The following discussion and analysis should be read in conjunction with our financial statements and notes thereto included elsewhere in this Form 10-Q. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward looking statements wherever they appear in this Form 10-Q. Our actual results could differ materially from those discussed here. For a discussion of certain factors that could cause actual results to be materially different, refer to our Annual Report on Form 10-K for the year ended December 30, 2007.

Current Year Developments

Economic and Financial Market Disruptions

Throughout the first three quarters of 2008, and accelerating in the third quarter of 2008, the Company's operations and financial condition have been directly and adversely affected by conditions in the broader economy and financial markets. Sharp increases in energy and other costs and the disruptions experienced in the financial markets, particularly in the credit and housing market, have resulted in reduced consumer spending, particularly in Southern California, have adversely affected our revenues, our operating costs and our overall operating results, have weakened our financial condition and, in response to the economic environment, the Company has undertaken various initiatives to control costs to offset weakness in consumer spending.

Restaurant Openings and Leases

In February 2008, we opened our first "In Short Order - Daily Grill" quick-casual restaurant in the lobby of the Sheraton Hotel in Seattle, WA.

In May 2008, we opened a 100% owned Daily Grill at The Shops at Prudential Center in Boston, MA.

In September 2008, we opened a 100% owned Grill on the Alley at the Promenade in Westlake Village, CA.

In March 2008, we signed a lease to open a wholly owned Grill on the Alley in Aventura, FL. The restaurant is currently scheduled to open in November 2008. This new lease entered into by the Company in 2008 increased our lease commitments as presented in the Liquidity and Capital Resources section below, by approximately $3.9 million.

Management Agreement Termination

During 2008, the Company and its Memphis Daily Grill managed location agreed to terminate the management agreement under which the Memphis Daily Grill is operated. As a result of this agreement, the Company will receive a non-refundable termination fee of $200,000. This fee will be received in equal monthly installments over an eighteen month period. The effective termination date of the management agreement was August 31, 2008.

Equipment Leases

In March 2008, we entered into a new equipment lease financing facility under which we have an available line of credit of $1.4 million for new kitchen equipment financing. Upon the completion of the equipment installation at each restaurant, the financing related to that restaurant will be converted from a line of credit to a term loan and will be recorded as a capital lease on the balance sheet. Until such time, the Company will pay minimal rent to the financing organization. The facility is collateralized by the related equipment, is based on a 7% to 8% rate and is repaid quarterly over three years. At September 28, 2008, $1,192,000 had been drawn on the facility to fund kitchen equipment installed in our Boston Daily Grill, Aventura Grill on the Alley and Westlake Grill on the Alley.

Stock Based Compensation

We recorded stock based compensation of $226,000 for the nine months ended September 28, 2008 and $276,000 for the nine months ended September 30, 2007. As of September 28, 2008, total unrecognized stock-based compensation expense related to non-vested stock options was $982,000, which is expected to be recognized over a weighted-average period of approximately 2.9 years.

There were 290,584 stock options granted in the first nine months of 2008.

Litigation Claim Settlement

On July 16, 2008, through non-binding mediation, the Company reached an agreement in principle to settle the ongoing class action lawsuit relating to employee meal and rest breaks, filed against us in June 2004. The settlement, whose terms must still be finalized and is subject to preliminary and final approval by the court, contains a not to exceed amount, based on claims made by eligible class members. The tentative settlement also requires a minimum payment of fifty percent of the total settlement amount after attorney's fees, administrative costs and plaintive incentive awards. Based on the proposed terms of the settlement and the historically low rate of claims made in these types of cases, we believe that the most likely estimate of total costs to the Company will be $0.9 million, of which $0.1 million was accrued in previous years. The balance, or $0.8 million, was recorded in the second quarter 2008 condensed consolidated financial statements.

A memorandum of understanding has been executed and we are currently waiting for the settlement to become binding, through judge approval. We expect the settlement to be paid out during the first half of fiscal 2009. During the third quarter of 2009, additional legal and economist costs were incurred totaling $0.3 million.

Restructuring Costs

During the third quarter of 2008, the Board of Directors of the Company made a determination to place on hold its planned restaurant openings for 2009. As part of this determination, capitalizable costs previously incurred related to these restaurants were written off during the third quarter of 2008. The expense associated with these costs was $821,000. Additionally, as part of the Company's decision to postpone restaurant openings, the Company continues to negotiate modifications of the lease agreements and costs of termination, if necessary. The Company expects to incur additional landlord costs as part of the modification or termination of the lease agreements associated with the restaurants no longer expected to open in 2009. The total estimated additional landlord cost of $876,000 has been expensed in the third quarter of 2008.

Issuance of Mandatorily Redeemable Convertible Preferred Stock and Warrants

In September 2008, we issued 5,000 shares of newly authorized Series C Convertible Preferred Stock ("Series C Preferred Shares") and warrants (the "Warrants") to purchase 600,000 shares of common stock for an aggregate purchase price of $5.0 million. The aggregate funds received were allocated $4.3 million to Series C Preferred Shares and $0.7 million to the Warrants. In accordance with Emerging Issues Task Force ("EITF") No. 00-27, "Application of Issues 98-5 to Certain Convertible Instruments", the values assigned to both the Series C Preferred Shares and the Warrants were allocated based on their relative fair values. The relative fair value of the Warrants was determined using the Black-Scholes option- pricing model, was recorded as additional paid in capital in the condensed consolidated balance sheets and reduced the carrying value of the Series C Preferred Shares. The value of the Warrants is being accreted to interest expense over the seven year life of the Series C Preferred Shares.

Dividends. The Series C Preferred Shares are entitled to cumulative dividends at the rate of 7.5% per annum (based on the liquidation preference of $1,000 per share) payable quarterly in cash or, at the sole option of the investor, in shares of Common Stock; provided, however, that (1) the investor may, at its sole option, defer receipt of dividends until conversion or redemption of the Series C Preferred Shares, (2) all dividends accruing through March 31, 2011 shall either be payable solely in common stock or deferred until after March 31, 2011, and (3) unless and until the shareholders of the Company shall have approved such issuances, no shares of common stock shall be issued as dividends on the Series C Preferred Shares if, as a result of such issuance, the investor would own 20% or more of the outstanding shares of our common stock following such issuance (the "Share Cap"). We agreed to submit to our shareholders for vote, and to recommend approval of such vote, a proposal to approve issuances of shares as dividends on the Series C Preferred Shares in excess of the Share Cap no later than July 31, 2009 (the "Outside Cap Waiver Date"). In the event that shareholder approval of issuances as dividends of shares of common stock in excess of the Share Cap is not received by the Outside Cap Waiver

Date, all dividends otherwise payable in common stock in excess of the Share Cap shall be payable solely in cash and shall be deemed to be subject to deferral until after March 31, 2011. Shares issued in payment of dividends shall be valued at market price but not less than $0.06 over the market price on August 29, 2008.

Conversion. Each of the Series C Preferred Shares is convertible, at the sole option of the investor, into 250 shares of common stock, or an aggregate of 1,250,000 shares of common stock, representing an effective conversion price of $4.00 per share, subject to adjustment for stock splits, reverse stock splits and stock dividends. Unless and until our shareholders shall have approved such issuances, no Series C Preferred Shares shall be convertible, and no shares of common stock shall be issued on conversion of the Series C Preferred Shares if, as a result of such conversion and issuance, the investor would own 20% or more of the outstanding shares of our common stock following such conversion and issuance (the "Conversion Cap"). We agreed to submit to our shareholders for vote, and to recommend approval of such vote, a proposal to approve conversions of Series C Preferred Shares in excess of the Conversion Cap at a meeting of shareholders to be held no later than July 31, 2009.

Redemption. On or after the earlier of (i) August 31, 2013 or (ii) an uncured default in the payment of dividends or in the payment of certain indebtedness, the investor may, at his sole option and upon the giving of a written notice (a "Redemption Notice") to the Company and delivery to the Company of the certificate(s) (the "Redeemed Share Certificates") evidencing the shares of Series C Preferred Stock to be so redeemed (the "Redeemed Shares"), require that we redeem, out of funds legally available therefor, some or all then outstanding Series C Preferred Shares for an amount (the "Redemption Amount") equal to
(x) the Series C Liquidation Preference multiplied by the number of Series C Preferred Shares to be redeemed, plus (y) accrued and unpaid dividends thereon, and we shall, not later than five (5) business days following receipt of the Redemption Notice and the Redeemed Share Certificates (the "Early Redemption Date"), redeem the Redeemed Shares covered by the Redemption Notice by paying to the investor, in cash, the applicable Redemption Amount.

Series C Preferred Shares not previously converted or redeemed and then outstanding shall, on August 31, 2015 (the "Final Redemption Date"), be redeemed by the Company out of funds lawfully available therefor at a price equal to the Redemption Amount.

The Company shall have the right to redeem the Series C Preferred Shares upon the occurrence of certain deemed liquidation events.

Voting. The Series C Preferred Shares shall be entitled to vote on an as converted basis on all matters submitted to a vote of the holders of the Company's Common Stock.

Liquidation. The Series C Preferred Shares are entitled to a preference upon liquidation of $1,000 per share plus all accrued and unpaid dividends.

In accordance with SFAS No. 150, the Series C Preferred Shares have been recorded as a long-term liability on our condensed consolidated balance sheets.

The Warrants. The Warrants entitle the investor to purchase up to 600,000 shares of common stock at any time prior to September 2, 2015 at an exercise price equal to $4.00 per share, subject to adjustment upon certain corporate events, including stock dividends, distributions and reclassifications.

Executive Salary Reduction Plan

Effective October 27, 2008, the Company implemented a temporary plan (the "Plan") pursuant to which each officer at the Vice President level and higher agreed to accept equity in the Company in lieu of cash in an amount equal to10% of their salary and each director agreed to accept equity in the Company in lieu of cash in an amount equal to100% of their compensation (the "Salary Reduction Amount").

In lieu of payment of the Salary Reduction Amount in cash, each participant in the Plan will be issued Restricted Stock Units ("RSUs") under the Company's 2006 Equity Incentive Plan. RSUs will be issued to each participant at the end of each pay period based on the average closing price of the Company's common stock over the three trading days ended on the date of issuance. All RSUs shall be subject to vesting provisions pursuant to which the RSUs and underlying shares of common stock will be subject to restrictions on transfer, and forfeiture, for a period of one year from issuance of each applicable RSU; provided, however, that vesting of the RSUs and underlying shares of common stock will be accelerated and the forfeiture requirement will lapse (1) in the case of termination of employment or services prior to full vesting, other than termination for gross misconduct or grave moral turpitude, 1/12 per month for each full month of continued service during the vesting period, and (2) in the case of sale or change of control of the Company or the death or permanent disability of the participant, in full on such event. Common stock certificates will be issued in settlement of the RSUs on the vesting date of each RSU.

The Plan will remain in place until further notice from the board of directors and will be available to all salaried employees on a voluntary basis.

Strategic Initiative

In October 2008, the Company announced that its Board of Directors had begun exploring strategic alternatives available to the Company and, in connection therewith, had retained Morgan Joseph & Co. as its financial advisor. Compensation is based initially on a retainer of $25,000 and may increase if other services are provided. The strategic alternatives to be evaluated may include, but are not limited to, raising additional equity or debt capital, sale of certain assets, recapitalization or merger of the Company with another entity.

Diamond Creek Credit Facility

In October 2008, the Company paid down $384,000 on the outstanding balance of the Diamond Creek credit facility.

In November 2008, the Company entered into Amendment Number Four to Credit Agreement (the "Amendment") amending its credit agreement, originally entered March 10, 2006 and amended December 29, 2006, March 19, 2008 and April 30, 2008 (the "Credit Agreement"), with Diamond Creek Investment Partners LLC (the "Diamond Creek"), as agent for the lender under the Credit Agreement.

The Amendment modified the Credit Agreement by (1) modifying the Base Rate Margin for non-LIBOR loans to fix said Base Rate Margin at 8% for the year following the Amendment and for any period, determined monthly, in which the trailing twelve months EBITDA is less than $2,500,000, (2) modifying the LIBOR Rate Margin for LIBOR loans to fix said LIBOR Rate Margin at 9% for the year following the Amendment and for any period, determined monthly, in which the trailing twelve months EBITDA is less than $2,500,000, (3) reducing the maximum credit available under the revolver from $12 million to $8 million,
(4) providing the lenders are not obligated to make any advances under the Credit Agreement for the one year period commencing on the date of the Amendment and (5) adding certain mandatory prepayment requirements in the event of sales of assets, receipt of funds from incurrence of debt or issuance of equity securities or the generation of excess cash flows. The Amendment also modified certain financial covenants and waived non-compliance with certain financial covenants as of the end of the Company's fiscal third quarter. The Company paid a fee of $100,000 to Diamond Creek as well as legal fees of $12,000 incurred by the lenders in connection with the Amendment. The fees paid will be capitalized and amortized over the remaining term of the credit agreement.

Results of Operations

The following table sets forth, for the periods indicated, information derived
from our condensed consolidated statements of operations expressed as a
percentage of total revenues:



                                           Three Months Ended                           Nine Months Ended
                                   September 28,         September 30,         September 28,         September 30,
                                       2008                  2007                  2008                  2007
Revenues:
Sales                                       68.3 %                74.6 %                70.7 %                75.8 %
Cost reimbursements                         28.2                  22.3                  26.3                  21.6
Management and license fees                  3.5                   3.1                   3.0                   2.6

Total revenues                             100.0                 100.0                 100.0                 100.0

Operating expenses:
Cost of sales                               20.0                  21.2                  20.3                  21.7
Labor                                       25.8                  27.5                  26.1                  27.4
Restaurant operating                        12.8                  13.2                  12.3                  12.3
Occupancy                                    5.9                   5.4                   5.7                   5.6
Reimbursed costs                            28.2                  22.2                  26.3                  21.6
General and administrative                   9.6                   8.5                   8.2                   7.9
Depreciation and amortization                4.2                   2.9                   3.7                   2.6
Preopening costs                             3.5                   2.6                   2.1                   1.2
Restructuring costs                          7.0                    -                    2.3                    -
Litigation claim settlement                  1.1                    -                    1.4                    -

Total operating expenses                   118.1                 103.5                 108.4                 100.3

Loss from operations                       (18.1 )                (3.5 )                (8.5 )                (0.2 )
Interest, net                               (0.7 )                (0.1 )                (0.4 )                (0.3 )

Loss before benefit
(provision) for income taxes
and minority interest                      (18.8 )                (3.6 )                (8.9 )                (0.5 )
Benefit (provision) for
income taxes                               (25.8 )                 1.4                  (7.4 )                 0.2
Minority interest in net
profit of subsidiaries                      (0.7 )                (0.6 )                (0.2 )                (0.4 )

Net loss                                   (45.3 )%               (2.8 )%              (16.5 )%               (0.7 )%

The following table sets forth, for the periods indicated, information derived from our condensed consolidated statements of operations expressed as a percentage of total restaurant sales:

                                            Three Months Ended                        Nine Months Ended
                                    September 28,        September 30,        September 28,        September 30,
                                        2008                 2007                 2008                 2007
Cost of sales                                29.3 %               28.4 %               28.8 %               28.6 %
Labor                                        37.7                 36.8                 36.9                 36.2
Restaurant operating expenses                18.7                 17.7                 17.4                 16.2
Occupancy                                     8.7                  7.3                  8.1                  7.5

The following tables set forth certain financial information and other restaurant data relating to our Company owned, managed and licensed restaurants, by concept:

                                           Third Quarter             Year To Date            Total Open at End of
                                        Openings (Closings)       Openings (Closings)            Third Quarter
                                        2008          2007        2008          2007          2008          2007
Daily Grill Restaurants:
Company owned                                -              1           1             1            15            13
Managed                                       1            -            1             2             8             8
Licensed                                     -             -           -             (1 )           1             1
Grill on the Alley Restaurants:
Company owned                                 1            -            1            -              6             5
In Short Order - Daily Grill:
Company owned                                -             -            1            -              1            -

Total                                         2             1           4             2            31            27

                                                Three Months Ended                            Nine Months Ended
                                       September 28,           September 30,         September 28,          September 30,
                                           2008                    2007                  2008                   2007
Weighted-average weekly sales
per Company owned restaurant:
Daily Grill                          $          52,737        $        61,382       $        59,006        $        66,593
Grill on the Alley                              94,384                 98,556                94,756                 98,114

Change in comparable restaurant
sales:(1)
Daily Grill                                      (10.7 )%                 5.1 %                (7.7 )%                 6.8 %
Grill on the Alley                                (4.5 )%                15.7 %                (3.4 )%                15.9 %
Total Company owned                               (8.0 )%                 9.1 %                (6.0 )%                10.2 %

Total consolidated sales (in
thousands):
Daily Grill                          $          10,282        $         9,514       $        33,457        $        30,766
Grill on the Alley                               6,229                  6,406                18,477                 19,132
In Short Order - Daily Grill                       164                     -                    365                     -

Total consolidated sales             $          16,675        $        15,920       $        52,299        $        49,898

(1) When computing comparable restaurant sales, comparable restaurants are defined as those restaurants which have been open for at least 18 consecutive months without closure for seven or more consecutive days.

We also earn revenues from management and license fees based on a percentage of sales and, in some cases, profit incentives from restaurants under management and licensing arrangements. Our revenue from management and license fees typically is earned at a rate of five to eight percent of reported sales at these restaurants. The sales of managed and licensed restaurants are not included in our sales revenues in the condensed consolidated statements of operations. However, we consider the disclosure of these sales to be a key indicator of brand strength and important to understanding how changes in sales at the managed and licensed restaurants impact our revenues.

Sales at non-Company owned Grill Concepts-branded restaurants, categorized as, managed and licensed restaurants were as follows:

                                                   Three Months Ended                                         Nine Months Ended
(in thousands)                      September 28, 2008           September 30, 2007            September 28, 2008            September 30, 2007
Managed                             $             7,800          $             5,698         $               22,891         $             19,668
Licensed                                          1,500                        1,773                          4,637                        5,120

                                    $             9,300          $             7,471         $               27,528         $             24,788

Management and license fees         $               846          $               656         $                2,228         $              1,716

Percent of sales                                    9.1 %                        8.8 %                          8.1 %                        6.9 %

As noted, the Company received notice of termination of the management agreement relating to the Memphis Daily Grill. The termination fee payable on termination of the management agreement, in the amount of $200,000, was recorded in management and license fees during the quarter ended June 29, 2008. Subsequent management and license fees, from and after the date of termination of management of the Memphis Daily Grill, September 30, 2008, will not include the termination fee or management fees relating to the Memphis Daily Grill.

Material Changes in Results of Operations for the Three and Nine Months Ended September 28, 2008 as compared to the Three and Nine Months Ended September 30, 2007

Revenues

Total revenues increased 14.5% to $24.4 million for the third quarter 2008 from $21.3 million in the third quarter 2007 and increased 12.4% to $74.0 million for the nine months ended September 28, 2008 from $65.8 million for the nine months ended September 30, 2007. For the quarter, total revenues consisted of sales revenues of $16.7 million, up 4.7% from $15.9 million in 2007, management and license fees of $0.8 million, up 28.9% from $0.7 million in 2007, and reimbursed managed outlet expenses of $6.9 million, up 45.1% from $4.7 million in 2007. For the nine month year-to-date period, total revenues consisted of sales revenues of $52.3 million, up 4.8% from $49.9 million in 2007, management and license fees of $2.2 million, up 29.9% from $1.7 million in 2007, and reimbursed managed outlet expenses of $19.5 million, up 37.0% from $14.2 million in 2007. Total comparable sales decreased by 8.0% for the third quarter of 2008 from a 9.1% increase in the prior comparable period. Total comparable sales for the nine . . .