RESTAURANT REVIEW : The 2nd Time May Be a Charm for Owner of Cordial Italian Eatery : A meal at Palazzio is an entertaining experience. Portions are grand and the service is friendly.

You’ve got to hand it to those hardy souls out there who operate restaurants. It’s a tough business, and when you’ve got a loser, you’ve got to know when to cut your losses and get out.

If you’ve got the resources, you might leave behind a money-losing operation, and plow a whole bunch more money into a new restaurant at the same location; this one, hopefully, a winner.

Which brings us to a couple of guys named Ken Boxer and Steven Sponder. Last year, on Coast Village Road in Montecito, they opened a place called the Village Grill.

Its food was described as New World Caribbean cuisine. The room was horribly loud, the food was iffy and success did not stroll through the doors.

Boxer and Sponder closed down the place, a crash remodeling program went on, and Boxer emerged with a restaurant called Palazzio.

Though you’d never call Palazzio quiet, you can at least give the waitress your order in a normal tone of voice. It’s a fun place as much as anything else: Large glass vats of red Italian Merlot on each side of the room are run on the “honor” system; while you’re waiting outside on the sidewalk for a table--and it can be a long wait--you can go inside and draw a glass ($2.95). The room is bright and open, the portions are grand, service is cordial and there are a few more gimmicks: On Saturday evenings, the whole restaurant crew is likely to flood the dining room and join the guests in an Italian song or two.

Altogether a very entertaining experience, and one that makes a person anxious to like the food as much as the restaurant. Though some of the food at Palazzio meets high expectations, the rest was a mixed bag.

This is one of those spots where small, crusty, garlicky yeast rolls are served throughout the meal. An excellent Italian black olive spread ($1.00) is especially effective on these.

You can believe the menu, half orders are usually plenty for one person. Just a half order of antipasti Palazzio ($7.50) fills a pretty large plate. Cold grilled eggplant layers the plate, with Kalamata olives, prosciutto, marinated mushrooms, roasted red and green bell peppers. The dish is tasty, oily and enough of an appetizer for several people.

The Caesar salad ($4.75 half order), with its parmigiano and reggiano cheeses, is nothing to write home about. Nor is the tomato and pesto soup ($2.50 cup).

I’d begin with the antipasti, or with the calamari fritti ($5.25 half order), tender and deep-fried, not too oily, although the accompanying marinara sauce is rather dull. Calamari not your thing? Insalata Palazzio ($5.50 half order) may do the job. Warmed goat cheese, prosciutto, roasted pine nuts and sun-dried tomatoes are served over spinach. A meal in itself, both tart and creamy and sort of “virtuous.”

A couple of the pastas are best ignored. The fusilli ($7.75 half order) with roasted eggplant, roasted red peppers, pine nuts and gorgonzola is one of those dishes you really ordered for the gorgonzola, yet the punch you expect from the cheese is missing.

It’s the same thing with penne puttenesca, which can be one of the great spicy Italian pasta dishes. At Palazzio, the puttenesca is just another dish. Its tomato sauce, Kalamata olives, garlic and capers all seem much too muted.

And there is the fettuccine al pesto ($7.95 half order), which boasts prosciutto, but with roasted red bell peppers, pesto and pine nuts, in a creamy sauce.

One of the best dishes is not a pasta. It’s an oven-roasted rosemary chicken ($10.95 full chicken), a large bird, beautifully crisp on the outside, juicy, succulent.

Desserts at Palazzio are conventional, items such as biscotti, made of white or dark chocolate ($2.00), or that overused dessert called tiramisu ($4.75).

* WHERE AND WHEN

Palazzio, 1151 Coast Village Road, Montecito, 969-8565. Open for lunch Monday-Saturday 11:30 a.m. to 2:30 p.m., dinner Sunday-Thursday 5:30 to 11 p.m., Friday and Saturday 5:30 p.m. to 12 a.m. Limited reservations. Beer and wine, major credit cards accepted. Lunch or dinner for two, food only, $14-$42.