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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







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

For the quarterly period ended September 27, 2008

OR



| ̈ | 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 000-50845





McCormick &
Schmicks Seafood Restaurants, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 20-1193199                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)
|                                                               | 
|720 SW Washington Street, Suite 550 Portland, Oregon           |  | 97205                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(503) 226-3440

(Registrants telephone number, including area code)





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

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



|                           |  |                      |  |                                                                        |  |                             
|-------------------------- |  | -------------------- |  | ---------------------------------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer  x |  | Non-accelerated filer   ̈ (Do not check if a smaller reporting company) |  | Smaller reporting company   ̈

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

There were 14,721,047 shares of common stock outstanding as of September 26, 2008.









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Table of Contents

INDEX



|                                                                                                                                           |  |   
|------------------------------------------------------------------------------------------------------------------------------------------ |  | --
|PART I. FINANCIAL INFORMATION                                                                                                              |  |   
|Item 1 - Financial Statements - (Unaudited)                                                                                                |  | 3 
|Condensed Consolidated Balance Sheets as of December 29, 2007 and September 27, 2008                                                       |  | 3 
|Condensed Consolidated Statements of Income for the thirteen and thirty-nine week periods ended September 
29, 2007 and September 27, 2008 |  | 4 
|Condensed Consolidated Statements of Cash Flows for the thirty-nine week period ended September 
29, 2007 and September 27, 2008           |  | 5 
|Notes to Condensed Consolidated Financial Statements                                                                                       |  | 6 
|Item 2 - Managements Discussion and Analysis of Financial Condition and Results of
Operations                                             |  | 9 
|Item 3 - Quantitative and Qualitative Disclosures About Market Risk                                                                        |  | 16
|Item 4 - Controls and Procedures                                                                                                           |  | 16
|PART II. OTHER INFORMATION                                                                                                                 |  |   
|Item 1 - Legal Proceedings                                                                                                                 |  | 17
|Item 1A - Risk Factors                                                                                                                     |  | 17
|Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds                                                                       |  | 21
|Item 3 - Defaults Upon Senior Securities                                                                                                   |  | 21
|Item 4 - Submissions of Matters to a Vote of Security Holders                                                                              |  | 21
|Item 5 - Other Information                                                                                                                 |  | 21
|Item 6 - Exhibits                                                                                                                          |  | 21
|Signatures                                                                                                                                 |  | 22



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PART I  FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

McCormick & Schmicks Seafood Restaurants, Inc. and Subsidiaries

Condensed
Consolidated Balance Sheets

(in thousands, except per share data)



|                                                                                                           |  |                  |         |                   |   |        
|---------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ----------------- | - | -------
|                                                                                                           |  | December 29,2007 |         | September 27,2008
|                                                                                                           |  |                  |         | (Unaudited)      
|Assets                                                                                                     |  |                  |         |                   |   |        
|Current assets                                                                                             |  |                  |         |                   |   |        
|Cash and cash equivalents                                                                                  |  | $                | 7,343   |                   | $ | 3,573  
|Trade accounts receivable, net                                                                             |  |                  | 10,135  |                   |   | 9,704  
|Tenant improvement allowance receivables                                                                   |  |                  | 7,663   |                   |   | 4,734  
|Income tax receivable                                                                                      |  |                  | 1,736   |                   |   | 209    
|Inventories                                                                                                |  |                  | 5,997   |                   |   | 6,288  
|Prepaid expenses and other current assets                                                                  |  |                  | 3,939   |                   |   | 5,583  
|Deferred income taxes                                                                                      |  |                  | 5,206   |                   |   | 1,003  
|                                                                                                           |  |                  |         |                   |   |        
|Total current assets                                                                                       |  |                  | 42,019  |                   |   | 31,094 
|Property and equipment, net                                                                                |  |                  | 156,956 |                   |   | 184,025
|Trademarks and other assets                                                                                |  |                  | 58,899  |                   |   | 58,812 
|Goodwill                                                                                                   |  |                  | 27,769  |                   |   | 27,363 
|                                                                                                           |  |                  |         |                   |   |        
|Total assets                                                                                               |  | $                | 285,643 |                   | $ | 301,294
|                                                                                                           |  |                  |         |                   |   |        
|Liabilities and Stockholders Equity                                                                       |  |                  |         |                   |   |        
|Current liabilities                                                                                        |  |                  |         |                   |   |        
|Accounts payable                                                                                           |  | $                | 24,158  |                   | $ | 22,818 
|Accrued expenses                                                                                           |  |                  | 33,668  |                   |   | 28,533 
|Capital lease obligations, current portion                                                                 |  |                  | 3,107   |                   |   | 2,949  
|                                                                                                           |  |                  |         |                   |   |        
|Total current liabilities                                                                                  |  |                  | 60,933  |                   |   | 54,300 
|Revolving credit facility                                                                                  |  |                  | 13,000  |                   |   | 27,500 
|Deferred rent and other long-term liabilities                                                              |  |                  | 21,392  |                   |   | 29,473 
|Deferred income taxes                                                                                      |  |                  | 11,521  |                   |   | 7,863  
|                                                                                                           |  |                  |         |                   |   |        
|Total liabilities                                                                                          |  |                  | 106,846 |                   |   | 119,136
|                                                                                                           |  |                  |         |                   |   |        
|Commitments and contingencies (Note 11)                                                                    |  |                  |         |                   |   |        
|Stockholders equity                                                                                       |  |                  |         |                   |   |        
|Common stock, $0.001 par value, 120,000 shares authorized, 14,685 and 14,721 shares issued and outstanding |  |                  | 15      |                   |   | 15     
|Additional paid in capital                                                                                 |  |                  | 146,918 |                   |   | 147,562
|Accumulated other comprehensive income                                                                     |  |                  | 2,828   |                   |   | 1,710  
|Retained earnings                                                                                          |  |                  | 29,036  |                   |   | 32,871 
|                                                                                                           |  |                  |         |                   |   |        
|Total stockholders equity                                                                                 |  |                  | 178,797 |                   |   | 182,158
|                                                                                                           |  |                  |         |                   |   |        
|Total liabilities and stockholders equity                                                                 |  | $                | 285,643 |                   | $ | 301,294
|                                                                                                           |  |                  |         |                   |   |        

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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McCormick & Schmicks Seafood Restaurants, Inc. and
Subsidiaries

Condensed Consolidated Statements of Income-Unaudited

(in thousands, except per share data)



|                                              |  |                            |        |   |                               |   |        |                   |  |   |                   |   |  |   |         |  
|--------------------------------------------- |  | -------------------------- | ------ | - | ----------------------------- | - | ------ | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                              |  | Thirteen week period ended |        |   | Thirty-nine week period ended |  
|                                              |  | September 29,2007          |        |   | September 27,2008             |   |        | September 29,2007 |  |   | September 27,2008 |  
|Revenues                                      |  | $                          | 88,095 |   |                               | $ | 99,897 |                   |  | $ | 259,170           |   |  | $ | 291,937 |  
|                                              |  |                            |        |   |                               |   |        |                   |  |   |                   |   |  |   |         |  
|Restaurant operating costs                    |  |                            |        |   |                               |   |        |                   |  |   |                   |   |  |   |         |  
|Food and beverage                             |  |                            | 25,668 |   |                               |   | 30,117 |                   |  |   | 75,040            |   |  |   | 88,226  |  
|Labor                                         |  |                            | 28,373 |   |                               |   | 32,403 |                   |  |   | 81,741            |   |  |   | 94,895  |  
|Operating                                     |  |                            | 13,899 |   |                               |   | 15,674 |                   |  |   | 39,639            |   |  |   | 45,559  |  
|Occupancy                                     |  |                            | 8,001  |   |                               |   | 9,263  |                   |  |   | 23,301            |   |  |   | 27,358  |  
|                                              |  |                            |        |   |                               |   |        |                   |  |   |                   |   |  |   |         |  
|Total restaurant operating costs              |  |                            | 75,941 |   |                               |   | 87,457 |                   |  |   | 219,721           |   |  |   | 256,038 |  
|General and administrative expenses           |  |                            | 4,658  |   |                               |   | 5,169  |                   |  |   | 14,420            |   |  |   | 15,881  |  
|Restaurant pre-opening costs                  |  |                            | 2,097  |   |                               |   | 1,460  |                   |  |   | 3,025             |   |  |   | 3,335   |  
|Depreciation and amortization                 |  |                            | 2,952  |   |                               |   | 3,932  |                   |  |   | 8,584             |   |  |   | 10,978  |  
|Impairment/restructuring charge (Note 12)     |  |                            |       |   |                               |   |       |                   |  |   |                  |   |  |   | 452     |  
|                                              |  |                            |        |   |                               |   |        |                   |  |   |                   |   |  |   |         |  
|Total costs and expenses                      |  |                            | 85,648 |   |                               |   | 98,018 |                   |  |   | 245,750           |   |  |   | 286,684 |  
|                                              |  |                            |        |   |                               |   |        |                   |  |   |                   |   |  |   |         |  
|Operating income                              |  |                            | 2,447  |   |                               |   | 1,879  |                   |  |   | 13,420            |   |  |   | 5,253   |  
|Interest expense (income), net                |  |                            | (70    | ) |                               |   | 278    |                   |  |   | (349              | ) |  |   | 694     |  
|Other (income), net                           |  |                            |       |   |                               |   | (50    | )                 |  |   |                  |   |  |   | (308    | )
|                                              |  |                            |        |   |                               |   |        |                   |  |   |                   |   |  |   |         |  
|Income before income taxes                    |  |                            | 2,517  |   |                               |   | 1,651  |                   |  |   | 13,769            |   |  |   | 4,867   |  
|Income tax expense                            |  |                            | 477    |   |                               |   | 291    |                   |  |   | 3,965             |   |  |   | 1,032   |  
|                                              |  |                            |        |   |                               |   |        |                   |  |   |                   |   |  |   |         |  
|Net income                                    |  | $                          | 2,040  |   |                               | $ | 1,360  |                   |  | $ | 9,804             |   |  | $ | 3,835   |  
|                                              |  |                            |        |   |                               |   |        |                   |  |   |                   |   |  |   |         |  
|Net income per share                          |  |                            |        |   |                               |   |        |                   |  |   |                   |   |  |   |         |  
|Basic                                         |  | $                          | 0.14   |   |                               | $ | 0.09   |                   |  | $ | 0.67              |   |  | $ | 0.26    |  
|Diluted                                       |  | $                          | 0.14   |   |                               | $ | 0.09   |                   |  | $ | 0.66              |   |  | $ | 0.26    |  
|Shares used in computing net income per share |  |                            |        |   |                               |   |        |                   |  |   |                   |   |  |   |         |  
|Basic                                         |  |                            | 14,639 |   |                               |   | 14,716 |                   |  |   | 14,530            |   |  |   | 14,702  |  
|Diluted                                       |  |                            | 14,817 |   |                               |   | 14,721 |                   |  |   | 14,767            |   |  |   | 14,705  |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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McCormick & Schmicks Seafood Restaurants, Inc. and
Subsidiaries

Condensed Consolidated Statements of Cash Flows-Unaudited

(in thousands)



|                                                                                  |  |                               |         |   |                   |   |         |  
|--------------------------------------------------------------------------------- |  | ----------------------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                  |  | Thirty-nine week period ended |        
|                                                                                  |  | September 29,2007             |         |   | September 27,2008 |  
|Operating activities                                                              |  |                               |         |   |                   |   |         |  
|Net income                                                                        |  | $                             | 9,804   |   |                   | $ | 3,835   |  
|Adjustments to reconcile net income to net cash provided by operating activities  |  |                               |         |   |                   |   |         |  
|Depreciation and amortization                                                     |  |                               | 8,584   |   |                   |   | 10,978  |  
|Deferred income taxes                                                             |  |                               | 1,687   |   |                   |   | 886     |  
|Share based compensation                                                          |  |                               | 1,129   |   |                   |   | 829     |  
|Changes in operating assets and liabilities                                       |  |                               |         |   |                   |   |         |  
|Trade accounts receivable, net                                                    |  |                               | (3,753  | ) |                   |   | 401     |  
|Tenant improvement allowance receivables                                          |  |                               | (4,246  | ) |                   |   | 2,929   |  
|Income tax receivable                                                             |  |                               |        |   |                   |   | 1,527   |  
|Inventories                                                                       |  |                               | (920    | ) |                   |   | (318    | )
|Prepaid expenses and other current assets                                         |  |                               | (3,819  | ) |                   |   | (1,660  | )
|Accounts payable                                                                  |  |                               | 336     |   |                   |   | (1,271  | )
|Accrued expenses                                                                  |  |                               | 3,682   |   |                   |   | (5,389  | )
|Other long-term liabilities                                                       |  |                               | 1,652   |   |                   |   | 2,029   |  
|                                                                                  |  |                               |         |   |                   |   |         |  
|Net cash provided by operating activities                                         |  |                               | 14,136  |   |                   |   | 14,776  |  
|                                                                                  |  |                               |         |   |                   |   |         |  
|Investing activities                                                              |  |                               |         |   |                   |   |         |  
|Purchase of property and equipment                                                |  |                               | (30,011 | ) |                   |   | (38,491 | )
|Acquisition of The Boathouse Restaurants of Canada, Inc. assets, net              |  |                               | (14,481 | ) |                   |   |        |  
|Decrease (increase) in other assets                                               |  |                               | 98      |   |                   |   | (367    | )
|                                                                                  |  |                               |         |   |                   |   |         |  
|Net cash used in investing activities                                             |  |                               | (44,394 | ) |                   |   | (38,858 | )
|                                                                                  |  |                               |         |   |                   |   |         |  
|Financing activities                                                              |  |                               |         |   |                   |   |         |  
|Increase in book overdraft                                                        |  |                               | 6,108   |   |                   |   |        |  
|Borrowings made on revolving credit facility                                      |  |                               | 9,000   |   |                   |   | 106,000 |  
|Payments made on revolving credit facility                                        |  |                               |        |   |                   |   | (91,500 | )
|Payments made on capital lease obligations                                        |  |                               | (291    | ) |                   |   | (28     | )
|Proceeds from stock options exercised                                             |  |                               | 4,108   |   |                   |   |        |  
|Deemed landlord financing proceeds (in the form of tenant improvement allowances) |  |                               |        |   |                   |   | 6,029   |  
|Deemed landlord financing payments                                                |  |                               |        |   |                   |   | (50     | )
|Excess tax benefits from share based compensation                                 |  |                               | 1,714   |   |                   |   | (69     | )
|                                                                                  |  |                               |         |   |                   |   |         |  
|Net cash provided by financing activities                                         |  |                               | 20,639  |   |                   |   | 20,382  |  
|                                                                                  |  |                               |         |   |                   |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                      |  |                               | 53      |   |                   |   | (70     | )
|                                                                                  |  |                               |         |   |                   |   |         |  
|Net decrease in cash and cash equivalents                                         |  |                               | (9,566  | ) |                   |   | (3,770  | )
|Cash and cash equivalents, beginning of period                                    |  |                               | 10,553  |   |                   |   | 7,343   |  
|                                                                                  |  |                               |         |   |                   |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                             | 987     |   |                   | $ | 3,573   |  
|                                                                                  |  |                               |         |   |                   |   |         |  
|Supplemental disclosure of cash flow information                                  |  |                               |         |   |                   |   |         |  
|Cash paid during the period                                                       |  |                               |         |   |                   |   |         |  
|Interest                                                                          |  | $                             | 298     |   |                   | $ | 755     |  
|Income taxes                                                                      |  | $                             | 3,762   |   |                   | $ | 648     |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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McCormick & Schmicks Seafood Restaurants, Inc. and
Subsidiaries

Notes to Condensed Consolidated Financial Statements-Unaudited

1. The Business and Organization

McCormick & Schmicks Seafood Restaurants, Inc. is a leading seafood restaurant operator in the affordable upscale dining segment. As of September 27, 2008, the Company operated 89 restaurants, including 83
restaurants in the United States, of which one is operated pursuant to a management agreement, and six restaurants operated in Canada under The Boathouse name.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair statement have been included.
Operating results for the thirteen and thirty-nine week periods ended September 27, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending December 27, 2008.

The condensed consolidated balance sheet at December 29, 2007 has been derived from the audited condensed consolidated financial statements at that
date, but does not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. For further information, refer to the consolidated financial statements and
notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended December 29, 2007.

3. Summary of Selected
Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the assets, liabilities and results of operations of McCormick & Schmicks Seafood Restaurants, Inc. and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

Management Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting
period. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual results could differ from those estimates under different assumptions or
conditions.

Revenue Recognition

Revenues are recognized at the point of delivery of products and services. The Company recognizes income from gift cards when the gift card is redeemed by the customer or when the likelihood of the gift card being redeemed by the customer
is remote (gift card breakage) and the Company determines there is no legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. The Company determines the gift card breakage rate based on historical redemption
patterns. Gift card income is included within revenues. Revenues are presented net of sales tax and the related obligation is recorded as a liability until the taxes are remitted to the appropriate taxing authorities.

Share-Based Compensation

The Company determines the
fair value of stock option awards on the date of grant using the Black-Scholes option-pricing model in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Share Based Payment (revised 2004)
(SFAS 123R). The Black-Scholes model is affected by the Companys stock price as well as the Companys assumptions regarding a number of complex and subjective variables, including but not limited to the Companys expected
stock price volatility over the term of the awards, life of the option, expected term of the option, the estimated forfeiture rate, the risk-free interest rate and the expected dividend yield.

Basic and Diluted Net Income per Share

Basic net
income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common non-vested shares and dilutive potential common
shares outstanding during the period. Dilutive potential common shares consist of employee stock options and restricted stock awards.

SFAS
No. 128, Earnings per Share, requires that employee equity share options, non-vested shares and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per
share. Diluted shares outstanding include the dilutive effect of in-the-money options and is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, assumed proceeds
include the amount the employee must pay for exercising stock options, any purchase price the grantee pays for restricted stock, the amount of compensation cost for future service that the Company has not yet recognized and the amount of tax
benefits, if any, that would be credited to additional paid-in capital upon the exercise of the options or vesting of the restricted stock and restricted stock awards.

Leases

The Company generally operates its restaurants in leased premises. The Company records the
minimum base rents for its operating leases using the straight-line method over the life of the lease term, including option periods that are reasonably assured of renewal due to the presence of certain economic penalties. For purposes of
calculating straight-line rents, the lease term commences on the date the Company obtains control of the property, which is normally when the property is ready for normal tenant improvements (build-out period). For certain leases the Company only
has the right to exercise its option for renewal if certain sales targets are achieved at or near the renewal date. These renewal option periods have been included in the lease term when the Company determines, at lease inception or at the
acquisition date of the restaurant, if later, that the sales targets are non-substantive and achievement of such sales targets is reasonably assured. The difference between rent expense calculated using the straight-line method and minimum rent paid
is recorded as a deferred rent liability.



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##### Table of Contents

The Company receives certain tenant improvement allowances which are recorded either as a deferred rent
liability or as a landlord financing liability, and are included in other long-term liabilities. Tenant improvement allowances which are considered lease incentives are amortized as reduction of rent expense over the lease term. Accordingly, the
Company has recorded a deferred rent liability for the straight-lining of rents and lease incentives, which is included in other long-term liabilities, of $20.4 million and $22.4 million as of December 29, 2007 and September 27, 2008,
respectively. Certain other landlord tenant improvement allowances received, depending on the specifics of the leased space, the lease agreement and in accordance with Emerging Issues Task Force (EITF) 97-10, The Effect of Lessee
Involvement in Asset Construction, for the amounts paid for structural components during the construction period are recorded as construction in progress and the landlord tenant improvement allowances received are recorded as a landlord
financing liability. Upon completion of construction for those leases that meet the criteria of EITF 97-10, those leases that do not qualify for sale leaseback treatment in accordance with SFAS No. 98, the landlord financing liability is
amortized over the lease term based on the rent payments designated in the lease agreement.

Foreign Currency

The Canadian dollar is the functional currency of the Companys subsidiary in Canada. Monetary assets and liabilities related to the Companys
operations in Canada are translated into U.S. dollars at the rate of exchange at the end of the applicable fiscal reporting period. Non-monetary assets and liabilities are translated into U.S. dollars at historical exchange rates. Revenues and
expenses are translated at the average rate of exchange for the applicable fiscal reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included in accumulated other comprehensive
income. Gains and losses resulting from foreign currency transactions are included in the Companys results of operations.

4. Recent Accounting
Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS
141(R)), a replacement of SFAS No. 141, Business Combinations. SFAS 141(R) applies to business combinations for which the acquisition date is on or after December 15, 2008, and may not be early adopted. The effect of SFAS
141(R) on the Company will be dependent upon any business combination activity in the future.

5. Long-Term Debt and Standby Letters of Credit

On December 28, 2007, the Company amended its existing senior credit facility to, among other things, increase the maximum
availability under the facility to $150.0 million and up to $200.0 million at the Companys request if specified conditions are met.

As of September 27, 2008, the outstanding balance on the Companys revolving credit facility was $27.5 million. The interest rate on the credit facility is based on the financial institutions prime rate plus a margin of up
to 0.50% or the Eurodollar rate plus a margin of 0.625% to 1.50%, with margins determined by certain financial ratios. The terms of the facility also allow the Company to borrow up to $10.0 million in Canadian dollars, which reduces the limit
available for borrowings under the credit facility by an equal amount, with an interest rate based on the Canadian Eurodollar Rate plus a margin of 0.725% to 1.60%, with margins determined by certain financial ratios. As of September 27, 2008,
the Companys effective interest rate on its borrowings was 4.1%. Under the revolving credit facility, the Company is required to comply with certain financial covenants, including a maximum adjusted leverage ratio, a minimum fixed charge ratio
and a maximum capital expenditure amount. The Company was in compliance with these covenants as of September 27, 2008.

Under the
Companys revolving credit facility agreement, borrowings are collateralized by the stock of the subsidiaries of the Company and are scheduled to mature on December 28, 2012. The revolving credit facility agreement also provides for bank
guarantees under standby letter of credit arrangements in the normal course of business operations. The standby letters of credit are cancelable only at the option of the beneficiary who is authorized to draw drafts on the issuing bank up to the
face amount of the standby letter of credit in accordance with its terms. As of September 27, 2008, the maximum exposure under these standby letters of credit was $3.0 million. As of September 27, 2008, the Company had a maximum of $119.5
million available under its revolving credit facility, subject to its financial covenants.

6. Share-Based Compensation

Share-based compensation expense recognized under SFAS 123R for both the thirteen week period ended September 29, 2007 and September 27, 2008
was $0.3 million.

The fair value of the Companys stock options was estimated using the following assumptions:



|                          |  |                                                                 |  
|------------------------- |  | --------------------------------------------------------------- | -
|                          |  | Thirteen and Thirty-nineweek periods endedSeptember 29,2007 (1) |  
|Expected volatility       |  | 24.8                                                            | %
|Option life               |  | 10 years                                                        |  
|Expected term             |  | 5.5 years                                                       |  
|Estimated forfeiture rate |  | 14                                                              | %
|Risk-free interest rate   |  | 3.9                                                             | %
|Dividend yield            |  | 0                                                               | %

(1) - The Company has not granted any options during the first three quarters of fiscal year 2008.

As of September 27, 2008, options to acquire a total of 904,600 shares of the Companys common stock had been granted under the Companys
2004 Stock Incentive Plan (the Plan) at an average grant price of $12.35. As of September 27, 2008, there were 325,977 options outstanding, of which 262,645 were exercisable.

The Company has issued 227,620 shares of restricted stock at an average price of $18.70 from the Plan to employees and executive officers. Grants are
issued at fair market value on the date of the grant. One-third of the restricted stock grants vest on each of the three anniversary dates following the grant date if the grantee is then employed by the Company. In April 2008, the Company issued
15,765 shares of restricted stock to the independent members of the Board of Directors at a price equal to $11.10, the fair market value of the stock on the date of grant. The restricted stock granted vests one year from the date of grant, if the
Director is still serving the Company as of the anniversary date. As of September 27, 2008, there were 115,388 shares of restricted stock outstanding.



7



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##### Table of Contents

Additional awards granted under the Plan may be in the form of nonqualified stock options, incentive
stock options, stock appreciation rights (SARs), restricted stock, stock bonuses and performance-based awards. Vesting of awards under the Plan may vary. Each award granted under the Plan may, at the discretion of the board of directors
of the Company, become fully exercisable or payable, as applicable, upon a change of control of the Company. There were no options granted in the quarter ended September 27, 2008.

Each award expires on the date determined at the date of grant; however, the maximum term of options, SARs and other rights to acquire common stock under
the Plan is ten years after the initial date of the award, subject to provisions for further deferred payment in certain circumstances. These and other awards may also be issued solely or in part for services. Any shares subject to awards that
are not paid or exercised before they expire or are terminated will become available for other award grants under the Plan. If not sooner terminated by the Companys board of directors, the Plan will terminate on June 16, 2014. As of
September 27, 2008 there were 499,938 shares reserved to be granted pursuant to the Plan.

The following table summarizes the status
of the Companys share-based compensation plans, including stock options and restricted stock grants, as of September 27, 2008.



|                                  |  |              |  |                                |       |                 |         |             |         |                         |   |          
|--------------------------------- |  | ------------ |  | ------------------------------ | ----- | --------------- | ------- | ----------- | ------- | ----------------------- | - | ---------
|                                  |  | StockOptions |  | Weighted AverageExercise Price |       | RestrictedStock |         | TotalShares |         | AggregateIntrinsicValue
|Outstanding at December 29, 2007  |  | 337,277      |  | $                              | 12.94 |                 | 73,322  |             | 410,599 |                         |   |          
|Awards granted                    |  |             |  |                                |      |                 | 85,620  |             | 85,620  |                         | $ | 756,881  
|Awards exercised                  |  |             |  |                                |      |                 | 36,056  |             | 36,056  |                         |   | 362,690  
|Awards forfeited                  |  | 11,300       |  |                                | 22.62 |                 | 7,498   |             | 18,798  |                         |   | 66,282   
|                                  |  |              |  |                                |       |                 |         |             |         |                         |   |          
|Outstanding at September 27, 2008 |  | 325,977      |  | $                              | 12.61 |                 | 115,388 |             | 441,365 |                         | $ | 1,020,030
|                                  |  |              |  |                                |       |                 |         |             |         |                         |   |          
|Exercisable at September 27, 2008 |  | 262,645      |  | $                              | 12.26 |                 |        |             | 262,645 |                         | $ |         

The aggregate intrinsic value of stock options represents the difference between the
Companys closing stock price of $8.84 as of September 27, 2008 and the exercise price multiplied by the number of options outstanding as of that date. In the case of the restricted stock the aggregate intrinsic value is calculated using
the closing price of the stock as of September 27, 2008 multiplied by the number of shares outstanding as of that date.

The following
table summarizes additional information about stock options outstanding at September 27, 2008.



|                         |  |                   |  |                                                    |  |                                |       |                   |         |                                |   |      
|------------------------ |  | ----------------- |  | -------------------------------------------------- |  | ------------------------------ | ----- | ----------------- | ------- | ------------------------------ | - | -----
|Outstanding              |  | Exercisable      
|Range of Exercise Prices |  | Number of Options |  | Weighted AverageRemaining Yearsof Contractual Life |  | Weighted AverageExercise price |       | Number of Options |         | Weighted AverageExercise price
|$12.00 $26.81           |  | 325,977           |  | 5.55                                               |  | $                              | 12.61 |                   | 262,645 |                                | $ | 12.25

As of September 27, 2008, unamortized compensation expense related to stock options and
restricted stock under the Plan was $1.3 million.

The following table summarizes share-based compensation expense related to employee
stock options and restricted stock awards under SFAS 123R for the thirteen and thirty-nine week periods ended September 29, 2007 and September 27, 2008 (in thousands).



|                                                                               |  |                            |     |                               |   |                   |  |                   |       |  |   |    
|------------------------------------------------------------------------------ |  | -------------------------- | --- | ----------------------------- | - | ----------------- |  | ----------------- | ----- |  | - | ---
|                                                                               |  | Thirteen week period ended |     | Thirty-nine week period ended
|                                                                               |  | September 29,2007          |     | September 27,2008             |   | September 29,2007 |  | September 27,2008
|Labor                                                                          |  | $                          | 6   |                               | $ | 2                 |  | $                 | 38    |  | $ | 7  
|General and administrative expenses                                            |  |                            | 281 |                               |   | 304               |  |                   | 1,091 |  |   | 822
|                                                                               |  |                            |     |                               |   |                   |  |                   |       |  |   |    
|Share-based compensation expense included in total costs and expenses          |  |                            | 287 |                               |   | 306               |  |                   | 1,129 |  |   | 829
|Income tax benefit related to share-based compensation                         |  |                            | 98  |                               |   | 118               |  |                   | 329   |  |   | 318
|                                                                               |  |                            |     |                               |   |                   |  |                   |       |  |   |    
|Share-based compensation expense related to employee stock options, net of tax |  | $                          | 189 |                               | $ | 188               |  | $                 | 800   |  | $ | 511
|                                                                               |  |                            |     |                               |   |                   |  |                   |       |  |   |    

7. Income Taxes

As of September 27, 2008, there had been no material changes to the Companys uncertain tax position disclosure as provided in the 2007 Annual Report on Form 10-K. The Company does not anticipate any
significant changes to the balance of unrecognized tax benefits in the next twelve months. It is the Companys policy to recognize interest and penalties related to uncertain tax positions in income tax expense.

8. Acquisition of The Boathouse Restaurants

On
March 30, 2007, the Company acquired all of the operating assets and intellectual property of The Boathouse restaurant brand from The Spectra Group of Great Restaurants, Inc. There were five operating The Boathouse restaurants in the greater
Vancouver, British Columbia area, and the Port Moody location which was under construction as of March 30, 2007. The Port Moody restaurant opened October 1, 2007. The aggregate purchase price for The Boathouse restaurants was $14.9
million, including capitalized transaction costs of $0.4 million. No unaudited pro forma data is presented due to the insignificant impact of the acquisition on the Companys condensed consolidated results of operations.

9. Comprehensive Income

The components of
comprehensive income for the thirteen and thirty-nine week periods ended September 29, 2007 and September 27, 2008 are as follows (in thousands):



|                                                                 |  |                            |       |                   |                               |       |                   |  |                   |       |  |   |        |  
|---------------------------------------------------------------- |  | -------------------------- | ----- | ----------------- | ----------------------------- | ----- | ----------------- |  | ----------------- | ----- |  | - | ------ | -
|                                                                 |  | Thirteen week period ended |       |                   | Thirty-nine week period ended |      
|                                                                 |  | September 29,2007          |       | September 27,2008 |                               |       | September 29,2007 |  | September 27,2008 |      
|Net income                                                       |  | $                          | 2,040 |                   | $                             | 1,360 |                   |  | $                 | 9,804 |  | $ | 3,835  |  
|Other comprehensive income (loss) - Foreign currency translation |  |                            | 14    |                   |                               | (476  | )                 |  |                   | 53    |  |   | (1,118 | )
|                                                                 |  |                            |       |                   |                               |       |                   |  |                   |       |  |   |        |  
|Total comprehensive income                                       |  | $                          | 2,054 |                   | $                             | 884   |                   |  | $                 | 9,857 |  | $ | 2,717  |  
|                                                                 |  |                            |       |                   |                               |       |                   |  |                   |       |  |   |        |  



8



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##### Table of Contents

10. Related Party Transactions

The Company leases certain properties from landlords deemed to be related parties of the Company. Total rent paid to these landlords was $0.3 million for each of the thirteen week periods ended September 29, 2007
and September 27, 2008.

11. Commitments and Contingencies

The Company is subject to various claims, possible legal actions, and other matters arising in the normal course of business. While it is difficult to accurately predict the outcome of these issues, the Company
believes that adequate provision for potential losses has been made in the accompanying condensed consolidated financial statements and that the ultimate resolution of these matters will not have a material adverse effect on the Companys
financial position, results of operations or cash flows.

In 2006, the Company was named in a class action complaint regarding employment
practices filed in the U.S. District Court for the Northern District of California. The Company contested the claims and negotiated with the plaintiffs to reach a settlement. In February 2008, the Company negotiated a resolution of the claims with
the private plaintiffs and the parties submitted the settlement to the Court for approval. The negotiated settlement includes a monetary settlement and some changes to the Companys hiring and employment practices. The Company recorded a $2.2
million charge in fiscal 2007 for the settlement of the claims. The Company does not anticipate the changes to its hiring and employment practices in connection with the settlement will significantly affect its operations. The settlement was
approved by the court, and the settlement amount was paid, in April 2008.

The Companys primary insurer has informed the Company it
believes the Company has exhausted its insurance coverage with respect to employment claims arising in the Companys 2004 coverage year, which it believes includes the litigation in California and possibly similar future claims. Furthermore,
the insurer has also taken the position that several claims arising in the 2005 to 2008 coverage years are related to certain 2004 claims, and therefore not eligible for coverage. The Company disagrees with this interpretation of the coverage, but
has taken this interpretation into consideration in connection with its accounting for such claims.

12. Impairment/Restructuring Charge

During the second quarter of the fiscal year 2008 the Company incurred a $452,000 restructuring charge as defined in SFAS 146, Accounting for
Costs Associated with Exit or Disposal Activities, related to the closure of Restaurant K in Washington D.C. The charge was related to exit costs, including the estimated liability on the Companys operating lease that terminates in June
2016. The Company is attempting to sublease the property to minimize net costs incurred over the remaining term of the lease. All of the leasehold improvements related to Restaurant K were fully impaired as of the end of fiscal year 2007.

13. Net Income Per Share

Net income
per share is computed in accordance with SFAS 128, Earnings per Share. Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is
computed based on the weighted average number of shares of common stock and potentially dilutive securities, which includes options and restricted stock outstanding under the Companys 2004 Stock Incentive Plan. For the thirteen and thirty-nine
week periods ended September 29, 2007 and September 27, 2008, 3,000 and 325,977, respectively, of the Companys shares were excluded from the calculation due to their anti-dilutive effect.



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

FORWARD-LOOKING STATEMENTS

This information should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Managements Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 29, 2007 contained in our 2007 Annual Report on Form 10-K.

The
following section contains forward-looking statements which are subject to risks and uncertainties. These forward-looking statements include those regarding anticipated restaurant openings, anticipated costs and sizes of future restaurants,
anticipated costs savings and the adequacy of anticipated sources of cash to fund our future capital requirements. Our actual results may differ materially from those discussed in the forward-looking statements. Words such as believes,
anticipates, expects, intends, plans and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Important factors that could cause actual results to differ materially from our expectations include those discussed below under Risk
Factors. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.

Overview

As of September 27, 2008, we operated
89 restaurants, including 83 restaurants in the United States, of which one was operated pursuant to a management agreement, and six restaurants operated in Canada under The Boathouse name. On June 23, 2008, we closed one restaurant in
Washington D.C. The closure resulted in a $452,000 charge related to exit costs, including the estimated liability on early termination of an operating lease that terminates in June 2016.

McCormick & Schmicks has successfully grown over the past 36 years by offering our customers menus that, at most restaurants, are printed
twice daily with a broad selection of affordable, quality, and fresh seafood in an upscale environment, serviced by knowledgeable and professional management and staff. McCormick & Schmicks inviting atmosphere and high quality,
diverse menu offering and compelling price-value proposition appeals to a diverse base of casual diners, families, travelers and the business community. Our revenues are primarily generated by sales at our restaurants, including banquets.

We utilize a broad-based marketing approach to drive guest traffic which includes advertisements in USA Today and Crains Business
Journals, as well as in-house marketing campaigns, including our preferred guest program and e-marketing programs. We have successfully grown our preferred guest program to more than 54,000 members since inception in 2006 and our online marketing
e-mail club database to over 118,000 customers.



9



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##### Table of Contents

We measure performance using key operating indicators such as comparable restaurant sales, food and
beverage costs, labor costs, restaurant operating expenses, and occupancy costs, with a focus on these costs and expenses as a percentage of revenues. For purposes of comparable restaurant sales, a restaurant is included in the comparable restaurant
base in the first full quarter following the eighteenth month of operations. We also track trends in average weekly revenues at both the restaurant level and on a condensed consolidated basis as an indicator of our performance. The key
operating measure used by management in evaluating our operating results is operating income. Operating income is calculated by deducting total restaurant operating costs, general and administrative expenses, restaurant pre-opening costs,
depreciation and amortization and other corporate costs from revenues. Restaurant pre-opening costs are analyzed based on the number and timing of restaurant openings and by comparison to budgeted amounts, with an overall target of approximately
$0.3 million to $0.4 million per restaurant opening, which may include non-cash rent expense during the construction period.

The most
significant restaurant operating costs are food and beverage costs, labor costs and employee benefit costs. We believe our national and regional presence allows us to achieve better quality and pricing on key products than most of our competitors.
We closely monitor food and beverage costs and regularly review our selection of preferred vendors on the basis of several key metrics, including pricing. In addition, because we print our menu twice daily in most of our restaurants, we are able to
adapt the seafood items we offer to changes in vendor pricing to optimize our revenue mix and mitigate the impact of cost increases in any particular seafood item by substituting a lower-cost alternative on our menu or by adjusting the price. With
respect to labor costs, we believe the combination of future growth in revenues and the resulting greater restaurant coverage of our vice presidents of operations and regional managers will allow us to leverage payroll expenses over time. Our
employee benefits include health insurance, the cost of which continues to increase faster than the general rate of inflation. We continually monitor this cost and review and implement strategies to effectively control increases.

General and administrative expenses are controlled in absolute amounts and monitored as a percentage of revenues. As we have continued our growth, we
have incurred substantial training costs and made significant investments in infrastructure, including our information systems. As we continue to grow and are able to leverage investments made in our people and systems, we expect these expenses to
decrease as a percentage of revenues over time.

Identification of appropriate new restaurant sites is essential to our growth strategy. We
evaluate and invest in new restaurants based on site-specific projected returns on investment. We believe our restaurant model and flexible real estate strategy provide us with continued opportunities to find attractive real estate locations on
favorable terms.

Strategic Focus and Operating Outlook

Our primary business focus for over 36 years has been to consistently offer a broad selection of high quality, fresh seafood, which we believe commands strong loyalty from our guests. During the fourth quarter of 2007
we initiated a new steak program to complement our seafood offerings. Under the new program, we increased the range of beef offerings on our menu, upgraded the quality of beef served and implemented new cooking techniques. As a result of the new
program, our beef sales have increased to approximately 14% of our entrée sales in the third quarter of 2008 compared to approximately 8% in the third quarter of 2007. We have also been highlighting our offerings of wild fish and are giving
the most affluent customers the opportunity to trade up in product mix which has been positively affecting our average check. We will continue this in the fourth quarter of 2008 by offering Alaskan King Crab legs direct from the boat Early
Dawn featured on the hit TV show The Deadliest Catch.

We have successfully expanded our McCormick &
Schmicks Seafood Restaurant concept throughout the United States and have competed effectively with national and regional restaurant chains and with local restaurant operators. We have continued to utilize our size and experience to maximize
our purchasing power, closely monitor our costs, and take advantage of areas where we feel we can trim costs without affecting the guest experience.

Our objective is to continue to prudently grow McCormick & Schmicks seafood restaurants and The Boathouse restaurants in existing and new markets. We also consider acquisitions of additional restaurants
or restaurant groups when opportunities are presented. Our stated long term growth target is to grow restaurant units at a prudent pace between 13% and 15% per year. Because of the current environment, particularly uncertainty regarding
consumer spending, and in line with our disciplined capital utilization, we are being more cautious when selecting new restaurant locations and are only accepting locations that provide for superior return on investments and provide for low revenue
risk, low leasing risk, and favorable lease terms.

We plan to open eleven new units in 2008, eight of which have opened as of the end of
the third quarter, and five to six units in 2009. Of the five to six units planned for 2009, we have five signed leases.

As part of our
Board of Directors executive succession planning responsibilities to identify Doug Schmicks replacement as CEO, the Board of Directors have identified a qualified candidate and we expect that the hiring process will conclude
shortly. Doug Schmick is expected to continue in his position as Chairman of the Board and to remain employed by us, focusing on strategic initiatives.

Financial Performance Overview

The following are results of our financial performance for the thirteen week period ended
September 27, 2008 compared to the thirteen week period ended September 29, 2007:



| |  |  | Revenues increased 13.4% to $99.9 million from $88.1 million
| | - |  | ------------------------------------------------------------



| |  |  | Comparable restaurant sales decreased 5.5%
| | - |  | ------------------------------------------



| |  |  | Restaurant pre-opening costs decreased to $1.5 million from $2.1 million
| | - |  | ------------------------------------------------------------------------



| |  |  | Operating income decreased to $1.9 million from $2.4 million
| | - |  | ------------------------------------------------------------



| |  |  | Net income decreased to $1.4 million from $2.0 million
| | - |  | ------------------------------------------------------



| |  |  | Diluted earnings per share decreased to $0.09 from $0.14.
| | - |  | ---------------------------------------------------------



10



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##### Table of Contents

Thirteen Week Period Ended September 29, 2007 Compared to Thirteen Week Period Ended September 27, 2008

The following table sets forth our operating results from our unaudited condensed consolidated statements of income.



|                                    |  |                            |        |   |                    |       |    |  |   |        |   |  |       |   
|----------------------------------- |  | -------------------------- | ------ | - | ------------------ | ----- | -- |  | - | ------ | - |  | ----- | --
|                                    |  | Thirteen week period ended |       
|                                    |  | September 29, 2007         |        |   | September 27, 2008 |      
|                                    |  | (in thousands)             |       
|Revenues                            |  | $                          | 88,095 |   |                    | 100.0 | %  |  | $ | 99,897 |   |  | 100.0 | % 
|                                    |  |                            |        |   |                    |       |    |  |   |        |   |  |       |   
|Restaurant operating costs          |  |                            |        |   |                    |       |    |  |   |        |   |  |       |   
|Food and beverage                   |  |                            | 25,668 |   |                    | 29.1  | %  |  |   | 30,117 |   |  | 30.1  | % 
|Labor                               |  |                            | 28,373 |   |                    | 32.2  | %  |  |   | 32,403 |   |  | 32.4  | % 
|Operating                           |  |                            | 13,899 |   |                    | 15.8  | %  |  |   | 15,674 |   |  | 15.7  | % 
|Occupancy                           |  |                            | 8,001  |   |                    | 9.1   | %  |  |   | 9,263  |   |  | 9.3   | % 
|                                    |  |                            |        |   |                    |       |    |  |   |        |   |  |       |   
|Total restaurant operating costs    |  |                            | 75,941 |   |                    | 86.2  | %  |  |   | 87,457 |   |  | 87.5  | % 
|General and administrative expenses |  |                            | 4,658  |   |                    | 5.3   | %  |  |   | 5,169  |   |  | 5.2   | % 
|Restaurant pre-opening costs        |  |                            | 2,097  |   |                    | 2.4   | %  |  |   | 1,460  |   |  | 1.5   | % 
|Depreciation and amortization       |  |                            | 2,952  |   |                    | 3.3   | %  |  |   | 3,932  |   |  | 3.9   | % 
|                                    |  |                            |        |   |                    |       |    |  |   |        |   |  |       |   
|Total costs and expenses            |  |                            | 85,648 |   |                    | 97.2  | %  |  |   | 98,018 |   |  | 98.1  | % 
|                                    |  |                            |        |   |                    |       |    |  |   |        |   |  |       |   
|Operating income                    |  |                            | 2,447  |   |                    | 2.8   | %  |  |   | 1,879  |   |  | 1.9   | % 
|Interest expense (income), net      |  |                            | (70    | ) |                    | (0.1  | )% |  |   | 278    |   |  | 0.3   | % 
|Other (income), net                 |  |                            |       |   |                    |      |    |  |   | (50    | ) |  | (0.1  | )%
|                                    |  |                            |        |   |                    |       |    |  |   |        |   |  |       |   
|Income before income taxes          |  |                            | 2,517  |   |                    | 2.9   | %  |  |   | 1,651  |   |  | 1.7   | % 
|Income tax expense                  |  |                            | 477    |   |                    | 0.6   | %  |  |   | 291    |   |  | 0.3   | % 
|                                    |  |                            |        |   |                    |       |    |  |   |        |   |  |       |   
|Net income                          |  | $                          | 2,040  |   |                    | 2.3   | %  |  | $ | 1,360  |   |  | 1.4   | % 
|                                    |  |                            |        |   |                    |       |    |  |   |        |   |  |       |   

Revenues and Restaurant Operating Costs

The following table sets forth revenues and restaurant operating costs, including food and beverage, labor, operating and occupancy costs from our unaudited condensed
consolidated statements of income.



|                                 |  |                            |        |                   |   |        |  |   |        |  |      |  
|-------------------------------- |  | -------------------------- | ------ | ----------------- | - | ------ |  | - | ------ |  | ---- | -
|                                 |  | Thirteen week period ended |        | Change            |  
|                                 |  | September 29,2007          |        | September 27,2008 |   | $      |  | % |       
|                                 |  | (in thousands)             |       
|Revenues                         |  | $                          | 88,095 |                   | $ | 99,897 |  | $ | 11,802 |  | 13.4 | %
|                                 |  |                            |        |                   |   |        |  |   |        |  |      |  
|Restaurant operating costs       |  |                            |        |                   |   |        |  |   |        |  |      |  
|Food and beverage                |  | $                          | 25,668 |                   | $ | 30,117 |  | $ | 4,449  |  | 17.3 | %
|Labor                            |  |                            | 28,373 |                   |   | 32,403 |  |   | 4,030  |  | 14.2 | %
|Operating                        |  |                            | 13,899 |                   |   | 15,674 |  |   | 1,775  |  | 12.8 | %
|Occupancy                        |  |                            | 8,001  |                   |   | 9,263  |  |   | 1,262  |  | 15.8 | %
|                                 |  |                            |        |                   |   |        |  |   |        |  |      |  
|Total restaurant operating costs |  | $                          | 75,941 |                   | $ | 87,457 |  | $ | 11,516 |  | 15.2 | %
|                                 |  |                            |        |                   |   |        |  |   |        |  |      |  

Revenues. Revenues increased $11.8 million, or 13.4%, to $99.9 million in the thirteen week period
ended September 27, 2008 from $88.1 million in the thirteen week period ended September 29, 2007. This increase was primarily due to the thirteen restaurants opened since September 29, 2007, which was partially offset by a 5.5%
decrease in comparable restaurants sales. We estimate that our 5.5% decrease in comparable restaurant sales was a result of a 9.8% decrease in traffic, which was partially offset by increased pricing of 3.0% and an increase of 1.3% due to changes in
product mix.

Food and Beverage Costs. Food and beverage costs increased $4.4 million, or 17.3%, to $30.1 million in the thirteen week period
ended September 27, 2008 from $25.7 million in the thirteen week period ended September 29, 2007. This increase was primarily due to the thirteen restaurants opened since September 29, 2007. Food and beverage costs as a percentage of
revenues increased to 30.1% in the thirteen week period ended September 27, 2008 from 29.1% in the thirteen week period ended September 29, 2007, primarily due to a higher mix of new restaurants, which typically run higher food and
beverage costs as a percentage of revenues during the first 18 months of operation, as well as inflationary pressures impacting our commodity costs, including the price of fish, poultry, dairy goods, produce and liquor.

Labor Costs. Labor costs increased $4.0 million, or 14.2%, to $32.4 million in the thirteen week period ended September 27, 2008 from $28.4 million in
thirteen week period ended September 29, 2007. This increase was primarily due to the thirteen restaurants opened since September 29, 2007. Labor costs as a percentage of revenues increased to 32.4% in the thirteen week period ended
September 27, 2008 from 32.2% in the thirteen week period ended September 29, 2007, primarily due to deleveraging of fixed labor costs at the comparable restaurants, coupled with the higher mix of new restaurants, which typically have
higher labor run rates in the first 18 months of operation. Deleveraging occurs when sales decline and fixed costs have a relatively larger impact as a percentage of revenues.

Operating Costs. Operating costs increased $1.8 million, or 12.8%, to $15.7 million in the thirteen week period ended September 27, 2008 from $13.9 million in the thirteen week period ended
September 29, 2007. This increase was primarily due to the thirteen restaurants opened since September 29, 2007. Operating costs as a percentage of revenues decreased to 15.7% in the thirteen week period ended September 27, 2008
from 15.8% in the thirteen week period ended September 29, 2007, primarily due to lower advertising expense as a percentage of revenues.

Occupancy
Costs. Occupancy costs increased $1.3 million, or 15.8%, to $9.3 million in the thirteen week period ended September 27, 2008 from $8.0 million in the thirteen week period ended September 29, 2007, primarily due to the thirteen
restaurants opened since September 29, 2007. Occupancy costs as a percentage of revenues increased to 9.3% in the thirteen week period ended September 27, 2008 from 9.1% in the thirteen week period ended September 29, 2007, primarily
due to deleveraging of fixed occupancy costs.

General and Administrative Expenses, Restaurant Pre-Opening Costs, and Depreciation and Amortization

The following table sets forth general and administrative expenses, restaurant pre-opening costs, and depreciation and amortization from our
unaudited condensed consolidated statements of income.



|                                    |  |                            |       |                   |   |       |  |   |      |   |  |       |   
|----------------------------------- |  | -------------------------- | ----- | ----------------- | - | ----- |  | - | ---- | - |  | ----- | --
|                                    |  | Thirteen week period ended |       | Change            |  
|                                    |  | September 29,2007          |       | September 27,2008 |   | $     |  |   | %    |  
|                                    |  |                            |       | (in thousands)    |   |       |  |   |      |  
|General and administrative expenses |  | $                          | 4,658 |                   | $ | 5,169 |  | $ | 511  |   |  | 11.0  | % 
|Restaurant pre-opening costs        |  |                            | 2,097 |                   |   | 1,460 |  |   | (637 | ) |  | (30.4 | )%
|Depreciation and amortization       |  |                            | 2,952 |                   |   | 3,932 |  |   | 980  |   |  | 33.2  | % 



11



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##### Table of Contents

General and Administrative Expenses. General and administrative expenses increased $0.5 million, or 11.0%, to
$5.2 million in the thirteen week period ended September 27, 2008 from $4.7 million in the thirteen week period ended September 29, 2007, primarily due to the thirteen company-owned restaurants added since September 29, 2007. General
and administrative expenses as a percentage of revenues decreased to 5.2% in the thirteen week period ended September 27, 2008 from 5.3% in the thirteen week period ended September 29, 2007, primarily due to the increase in revenues.

Restaurant Pre-Opening Costs. Restaurant pre-opening costs decreased $0.6 million, to $1.5 million in the thirteen week period ended
September 27, 2008 from $2.1 million in the thirteen week period ended September 29, 2007, primarily due to the timing of restaurant openings and the number of restaurants under construction.

Depreciation and Amortization. Depreciation and amortization increased $1.0 million, or 33.2%, to $3.9 million in the thirteen week period ended
September 27, 2008 from $3.0 million in the thirteen week period ended September 29, 2007. The increase was primarily due to the thirteen restaurants opened since September 29, 2007. Depreciation and amortization as a percentage of
revenues increased to 3.9% in the thirteen week period ended September 27, 2008 from 3.3% in the thirteen week period ended September 29, 2007, primarily due to the thirteen restaurants opened since September 29, 2007, coupled with
the deleveraging of comparable sales.

Interest Expense (income), Net, Other Income, Net, Income Tax Expense and Net Income

The following table sets forth interest expense (income), net, other income, net, income tax expense and net income from our unaudited condensed consolidated statements
of income.



|                               |  |                            |       |   |                   |   |       |   |  |   |      |   |  |        |   
|------------------------------ |  | -------------------------- | ----- | - | ----------------- | - | ----- | - |  | - | ---- | - |  | ------ | --
|                               |  | Thirteen week period ended |       |   | Change            |  
|                               |  | September 29,2007          |       |   | September 27,2008 |   |       | $ |  |   | %    |  
|                               |  |                            |       |   | (in thousands)    |   |       |   |  |   |      |  
|Interest expense (income), net |  | $                          | (70   | ) |                   | $ | 278   |   |  | $ | 348  |   |  | *      |   
|Other (income), net            |  |                            |      |   |                   |   | (50   | ) |  |   | (50  | ) |  | (100.0 | )%
|                               |  |                            |       |   |                   |   |       |   |  |   |      |   |  |        |   
|Income before income taxes     |  | $                          | 2,517 |   |                   | $ | 1,651 |   |  | $ | (866 | ) |  | (34.5  | )%
|Income tax expense             |  |                            | 477   |   |                   |   | 291   |   |  |   | (186 | ) |  | (39.0  | )%
|                               |  |                            |       |   |                   |   |       |   |  |   |      |   |  |        |   
|Net income                     |  | $                          | 2,040 |   |                   | $ | 1,360 |   |  | $ | (680 | ) |  | (33.3  | )%
|                               |  |                            |       |   |                   |   |       |   |  |   |      |   |  |        |   



|* | Percentage is non-meaningful
|- | ----------------------------

Interest Expense (Income),
Net. Interest expense, net, was a net interest expense of $0.3 million for the thirteen week period ended September 27, 2008, compared to a net interest income of $0.1 million in the thirteen week period ended September 29, 2007.
The change was primarily due to the increased average borrowings outstanding and lower interest income earned on investment balances for the quarter ended September 27, 2008.

Other Income, Net. Other income was $0.1 million for the thirteen week period ended September 27, 2008, due to business interruption insurance proceeds. The business interruption was caused by weather
related damage to our location at the CNN Center in Atlanta, GA, which caused the restaurant to close briefly for repairs. The damaged restaurant was repaired and was operating as of September 27, 2008. The estimated year-to-date revenues lost
as a result of the business interruption was $0.7 million as of September 27, 2008.

Income Tax Expense. Income tax expense was $0.3
million in the thirteen week period ended September 27, 2008 compared to $0.5 million in the thirteen week period ended September 29, 2007. Income tax expense reflects an estimated annual effective tax rate of 21.2% compared to 28.8% in
the thirteen week period ended September 29, 2007. The decrease in the estimated effective annualized tax rate is primarily due to the estimated tax impact of FICA tax credits being calculated on lower income before income tax.

Net Income.Net income decreased $0.7 million to $1.4 million in the thirteen week period ended September 27, 2008 from net income of $2.0 million in
the thirteen week period ended September 29, 2007, primarily due to a decrease in comparable restaurant sales of 5.5%, coupled with lower restaurant operating margins, and increases in interest expense and depreciation and amortization expense.

Thirty-nine Week Period Ended September 29, 2007 Compared to Thirty-nine Week Period Ended September 27, 2008

The following are results of our financial performance for the thirty-nine week period ended September 27, 2008 compared to the thirty-nine week period ended
September 29, 2007:



| |  |  | Revenues increased 12.6% to $291.9 million from $259.2 million
| | - |  | --------------------------------------------------------------



| |  |  | Comparable restaurant sales decreased 5.3%
| | - |  | ------------------------------------------



| |  |  | Restaurant pre-opening costs increased to $3.3 million from $3.0 million
| | - |  | ------------------------------------------------------------------------



| |  |  | Operating income decreased to $5.2 million from $13.4 million
| | - |  | -------------------------------------------------------------



| |  |  | Net income decreased to $3.8 million from $9.8 million
| | - |  | ------------------------------------------------------



| |  |  | Diluted earnings per share decreased to $0.26 from $0.66
| | - |  | --------------------------------------------------------



12



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##### Table of Contents

The following table sets forth our operating results from our unaudited consolidated statements of income.



|                                    |  |                               |         |   |                   |       |    |  |   |         |   |  |       |   
|----------------------------------- |  | ----------------------------- | ------- | - | ----------------- | ----- | -- |  | - | ------- | - |  | ----- | --
|                                    |  | Thirty-nine week period ended |        
|                                    |  | September 29,2007             |         |   | September 27,2008 |      
|                                    |  | (in thousands)                |        
|Revenues                            |  | $                             | 259,170 |   |                   | 100.0 | %  |  | $ | 291,937 |   |  | 100.0 | % 
|                                    |  |                               |         |   |                   |       |    |  |   |         |   |  |       |   
|Restaurant operating costs          |  |                               |         |   |                   |       |    |  |   |         |   |  |       |   
|Food and beverage                   |  |                               | 75,040  |   |                   | 29.0  | %  |  |   | 88,226  |   |  | 30.2  | % 
|Labor                               |  |                               | 81,741  |   |                   | 31.5  | %  |  |   | 94,895  |   |  | 32.5  | % 
|Operating                           |  |                               | 39,639  |   |                   | 15.3  | %  |  |   | 45,559  |   |  | 15.6  | % 
|Occupancy                           |  |                               | 23,301  |   |                   | 9.0   | %  |  |   | 27,358  |   |  | 9.4   | % 
|                                    |  |                               |         |   |                   |       |    |  |   |         |   |  |       |   
|Total restaurant operating costs    |  |                               | 219,721 |   |                   | 84.8  | %  |  |   | 256,038 |   |  | 87.7  | % 
|General and administrative expenses |  |                               | 14,420  |   |                   | 5.5   | %  |  |   | 15,881  |   |  | 5.4   | % 
|Restaurant pre-opening costs        |  |                               | 3,025   |   |                   | 1.2   | %  |  |   | 3,335   |   |  | 1.1   | % 
|Depreciation and amortization       |  |                               | 8,584   |   |                   | 3.3   | %  |  |   | 10,978  |   |  | 3.8   | % 
|Impairment/restructuring charge     |  |                               |        |   |                   |      |    |  |   | 452     |   |  | 0.2   | % 
|                                    |  |                               |         |   |                   |       |    |  |   |         |   |  |       |   
|Total costs and expenses            |  |                               | 245,750 |   |                   | 94.8  | %  |  |   | 286,684 |   |  | 98.2  | % 
|                                    |  |                               |         |   |                   |       |    |  |   |         |   |  |       |   
|Operating income                    |  |                               | 13,420  |   |                   | 5.2   | %  |  |   | 5,253   |   |  | 1.8   | % 
|Interest expense (income), net      |  |                               | (349    | ) |                   | (0.1  | )% |  |   | 694     |   |  | 0.2   | % 
|Other (income), net                 |  |                               |        |   |                   |      |    |  |   | (308    | ) |  | (0.1  | )%
|                                    |  |                               |         |   |                   |       |    |  |   |         |   |  |       |   
|Income before income taxes          |  |                               | 13,769  |   |                   | 5.3   | %  |  |   | 4,867   |   |  | 1.7   | % 
|Income tax expense                  |  |                               | 3,965   |   |                   | 1.5   | %  |  |   | 1,032   |   |  | 0.4   | % 
|                                    |  |                               |         |   |                   |       |    |  |   |         |   |  |       |   
|Net income                          |  | $                             | 9,804   |   |                   | 3.8   | %  |  | $ | 3,835   |   |  | 1.3   | % 
|                                    |  |                               |         |   |                   |       |    |  |   |         |   |  |       |   

Revenues and Restaurant Operating Costs

The following table sets forth revenues and restaurant operating costs, including food and beverage, labor, operating and occupancy costs from our unaudited consolidated
statements of income.



|                                 |  |                               |         |                   |   |         |  |   |        |  |      |  
|-------------------------------- |  | ----------------------------- | ------- | ----------------- | - | ------- |  | - | ------ |  | ---- | -
|                                 |  | Thirty-nine week period ended |         | Change            |  
|                                 |  | September 29,2007             |         | September 27,2008 |   | $       |  | % |       
|                                 |  |                               |         | (in thousands)    |   |         |  |   |       
|Revenues                         |  | $                             | 259,170 |                   | $ | 291,937 |  | $ | 32,767 |  | 12.6 | %
|                                 |  |                               |         |                   |   |         |  |   |        |  |      |  
|Restaurant operating costs       |  |                               |         |                   |   |         |  |   |        |  |      |  
|Food and beverage                |  | $                             | 75,040  |                   | $ | 88,226  |  | $ | 13,186 |  | 17.6 | %
|Labor                            |  |                               | 81,741  |                   |   | 94,895  |  |   | 13,154 |  | 16.1 | %
|Operating                        |  |                               | 39,639  |                   |   | 45,559  |  |   | 5,920  |  | 14.9 | %
|Occupancy                        |  |                               | 23,301  |                   |   | 27,358  |  |   | 4,057  |  | 17.4 | %
|                                 |  |                               |         |                   |   |         |  |   |        |  |      |  
|Total restaurant operating costs |  | $                             | 219,721 |                   | $ | 256,038 |  | $ | 36,317 |  | 16.5 | %
|                                 |  |                               |         |                   |   |         |  |   |        |  |      |  

Revenues. Revenues increased $32.8 million, or 12.6%, to $291.9 million in the thirty-nine week period
ended September 27, 2008 from $259.2 million in the thirty-nine week period ended September 29, 2007. This increase was primarily due to the thirteen restaurants opened since September 29, 2007, which was partially offset by a
decrease in comparable restaurant sales of 5.3%. We estimate that our 5.3% decrease in comparable restaurant sales was a result of a 7.3% decrease in traffic, which was partially offset by positive pricing of 1.4% and an increase of 0.6% due to
changes in product mix.

Food and Beverage Costs. Food and beverage costs increased $13.2 million, or 17.6%, to $88.2 million in the
thirty-nine week period ended September 27, 2008 from $75.0 million in the thirty-nine week period ended September 29, 2007. This increase was primarily attributable to the thirteen restaurants opened since September 29, 2007. Food
and beverage costs as a percentage of revenues increased to 30.2% in the thirty-nine week period ended September 27, 2008 from 29.0% in the thirty-nine week period ended September 29, 2007, primarily due to the higher mix of new
restaurants, which typically run higher food and beverage costs as a percentage of revenues during the first 18 months of operation, as well as inflationary pressures impacting our commodity costs, including the price of fish, poultry, dairy goods,
produce and liquor.

Labor Costs. Labor costs increased $13.2 million, or 16.1%, to $94.9 million in the thirty-nine week period ended
September 27, 2008 from $81.7 million in thirty-nine week period ended September 29, 2007. This increase was primarily attributable to the thirteen restaurants opened since September 29, 2007. Labor costs as a percentage of revenues
increased to 32.5% in the thirty-nine week period ended September 27, 2008 from 31.5% in the thirty-nine week period ended September 29, 2007, primarily due to the deleveraging of fixed labor costs at the comparable restaurants, coupled
with the higher mix of new restaurants, which typically run higher labor costs as a percentage of revenues.

Operating Costs. Operating costs
increased $5.9 million, or 14.9%, to $45.6 million in the thirty-nine week period ended September 27, 2008 from $39.6 million in the thirty-nine week period ended September 29, 2007. This increase was primarily attributable to the thirteen
restaurants opened since September 29, 2007. Operating costs as a percentage of revenues increased to 15.6% in the thirty-nine week period ended September 27, 2008 from 15.3% in the thirty-nine week period ended September 29,
2007, primarily due to increases in utilities costs.

Occupancy Costs. Occupancy costs increased $4.1 million, or 17.4%, to $27.4 million in
the thirty-nine week period ended September 27, 2008 from $23.3 million in the thirty-nine week period ended September 29, 2007, primarily due to the thirteen restaurants opened since September 29, 2007. Occupancy costs as a
percentage of revenues increased to 9.4% in the thirty-nine week period ended September 27, 2008 from 9.0% in the thirty-nine week period ended September 29, 2007, primarily due to deleveraging of fixed occupancy costs at the comparable
restaurants.

General and Administrative Expenses, Restaurant Pre-Opening Costs, Depreciation and Amortization and Restructuring Charge

The following table sets forth general and administrative expenses, restaurant pre-opening costs, depreciation and amortization, and
impairment/restructuring charge from our unaudited consolidated statements of income.



|                                    |  |                               |        |                   |   |        |  |   |       |  |       |  
|----------------------------------- |  | ----------------------------- | ------ | ----------------- | - | ------ |  | - | ----- |  | ----- | -
|                                    |  | Thirty-nine week period ended |        | Change            |  
|                                    |  | September 29,2007             |        | September 27,2008 |   | $      |  | % |      
|                                    |  |                               |        | (in thousands)    |   |        |  |   |      
|General and administrative expenses |  | $                             | 14,420 |                   | $ | 15,881 |  | $ | 1,461 |  | 10.1  | %
|Restaurant pre-opening costs        |  |                               | 3,025  |                   |   | 3,335  |  |   | 310   |  | 10.2  | %
|Depreciation and amortization       |  |                               | 8,584  |                   |   | 10,978 |  |   | 2,394 |  | 27.9  | %
|Impairment/restructuring charge     |  |                               |       |                   |   | 452    |  |   | 452   |  | 100.0 | %



13



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##### Table of Contents

General and Administrative Expenses. General and administrative expenses increased $1.5 million, or 10.1%, to
$15.9 million in the thirty-nine week period ended September 27, 2008 from $14.4 million in the thirty-nine week period ended September 29, 2007, primarily due to the thirteen restaurants opened since September 29, 2007, partially
offset by decreased legal fees and share-based compensation. General and administrative expenses as a percentage of revenues decreased to 5.4% in the thirty-nine week period ended September 27, 2008 from 5.5% in the thirty-nine week period
ended September 29, 2007, primarily due to decreased legal fees.

Restaurant Pre-Opening Costs. Restaurant pre-opening costs increased
$0.3 million, or 10.2%, to $3.3 million in the thirty-nine week period ended September 27, 2008 from $3.0 million in the thirty-nine week period ended September 29, 2007, primarily due to the timing of restaurant openings and restaurants
under construction in the thirty-nine week period ended September 27, 2008, compared to the thirty-nine week period ended September 29, 2007.

Depreciation and Amortization. Depreciation and amortization increased $2.4 million, or 27.9%, to $11.0 million in the thirty-nine week period ended September 27, 2008 from $8.6 million in the thirty-nine week period ended
September 29, 2007. The increase was primarily due to the addition of thirteen restaurants since September 29, 2007. Depreciation and amortization as a percentage of revenues increased to 3.8% in the thirty-nine week period ended
September 27, 2008 from 3.3% in the thirty-nine week period ended September 29, 2007, primarily due to the thirteen restaurants opened since September 29, 2007, coupled with the deleveraging of comparable sales.

Impairment/Restructuring Charge. A restructuring charge in the amount of $0.5 million was taken in the thirteen week period ended June 28, 2008 related to
the closure of one of our restaurants, Restaurant K, in Washington D.C. The restructuring charge was related to exit costs, including our estimated liability on our operating lease that terminates in June 2016. We are attempting to sublease the
property in order to minimize net costs incurred over the remaining term of the lease. All of the leasehold improvements related to Restaurant K were fully impaired as of the end of fiscal year 2007.

Interest Expense (Income), Net, Other Income, Net, Income Tax Expense and Net Income

The following table sets forth interest expense (income), net, other income, net, income tax expense and net income from our unaudited consolidated statements of income.



|                               |  |                               |        |   |                   |   |       |   |  |   |        |   |  |        |   
|------------------------------ |  | ----------------------------- | ------ | - | ----------------- | - | ----- | - |  | - | ------ | - |  | ------ | --
|                               |  | Thirty-nine week period ended |        |   | Change            |  
|                               |  | September 29,2007             |        |   | September 27,2008 |   |       | $ |  |   | %      |  
|                               |  |                               |        |   | (in thousands)    |   |       |   |  |   |        |  
|Interest expense (income), net |  | $                             | (349   | ) |                   | $ | 694   |   |  | $ | 1,043  |   |  | *      |   
|Other (income), net            |  |                               |       |   |                   |   | (308  | ) |  |   | (308   | ) |  | (100.0 | )%
|                               |  |                               |        |   |                   |   |       |   |  |   |        |   |  |        |   
|Income before income taxes     |  | $                             | 13,769 |   |                   | $ | 4,867 |   |  | $ | (8,902 | ) |  | (64.6  | )%
|Income tax expense             |  |                               | 3,965  |   |                   |   | 1,032 |   |  |   | (2,933 | ) |  | (74.0  | )%
|                               |  |                               |        |   |                   |   |       |   |  |   |        |   |  |        |   
|Net income                     |  | $                             | 9,804  |   |                   | $ | 3,835 |   |  | $ | (5,969 | ) |  | (60.9  | )%
|                               |  |                               |        |   |                   |   |       |   |  |   |        |   |  |        |   



|* | Percentage is non-meaningful
|- | ----------------------------

Interest Expense (Income),
Net. Interest expense (income), net was a net interest expense of $0.7 million in the thirty-nine week period ended September 27, 2008 compared to a net interest income of $0.3 million in the thirty-nine week period ended
September 29, 2007. This change was primarily due to the increased average borrowings outstanding and lower interest income earned on investment balances for the thirty-nine week period ended September 27, 2008.

Other Income, Net. Other income, net was $0.3 million for the thirty-nine week period ended September 27, 2008, due to business interruption insurance
proceeds. The business interruption was caused by weather related damage to our location at the CNN Center in Atlanta, GA, which caused the restaurant to close briefly for repairs. The damaged restaurant was repaired and was re-opened and operating
as of September 27, 2008. The estimated revenues lost as a result of the business interruption was $0.7 million as of September 27, 2008.

Income Tax Expense. Income tax expense was $1.0 million in the thirty-nine week period ended September 27, 2008, which reflects an estimated effective annualized tax rate of 21.2%. In the thirty-nine week period ended
September 29, 2007, income tax expense was $4.0 million, which reflects an estimated effective annualized tax rate of 28.8%. The decrease in the estimated effective tax rate is primarily attributable to the FICA credits being calculated on
lower pre-tax income.

Net Income.Net income decreased $6.0 million to $3.8 million in the thirty-nine week period ended September 27,
2008, compared to net income of $9.8 million in the thirty-nine week period ended September 29, 2007, primarily due to a decrease in comparable restaurant sales of 5.3%, coupled with lower restaurant operating margins, an increase in interest
expense, and increased depreciation and amortization.

Liquidity and Capital Resources

Our primary cash needs have been for new restaurant construction, restaurant acquisition, working capital and general corporate purposes, including
payments under credit facilities. Our main sources of cash have been borrowings under our credit facility, net cash provided by operating activities, cash from tenant improvement allowances, and issuance of common stock. The following table
summarizes our sources and uses of cash and cash equivalents from our unaudited condensed consolidated statements of cash flows:



|                                                             |  |                               |         |   |                   |   |         |  
|------------------------------------------------------------ |  | ----------------------------- | ------- | - | ----------------- | - | ------- | -
|                                                             |  | Thirty-nine week period ended |        
|                                                             |  | September 29,2007             |         |   | September 27,2008 |  
|                                                             |  | (in thousands)                |        
|Net cash provided by operating activities                    |  | $                             | 14,136  |   |                   | $ | 14,776  |  
|Net cash used in investing activities                        |  |                               | (44,394 | ) |                   |   | (38,858 | )
|Net cash provided by financing activities                    |  |                               | 20,639  |   |                   |   | 20,382  |  
|Effect of exchange rate changes on cash and cash equivalents |  |                               | 53      |   |                   |   | (70     | )
|                                                             |  |                               |         |   |                   |   |         |  
|Net decrease in cash and cash equivalents                    |  | $                             | (9,566  | ) |                   | $ | (3,770  | )
|                                                             |  |                               |         |   |                   |   |         |  

The change in net cash provided by operating activities of $14.8 million in the thirty-nine week
period ended September 27, 2008 compared to net cash provided by operating activities of $14.1 million in the thirty-nine week period ended September 29, 2007 was primarily due to the change in tenant improvement allowances of $7.2
million, partially offset by a decrease in net income between periods of $6.0 million.



14



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##### Table of Contents

Net cash used in investing activities was $38.9 million in the thirty-nine week period ended
September 27, 2008 compared to $44.4 million in the thirty-nine week period ended September 29, 2007. We use cash primarily for equipment purchases and construction costs related to new restaurant openings, to purchase restaurants, and to
upgrade and add capacity to existing restaurants. Net cash used in investing activities decreased between thirty-nine week periods primarily due to our purchase in March 2007 of all the assets of The Boathouse Restaurants for $14.9 million,
including capitalized transaction costs of $0.4 million. Purchases of property and equipment also include purchases of information technology systems and expenditures relating to our corporate headquarters.

Net cash provided by financing activities was $20.4 million in the thirty-nine week period ended September 27, 2008 compared to $20.6 million in the
thirty-nine week period ended September 29, 2007. Net cash provided by financing activities was primarily due to the borrowings on our revolving credit facility related to the amounts paid for construction of new restaurant openings during the
thirty-nine week period ended September 27, 2008 and restaurants we plan to open during the remainder of fiscal year 2008. Net cash provided by financing activities for the thirty-nine week period ended September 29, 2007 was primarily the
result of borrowings under our revolving credit facility related to the amounts paid for construction of new restaurant openings, coupled with the acquisition of The Boathouse restaurants.

On December 28, 2007, we amended its existing senior credit facility to, among other things, increase the maximum availability under the facility to
$150.0 million and up to $200.0 million at our request if specified conditions are met.

As of September 27, 2008, the outstanding balance on our
revolving credit facility was $27.5 million. The interest rate on the credit facility is based on the financial institutions prime rate plus a margin of up to 0.50% or the Eurodollar rate plus a margin of 0.625% to 1.50%, with margins
determined by certain financial ratios. The terms of the facility also allow us to borrow up to $10.0 million in Canadian dollars, which reduces the limit available for borrowings under the credit facility by an equal amount, with an interest rate
based on the Canadian Eurodollar Rate plus a margin of 0.725% to 1.60%, with margins determined by certain financial ratios. As of September 27, 2008, our effective interest rate on our borrowings was 4.1%. Under our revolving credit facility
agreement, we are subject to certain financial covenants, including a maximum adjusted leverage ratio, a minimum fixed charge ratio and a maximum capital expenditure amount. We were in compliance with these covenants as of September 27, 2008.

Under our revolving credit facility agreement, loans are collateralized by the stock of the subsidiaries of the Company and are scheduled
to mature on December 28, 2012. The revolving credit facility agreement also provides for bank guarantees under standby letter of credit arrangements in the normal course of business operations. Our commercial bank issues standby letters of
credit to secure our obligations to pay or perform when required to do so, pursuant to the requirements of an underlying agreement or the provision of goods and services. The standby letters of credit are cancelable only at the option of the
beneficiary who is authorized to draw drafts on the issuing bank up to the face amount of the standby letter of credit in accordance with its terms. As of September 27, 2008 the maximum exposure under these standby letters of credit was $3.0
million. At September 27, 2008 we had $119.5 million available under our revolving credit facility.

On July 30, 2008, our Board
of Directors authorized the repurchase of up to $20 million of the Companys common stock. Such repurchases may be made from time to time in open market transactions or through privately negotiated transactions. As of September 27, 2008 we
have not repurchased any shares.

We believe the net cash provided by operating activities and funds available from our revolving credit
facility will be sufficient to satisfy our working capital and capital expenditure requirements, including restaurant construction, and pre-opening costs and potential initial operating losses related to new restaurant openings, for at least the
next twelve months.

Critical Accounting Policies and Use of Estimates

Our significant accounting policies are those that we believe are both important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are inherently uncertain. We believe our critical accounting policies and estimates used in the preparation of our condensed consolidated financial statements are the following:

Impairment of Long-Lived Assets

We review property and equipment (which includes leasehold improvements) for impairment when events or circumstances indicate these assets might be impaired and at least annually. We test impairment using historical cash flow and other
relevant facts and circumstances as the primary basis for our estimates of future cash flows. The analysis is performed at the restaurant level for indicators of permanent impairment. In determining future cash flows, significant estimates are made
by us with respect to future operating results of each restaurant over its remaining lease term. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset-carrying amount exceeds its fair
value. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment.

In our most recent
impairment evaluation for long-lived assets, we identified assets at three restaurant locations that were determined to be impaired as of December 29, 2007. We recorded an impairment charge of $5.4 million related to the impairment of fixtures,
equipment, and leasehold improvements. Two of the three locations are currently operating and management is evaluating whether or not we will continue to operate the remaining identified restaurants.

During the second quarter of fiscal year 2008 we incurred a charge as defined in SFAS 146, Accounting for Cost Associated with Exit or Disposal
Activities, related to the closure of Restaurant K in Washington D.C. The charge was related to exit costs, including our estimated liability on our operating lease that terminates in June 2016. We are attempting to sublease the property in
order to minimize net costs incurred over the remaining term of the lease. All of the leasehold improvements related to Restaurant K were fully impaired as of the end of fiscal year 2007.

Goodwill and Other Indefinite Lived Assets

Goodwill and other indefinite lived assets that resulted from our acquisition of The Boathouse restaurants in March 2007, as well as other intangible assets with indefinite lives are not subject to amortization. However, such assets must be
tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and at least annually. We completed our most recent impairment test on balances as of December 29, 2007, and determined
that there was no impairment related to goodwill and other indefinite lived assets. In assessing the recoverability of goodwill and other indefinite lived assets, market values and projections regarding estimated future cash flows and other factors
are used to determine the fair value of the respective assets. The estimated future cash flows were projected using significant assumptions, including future revenues and expenses. If these estimates or related projections change in the future, we
may be required to record impairment charges for these assets. We review these assets annually for impairment and if a triggering event occurs.



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Insurance Liability

We maintain various insurance policies including workers compensation, employee health, and general liability. Pursuant to those policies, we are responsible for losses up to certain limits and are required to
estimate a liability that represents our ultimate exposure for aggregate losses below those limits. This liability is based on managements estimates of the ultimate costs to be incurred to settle known claims and claims not reported as of the
balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions, and economic conditions. If actual trends differ from our estimates, our financial
results could be impacted. In addition, we may exceed our insurance coverage for specified matters. Our primary insurer has informed us it believes we have exhausted our insurance coverage with respect to employment claims arising in our 2004
coverage year, which it believes includes litigation in California and possibly similar future claims. Furthermore, the insurer has also taken the position that several claims arising in the 2005 to 2008 coverage years are related to certain 2004
claims, and therefore not eligible for coverage. We disagree with this interpretation of our coverage, but we have taken this interpretation into account in connection with our accounting for claims under the policy. See PART II. OTHER
INFORMATIONITEM 1. LEGAL PROCEEDINGS.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the
financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.

We record net deferred tax assets to the extent we believe these assets will more likely than not be
realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In
the event we were to determine that we would not be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for
income taxes.

Operating Leases

We generally operate our restaurants in leased premises. We record the minimum base rents for our operating leases using the straight-line method over the life of the lease term, including option periods that are reasonably assured of
renewal due to the presence of certain economic penalties. For purposes of calculating straight-line rents, the lease term commences on the date we obtain control of the property, which is normally when the property is ready for normal tenant
improvements (build-out period). For certain leases we only have the right to exercise our option for renewal if certain sales targets are achieved at or near the renewal date. These renewal option periods have been included in the lease term when
we determine, at lease inception or at the acquisition date of the restaurant, if later, that the sales targets are non-substantive and achievement of such sales targets is reasonably assured. The difference between rent expense calculated using the
straight-line method and minimum rent paid is recorded as a deferred rent liability. We receive certain tenant improvement allowances which are recorded either as a deferred rent liability or as a landlord financing liability, and are included in
other long-term liabilities. Tenant improvement allowances which are considered lease incentives, are amortized as reduction of rent expense over the lease term. Accordingly, we have recorded a deferred rent liability for the straight-lining of
rents and lease incentives, which is included in other long-term liabilities, of $20.4 million and $22.4 million as of December 29, 2007 and September 27, 2008, respectively. Certain other landlord tenant improvement allowances received,
depending on the specifics of the leased space, the lease agreement and in accordance with Emerging Issues Task Force (EITF) 97-10, The Effect of Lessee Involvement in Asset Construction, for the amounts paid for structural
components are recorded during the construction period as construction in progress and the landlord tenant improvement allowances received are recorded as a landlord financing liability. Upon completion of construction for those leases that meet the
criteria of EITF 97-10, those leases that do not qualify for sale leaseback treatment in accordance with SFAS No. 98, the landlord financing liability is amortized over the lease term based on the rent payments designated in the lease
agreement.

Share-Based Compensation

We account for share-based compensation in accordance with the fair value recognition provisions of SFAS No. 123, Share Based Payment (revised 2004) (SFAS 123R). We adopted SFAS 123R using the modified
prospective transition method as of January 1, 2006, the first day of our fiscal year 2006. Under SFAS 123R, we determine the fair value of share-based payment awards on the date of grant using the Black-Scholes option-pricing model. The model
is affected by our stock price as well as our assumptions regarding a number of complex and subjective variables, including but not limited to our expected stock price volatility over the term of the awards, life of the option, expected term of the
option, the estimated forfeiture rate, the risk-free interest rate and the expected dividend yield.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We are exposed to various market risks, including changes in interest rates and foreign currency exchange rates. Our foreign exchange rate risk relates to our operations in Canada.

Our market risk exposure for changes in interest rates relates to our cash and cash equivalents and revolving credit facility. We invest any excess cash
in highly liquid short-term investments with maturities of less than one year. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and,
therefore, impact our cash flows and results of operations.

Under our revolving credit facility, we are exposed to market risk from
changes in interest rates on borrowings, which bear interest at the financial institutions prime rate plus a margin of up to 0.50% or the Eurodollar rate plus a margin of 0.625% to 1.50%, with margins determined by certain financial ratios. At
our option, we may convert loans under our revolving credit facility from one type of rate to the other. The terms of the facility also allow us to borrow up to $10.0 million in Canadian dollars, with an interest rate based on the Canadian
Eurodollar Rate plus a margin of 0.725% to 1.60%, with margins determined by certain financial ratios. As of September 27, 2008, there was an outstanding balance of $27.5 million under our revolving credit facility. As of September 27,
2008, the Companys effective interest rate on its borrowings was 4.1%. A hypothetical 40 basis point change in our effective borrowing rate would not have a material effect on our results of operations.

A portion of our revenue is generated in Canada. As a result, we conduct some transactions in Canadian currency, which increases our exposure to
fluctuations in foreign currency exchange rates relative to the U.S. dollar. A hypothetical 10% decline in the foreign exchange rate between the Canadian dollar and the U.S. dollar would not have a material effect on our results of operations.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Disclosure Controls and
Procedures.Our management has evaluated, under the supervision and with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period
covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the Exchange Act). Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of
the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely
manner, and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.



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Changes in Internal Control Over Financial Reporting.There have been no changes in our
internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

Occasionally, we are a defendant
in litigation arising in the ordinary course of our business, including claims resulting from slip and fall accidents, employment related claims and claims from guests or employees alleging illness, injury or other food quality, health
or operational concerns. These may include claims brought against us by private party plaintiffs and various government agencies, including federal, state and local taxing agencies, various state and local health departments, and the Equal
Employment Opportunity Commission (EEOC) and other employment related agencies, among others. In certain instances we may settle claims if management concludes that future costs to defend the suits outweigh the costs to settle the
claims.

In 2006, we were named in a class action complaint regarding employment practices filed in the U.S. District Court for the
Northern District of California. We contested the claims and negotiated with the plaintiffs to reach a settlement. In February 2008, we negotiated a resolution of the claims with the private plaintiffs and the parties submitted the settlement to the
Court for approval. The negotiated settlement includes a monetary settlement and some changes to the Companys hiring and employment practices. We recorded a $2.2 million charge in fiscal 2007 for the pending settlement of the claims. We do not
anticipate the changes to our hiring and employment practices in connection with the settlement will significantly affect our operations. The settlement was approved by the court, and the settlement amount was paid, in April 2008.

Our primary insurer has informed us it believes we have exhausted our insurance coverage with respect to employment claims arising in our 2004 coverage
year, which it believes includes the litigation in California and possibly similar future claims. Furthermore, the insurer has also taken the position that several claims arising in 2005-2008 are related to certain 2004 claims, and therefore not
eligible for coverage. We disagree with this interpretation of the coverage, but have taken this interpretation into account in connection with the accounting for employment claims.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Disruptions in the economy and the financial
markets may adversely impact our business and results of operations, and could increase our cost of borrowing.

The restaurant industry is being
affected by economic factors, including changes in national, regional, and local economic conditions, employment levels and consumer spending patterns. The recent increased concerns about the economy and financial markets has reduced consumer
confidence and decreased restaurant traffic, particularly at upscale restaurants, which is harmful to our business and results of operations. If these conditions continue or worsen, deteriorating financial performance could affect the financial
ratios and covenants under our credit agreement, which, in turn, could affect our ability to borrow, increase our cost of borrowing or result in accelerated payment of outstanding loans.

Restaurant companies have been the target of class-actions and other lawsuits alleging, among other things, violation of federal and state law.

We are subject to a variety of claims arising in the ordinary course of our business brought by or on behalf of our customers or employees, including
personal injury claims, contract claims, and employment-related claims. In recent years, a number of restaurant companies have been subject to lawsuits, including class-action lawsuits, alleging violations of federal and state law regarding
workplace, employment and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted against us from time to time. Regardless of whether any claims against
us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance. A judgment significantly in excess of our insurance coverage for
any claims could adversely affect our financial condition or results of operations materially, and adverse publicity resulting from these allegations may adversely affect our business materially. We may incur substantial damages and expenses
resulting from lawsuits, which could have a material adverse effect on our business. See Item 1, Legal Proceedings.

The disruptions in
the economy and the financial markets may adversely impact our business and results of operations, and could increase our costs of borrowing.

The restaurant industry can be affected by economic factors, including changes in national, regional, and local economic conditions, employment levels and consumer spending patterns. The recent disruptions in the
economy and financial markets could reduce consumer confidence and decrease restaurant traffic, particularly at upscale restaurants, which could be harmful to our financial position and results of operations. In addition, deteriorating financial
performance or other economic factors could affect the financial ratios and covenants under our credit agreement, which could affect our ability to borrow, increase the cost of borrowing or result in accelerated payment of outstanding loans. There
can be no assurances that government responses to the disruptions in the financial markets will restore consumer confidence.

Our ability to raise
capital in the future may be limited, which could adversely impact our growth.

Changes in our operating plans, acceleration of our
expansion plans, lower than anticipated sales, increased expenses or other events described in these risk factors may require us to seek additional debt or equity financing. Financing may not be available on acceptable terms and our failure to raise
capital when needed could negatively impact our growth and our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve significant
cash payment obligations and covenants that restrict our ability to operate our business.

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

The results achieved by our restaurants may
not be indicative of longer term performance or the potential market acceptance of restaurants in other locations. New restaurants that we open may not have operating results similar to those of prior restaurants. The failure of our existing or new
restaurants to perform as predicted could result in an impairment charge, which could negatively impact our results of operations. In 2007, we recorded an impairment charge of $5.4 million related to long lived assets at three of our existing
restaurants, and in the second quarter of 2008, we recorded a $452,000 charge related to the closure of a restaurant in Washington, D.C.



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Our ability to expand our restaurant base is influenced by factors beyond our control and therefore we may not be
able to achieve our planned growth.

Our growth strategy depends in large part on our ability to open new restaurants and to operate
these restaurants profitably. Delays or failures in opening new restaurants could impair our ability to meet our growth objectives. We have in the past experienced delays in restaurant openings and may experience similar delays in the future. Our
ability to expand our business successfully will depend upon numerous factors, including:



| |  |  | hiring, training and retaining skilled management, chefs and other qualified personnel to open, manage and operate new restaurants;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | locating and securing a sufficient number of suitable new restaurant sites in new and existing markets on acceptable lease terms;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | managing the amount of time and construction and development costs associated with the opening of new restaurants;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | obtaining adequate financing for the construction of new restaurants;
| | - |  | ---------------------------------------------------------------------



| |  |  | securing governmental approvals and permits required to open new restaurants in a timely manner, if at all;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | successfully promoting our new restaurants and competing in the markets in which our new restaurants are located; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | general economic conditions.
| | - |  | ----------------------------

Some
of these factors are beyond our control. We may not be able to achieve our expansion goals and our new restaurants may not be able to achieve operating results similar to those of our existing restaurants.

Our operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors,
resulting in a decline in our stock price.

Our operating results may fluctuate significantly because of several factors, including:



| |  |  | our ability to achieve and manage our planned expansion;
| | - |  | --------------------------------------------------------



| |  |  | our ability to achieve market acceptance, particularly in new markets;
| | - |  | ----------------------------------------------------------------------



| |  |  | our ability to raise capital;
| | - |  | -----------------------------



| |  |  | changes in the availability and costs of food;
| | - |  | ----------------------------------------------



| |  |  | the loss of key management personnel;
| | - |  | -------------------------------------



| |  |  | the concentration of our restaurants in specific geographic areas;
| | - |  | ------------------------------------------------------------------



| |  |  | our ability to protect our name and logo and other proprietary information;
| | - |  | ---------------------------------------------------------------------------



| |  |  | changes in consumer preferences or discretionary spending;
| | - |  | ----------------------------------------------------------



| |  |  | fluctuations in the number of visitors or business travelers to our downtown locations;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | health concerns about seafood or other foods;
| | - |  | ---------------------------------------------



| |  |  | our ability to attract, motivate and retain qualified employees;
| | - |  | ----------------------------------------------------------------



| |  |  | increases in labor costs;
| | - |  | -------------------------



| |  |  | the impact of federal, state or local government regulations relating to our employees or the sale or preparation of food and the sale of alcoholic beverages;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the impact of litigation;
| | - |  | -------------------------



| |  |  | the effect of competition in the restaurant industry; and
| | - |  | ---------------------------------------------------------



| |  |  | economic trends generally.
| | - |  | --------------------------

Our
business also is subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the second and fourth quarter of each year. As a result, our quarterly and annual operating results and restaurant sales may
fluctuate significantly as a result of seasonality and the factors discussed above. Accordingly, results for any one fiscal quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable
restaurant sales for any particular future period may decrease. If our comparable restaurant sales continue to decline as a result of the decreased consumer confidence and spending in the overall economy, our operating results would likely suffer,
which in turn could cause our operating results to fall below the expectations of securities analysts and investors. In such event, the price of our common stock would likely be adversely affected.

Our operations are susceptible to changes in food availability and costs, which could adversely affect our operating results.

Our profitability depends significantly on our ability to anticipate and react to changes in food costs, particularly seafood costs. We rely on local,
regional and national suppliers to provide our seafood. Increases in distribution costs or sale prices or failure to perform by these suppliers could cause our food costs to increase. We could also experience significant short-term disruptions in
our supply if a significant supplier failed to meet its obligations. The supply of seafood is more volatile than other types of food. The type, variety, quality and price of seafood are subject to factors beyond our control, including weather,
governmental regulation, availability and seasonality, each of which may affect our food costs or cause a disruption in our supply. Changes in the price or availability of certain types of seafood could affect our ability to offer a broad menu and
price offering to customers and could materially adversely affect our profitability.

Unexpected expenses and low market acceptance could adversely
affect the profitability of restaurants that we open in new markets.

Our growth strategy includes opening restaurants in markets
where we have little or no operating experience and in which potential customers may not be familiar with our restaurants. The success of these new restaurants may be affected by different competitive conditions, consumer tastes and discretionary
spending patterns, and our ability to generate market awareness and acceptance of the McCormick & Schmicks brand and our other brands. As a result, we may incur costs related to the opening, operation and promotion of these new
restaurants that are greater than those incurred in other areas. Even though we may incur substantial additional costs with these new restaurants, they may attract fewer customers than our more established restaurants in existing markets. Sales at
restaurants we open in new markets may take longer to reach our average annual sales, if at all. As a result, the results of operations at our new restaurants may be inferior to those of our existing restaurants. We may not be able to profitably
open restaurants in new markets.



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Our growth may strain our infrastructure and resources, which could slow our development of new restaurants and
adversely affect our ability to manage our existing restaurants.

We opened seven company-owned restaurants in 2006, and in 2007 we
opened twelve company-owned restaurants and acquired five The Boathouse restaurants in March 2007. We plan to open eleven company-owned restaurants in 2008, of which we have opened eight as of September 27, 2008. Our expansion and our future
growth may strain our restaurant management systems and resources, financial controls and information systems. Those demands on our infrastructure and resources may also adversely affect our ability to manage our existing restaurants. If we fail to
continue to improve our infrastructure or to manage other factors necessary for us to meet our expansion objectives, our operating results could be materially and adversely affected.

Any acquisition of new restaurants could strain our financial resources or result in dilution to our existing stockholders.

Future acquisitions of existing restaurants, which may be accomplished with cash or through the issuance of our equity securities, or a combination of both, could result in dilutive issuances of our equity securities,
the incurrence of debt and contingent liabilities and impairment charges related to goodwill and other intangible assets, any of which could harm our business, financial condition or results of operations.

A decline in visitors or business travelers to downtown areas where our restaurants are located could negatively affect our restaurant sales.

Many of our restaurants are located in downtown areas. We depend on both local residents and business travelers to frequent these locations. If the
number of visitors to downtown areas declines due to economic or other conditions, changes in consumer preferences, changes in discretionary consumer spending or for other reasons, our revenues could decline significantly and our results of
operations could be adversely affected.

If we lose the services of any of our key management personnel our business could suffer.

We depend on the services of our key senior management personnel. If we lose the services of any members of our senior management
or key personnel for any reason, we may be unable to replace them with qualified personnel, which could have a material adverse effect on our business and growth. We do not carry key person life insurance on any of our executive officers.

Many of our restaurants are concentrated in local or regional areas and, as a result, we are sensitive to economic and other trends and developments
in these areas.

We operate five restaurants in the Chicago, Illinois area, five restaurants in the Seattle, Washington area, seven
in the Portland, Oregon area, thirteen in California, and six in the greater Vancouver, British Columbia area; our East Coast restaurants are concentrated in and around Washington, D.C. As a result, adverse economic conditions, weather and labor
markets in any of these areas could have a material adverse effect on our overall results of operations.

In addition, given our geographic
concentrations, negative publicity regarding any of our restaurants in these areas could have a material adverse effect on our business and operations, as could other regional occurrences such as local strikes, oil spills, terrorist attacks, energy
shortages or increases in energy prices, droughts or earthquakes or other natural disasters.

Our success depends on our ability to protect our
proprietary information. Failure to protect our trademarks, service marks or trade secrets could adversely affect our business.

Our
business prospects depend in part on our ability to develop favorable consumer recognition of the McCormick & Schmicks name. Although McCormick & Schmicks, M&S Grill, McCormick & Schmicks Grill, The
Boathouse Restaurants, and other of our service marks are registered trademarks, our trademarks could be imitated in ways that we cannot prevent. In addition, we rely on trade secrets, proprietary know-how, concepts and recipes. Our methods of
protecting this information may not be adequate, however, and others could independently develop similar know-how or obtain access to our trade secrets, know-how, concepts and recipes.

Moreover, we may face claims of misappropriation or infringement of third parties rights that could interfere with our use of our proprietary
know-how, concepts, recipes or trade secrets. Defending these claims may be costly and, if unsuccessful, may prevent us from continuing to use this proprietary information in the future, and may result in a judgment or monetary damages.

We do not maintain confidentiality and non-competition agreements with all of our executives, key personnel or suppliers. If competitors independently
develop or otherwise obtain access to our know-how, concepts, recipes or trade secrets, the appeal of our restaurants could be reduced and our business could be harmed.

Our insurance policies may not provide adequate levels of coverage against all claims.

We
believe we maintain insurance coverage that is customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not commercially reasonable to insure. These losses,
if they occur, could have a material and adverse effect on our business and results of operations. Our primary insurer has informed us it believes we have exhausted our insurance coverage with respect to employment claims arising in our 2004
coverage year, which it believes includes litigation in California and possibly similar future claims. We disagree with this interpretation of our coverage, but we have taken this interpretation into account in connection with our accounting for
claims under the policy, see PART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS. We may not succeed in our planned contest of our insurers conclusion. If we are unsuccessful, and if our insurer determines that other existing employment
claims arose in 2004 and are therefore not covered, our resolution of those claims would be more expensive.

Expanding our restaurant base by opening
new restaurants in existing markets could reduce the business of our existing restaurants.

Our growth strategy includes opening
restaurants in markets in which we already have existing restaurants. We may be unable to attract enough customers to the new restaurants for them to operate at a profit. Even if we are able to attract enough customers to the new restaurants to
operate them at a profit, those customers may be former customers of one of our existing restaurants in that market and the opening of new restaurants in the existing market could reduce the revenue of our existing restaurants in that market.

We may not be able to successfully integrate into our business the operations of restaurants that we acquire, which may adversely affect our
business, financial condition and results of operations.

We completed our purchase of The Boathouse restaurants in March 2007.
These restaurants, all of which are located in the greater Vancouver, British Columbia area, are the first we own and operate outside of the United States. We may seek to selectively acquire existing restaurants and integrate them into our business
operations. Achieving the expected benefits of any restaurants that we acquire will depend in large part on our ability to successfully integrate the operations of the acquired restaurants and personnel in a timely and efficient manner. The risks
involved in such restaurant acquisitions and integration include:



| |  |  | challenges and costs associated with the acquisition and integration of restaurant operations located in markets where we have limited or no experience;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | possible disruption to our business as a result of the diversion of managements attention from its normal operational responsibilities and duties; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | consolidation of the corporate, information technology, accounting and administrative infrastructure and resources of the acquired restaurants into our business.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

We may be unable to successfully integrate the operations, or realize the anticipated benefits, of any restaurants that
we acquire. If we cannot overcome the challenges and risks that we face in integrating the operations of newly acquired restaurants, our business, financial condition and results of operations could be adversely affected.

Negative publicity concerning food quality, health and other issues and costs or liabilities resulting from litigation may have a material adverse effect on our
results of operations.

We are sometimes the subject of complaints or litigation from customers alleging illness, injury or other
food quality, health or operational concerns. Litigation or adverse publicity resulting from these allegations may materially and adversely affect us or our restaurants, regardless of whether the allegations are valid or whether we are liable.
Further, these claims may divert our financial and management resources from revenue-generating activities and business operations.

Health concerns
relating to the consumption of seafood or other foods could affect consumer preferences and could negatively impact our results of operations.

We may lose customers based on health concerns about the consumption of seafood or negative publicity concerning food quality, illness and injury generally, such as negative publicity concerning the accumulation of
mercury or other carcinogens in seafood, e-coli, mad cow or foot-and-mouth disease, publication of government or industry findings about food products served by us or other health concerns or operating issues stemming from
one of our restaurants. In addition, our operational controls and training may not be fully effective in preventing all food-borne illnesses. Some food-borne illness incidents could be caused by food suppliers and transporters and would be outside
of our control. Any negative publicity, health concerns or specific outbreaks of food-borne illnesses attributed to one or more of our restaurants, or the perception of an outbreak, could result in a decrease in guest traffic to our restaurants and
could have a material adverse effect on our business.

Changes in consumer preferences or discretionary consumer spending could negatively impact our
results of operations.

The restaurant industry is characterized by the introduction of new concepts and is subject to rapidly
changing consumer preferences, tastes and purchasing habits. Our continued success depends in part upon the popularity of seafood and the style of dining we offer. Shifts in consumer preferences away from this cuisine or dining style could
materially and adversely affect our operating results. Our success will depend in part on our ability to anticipate and respond to changing consumer preferences, tastes and purchasing habits, and to other factors affecting the restaurant industry,
including new market entrants and demographic changes. If we change our concept and menu to respond to changes in consumer tastes or dining patterns, we may lose customers who do not like the new concept or menu, and may not be able to attract a
sufficient new customer base to produce the revenue needed to make the restaurant profitable. Our success also depends to a significant extent on numerous factors affecting discretionary consumer spending, including economic conditions, disposable
consumer income and consumer confidence. Adverse changes in these factors could reduce guest traffic or impose practical limits on pricing, either of which could harm our results of operations.

Labor shortages or increases in labor costs could slow our growth or harm our business.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including regional operational
managers and regional chefs, restaurant general managers and executive chefs, necessary to continue our operations and keep pace with our growth. Qualified individuals are in short supply and competition for these employees is intense. If we are
unable to recruit and retain sufficient qualified individuals, our business and our growth could be adversely affected. Additionally, competition for qualified employees could require us to pay higher wages, which could result in higher labor costs.
If our labor costs increase, our results of operations will be negatively affected.

We may incur costs or liabilities and lose revenue, and our
growth strategy may be adversely impacted, as a result of government regulation.

Our restaurants are subject to various federal,
state and local government regulations, including those relating to employees, the preparation and sale of food and the sale of alcoholic beverages. These regulations affect our restaurant operations and our ability to open new restaurants.

Each of our restaurants must obtain licenses from regulatory authorities to sell liquor, beer and wine, and each restaurant must obtain a
food service license from local health authorities. Each liquor license must be renewed annually and may be revoked at any time for cause, including violation by us or our employees of any laws and regulations relating to the minimum drinking age,
advertising, wholesale purchasing and inventory control. In certain jurisdictions where we operate, the number of alcoholic beverage licenses available is limited and licenses are traded at market prices.

The failure to maintain our food and liquor licenses and other required licenses, permits and approvals could adversely affect our operating results.
Difficulties or failure in obtaining the required licenses and approvals could delay or result in our decision to cancel the opening of new restaurants.

We are subject to dram shop statutes in some states. These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic
beverages to the intoxicated person. A judgment substantially in excess of our insurance coverage could harm our operating results and financial condition.

Various federal and state labor laws govern our relationship with our employees and affect operating costs. These laws include minimum wage requirements, overtime pay, unemployment tax rates, workers
compensation rates, and citizenship requirements. Additional government-imposed increases in minimum wages, overtime pay, paid leaves of absence and mandated health benefits, increased tax reporting and tax payment requirements for employees who
receive gratuities, or a reduction in the number of states that allow tips to be credited toward minimum wage requirements could harm our operating results and financial condition.

The Federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. Although our
restaurants are designed to be accessible to the disabled, we could be required to make modifications to our restaurants to provide service to, or make reasonable accommodations for, disabled persons.



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Our operations and profitability are susceptible to the effects of violence, war and economic trends.

Terrorist attacks and other acts of violence or war and U.S. military reactions to such attacks may negatively affect our
operations and an investment in our shares of common stock. The terrorist attacks in New York and Washington, D.C. on September 11, 2001 led to a temporary interruption in deliveries from some of our suppliers and, we believe, contributed to
the decline in average annual comparable restaurant sales in 2001 and 2002.

Future acts of violence or war could cause a decrease in
travel and in consumer confidence, decrease consumer spending, result in increased volatility in the United States and worldwide financial markets and economy, or result in an economic recession in the United States or abroad. They could also impact
consumer leisure habits, for example, by increasing time spent watching television news programs at home, and may reduce the number of times consumers dine out, which could adversely impact our revenue. Any of these occurrences could harm our
business, financial condition or results of operations, and may result in the volatility of the market price for our securities and on the future price of our securities.

Terrorist attacks could also directly impact our physical facilities or those of our suppliers, and attacks or armed conflicts may make travel and the transportation of our supplies and products more difficult and
more expensive and ultimately affect our revenues.

Macro-economic trends in the U.S. and Canadian economy could impact the costs of our
raw materials as well the cost of transportation of our supplies, making products more difficult and more expensive and ultimately affect our revenues.

We may not be able to compete successfully with other restaurants, which could adversely affect our results of operations.

The restaurant industry is intensely competitive with respect to price, service, location, food quality, ambiance and the overall dining experience. Our competitors include a large and diverse group of restaurant chains and individual
restaurants that range from independent local operators to well capitalized national restaurant companies. Some of our competitors have been in existence for a substantially longer period than we have and may be better established in the markets
where our restaurants are or may be located. Some of our competitors may have substantially greater financial, marketing and other resources than we do. If our restaurants are unable to compete successfully with other restaurants in new and existing
markets, our results of operations will be adversely affected. We also compete with other restaurants for experienced management personnel and hourly employees, and with other restaurants and retail establishments for quality restaurant sites.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

None.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



|ITEM 6. | EXHIBITS
|------- | --------

Items identified with an asterisk (*) are
management contracts or compensatory plan arrangements.



|     |  |                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|3.1  |  | Certificate of Incorporation of McCormick & Schmicks Seafood Restaurants, Inc., as amended. Incorporated by reference to Exhibit 3.1 to the Companys Registration
Statement on Form S-1, File No. 333-114977.
|     | 
|3.2  |  | Amended and Restated Bylaws of McCormick & Schmicks Seafood Restaurants, Inc., as amended (incorporated by reference to Exhibit 3.1 to our current report on Form 8-K dated
February 14, 2008)                
|     | 
|31.1 |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                          
|     | 
|31.2 |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                          
|     | 
|32.1 |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                         
|     | 
|32.2 |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                         



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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.

McCORMICK & SCHMICKS SEAFOOD RESTAURANTS, INC.

|    |  |                                             
|--- |  | --------------------------------------------
|    | 
|By: |  | /s/ DOUGLAS L. SCHMICK                      
|    |  | Douglas L. Schmick                          
|    |  | Chief Executive Officer                     
|    |  | (principal executive officer)               
|    | 
|By: |  | /s/ EMANUEL N. HILARIO                      
|    |  | Emanuel N. Hilario                          
|    |  | Chief Financial Officer                     
|    |  | (principal financial and accounting officer)

Date: November 6, 2008



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