Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Famous Dave's of America, Inc. was incorporated as a Minnesota corporation in March 1994 and opened its first restaurant in Minneapolis in June 1995. As of September 28, 2008, there were 170 Famous Dave's restaurants operating in 36 states, including 47 company-owned restaurants and 123 franchise-operated restaurants. An additional 104 franchise restaurants were in various stages of development as of September 28, 2008.
Fiscal Year
Our fiscal year ends on the Sunday closest to December 31st. Our fiscal year is generally 52 weeks; however, it periodically consists of 53 weeks. The fiscal years ending December 28, 2008 (fiscal 2008) and December 30, 2007 (fiscal 2007), are both 52 week fiscal years. The fiscal year ending January 3, 2010 (fiscal 2009) is a 53 week fiscal year.
Revenue
Our revenue consists of restaurant sales, franchise-related revenue, and licensing and other revenue. Our franchise-related revenue is comprised of area development fees, initial franchise fees, and continuing royalty payments. Our area development fee to secure the territory consists of a non-refundable payment equal to $10,000 per restaurant in consideration for the services we perform in preparation of executing each area development agreement. Substantially all of these services, which include; but are not limited to, conducting market and trade area analysis, arranging a franchise meeting with Famous Dave's Executive Team, and performing potential franchise background investigation, are completed prior to our execution of the area development agreement and receipt of the corresponding area development fee. As a result, we recognize as revenue this fee in full upon receipt. Our initial franchise fee is typically $40,000 per restaurant, of which $5,000 is recognized immediately when a franchise agreement is signed, reflecting the commission earned and expenses incurred related to the sale. The remaining $35,000 is included in deferred franchise fees and is recognized as revenue; when a franchisee has secured a site, meaning a lease has been executed or a property purchase agreement has been signed, at which time we have substantially performed all of our obligations. Franchisees are also required to pay us a monthly royalty equal to a percentage of their net sales,

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES which has historically varied from 4% to 5%. Currently, most new franchises pay us a royalty of 5% of their net sales. Licensing revenue includes royalties from a retail line of business, including sauces, seasonings, rubs, and marinades. Other revenue includes opening assistance and training we provide to our franchise partners. Costs and expenses associated with these services are included in general and administrative expense. Our measures of comparable sales represent net sales for restaurants open year-round for at least 24 months. We are providing 18 month comparable sales information in fiscal 2008 only for comparability purposes.
Costs and Expenses
Restaurant costs and expenses include food and beverage costs, operating payroll and employee benefits, occupancy costs, repair and maintenance costs, supplies, advertising and promotion, and restaurant depreciation and amortization. Certain of these costs and expenses are variable and will increase or decrease with sales volume. The primary fixed costs are corporate and restaurant management salaries and occupancy costs. Our experience is that when a new restaurant opens, it incurs higher than normal levels of labor and food costs until operations stabilize, usually during the first three to four months of operation. As restaurant management and staff gain experience following a restaurant's opening, labor scheduling, food cost management and operating expense control are improved to levels similar to those at our more established restaurants.
General and Administrative Expenses
General and administrative expenses include all corporate and administrative functions that provide an infrastructure to support existing operations and support future growth. Salaries, bonuses, Associate benefits, legal fees, accounting fees, consulting fees, travel, rent and general insurance are major items in this category. Additionally, we record expense for Managers In Training ("MIT's") in this category for approximately six weeks prior to a restaurant opening. We also provide franchise services for which the revenue is included in other revenue and the expenses are included in general and administrative expenses.

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES The following table presents items in our consolidated statements of operations as a percentage of net restaurant sales or total revenue, as indicated, for the following periods(3): FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES OPERATING RESULTS (unaudited) Three Months Nine Months Ended Ended September 28, September 30, September 28, September 30, 2008 2007 2008 2007 Food and beverage costs (1) 31.3 % 30.3 % 30.8 % 30.3 % Labor and benefits (1) 32.3 % 30.4 % 30.8 % 29.8 % Operating expenses (1) 24.6 % 25.0 % 25.9 % 25.0 % Depreciation & amortization (restaurant level) (1) 4.2 % 3.6 % 4.0 % 3.7 % Depreciation & amortization (corporate level) (2) 0.4 % 0.4 % 0.3 % 0.4 % Asset impairment and lease termination and other closing costs (1) 12.8 % - 4.2 % - General and administrative (2) 9.5 % 13.3 % 11.5 % 13.7 % Pre-opening expenses and net loss on disposal of property(1) 1.1 % 1.3 % 0.7 % 0.6 % Total costs and expenses (2) 102.0 % 90.9 % 95.4 % 90.7 % (Loss) Income from operations (2) (2.0 %) 9.1 % 4.6 % 9.3 %

(1) As a percentage of restaurant sales, net

(2) As a percentage of total revenue

(3) Data regarding our restaurant operations as presented in the table, includes sales, costs and expenses associated with our Rib Team, which netted income of $48,000 and $6,000, respectively for the three months ended September 28, 2008 and September 30, 2007, respectively. The Rib Team netted income of $12,000 and a net loss of $44,000, respectively for the nine months ended September 28, 2008 and September 30, 2007, respectively. Our Rib Team travels around the country introducing people to our brand of barbeque, building brand awareness.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and notes, and the audited consolidated financial statements and notes included in our Form 10-K for the fiscal year ended December 30, 2007.

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES Total Revenue
Total revenue of approximately $35.1 million for the third quarter of fiscal 2008 increased approximately $3.2 million or 10.0% over revenue of approximately $31.9 million for the comparable quarter in fiscal 2007. This increase reflects a 11.9% increase in company-owned restaurant sales and a 6.2% increase in franchise royalty revenue. For the nine months ended September 28, 2008, total revenue of approximately $107.6 million increased approximately $13.1 million, or 13.9% over revenue of approximately $94.4 million, for the nine months ended September 28, 2008. This increase reflects a 15.3% increase in company-owned restaurant sales and a 10.9% increase in franchise royalty revenue.
Restaurant Sales, net
Restaurant sales for the third quarter of fiscal 2008 were $30.4 million, compared to $27.2 million for the same period in fiscal 2007, reflecting a 11.9% increase. Restaurant sales for the nine months ended September 28, 2008 were approximately $93.2 million compared to approximately $80.8 million for the nine months ended September 30, 2007, reflecting a 15.3% increase. These increases are largely due to the opening of four new company-owned restaurants since the third quarter of 2007, and an approximate 3.6% weighted average price increase, partially offset by a 4.7% comparable sales decrease.
Franchise-Related Revenue
Franchise-related revenue consists of royalty revenue and franchise fees, which include initial franchise fees and area development fees.
Franchise-related revenue was approximately $4.5 million for the third quarter of fiscal 2008, representing a 16.3% decrease from the comparable period of 2007, primarily reflecting increased royalties, offset by decreased franchise fees. Royalty revenue, which is based on a percent of franchise-operated restaurant net sales, increased 6.2% reflecting the nine net franchise restaurants that opened since the third quarter of fiscal 2007.
Franchise-related revenue was approximately $13.7 million for the nine months ended September 28, 2008 compared to approximately $12.9 million for the nine months ended September 30, 2007, reflecting a year-over-year increase in royalty revenue of 10.9% for the nine month timeframe. There were 123 franchise-operated restaurants opened at September 28, 2008 compared to 114 at September 30, 2007.
Licensing and Other Revenue
Licensing revenue includes royalties from a retail line of business, including sauces, rubs, marinades and seasonings. Other revenue includes fees obtained in connection with opening assistance and training we provide to our franchise partners. For the third quarter of fiscal 2008, the licensing royalty revenue was approximately $90,000 compared to approximately $75,000 for the comparable period of fiscal 2007. Licensing royalty revenue was approximately $328,000 for the nine months ended September 28, 2008 as compared to $273,000 for the comparable period of fiscal 2007. Other revenue for the fiscal 2008 third quarter was approximately $115,000 compared to $109,000 for the comparable prior year quarter. Other revenue for the nine months ended September 28, 2008 was approximately $379,000 compared to approximately $445,000 for the comparable period of fiscal 2007. The amount of other revenue is expected to be slightly less for fiscal 2008 based on the level of opening assistance for franchised openings that we performed in 2008.

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES Same Store Net Sales
It is our policy to include in our same store net sales base, restaurants that are open year round and have been open at least 24 months. This fiscal year, we will provide both 24 month and 18 month same store net sales information. We believe we have a longer honeymoon period than typical casual dining, driven by high initial trial and broad reach, when we open a restaurant. Accordingly, in fiscal 2008 we moved to a 24 month comparable sales calculation, intended to provide a more appropriate measure of performance. Same store net sales for company-owned restaurants open at least 24 months for the third quarter of fiscal 2008 decreased 4.7%, compared to fiscal 2007's third quarter increase of 2.1%. For the third quarter of fiscal 2008, there were 38 restaurants included in the company-owned 24 month comparable sales base and 36 for the third quarter of fiscal 2007. Same store net sales for company-owned restaurants open at least 24 months for the nine months ended September 28, 2008 increased 0.1%, compared to fiscal 2007's nine months ended September 30, 2007 increase of 1.7%. For the nine months ended September 28, 2008 and September 30, 2007, respectively, there were 38 and 36 restaurants, respectively, included in the company-owned 24 month comparable sales base. The decline in comparable store sales reflects slower traffic in all three of our sales drivers - dine-in, to-go, catering, partially offset by weighted average price increases of 3.6% in 2008.
Same store net sales for company-owned restaurants open at least 18 months for the third quarter of fiscal 2008 decreased 4.8%, compared to fiscal 2007's third quarter increase of 2.1%. For the third quarter of fiscal 2008, there were 39 restaurants included in the company-owned 18 month comparable sales base and 36 for the third quarter of fiscal 2007. Same store net sales for company-owned restaurants open at least 18 months for the nine months ended September 28, 2008 decreased 0.1%, compared to the fiscal 2007 comparable period increase of 1.7%. For the nine months ended September 28, 2008 there were 38 restaurants included in the company-owned 18 month comparable sales base and 36 restaurants for the comparable period of fiscal 2007.
Same store net sales on a 24 month basis for franchise-operated restaurants for the third quarter of 2008 decreased 4.6% compared to a decrease of 3.2% in 2007. For the third quarter of 2008 and 2007 there were 86 and 70 restaurants, respectively, included in the franchise-operated 24 month comparable sales base. Much of the decline in the third quarter of fiscal 2008 reflects the economic challenges being faced in certain franchise markets. Four states representing 17 franchise-operated restaurants accounted for 48% of the decline in franchise comparable sales. Approximately 31.4% of the 86 franchise restaurants in the comparable sales base for the third quarter of 2008 had flat to positive comparable sales.
Same store net sales on a 24 month basis for franchise-operated restaurants for the first nine months of fiscal 2008 and fiscal 2007 decreased 2.8%. For the first nine months of fiscal 2008 and fiscal 2007, there were 75 and 56 restaurants, respectively, included in the franchise-operated 24 month comparable sales base.
Same store net sales on an 18 month basis for franchise-operated restaurants for the third quarter of 2008 decreased 5.2%, compared to a decrease of 3.5% for the third quarter of fiscal 2007. For the third quarter of 2008 and 2007, there were 95 and 80 restaurants, respectively, included in the franchise-operated 18 month comparable sales base.
Same store net sales on an 18 month basis for franchise-operated restaurants for the first nine months of fiscal 2008 and fiscal 2007, respectively, was a decrease of 3.7% and 4.1%, respectively. For the first nine months of fiscal 2008 and fiscal 2007, respectively, there were 86 and 70 restaurants, respectively, included in the franchise-operated 18 month comparable sales base.

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES Average Weekly Net Sales and Operating Weeks The following table shows company-owned and franchise-operated average weekly net sales and company-owned and franchise-operated operating weeks for the third quarter and first nine months of fiscal 2008 and fiscal 2007 ended September 28, 2008 and September 30, 2007, respectively: Three Months Ended Nine months ended September 28, September 30, September 28, September 30, 2008 2007 2008 2007 Average Weekly Net Sales (AWS): Company-Owned $ 49,429 $ 51,667 $ 52,368 $ 50,907 Full-Service $ 51,039 $ 53,426 $ 54,465 $ 52,839 Counter-Service $ 38,489 $ 41,648 $ 38,583 $ 39,781 Franchise-Operated $ 58,276 $ 58,196 $ 58,449 $ 58,343 AWS 2005 and Post 2005: (1) Company-Owned $ 62,578 $ 67,610 $ 67,918 $ 70,057 Franchise-Operated $ 64,600 $ 65,184 $ 65,691 $ 67,187 AWS Pre-2005: (1) Company-Owned $ 46,295 $ 49,827 $ 48,608 $ 48,783 Franchise-Operated $ 50,355 $ 51,483 $ 49,834 $ 50,567

(1) Provides further delineation between AWS for restaurants opened during the pre-fiscal 2005 timeframe, and restaurants opened during the fiscal 2005 and post-fiscal 2005, timeframes.

Operating Weeks: Company-Owned 608 522 1,772 1,582 Franchise-Operated 1,597 1,443 4,723 4,155

We continue to demonstrate our category leadership in off-premise sales. Catering and "TO GO" accounted for approximately 34.9% of fiscal 2008's third quarter sales compared with approximately 35.5% for the third quarter of 2007, with the decline in the percentage reflecting a decline in corporate caterings.
Food and Beverage Costs
Food and beverage costs for the third quarter of fiscal 2008 were approximately $9.5 million or 31.3% of net restaurant sales, compared to approximately $8.2 million or 30.3% of net restaurant sales for the third quarter of fiscal 2007.
Food and beverage costs for the first nine months of fiscal 2008 were approximately $28.8 million or 30.8% of net restaurant sales compared to approximately $24.5 million or 30.3% of net restaurant sales for the comparable period of fiscal 2007.
Our annual pork contract which lasts through December 2008, resulted in a 1.0% price increase for fiscal 2008. We have recently renegotiated our pork contract at an approximate 2% decrease in price for fiscal 2009. Our poultry contract pricing negotiated in January 2008 resulted in an increase of 12% through September 2008. Our poultry contract for the remainder of fiscal 2008 reflected a price increase of 5% over prior year. Prices under our hamburger and brisket contract, which runs through December 2008, are essentially flat for fiscal 2008 as compared to prior year. We are currently renegotiating this contract for 2009. For fiscal 2008, we expect food costs to be approximately 100 basis points higher as a percentage of

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES sales as compared to 2007. We have included rebates from food and beverage vendors that had previously gone to the National Ad fund, of which approximately $344,000 has been recorded in the first nine months of 2008. We took a 1.6% price increase in June, and a 2.0% price increase in October 2008 to help mitigate food cost pressures. Looking forward, we intend to be much more opportunistic in 2009 with contract pricing - looking at shorter time horizons to capitalize on downturns in prices as we expect the markets to be more volatile throughout 2009.
Labor and Benefits Costs
Labor and benefits costs for the third quarter ended September 28, 2008 were approximately $9.8 million or 32.3% of net restaurant sales, compared to approximately $8.3 million or 30.4% of net restaurant sales for the three months ended September 30, 2007. Labor and benefits costs for the nine months ended September 28, 2008 were approximately $28.7 million or 30.8% of net restaurant sales, compared to approximately $24.1 million or 29.8% of net restaurant sales for the nine months ended September 30, 2007. The increase in labor and benefits costs for the third quarter were impacted by higher health insurance claims partially offset by lower worker's compensation costs. Additionally, there were various state and federal minimum wage increases phased in during the third quarter. Finally, the takeover of the Atlanta restaurants in July had an approximate 40 basis point impact on labor costs for the third quarter. For 2008, we expect labor and benefits costs as a percentage of net restaurant sales to be approximately 100 basis points higher compared to 2007 levels primarily as a result of expected inefficiencies from the three company-owned restaurant openings in October 2008. As stated previously, our experience is that newly opened restaurants incur higher than normal levels of labor costs until operations stabilize, usually during the first three to four months of operations.
Operating Expenses
Operating expenses for the third quarter of fiscal 2008 were approximately $7.5 million or 24.6% of net restaurant sales, compared to operating expenses of approximately $6.8 million or 25.0% of net restaurant sales for the third quarter of fiscal 2007. The increase in restaurant level operating expenses for the third quarter of fiscal 2008 is primarily due to higher utility and repair and maintenance costs. Additionally, there were deferred rent credits of approximately $477,000 recorded associated with the impairment of a restaurant in Minnesota and a restaurant in Illinois. Operating expenses for the nine months ended September 28, 2008 were approximately $24.2 million or 25.9% of net restaurant sales, compared to approximately $20.2 million or 25.0% of net restaurant sales for the nine months ended September 30, 2007. The increase in restaurant level operating expenses as a percentage of net restaurant sales for the 2008 year-to-date period is primarily due to higher utilities, repairs and maintenance costs and the shifting of advertising costs to the earlier part of 2008. During fiscal 2008, operating expenses as a percentage of net restaurant sales are expected to be higher by 60 basis points from the percentage for fiscal 2007 due to utility increases, partially offset by the deferred rent credits. Fiscal 2008 advertising expenses are expected to be flat to prior year, at approximately 3.5% of net restaurant sales, which includes 1.0% to be contributed to the national advertising fund.
Depreciation and Amortization
Depreciation and amortization expense for the third quarter of 2008 was approximately $1.4 million or 4.0% of total revenue, compared to the third quarter of 2007 at approximately $1.1 million or 3.5% of total revenue. Depreciation and amortization expense for the nine months ended September 28, 2008 and September 30, 2007 was approximately $4.1 million and $3.4 million, respectively, and was 3.8% and 3.6% respectively, of total revenue. Depreciation and amortization increased year-over-year due to capital invested toward the opening of four new restaurants since September 2007 and the result of the fiscal 2007 reclassification of assets previously held for sale to assets held and used. During fiscal 2008, depreciation and amortization is expected to increase modestly from fiscal 2007 levels due to expected capital expenditures of approximately $11.0 million for four new and existing company-owned restaurants and other projects.

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FAMOUS DAVE'S OF AMERICA, INC. AND SUBSIDIARIES
Asset Impairment and Lease Termination and Other Closing Costs During the third quarter of 2008, we recorded $3.9 million in asset impairment and lease termination charges and took $477,000 of deferred rent credits as described below. Taken together these charges and credits had a $0.24 negative impact on earnings per share in the third quarter.
In September of 2008, the Company closed an existing restaurant in Chicago, Illinois in conjunction with opening, a new prototype restaurant within four miles of the existing restaurant, supporting the Company's strategy to reposition legacy restaurants within a market when opportunities arise. The closure resulted in a non-cash charge of approximately $148,000 representing the disposal of assets net of a deferred rent credit. Additionally, subsequent to quarter end, the Company negotiated a lease buyout for this location and another location in the Chicago market that had previously closed for a total of $80,000.
Additionally, during the quarter, the Company recorded non-cash impairment charges on two other locations, one in Chicago and one in Minneapolis for the impairment of fixed assets for a total of approximately $2.0 million. Associated with the leases for these locations, the Company recognized a deferred rent credit of approximately $477,000 based on uncertainty regarding the future exercise of option periods provided in these leases.
Also during the third quarter, the Company acquired three franchise restaurants in Atlanta from a franchisee in exchange for amounts owed and deemed uncollectible. Based on the Company's assessment of expected cash flows from those locations, a net impairment charge of approximately $1.7 million was recorded related to assets acquired. The Company has completed its assessment of the long-term viability of these restaurants and continues to have discussions with the landlords regarding the buyout of these leases.
General and Administrative Expenses
General and administrative expenses for the third quarter of 2008 were approximately $3.3 million or 9.5% of total revenue, compared to approximately $4.2 million or 13.3% of total revenue for the third quarter of fiscal 2007. General and administrative expenses as a percent of total revenue, excluding stock-based compensation, were 9.2% for the third quarter of 2008 and 12.0% for the third quarter of 2007. General and administrative expenses for the third quarter of 2008 reflected an approximate $910,000 expense reduction due to lower stock-based compensation expenses resulting from the departure of our two prior Chief Executive Officers, lower bonuses resulting from our earnings per share loss, and purposeful decisions to "right size" the organization and eliminate unnecessary travel and expenditures. General and administrative expenses for the first nine months of fiscal 2008 were approximately $12.4 million or 11.5% of total revenue compared to approximately $12.9 million or 13.7% of total revenue for the first nine months of fiscal 2007. General and administrative expenses as a percent of total revenue, excluding stock-based compensation was 10.8% and 12.2% for the year-to-date periods of 2008 and 2007, respectively. General and . . .