**UNITEDSTATES**

**SECURITIESAND 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 25, 2007**                                                                                                                                                         |
| ** **                                                                                                                                                                                                     |
| **OR**                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                     |
| **o**                                                                                                                                                                                                          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                     | ** **                                                                                              |
| **For  the transition period  from                            to** |
| ** **                                                                                                                                                                                                     |
| **Commission  File Number 000-50972**                                                                                                                                                                          |

 

**TexasRoadhouse, Inc.**

(Exact name ofregistrant specified in its charter)

| **Delaware**                                               |   | **20-1083890**          |
|------------------------------------------------------------|--------|-------------------------|
| (State or other  jurisdiction of                           |   | (IRS Employer           |
| incorporation or  organization)                            |   | Identification  Number) |
|                                                       |   |                    |
| **6040 Dutchmans Lane, Suite 200**                    |
| **Louisville,  Kentucky 40205**                            |
| (Address of  principal executive offices) (Zip Code)       |
|                                                       |
| **(502)  426-9984**                                        |
| (Registrant’s  telephone number, including area code) |

 

Indicate by check markwhether registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes   x No  o.

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.  (Check one):

| Large accelerated filer x |   | Accelerated  filer o |   | Non-accelerated  filer  o |
|--------------------------------|--------|----------------------|--------|-------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes   o  No  x.

The number of shares ofClass A and Class B common stock outstanding were 69,532,822 and5,265,376, respectively, on October 26, 2007.

 

----

**TABLEOF CONTENTS**
| PART I. FINANCIAL  INFORMATION                                                                                          |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                         |   |
| Item 1 — Financial  Statements — Texas Roadhouse, Inc. and Subsidiaries                                       | 3      |
| Condensed  Consolidated Balance Sheets — September 25, 2007 and December 26, 2006                                  | 3      |
| Condensed  Consolidated Statements of Income — For the 13 and 39 Weeks Ended September  25, 2007 and September 26, 2006 | 4      |
| Condensed  Consolidated Statements of Cash Flows — For the 39 Weeks Ended September 25,  2007 and September 26, 2006    | 5      |
| Notes to  Condensed Consolidated Financial Statements                                                                        | 6      |
| Item 2 —  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                   | 12     |
| Item 3 —  Quantitative and Qualitative Disclosures About Market Risk                                                    | 19     |
| Item 4 — Controls  and Procedures                                                                                       | 19     |
|                                                                                                                         |   |
| PART II. OTHER  INFORMATION                                                                                             |   |
|                                                                                                                         |   |
| Item 1 — Legal  Proceedings                                                                                             | 20     |
| Item  1A — Risk Factors                                                                                                 | 20     |
| Item 2 —  Unregistered Sales of Equity Securities and Use of Proceeds                                                   | 20     |
| Item 3 —  Defaults Upon Senior Securities                                                                               | 20     |
| Item 4 —  Submission of Matters to a Vote of Security Holders                                                           | 20     |
| Item 5 — Other  Information                                                                                             | 20     |
| Item  6 — Exhibits                                                                                                      | 20     |
|                                                                                                                         |   |
| Signatures                                                                                                                   | 21     |

 

2

----

**PART I — FINANCIAL INFORMATION**

**ITEM1 — FINANCIAL STATEMENTS**

**TexasRoadhouse, Inc. and Subsidiaries**

**Condensed Consolidated Balance Sheets**

**(inthousands, except share and per share data)**

**(unaudited)**
| ** **                                                                                                                                                                                               | ** ** | **September 25, 2007** | ** ** | **December 26, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Assets**                                                                                                                                                                                               | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                                                                                                          |       |                             |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                               |       | $                                | 15,336     |                            | $          | 33,784 |   |
| Receivables, net of  allowance for doubtful accounts of $53 and $69 at September 25, 2007 and  December 26, 2006, respectively                                                                           |       | 7,444                            |       | 8,299                           |       |
| Inventories                                                                                                                                                                                              |       | 6,814                            |       | 6,436                           |       |
| Prepaid expenses                                                                                                                                                                                         |       | 1,724                            |       | 2,920                           |       |
| Deferred tax assets                                                                                                                                                                                      |       | 691                              |       | 1,066                           |       |
| Total current assets                                                                                                                                                                                     |       | 32,009                           |       | 52,505                          |       |
| Property and equipment,  net                                                                                                                                                                             |       | 375,890                          |       | 305,731                         |       |
| Goodwill                                                                                                                                                                                                 |       | 101,725                          |       | 86,649                          |       |
| Intangible asset, net                                                                                                                                                                                    |       | 8,611                            |       | 4,880                           |       |
| Other assets                                                                                                                                                                                             |       | 3,471                            |       | 2,823                           |       |
| Total assets                                                                                                                                                                                             |       | $                                | 521,706    |                            | $          | 452,588 |   |
|                                                                                                                                                                                                     |       |                             |       |                            |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Current liabilities:                                                                                                                                                                                     |       |                             |       |                            |       |
| Current maturities of  long-term debt and obligations under capital leases                                                                                                                               |       | $                                | 295        |                            | $          | 653 |   |
| Accounts payable                                                                                                                                                                                         |       | 18,813                           |       | 18,794                          |       |
| Deferred revenue — gift  certificates                                                                                                                                                               |       | 12,122                           |       | 26,205                          |       |
| Accrued wages                                                                                                                                                                                            |       | 14,009                           |       | 12,653                          |       |
| Income tax payable                                                                                                                                                                                       |       | 2,297                            |       | 3,725                           |       |
| Accrued taxes and  licenses                                                                                                                                                                              |       | 8,741                            |       | 6,726                           |       |
| Other accrued  liabilities                                                                                                                                                                               |       | 8,643                            |       | 8,139                           |       |
| Total current  liabilities                                                                                                                                                                               |       | 64,920                           |       | 76,895                          |       |
| Long-term debt and  obligations under capital leases, excluding current maturities                                                                                                                       |       | 74,561                           |       | 35,362                          |       |
| Stock option deposits                                                                                                                                                                                    |       | 4,655                            |       | 4,102                           |       |
| Deferred rent                                                                                                                                                                                            |       | 6,898                            |       | 5,829                           |       |
| Deferred tax  liabilities                                                                                                                                                                                |       | 6,062                            |       | 7,823                           |       |
| Other liabilities                                                                                                                                                                                        |       | 3,889                            |       | 2,198                           |       |
| Total liabilities                                                                                                                                                                                        |       | 160,985                          |       | 132,209                         |       |
| Minority interest in  consolidated subsidiaries                                                                                                                                                          |       | 1,987                            |       | 1,305                           |       |
| Stockholders’ equity:                                                                                                                                                                               |       |                             |       |                            |       |
| Preferred stock ($0.001  par value, 1,000,000 shares authorized; no shares issued or outstanding)                                                                                                        |       | —                           |       | —                          |       |
| Common stock,  Class A, ($0.001 par value, 100,000,000 shares authorized, 69,520,648  and 69,002,925 shares issued and outstanding at September 25, 2007 and  December 26, 2006, respectively) |       | 70                               |       | 69                              |       |
| Common stock,  Class B, ($0.001 par value, 8,000,000 shares authorized, 5,265,376 shares  issued and outstanding)                                                                                   |       | 5                                |       | 5                               |       |
| Additional paid in  capital                                                                                                                                                                              |       | 262,807                          |       | 255,253                         |       |
| Retained earnings                                                                                                                                                                                        |       | 95,852                           |       | 63,747                          |       |
| Total stockholders’  equity                                                                                                                                                                         |       | 358,734                          |       | 319,074                         |       |
| Total liabilities and stockholders’ equity                                                                                                                                                          |       | $                                | 521,706    |                            | $          | 452,588 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

3

----

**TexasRoadhouse, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Income**

**(inthousands, except per share data)**

**(unaudited)**
| ** **                                                   | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                   | ** ** | **September 25,  2007** | ** ** | **September 26,  2006** | ** ** | **September 25,  2007** | ** ** | **September 26,  2006** | ** ** |
| Revenue:                                                     |       |                         |       |                         |       |   |   |   |   |
| Restaurant sales                                             |       | $                            | 186,879    |                         | $          | 145,859 |   | $ | 540,452 |   | $ | 436,804 |   |
| Franchise  royalties and fees                                |       | 2,575                        |       | 2,595                        |       | 8,325 |   | 7,769 |   |
|                                                         |       |                         |       |                         |       |   |   |   |   |
| Total revenue                                                |       | 189,454                      |       | 148,454                      |       | 548,777 |   | 444,573 |   |
|                                                         |       |                         |       |                         |       |   |   |   |   |
| Costs and  expenses:                                         |       |                         |       |                         |       |   |   |   |   |
| Restaurant operating  costs:                                 |       |                         |       |                         |       |   |   |   |   |
| Cost of sales                                                |       | 65,850                       |       | 51,243                       |       | 189,197 |   | 153,335 |   |
| Labor                                                        |       | 53,702                       |       | 40,509                       |       | 152,281 |   | 120,675 |   |
| Rent                                                         |       | 2,913                        |       | 2,588                        |       | 8,544 |   | 7,397 |   |
| Other operating                                              |       | 29,628                       |       | 23,481                       |       | 86,314 |   | 70,374 |   |
| Pre-opening                                                  |       | 2,616                        |       | 2,948                        |       | 9,301 |   | 8,759 |   |
| Depreciation and  amortization                               |       | 8,028                        |       | 5,580                        |       | 21,903 |   | 15,641 |   |
| General and  administrative                                  |       | 9,524                        |       | 7,864                        |       | 29,442 |   | 25,773 |   |
|                                                         |       |                         |       |                         |       |   |   |   |   |
| Total costs and  expenses                                    |       | 172,261                      |       | 134,213                      |       | 496,982 |   | 401,954 |   |
|                                                         |       |                         |       |                         |       |   |   |   |   |
| Income from  operations                                      |       | 17,193                       |       | 14,241                       |       | 51,795 |   | 42,619 |   |
|                                                         |       |                         |       |                         |       |   |   |   |   |
| Interest  expense, net                                       |       | 830                          |       | 64                           |       | 1,427 |   | 533 |   |
| Minority  interest                                           |       | 98                           |       | 76                           |       | 617 |   | 361 |   |
| Equity income  from investments in unconsolidated affiliates |       | (66                          | )          | (47                          | )          | (256 | ) | (182 | ) |
|                                                         |       |                         |       |                         |       |   |   |   |   |
| Income before  taxes                                         |       | 16,331                       |       | 14,148                       |       | 50,007 |   | 41,907 |   |
| Provision for income  taxes                                  |       | 5,779                        |       | 4,998                        |       | 17,902 |   | 15,744 |   |
| Net income                                                   |       | $                            | 10,552     |                         | $          | 9,150 |   | $ | 32,105 |   | $ | 26,163 |   |
|                                                         |       |                         |       |                         |       |   |   |   |   |
| Net income per  common share:                                |       |                         |       |                         |       |   |   |   |   |
| Basic                                                        |       | $                            | 0.14       |                         | $          | 0.12 |   | $ | 0.43 |   | $ | 0.35 |   |
|                                                         |       |                         |       |                         |       |   |   |   |   |
| Diluted                                                      |       | $                            | 0.14       |                         | $          | 0.12 |   | $ | 0.42 |   | $ | 0.34 |   |
|                                                         |       |                         |       |                         |       |   |   |   |   |
| Weighted average  shares outstanding:                        |       |                         |       |                         |       |   |   |   |   |
| Basic                                                        |       | 74,729                       |       | 74,052                       |       | 74,556 |   | 73,774 |   |
|                                                         |       |                         |       |                         |       |   |   |   |   |
| Diluted                                                      |       | 76,794                       |       | 76,323                       |       | 76,846 |   | 76,437 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

4

----

**TexasRoadhouse, Inc. and Subsidiaries**

**Condensed Consolidated Statements of Cash Flows**

**(inthousands)**

**(unaudited)**
| ** **                                                                         | ** ** | **39 Weeks Ended**     | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **September 25, 2007** | ** ** | **September 26, 2006** | ** ** |
| **Cash  flows from operating activities:**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                | 32,105     |   | $ | 26,163 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                      |       | 21,903                           |       | 15,641 |   |
| Deferred income taxes                                                              |       | (1,386                           | )          | (1,366 | ) |
| Loss on disposition of assets                                                      |       | 140                              |       | 205 |   |
| Minority interest                                                                  |       | 617                              |       | 361 |   |
| Equity income from investments in unconsolidated  affiliates                       |       | (256                             | )          | (182 | ) |
| Distributions received from investments in  unconsolidated affiliates              |       | 303                              |       | 248 |   |
| Provision for doubtful accounts                                                    |       | (16                              | )          | — |   |
| Share-based compensation expense                                                   |       | 3,871                            |       | 5,020 |   |
| Changes in  operating working capital:                                             |       |                             |       |   |   |
| Receivables                                                                        |       | 891                              |       | 1,384 |   |
| Inventories                                                                        |       | (147                             | )          | 289 |   |
| Prepaid expenses and other current assets                                          |       | 1,338                            |       | 873 |   |
| Other assets                                                                       |       | (237                             | )          | 166 |   |
| Accounts payable                                                                   |       | (526                             | )          | (3,603 | ) |
| Deferred revenue — gift certificates                                          |       | (14,954                          | )          | (12,072 | ) |
| Accrued wages                                                                      |       | 1,103                            |       | 1,673 |   |
| Excess tax benefits from share-based compensation                                  |       | (1,661                           | )          | (3,483 | ) |
| Prepaid income taxes and income taxes payable                                      |       | 233                              |       | 7,803 |   |
| Accrued taxes and licenses                                                         |       | 1,702                            |       | 2,573 |   |
| Other accrued liabilities                                                          |       | 319                              |       | (2,163 | ) |
| Deferred rent                                                                      |       | 1,037                            |       | 761 |   |
| Other liabilities                                                                  |       | 1,691                            |       | (934 | ) |
|                                                                               |       |                             |       |   |   |
| Net cash  provided by operating activities                                         |       | $                                | 48,070     |   | $ | 39,357 |   |
|                                                                               |       |                             |       |   |   |
| **Cash  flows from investing activities:**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Capital  expenditures — property and equipment                                |       | (76,673                          | )          | (66,264 | ) |
| Proceeds from  sale of property and equipment, including insurance proceeds        |       | 433                              |       | 1,332 |   |
| Acquisitions of  franchise restaurants, net of cash acquired                       |       | (32,976                          | )          | (13,203 | ) |
|                                                                               |       |                             |       |   |   |
| Net cash used in  investing activities                                             |       | $                                | (109,216   | ) | $ | (78,135 | ) |
|                                                                               |       |                             |       |   |   |
| **Cash  flows from financing activities:**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Proceeds from  revolving credit facility, net                                      |       | 41,000                           |       | 15,000 |   |
| Principal  payments on long-term debt and capital lease obligations                |       | (2,159                           | )          | (3,648 | ) |
| Payments for  debt issuance costs                                                  |       | (459                             | )          | — |   |
| Distributions to  minority interest holders                                        |       | (850                             | )          | (593 | ) |
| Proceeds from  minority interest contributions and other                           |       | 982                              |       | 737 |   |
| Excess tax  benefits from share-based compensation                                 |       | 1,661                            |       | 3,483 |   |
| Repayments of  stock option deposits                                               |       | —                           |       | (335 | ) |
| Proceeds from  stock option deposits                                               |       | 783                              |       | 1,129 |   |
| Proceeds from  exercise of stock options                                           |       | 1,740                            |       | 3,308 |   |
|                                                                               |       |                             |       |   |   |
| Net cash  provided by financing activities                                         |       | $                                | 42,698     |   | $ | 19,081 |   |
|                                                                               |       |                             |       |   |   |
| Net decrease in  cash                                                              |       | (18,448                          | )          | (19,697 | ) |
| Cash and cash  equivalents — beginning of period                              |       | 33,784                           |       | 28,987 |   |
| Cash and cash  equivalents — end of period                                    |       | $                                | 15,336     |   | $ | 9,290 |   |
|                                                                               |       |                             |       |   |   |
| Supplemental  disclosures of cash flow information:                                |       |                             |       |   |   |
|   Interest,  net of amounts capitalized                                  |       | $                                | 1,562      |   | $ | 697 |   |
|   Income  taxes                                                          |       | $                                | 19,055     |   | $ | 9,230 |   |
| Supplemental  schedule for non-cash investing and financing activities:            |       |                             |       |   |   |
|   Stock  acquisition of franchise restaurants                            |       | $                                | —     |   | $ | 39,394 |   |
|   Assumption  of debt — acquisitions                                |       | $                                | —     |   | $ | 2,291 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

5

----

**TexasRoadhouse, Inc. and Subsidiaries**

**Notes to Condensed Consolidated Financial Statements**

**(Tabulardollar amounts in thousands, except per share data)**

**(unaudited)**

**(1)   Basisof Presentation**

The accompanyingunaudited condensed consolidated financial statements include the accounts ofTexas Roadhouse, Inc. (the “Company”) and its wholly-owned subsidiaries,Texas Roadhouse Holdings LLC (“Holdings”), Texas Roadhouse DevelopmentCorporation (“TRDC”) and Texas Roadhouse Management Corp. (“ManagementCorp.”), as of and for the 13 and 39 weeks ended September 25, 2007 andSeptember 26, 2006.  The Company and its wholly-owned subsidiaries operateTexas Roadhouse restaurants. Holdings also provides supervisory andadministrative services for certain other franchise and license restaurants.TRDC sells franchise rights and collects the franchise royalties andfees.  Management Corp. provides management services to the Company,Holdings and certain other license and franchise restaurants.

Management of theCompany has made a number of estimates and assumptions relating to thereporting of assets and liabilities, the disclosure of contingent assets andliabilities at the date of the condensed consolidated financial statements andthe reporting of revenue and expenses during the period to prepare thesecondensed consolidated financial statements in conformity with U.S. generallyaccepted accounting principles (“GAAP”). Significant items subject to suchestimates and assumptions include the carrying amount of property andequipment, goodwill, obligations related to insurance reserves, income taxesand share-based compensation expense. Actual results could differ from thoseestimates.

In the opinion ofmanagement, the accompanying unaudited financial statements reflect alladjustments, consisting only of normal recurring adjustments, necessary topresent fairly the financial position, the results of operations and cash flowsof the Company for the periods presented.  The financial statements havebeen prepared in accordance with GAAP, except that certain information andfootnotes have been condensed or omitted pursuant to rules and regulationsof the Securities and Exchange Commission (“SEC”).  Operating results forthe 13 and 39 weeks ended September 25, 2007 are not necessarily indicative ofthe results that may be expected for the year ending December 25,2007.  The financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 26, 2006.

**(2)   Share-basedCompensation**

The followingtable summarizes the share-based compensation recorded in the accompanyingcondensed consolidated statements of income:
| ** **                             | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **September 25,  2007** | ** ** | **September 26,  2006** | ** ** | **September 25,  2007** | ** ** | **September 26,  2006** | ** ** |
| ** **                             | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Labor expense                          |       | $                            | 583        |                         | $          | 705 |   | $ | 1,608 |   | $ | 2,398 |   |
| General and administrative expense     |       | 851                          |       | 800                          |       | 2,263 |   | 2,622 |   |
| Total share-based compensation expense |       | $                            | 1,434      |                         | $          | 1,505 |   | $ | 3,871 |   | $ | 5,020 |   |

 

6

----

Asummary of option activity as of September 25, 2007 and changes during the periodthen ended is presented below.

*Summary Details for Plan ShareOptions*
| ** **                         | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-Average  Remaining Contractual  Term (years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------|------------|------------|------------|---------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------|------------|
|                               |       |       |       |                                        |       |                                                                |       |                            |       |
| Outstanding at December 26, 2006   |       | 6,933,236  |       | $                                           | 7.98       |                                                                |       |                            |       |   |
| Granted                            |       | 844,107    |       | 14.45                                       |       |                                                                |       |                            |       |
| Forfeited                          |       | (72,710    | )          | 13.26                                       |       |                                                                |       |                            |       |
| Exercised                          |       | (517,723   | )          | 3.80                                        |       |                                                                |       |                            |       |
| Outstanding at September 25, 2007  |       | 7,186,910  |       | $                                           | 9.00       |                                                                | 6.56       |                            | $          | 23,160 |   |
|                               |       |       |       |                                        |       |                                                                |       |                            |       |
| Exercisable at  September 25, 2007 |       | 4,568,502  |       | $                                           | 7.08       |                                                                | 5.61       |                            | $          | 23,476 |   |

 

Theweighted-average grant date fair value of options granted during the 13 weeksended September 25, 2007 and September 26, 2006 was $3.92 and $3.84,respectively.  The weighted-average grantdate fair value of options granted during the 39 weeks ended September 25, 2007and September 26, 2006 was $4.77 and $5.17, respectively, using theBlack-Scholes option-pricing model with the following weighted-averageassumptions:
|                          | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **September 25,  2007** | ** ** | **September 26,  2006** | ** ** | **September 25,  2007** | ** ** | **September 26,  2006** | ** ** |
|                     |       |                         |       |                         |       |   |   |   |   |
| Risk-free interest rate  |       | 4.52                         | %          | 4.84                         | %          | 4.56 | % | 4.83 | % |
| Expected term (years)    |       | 3.0 – 5.0               |       | 3.0 – 5.0               |       | 3.0 – 5.0 |   | 3.0 – 5.0 |   |
| Expected volatility      |       | 35.9                         | %          | 43.1                         | %          | 35.6 | % | 43.2 | % |
| Expected dividend  yield |       | 0.0                          | %          | 0.0                          | %          | 0.0 | % | 0.0 | % |

 

The totalintrinsic value of options exercised during the 13 weeks ended September 25,2007 and September 26, 2006 was $0.5 million and $0.7 million,respectively.  The total intrinsic valueof options exercised during the 39 weeks ended September 25, 2007 and September26, 2006 was $5.5 million and $13.0 million, respectively.   As of September 25, 2007, with respect tounvested stock options, there was $5.5 million of unrecognized compensationcost that is expected to be recognized over a weighted-average period of 1.3years.  The total grant date fair valueof stock options vested for the 13 week periods ended September 25, 2007and September 26, 2006 was $0.7 million and $2.0 million, respectively, and forthe 39 week periods ended September 25, 2007 and September 26, 2006 was $3.1million and $4.7 million, respectively.

**(3)   Long-termDebt and Obligations Under Capital Leases**

Long-term debt andobligations under capital leases consisted of the following:
|                                          | ** ** | **September 25 , 2007** | ** ** | **December 26, 2006** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| Installment  loans, due 2007 — 2016 |       | $                                      | 3,268      |                            | $          | 5,388 |   |
| Obligations  under capital leases        |       | 588                                    |       | 627                             |       |
| Revolver                                 |       | 71,000                                 |       | 30,000                          |       |
|                                     |       | 74,856                                 |       | 36,015                          |       |
| Less current  maturities                 |       | 295                                    |       | 653                             |       |
|                                     |       | $                                      | 74,561     |                            | $          | 35,362 |   |

 

Theweighted-average interest rate for installment loans outstanding at September25, 2007 and December 26, 2006 was 9.93% and 9.67%, respectively.  The debt is secured by certain land,buildings and equipment.

7

----

On May 31, 2007,the Company amended and restated its existing five-year revolving creditfacility dated October 8, 2004 with a syndicate of commercial lenders led byBank of America, N.A., Banc of America Securities LLC and National CityBank.  The facility was increased from$150.0 million to $250.0 million and the term was extended to May 31,2012.  The terms of the facility requirethe Company to pay interest on outstanding borrowings at LIBOR plus a margin of0.50% to 0.875% and to pay a commitment fee of 0.10% to 0.175% per year on anyunused portion of the facility, in both cases depending on the Company’sleverage ratio.   The weighted-averageinterest rate for the revolver at September 25, 2007 and December 26, 2006 was6.07% and 6.08%, respectively.  AtSeptember 25, 2007, the Company had $71.0 million outstanding under the creditfacility and $176.0 million of availability, net of $3.0 million of outstandingletters of credit.

The lenders’obligation to extend credit under the facility depends on the Companymaintaining certain financial covenants, including a minimum consolidated fixedcharge coverage ratio of 2.00 to 1.00 and a maximum consolidated leverage ratioof 3.00 to 1.00.  The new credit facilitypermits the Company to incur additional secured or unsecured indebtednessoutside the facility, except for the incurrence of secured indebtedness that inthe aggregate exceeds 20% of the Company’s consolidated tangible net worth orcircumstances where the incurrence of secured or unsecured indebtedness wouldprevent the Company from complying with its financial covenants.  The Company is currently in compliance withsuch covenants.

**(4)   RecentAccounting Pronouncements**

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, *Fair Value Measurements*(“SFAS157”), which defines fair value, establishes a framework for measuring fairvalue and expands disclosures about fair value measurements.  The provisions of SFAS 157 are effective asof the beginning of the Company’s 2008 fiscal year.  The Company is currently evaluating theimpact of adopting SFAS 157 on its consolidated financial position, results ofoperations or cash flows.

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* (“SFAS 159”). SFAS 159permits entities to choose to measure many financial assets and financialliabilities at fair value. Unrealized gains and losses on items for which thefair value option has been elected are reported in earnings. The provisions ofSFAS 159 are effective as of the beginning of the Company’s 2008 fiscal year.The Company is currently evaluating the impact of adopting SFAS 159 on itsconsolidated financial position, results of operations or cash flows.

**(5)   Commitmentsand Contingencies**

The estimated costof completing capital project commitments at September 25, 2007 and December26, 2006 was approximately $85.4 million and $81.0 million, respectively.

The Companyentered into real estate lease agreements for franchise restaurants located inEverett, MA, Longmont, CO, Montgomeryville, PA and Fargo, ND before grantingfranchise rights for those restaurants. The Company has subsequently assignedthe leases to the franchisees, but remains contingently liable if a franchiseedefaults under the terms of a lease.  The Longmont lease was assigned inOctober 2003 and expires in May 2014, the Everett lease was assignedin September 2002 and expires in February 2018, the Montgomeryvillelease was assigned in October 2004 and expires in June 2021 and the Fargo leasewas assigned in February 2006 and expires in July 2016.  As the fair value of the guarantees is notconsidered significant, no liability has been recorded.  As discussed in note 6, the Everett, MA, Longmont,CO, and Fargo, ND restaurants are owned, in whole or part, by certain officers,directors and 5% stockholders of the Company.

The Company isinvolved in various claims and legal actions arising in the normal course ofbusiness. In the opinion of management, the ultimate disposition of thesematters will not have a material effect on the Company’s consolidated financialposition, results of operations or cash flows.

On March 26, 2007,a civil case styled as a class action complaint titled *Nicole M. Ehrheartv. Texas Roadhouse, Inc. and Does 1 through 10 (“Ehrheart”)*, CaseNumber CA 07-54, was filed against the Company in the United States DistrictCourt for the Western District of Pennsylvania Erie Division.  The case alleges liability under the Fair andAccurate Credit Transactions Act (“FACTA”) based on the alleged practice ofunlawfully including more information than is permitted on the electronicallyprinted credit or debit card receipts provided to customers.  The plaintiff seeks monetary damages,including statutory damages, punitive damages, costs and attorneys’ fees, and apermanent injunction against the alleged unlawful practice.  Statutory damages range from $100 to $1,000for each willful violation.  The Companyhas filed an answer to the complaint denying the material allegations of thecomplaint; discovery has not yet begun.

OnJuly 20, 2007, a civil case styled as a class action complaint titled *Mario Aliano v. Texas Roadhouse Holdings LLC, Texas Roadhouse, Inc. andDoes 1-10**(“Aliano”),* CaseNumber 07cv4108, was filed against the Company in the United States DistrictCourt for the Northern District of Illinois Eastern Division.  The case alleges liability under FACTA.  The plaintiff seeks statutory damages of $100to $1,000 per violation, attorneys’ fees, litigation expenses and costs.  The Company has filed an answer to thecomplaint denying the material allegations of the complaint; discovery has notyet begun.

8

----

The Companybelieves it has meritorious defenses to the *Ehrheart* and *Aliano* claims and intends to vigorously defend against theclaims, including the plaintiffs’ efforts to certify a nationwide classaction.  Management believes that neithercase will have a material adverse effect on the Company’s business and itsconsolidated financial position, results of operation and cash flows.  However, if either court both granted classaction status and imposed statutory penalties, the resolution of the case wouldlikely have a material adverse effect on the Company’s business and its consolidatedfinancial position, results of operation and cash flows.

The Companycurrently buys most of its beef from four suppliers.  Although there are a limited number of beefsuppliers, management believes that other suppliers could provide a similarproduct on comparable terms.  A change insuppliers, however, could cause supply shortages and a possible loss of sales,which would affect operating results adversely. The Company has no material minimum purchase commitments with itsvendors that extend beyond a year.

**(6)   RelatedParty Transactions**

The Longview,Texas restaurant, which was acquired by the Company in connection with thecompletion of the initial public offering, leases the land and restaurantbuilding from an entity controlled by Steven L. Ortiz, the Company’s ChiefOperating Officer. The lease term is 15 years and will terminate inNovember 2014. The lease can be renewed for two additional terms of fiveyears each. Rent is approximately $16,000 per month and will increase by 5% onthe 11th anniversary date of the lease. The lease can be terminated if thetenant fails to pay the rent on a timely basis, fails to maintain the insurancespecified in the lease, fails to maintain the building or property or becomesinsolvent. Total rent payments were approximately $50,000 for both 13 weekperiods ended September 25, 2007 and September 26, 2006.   For the 39 weeks ended September 25,2007 and September 26, 2006, rent payments were approximately $0.1 million.

The Bossier City,Louisiana restaurant, of which Steven L. Ortiz, the Company’s Chief OperatingOfficer, beneficially owns 66.0% and the Company owns 5.0%, leases the land andbuilding from an entity owned by Mr. Ortiz. The lease term is 15 years and will terminate on March 31, 2020.  The lease can be renewed for three additionalterms of five years each.  Rent isapproximately $15,100 per month for the first five years of the lease andescalates 10% each five year period during the term.  The lease can be terminated if the tenantfails to pay rent on a timely basis, fails to maintain insurance, abandons theproperty or becomes insolvent.  Totalrent payments were approximately $45,000 for each of the 13 week periods endedSeptember 25, 2007 and September 26, 2006. For the 39 weeks ended September 25, 2007 and September 26, 2006, rentpayments were approximately $0.1 million.

The Company had 14and 13 franchise and license restaurants owned, in whole or part, by certainofficers, directors and 5% stockholders of the Company at September 25, 2007and September 26, 2006, respectively. These entities paid the Company fees ofapproximately $0.5 million during each of the 13 week periods ended September25, 2007 and September 26, 2006.  For the39 weeks ended September 25, 2007 and September 26, 2006, these entities paidthe Company fees of approximately $1.6 million and $1.5 million,respectively.  As disclosed in note 5,the Company is contingently liable on leases which are related to three ofthese restaurants.

The Companyemploys Juli Miller Hart, the wife of G.J. Hart, the Company’s Chief ExecutiveOfficer. Ms. Hart does not report to Mr. Hart.

**(7)   EarningsPer Share**

The share and netincome per share data for all periods presented are based on the historicalweighted-average shares outstanding.  The diluted earnings per sharecalculations show the effect of the weighted-average stock options andrestricted stock awards outstanding from the Company’s equity incentiveplan.  For the 13 and 39 weeks endedSeptember 25, 2007, options to purchase 2,337,943 and 2,146,911 shares ofcommon stock, respectively, were outstanding, but not included in thecomputation of diluted earnings per share because their inclusion wouldhave had an anti-dilutive effect.  Forthe 13 and 39 weeks ended September 26, 2006, options to purchase 1,865,852shares of common stock were outstanding but not included in the computation ofdiluted earnings per share because their inclusion would have had ananti-dilutive effect.

9

----

The followingtable sets forth the calculation of weighted-average shares outstanding aspresented in the accompanying condensed consolidated statements of income:
| ** **                                  | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | **September 25,  2007** | ** ** | **September 26,  2006** | ** ** | **September 25,  2007** | ** ** | **September 26,  2006** | ** ** |
| Net income                                  |       | $                            | 10,552     |                         | $          | 9,150 |   | $ | 32,105 |   | $ | 26,163 |   |
|                                        |       |                         |       |                         |       |   |   |   |   |
| Basic EPS:                                  |       |                         |       |                         |       |   |   |   |   |
| Weighted-average  common shares outstanding |       | 74,729                       |       | 74,052                       |       | 74,556 |   | 73,774 |   |
|                                        |       |                         |       |                         |       |   |   |   |   |
| Basic EPS                                   |       | $                            | 0.14       |                         | $          | 0.12 |   | $ | 0.43 |   | $ | 0.35 |   |
|                                        |       |                         |       |                         |       |   |   |   |   |
| Diluted EPS:                                |       |                         |       |                         |       |   |   |   |   |
| Weighted-average  common shares outstanding |       | 74,729                       |       | 74,052                       |       | 74,556 |   | 73,774 |   |
| Dilutive effect  of stock options           |       | 2,065                        |       | 2,271                        |       | 2,290 |   | 2,663 |   |
| Shares – diluted                       |       | 76,794                       |       | 76,323                       |       | 76,846 |   | 76,437 |   |
|                                        |       |                         |       |                         |       |   |   |   |   |
| Diluted EPS                                 |       | $                            | 0.14       |                         | $          | 0.12 |   | $ | 0.42 |   | $ | 0.34 |   |

 

**(8)****         Acquisitions**

On June 27, 2007,the first day of the Company’s third fiscal quarter, the Company completed theacquisitions of nine restaurants located in Indiana, Kentucky andMissouri.  Pursuant to the terms of theacquisition agreements, the Company paid an aggregate purchase price ofapproximately $22.6 million, excluding cash acquired.  In conjunction with these acquisitions, theCompany acquired land and buildings leased by seven of the nine franchiseesfrom parties related to those franchisees for an aggregate purchase price ofapproximately $12.1 million.  Theseacquisitions, which are expected to be accretive to earnings, are consistentwith our long-term strategy to increase net income and earnings per share.

These transactionswere accounted for using the purchase method as defined in SFAS No. 141, *Business Combinations*. Based on a purchase price of $33.0 million, including $0.2 million ofdirect acquisition costs and net of the $1.4 million of cash acquired, the $0.5million charge related to Emerging Issues Task Force (“EITF”) Issue 04-1, *Accounting for Preexisting Relationships between the Parties to aBusiness Combination* (“EITF 04-1”), and the Company’s estimates ofthe fair value of net assets acquired, $15.1 million of goodwill was generatedby the acquisitions, which is not amortizable for book purposes, but isdeductible for tax purposes.

The purchase pricehas been preliminarily allocated as follows:

| Current assets              |   | $      | 393    |   |
|-----------------------------|--------|--------|--------|--------|
| Property and equipment, net |   | 15,629 |   |
| Goodwill                    |   | 15,076 |   |
| Intangible asset            |   | 4,064  |   |
| Other assets                |   | 12     |   |
| Current liabilities         |   | (2,166 | )      |
| Other liabilities           |   | (32    | )      |
|                        |   |   |   |
|                        |   | $      | 32,976 |   |

 

The Companyexpects to complete the allocation of purchase price to the fair value ofassets acquired and liabilities assumed in the fourth quarter of fiscal2007.  The Company does not expect anyadjustments to be significant.

10

----

If theacquisitions had been completed as of the beginning of the year ended December26, 2006, pro forma revenue, net income and earnings per share would have beenas follows as of and for the 13 and 39 weeks ended September 25, 2007 andSeptember 26, 2006:
|             | ** ** | **13 Weeks Ended** | ** ** | **39 Weeks Ended** | ** ** |
|-------------|------------|------------------------------|------------|------------------------------|------------|
| ** **  | ** ** | **September 25,  2007** | ** ** | **September 26,  2006** | ** ** | **September 25,  2007** | ** ** | **September 26,  2006** | ** ** |
|        |       |                         |       |                         |       |   |   |   |   |
| Revenue     |       | $                            | 189,454    |                         | $          | 156,100 |   | $ | 565,765 |   | $ | 468,747 |   |
| Net income  |       | $                            | 10,552     |                         | $          | 9,311 |   | $ | 32,547 |   | $ | 26,994 |   |
| Basic EPS   |       | $                            | 0.14       |                         | $          | 0.13 |   | $ | 0.44 |   | $ | 0.37 |   |
| Diluted EPS |       | $                            | 0.14       |                         | $          | 0.12 |   | $ | 0.42 |   | $ | 0.35 |   |

 

As a result ofthese acquisitions, the Company incurred a charge of $0.5 million and recordedan intangible asset relating to certain reacquired franchise rights of $4.1million in accordance with EITF 04-1. EITF 04-1 requires that a business combination between two parties thathave a preexisting relationship be evaluated to determine if a settlement of apreexisting relationship exists.  EITF04-1 also requires that certain reacquired rights (including the rights to theacquirer’s trade name under a franchise agreement) be recognized as intangibleassets apart from goodwill.  However, ifa contract giving rise to the reacquired rights includes terms that arefavorable or unfavorable when compared to pricing for current markettransactions for the same or similar items, EITF 04-1 requires that asettlement gain or loss should be measured as the lesser of (i) the amount bywhich the contract is favorable or unfavorable under market terms from theperspective of the acquirer or (ii) the stated settlement provisions of thecontract available to the counterparty to which the contract is unfavorable.

The intangibleasset of $4.1 million has a weighted-average life of approximately 13years.  When calculating this intangibleasset, the Company considered the remaining term of the existing franchiseagreements including renewals.  Theremaining terms ranged from nine to 18 years. The Company recorded amortization expense relating to the intangibleasset of approximately $0.1 million for the 13 weeks ended September 25,2007.  The Company expects the annualexpense for each of the next five years to be $0.3 million.

**(9)   Income Taxes**

In June 2006, FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes — an Interpretation of FAS 109* (“FIN 48”), wasissued.  FIN 48 clarifies the accountingfor uncertainty in income taxes recognized in an entity’s financial statementsin accordance with FASB Statement No. 109, *Accounting for IncomeTaxes.*  FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  The Company adopted theprovisions of FIN 48 on December 27, 2006, the first day of the Company’s 2007fiscal year.

As a result of theimplementation of FIN 48, the Company recognized no material adjustment in theliability for unrecognized income tax benefits. At the adoption date of December 27, 2006 and as of September 25, 2007,the Company had no significant unrecognized income tax benefits or accruedinterest or penalties related to uncertain tax positions.  The Company does not expect that the amountsof any unrecognized income tax benefits will change significantly within thenext 12 months.

The Company mayfrom time to time be assessed interest or penalties by major tax jurisdictions,although any such assessments historically have been minimal and have not had amaterial effect on its consolidated financial position, results of operationsor cash flows.  In the event the Companyreceives an assessment for interest and/or penalties, it has been classified inthe financial statements as income tax expense.

The tax years 2003- 2006 remain open to examination by the major taxing jurisdictions to which weare subject.

11

----

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

**OVERVIEW**

Texas Roadhouse isa growing, moderately priced, full-service restaurant chain. Our founder andchairman, W. Kent Taylor, started the business in 1993. Our mission statementis “Legendary Food, Legendary Service®.” Our operating strategy is designed to position each of ourrestaurants as the local hometown destination for a broad segment of consumersseeking high quality, affordable meals served with friendly, attentive service.As of September 25, 2007, there were 275 Texas Roadhouse restaurants operatingin 44 states, including:

·  194 “companyrestaurants,” of which 189 were wholly-owned and five were majority-owned. The results of operations of company restaurants are included in ourcondensed consolidated operating results. The portion of income attributable tominority interests in company restaurants that are not wholly-owned isreflected in the line item entitled “Minority interest” in our condensedconsolidated statements of income.

·  81 “franchiserestaurants,” of which 78 were franchise restaurants and three were licenserestaurants. We have a 5.0% to 10.0% ownership interest in 18 franchiserestaurants.  The income derived from ourminority interests in these franchise restaurants is reported in the line itementitled “Equity income from investments in unconsolidated affiliates” inour condensed consolidated statements of income. Additionally, we providevarious management services to these franchise restaurants, as well as twoadditional franchise restaurants in which we have no ownership interest.

We havecontractual arrangements which grant us the right to acquire at pre-determinedvaluation formulas (i) the remaining equity interests in the five openmajority-owned company restaurants, and (ii) 62 of the franchiserestaurants.

**Presentationof Financial and Operating Data**

Throughout thisreport, the 13 weeks ended September 25, 2007 and September 26, 2006 arereferred to as Q3 2007 and Q3 2006, respectively, and the 39 weeks endedSeptember 25, 2007 and September 26, 2006 are referred to as 2007 YTD and 2006YTD, respectively.

**Long-termStrategies to Grow Earnings Per Share**

Our long-termstrategies with respect to increasing net income and earnings per share includethe following:

*ExpandingOur Restaurant Base.*   We will continue toevaluate opportunities to develop Texas Roadhouse restaurants in existing andnew markets. We will remain focused primarily on mid-sized markets where webelieve there exists a significant demand for our restaurants because ofpopulation size, income levels and the presence of shopping and entertainmentcenters and a significant employment base.

We may, at ourdiscretion, add franchise restaurants primarily with franchisees who havedemonstrated prior success with the Texas Roadhouse or other restaurantconcepts and in markets in which the franchisee demonstrates superior knowledgeof the demographics and restaurant operating conditions.  We may also look to acquire franchiserestaurants under terms favorable to the Company and our stockholders.  Additionally, from time to time, we mayevaluate potential mergers, acquisitions, joint ventures or other strategicinitiatives to acquire or develop additional concepts.

*ImprovingRestaurant Level Profitability.*   We plan toincrease restaurant level profitability through a combination of increasedcomparable restaurant sales and operating cost management.

*LeveragingOur Scalable Infrastructure.*   Over the pastseveral years, we have made significant investments in our infrastructure,including information systems, real estate, human resources, legal, marketingand operations. As a result, we believe that our general and administrativecosts will increase at a slower growth rate than our revenue.

**KeyMeasures We Use to Evaluate Our Company**

Key measures we use toevaluate and assess our business include the following:

*Numberof Restaurant Openings.*   Number of restaurantopenings reflects the number of restaurants opened during a particular fiscalperiod. For company restaurant openings we incur pre-opening costs, which aredefined below, before the restaurant opens. Typically new restaurants open withan initial start-up period of higher than normalized sales volumes, whichdecrease to a steady level approximately three to six months after opening.However, although sales volumes are generally higher, so are initial costs,resulting in restaurant operating margins that are generally lower during thestart-up period of operation and increase to a steady level approximately threeto six months after opening.

12

----

*ComparableRestaurant Sales Growth. *  Comparablerestaurant sales growth reflects the change in year-over-year sales for allcompany restaurants for the comparable restaurant base. We define thecomparable restaurant base to include those restaurants open for a full 18months before the beginning of the later fiscal period. Comparable restaurantsales growth can be generated by an increase in guest traffic counts or byincreases in the per person average check amount. Menu price changes and themix of menu items sold can affect the per person average check amount.

*AverageUnit Volume.*   Average unit volume representsthe average annual restaurant sales for all company restaurants open for a fullsix months before the beginning of the period measured. Growth in averageunit volumes in excess of comparable restaurant sales growth is generally anindication that newer restaurants are operating with sales levels in excess ofthe company average. Conversely, growth in average unit volumes less thangrowth in comparable restaurant sales growth is generally an indication thatnewer restaurants are operating with sales levels lower than the systemaverage.

*StoreWeeks.*   Store weeks represent the number ofweeks that our company restaurants were open during the reporting period.

**OtherKey Definitions**

*RestaurantSales.*   Restaurant sales include gross foodand beverage sales, net of promotions and discounts.

*FranchiseRoyalties and Fees.*   Franchisees typicallypay a $40,000 initial franchise fee for each new restaurant and a franchiserenewal fee equal to the greater of 30% of the then-current initial franchisefee or $10,000 to $15,000. Franchise royalties consist of royalties in theamount of 2.0% to 4.0% of gross sales paid to us by our franchisees.

*RestaurantCost of Sales.*   Restaurant cost of salesconsists of food and beverage costs.

*RestaurantLabor Expenses.*   Restaurant labor expensesinclude all direct and indirect labor costs incurred in operations except forprofit sharing incentive compensation expenses earned by our managing partnersand market partners. These profit sharing expenses are reflected in restaurantother operating expenses.  Restaurantlabor expenses also include share-based compensation expense related torestaurant-level employees.

*RestaurantRent Expense.*   Restaurant rent expenseincludes all rent associated with the leasing of real estate and includes base,percentage and straight-line rent expense.

*RestaurantOther Operating Expenses.*   Restaurant otheroperating expenses consist of all other restaurant-level operating costs, themajor components of which are utilities, supplies, advertising, repair andmaintenance, property taxes, credit card fees and general liability insurance.Profit sharing allocations to managing partners and market partners are alsoincluded in restaurant other operating expenses.

*Pre-openingExpenses.*   Pre-opening expenses, which arecharged to operations as incurred, consist of expenses incurred before theopening of a new restaurant and are comprised principally of opening team andtraining salaries, travel expenses, rent, and food, beverage and other initialsupplies and expenses.

*Depreciationand Amortization Expenses.*   Depreciation andamortization expenses (“D&A”) includes the depreciation of fixed assets andamortization of intangibles with definite lives.

*Generaland Administrative Expenses.*   General andadministrative expenses (“G&A”) are comprised of expenses associated withcorporate and administrative functions that support development and restaurantoperations and provide an infrastructure to support future growth.   Supervision and accounting fees receivedfrom certain franchise restaurants and license restaurants are offset againstG&A.  G&A also includesshare-based compensation expense related to corporate office employees.

*InterestExpense, Net.*   Interest expense includes thecost of our debt obligations including the amortization of loan fees, reducedby interest income and capitalized interest. Interest income includes earnings on cash and cash equivalents.

*MinorityInterest.*   Our consolidated subsidiaries atSeptember 25, 2007 included seven majority-owned restaurants, five of whichwere open and two of which were under construction.  Our consolidatedsubsidiaries at September 26, 2006 included five majority-owned restaurants,all of which were open.  Minorityinterest represents the portion of income attributable to the other owners ofthe majority-owned or controlled restaurants.

*EquityIncome from Unconsolidated Affiliates.*   Weown a 5.0% to 10.0% equity interest in 18 franchise restaurants. Equity incomefrom unconsolidated affiliates represents our percentage share of net incomeearned by these unconsolidated affiliates.

13

----

**Resultsof Operations** 
| ** **                                                   | ** ** | **13 Weeks Ended**     | ** ** | **39 Weeks Ended**     | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | **September 25, 2007** | ** ** | **September 26, 2006** | ** ** | **September 25, 2007** | ** ** | **September 26, 2006** | ** ** |
| **($ in thousands)**                               | ** ** | **$**                            | ** ** | **%**                            | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
|                                                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue:                                                     |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Restaurant sales                                             |       | 186,879                          |       | 98.6                             |       | 145,859 |   | 98.3 |   | 540,452 |   | 98.5 |   | 436,804 |   | 98.3 |   |
| Franchise royalties and fees                                 |       | 2,575                            |       | 1.4                              |       | 2,595 |   | 1.7 |   | 8,325 |   | 1.5 |   | 7,769 |   | 1.7 |   |
|                                                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenue                                                |       | 189,454                          |       | 100.0                            |       | 148,454 |   | 100.0 |   | 548,777 |   | 100.0 |   | 444,573 |   | 100.0 |   |
|                                                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Costs and  expenses:                                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *(As a  percentage of restaurant sales)*                     | * *   | * *                         | * *   | * *                         | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Restaurant operating costs:                                  |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales                                                |       | 65,850                           |       | 35.2                             |       | 51,243 |   | 35.1 |   | 189,197 |   | 35.0 |   | 153,335 |   | 35.1 |   |
| Labor                                                        |       | 53,702                           |       | 28.7                             |       | 40,509 |   | 27.8 |   | 152,281 |   | 28.2 |   | 120,675 |   | 27.6 |   |
| Rent                                                         |       | 2,913                            |       | 1.6                              |       | 2,588 |   | 1.8 |   | 8,544 |   | 1.6 |   | 7,397 |   | 1.7 |   |
| Other operating                                              |       | 29,628                           |       | 15.9                             |       | 23,481 |   | 16.1 |   | 86,314 |   | 16.0 |   | 70,374 |   | 16.1 |   |
| *(As a  percentage of total revenue)*                        | * *   | * *                         | * *   | * *                         | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Pre-opening                                                  |       | 2,616                            |       | 1.4                              |       | 2,948 |   | 2.0 |   | 9,301 |   | 1.7 |   | 8,759 |   | 2.0 |   |
| Depreciation and amortization                                |       | 8,028                            |       | 4.2                              |       | 5,580 |   | 3.8 |   | 21,903 |   | 4.0 |   | 15,641 |   | 3.5 |   |
| General and administrative                                   |       | 9,524                            |       | 5.0                              |       | 7,864 |   | 5.3 |   | 29,442 |   | 5.4 |   | 25,773 |   | 5.8 |   |
|                                                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total costs and  expenses                                    |       | 172,261                          |       | 90.9                             |       | 134,213 |   | 90.4 |   | 496,982 |   | 90.6 |   | 401,954 |   | 90.4 |   |
| Income from  operations                                      |       | 17,193                           |       | 9.1                              |       | 14,241 |   | 9.6 |   | 51,795 |   | 9.4 |   | 42,619 |   | 9.6 |   |
| Interest  expense, net                                       |       | 830                              |       | 0.4                              |       | 64 |   | NM |   | 1,427 |   | 0.2 |   | 533 |   | 0.1 |   |
| Minority  interest                                           |       | 98                               |       | 0.1                              |       | 76 |   | 0.1 |   | 617 |   | 0.1 |   | 361 |   | 0.1 |   |
| Equity income  from investments in unconsolidated affiliates |       | (66                              | )          | NM                               |       | (47 | ) | NM |   | (256 | ) | NM |   | (182 | ) | NM |   |
|                                                         |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income before  taxes                                         |       | 16,331                           |       | 8.6                              |       | 14,148 |   | 9.5 |   | 50,007 |   | 9.1 |   | 41,907 |   | 9.4 |   |
| Provision for  income taxes                                  |       | 5,779                            |       | 3.0                              |       | 4,998 |   | 3.4 |   | 17,902 |   | 3.3 |   | 15,744 |   | 3.5 |   |
| Net income                                                   |       | 10,552                           |       | 5.6                              |       | 9,150 |   | 6.1 |   | 32,105 |   | 5.8 |   | 26,163 |   | 5.9 |   |

 

**RestaurantUnit Activity**
|                                    | ** ** | **Company** | ** ** | **Franchise** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------|------------|---------------|------------|-----------|------------|
| Balance at  December 26, 2006 |       | 163         |       | 88            |       | 251       |       |
| Openings                           |       | 10          |       | —        |       | 10        |       |
| Closures                           |       | —      |       | —        |       | —    |       |
|                               |       |        |       |          |       |      |       |
| Balance at  March 27, 2007    |       | 173         |       | 88            |       | 261       |       |
| Opening                            |       | 7           |       | 2             |       | 9         |       |
| Closures                           |       | —      |       | —        |       | —    |       |
|                               |       |        |       |          |       |      |       |
| Balance at June  26, 2007          |       | 180         |       | 90            |       | 270       |       |
| Opening                            |       | 5           |       | —        |       | 5         |       |
| Acquisitions  (Dispositions)       |       | 9           |       | (9            | )          | —    |       |
| Closures                           |       | —      |       | —        |       | —    |       |
|                               |       |        |       |          |       |      |       |
| Balance at  September 25, 2007     |       | 194         |       | 81            |       | 275       |       |

 

14

----

**Q32007 (13 weeks) Compared to Q3 2006 (13 weeks) and 2007 YTD (39 weeks)Compared to 2006 YTD (39 weeks)**

*RestaurantSales.*   Restaurant sales increased by28.1%  in Q3 2007 as compared to Q3 2006and by 23.7% in 2007 YTD as compared to 2006 YTD.  These increases were primarily attributableto the opening of new restaurants, the acquisitions of nine franchiserestaurants on June 27, 2007 and comparable restaurant sales growth.

The followingtable summarizes certain key drivers and/or attributes of restaurant sales atcompany restaurants for the periods.
|                                     | ** ** | **Q3 2007** | ** ** | **Q3 2006** | ** ** | **2007 YTD** | ** ** | **2006 YTD** | ** ** |
|-------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|-------------------|------------|
|                                |       |             |       |             |       |              |       |              |       |
| Store weeks                         |       | 2,487            |       | 1,949            |       | 6,926             |       | 5,610             |       |
| Comparable  restaurant sales growth |       | 2.5              | %          | 2.3              | %          | 2.0               | %          | 3.4               | %          |
| Average unit volume (in  thousands) |       | $                | 973        |             | $          | 958               |       | $                 | 3,043      |   | $ | 3,016 |   |
|                                     |            |                  |            |                  |            |                   |            |                   |            |  |  |  |  |

 

The amounts in the table above include the impact of increased menupricing of approximately 0.8% implemented in October 2006 and approximately 2%implemented in phases starting in December 2006 through February 2007.  The October 2006 menu price increase wasprincipally driven by industry wide increases in commodity costs, while themost recent increase was principally driven by increases in minimum and tipwages which took effect in numerous states at the beginning of 2007.

On June 27, 2007, we acquired nine franchise restaurants.  We estimate that these acquisitions will beslightly accretive to fiscal 2007 diluted earnings per share as we will haveonly six months of operating results and we have recorded a pre-taxacquisition-related charge of $0.5 million during the third quarter of fiscal2007, in accordance with Emerging Issues Task Force Issue 04-1, *Accounting for Preexisting Relationships between theParties to a Business Combination. * On an on-going annual basis, we estimate theseacquisitions will be accretive to diluted earnings per share by approximately$0.015.  In Q3 2007, restaurant salesincluded $8.3 million from the nine acquired franchise restaurants.  For comparative purposes, average unitvolumes for Q3 2006 and 2006 YTD in the table above were adjusted to reflectrestaurant sales of the nine acquired franchise stores as part of company-ownedrestaurants average unit volume.

*FranchiseRoyalties and Fees.* Franchise royalties and fees decreased by 0.8% in Q3 2007 from Q3 2006and increased by $0.6 million, or by 7.2%, in 2007 YTD as compared to 2006YTD.  The decrease in Q3 2007 wasprimarily attributable to the loss of royalties associated with the nineacquired franchise restaurants, offset by the opening of new franchiserestaurants in the latter half of fiscal 2006 and during fiscal 2007,increasing royalty rates in conjunction with the renewal of certain franchiseagreements and comparable restaurant sales growth of 2.0%.   The increase in 2007 YTD was primarily attributableto the opening of new franchise restaurants in the latter half of fiscal 2006and during fiscal 2007, increasing royalty rates in conjunction with therenewal of certain franchise agreements and comparable restaurant sales growthof 1.5%, offset by the loss of royalties associated with the nine acquiredfranchise restaurants.   The acquiredfranchise restaurants generated approximately $0.6 million in franchiseroyalties in 2007 YTD.  The acquiredfranchise restaurants generated approximately $0.3 million and $0.8 million infranchise royalties in Q3 2006 and 2006 YTD, respectively.  As these restaurants are now company-owned,royalties related to these restaurants will no longer be earnedpost-acquisition.  Franchise restaurantcount activity is shown in the restaurant unit activity table above.

*RestaurantCost of Sales.* Restaurant cost of sales, as a percentage of restaurant sales, increasedto 35.2% in Q3 2007 from 35.1% in Q3 2006 and decreased to 35.0% in 2007 YTDfrom 35.1% in 2006 YTD.  The increase inQ3 2007 was primarily attributable to higher dairy costs, offset by the impactof menu price increases as discussed above. The decrease in 2007 YTD was primarily attributable to the impact ofmenu price increases as discussed above, partially offset by higher dairycosts.

*RestaurantLabor Expenses.*   Restaurant labor expenses,as a percentage of restaurant sales, increased to 28.7% in Q3 2007 from 27.8%in Q3 2006 and to 28.2% in 2007 YTD from 27.6% in 2006 YTD.  These increases were primarily attributableto higher average hourly wage rates resulting from several state-mandatedincreases in minimum and tip wage rates during 2007 and restaurants opened in2007 YTD as we generally incur higher labor costs during the first few monthsafter the opening of a new restaurant. Additionally, due to changes in our claims development history based onour most recent quarterly actuarial analysis received at the end of Q3 2007,workers’ compensation expense increased in Q3 2007 by $0.1 million as comparedto a decrease in Q3 2006 by $0.6 million. These increases were partially offset by the impact of menu priceincreases as discussed above and lower share-based compensation expense.  Our labor costs will continue to be pressuredby federal and state-mandated increases in minimum and tip wage rates.

*RestaurantRent Expense.*   Restaurant rent expense, as apercentage of restaurant sales, decreased to 1.6% in Q3 2007 from 1.8% in Q32006 and to 1.6% in 2007 YTD from 1.7% in 2006 YTD due to sales growth in therespective periods.

*RestaurantOther Operating Expenses. *Restaurantother operating expenses, as a percentage of restaurant sales, decreased to15.9% in Q3 2007 from 16.1% in Q3 2006 and to 16.0% in 2007 YTD from 16.1% in2006 YTD.  For Q3 2007 and 2007 YTD, adecrease in equipment rent and lower managing partner and market partnerbonuses, as a percentage of restaurant sales, were partially offset by areduction in the impact of favorable general liability insurance claimsexperience.  

15

----

Equipment rent decreased0.4% and 0.3%, as a percentage of restaurant sales, in Q3 2007 and 2007 YTD,respectively, due to our discontinuance of leasing arrangements for restaurantequipment packages.  Managing partner andmarket partner bonuses are lower, as a percentage of restaurant sales, due tohigher costs.  During Q3 2007, a $0.7million adjustment made to general liability insurance expense due to favorablegeneral liability claims experience based on our most recent quarterlyactuarial analysis was lower than a $1.3 million adjustment made in Q3 2006.

*RestaurantPre-opening Expenses.*   Pre-opening expensesdecreased to $2.6 million in Q3 2007 from $2.9 million in Q3 2006 and increasedto $9.3 million in 2007 YTD from $8.8 million in 2006 YTD.  Pre-openingexpenses in Q3 2007 were relatively unchanged compared to Q3 2006 as the numberof restaurants being opened and/or near the same stages in the developmentpipeline were comparable.  The increasein 2007 YTD was primarily due to seven more restaurants being opened in 2007YTD compared to 2006 YTD.  Pre-openingcosts will fluctuate from period to period based on the number and timing ofrestaurant openings and the number and timing of restaurant managers hired.

*Depreciationand Amortization Expense.*   D&A, as apercentage of revenue, increased to 4.2% in Q3 2007 from 3.8% in Q3 2006 andincreased to 4.0% in 2007 YTD from 3.5% in 2006 YTD. These increases wererelated to capital spending on new restaurants.

*Generaland Administrative Expenses.* G&A decreased to 5.0% of revenue in Q3 2007 from 5.3% of revenue inQ3 2006 and decreased in 2007 YTD to 5.4% of revenue from 5.8% of revenue in2006 YTD.  The decrease in Q3 2007 wasprimarily due to leveraging of the base business and lower share-basedcompensation costs, partially offset by the $0.5 million charge in Q3 2007relating to the acquisitions of nine franchise restaurants.  The decrease in 2007 YTD was primarily due toleveraging of the base business and lower share-based compensation costs.

*InterestExpense, Net.*   Interest expense increased to$0.8 million in Q3 2007 from $0.1 million in Q3 2006 and increased to $1.4million in 2007 YTD from $0.5 million 2006 YTD. The increase in Q3 2007 was primarily due to increased borrowings underour credit facility, partially offset by an increase in interest income.  The increase in 2007 YTD was primarily due toincreased borrowings under our credit facility, partially offset by an increasein capitalized interest, an increase in interest income, the payoff of certaininstallment loans in the first quarter of fiscal 2006 and the prepaymentpenalties of $0.1 million associated with those loans.

In conjunctionwith our acquisitions of nine franchise restaurants on June 27, 2007 for anaggregate purchase price of approximately $22.6 million, we acquired land andbuildings leased by seven of the nine franchisees from parties related to thosefranchisees for an aggregate price of approximately $12.1 million.  The purchase price for all transactions waspaid in cash, funded through borrowings under our credit facility.  We expect our interest expense for fiscal2007 to increase as a result of these borrowings.

*IncomeTax Expense. * Our effective tax rate increased slightly to35.4% in Q3 2007 from 35.3% in Q3 2006 and decreased in 2007 YTD to 35.8% from37.6% in 2006 YTD.  The increase in Q32007 was primarily due to an increase in state income tax rates, lower taxcredits and an increase in the non-deductible portion of certain incentivestock options, partially offset by a decrease in the non-deductible portion ofcertain costs.  The decrease in the ratefor 2007 YTD was primarily due to higher tax credits, the non-deductibility ofa $0.8 million charge related to franchise acquisitions in the first quarter offiscal 2006 and a decrease in the non-deductible portion of certain incentivestock options relating to share-based compensation costs, partially offset byan increase in state income tax rates. We expect the effective tax rate to be approximately 35.8% for fiscal2007.

**Liquidityand Capital Resources**

The followingtable presents a summary of our net cash provided by (used in) operating,investing and financing activities: 
|                                            | ** ** | **39 Weeks Ended**     | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **September 25, 2007** | ** ** | **September 26, 2006** | ** ** |
| ** **                                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net cash provided  by operating activities |       | $                                | 48,070     |   | $ | 39,357 |   |
| Net cash used in  investing activities     |       | (109,216                         | )          | (78,135 | ) |
| Net cash  provided by financing activities |       | 42,698                           |       | 19,081 |   |
|                                       |       |                             |       |   |   |
| Net decrease in cash                       |       | $                                | (18,448    | ) | $ | (19,697 | ) |

 

Net cash providedby operating activities was $48.1 million in 2007 YTD compared to $39.4 millionin 2006 YTD.  The increase was driven by higher net income anddepreciation, partially offset by higher gift card redemptions, changes inother working capital and lower share-based compensation costs.  Our operations have not required significantworking capital and, like many restaurant companies, we have been able tooperate with negative working capital. Sales are primarily for cash, and restaurant operations do not requiresignificant inventories or receivables. In addition, we received trade credit for the purchase of food,beverages and supplies, thereby reducing the need for incremental workingcapital to support growth.

16

----

Net cash used ininvesting activities was $109.2 million in 2007 YTD compared to $78.1 millionin 2006 YTD.  The increase was primarily because we spent $19.8 millionmore in 2007 YTD than in 2006 YTD in conjunction with the acquisitions offranchise restaurants.  In 2006 YTD, weissued shares of Class A Common Stock for a portion of the franchiseacquisitions purchase price.  Inaddition, during 2007 YTD we have incurred higher capital expendituresresulting from the opening of more restaurants.

In Q3 2007, wecompleted the acquisitions of nine franchise restaurants for an aggregatepurchase price of approximately $22.6 million, and the land and buildingsleased by seven of the nine franchisees from parties related to thosefranchisees for an aggregate purchase price of approximately $12.1 million.  In conjunction with these acquisitions, weborrowed $36.0 million under our credit facility primarily to fund the purchaseprice.  See note 8 to the condensedconsolidated financial statements.

We require capitalprincipally for the development of new company restaurants and therefurbishment of existing restaurants.  We either lease our restaurantsite locations under operating leases for periods of five to 30 years(including renewal periods) or purchase the land where it is cost effective. Asof September 25, 2007, there were 101 restaurants developed on land which weowned.

Our future capitalrequirements will primarily depend on the number of new restaurants we open andthe timing of those openings within a given fiscal year. These requirementswill include costs directly related to opening new restaurants and may alsoinclude costs necessary to ensure that our infrastructure is able to support alarger restaurant base. In fiscal 2007, we expect our capital expenditures tobe approximately $100.0 million to $110.0 million, excluding any cashused for franchise acquisitions, substantially all of which will relate toplanned restaurant openings. We continue to evaluate opportunities to acquirefranchise restaurants under terms which would create value for us and our stockholders.  We intend to satisfy our capital requirementsover the next 12 months with cash on hand, net cash provided by operatingactivities and funds available under our credit facility.

Net cash providedby financing activities was $42.7 million in 2007 YTD as compared to net cashprovided by financing activities of $19.1 million in 2006 YTD.  The increase was primarily due to a $26.0million increase in proceeds from our credit facility, partially offset bylower proceeds from the exercise of stock options.  The increase in borrowings was due to the$36.0 million borrowed in the current year in conjunction with the acquisitionsof nine franchise restaurants and the related land and buildings associatedwith seven of the nine restaurants in Q3 2007. The decrease in proceeds from the exercise of stock options is due tofewer shares being exercised during 2007 YTD.

In 2007 YTD, wepaid distributions of $0.9 million to equity holders of five of ourmajority-owned company restaurants. Currently, our intent is to retain our future earnings, if any,primarily to finance the future development and operation of our business.

On May 31, 2007,we amended and restated our existing five-year revolving credit facility datedOctober 8, 2004 with a syndicate of commercial lenders led by Bank of America,N.A., Banc of America Securities LLC and National City Bank. The facility wasincreased from $150.0 million to $250.0 million and the term was extended toMay 31, 2012.  The terms of the facilityrequire us to pay interest on outstanding borrowings at LIBOR plus a margin of0.50% to 0.875% and to pay a commitment fee of 0.10% to 0.175% per year on anyunused portion of the facility, in both cases depending on our leverageratio.   The weighted-average interestrate for the revolver at September 25, 2007 and December 26, 2006 was 6.07% and6.08%, respectively.

The lenders’obligation to extend credit under the facility depends on us maintainingcertain financial covenants, including a minimum consolidated fixed chargecoverage ratio of 2.00 to 1.00 and a maximum consolidated leverage ratio of3.00 to 1.00.  The new credit facilitypermits us to incur additional secured or unsecured indebtedness outside thefacility, except for the incurrence of secured indebtedness that in the aggregateexceeds 20% of our consolidated tangible net worth or circumstances where theincurrence of secured or unsecured indebtedness would prevent us from complyingwith our financial covenants.   We arecurrently in compliance with such covenants.

At September 25,2007, we had $71.0 million of outstanding borrowings under our credit facilityand $176.0 million of availability net of $3.0 million of outstanding lettersof credit.  In addition, we had various other notes payable totaling $3.3million with interest rates ranging from 4.35% to 10.80%.  Each of thesenotes related to the financing of specific restaurants. Our totalweighted-average effective interest rate at September 25, 2007 was 6.24%.

17

----

**ContractualObligations**

The followingtable summarizes the amount of payments due under specified contractualobligations as of September 25, 2007:
|                                | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More than  5 years** | ** ** |
| ** **                     | ** ** | **(in thousands)**                   | ** ** |
| Long-term debt  obligations    |       | $                                         | 74,268     |   | $ | 239 |   | $ | 493 |   | $ | 71,573 |   | $ | 1,963 |   |
| Capital lease  obligations     |       | 588                                       |       | 56 |   | 133 |   | 165 |   | 234 |   |
| Interest (1)                   |       | 2,224                                     |       | 376 |   | 662 |   | 528 |   | 658 |   |
| Operating lease  obligations   |       | 122,725                                   |       | 14,886 |   | 22,882 |   | 23,080 |   | 61,877 |   |
| Capital  obligations           |       | 85,365                                    |       | 85,365 |   | — |   | — |   | — |   |
| Total contractual  obligations |       | $                                         | 285,170    |   | $ | 100,922 |   | $ | 24,170 |   | $ | 95,346 |   | $ | 64,732 |   |

 

----

(1)          Assumes constant rateuntil maturity for our fixed and variable rate debt and capital leaseobligations.

Uses interest rates as of September 25, 2007 for our variable ratedebt. Interest payments on our variable-rate revolving credit facility havebeen excluded from the amounts shown above, primarily because the balanceoutstanding under our revolving credit facility, described further in Note 3 ofthe Condensed Consolidated Financial Statements, can fluctuate daily.

The Company has nomaterial minimum purchase commitments with its vendors that extend beyond ayear.  See note 5 to the condensedconsolidated financial statements for details of contractual obligations.

**Off-BalanceSheet Arrangements**

Except foroperating leases (primarily restaurant leases), we do not have any off-balancesheet arrangements.

**Guarantees**

We entered intoreal estate lease agreements for franchise restaurants located in Everett, MA,Longmont, CO, Montgomeryville, PA and Fargo, ND prior to our granting franchiserights for those restaurants. We have subsequently assigned the leases to thefranchisees, but we remain contingently liable if a franchisee defaults underthe terms of a lease. The Longmont lease expires in May 2014, the Everettlease expires in February 2018, the Montgomeryville lease expires in June2021 and the Fargo lease expires in July 2016.

**Recently Issued AccountingStandards**

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, *Fair Value Measurements*(“SFAS157”), which defines fair value, establishes a framework for measuring fairvalue and expands disclosures about fair value measurements.  The provisions of SFAS 157 are effective as ofthe beginning of the Company’s 2008 fiscal year.  The Company is currently evaluating theimpact of adopting SFAS 157 on its consolidated financial position, results ofoperations or cash flows.

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities* (“SFAS 159”). SFAS 159permits entities to choose to measure many financial assets and financialliabilities at fair value. Unrealized gains and losses on items for which thefair value option has been elected are reported in earnings. The provisions ofSFAS 159 are effective as of the beginning of the Company’s 2008 fiscal year.The Company is currently evaluating the impact of adopting SFAS 159 on its consolidatedfinancial position, results of operations or cash flows.

18

----

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We are exposed tomarket risk from changes in interest rates on debt and changes in commodityprices. Our exposure to interest rate fluctuations is limited to ouroutstanding bank debt. At September 25, 2007, there was $71.0 millionoutstanding under our revolving line of credit which bears interest atapproximately 50 to 87.5 basis points (depending on our leverage ratios) overthe London Interbank Offered Rate.   Our various other notes payabletotaled $3.3 million at September 25, 2007 and had fixed rates ranging from4.35% to 10.80%.  Should interest rates based on these borrowings increaseby one percentage point, our estimated annual interest expense would increaseby $0.7 million.

Many of theproducts and the ingredients used in the products sold in our restaurants arecommodities that are subject to unpredictable price volatility.  There are no established fixed price marketsfor certain commodities such as produce and cheese, and we are subject toprevailing market conditions when purchasing those types of commodities.  For others commodities, we employ variouspurchasing and pricing contract techniques in an effort to minimize volatility,including fixed price contracts for terms of one year or less and negotiatingprices with vendors with reference to fluctuating market prices.  We currently do not use financial instrumentsto hedge commodity prices, but we will continue to evaluate theireffectiveness. Extreme and/or long term increases in commodity prices couldadversely affect our future results, especially if we are unable, primarily dueto competitive reasons, to increase menu prices. Additionally, if there is atime lag between the increasing commodity prices and our ability to increasemenu prices, or if we believe the commodity price increase to be short induration and we choose not to pass on the cost increases, our short-termfinancial results could be negatively affected.

We are subject tobusiness risk as our beef supply is highly dependent upon four vendors.  If these vendors were unable to fulfill theirobligations under their contracts, we may encounter supply shortages and incur highercosts to secure adequate supplies, any of which would harm our business.

**ITEM4. CONTROLS AND PROCEDURES**

**Evaluation of disclosure controlsand procedures**

We have evaluatedthe effectiveness of the design and operation of our disclosure controls andprocedures pursuant to, and as defined in, Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, as of theend of the period covered by this report. Based on the evaluation, performedunder the supervision and with the participation of our management, includingthe Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”),our management, including the CEO and CFO, concluded that our disclosurecontrols and procedures were effective as of the period covered by this report.

**Changes in internal control**

During the periodcovered by this report, there were no significant changes with respect to ourinternal control over financial reporting that materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

19

----

**PART II — OTHER INFORMATION**

**ITEM1.  LEGAL PROCEEDINGS**

Occasionally, weare a defendant in litigation arising in the ordinary course of our business,including “slip and fall” accidents, employment related claims and claims from guestsor employees alleging illness, injury or food quality, health or operationalconcerns.  None of these types of litigation, most of which are covered byinsurance, has had a material effect on us and, as of the date of this report,we are not party to any litigation that we believe would have a materialadverse effect on our business.

On March 26, 2007,a civil case styled as a class action complaint titled *Nicole M.Ehrheart v. Texas Roadhouse, Inc. and Does 1 through 10 (“Ehrheart”)*,Case Number CA 07-54, was filed against us in the United States District Courtfor the Western District of Pennsylvania Erie Division.  The case alleges liability under the Fair andAccurate Credit Transactions Act (“FACTA”) based on the alleged practice ofunlawfully including more information than is permitted on the electronicallyprinted credit or debit card receipts provided to customers.  The plaintiff seeks monetary damages,including statutory damages, punitive damages, costs and attorneys’ fees, and apermanent injunction against the alleged unlawful practice.  Statutory damages range from $100 to $1,000for each willful violation.  We havefiled an answer to the complaint denying the material allegations of thecomplaint; discovery has not yet begun.

OnJuly 20, 2007, a civil case styled as a class action complaint titled *Mario Aliano v. Texas Roadhouse Holdings LLC, Texas Roadhouse, Inc. andDoes 1-10**(“Aliano”),*Case Number 07cv4108, was filed against us in the United States District Courtfor the Northern District of Illinois Eastern Division.  The case alleges liability under FACTA.  The plaintiff seeks statutory damages of $100to $1,000 per violation, attorneys’ fees, litigation expenses and costs.  We have filed an answer to the complaintdenying the material allegations of the complaint; discovery has not yet begun.

We believe we havemeritorious defenses to the *Ehrheart* and *Aliano* claims, and we intend to vigorously defend againstthe claims, including the plaintiffs’ efforts to certify a nationwide class action.  We believe that neither case will have amaterial adverse effect on the Company’s business and its consolidatedfinancial position, results of operation and cash flows.  However, if either court both granted classaction status and imposed statutory penalties, the resolution of the case wouldlikely have a material adverse effect on our business and our consolidatedfinancial position, results of operation and cash flows.

**ITEM1A.   RISK FACTORS**

Informationregarding risk factors appears in our Annual Report on Form 10-K for the yearended December 26, 2006, under the heading “Special Note RegardingForward-looking Statements” and in the Form 10-K Part I, Item 1A, RiskFactors.  There have been no materialchanges from the risk factors previously disclosed in our Form 10-K.

**ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None.

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

None.

**ITEM5. OTHER INFORMATION.**

None.

**ITEM6. EXHIBITS.** 
| Exhibit No. | ** ** | **Description**                                                                                                                                                               |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                    |
| 10.1             |       | Third Amendment to Amended and Restated Lease  Agreement (Two Paragon Centre) dated September 7, 2007 between Paragon Centre  Holdings, LLC and Texas Roadhouse Holdings LLC. |
| 31.1             |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                     |
| 31.2             |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                     |
| 32.1             |       | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                |
| 32.2             |       | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                |

 

20

----

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized. 
|                         |   | TEXAS ROADHOUSE, INC. |
|-------------------------|--------|-----------------------|
|                    |   |                  |
| Date: November  2, 2007 |   | By:                   |   | /s/ G.J. Hart |   |
|                    |   |                  |   | G.J. Hart |
|                    |   |                  |   | President, Chief Executive Officer |
|                    |   |                  |   | (principal executive officer) |
|                    |   |                  |   |   |
| Date: November  2, 2007 |   | By:                   |   | /s/ Scott M. Colosi |   |
|                    |   |                  |   | Scott M. Colosi |
|                    |   |                  |   | Chief Financial Officer |
|                    |   |                  |   | (principal financial officer) |
|                    |   |                  |   | (chief accounting officer) |
|                         |        |                       |  |  |  |  |

 

21

----