P F CHANGS CHINA BISTRO INC, 424B4, 1998-12-07

P F CHANGS CHINA BISTRO INC
424B4, 1998-12-07
EATING PLACES

Previous: PROFUNDS, 485APOS, 1998-12-07

Next: SL GREEN REALTY CORP, S-3, 1998-12-07

<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration File No. 333-59749

PROSPECTUS
DECEMBER 4, 1998

4,150,000 SHARES

[P.F. CHANG'S LOGO]

COMMON STOCK

Of the 4,150,000 shares of common stock offered hereby (the "Common
Stock"), 3,300,000 shares are being offered by P.F. Chang's China Bistro, Inc.
("P.F. Chang's" or the "Company") and 850,000 shares are being offered by the
Selling Stockholder. See "Principal and Selling Stockholders." The Company will
not receive any of the proceeds from the sale of the shares by the Selling
Stockholder.

Prior to this offering, there has been no public market for the Common
Stock. See "Underwriting" for information relating to the factors to be
considered in determining the initial public offering price.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "PFCB."

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............................ $12.00 $0.84 $11.16 $11.16
Total(3)............................. $49,800,000 $3,486,000 $36,828,000 $9,486,000
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) The Company and the Selling Stockholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $800,000.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days after the date hereof to purchase up to 622,500 additional shares of
Common Stock on the same terms and conditions set forth above solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to the Public, Underwriting Discounts and Commissions and
Proceeds to the Company will be $57,270,000, $4,008,900 and $43,775,100,
respectively. See "Underwriting."

The shares of Common Stock are offered by the several Underwriters subject
to prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to certain prior conditions including the right of the Underwriters to
reject any order in whole or in part. It is expected that delivery of the
certificates representing the shares of Common Stock will be made in New York,
New York on or about December 9, 1998.

DONALDSON, LUFKIN & JENRETTE
NATIONSBANC MONTGOMERY SECURITIES LLC

DAIN RAUSCHER WESSELS
a division of Dain Rauscher
Incorporated
<PAGE> 2

The inside front cover of the prospectus contains a map of the United
States which identifies the cities in which the Company has existing restaurants
and restaurants scheduled to be opened in 1998. Above the map is a photograph of
the exterior of the Scottsdale, Arizona restaurant. The inside cover folds out
to display photographs of the interiors of other P.F. Chang's China Bistro
restaurants set over the background of a mural depicting 12th century China.

[INSIDE FRONT COVER]

The Company has registered the servicemark "P.F. Chang's China Bistro." All
other brand names and trademarks appearing in this Prospectus are the property
of their respective holders.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. As used in this Prospectus, unless the context
otherwise requires, the terms "Company" and "P.F. Chang's" include P.F. Chang's
China Bistro, Inc. and all of its subsidiaries and affiliates and their
respective predecessors. Except as otherwise noted, all information in this
Prospectus assumes (i) no exercise of the Underwriters' over-allotment option,
(ii) no exercise of options or warrants to purchase shares of Common Stock and
(iii) the conversion into shares of Common Stock upon the closing of this
offering of all outstanding shares of Convertible Redeemable Preferred Stock and
the deferred purchase price liability representing the balance of the purchase
price from the acquisition of minority interests in three of the four original
restaurants (the "Deferred Purchase Price Liability"). Information in this
Prospectus also gives effect to a one-for-two reverse split of the Common Stock
effected in August 1998. See "Description of Capital Stock" and "Underwriting."

THE COMPANY

P.F. Chang's owns and operates 22 full service restaurants that feature a
blend of high quality, traditional Chinese cuisine and American hospitality in a
sophisticated, contemporary bistro setting. The Company's restaurants offer
intensely flavored, highly memorable culinary creations, prepared from fresh
ingredients, including premium herbs and spices imported directly from China.
The 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 P.F. Chang'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 Ravioli, Chicken in Soothing Lettuce Wrap, Szechwan-Style Long
Beans and Dan Dan Noodles. The traditional cuisine is complemented by a full
service bar offering an extensive selection of wines, specialty drinks, Asian
beers, cappuccino and espresso. The average check per customer, including
beverage, is approximately $17.00. The Company offers 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.

The Company was formed in early 1996 with the acquisition of the four
original P.F. Chang's restaurants and the hiring of an experienced management
team, led by Richard Federico and Robert Vivian, the Company's Chief Executive
Officer and Chief Financial Officer, respectively, to support the Company's
founder, Paul Fleming. P.F. Chang's opened three additional restaurants in 1996,
six in 1997 and expects to open ten restaurants in 1998 (nine of which are open)
and 13 in 1999. Key to the Company's expansion strategy and success at the
restaurant level is the Company's management philosophy pursuant to which
regional managers ("Market Partners"), certain general managers ("Operating
Partners") and certain executive chefs ("Culinary Partners") are allowed to
participate in the cash flows of the restaurants for which they have
responsibility. The Company has demonstrated the viability of the P.F. Chang's
concept in a wide variety of markets across the United States, including the
Southwest, southern California, Texas and southern Florida.

The P.F. Chang's concept was developed in 1993 by Paul Fleming, a
Phoenix-based restaurateur, in collaboration with Philip Chiang, the owner of
the Mandarin restaurant in Beverly Hills, California. The Company's objectives
are to (i) develop and operate a nationwide system of restaurants that offer
guests a sophisticated dining experience, (ii) create a loyal customer base that
generates a high level of repeat business and (iii) provide superior returns to
its investors. To achieve its objectives, the Company strives to offer high
quality Chinese cuisine in a memorable atmosphere while delivering superior
customer service and an excellent dining value. The Company intends to continue
its expansion program and believes the management incentives provided by its
Market, Operating and Culinary Partners programs should position the Company to
continue this expansion without sacrificing the Company's restaurant level
operating performance and return on investment.
------------------

The Company was incorporated in January 1996 as a Delaware corporation in
connection with the acquisition of the four original P.F. Chang's restaurants.
The Company's principal executive office is located at 5090 North 40th Street,
Suite 160, Phoenix, Arizona 85018. The Company's telephone number is (602) 957-
8986, and its facsimile number is (602) 957-8998.
3
<PAGE> 4

THE OFFERING

Common Stock offered by the Company........... 3,300,000 shares

Common Stock offered by the Selling
Stockholder................................... 850,000 shares

Common Stock to be outstanding after the
offering...................................... 9,583,218 shares(1)

Use of proceeds............................... Development of new restaurants,
repayment of certain
indebtedness and general
corporate purposes including
working capital. See "Use of
Proceeds."

Proposed Nasdaq National Market symbol........ PFCB
- ------------------------------
(1) Based on 6,283,218 shares outstanding at September 27, 1998, which includes
(i) 2,500,000 shares of Common Stock outstanding as of such date, (ii)
3,516,613 shares issuable on conversion of outstanding shares of Series A
Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") and
outstanding shares of Series B Convertible Redeemable Preferred Stock (the
"Series B Preferred Stock" and together with the Series A Preferred Stock,
the "Preferred Stock"), (iii) 83,362 shares of Common Stock issuable upon
conversion of paid-in-kind dividends to be paid to holders of Series A
Preferred Stock of the Company subsequent to September 27, 1998 but prior to
consummation of the offering and (iv) 183,243 shares issuable upon
consummation of this offering upon conversion of the Deferred Purchase Price
Liability. Excludes (i) 1,130,885 shares reserved as of such date for
issuance upon the exercise of outstanding stock options at a weighted
average exercise price of $4.68 per share, (ii) an aggregate of 562,500
shares reserved for future grant under the Company's stock option and stock
purchase plans and (iii) 62,190 shares reserved for issuance upon the
exercise of outstanding warrants at an exercise price of $4.00 per share.
See "Management--Benefit Plans" and "Description of Capital Stock."

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
FISCAL YEAR TOTAL YEAR FISCAL YEAR SEPTEMBER 28, SEPTEMBER 27,
1995(2) 1996(3) 1997 1997 1998
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................ $10,465 $18,445 $39,768 $27,638 $53,176
Total restaurant operating costs.... 8,891 15,835 32,470 22,403 42,647
Income (loss) from operations....... 660 9 (2) 455 2,198
Net income (loss)................... $ 647 $(1,145) $(1,696) $ (865) $ 884
Diluted net income (loss) per
share............................. -- -- $ (1.03) $ (0.53) $ 0.05
Shares used in calculation of
diluted net income (loss) per
share(4).......................... -- -- 2,500 2,500 3,206
PRO FORMA DATA:(5)
Pro forma diluted net income (loss)
per share......................... -- $ (0.12) $ (0.11) $ 0.01 $ 0.21
Shares used in calculation of pro
forma diluted net income (loss)
per share......................... -- 5,060 5,795 5,940 7,763
OPERATING DATA:
Comparable restaurant sales
increase(6)....................... 25.1% 13.0% 13.8% 12.3% 12.9%
Average weekly restaurant sales..... $81,122 $81,976 $90,383 $91,823 $95,127
Return on investment(7)............. 25.2% 34.4% 34.9% -- --
Restaurants open at end of period... 4 7 13 9 17
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 27, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(8) AS ADJUSTED(9)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,184 $ 3,184 $21,212
Total assets................................................ 41,528 41,528 59,556
Short- and long-term debt................................... 20,475 20,475 2,475
Deferred Purchase Price Liability........................... 2,199 -- --
Convertible Redeemable Preferred Stock...................... 18,526 -- --
Common stockholders' equity (deficit)....................... (4,280) 16,445 52,473
</TABLE>

4
<PAGE> 5

- ------------------------------
(1) The Company's fiscal quarters typically consist of thirteen week periods
ending on the Sunday closest to the last day of the calendar quarter, and
its fiscal year ends on the Sunday closest to December 31 in each year.

(2) Fiscal year 1995 information reflects the combined results of operations of
Fleming Chinese Restaurants, Inc. (Scottsdale), P.F. Chang's II, Inc.
(Newport Beach), P.F. Chang's III, L.L.C. (La Jolla) and P.F. Chang's IV,
L.L.C. (Irvine) (collectively, the "Predecessors"). Accordingly, net income
(loss) per share for fiscal year 1995 is not presented because it is not
meaningful. See "Certain Transactions" and Note 1 of Notes to Consolidated
Financial Statements.

(3) Prior to February 29, 1996, the Company's business was conducted by the
Predecessors. Total year 1996 information reflects the combined results of
the Predecessors for the period beginning January 1, 1996 and ending
February 28, 1996 and the results of the Company for the period beginning
February 29, 1996 and ending December 29, 1996. Accordingly, net income
(loss) per share for total year 1996 is not presented because it is not
meaningful. The allocation of the purchase price in connection with the
purchase of minority interests resulted in no material adjustment to the
historical recorded basis in the assets and liabilities except for goodwill.
Therefore, the effect to the statement of operations is primarily
amortization of goodwill subsequent to the date of acquisition. See
"Selected Consolidated Financial and Operating Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Certain Transactions" and Note 1 of Notes to Consolidated Financial
Statements.

(4) See Notes 2, 6 and 8 of Notes to Consolidated Financial Statements.

(5) Pro forma information gives effect as of the beginning of each period to (i)
the purchase of substantially all of the minority interests in the
Predecessors, (ii) the repayment of the Company's revolving line of credit
through the application of the net proceeds from the sale of a sufficient
number of shares of Common Stock at the initial public offering price, and
(iii) the conversion into Common Stock of the Preferred Stock and the
Deferred Purchase Price Liability.

(6) A new restaurant is included in the calculation of the change in comparable
restaurant sales in the eighteenth month of that restaurant's operation.

(7) Return on investment for each restaurant is determined as the quotient of
earnings of such restaurant before interest, taxes and rent divided by the
Company's total investment in restaurant assets. The information presented
in the table is the aggregate return on investment for all restaurants open
during the respective periods. The computation of return on investment
excludes rents, interest and taxes to provide for an evaluation of
operational results of individual restaurants without the variability
introduced by different forms of financing and ownership (i.e., purchased
and financed versus leased). See "Business--Unit Economics."

(8) Adjusted to give effect to the conversion into Common Stock of the Preferred
Stock and the Deferred Purchase Price Liability.

(9) Adjusted to give effect as of September 27, 1998 to (i) the receipt by the
Company of the estimated net proceeds of $36,028,000 from the sale of
3,300,000 shares of Common Stock offered hereby by the Company, (ii)
application of a portion of the net proceeds of this offering to repay the
Company's revolving line of credit, and (iii) the conversion into Common
Stock of the Preferred Stock and the Deferred Purchase Price Liability.

5
<PAGE> 6

RISK FACTORS

In addition to the other information in this Prospectus, prospective
investors should carefully consider the following risk factors in evaluating an
investment in the Company before purchasing any shares of Common Stock offered
hereby. This Prospectus contains forward-looking statements which involve risks
and uncertainties. Such forward-looking statements may be deemed to include
anticipated restaurant openings, anticipated costs and sizes of future
restaurants and the adequacy of anticipated sources of cash, including the
proceeds from this offering, to fund the Company's future capital requirements.
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. Prospective investors
are cautioned that actual events or results may differ materially from those
discussed in the forward-looking statements. Factors that might cause actual
events or results to differ materially from those indicated by such forward-
looking statements may include the matters set forth below and elsewhere in this
Prospectus.

HISTORY OF NET LOSSES

Although the Company has achieved positive cash flow from its restaurant
operations since inception, the significant investment of resources in acquiring
and opening its restaurants resulted in the Company incurring net losses in each
fiscal period from inception through December 28, 1997. As of September 27,
1998, the Company had an accumulated deficit of approximately $4.3 million.
Although the Company achieved net income in the first three quarters of fiscal
1998, there can be no assurance that the Company will be able to sustain
profitable operations in the future. In fact, due to expenses related to opening
six stores in the fourth quarter of 1998 the Company expects to sustain a net
loss for the quarter. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

UNCERTAINTIES ASSOCIATED WITH EXPANDING OPERATIONS

Because the Company currently operates only 22 restaurants, eleven of which
have been opened within the last twelve months, the results achieved to date by
the Company's relatively small number of restaurants may not be indicative of
those restaurants' long-term performance or the potential market acceptance of
restaurants in other locations. Further, there can be no assurance that any new
restaurant which the Company opens will obtain similar operating results to
those of prior restaurants. The Company anticipates that its new restaurants
will commonly take several months to reach planned operating levels due to
certain inefficiencies typically associated with new restaurants, including lack
of market awareness, inability to hire sufficient staff and other factors.

A critical factor in the Company's future success is its ability to
successfully expand its operations. The Company expanded from seven restaurants
at the end of 1996 to 22 restaurants as of December 3, 1998. The Company expects
to open a total of ten restaurants during 1998 (nine of which are open) and an
additional 13 in 1999. The Company's ability to expand successfully will depend
on a number of factors, including the identification and availability of
suitable locations, competition for restaurant sites, the negotiation of
favorable lease arrangements, timely development in certain cases of commercial,
residential, street or highway construction near the Company's restaurants,
management of the costs of construction and development of new restaurants,
securing required governmental approvals and permits, recruitment of qualified
operating personnel (particularly managers and chefs), the competition in new
markets, general economic conditions and other factors, some of which are beyond
the control of the Company. The opening of additional restaurants in the future
will depend in part upon the Company's ability to generate sufficient funds from
operations or to obtain sufficient equity or debt financing on favorable terms
to support such expansion. There can be no assurance that the Company will be
successful in addressing these risks, that the Company will be able to open its
planned new operations on a timely basis, if at all, or, if opened, that those
operations will be operated profitably. The Company has experienced, and expects
to continue to experience, delays in restaurant openings from time to time.
Delays or failures in opening planned new restaurants could have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows.

6
<PAGE> 7

The Company's growth strategy may strain the Company's management,
financial and other resources. To manage its growth effectively, the Company
must maintain a high level of quality and service at its existing and future
restaurants, continue to enhance its operational, financial and management
capabilities and locate, hire, train and retain experienced and dedicated
operating personnel, particularly managers and chefs. There can be no assurance
that the Company will be able to effectively manage these and other factors
necessary to permit it to achieve its expansion objectives, and any failure to
do so could have a material adverse effect on the Company's business, financial
condition, results of operations or cash flows.

DEVELOPMENT AND CONSTRUCTION RISKS

Because each P.F. Chang's restaurant is distinctively designed to
accommodate particular characteristics of each location and to blend local or
regional design themes with the Company's principal trade dress and other common
design elements, each location presents its own development and construction
risks. Many factors may affect the costs associated with the development and
construction of the Company's 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. There can be no assurance that the Company will
be able to develop additional P.F. Chang's restaurants within anticipated
budgets or time periods, and any such failure could materially adversely affect
the Company's business, financial condition, results of operations or cash
flows.

DEPENDENCE ON KEY PERSONNEL

The success of the Company's business will continue to be highly dependent
on its key operating officers and employees, including Richard Federico, the
Company's Chief Executive Officer and President, and Robert Vivian, the
Company's Chief Financial Officer. The Company's success in the future will be
dependent on its ability to attract, retain and motivate a sufficient number of
qualified management and operating personnel, including Market Partners,
Operating Partners and chefs, to keep pace with an aggressive expansion
schedule. Such qualified individuals are historically in short supply and any
inability of the Company to attract and retain such key employees may limit its
ability to effectively penetrate new market areas. Additionally, the ability of
these key personnel to maintain consistency in the quality and atmosphere of the
Company's restaurants in various markets is a critical factor in the Company's
success. Any failure to do so may harm the Company's reputation and could have a
material adverse effect on the Company's business, financial condition, results
of operations or cash flows. See "Business--Operations" and "Management."

RESTAURANT INDUSTRY AND COMPETITION

The restaurant industry is intensely competitive with respect to food
quality, price-value relationships, ambiance, service and location, and many
restaurants compete with the Company at each of its locations. The Company's
competitors include mid-price, full-service casual dining restaurants and
locally owned and operated Chinese restaurants. There are many well-established
competitors with substantially greater financial, marketing, personnel and other
resources than the Company, and many of the Company's competitors are well
established in the markets where the Company's operations are, or in which they
may be, located. Additionally, other companies may develop restaurants that
operate with similar concepts.

The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, discretionary spending priorities, weather
conditions, tourist travel, traffic patterns and the type, number and location
of competing restaurants. Changes in these factors could have a material adverse
effect on the Company's business, financial condition, results of operations or
cash flows. In the future, changes in consumer tastes may require the Company to
modify or refine elements of its restaurant system to evolve its concept in
order to compete with popular new restaurant formats or concepts that develop
from time to time, and there can be no assurance that the Company will be
successful in implementing such modifications. See "Business--Competition."

7
<PAGE> 8

FLUCTUATIONS IN OPERATING RESULTS

The Company's 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, weather
conditions, the timing of new restaurant openings and related expenses, revenues
contributed by new restaurants and increases or decreases in comparable
restaurant revenues. Historically, the Company has experienced variability in
the amount and percentage of revenues attributable to preopening expenses. The
Company typically incurs the most significant portion of preopening expenses
associated with a given restaurant within the two months immediately preceding
and the month of the opening of the restaurant. In addition, the Company's
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 have a meaningful impact on
preopening expenses and labor and operating costs until such time as a larger
base of restaurants in operation mitigates such impact. Due to the foregoing
factors, 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, the Company's results of operations may be below the
expectations of public market analysts and investors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

CHANGES IN FOOD COSTS

The Company's profitability is dependent in part on its ability to
anticipate and react to changes in food costs. Other than for produce, which is
purchased locally by each restaurant, the Company relies on Distributors
Marketing Alliance as the primary distributor of its food. Distributors
Marketing Alliance is a cooperative of multiple food distributors located
throughout the nation. The Company has a non-exclusive short term contract with
Distributors Marketing Alliance on terms and conditions which the Company
believes are consistent with those made available to similarly situated
restaurant companies. Although the Company believes that alternative
distribution sources are available, any increase in distribution prices or
failure to perform by the Distributors Marketing Alliance could cause the
Company's food costs to fluctuate. Further, various factors beyond the Company's
control, including adverse weather conditions and governmental regulation, may
affect the Company's food costs. There can be no assurance that the Company will
be able to anticipate and react to changing food costs through its purchasing
practices and menu price adjustments in the future, and failure to do so could
have a material adverse effect on the Company's business, financial condition,
results of operations or cash flows.

LITIGATION

The Company is from time to time the subject of complaints or litigation
from guests alleging illness, injury or other food quality, health or
operational concerns. Adverse publicity resulting from such allegations may
materially adversely affect the Company and its restaurants, regardless of
whether such allegations are valid or whether the Company is liable. The Company
also is the subject of complaints or allegations from former or prospective
employees from time to time. A lawsuit or claim could result in an adverse
decision against the Company that could materially adversely affect the Company
or its business.

GOVERNMENTAL REGULATION; MINIMUM WAGE

The Company's operations are subject to regulation by federal agencies and
to licensing and regulation by state and local health, environmental, labor
relations, sanitation, building, zoning, safety, fire and other departments
relating to the development and operation of restaurants and retail
establishments. The Company's activities are also subject to the federal
Americans With Disabilities Act and related regulations, which prohibit
discrimination on the basis of disability in public accommodations and
employment. The Company is also 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. Given the location of many of the Company's
restaurants, even if the Company's operation of those restaurants is in strict
compliance with the requirements of the Immigration and
8
<PAGE> 9

Naturalization Service (the "INS"), the Company's employees may not all meet
federal citizenship or residency requirements, which could lead to disruptions
in its work force. Changes in any or all of these laws or regulations, such as
government-imposed paid leaves of absence or mandated health benefits, or
increased tax reporting and tax payment requirements for employees who receive
gratuities, could have a material adverse effect on the Company's business,
financial condition and results of operations. Delays or failures in obtaining
or maintaining required construction and operating licenses, permits or
approvals could delay or prevent the opening of new restaurants or could
materially and adversely affect the operation of existing restaurants. In
addition, there can be no assurance that the Company will be able to obtain
necessary variances or amendments to required licenses, permits or other
approvals on a cost-effective and timely basis in order to construct and develop
restaurants in the future. See "Business--Governmental Regulation."

A number of the Company's employees are subject to various minimum wage
requirements. Many of the Company's employees work in restaurants located in
California and receive salaries equal to the California minimum wage. The
minimum wage in California rose from $5.00 per hour effective March 1, 1997 to
$5.75 per hour effective March 1, 1998. There can be no assurance that similar
increases will not be implemented in other jurisdictions in which the Company
operates or seeks to operate. In addition, the federal minimum wage increased to
$5.15 per hour effective September 1, 1997. There can be no assurance that the
Company will be able to pass additional increases in labor costs through to its
guests in the form of menu price adjustments and, accordingly, such minimum wage
increases could have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.

POTENTIAL LABOR SHORTAGES

The success of the Company will continue to be dependent on its ability to
attract and retain a sufficient number of qualified employees, including kitchen
staff and waitstaff, to keep pace with its expansion schedule. Qualified
individuals needed to fill these positions are in short supply in certain areas,
and the inability to recruit and retain such individuals may delay the planned
openings of new restaurants or result in high employee turnover in existing
restaurants which could have a material adverse effect on the Company's
business, financial condition, cash flows or results of operations.

CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT

Following the closing of this offering, the Company's directors, officers
and their affiliates will beneficially own approximately 50.6% of the
outstanding Common Stock (47.7% if the Underwriters' over-allotment option is
exercised in full). As a result of such Common Stock ownership, the Company's
directors, officers and their affiliates, if they voted together, would be able
to elect all members of the Company's Board of Directors and control corporate
actions requiring stockholder approval. See "Principal and Selling
Stockholders."

CERTAIN ANTI-TAKEOVER MEASURES

The Company's Amended and Restated Certificate of Incorporation (the
"Charter") authorizes the Board of Directors to issue up to 10,000,000 shares of
preferred stock and to determine the powers, preferences, privileges, rights,
including voting rights, qualifications, limitations and restrictions of those
shares without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The Charter and By-laws, among other things, require that stockholder
actions occur at duly called meetings of the stockholders, limit who may call
special meetings of stockholders, do not permit cumulative voting in the
election of directors and require advance notice of stockholder proposals and
director nominations. Also, Section 203 of the Delaware General Corporation Law
(the "DGCL") restricts certain business combinations with any "interested
stockholder" as defined by such statute. These and other provisions could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company, discourage a hostile bid or
delay, prevent or deter a merger, acquisition or tender offer in which the
Company's stockholders could receive a premium for their shares, or a

9
<PAGE> 10

proxy contest for control of the Company or other change in the Company's
management. See "Management" and "Description of Capital Stock."

ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or,
if one develops, that it will be maintained. The initial public offering price
of the Common Stock has been established by negotiation among the Company, the
Selling Stockholder and the Underwriters. See "Underwriting" for a discussion of
factors considered in determining the initial public offering price. The market
price of the Common Stock could be subject to significant fluctuations in
response to the Company's operating results and other factors, including general
economic and market conditions. In addition, the stock market in recent periods
has experienced and continues to experience significant price and volume
fluctuations, which have affected the market price of the stock of many
companies and which have often been unrelated or disproportionate to the
operating performance of these companies. These fluctuations, as well as a
shortfall in sales or earnings compared to securities analysts' expectations,
changes in analysts' recommendations or projections or general economic and
market conditions, may adversely affect the market price of the Common Stock. In
the past, securities class action litigation has often been instituted following
periods of volatility in the market price for a company's securities. Such
litigation could result in substantial costs and a diversion of management
attention and resources, which could have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.

ADDITIONAL SHARES ELIGIBLE FOR FUTURE SALE IN THE PUBLIC MARKET

The sale of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. Upon the closing of this offering, the Company will have
outstanding an aggregate of 9,583,218 shares of Common Stock (including 183,243
shares issuable upon conversion of the Deferred Purchase Price Liability),
assuming no exercise of outstanding options, warrants or the Underwriters'
over-allotment option.

The 4,150,000 shares of Common Stock sold in this offering (and any shares
sold upon exercise of the Underwriters' over-allotment option) will be freely
tradable without restriction under the Securities Act of 1933, as amended (the
"Securities Act"). The remaining 5,433,218 shares of Common Stock are
"restricted shares" within the meaning of Rule 144 promulgated under the
Securities Act and are subject to restrictions under the Securities Act. Of
these restricted shares, 5,245,445 are subject to lock-up agreements under which
the holders have agreed not to sell or otherwise dispose of any of their shares
for a period of 180 days after the date of this Prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ").
In its sole discretion and at any time without notice, DLJ may release all or
any portion of the shares subject to the lock-up agreements. All of the
restricted shares subject to lock-up agreements will become available for sale
in the public market immediately following expiration of the 180-day lock-up
period, subject (to the extent applicable) to the volume and other limitations
of Rule 144 or Rule 701 promulgated under the Securities Act. In addition,
beginning 90 days after the date of this Prospectus, 187,773 restricted shares
not subject to lock-up agreements or contractual restrictions will become
available for sale in the public market, subject to the volume and other
limitations of Rule 144. In addition, after expiration of the lock-up period,
certain securityholders of the Company have the contractual right to require the
Company to register certain of their shares of Common Stock for future sale. The
Company is unable to predict the effect that future sales made pursuant to any
such registration rights, under Rule 144 or otherwise, may have on the
prevailing market price of the Common Stock. See "Description of Capital
Stock -- Registration Rights" and "Shares Eligible for Future Sale."

DILUTION

The price to the public in this offering is substantially higher than the
net tangible book value per share of Common Stock. Investors purchasing shares
of Common Stock in this offering will therefore incur immediate and substantial
dilution of $7.36 per share. See "Dilution."

10
<PAGE> 11

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,300,000 shares of
Common Stock being offered by the Company hereby are estimated to be
approximately $36,028,000 ($42,975,100 if the Underwriters' over-allotment
option is exercised in full), after deducting underwriting discounts and
commissions and other estimated offering expenses. The Company will not receive
any proceeds from the sale of shares by the Selling Stockholder. As a result of
this offering, the Company's commercial lender has the right to require the
Company to repay all amounts outstanding under its revolving line of credit
($25.0 million outstanding as of the date of this Prospectus), which bears
interest at LIBOR plus 6.0% (11.2% as of December 3, 1998) and expires December
31, 1998. This indebtedness was incurred for the development of restaurants, and
the Company plans to use a portion of the net proceeds of this offering to repay
all such indebtedness. In addition, the Company intends to use the balance of
the net proceeds for development of new restaurants in 1999 and for general
corporate purposes. The Company expects that its planned future restaurants will
require, on average, a total cash investment per restaurant, exclusive of
landlord contributions, of approximately $1.5 million to $2.0 million.
Preopening expenses are expected to range from $250,000 to $300,000 per
restaurant. Pending such uses, the Company intends to invest the net proceeds in
short-term, investment-grade, interest-bearing securities.

DIVIDEND POLICY

The Company has not declared or paid any cash dividends on its Common Stock
in the past and does not anticipate paying dividends in the foreseeable future.
In addition, the Company's current credit agreements prohibit the payment of
cash dividends. The Company currently intends to retain its earnings for the
operation and development of its business. Any future payment of dividends is
within the discretion of the Company's Board of Directors and will depend, among
other factors, upon the capital requirements, operating results and financial
condition of the Company from time to time and restrictions under credit
agreements existing from time to time.

11
<PAGE> 12

CAPITALIZATION

The following table sets forth the consolidated cash and cash equivalents,
short-term debt and capitalization of the Company as of September 27, 1998: (i)
on an actual basis; (ii) on a pro forma basis to reflect the conversion into
Common Stock of the Preferred Stock and the Deferred Purchase Price Liability;
and (iii) on a pro forma as adjusted basis to reflect the sale of the shares of
Common Stock offered by the Company hereby, the conversion into Common Stock of
the Preferred Stock and the Deferred Purchase Price Liability, and the
application of the estimated net proceeds from the offering. This table should
be read in conjunction with the Consolidated Financial Statements and the Notes
thereto included elsewhere in this Prospectus. See "Use of Proceeds."

<TABLE>
<CAPTION>
SEPTEMBER 27, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED(1)
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 3,184 $ 3,184 $21,212
======= ======= =======
Revolving line of credit and current portion of
long-term debt....................................... $18,437 $18,437 $ 437
======= ======= =======
Deferred Purchase Price Liability(2)................... $ 2,199 $ -- $ --
Long-term debt, less current portion................... 2,038 2,038 2,038
Convertible Redeemable Preferred Stock: $0.001 par
value; 10,000,000 shares authorized; 7,033,226 shares
issued and outstanding, actual; no shares issued and
outstanding, pro forma and pro forma as adjusted..... 18,526 -- --
Common stockholders' equity (deficit):
Common stock: $0.001 par value; 20,000,000 shares
authorized; 2,500,000 shares issued and
outstanding, actual; 6,283,218 shares issued and
outstanding, pro forma; 9,583,218 shares issued
and outstanding, pro forma as adjusted(3)......... 3 6 10
Additional paid-in capital........................ 2 20,724 56,748
Accumulated deficit............................... (4,285) (4,285) (4,285)
------- ------- -------
Total common stockholders' equity (deficit)..... (4,280) 16,445 52,473
------- ------- -------
Total capitalization............................ $18,483 $18,483 $54,511
======= ======= =======
</TABLE>

- ------------------------------
(1) Adjusted to give effect as of September 27, 1998 to (i) the receipt by the
Company of the estimated net proceeds of $36,028,000 from the sale of
3,300,000 shares of Common Stock offered hereby by the Company, (ii)
application of a portion of the net proceeds of this offering to repay the
Company's revolving line of credit and (iii) the conversion into Common
Stock of the Preferred Stock and the Deferred Purchase Price Liability.

(2) See Note 1 of Notes to Consolidated Financial Statements.

(3) Based on 6,283,218 shares outstanding at September 27, 1998, which includes
(i) 2,500,000 shares of Common Stock outstanding as of such date, (ii)
3,516,613 shares issuable on conversion of outstanding Preferred Stock,
(iii) 83,362 shares of Common Stock issuable upon conversion of paid-in-kind
dividends to be paid to holders of Series A Preferred Stock of the Company
subsequent to September 27, 1998 but prior to consummation of the offering
and (iv) 183,243 shares issuable upon consummation of this offering upon
conversion of the Deferred Purchase Price Liability. Excludes (i) 1,130,885
shares reserved as of such date for issuance upon the exercise of
outstanding stock options at a weighted average price of $4.68 per share,
(ii) an aggregate of 562,500 shares reserved for future grant under the
Company's stock option and stock purchase plans and (iii) 62,190 shares
reserved for issuance upon the exercise of outstanding warrants at an
exercise price of $4.00 per share. See "Management -- Benefit Plans" and
"Description of Capital Stock."

12
<PAGE> 13

DILUTION

At September 27, 1998, the Company had a net tangible book value of $8.5
million, or $1.35 per share of Common Stock. "Net tangible book value" per share
represents the amount of total tangible assets of the Company reduced by the
amount of its total liabilities and divided by the total number of outstanding
shares of Common Stock, giving effect to the conversion into Common Stock of the
Preferred Stock and the Deferred Purchase Price Liability. The pro forma net
tangible book value of the Company as of September 27, 1998, giving effect to
the sale of the 3,300,000 shares offered hereby by the Company, would have been
approximately $44.5 million, or $4.64 per share. This represents an immediate
increase in net tangible book value of $3.29 per share to existing stockholders
and an immediate dilution in net tangible book value of $7.36 per share to new
investors. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C> <C>
Initial public offering price per share..................... $12.00
------
Net tangible book value per share before the offering..... $1.35
-----
Increase attributable to new investors.................... 3.29
-----
Pro forma net tangible book value per share after the
offering.................................................. 4.64
------
Dilution per share to new investors......................... $ 7.36
======
</TABLE>

The following table summarizes, on a pro forma basis as of September 27,
1998, the differences between the existing stockholders (including persons who
will receive Common Stock upon conversion of the Deferred Purchase Price
Liability) and the new investors with respect to the number of shares of Common
Stock purchased from the Company, the total consideration paid to the Company
and the average price per share paid by existing stockholders and new investors:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ------------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE
(IN THOUSANDS) PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)...... 6,283,218 65.6% $17,312 30.4% $ 2.76
New investors(1).............. 3,300,000 34.4 39,600 69.6 $12.00
--------- ----- ------- -----
Total............... 9,583,218 100.0% $56,912 100.0%
========= ===== ======= =====
</TABLE>

- ------------------------------
(1) Sales by the Selling Stockholder in this offering will reduce the number of
shares held by existing stockholders to 5,433,218, or 56.7% of the total
number of shares of Common Stock outstanding, and will increase the number
of shares held by new investors to 4,150,000, or 43.3% of the total number
of shares of Common Stock outstanding after the offering.

13
<PAGE> 14

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

The selected statements of operations data set forth below for the fiscal
year ended December 31, 1995, the period from January 1, 1996 to February 28,
1996, the period from February 29, 1996 to December 29, 1996 and the fiscal year
ended December 28, 1997 and the consolidated balance sheet data set forth below
as of December 29, 1996 and December 28, 1997 have been derived from the
financial statements of the Company and the Predecessors audited by Ernst &
Young LLP, independent auditors, which are included elsewhere in this
Prospectus. The selected combined statements of operations data for the fiscal
years ended December 31, 1993 and December 31, 1994 and the combined balance
sheet data set forth below as of December 31, 1993, December 31, 1994 and
December 31, 1995 are derived from the unaudited combined financial statements
of the Predecessors. The selected consolidated financial data as of September
27, 1998 and for the nine months ended September 27, 1998 and September 28, 1997
has been derived from the unaudited consolidated financial statements of the
Company included elsewhere in this Prospectus. In the opinion of management, all
adjustments, consisting of only normal recurring accruals, considered necessary
for a fair presentation have been made. The results of operations for the nine
months ended September 27, 1998 are not necessarily indicative of the results to
be expected for the entire fiscal year. The following table is qualified by
reference to and should be read in conjunction with the consolidated financial
statements, related notes thereto and other financial data included elsewhere
herein. The Company's fiscal quarters typically consist of thirteen week periods
ending on the Sunday closest to the last day of the calendar quarter, and its
fiscal year ends on the Sunday closest to December 31 in each year.
<TABLE>
<CAPTION>
PREDECESSORS(1) COMPANY
------------------------------------- ------------------------------
PERIOD PERIOD
FISCAL FISCAL FISCAL FROM FROM TOTAL FISCAL
YEAR YEAR YEAR 1/1/96 TO 2/29/96 TO YEAR YEAR
1993 1994 1995 2/28/96 12/29/96 1996(2) 1997
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues.................... $1,478 $5,348 $10,465 $2,815 $15,630 $18,445 $39,768
Costs and expenses:
Restaurant operating
costs:
Cost of sales......... 368 1,422 2,957 772 4,454 5,226 11,317
Labor................. 516 1,728 3,347 918 4,736 5,654 11,683
Operating............. 243 917 1,528 527 2,944 3,471 6,727
Occupancy............. 134 454 1,059 205 1,279 1,484 2,743
------ ------ ------- ------ ------- ------- -------
Total restaurant
operating
costs............ 1,261 4,521 8,891 2,422 13,413 15,835 32,470
General and
administrative........ 7 57 192 17 1,368 1,385 4,276
Depreciation and
amortization.......... 26 70 322 82 352 434 1,102
Preopening.............. 204 249 400 17 765 782 1,922
------ ------ ------- ------ ------- ------- -------
Income (loss) from
operations................ (20) 451 660 277 (268) 9 (2)
Interest income (expense),
net....................... (1) (10) (13) (4) (127) (131) (317)
------ ------ ------- ------ ------- ------- -------
Income (loss) before
elimination of minority
interests and provision
for income taxes.......... (21) 441 647 273 (395) (122) (319)
Elimination of minority
interests................. -- -- -- -- (720) (993) (1,308)
------ ------ ------- ------ ------- ------- -------
Income (loss) before
provision for income
taxes..................... (21) 441 647 273 (1,115) (1,115) (1,627)
Provision for income
taxes..................... -- -- -- -- (30) (30) (69)
------ ------ ------- ------ ------- ------- -------
Net income (loss)........... $ (21) $ 441 $ 647 $ 273 (1,145) (1,145) (1,696)
====== ====== ======= ======
Convertible Redeemable Preferred Stock accretion................... (504) (504) (876)
------- ------- -------
Net income (loss) available to common stockholders................. $(1,649) $(1,649) $(2,572)
======= ======= =======
Basic net income (loss) per share.................................. $ (0.66) $ (1.03)
======= =======
Diluted net income (loss) per share................................ $ (0.66) $ (1.03)
======= =======
Shares used in calculation of basic net income (loss) per
share(3)......................................................... 2,500 2,500
======= =======
Shares used in calculation of diluted net income (loss) per
share(3)......................................................... 2,500 2,500
======= =======

<CAPTION>
COMPANY
----------------------------
NINE MONTHS ENDED
----------------------------
SEPTEMBER 28, SEPTEMBER 27
1997 1998
<S> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues........................................................... $27,638 $53,176
Costs and expenses:
Restaurant operating
costs:
Cost of sales................................................ 7,827 14,752
Labor........................................................ 8,113 15,221
Operating.................................................... 4,576 8,897
Occupancy.................................................... 1,887 3,777
------- -------
Total restaurant
operating
costs................................................... 22,403 42,647
General and
administrative............................................... 2,985 4,327
Depreciation and
amortization................................................. 713 1,596
Preopening..................................................... 1,082 2,408
------- -------
Income (loss) from
operations....................................................... 455 2,198
Interest income (expense),
net.............................................................. (165) (760)
------- -------
Income (loss) before
elimination of minority
interests and provision
for income taxes................................................. 290 1,438
Elimination of minority
interests........................................................ (1,093) (543)
------- -------
Income (loss) before
provision for income
taxes............................................................ (803) 895
Provision for income
taxes............................................................ (62) (11)
------- -------
Net income (loss).................................................. (865) 884
Convertible Redeemable Preferred Stock accretion................... (461) (718)

Net income (loss) available to common stockholders................. $(1,326) $ 166
======= =======
Basic net income (loss) per share.................................. $ (0.53) $ 0.07
======= =======
Diluted net income (loss) per share................................ $ (0.53) $ 0.05
======= =======
Shares used in calculation of basic net income (loss) per
share(3)......................................................... 2,500 2,500
======= =======
Shares used in calculation of diluted net income
(loss) per share(3)...................................... 2,500 3,206
======= =======
</TABLE>

14
<PAGE> 15

<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
FISCAL YEAR TOTAL YEAR FISCAL YEAR SEPTEMBER 28, SEPTEMBER 27,
1995(1) 1996(2) 1997 1997 1998
<S> <C> <C> <C> <C> <C>
PRO FORMA DATA:(4)
Pro forma diluted net income (loss) per share...... -- $ (0.12) $ (0.11) $ 0.01 $ 0.21
Shares used in calculation of pro forma diluted net
income (loss) per share.......................... -- 5,060 5,795 5,940 7,763
OPERATING DATA:
Comparable restaurant sales increase(5)............ 25.1% 13.0% 13.8% 12.3% 12.9%
Average weekly restaurant sales.................... $81,122 $81,976 $90,383 $91,823 $95,127
Return on investment(6)............................ 25.2% 34.4% 34.9% -- --
Restaurants open at end of period.................. 4 7 13 9 17
</TABLE>

<TABLE>
<CAPTION>
PREDECESSORS COMPANY
------------------------------------------ -------------------------------------------
AS OF AS OF
------------------------------------------ -------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 29, DECEMBER 28, SEPTEMBER 27,
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $153 $ 347 $ 480 $ 1,877 $ 2,739 $ 3,184
Total assets...................... 716 1,692 2,997 13,044 28,489 41,528
Short- and long-term debt......... 33 222 350 1,763 8,372 20,475
Deferred Purchase Price
Liability....................... -- -- -- -- 2,426 2,199
Convertible Redeemable Preferred
Stock........................... -- -- -- 10,517 17,808 18,526
Common stockholders' and members'
equity (deficit)................ 500 1,217 1,295 (1,874) (4,446) (4,280)
</TABLE>

- ------------------------------
(1) Information for fiscal years 1993, 1994 and 1995 and the period beginning
January 1, 1996 and ending February 28, 1996 as well as information as of
December 31, 1993, December 31, 1994 and December 31, 1995 relate to the
Predecessors. See "Certain Transactions" and Note 1 of Notes to Consolidated
Financial Statements.

(2) Total year 1996 information reflects the combined results of the
Predecessors for the period beginning January 1, 1996 and ending February
28, 1996 and of the Company for the period beginning February 29, 1996 and
ending December 29, 1996. See "Certain Transactions" and Note 1 of Notes to
Consolidated Financial Statements.

(3) See Notes 2, 6 and 8 of Notes to Consolidated Financial Statements.

(4) Pro forma information gives effect as of the beginning of each period to (i)
the purchase of substantially all of the minority interests in the
Predecessors, (ii) the repayment of the Company's revolving line of credit
through the application of the net proceeds from the sale of a sufficient
number of shares of Common Stock at the initial public offering price, and
(iii) the conversion into Common Stock of the Preferred Stock and the
Deferred Purchase Price Liability.

(5) A new restaurant is included in the calculation of the change in comparable
restaurant sales in the eighteenth month of that restaurant's operation.

(6) Return on investment for each restaurant is determined as the quotient of
earnings of such restaurant before interest, taxes and rent divided by the
Company's total investment in restaurant assets. The information presented
in the table is the aggregate return on investment for all restaurants open
during the respective periods. The computation of return on investment
excludes rents, interest and taxes to provide for an evaluation of
operational results of individual restaurants without the variability
introduced by different forms of financing and ownership (i.e., purchased
and financed versus leased). See "Business--Unit Economics."

15
<PAGE> 16

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

P.F. Chang's owns and operates 22 full service restaurants that feature a
distinctive blend of high quality, traditional Chinese cuisine and American
hospitality in a sophisticated, contemporary bistro setting. The Company was
formed in early 1996 with the acquisition of the four original P.F. Chang's
restaurants and the hiring of an experienced management team, led by Richard
Federico and Robert Vivian, the Company's Chief Executive Officer and Chief
Financial Officer, respectively, to support the Company's founder, Paul Fleming.
Utilizing a partnership management philosophy, the Company embarked on a
strategic expansion of the concept targeted at major metropolitan areas
throughout the United States and opened three additional restaurants in 1996 and
six in 1997.

The Company intends to open ten new restaurants in 1998 (nine of which are
open and one of which is under development) and 13 restaurants in 1999. The 23
units that the Company intends to develop in 1998 and 1999 will be situated in
approximately 15 new cities across the United States (inclusive of new cities in
which the Company has already opened restaurants in 1998). The Company has
signed lease agreements for eleven of the 13 units planned for 1999 and has
signed letters of intent for the two remaining planned restaurants. The Company
intends to continue to develop 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 between $1.5 million and $2.0 million and a total capitalized
investment of between $2.5 million and $3.0 million per restaurant. This total
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."

Prior to February 29, 1996, the Company's business was conducted by four
business entities controlled by Paul Fleming: Fleming Chinese Restaurants, Inc.
(Scottsdale), P.F. Chang's II, Inc. (Newport Beach), P.F. Chang's III, L.L.C.
(La Jolla) and P.F. Chang's IV, L.L.C. (Irvine)(collectively, the
"Predecessors"). In February 1996, the Company acquired from Paul Fleming and
certain other investors in the Predecessors approximately 70% of the Scottsdale
restaurant, 43% of the Newport Beach restaurant, 50% of the La Jolla restaurant
and 54% of the Irvine restaurant. In May 1996, the Company acquired the
remaining minority interests in the Irvine restaurant, and in October 1997, the
Company acquired all of the outstanding minority interests in the Scottsdale and
Newport Beach restaurants and all but 2.5% of the La Jolla restaurant. As a
result of the ownership structure in place from February 29, 1996 to October
1997, historical financial results for that period reflect an increase in the
Company's net loss attributable to those ownership interests which is reflected
in the elimination of minority interests. The acquisitions of minority interests
in February 1996 and October 1997 were accounted for using the purchase method
of accounting and resulted in goodwill of $4.1 million and $4.6 million,
respectively, which is being amortized over 20 years on a straight-line basis.
See "Certain Transactions."

In addition, elimination of minority interests for all periods subsequent
to 1996 includes the effect of the Company's partnership management structure.
The Company has entered into a series of partnership agreements with each of its
Market Partners, Operating Partners and Culinary Partners. These partnership
agreements typically provide that the Market Partner is entitled to a specified
percentage of the cash flows from the restaurants that partner has developed and
oversees as the regional manager. Similarly, the Operating Partners and Culinary
Partners receive a percentage of the cash flows from the restaurant in which
they work. See "Business--Operations."

16
<PAGE> 17

RESULTS OF OPERATIONS

The operating results of the Company for fiscal years 1995, 1996 and 1997
and for the nine months ended September 28, 1997 and September 27, 1998
expressed as a percentage of revenues were as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
FISCAL YEAR TOTAL YEAR FISCAL YEAR SEPTEMBER 28, SEPTEMBER 27,
1995 1996(1) 1997 1997 1998
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Restaurant operating
costs:
Cost of sales........... 28.3 28.3 28.4 28.3 27.8
Labor................... 32.0 30.7 29.4 29.4 28.6
Operating............... 14.6 18.8 16.9 16.6 16.7
Occupancy............... 10.1 8.0 6.9 6.8 7.1
----- ----- ----- ----- -----
Total restaurant
operating costs.... 85.0 85.8 81.6 81.1 80.2
General and
administrative.......... 1.8 7.5 10.8 10.8 8.1
Depreciation and
amortization............ 3.1 2.4 2.8 2.6 3.0
Preopening................ 3.8 4.3 4.8 3.9 4.5
----- ----- ----- ----- -----
Income (loss) from
operations................... 6.3 -- -- 1.6 4.2
Interest income (expense),
net.......................... (0.1) (0.7) (0.8) (0.6) (1.4)
Elimination of minority
interests.................... -- (5.3) (3.3) (3.9) (1.0)
----- ----- ----- ----- -----
Income (loss) before provision
for income taxes............. 6.2 (6.0) (4.1) (2.9) 1.8
Provision for income taxes..... -- (0.2) (0.2) (0.2) --
----- ----- ----- ----- -----
Net income (loss).............. 6.2% (6.2)% (4.3)% (3.1)% 1.8%
===== ===== ===== ===== =====
</TABLE>

- ------------------------------
(1) Total fiscal year 1996 information reflects the combined results of the
Predecessors and the Company. See "Selected Consolidated Financial and
Operating Data."

NINE MONTHS ENDED SEPTEMBER 27, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 28,
1997

REVENUES

The Company's revenues are derived entirely from food and beverage sales.
Revenues increased by $25.6 million, or 92.4%, to $53.2 million in the nine
months ended September 27, 1998 from $27.6 million in the nine months ended
September 28, 1997. The increase was primarily attributable to revenues of $18.7
million generated by new restaurants opened in the fourth quarter of 1997 and
the first nine months of 1998 and the increase in revenues in existing
restaurants. Increased customer visits produced comparable restaurant sales
gains of 12.9% in the first nine months of 1998. The Company did not implement
any meaningful price increases in the first nine months of 1998.

COSTS AND EXPENSES

Cost of sales. Cost of sales is composed of the cost of food and
beverages. Cost of sales decreased as a percentage of revenues to 27.8% in the
nine months ended September 27, 1998 from 28.3% in the nine months ended
September 28, 1997. This decrease was primarily the result of cost efficiencies
achieved through the improved management of product purchasing, food preparation
and waitstaff performance as the Company's restaurants mature.

Labor. Labor expenses consist of restaurant management salaries, hourly
staff payroll costs and other payroll-related items. Labor expenses as a
percentage of revenues decreased to 28.6% in the nine months ended September 27,
1998 from 29.4% in the nine months ended September 28, 1997. The decrease in
labor

17
<PAGE> 18

expenses was primarily due to improvements in the management of hourly staff
levels in the restaurants that opened in late 1996 and the first nine months of
1997. These improved efficiencies more than offset the increase in hourly wages
mandated by the federal government and the State of California. The Company
expects that the increase in minimum wage will continue to exert upward pressure
on its labor costs on a year-over-year basis for the remainder of 1998 and the
first quarter of 1999.

Operating. Operating expenses consist primarily of various
restaurant-level costs, which are generally variable and are expected to
fluctuate with revenues. In addition, the Company's 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. Operating expenses increased nominally as a percentage
of revenues to 16.7% in the nine months ended September 27, 1998 from 16.6% in
the nine months ended September 28, 1997.

Occupancy. Occupancy costs include both fixed and variable portions of
rent, common area maintenance charges, property insurance and property taxes.
Occupancy costs increased as a percentage of revenues to 7.1% in the nine months
ended September 27, 1998 from 6.8% in the nine months ended September 28, 1997,
due primarily to an increase in property taxes.

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.
General and administrative expenses increased to $4.3 million (8.1% of revenues)
in the nine months ended September 27, 1998 from $3.0 million (10.8% of
revenues) in the nine months ended September 28, 1997, due primarily to the
addition of corporate management personnel which resulted in approximately
$880,000 of additional compensation and benefits expense as well as additional
costs to support a larger restaurant base including an additional $276,000 in
travel and consulting fees. The decrease as a percentage of revenues was due
primarily to the Company's expanding revenue base and its ability to leverage
the duties and responsibilities of its Market Partners.

Depreciation and amortization. Depreciation and amortization expenses
include the depreciation of fixed assets and the amortization of goodwill costs
associated with the acquisition of the ownership interests in the original
restaurants. Depreciation and amortization increased to $1.6 million in the nine
months ended September 27, 1998 from $713,000 in the nine months ended September
28, 1997. This increase was primarily due to depreciation on new restaurants
totaling $695,000 as well as an additional $172,000 of amortization of the
goodwill associated with the acquisition in October 1997 of the remaining
minority interests in three of the four original restaurants.

Preopening. 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, advertising and employee payroll
and related training costs. Preopening expenses in the nine months ended
September 27, 1998 increased to $2.4 million from $1.1 million in the nine
months ended September 28, 1997 due to the greater number of restaurants opened
or under development during the 1998 period.

Interest income (expense), net. Net interest expense increased to $760,000
in the nine months ended September 27, 1998 from $165,000 in the nine months
ended September 28, 1997 principally due to borrowings under the Company's line
of credit.

ELIMINATION OF MINORITY INTERESTS

Elimination of minority interests for the nine months ended September 28,
1997 includes approximately $1.1 million attributable to the minority interests
in the Scottsdale, Newport Beach and La Jolla restaurants. As a result of the
acquisition of substantially all of these minority interests in October 1997,
elimination of minority interests for the nine months ended September 27, 1998
declined to $543,000. Approximately $17,000 and $518,000 was attributable to the
collective minority interests of Market Partners, Operating Partners and
Culinary Partners in the nine months ended September 28, 1997 and September 27,
1998, respectively.
18
<PAGE> 19

PROVISION FOR INCOME TAXES

The provision for income taxes for the nine months ended September 27, 1998
and September 28, 1997 represents certain minimum state taxes based on taxable
factors other than earnings. The Company did not record a tax benefit for the
losses generated for the nine months ended September 28, 1997 as utilization of
such losses in future periods was deemed uncertain. The income tax provision for
the nine months ended September 27, 1998 differs from the expected provision for
income taxes derived by applying the statutory income tax rate as a result of a
reduction in the previously provided deferred income tax asset valuation
allowance.

YEAR ENDED DECEMBER 28, 1997 COMPARED TO YEAR ENDED DECEMBER 29, 1996

The following discussion of the Company's results of operations for the
year ended December 29, 1996 relates to the combined operating results of the
Company and the Predecessors. The Company has not presented separate analyses
regarding the two month period ended February 28, 1996 relating to the
Predecessors or the ten month period ended December 29, 1996 relating to the
Company because the Company believes that such discussion would not be
meaningful.

REVENUES

Revenues increased by $21.3 million, or 115.6%, to $39.8 million in 1997
from $18.4 million in 1996. The increase was primarily attributable to $19.0
million of additional revenues generated by new restaurants opened in 1997 and
the increase in revenues in 1997 for restaurants opened in 1996. Comparable
restaurant sales, driven by increased customer visits, increased 13.8% in 1997.
The Company did not implement any meaningful price increases in 1997.

COSTS AND EXPENSES

Cost of sales. Cost of sales increased nominally as a percentage of
revenues to 28.4% in 1997 from 28.3% in 1996.

Labor. Labor costs decreased as a percentage of revenues to 29.4% in 1997
from 30.7% in 1996. This decrease was primarily the result of improvements in
the management of hourly staff levels in new and existing restaurants.

Operating. Operating expenses decreased as a percentage of revenues to
16.9% in 1997 from 18.8% in 1996, due primarily to the maturation of restaurants
opened in 1996 (which resulted in lower operating expenses as a percentage of
sales for those restaurants) and the larger and more mature restaurant base that
existed in 1997, which mitigated the impact of higher operating expenses
associated with restaurants opened in 1997.

Occupancy. Occupancy costs decreased as a percentage of revenues to 6.9%
in 1997 from 8.0% in 1996. This decrease was primarily the result of the
increase in revenues and, to a lesser extent, more favorable lease terms
associated with the new restaurants opened in 1997.

General and administrative. General and administrative expenses increased
to $4.3 million (10.8% of revenues) in 1997, from $1.4 million (7.5% of
revenues) in 1996. This increase was primarily the result of the addition of
corporate management personnel in 1996 and 1997, resulting in $1.7 million of
additional compensation and benefits in 1997 as well as the increased cost of
supporting a larger restaurant base including $240,000 in additional accounting
and legal fees, $520,000 in additional travel and consulting fees, and an
additional $175,000 in facility expenses.

Depreciation and amortization. Depreciation and amortization increased to
$1.1 million in 1997 from $434,000 in 1996. This increase was primarily the
result of depreciation recognized on capital expenditures for new restaurants
and an additional $90,000 of amortization of goodwill associated with the
purchase of minority interests in October 1997.

19
<PAGE> 20

Preopening. Preopening expenses in 1997 increased to $1.9 million from
$782,000 in 1996 due to a greater number of restaurants which were developed in
1997 compared to 1996.

Interest income (expense), net. Net interest expense increased to $317,000
in 1997 from $131,000 in 1996 due to borrowings on the Company's line of credit
and an increase in long-term debt.

ELIMINATION OF MINORITY INTERESTS

Elimination of minority interests increased to $1.3 million in 1997 from
$993,000 in 1996 primarily due to the increased income generated by the
Scottsdale, Newport Beach and La Jolla restaurants. Elimination of minority
interests in 1997 was also higher due to approximately $110,000 attributable in
1997 to the collective minority interests of Market Partners, Operating Partners
and Culinary Partners; such partnership arrangements were not in place in 1996.
These increases were offset in part by the repurchase in October 1997 of the
minority interests in the Scottsdale, Newport Beach and La Jolla restaurants.

PROVISION FOR INCOME TAXES

The provision for income taxes for 1997 and 1996 represents certain minimum
state taxes based on taxable factors other than earnings. The Company did not
record a tax benefit for the losses generated for fiscal years 1997 and 1996 as
utilization of such losses in future periods was deemed uncertain. At December
28, 1997, the Company had a net operating loss carryforward of approximately
$1.9 million which will expire for federal tax purposes in 2011 and for state
tax purposes in 2001. The expected income tax benefit derived by applying the
statutory income tax rate has been eliminated as a result of an increase in the
deferred income tax asset valuation allowance.

YEAR ENDED DECEMBER 29, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

REVENUES

Revenues increased by $8.0 million, or 76.3%, to $18.4 million in 1996 from
$10.5 million in 1995. The increase was primarily attributable to revenues of
$6.9 million generated by new restaurants opened in 1996 and the increase in
revenues in 1996 for restaurants opened in 1995. Increased customer visits
generated comparable restaurant sales gains of 13.0% in 1996. The Company did
not implement any meaningful price increases in 1996.

COSTS AND EXPENSES

Cost of sales. Cost of sales remained constant as a percentage of revenues
at 28.3% in both 1996 and 1995.

Labor. Labor costs decreased as a percentage of revenues to 30.7% in 1996
from 32.0% in 1995. This decrease was primarily the result of improvements in
the management of hourly staff levels in new and existing restaurants.

Operating. Operating costs increased as a percentage of revenues to 18.8%
in 1996 from 14.6% in 1995. This increase was primarily the result of new
restaurant openings in the last quarter of 1996 which resulted in additional
restaurant administration and facility costs.

Occupancy. Occupancy costs decreased as a percentage of revenues to 8.0%
in 1996 from 10.1% in 1995. This decrease was primarily the result of the
increased revenue base and to a lesser extent, more favorable lease terms
associated with the new restaurants opened in 1996.
20
<PAGE> 21

General and administrative. General and administrative expenses increased
in 1996 to $1.4 million, or 7.5% of revenues, from $192,000, or 1.8% of
revenues, in 1995. This increase was primarily attributable to the initial
formation of the Company, including the addition of management personnel.

Depreciation and amortization. Depreciation and amortization expenses
increased to $434,000 in 1996 from $322,000 in 1995. This increase was
principally the result of depreciation recognized on capital expenditures on new
restaurants opened in 1996 and $154,000 of amortization of goodwill associated
with the February 1996 acquisition. See "Certain Transactions."

Preopening. Preopening expenses increased to $782,000 in 1996 from
$400,000 in 1995, due to a greater number of restaurants under development in
1996.

Interest income (expense), net. Net interest expense increased to $131,000
in 1996 from $13,000 in 1995 due to interest expense incurred on notes payable
to minority stockholders in connection with the February 1996 acquisition. See
"Certain Transactions."

ELIMINATION OF MINORITY INTERESTS

The elimination of minority interests of $993,000 in 1996 was the result of
the formation of the Company in February 1996 and the related acquisition of the
majority of the interests in the original restaurants. In 1995, because the
operating results of the Predecessors are presented on a combined basis, there
were no minority interests.

PROVISION FOR INCOME TAXES

The provision for income taxes in 1996 represents certain minimum state
taxes based on taxable factors other than earnings. The Company did not record a
tax benefit for the losses generated for fiscal year 1996 as utilization of such
losses in future periods was deemed uncertain. The expected income tax benefit
derived by applying the statutory income tax rate has been eliminated as a
result of a deferred income tax asset valuation allowance. The Company's taxable
income for the year ended December 31, 1995 was allocated and taxed directly to
the stockholders and members of the Predecessors resulting in no tax provision.

21
<PAGE> 22

QUARTERLY RESULTS

The following tables set forth certain unaudited quarterly information for
each of the eight fiscal quarters in the two year period ended September 27,
1998. This quarterly information has been prepared on a consistent basis with
the audited financial statements and, in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented. The Company's
quarterly operating results may fluctuate significantly as a result of a variety
of factors, and operating results for any quarter are not necessarily indicative
of results for a full fiscal year. See "Risk Factors--Fluctuations in Operating
Results."

<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997 FISCAL 1998
----------- ------------------------------------- ---------------------------
FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... $5,458 $8,175 $9,528 $9,935 $12,130 $15,728 $17,209 $20,239
Costs and expenses:
Restaurant operating
costs:
Cost of sales.......... 1,575 2,324 2,705 2,798 3,490 4,394 4,705 5,653
Labor.................. 1,713 2,384 2,844 2,885 3,570 4,556 4,844 5,821
Operating.............. 1,063 1,284 1,587 1,705 2,151 2,579 2,861 3,457
Occupancy.............. 491 564 642 681 856 1,103 1,254 1,420
------ ------ ------ ------ ------- ------- ------- -------
Total restaurant
operating costs... 4,842 6,556 7,778 8,069 10,067 12,632 13,664 16,351
General and
administrative........... 642 760 1,063 1,162 1,291 1,348 1,405 1,574
Depreciation and
amortization............. 159 209 242 262 389 489 524 583
Preopening................. 467 146 253 683 840 432 785 1,191
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) from
operations................. (652) 504 192 (241) (457) 827 831 540
Interest income (expense),
net........................ (72) (81) (46) (38) (152) (210) (245) (305)
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before
elimination of minority
interests and provision for
income taxes............... (724) 423 146 (279) (609) 617 586 235
Elimination of minority
interests.................. (103) (383) (375) (335) (215) (156) (189) (198)
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before
provision for income
taxes...................... (827) 40 (229) (614) (824) 461 397 37
Provision for income taxes... (1) (32) (20) (10) (7) (4) (7) --
------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)............ $ (828) $ 8 $ (249) $ (624) $ (831) $ 457 $ 390 $ 37
====== ====== ====== ====== ======= ======= ======= =======
Restaurants open at end of
period..................... 7 7 8 9 13 13 14 17
</TABLE>

22
<PAGE> 23

The operating results of the Company for such eight fiscal quarters
expressed as a percentage of revenues were as follows:

<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997 FISCAL 1998
----------- ------------------------------------- ---------------------------
FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Restaurant operating costs:
Cost of sales................ 28.8 28.4 28.4 28.2 28.8 27.9 27.4 27.9
Labor........................ 31.4 29.2 29.8 29.0 29.4 29.0 28.1 28.8
Operating.................... 19.5 15.7 16.7 17.1 17.7 16.4 16.6 17.1
Occupancy.................... 9.0 6.9 6.7 6.9 7.1 7.0 7.3 7.0
----- ----- ----- ----- ----- ----- ----- -----
Total restaurant operating
costs................... 88.7 80.2 81.6 81.2 83.0 80.3 79.4 80.8
General and administrative....... 11.8 9.3 11.2 11.7 10.6 8.6 8.2 7.7
Depreciation and amortization.... 2.9 2.5 2.5 2.6 3.2 3.1 3.0 2.9
Preopening....................... 8.6 1.8 2.7 6.9 6.9 2.7 4.6 5.9
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations...... (12.0) 6.2 2.0 (2.4) (3.7) 5.3 4.8 2.7
Interest income (expense), net..... (1.3) (1.0) (0.5) (0.4) (1.3) (1.4) (1.4) (1.5)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before elimination of
minority interests and provision
for income taxes................. (13.3) 5.2 1.5 (2.8) (5.0) 3.9 3.4 1.2
Elimination of minority
interests........................ (1.9) (4.7) (3.9) (3.4) (1.8) (1.0) (1.1) (1.0)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before provision for
income taxes..................... (15.2) 0.5 (2.4) (6.2) (6.8) 2.9 2.3 0.2
Provision for income taxes......... -- (0.4) (0.2) (0.1) (0.1) -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss).................. (15.2)% 0.1% (2.6)% (6.3)% (6.9)% 2.9% 2.3% 0.2%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

Historically, the Company has experienced variability in the amount and
percentage of revenues attributable to preopening expenses. The Company
typically incurs the most significant portion of preopening expenses associated
with a given restaurant within the two months immediately preceding and the
month of the opening of the restaurant. In addition, the Company's experience to
date has been that labor and operating costs associated with a newly opened
restaurant (for approximately its first four to six months of operation) are
materially greater than what can be expected after that time, both in aggregate
dollars and as a percentage of revenues. Accordingly, the volume and timing of
new restaurant openings has had and is expected to have a meaningful impact on
preopening expenses, labor and operating costs until such time as a larger base
of restaurants in operation mitigates such impact. For example, preopening
expense in the quarter ended September 27, 1998 increased by $406,000 over the
prior quarter as a result of an increase in the number of stores under
development in the quarter. Further, because the Company has relied on
borrowings under its line of credit to fund the development of its restaurants
in 1998, interest expense (net) for the quarter ended September 27, 1998
increased by $60,000 over the prior quarter. The Company anticipates that this
effect on preopening expenses and interest expense (net) will increase in the
quarter ending December 27, 1998.

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its capital requirements since its inception through
private sales of equity securities, debt financing, sale-leaseback arrangements
and cash flow from operations. Net cash provided by operating activities was
$625,000, $139,000 and $4.6 million for total year 1996, fiscal year 1997 and
the nine months ended September 27, 1998, respectively. Net cash provided by
operating activities exceeded the net losses for the periods due principally to
the effect of minority interests and depreciation.

The Company uses cash primarily to fund the development and construction of
new restaurants. Net cash used in investing activities in total year 1996,
fiscal year 1997 and the nine months ended September 27, 1998 was $8.2 million,
$11.5 million and $15.8 million, respectively, which included payments of $4.2
million and $2.5 million in total year 1996 and fiscal year 1997, respectively,
made in connection with the acquisition of

23
<PAGE> 24

minority interests. Capital expenditures were $4.0 million, $8.7 million and
$15.5 million in total year 1996, fiscal year 1997 and the nine months ended
September 27, 1998, respectively. The Company intends to open ten restaurants in
1998 (nine of which are open) and 13 in 1999. Total capital expenditures are
expected to be approximately $23 million in 1998. The Company expects that its
planned future restaurants will require, on average, a total cash investment per
restaurant, exclusive of landlord contributions, of approximately $1.5 million
to $2.0 million. Preopening expenses are expected to range from $250,000 to
$300,000 per restaurant.

Net cash provided by financing activities in 1996, 1997 and the nine months
ended September 27, 1998 was $9.0 million, $12.2 million, and $11.6 million,
respectively. Financing activities in 1996 and 1997 consisted principally of
sales of Preferred Stock. The Company has a line of credit agreement which
matures on December 31, 1998 under which it has borrowed $25 million (as of the
date of this Prospectus) and which bears interest at LIBOR plus 6.0% (11.2% as
of December 3, 1998). Pursuant to its terms, the lender has the right to require
that all borrowings under the credit agreement be repaid upon the consummation
of this offering; however, until maturity, the Company will continue to be
eligible to borrow funds under such line of credit after repayment. The terms of
the line of credit require the Company to maintain a net worth of at least $10
million, including convertible redeemable preferred stock. The line of credit
agreement also contains covenants which place various restrictions on sales of
properties, transactions with affiliates, creation of additional debt, and other
customary nonfinancial covenants. The line of credit agreement is collateralized
by the Company's interests in the partnerships through which the Company
operates its restaurants. The Company does not anticipate that the above
covenants and restrictions will have a significant impact on the Company.
Although the line of credit matures on December 31, 1998, the Company believes
that the lender will be willing to extend the term of the line of credit on
terms and conditions which are comparable to or more favorable than those
contained in the existing line of credit, or that other financing will be
available in an amount and on terms and conditions which are adequate to meet
the Company's working capital and liquidity needs, but there can be no assurance
that such financing will be available.

Although the Company has achieved positive cash flow from its restaurant
operations since inception and has not budgeted any material portion of the net
proceeds of this offering for the operation of its restaurants, the significant
investment of resources in acquiring and opening its restaurants resulted in the
Company incurring net losses in each fiscal period from inception through
December 28, 1997. As a result, the Company had negative working capital at
September 27, 1998 despite the fact that it achieved net income in the first
three quarters of fiscal 1998. Such working capital deficiency will be
substantially reduced by the anticipated repayment of its line of credit from
the proceeds of this offering and by the conversion of the Deferred Purchase
Price Liability into Common Stock.

The Company's capital requirements, including development costs related to
the opening of additional restaurants, have been and will continue to be
significant. To date, the Company has been substantially dependent upon loans
from lending institutions and private equity funding to develop its restaurants.
In addition to the repayment of borrowings under its line of credit, most of
which have been incurred for the development of new restaurants, the Company
intends to use the balance of the net proceeds for development of new
restaurants in 1999 and for general corporate purposes. The Company's future
capital requirements and the adequacy of its available funds will depend on many
factors, including the pace of expansion, real estate markets, site locations
and the nature of the arrangements negotiated with landlords. Although no
assurance can be given, the Company believes that cash flow from operations
together with the net proceeds from this offering and borrowings under an
extension of its line of credit (or under alternative credit facilities on
similar or more favorable terms) will be sufficient to fund its capital
requirements through 1999. In the event that additional capital is required, the
Company may seek to raise such capital through public or private equity or debt
financings. Future capital funding transactions may result in dilution to
purchasers in this offering. There can be no assurance that such capital will be
available on favorable terms, if at all.

The Company leases restaurant and office facilities and equipment and
certain real property under operating leases expiring between 2000 and 2019.
Future minimum lease payments under operating leases, including restaurant
facilities currently under construction or yet to be constructed as of September
27, 1998

24
<PAGE> 25

were as follows: remainder of 1998 - $1.0 million; 1999 - $5.5 million;
2000 - $5.8 million; 2001 - $5.8 million; 2002 - $5.7 million; and
thereafter - $56.0 million.

PREFERRED STOCK AND ACCRETION

In February 1996 and September 1996, the Company sold shares of its Series
A Preferred Stock convertible into 2,677,135 shares of Common Stock at $4.00 per
common share, and in May 1997, the Company sold shares of its Series B Preferred
Stock convertible into 758,565 shares of Common Stock at $8.70 per common share.
The Series A Preferred Stock has an annual six percent dividend payable
quarterly on March 31, June 30, September 30, and December 31 in shares of
Series A Preferred Stock on a cumulative basis beginning January 1, 1998. The
Series B Preferred Stock has an annual six percent dividend payable quarterly on
March 31, June 30, September 30, and December 31 in shares of Series B Preferred
Stock on a cumulative basis beginning April 1, 1999. Dividend accretion on the
Series A and Series B Preferred Stock was approximately $504,000 for the year
ended December 29, 1996, $876,000 for the year ended December 28, 1997, and
$718,000 for the nine months ended September 27, 1998, respectively. At
September 27, 1998, the carrying basis of the Preferred Stock was $18.5 million.
As a result of this offering, each two shares of Series A Preferred Stock and
Series B Preferred Stock will be automatically converted into one share of
Common Stock.

INFLATION

The primary inflationary factors affecting the Company's operations are
food and labor costs. A large number of the Company's restaurant personnel are
paid at rates based on the applicable minimum wage, and increases in the minimum
wage directly affect the Company's labor costs. To date, inflation has not had a
material impact on the Company's results of operations. See "Risk
Factors--Changes in Food Costs."

YEAR 2000 COMPLIANCE

The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex as virtually every computer operation will be affected
in some way by the rollover of the two digit year value to "00". The issue is
whether computer systems will properly recognize date-sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The Company
has reviewed both its information technology and its non-information technology
systems to determine whether they are year 2000 compliant, and the Company has
not identified any material systems which are not year 2000 compliant. The
Company has initiated formal communications with all significant suppliers and
service providers to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate the year 2000 problem. The Company has
received written assurances of year 2000 compliance from a majority of the third
parties with whom it has relationships, including its POS, payroll and credit
card service providers. Unless public suppliers of water, electricity and
natural gas are disrupted for a substantial period of time (in which case the
Company's business may be materially adversely affected), the Company believes
its operations will not be significantly disrupted even if third parties with
whom the Company has relationships are not year 2000 compliant. Further, the
Company believes that it will not be required to make any material expenditure
to address the year 2000 problem. However, uncertainty exists concerning the
potential costs and effects associated with any year 2000 compliance, and the
Company intends to continue to make efforts to ensure that third parties with
whom it has relationships are year 2000 compliant. Any year 2000 compliance
problem of either the Company or its vendors could materially adversely affect
the Company's business, financial condition or operating results.

25
<PAGE> 26

BUSINESS

P.F. Chang's owns and operates 22 full service restaurants that feature a
distinctive blend of high quality, traditional Chinese cuisine and American
hospitality in a sophisticated, contemporary bistro setting. The Company's
restaurants offer intensely flavored, highly memorable culinary creations,
prepared from fresh ingredients, including premium herbs and spices imported
directly from China. The 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 P.F. Chang'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 Ravioli, Chicken in Soothing Lettuce Wrap,
Szechwan-Style Long Beans and Dan Dan Noodles. The traditional cuisine is
complemented by a full service bar offering an extensive selection of wines,
specialty drinks, Asian beers, cappuccino and espresso. The average check per
customer, including beverage, is approximately $17.00. The Company offers
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.

The Company was formed in early 1996 with the acquisition of the four
original P.F. Chang's restaurants and the hiring of an experienced management
team led by Richard Federico and Robert Vivian, the Company's Chief Executive
Officer and Chief Financial Officer, respectively, to support the Company's
founder, Paul Fleming. P.F. Chang's opened three additional restaurants in 1996,
six in 1997 and expects to open ten restaurants in 1998 (nine of which are open)
and 13 in 1999. Key to the Company's expansion strategy and success at the
restaurant level is the P.F. Chang's management philosophy utilizing Market,
Operating and Culinary Partners. The Company has demonstrated the viability of
the P.F. Chang's concept in a wide variety of markets across the United States,
including the Southwest, southern California, Texas and southern Florida.

P.F. CHANG'S CHINA BISTRO CONCEPT AND STRATEGY

Offer High Quality Chinese Cuisine. P.F. Chang's seeks to differentiate
itself from other Chinese restaurants by offering only premium products made
from scratch upon order, from original regional Chinese recipes. The Company
utilizes traditional Hong Kong preparation techniques, which combine high
temperature wok cooking, fresh ingredients and reduced oil to produce dishes
with a distinct, outstanding and highly memorable flavor. A core menu is served
at both lunch and dinner featuring a variety of freshly prepared wok-fired
creations, roasted duck and chicken, fresh seafood, homemade soups, signature
salads and desserts. All products are served family-style allowing the guests to
build a meal of complementary flavors, colors and aromas.

Create a Memorable Atmosphere. The Company seeks to design a unique
atmosphere for each restaurant that it operates. Common design elements of the
restaurants include natural wood and slate floors, custom millwork, special
light fixtures, hand-painted murals depicting ancient Chinese history and
life-size terra cotta soldiers, all of which create a warm and elegant ambiance.
Exhibition-style kitchens, featuring the Company's classically trained wok
chefs, reinforce the perceptions of quality, freshness, authenticity and
cleanliness and add flash and fire to the energy of the restaurant.

Deliver Superior Customer Service. Significant time and resources are
spent in the development and implementation of a comprehensive service system at
each restaurant. The Company offers guests prompt, friendly and efficient
service, keeping waitstaff-to-table ratios high, and staffing each restaurant
with an experienced management team to ensure consistent and attentive customer
service. The Company employs
26
<PAGE> 27

food runners to ensure prompt delivery of fresh food at the appropriate
temperature, allowing the waitstaff to focus on overall customer satisfaction.
All service personnel are thoroughly trained in the subtle flavors of each dish.
Using a thorough knowledge and understanding of the Company's menu, the
waitperson assists guests in selecting a meal that balances the principles of
fan and t'sai foods to attain a harmony of taste, texture, color and aroma.

Provide Excellent Dining Value. The Company believes it provides its
guests with an exceptional value by serving high quality Chinese cuisine in a
memorable atmosphere with superior customer service, all for an average check of
approximately $17.00. This price-value relationship helps create the long-term
bond between P.F. Chang's and its guests. Because of the superior level of
customer satisfaction it delivers, the Company believes it enjoys a high level
of repeat business, which serves as a solid foundation from which to grow
incremental sales. For the fiscal year ended December 28, 1997 and the nine
months ended September 27, 1998, the Company generated comparable restaurant
sales growth of approximately 13.8% and 12.9%, respectively.

Achieve Exceptional Restaurant Economics. In the first nine months of
1998, the Company's restaurants produced average weekly sales of $95,127 and
restaurant operating income of 19.8% of sales. In addition, for the 12 month
period ended September 27, 1998, the Company's restaurants have achieved
restaurant pre-tax return on investment of 37.6%. The Company believes that it
has been able to achieve these results due to the broad appeal of the P.F.
Chang's concept, careful site selection and consistent application of its
management and training concepts.

Pursue Accelerated, Disciplined Restaurant Expansion. The Company plans to
develop restaurants in both existing and new markets nationwide where the
Company believes it can generate attractive unit-level economics. The Company
targets high traffic, high visibility locations in affluent urban and suburban
markets. The flexibility of the P.F. Chang's concept enables the Company to open
successful restaurants in a wide variety of locations, including residential
neighborhoods, shopping centers, office buildings and hotels. The Company
expects to open ten new restaurants in 1998 (nine of which are open) and 13 in
1999. The Company intends to continue to develop 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 $1.5 million to $2.0 million
and a total capitalized investment of between $2.5 million and $3.0 million per
restaurant. This total investment includes the capitalized lease value of the
property, which can vary greatly depending on the specific trade area.

Leverage P.F. Chang's Partnership Management Philosophy. The Company
believes that economic participation by management at the operating level is a
key to the long-term success of its restaurants. The Company has developed a
partnership management philosophy based on a three person team at each
restaurant: the Market Partner (regional manager), Operating Partner (restaurant
manager) and Culinary Partner (chef). Each of these partners is provided an
opportunity to invest in and to participate in the cash flows of the restaurants
for which they are responsible. As a result of this structure, the Company
believes it is able to (i) attract and retain highly experienced and motivated
managers with powerful incentives to execute the Company's strategy and maximize
stockholder value, (ii) provide stable restaurant management which reduces staff
turnover and increases customer satisfaction and (iii) leverage the specific
market knowledge of its partners to facilitate the rapid expansion of the
concept.

UNIT ECONOMICS

The following table depicts the pre-tax return on investment for the fiscal
years 1995, 1996 and 1997, as well as the 12 months ended September 27, 1998.
Return on investment is calculated as the quotient of restaurant income (loss)
before interest, taxes and rent divided by the total restaurant investment. The
computation of return on investment excludes rents, interest and taxes to
provide for an evaluation of

27
<PAGE> 28

operational results of individual restaurants without the variability introduced
by different forms of financing and ownership (i.e., purchased and financed
versus leased).

RETURN ON INVESTMENT
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE WEEKLY SALES)

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL 12 MONTHS ENDED
1995 1996 1997 SEPTEMBER 27, 1998
<S> <C> <C> <C> <C>
TOTAL RESTAURANTS
Sales weeks.................................. 129 225 440 698
Average weekly sales......................... $81,122 $81,976 $90,383 $ 93,561
Sales........................................ 10,465 18,445 39,768 65,306
Restaurant income (loss) before income
taxes(1)................................... $ 585 $ 1,502 $ 4,482 $ 8,220
Interest expense............................. 13 67 214 225
Rent expense(2).............................. 656 1,297 2,124 3,469
------- ------- ------- --------
Restaurant EBIT + rent(a).................... $ 1,254 $ 2,866 $ 6,820 $ 11,914
======= ======= ======= ========
Average restaurant assets employed
(net)(3)................................... $ 1,522 $ 2,448 $ 8,243 $ 14,066
Present value of remaining lease
obligations(4)............................. 3,461 5,891 11,272 17,616
------- ------- ------- --------
Total restaurant investment(b)............... $ 4,983 $ 8,339 $19,515 $ 31,682
======= ======= ======= ========
Return on investment(a)/(b).................. 25.2% 34.4% 34.9% 37.6%
RESTAURANTS OPENED IN 1998
Sales weeks................................................................. 52
Average weekly sales........................................................ $104,411
Sales....................................................................... 5,429
Restaurant income (loss) before income taxes(1)............................. $ (1,000)
Interest expense............................................................ --
Rent expense(2)............................................................. 280
--------
Restaurant EBIT + rent(a)................................................... $ (720)
========
Average restaurant assets employed (net)(3)................................. $ 1,653
Present value of remaining lease obligations(4)............................. 1,639
--------
Total restaurant investment(b).............................................. $ 3,292
========
Return on investment(a)/(b)................................................. (21.9)%
RESTAURANTS OPENED IN 1997
Sales weeks...................................................... 76 282
Average weekly sales............................................. $73,675 $ 78,073
Sales............................................................ 5,599 22,017
Restaurant income (loss) before income taxes(1).................. $(1,727) $ 1,305
Interest expense................................................. -- --
Rent expense(2).................................................. 282 1,148
------- --------
Restaurant EBIT + rent(a)........................................ $(1,445) $ 2,453
======= ========
Average restaurant assets employed (net)(3)...................... $ 2,230 $ 6,934
Present value of remaining lease obligations(4).................. 2,068 7,069
------- --------
Total restaurant investment(b)................................... $ 4,298 $ 14,003
======= ========
Return on investment(a)/(b)...................................... (33.6)% 17.5%
</TABLE>

28
<PAGE> 29

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL 12 MONTHS ENDED
1995 1996 1997 SEPTEMBER 27, 1998
<S> <C> <C> <C> <C>
RESTAURANTS OPENED IN 1996
Sales weeks........................................... 17 156 156
Average weekly sales.................................. $63,527 $92,930 $106,470
Sales................................................. 1,080 14,497 16,609
Restaurant income (loss) before income taxes(1)....... $ (850) $ 1,866 $ 3,052
Interest expense...................................... 10 193 210
Rent expense(2)....................................... 65 717 828
------- ------- --------
Restaurant EBIT + rent(a)............................. $ (775) $ 2,776 $ 4,090
======= ======= ========
Average restaurant assets employed (net)(3)........... $ 402 $ 4,060 $ 3,769
Present value of remaining lease obligations(4)....... 704 4,294 4,250
------- ------- --------
Total restaurant investment (b)....................... $ 1,106 $ 8,354 $ 8,019
======= ======= ========
Return on investment (a)/(b).......................... (70.1)% 33.2% 51.0%
RESTAURANTS OPENED PRIOR TO 1996
Sales weeks.................................. 129 208 208 208
Average weekly sales......................... $81,122 $83,484 $94,578 $102,167
Sales........................................ 10,465 17,365 19,672 21,251
Restaurant income (loss) before income
taxes(1)................................... $ 585 $ 2,352 $ 4,343 $ 4,863
Interest expense............................. 13 57 21 15
Rent expense(2).............................. 656 1,232 1,125 1,213
------- ------- ------- --------
Restaurant EBIT + rent(a).................... $ 1,254 $ 3,641 $ 5,489 $ 6,091
======= ======= ======= ========
Average restaurant assets employed
(net)(3)................................... $ 1,522 $ 2,046 $ 1,953 $ 1,710
Present value of remaining lease
obligations(4)............................. 3,461 5,187 4,910 4,658
------- ------- ------- --------
Total restaurant investment(b)............... $ 4,983 $ 7,233 $ 6,863 $ 6,368
======= ======= ======= ========
Return on investment(a)/(b).................. 25.2% 50.3% 80.0% 95.6%
</TABLE>

- ---------------
(1) Restaurant income (loss) before income taxes represents restaurant revenues
less all restaurant-specific operating costs, depreciation, preopening
costs, and interest expense. Preopening costs are aggregated in the month in
which a restaurant opens. General and administrative expenses, interest
expense on general corporate debt, depreciation on general corporate assets,
and amortization of goodwill are excluded from the calculation.

(2) Rent expense consists of minimum contractual rents plus contingent rents.

(3) Average restaurant assets employed (net) represents the 12 month average of
all restaurant-specific long-term assets, net of any accumulated
depreciation, determined on a prorated basis for restaurants opened within
the period.

(4) Present value of remaining lease obligations represents the 12 month average
discounted present value of restaurant lease payments to the date of lease
expiration using a 10% discount rate, determined on a prorated basis for
restaurants opened within the period.

29
<PAGE> 30

LOCATIONS

The following table depicts existing restaurants and restaurants expected
to open in 1998:

<TABLE>
<CAPTION>
APPROXIMATE SQUARE INTERIOR
EXISTING LOCATIONS OPENING DATE FOOTAGE SEATING*
- ------------------ ------------ ------------------ --------
<S> <C> <C> <C>
Scottsdale, AZ (Fashion Square) July 1993 6,050 177
Newport Beach, CA (Fashion Island) June 1994 5,050 155
La Jolla, CA (UTC) August 1995 7,400 257
Irvine, CA (Spectrum Center) November 1995 7,000 208
Las Vegas, NV (Paradise & Flamingo) October 1996 7,000 220
Houston, TX (Highland Village) December 1996 6,500 182
Littleton, CO (Park Meadows) December 1996 7,600 245
Metarie, LA (Lakeside) April 1997 5,850 201
Miami, FL (The Falls) September 1997 5,800 206
Charlotte, NC (Phillips Place) October 1997 6,900 211
N. Miami, FL (Aventura) October 1997 7,000 244
Tempe, AZ (Centerpoint) December 1997 6,600 228
McLean, VA (Tysons Corner) December 1997 6,500 204
Dallas, TX (North Tollway) March 1998 6,900 192
El Segundo, CA (Manhattan Beach) June 1998 6,950 220
Austin, TX (Jollyville Road) July 1998 7,000 196
Dallas, TX (NorthPark) August 1998 6,100 178
Atlanta, GA (Ashwood & Perimeter) October 1998 7,000 225
Birmingham, AL (The Summit) October 1998 7,150 230
Denver, CO (LoDo) October 1998 7,150 230
Northbrook, IL (Northbrook Court) November 1998 7,000 210
Troy, MI (Somerset) December 1998 7,000 217
PLANNED LOCATION ANTICIPATED OPENING DATE
- --------------------------------------------- -------------------------------------------
West Hollywood, CA (Beverly Center) December 1998 6,600 212
</TABLE>

- ------------------------------
* Many of the Company's restaurants have outdoor seating in addition to
interior seating.

In 1999, the Company intends to open 13 new restaurants in approximately
seven new markets, including New York, Boston, Orlando, San Francisco, Salt Lake
City, Raleigh and Columbus.

EXPANSION STRATEGY AND SITE SELECTION

The Company is actively developing 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, the
Company identifies specific trade areas with high traffic patterns and suitable
demographic characteristics, including population density, consumer attitudes
and affluence. Within an appropriate trade area, the Company evaluates specific
sites that provide visibility, accessibility and exposure to traffic volume. The
Company's site criteria are flexible, as is evidenced by the variety of
environments and facilities in which the Company currently operates. These
facilities include freestanding buildings, regional malls and entertainment
centers. Each restaurant is designed to convey a unique expression of local
styles incorporated into the P.F. Chang's decor that maximizes the value and
visibility of the site.

The Company intends to continue to develop restaurants 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 between $2.5 million and $3.0 million
per restaurant. This total investment includes the capitalized lease value of
the property, which can vary greatly depending on the specific trade area. The
Company expects that its planned future restaurants will require, on average, a
total cash investment per restaurant, exclusive of landlord contributions, of
approximately $1.5 million to $2.0 million. Preopening expenses are expected to
range from

30
<PAGE> 31

$250,000 to $300,000 per restaurant. The Company currently leases the sites for
all of its restaurants and does not intend to purchase real estate for its sites
in the future.

The P. F. Chang's menu 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. The Company's 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, chickens, BBQ spare ribs
and BBQ pork 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. MSG is not added or used in any P.F. Chang's menu
items.

In addition to the core menu, P.F. Chang's also offers special lunch and
dinner selections. These menus offer specials developed by the Company's
Culinary Partners around the country and are changed two to three times a year.
Individual items that are received well by guests migrate to the core menu. The
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 annual trips to China
by the P.F. Chang's corporate executive chef, continually reinforce the
Company's commitment to training the P.F. Chang's chefs and enhancing the menu
offerings.

The Company's entrees range in price from $8.00 to $13.00, and its
appetizers range in price from $4.00 to $7.00. The Company's average check per
guest, including alcoholic beverages, is approximately $17.00. Sales of
alcoholic beverages, featuring an extensive selection of wines, all of which are
offered by the glass, constitute approximately 20% of revenues. Lunch and dinner
contribute roughly 30% and 70% of revenues, respectively.

DECOR AND ATMOSPHERE

The Company believes that ambiance plays a critical role in the dining
experience. By combining the influences of Chinese and American cultures, each
restaurant is designed to create a warm, sophisticated environment that is
intended to be suitable for a variety of occasions. Each restaurant incorporates
certain elements of local styles and common design elements, including
hand-painted murals depicting 12th century China, sculptures of Xi'an warriors,
hardwood and slate flooring, decorative lighting and custom millwork, all of
which provide continuity of the brand. Seating is a comfortable combination of
tables, booths and banquettes. Bistro-style counter seating is also available,
frequently with a view of the exhibition-style kitchen in order to accommodate
peak-period demand and the preferences of single or time-pressed diners.

OPERATIONS

In order to provide incentive to key management personnel, the Company has
entered into a series of partnership agreements with its regional managers
("Market Partners") and certain of its general managers ("Operating Partners")
and certain of its executive chefs ("Culinary Partners"). These partnership
agreements entitle the Market Partner to a specified percentage of the cash
flows from the restaurants that partner has developed and oversees as the
regional manager. Similarly, the general manager and the executive chef at most
of the Company's restaurants are offered the opportunity to become Operating
Partners and Culinary Partners, respectively, and to receive a percentage of the
cash flows from the restaurant in which they work. Each Market Partner receives
7% of the operating cash flow (net of Operating and Culinary Partner
distributions) generated by each restaurant in his or her territory. Each
Operating Partner receives 6% of the operating cash flow generated by the
restaurant he or she manages, and each Culinary Partner receives 2% of the
operating cash flow generated by the restaurant in which he or she works. At the
time an individual becomes a Market Partner, Operating Partner or Culinary
Partner, that person is required to make an equity investment in the partnership
of $50,000 for a Market Partner, $25,000 for an Operating Partner or $8,333 for
a Culinary Partner. Each Market, Operating and Culinary Partner must enter into
a five year employment agreement with the Company. The Company has the right, in
its sole discretion, to terminate the employment of any Market Partner,
Operating Partner or Culinary Partner, and, upon such termination, to repurchase
that partner's interest in the partnership at such partner's then-current basis
in the partnership. If an individual
31
<PAGE> 32

continues to serve as Market Partner, Operating Partner or Culinary Partner for
five years, then the Company has the right to repurchase that person's interest
in the partnership for a value which is determined by reference to trailing cash
flows. The Company has implemented this partnership structure to facilitate the
development and operation of its restaurants. By requiring this level of
commitment and by providing the Market, Operating and Culinary Partners with a
significant stake in the success of the restaurant, the Company believes that it
is able to attract and retain experienced and highly motivated managers.

Each of the Company's eight Market Partners oversees a territory that can
support seven to ten restaurants. The Market Partner's role is to ensure that
each restaurant within his or her territory achieves a competitive return on
investment through the successful execution of the concept. The typical Market
Partner is an individual who has achieved a leadership position (such as
Director of Operations) at a multi-unit, full-service restaurant company. The
Company anticipates adding six to eight Market Partners over the next five years
for its domestic development.

The Company strives to create a sophisticated dining experience through the
careful selection, training and supervision of personnel. The staff of a typical
restaurant consists of an Operating Partner, two or three managers, a Culinary
Partner, one or two sous chefs and approximately 125 hourly employees, many of
whom work part-time. The Operating Partner of each restaurant is responsible for
the day-to-day operation of that restaurant, including hiring, training and
development of personnel, as well as operating results. The Culinary Partner is
responsible for product quality, purchasing, food costs and kitchen labor costs.
The Company requires its Operating Partners and Culinary Partners to have
significant experience in the full-service restaurant industry.

The Company has a comprehensive 12 week management development program.
This program consists of six weeks of culinary training including both culinary
job functions and culinary management. The remaining six weeks focus 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. The training program is comprised of a series of
projects and skill assessments. Each trainee is formally evaluated at the end of
each week in writing by the Operating Partner and Culinary Partner. This
feedback is forwarded to the program's administrators, the Director of Training
and the Director of Culinary Development. Upon the completion of each six week
section each trainee must successfully complete a comprehensive certification
administered by the Market Partner, Director of Culinary Development or the
Director of Training. A trainee cannot advance or complete the program without
being certified.

The Operating Partners and Culinary Partners are responsible for selecting
employees for their restaurants. The Partners are accountable for administering
the Company's staff training programs that are developed by the training and
culinary departments. The employee development program lasts between one and two
weeks and focuses on both technical and cultural knowledge.

MARKETING

The Company 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, the Company has created an environment that fosters
repeat patronage and encourages word-of-mouth recommendations. The Company
believes that word-of-mouth advertising is a key component in driving guest
trial and usage.

To attract new customers, the Company 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 it operates. In order to increase local
awareness of its restaurants, the Company builds relationships with local radio
personalities who provide testimonials to their listening audiences. The
partnered stations 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. In
most cases, the commercials are endorsed, live reads that are typically longer
than a normal 60 second commercial.

32
<PAGE> 33

The Company 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.

A national advertising campaign comprised of advertisements in inflight
magazines of Southwest Airlines and America West Airlines, which carry a high
level of traffic in the Company's markets, is designed to make frequent
travelers aware of P.F. Chang's locations across the country.

MANAGEMENT INFORMATION SYSTEMS

The Company 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 ("POS") 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 POS 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 the POS system is transmitted to the corporate
office on a daily basis, which enables senior management to continually monitor
operating results. The Company believes that its current POS system will be an
adequate platform to support its planned expansion.

The Company uses software and hardware developed by reputable vendors and
commonly used in the restaurant industry. These systems are integrated to
provide senior management with daily and weekly sales and cost analysis, monthly
detailed profit statements and comparisons between actual and budgeted operating
results.

PURCHASING

The Company's purchasing programs provide its 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 the Company utilizes only fresh ingredients in all of its
menu offerings, inventory is maintained at a modest level. The Company
negotiates short-term and long-term contracts depending on demand for its
products. These contracts range in duration from two to twelve months. With the
exception of produce, which is purchased locally, the Company utilizes
Distributors Marketing Alliance as the primary distributor of product to all of
its restaurants. Distributors Marketing Alliance is a cooperative of multiple
food distributors located throughout the nation. The Company has a non-exclusive
short term contract with Distributors Marketing Alliance on terms and conditions
which the Company believes are consistent with those made available to similarly
situated restaurant companies. The Company believes that competitively priced
alternative distribution sources are available should such channels be
necessary. Chinese-specific ingredients are usually sourced directly from Hong
Kong, China and Taiwan. The Company has developed an extensive network of
importers in order to maintain an adequate supply of items that conform to the
Company's brand and product specifications.

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 the Company at each of its 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. The Company's primary competitors include mid-price,
full service casual dining restaurants and locally-owned and operated Chinese
restaurants. There are many well-established competitors with substantially
greater financial, marketing, personnel and other resources than the Company. In
addition, many of the Company's competitors are well established in the markets
where the Company's operations are, or in which they may be, located. While the
Company believes that its restaurants are distinctive in design and operating
concept, other companies may develop restaurants that operate with similar
concepts.

33
<PAGE> 34

PROPERTIES

All of the Company's restaurants are located in leased facilities. Current
restaurant leases have expiration dates ranging from 2002 to 2019, with the
majority of the leases providing for five-year options to renew for at least one
additional term. All of the Company's 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
the Company to pay the costs of insurance, taxes, and a portion of the lessor's
operating costs. The Company does not anticipate any difficulties renewing
existing leases as they expire.

The Company's executive offices are located in approximately 4,400 square
feet of leased space in Phoenix, Arizona.

EMPLOYEES

At September 27, 1998, the Company employed approximately 2,400 persons, 35
of whom were executive office personnel, 176 of whom were unit management
personnel and the remainder of whom were hourly restaurant personnel. The
Company's employees are not covered by a collective bargaining agreement. The
Company considers its employee relations to be good.

GOVERNMENTAL REGULATION

The Company's restaurants 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 and the preparation
and sale of food and alcoholic beverages. The Company's 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.
There can be no assurance that the Company will 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 the Company's operations and its relationship with its employees,
including minimum wage, overtime, working conditions, fringe benefit and
citizenship requirements. In particular, the Company is subject to the
regulations of the INS. Given the location of many of the Company's restaurants,
even if the Company's operation of those restaurants is in strict compliance
with INS requirements, the Company's employees may not all meet federal
citizenship or residency requirements, which could lead to disruptions in its
work force.

Approximately 20% of the Company's revenues are attributable to the sale of
alcoholic beverages. The Company is required to comply with the alcohol
licensing requirements of the federal government, states and municipalities
where its 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.
Failure to comply with federal, state or local regulations could cause the
Company's licenses to be revoked or force it to terminate the sale of alcoholic
beverages at one or more of its restaurants.

The Company is 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 the Company carries liquor liability coverage as part of
its existing comprehensive general liability insurance, there can be no
assurance that it will not be subject to a judgment in excess of such insurance
coverage or that it will be able to obtain or continue to maintain such
insurance coverage at reasonable costs, or at all.

The federal Americans With Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. The Company is
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.
34
<PAGE> 35

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information concerning each of the
Company's directors and executive officers:

<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Richard L. Federico....................... 44 Chief Executive Officer, President and
Director
Robert T. Vivian.......................... 40 Chief Financial Officer and Secretary
Frank Ziska............................... 51 Chief Development Officer
Gregory C. Carey.......................... 46 Chief Operating Officer
Paul M. Fleming........................... 44 Director and Founder
J. Michael Chu(2)......................... 40 Director
Gerald R. Gallagher(1).................... 57 Director
R. Michael Welborn(1)(2).................. 47 Director
James G. Shennan.......................... 57 Director
Yves Sisteron............................. 43 Director
</TABLE>

- ------------------------------
(1) Compensation Committee Member.

(2) Audit Committee Member.

Richard L. Federico joined the Company as President and a director in
February 1996 and in September 1997 succeeded Paul M. Fleming as Chief Executive
Officer. From February 1989 to January 1996 Mr. Federico served as President of
the Italian Concepts division of Brinker International, Inc. where he was
responsible for concept development and operations. Under his direction, this
division grew from one unit in 1989 to more than 70 units by 1996.

Robert T. Vivian has served as Chief Financial Officer and Secretary since
April 1996. From January 1991 to April 1996 Mr. Vivian served in a variety of
positions at Brinker International, Inc., the most recent of which was Vice
President of Investor Relations. In this capacity, Mr. Vivian was responsible
for dissemination of financial information and corporate communications to
Brinker's stockholders.

Frank Ziska has served as Chief Development Officer since June 1998. Prior
to joining the Company, from 1994 to June 1998, Mr. Ziska served as Managing
Director of United States and Canadian Operations for Cushman & Wakefield
Worldwide, a real estate brokerage firm. Prior to that time, beginning in 1989,
Mr. Ziska served as Managing Director and Branch Manager of Arizona Operations
for Cushman & Wakefield of Arizona, Inc.

Gregory C. Carey has served as Chief Operating Officer of the Company since
August 1998. From June 1994 to August 1998 Mr. Carey served as Chief Operating
Officer for Rainforest Cafe Inc. where he was responsible for operations as well
as site selection, design and implementation. From July 1989 to June 1994 Mr.
Carey was Senior General Manager for Restaurants Unlimited, Inc.

Paul M. Fleming founded the Company in January 1996 and has served as a
director of the Company since that time. Mr. Fleming also served as Chief
Executive Officer of the Company from January 1996 to September 1997. From
November 1992 to February 1996, Mr. Fleming served as President of Fleming
Chinese Restaurants, Inc., the entity which opened, developed and managed the
first four P.F. Chang's restaurants, each of which were owned by separate
entities and were located in Scottsdale, Arizona and Irvine, Newport Beach and
La Jolla, California. In addition, from 1983 to 1997, Mr. Fleming was also a
franchisee of Ruth's Chris Steakhouse, Inc.

J. Michael Chu has served as a director of the Company since February 1996.
Mr. Chu has been a Managing Director of Catterton-Simon Partners, a venture
capital firm, since 1990. Mr. Chu also serves on the boards of directors of Fine
Host Corp and several private companies.

35
<PAGE> 36

Gerald R. Gallagher has served as a director of the Company since February
1996. He has been a General Partner of Oak Investment Partners, a venture
capital firm, since May 1987. Mr. Gallagher also serves on the boards of
directors of several private companies.

R. Michael Welborn has served as a director of the Company since August
1996. Mr. Welborn has served as the Chairman of Bank One, Arizona, N.A., a
commercial bank, since January 1996. From September 1993 to December 1995 he
served as Managing Director of The Venture West Group, a merchant bank. From May
1988 to September 1993 Mr. Welborn served as Chairman of Citibank of Arizona.
Mr. Welborn also serves on the boards of directors of Bank One, Arizona, N.A.
and a private company.

James G. Shennan, Jr. has served as a director of the Company since May
1997. He has been a principal of Trinity Ventures, a venture capital firm, since
June 1989. Mr. Shennan also serves on the boards of directors of Starbuck's
Corporation and a number of privately-held, consumer-oriented companies in which
Trinity Ventures is an investor.

Yves Sisteron has served as a director of the Company since May 1997. Mr.
Sisteron has been a Principal of Global Retail Partners, L.P. since January 1996
and a Manager, U.S. Investments of Carrefour S.A. since March 1993. Mr. Sisteron
has a J.D. and an L.L.M. from Lyon Law School and an L.L.M. in Comparative Law
from New York University School of Law. Mr. Sisteron also serves on the boards
of directors of InterWorld Technology Ventures, Inc. and several private
companies.

Currently, all directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
Officers are elected by and serve at the discretion of the Company's Board of
Directors. There are no family relationships among the directors or officers of
the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

The Compensation Committee of the Company's Board of Directors is comprised
of Michael Welborn and Gerald Gallagher. Neither of these individuals was at any
time during the 1997 fiscal year or at any other time an officer or employee of
the Company. No executive officer of the Company serves as a member of the board
of directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.

DIRECTOR COMPENSATION

The Company does not compensate directors for service on the Board of
Directors or its committees but does reimburse reasonable costs and expenses
associated with attendance at meetings. Mr. Welborn, the only director who is
not a member of management and who is not affiliated with any of the Company's
venture capital investors, received a nonqualified stock option to purchase
25,000 shares of Common Stock, at an exercise price of $2.40 per share in August
1996, subject to vesting over a five year period. In addition, following the
consummation of this offering, future directors and certain of the Company's
existing directors will be eligible for automatic stock option grants under the
Company's 1998 Stock Option Plan. See "Management -- Benefit Plans."

LIMITATION OF LIABILITY AND INDEMNIFICATION

Pursuant to provisions of the Delaware General Corporation Law ("DGCL"),
the Company has adopted provisions in its Charter, which provide that directors
of the Company shall not be personally liable for monetary damages to the
Company or its stockholders for a breach of fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the DGCL relating to improper dividends or distributions; or (iv)
for any transaction from which the director derived an improper personal
benefit. Such limitation of liability does not affect the availability of
equitable remedies such as injunctive relief or rescission.

The Certificate also authorizes the Company to indemnify its current and
former officers, directors, employees or agents against certain liabilities that
may arise by reason of their status or service as directors,
36
<PAGE> 37

officers, employees or agents of the Company (other than liabilities arising
from acts or omissions not in good faith or willful misconduct).

The Company's By-laws authorize the Company to indemnify its officers,
directors, employees and agents to the extent permitted by the DGCL. Pursuant to
Section 145 of the DGCL, which empowers the Company to enter into
indemnification agreements with its officers, directors, employees and agents,
the Company has entered into separate indemnification agreements with its
directors and executive officers which may, in some cases, be broader than the
specific indemnification provisions contained in the DGCL. The indemnification
agreements may require the Company, among other things, to indemnify such
executive officers and directors against certain liabilities that may arise by
reason of their status or service as directors or officers (other than
liabilities arising from acts or omissions not in good faith or willful
misconduct) and to advance expenses incurred as a result of any proceeding
against them as to which they could be indemnified.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted and the Company is not aware of any threatened
litigation or proceeding that may result in a claim for such indemnification.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information concerning the compensation paid
to each person who served as the Company's Chief Executive Officer during the
fiscal year ended December 28, 1997 and each other executive officer whose
combined salary and bonus for the fiscal year ended December 28, 1997 exceeded
$100,000 for services rendered in all capacities to the Company and its
subsidiaries for that fiscal year. The executive officers named below are
referred to herein as the "Named Executive Officers."

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION/
AWARDS
------------------
ANNUAL COMPENSATION SHARES OF
-------------------- COMMON STOCK
NAME AND PRINCIPAL POSITION(S) SALARY BONUS UNDERLYING OPTIONS
- ------------------------------ -------- -------- ------------------
<S> <C> <C> <C>
Richard L. Federico.................................. $270,000 $115,000 50,000
Chief Executive Officer and President
Robert T. Vivian..................................... 106,000 23,000 7,500
Chief Financial Officer and Secretary
Paul M. Fleming...................................... 167,000 50,000 --
Founder and former Chief Executive Officer
</TABLE>

37
<PAGE> 38

OPTION GRANTS

The following table sets forth certain information concerning the grant of
options to purchase the Company's Common Stock made during the fiscal year ended
December 28, 1997 to each of the Named Executive Officers:

OPTION GRANTS IN FISCAL YEAR 1997

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF SHARES PERCENT OF TOTAL STOCK PRICE
OF COMMON STOCK OPTIONS GRANTED EXERCISE APPRECIATION FOR
UNDERLYING TO EMPLOYEES OR BASE OPTION TERM(3)
OPTIONS IN FISCAL PRICE EXPIRATION --------------------
NAME AND PRINCIPAL POSITION(S) GRANTED(1) YEAR 1997(2) ($/SH) DATE 5% 10%
- ------------------------------ ---------------- ---------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Federico........ 50,000 29.4% $ 6.00 08/14/07 $188,668 $478,123
Chief Executive Officer and
President
Robert T. Vivian........... 7,500 4.4 10.00 11/25/07 47,167 119,531
Chief Financial Officer and
Secretary
Paul M. Fleming............ -- -- -- -- -- --
Founder and former Chief
Executive Officer
</TABLE>

- ------------------------------
(1) Options generally vest over a period of five years with 20% of the options
vesting one year after the date of grant and the balance vesting in equal
monthly installments.

(2) In 1997, the Company granted options to purchase an aggregate of 170,000
shares.

(3) Potential Realizable Value is based on certain assumed rates of appreciation
pursuant to rules prescribed by the Securities and Exchange Commission
("SEC"). Actual gains, if any, on stock option exercises are dependent upon
future performance of the Company and related Common Stock price levels
during the terms of the options. There can be no assurance that the amounts
reflected in this table will be achieved.

FISCAL YEAR-END VALUES OF STOCK OPTIONS

The following table sets forth certain information concerning the 1997
fiscal year-end value of unexercised options held by the Named Executive
Officers. None of the Named Executive Officers exercised any options during
fiscal 1997.

AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 12/28/97 12/28/97(2)
------------------------------- -------------------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE
---- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Richard L. Federico................... 393,965 0 $2,814,134 --
Robert T. Vivian...................... 93,490 0 653,524 --
Paul M. Fleming....................... 286,640 0 1,719,840 --
</TABLE>

- ------------------------------
(1) All options issued to the Named Executive Officers are immediately
exercisable. However, unvested shares are subject to a right of repurchase
on behalf of the Company in the event of the Named Executive Officer's
termination of service with the Company.

(2) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 28, 1997 ($10.00 as
determined by the Company's Board of Directors) and the exercise price of
the Named Executive Officer's options.

38
<PAGE> 39

BENEFIT PLANS

1998 Stock Option Plan. A total of 280,000 shares of the Company's Common
Stock (the "Share Reserve") have been reserved for issuance under the Company's
1998 Stock Option Plan (the "1998 Option Plan"). In addition, the Share Reserve
will be increased if any outstanding options issued under the 1997 Restaurant
Management Plan and the 1996 Employee Stock Option Plan (collectively, the
"Prior Plans") expire or are canceled, or if the Company exercises its right to
repurchase unvested shares of stock which were acquired upon exercise of options
granted under the Prior Plans. As of September 27, 1998: (i) no shares of Common
Stock have been issued upon exercise of options under the 1998 Option Plan or
the Prior Plans; (ii) 117,500 shares were subject to options outstanding under
the 1998 Option Plan; and (iii) an aggregate of 1,013,385 shares were subject to
outstanding options under the Prior Plans. The 1998 Option Plan provides for
discretionary grants of incentive stock options and nonqualified stock options
to the Company's employees, officers, directors, consultants, advisors, and/or
other independent contractors. The option price per share for an incentive stock
option may not be less than 100% of the fair market value of a share of Common
Stock on the grant date. The option price per share for a nonstatutory stock
option may not be less than 85% of the fair market value of a share of Common
Stock on the grant date. The option price per share for an incentive stock
option granted to a person owning stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company (or a parent or
subsidiary) may not be less than 110% of the fair market value of a share of
Common Stock on the grant date. The Company's Compensation Committee has the
authority to, among other things, determine the vesting schedule for each option
granted. All options expire within ten years. The 1998 Option Plan includes an
automatic grant program for outside directors. Pursuant to this program, each
outside director will be granted an option to purchase 10,000 shares of Common
Stock at the time he or she is first elected or appointed a director of the
Company. In addition, Michael Welborn and each outside director elected after
the consummation of this offering remaining in office on the day following each
annual meeting of stockholders will be granted an option to purchase 2,500
shares. With respect to the other outside directors in office prior to
consummation of this offering (Messrs. Chu, Gallagher and Sisteron), each such
director remaining in office 18 months after the consummation of this offering
shall be granted an option to purchase 2,500 shares on the day following each
annual meeting of stockholders thereafter.

1997 Restaurant Management Stock Option Plan. As of September 27, 1998,
56,875 shares were subject to options outstanding under the Company's 1997
Restaurant Management Plan (the "Restaurant Management Plan"). All of such
outstanding options were exercisable as of such date subject, in certain cases,
to the Company's right to repurchase the shares acquired upon exercise. The
Company will not issue additional options under the Restaurant Management Plan.
The Restaurant Management Plan provides for grants of incentive stock options
and nonqualified stock options to employees of the Company who hold the position
of general manager or assistant manager or a position of similar importance to
the Company. The option price per share for an incentive stock option may not be
less than 100% of the fair market value of a share of Common Stock on the grant
date. The option price per share for nonqualified stock option may not be less
than 85% of the fair market value of a share of Common Stock on the grant date.
The option price per share for an option granted to a person owning stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company (or a parent or subsidiary) or 10% of the total combined
value of all such classes of stock may not be less than 110% of the fair market
value of a share of Common Stock on the grant date. Generally, options vest over
five years with 20% of the options vesting one year after the grant date and the
balance vesting in equal monthly installments over the remaining term of the
options. Options expire within ten years.

1996 Employee Stock Option Plan. As of September 27, 1998, 956,510 shares
were subject to options under the Company's 1996 Employee Stock Option Plan (the
"Employee Plan"). All of such outstanding options were exercisable as of such
date subject, in certain cases, to the Company's right to repurchase the shares
acquired upon exercise. The Company will not issue any additional options under
the Employee Plan. The Employee Plan provides for grants of incentive stock
options and nonqualified stock options to the Company's employees (including
officers), directors, consultants, advisors, and/or other independent
contractors. The option price per share for an incentive stock option may not be
less than 100% of the fair market value of a share of Common Stock on the grant
date. The option price per share for a nonqualified stock option
39
<PAGE> 40

may not be less than 85% of the fair market value of a share of Common Stock on
the grant date. The option price per share for an option granted to a person
owning stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company (or a parent or subsidiary) or 10% of the total
combined value of all such classes of stock may not be less than 110% of the
fair market value of a share of Common Stock on the grant date. Generally,
options vest over five years with 20% of the options vesting one year after the
grant date and the balance vesting in equal monthly installments over the
remaining term of the options. Options expire within ten years.

1998 Employee Stock Purchase Plan. A total of 400,000 shares of the
Company's Common Stock have been reserved for issuance under the Company's 1998
Employee Stock Purchase Plan (the "Purchase Plan"), none of which have been
issued. The Purchase Plan permits eligible employees to purchase Common Stock at
a discount, but only through payroll deductions, during concurrent 24 month
offering periods. Each offering period will be divided into four consecutive six
month purchase periods. The price at which stock is purchased under the Purchase
Plan is equal to 85% of the lower of the fair market value of the Common Stock
on the first day of the offering period and the fair market value of the Common
Stock on the last day of the purchase period. The initial offering period will
commence on the effective date of this offering.

EMPLOYMENT AGREEMENT

The Company entered into an employment agreement with Paul M. Fleming on
January 1, 1996. Pursuant to the terms of the agreement, Mr. Fleming is
currently serving as a director and employee of the Company for a term which
expires December 31, 1998. On September 2, 1998, the Company amended the
employment agreement to provide for Mr. Fleming's transition from an employee of
the Company to a consultant of the Company. Pursuant to the terms of the
employment agreement, as amended, the Company shall retain Mr. Fleming as a
consultant and shall nominate him as a director each year during the period
beginning January 1, 1999 and ending December 31, 2000. Until December 31, 1998,
Mr. Fleming is entitled to a base salary and a bonus equal to 50% of such base
salary. Beginning January 1, 1999, Mr. Fleming will be compensated for services
rendered as a consultant and reimbursed for all actual, out-of-pocket expenses
incurred in providing such services to the Company. The agreement prohibits Mr.
Fleming from competing with the Company in the area of Chinese and Asian food
concepts during the term of the agreement and for two years after the
termination thereof.

40
<PAGE> 41

CERTAIN TRANSACTIONS

Since December 31, 1995, there has not been, nor is there currently
proposed, any transaction or series of similar transactions to which the Company
or its Predecessors was or is to be a party in which the amount involved exceeds
$60,000 and in which any director, executive officer or beneficial holder of
more than 5% of any class of voting securities of the Company or members of such
person's immediate family had or will have a direct or indirect material
interest other than the transactions described below.

Formation and Series A Preferred Financing. The Company was formed on
January 31, 1996, through the issuance of 500 shares of Common Stock to Paul
Fleming for a purchase price of $100. In February 1996, the Company sold shares
of Series A Preferred Stock convertible into 2,487,500 shares of Common Stock at
a price of $4.00 per common share and related warrants for an aggregate purchase
price of $9,950,000. Contemporaneously, the Company acquired Paul and Kelly
Fleming's 52% interest in Fleming Chinese Restaurants, Inc., which operated the
first P.F. Chang's restaurant in Scottsdale, Arizona, for $1,037,000 in cash and
$954,000 in notes payable. The Company also acquired from the Flemings (i) a 43%
interest in P.F. Chang's II, Inc., which operated a P.F. Chang's restaurant in
Newport Beach, California, (ii) a 50% ownership in P.F. Chang's III, L.L.C.,
which operated a P.F. Chang's restaurant in La Jolla, California and (iii) a 54%
ownership interest in P.F. Chang's IV, L.L.C., which operated a P.F. Chang's
restaurant in Irvine, California, all for an aggregate purchase price of
$2,006,000 in cash and 2,499,500 shares of Common Stock of the Company. In
September 1996, the Company issued shares of Series A Preferred Stock
convertible into 189,635 shares of Common Stock at a price of $4.00 per common
share for an aggregate purchase price of $758,540. Pursuant to the terms of the
Company's Charter, on March 31, 1998, June 30, 1998 and September 30, 1998 the
Company issued, and upon the consummation of this offering will issue,
paid-in-kind dividends ("PIK Dividends") to the stockholders of the Company who
hold Series A Preferred Stock. PIK Dividends are cumulative and are equal to 6%
of the number of shares of Series A Preferred Stock owned by each stockholder
payable in quarterly installments. Upon completion of this offering, all shares
of the Series A Preferred Stock will convert into shares of Common Stock.

The following executive officers, directors and beneficial holders of more
than 5% of a class of the Company's capital stock purchased shares of the Series
A Preferred Stock having an aggregate purchase price of at least $60,000.

<TABLE>
<CAPTION>
SHARES
EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS(1) PURCHASED(4)
- ---------------------------------------------------- ------------
<S> <C>
Oak Investment Partners VI, Limited Partnership(2).......... 906,085
Catterton-Simon Partners, L.P.(2)........................... 625,000
Trinity Ventures V, L.P.(2)................................. 475,000
Silver Creek Investments Limited(2)......................... 437,500
Yves Sisteron(2)............................................ 40,450
Richard L. Federico(3)...................................... 50,000
</TABLE>

- ------------------------------
(1) See notes to "Principal and Selling Stockholders" for information relating
to the beneficial ownership of shares and identification of affiliated
stockholders.

(2) A beneficial owner (together with affiliates) of more than 5% of a class of
the Company's capital stock. Gerald R. Gallagher, J. Michael Chu, James G.
Shennan and Yves Sisteron, each a director of the Company, are affiliated
with Oak Investment Partners VI, Limited Partnership, Catterton-Simon
Partners, L.P., Trinity Ventures V, L.P. and Global Retail Partners, L.P.,
respectively.

(3) An officer and director of the Company.

(4) Represents number of shares of Common Stock issuable upon conversion of
purchased shares of Series A Preferred Stock. Excludes an aggregate of
164,275 shares of Common Stock issuable upon conversion of PIK Dividends (a)
paid on March 31, 1998, June 30, 1998 and September 30, 1998 and (b) to be
paid at the consummation of this offering.

41
<PAGE> 42

Series B Preferred Financing. In May 1997, the Company sold shares of
Series B Preferred Stock convertible into 758,565 shares of Common Stock at a
price of $8.70 per common share, for an aggregate purchase price of $6,599,519.
The following executive officers, directors and beneficial holders of more than
5% of a class of the Company's capital stock purchased shares of Series B
Preferred Stock having an aggregate purchase price of at least $60,000.

<TABLE>
<CAPTION>
SHARES
EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS(1) PURCHASED(3)
- ---------------------------------------------------- ------------
<S> <C>
Global Retail Partners, L.P.(2)............................. 322,018
Oak Investment Partners VI, Limited Partnerships(2)......... 114,942
Catterton-Simon Partners, L.P.(2)........................... 114,942
Trinity Ventures V, L.P.(2)................................. 114,942
</TABLE>

- ------------------------------
(1) See notes to table of beneficial ownership in "Principal and Selling
Stockholders" for information relating to the beneficial ownership of shares
and identification of affiliated stockholders.

(2) A beneficial owner (together with its affiliates) of more than 5% of a class
of the Company's Capital Stock. Gerald R. Gallagher, J. Michael Chu, James
G. Shennan and Yves Sisteron, each a director of the Company, are affiliated
with Oak Investment Partners VI, Limited Partnership, Catterton-Simon
Partners, L.P., Trinity Ventures V, L.P. and Global Retail Partners, L.P.,
respectively.

(3) Represents number of shares of Common Stock issuable upon conversion of
purchased shares of Series B Preferred Stock.

Purchase of Remaining Minority Interests. During 1997, the Company
purchased substantially all the remaining outstanding minority interests in the
Scottsdale, La Jolla and Newport Beach restaurants for approximately $2,520,000
in cash and $2,426,000 in Common Stock of the Company to be issued upon
consummation of this offering upon conversion of the Deferred Purchase Price
Liability. In September 1998, the Company, upon demand by the individual
holders, made cash payments aggregating $227,000; thus reducing the Deferred
Purchase Price Liability to $2,199,000 at September 27, 1998. The number of
shares of Common Stock to be issued will be determined by dividing $2,199,000 by
the initial offering per share price. If the offering is not consummated, the
Company is obligated, upon demand of the individual holders, to pay the minority
interest holders their respective portions of the Deferred Purchase Price
Liability in cash, provided that such request is made on or prior to December
31, 1998.

Promissory Notes. Prior to the formation of the Company, Paul Fleming, the
founder and a director of the Company, personally guaranteed several promissory
notes entered into by the Predecessors to pay for improvements to the
Scottsdale, La Jolla and Newport Beach restaurants. The aggregate original
principal amount of the notes was $472,000. In connection with the Company's
acquisition of the interests in the Predecessors, the Company assumed the
promissory notes. Mr. Fleming remains a guarantor of the notes. As of September
27, 1998, the aggregate outstanding principal amount of the notes was
approximately $103,000.

42
<PAGE> 43

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock as of September 27, 1998, and
as adjusted to reflect the sale of the shares offered hereby, assuming no
exercise of the Underwriters' over-allotment option, by (i) each person
(together with its affiliates) who is known by the Company to be the beneficial
owner of more than 5% of the Company's Common Stock; (ii) each of the Named
Executive Officers; (iii) each director of the Company (who, where applicable,
is listed under the name of the principal stockholder with which he is
affiliated); (iv) all executive officers and directors of the Company as a
group; and (v) the Selling Stockholder. Except pursuant to applicable community
property laws or as indicated in the footnotes to this table, the Company
believes that each stockholder identified in the table possesses sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by such stockholder. The address of the individuals listed
below is the address of the Company appearing on the cover of this registration
statement.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED SHARES
PRIOR TO THE BENEFICIALLY OWNED
OFFERING(1)(2) SHARES AFTER THE OFFERING(1)(2)
--------------------- BEING ------------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Oak Investment Partners VI, Limited
Partnership(3)........................ 1,076,627 17.1% -- 1,076,627 11.2%
Gerald R. Gallagher
4550 Norwest Center
Minneapolis, MN 55402
Catterton-Simon Partners, L.P.(4)....... 778,295 12.4 -- 778,295 8.1
J. Michael Chu
9 Greenwich Office Park
Greenwich, CT 06830
Trinity Ventures V, L.P.(5)............. 619,090 9.9 -- 619,090 6.5
James G. Shennan, Jr.
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
Global Retail Partners, L.P.(6)......... 364,949 5.8 -- 364,949 3.8
Yves Sisteron
2121 Avenue of the Stars, Suite 1600
Los Angeles, CA 90067
Silver Creek Investments Limited(7)..... 464,347 7.4 -- 464,347 4.8
61 Purchase Street, Suite #2R
Rye, NY 10580
Paul M. Fleming(8)...................... 2,641,170 40.2 850,000 1,791,170 18.1
R. Michael Welborn(9)................... 30,173 * -- 30,173 *
Richard L. Federico(10)................. 447,034 6.7 -- 447,034 4.5
Robert T. Vivian(11).................... 105,990 1.7 -- 105,990 1.1
All officers and directors as a group
(10 persons)(12)...................... 6,148,328 85.6 850,000 5,298,328 50.6
</TABLE>

- ------------------------------
* Less than one percent.

(1) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, a person has beneficial ownership of any securities over which
such person directly or indirectly, through any contract, arrangement,
undertaking, relationship or otherwise has or shares voting power and/or
investment power, or as to which such person has the right to acquire such
voting and/or investment power within 60 days.

(2) Based on 6,283,218 shares outstanding at September 27, 1998, which includes
(i) 2,500,000 shares of Common Stock outstanding as of such date, (ii)
3,516,613 shares issuable on conversion of outstanding Preferred Stock,
(iii) 83,362 shares of Common Stock issuable upon conversion of
paid-in-kind dividends to be paid to holders of
43
<PAGE> 44

Series A Preferred Stock of the Company subsequent to September 27, 1998
but prior to consummation of the offering and (iv) 183,243 shares issuable
upon consummation of this offering upon conversion of the Deferred Purchase
Price Liability. Shares outstanding as of September 27, 1998 excludes (i)
1,130,885 shares reserved as of such date for issuance upon the exercise of
outstanding stock options at a weighted average price of $4.68 per share,
(ii) an aggregate of 562,500 shares reserved for future grants under the
Company's stock option and stock purchase plans and (iii) 62,190 shares
reserved for issuance upon the exercise of outstanding warrants at an
exercise price of $4.00 per share. Shares of Common Stock outstanding after
the offering equals 9,583,218 shares (assuming no exercise of the
Underwriter's over-allotment option). Percentage of beneficial ownership as
to any person as of a particular date is calculated by dividing the number
of shares beneficially owned by such person by the sum of the number of
shares outstanding as of such date and the number of shares as to which
such person has the right to acquire voting and/or investment power within
60 days of such date.

(3) Includes 55,601 shares of Common Stock issuable upon conversion of PIK
Dividends paid to the named stockholder and its affiliates who hold Series
A Preferred Stock prior to consummation of the offering. Includes 1,052,079
shares held by Oak Investment Partners VI, Limited Partnership and 24,548
shares held by Oak VI Affiliates Fund, Limited Partnership. Gerald
Gallagher, a director of the Company, is a partner of Oak Investment
Partners with certain voting and investment power over such shares.
Although Mr. Gallagher may be deemed to be a beneficial owner of such
shares, he disclaims all such beneficial ownership except to the extent of
any pecuniary interest therein which he may have.

(4) Includes 38,354 shares of Common Stock issuable upon conversion of PIK
Dividends paid to the named stockholder and its affiliates who hold Series
A Preferred Stock prior to consummation of the offering. Includes 464,347
shares held by Catterton-Simon Partners, L.P., 227,741 shares held by
Catterton-PFC, L.L.C. and 86,207 shares held by Catterton-PFC Partners II,
L.L.C. Michael Chu, a director of the Company, is President and Managing
Director of Catterton-Simon Partners with certain voting and investment
power over such shares. Although Mr. Chu may be deemed to be a beneficial
owner of such shares, he disclaims all such beneficial ownership except to
the extent of any pecuniary interest therein which he may have.

(5) Includes 29,147 shares of Common Stock issuable upon conversion of PIK
Dividends paid to the named stockholder and its affiliates who hold Series
A Preferred Stock prior to consummation of the offering. Includes 583,005
shares held by Trinity Ventures V, L.P. and 36,085 shares held by Trinity
Ventures V Side-by-Side Fund, L.P. James G. Shennan, Jr., a director of the
Company, is a partner of Trinity Ventures with certain voting and
investment power over such shares. Although Mr. Shennan may be deemed to be
a beneficial owner of such shares, he disclaims all such beneficial
ownership except to the extent of any pecuniary interest therein which he
may have.

(6) Includes 2,481 shares of Common Stock issuable upon conversion of PIK
Dividends paid to Yves Sisteron and certain other individuals affiliated
with DLJ who hold Series A Preferred Stock prior to consummation of the
offering. Includes 8,153 shares held by Mr. Sisteron, 202,662 shares held
by Global Retail Partners, L.P., 13,952 shares held by Global Retail
Partners Funding, Inc., 13,174 shares held by GRP Partners, L.P., 60,389
shares held by DLJ Diversified Partners, L.P., 3,488 shares held by DLJ
First ESC, L.P., 22,426 shares held by DLJ Diversified Partners -- A, L.P.
and 40,705 shares held by certain other individuals affiliated with DLJ.
Each of such persons is affiliated with Global Retail Partners, L.P. and
Global Retail Partners, L.P. and such affiliates are each affiliates of
DLJ. Yves Sisteron, a director of the Company, is a Principal of Global
Retail Partners L.P. Mr. Sisteron disclaims beneficial ownership of all
shares owned by Global Retail Partners, L.P. and its affiliates except to
the extent of his pecuniary interest, if any, therein.

(7) Includes 26,847 shares of Common Stock issuable upon conversion of PIK
Dividends paid to the named stockholder who holds Series A Preferred Stock
prior to consummation of the offering.

(8) Includes 286,640 shares subject to options which are exercisable within 60
days of December 31, 1998.

(9) Includes 25,000 shares subject to options which are exercisable within 60
days of December 31, 1998.

(10) Includes 3,068 shares of Common Stock issuable upon conversion of PIK
Dividends paid to the named stockholder who holds Series A Preferred Stock
prior to consummation of the offering. Includes 393,965 shares subject to
options which are exercisable within 60 days of December 31, 1998.

(11) Includes 105,990 shares subject to options which are exercisable within 60
days of December 31, 1998.

(12) Includes 896,595 shares subject to options which are exercisable within 60
days of December 31, 1998 and 128,651 shares of Common Stock issuable upon
conversion of PIK Dividends.

44
<PAGE> 45

DESCRIPTION OF CAPITAL STOCK

The following description of the capital stock of the Company and certain
provisions of the Company's Charter and By-laws is a summary and is qualified in
its entirety by the provisions of the Charter and By-laws, which have been filed
as exhibits to the Company's Registration Statement, of which this Prospectus is
a part.

Upon the closing of the offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, $0.001 par value, and
10,000,000 shares of Preferred Stock, $0.001 par value.

COMMON STOCK

As of September 27, 1998, there were 6,283,218 shares of Common Stock
(after giving effect to the conversion into Common Stock of the Preferred Stock
and the Deferred Purchase Price Liability upon the closing of this offering)
outstanding held of record by 59 stockholders. Holders of Common Stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available thereof. In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior liquidation rights of preferred stock, if any, then
outstanding. The Common Stock has no preemptive or conversion rights or other
subscriptive rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and non-assessable, and the shares of Common Stock to be outstanding upon
completion of the offering contemplated by this Prospectus will be fully paid
and non-assessable. The Charter does not provide for cumulative voting and,
accordingly, the holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election.

PREFERRED STOCK

Upon consummation of the offering there will be no outstanding shares of
preferred stock of the Company. The Board of Directors has the authority,
without action by the stockholders, to designate and issue preferred stock in
one or more series and to designate the dividend rate, voting rights and other
rights, preferences and restrictions of each series, any or all of which may be
greater than the rights of the Common Stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the Common Stock until the Board of Directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things, restricting dividends on the Common Stock,
diluting the voting power of the Common Stock, impairing the liquidation rights
of the Common Stock and delaying or preventing a change in control of the
Company without further action by the stockholders. The Company has no present
plans to issue any shares of preferred stock.

REGISTRATION RIGHTS

Pursuant to the Amended and Restated Registration Rights Agreement dated
May 1, 1997, between the Company and certain stockholders, certain investors
holding an aggregate of 3,599,975 shares (the "Registrable Securities") will
have certain "demand" rights to register those shares under the Securities Act.
Beginning 180 days after the date of this Prospectus, if requested by holders of
more than 50% of the Registrable Securities then outstanding and assuming a
reasonably anticipated aggregate price to the public of at least $5 million,
then, subject to certain limitations, the Company must file a registration
statement under the Securities Act covering all Registrable Securities requested
to be included by holders of Registrable Securities. The Company is required to
effect up to three such "demand" registrations. The Company has the right to
delay any such registration for up to 90 days under certain circumstances. All
fees, costs and expenses of such registrations other than underwriting discounts
and commissions, will be borne by the Company.

In addition, holders of Registrable Securities have certain "piggyback"
registration rights. If the Company proposes to register any of its securities
under the Securities Act other than in connection with the Company's employee
benefit plans or a corporate reorganization, then, subject to certain
limitations, the
45
<PAGE> 46

holders of Registrable Securities may require the Company to include all or a
portion of their shares in such registration, although the managing underwriter
of any such offering has certain rights to limit the number of shares in such
registration.

Subject to certain limitations, expenses incurred in connection with the
above registrations (other than underwriters' and brokers' discounts and
commissions) will be borne by the Company.

DEFERRED PURCHASE PRICE LIABILITY

In connection with the repurchase by the Company of minority interests in
the Scottsdale, La Jolla and Newport Beach restaurants, certain of the former
minority interest holders have the right to receive a number of shares of
restricted Common Stock of the Company upon completion of the offering
determined by dividing $2,199,000 by the initial public offering price per
share. If the offering is not consummated, the Company is obligated, upon demand
of the individual holders, to pay the minority interest holders their respective
portions of the Deferred Purchase Price Liability in cash, provided that such
request is made on or prior to December 31, 1998.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Section 102(b)(7) of the DGCL authorizes corporations to limit or eliminate
the personal liability of directors to corporations and their stockholders for
monetary damages for a breach of a director's fiduciary duty of care. Although
Section 102(b)(7) does not change a director's duty of care, it enables
corporations to limit available relief to equitable remedies such as injunction
or rescission. The Company's Charter limits the liability of directors to the
Company and its stockholders. Specifically, directors of the Company are not
personally liable for monetary damages to the Company or its stockholders for a
breach of fiduciary duty as a director, except for liability: (i) for any breach
of the director's duty of loyalty to the Company or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under Section 174 of the DGCL; or (iv) for any
transaction from which the director derived an improper personal benefit.

ANTI-TAKEOVER PROVISIONS

General. Certain provisions of the DGCL and the Company's Charter and
By-laws may discourage or make it more difficult for a third-party to acquire
control of the Company. Such provisions may limit the price that certain
investors are willing to pay in the future for shares of the Company's Common
Stock. These certain provisions may also have the effect of discouraging or
preventing certain types of transactions involving an actual or threatened
change of control of the Company (including unsolicited takeover attempts), even
though such a transaction may offer the Company's stockholders the opportunity
to sell their stock at a price above the prevailing market price. The Charter
allows the Company to issue preferred stock with rights senior to those of the
Common Stock and other rights that could adversely affect the interests of
holders of shares of Common Stock without any further vote or action by the
stockholders. The issuance of preferred stock, for example, could decrease the
amount of earnings or assets available for distribution to the holders of shares
of Common Stock or could adversely affect the rights and powers, including
voting rights, of the holders of shares of Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock, as well as having the anti-takeover effects discussed
above.

Delaware Takeover Statute. The Company is subject to Section 203 of the
DGCL, which prohibits a Delaware corporation from engaging in a "business
combination" with certain persons ("Interested Stockholders") for three years
following the time any such person becomes an Interested Stockholder. Interested
Stockholders generally include (i) persons who are the beneficial owners of 15%
or more of the outstanding voting stock of the corporation, and (ii) persons who
are affiliates or associates of the corporation and who hold 15% or more of the
corporation's outstanding voting stock at any time within three years before the
date on which such person's status as an Interested Stockholder is determined.
Subject to certain exceptions, a business combination includes, among other
things, (i) mergers or consolidations, (ii) the sale, lease, exchange, mortgage,
pledge, transfer or other disposition of assets having an aggregate market value
equal to 10% or more of either the aggregate market value of all assets of the
corporation determined on a consolidated

46
<PAGE> 47

basis or the aggregate market value of all the outstanding stock of the
corporation, (iii) transactions that result in, among other things, the issuance
or transfer by the corporation of any stock of the corporation to the Interested
Stockholder, except pursuant to a transaction that effects a pro rata
distribution to all stockholders of the corporation, (iv) any transaction
involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series, or securities convertible into the
stock of any class or series, of the corporation that is owned directly or
indirectly by the Interested Stockholder, or (v) any receipt by the Interested
Stockholder of the benefit (except proportionately as a stockholder) of any
loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation.

Section 203 does not apply to a business combination if (i) before a person
becomes an Interested Stockholder, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the Interested Stockholder becoming an Interested Stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
Interested Stockholder, the Interested Stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, other than certain excluded shares, or (iii) at or subsequent to such
time the business combination is (a) approved by the board of directors of the
corporation and (b) authorized at a regular or special meeting of stockholders,
and not by written consent, by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock of the corporation not owned by the
Interested Stockholder.

CHARTER AND BY-LAWS

The Company's By-laws provide that special meetings of the stockholders of
the Company may be called only by the President or Secretary of the Company upon
the written request of a majority of the Board of Directors. The Company's
Bylaws also require advance written notice of a special meeting to each
stockholder of the Company entitled to vote at such meeting not less than 10,
nor more than 60, days prior to the meeting. The Company's Charter does not
include a provision for cumulative voting in the election of directors. Under
cumulative voting, a minority stockholder holding a sufficient number of shares
may be able to ensure the election of one or more directors. The absence of
cumulative voting may have the effect of limiting the ability of minority
stockholders to effect changes in the Board of Directors and, as a result, may
have the effect of deterring a hostile takeover or delaying or preventing
changes in control or management of the Company.

The Company's By-laws provide that the authorized number of directors may
be changed by an amendment to the By-laws adopted by the Board of Directors or
by the stockholders. Vacancies in the Board of Directors may be filled either by
holders of a majority of the Company's directors then in office, though less
than a quorum, or by a sole remaining director, or if there are no directors in
office, in the manner provided by statute. If the directors then in office
constitute less than a majority of the whole board, any stockholder or
stockholders holding at least ten percent (10%) of the outstanding capital stock
entitled to vote may apply to the Court of Chancery to order an election.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is First Chicago
Trust Company of New York, P.O. Box 20533, Jersey City, New Jersey 07303,
attention: John Gagnon (201) 222-4114.

47
<PAGE> 48

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
the offering because of certain contractual and legal restrictions on resale (as
described below), sales of substantial amounts of Common Stock in the public
market after such restrictions lapse could adversely affect the prevailing
market price at such time and the ability of the Company to raise equity capital
in the future.

Upon completion of this offering, the Company will have outstanding an
aggregate of 9,583,218 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options or
warrants to purchase Common Stock. Of these shares, the shares of Common Stock
to be sold in this offering will be freely tradable without restriction or
further registration under the Securities Act, unless such shares are held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act (the "Affiliates"). The remaining 5,433,218 shares held by
existing stockholders of the Company were sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act and are
"restricted" securities within the meaning of Rule 144 under the Securities Act
(the "Restricted Shares"). Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144 or Rule 701 promulgated under the Securities Act, which rules are
summarized below. As a result of the contractual restrictions described below
and the provisions of Rule 144 Rule and 701, the Restricted Shares will be
available for in the public market as follows (based on the number of shares
outstanding as of September 27, 1998): (i) 187,773 Restricted Shares will be
eligible for sale 90 days after the date of this Prospectus; and (ii) all of the
Restricted Shares will be available for sale in the public market upon
expiration of the lock-up agreements 180 days after the date of this Prospectus.

All officers and directors, and certain stockholders and option holders of
the Company have agreed not to sell, make any short sale of, grant any option
for the purchase of, or otherwise transfer or dispose of, any shares of Common
Stock or any securities convertible into or exercisable for Common Stock held by
such persons for a period of 180 days after the date of this Prospectus, without
the prior written consent of DLJ. When determining whether or not to release
shares from the lock-up agreements, DLJ will consider, among other factors, the
stockholder's reasons for requesting the release, the number of shares for which
the release is being requested and market conditions at the time.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
shares for at least one year is entitled to sell, within any three-month period
commencing 90 days after the date of this Prospectus, a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of Common
Stock (approximately 95,832 shares immediately after the offering) or (ii) the
average weekly trading volume of the Common Stock on the Nasdaq National Market
during the four calendar weeks preceding such sale, subject to the filing of a
Form 144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. In addition, a
person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
following completion of the offering. In general, under Rule 701 of the
Securities Act as currently in effect, any employee, consultant or advisor of
the Company who purchased shares from the Company in connection with a
compensatory stock or option plan or written employment agreement is eligible to
resell such shares 90 days after the effective date of the offering in reliance
on Rule 144, but without compliance with certain restrictions, including the
holding period conditions, contained in Rule 144.

Within 90 days of the date of this Prospectus, the Company intends to file
a registration statement under the Securities Act to register shares of Common
Stock reserved for issuance under its equity incentive plans, thus permitting
the resale of such shares by non-affiliates in the public market without
restriction under the Securities Act. Such registration statements will become
effective immediately upon filing. As of September 27, 1998, 1,130,885 options
to purchase shares of Common Stock were outstanding under the Company's stock
option plans and agreements, all of which are subject to the lock-up agreements
described above.

48
<PAGE> 49

UNDERWRITING

Subject to the terms and conditions of an Underwriting Agreement dated
December 3, 1998 (the "Underwriting Agreement"), the Underwriters named below,
who are represented by Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ"), NationsBanc Montgomery Securities LLC ("NationsBanc Montgomery") and
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain Rauscher
Wessels") (the "Representatives"), have severally agreed to purchase from the
Company and the Selling Stockholder the respective number of shares of Common
Stock set forth opposite their names below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,678,043
NationsBanc Montgomery Securities LLC....................... 1,006,826
Dain Rauscher Wessels....................................... 671,217

Bear, Stearns & Co., Inc. .................................. 48,116
BT Alex.Brown Incorporated.................................. 48,116
Credit Suisse First Boston Corporation...................... 48,116
Deutsche Bank Securities Inc. .............................. 48,116
Goldman, Sachs & Co. ....................................... 48,116
Hambrecht & Quist LLC....................................... 48,116
Lehman Brothers Inc. ....................................... 48,116
Morgan Stanley & Co. Incorporated........................... 48,116
Salomon Smith Barney Inc. .................................. 48,116
Johnson Rice & Company L.L.C. .............................. 48,116

William Blair & Company, L.L.C. ............................ 24,058
J.C. Bradford & Co. ........................................ 24,058
Fahnestock & Co. Inc. ...................................... 24,058
Janney Montgomery Scott Inc. ............................... 24,058
Ladenburg Thalmann & Co. Inc. .............................. 24,058
McDonald Investments Inc., a KeyCorp Company................ 24,058
Piper Jaffray Inc. ......................................... 24,058
Ragen Mackenzie Incorporated................................ 24,058
Raymond James & Associates, Inc. ........................... 24,058
Sanders Morris Mundy Inc. .................................. 24,058
Sands Brothers & Co., Ltd. ................................. 24,058
Stephens Inc. .............................................. 24,058
Sutro & Co. Incorporated.................................... 24,058
---------
Total............................................. 4,150,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.

The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $0.50 per share.
The Underwriters may allow, and such dealers may re-allow, to certain other
dealers a concession not in excess of $0.10 per share. After the initial
offering of the Common Stock, the public offering price and other selling

49
<PAGE> 50

terms may be changed by the Representatives at any time without notice. The
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.

The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of 622,500 additional shares of Common
Stock at the initial public offering price less underwriting discounts and
commissions. The Underwriters may exercise such option solely to cover
over-allotments, if any, made in connection with the offering. To the extent
that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table.

The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

Each of the Company, its executive officers and directors and certain
stockholders of the Company (including the Selling Stockholder) has agreed,
subject to certain exceptions, not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise) for a period of 180 days after the date of this Prospectus
without the prior written consent of DLJ. In addition, during such period, the
Company has also agreed not to file any registration statement with respect to,
and each of its executive officers, directors and certain stockholders of the
Company (including the Selling Stockholder) has agreed not to make any demand
for, or exercise any right with respect to, the registration of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock other than registrations relating to equity compensation plans
without DLJ's prior written consent.

Prior to the offering, there has been no established trading market for the
Common Stock. The initial public offering price for the shares of Common Stock
offered hereby has been determined by negotiation among the Company,
representatives of the Selling Stockholder and the Representatives. The factors
considered in determining the initial public offering price include the history
of and the prospects for the industry in which the Company competes, the past
and present operations of the Company, the historical results of operations of
the Company, the prospects for future earnings of the Company, the recent market
prices of securities of generally comparable companies and the general condition
of the securities markets at the time of the offering.

Global Retail Partners, L.P. ("GRP") and certain of its affiliates, each an
affiliate of DLJ, are stockholders of the Company. Yves Sisteron, a Principal of
GRP and a director of the Company, has been elected to the Board of Directors
pursuant to the provisions of a stockholder agreement which entitles Global
Retail Partners, L.P., as a holder of Series B Preferred Stock and so long as it
continues to hold at least a specified percentage of the Series B Preferred
Stock, to elect one of the seven directors of the Company. Such stockholder
agreement will terminate upon consummation of this offering. In May 1997, Global
Retail Partners, L.P. and its affiliates, including Mr. Sisteron, acquired
shares of the Company's Series B Preferred Stock convertible into an aggregate
of 322,018 shares of Common Stock. Previously, in February 1996, Mr. Sisteron
and two other individual affiliates of DLJ, acquired shares of the Company's
Series A Preferred Stock convertible into an aggregate of 40,450 shares of
Common Stock and have since received and will receive scheduled PIK Dividends
thereon. In addition, certain individuals who are associated with NationsBanc
Montgomery acquired shares of Series A Preferred Stock convertible into an
aggregate of 88,100 shares of Common Stock in February 1996 and have since
received and will receive scheduled PIK Dividends thereon, and such individuals
and one other individual associated with NationsBanc Montgomery acquired shares
of Series B Preferred Stock convertible into an aggregate of 24,405 shares of
Common Stock in May
50
<PAGE> 51

1997. In February 1996, NationsBanc Montgomery also received a five-year warrant
to purchase shares of Series A Preferred Stock convertible into 62,190 shares of
Common Stock at an exercise price of $4.00 per common share in connection with
placement agent and other services it performed for the Company. See
"Management," "Certain Transactions" and "Principal and Selling Stockholders."

Other than in the United States, no action has been taken by the Company,
the Selling Stockholder or the Underwriters that would permit a public offering
of the shares of Common Stock offered hereby in any jurisdiction where action
for that purpose is required. The shares of Common Stock offered hereby may not
be offered or sold, directly or indirectly, nor may this Prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of Common Stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
Prospectus comes are advised to inform themselves about and to observe any
restrictions relating to the offering of the Common Stock and the distribution
of this Prospectus. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any shares of Common Stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.

In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot the offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members and selected
dealers if they repurchase previously distributed Common Stock in syndicate
covering transactions, in stabilizing transactions or otherwise. These
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.

LEGAL MATTERS

The validity of the securities offered hereby has been and general
corporate legal matters will be passed upon for the Company by Gray Cary Ware &
Freidenrich LLP, San Diego, California. Certain legal matters will be passed
upon for the Underwriters by Akin, Gump, Strauss, Hauer & Feld, L.L.P., San
Antonio, Texas.

EXPERTS

The consolidated financial statements of P.F. Chang's China Bistro, Inc. at
December 28, 1997 and December 29, 1996 and for the year ended December 28,
1997, and the period from February 29, 1996 to December 29, 1996, and the
combined results of operations of its Predecessors for the period from January
1, 1996 to February 28, 1996 and the year ended December 31, 1995 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission a
Registration Statement (which term shall include any amendments thereto) on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement. As
used herein, the term "Registration Statement" means the initial Registration
Statement (including the exhibits, schedules, financial statements and notes
filed as part thereof) and any and all amendments thereto. This Prospectus omits
certain information contained in the Registration Statement as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement. Statements herein concerning the contents of any
51
<PAGE> 52

contract or other document are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed with the
Commission as an exhibit to the Registration Statement, each such statement
being qualified by and subject to such reference in all respects. With respect
to each such document filed with the Commission as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved.

As a result of this offering, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith, will file reports and other information with the
Commission. Reports, registration statements, proxy statements, and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
Commission's Regional Offices: 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, New York, New York 10048. Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. The Commission maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the site is
http://www.sec.gov.

The Company intends to furnish holders of the Common Stock with annual
reports containing, among other information, audited financial statements
certified by an independent audited accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. The Company intends to furnish such other reports
as it may determine or as may be required by law.

52
<PAGE> 53

P.F. CHANG'S CHINA BISTRO, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 29, 1996, December
28, 1997, and September 27, 1998 (unaudited)........... F-3
Consolidated Statements of Operations for the Year Ended
December 31, 1995, the Period from January 1, 1996 to
February 28, 1996, the Period from February 29, 1996 to
December 29, 1996, the Year Ended December 28, 1997,
and the Nine Months Ended September 28, 1997 and
September 27, 1998 (unaudited)......................... F-4
Consolidated Statements of Convertible Redeemable
Preferred Stock and Common Stockholders' and Members'
Equity (Deficit) for the Year Ended December 31, 1995,
the Period from January 1, 1996 to February 28, 1996,
the Period from February 29, 1996 to December 29, 1996,
the Year Ended December 28, 1997, and the Nine Months
Ended September 27, 1998 (unaudited)................... F-5
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1995, the Period from January 1, 1996 to
February 28, 1996, the Period from February 29, 1996 to
December 29, 1996, the Year Ended December 28, 1997,
and the Nine Months Ended September 28, 1997 and
September 27, 1998 (unaudited)......................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>

F-1
<PAGE> 54

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of P.F.
Chang's China Bistro, Inc. (Company) as of December 29, 1996 and December 28,
1997, and the related consolidated statements of operations, convertible
redeemable preferred stock and common stockholders' and members' equity
(deficit), and cash flows for the period from February 29, 1996 to December 29,
1996 and for the year ended December 28, 1997. We have also audited the combined
statements of operations, stockholders' and members' equity (deficit), and cash
flows of the corporations and limited liability companies listed in Note 2 for
the year ended December 31, 1995 and for the period from January 1, 1996 to
February 28, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of P.F. Chang's
China Bistro, Inc. at December 29, 1996 and December 28, 1997 and the results of
its operations and its cash flows for the period from February 29, 1996 to
December 29, 1996 and for the year ended December 28, 1997, and the combined
results of operations and cash flows of the corporations and limited liability
companies listed in Note 2 for the year ended December 31, 1995 and for the
period from January 1, 1996 to February 28, 1996, in conformity with generally
accepted accounting principles.

ERNST & YOUNG LLP

Phoenix, Arizona
January 26, 1998, except for Note 11
as to which the date is August 27, 1998

F-2
<PAGE> 55

P.F. CHANG'S CHINA BISTRO, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 29, DECEMBER 28, SEPTEMBER 27, SEPTEMBER 27,
1996 1997 1998 1998
------------ ------------ ------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,877 $ 2,739 $ 3,184 $ 3,184
Receivables............................................... 659 2,062 425 425
Inventories............................................... 194 363 431 431
Current portion of notes receivable from related
parties................................................. -- 130 124 124
Prepaids and other current assets......................... 79 417 353 353
------- ------- ------- -------
Total current assets........................................ 2,809 5,711 4,517 4,517
Construction-in-progress.................................... 3,202 3,787 9,541 9,541
Property and equipment, net................................. 2,954 10,207 18,728 18,728
Goodwill, net of accumulated amortization of $154,000,
$398,000 and $725,000 in 1996, 1997 and 1998,
respectively.............................................. 3,971 8,307 7,980 7,980
Notes receivable from related parties, less current
portion................................................... -- 162 177 177
Other assets................................................ 108 315 585 585
------- ------- ------- -------
Total assets................................................ $13,044 $28,489 $41,528 $41,528
======= ======= ======= =======
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit.................................. $ -- $ 5,500 $18,000 $18,000
Accounts payable.......................................... 1,049 1,658 1,098 1,098
Accrued payroll........................................... 624 1,214 1,065 1,065
Other accrued expenses.................................... 536 988 1,968 1,968
Unearned revenue.......................................... 133 305 274 274
Current portion of long-term debt, including $220,000,
$242,000, and $262,000 due to related parties in 1996,
1997 and 1998, respectively............................. 432 481 437 437
Deferred purchase price................................... -- 2,426 2,199 --
Accrued minority members' distributions................... 281 -- -- --
------- ------- ------- -------
Total current liabilities................................... 3,055 12,572 25,041 22,842
Long-term debt, including $583,000, $340,000 and $141,000
due to related parties in 1996, 1997 and 1998,
respectively.............................................. 1,331 2,391 2,038 2,038
Interests of minority members and partners in consolidated
limited liability companies and partnerships.............. 15 164 203 203
Commitments and contingencies...............................
Convertible redeemable preferred stock, $0.001 par value,
10,000,000 shares authorized:
Series A--5,354,270 shares issued and outstanding at
December 29, 1996 and December 28, 1997 and 5,516,094
shares issued and outstanding at September 27, 1998,
liquidation preference of $10,709,000 at December 29,
1996 and December 28, 1997 and $11,032,000 at September
27, 1998................................................ 10,517 11,175 11,592 --
Series B--1,517,131 shares issued and outstanding,
liquidation preference of $6,600,000 at December 28,
1997 and September 27, 1998............................. -- 6,633 6,934 --
Common stockholders' equity (deficit):
Common stock, $0.001 par value, 20,000,000 shares
authorized: 2,500,000 shares issued and outstanding
(6,283,218 shares pro forma)............................ 3 3 3 6
Additional paid-in capital................................ 2 2 2 20,724
Accumulated deficit....................................... (1,879) (4,451) (4,285) (4,285)
------- ------- ------- -------
Total common stockholders' equity (deficit)................. (1,874) (4,446) (4,280) 16,445
------- ------- ------- -------
Total liabilities, convertible redeemable preferred stock
and common stockholders' equity (deficit)................. $13,044 $28,489 $41,528 $41,528
======= ======= ======= =======
</TABLE>

See accompanying notes.
F-3
<PAGE> 56

P.F. CHANG'S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PREDECESSORS COMPANY
------------------------------ -----------------------------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, 1996 FEBRUARY 29, NINE MONTHS ENDED
YEAR ENDED TO 1996 TO YEAR ENDED -----------------------------
DECEMBER 31, FEBRUARY 28, DECEMBER 29, DECEMBER 28, SEPTEMBER 28, SEPTEMBER 27,
1995 1996 1996 1997 1997 1998
------------ --------------- ------------ ------------ ------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $10,465 $2,815 $15,630 $39,768 $27,638 $53,176
Costs and expenses:
Restaurant operating costs:
Cost of sales............. 2,957 772 4,454 11,317 7,827 14,752
Labor..................... 3,347 918 4,736 11,683 8,113 15,221
Operating................. 1,528 527 2,944 6,727 4,576 8,897
Occupancy................. 1,059 205 1,279 2,743 1,887 3,777
------- ------ ------- ------- ------- -------
Total restaurant
operating costs..... 8,891 2,422 13,413 32,470 22,403 42,647
General and
administrative............ 192 17 1,368 4,276 2,985 4,327
Depreciation and
amortization.............. 322 82 352 1,102 713 1,596
Preopening.................. 400 17 765 1,922 1,082 2,408
------- ------ ------- ------- ------- -------
Income (loss) from
operations.................. 660 277 (268) (2) 455 2,198
Interest income (expense):
Interest expense............ (13) (4) (163) (380) (263) (906)
Interest income............. - - 36 63 98 146
------- ------ ------- ------- ------- -------
Income (loss) before
elimination of minority
members' and partners'
interests and provision for
income taxes................ 647 273 (395) (319) 290 1,438
Elimination of minority
members' and partners'
interests................... - - (720) (1,308) (1,093) (543)
------- ------ ------- ------- ------- -------
Income (loss) before provision
for income taxes............ 647 273 (1,115) (1,627) (803) 895
Provision for income taxes.... - - (30) (69) (62) (11)
------- ------ ------- ------- ------- -------
Net income (loss)............. $ 647 $ 273 (1,145) (1,696) (865) 884
======= ======
Redeemable preferred stock
accretion................... (504) (876) (461) (718)
------- ------- ------- -------
Net income (loss) available to
common stockholders......... $(1,649) $(2,572) $(1,326) $ 166
======= ======= ======= =======
Net income (loss) per share:
Basic....................... $ (0.66) $ (1.03) $ (0.53) $ 0.07
======= ======= ======= =======
Diluted..................... $ (0.66) $ (1.03) $ (0.53) $ 0.05
======= ======= ======= =======
Weighted average shares used
in computation:
Basic....................... 2,500 2,500 2,500 2,500
======= ======= ======= =======
Diluted..................... 2,500 2,500 2,500 3,206
======= ======= ======= =======
Pro forma data (unaudited):
Net income (loss) per share:
Basic..................... $ (0.30) $ 0.14
======= =======
Diluted................... $ (0.30) $ 0.13
======= =======
Weighted average shares used
in computation:
Basic..................... 5,717 6,171
======= =======
Diluted................... 5,717 6,877
======= =======
</TABLE>

See accompanying notes.
F-4
<PAGE> 57

P.F. CHANG'S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
COMMON STOCKHOLDERS' AND MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE REDEEMABLE PREFERRED STOCK
-----------------------------------------
SERIES A SERIES B
------------------- ------------------
SHARES AMOUNT SHARES AMOUNT
------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
PREDECESSORS
Balances, January 1, 1995......................... -- $ -- -- $ --
Members' contributions............................ -- -- -- --
Distributions..................................... -- -- -- --
Net income (loss)................................. -- -- -- --
----- ------- ----- ------
Balances, December 31, 1995....................... -- -- -- --
Distributions..................................... -- -- -- --
Net income (loss)................................. -- -- -- --
----- ------- ----- ------
Balances, February 28, 1996....................... -- -- -- --
COMPANY
Conversion of S corporations to limited liability
companies....................................... -- -- -- --
Purchase of members' interests.................... -- -- -- --
Reclassification to minority interest upon
consolidation in connection with acquisition of
interests....................................... -- -- -- --
Issuance of common stock.......................... -- -- -- --
Issuance of Series A preferred stock, net of
issuance costs of $695,000...................... 5,354 10,013 -- --
Redeemable preferred stock accretion.............. -- 504 -- --
Net loss.......................................... -- -- -- --
----- ------- ----- ------
Balances, December 29, 1996....................... 5,354 10,517
Issuance of Series B preferred stock, net of
issuance costs of $184,000...................... -- -- 1,517 6,415
Redeemable preferred stock accretion.............. -- 658 -- 218
Net loss.......................................... -- -- -- --
----- ------- ----- ------
Balances, December 28, 1997....................... 5,354 11,175 1,517 6,633
Series A preferred stock dividend paid
(unaudited)..................................... 162 -- -- --
Redeemable preferred stock accretion
(unaudited)..................................... -- 417 -- 301
Net income (unaudited)............................ -- -- -- --
----- ------- ----- ------
Balances, September 27, 1998 (unaudited).......... 5,516 $11,592 1,517 $6,934
===== ======= ===== ======

<CAPTION>
COMMON STOCKHOLDERS' AND MEMBERS' EQUITY (DEFICIT)
--------------------------------------------------------------------
COMMON STOCK ADDITIONAL
---------------- PAID-IN MEMBERS' ACCUMULATED
SHARES AMOUNT CAPITAL CAPITAL DEFICIT TOTAL
------ ------ ---------- -------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
PREDECESSORS
Balances, January 1, 1995......................... 20 $-- $1,419 $ -- $ (202) $ 1,217
Members' contributions............................ -- -- -- 710 -- 710
Distributions..................................... -- -- (706) (50) (523) (1,279)
Net income (loss)................................. -- -- -- (18) 665 647
----- -- ------ ------- ------- -------
Balances, December 31, 1995....................... 20 -- 713 642 (60) 1,295
Distributions..................................... -- -- (112) -- (228) (340)
Net income (loss)................................. -- -- -- (12) 285 273
----- -- ------ ------- ------- -------
Balances, February 28, 1996....................... 20 -- 601 630 (3) 1,228
COMPANY
Conversion of S corporations to limited liability
companies....................................... (20) -- (601) 601 -- --
Purchase of members' interests.................... -- -- -- (1,231) -- (1,231)
Reclassification to minority interest upon
consolidation in connection with acquisition of
interests....................................... -- -- -- -- (227) (227)
Issuance of common stock.......................... 2,500 3 2 -- -- 5
Issuance of Series A preferred stock, net of
issuance costs of $695,000...................... -- -- -- -- -- --
Redeemable preferred stock accretion.............. -- -- -- -- (504) (504)
Net loss.......................................... -- -- -- -- (1,145) (1,145)
----- -- ------ ------- ------- -------
Balances, December 29, 1996....................... 2,500 3 2 -- (1,879) (1,874)
Issuance of Series B preferred stock, net of
issuance costs of $184,000...................... -- -- -- -- -- --
Redeemable preferred stock accretion.............. -- -- -- -- (876) (876)
Net loss.......................................... -- -- -- -- (1,696) (1,696)
----- -- ------ ------- ------- -------
Balances, December 28, 1997....................... 2,500 3 2 -- (4,451) (4,446)
Series A preferred stock dividend paid
(unaudited)..................................... -- -- -- -- -- --
Redeemable preferred stock accretion
(unaudited)..................................... -- -- -- -- (718) (718)
Net income (unaudited)............................ -- -- -- -- 884 884
----- -- ------ ------- ------- -------
Balances, September 27, 1998 (unaudited).......... 2,500 $3 $ 2 $ -- $(4,285) $(4,280)
===== == ====== ======= ======= =======
</TABLE>

See accompanying notes.

F-5
<PAGE> 58

P.F. CHANG'S CHINA BISTRO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PREDECESSORS COMPANY
------------------------------ ----------------------------------------------------------------
PERIOD FROM PERIOD FROM NINE MONTHS ENDED
YEAR ENDED JANUARY 1, 1996 FEBRUARY 29, 1996 YEAR ENDED -----------------------------
DECEMBER 31, TO FEBRUARY 28, TO DECEMBER 29, DECEMBER 28, SEPTEMBER 28, SEPTEMBER 27,
1995 1996 1996 1997 1997 1998
------------ --------------- ----------------- ------------ ------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............. $ 647 $ 273 $(1,145) $(1,696) $ (865) $ 884
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation................ 322 82 198 858 558 1,269
Amortization................ -- -- 154 244 155 327
Minority members' and
partners' interests....... -- -- 720 1,308 1,093 543
Change in operating assets
and liabilities:
Receivables............... (127) 134 (658) (1,403) 359 1,637
Inventories............... (54) (5) (75) (169) (32) (68)
Prepaids and other current
assets.................. (56) (6) 17 (338) (463) 64
Other assets.............. (40) 8 (63) (207) 70 (270)
Accounts payable.......... 489 (65) 395 609 233 (560)
Accrued payroll........... 50 80 385 590 (17) (149)
Other accrued expenses.... 299 (143) 289 452 269 980
Unearned revenue.......... 67 (13) 63 172 (7) (31)
Accrued minority members'
distributions........... -- -- -- (281) (281) --
------- ----- ------- ------- ------- -------
Net cash provided by operating
activities.................. 1,597 345 280 139 1,072 4,626
INVESTING ACTIVITIES:
Capital expenditures.......... (824) -- (4,008) (8,696) (6,039) (15,538)
Increase in notes receivable
from related parties........ -- -- -- (292) (101) (9)
Payment for members'
interests................... -- -- (4,175) (2,520) -- (227)
------- ----- ------- ------- ------- -------
Net cash used in investing
activities.................. (824) -- (8,183) (11,508) (6,140) (15,774)
FINANCING ACTIVITIES:
Net proceeds from revolving
line of credit.............. -- -- -- 5,500 -- 12,500
Proceeds from issuance of
long-term debt.............. -- -- -- 1,600 1,600 --
Repayments of long-term
debt........................ (71) (7) (267) (491) (378) (397)
Proceeds from issuance of
common stock................ -- -- 5 -- -- --
Proceeds from issuance of
redeemable preferred stock,
net of issuance costs....... -- -- 10,013 6,415 6,415 --
Proceeds from minority
partners' contributions..... -- -- -- 441 340 289
Proceeds from members'
contributions............... 710 -- -- -- -- --
Distributions to members and
stockholders................ (1,279) (340) -- -- -- --
Distributions to minority
members and partners........ -- -- (449) (1,234) (760) (799)
------- ----- ------- ------- ------- -------
Net cash provided by (used in)
financing activities........ (640) (347) 9,302 12,231 7,217 11,593
------- ----- ------- ------- ------- -------
Net increase (decrease) in
cash and cash equivalents... 133 (2) 1,399 862 2,149 445
Cash and cash equivalents at
the beginning of the
period...................... 347 480 478 1,877 1,877 2,739
------- ----- ------- ------- ------- -------
Cash and cash equivalents at
the end of the period....... $ 480 $ 478 $ 1,877 $ 2,739 $ 4,026 $ 3,184
======= ===== ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest........ $ 13 $ 4 $ 108 $ 319 $ 309 $ 837
Cash paid for income taxes.... -- -- 30 69 62 11
Purchase of members' interests
through issuance of
long-term debt.............. -- -- 1,266 -- -- --
Purchase of property and
equipment through issuance
of long-term debt........... 200 -- 421 -- -- --
Purchase of members' and
partners' interest through
deferred purchase price..... -- -- -- 2,426 -- --
</TABLE>

See accompanying notes.
F-6
<PAGE> 59

P.F. CHANG'S CHINA BISTRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997 AND SEPTEMBER 27, 1998
(THE INFORMATION AS OF SEPTEMBER 27, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 28, 1997
AND SEPTEMBER 27, 1998 IS UNAUDITED)

1. BASIS OF PRESENTATION

P.F. Chang's China Bistro, Inc. (Company) operates restaurants in Arizona,
California, Colorado, Texas, Illinois, Michigan, Nevada, Florida, North
Carolina, Louisiana, Alabama, Georgia and Virginia under the name of "P.F.
Chang's China Bistro." The Company was formed in January, 1996 through the
issuance of 500 shares of common stock to Mr. Paul Fleming for $100 in cash. In
February 1996, the Company sold 4,975,000 shares of Series A convertible
preferred stock convertible into 2,487,500 shares of common stock and warrants
for $9,950,000 in cash. Contemporaneously, the Company acquired Mr. Fleming's 52
percent interest in Fleming Chinese Restaurants, Inc., which operates a
restaurant in Scottsdale, Arizona (Scottsdale), for $1,037,000 in cash and
$954,000 in notes payable. The Company also acquired Mr. Fleming's 43 percent
interest in P.F. Chang's II, Inc., which operates a restaurant in Newport Beach,
California (Newport Beach); 49.85 percent ownership in P.F. Chang's III, L.L.C.,
which operates a restaurant in La Jolla, California (La Jolla); and 54.2 percent
ownership interest in P.F. Chang's IV, L.L.C., which operates a restaurant in
Irvine, California (Irvine), for $2,006,000 in cash and 2,499,500 shares of
common stock of the Company. In addition, in 1996 the Company acquired an
additional 18 percent ownership in Scottsdale and the remaining 45.8 percent
ownership of Irvine in various transactions for an aggregate of $1,132,000 in
cash and $312,000 in notes payable.

The acquisition of the ownership interests in the various entities during
1996 have been accounted for under the purchase method of accounting for
business combinations. Accordingly, the purchase price was allocated to the
proportional assets acquired and liabilities assumed based on their relative
fair values, with $4,125,000 allocated to goodwill. As a result of the start-up
nature of the operations of the Company, the significant prior claims of the
preferred stockholders of the Company, and the minority interests in Scottsdale,
Newport Beach and La Jolla, no significant value was assigned to the common
stock issued in the acquisitions.

During 1997, the Company purchased substantially all the remaining
outstanding minority interests in the Scottsdale, La Jolla and Newport Beach
restaurants for approximately $2,520,000 in cash and $2,426,000 in common stock
of the Company to be issued in connection with a contemplated initial public
offering (IPO). Upon consummation of an IPO, the number of common shares to be
issued will be the fixed purchase price of $2,426,000 divided by the price per
share of the common stock sold in the IPO. Should the IPO not be completed by a
stipulated date as defined, the Company will be obligated (upon demand of the
individual holders) to pay the minority interest holders the $2,426,000 in cash.

The acquisition of the ownership interests in the various entities during
1997 has been accounted for under the purchase method of accounting for business
combinations. Accordingly, the purchase price was allocated to the proportional
assets acquired and liabilities assumed based on their relative fair values,
with $4,581,000 allocated to goodwill.

Two of the predecessor entities, Fleming Chinese Restaurants, Inc. and P.F.
Chang's II, Inc. were dissolved and their operations transferred to two new
entities, PFCCB Scottsdale, L.L.C. and PFCCB Newport Beach, L.L.C. Accordingly,
at December 29, 1996, each of the existing restaurants was structured as a
limited liability corporation, and the Company's ownership of these restaurants
is through its membership in each limited liability corporation. The Company's
new restaurants are generally organized as partnerships with the Company as
general partner.

The operations of the predecessor entities which operated the restaurants
have been presented in the accompanying combined financial statements for 1995
and through the date of acquisition at historical cost due to the common
ownership. The allocation of the purchase price resulted in no material
adjustment to the historical recorded basis in the assets and liabilities except
for goodwill. Therefore, the effect to the statement of operations is primarily
amortization subsequent to the date of acquisition.

F-7
<PAGE> 60
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has incurred successive losses and has negative working capital
at December 28, 1997, and its capital requirements, including start-up costs,
related to the opening of additional restaurants have been, and will continue to
be significant. The Company has experienced positive operating cash flows since
its inception. To date, the Company has been substantially dependent upon loans
from lending institutions and private equity funding to develop its restaurants.
The Company will be required to seek significant amounts of additional debt
and/or equity capital in order to fund its planned development activities.
Although there is no assurance that the Company will be able to obtain adequate
financing for its future development, management believes that such capital will
be available to the Company.

In the event the Company is unsuccessful in obtaining additional funds for
development, management may need to take steps to continue to operate within the
available cash flow. Such steps may include, among others, the postponement of
planned future development.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The 1996 and 1997 consolidated financial statements include the accounts
and operations of the Company and its subsidiaries or partnerships in which it
owns more than a 50 percent interest. All material balances and transactions
between the consolidated entities have been eliminated.

The 1995 combined statements of operations and cash flows includes the
accounts of Fleming Chinese Restaurants, Inc., P.F. Chang's II, Inc., P.F.
Chang's III, L.L.C., and P.F. Chang's IV, L.L.C. All material balances and
transactions between the combined entities have been eliminated.

INTERIM FINANCIAL INFORMATION

The consolidated financial statements for the nine months ended September
28, 1997 and September 27, 1998 are unaudited and have been prepared on the same
basis as the audited consolidated financial statements included herein. In the
opinion of management, such unaudited consolidated financial statements include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of financial position and results of operations. The results
of operation for such interim periods are not necessarily indicative of the
results that may be expected for any future periods.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity date of
three months or less when purchased to be cash equivalents.

RECEIVABLES

Receivables consist primarily of amounts due from landlords or other
parties for the reimbursement of leasehold improvements paid by the Company.

INVENTORIES

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

NOTES RECEIVABLE FROM RELATED PARTIES

Notes receivable from related parties represent amounts due the Company
from limited partners of affiliated partnerships. Payments of principal and
interest of 11.0 percent amortized over a five year period are due monthly with
a balloon payment for the outstanding principal and interest due at the end of
two years.

F-8
<PAGE> 61
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONSTRUCTION-IN-PROGRESS

The Company capitalizes all direct costs in the construction of new
restaurants. Upon opening, these costs are depreciated over their useful lives
based upon the property classifications.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Furniture, fixtures, and
equipment are depreciated on a straight line basis over the estimated useful
service lives of the related assets which approximate seven years. Leasehold
improvements are amortized over the shorter of the useful life of the asset or
the length of the related lease term. China and smallwares are depreciated over
two years up to 50 percent of their original cost, after which subsequent
additions are expensed as purchased.

GOODWILL

Goodwill represents the excess of cost over net assets acquired in the
purchase of interests in various restaurants (see Note 1) and is being amortized
over 20 years on a straight-line basis. The Company assesses the recoverability
of goodwill based upon expected future undiscounted cash flows resulting from
the acquired interests in the restaurants.

UNEARNED REVENUE

Unearned revenue represents gift certificates sold but not yet redeemed.
Revenues are recognized upon redemption of the gift certificates.

ADVERTISING

The Company expenses advertising as incurred. Advertising expense during
the year ended December 31, 1995, the period from January 1, 1996 to February
28, 1996, the period from February 29, 1996 to December 29, 1996, and for the
year ended December 28, 1997 was approximately $328,000, $10,000, $232,000, and
$901,000, respectively. During the nine months ended September 28, 1997 and
September 27, 1998, advertising expense was approximately $660,000 and $864,000,
respectively.

PREOPENING

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

INCOME TAXES

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

Minority members' and partners' interests in income or loss of limited
liability corporations and partnerships includes no provision for income taxes
as any tax liability related thereto is the responsibility of the individual
minority members.

The predecessor entities are S corporations and limited liability
corporations under the Internal Revenue Code. Accordingly, the taxable income
and losses are allocated and taxed directly to the stockholders and

F-9
<PAGE> 62
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

members resulting in no tax provision for the year ended December 31, 1995 or
the period from January 1, 1996 to February 28, 1996.

STOCK BASED COMPENSATION

The Company grants stock options for a fixed number of shares to certain
employees with an exercise price equal to or greater than the fair value of the
shares at the date of grant. The Company accounts for stock option grants to
employees in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and, accordingly,
recognizes no compensation expense for the stock option grants.

NET INCOME (LOSS) PER SHARE

Net income (loss) per share is computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."

Pro forma basic and diluted net income per share has been computed giving
effect to the conversion of all the outstanding shares of convertible redeemable
preferred stock and deferred purchase price liability into common stock upon
closing of the Company's IPO (determined using the if-converted method).

PRO FORMA BALANCE SHEET (UNAUDITED)

As discussed in Notes 1 and 6, the convertible redeemable preferred stock
and deferred purchase price liability will be automatically converted upon the
closing of the public offering contemplated herein. The accompanying pro forma
balance sheet gives effect to this conversion as if such event occurred on
September 27, 1998.

FISCAL YEAR

The Company's fiscal year ends on the Sunday closest to the end of December
and includes 52 weeks in 1995, 1996 and 1997.

USE OF ESTIMATES

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

CONCENTRATIONS OF CREDIT RISK

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

F-10
<PAGE> 63
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RECLASSIFICATIONS

Certain amounts shown in the prior period combined and consolidated
financial statements have been reclassified to conform with the current year
consolidated financial statements presentation.

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28, SEPTEMBER 27,
1996 1997 1998
------------ ------------ -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements....................... $1,551 $ 6,904 $14,483
Furniture, fixtures and equipment............ 1,946 4,386 6,365
China and smallwares......................... 142 423 654
------ ------- -------
3,639 11,713 21,502
Less accumulated depreciation................ 685 1,506 2,774
------ ------- -------
$2,954 $10,207 $18,728
====== ======= =======
</TABLE>

4. REVOLVING LINE OF CREDIT

On October 24, 1997, the Company entered into a $10,000,000 revolving line
of credit agreement with a finance corporation. The line of credit bears
interest at LIBOR plus 4.0 percent, payable monthly, and expires on November 1,
1998. At December 28, 1997, amounts available under the line of credit were
approximately $4,500,000. In June 1998, the Company amended its revolving line
of credit to provide for a $20,000,000 line with interest at LIBOR plus 3.5
percent and expires on July 1, 1999. At September 27, 1998, amounts available
under the line of credit were $2,000,000. The weighted average interest rate
under the line of credit was 9.5 percent in 1997 and 1998, respectively.

The line of credit requires the Company to maintain a net worth of at least
$10,000,000 including convertible redeemable preferred stock. The line of credit
agreement also contains covenants which place various restrictions on sales of
properties, transactions with affiliates, creation of additional debt, and other
nonfinancial covenants, as defined. The line of credit agreement is
collateralized by the Company's interests in certain affiliated partnerships.

F-11
<PAGE> 64
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28, SEPTEMBER 27,
1996 1997 1998
------------ ------------ -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
$1,100,000 promissory note, collateralized by
leasehold improvements, payable in monthly
installments of $11,354 including interest
at 11.0 percent, until March 1, 2017, when
all remaining principal and interest is due
and payable. Additional payments may be
required under the promissory note based on
a percentage of gross sales. ............... $ -- $1,088 $1,075
$500,000 promissory note, collateralized by
equipment, payable in monthly installments
of $8,561 including interest at 11.0 percent
until March 1, 2004 when all remaining
principal and interest is due and
payable. ................................... -- 463 423
$1,266,000 unsecured promissory notes, a
portion of which is payable to related
parties, in quarterly installments of
$96,967 including interest at 10.0 percent,
until March 1, 2000, when all remaining
principal and interest is due and
payable. ................................... 1,065 762 526
$421,000 equipment loan, collateralized by
furniture, fixtures and equipment, payable
in monthly installments of $7,202 including
interest at 11.0 percent, until January 1,
2004, when all remaining principal and
interest is due and payable. ............... 421 382 348
$200,000 unsecured promissory note, payable in
monthly installments of $3,333 plus interest
at prime plus one percent, until April 2001,
when all remaining principal and interest is
due and payable. The note is guaranteed by a
stockholder of the Company. ................ 173 133 103
Other......................................... 104 44 --
------ ------ ------
1,763 2,872 2,475
Less current portion.......................... 432 481 437
------ ------ ------
$1,331 $2,391 $2,038
====== ====== ======
</TABLE>

The aggregate annual payments of long-term debt outstanding at December 28,
1997, for the next five years and thereafter, are summarized as follows:
1998--$481,000; 1999--$523,000; 2000--$281,000; 2001--$178,000; 2002--$184,000;
and thereafter--$1,225,000.

F-12
<PAGE> 65
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY

PREFERRED STOCK

In February 1996, the Company issued 4,975,000 shares of Series A
convertible redeemable preferred stock (Series A preferred stock) convertible
into 2,487,500 shares of common stock, and warrants exercisable for 1,243,750
shares of Series A preferred stock convertible into 621,875 shares of common
stock, for an aggregate purchase price of approximately $9,950,000, less
issuance costs of $695,000. In September 1996, the Company issued an additional
379,270 shares of Series A preferred stock convertible into 189,635 shares of
common stock for $758,000 in order to purchase the remaining minority interests
in the Irvine restaurant. The Series A preferred stock has a $0.001 par value
and an annual six percent dividend payable quarterly on March 31, June 30,
September 30, and December 31 in shares of such Series A preferred stock on a
cumulative basis beginning January 1, 1998. The Company may also declare, upon
unanimous consent of the Non-Investor Directors as defined, a cash dividend
equal to ten percent of the liquidation price of the Series A preferred stock in
lieu of the Series A preferred stock dividend.

In May 1997, the Company issued 1,517,131 shares of Series B convertible
redeemable preferred stock (Series B preferred stock) convertible into 758,565
shares of common stock for an aggregate purchase price of $6,599,000, less
issuance costs of approximately $184,000. The Series B preferred stock has a
$0.001 par value and an annual six percent dividend payable quarterly on March
31, June 30, September 30, and December 31 in shares of such Series B preferred
stock on a cumulative basis beginning April 1, 1999. The Company may also
declare, upon unanimous consent of the Non-Investor Directors as defined, a cash
dividend equal to ten percent of the liquidation price of the Series B preferred
stock in lieu of the Series B preferred stock dividend.

Each two shares of Series A and Series B preferred stock are convertible at
any time into one share of common stock, subject to dilution adjustments as
defined, at the option of the holder and is automatically converted into common
stock at the date of a qualified IPO. The Series A preferred stock is
mandatorily redeemable at a minimum of 50 percent of the shares outstanding in
May 2003 with the remaining outstanding shares becoming mandatorily redeemable
in May 2004 at $2.00 per share plus accrued and unpaid dividends. The Series A
preferred stock has a liquidation preference equal to the greater of $2.00 per
share or such amount per share as would have been payable had each share of
Series A preferred stock been converted into common stock. The Series B
preferred stock is mandatorily redeemable at a minimum of 50 percent of the
shares outstanding in May 2003 with the remaining outstanding shares becoming
mandatorily redeemable in May 2004 at $4.35 per share plus accrued and unpaid
dividends. The Series B preferred stock has a liquidation preference equal to
the greater of $4.35 per share or such amount per share as would have been
payable had each share of Series B preferred stock been converted into common
stock. Upon voluntary or involuntary liquidation, the holders of the Series A
and Series B preferred stock shall be entitled to be paid out of the assets of
the Company with the common stockholders being entitled to all remaining assets
of the Company to be distributed. The holders of the Series A and Series B
preferred stock have the right to vote based on the number of shares of common
stock into which each share of Series A and Series B preferred stock would thus
be converted. The difference between the redemption amount and the carrying
amount of the Series A and Series B preferred stock and dividends thereon
calculated on a straight-line basis beginning with the date of issuance is being
recorded through periodic accretions charged to accumulated deficit. Effective
April 30, 1997, 2,233,980 and 417,156 shares of Series A and Series B preferred
stock, respectively, have been reserved for issuance upon the exercise of
warrants previously issued and upon issuance of "payment-in-kind" dividends of
Series A and Series B preferred stock.

The warrant to purchase Series A preferred stock issued during 1996 was
cancelable by the Company should the Irvine restaurant achieve certain operating
goals. During 1997, the Irvine restaurant achieved such goals, and the warrant
was consequently canceled.

F-13
<PAGE> 66
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the original capitalization of the Company, an
additional warrant to purchase 124,380 shares of Series A preferred stock,
convertible into 62,190 shares of common stock, was issued to an investment bank
with an exercise price of $4.00 per common share. The warrant expires February
28, 2001.

SHAREHOLDERS' AGREEMENT

The Company's common and preferred stock is subject to a shareholders'
agreement which provides to the stockholders a right of first refusal to
purchase the other stockholders' interests. Before any such shares of common and
preferred stock may be sold, assigned, transferred, pledged, encumbered, or
disposed in any way, such shares shall first be offered to the Company and other
stockholders party to the shareholders' agreement. In addition, such
stockholders have certain bring-along and tag-along rights with respect to sales
of common stock by certain other stockholders. Upon a qualified IPO, all rights
and obligations under the shareholders' agreement terminate.

PARTNERSHIP AGREEMENTS

The Company has entered into a series of partnership agreements with each
of its regional managers (Market Partners), certain of its general managers
(Operating Partners) and certain of its executive chefs (Culinary Partners).
These partnership agreements entitle the Market Partner to a specified
percentage of the cash flows from the restaurants that partner has developed and
oversees as the regional manager. Similarly, the general manager and the
executive chef at most of the Company's restaurants are offered the opportunity
to become Operating Partners and Culinary Partners, respectively, and to receive
a percentage of the cash flows from the restaurant in which they work. At the
time an individual becomes a Market Partner, Operating Partner or Culinary
Partner, that person is required to make an equity investment in the partnership
and to enter into a five year employment agreement with the Company. The Company
has the right, in its sole discretion, to terminate the employment of any Market
Partner, Operating Partner or Culinary Partner, and, upon such termination, to
repurchase that partner's interest in the partnership at such partners
then-current basis in the partnership. If an individual continues to serve as
Market Partner, Operating Partner or Culinary Partner for five years, then the
Company has the right to repurchase that person's interest in the partnership
for a value, which is determined by reference to trailing cash flows.

COMMON STOCK

The Company has reserved 5,912,920 shares of common stock for issuance upon
the exercise of options and warrants to purchase such shares, and upon the
conversion of Series A and Series B preferred stock into such shares.

STOCK OPTION PLAN

The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," (Statement 123) requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals or exceeds the fair value of the underlying stock
on the date of grant, no compensation expense is recognized.

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

F-14
<PAGE> 67
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

exercise price that equals or exceeds the fair value of such shares on the date
such option is granted. Vesting periods are determined at the discretion of the
board of directors, and options currently outstanding at December 28, 1997 vest
over five years. Options may be exercised immediately upon grant subject to a
right by the Company to repurchase any unvested shares at the exercise price.
Any options granted shall not be exercisable after ten years. Incentive options
granted to individuals who own more than ten percent of the total combined
voting power of all classes of stock shall not be exercisable after five years
and options granted to prospective employees, consultants or directors may not
become exercisable prior to the date on which such person commences services
with the Company. Upon certain changes in control of the Company, the Plan
provides for two additional years of immediate vesting. The Company has reserved
a total of 1,086,500 shares of common stock for issuance under the 1996 and 1997
Plans.

Pro forma information regarding net income (loss) is required by Statement
123, which also requires that the information be determined as if the Company
has accounted for its employee stock options granted subsequent to December 31,
1994 under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1996 and 1997:
risk-free interest rate of 5.5 percent; a dividend yield of -0-percent;
volatility factors of the expected market price of the Company's common stock of
.01 and .122, respectively; and a weighted-average expected life of the option
of five years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

Because Statement 123 is applicable to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
approximately 2002. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period.
The Company's pro forma information follows:

<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 29,
1996 TO YEAR ENDED
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net loss, as reported.............................. $1,145 $1,696
Pro forma compensation expense for stock options... 48 82
------ ------
Pro forma net loss................................. $1,193 $1,778
====== ======
</TABLE>

F-15
<PAGE> 68
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------
SHARES WEIGHTED-
AVAILABLE AVERAGE
FOR EXERCISE
OPTIONS SHARES PRICE
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1995................... -- -- $ --
Authorized....................................... 890,000 -- --
Granted.......................................... (791,510) 791,510 2.98
Exercised........................................ -- -- --
Forfeited (canceled)............................. -- -- --
-------- --------- ------
Outstanding at December 29, 1996................... 98,490 791,510 2.98
Authorized....................................... 196,500 -- --
Granted.......................................... (170,000) 170,000 5.40
Exercised........................................ -- -- --
Forfeited (canceled)............................. -- -- --
-------- --------- ------
Outstanding at December 28, 1997................... 124,990 961,510 3.40
Authorized (unaudited)........................... 206,885 -- --
Granted (unaudited).............................. (169,375) 169,375 11.93
Exercised (unaudited)............................ -- -- --
Forfeited (canceled) (unaudited)................. -- -- --
-------- --------- ------
Outstanding at September 27, 1998 (unaudited)...... 162,500 1,130,885 $ 4.68
======== ========= ======
</TABLE>

Information regarding options outstanding and exercisable at December 28,
1997 is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.40 504,872 8.16 years $ 2.40 176,672 $2.40
$4.00-$6.00 445,388 5.38 years 4.38 105,510 4.00
$10.00 11,250 9.90 years 10.00 -- --
</TABLE>

Since options are generally exercisable upon date of grant, options
exercisable included in the above table represent vested options that are not
subject to repurchase by the Company. The weighted-average fair value of options
granted during the period from February 29, 1996 to December 29, 1996 and for
the year ended December 28, 1997 was $0.56 and $1.38, respectively.

F-16
<PAGE> 69
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES

Income tax expense consisted of the following:

<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 29,
1996 TO YEAR ENDED
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Federal:
Current.......................................... $-- $--
Deferred......................................... -- --
--- ---
-- --
State:
Current.......................................... 30 69
Deferred......................................... -- --
--- ---
30 69
--- ---
$30 $69
=== ===
</TABLE>

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

<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 29,
1996 TO YEAR ENDED
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Income tax benefit at federal statutory rate....... $(379) $(553)
State taxes, net of federal benefit................ 30 69
Increase in valuation allowance.................... 398 426
Other, net......................................... (19) 127
----- -----
$ 30 $ 69
===== =====
</TABLE>

The Company's net income for the year ended December 31, 1995 and for the
period from January 1, 1996 to February 28, 1996 included earnings attributable
to the Scottsdale, Newport Beach, La Jolla and Irvine restaurants. These
restaurants were organized as limited liability companies or had elected under
Subchapter S of the Internal Revenue Code to have their stockholders pay any
federal and state income tax due on their earnings. Although income prior to the
consolidation attributable to the acquired restaurants is included in the
Company's consolidated financial statements, the Company is not required to pay
income taxes on the income since they are the responsibility of the members and
stockholders of the acquired companies.

F-17
<PAGE> 70
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Bonus accrual.................................... $ 47 $ --
Depreciation on property and equipment........... 44 2
Preopening expenses.............................. 80 267
Goodwill amortization............................ 7 --
Net operating loss carryforwards................. 290 760
----- ------
468 1,029
Deferred tax liabilities:
Goodwill amortization............................ -- 136
----- ------
468 893
Valuation allowance................................ (468) (893)
----- ------
Net deferred tax assets............................ $ -- $ --
===== ======
</TABLE>

During the period from January 1, 1996 to December 29, 1996 and for the
year ended December 28, 1997, the valuation allowance increased $468,000 and
$425,000, respectively. At December 28, 1997, the Company has a net operating
loss carryforward of approximately $1,900,000 which begins to expire for federal
purposes in 2011 and for state purposes in 2001.

F-18
<PAGE> 71
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. NET INCOME (LOSS) PER SHARE AND PRO FORMA NET INCOME (LOSS) PER SHARE

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

<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 29, NINE MONTHS ENDED
1996 TO YEAR ENDED -----------------------------
DECEMBER 29, DECEMBER 28, SEPTEMBER 28, SEPTEMBER 27,
1996 1997 1997 1998
------------ ------------ ------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)................ $(1,145) $(1,696) $ (865) $ 884
Convertible redeemable preferred
stock accretion............... (504) (876) (461) (718)
------- ------- ------- ------
Numerator for basic net income
(loss) per share--income
available to common
stockholders.................. (1,649) (2,572) (1,326) 166
Effect of dilutive securities:
Convertible redeemable
preferred stock accretion... -- -- -- --
------- ------- ------- ------
Numerator for diluted net income
(loss) per share--income
available to common
stockholders after assumed
conversions................... $(1,649) $(2,572) $(1,326) $ 166
======= ======= ======= ======
Denominator:
Denominator for basic net income
(loss) per
share--weighted-average
shares........................ 2,500 2,500 2,500 2,500
Effect of dilutive securities:
Employee and director stock
options....................... -- -- -- 666
Warrants......................... -- -- -- 40
Convertible redeemable preferred
stock......................... -- -- -- --
------- ------- ------- ------
Denominator for diluted net income
(loss) per share--adjusted
weighted average shares and
assumed conversions.............. 2,500 2,500 2,500 3,206
======= ======= ======= ======
Net income (loss) per share:
Basic............................ $ (0.66) $ (1.03) $ (0.53) $ 0.07
======= ======= ======= ======
Diluted.......................... $ (0.66) $ (1.03) $ (0.53) $ 0.05
======= ======= ======= ======
</TABLE>

Warrants to purchase Series A Preferred Stock convertible into 62,190
shares of common stock and options to purchase 961,510 shares of common stock
ranging from $2.40 to $10.00 per share were outstanding during the year ended
December 28, 1997. Warrants and options outstanding for the period from February
29, 1996 to December 29, 1996, the year ended December 28, 1997 and the nine
months ended September 28, 1997 were not included in the computation of diluted
net income (loss) per share because the effect would be antidilutive. The
preferred stock convertible to common stock is not included in the computation
of diluted net income (loss) per share during the periods above, because the
assumed conversions would be antidilutive.

As discussed in Note 1 and should the Company complete an IPO, contingently
issuable shares based on the IPO common stock price will be issued. As the
conditions for the shares to be issued have not been satisfied, the contingent
shares are not included in diluted net income (loss) per share.

F-19
<PAGE> 72
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the computation of basic and diluted pro
forma net income (loss) per share giving effect to the conversion of the
preferred stock and the deferred purchase price to common stock as of the
beginning of each period presented:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 28, ENDED SEPTEMBER 27,
1997 1998
------------ -------------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Numerator for basic pro forma net income (loss) per
share:
Net income (loss)................................... $(1,696) $ 884
======= ======
Denominator:
Weighted-average shares............................. 2,500 2,500
Conversion of convertible preferred stock and
deferred purchase price liability................ 3,217 3,671
------- ------
Denominator for basic pro forma net income (loss)
per share........................................ 5,717 6,171
Effect of dilutive securities:
Employee and director stock options.............. -- 666
Warrants......................................... -- 40
------- ------
Denominator for dilutive pro forma net income (loss)
per share--adjusted weighted average shares and
assumed conversions.............................. 5,717 6,877
======= ======
Pro forma net income (loss) per share:
Basic............................................... $ (0.30) $ 0.14
======= ======
Diluted............................................. $ (0.30) $ 0.13
======= ======
</TABLE>

9. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases restaurant and office facilities and equipment and
certain real property under operating leases having terms expiring between 2000
and 2019. The restaurant facility and real property leases primarily have
renewal clauses of five to 15 years exercisable at the option of the Company and
rent escalation clauses stipulating specific rent increases, some of which are
based on the consumer price index. Certain of these leases require the payment
of contingent rentals based on a percentage of gross revenues, as defined. Rent
expense during the year ended December 31, 1995, the period from January 1, 1996
to February 28, 1996, the period from February 29, 1996 to December 29, 1996 and
for the year ended December 28, 1997 was approximately $656,000, $121,000,
$1,176,000 and $2,203,000, respectively. During the nine months ended September
28, 1997 and September 27, 1998, rent expense was approximately $1,520,000 and
$2,883,000, respectively. Contingent rent included in rent expense during the
year ended December 31, 1995, the period from January 1, 1996 to February 28,
1996, the period from February 29, 1996 to December 29, 1996 and for the year
ended December 28, 1997 was approximately $152,000, $76,000, $225,000 and
$605,000, respectively. During the nine months ended September 28, 1997 and
September 27, 1998, contingent rent included in rent expense was approximately
$432,000 and $812,000, respectively.

At December 28, 1997, the Company had entered into other lease agreements
for restaurant facilities currently under construction or yet to be constructed.
In addition, the leases also contain provisions for

F-20
<PAGE> 73
P.F. CHANG'S CHINA BISTRO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

additional contingent rent based upon gross sales, as defined in the leases.
Future minimum lease payments under operating leases (including restaurants to
be opened in 1998) are as follows (in thousands):

<TABLE>
<S> <C>
1998............................................... $ 3,158
1999............................................... 4,161
2000............................................... 4,220
2001............................................... 4,172
2002............................................... 4,145
Thereafter......................................... 38,537
-------
Total minimum lease payments....................... $58,393
=======
</TABLE>

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

10. BENEFIT PLAN

Effective July 1, 1997, the Company adopted the 401(k) Defined Contribution
Benefit Plan, which covers substantially all employees of the Company that have
completed one year of service and have attained the age of 21 years old. The
plan permits participants to contribute to the plan, subject to Internal Revenue
Code restrictions, and the plan also permits the Company to make discretionary
matching contributions. During the year ended December 28, 1997 and for the nine
months ended September 27, 1998, the Company did not make any contributions to
the Plan.

11. SUBSEQUENT EVENTS

On June 2, 1998, the Company's Board of Directors approved, subject to
stockholder approval, a one-for-two reverse stock split of the common stock and
made conforming adjustments on the terms of all outstanding common stock
equivalents, including the preferred stock, except for the par value and
authorized shares. All shares and per share information in the accompanying
consolidated financial statements has been retroactively adjusted to reflect the
reverse split.

During 1998, the Company's Board of Directors approved, subject to
stockholder approval, the 1998 Stock Option Plan (1998 Plan) which provides for
discretionary grants of incentive stock options and nonqualified stock options
to the Company's employees including officers, directors, consultants, advisors,
and other independent contractors. A total of 280,000 shares have been reserved
for issuance under the 1998 Plan. The option price per share for an incentive
stock option may not be less than 100% of the fair market value of a share of
common stock on the grant date. The option price per share for a nonstatutory
stock option may not be less than 85 percent of the fair market value of a share
of common stock on the grant date. The option price per share for an incentive
stock option granted to a person owning stock possessing more than 10 percent of
the total combined voting power of all classes of stock of the Company (or a
parent or subsidiary) may not be less than 110 percent of the fair market value
of a share of common stock on the grant date. The Company's Compensation
Committee has the authority to, among other things, determine the vesting
schedule for each option granted. All options expire within 10 years. The 1998
Plan includes an automatic grant program for outside directors. Pursuant to this
program, each outside director will be granted an option to purchase 10,000
shares of common stock at the time he or she is first elected or appointed a
director of the Company. In addition, each outside director remaining in office
will be granted an option to purchase 2,500 shares on the day following each
annual meeting of stockholders.

During 1998, the Company's Board of Directors approved, subject to
stockholder approval, the 1998 Employee Stock Purchase Plan (Purchase Plan) and
reserved 400,000 shares for issuance thereunder. The Purchase Plan permits
eligible employees to purchase common stock at a discount, but only through
payroll deductions, during concurrent 24 month offering periods. Each offering
period will be divided into four consecutive 6 month purchase periods. The price
at which stock is purchased under the Purchase Plan is equal to 85 percent of
the lower of the fair market value of the common stock on the first day of the
offering period and the fair market value of the common stock on the last day of
the purchase period.
F-21
<PAGE> 74
APPETIZERS
- --------------------------------------------------------------------------------
PEKING RAVIOLIS
Crescent-shaped dumplings filled with
ground pork and vegetables.
(Pan Fried or Steamed)
$4.95

TRADITIONAL SPARE RIBS
BBQed using our age-old technique.
$5.95

SALT & PEPPER SHRIMP
Shell on shrimp, tossed with scallions,
Kosher salt and course black pepper.
$6.95

CHANG'S CHICKEN IN
SOOTHING LETTUCE WRAP
Quickly-cooked spiced chicken served
in a cool lettuce cup.
$5.95

NORTHERN STYLE SHORT RIBS
Marinated and lightly fried.
Served with a salt and pepper dip.
$5.95

CHANG'S VEGETABLES IN
SOOTHING LETTUCE WRAP
Wok seared vegetables Southeast Asian style
with mint and lime. Served in a cool lettuce cup.
$5.95

HARVEST SPRING ROLLS
Shredded vegetables wrapped in a delicate
pancake then fried.
$3.50

VEGETARIAN DUMPLINGS
Crescent-shaped dumplings filled
with shredded vegetables.
(Pan Fried or Steamed)
$4.95

CANTONESE PORK MEDALLIONS
BBQed, then sliced.
$4.95

SHRIMP DUMPLINGS
Steamed, served with a ginger
chili soy sauce.
$6.95

RED SAUCED WONTONS
Shrimp and pork filled wontons
served with chili soy sauce.
$5.75

SOUPS
- --------------------------------------------------------------------------------

HOT AND SOUR SOUP
A seductive blend of chicken and bean curd.
Sparked with hot white pepper, and vinegar which
creates an appetite for more.
Cup $2.95 Bowl $4.95

WONTON SOUP
Mushrooms, chicken, shrimp, and pork wontons
in a chicken broth.
Bowl $4.95

SALADS
- --------------------------------------------------------------------------------
WONTON CHICKEN SALAD
Fried wonton strips, chicken and garden vegetables
with a refreshing vinaigrette on shredded lettuce.
$6.95

WARM DUCK SALAD
Strips of crisp duck tossed with soy vinaigrette
and red cabbage.
$8.95

AHI TUNA SALAD
Rolled in Chinese spices, wok seared, served
on mixed greens with a spicy mustard dressing.
$9.95

COLD CUCUMBER SALAD
Cucumbers sprinkled with
soy and sesame.
$4.95

CHANG'S CHICKEN SALAD
Tossed with a ginger vinaigrette and peanut
sauce on a bed of greens.
$7.95

BARBECUE CHICKEN SALAD
Slow roasted Cantonese style chicken breast
served warm over mixed greens.
$7.95

<PAGE> 75
CHANG'S RECOMMENDS
----------------------------------
(Served with steamed rice)

LEMON PEPPER SHRIMP
Served on sauteed chives and bean sprouts.
$12.95

CANTONESE DUCK
Slow-roasted with Chang's secret ingredients.
$12.95

PHILIP'S BETTER LEMON CHICKEN
Quick-fired with a tart citrus sauce that
has a hint of sweetness.
$10.75

MALAYSIAN CHICKEN
In a curry sauce with coconut milk and onions.
Served with peanuts, raisins, coconut and
plum sauce on the side.
$9.95

[CHINESE CHARACTER]BEEF A LA SZECHWAN
Twice-cooked with celery and carrots resulting in
a crispy texture unlike anything you are used to.
$11.95

[CHINESE CHARACTER]SZECHWAN CHICKEN CHOW FUN
Wok seared with chilis, green onions and
Szechwan preserved vegetables.
$8.95

[CHINESE CHARACTER]SZECHWAN FROM THE SEA
Tender scallops, shrimp or calamari prepared
in a red chili garlic sauce.
$11.95

CHEF ROY'S FAVORITE CHICKEN
With oyster sauce and scallions. Served on
a bed of fresh steamed broccoli.
$10.25

CHICKEN WITH BLACK BEAN SAUCE
Chunks of chicken, stir-fried in Oriental
black bean sauce.
$10.50

[CHINESE CHARACTER]CHANG'S SPICY CHICKEN
Lightly-breaded chunks stir-fried in
a sweet Szechwan sauce.
(Our version of General Chu's)
$10.75

CANTONESE CHICKEN
Slow-roasted with Chang's
secret ingredients.
$9.95

CRISPY HONEY SHRIMP
Lightly battered shrimp, quick fried and
coated with a flavorful sauce.
$12.95

MEATS
----------------------------------
(Served with steamed rice)

[CHINESE CHARACTER]ORANGE PEEL BEEF
Szechwan-style beef tossed with red chilis and
fresh orange peel for a rewarding taste sensation.
$10.25

MONGOLIAN BEEF
Quickly-cooked steak with
scallions and garlic.
$10.95

SWEET AND SOUR PORK
Stir-fried with pineapples, peppers and onions
in a pungent sweet flavored sour sauce.
$8.95

MU SHU PORK
An American favorite served with hoisin
sauce and thin pancakes.
$7.95

CHICKEN
----------------------------------
(Served with steamed rice)

[CHINESE CHARACTER]KUNG PAO CHICKEN
Diced chicken quick-fired with peanuts, chili
peppers and scallions. Our hot favorite.
$9.95

[CHINESE CHARACTER]ORANGE PEEL CHICKEN
Tossed with orange peel and chili peppers
for a spicy/citrus combination.
$9.95

MU SHU CHICKEN
A Chinese classic served with hoisin
sauce and thin pancakes.
$8.95

[CHINESE CHARACTER]SPICY GROUND CHICKEN AND EGGPLANT
Eggplant sauteed with fiery spices,
ground chicken and scallions.
$8.95

SWEET AND SOUR CHICKEN
Stir-fried with pineapples, peppers and onions
in a pungent sweet flavored sour sauce.
$8.95

<PAGE> 76
SEAFOOD
(Served with steamed rice)

TREASURES OF THE SEA [CHINESE CHARACTER]ORANGE PEEL SHRIMP
Choice of scallops or shrimp Tossed with hot chilis and
sauteed with chives, snow fresh orange peel.
peas and wine. $12.95
$11.95

CHANG'S LEMON SCALLOPS PAUL'S CATFISH
A light lemon sauce over Farm raised catfish fillets
quick-cooked scallops. sauteed and served with
$11.95 black bean sauce.
$12.95

[CHINESE CHARACTER]KUNG PAO SCALLOPS OR SHRIMP
Cooked traditionally with peanuts
and fresh chili peppers.
$1l.95

NOODLES, MEINS AND RICE

DOUBLE PAN FRIED NOODLES [CHINESE CHARACTER]GARLIC NOODLES
Semi-crisp egg noodles stir-fried Egg noodles tossed with
with vegetables and served with a garlic and chilis.
choice of beef, pork, A Mainland tradition.
chicken, or shrimp. $7.95
$8.95

CHOW MEIN P.F. CHANG'S FRIED RICE
Egg noodles stir fried with a Mixed with egg and soy, garnished
choice of beef, pork, with sliced scallions. Choice of
chicken or shrimp. beef, chicken, pork, or shrimp.
$8.95 $5.95

[CHINESE CHARACTER]DAN DAN NOODLES SINGAPORE NOODLES
Scallions, garlic and chilis sauteed Thin rice noodles stir-fried
with ground chicken nesting on hot with vegetables. Served
egg noodles. Garnished with shredded with or without curry.
cucumber and bean sprouts. (Chinese angel hair)
$8.95 $7.95

CANTONESE CHOW FUN
Wide rice noodles with choice of chicken
or beef with onions and garlic.
$9.95

VEGETARIAN PLATES AND SIDES

SZECHWAN-STYLE LONG BEANS GARLIC SNAP PEAS
Quickly cooked with Stir-fried with garlic.
preserved vegetables. $4.95
$5.95

SPINACH SAUTEED WITH GARLIC BUDDHA'S FEAST
The name says it all. Mixed vegetables.
$4.95 (Steamed or Stir-Fried)
$5.95

SHANGHAI SNOW PEAS POACHED BABY BOK CHOY
Sauteed with black mushrooms Served with lightly
and water chestnuts. sauteed black mushrooms.
$4.95 $5.95

[CHINESE CHARACTER]SAUTEED SPICY EGGPLANT
Tossed with scallions and a fiery sauce.
$6.95

Please no cigar or pipe smoking.
[CHINESE CHARACTER]Spicy dish Sorry, no checks accepted.
<PAGE> 77
WELCOME
--------------------------------------------
P.F. Chang's believes that variety is the
keystone of a great meal. Our menu offers
culinary creations from the major regions of
China: Canton, Shanghai, Szechwan, Hunan,
Mongolia, as well as our unique
specialties, which draw on a multitude
of traditions to create a unique
dining adventure.

FAN AND T'SAI
--------------------------------------------
The essential goal of a Chinese meal is to
attain the 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.
Only the very best of fresh ingredients find
their way to our kitchens. You can't help but
notice a unique clarity and distinctness of flavor.
And no MSG is allowed by our chef in
food preparation.

WINE AND CHINESE?
--------------------------------------------
Absolutely. It's a perfect way to excite all the
flavors of each of China's principal food
regions. Your server can offer sophisticated
recommendations from our extensive wine list
for the ideal selection. And make sure to sample
our specially blended teas. They are the perfect
complement to our one-of-a-kind
dessert creations.

PREPARATIONS FOR YOU
--------------------------------------------
We are proud of our food preparation
techniques. Each dish is prepared to order using
only the freshest of ingredients. Ask questions.
Then experience a memorable blend of
Chinese cuisine and American hospitality:
the delicious harmony of
P.F. Chang's China Bistro.
<PAGE> 78

YOU ARE SURROUNDED
---------------------------------
...by a unique environment combining the best influences of
Chinese and American cultures. As you dine in comfort, enjoying
the finest traditions of American hospitality, you are also aware of
the mystery and legend of a people thousands of years old.
You'll notice...

FROM THE MOMENT
---------------------------------
...you enter P.F. Chang's China Bistro, everything you see
from the Mural to the Menu tells ancient stories of Emperors,
Gods, Guardians and more.
In fact...

THE SCULPTURES
---------------------------------
...are interpretations of those unearthed in the ancient city
of Xi'an, dating back to the 11th Century B.C. They depict a time
when lions proudly guarded the Qian Ling Mausoleum during
the T'ang Dynasty; when loyal handmaidens willingly attended to
the needs of royalty and when stern figures of warriors were buried
with Emperors in place of entombing the ruler's actual servants.
Now, if you...

LOOK TO THE MURAL
---------------------------------
... intimidation gives way to meditation in this dramatic
recreation of a typical mid-12th Century narrative screen
painting. The challenge for our artist was to achieve a mural
of this magnitude from a very small original scene.
And finally...

THE MENU SPEAKS
---------------------------------
...to us in Chinese symbols, each with a variety of meanings
when read alone, but presenting a specific meaning when
combined. Look at the front of the menu. The topmost character
symbolizes all things rich, and often represents China, herself.
The lower figure usually means an intimate, casual place to
enjoy fine dining. Combined on the front of our menu, these
characters can be read to mean...A China Bistro.

[P. F. CHANG'S CHINA BISTRO LOGO]

<PAGE> 79
The inside back cover of the prospectus contains photographs of menu items
offered at the Company's restaurants set over the background of a mural
depicting 12th century China.
<PAGE> 80

- ------------------------------------------------------
- ------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 6
Use of Proceeds............................ 11
Dividend Policy............................ 11
Capitalization............................. 12
Dilution................................... 13
Selected Consolidated Financial and
Operating Data........................... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 16
Business................................... 26
Management................................. 35
Certain Transactions....................... 41
Principal and Selling Stockholders......... 43
Description of Capital Stock............... 45
Shares Eligible for Future Sale............ 48
Underwriting............................... 49
Legal Matters.............................. 51
Experts.................................... 51
Additional Information..................... 51
Index to Consolidated Financial
Statements............................... F-1
</TABLE>

------------------

UNTIL DECEMBER 29, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

- ------------------------------------------------------
- ------------------------------------------------------

- ------------------------------------------------------
- ------------------------------------------------------
4,150,000 SHARES

[P.F. CHANG'S LOGO]

COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE

NATIONSBANC MONTGOMERY
SECURITIES LLC

DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated

December 4, 1998
- ------------------------------------------------------
- ------------------------------------------------------