profitability because many restaurant costs and expenses are not expected to change at the same rate as sales. Management believes that excellence in restaurant operations, and particularly providing exceptional guest service, will help to maintain or increase net sales in the Company's restaurants over time and will support menu pricing levels which allow the Company to achieve reasonable operating margins while absorbing the higher costs of providing high-quality dining experiences and operating cost increases.
Changes in sales for existing restaurants are generally measured in the restaurant industry by computing the change in same store sales, which represents the change in sales for the same group of restaurants from the same period in the prior year. Same store sales changes can be the result of changes in guest counts, which the Company estimates based on a count of entrée items sold, and changes in the average check per guest. The average check per guest can be affected by menu price changes and the mix of menu items sold. Management regularly analyzes guest count, average check and product mix trends for each restaurant in order to improve menu pricing and product offering strategies. Management believes it is important to maintain or increase guest counts and average guest checks over time in order to improve the Company's profitability.
Other key indicators which can be used to evaluate and understand the Company's restaurant operations include cost of sales, restaurant labor and related costs and other operating expenses, with a focus on these expenses as a percentage of net sales. Since the Company uses primarily fresh ingredients for food preparation, the cost of food commodities can vary significantly from time to time due to a number of factors. The Company generally expects to increase menu prices in order to offset the increase in the cost of food products as well as increases which the Company experiences in labor and related costs and other operating expenses, but attempts to balance these increases with the goals of providing reasonable value to the Company's guests. Management believes that restaurant operating margin, which is net sales less total restaurant operating expenses expressed as a percentage of net sales, is an important indicator of the Company's success in managing its restaurant operations because it is affected by the level of sales achieved, menu pricing strategy, and the management and control of restaurant operating expenses in relation to net sales.
The number of restaurants opened or under development in a particular year can have a significant impact on the Company's operating results because pre-opening expense for new restaurants is significant and most new restaurants incur operating losses during their early months of operation.
Because large capital investments are required for J. Alexander's restaurants and because a significant portion of labor costs and other operating expenses are fixed or semi-variable in nature, management believes the sales required for a J. Alexander's restaurant to break even are relatively high compared to many other casual dining concepts and that it is necessary for the Company to achieve relatively high sales volumes in its restaurants in order to achieve desired financial returns. The Company's criteria for new restaurant development target locations with high population densities and high household incomes which management believes provide the best prospects for achieving attractive financial returns on the Company's investments in new restaurants. The Company opened one restaurant in the third quarter of 2008 and one restaurant at the beginning of the fourth quarter of 2008 and expects to open one additional restaurant in December of 2008.

The following table sets forth, for the periods indicated, (i) the items in the Company's Condensed Consolidated Statements of Operations expressed as a percentage of net sales, and (ii) other selected operating data:

                                                       Quarter Ended                     Nine Months Ended
                                                 Sept. 28          Sept. 30          Sept. 28          Sept. 30
                                                   2008              2007              2008              2007
Net sales                                          100.0 %           100.0 %           100.0 %           100.0 %
Costs and expenses:
Cost of sales                                       33.0              32.8              32.1              32.4
Restaurant labor and related costs                  35.4              33.2              32.9              32.0
Depreciation and amortization of
restaurant property and equipment                    4.6               3.9               4.2               3.7
Other operating expenses                            22.9              20.2              21.1              19.7

Total restaurant operating expenses                 96.0              90.1              90.3              87.8
General and administrative expenses                  7.6               6.8               7.1               6.8
Pre-opening expense                                  2.7               1.6               1.2               0.6

Operating income (loss)                             (6.4 )             1.5               1.5               4.9
Other income (expense):
Interest expense                                    (1.2 )            (1.2 )            (1.2 )            (1.3 )
Interest income                                      0.1               0.4               0.1               0.5
Other, net                                           0.1               0.1                 -               0.1

Total other expense                                 (1.1 )            (0.8 )            (1.1 )            (0.8 )

Income (loss) before income taxes                   (7.5 )             0.7               0.4               4.1
Income tax benefit (provision)                       1.3               0.4               0.3              (0.9 )

Net income (loss)                                   (6.2 )%            1.2 %             0.8 %             3.2 %


Note: Certain percentage totals do not
sum due to rounding.

Restaurants open at end of period                     31                28

Average weekly sales per restaurant (1):
All restaurants                                 $ 81,600          $ 91,500          $ 89,100          $ 95,700
Percent change                                     -10.8 %                              -6.9 %
Same store restaurants (2)                      $ 84,300          $ 91,500          $ 91,100          $ 95,700
Percent change                                      -7.9 %                              -4.8 %

(1) The Company computes average weekly sales per restaurant by dividing total restaurant sales for the period by the total number of days all restaurants were open for the period to obtain a daily sales average, with the daily sales average then multiplied by seven to arrive at weekly average sales per restaurant. Days on which restaurants are closed for business for any reason other than the scheduled closure of all J. Alexander's restaurants on Thanksgiving day and Christmas day are excluded from this calculation. Average weekly same store sales per restaurant are computed in the same manner as described above except that sales and sales days used in the calculation include only those for restaurants open for more than 18 months. Revenue associated with reductions in liabilities for gift cards which are considered to be only remotely likely to be redeemed is not included in the calculation of average weekly sales per restaurant or average weekly same store sales per restaurant.

(2) Includes the 28 restaurants open for more than 18 months.

Net Sales
Net sales decreased by $995,000, or 3.0%, and by $9,000 in the third quarter and first nine months of 2008, respectively, compared to the same periods of 2007. These decreases were due to decreases in net sales in the same store restaurant base which more than offset net sales generated by two new restaurants opened in the fourth quarter of 2007 and one new restaurant opened in the third quarter of 2008.
The reported average weekly consolidated and same store sales per restaurant have been adjusted for the effect of 22 sales days and estimated net sales of approximately $300,000 lost in the first nine months of 2008 due to a fire at the Company's Denver restaurant and severe winter weather conditions in the Ohio market. Also, the Company's fiscal calendar resulted in New Year's Eve, when the Company typically experiences much higher than normal net sales, being included as the first day of fiscal 2008, but not being included in the first nine months of 2007. Management estimates that average weekly same store sales excluding the first day of the first nine months of both fiscal 2008 and 2007 decreased by 5.1% compared to the 4.8% decrease for the full nine months.
Management estimates the average check per guest, including alcoholic beverage sales, increased by less than 1.0% in 2008, to approximately $24.12 in the third quarter of 2008 and $24.41 in the first nine months of 2008. Management believes these increases were due primarily to the effect of higher menu prices which it estimates averaged approximately 0.3% and 1.0% higher in the third quarter and first nine months of 2008, respectively, than in the corresponding periods of 2007. Menu price increase estimates reflect menu price changes, without regard to any change in product mix because of price increases, and may not reflect amounts effectively paid by the customer. Management estimates that weekly average guest counts decreased on a same store basis, as adjusted for sales days lost for the first nine months of 2008, by approximately 7.7% and 5.4% in the third quarter and first nine months of 2008, respectively, compared to the same periods of 2007.
The Company's same store sales have now decreased for four consecutive quarters. Management believes these decreases, as well as related guest count losses, are due to a significant slowdown in discretionary consumer spending due to the effects of rising inflation, the tightening of consumer credit and general concerns about lower home values, the financial markets and the U.S economy. The downturn in same store sales trends in recent months has affected virtually all of the Company's restaurants, with the restaurants in Ohio and Illinois having been affected somewhat more than those in most other markets. Restaurant Costs and Expenses
Total restaurant operating expenses increased to 96.0% of net sales in the third quarter of 2008 from 90.1% in the third period of the previous year and to 90.3% of net sales in the first nine months of 2008 from 87.8% in the first nine months of 2007 due primarily to the adverse effects of lower same store sales and the effect of three new restaurants opened since the third quarter of 2007, with the effects of these factors being partially offset by lower cost of sales for the first nine months of 2008. Restaurant operating margins decreased to 4.0% in the third

quarter of 2008 from 9.9% in the third quarter of 2007 and to 9.7% in the first nine months of 2008 compared to 12.2% in the same period of 2007.
Cost of sales, which includes the cost of food and beverages, increased by 0.2% as a percentage of net sales for the third quarter of 2008 and decreased by 0.3% as a percentage of net sales for the first nine months of 2008 compared to the same periods of 2007. During these periods, increases in input costs for a number of food products were largely offset by lower prices paid for beef which was purchased at weekly market prices beginning in March of 2008 rather than under a fixed price purchasing agreement as in 2007. The effect of lower prices paid for beef in 2008 reduced cost of sales by an estimated 1.0% of net sales in the third quarter of 2008 and 0.5% for the first nine months of 2008 compared to the same periods of 2007. In addition, cost of sales for the first nine months of 2008 included the settlement of a claim against a prospective vendor which decreased cost of sales for the period by 0.2%.
Beef purchases represent the largest component of the Company's cost of sales and comprise approximately 25% to 30% of this expense category. In recent years, the Company has entered into fixed price beef purchase agreements in an effort to minimize the impact of significant increases in the market price of beef. However, because of uncertainty in the beef market and the high prices at which beef has been quoted to the Company on a forward fixed price basis relative to current market prices, the Company has not entered into a fixed price beef purchase agreement to replace the agreement which expired in March of 2008, and has purchased beef based on weekly market prices since that time. Market prices for beef increased somewhat during the third quarter of 2008 compared to prices paid by the Company in the second quarter of 2008 and there can be no assurance prices will not increase further. Management will continue to monitor the beef market and if there are significant changes in market conditions or attractive opportunities to contract in the future, will consider entering into a fixed price purchasing agreement.
Management expects the Company to experience increases in many of the food commodities it purchases for the remainder of 2008 and throughout 2009. However, management is uncertain at this time to what extent it will raise menu prices in response to such increases because the Company is experiencing decreases in same store guest counts and continues to have concerns about reduced spending by consumers.
Restaurant labor and related costs increased to 35.4% of net sales in the third quarter of 2008 from 33.2% in the third quarter of 2007 and to 32.9% for the first nine months of 2008 from 32.0% for the first nine months of 2007. These increases were due primarily to the effects of lower same store sales and higher labor costs incurred in the three new restaurants opened since the third quarter of 2007, with the effects of these factors being partially offset by lower incentive compensation and other employee benefits expense.
The Company estimates that the impact of increases in minimum wage rates will be approximately $150,000 in 2008 and $300,000 in 2009. Most of these increases relate to increases in minimum cash rates required by certain states to be paid to tipped employees. The increases in the federal minimum wage rate for non-tipped employees in 2007 and 2008 have not had, and are not expected to have, a significant impact on the Company because most of the Company's non-tipped employees are already paid more than the federal minimum wage. The required federal minimum cash wage paid to tipped employees was not increased in 2007 or 2008.

Depreciation and amortization of restaurant property and equipment increased by $188,000 in the third quarter of 2008 and $501,000 in the first nine months of 2008 compared to the same periods in 2007 because of the effect of the three new restaurants opened since the third quarter of 2007. The effect of the new restaurants as well as the effect of lower same store sales resulted in increases in this expense category as a percentage of net sales in the 2008 periods.
Other operating expenses, which include restaurant level expenses such as china and supplies, laundry and linen costs, repairs and maintenance, utilities, credit card fees, rent, property taxes and insurance, increased to 22.9% of net sales in the third quarter of 2008, from 20.2% of net sales in the third quarter of 2007 and to 21.1% of net sales for the first nine months of 2008 compared to 19.7% in the same period of 2007. These increases were also due to the effects of the three new restaurants opened since the third quarter of 2007 and lower sales in the same store restaurant base. General and Administrative Expenses
General and administrative expenses, which include all supervisory costs and expenses, management training and relocation costs, and other costs incurred above the restaurant level, increased by $206,000 in the third quarter of 2008 versus the third quarter of 2007 due primarily to a reduction in general and administrative expenses in the third quarter of 2007 resulting from the elimination of bonus accruals made during the first half of 2007 for the corporate management staff. General and administrative expenses increased by $320,000 in the first nine months of 2008 compared to the same period of 2007. Included in this increase were higher compensation and employee relocation expenses, higher legal and accounting fees, higher share-based compensation expense and the cost of marketing research. These increases were partially offset by lower travel expenses.
Pre-Opening Expense
Pre-opening expense consists of expenses incurred prior to opening a new restaurant and includes principally manager salaries and relocation costs, payroll and related costs for training new employees, travel and lodging expenses for employees who assist with training new employees, and the cost of food and other expenses associated with practice of food preparation and service activities. Pre-opening expense also includes rent expense for leased properties for the period of time between the Company taking control of the property and the opening of the restaurant.
Pre-opening expense of $872,000 and $1,205,000 was incurred in the third quarter and first nine months of 2008, respectively, in connection with three J. Alexander's restaurants under development during those periods. The Company estimates that it will incur approximately $400,000 of additional pre-opening expense during the fourth quarter of 2008 in connection with the third of these new restaurants which is expected to open in December. Pre-opening expense is higher in 2008 than 2007 primarily because an additional restaurant is being opened in 2008.
Other Income (Expense)
Interest expense for the third quarter and first nine months of 2008 decreased compared to the comparable periods of 2007 primarily because of the effect of reductions in outstanding

debt. For the third quarter of 2008, the effect of lower outstanding debt was partially offset by a reduction in interest costs capitalized in connection with new restaurant development. For the first nine months of 2008, capitalized interest costs increased compared to the same period of 2007, contributing to the decrease in total interest expense.
Interest income decreased in the third quarter and first nine months of 2008 compared to the corresponding periods of 2007 due to lower average balances of surplus funds invested in money market funds and lower interest rates earned on those funds. Interest income is expected to continue to decrease in the fourth quarter of 2008 compared to the last quarter of 2007 due to the use of a significant portion of the Company's surplus funds for restaurant development and lower expected yields on invested funds. Income Taxes
The Company recorded an income tax benefit of $343,000 for the first nine months of 2008. This benefit relates primarily to the effect of FICA tip tax credits earned by the Company which exceed the tax liability computed at statutory rates and is based on the actual effective tax rate for the year-to-date period. Management does not believe a reasonable estimate of the year-to-date tax provision can be made using the estimated annual effective tax rate because the Company's estimated pre-tax results for the year are expected to be close to break-even, and a relatively small change in the Company's estimated operating results for the year could result in a large change in the estimated annual effective tax rate. The tax benefit for the third quarter of 2008 represents the difference in the benefit for the first nine months of 2008 and the expense recorded for the first half of 2008.
The Company's income tax provision for the first nine months of 2007 was based on an estimated effective rate of 23.3% for the fiscal year and also included a favorable adjustment of $55,000 which represents a discrete item recorded in connection with the finalization of tax matters upon filing of the Company's income tax return for 2006. This rate is lower than the statutory federal income tax rate of 34% due primarily to the effect of FICA tip tax credits, with the effect of those credits being partially offset by the effect of state income taxes. Because the estimated annual effective rate for 2007 was lower than the estimated rate applied to the first half of the year, an income tax benefit was recorded in the third quarter of 2007 to adjust the year-to-date amount. The income tax benefit for the third quarter of 2007 also includes a favorable adjustment of $43,000 related to the discrete item noted above. Outlook
Management expects that the final quarter of 2008 as well as 2009 will continue to be very challenging. Because, as previously discussed, a significant portion of the Company's labor and other operating expenses are fixed or semi-variable in nature, management expects that continued decreases in same store sales, which management expects will persist for at least several more months and which could worsen, will have a significant negative effect on the Company's restaurant operating margins and profitability in 2008 and 2009, especially given management's expectation that input costs and other restaurant operating expenses will also continue to increase and that certain of the Company's newer restaurants are performing at sales levels below management's expectations and are expected to incur operating losses for an additional period of time.

LIQUIDITY AND CAPITAL RESOURCES
The Company's capital needs are primarily for the development and construction of new J. Alexander's restaurants, for maintenance of and improvements to its existing restaurants, and for meeting debt service requirements and operating lease obligations. Additionally, the Company paid cash dividends to all shareholders aggregating $666,000, $657,000 and $653,000 in January of 2008, 2007 and 2006, respectively, which dividends met the requirements to extend certain contractual standstill restrictions under an agreement with the Company's largest shareholder. The Company will consider whether or not to pay additional dividends in the future. The Company has met its needs and maintained liquidity in recent years primarily through use of cash and cash equivalents on hand, cash flow from operations and the availability of a bank line of credit.
Cash and cash equivalents on hand at September 28, 2008 was approximately $4.9 million, down significantly from $11.3 million at the end of 2007 due to the use of a portion of these funds for restaurant development during 2008. Primarily because of the decrease in cash and cash equivalents, the Company had a working capital deficit of $2,524,000 at September 28, 2008 compared to a positive working capital position of $4,412,000 at December 30, 2007. The Company does not believe its working capital deficit impairs the overall financial condition of the Company. Many companies in the restaurant industry operate with a working capital deficit because guests pay for their purchases with cash or by credit card at the time of the sale while trade payables for food and beverage purchases and other obligations related to restaurant operations are not typically due for some time after the sale takes place. Since requirements for funding accounts receivable and inventories are relatively insignificant, virtually all cash generated by operations is available to meet current obligations.
The Company's net cash provided by operating activities totaled $5,029,000 and $6,108,000 for the first nine months of 2008 and 2007, respectively. Management expects that future cash flows from operating activities will vary primarily as a result of future operating results. The Company expects to . . .