OVERVIEW

Texas Roadhouse is a growing, moderately priced, full-service restaurant chain. Our founder and chairman, W. Kent Taylor, started the business in 1993. Our mission statement is "Legendary Food, Legendary Service®." Our operating strategy is designed to position each of our restaurants as the local hometown destination for a broad segment of consumers seeking high quality, affordable meals served with friendly, attentive service. As of September 29, 2009, there were 326 Texas Roadhouse restaurants operating in 46 states, including:

† 255 "company restaurants," of which 245 were wholly-owned and 10 were majority-owned. The results of operations of company restaurants are included in our condensed consolidated statements of income. The portion of income attributable to minority interests in company restaurants that are not wholly-owned is reflected in the line item entitled "Net income attributable to noncontrolling interests" in our condensed consolidated statements of income.

† 71 "franchise restaurants," of which 68 were franchise restaurants and three were license restaurants. We have a 5.0% to 10.0% ownership interest in 21 franchise restaurants. The income derived from our minority interests in these franchise restaurants is reported in the line item entitled "Equity income from investments in unconsolidated affiliates" in our condensed consolidated statements of income. Additionally, we provide various management services to these franchise restaurants, as well as seven additional franchise restaurants in which we have no ownership interest.

We have contractual arrangements which grant us the right to acquire at pre-determined valuation formulas (i) the remaining equity interests in eight of the 10 majority-owned company restaurants, and (ii) 63 of the franchise restaurants.

Presentation of Financial and Operating Data

Throughout this report, the 13 weeks ended September 29, 2009 and September 23, 2008 are referred to as Q3 2009 and Q3 2008, respectively, and the 39 weeks ended September 29, 2009 and September 23, 2008 are referred to as 2009 YTD and 2008 YTD, respectively.

Long-term Strategies to Grow Earnings Per Share

Our long-term strategies with respect to increasing net income and earnings per share include the following:

Expanding Our Restaurant Base. We will continue to evaluate opportunities to develop Texas Roadhouse restaurants in existing and new domestic or international markets. We will remain focused primarily on mid-sized markets where we believe a significant demand for our restaurants exists because of population size, income levels and the presence of shopping and entertainment centers and a significant employment base.

We may, at our discretion, add franchise restaurants, domestically and/or internationally, primarily with franchisees who have demonstrated prior success with the Texas Roadhouse or other restaurant concepts and in markets in which the franchisee demonstrates superior knowledge of the demographics and restaurant operating conditions. We may also look to acquire franchise restaurants under terms favorable to us and our stockholders. Additionally, from time to time, we may evaluate potential mergers, acquisitions, joint ventures or other strategic initiatives to acquire or develop additional concepts. On February 24, 2009, we opened a new restaurant, Aspen Creek, which is wholly-owned by Texas Roadhouse, Inc.

Maintaining and/or Improving Restaurant Level Profitability. We plan to maintain, or possibly increase, restaurant level profitability through a combination of increased comparable restaurant sales and operating cost management.

Leveraging Our Scalable Infrastructure. Over the past several years, we have made significant investments in our infrastructure, including information systems, real estate, human resources, legal, marketing and operations. As a result, we believe that our general and administrative costs will increase at a slower growth rate than our revenue.

Stock Repurchase Program. We continue to look at opportunities to repurchase our Class A common stock at favorable market prices under our stock repurchase program. Currently, our Board of Directors has authorized us to repurchase up to $75.0 million of our Class A common stock. As of September 29, 2009, $18.2 million worth of Class A common stock remains authorized for repurchase.

Key Measures We Use to Evaluate Our Company

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

Number of Restaurant Openings. Number of restaurant openings reflects the number of restaurants opened during a particular fiscal period. For company restaurant openings we incur pre-opening costs, which are defined below, before the restaurant opens. Typically new restaurants open with an initial start-up period of higher than normalized sales volumes, which decrease 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 the start-up period of operation and increase to a steady level approximately three to six months after opening.

Comparable Restaurant Sales Growth. Comparable restaurant sales growth reflects the change in year-over-year sales for all company restaurants for the comparable restaurant base. We define the comparable restaurant base to include those restaurants open for a full 18 months before the beginning of the later fiscal period excluding restaurants closed during the period. Comparable restaurant sales growth can be impacted by changes in guest traffic counts or by changes in the per person average check amount. Menu price changes and the mix of menu items sold can affect the per person average check amount.

Average Unit Volume. Average unit volume represents the average annual restaurant sales for all company restaurants open for a full six months before the beginning of the period measured. Average unit volume excludes sales on restaurants closed during the period. Growth in average unit volumes in excess of comparable restaurant sales growth is generally an indication that newer restaurants are operating with sales levels in excess of the company average. Conversely, growth in average unit volumes less than growth in comparable restaurant sales growth is generally an indication that newer restaurants are operating with sales levels lower than the system average.

Store Weeks. Store weeks represent the number of weeks that our company restaurants were open during the reporting period.

Other Key Definitions

Restaurant Sales. Restaurant sales include gross food and beverage sales, net of promotions and discounts.

Franchise Royalties and Fees. Franchisees typically pay a $40,000 initial franchise fee for each new restaurant and a franchise renewal fee equal to the greater of 30% of the then-current initial franchise fee or $10,000 to $15,000. Franchise royalties consist of royalties typically in the amount of 2.0% to 4.0% of gross sales, as defined in our franchise agreement, paid to us by our franchisees.

Restaurant Cost of Sales. Restaurant cost of sales consists of food and beverage costs.

Restaurant Labor Expenses. Restaurant labor expenses include all direct and indirect labor costs incurred in operations except for profit sharing incentive compensation expenses earned by our managing partners. These profit sharing expenses are reflected in restaurant other operating expenses. Restaurant labor expenses also include share-based compensation expense related to restaurant-level employees.

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

Restaurant Other Operating Expenses. Restaurant other operating expenses consist of all other restaurant-level operating costs, the major components of which are utilities, supplies, advertising, repair and maintenance, property taxes, credit card fees and general liability insurance. Profit sharing allocations to managing partners and market partners are also included in restaurant other operating expenses.

Pre-opening Expenses. Pre-opening expenses, which are charged to operations as incurred, consist of expenses incurred before the opening of a new restaurant and are comprised principally of opening team and training salaries, travel expenses, rent, and food, beverage and other initial supplies and expenses.

Depreciation and Amortization Expenses. Depreciation and amortization expenses ("D&A") includes the depreciation of fixed assets and amortization of intangibles with definite lives.

Impairment and closure costs. Impairment and closure costs include any impairment of long-lived assets associated with restaurants where the carrying amount of the asset is not recoverable and exceeds the fair value of the asset and expenses associated with the closure of a restaurant. Closure costs also include any gains or losses associated with the sale of a closed restaurant and/or assets held for sale.

General and Administrative Expenses. General and administrative expenses ("G&A") are comprised of expenses associated with corporate and administrative functions that support development and restaurant operations and provide an infrastructure to support future growth. Supervision and accounting fees received from certain franchise restaurants and license restaurants are offset against G&A. G&A also includes share-based compensation expense related to executive officers, support center employees and market partners.

Interest Expense, Net. Interest expense includes the cost of our debt obligations including the amortization of loan fees, reduced by interest income and capitalized interest. Interest income includes earnings on cash and cash equivalents.

Equity Income from Unconsolidated Affiliates. We own a 5.0% to 10.0% equity interest in 21 franchise restaurants. Equity income from unconsolidated affiliates represents our percentage share of net income earned by these unconsolidated affiliates.

Net Income Attributable to Noncontrolling Interests. Net income attributable to noncontrolling interests represents the portion of income attributable to the other owners of the majority-owned or controlled restaurants. Our consolidated subsidiaries at September 29, 2009 and September 23, 2008 included ten majority-owned restaurants, all of which were open.

                             Results of Operations



                                       13 Weeks Ended                                  39 Weeks Ended
                         September 29, 2009      September 23, 2008      September 29, 2009      September 23, 2008
($ in thousands)            $            %          $            %          $            %          $            %

Revenue:
Restaurant sales           224,417       99.1      215,739       99.1      708,808       99.1      639,137       98.9
Franchise royalties
and fees                     2,050        0.9        1,996        0.9        6,155        0.9        7,132        1.1

Total revenue              226,467      100.0      217,735      100.0      714,963      100.0      646,259      100.0

Costs and expenses:
(As a percentage of
restaurant sales)
Restaurant operating
costs:
Cost of sales               74,489       33.2       76,845       35.6      237,844       33.6      225,205       35.2
Labor                       67,630       30.1       63,750       29.5      210,203       29.7      183,996       28.8
Rent                         5,029        2.2        4,248        2.0       14,870        2.1       11,138        1.7
Other operating             38,778       17.3       36,772       17.0      119,450       16.9      105,368       16.5
(As a percentage of
total revenue)
Pre-opening                  1,194        0.5        2,935        1.3        4,411        0.6        8,973        1.4
Depreciation and
amortization                10,395        4.6        9,444        4.3       31,482        4.4       27,056        4.2
Impairment and
closure                       (201 )       NM           43         NM         (273 )       NM          777        0.1
General and
administrative              11,872        5.2       10,277        4.7       35,918        5.0       32,585        5.0

Total costs and
expenses                   209,186       92.4      204,314       93.8      653,905       91.5      595,098       92.1
Income from
operations                  17,281        7.6       13,421        6.2       61,058        8.5       51,161        7.9
Interest expense, net          784        0.3          974        0.4        2,517        0.4        2,336        0.4
Equity income from
investments in
unconsolidated
affiliates                     (36 )       NM          (45 )       NM         (185 )       NM         (184 )       NM

Income before taxes         16,533        7.3       12,492        5.7       58,726        8.2       49,009        7.6
Provision for income
taxes                        5,431        2.4        3,906        1.8       18,582        2.6       16,498        2.5
Net income including
noncontrolling
interests                   11,102        4.9        8,586        3.9       40,144        5.6       32,511        5.1
Net income (loss)
attributable to
noncontrolling
interests                      407        0.2          (58 )       NM        1,374        0.2          482        0.1
Net income
attributable to Texas
Roadhouse, Inc. and
subsidiaries                10,695        4.7        8,644        4.0       38,770        5.4       32,029        5.0

NM - Not meaningful

                            Restaurant Unit Activity



                                Company   Franchise   Total
Balance at December 30, 2008        245          69     314
Openings                             12           3      15
Acquisitions (Dispositions)           -           -       -
Closures                             (2 )        (1 )    (3 )

Balance at September 29, 2009       255          71     326

Q3 2009 (13 weeks) Compared to Q3 2008 (13 weeks) and 2009 YTD (39 weeks) Compared to 2008 YTD (39 weeks)

Restaurant Sales. Restaurant sales increased by 4.0% in Q3 2009 as compared to Q3 2008 and by 10.9% in 2009 YTD compared to 2008 YTD. These increases were attributable to the opening of new restaurants and the acquisitions of franchise restaurants in fiscal 2008, partially offset by a decrease in comparable restaurant sales and average unit volumes.

The following table summarizes certain key drivers and/or attributes of restaurant sales at company restaurants for the periods.

                                      Q3 2009      Q3 2008      2009 YTD      2008 YTD

Store weeks                              3,331        3,000         9,893         8,472
Comparable restaurant sales growth        (4.6 )%      (3.2 )%       (3.0 )%       (1.5 )%
Average unit volume (in thousands)   $     874    $     927    $    2,792    $    2,920

We have implemented certain menu pricing increases to partially offset impacts from higher operating costs and other inflationary pressures. The following table summarizes our menu pricing actions for the periods shown.

                                             Increased Menu
                                                Pricing

                     April 2009                         1.4 %
                     May/June 2008                      1.5 %
                     January/February 2008              1.1 %

We will continue to evaluate the need for and test further menu price increases as we assess the current inflationary and competitive environment.

On September 24, 2008, we acquired one franchise restaurant, which is expected to have no significant net revenue or accretive impact on an on-going annual basis. In Q3 2009 and 2009 YTD, restaurant sales included $0.8 million and $2.8 million from the acquired franchise restaurant.

Franchise Royalties and Fees. Franchise royalties and fees increased slightly by $0.1 million, or by 2.7%, in Q3 2009 from Q3 2008 and decreased by $1.0 million, or by 13.7%, in 2009 YTD from 2008 YTD. The slight increase in Q3 2009 was primarily attributable to new franchise restaurants in 2009 YTD and increasing royalty rates and franchise fees in conjunction with the renewal of certain franchise agreements, partially offset by the reduction of royalties in several restaurants and a decrease in average unit volumes. The decrease in 2009 YTD was primarily attributable to the loss of royalties associated with the acquisition of 13 franchise restaurants in 2008, the reduction of royalties in several restaurants and a decrease in average unit volumes. This decrease was partially offset by new franchise restaurants in 2009 YTD and increasing royalty rates and franchise fees in conjunction with the renewal of certain franchise agreements. The acquired franchise restaurants generated approximately $0.1 million and $0.8 million in franchise royalties in Q3 2008 and 2008 YTD, respectively. Franchise comparable restaurant sales decreased 3.6% and 3.0% in Q3 2009 and 2009 YTD, respectively. Franchise restaurant count activity is shown in the restaurant unit activity table above.

Restaurant Cost of Sales. Restaurant cost of sales, as a percentage of restaurant sales, decreased to 33.2% in Q3 2009 from 35.6% in Q3 2008 and to 33.6% in 2009 YTD from 35.2% in 2008 YTD. These decreases were primarily attributable to the benefit of lower beef, dairy and produce costs and menu price increases discussed above, partially offset by higher commodity costs on chicken and food items such as wheat and oil-based ingredients. Through the second quarter of 2009, we had fixed price contracts for 90% of our beef product volume with the remainder subject to fluctuating market prices. During the third quarter of 2009, we locked in the 10% remainder and currently have fixed price contracts on 100% of our beef product volume. We expect commodity cost deflation of approximately 2.5-3.0% in 2009.

Restaurant Labor Expenses. Restaurant labor expenses, as a percentage of restaurant sales, increased to 30.1% in Q3 2009 from 29.5% in Q3 2008 and to 29.7% in 2009 YTD from 28.8% in 2008 YTD. These increases were primarily attributable to a decrease in average unit volumes combined with higher average wage rates, higher payroll tax expense as a result of state unemployment rate changes that occurred in the first quarter of 2009, and higher workers' compensation expense due to changes in our claims

development history. These increases were partially offset by menu price increases discussed above. Based on our most recent actuarial analysis received at the end of Q3 2009, workers' compensation expense increased in Q3 2009 by $0.3 million as compared to a decrease in Q3 2008 of $0.1 million. Higher average hourly wage rates resulted from several state-mandated increases in minimum and tip wage rates throughout 2008 and 2009, including increases in federal minimum wage rate in July 2008 and July 2009. We anticipate our labor costs will continue to be pressured by inflation. These increases may or may not be offset by additional menu price adjustments.

Restaurant Rent Expense. Restaurant rent expense, as a percentage of restaurant sales, increased to 2.2% in Q3 2009 from 2.0% in Q3 2008 and increased to 2.1% in 2009 YTD from 1.7% in 2008 YTD. These increases were primarily attributable to a decrease in average unit volumes, combined with rent expense associated with the franchise restaurants acquired in 2008 and the restaurants opened in 2009 YTD and fiscal 2008, as we are leasing more land and buildings than we have in the past.

Restaurant Other Operating Expenses. Restaurant other operating expenses, as a percentage of restaurant sales, increased to 17.3% in Q3 2009 from 17.0% in Q3 2008 and to 16.9% in 2009 YTD from 16.5% in 2008 YTD. These increases were primarily attributable to a reduction in the impact of favorable general liability insurance claims experience, higher costs for repairs and maintenance, managing partner and market partner bonuses, property taxes and credit card charges, as a percentage of restaurant sales, and a decrease in average unit volumes, partially offset by lower utilities. During Q3 2009, a $0.2 million adjustment made to general liability insurance expense due to favorable general liability claims experience based on our most recent quarterly actuarial analysis was lower than a $0.9 million adjustment made in Q3 2008. Managing partner and market partner bonus expense was higher in Q3 2009 and 2009 YTD as a result of improved restaurant margins.

Restaurant Pre-opening Expenses. Pre-opening expenses decreased to $1.2 million in Q3 2009 from $2.9 million in Q3 2008 and decreased to $4.4 million in 2009 YTD from $9.0 million in 2008 YTD. These decreases were primarily attributable to fewer openings and fewer restaurants being in the development pipeline in 2009 compared to 2008. In fiscal 2009, we have reduced our planned Company-owned restaurant openings to approximately 17 restaurants, 12 of which opened in 2009 YTD, compared to 29 restaurants opened in fiscal 2008, 23 of which opened during 2008 YTD. Pre-opening costs will fluctuate from period to period based on the number and timing of restaurant openings and the number and timing of restaurant managers hired.

Depreciation and Amortization Expense. D&A, as a percentage of total revenue, increased to 4.6% in Q3 2009 from 4.3% in Q3 2008 and to 4.4% in 2009 YTD from 4.2% in 2008 YTD. These increases were primarily attributable to higher construction costs and other capital spending on new restaurants and a decrease in average unit volumes, partially offset by lower depreciation expense on older restaurants.

Impairment and Closure Expenses. Impairment and closure expenses decreased to ($0.2) million in Q3 2009 compared to $43,000 in Q3 2008. Impairment and closure expenses decreased to ($0.3) million in 2009 YTD compared to $0.8 million in 2008 YTD. We recorded a gain of $0.6 million in Q3 2009 due to the sale of a restaurant closed during Q3 2009. Additionally, we recorded $0.4 million in Q3 2009 due to charges incurred in conjunction with the closure of a second restaurant in Q3 2009. In the first quarter of 2008, we recorded $0.7 million due to lease reserve and other charges incurred in conjunction with the closure of a restaurant in Q1 2008. The lease associated with this restaurant was favorably settled in the second quarter of 2009.

General and Administrative Expenses. G&A, as a percentage of total revenue, increased to 5.2% in Q3 2009 from 4.7% in Q3 2008 and remained the same at 5.0% in 2009 YTD compared to 2008 YTD. The increase in Q3 2009 was primarily attributable to higher performance-based bonus expense for executive and other support center employees, partially offset by lower abandoned site costs and the leveraging of costs due to revenue growth. In 2009 YTD, higher performance-based bonus expense was offset by the lower abandoned site costs and the leveraging of costs due to revenue growth. Bonus expense was $1.9 million and $2.3 million higher in Q3 2009 and 2009 YTD, respectively, for two reasons. First, additional bonus expense of $1.2 million and $1.6 million was recorded in Q3 2009 and 2009 YTD, respectively in anticipation of exceeding our bonus targets for fiscal 2009. Second, in Q3 2008 and 2008 YTD, bonus expense was lower by $0.7 million due to no profit portion of bonus being earned in Q3 2008. For the remainder of 2009, we expect bonus expense to be $1.0 - $1.5 million higher than the same period in 2008 as a result of not meeting our bonus targets in fiscal 2008 and exceeding our targets for fiscal 2009. Abandoned site costs were $0.3 million higher in Q3 2008 as a result of cutting back our planned openings for 2009.

Interest Expense, Net. Interest expense decreased to $0.8 million in Q3 2009 from $1.0 million in Q3 2008 and increased to $2.5 million in 2009 YTD from $2.3 million in 2008 YTD. The decrease in Q3 2009 was primarily attributable to lower interest rates, partially offset by lower interest income and capitalized interest. The increase in 2009 YTD was primarily attributable to lower interest income and capitalized interest and increased borrowings under our credit facility, partially offset by lower interest rates. Lower interest income and capitalized interest were primarily due to lower interest rates and slower restaurant development in 2009 YTD compared to 2008 YTD. For 2009 YTD, the increased borrowings were primarily related to cash spent on stock repurchases and franchise restaurant acquisitions during 2008.

Income Tax Expense. We account for income taxes in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740, Income Taxes ("ASC 740"). Our effective tax rate increased to 33.7% in Q3 2009 from 31.1% in Q3 2008 and decreased to 32.4% in 2009 YTD from 34.0% in 2008 YTD. The increase in Q3 2009 was primarily

attributable to lower federal tax credits, such as FICA tip credit and Work Opportunity Tax credits, as a percentage of net income before income tax, partially offset by lower non-deductible stock compensation expense. The decrease in 2009 YTD was primarily attributable to lower non-deductible stock compensation expense and higher federal tax credits, as a percentage of net income before income tax. We expect the effective tax rate to be approximately 32.4% for fiscal 2009.

Liquidity and Capital Resources



The following table presents a summary of our net cash provided by (used in)
operating, investing and financing activities:



                                                            39 Weeks Ended
                                              September 29, 2009      September 23, 2008

Net cash provided by operating activities    $             68,296    $             58,250
Net cash used in investing activities                     (32,460 )               (93,529 )
Net cash (used in)/provided by financing
activities                                                 (5,261 )                37,434

Net increase in cash and cash equivalents    $             30,575    $              2,155

Net cash provided by operating activities was $68.3 million in 2009 YTD compared to $58.3 million in 2008 YTD. This increase was primarily due to higher net income and depreciation, as a result of opening new restaurants, and deferred income taxes, partially offset by a $7.1 million reduction in the source of cash from accounts receivable, along with other decreases in working capital. The $7.1 million reduction in the source of cash from accounts receivable was driven by timing issues related to credit card settlements. Our fiscal year 2007 ended on a bank holiday, therefore we had a larger than normal amount of credit card settlements in accounts receivable at the end of 2007, which were subsequently received during the first quarter of 2008.

Our operations have not required significant working capital and, like many restaurant companies, we have been able to operate with negative working . . .