Cover Page About Brinker International Inc. Financial Highlights To Our Shareholders, Employees and Guests Chili's Romano's Macaroni Grill On The Border Mexican Grill & Cantina Maggiano's Little Italy Corner Bakery Cafe Cozymel's Coastal Grill Big Bowl Asian Kitchen Rockfish Seafood Grill Board of Directors Principal Officers Principal Officers in Restaurant Concepts Shareholder Information FINANCIAL INFORMATION    Selected Financial Data    Management's Discussion and Analysis    Consolidated Statements of Income    Consolidated Balance Sheets    Consolidated Statements of Shareholders' Equity    Consolidated Statements of Cash Flows    Notes to Consolidated Financial Statements    Independent Auditors' Report    Management's Responsibility Back Cover

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The Company enters into interest rate swaps to manage fluctuations in interest expense and to maintain the value of fixed-rate debt (senior notes). The fixed-rate debt is exposed to changes in fair value as market-based interest rates fluctuate. The Company entered into two interest rate swaps in April 2000 with a total notional value of $42.8 million at June 26, 2002. This fair value hedge changes the fixed-rate interest on the entire balance of the Company's senior notes to variable-rate interest. Under the terms of the hedges (which expire in fiscal 2005), the Company pays semi-annually a variable interest rate based on 90-Day LIBOR (1.86% at June 26, 2002) plus 0.530% for one of the swaps and 180-Day LIBOR (1.91% at June 26, 2002) plus 0.395% for the other swap, in arrears, compounded at three-month intervals. The Company receives semi-annually the fixed interest rate of 7.8% on the senior notes. The estimated fair value of these agreements at June 26, 2002 was approximately $3.2 million, which is included in other assets in the Company's consolidated balance sheet at June 26, 2002. The Company's interest rate swap hedges meet the criteria for the "short-cut method" under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Accordingly, the changes in fair value of the swaps are offset by a like adjustment to the carrying value of the debt and no hedge ineffectiveness is assumed.     The Company entered into three interest rate swaps in December 2001 with a total notional value of $117.8 million at June 26, 2002. These fair value hedges change the fixed-rate interest component of an operating lease commitment for certain real estate properties entered into in November 1997 to variable-rate interest. Under the terms of the hedges (which expire in fiscal 2018), the Company pays monthly a variable rate based on 30-Day LIBOR (1.84% at June 26, 2002) plus 1.26%. The Company receives monthly the fixed interest rate of 7.156% on the lease. The estimated fair value of these agreements at June 26, 2002 was an asset of approximately $5.7 million. The fair value hedges were fully effective during the fiscal year ended June 26, 2002. Accordingly, the change in fair value of the swaps was recorded in other liabilities.