Forward-Looking Statements

This report contains forward-looking statements that involve risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as "expects," "anticipates," "intends," "plans" and similar expressions. Our actual results could differ materially from those discussed in these statements. Factors that could contribute to these differences include those discussed under "Risk Factors" of our 2007 Annual Report on Form 10-K and elsewhere in this report. The cautionary statements made in this report should be read as being applicable to all forward-looking statements wherever they appear in this report.

Overview

California Pizza Kitchen, Inc. (referred to hereafter as the "Company" or in the first person notations "we" and "our") is a leading casual dining restaurant chain. As of August 1, 2008, we own, operate, license or franchise 243 locations under the names California Pizza Kitchen, California Pizza Kitchen ASAP ("CPK/ASAP") and LA Food Show in 30 states, the District of Columbia and eight foreign countries. We have 43 locations that operate under franchise or license agreements and use the California Pizza Kitchen and California Pizza Kitchen ASAP brand names and trademarks. We opened our first restaurant in 1985 in Beverly Hills, California and during our 23 years of operating history, we have developed a recognized consumer brand and demonstrated the appeal of our concept in a wide variety of geographic areas. Our restaurants, which feature an exhibition-style kitchen centered around an open-flame oven, provide a distinctive casual dining experience that is family friendly and has a broad consumer appeal.

We manage our operations by restaurant and have aggregated our operations into one reportable segment. For analytical purposes, we have broken this segment into three concepts. As of June 29, 2008, we had 1) 190 company-owned full service California Pizza Kitchen restaurants; 2) nine company-owned CPK/ASAP restaurants and 3) one company-owned LA Food Show restaurant.

We intend to open 12 full service restaurants during 2008, eight of which were opened in the first six months of 2008. We have signed lease agreements for all new full service restaurants planned for the remainder of fiscal 2008. The majority of these new restaurants require, on average, a gross cash investment of approximately $2.8 million for inline restaurants and $3.2 million for freestanding restaurants. Tenant improvement allowances, most of which are generally associated with inline restaurants, average approximately $500,000 and are recorded as reductions to future rent over the initial lease term. In addition, pre-opening costs are expected to be approximately $350,000 per new full service restaurant, including the impact of Staff Position No. FAS 13-1, "Accounting for Rental Costs Incurred during a Construction Period" ("FSP 13-1").

It is common in the restaurant industry for new restaurant locations to initially open with sales volumes in excess of their sustainable run-rate levels. This initial "honeymoon" effect usually results from promotional and other consumer awareness activities that generate abnormally high customer traffic for our new restaurants. During the several months following the opening of a new restaurant, customer traffic generally settles into its normal pattern, resulting in sales volumes that gradually adjust downward to their expected sustained run-rate level. Additionally, our new restaurants usually require a 90- to 120-day period after opening to reach their targeted restaurant-level operating margin due to cost of sales and labor inefficiencies commonly associated with new restaurants. As a result, a significant number of restaurant openings or delays in those openings in any single fiscal quarter, accompanied with their associated pre-opening costs, could have a significant impact on our consolidated results of operations for that period. Therefore, our results of operations for any single fiscal quarter are not necessarily indicative of the results to be expected for any other fiscal quarter or for a full fiscal year.

Cost of sales is comprised of food, beverage and paper supplies, labor and direct operating and occupancy expenses. The components of food, beverage and paper supplies are variable and increase with sales volume. Labor costs include direct hourly and management wages, stock-based compensation, bonuses and taxes and benefits for restaurant employees. Direct operating and occupancy costs include restaurant supplies, marketing costs, fixed rent, percentage rent, common area maintenance charges, utilities, real estate taxes, repairs and maintenance and other related restaurant costs. Direct operating and occupancy costs generally increase with sales volume but decline as a percentage of restaurant sales.

General and administrative costs include all corporate and administrative functions that support existing operations and provide infrastructure to facilitate our future growth. Components of this category include management, supervisory and staff salaries and related employee benefits, stock-based compensation, travel and relocation costs, information systems, training, corporate rent and professional and consulting fees. Depreciation and amortization principally includes depreciation on capital expenditures for restaurants. Pre-opening costs, which are expensed as incurred, consist of rent from the date construction begins through the restaurant opening date, the costs of hiring and training the initial workforce, travel, the cost of food used in training, marketing costs, the cost of the initial stocking of operating supplies and other direct costs related to the opening of a restaurant.

Our fiscal year consists of 52 or 53 weeks and ends on the Sunday closest to December 31 in each year. The three- and six-month periods ended June 29, 2008 and July 1, 2007 each consisted of 13 and 26 weeks, respectively. In calculating company-owned comparable restaurant sales, we include a restaurant in the comparable base once it has been open for 18 months. As of June 29, 2008, we had 171 company-owned restaurants that met this criterion.

Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. When we prepare these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to investments, self-insurance, leasing activities, deferred tax assets, intangible assets, long-lived assets and stock-based compensation. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Results of Operations

Our operating results for the three and six months ended June 29, 2008 and
July 1, 2007 are expressed as a percentage of revenues below, except for cost of
sales which is expressed as a percentage of restaurant sales:



                                            Three Months Ended         Six Months Ended
                                           June 29,      July 1,     June 29,     July 1,
                                             2008         2007         2008        2007
Revenues:
Restaurant sales                                98.4 %      98.7 %       98.6 %      98.9 %
Royalties from Kraft licensing agreement         0.9 %       0.7 %        0.7 %       0.6 %
Domestic franchise revenues                      0.4 %       0.4 %        0.4 %       0.3 %
International franchise revenues                 0.3 %       0.2 %        0.3 %       0.2 %

Total revenues                                 100.0 %     100.0 %      100.0 %     100.0 %
Costs and expenses:
Food, beverage and paper supplies               25.0 %      24.5 %       24.7 %      24.6 %
Labor (1)                                       36.9 %      36.3 %       37.5 %      37.2 %
Direct operating and occupancy                  19.6 %      19.7 %       20.0 %      19.5 %

Cost of sales                                   81.6 %      80.5 %       82.2 %      81.3 %
General and administrative (2)                   7.4 %       7.7 %        7.7 %       8.1 %
Depreciation and amortization                    5.9 %       5.7 %        6.3 %       5.7 %
Pre-opening costs                                0.5 %       0.5 %        0.8 %       0.7 %
Store closure costs                              0.5 %       0.5 %        0.2 %       0.2 %

Total costs and expenses                        94.6 %      93.9 %       96.0 %      95.1 %

Operating income                                 5.4 %       6.1 %        4.0 %       4.9 %
Other income (expense):
Interest income (expense), net                   0.1 %       0.1 %       -0.1 %       0.1 %

Total other income (expense)                     0.1 %       0.1 %       -0.1 %       0.1 %

Income before income tax provision               5.5 %       6.1 %        3.9 %       4.9 %
Income tax provision                             1.8 %       2.1 %        1.3 %       1.7 %

Net income                                       3.7 %       4.0 %        2.6 %       3.2 %

(1) Labor percentage includes approximately 10 basis points attributable to stock-based compensation in both the three and six months ended June 29, 2008 and the three and six months ended July 1, 2007.

(2) General and administrative percentage includes approximately 90 basis points attributable to stock-based compensation in each of the three and six months ended June 29, 2008, compared to 90 and 110 basis points in the three and six months ended July 1, 2007, respectively.

The following table details the number of locations at the end of the second quarter of 2008:

                                        Total Units at                                        Total Units at
Second Quarter 2008                     March 30, 2008     Opened     Acquired     Closed     June 29, 2008
Company-owned full service domestic                188          3           -           1                190
Company-owned ASAP domestic                          9         -            -          -                   9
Company-owned LA Food Show                           1         -            -          -                   1
Franchised domestic                                 17         -            -          -                  17
Franchised international                            19          3           -          -                  22
Sports and entertainment venues                      3         -            -          -                   3

Total                                              237          6           -           1                242

Three months ended June 29, 2008 compared to the three months ended July 1, 2007

Total Revenues. Total revenues increased by $18.0 million, or 11.3%, to $176.6 million in the second quarter of 2008 from $158.6 million in the second quarter of 2007 due to a $17.2 million increase in restaurant sales and a $0.9 million increase in franchise and other revenues. The increase in restaurant sales was primarily due to the addition of 21 full service restaurants since the end of the second quarter of 2007. The 18-month comparable base restaurant increase was 1.4%, driven by the Company's successful

Thank You Card Program, a 4.9% increase in pricing, 3.3% decrease in guest counts and a 0.2% decrease in menu mix. The increase in franchise and other revenues was primarily due to increased royalties from Kraft's distribution of our frozen pizza and the opening of seven international franchises since the second quarter of 2007.

Food, beverage and paper supplies. Food, beverage and paper supplies increased by $5.1 million, or 13.3%, to $43.5 million in the second quarter of 2008 from $38.4 million in the second quarter of 2007. Food, beverage and paper supplies as a percentage of restaurant sales was 25.0% in the second quarter of 2008 compared to 24.5% in the second quarter of 2007. The increase in food, beverage and paper supplies as a percentage of restaurant sales was primarily due to higher grocery, dairy, seafood and fuel surcharge costs partially offset by lower bread costs and higher purchase rebates.

Labor. Labor increased by $7.3 million, or 12.8%, to $64.2 million in the second quarter of 2008 from $56.9 million in the second quarter of 2007. As a percentage of restaurant sales, labor was 36.9% in the second quarter of 2008 compared to 36.3% in the second quarter of 2007. The dollar increase in labor was primarily due to increased hourly labor associated with minimum wage increases in nine states that represent 60% of our base, new store inefficiencies, higher payroll taxes and medical benefit costs.

Direct operating and occupancy. Direct operating and occupancy costs increased by $3.3 million, or 10.7%, to $34.1 million in the second quarter of 2008 from $30.8 million in the second quarter of 2007. Direct operating and occupancy costs as a percentage of restaurant sales was 19.6% in the second quarter of 2008 compared to 19.7% in the second quarter of 2007. The dollar increase in direct operating and occupancy costs was primarily due to increased rent, utility and common area maintenance expenses and higher credit card charges.

General and administrative. General and administrative costs increased by $0.9 million, or 7.4%, to $13.1 million in the second quarter of 2008 from $12.2 million in the second quarter of 2007. General and administrative costs as a percentage of total revenue decreased to 7.4% in the second quarter of 2008 from 7.7% in the second quarter of 2007. The dollar increase in general and administrative expenses was primarily a result of additional personnel to support restaurant operations, and increased office expenses and professional services.

Depreciation and amortization. Depreciation and amortization increased by $1.5 million, or 16.7%, to $10.5 million in the second quarter of 2008 from $9.0 million in the second quarter of 2007. The increase in the second quarter of 2008 was primarily due to the addition of 21 full service restaurants since the end of the second quarter of 2007.

Pre-opening costs. Pre-opening costs increased by $0.1 million to $1.0 million in the second quarter of 2008 from $0.9 million in the second quarter of 2007. We opened three full service restaurants in the second quarter of 2008 compared to opening two full service restaurants in the second quarter of 2007. Included in the $1.0 million pre-opening costs is $0.3 million associated with FSP 13-1, compared to $0.4 million in the second quarter of 2007.

Store closure costs. Store closure costs increased by $71,000 to $839,000 in the second quarter of 2008 from $768,000 in the second quarter of 2007. Store closure costs in the second quarter of 2008 related to the impairment of one full service restaurant. Store closure costs in the second quarter of 2007 related to early termination costs for one unopened CPK/ASAP that included a lease buyout and construction write-off.

Interest income (expense), net. Interest income increased by $88,000 to $179,000 in the second quarter of 2008 from $91,000 in the second quarter of 2007. The net increase was the effect of lower interest expense due to the capitalization of interest for new restaurants under construction in accordance with FASB SFAS No. 34, "Capitalization of Interest Cost" ("SFAS No. 34").

Income tax provision. The effective income tax rate was 32.3% for the second quarter of 2008 compared to 34.9% for the second quarter of 2007. The decrease in the effective income tax rate is primarily the result of a larger tax rate benefit from tax credits, driven by lower expected earnings before income taxes compared to the prior year due to the challenging state of the economy. The tax rate was also impacted by the completion of various tax audits and an adjustment to deferred taxes.

Net income. Net income increased by $0.3 million to $6.6 million in the second quarter of 2008 from $6.3 million in the second quarter of 2007. Net income as a percentage of revenues decreased to 3.7% in the second quarter of 2008 from 4.0% in the prior year.

Six months ended June 29, 2008 compared to the six months ended July 1, 2007

Total Revenues. Total revenues increased by $33.4 million, or 10.8%, to $341.3 million in the first six months of 2008 from $307.9 million in the first six months of 2007 due to a $32.1 million increase in restaurant sales and a $1.3 million increase in franchise and other revenues. The increase in restaurant sales was due to 11.4% sales growth for full service restaurants, 4.6% increase in weekly sales average for CPK/ASAP restaurants and $2.0 million in sales derived from LA Food Show. The 18-month comparable base restaurant increase was 1.0%, driven by the Company's successful Thank You Card Program, a 5.1% increase in pricing and a 4.1% decrease in guest counts. The increase in franchise and other revenues was primarily due to increased royalties from Kraft's distribution of our frozen pizza and the opening of seven international franchises since the second quarter of 2007.

Food, beverage and paper supplies. Food, beverage and paper supplies increased by $8.4 million, or 11.2%, to $83.2 million in the first six months of 2008 from $74.8 million in the first six months of 2007. Food, beverage and paper supplies as a percentage of restaurant sales increased to 24.7% in the first six months of 2008 from 24.6% in the fist six months of 2007. The slight increase of food, beverage and paper supplies as a percentage of restaurant sales was primarily due to higher seafood and dairy costs, offset by improved management of meat and bread costs.

Labor. Labor increased by $13.2 million, or 11.7%, to $126.3 million in the first six months of 2008 from $113.1 million in the first six months of 2007. As a percentage of restaurant sales, labor increased to 37.5% in the first six months of 2008 from 37.2% in the first six months of 2007. The increase in labor as a percentage of restaurant sales was primarily due to increased hourly labor associated with minimum wage increases in nine states that represent 60% of our base and increased management labor and medical benefit costs.

Direct operating and occupancy. Direct operating and occupancy costs increased by $7.8 million, or 13.1%, to $67.3 million in the first six months of 2008 from $59.5 million in the first six months of 2007. Direct operating and occupancy costs as a percentage of restaurant sales increased to 20.0% in the first six months of 2008 from 19.5% in the first six months of 2007. The dollar increase in direct operating and occupancy costs was primarily due to increased rent, utility, and common area maintenance expenses and higher credit card charges.

General and administrative. General and administrative costs increased by $1.1 million, or 4.4%, to $26.1 million in the first six months of 2008 from $25.0 million in the first six months of 2007. General and administrative costs as a percentage of total revenue decreased to 7.7% in the first six months of 2008 from 8.1% in the first six months of 2007. The dollar increase in general and administrative expenses was primarily a result of additional personnel to support restaurant operations and increased professional services.

Depreciation and amortization. Depreciation and amortization increased by $3.8 million, or 21.6%, to $21.4 million in the first six months of 2008 from $17.6 million in the first six months of 2007. The increase in the first six months of 2008 was primarily due to the addition of 21 full service restaurants since the end of the second quarter of 2007.

Pre-opening costs. Pre-opening costs increased by $0.4 million to $2.6 million in the first six months of 2008 from $2.2 million in the first six months of 2007. We opened eight full service restaurants in the first six months of 2008 compared to opening four full service restaurants and two CPK/ASAP restaurants in the first six months of 2007. Pre-opening costs also included $0.6 million in the first six months of 2008 related to the impact of FSP 13-1, compared to $0.7 million in the first six months of 2007.

Store closure costs. Store closure costs increased by $71,000 to $839,000 in the first six months of 2008 from $768,000 in the first six months of 2007. Store closure costs in the first six months of 2008 related to the impairment of one full service restaurant. Store closure costs in the first six months of 2007 related to early termination costs for one unopened CPK/ASAP that included a lease buyout and construction write-off.

Interest income (expense), net. Interest expense was $322,000 in the first six months of 2008 compared to interest income of $178,000 in the first six months of 2007. Interest expense relates to borrowings against our line of credit in the first six months of 2008, a portion of which was capitalized for new restaurants under construction in accordance with SFAS No. 34. There were no borrowings in the first six months of 2007.

Income tax provision. The effective income tax rate was 32.0% for the first six months of 2008 compared to 34.8% for the first six months of 2007. The decrease in the effective tax rate over the prior year was primarily a result of a larger tax rate benefit from tax credits driven by lower than expected earnings before income taxes compared to the prior year due to the challenging state of the economy. In addition, the tax rate in the prior year was impacted to a greater degree by limitations on deductibility of stock-based compensation.

Net income. Net income decreased by $0.9 million to $9.0 million in the first six months of 2008 from $9.9 million in the first six months of 2007. Net income as a percentage of revenues decreased to 2.6% in the first six months of 2008 from 3.2% in the prior year.

Liquidity and capital resources

We fund our capital requirements principally through cash flow from operations and borrowings from our line of credit. For the first six months of 2008, net cash flows provided by operating activities were $33.3 million compared to $27.5 million for the first six months of 2007. Net cash flows provided by operating activities for the first six months of 2008 were higher than the first six months of 2007 primarily due to increased depreciation and a net increase in the changes in operating assets and liabilities.

Net cash flows used in investing activities for the first six months of 2008 decreased to $27.3 million from $32.4 million for the first six months of 2007 due to decreased capital expenditures related to new restaurants, minor remodels and capitalized maintenance.

We opened eight new full service restaurants in the first six months of 2008. The new full service restaurants are larger than our pre-2004 restaurants and require, on average, a higher net investment than our pre-2004 restaurants due to their increased size. However, we have seen and expect corresponding sales to be higher and to ultimately generate a higher restaurant cash flow. Pre-opening costs for each of these new full service restaurants are approximately $350,000; however, any unexpected delays in construction, labor shortages or other factors could result in higher than anticipated pre-opening costs. CPK/ASAPs are approximately half the size of our full service restaurants. We currently have 9 CPK/ASAP restaurants and are re-engineering the concept. The CPK/ASAP restaurants will benefit from re-engineering efforts that include menu, marketing and speed of service enhancements.

Net proceeds from issuance of common stock were $1.2 million for the first six months of 2008 compared to $3.5 million for the first six months of 2007 and consisted of purchases under our employee stock purchase plan of $0.5 million for both six month periods, and common stock option exercises of $0.7 million and $3.0 million, respectively.

Since August 2004, the Board of Directors has authorized several stock repurchase programs to acquire the Company's common stock from time to time in the open market and through privately negotiated transactions. Through the third quarter of 2007, 2,604,706 shares were repurchased for an aggregate purchase price of $48.5 million. The average purchase price per share was $18.61. The Company did not repurchase any of its equity securities during the second quarter of 2007.

On August 7, 2007, the Board of Directors authorized a new stock repurchase program ("August 2007 Program") to acquire the Company's common stock from time to time in the open market and through privately negotiated transactions. Under the August 2007 Program, up to $50.0 million of the Company's common stock could be reacquired from time to time over a 24-month period. 334,963 shares were repurchased in the open market for the aggregate price of $3.7 million prior to February 1, 2008.

On February 1, 2008, the Company entered into a collared accelerated share repurchase agreement ("ASR") with Bank of America, N.A. ("Bank of America"), an unrelated third party, under which the Company repurchased the remaining $46.3 million of common stock under the August 2007 Program. On February 1, 2008, the Company made a payment of $46.3 million to Bank of America for the shares to be acquired under the ASR. The Company funded this payment from borrowings under its revolving credit facility and available cash balances. The payment was recorded as a reduction to stockholders' equity. Through the conclusion of the program on June 19, 2008, Bank of America delivered to the Company 3,297,574 shares of common stock. The average price paid for the all shares repurchased during the ASR was $14.03. The average price paid for all shares under the August 2008 Program was $13.76. The Company has accounted for this transaction in accordance with Emerging Issues Task Force (EITF) Issue No. 99-7, "Accounting for an Accelerated Share Repurchase Program."

In January 2008, the Company entered into a Second Amendment to its Amended and Restated Credit Agreement (the "Amendment") with Bank of America, N.A. to amend the Amended and Restated Credit Agreement dated June 30, 2004 (the "Original Credit Agreement"). The Amendment increased the revolving line of credit from $75.0 million to $100.0 million. The line of credit bears interest at either the bank base rate minus 75 basis points or LIBOR plus 80 basis points and expires on June 30, 2009. Other than the increased maximum borrowing capacity, there were no other material changes to the terms of the Original Credit Agreement.

On May 7, 2008, the Company replaced its $100.0 million credit facility by entering into a new five-year revolving credit facility (the "Facility") with a syndicate of banks, featuring a maximum available borrowing capacity of $150.0 million. The Facility contains an uncommitted option to increase, subject to . . .