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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number: 0-25123

P.F. Chang’s China Bistro, Inc.

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

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

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

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

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

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes þ          No o

          The aggregate market value of the registrant’s common stock as of the last day of the second fiscal quarter, June 29, 2003, is $1,235,078,898.

          On February 27, 2004 there were outstanding 25,565,988 shares of the registrant’s Common Stock.

Documents Incorporated by Reference

          Specified portions of the registrant’s Proxy Statement with respect to the Annual Meeting of Stockholders to be held April 23, 2004 are incorporated by reference into Part III of this Report.

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Explanatory Note

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

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

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PART I

Item 1.     Business

General

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

      P.F. Chang’s owned and operated 97 full service, or Bistro, restaurants as of December 28, 2003 that feature a blend of high quality, traditional Chinese cuisine and American hospitality in a sophisticated, contemporary bistro setting. Our restaurants offer intensely flavored, highly memorable culinary creations, prepared from fresh ingredients, including premium herbs and spices imported directly from China. Our menu is focused on select dishes created to capture the distinct flavors and styles of the five major culinary regions of China: Canton, Hunan, Mongolia, Shanghai and Szechwan. By adhering to the Chinese culinary precepts of fan and t’sai, a balancing of rice, noodles and grains with meat, seafood and vegetables, the Bistro’s menu offers an array of taste, texture, color and aroma. The menu is highlighted by dishes such as Chang’s Spicy Chicken, Orange Peel Beef, Peking Dumplings, Chicken in Soothing Lettuce Wrap, Szechwan-Style Long Beans and Dan Dan Noodles. Our traditional cuisine is complemented by a full service bar offering an extensive selection of wines, specialty drinks, Asian beers, cappuccino and espresso. We offer superior customer service in a high energy atmosphere featuring a display kitchen, exhibition wok cooking and a decor that includes wood and slate floors, mounted life-size terra cotta replicas of Xi’an warriors and narrative murals depicting 12th century China.

      We also owned and operated 33 limited service, or Pei Wei, restaurants as of December 28, 2003. Pei Wei Asian Diner caters to a quicker, more casual dining experience as compared to P.F. Chang’s China Bistro. Pei Wei opened its first unit in July 2000 in the Phoenix, Arizona area, four units in 2001, 11 units in 2002, and 17 units in 2003. These restaurants are located in Arizona, Colorado, Southern California, Nevada, New Mexico, and Texas.

Concept and Strategy

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

Menu

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

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      In addition to the core menu, the Bistro menu also offers special lunch and dinner selections. These special selections are developed by our executive chefs around the country and are modified several times a year to provide our guests with fresh, new tastes. Individual items that are well received by guests migrate to the core menu. Fresh produce, seafood, meat, poultry and specialty items that are specific to a certain region of the United States or to a specific season are featured on a daily basis. Extensive research and development, including trips to China by our corporate executive chef, continually reinforce our commitment to training P.F. Chang’s chefs and enhancing our menu offerings.

      The Bistro’s entrees range in price from $8.00 to $18.00, and our appetizers range in price from $4.00 to $8.00. The average check per guest, including alcoholic beverages, is approximately $17.00 to $18.00. Sales of alcoholic beverages, featuring an extensive selection of wines, all of which are offered by the glass, constitute approximately 17% of revenues. Lunch and dinner contribute approximately 33% and 67% of revenues, respectively.

      The menu for our limited service concept, Pei Wei, also offers a variety of intensely flavored culinary creations; however, this menu is more concise and includes not only Chinese cuisine but other Asian dishes as well. Our guests can enjoy some of their favorite Chinese dishes available at the Bistro, such as Soothing Lettuce Wraps and Orange Peel Beef, while also sampling other items such as Vietnamese Salad Rolls and Pad Thai. Pei Wei entrees range in price from $6.00 to $9.00, with appetizers ranging from $3.00 to $7.00. We offer beer and wine at Pei Wei and these purchases comprise approximately 2% of sales. Take-out sales comprise approximately 40% of total revenues. The average check for a guest dining in at Pei Wei, including beer and wine sales, is approximately $8.00 to $9.00. Lunch and dinner contribute approximately 45% and 55% of revenues, respectively.

Operations

      We utilize a partnership structure to facilitate the development, leadership and operation of our restaurants. We have entered into a series of partnership agreements with all of our regional managers (“Market Partners” and “Area Partners”), and with those of our general managers (“Operating Partners”) and executive chefs (“Chef Partners”) who choose to invest. Each partner who wishes to participate in the partnership structure is required to make a cash capital contribution in exchange for their percentage interest in the partnership. We do not finance any partner capital contributions. For this capital contribution, the partner receives an ownership interest generally ranging from two to seven percent in a specific restaurant or region. Each partner shares in the income or loss of the restaurant or region they invest in based solely on their percentage interest purchased.

      P.F. Chang’s strives to create a sophisticated dining experience through the careful selection, training and supervision of personnel. The staff of a typical Bistro restaurant consists of a general manager, two or three managers, an executive chef, one or two sous chefs and approximately 125 hourly employees, many of whom work part-time. The staff of a typical Pei Wei restaurant consists of a general manager, one or two managers, an executive chef, and one sous chef, as well as approximately 45 hourly employees. The general manager of each restaurant is responsible for the day-to-day operations of that restaurant, including hiring, training and development of personnel, as well as operating results. The executive chef is responsible for product quality, purchasing, food costs and kitchen labor costs. P.F. Chang’s requires our general managers and executive chefs to have significant experience in the full service restaurant industry.

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

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

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Marketing

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

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

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

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

Competition

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

Management Information Systems

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

Purchasing

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

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Employees

      At December 28, 2003, P.F. Chang’s employed approximately 16,500 persons, 155 of whom were executive office personnel, 1,070 of whom were unit management personnel and the remainder of whom were hourly restaurant personnel. Our employees are not covered by a collective bargaining agreement. We consider our employee relations to be good.

Unit Economics

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

Access to Information

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

Risk Factors

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

      We operated 97 full service, or Bistro, restaurants and 33 limited service, or Pei Wei, restaurants as of December 28, 2003, 35 of which have been opened within the last twelve months. The results achieved by these restaurants may not be indicative of longer-term performance or the potential market acceptance of restaurants in other locations. We cannot assure you that any new restaurant that we open will have similar operating results to those of prior restaurants. Our new restaurants commonly take several months to reach planned operating levels due to inefficiencies typically associated with new restaurants, including lack of market awareness, inability to hire sufficient staff and other factors. The failure of our existing or new restaurants to perform as predicted could negatively impact our revenues and results of operations.

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

      Critical to our future success is our ability to successfully expand our operations. We have expanded from seven restaurants at the end of 1996 to 130 restaurants as of December 28, 2003. We expect to open 18 Bistros and 20 Pei Wei restaurants in 2004. Our ability to expand successfully will depend on a number of factors, including:

	•	identification and availability of suitable locations;
	•	competition for restaurant sites;
	•	negotiation of favorable lease arrangements;
	•	timely development of commercial, residential, street or highway construction near our restaurants;
	•	management of the costs of construction and development of new restaurants;
	•	securing required governmental approvals and permits;

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	•	recruitment of qualified operating personnel, particularly managers and chefs;
	•	weather conditions;
	•	competition in new markets; and
	•	general economic conditions.

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

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

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

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

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

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

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

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

      Our success will continue to be dependent on our ability to attract and retain a sufficient number of qualified employees, including kitchen staff and waitstaff, to keep pace with our expansion schedule. Qualified individuals needed to fill these positions are in short supply in certain areas. Our inability to recruit and retain qualified individuals may delay the planned openings of new restaurants while high employee turnover in

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

      Although it appears that our country’s current economic conditions are improving, we could still experience pressures in 2004 associated with a weak economy. Our customers may become more apprehensive about the economy and reduce their level of discretionary spending. A decrease in discretionary spending could impact the frequency with which our customers choose to dine out or the amount they spend on meals while dining out, thereby decreasing our revenues. Additionally, the continued military responses to terrorist attacks on the United States and possible future terrorist attacks may exacerbate current economic conditions and lead to further weakening in the economy. Adverse economic conditions and any related decrease in discretionary spending by our customers could have an adverse effect on our revenues and operating results.

Fluctuations in operating results may cause profitability to decline.

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

	•	general economic conditions;
	•	consumer confidence in the economy;
	•	changes in consumer preferences;
	•	competitive factors, including the performance of restaurant stocks;
	•	weather conditions;
	•	timing of new restaurant openings and related expenses;
	•	revenues contributed by new restaurants; and
	•	increases or decreases in comparable restaurant revenues.

      Historically, we have experienced variability in the amount and percentage of revenues attributable to preopening expenses. We typically incur the most significant portion of preopening expenses associated with a given restaurant within the two months immediately preceding and the month of the opening of the restaurant. Our experience to date has been that labor and operating costs associated with a newly opened restaurant for the first several months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Accordingly, the volume and timing of new restaurant openings has had, and is expected to continue to have, a meaningful impact on preopening expenses as well as labor and operating costs.

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

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

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      For the reasons noted above, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for a full fiscal year, and, from time to time in the future, our results of operations may be below the expectations of public market analysts and investors. This discrepancy could cause the market price of our common stock to decline. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

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

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

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

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

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

      Our success will continue to be highly dependent on our key operating officers and employees. We must continue to attract, retain and motivate a sufficient number of qualified management and operating personnel, including regional managers, general managers and executive chefs, to keep pace with an aggressive expansion schedule. Individuals of this caliber are historically in short supply and this shortage may limit our ability to effectively penetrate new market areas. Additionally, the ability of these key personnel to maintain consistency in the quality and atmosphere of our restaurants is a critical factor in our success. Any failure to do so may harm our reputation and result in a loss of business.

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

      Our profitability is dependent in part on our ability to anticipate and react to changes in food costs. Other than for a portion of our produce, which is purchased locally by each restaurant, we rely on Distribution Market Advantage as the primary distributor of our ingredients. Distribution Market Advantage is a cooperative of multiple food distributors located throughout the nation. We have a non-exclusive contract with Distribution Market Advantage on terms and conditions that we believe are consistent with those made available to similarly situated restaurant companies. Although we believe that alternative distribution sources are available, any increase in distribution prices or failure to perform by the Distribution Market Advantage could cause our food costs to fluctuate. Additional factors beyond our control, including adverse weather conditions and governmental regulation, may affect our food costs. We may not be able to anticipate and react

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Rising insurance costs could negatively impact profitability.

      The cost of insurance (workers compensation insurance, general liability insurance, health insurance and directors and officers liability) has risen significantly over the past few years and is expected to continue to increase in 2004. These increases could have a negative impact on our profitability if we are not able to negate the effect of such increases by continuing to improve our operating efficiencies. We self insure a substantial portion of our workers compensation, general liability and health care costs and unfavorable changes in trends could also have a negative impact on our profitability.

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

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

	•	environmental;
	•	building construction;
	•	zoning requirements;
	•	the preparation and sale of food and alcoholic beverages; and
	•	employment.

      Our facilities are licensed and subject to regulation under state and local fire, health and safety codes. The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. We may not be able to obtain necessary licenses or other approvals on a cost-effective and timely basis in order to construct and develop restaurants in the future. Various federal and state labor laws govern our operations and our relationship with our employees, including minimum wage, overtime, working conditions, fringe benefit and citizenship requirements. In particular, we are subject to the regulations of the Bureau of Citizenship and Immigration Service (“BCIS”). Given the location of many of our restaurants, even if we operate those restaurants in strict compliance with BCIS requirements, our employees may not all meet federal citizenship or residency requirements, which could lead to disruptions in our work force.

      Approximately 17% of our revenues at the Bistro and 2% at Pei Wei are attributable to the sale of alcoholic beverages. We are required to comply with the alcohol licensing requirements of the federal government, states and municipalities where our restaurants are located. Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. If we fail to comply with federal, state or local regulations our licenses may be revoked and we may be forced to terminate the sale of alcoholic beverages at one or more of our restaurants.

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

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

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Litigation could have a material adverse effect on our business.

      We are from time to time the subject of complaints or litigation from guests alleging food-borne illness, injury or other food quality, health or operational concerns. We may be adversely affected by publicity resulting from such allegations, regardless of whether such allegations are valid or whether we are liable. We are also subject to complaints or allegations from former or prospective employees from time to time. A lawsuit or claim could result in an adverse decision against us that could have a materially adverse effect on our business. Additionally, the costs and expense of defending ourselves against lawsuits or claims, regardless of merit, could have an adverse impact on our profitability. (See Item 3 of the Form 10-K.)

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

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

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

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

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

Special Note Regarding Forward-Looking Statements

      Some of the statements in this Form 10-K and the documents we incorporate by reference constitute forward-looking statements. In some cases, you can identify forward-looking statements by terms such as may, will, should, expect, plan, intend, forecast, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terminology. The forward-looking statements contained in this document involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include the matters listed under Risk Factors and elsewhere in this Form 10-K, including, but not limited to, anticipated restaurant openings, anticipated costs and sizes of future restaurants and the adequacy of anticipated sources of cash to fund our future capital requirements. Because we cannot guarantee future results, levels of activity, performance or achievements, you should not place undue reliance on these forward-looking statements.

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

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

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

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Expansion Strategy and Site Selection

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

      We intend to continue to develop Bistros that typically range in size from 6,000 square feet to 7,000 square feet, and that require, on average, a total capitalized investment of approximately $3.4 million per restaurant. This total investment includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. We expect that our planned future restaurants will require, on average, a total cash investment per restaurant of approximately $2.3 million. Preopening expenses are expected to average approximately $375,000 per restaurant. We currently lease the sites for all of our Bistro restaurants and do not intend to purchase real estate for our sites in the future.

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

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

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

      P.F. Chang’s executive offices are currently located in approximately 30,000 square feet of leased space in Scottsdale, Arizona.

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

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

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

      None.

PART II

      P.F. Chang’s common stock is traded on the Nasdaq Stock Market under the symbol “PFCB”.

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

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

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

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

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

Selected Consolidated Financial Data

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

Overview

      As of December 28, 2003, we owned and operated 97 full service restaurants, or Bistros, that combine a distinctive blend of high quality, traditional Chinese cuisine and American hospitality in a sophisticated, contemporary bistro setting. P.F. Chang’s was formed in early 1996 with the acquisition of the four original Bistro restaurants and the hiring of an experienced management team. Utilizing a partnership management philosophy, we embarked on a strategic expansion of the concept targeted at major metropolitan areas throughout the United States.

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

      We intend to open 18 new Bistros in 2004. Approximately half of those units that we intend to develop in 2004 will be located in existing markets, and approximately half of these new restaurants will be in new markets across the United States. We have signed lease agreements or letters of intent for all of our development planned for fiscal 2004. We intend to continue to develop full service restaurants that typically range in size from 6,000 square feet to 7,000 square feet, and that require, on average, a total cash investment of approximately $2.3 million and total invested capital of approximately $3.4 million per restaurant. Preopening expenses are expected to average approximately $375,000 per restaurant. This total capitalized investment includes the capitalized lease value of the property, which can vary greatly depending on the specific trade area. See “Risk Factors — Development and Construction Risks.”

      We also intend to develop 20 Pei Wei restaurants in 2004. We will continue our development in existing markets and plan to enter five to six new markets in 2004. Our Pei Wei restaurants are generally around 3,000 to 3,200 square feet in size and require an average total cash investment of approximately $750,000 and total invested capital of approximately $1.3 million per restaurant. Preopening expenses at Pei Wei are expected to average approximately $110,000 per restaurant.

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Results of Operations

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

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

      P.F. Chang’s operates on a 52/53-week year, with the fiscal year ending on the Sunday closest to December 31. Fiscal years 2002 and 2003 each were comprised of 52 weeks.

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

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

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

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

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

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

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

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

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

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

      Operating. Operating expenses consist primarily of various restaurant-level costs, which are generally variable and are expected to fluctuate with revenues. Our experience to date has been that operating costs associated with a newly opened restaurant, for approximately its first four to six months of operation, are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Consolidated operating expenses increased by $22.2 million, or 31.4%, to $93.0 million in the year ended December 28, 2003 from $70.8 million in the year ended December 29, 2002. Operating expenses

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

      Occupancy. Occupancy costs include both fixed and variable portions of rent, common area maintenance charges, property insurance and property taxes. Consolidated occupancy costs increased by $5.1 million, or 20.0%, to $30.6 million in the year ended December 28, 2003 from $25.5 million in the year ended December 29, 2002. Occupancy costs decreased as a percentage of revenues to 5.5% in the year ended December 28, 2003 from 6.0% in the year ended December 29, 2002. Each segment contributed as follows:

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

      General and Administrative. General and administrative expenses are composed of expenses associated with corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future growth, including management and staff salaries, employee benefits, travel, legal and professional fees, technology and market research. Consolidated general and administrative expenses increased to $28.8 million in the year ended December 28, 2003 from $20.6 million in the year ended December 29, 2002. Consolidated general and administrative expenses increased as a percentage of revenues to 5.1% in the year ended December 28, 2003 from 4.9% in the year ended December 29, 2002. Each segment contributed as follows:

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

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

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

      Preopening Expense. Preopening costs, which are expensed as incurred, consist of expenses incurred prior to opening a new restaurant and are comprised principally of manager salaries and relocation, employee payroll and related training costs. Consolidated preopening expenses in the year ended December 28, 2003 increased to $8.7 million from $6.3 million in the year ended December 29, 2002. Preopening expenses as a percentage of revenues were 1.5% for both the years ended December 28, and December 29, 2002. Each segment contributed as follows:

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

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

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

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

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      Minority interest represents the portion of our net earnings (losses) which is attributable to the collective ownership interests of our minority investors. P.F. Chang’s employs a partnership management structure in connection with which we have entered into a series of partnership agreements with our regional managers, certain of our general managers, and certain of our executive chefs. We also have minority shareholders in our Pei Wei Asian Diner, Inc. subsidiary. Consolidated minority interest for the year ended December 28, 2003 increased to $7.9 million from $5.2 million for the year ended December 29, 2002. As a percentage of revenues, minority interest was 1.4% of revenues for the year ended December 28, 2003 and 1.2% of revenues for the year ended December 29, 2002. The impact of an increase in the operating profit at many of our existing restaurants in 2003 compared to 2002 was slightly offset by the impact of Pei Wei’s lower minority investor ownership on our total minority interest expense.

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

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

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

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

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

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

	Bistro: Revenues increased by $87.3 million at our Bistro restaurants. This increase was attributable to revenues of $28.1 million generated by new restaurants opened in 2002, a $44.0 million increase in revenues in 2002 for restaurants that opened in 2001 and a $15.2 million increase in revenues for restaurants opened prior to 2001. Increased customer visits as well as a modest price increase in the last half of the second quarter of 2001 produced comparable restaurant sales gains of 5.3% in 2002. Restaurants are included in this comparable restaurant measure once they reach their eighteenth month of operation.
	Pei Wei: Revenues increased by $16.0 million at our Pei Wei restaurants. The increase was primarily attributable to revenues of $9.8 million generated by our eleven new restaurants opened in 2002 and a $6.5 million increase in revenues in 2002 for the four restaurants that opened in 2001.

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

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