- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-Q

———————


X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
	ACT OF 1934
For the quarterly period ended: September 28, 2008
Or

	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
	ACT OF 1934
For the transition period from: _____________ to _____________

———————

Dinewise, Inc.

(Exact name of registrant as specified in its charter)

———————


Nevada	333-100110	01-0741042
(State or Other Jurisdiction	(Commission	(I.R.S. Employer
of Incorporation)	File Number)	Identification No.)

500 Bi-County Blvd., Suite 400, Farmingdale, NY 11735-3940

(Address of Principal Executive Office) (Zip Code)

(631) 694-1111

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

———————


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.	X	Yes		No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer				Accelerated filer
Non-accelerated filer				Smaller reporting company	X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).		Yes	X	No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 3, 2008, the registrant had a total of 32,378,915 Common Shares outstanding.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by
Transitional Small Business Disclosure Format (Check one):		Yes	X	No

DINEWISE, INC.

SEPTEMBER 28, 2008

INDEX

PAGE

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets – September 28, 2008 (unaudited)
and December 30, 2007

Condensed Consolidated Statements of Operations – Nine Months Ended
September 28, 2008 and September 30, 2007 (unaudited)

Condensed Consolidated Statements of Operations – Three Months Ended
September 28, 2008 and September 30, 2007 (unaudited)

Condensed Consolidated Statements of Cash Flows – Nine Months Ended
September 28, 2008 and September 30, 2007 (unaudited)

Notes to Condensed Consolidated Financial Statements (unaudited)

Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations

Item 3. Controls and Procedures

PART II. OTHER INFORMATION

Item 6. Exhibits

Signatures

DINEWISE, INC.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)


	September 28 2008		December 30, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	247		$	429
Due from financial institution		178			103
Inventories		88			264
Prepaid expenses and other assets, net		36			33
Total current assets		549			829
Property and equipment, net		171			226
Deferred finance costs		263			368
Other assets, net		2			15
Total assets	$	985		$	1,438

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	509		$	646
Accrued expenses		1,403			1,476
Deferred revenue		383			426
Income and other taxes payable		44			42
Convertible debt, short-term		540			530
Capital lease obligation, short-term		10			10
Total current liabilities		2,889			3,130

Convertible debt		2,274			2,256
Derivative liability		284			504
Capital lease obligation		26			33
Accrued expenses, long-term portion		—			50
Total liabilities		5,473			5,973

Commitments

Stockholders’ deficit
Preferred stock, par value $.001; authorized 10,000,000 shares; issued and outstanding 0 shares,		—			—
Common stock, par value $.001; authorized 50,000,000 shares; issued and outstanding 32,378,915 and 31,064,915, respectively		32			31

Additional paid-in capital		40,966			40,844
Accumulated deficit		(45,486	)		(45,410	)
Total stockholders’ deficit		(4,488	)		(4,535	)
Total liabilities and stockholders’ deficit	$	985		$	1,438

The accompanying notes are an integral part of these condensed consolidated financial statements.

DINEWISE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Nine Months Ended
	September 28, 2008		September 30, 2007
	(Dollar amounts in thousands, except per share data)

Revenues	$	6,528		$	8,037
Cost of goods sold		2,825			3,909

Gross profit		3,703			4,128

Operating expenses		3,311			5,243

Operating income (loss)		392			(1,115	)

Interest expense (income), net		464			(549	)

Loss before provision for income taxes		(72	)		(566	)

Provision for income taxes		4			6

Net loss	$	(76	)	$	(572	)

Net loss per share (basic and diluted)	$	(0.00	)	$	(0.02	)


Common shares used in computing net loss per share amounts (basic and diluted)		32,020,312			30,328,265

The accompanying notes are an integral part of these condensed consolidated financial statements.

DINEWISE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended
	September 28, 2008		September 30, 2007
	(Dollar amounts in thousands, except per share data)

Revenues	$	1,885		$	2,510
Cost of goods sold		812			1,162

Gross profit		1,073			1,348

Operating expenses		984			1,791

Operating income (loss)		89			(443	)

Interest expense (income), net		225			(391	)

Loss before provision for income taxes		(136	)		(52	)

Provision for income taxes		2			2

Net loss	$	(138	)	$	(54	)

Net loss per share (basic and diluted)	$	(0.00	)	$	(0.00	)

Common shares used in computing net loss per share amounts (basic and diluted)		32,378,915			30,614,999

The accompanying notes are an integral part of these condensed consolidated financial statements.

DINEWISE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended
	September 28, 2008		September 30, 2007
	(Dollar amounts in thousands)
OPERATING ACTIVITIES:
Net loss	$	(76	)	$	(572	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization		170			229
Amortization of debt discount		288			267
Mark to market and adjustment of derivative liability		(270	)		(1,254	)
Share based compensation expense		108			138

Changes in operating assets and liabilities:
Increase in accounts receivable		(75	)		(107	)
Decrease in inventory		176			77
Decrease in prepaid expenses and other assets		4			14
Increase in deferred finance costs		—			(210	)
Increase (decrease) in income and other taxes payable		2			(247	)
(Decrease) increase in accounts payable		(137	)		26
(Decrease) increase in deferred revenue		(43	)		15
Decrease in accrued expenses		(123	)		(101	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		24			(1,725	)

INVESTING ACTIVITIES:
Purchases of property and equipment		(4	)		(14	)

NET CASH USED IN INVESTING ACTIVITIES		(4	)		(14	)

FINANCING ACTIVITIES:
Proceeds from convertible debt financing		—			1,705
Payments on convertible debt financings		(195	)		—
Repayments of capital lease obligations, net		(7	)		(11	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(202	)		1,694

NET DECREASE IN CASH AND CASH EQUIVALENTS		(182	)		(45	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		429			816

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	247		$	771

CASH PAID DURING THE PERIOD FOR:
Interest	$	346		$	337
Income Taxes	$	—		$	—

NON-CASH FINANCING ACTIVITIES
Reduction of convertible notes and increase in common stock and additional paid-in capital due to conversion of notes	$	2		$	82

The accompanying notes are an integral part of these condensed consolidated financial statements.

DINEWISE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts are in thousands, except per share data)

NOTE A- THE COMPANY AND NATURE OF OPERATIONS

On July 14, 2006 (the "Closing Date"), pursuant to an Agreement and Plan of Reorganization (the "Merger Agreement"), among the Company (formerly known as Simplagene USA, Inc., a public shell company with nominal assets), SMPG Merco Co., Inc., a Delaware corporation and a wholly owned subsidiary of the Registrant ("Merco"), New Colorado Prime Holdings, Inc., a privately owned Delaware corporation ("NCPH"), and Craig Laughlin ("Laughlin"), the Company acquired, through a merger (the "Merger") of Merco with and into NCPH, all of the issued and outstanding capital stock of NCPH (the "NCPH Capital Stock"). Upon completion of this transaction, the former NCPH shareholders and NCPH's financial advisor acquired approximately 93.5% of the Company's issued and outstanding shares of $0.001 par value common stock. This transaction constituted a change in control of the Company. In connection with the change of control, Paul A. Roman, Chairman of the Board and Chief Executive Officer of NCPH, became Chairman of the Board and Chief Executive Officer of the Company, Thomas McNeill, Vice President, Chief Financial Officer and a director of NCPH, became Vice President, Chief Financial Officer and a director of the Company, and Richard Gray, a director of NCPH, became a director of the Company. Craig Laughlin was the Company's sole officer and director prior to this transaction and resigned at the time the transaction was consummated. Mr. Laughlin was also the Company's majority stockholder immediately prior to the Closing Date.

NCPH is a Delaware corporation established in 2001 and owns 100% of Colorado Prime Corporation, a company originally established in 1959 to provide in-home "restaurant quality" beef shopping services throughout the United States. During 2005, NCPH established the Dinewise® brand to serve this market by attracting new customers through multi-channel media which includes catalogues, e-commerce and strategic alliances, as well as existing customer referrals. Dinewise® is a direct-to-consumer gourmet home meal replacement provider. Dinewise® targets lifestyle profiles, i.e. busy moms, singles, retirees, seniors, and working couples, as well as health profiles including diabetic, heart smart, low carbohydrate, low calorie, and weight loss. The Company has positioned its Dinewise® brand as the solution for time-constrained but discerning consumers focused on satisfying every member of the family by offering a broad array of the highest quality meal planning, delivery, and preparation services. Products are customized meal solutions, delivered fresh-frozen directly to the home. Using the efficiency, exposure and reach of the Internet and other direct marketing channels, Dinewise® capitalizes on consumers' emerging need for convenient, simple, customized solutions for home meal planning and preparation that satisfies the consumers' health and lifestyle needs with ready-to-eat, ready-to-heat, or ready-to-assemble hot or cold meals or entrees.

The July 14, 2006 acquisition of NCPH by the Company effected a change in control and was accounted for as a "reverse acquisition" whereby NCPH is the accounting acquirer for financial statement purposes.

On September 8, 2006, the stockholders of SimplaGene USA, Inc., upon the recommendation of the Company’s Board of Directors, approved an amendment to the Company’s Articles of Incorporation to change the name of the Company to Dinewise, Inc.

Until such time as additional capital is raised to accelerate its marketing plan, the Company will focus only on those channels that deliver the highest response rates and incremental profits, thus substantially reducing both marketing expenses and short-term sales growth opportunities. By executing these cost reductions to substantially reduce our quarterly losses, amending the Debenture as noted below, and with the Company’s cash balances, the Company has continued to operate, however at reduced revenue levels. While the Company has been able to raise capital and or amend its Debenture agreements in the past, the capital markets have deteriorated in the past quarter. While we continue to seek additional capital to allow operations to continue and then accelerate our marketing spend after such funding is attained, as well as complete a strategic acquisition, there is no assurance we will be able to raise the required capital. In the event it takes longer to obtain appropriate funding, or we are unable to obtain such funding, we will need to significantly curtail further expenses, which may significantly reduce future revenues and cash flows.

DINEWISE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE B - BASIS OF PRESENTATION

Principles of consolidation

The condensed interim consolidated financial statements include the accounts of Dinewise, Inc. and its wholly-owned subsidiaries. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and SEC rules for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The consolidated financial statements included herein should be read in conjunction with the annual consolidated financial statements and the footnotes thereto contained in the Company’s annual report to the Securities and Exchange Commission for the fiscal year ended on December 30, 2007, filed on Form 10-KSB on March 31, 2008. In our opinion, the information presented reflects all adjustments necessary for a fair statement of interim results. All such adjustments are of a normal and recurring nature. The foregoing interim results are not necessarily indicative of the results of operations for the full year ending December 28, 2008.

Fiscal year

The Company's fiscal year ends on the last Sunday in December. The Company's 2008 nine-month period consisted of the thirty-nine weeks, which began on December 31, 2007 and ended on September 28, 2008. The Company's 2007 nine-month period consisted of the thirty-nine weeks, which began on January 1, 2007 and ended on September 30, 2007.

The Company’s 2008 third fiscal quarter consisted of the thirteen-week period, which began on June 30, 2008 and ended on September 28, 2008. The Company’s 2007 third fiscal quarter consisted of the thirteen-week period, which began on July 2, 2007 and ended on September 30, 2007.

NOTE C – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue recognition

The Company recognizes revenue from product sales when (i) persuasive evidence of an arrangement exists and the sales price is fixed or determinable (evidenced by written sales orders), (ii) delivery of the product has occurred, and (iii) collectibility of the resulting receivable is reasonably assured. Shipping and handling expenses of $196 and $686 are included in selling, general and administrative expenses for the three and nine months ended September 28, 2008 respectively, and $291and $893 for the three and nine months ended September 30, 2007, respectively.

The Company records its Revenue net of any sales taxes collected on its sales, which are then subsequently remitted to the local tax office, as required.

With respect to product sales, we recognize revenue on a gross basis, using the criteria outlined in Emerging Issues Task Force Issue (“EITF”) No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, net of provisions for discounts and allowances. Our product sales are collected utilizing major credit cards, prior to the sale of the DineWise branded products, or are collected within three days of delivery of other product sales. All product sales are final and we have a “no return” policy. However, in limited instances, due to product quality or delivery delays, we may replace the product or issue a credit to the customer, which amounts have been insignificant.

Cash and cash equivalents

Cash and cash equivalents include only securities having a maturity of three months or less at the time of purchase. At September 28, 2008 and December 30, 2007, demand accounts and money market accounts comprised all of the Company’s cash and cash equivalents.

DINEWISE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE C – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Due from financial institution

The Company submits substantially all accounts receivable to a third party financial institution for collection, without recourse. Payment is generally received from this financial institution within three business days. The financial institution holds in escrow approximately 3% of the net receivables that have been submitted by the Company and not collected. This escrow is evaluated by the financial institution on a quarterly basis.

Property and equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets or, in the case of leasehold improvements, the lesser of the life of the related leases or the life of the improvement.

Costs of internal use software are accounted for in accordance with Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and Emerging Issue Task Force No. 00-02 ("EITF 00-02"), "Accounting for Website Development Costs." SOP 98-1 and EITF 00-02 require that the Company expense computer software and website development costs as they are incurred during the preliminary project stage. Once the capitalization criteria of SOP 98-1 and EITF 00-02 have been met, external direct costs of materials and services consumed in developing or obtaining internal-use software, including website development, are capitalized. Capitalized costs are amortized using the straight-line method over the software's estimated useful life, estimated at three years. Capitalized internal use software and website development costs are included in property and equipment, net, in the accompanying balance sheets.

Estimated useful lives are as follows:

Machines and office equipment: 5 to 8 years

Capitalized software and development: 3 years

Long-lived assets

The Company determines the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Management believes there was no impairment of any long-lived assets as of September 28, 2008 and December 30, 2007.

Marketing costs

Marketing costs are included as part of operating expenses and include direct-mail catalog costs, internet based advertising, marketing and promotional expenses and payroll-related expenses for personnel engaged in these activities. Direct-mail catalog costs are initially recorded as prepaid expenses and charged to operations as marketing expense during the period in which future benefits are expected to be received. Typically, this period falls within 45 days of the direct mailing. All other advertising costs are charged to expense as incurred or the first time the advertising takes place.

DINEWISE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE C – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Debt discount and derivative liability

As a result of the Company entering into a Subscription Agreement on July 14, 2006 with Dutchess Private Equities Fund, LP and Dutchess Private Equities Fund, II, LP (collectively, the "Investors") pursuant to which the Company agreed to sell to the Investors an aggregate of $2,500 of Five-Year Convertible Debentures (the "Convertible Debentures") and warrants to purchase 5,050,505 shares of Common Stock at an exercise price of $.495 per share (the "Warrants"), the Company has identified certain embedded derivatives within the Convertible Debentures. The value of these embedded derivatives were $1,200 at July 14, 2006. On February 16, 2007, the Company issued and sold to one of its existing investors, Dutchess Private Equities Fund, Ltd. (“Dutchess”), a $1,750 principal amount Convertible Debenture due March 31, 2010, as amended on March 17, 2008 (the”Debenture”) and a warrant amended on March 17, 2008 to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share. See Note I for a complete summary of the Company’s amendment of the Debenture. The Company has identified certain embedded derivatives within the Debenture. The value of these embedded derivatives was $477 at February 16, 2007. These amounts were bifurcated from the Convertible Debentures and Debenture on the face of the balance sheet and a corresponding derivative liability was established. These debt discounts will be amortized over their respective lives, using the effective interest method, and charged to interest expense until fully amortized in July 2011 and March 2010, respectively. As of September 28, 2008 and December 30, 2007 the unamortized debt discount was $1,015 and $1,240 respectively. In the event the Convertible Debentures or Debenture are reduced in full or in part, either by Company prepayments or by conversion into common shares by the Investors, the debt discount related to the amount reduced will be immediately recognized as interest expense and charged to operations. In addition, the change in the valuation of the embedded derivatives for the three and nine months ended September 28, 2008 resulted in income of $9 and $270, respectively, and for the three and nine months ended September 30, 2007 of $652 and $1,254, respectively, and was reflected in interest expense. In all future periods, the change in the valuation of the derivative liabilities will continue to be recognized as interest expense or income and charged to operations accordingly.

Amortization of deferred finance costs

As a result of the Company’s $2,500 Convertible Debenture financing completed on July 14, 2006, and its $1,750 Debenture financing completed on February 16, 2007, it incurred deferred finance charges of $375 and $210, respectively. These amounts are being amortized monthly, as a charge to interest expense, over the 5-year and 2-year terms of the notes, respectively. In the three and nine months ended September 28, 2008, amortization expense was $30 and $106, respectively. In the three and nine months ended September 30, 2007, amortization expense was $48 and $132, respectively. In the event the Convertible Debentures or the Debenture are reduced in full or in part, either by Company prepayments or by conversion into common shares by the Investors, the deferred finance charges related to the amount reduced will be immediately recognized as interest expense. As of September 28, 2008 and December 30, 2007, unamortized deferred finance charges were $263 and $368, respectively.

Income taxes

The Company accounts for its income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” . Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Due to the uncertainty of future earnings, all deferred tax assets are fully reserved for.

DINEWISE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE C – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Concentration risk

The Company purchased approximately 74% and 71% of its food products from one vendor during the three and nine months ended September 28, 2008, respectively, and approximately 68% and 69% during the three and nine months ended September 30, 2007, respectively. The Company is not obligated to purchase from this vendor, and, if necessary, there are other vendors from which the Company can purchase food products.

All of the Company’s receivables are due from one financial institution (TD Banknorth, Inc.) under an agreement in which the Company receives payment on its receivables within 3-5 business days. The Company has had no losses on collections in the past, and since this institution is deemed financially sound, there is little, if any, collection risk at this time.

Stock based compensation

SFAS 123R, “Share-Based Payment” addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. It requires companies to recognize in the statement of operations the grant date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation model. The statement eliminates the intrinsic value-based method prescribed by APB Opinion No. 25, and related interpretation, that the Company had previously used. The Company has adopted SFAS No. 123R effective December 26, 2005 (the beginning of its 2006 fiscal year) using the modified prospective method. The Company adopted a nonqualified stock option plan on November 13, 2006. There were no options granted prior to fiscal 2006. As a result of the adoption of SFAS No.123R, the Company recorded share-based compensation for options attributable to employees, officers, directors and consultants of $36 and $108, in the three and nine months ended September 28, 2008, respectively, and $52 and $138 and in the three and nine months ended September 30, 2007, respectively.

NOTE D – RECENTLY ADOPTED AND NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 applies under other previously issued accounting pronouncements that require or permit fair value measurements but does not require any new fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with the exception of all non-financial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, which will be effective for years beginning after November 15, 2008.

We adopted FAS No. 157 on December 30, 2007. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework, creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements, and details the disclosures that are required for items measured at fair value. Under SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," entities are permitted to choose to measure many financial instruments and certain other items at fair value. We did not elect the fair value measurement option under SFAS No. 159 for any of our financial assets or liabilities.

DINEWISE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE D – RECENTLY ADOPTED AND NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

We currently have one financial instrument that must be measured under the new fair value standard. This financial Liability is a derivative liability. We currently do not have non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis. Our financial assets and liabilities are to be measured using inputs from the three levels of the fair value hierarchy, which are as follows:

Level 1 - inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date;

Level 2 - inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs); and

Level 3 - unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing assets or liabilities based on the best information available.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

In accordance with the fair value hierarchy described above, the following table shows the fair value of our financial liabilities that are required to be measured at fair value on a recurring basis at September 28, 2008.


Description	Classification	Value at September 28, 2008	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)

Derivatives	Non current liabilities	$284	—	—	$284

Total liabilities		$284	$ —	$ —	$284

The following table summarizes the changes in fair value of our Level 3 assets and liabilities:


	Fair Value Measurements of Liabilities Using Level 3 Inputs
	Derivative liabilities
Beginning balance at year-end 2007	$	504
Total (Gains) Losses (realized or unrealized)
Included in earnings		(283	)
Included in other comprehensive income		—
Transfers in or out of Level 3		—
Purchases, sales, issuances and settlements		63
Ending balance at September 28, 2008	$	284
Gains (losses) for the 2008 nine months ended included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date		283

DINEWISE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE D – RECENTLY ADOPTED AND NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

The valuation of the embedded derivatives for the conversion features was valued using a binomial model, utilizing the Company’s stock price at the point of valuation. The value of the Warrants were calculated using the Black Scholes model with observable inputs to the valuation model including volatility, discount rates, forfeiture rates, dividend rates and the expected life.

In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations,” (“FAS 141”) and Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”). FAS No. 141 (revised 2007) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This standard also requires the fair value measurement of certain other assets and liabilities related to the acquisition such as contingencies. FAS 141 (revised 2007) applies prospectively to business combinations and is effective for fiscal years beginning on or after December 15, 2008. We are currently evaluating the impact of FAS 141 (revised 2007) on our accounting for past and future acquisitions and on our consolidated financial statements.

FAS 160 requires that a noncontrolling interest in a subsidiary be reported as equity in the consolidated financial statements. Consolidated net income should include the net income for both the parent and the noncontrolling interest with disclosure of both amounts on the consolidated statement of income. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. The presentation provisions of FAS 160 are to be applied retrospectively, and FAS 160 is effective for fiscal years beginning on or after December 15, 2008. We are currently evaluating the impact of FAS 160 on our consolidated financial statements.

In December 2007, the SEC issued Staff Accounting Bulletin 110, or "SAB No. 110," which expresses the views of the staff regarding the use of a "simplified" method, as discussed in SAB No. 107, in developing an estimate of the expected term of "plain vanilla" stock options in accordance with SFAS No. 123 (R). SAB No. 110 allows for the continued use, under certain circumstances, of the "simplified" method in developing an estimate of the expected term of so-called "plain vanilla" stock options, and we will continue to use such method until such time as there is sufficient historical evidence on which we can base an estimate of the expected term of our stock options.

NOTE E- PLAN OF RESTRUCTURING

To generate cash to fund the operations of the Company, and to satisfy the requirement to repay its principal lenders, the Company sold its accounts receivable at a significant discount throughout 2003. In addition, the Company restructured its operations to enhance short-term liquidity through cost reductions. In April 2003, the Company closed down its direct to consumer sales and telemarketing operations. This included closing all sales offices outside of its corporate office, all telemarketing centers, and all distribution routes. Approximately 930 employees and 55 lessees were terminated pursuant to the Company's revised operating plans. The Company's present operations consist of fulfilling reorder customers through the use of an outsourced delivery agent. Also, the Company has commenced attracting new customers through multi-channel media which include catalogues, e-commerce, strategic alliances and exhibit marketing as well as existing customer referrals. The Company fully satisfied all outstanding borrowings under its credit facility through the proceeds from the sale of accounts receivable in July and December of 2003 with a new financial institution. Accordingly, under the current business model, the Company no longer participates in the collection of accounts receivable. This is now outsourced to the financial institution as discussed in Note C Summary of Significant Accounting Policies.

DINEWISE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE E- PLAN OF RESTRUCTURING (Continued)

The balance of accrued restructuring charges consisted of the following:


	September 28, 2008		December 30, 2007
Accrued future and past minimum payments under current and delinquent lease obligations	$	901		$	901
Break fee under renegotiation of lease (See Note H)		75			150
	$	976		$	1,051

In connection with the restructuring activities noted above, the Company stopped paying various vendors who were providing goods and services to the Company (although the related liabilities are recorded in the accompanying consolidated balance sheet). The Company may, from time to time, be in negotiations with vendors to pay a reduced amount; when the Company reaches an agreement with the vendor the Company may record forgiveness of debt income. As of September 28, 2008 and December 30, 2007, $901 and $897 related to delinquent lease obligations, respectively.

NOTE F- ACCRUED EXPENSES

Accrued expenses consisted of the following as of September 28, 2008 and December 30, 2007:


	September 28, 2008		December 30, 2007
Accrued restructuring charges	$	976		$	1,051
Payroll and health benefits		263			203
Professional fees		122			174
Other		42			98
	$	1,403		$	1,526

Accrued expenses include the long-term portion of the break fee associated with the re-negotiation of the Company’s capital lease. At September 28, 2008 and December 30, 2007 the long-term portion of the break fee was $0 and $50, respectively.

NOTE G- INCOME (LOSS) PER COMMON SHARE

Net income (loss) per common share amounts (basic EPS) are computed by dividing net income (loss) by the weighted average number of common shares outstanding, excluding any potential dilution. Net income (loss) per common share amounts assuming dilution (diluted EPS) are computed by reflecting potential dilution from the exercise of stock options and warrants, and the conversion into common stock of convertible loans. Diluted EPS for the quarter and nine months ended September 28, 2008 and September 30, 2007 are the same as basic EPS, as the inclusion of the impact of any common stock equivalents outstanding during those periods would be anti-dilutive.

DINEWISE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE G- INCOME (LOSS) PER COMMON SHARE (Continued)

Common stock equivalents not included in EPS are as follows:


	Nine Months Ended
	9/28/08	9/30/07
Stock options	2,600,000	2,600,000
Stock warrants	600,000	700,000
Convertible Debt #1 (1)	9,897,858	9,935,729
Convertible Debt #2 (2)	4,803,922	7,343,137
Total	17,901,780	20,578,866

———————

(1)

At September 28, 2008 the Company had outstanding a) $2,399 convertible debentures at a conversion price at the lesser of $.495 or 80% of the best bid price in the ten days prior to conversion and b) warrants to purchase 5,050,505 shares of Common Stock at an exercise price of $.495 per share. The above calculation of potential shares outstanding was calculated based upon a conversion price of $.495, however this conversion price could be lower in the future with respect to the convertible debentures in whole or in part.

(2)

At September 28, 2008 the Company had outstanding a) $1,430 convertible debentures at a conversion price at the lesser of $.51 or 75% of the best bid price in the ten days prior to conversion and b) warrants to purchase 2,000,000 shares of Common Stock at an exercise price of $.25 per share. The above calculation of potential shares outstanding was calculated based upon a conversion price of $.51 for the convertible debentures, however this conversion price could be lower in the future with respect to some or all of the Convertible Debentures.

NOTE H- COMMITMENTS

In March 2004, the Company re-negotiated the capital lease of its corporate headquarters located in Farmingdale, New York, converting it to an operating lease and reducing its office space. The Company was charged a break fee of $590, with $90 paid in 2004 and the balance payable in sixty equal monthly installments of approximately $8 each commencing July 2004. As of September 28, 2008 and December 30, 2007, the Company has accrued $75 and $150, respectively in accrued restructuring charges relating to this break fee.

Future minimum operating lease payments, adjusted for the lease amendment, as of September 28, 2008 are as follows:


YEAR ENDED
2008		30
2009		128
2010		132
2011		136
2012		140
Thereafter		156
	$	722

Rent expense charged to operations was $33 and $98 for the three and nine months ended September 28, 2008 and $31 and $95 for the three and nine months ended September 30, 2007, respectively.

DINEWISE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE I- CONVERTIBLE DEBT AND DERIVATIVE LIABILITY

On July 14, 2006 (the "Closing Date"), the Company entered into a Subscription Agreement with Dutchess Private Equities Fund, LP and Dutchess Private Equities Fund, II, LP (collectively, the "Investors") pursuant to which the Company agreed to sell to the Investors an aggregate of $2,500 of Five-Year Convertible Debentures (the "Convertible Debentures") which mature on July 14, 2011 and warrants to purchase 5,050,505 shares of Common Stock at an exercise price of $.495 per share (the "Warrants"). $1,250 was funded immediately and the remaining $1,250 was funded on August 11, 2006, the date the Company filed a Registration Statement covering the resale of the securities with the Securities and Exchange Commission (the "SEC").

The Convertible Debentures bear interest at a rate of 10% per annum, payment of which commenced on August 1, 2006 and continues monthly thereafter. Interest is payable in cash or shares of Common Stock at the election of the Investors. The Investors may convert the unpaid face value of, plus the accrued interest on, the Convertible Debentures into Common Stock at any time at the lesser of (i) $.495 and (ii) eighty percent (80%) of the lowest closing bid price on the Common Stock during the ten (10) trading days immediately preceding the receipt by the Company of a notice of conversion by the Investors (the "Conversion Price"). The Convertible Debentures do not require the Company to make principal payments, and in the event an amount is outstanding at the end of the term on July 14, 2011, it will automatically convert into common shares of the Company.

The Company is required at all times to reserve sufficient shares for full conversion of the Convertible Debentures and exercise of the Warrants.

If an event of default occurs, as defined in the Convertible Debentures, the Investors may exercise their right to increase the face amount of the Convertible Debenture by three percent (3%) as an initial penalty and by three percent (3%) for each subsequent event of default. In addition, the Investors may exercise their right to increase the face amount by two-and-a-half percent (2.5%) per month to be paid as liquidated damages, compounded daily.

Pursuant to a Security Agreement, dated as of the Closing Date, by and among the Company and the Investors (the "Security Agreement"), the Company's obligation to repay the amounts outstanding under the Convertible Debenture is secured by a first priority security interest in the assets of the Company. In addition, shares of Common Stock currently owned or hereafter acquired by the Company’s Chief Executive Officer, Chief Financial Officer and Chief Marketing Officer have been pledged as security for repayment of the Debentures, which shares may be sold by the holders thereof only pursuant to Leak-Out Agreements executed by each of such holders with the Investors.

On February 16, 2007, the Company issued and sold to one of its existing investors, Dutchess Private Equities Fund, Ltd. (“Dutchess”), a $1,750 principal amount Convertible Debenture due March 31, 2009 (the”Debenture”) and a warrant to purchase 4,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share. The Company will pay monthly interest on the outstanding principal amount of the Debenture at a rate per annum equal to 14%, commencing on March 31, 2007, and on the last day of each calendar month thereafter until the principal amount is paid in full. Amortizing payments of interest and the aggregate principal amount outstanding under the Debenture are to be made by the Company.

On March 17, 2008, the Company amended the February 16, 2007 Debenture (“Debenture”) and the February 16, 2007 Warrant (“Warrant”) issued by the Company to Dutchess Private Equities Fund, Ltd (“Dutchess”). The material changes are as follows:

The maturity date of the Debenture is extended from March 31, 2009 to March 31, 2010.

The interest rate per annum on the Debenture shall increase from 14% to 15% per annum on October 1, 2008 and shall increase to 16% per annum on April 1, 2009.

DINEWISE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE I- CONVERTIBLE DEBT AND DERIVATIVE LIABILITY (Continued)

Monthly principal payments on the Debenture have been restructured as follows:


	Original Terms	Amended Terms
3/31/08 – 8/31/08	$35 per month	$20 per month
9/30/08-2/28/09	$70 per month	$35 per month
3/31/09	Remaining unpaid balance	$50
4/30/09-8/31/09	Not applicable	$50 per month
9/30/09-2/28/10	Not applicable	$65 per month
3/31/10	Not applicable	Remaining unpaid balance

Under the terms of the amendment, if at the end of any of the Company’s quarter end periods as filed with the SEC, the Company has cash deposits in any accounts, whether bank, brokerage or other accounts (“Bank Balance(s)”), that exceed $750, the Company shall pay to Dutchess twenty percent (20%) of such amounts in excess of $750 but below $2,250; upon such time as the Company has in excess of $2,250 as a Bank Balance, the Company shall pay to Dutchess one hundred percent (100%) of such amounts in excess of $2,250.

Prior to the amendment, upon such time as the Company had in excess of $2,250 as a Bank Balance, the Company was required to pay to Dutchess one hundred percent (100%) of such amounts in excess of $2,250.

As of the date of the amendment, two million Warrants (2,000,000) have fully vested and the remaining two million (2,000,000) unvested Warrants shall expire.

In addition, the Company issued to Dutchess one million two hundred and forty thousand (1,240,000) shares of the Company’s Common Stock.

The Company has identified certain embedded derivatives within the convertible debentures as a result of the variable nature of the conversion price formula of the convertible debentures. The value of these embedded derivatives was $1,200 at July 14, 2006, the date the Convertible Debentures was issued, and $477 on February 16, 2007, the date the Debenture was issued. These amounts were bifurcated from the convertible debentures on the face of the balance sheet and a corresponding derivative liability was established. This debt discount will be amortized over the life of the convertible debentures, using the effective interest method, and charged to interest expense until fully amortized in July 2011 and March 2010, respectively. As of September 28, 2008 and December 30, 2007 the unamortized debt discount was $1,015 and $1,240, respectively. In the event the Convertible Debentures are reduced in full or in part, either by Company prepayments or by conversion into common shares by the Investors, the debt discount related to the amount reduced will be immediately recognized as interest expense and charge to operations. In addition, the change in the valuation of the embedded derivatives during the three and nine months ended September 28, 2008 resulted in income of $9 and $270, respectively, and for the three and nine months ended September 30, 2007 resulted in income of $652 and $1,254, respectively ,and was reflected in interest expense. In all future periods, the change in the valuation of the derivative liabilities will continue to be recognized as interest expense or income and charged to operations accordingly.

DINEWISE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

NOTE I- CONVERTIBLE DEBT AND DERIVATIVE LIABILITY (Continued)

As of September 28, 2008 and December 30, 2007 the convertible debentures outstanding were as follows:


	9/28/08		12/30/07
convertible debentures	$	3,829		$	4,026
debt discount		(1,015)			(1,240)
convertible debentures, net		2,814			2,786
Less current portion	$	(540)			(530)
convertible debentures, long term	$	2,274		$	2,256

As of September 28, 2008 the derivative liability outstanding was as follows:


Liability at December 30, 2007	$	504
Decrease in Valuation, net		(220)
Liability at September 28, 2008	$	284

On March 17, 2008, as a result of an amendment to the Company’s Debenture, the Company accounted for the amendments, in accordance with EITF 96-19 and 06-6. The original debt instrument and the modified debt instrument, as well as the change in the conversion features were not deemed substantially different as defined by being at least 10% different from the original value. Accordingly there is no deemed extinquishment of the old debt. Accordingly the Company recorded expense of $0 and $6 for the three and nine months ended September 28, 2008 reflected in interest expense, net, as follows:


		Expense (income)
1,240,000 shares issued to Dutchess	$	13
2,000,000 warrants terminated upon the amendment		(7)
Total	$	6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollar amounts are in thousands, except share and per share data)

Critical Accounting Policies and Estimates

This management’s discussion and analysis is based on our consolidated financial statements which are prepared using certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. While we believe that these accounting policies, and management's judgments and estimates, are reasonable, actual future events can and often do result in outcomes that can be materially different from management's current judgments and estimates. We believe that the accounting policies and related matters described in the paragraphs below are those that depend most heavily on management's judgments and estimates.

Fiscal Year

Our fiscal year ends on the last Sunday in December. Our 2008 fiscal year will consist of the fifty-two week period which began on December 31, 2007 and ends on December 28, 2008; our 2007 fiscal year consisted of the fifty-two week period which began on January 1, 2007 and ended on December 30, 2007.

Revenue Recognition

We recognize revenue from product sales when (i) persuasive evidence of an arrangement exists and the sales price is fixed or determinable (evidenced by written sales orders), (ii) delivery of the product has occurred, and (iii) collectibility of the resulting receivable is reasonably assured. Shipping and handling expenses of $196 and $686 are included in selling, general and administrative expenses for the three and nine months ended September 28, 2008, respectively, and $291 and $893 for the three and nine months ended September 30, 2007, respectively.

The Company records its revenue net of any sales taxes collected on its sales, which are then subsequently remitted to the local tax office, as required.

Impairment of Fixed Assets and Intangibles

We determine the recoverability of our long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Long-lived assets, such as property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Management believes there is no impairment of any long-lived assets as of September 28, 2008 and December 30, 2007.

Income Taxes

We account for our income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Due to the uncertainty of future earnings, all deferred tax assets are fully reserved for.

Accounting for Uncertain Tax Positions

In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

We adopted FIN 48 on January 1, 2007 and it had no material impact on our financial statements. We recognize interest and penalties, if any, as part of our provision for income taxes in our Consolidated Statements of Operations. We file a consolidated U.S. federal income tax return as well as unitary income and sales tax returns in several state jurisdictions, of which New York, North Carolina and California are the most significant. The Internal Revenue Service has completed examinations of our federal returns for taxable years prior to 1993. We are currently being examined by the state of North Carolina for the taxable years 2003 through 2005.

Debt discount and Derivative liability

As a result of the Company entering into a Subscription Agreement on July 14, 2006 with Dutchess Private Equities Fund, LP and Dutchess Private Equities Fund, II, LP (collectively, the "Investors") pursuant to which the Company agreed to sell to the Investors an aggregate of $2,500 of Five-Year Convertible Debentures (the "Convertible Debentures") and warrants to purchase 5,050,505 shares of Common Stock at an exercise price of $.495 per share (the "Warrants"), the Company has identified certain embedded derivatives within the Convertible Debentures. The value of these embedded derivatives were $1,200 at July 14, 2006. On February 16, 2007, the Company issued and sold to one of its existing investors, Dutchess Private Equities Fund, Ltd. (“Dutchess”), a $1,750 principal amount Convertible Debenture due March 31, 2010, as amended on March 17, 2008, (the”Debenture”) and a warrant to purchase 2,000,000 shares, as amended on March 17, 2008, of the Company’s common stock at an exercise price of $0.25 per share. See Note I for a complete summary of the Company’s amendment of its Debenture. The Company has identified certain embedded derivatives within the Debenture. The value of these embedded derivatives was $477 at February 16, 2007. These amounts were bifurcated from the Convertible Debentures and Debenture on the face of the balance sheet and a corresponding derivative liability was established. These debt discounts will be amortized over their respective lives, using the effective interest method, and charged to interest expense until fully amortized in July 2011 and March 2010, respectively. As of September 28, 2008 and December 30, 2007 the unamortized debt discount was $1,015 and $1,240, respectively. In the event the Convertible Debentures or Debenture are reduced in full or in part, either by Company prepayments or by conversion into common shares by the Investors, the debt discount related to the amount reduced will be immediately recognized as interest expense and charged to operations. In addition, the change in the valuation of the embedded derivatives for the three and nine months ended September 28, 2008 resulted in income of $9 and $270, respectively, and for the three and nine months ended September 30, 2007 resulted in income of $652 and $1,254, respectively, and was reflected in interest expense. In all future periods, the change in the valuation of the derivative liabilities will continue to be recognized as interest expense or income and charged to operations accordingly.

Results of Operations

Revenues and expenses consist primarily of the following components:

Revenues. Revenues consist primarily of food sales. Food sales include sales of prime cut proteins (such as beef, chicken, pork and fish) and assorted vegetables, soups, appetizers, desserts and other meal accents, as well as gourmet, prepared meals and prepared meal compliments. Included in revenues are shipping and handling charges billed to customers and sales credits and adjustments, including product returns. Although we may replace the product or issue a credit to the customer due to product quality or delivery delays, such amounts have been insignificant. Also included in revenues are sales of durable goods such as cutlery, cookware and appliances.

Cost of Goods Sold . Cost of goods sold consists primarily of the cost of the food and durable products sold and the costs of outside fulfillment of food orders.

Operating Expenses . Operating expenses consist of compensation for sales, marketing, delivery, administrative, information technology, customer service personnel, advertising, marketing and promotional expenses, shipping and handling expenses, facility expenses, website development costs, professional service fees and other general corporate expenses.

Interest Expense (Income), net . Consists of interest expense paid on our convertible debt outstanding, amortization of debt discount, and the change in the value of the embedded derivative liability for the period, net of any interest income earned on cash balances and marketable securities.

Income Taxes . We are subject to corporate level income taxes and record a provision for income taxes based on an estimated effective tax rate for the year.

Nine Months Ended September 28, 2008 Compared To Nine Months Ended September 30, 2007

Revenue

Revenue decreased to $6,528 for the nine months ended September 28, 2008 as compared to $8,037 for the nine months ended September 30, 2007. The decline in revenue of $1,509, or 18.8%, resulted primarily from a reduction in direct telemarketing food sales with the focus of new sales, customer creation and marketing on the DineWise® branded product line, however during 2008 the Company substantially reduced its marketing initiatives. In the future the Company expects to focus its marketing investments on this brand utilizing a multi-channel marketing approach, inclusive of web advertising and search engine optimization, as well as catalog circulation. However, until such time as the needed capital to continue to execute our marketing plan is secured, we will focus only on those channels that deliver the highest response rates and incremental profits, thus substantially reducing both marketing expenses and short-term sales growth opportunities. Direct telemarketing food sales were $4,585 in 2008 as compared to $5,527 in 2007 and houseware sales were $448 in 2008 as compared to $551 in 2007. Sales from our DineWise® branded product line were $1,495 in 2008 as compared to $1,959 in 2007.

Cost of Goods Sold

Cost of goods sold decreased $1,084 to $2,825 for the nine months ended September 28, 2008 as compared to $3,909 for the prior year period. Gross profit as a percent of revenue increased to 56.7% in 2008 as compared to 51.4% in 2007. This improvement is primarily the result of consumer price increases and mix of products sold.

Operating Expenses

Operating expenses decreased $1,932 to $3,311 in 2008 as compared to $5,243 in 2007. The decrease was primarily the result of decreased marketing expenses on our Dinewise® branded products of $932 ($512 in 2008 and $1,444 in 2007), reductions in employee and employee related costs of $534, reductions in investor relations of $228, reductions in insurance and accounting expense of $172, and lower delivery expenses, primarily related to the decline in sales, of $207 ($686 in 2008 and $893 in 2007), offset, in part by, a change in estimate in accounting for sales taxes resulting in a recovery of $209 in 2007 and none in 2008.

Interest Expense

Interest expense (income), net was $464 and ($549), for the nine months ended September 28, 2008 and September 30, 2007, respectively. This is the result of interest expense of $346 and $337 in the respective periods, incurred on our $2,500 Convertible Debentures and $1,750 Debenture issued in July 2006 and February 2007 with an interest rate of 10% and 14% per annum, respectively, offset in part by interest income of $6 and $31. In addition, the Company incurred amortization expense in the amount of $288 and $267, in the respective periods, as a result of amortizing the debt discount, and mark to market income of $270 and $1,254 as a result of the decrease in the value of the embedded derivative liability for the period. In addition, the Company amortized $106 and $132 in finance costs associated with our Convertible Debentures and Warrants. These amortization expenses will continue to be amortized each quarter over the five-year and two-year lives of the Convertible Debentures, respectively. In the event there is a conversion or prepayment of all or a portion of this debt, the Company will recognize immediately the unamortized deferred finance costs and debt discount expense related to the conversions or prepayments. As of September 28, 2008 the unamortized portion of the deferred finance costs and debt discount were $263 and $1,015, respectively.

Income Taxes

In 2008 and 2007 we recorded income tax expenses of $4 and $6, respectively, which is comprised principally of state franchise taxes. We have provided and continue to provide for a full valuation allowance against our deferred income tax assets. The valuation allowance is subject to adjustment based upon our ongoing assessment of our future income and may be wholly or partially reversed in the future.

Net Income (Loss)

For the nine months ended September 28, 2008, net loss was ($76) as compared to a net loss of ($572) for the nine months ended September 30, 2007. This improvement was primarily due to reduced operating expenses of $1,932, offset, in part by, reduced mark to market income of $984 ($270 in 2008 and $1254 in 2007) related to the change in the value of the embedded derivative liability and $425 less gross profit due to reduced sales, offset in part by improved margins.

Three Months Ended September 28, 2008 Compared To Three Months Ended September 30, 2007

Revenue

Revenue decreased to $1,885 for the three months ended September 28, 2008 as compared to $2,510 for the three months ended September 30, 2007. The decline in revenue of $625, or 24.9%, resulted primarily from a reduction in direct telemarketing food sales with the focus of new sales, customer creation and marketing on the DineWise® branded product line, however during 2008 the Company substantially reduced its marketing initiatives. In the future the Company expects to focus its marketing investments on this brand utilizing a multi-channel marketing approach, inclusive of web advertising and search engine optimization, as well as catalog circulation. However, until such time as the needed capital to continue to execute our marketing plan is secured, we will focus only on those channels that deliver the highest response rates and incremental profits, thus substantially reducing both marketing expenses and short-term sales growth opportunities. Direct telemarketing food sales were $1,398 in 2008 as compared to $1,708 in 2007 and houseware sales were $120 in 2008 as compared to $148 in 2007. Sales from our DineWise® branded product line were $367 in 2008 as compared to $654 in 2007.

Cost of Goods Sold

Cost of goods sold decreased $350 to $812 for the three months ended September 28, 2008 as compared to $1,162 for the prior year period. Gross profit as a percent of revenue increased to 56.9% in 2008 as compared to 53.7% in 2007. This improvement is primarily the result of consumer price increases and mix of products sold.

Operating Expenses

Operating expenses decreased $807 to $984 in 2008 as compared to $1,791 in 2007. The decrease was primarily the result of decreased marketing expenses on our Dinewise® branded products of $379 ($120 in 2008 and $499 in 2007), reductions in employee and employee related costs of $213, reductions in investor relations of $46, reductions in insurance and accounting expense of $30, and lower delivery expenses, primarily related to the decline in sales, of $95 ($196 in 2008 and $291 in 2007).

Interest Expense

Interest expense (income), net was $225 and ($391), for the three months ended September 28, 2008 and September 30, 2007, respectively. This is the result of interest expense of $114 and $122 in the respective periods, incurred on our $2,500 Convertible Debentures and $1,750 Debenture issued in July 2006 and February 2007 with an interest rate of 10% and 14% per annum, respectively, offset in part by interest income of $5 and $12. In addition, the Company incurred amortization expense in the amount of $95 and $103, in the respective periods, as a result of amortizing the debt discount, and mark to market income of $9 and $652 as a result of the decrease in the value of the embedded derivative liability for the period. In addition, the Company amortized $30 and $48 in finance costs associated with our Convertible Debentures and Warrants. These amortization expenses will continue to be amortized each quarter over the five-year and two-year lives of the Convertible Debentures, respectively. In the event there is a conversion or prepayment of all or a portion of this debt, the Company will recognize immediately the unamortized deferred finance costs and debt discount expense related to the conversions or prepayments. As of

September 28, 2008 the unamortized portion of the deferred finance costs and debt discount were $263 and $1,015, respectively.

Income Taxes

In 2008 and 2007 we recorded income tax expenses of $2 and $2, respectively, which is comprised principally of state franchise taxes. We have provided and continue to provide for a full valuation allowance against our deferred income tax assets. The valuation allowance is subject to adjustment based upon our ongoing assessment of our future income and may be wholly or partially reversed in the future.

Net Income (Loss)

For the three months ended September 28, 2008, net loss was ($138) as compared to a net loss of ($54) for the three months ended September 30, 2007. This increase in the net loss was primarily due to reductions in mark to market income of $643 ($9 in 2008 and $652 in 2007) related to the change in the value of the embedded derivative liability and $275 less gross profit due to reduced sales, offset in part by reduced operating expenses of $807.

Contractual Obligations and Commercial Commitments

As of September 28, 2008, our principal commitments consisted of an obligation under an operating lease in connection with office space for our corporate headquarters, interest payments on our $2.5 million Convertible Debentures issued on July 14, 2006, interest and principal payments on our $1.750 million Convertible Debentures issued on February 16, 2007 and capital lease obligations. Although we have no material commitments for capital expenditures, we anticipate continuing requirements for capital expenditures consistent with anticipated growth in operations, infrastructure and personnel. Following is a summary of our contractual obligations. We have no other commercial commitments:

Future minimum operating lease payments, adjusted for a lease amendment, as of September 28, 2008, interest payments on our $2.5 million Convertible Debentures at 10% per annum, interest and principal payments on our $1.750 million Convertible Debentures at 14%-16% per annum, both assuming no conversion to common stock or prepayments, and capital lease obligations, including interest, are as follows (in thousands):


Year		Operating lease		Interest payments		Term-Note Repayments		Capital Lease obligations		Total

2008		30		111		105		4		250
2009		128		407		630		14		1,179
2010		132		265		695		14		1,106
2011		136		130		—		10		276
2012		140		—		—		—		140
Thereafter		156		—		—		—		156
	$	722	$	913	$	1,430	$	42	$	3,107

The $2.5 million Convertible Debentures issued on July 14, 2006 do not require the Company to make principal payments, and in the event an amount is outstanding at the end of the term on July 14, 2011, it will automatically convert into common shares of the Company. Other than the above commitments, and employment agreements with its Chief Executive Officer and Chief Financial Officer, there were no items that significantly impacted our commitments and contingencies.

Liquidity and Capital Resources

At September 28, 2008, we had a cash balance of $247 as compared to a cash balance of $429 at December 30, 2007. Our principal source of cash is the financing of accounts receivable through a third party financial institution whereby substantially all receivables generated from sales to customers are submitted for collection, without recourse. Generally payments, net of financing fees of approximately 3%, are received within 3-5 business days from the date of submission. We had working capital deficits at September 28, 2008 and December 30, 2007 of $2,340 and $2,301, respectively. Included in our accrued expenses at September 28, 2008 and December 30, 2007 are net restructuring charges of $976 and $1,051, respectively. In connection with these accrued charges, we may, from time to time, be in negotiations with vendors to pay reduced amounts which could result in forgiveness of debt income.

On July 14, 2006, we engaged in a financing transaction with Dutchess Private Equity Fund, LP and Dutchess Private Equities Fund II, LP (collectively, “Dutchess”) pursuant to which the Company sold $2,500 Convertible Debentures, with interest at the rate of 10% per annum, and warrants to purchase 5,050,505 shares of common stock at an exercise price of $.495 per share to Dutchess. On February 16, 2007, the Company issued and sold to one of its existing investors, Dutchess, a $1,750 principal amount Debenture due March 31, 2009 and a warrant to purchase 4,000,000 shares of the Company’s common stock, par value $0.001 per share, at an exercise price of $0.25 per share. The Company pays monthly interest on the outstanding principal amount of the Debenture at a rate per annum equal to 14%. On March 17, 2008, the Company amended the February 16, 2007 Debenture (“Debenture”) and its February 16, 2007 Warrant (“Warrant”) issued by the Company to Dutchess Private Equities Fund, Ltd (“Dutchess”). The material changes are as follows:

The maturity date of the Debenture is extended from March 31, 2009 to March 31, 2010.

The interest rate per annum on the Debenture shall increase from 14% to 15% per annum on October 1, 2008, and shall increase to 16% per annum on April 1, 2009.

Monthly principal payments on the Debenture have been restructured as follows:


	Original Terms	Amended Terms
3/31/08 – 8/31/08	$35 per month	$20 per month
9/30/08-2/28/09	$70 per month	$35 per month
3/31/09	Remaining unpaid balance	$50
4/30/09-8/31/09	Not applicable	$50 per month
9/30/09-2/28/10	Not applicable	$65 per month
3/31/10	Not applicable	Remaining unpaid balance

Under the terms of the amendment, if at the end of any of the Company’s quarter end periods as filed with the SEC, the Company has cash deposits in any accounts, whether bank, brokerage or other accounts (“Bank Balance(s)”), that exceeds $750, the Company shall pay to Dutchess twenty percent (20%) of such amounts in excess of $750 but below $2,250; upon such time as the Company has in excess of $2,250 as a Bank Balance, the Company shall pay to Dutchess one hundred percent (100%) of such amounts in excess of $2,250.

As of the date of the amendment, two million Warrants (2,000,000) have fully vested and the remaining two million (2,000,000) unvested Warrants shall expire.

In addition, the Company issued to Dutchess one million two hundred and forty thousand (1,240,000) shares of the Company’s Common Stock.

The Company may prepay the Debenture at any time from time to time without penalty and any future financing must first be utilized to repay the then outstanding balance on the Debenture, if any. The Debenture is convertible at any time, at the option of Dutchess, into shares of common stock at a conversion price equal to the lesser of (i) 75% of the lowest closing bid price of the common stock during the 10 trading days immediately prior to the date that Dutchess sends the Company a signed conversion notice; or (ii) $0.51 per share. In September 2007 and during the fourth quarter of 2007, the Company took actions to reduce expenses by eliminating both operating costs, including employee reductions, as well as reducing the current marketing spend on customer acquisition.

Until such time as additional capital is raised to accelerate its marketing plan, the Company will focus only on those channels that deliver the highest response rates and incremental profits, thus substantially reducing both marketing expenses and short-term sales growth opportunities. By executing these cost reductions to substantially reduce our quarterly losses, amending the Debenture as noted above, and with the Company’s cash balances, the Company has continued to operate, however at reduced revenue levels. While the Company has been able to raise capital and or amend its Debenture agreements in the past, the capital markets have deteriorated in the past quarter. While we continue to seek additional capital to allow operations to continue, and then accelerate our marketing spend after such funding is attained, as well as complete a strategic acquisition, there is no assurance we will be able to raise the required capital. In the event it takes longer to obtain appropriate funding, or we are unable to obtain such funding, we will need to significantly curtail further expenses, which may significantly reduce future revenues and cash flows.

At September 28, 2008 we had $3,829 in convertible debt outstanding, gross of debt discount. During the nine months ended September 28, 2008 convertible debt in the amount of $2 was converted to common stock. We currently have no off -balance sheet financing arrangements.

For the nine months ended September 28, 2008, cash provided by operations was $24, as compared to cash used in operations of $1,725 for the nine months ended September 30, 2007. This was primarily attributable to net loss for the period, adjusted for non-cash items of $220, decreased inventory of $176, decreases in prepaid expenses and other assets of $4 and increased taxes payable of $2, offset, in part by, decreased accrued expenses of $123, decreased accounts payable of $137, decreased deferred revenue of $43, and increased accounts receivable of $75. Our operations are organized to have a cash-to-cash cycle of approximately 30 days. This is accomplished by paying for inventory to outsourced vendors just prior to shipment to the customer, and maintaining certain levels of inventory on our branded products, and financing the accounts receivable from a third party financial institution or use of major credit card carriers.

For the nine months ended September 28, 2008 the Company purchased computer related equipment in the amount of $4.

For the nine months ended September 28, 2008 the Company made principal payments on its convertible debt in the amount of $195 and made payments under capital leases in the amount of $7.

We have not declared or paid any dividends in the nine months ended September 28, 2008 and we are currently restricted from paying dividends according to the financing agreements entered into on July 14, 2006 and February 16, 2007. The declaration and payment of dividends in the future will be determined by our Board of Directors in light of conditions then existing, including our earnings, financial condition, capital requirements and other factors.

FORWARD LOOKING STATEMENTS

Special Note Regarding Forward-Looking Statements : A number of statements contained in this discussion and analysis are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. You are cautioned not to place undue reliance on these forward-looking statements. The nature of our business makes predicting the future trends of our revenues, expenses and net income difficult. The risks and uncertainties involved in our businesses could affect the matters referred to in such statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, but are not limited to:

our ability to meet our financial obligations;

the relative success of marketing and advertising;

the continued attractiveness of our lifestyle and diet programs;

competition, including price competition and competition with self-help weight loss and medical programs;

our ability to obtain and continue certain relationships with the providers of popular nutrition and fitness approaches and the suppliers of our meal delivery service;

adverse results in litigation and regulatory matters, more aggressive enforcement of existing legislation or regulations, a change in the interpretation of existing legislation or regulations, or promulgation of new or enhanced legislation or regulations;

general economic and business conditions; and

other risks described in the Company’s Securities and Exchange Commission filings.

Item 3.

Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of September 28, 2008. Based on that evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, information required to be disclosed by the Company in the reports it files or submits under the Exchange Act, and in ensuring that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is collected and conveyed to the Company’s management, including its CEO and CFO, to allow timely decisions to be made regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company performed an evaluation, under supervision and with participation of the Company’s management, including its CEO and CFO, of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of December 30, 2007.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permits the Company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal controls over financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6.

Exhibits


Exhibit 31.1	Rule 13a-14a Certification (Chief Executive Officer) (1)
Exhibit 31.2	Rule 13a-14a Certification (Chief Financial Officer) (1)
Exhibit 32	Section 1350 Certifications (1)
———————
(1) Filed herewith

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Dinewise, Inc.


	By:	/s/ T HOMAS M C N EILL
		Thomas McNeill Vice President, Chief Financial Officer and Principal Accounting Officer

Dated: November 10, 2008

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