 |              |    |   | 181,846 |        
|Deferred income tax assets                                                                                                              |                                                                                                                                                                |                                                                                                                                                                         | 0       |              |    |   | 2,695   |        
|Goodwill                                                                                                                                |                                                                                                                                                                |                                                                                                                                                                         | 6,819   |              |    |   | 6,819   |        
|Other assets                                                                                                                            |                                                                                                                                                                |                                                                                                                                                                         | 3,862   |              |    |   | 5,570   |        
|                                                                                                                                        |                                                                                                                                                                |                                                                                                                                                                         |         |              |    |   |         |        
|Total assets                                                                                                                            |                                                                                                                                                                | $                                                                                                                                                                       | 212,677 |              |    | $ | 273,077 |        
|                                                                                                                                        |                                                                                                                                                                |                                                                                                                                                                         |         |              |    |   |         |        
|                                                                                                                                       
|LIABILITIES AND COMMON STOCKHOLDERS
    EQUITY                                                                                        
|Current liabilities:                                                                                                                    |                                                                                                                                                                |                                                                                                                                                                         |         |              |    |   |         |        
|                                                                                                                                        | Accounts payable                                                                                                                                               |                                                                                                                                                                         | $       | 7,051        |    |   | $       | 8,367   |   
|                                                                                                                                        | Construction payable                                                                                                                                           |                                                                                                                                                                         |         | 3,600        |    |   |         | 6,459   |   
|                                                                                                                                        | Accrued expenses                                                                                                                                               |                                                                                                                                                                         |         | 15,497       |    |   |         | 29,222  |   
|                                                                                                                                        | Unearned revenue                                                                                                                                               |                                                                                                                                                                         |         | 6,894        |    |   |         | 9,851   |   
|                                                                                                                                        | Current portion of long-term debt, including
    $1,021,000 and $1,454,000 due to related parties at
    December 29, 2002 and December 28, 2003, respectively |                                                                                                                                                                         |         | 1,633        |    |   |         | 1,454   |   
|                                                                                                                                        |                                                                                                                                                                |                                                                                                                                                                         |         |              |    |   |         |        
|Total current liabilities                                                                                                               |                                                                                                                                                                |                                                                                                                                                                         | 34,675  |              |    |   | 55,353  |        
|Long-term debt, including $828,000 and $136,000
    due to related parties at December 28, 2002 and
    December 28, 2003, respectively |                                                                                                                                                                |                                                                                                                                                                         | 1,441   |              |    |   | 136     |        
|Deferred income tax liabilities                                                                                                         |                                                                                                                                                                |                                                                                                                                                                         | 237     |              |    |   | 0       |        
|Minority interests                                                                                                                      |                                                                                                                                                                |                                                                                                                                                                         | 7,527   |              |    |   | 11,877  |        
|Commitments and contingencies                                                                                                           |                                                                                                                                                                |                                                                                                                                                                         |         |              |    |   |         |        
|Common stockholders equity:                                                                                                            |                                                                                                                                                                |                                                                                                                                                                         |         |              |    |   |         |        
|                                                                                                                                        |                                                                                                                                                                | Common stock, $0.001 par value, 40,000,000 shares
    authorized: 25,001,775 shares issued and outstanding at
    December 29, 2002 and 25,518,039 at December 28, 2003 |         |              | 25 |   |         |         | 26 | 
|                                                                                                                                        | Additional paid-in capital                                                                                                                                     |                                                                                                                                                                         |         | 128,114      |    |   |         | 139,639 |   
|                                                                                                                                        | Retained earnings                                                                                                                                              |                                                                                                                                                                         |         | 40,658       |    |   |         | 66,046  |   
|                                                                                                                                        |                                                                                                                                                                |                                                                                                                                                                         |         |              |    |   |         |        
|Total common stockholders equity                                                                                                       |                                                                                                                                                                |                                                                                                                                                                         | 168,797 |              |    |   | 205,711 |        
|                                                                                                                                        |                                                                                                                                                                |                                                                                                                                                                         |         |              |    |   |         |        
|Total liabilities and common stockholders
    equity                                                                                   |                                                                                                                                                                | $                                                                                                                                                                       | 212,677 |              |    | $ | 273,077 |        
|                                                                                                                                        |                                                                                                                                                                |                                                                                                                                                                         |         |              |    |   |         |        

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 30,                             |                                  | December 29, |        | December 28,
|                                                                   |                               | 2001                                     |                                  | 2002         |        | 2003        
|                                                                   |                               |                                          |                                  |              |        |             
|                                                                   |                               |                                         
|                                                                   |                               | (In thousands, except per share amounts)
|                                                                   |                               | (Restated)                               |                                  | (Restated)   |        |             
|Revenues                                                           |                               | $                                        | 318,776                          |              |        | $            | 422,091 |        |         | $       | 559,245 |       
|Costs and expenses:                                                |                               |                                          |                                  |              |        |              |         |        |         |         |         |       
|                                                                   | Restaurant operating costs:   |                                          |                                  |              |        |              |         |        |         |         |         |        |        
|                                                                   |                               | Cost of sales                            |                                  |              | 86,368 |              |         |        | 112,571 |         |         |        | 152,788 |        
|                                                                   |                               | Labor                                    |                                  |              | 97,094 |              |         |        | 133,536 |         |         |        | 174,989 |        
|                                                                   |                               | Partner bonus                            |                                  |              | 992    |              |         |        | 1,192   |         |         |        | 1,439   |        
|                                                                   |                               | Operating                                |                                  |              | 53,932 |              |         |        | 70,775  |         |         |        | 92,988  |        
|                                                                   |                               | Occupancy                                |                                  |              | 19,902 |              |         |        | 25,457  |         |         |        | 30,559  |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |         |         |         |       
|                                                                   |                               |                                          | Total restaurant operating costs |              |        | 258,288      |         |        |         | 343,531 |         |        |         | 452,763 | 
|                                                                   | General and administrative    |                                          |                                  | 16,359       |        |              |         | 20,590 |         |         |         | 28,768 |        
|                                                                   | Depreciation and amortization |                                          |                                  | 11,007       |        |              |         | 13,959 |         |         |         | 18,834 |        
|                                                                   | Preopening expense            |                                          |                                  | 5,099        |        |              |         | 6,334  |         |         |         | 8,654  |        
|                                                                   | Partner investment expense    |                                          |                                  | 2,744        |        |              |         | 5,798  |         |         |         | 4,196  |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |         |         |         |       
|Income from operations                                             |                               |                                          | 25,279                           |              |        |              | 31,879  |        |         |         | 46,030  |       
|Interest and other income (expense):                               |                               |                                          |                                  |              |        |              |         |        |         |         |         |       
|                                                                   | Interest expense              |                                          |                                  | (302         | )      |              |         | (263   | )       |         |         | (11    | )      
|                                                                   | Interest and other income     |                                          |                                  | 1,202        |        |              |         | 304    |         |         |         | 56     |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |         |         |         |       
|Income before minority interest and provision for
    income taxes |                               |                                          | 26,179                           |              |        |              | 31,920  |        |         |         | 46,075  |       
|Minority interest                                                  |                               |                                          | (4,558                           | )            |        |              | (5,243  | )      |         |         | (7,887  | )     
|                                                                   |                               |                                          |                                  |              |        |              |         |        |         |         |         |       
|Income before provision for income taxes                           |                               |                                          | 21,621                           |              |        |              | 26,677  |        |         |         | 38,188  |       
|Provision for income taxes                                         |                               |                                          | (7,654                           | )            |        |              | (9,097  | )      |         |         | (12,800 | )     
|                                                                   |                               |                                          |                                  |              |        |              |         |        |         |         |         |       
|Net income                                                         |                               | $                                        | 13,967                           |              |        | $            | 17,580  |        |         | $       | 25,388  |       
|                                                                   |                               |                                          |                                  |              |        |              |         |        |         |         |         |       
|Net income per share:                                              |                               |                                          |                                  |              |        |              |         |        |         |         |         |       
|                                                                   | Basic                         |                                          | $                                | 0.59         |        |              | $       | 0.71   |         |         | $       | 1.00   |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |         |         |         |       
|                                                                   | Diluted                       |                                          | $                                | 0.55         |        |              | $       | 0.68   |         |         | $       | 0.97   |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |         |         |         |       
|Weighted average shares used in computation:                       |                               |                                          |                                  |              |        |              |         |        |         |         |         |       
|                                                                   | Basic                         |                                          |                                  | 23,728       |        |              |         | 24,688 |         |         |         | 25,345 |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |         |         |         |       
|                                                                   | Diluted                       |                                          |                                  | 25,470       |        |              |         | 25,924 |         |         |         | 26,250 |        
|                                                                   |                               |                                          |                                  |              |        |              |         |        |         |         |         |       

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, December 31, 2000, as
    restated                               |  |                             | 20,906 |            |  | $        | 20 |          |  | $     | 66,747  |  |  | $ | 9,111  |  |  | $ | 75,878  | 
|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, as restated                                                    |  |                             |       |            |  |          |   |          |  |       |        |  |  |   | 13,967 |  |  |   | 13,967  | 
|                                                                           |  |                             |        |            |  |          |    |          |  |       |         |  |  |   |        |  |  |   |         | 
|Balances, December 30, 2001, as
    restated                               |  |                             | 23,896 |            |  |          | 24 |          |  |       | 110,617 |  |  |   | 23,078 |  |  |   | 133,719 | 
|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, as restated                                                    |  |                             |       |            |  |          |   |          |  |       |        |  |  |   | 17,580 |  |  |   | 17,580  | 
|                                                                           |  |                             |        |            |  |          |    |          |  |       |         |  |  |   |        |  |  |   |         | 
|Balances, December 29, 2002, as
    restated                               |  |                             | 25,002 |            |  |          | 25 |          |  |       | 128,114 |  |  |   | 40,658 |  |  |   | 168,797 | 
|Issuance of common stock under stock option plans                          |  |                             | 473    |            |  |          | 1  |          |  |       | 5,289   |  |  |   |       |  |  |   | 5,290   | 
|Issuance of common stock under employee stock
    purchase plan            |  |                             | 43     |            |  |          |   |          |  |       | 1,123   |  |  |   |       |  |  |   | 1,123   | 
|Issuance of common stock of Pei Wei subsidiary
    under stock option plan |  |                             |       |            |  |          |   |          |  |       | 138     |  |  |   |       |  |  |   | 138     | 
|Tax benefit from disqualifying stock option
    dispositions               |  |                             |       |            |  |          |   |          |  |       | 4,975   |  |  |   |       |  |  |   | 4,975   | 
|Net income                                                                 |  |                             |       |            |  |          |   |          |  |       |        |  |  |   | 25,388 |  |  |   | 25,388  | 
|                                                                           |  |                             |        |            |  |          |    |          |  |       |         |  |  |   |        |  |  |   |         | 
|Balances, December 28, 2003                                                |  |                             | 25,518 |            |  | $        | 26 |          |  | $     | 139,639 |  |  | $ | 66,046 |  |  | $ | 205,711 | 
|                                                                           |  |                             |        |            |  |          |    |          |  |       |         |  |  |   |        |  |  |   |         | 

See accompanying notes to consolidated financial
statements.

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P.F. CHANGS CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                        |                                                              |                                   |         |              |       |              |         |        |        |   |         |        |        |  
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | --------------------------------- | ------- | ------------ | ----- | ------------ | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                                                                        |                                                              | Year Ended                        |         | Year Ended   |       | Year Ended  
|                                                                                                        |                                                              | December 30,                      |         | December 29, |       | December 28,
|                                                                                                        |                                                              | 2001                              |         | 2002         |       | 2003        
|                                                                                                        |                                                              |                                   |         |              |       |             
|                                                                                                        |                                                              |                                  
|                                                                                                        |                                                              | (In thousands)                   
|                                                                                                        |                                                              | (Restated)                        |         | (Restated)   |       |             
|Operating Activities:                                                                                   |                                                              |                                   |         |              |       |              |         |        |        |   |         |       
|Net income                                                                                              |                                                              | $                                 | 13,967  |              |       | $            | 17,580  |        |        | $ | 25,388  |       
|Adjustments to reconcile net income to net cash
    provided by operating activities:                   |                                                              |                                   |         |              |       |              |         |        |        |   |         |       
|                                                                                                        | Depreciation and amortization                                |                                   |         | 10,561       |       |              |         | 13,960 |        |   |         | 18,834 |       
|                                                                                                        | Partner investment expense                                   |                                   |         | 1,800        |       |              |         | 4,293  |        |   |         | 3,355  |       
|                                                                                                        | Partner bonus expense                                        |                                   |         | 992          |       |              |         | 1,192  |        |   |         | 1,439  |       
|                                                                                                        | Amortization of goodwill                                     |                                   |         | 446          |       |              |         |       |        |   |         |       |       
|                                                                                                        | Deferred income taxes (benefit)                              |                                   |         | 8            |       |              |         | (1,173 | )      |   |         | (2,932 | )     
|                                                                                                        | Tax benefit from disqualifying stock option
    dispositions |                                   |         | 1,236        |       |              |         | 11,676 |        |   |         | 4,975  |       
|                                                                                                        | Minority interest                                            |                                   |         | 4,558        |       |              |         | 5,243  |        |   |         | 7,887  |       
|                                                                                                        | Changes in operating assets and liabilities:                 |                                   |         |              |       |              |         |        |        |   |         |        |       
|                                                                                                        |                                                              | Inventories                       |         |              | (383  | )            |         |        | (253   | ) |         |        | (592   | )
|                                                                                                        |                                                              | Prepaids and other current assets |         |              | (491  | )            |         |        | (2,725 | ) |         |        | (137   | )
|                                                                                                        |                                                              | Other assets                      |         |              | (899  | )            |         |        | 803    |   |         |        | (1,708 | )
|                                                                                                        |                                                              | Accounts payable                  |         |              | 2,636 |              |         |        | 1,287  |   |         |        | 1,316  |  
|                                                                                                        |                                                              | Accrued expenses                  |         |              | 6,972 |              |         |        | (785   | ) |         |        | 13,725 |  
|                                                                                                        |                                                              | Unearned revenue                  |         |              | 1,357 |              |         |        | 2,744  |   |         |        | 2,957  |  
|                                                                                                        |                                                              |                                   |         |              |       |              |         |        |        |   |         |       
|Net cash provided by operating activities                                                               |                                                              |                                   | 42,760  |              |       |              | 53,842  |        |        |   | 74,507  |       
|Investing Activities:                                                                                   |                                                              |                                   |         |              |       |              |         |        |        |   |         |       
|Capital expenditures                                                                                    |                                                              |                                   | (35,921 | )            |       |              | (43,471 | )      |        |   | (63,654 | )     
|Sales (purchases) of investments                                                                        |                                                              |                                   | (15,000 | )            |       |              | 9,500   |        |        |   | (1,200  | )     
|Purchases of minority interests                                                                         |                                                              |                                   | 20      |              |       |              | 47      |        |        |   | (22     | )     
|                                                                                                        |                                                              |                                   |         |              |       |              |         |        |        |   |         |       
|Net cash used in investing activities                                                                   |                                                              |                                   | (50,901 | )            |       |              | (33,924 | )      |        |   | (64,876 | )     
|Financing Activities:                                                                                   |                                                              |                                   |         |              |       |              |         |        |        |   |         |       
|Proceeds from revolving credit facility, net of
    repayments                                          |                                                              |                                   | (15,000 | )            |       |              |        |        |        |   |        |       
|Repayments of long-term debt                                                                            |                                                              |                                   | (250    | )            |       |              | (1,901  | )      |        |   | (1,756  | )     
|Proceeds from sale of common stock                                                                      |                                                              |                                   | 40,768  |              |       |              |        |        |        |   |        |       
|Proceeds from sale of subsidiary common stock                                                           |                                                              |                                   |        |              |       |              | 111     |        |        |   | 138     |       
|Proceeds from stock options exercised and
    employee stock purchases                                  |                                                              |                                   | 1,870   |              |       |              | 5,711   |        |        |   | 6,413   |       
|Proceeds from minority investors contributions                                                          |                                                              |                                   | 555     |              |       |              | 934     |        |        |   | 1,074   |       
|Distributions to minority members and partners                                                          |                                                              |                                   | (5,393  | )            |       |              | (6,483  | )      |        |   | (9,111  | )     
|                                                                                                        |                                                              |                                   |         |              |       |              |         |        |        |   |         |       
|Net cash provided by (used in) financing
    activities                                                 |                                                              |                                   | 22,550  |              |       |              | (1,628  | )      |        |   | (3,242  | )     
|                                                                                                        |                                                              |                                   |         |              |       |              |         |        |        |   |         |       
|Net increase in cash and cash equivalents                                                               |                                                              |                                   | 14,409  |              |       |              | 18,290  |        |        |   | 6,389   |       
|Cash and cash equivalents at the beginning of the
    year                                              |                                                              |                                   | 6,390   |              |       |              | 20,799  |        |        |   | 39,089  |       
|                                                                                                        |                                                              |                                   |         |              |       |              |         |        |        |   |         |       
|Cash and cash equivalents at the end of the year                                                        |                                                              | $                                 | 20,799  |              |       | $            | 39,089  |        |        | $ | 45,478  |       
|                                                                                                        |                                                              |                                   |         |              |       |              |         |        |        |   |         |       
|Supplemental Disclosures of Cash Flow
    Information:                                                  |                                                              |                                   |         |              |       |              |         |        |        |   |         |       
|Cash paid for interest                                                                                  |                                                              | $                                 | 358     |              |       | $            | 195     |        |        | $ | 146     |       
|Cash paid for income taxes                                                                              |                                                              |                                   | 4,223   |              |       |              | 2,019   |        |        |   | 1,791   |       
|Purchase of minority interests through issuance
    of long-term debt and conversion to members capital |                                                              |                                   | 778     |              |       |              | 2,955   |        |        |   | 370     |       

See accompanying notes to consolidated financial
statements.

35



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 28, 2003




|   |                                                                       
|-- | ----------------------------------------------------------------------
|1. | Restatement of Previously Issued Consolidated
    Financial Statements

In response to recent changes concerning the
accounting for certain partnership arrangements at companies
that have partnership programs similar to
P.F. Changs, the Company requested the staff of the
U.S. Securities and Exchange Commission (the
Staff) to review its accounting for the
Companys partnership structure. As a result of its
discussions with the Staff, the Company is restating its
Consolidated Financial Statements for periods prior to
December 28, 2003. These restatements result in a portion
of the Companys partnership program being accounted for
under a compensatory accounting model.

The Company will now i) reclassify a portion
of its minority interest expense to compensation expense for an
employee/partner imputed bonus, ii) record an expense for
the difference between a partners cash capital
contribution and the imputed fair value of that interest and
iii) write off all intangibles balances previously recorded
on the balance sheet on a retrospective basis to reflect the
fact that the Company had the option to repurchase
partners interests at their capital account balances
rather than at fair value.

The effects of the Companys restatement on
previously reported Consolidated Financial Statements for 2001
and 2002 are summarized below.

The following table reflects the effect of the
restatement on the Consolidated Statements of Income (in
thousands):

|                                                                   |  |                         |         |                         |  |               |         |          |  |   |         |   |  |   |         |  
|------------------------------------------------------------------ |  | ----------------------- | ------- | ----------------------- |  | ------------- | ------- | -------- |  | - | ------- | - |  | - | ------- | -
|                                                                   |  |                         |         |                        
|                                                                   |  | Year Ended December 30, |         | Year Ended December 29,
|                                                                   |  | 2001                    |         | 2002                   
|                                                                   |  |                         |         |                        
|                                                                   |  | As Previously           |         | As                      |  | As Previously |         | As      
|                                                                   |  | Reported                |         | Restated                |  | Reported      |         | Restated
|                                                                   |  |                         |         |                         |  |               |         |         
|Selected Statement of Income Data:                                 |  |                         |         |                         |  |               |         |          |  |   |         |   |  |   |         |  
|Partner bonus                                                      |  | $                       |        |                         |  | $             | 992     |          |  | $ |        |   |  | $ | 1,192   |  
|Total restaurant operating costs                                   |  |                         | 257,296 |                         |  |               | 258,288 |          |  |   | 342,339 |   |  |   | 343,531 |  
|Depreciation and amortization                                      |  |                         | 11,064  |                         |  |               | 11,007  |          |  |   | 14,371  |   |  |   | 13,959  |  
|Partner investment expense                                         |  |                         |        |                         |  |               | 2,744   |          |  |   |        |   |  |   | 5,798   |  
|Income from operations                                             |  |                         | 28,958  |                         |  |               | 25,279  |          |  |   | 38,457  |   |  |   | 31,879  |  
|Income before minority interest and provision for
    income taxes |  |                         | 29,858  |                         |  |               | 26,179  |          |  |   | 38,498  |   |  |   | 31,920  |  
|Minority interest                                                  |  |                         | (5,550  | )                       |  |               | (4,558  | )        |  |   | (6,435  | ) |  |   | (5,243  | )
|Income before provision for income taxes                           |  |                         | 24,308  |                         |  |               | 21,621  |          |  |   | 32,063  |   |  |   | 26,677  |  
|Provision for income taxes                                         |  |                         | (8,689  | )                       |  |               | (7,654  | )        |  |   | (11,171 | ) |  |   | (9,097  | )
|Net income                                                         |  |                         | 15,619  |                         |  |               | 13,967  |          |  |   | 20,892  |   |  |   | 17,580  |  
|Basic net income per share                                         |  |                         | 0.66    |                         |  |               | 0.59    |          |  |   | 0.85    |   |  |   | 0.71    |  
|Diluted net income per share                                       |  |                         | 0.61    |                         |  |               | 0.55    |          |  |   | 0.81    |   |  |   | 0.68    |  

36



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table reflects the effect of the
restatement on the Consolidated Balance Sheet (in thousands):

|                                                      |  |                   |         |          |  |  |         | 
|----------------------------------------------------- |  | ----------------- | ------- | -------- |  |  | ------- | 
|                                                      |  |                  
|                                                      |  | December 29, 2002
|                                                      |  |                  
|                                                      |  | As Previously     |         | As      
|                                                      |  | Reported          |         | Restated
|                                                      |  |                   |         |         
|Selected Balance Sheet Data:                          |  |                   |         |          |  |  |         | 
|Intangibles                                           |  |                   | 5,773   |          |  |  |        | 
|Total assets                                          |  |                   | 218,450 |          |  |  | 212,677 | 
|Deferred income tax liabilities                       |  |                   | 4,261   |          |  |  | 237     | 
|Minority interests                                    |  |                   | 2,848   |          |  |  | 7,527   | 
|Retained earnings                                     |  |                   | 47,086  |          |  |  | 40,658  | 
|Total common stockholders equity                     |  |                   | 175,225 |          |  |  | 168,797 | 
|Total liabilities and common stockholders
    equity |  |                   | 218,450 |          |  |  | 212,677 | 

The following table reflects the effect of the
restatement on the Consolidated Statements of Cash Flows (in
thousands):

|                                          |  |                         |         |                         |  |               |         |          |  |   |         |   |  |   |         |  
|----------------------------------------- |  | ----------------------- | ------- | ----------------------- |  | ------------- | ------- | -------- |  | - | ------- | - |  | - | ------- | -
|                                          |  |                         |         |                        
|                                          |  | Year Ended December 30, |         | Year Ended December 29,
|                                          |  | 2001                    |         | 2002                   
|                                          |  |                         |         |                        
|                                          |  | As Previously           |         | As                      |  | As Previously |         | As      
|                                          |  | Reported                |         | Restated                |  | reported      |         | Restated
|                                          |  |                         |         |                         |  |               |         |         
|Selected Cash Flow Data:                  |  |                         |         |                         |  |               |         |          |  |   |         |   |  |   |         |  
|Net income                                |  | $                       | 15,619  |                         |  | $             | 13,967  |          |  | $ | 20,892  |   |  | $ | 17,580  |  
|Amortization of intangibles               |  |                         | 57      |                         |  |               |        |          |  |   | 411     |   |  |   |        |  
|Partner investment expense                |  |                         |        |                         |  |               | 1,800   |          |  |   |        |   |  |   | 4,293   |  
|Partner bonus expense                     |  |                         |        |                         |  |               | 992     |          |  |   |        |   |  |   | 1,192   |  
|Amortization of goodwill                  |  |                         | 446     |                         |  |               | 446     |          |  |   |        |   |  |   |        |  
|Deferred income taxes                     |  |                         | 1,042   |                         |  |               | 8       |          |  |   | 901     |   |  |   | (1,173  | )
|Minority interest                         |  |                         | 5,550   |                         |  |               | 4,558   |          |  |   | 6,435   |   |  |   | 5,243   |  
|Net cash provided by operating activities |  |                         | 43,704  |                         |  |               | 42,760  |          |  |   | 55,346  |   |  |   | 53,842  |  
|Purchases of minority interests           |  |                         | (924    | )                       |  |               | 20      |          |  |   | (1,457  | ) |  |   | 47      |  
|Net cash used in investing activities     |  |                         | (51,845 | )                       |  |               | (50,901 | )        |  |   | (35,428 | ) |  |   | (33,924 | )



|   |                                               
|-- | ----------------------------------------------
|2. | 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
each of 2001, 2002 and 2003.



| |                 
| | ----------------
| | 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

37



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 28, 2003 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 28, 2003 and
December 29, 2002, $5.0 million and $3.8 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.



| |            
| | -----------
| | 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 30, 2001, December 29, 2002, and
December 28, 2003 the Company capitalized $77,000, zero,
and $106,000 respectively, of interest costs.

38



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 is less than the assets carrying amount. The
Companys policy is to evaluate long-lived assets for
impairment at the restaurant level. As of December 28,
2003, no impairment on long-lived assets has been recognized.
There can be no assurance that future impairment tests will not
result in a charge to earnings.



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

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141, Business
Combinations, and 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 28, 2003, 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.



| |                  
| | -----------------
| | 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 28, 2003,
management believes it has provided adequate reserves for its
self-insured exposure.



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

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



| |                      
| | ---------------------
| | Unearned Compensation

The Company records the difference between the
imputed fair value of our partners interest and our
partners cash capital contribution as an increase to our
minority interest account in our balance sheet and as a deferred
charge in the same initial amount. The deferred charge for
unearned compensation is amortized to expense over the five year
vesting period for those arrangements with a
forfeiture provision. At December 28, 2003 the unamortized
deferred compensation balance was $11.5 million and is
presented in the balance sheet as a reduction to the related
minority interest balance.

39



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                    
| | -------------------
| | 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 30, 2001,
December 29, 2002 and December 28, 2003 was
approximately $2,304,000, $2,464,000 and $2,802,000,
respectively.



| |                      
| | ---------------------
| | Partner Bonus Expense

Partner bonus expense represents the portion of
restaurant level operating results that are allocable to our
partners but are presented as bonus expense for accounting
purposes. Given that employees who choose to invest as partners
are not eligible to participate in our restaurant level bonus
program, a portion of their partnership earnings allocated to
the partners that would otherwise be presented as minority
interest expense are deemed to be a bonus expense for financial
reporting purposes. The amounts so imputed are based on the
existing programs used by the Company for non-investing
employees based on individual restaurant level operating results.



| |                   
| | ------------------
| | 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.



| |                           
| | --------------------------
| | Partner Investment Expense

Partner investment expense consists of two
different types of expenses, each of which relates to certain
attributes of our partnership program. One element is the
amortization of unearned compensation relating to the excess of
the imputed fair value of the interest acquired amortized over
the five-year period in which the Company has the right to
repurchase the interest upon termination at the capital account
balance. The other element is a buy-out expense for the past
repurchases of minority partners at amounts in excess of their
capital account balance when the Company either had the option
to repurchase such amounts at the capital account balance, or
repurchases occurred and that right had not lapsed for at least
six months.

The portion of each of these elements included in
partner contribution expense consists of the following:

|                                      |  |                |       |              |  |              |       |  |  |   |       | 
|------------------------------------- |  | -------------- | ----- | ------------ |  | ------------ | ----- |  |  | - | ----- | 
|                                      |  | Year Ended     |       | Year Ended   |  | Year Ended  
|                                      |  | December 30,   |       | December 29, |  | December 28,
|                                      |  | 2001           |       | 2002         |  | 2003        
|                                      |  |                |       |              |  |             
|                                      |  |               
|                                      |  | (In thousands)
|                                      |  | (Restated)     |       | (Restated)   |  |             
|Amortization of unearned compensation |  | $              | 1,506 |              |  | $            | 2,352 |  |  | $ | 3,261 | 
|Buy-out expense                       |  |                | 1,238 |              |  |              | 3,446 |  |  |   | 935   | 
|                                      |  |                |       |              |  |              |       |  |  |   |       | 
|                                      |  | $              | 2,744 |              |  | $            | 5,798 |  |  | $ | 4,196 | 
|                                      |  |                |       |              |  |              |       |  |  |   |       | 

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.

40



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                                             |                                                                                                                                                |                                          |        |              |  |              |        |        |  |   |        |        | 
|-------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------ | ------------ |  | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                             |                                                                                                                                                | Year Ended                               |        | Year Ended   |  | Year Ended  
|                                             |                                                                                                                                                | December 30,                             |        | December 29, |  | December 28,
|                                             |                                                                                                                                                | 2001                                     |        | 2002         |  | 2003        
|                                             |                                                                                                                                                |                                          |        |              |  |             
|                                             |                                                                                                                                                |                                         
|                                             |                                                                                                                                                | (In thousands, except per share amounts)
|                                             |                                                                                                                                                | (Restated)                               |        | (Restated)   |  |             
|Net income, as reported                      |                                                                                                                                                | $                                        | 13,967 |              |  | $            | 17,580 |        |  | $ | 25,388 |       
|                                             | Deduct: Total stock-based employee compensation
    expense determined under fair value methods for all awards, net
    of related tax effects |                                          |        | 1,479        |  |              |        | 2,232  |  |   |        | 3,482  | 
|                                             |                                                                                                                                                |                                          |        |              |  |              |        |        |  |   |        |       
|Pro forma net income                         |                                                                                                                                                | $                                        | 12,488 |              |  | $            | 15,348 |        |  | $ | 21,906 |       
|                                             |                                                                                                                                                |                                          |        |              |  |              |        |        |  |   |        |       
|Net income per share:                        |                                                                                                                                                |                                          |        |              |  |              |        |        |  |   |        |       
|                                             | Basic, as reported                                                                                                                             |                                          | $      | 0.59         |  |              | $      | 0.71   |  |   | $      | 1.00   | 
|                                             |                                                                                                                                                |                                          |        |              |  |              |        |        |  |   |        |       
|                                             | Basic, pro forma                                                                                                                               |                                          | $      | 0.53         |  |              | $      | 0.62   |  |   | $      | 0.86   | 
|                                             |                                                                                                                                                |                                          |        |              |  |              |        |        |  |   |        |       
|                                             | Diluted, as reported                                                                                                                           |                                          | $      | 0.55         |  |              | $      | 0.68   |  |   | $      | 0.97   | 
|                                             |                                                                                                                                                |                                          |        |              |  |              |        |        |  |   |        |       
|                                             | Diluted, pro forma                                                                                                                             |                                          | $      | 0.49         |  |              | $      | 0.59   |  |   | $      | 0.83   | 
|                                             |                                                                                                                                                |                                          |        |              |  |              |        |        |  |   |        |       
|Weighted average shares used in computation: |                                                                                                                                                |                                          |        |              |  |              |        |        |  |   |        |       
|                                             | Basic                                                                                                                                          |                                          |        | 23,728       |  |              |        | 24,688 |  |   |        | 25,345 | 
|                                             |                                                                                                                                                |                                          |        |              |  |              |        |        |  |   |        |       
|                                             | Diluted                                                                                                                                        |                                          |        | 25,470       |  |              |        | 25,924 |  |   |        | 26,250 | 
|                                             |                                                                                                                                                |                                          |        |              |  |              |        |        |  |   |        |       

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 7
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

41



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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. For the
year ended December 28, 2003, there were 17,500 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
additional potentially dilutive effect of unexercised Pei Wei
stock options 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.

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

|                                                                                                                    |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |        |     | 
|------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ---------------------------------------- | ------ | ------------ | ----- | ------------ | ------ | ------ | ----- |  | ------ | ------ | --- | 
|                                                                                                                    |                                                                                                        | Year Ended                               |        | Year Ended   |       | Year Ended  
|                                                                                                                    |                                                                                                        | December 30,                             |        | December 29, |       | December 28,
|                                                                                                                    |                                                                                                        | 2001                                     |        | 2002         |       | 2003        
|                                                                                                                    |                                                                                                        |                                          |        |              |       |             
|                                                                                                                    |                                                                                                        |                                         
|                                                                                                                    |                                                                                                        | (In thousands, except per share amounts)
|                                                                                                                    |                                                                                                        | (Restated)                               |        | (Restated)   |       |             
|Numerator:                                                                                                          |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|                                                                                                                    | Numerator for basic and diluted net income per
    share  net income available to common stockholders |                                          | $      | 13,967       |       |              | $      | 17,580 |       |  | $      | 25,388 |    
|                                                                                                                    |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|Denominator:                                                                                                        |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|                                                                                                                    | Denominator for basic net income per
    share  weighted-average shares                               |                                          |        | 23,728       |       |              |        | 24,688 |       |  |        | 25,345 |    
|                                                                                                                    | Effect of dilutive securities:                                                                         |                                          |        |              |       |              |        |        |       |  |        |        |    
|                                                                                                                    |                                                                                                        | Employee and director stock options      |        |              | 1,730 |              |        |        | 1,236 |  |        |        | 905 | 
|                                                                                                                    |                                                                                                        | Warrants                                 |        |              | 12    |              |        |        |      |  |        |        |    | 
|                                                                                                                    |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|Denominator for diluted net income per
    share  adjusted for weighted average shares and
    assumed conversions |                                                                                                        |                                          | 25,470 |              |       |              | 25,924 |        |       |  | 26,250 |       
|                                                                                                                    |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|Net income per share:                                                                                               |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|                                                                                                                    | Basic                                                                                                  |                                          | $      | 0.59         |       |              | $      | 0.71   |       |  | $      | 1.00   |    
|                                                                                                                    |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       
|                                                                                                                    | Diluted                                                                                                |                                          | $      | 0.55         |       |              | $      | 0.68   |       |  | $      | 0.97   |    
|                                                                                                                    |                                                                                                        |                                          |        |              |       |              |        |        |       |  |        |       



| |                                        
| | ---------------------------------------
| | 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

42



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P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 January 2003, the Financial Accounting
Standards Board issued FASB Interpretation No. 46
(FIN 46), Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51,
which addresses consolidation by business enterprises of
variable interest entities (VIEs) either:
(1) that do not have sufficient equity investment at risk
to permit the entity to finance its activities without
additional subordinated financial support, or (2) in which
the equity investors lack an essential characteristic of a
controlling financial interest. In December 2003, the FASB
completed deliberations of proposed modifications to FIN 46
(Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date
of the VIE. VIEs created after January 31, 2003, but prior
to January 1, 2004, may be accounted for either based on
the original interpretation or the Revised Interpretations. For
VIEs created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim
or annual period ending after December 15, 2003. Certain
disclosures are effective immediately. VIEs created after
January 1, 2004 must be accounted for under the Revised
Interpretations. The adoption of FIN No. 46 did not have a
material effect on the Companys consolidated financial
position, results of operations or cash flows.

In April 2003, the Financial Accounting Standards
Board issued SFAS No. 149 (FAS 149), Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities This statement amends and clarifies financial
accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under FAS 133. FAS 149 is
effective for contracts entered in to or modified after
June 30, 2003. P.F. Changs does not have any
derivative financial instruments. The adoption of FAS 149
did not have an effect on our financial statements.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This
Statement requires that certain instruments that were previously
classified as equity on a companys statement of financial
position now be classified as liabilities. The Statement is
effective for financial instruments entered into or modified
after May 31, 2003, and to all other instruments that exist
as of the beginning of the first interim financial reporting
period beginning after June 15, 2003. The Company currently
has no instruments impacted by the adoption of this statement
and therefore the adoption did not have an effect on the
Companys consolidated financial position, results of
operations or cash flows.

43



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

3.     Property and
Equipment

Property and equipment consists of the following:

|                                               |  |                |         |              |  |   |         | 
|---------------------------------------------- |  | -------------- | ------- | ------------ |  | - | ------- | 
|                                               |  | December 29,   |         | December 28,
|                                               |  | 2002           |         | 2003        
|                                               |  |                |         |             
|                                               |  |               
|                                               |  | (In thousands)
|Leasehold improvements                         |  | $              | 129,534 |              |  | $ | 174,048 | 
|Furniture, fixtures and equipment              |  |                | 42,030  |              |  |   | 57,397  | 
|China and smallwares                           |  |                | 4,406   |              |  |   | 5,761   | 
|                                               |  |                |         |              |  |   |         | 
|                                               |  |                | 175,970 |              |  |   | 237,206 | 
|Less accumulated depreciation and amortization |  |                | 38,915  |              |  |   | 55,360  | 
|                                               |  |                |         |              |  |   |         | 
|                                               |  | $              | 137,055 |              |  | $ | 181,846 | 
|                                               |  |                |         |              |  |   |         | 

4.     Accrued
Expenses

Accrued expenses consists of the following:

|                          |  |                |        |              |  |   |        | 
|------------------------- |  | -------------- | ------ | ------------ |  | - | ------ | 
|                          |  | December 29,   |        | December 28,
|                          |  | 2002           |        | 2003        
|                          |  |                |        |             
|                          |  |               
|                          |  | (In thousands)
|Accrued payroll           |  | $              | 5,455  |              |  | $ | 7,220  | 
|Sales and use tax payable |  |                | 2,555  |              |  |   | 3,233  | 
|Property tax payable      |  |                | 2,684  |              |  |   | 2,389  | 
|Accrued insurance         |  |                | 1,816  |              |  |   | 4,184  | 
|Accrued rent              |  |                | 2,588  |              |  |   | 3,022  | 
|Income taxes payable      |  |                |       |              |  |   | 6,731  | 
|Other accrued expenses    |  |                | 399    |              |  |   | 2,443  | 
|                          |  |                |        |              |  |   |        | 
|                          |  | $              | 15,497 |              |  | $ | 29,222 | 
|                          |  |                |        |              |  |   |        | 

5.     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 28, 2003, although $1.8 million is committed
for the issuance of a letter of credit which is required by
insurance companies for our workers compensation and general
liability insurance claims.

44



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

6.     Long-Term
Debt

Long-term debt consists of the following:

|                                                                                                                                                                                                                                                        |                      |                |       |              |  |   |       |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | -------------- | ----- | ------------ |  | - | ----- | ----- | 
|                                                                                                                                                                                                                                                        |                      | December 29,   |       | December 28,
|                                                                                                                                                                                                                                                        |                      | 2002           |       | 2003        
|                                                                                                                                                                                                                                                        |                      |                |       |             
|                                                                                                                                                                                                                                                        |                      |               
|                                                                                                                                                                                                                                                        |                      | (In thousands)
|$3.0 million in unsecured promissory notes,
    payable to related parties from the sale of minority partner
    interests, in annual installments of $1.5 million plus
    interest, with a rate of 225 basis points over LIBOR, until
    August 2005 |                      | $              | 1,864 |              |  | $ | 1,590 |      
|$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 |              |  |   |      |      
|                                                                                                                                                                                                                                                        |                      |                |       |              |  |   |       |      
|                                                                                                                                                                                                                                                        |                      |                | 3,074 |              |  |   | 1,590 |      
|                                                                                                                                                                                                                                                        | Less current portion |                |       | 1,633        |  |   |       | 1,454 | 
|                                                                                                                                                                                                                                                        |                      |                |       |              |  |   |       |      
|                                                                                                                                                                                                                                                        |                      | $              | 1,441 |              |  | $ | 136   |      
|                                                                                                                                                                                                                                                        |                      |                |       |              |  |   |       |      

The aggregate annual payments of long-term debt
outstanding at December 28, 2003, are summarized as
follows: 2004  $1.5 million; 2005 
$136,000. 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.

7.     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 29, 2002 and December 28, 2003.

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

45



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

under the 1997 Plan may be granted to key
employees of the Company who are actively engaged in 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 28, 2003 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 28, 2003.

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:

|                                         |  |      |      |      |  |      |      |   |  |  |      |  
|---------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                         |  | 2001 |      | 2002 |  | 2003
|                                         |  |      |      |      |  |     
|Weighted average risk-free interest rate |  |      | 5.5  | %    |  |      | 4.0  | % |  |  | 3.3  | %
|Expected life of options (years)         |  |      | 5.00 |      |  |      | 5.00 |   |  |  | 5.00 |  
|Expected stock volatility                |  |      | 43.3 | %    |  |      | 49.3 | % |  |  | 46.4 | %
|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

46



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P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

employee stock options. The weighted-average fair
value of options granted for the years ended December 30,
2001, December 29, 2002 and December 28, 2003 was
$8.59, $14.60 and $16.23, respectively.

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 |      
|                                         | Authorized           |                     |         |          |   |          |           |           |   |   |       |      | 
|                                         | Granted              |                     |         | (602,000  | ) |          |           | 602,000    |   |   |       | 43.34 | 
|                                         | Exercised            |                     |         |          |   |          |           | (464,535   | ) |   |       | 11.38 | 
|                                         | Forfeited (canceled) |                     |         | 96,198    |   |          |           | (96,198    | ) |   |       | 18.92 | 
|                                         |                      |                     |         |           |   |          |           |            |   |   |       |      
|Outstanding at December 28, 2003         |                      |                     | 449,560 |           |   |          | 2,428,194 |            |   | $ | 22.46 |      
|                                         |                      |                     |         |           |   |          |           |            |   |   |       |      
|Options exercisable at December 28, 2003 |                      |                     |         |           |   |          | 1,236,275 |            |   | $ | 13.45 |      
|                                         |                      |                     |         |           |   |          |           |            |   |   |       |      

47



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Information regarding options outstanding and
exercisable at December 28, 2003 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 |  |                     | 439,130 |                     |  |                | 2.6 years |             |  | $              | 1.73  |  |  |  | 439,130 |  |  | $ | 1.73  | 
|$ 5.01  $10.00 |  |                     | 70,371  |                     |  |                | 5.4 years |             |  |                | 8.48  |  |  |  | 60,369  |  |  |   | 8.25  | 
|$10.01  $15.00 |  |                     | 389,582 |                     |  |                | 6.0 years |             |  |                | 13.01 |  |  |  | 277,258 |  |  |   | 12.73 | 
|$15.01  $20.00 |  |                     | 512,403 |                     |  |                | 7.3 years |             |  |                | 18.54 |  |  |  | 243,493 |  |  |   | 18.33 | 
|$20.01  $25.00 |  |                     | 18,105  |                     |  |                | 8.0 years |             |  |                | 24.39 |  |  |  | 4,227   |  |  |   | 24.39 | 
|$25.01  $30.00 |  |                     | 47,274  |                     |  |                | 8.4 years |             |  |                | 29.15 |  |  |  | 6,290   |  |  |   | 29.08 | 
|$30.01  $35.00 |  |                     | 422,079 |                     |  |                | 8.6 years |             |  |                | 31.32 |  |  |  | 137,758 |  |  |   | 31.77 | 
|$35.01  $40.00 |  |                     | 102,500 |                     |  |                | 9.2 years |             |  |                | 38.28 |  |  |  | 60,000  |  |  |   | 39.54 | 
|$40.01  $45.00 |  |                     | 30,250  |                     |  |                | 9.8 years |             |  |                | 44.86 |  |  |  | 7,750   |  |  |   | 44.86 | 
|$45.01  $50.00 |  |                     | 396,500 |                     |  |                | 9.6 years |             |  |                | 46.13 |  |  |  |        |  |  |   |      | 

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. After factoring in a 1000 for 1 stock split
that occurred in 2003, a total of 169,000 shares of common stock
have been reserved for issuance under the 2001 Pei Wei Plan. As
of December 28, 2003, 140,500 options have been granted at
prices ranging from $7.40 to $26.00, 35,633 options have been
exercised at $7.40 and 4,000 options with an exercise price of
$7.40 have been canceled. The Company holds 960,000 shares of
common stock of Pei Wei Asian Diner.



| |                             
| | ----------------------------
| | 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
six-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 offering period.

8.     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 30, 2001,
December 29, 2002 and December 28, 2003, the Company
did not make any contributions to the Plan.

48



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

9.     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 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 28, 2003, approximately 968,000 shares were
affected by these agreements of which 260,000 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 26,133 shares of Pei Wei Asian Diner, Inc.
common stock issued as of December 28, 2003, and options to
purchase 29,867 shares of which 28,000 were unvested as of
December 28, 2003. The agreement also covers options to
purchase 10,000 shares of P.F. Changs China Bistro
stock, all of which were unvested as of December 28, 2003.

10.     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 their percentage 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.

As of December 28, 2003, there were 159
partners within the P.F. Changs China Bistro, Inc. system.
During 2003, we purchased interests held by five of our minority
partners for a total of approximately $1.3 million.
Approximately $863,000 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 28,
2003. In 2004, we will have the opportunity to purchase
23 additional partnership interests.

49



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

11.     Income
Taxes

Income tax expense (benefit) consisted of
the following:

|         |          |                |       |              |  |              |       |        |   |   |        |        |  
|-------- | -------- | -------------- | ----- | ------------ |  | ------------ | ----- | ------ | - | - | ------ | ------ | -
|         |          | Year Ended     |       | Year Ended   |  | Year Ended  
|         |          | December 30,   |       | December 29, |  | December 28,
|         |          | 2001           |       | 2002         |  | 2003        
|         |          |                |       |              |  |             
|         |          |               
|         |          | (In thousands)
|         |          | (Restated)     |       | (Restated)   |  |             
|Federal: |          |                |       |              |  |              |       |        |   |   |        |       
|         | Current  |                | $     | 6,397        |  |              | $     | 8,094  |   |   | $      | 13,005 |  
|         | Deferred |                |       | 7            |  |              |       | (1,018 | ) |   |        | (2,494 | )
|         |          |                |       |              |  |              |       |        |   |   |        |       
|         |          |                | 6,404 |              |  |              | 7,076 |        |   |   | 10,511 |       
|State:   |          |                |       |              |  |              |       |        |   |   |        |       
|         | Current  |                |       | 1,249        |  |              |       | 2,176  |   |   |        | 2,727  |  
|         | Deferred |                |       | 1            |  |              |       | (155   | ) |   |        | (438   | )
|         |          |                |       |              |  |              |       |        |   |   |        |       
|         |          |                | 1,250 |              |  |              | 2,021 |        |   |   | 2,289  |       
|         |          |                |       |              |  |              |       |        |   |   |        |       
|         |          | $              | 7,654 |              |  | $            | 9,097 |        |   | $ | 12,800 |       
|         |          |                |       |              |  |              |       |        |   |   |        |       

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

|                                             |  |                |       |              |  |              |        |   |  |   |        |  
|-------------------------------------------- |  | -------------- | ----- | ------------ |  | ------------ | ------ | - |  | - | ------ | -
|                                             |  | Year Ended     |       | Year Ended   |  | Year Ended  
|                                             |  | December 30,   |       | December 29, |  | December 28,
|                                             |  | 2001           |       | 2002         |  | 2003        
|                                             |  |                |       |              |  |             
|                                             |  |               
|                                             |  | (In thousands)
|                                             |  | (Restated)     |       | (Restated)   |  |             
|Income tax expense at federal statutory rate |  | $              | 7,567 |              |  | $            | 9,341  |   |  | $ | 13,366 |  
|State taxes, net of federal expense          |  |                | 812   |              |  |              | 1,313  |   |  |   | 1,488  |  
|FICA tip credit                              |  |                | (411  | )            |  |              | (967   | ) |  |   | (2,816 | )
|Increase (decrease) in valuation allowance   |  |                | (358  | )            |  |              | (1,158 | ) |  |   |       |  
|Other, net                                   |  |                | 44    |              |  |              | 568    |   |  |   | 762    |  
|                                             |  |                |       |              |  |              |        |   |  |   |        |  
|                                             |  | $              | 7,654 |              |  | $            | 9,097  |   |  | $ | 12,800 |  
|                                             |  |                |       |              |  |              |        |   |  |   |        |  

50



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P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 30,   |        | December 29, |  | December 28,
|                                      |                                        | 2001           |        | 2002         |  | 2003        
|                                      |                                        |                |        |              |  |             
|                                      |                                        |               
|                                      |                                        | (In thousands)
|                                      |                                        | (Restated)     |        | (Restated)   |  |             
|Deferred tax assets:                  |                                        |                |        |              |  |              |       |       |  |   |        |      
|                                      | Preopening expenses                    |                | $      | 644          |  |              | $     | 486   |  |   | $      | 1,109 | 
|                                      | FICA tip and AMT credit carryforward   |                |        | 1,158        |  |              |       | 2,646 |  |   |        | 5,184 | 
|                                      | Buyout intangible                      |                |        | 1,267        |  |              |       | 2,223 |  |   |        | 2,529 | 
|                                      | Unearned compensation                  |                |        | 683          |  |              |       | 1,801 |  |   |        | 2,942 | 
|                                      | Other                                  |                |        | 264          |  |              |       | 473   |  |   |        | 1,052 | 
|                                      |                                        |                |        |              |  |              |       |       |  |   |        |      
|                                      |                                        |                | 4,016  |              |  |              | 7,629 |       |  |   | 12,816 |      
|Deferred tax liabilities:             |                                        |                |        |              |  |              |       |       |  |   |        |      
|                                      | Depreciation on property and equipment |                |        | 3,902        |  |              |       | 7,285 |  |   |        | 9,327 | 
|                                      | Goodwill amortization                  |                |        | 366          |  |              |       | 581   |  |   |        | 794   | 
|                                      |                                        |                |        |              |  |              |       |       |  |   |        |      
|                                      |                                        |                | 4,268  |              |  |              | 7,866 |       |  |   | 10,121 |      
|Valuation allowance                   |                                        |                | (1,158 | )            |  |              |      |       |  |   |       |      
|                                      |                                        |                |        |              |  |              |       |       |  |   |        |      
|Net deferred tax liabilities (assets) |                                        | $              | 1,410  |              |  | $            | 237   |       |  | $ | (2,695 | )    
|                                      |                                        |                |        |              |  |              |       |       |  |   |        |      

The FICA tip credit carryforward begins to expire
in 2022. For the year ended December 29, 2002 the valuation
decreased by $1,158,000, 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 forecasts.

At December 28, 2003, 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 28, 2003, the Company recorded a
$5.0 million increase to equity with a corresponding
$5.0 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.

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 2004 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 30,
2001, December 29, 2002 and December 28, 2003 was
approximately $14,249,000, $18,055,000 and $22,682,000,
respectively. Contingent rent included in rent expense for the
years ended December 30, 2001, December 29, 2002 and
December 28, 2003 was approximately $4,246,000, $5,348,000
and $6,380,000, respectively.

At December 28, 2003, 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

51



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P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

additional contingent rent based upon gross
revenues, as defined in the leases. Future minimum lease
payments under operating leases (including restaurants to be
opened after December 28, 2003) are as follows (in
thousands):

|           |                              |   |         |         | 
|---------- | ---------------------------- | - | ------- | ------- | 
|2004       |                              | $ | 21,168  |        
|2005       |                              |   | 21,972  |        
|2006       |                              |   | 21,217  |        
|2007       |                              |   | 21,027  |        
|2008       |                              |   | 20,762  |        
|Thereafter |                              |   | 133,864 |        
|           |                              |   |         |        
|           | Total minimum lease payments |   | $       | 240,010 | 
|           |                              |   |         |        

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.



| |                     
| | --------------------
| | Purchase Obligations

The Company enters into various purchase
obligations in the ordinary course of its business. Those that
are binding relate primarily to certain commodities contracts
and construction for restaurants we plan to open in the near
future. At December 28, 2003 such purchase obligations
approximated $30.3 million and were due within the
following 12 month period.



| |           
| | ----------
| | Litigation

The Company is engaged in legal actions arising
in the ordinary course of business and believes that the
ultimate outcome of these actions will not have a material
adverse effect on the results of operations, liquidity or
financial position.

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.

52



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##### Table of Contents



P.F. CHANGS CHINA BISTRO, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The table below presents information about
reportable segments:

|                               |                            |                |   |         |  |         |   |         |  |  |   |        |  
|------------------------------ | -------------------------- | -------------- | - | ------- |  | ------- | - | ------- |  |  | - | ------ | -
|                               |                            | Total          |   | Bistro  |  | Pei Wei
|                               |                            |                |   |         |  |        
|                               |                            |               
|                               |                            | (In thousands)
|Fiscal Year 2003:              |                            |                |   |         |  |         |   |         |  |  |   |       
|                               | Revenues                   |                | $ | 559,245 |  |         | $ | 505,062 |  |  | $ | 54,183 |  
|                               | Income before income taxes |                |   | 38,188  |  |         |   | 38,366  |  |  |   | (178   | )
|                               | Capital expenditures       |                |   | 63,654  |  |         |   | 51,441  |  |  |   | 12,213 |  
|                               | Total assets               |                |   | 273,077 |  |         |   | 247,593 |  |  |   | 25,484 |  
|                              
|Fiscal Year 2002, as restated: |                            |                |   |         |  |         |   |         |  |  |   |       
|                               | Revenues                   |                | $ | 422,091 |  |         | $ | 400,190 |  |  | $ | 21,901 |  
|                               | Income before income taxes |                |   | 26,677  |  |         |   | 29,360  |  |  |   | (2,683 | )
|                               | Capital expenditures       |                |   | 43,471  |  |         |   | 33,244  |  |  |   | 10,227 |  
|                               | Total assets               |                |   | 212,677 |  |         |   | 199,578 |  |  |   | 13,099 |  
|                              
|Fiscal Year 2001, as restated: |                            |                |   |         |  |         |   |         |  |  |   |       
|                               | Revenues                   |                | $ | 318,776 |  |         | $ | 312,864 |  |  | $ | 5,912  |  
|                               | Income before income taxes |                |   | 21,621  |  |         |   | 22,478  |  |  |   | (857   | )
|                               | Capital expenditures       |                |   | 35,921  |  |         |   | 33,460  |  |  |   | 2,461  |  
|                               | Total assets               |                |   | 171,257 |  |         |   | 167,109 |  |  |   | 4,148  |  

14.     Interim
Financial Results (Unaudited)

The following tables set forth certain unaudited
consolidated financial information for each of the four quarters
in fiscal 2002 and 2003. 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 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 29, 2002          |        | Year Ended December 28, 2003
|                                            |  |                                       |        |                             
|                                            |  | First                                 |        | Second                       |  | Third      |         | Fourth     |  | First      |         | Second     |  | Third      |         | Fourth 
|                                            |  | Quarter                               |        | Quarter                      |  | Quarter    |         | Quarter    |  | Quarter    |         | Quarter    |  | Quarter    |         | Quarter
|                                            |  |                                       |        |                              |  |            |         |            |  |            |         |            |  |            |         |        
|                                            |  |                                      
|                                            |  | (In thousands, except per share data)
|                                            |  | (Restated)                            |        | (Restated)                   |  | (Restated) |         | (Restated) |  | (Restated) |         | (Restated) |  | (Restated) |         |        
|Revenues                                    |  | $                                     | 97,500 |                              |  | $          | 101,650 |            |  | $          | 107,052 |            |  | $          | 115,889 |         |  | $ | 131,595 |  |  | $ | 136,605 |  |  | $ | 139,729 |  |  | $ | 151,316 | 
|Restaurant operating profit                 |  |                                       | 17,949 |                              |  |            | 19,273  |            |  |            | 19,315  |            |  |            | 22,024  |         |  |   | 25,286  |  |  |   | 25,886  |  |  |   | 26,166  |  |  |   | 29,143  | 
|Income before provision for income taxes    |  |                                       | 4,572  |                              |  |            | 7,044   |            |  |            | 5,726   |            |  |            | 9,334   |         |  |   | 9,649   |  |  |   | 9,926   |  |  |   | 8,261   |  |  |   | 10,352  | 
|Net income                                  |  |                                       | 3,087  |                              |  |            | 4,594   |            |  |            | 3,765   |            |  |            | 6,132   |         |  |   | 6,398   |  |  |   | 6,587   |  |  |   | 5,536   |  |  |   | 6,867   | 
|Basic net income per share                  |  |                                       | 0.13   |                              |  |            | 0.19    |            |  |            | 0.15    |            |  |            | 0.25    |         |  |   | 0.25    |  |  |   | 0.26    |  |  |   | 0.22    |  |  |   | 0.27    | 
|Diluted net income per share                |  |                                       | 0.12   |                              |  |            | 0.18    |            |  |            | 0.15    |            |  |            | 0.24    |         |  |   | 0.25    |  |  |   | 0.25    |  |  |   | 0.21    |  |  |   | 0.26    | 
|Basic weighted average shares outstanding   |  |                                       | 24,088 |                              |  |            | 24,727  |            |  |            | 24,944  |            |  |            | 24,994  |         |  |   | 25,137  |  |  |   | 25,338  |  |  |   | 25,414  |  |  |   | 25,491  | 
|Diluted weighted average shares outstanding |  |                                       | 25,894 |                              |  |            | 26,008  |            |  |            | 25,841  |            |  |            | 25,954  |         |  |   | 26,038  |  |  |   | 26,228  |  |  |   | 26,331  |  |  |   | 26,402  | 

Note:Our fourth
quarter 2003 financial results differ from those previously
released on February 11, 2004 due to the restatement
described in Note 1.

53



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##### Table of Contents






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

None.




Item 9A.     Controls
and Procedures

(a) Evaluation of Disclosure Controls and
Procedures. Under the supervision and with the participation of
our management, including our Chief Executive Officer, or CEO,
and Chief Financial Officer, or CFO, we evaluated the
effectiveness of our disclosure controls and procedures as such
term is defined in Rules 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended. Based on this
evaluation, our CEO and CFO concluded that our disclosure
controls and procedures were effective as of end of the period
covered by this annual report.

(b) Changes in Internal Controls. No change
in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
Act) occurred during the fiscal year ended December 28,
2003 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




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
Directors and Executive Officers, Board
Meetings and Committees, Section 16(a)
Beneficial Ownership Reporting Compliance, and Code
of Ethics, contained in the Companys definitive
proxy statement in connection with the solicitation of proxies
for the Companys 2003 Annual Meeting of Stockholders to be
held on April 23, 2004 (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 and Other Matters contained
in the Proxy Statement.




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 28, 2003 was as follows (number of shares
in thousands):

|                                                              |  |                  |           |                   |  |               |       |  |  |   |           |    
|------------------------------------------------------------- |  | ---------------- | --------- | ----------------- |  | ------------- | ----- |  |  | - | --------- | ---
|                                                              |  |                  |           |                   |  | Number of    
|                                                              |  | Number of Shares |           | Weighted          |  | Shares       
|                                                              |  | to Be Issued     |           | Average           |  | Remaining    
|                                                              |  | upon Exercise of |           | Exercise Price of |  | Available for
|                                                              |  | Outstanding      |           | Outstanding       |  | Future       
|Plan Category                                                 |  | Options          |           | Options           |  | Issuance     
|                                                              |  |                  |           |                   |  |              
|Equity compensation plans approved by
    shareholders(a)     |  |                  | 2,064,898 |                   |  |               | 21.65 |  |  | $ | 1,021,882 | (c)
|Equity compensation plans not approved by
    shareholders(b) |  |                  | 574,538   |                   |  |               | 25.06 |  |  |   | 15,836    |    
|                                                              |  |                  |           |                   |  |               |       |  |  |   |           |    
|Total                                                         |  |                  | 2,639,436 |                   |  |               |       |  |  | $ | 1,037,718 |    
|                                                              |  |                  |           |                   |  |               |       |  |  |   |           |    



---



|    |                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 588,158 shares reserved for
    issuance under the 1998 Employee Stock Purchase Plan.                                                                                            

54



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##### Table of Contents



Information about employee and executive stock
option grants at December 28, 2003 was as follows:

|                                                                                           |  |      |       |      |  |      |       |  |  |  |       | 
|------------------------------------------------------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                                                                           |  | 2003 |       | 2002 |  | 2001
|                                                                                           |  |      |       |      |  |     
|Net grants during the period as % of outstanding
    shares                                |  |      | 2.0%  |      |  |      | 1.6%  |  |  |  | 2.4%  | 
|Grants to named executive officers* as % of total
    options granted                      |  |      | 24.9% |      |  |      | 23.7% |  |  |  | 28.3% | 
|Grants to named executive officers* as % of
    outstanding shares                         |  |      | 0.6%  |      |  |      | 0.5%  |  |  |  | 0.8%  | 
|Cumulative options held by named executive
    officers* as % of total options outstanding |  |      | 44.8% |      |  |      | 47.1% |  |  |  | 39.1% | 



---



|  |                                                                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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.     Principal
Accounting Fees and Services

The response to this item is contained in our
Proxy Statement under the caption Independent Auditors
Fees and Other Matters, and is incorporated herein by
reference.




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 29,
    2002 and December 28, 2003;                                                                   
|
| | Consolidated Statements of Income for the Years
    Ended December 30, 2001, December 29, 2002 and
    December 28, 2003;                     
|
| | Consolidated Statements of Common
    Stockholders Equity for the Years Ended December 30,
    2001, December 29, 2002 and December 28, 2003;
|
| | Consolidated Statements of Cash Flows for the
    Years Ended December 30, 2001, December 29, 2002 and
    December 28, 2003;                 
|
| | 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.

55



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##### Table of Contents



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.                                                                                                      
|        | 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(9)  |                      |  | Second Amendment to office lease between the
    Company and PHXAZ-Kierland Commons, LLC, dated November 12,
    2002.                                 
|        | 10.22(9)  |                      |  | 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.                                                                                               
|        | 31.1      |                      |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
|        | 31.2      |                      |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002 for Kristina K. Cashman.
|        | 32.1      |                      |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
|        | 32.2      |                      |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002 for 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.     

56



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##### Table of Contents





|    |                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------
|(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.
|   
|(9) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K dated
    February 12, 2003.  

(b) Reports on Form 8-K:



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Report on Form 8-K filed on October 7,
    2003 containing a press release announcing P.F. Changs
    revenues for its third fiscal quarter of 2003. 
|
| | Report on Form 8-K filed on October 27,
    2003 containing a press release announcing P.F. Changs
    earnings for its third fiscal quarter of 2003.

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 March 15, 2004.



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



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

| |                                     
| | ------------------------------------
| |                                     
| | Richard L. 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) |  | March 15, 2004
|         
|By:       |  | /s/ KRISTINA K. CASHMANKristina Cashman        |  | Chief Financial Officer and Secretary
    (Principal Accounting Officer)         |  | March 15, 2004
|         
|By:       |  | /s/ KENNETH J. WESSELSKenneth J. Wessels       |  | Director                                                                         |  | March 15, 2004
|         
|By:       |  | /s/ R. MICHAEL WELBORNR. Michael Welborn       |  | Director                                                                         |  | March 15, 2004
|         
|By:       |  | /s/ JAMES G. SHENNAN, JR.James G. Shennan, Jr. |  | Director                                                                         |  | March 15, 2004
|         
|By:       |  | /s/ F. LANE CARDWELL, JR.F. Lane Cardwell, Jr. |  | Director                                                                         |  | March 15, 2004
|         
|By:       |  | /s/ M. ANN RHOADESM. Ann Rhoades               |  | Director                                                                         |  | March 15, 2004
|         
|By:       |  | /s/ LESLEY H. HOWELesley H. Howe               |  | Director                                                                         |  | March 15, 2004

58



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##### Table of Contents



EXHIBIT INDEX

|        |           |                      |  |                                                                                                                                                        
|------- | --------- | -------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|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(9)  |                      |  | Second Amendment to office lease between the
    Company and PHXAZ-Kierland Commons, LLC, dated November 12,
    2002.                                 
|        | 10.22(9)  |                      |  | 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.                                                                                               
|        | 31.1      |                      |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
|        | 31.2      |                      |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002 for Kristina K. Cashman.
|        | 32.1      |                      |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002 for Richard L. Federico.
|        | 32.2      |                      |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002 for 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.                             



---



##### Table of Contents





|    |                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------
|(8) | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q dated
    October 23, 2002.
|   
|(9) | Incorporated by reference to the
    Registrants Annual Report on Form 10-K dated
    February 12, 2003.