Domestic Franchise Operations

In addition to our company developed restaurants, we continue our domestic expansion by growing our number of franchised restaurants. We are accomplishing this part of our growth through new or renewed development obligations with new or existing franchisees. In many cases, we have also sold and may sell Company-owned restaurants to our franchisees (new or existing). At June 28, 2006, 20 total franchise development arrangements existed. During the year ended June 28, 2006, our franchisees opened 20 Chili’s restaurants, one Macaroni Grill restaurant and one On The Border restaurant.

During fiscal 2006, we entered into new or renewed franchise development agreements with seven franchisees for the development of 53 Chili’s restaurants, 12 Macaroni Grill restaurants and 16 On The Border restaurants. The areas of development for these franchise locations include all or portions of the States of California, Florida, Idaho, Montana, Oregon, South Carolina, and Wyoming. In particular, we signed a development agreement with a franchisee for the development of Chili’s restaurants in the State of Montana which will give us the opportunity to have a Chili’s restaurant located in all 50 states. In connection with several of these development agreements, we also sold 14 Company-owned Chili’s restaurants, four Company-owned Macaroni Grill restaurants, and two Company-owned On The Border restaurants to five different franchisees.

We also acquired 11 Chili’s franchised restaurants in the state of Texas in fiscal 2006, and the first Macaroni Grill restaurant airport location opened in Orlando, Florida.

Our goal is to selectively pursue domestic franchise expansion. A typical domestic franchise development agreement provides for payment of development and initial franchise fees in addition to subsequent royalty and advertising fees based on the gross sales of each restaurant. We expect future domestic franchise development agreements to remain limited to enterprises having significant experience as restaurant operators and proven financial ability to support and develop multi-unit operations.

International Operations

Our strategy also includes the development of our brands internationally. We continue our international growth through development agreements with new and existing franchisees introducing our brands into new countries, as well as expanding them in existing countries. At June 28, 2006, we had 28 total franchise development arrangements. During the fiscal year 2006, our franchisees opened 13 Chili’s restaurants and one Macaroni Grill restaurant. In the same year, we entered into new or renewed franchise development agreements with 8 franchisees for the development of 61 Chili’s restaurants, 26 Macaroni Grill restaurants, and 23 On The Border restaurants. The countries of development for these locations include Bahrain, Egypt, Guam, Japan, Jordan, Kuwait, Mexico, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Of note in fiscal 2006 was our acquisition of five franchised restaurants in the United Kingdom (four Chili’s and one Macaroni Grill) from our franchisee. These restaurants are now owned and operated by our United Kingdom subsidiary.

As we develop our brands internationally, we will selectively pursue expansion through various means, including, franchising, joint ventures and Company-owned development. Similar to our domestic franchise agreements, a typical international franchise development agreement provides for payment of development fees and initial franchise fees in addition to subsequent royalty and advertising fees based on the gross sales of each restaurant. We expect future development agreements to remain limited to enterprises having significant experience as restaurant operators and proven financial ability to support and develop multi-unit, as well as in some instances multi-brands, operations.

Jointly-Developed Operations

From time to time, we enter into agreements for research and development activities related to the testing of new restaurant brands, typically acquiring a significant equity interest in such ventures. As of the end of June 28, 2006, we did not have any of these agreements.

Restaurant Management

Our philosophy to maintain and operate each brand as a distinct and separate entity ensures that the culture, recruitment and training programs and unique operating environments of each brand are preserved. These factors are critical to the viability of each brand. Each brand is directed by a president and one or more brand vice presidents overseeing specifically identified areas. At the same time we utilize common and shared infrastructure where it provides efficiencies and cost-savings to the brands.

Restaurant management structure varies by brand. The individual restaurants themselves are led by a management team including a general manager and between two to five additional managers. The level of restaurant supervision depends upon the operating complexity and sales volume of each brand and each location. On average, an area director/supervisor is responsible for the supervision of three to seven restaurants. For those brands with a significant number of units within a geographical region, additional levels of management may be provided.

We believe that there is a high correlation between the quality of restaurant management and the long-term success of a brand. In that regard, we encourage increased tenure at all management positions through various short and long-term incentive programs, which may include equity ownership. These programs, coupled with a general management philosophy emphasizing quality of life, have enabled us to attract and retain management employees at levels above the industry norm.

We ensure consistent quality standards in all brands through the issuance of operations manuals covering all elements of operations and food and beverage manuals, which provide guidance for preparation of brand-formulated recipes. Routine visitation to the restaurants by all levels of supervision enforces strict adherence to our overall brand standards and operating procedures.

The director of training for each brand is responsible for maintaining each brand’s operational training program. The training program includes a three to four month training period for restaurant management trainees, a continuing management training process for managers and supervisors, and training teams consisting of groups of employees experienced in all facets of restaurant operations that train employees to open new restaurants. The training teams typically begin on-site training at a new restaurant seven to ten days prior to opening and remain on location one to two weeks following the opening to ensure the smooth transition to operating personnel.

Purchasing

Our ability to maintain consistent quality of products throughout each of our restaurant brands depends upon acquiring food and beverage products and related items from reliable sources. We pre-approve our suppliers. Our suppliers, and our restaurants, are required to adhere to strict product specifications established through our quality assurance program. This requirement ensures that high quality, wholesome food and beverage products are served in each of our restaurants. We negotiate directly with major suppliers to obtain competitive prices and use purchase commitment contracts to stabilize the potentially volatile pricing associated with certain commodity items. All essential food and beverage products are available, or upon short notice can be made available, from alternative qualified suppliers to be delivered to any of our brand restaurants. Because of the relatively rapid turnover of perishable food products, inventories in the restaurants, consisting primarily of food, beverages and supplies, have a modest aggregate dollar value in relation to revenues.

Advertising and Marketing

Our brands generally focus on the eighteen to fifty-four year old age group, which constitutes approximately half of the United States population. Members of this population segment grew up on fast food, but we believe that, with increasing maturity, they prefer a more adult, upscale dining experience. To attract this target group, we rely primarily on television, radio, direct mail advertising and information communicated by customers, with each of our restaurant brands utilizing one or more of such mediums to meet the brand’s needs and direction.

Our franchise agreements require advertising contributions to us by the franchisees. We use these contributions exclusively for the purpose of maintaining, directly administering and preparing standardized advertising and promotional activities. Franchisees also spend additional amounts on local advertising. Any local advertising must be approved by us first.

Employees

At June 28, 2006, we employed approximately 110,800 persons, of whom approximately 1,100 were corporate personnel, 6,400 were restaurant area directors, managers or trainees and 103,300 were employed in non-management restaurant positions. Our executive officers have an average of approximately 19 years of experience in the restaurant industry.

We consider our employee relations to be good and continue to focus on improving our employee turnover rate. Most employees, other than restaurant management and corporate personnel, are paid on an hourly basis. We believe that we provide working conditions and wages that compare favorably with those of our competition. Our employees are not covered by any collective bargaining agreements.

Trademarks

We have registered and/or have pending, among other marks, “Brinker International”, “Chili’s”, “Chili’s Bar & Bites”, “Chili’s Grill & Bar”, “Chili’s Margarita Bar”, “Chili’s Southwest Grill & Bar”, “Chili’s Too”, “Romano’s Macaroni Grill”, “Macaroni Grill”, “Maggiano’s”, “Maggiano’s Little Italy”, “On The Border”, “On The Border Mexican Cafe”, and “On The Border Mexican Grill & Cantina”, as trademarks with the United States Patent and Trademark Office.

Available Information

We maintain an internet website with the address of http://www.brinker.com. You may obtain, free of charge, copies of our reports filed with, or furnished to, the Securities and Exchange Commission (the “SEC”) on Forms 10-K, 10-Q, and 8-K, Any amendments to such reports are also available for viewing and copying at our internet website. These reports will be available as soon as reasonably practicable after filing such material with, or furnishing it to, the SEC. In addition, you may view and obtain, free of charge, at our website, copies of our corporate governance materials, including, Corporate Governance Guidelines, Governance and Nominating Committee Charter, Audit Committee Charter, Compensation Committee Charter, Executive Committee Charter, Code of Conduct and Ethical Business Policy, and Problem Resolution Procedure/Whistle Blower Policy.