GENERAL
     For an understanding of the significant factors that influenced the performance of Brinker International, Inc. (the ‘‘Company'') during the past three fiscal years, the following discussion should be read in conjunction with the consolidated financial statements and related notes found elsewhere in this annual report.

     The Company has a 52/53 week fiscal year ending on the last Wednesday in June. Fiscal years 2003, 2002 and 2001, which ended on June 25, 2003, June 26, 2002, and June 27, 2001 respectively, each contained 52 weeks.

RESULTS OF OPERATIONS FOR FISCAL YEARS 2003, 2002, AND 2001
     The following table sets forth expenses as a percentage of total revenues for the periods indicated for revenue and expense items included in the consolidated statements of income:

	Percentage of Total Revenues
	Fiscal Years
	2003			2002			2001
Revenues	100.0%		100.0%		100.0%
Operating Costs and Expenses:
Cost of sales	27.4%		27.6%		27.6%
Restaurant expenses	55.7%		55.1%		54.1%
Depreciation and amortization	4.8%		4.5%		4.2%
General and administrative	4.0%		4.2%		4.5%
Total operating costs and expenses	91.9%		91.4%		90.4%
Operating income	8.1%		8.6%		9.6%
Interest expense	0.4%		0.5%		0.4%
Other, net	—		0.1%		—
Income before provision for income taxes	7.7%		8.0%		9.2%
Provision for income taxes	2.6%		2.7%		3.2%
Net income	5.1%		5.3%		6.0%

REVENUES
     Revenue growth of 13.8% and 20.0% in fiscal 2003 and 2002, respectively, was attributable primarily to the increases in sales weeks driven by new unit expansion, acquisitions of units from former franchise partners and increases in comparable store sales. Revenues for fiscal 2003 increased due to a 12.6% increase in sales weeks and a 1.5% increase in comparable store sales. Revenues for fiscal 2002 increased due to a 19.1% increase in sales weeks and a 1.5% increase in comparable store sales. Menu price increases were 1.3% and 1.8% in fiscal 2003 and 2002, respectively.

COSTS AND EXPENSES (as a Percent of Revenues)
     Cost of sales decreased 0.2% in fiscal 2003 due primarily to a 0.9% decrease in commodity prices for meat and cheese, a 0.4% favorable product mix shift for beverages, and a 0.1% increase in menu prices, partially offset by a 1.0% unfavorable product mix shift for meat and produce and a 0.2% increase in commodity prices for beverages. Cost of sales remained flat in fiscal 2002 due to a 0.6% increase in menu prices, a 0.5% favorable product mix shift for dairy, cheese and produce, and a 0.2% decrease in commodity prices for seafood, offset by a 1.0% unfavorable product mix shift for meat and seafood and a 0.3% increase in commodity prices for dairy and cheese.

     Restaurant expenses increased 0.6% in fiscal 2003 due primarily to asset impairment charges totaling $20.3 million related to the Company's decision to discontinue growth and sell all sixteen of its Cozymel's Coastal Grill (‘‘Cozymel's'') restaurants, $5.4 million in charges resulting from the decision to close nine restaurants and to write down the assets of one under-performing restaurant, a $4.1 million impairment of intellectual property rights, an increase in labor costs resulting from increases in wage rates and payroll taxes, and an increase in health and workers compensation insurance costs resulting from higher premiums and fees. These increases were partially offset by an approximate $11.0 million expense related to the settlement of certain California labor matters and an approximate $8.7 million impairment charge related to the write-off of a portion of the notes receivable from Eatzi's Corporation (‘‘Eatzi's'') recorded in fiscal 2002. Restaurant expenses increased 1.0% in fiscal 2002 due primarily to the previously mentioned expense related to the California labor matters and impairment charge related to the notes receivable from Eatzi's, and increased labor wage rates. These increases were partially offset by increased sales leverage and menu price increases.

     Depreciation and amortization increased 0.3% in fiscal 2003 and 2002 due primarily to new unit construction, ongoing remodel costs, the acquisition of previously leased equipment and certain real estate assets, and restaurants acquired during fiscal 2002 and 2001. These increases were partially offset by increased sales leverage and a declining depreciable asset base for older units. The increase in fiscal 2002 was also partially offset by the elimination of goodwill and certain other intangibles amortization in accordance with Statement of Financial Accounting Standards (‘‘SFAS'') No. 142.

     General and administrative expenses decreased 0.2% in fiscal 2003 and 0.3% in fiscal 2002 as a result of the Company's continued focus on controlling corporate expenditures relative to increasing revenues and increased sales leverage resulting from new unit openings and acquisitions.

     Interest expense decreased 0.1% in fiscal 2003 as a result of decreased average borrowings and interest rates on the Company's credit facilities, a decrease in interest expense on senior notes due to a scheduled repayment, and an increase in interest capitalization related to increased new restaurant construction activity. These decreases were partially offset by the amortization of debt issuance costs and debt discounts on the Company's convertible debt. Interest expense increased 0.1% in fiscal 2002 as a result of amortization of debt issuance costs and debt discounts on the Company's convertible debt. These increases were partially offset by lower interest rates on the Company's credit facilities, a decrease in interest expense on senior notes due to a scheduled repayment, and an increase in interest capitalization related to increased new restaurant construction activity.

     Other, net decreased 0.1% in fiscal 2003 due primarily to gains from life insurance proceeds totaling approximately $3.5 million. These gains were partially offset by a $1.7 million increase in the Company's net savings plan obligations and a $1.1 million increase in the Company's share of losses in equity method investees. Other, net increased 0.1% in fiscal 2002 due to a $2.1 million increase in the Company's net savings plan obligations, partially offset by a $689,000 reduction in the Company's share of losses in equity method investees.

INCOME TAXES
     The Company's effective income tax rate was 33.5%, 34.1%, and 34.6% in fiscal 2003, 2002, and 2001, respectively. The decrease in fiscal 2003 is primarily due to the increase in the FICA tax credit resulting from increased tip reporting and the non-taxable gains from life insurance proceeds, partially offset by the non-deductible loss resulting from the impairment of Cozymel's goodwill. The decrease in fiscal 2002 is primarily due to the elimination of goodwill amortization in accordance with SFAS No. 142 and a decrease in the effective state tax rates.

IMPACT OF INFLATION
     The Company has not experienced a significant overall impact from inflation. As operating expenses increase, the Company, to the extent permitted by competition, recovers increased costs through a combination of menu price increases and reviewing, then implementing, alternative products or processes.